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Principles of ManagementPrinciples of Management

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Contents

Publisher Information x

Chapter 1: Introduction to Principles of Management

1.1 Introduction to Principles of Management 21.2 Case in Point: Doing Good as a Core Business Strategy 51.3 Who Are Managers? 81.4 Leadership, Entrepreneurship, and Strategy 131.5 Planning, Organizing, Leading, and Controlling 201.6 Economic, Social, and Environmental Performance 251.7 Performance of Individuals and Groups 311.8 Your Principles of Management Survivor’s Guide 36

Chapter 2: Personality, Attitudes, and Work Behaviors

2.1 Chapter Introduction 482.2 Case in Point: SAS Institute Invests in Employees 502.3 Personality and Values 522.4 Perception 702.5 Work Attitudes 782.6 The Interactionist Perspective: The Role of Fit 842.7 Work Behaviors 872.8 Developing Your Positive Attitude Skills 100

Chapter 3: History, Globalization, and Values-Based Leadership

3.1 History, Globalization, and Values-Based Leadership 1043.2 Case in Point: Hanna Andersson Corporation Changes for Good 1063.3 Ancient History: Management Through the 1990s 1093.4 Contemporary Principles of Management 1163.5 Global Trends 122

3.6 Globalization and Principles of Management 1303.7 Developing Your Values-Based Leadership Skills 136

Chapter 4: Developing Mission, Vision, and Values

4.1 Developing Mission, Vision, and Values 1434.2 Case in Point: Xerox Motivates Employees for Success 1454.3 The Roles of Mission, Vision, and Values 1484.4 Mission and Vision in the P-O-L-C Framework 1534.5 Creativity and Passion 1604.6 Stakeholders 1694.7 Crafting Mission and Vision Statements 1754.8 Developing Your Personal Mission and Vision 182

Chapter 5: Strategizing

5.1 Strategizing 1915.2 Case in Point: Unnamed Publisher Transforms Textbook Industry 1935.3 Strategic Management in the P-O-L-C Framework 1965.4 How Do Strategies Emerge? 2045.5 Strategy as Trade-Offs, Discipline, and Focus 2095.6 Developing Strategy Through Internal Analysis 2195.7 Developing Strategy Through External Analysis 2315.8 Formulating Organizational and Personal Strategy With the Strategy Diamond 242

Chapter 6: Goals and Objectives

6.1 Goals and Objectives 2516.2 Case in Point: Nucor Aligns Company Goals With Employee Goals 2536.3 The Nature of Goals and Objectives 2556.4 From Management by Objectives to the Balanced Scorecard 2606.5 Characteristics of Effective Goals and Objectives 2696.6 Using Goals and Objectives in Employee Performance Evaluation 2756.7 Integrating Goals and Objectives with Corporate Social Responsibility 2816.8 Your Personal Balanced Scorecard 289

Chapter 7: Organizational Structure and Change

7.1 Organizational Structure and Change 2987.2 Case in Point: Toyota Struggles With Organizational Structure 3007.3 Organizational Structure 3037.4 Contemporary Forms of Organizational Structures 312

7.5 Organizational Change 3177.6 Planning and Executing Change Effectively 3287.7 Building Your Change Management Skills 334

Chapter 8: Organizational Culture

8.1 Organizational Culture 3378.2 Case in Point: Google Creates Unique Culture 3398.3 Understanding Organizational Culture 3428.4 Measuring Organizational Culture 3468.5 Creating and Maintaining Organizational Culture 3568.6 Creating Culture Change 3708.7 Developing Your Personal Skills: Learning to Fit In 375

Chapter 9: Social Networks

9.1 Social Networks 3799.2 Case in Point: Networking Powers Relationships 3819.3 An Introduction to the Lexicon of Social Networks 3839.4 How Managers Can Use Social Networks to Create Value 3899.5 Ethical Considerations With Social Network Analysis 4009.6 Personal, Operational, and Strategic Networks 4089.7 Mapping and Your Own Social Network 414

Chapter 10: Leading People and Organizations

10.1 Leading People and Organizations 42110.2 Case in Point: Indra Nooyi Draws on Vision and Values to Lead 42410.3 Who Is a Leader? Trait Approaches to Leadership 42710.4 What Do Leaders Do? Behavioral Approaches to Leadership 43410.5 What Is the Role of the Context? Contingency Approaches to Leadership 43910.6 Contemporary Approaches to Leadership 44710.7 Developing Your Leadership Skills 461

Chapter 11: Decision Making

11.1 Decision Making 46711.2 Case in Point: Bernard Ebbers Creates Biased Decision Making at WorldCom 46911.3 Understanding Decision Making 47211.4 Faulty Decision Making 48511.5 Decision Making in Groups 49011.6 Developing Your Personal Decision-Making Skills 498

Chapter 12: Communication in Organizations

12.1 Communication in Organizations 50112.2 Case in Point: Edward Jones Communicates Caring 50312.3 Understanding Communication 50512.4 Communication Barriers 51112.5 Different Types of Communication 52312.6 Communication Channels 53012.7 Developing Your Personal Communication Skills 539

Chapter 13: Managing Groups and Teams

13.1 Managing Groups and Teams 54513.2 Case in Point: General Electric Allows Teamwork to Take Flight 54713.3 Group Dynamics 54913.4 Understanding Team Design Characteristics 55813.5 Organizing Effective Teams 57313.6 Barriers to Effective Teams 57913.7 Developing Your Team Skills 582

Chapter 14: Motivating Employees

14.1 Motivating Employees 58514.2 Case in Point: Zappos Creates a Motivating Place to Work 58814.3 Need-Based Theories of Motivation 59014.4 Process-Based Theories 59814.5 Developing Your Personal Motivation Skills 620

Chapter 15: The Essentials of Control

15.1 The Essentials of Control 62415.2 Case in Point: Newell Rubbermaid Leverages Cost Controls to Grow 62615.3 Organizational Control 62815.4 Types and Levels of Control 63615.5 Financial Controls 64215.6 Nonfinancial Controls 65115.7 Lean Control 65915.8 Crafting Your Balanced Scorecard 665

Chapter 16: Strategic Human Resource Management

16.1 Strategic Human Resource Management 67116.2 Case in Point: Kronos Uses Science to Find the Ideal Employee 674

16.3 The Changing Role of Strategic Human Resource Management in Principles ofManagement

677

16.4 The War for Talent 68316.5 Effective Selection and Placement Strategies 68916.6 The Roles of Pay Structure and Pay for Performance 69616.7 Designing a High-Performance Work System 70216.8 Tying It All Together—Using the HR Balanced Scorecard to Gauge andManage Human Capital, Including Your Own

709

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Publisher Information

Principles of Management is adapted from a work produced and

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by a publisher who has requested that they and the original author not

receive attribution. This adapted edition is produced by the University

of Minnesota Libraries Publishing through the eLearning Support Initiative.

This adaptation has reformatted the original text, and replaced some images and figures to make the resulting

whole more shareable. This adaptation has not significantly altered or updated the original 2010 text. This work

is made available under the terms of a Creative Commons Attribution-NonCommercial-ShareAlike license.

Chapter 1: Introduction to Principles ofManagement

1.1 Introduction to Principles of Management

1.2 Case in Point: Doing Good as a Core Business Strategy

1.3 Who Are Managers?

1.4 Leadership, Entrepreneurship, and Strategy

1.5 Planning, Organizing, Leading, and Controlling

1.6 Economic, Social, and Environmental Performance

1.7 Performance of Individuals and Groups

1.8 Your Principles of Management Survivor’s Guide

1.1 Introduction to Principles of Management

Figure 1.1

Managers make things happen through strategic and entrepreneurial leadership.

Unsplash – CC0 Public Domain.

What’s in It for Me?

Reading this chapter will help you do the following:

1. Learn who managers are and about the nature of their work.

2. Know why you should care about leadership, entrepreneurship, and strategy.

3. Know the dimensions of the planning-organizing-leading-controlling (P-O-L-C) framework.

4. Learn how economic performance feeds social and environmental performance.

5. Understand what performance means at the individual and group levels.

6. Create your survivor’s guide to learning and developing principles of management.

We’re betting that you already have a lot of experience with organizations, teams, and leadership. You’ve been

through schools, in clubs, participated in social or religious groups, competed in sports or games, or taken on

full- or part-time jobs. Some of your experience was probably pretty positive, but you were also likely wondering

sometimes, “Isn’t there a better way to do this?”

After participating in this course, we hope that you find the answer to be “Yes!” While management is both art

and science, with our help you can identify and develop the skills essential to better managing your and others’

behaviors where organizations are concerned.

Before getting ahead of ourselves, just what is management, let alone principles of management? A manager’s

primary challenge is to solve problems creatively, and you should view management as “the art of getting things

done through the efforts of other people.”1 The principles of management, then, are the means by which you

actually manage, that is, get things done through others—individually, in groups, or in organizations. Formally

defined, the principles of management are the activities that “plan, organize, and control the operations of the basic

elements of [people], materials, machines, methods, money and markets, providing direction and coordination,

and giving leadership to human efforts, so as to achieve the sought objectives of the enterprise.”2 For this reason,

principles of management are often discussed or learned using a framework called P-O-L-C, which stands for

planning, organizing, leading, and controlling.

Managers are required in all the activities of organizations: budgeting, designing, selling, creating, financing,

accounting, and artistic presentation; the larger the organization, the more managers are needed. Everyone

employed in an organization is affected by management principles, processes, policies, and practices as they are

either a manager or a subordinate to a manager, and usually they are both.

Managers do not spend all their time managing. When choreographers are dancing a part, they are not managing,

nor are office managers managing when they personally check out a customer’s credit. Some employees perform

only part of the functions described as managerial—and to that extent, they are mostly managers in limited

areas. For example, those who are assigned the preparation of plans in an advisory capacity to a manager, to that

extent, are making management decisions by deciding which of several alternatives to present to the management.

However, they have no participation in the functions of organizing, staffing, and supervising and no control over

the implementation of the plan selected from those recommended. Even independent consultants are managers,

since they get most things done through others—those others just happen to be their clients! Of course, if advisers

or consultants have their own staff of subordinates, they become a manager in the fullest sense of the definition.

They must develop business plans; hire, train, organize, and motivate their staff members; establish internal

policies that will facilitate the work and direct it; and represent the group and its work to those outside of the firm.

1We draw this definition from a biography of Mary Parker Follett (1868–1933) written by P. Graham, Mary

Parker Follett: Prophet of Management (Boston: Harvard Business School Press, 1995). Follett was an American

social worker, consultant, and author of books on democracy, human relations, and management. She worked as a

management and political theorist, introducing such phrases as “conflict resolution,” “authority and power,” and

“the task of leadership.”

2The fundamental notion of principles of management was developed by French management theorist Henri

Fayol (1841–1925). He is credited with the original planning-organizing-leading-controlling framework (P-O-L-

C), which, while undergoing very important changes in content, remains the dominant management framework

1.1 INTRODUCTION TO PRINCIPLES OF MANAGEMENT • 3

in the world. See H. Fayol, General and Industrial Management (Paris: Institute of Electrical and Electronics

Engineering, 1916).

4 • PRINCIPLES OF MANAGEMENT

1.2 Case in Point: Doing Good as a Core Business Strategy

Figure 1.2

Timothy Brown – Browsing – CC BY 2.0.

Goodwill Industries International (a nonprofit organization) has been an advocate of diversity for over 100years. In 1902, in Boston, Massachusetts, a young missionary set up a small operation enlisting strugglingimmigrants in his parish to clean and repair clothing and goods to later sell. This provided workers withthe opportunity for basic education and language training. His philosophy was to provide a “hand up,” nota “hand out.” Although today you can find retail stores in over 2,300 locations worldwide, and in 2009more than 64 million people in the United States and Canada donated to Goodwill, the organization hasmaintained its core mission to respect the dignity of individuals by eliminating barriers to opportunitythrough the power of work. Goodwill accomplishes this goal, in part, by putting 84% of its revenue back

into programs to provide employment, which in 2008 amounted to $3.23 billion. As a result of theseprograms, every 42 seconds of every business day, someone gets a job and is one step closer to achievingeconomic stability.

Goodwill is a pioneer of social enterprise and has managed to build a culture of respect through itsdiversity programs. If you walk into a local Goodwill retail store you are likely to see employees fromall walks of life, including differences in gender and race, physical ability, sexual orientation, and age.Goodwill provides employment opportunities for individuals with disabilities, lack of education, or lackof job experience. The company has created programs for individuals with criminal backgrounds whomight otherwise be unable to find employment, including basic work skill development, job placementassistance, and life skills. In 2008, more than 172,000 people obtained employment, earning $2.3 billion inwages and gaining tools to be productive members of their community. Goodwill has established diversityas an organizational norm, and as a result, employees are comfortable addressing issues of stereotyping anddiscrimination. In an organization of individuals with such wide-ranging backgrounds, it is not surprisingthat there are a wide range of values and beliefs.

Management and operations are decentralized within the organization with 166 independent community-based Goodwill stores. These regional businesses are independent, not-for-profit human servicesorganizations. Despite its decentralization, the company has managed to maintain its core values. Seattle’sGoodwill is focused on helping the city’s large immigrant population and those individuals without basiceducation and English language skills. And at Goodwill Industries of Kentucky, the organization recentlyinvested in custom software to balance daily sales at stores to streamline operations so managers can spendless time on paperwork and more time managing employees.

Part of Goodwill’s success over the years can be attributed to its ability to innovate. As technology evolvesand such skills became necessary for most jobs, Goodwill has developed training programs to ensure thatindividuals are fully equipped to be productive members of the workforce, and in 2008 Goodwill wasable to provide 1.5 million people with career services. As an organization, Goodwill itself has enteredinto the digital age. You can now find Goodwill on Facebook, Twitter, and YouTube. Goodwill’s businesspractices encompass the values of the triple bottom line of people, planet, and profit. The organizationis taking advantage of new green initiatives and pursuing opportunities for sustainability. For example,at the beginning of 2010, Goodwill received a $7.3 million grant from the U.S. Department of Labor,which will provide funds to prepare individuals to enter the rapidly growing green industry of their choice.Oregon’s Goodwill Industries has partnered with the Oregon Department of Environmental Quality and itsOregon E-Cycles program to prevent the improper disposal of electronics. Goodwill discovered long agothat diversity is an advantage rather than a hindrance.

Based on information from Goodwill Industries of North Central Wisconsin. (2009). A brief historyof Goodwill Industries International. Retrieved March 3, 2010, from http://www.goodwillncw.org/goodwillhistory1.htm; Walker, R. (2008, November 2). Consumed: Goodwill hunting. New York TimesMagazine, p. 18; Tabafunda, J. (2008, July 26). After 85 years, Seattle Goodwill continues to improvelives. Northwest Asian Weekly. Retrieved March 1, 2010, from http://www.nwasianweekly.com/old/2008270031/goodwill20082731.htm; Slack, E. (2009). Selling hope. Retail Merchandiser, 49(1), 89–91;Castillo, L. (2009, February 24). Goodwill Industries offers employment programs. Clovis News Journal.Retrieved April 22, 2010, from http://www.cnjonline.com/news/industries-32474-goodwill-duttweiler.html; Information retrieved April 22, 2010, from the Oregon E-Cycles Web site:http://www.deq.state.or.us/lq/ecycle.

6 • PRINCIPLES OF MANAGEMENT

Discussion QuestionsDiscussion Questions

1. How might the implications of the P-O-L-C framework differ for an organization like GoodwillIndustries versus a firm like Starbucks?

2. What are Goodwill’s competitive advantages?

3. Goodwill has found success in the social services. What problems might result from hiring andtraining the diverse populations that Goodwill is involved with?

4. Have you ever experienced problems with discrimination in a work or school setting?

5. Why do you think that Goodwill believes it necessary to continually innovate?

1.2 CASE IN POINT: DOING GOOD AS A CORE BUSINESS STRATEGY • 7

1.3 Who Are Managers?

Learning Objectives

1. Know what is meant by “manager”.

2. Be able to describe the types of managers.

3. Understand the nature of managerial work.

ManagersManagers

We tend to think about managers based on their position in an organization. This tells us a bit about their

role and the nature of their responsibilities. The following figure summarizes the historic and contemporary

views of organizations with respect to managerial roles (Ghoshal & Barlett, 1999). In contrast to the traditional,

hierarchical relationship among layers of management and managers and employees, in the contemporary view,

top managers support and serve other managers and employees (through a process called empowerment), just

as the organization ultimately exists to serve its customers and clients. Empowerment is the process of enabling

or authorizing an individual to think, behave, take action, and control work and decision making in autonomous

ways.

Figure 1.3

Communication is a key managerial role.

Adrian Gaskell – Women In Management Eleanor McDonald Lecture – CC BY 2.0.

In both the traditional and contemporary views of management, however, there remains the need for different

types of managers. Top managers are responsible for developing the organization’s strategy and being a steward

for its vision and mission. A second set of managers includes functional, team, and general managers. Functional

managers are responsible for the efficiency and effectiveness of an area, such as accounting or marketing.

Supervisory or team managers are responsible for coordinating a subgroup of a particular function or a team

composed of members from different parts of the organization. Sometimes you will hear distinctions made

between line and staff managers.

A line manager leads a function that contributes directly to the products or services the organization creates. For

example, a line manager (often called a product, or service manager) at Procter & Gamble (P&G) is responsible

for the production, marketing, and profitability of the Tide detergent product line. A staff manager, in contrast,

leads a function that creates indirect inputs. For example, finance and accounting are critical organizational

functions but do not typically provide an input into the final product or service a customer buys, such as a box of

Tide detergent. Instead, they serve a supporting role. A project manager has the responsibility for the planning,

execution, and closing of any project. Project managers are often found in construction, architecture, consulting,

computer networking, telecommunications, or software development.

A general manager is someone who is responsible for managing a clearly identifiable revenue-producing unit,

such as a store, business unit, or product line. General managers typically must make decisions across different

functions and have rewards tied to the performance of the entire unit (i.e., store, business unit, product line, etc.).

General managers take direction from their top executives. They must first understand the executives’ overall

plan for the company. Then they set specific goals for their own departments to fit in with the plan. The general

manager of production, for example, might have to increase certain product lines and phase out others. General

managers must describe their goals clearly to their support staff. The supervisory managers see that the goals are

met.

1.3 WHO ARE MANAGERS? • 9

Figure 1.4 The Changing Roles of Management and Managers

The Nature of Managerial WorkThe Nature of Managerial Work

Managers are responsible for the processes of getting activities completed efficiently with and through other

people and setting and achieving the firm’s goals through the execution of four basic management functions:

planning, organizing, leading, and controlling. Both sets of processes utilize human, financial, and material

resources.

Of course, some managers are better than others at accomplishing this! There have been a number of studies on

what managers actually do, the most famous of those conducted by Professor Henry Mintzberg in the early 1970s

(Mintzberg, 1973). One explanation for Mintzberg’s enduring influence is perhaps that the nature of managerial

work has changed very little since that time, aside from the shift to an empowered relationship between top

managers and other managers and employees, and obvious changes in technology, and the exponential increase in

information overload.

After following managers around for several weeks, Mintzberg concluded that, to meet the many demands

of performing their functions, managers assume multiple roles. A role is an organized set of behaviors, and

Mintzberg identified 10 roles common to the work of all managers. As summarized in the following figure, the 10

roles are divided into three groups: interpersonal, informational, and decisional. The informational roles link all

managerial work together. The interpersonal roles ensure that information is provided. The decisional roles make

significant use of the information. The performance of managerial roles and the requirements of these roles can

be played at different times by the same manager and to different degrees, depending on the level and function of

management. The 10 roles are described individually, but they form an integrated whole.

The three interpersonal roles are primarily concerned with interpersonal relationships. In the figurehead role, the

manager represents the organization in all matters of formality. The top-level manager represents the company

legally and socially to those outside of the organization. The supervisor represents the work group to higher

10 • PRINCIPLES OF MANAGEMENT

management and higher management to the work group. In the liaison role, the manager interacts with peers and

people outside the organization. The top-level manager uses the liaison role to gain favors and information, while

the supervisor uses it to maintain the routine flow of work. The leader role defines the relationships between the

manager and employees.

Figure 1.5 Ten Managerial Roles

The direct relationships with people in the interpersonal roles place the manager in a unique position to get

information. Thus, the three informational roles are primarily concerned with the information aspects of

managerial work. In the monitor role, the manager receives and collects information. In the role of disseminator,

the manager transmits special information into the organization. The top-level manager receives and transmits

more information from people outside the organization than the supervisor. In the role of spokesperson, the

manager disseminates the organization’s information into its environment. Thus, the top-level manager is seen as

an industry expert, while the supervisor is seen as a unit or departmental expert.

The unique access to information places the manager at the center of organizational decision making. There are

four decisional roles managers play. In the entrepreneur role, the manager initiates change. In the disturbance

handler role, the manager deals with threats to the organization. In the resource allocator role, the manager chooses

where the organization will expend its efforts. In the negotiator role, the manager negotiates on behalf of the

organization. The top-level manager makes the decisions about the organization as a whole, while the supervisor

makes decisions about his or her particular work unit.

The supervisor performs these managerial roles but with different emphasis than higher managers. Supervisory

management is more focused and short-term in outlook. Thus, the figurehead role becomes less significant and

1.3 WHO ARE MANAGERS? • 11

the disturbance handler and negotiator roles increase in importance for the supervisor. Since leadership permeates

all activities, the leader role is among the most important of all roles at all levels of management.

So what do Mintzberg’s conclusions about the nature of managerial work mean for you? On the one hand,

managerial work is the lifeblood of most organizations because it serves to choreograph and motivate individuals

to do amazing things. Managerial work is exciting, and it is hard to imagine that there will ever be a shortage

of demand for capable, energetic managers. On the other hand, managerial work is necessarily fast-paced and

fragmented, where managers at all levels express the opinion that they must process much more information and

make more decisions than they could have ever possibly imagined. So, just as the most successful organizations

seem to have well-formed and well-executed strategies, there is also a strong need for managers to have good

strategies about the way they will approach their work. This is exactly what you will learn through principles of

management.

Key Takeaway

Managers are responsible for getting work done through others. We typically describe the key managerialfunctions as planning, organizing, leading, and controlling. The definitions for each of these have evolvedover time, just as the nature of managing in general has evolved over time. This evolution is best seen inthe gradual transition from the traditional hierarchical relationship between managers and employees, toa climate characterized better as an upside-down pyramid, where top executives support middle managersand they, in turn, support the employees who innovate and fulfill the needs of customers and clients.Through all four managerial functions, the work of managers ranges across 10 roles, from figurehead tonegotiator. While actual managerial work can seem challenging, the skills you gain through principles ofmanagement—consisting of the functions of planning, organizing, leading, and controlling—will help youto meet these challenges.

Exercises

1. Why do organizations need managers?

2. What are some different types of managers and how do they differ?

3. What are Mintzberg’s 10 managerial roles?

4. What three areas does Mintzberg use to organize the 10 roles?

5. What four general managerial functions do principles of management include?

ReferencesReferences

Ghoshal, S. and C. Bartlett, The Individualized Corporation: A Fundamentally New Approach to Management

(New York: Collins Business, 1999).

Mintzberg, H. The Nature of Managerial Work (New York: Harper & Row, 1973).

12 • PRINCIPLES OF MANAGEMENT

1.4 Leadership, Entrepreneurship, and Strategy

Learning ObjectivesLearning Objectives

1. Know the roles and importance of leadership, entrepreneurship, and strategy in principles ofmanagement.

2. Understand how leadership, entrepreneurship, and strategy are interrelated.

The principles of management are drawn from a number of academic fields, principally, the fields of leadership,

entrepreneurship, and strategy.

LeadershipLeadership

If management is defined as getting things done through others, then leadership should be defined as the social

and informal sources of influence that you use to inspire action taken by others. It means mobilizing others to

want to struggle toward a common goal. Great leaders help build an organization’s human capital, then motivate

individuals to take concerted action. Leadership also includes an understanding of when, where, and how to use

more formal sources of authority and power, such as position or ownership. Increasingly, we live in a world where

good management requires good leaders and leadership. While these views about the importance of leadership

are not new (see “Views on Managers Versus Leaders”), competition among employers and countries for the best

and brightest, increased labor mobility (think “war for talent” here), and hypercompetition puts pressure on firms

to invest in present and future leadership capabilities.

P&G provides a very current example of this shift in emphasis to leadership as a key principle of management.

For example, P&G recruits and promotes those individuals who demonstrate success through influence rather than

direct or coercive authority. Internally, there has been a change from managers being outspoken and needing to

direct their staff, to being individuals who electrify and inspire those around them. Good leaders and leadership

at P&G used to imply having followers, whereas in today’s society, good leadership means followership and

bringing out the best in your peers. This is one of the key reasons that P&G has been consistently ranked among

the top 10 most admired companies in the United States for the last three years, according to Fortune magazine

(Fortune, 2008).

Whereas P&G has been around for some 170 years, another winning firm in terms of leadership is Google, which

has only been around for little more than a decade. Both firms emphasize leadership in terms of being exceptional

at developing people. Google has topped Fortune’s 100 Best Companies to Work for the past two years. Google’s

founders, Sergey Brin and Larry Page, built a company around the idea that work should be challenging and the

challenge should be fun (Google, 2008). Google’s culture is probably unlike any in corporate America, and it’s

not because of the ubiquitous lava lamps throughout the company’s headquarters or that the company’s chef used

to cook for the Grateful Dead. In the same way Google puts users first when it comes to online service, Google

espouses that it puts employees first when it comes to daily life in all of its offices. There is an emphasis on team

achievements and pride in individual accomplishments that contribute to the company’s overall success. Ideas

are traded, tested, and put into practice with a swiftness that can be dizzying. Observers and employees note that

meetings that would take hours elsewhere are frequently little more than a conversation in line for lunch and few

walls separate those who write the code from those who write the checks. This highly communicative environment

fosters a productivity and camaraderie fueled by the realization that millions of people rely on Google results.

Leadership at Google amounts to a deep belief that if you give the proper tools to a group of people who like to

make a difference, they will.

Figure 1.6

Leaders inspire the collective action of others toward a shared goal.

geralt – CC0 public domain.

Views on Managers Versus LeadersViews on Managers Versus Leaders

My definition of a leader…is a man who can persuade people to do what they don’t

want to do, or do what they’re too lazy to do, and like it.

Harry S. Truman (1884–1972), 33rd president of the United States

14 • PRINCIPLES OF MANAGEMENT

You cannot manage men into battle. You manage things; you lead people.

Grace Hopper (1906–1992), Admiral, U.S. Navy

Managers have subordinates—leaders have followers.

Chester Bernard (1886–1961), former executive and author of Functions of the

Executive

The first job of a leader is to define a vision for the organization…Leadership is the

capacity to translate vision into reality.

Warren Bennis (1925–), author and leadership scholar

A manager takes people where they want to go. A great leader takes people where

they don’t necessarily want to go but ought to.

Rosalynn Carter (1927–), First Lady of the United States, 1977–1981

EntrepreneurshipEntrepreneurship

It’s fitting that this section on entrepreneurship follows the discussion of Google. Entrepreneurship is defined as

the recognition of opportunities (needs, wants, problems, and challenges) and the use or creation of resources to

implement innovative ideas for new, thoughtfully planned ventures. Perhaps this is obvious, but an entrepreneur

is a person who engages in the process of entrepreneurship. We describe entrepreneurship as a process because

it often involves more than simply coming up with a good idea—someone also has to convert that idea into

action. As an example of both, Google’s leaders suggest that its point of distinction “is anticipating needs not yet

articulated by our global audience, then meeting them with products and services that set new standards. This

constant dissatisfaction with the way things are is ultimately the driving force behind the world’s best search

engine (Google, 2008).”

Entrepreneurs and entrepreneurship are the catalysts for value creation. They identify and create new markets,

as well as foster change in existing ones. However, such value creation first requires an opportunity. Indeed, the

opportunity-driven nature of entrepreneurship is critical. Opportunities are typically characterized as problems

in search of solutions, and the best opportunities are big problems in search of big solutions. “The greater the

inconsistencies in existing service and quality, in lead times and in lag times, the greater the vacuums and gaps in

information and knowledge, the greater the opportunities (Timmons, 1999).” In other words, bigger problems will

often mean there will be a bigger market for the product or service that the entrepreneur creates. We hope you can

see why the problem-solving, opportunity-seeking nature of entrepreneurship is a fundamental building block for

effective principles of management.

1.4 LEADERSHIP, ENTREPRENEURSHIP, AND STRATEGY • 15

StrategyStrategy

When an organization has a long-term purpose, articulated in clear goals and objectives, and these goals and

objectives can be rolled up into a coherent plan of action, then we would say that the organization has a

strategy. It has a good or even great strategy when this plan also takes advantage of unique resources and

capabilities to exploit a big and growing external opportunity. Strategy then, is the central, integrated, externally-

oriented concept of how an organization will achieve its objectives (Hambrick & Fredrickson, 2001). Strategic

management is the body of knowledge that answers questions about the development and implementation of good

strategies.

Strategic management is important to all organizations because, when correctly formulated and communicated,

strategy provides leaders and employees with a clear set of guidelines for their daily actions. This is why strategy

is so critical to the principles of management you are learning about. Simply put, strategy is about making choices:

What do I do today? What shouldn’t I be doing? What should my organization be doing? What should it stop

doing?

Synchronizing Leadership, Entrepreneurship, and StrategySynchronizing Leadership, Entrepreneurship, and Strategy

You know that leadership, entrepreneurship, and strategy are the inspiration for important, valuable, and useful

principles of management. Now you will want to understand how they might relate to one another. In terms

of principles of management, you can think of leadership, entrepreneurship, and strategic management as

answering questions about “who,” “what,” and “how.” Leadership helps you understand who helps lead the

organization forward and what the critical characteristics of good leadership might be. Entrepreneurial firms and

entrepreneurs in general are fanatical about identifying opportunities and solving problems—for any organization,

entrepreneurship answers big questions about “what” an organization’s purpose might be. Finally, strategic

management aims to make sure that the right choices are made—specifically, that a good strategy is in place—to

exploit those big opportunities.

One way to see how leadership, entrepreneurship, and strategy come together for an organization—and for

you—is through a recent (disguised) job posting from Craigslist. Look at the ideal candidate characteristics

identified in the Help Wanted ad—you don’t have to look very closely to see that if you happen to be a recent

business undergrad, then the organization depicted in the ad is looking for you. The posting identifies a number of

areas of functional expertise for the target candidate. You can imagine that this new position is pretty critical for

the success of the business. For that reason, we hope you are not surprised to see that, beyond functional expertise,

this business seeks someone with leadership, entrepreneurial, and strategic orientation and skills. Now you have a

better idea of what those key principles of management involve.

Help Wanted—Chief of StaffHelp Wanted—Chief of Staff

We’re hiring a chief of staff to bring some order to the mayhem of our firm’s growth. You will toucheverything at the company, from finance to sales, marketing to operations, recruiting to human resources,accounting to investor relations. You will report directly to the CEO.

16 • PRINCIPLES OF MANAGEMENT

Here’s what you’re going to be asked to do across a range of functional areas in the first 90 days, beforeyour job evolves into a whole new set of responsibilities:

Marketing

• Leverage our existing customer base using best-in-class direct marketing campaigns via e-mail,phone, Web, and print or mail communications.

• Convert our current customer spreadsheet and database into a highly functional, lean customerrelationship management (CRM) system—we need to build the infrastructure to service and reachout to customers for multiple users.

• Be great at customer service personally—excelling in person and on the phone, and you will help usbuild a Ninja certification system for our employees and partners to be like you.

• Build our Web-enabled direct sales force, requiring a lot of strategic work, sales-force incentivedesign and experimentation, and rollout of Web features to support the direct channel.

Sales

• Be great at demonstrating our product in the showroom, as well as at your residence and in thefield—plan to be one of the top sales reps on the team (and earn incremental variable compensationfor your efforts).

Finance and Accounting

• Build our financial and accounting structures and processes, take over QuickBooks, manage ourteam of accountants, hire additional resources as needed, and get that profit and loss statement(P&L) rocking.

• Figure out when we should pay our bills and manage team members to get things paid on time andmanage our working capital effectively.

• Track our actual revenues and expenses against your own projection—you will be building andrunning our financial model.

Operations

• We are building leading-edge capabilities on returns, exchanges, and shipping—you will help guidestrategic thinking on operational solutions and will implement them with our operations manager.

• We are looking for new headquarters, you may help identify, build out, and launch.

HR and Recruiting

• We are recruiting a team of interns—you will take the lead on the program, and many or all of themwill report to you; you will be an ombudsman of sorts for our summer program.

• The company has a host of HR needs that are currently handled by the CEO and third parties; youwill take over many of these.

Production and Product Development

• The company is actively recruiting a production assistant/manager—in the meanwhile, there are anumber of Web-facing and vendor-facing activities you will pitch in on.

1.4 LEADERSHIP, ENTREPRENEURSHIP, AND STRATEGY • 17

The Ideal Candidate Is…

• a few years out of college but is at least two or three years away from going to business or othergraduate school;

• charismatic and is instantly likeable to a wide variety of people, driven by sparkling wit, a highdegree of extraversion, and a balanced mix of self-confidence and humility;

• able to read people quickly and knows how to treat people accordingly;

• naturally compassionate and demonstrates strong empathy, easily thinking of the world from theperspective of another person;

• an active listener and leaves people with the sense that they are well heard;

• exceptionally detail-oriented and has a memory like a steel trap—nothing falls through the cracks;

• razor sharp analytically, aced the math section of their SAT test, and excels at analyzing and solvingproblems;

• a perfectionist and keeps things in order with ease.

Key TakeawayKey Takeaway

The principles of management are drawn from three specific areas—leadership, entrepreneurship, andstrategic management. You learned that leadership helps you understand who helps lead the organizationforward and what the critical characteristics of good leadership might be. Entrepreneurs are fanaticalabout identifying opportunities and solving problems—for any organization, entrepreneurship answers bigquestions about “what” an organization’s purpose might be. Finally, as you’ve already learned, strategicmanagement aims to make sure that the right choices are made—specifically, that a good strategy is inplace—to exploit those big opportunities.

ExercisesExercises

1. How do you define leadership, and who would you identify as a great leader?

2. What is entrepreneurship?

3. What is strategy?

4. What roles do leadership, entrepreneurship, and strategy play in good principles of management?

ReferencesReferences

Hambrick, D and J. Fredrickson, “Are You Sure You Have a Strategy?” Academy of Management Executive 15,

no. 4 (2001): 2.

18 • PRINCIPLES OF MANAGEMENT

Google.com, http://www.google.com/intl/en/corporate/tenthings.html (accessed October 15, 2008).

Ranking of Most Admired Firms for 2006, 2007, 2008. http://www.fortune.com (accessed October 15, 2008).

Timmons, J. The Entrepreneurial Process (New York: McGraw-Hill, 1999), 39.

1.4 LEADERSHIP, ENTREPRENEURSHIP, AND STRATEGY • 19

1.5 Planning, Organizing, Leading, and Controlling

Learning Objectives

1. Know the dimensions of the planning-organizing-leading-controlling (P-O-L-C) framework.

2. Know the general inputs into each P-O-L-C dimension.

A manager’s primary challenge is to solve problems creatively. While drawing from a variety of academic

disciplines, and to help managers respond to the challenge of creative problem solving, principles of management

have long been categorized into the four major functions of planning, organizing, leading, and controlling (the

P-O-L-C framework). The four functions, summarized in the P-O-L-C figure, are actually highly integrated when

carried out in the day-to-day realities of running an organization. Therefore, you should not get caught up in trying

to analyze and understand a complete, clear rationale for categorizing skills and practices that compose the whole

of the P-O-L-C framework.

It is important to note that this framework is not without criticism. Specifically, these criticisms stem from the

observation that the P-O-L-C functions might be ideal but that they do not accurately depict the day-to-day actions

of actual managers (Mintzberg, 1973; Lamond, 2004). The typical day in the life of a manager at any level can

be fragmented and hectic, with the constant threat of having priorities dictated by the law of the trivial many and

important few (i.e., the 80/20 rule). However, the general conclusion seems to be that the P-O-L-C functions of

management still provide a very useful way of classifying the activities managers engage in as they attempt to

achieve organizational goals (Lamond, 2004).

Figure 1.7 The P-O-L-C Framework

PlanningPlanning

Planning is the function of management that involves setting objectives and determining a course of action for

achieving those objectives. Planning requires that managers be aware of environmental conditions facing their

organization and forecast future conditions. It also requires that managers be good decision makers.

Planning is a process consisting of several steps. The process begins with environmental scanning which simply

means that planners must be aware of the critical contingencies facing their organization in terms of economic

conditions, their competitors, and their customers. Planners must then attempt to forecast future conditions. These

forecasts form the basis for planning.

Planners must establish objectives, which are statements of what needs to be achieved and when. Planners must

then identify alternative courses of action for achieving objectives. After evaluating the various alternatives,

planners must make decisions about the best courses of action for achieving objectives. They must then formulate

necessary steps and ensure effective implementation of plans. Finally, planners must constantly evaluate the

success of their plans and take corrective action when necessary.

There are many different types of plans and planning.

Strategic planning involves analyzing competitive opportunities and threats, as well as the strengths and

weaknesses of the organization, and then determining how to position the organization to compete effectively

in their environment. Strategic planning has a long time frame, often three years or more. Strategic planning

generally includes the entire organization and includes formulation of objectives. Strategic planning is often based

on the organization’s mission, which is its fundamental reason for existence. An organization’s top management

most often conducts strategic planning.

Tactical planning is intermediate-range (one to three years) planning that is designed to develop relatively concrete

and specific means to implement the strategic plan. Middle-level managers often engage in tactical planning.

Operational planning generally assumes the existence of organization-wide or subunit goals and objectives and

specifies ways to achieve them. Operational planning is short-range (less than a year) planning that is designed to

develop specific action steps that support the strategic and tactical plans.

OrganizingOrganizing

Organizing is the function of management that involves developing an organizational structure and allocating

human resources to ensure the accomplishment of objectives. The structure of the organization is the framework

within which effort is coordinated. The structure is usually represented by an organization chart, which provides

a graphic representation of the chain of command within an organization. Decisions made about the structure of

an organization are generally referred to as organizational design decisions.

Organizing also involves the design of individual jobs within the organization. Decisions must be made about

the duties and responsibilities of individual jobs, as well as the manner in which the duties should be carried out.

Decisions made about the nature of jobs within the organization are generally called “job design” decisions.

Organizing at the level of the organization involves deciding how best to departmentalize, or cluster, jobs

1.5 PLANNING, ORGANIZING, LEADING, AND CONTROLLING • 21

into departments to coordinate effort effectively. There are many different ways to departmentalize, including

organizing by function, product, geography, or customer. Many larger organizations use multiple methods of

departmentalization.

Organizing at the level of a particular job involves how best to design individual jobs to most effectively use

human resources. Traditionally, job design was based on principles of division of labor and specialization, which

assumed that the more narrow the job content, the more proficient the individual performing the job could become.

However, experience has shown that it is possible for jobs to become too narrow and specialized. For example,

how would you like to screw lids on jars one day after another, as you might have done many decades ago if you

worked in company that made and sold jellies and jams? When this happens, negative outcomes result, including

decreased job satisfaction and organizational commitment, increased absenteeism, and turnover.

Recently, many organizations have attempted to strike a balance between the need for worker specialization and

the need for workers to have jobs that entail variety and autonomy. Many jobs are now designed based on such

principles as empowerment, job enrichment and teamwork. For example, HUI Manufacturing, a custom sheet

metal fabricator, has done away with traditional “departments” to focus on listening and responding to customer

needs. From company-wide meetings to team huddles, HUI employees know and understand their customers and

how HUI might service them best (Huimfg, 2008).

LeadingLeading

Leading involves the social and informal sources of influence that you use to inspire action taken by others. If

managers are effective leaders, their subordinates will be enthusiastic about exerting effort to attain organizational

objectives.

The behavioral sciences have made many contributions to understanding this function of management. Personality

research and studies of job attitudes provide important information as to how managers can most effectively

lead subordinates. For example, this research tells us that to become effective at leading, managers must first

understand their subordinates’ personalities, values, attitudes, and emotions.

Studies of motivation and motivation theory provide important information about the ways in which workers

can be energized to put forth productive effort. Studies of communication provide direction as to how managers

can effectively and persuasively communicate. Studies of leadership and leadership style provide information

regarding questions, such as, “What makes a manager a good leader?” and “In what situations are certain

leadership styles most appropriate and effective?”

22 • PRINCIPLES OF MANAGEMENT

Figure 1.8

Quality control ensures that the organization delivers on its promises.

International Maize and Wheat Improvement Center – Maize seed quality control at small seed company

Bidasem – CC BY-NC-SA 2.0.

ControllingControlling

Controlling involves ensuring that performance does not deviate from standards. Controlling consists of three

steps, which include (1) establishing performance standards, (2) comparing actual performance against standards,

and (3) taking corrective action when necessary. Performance standards are often stated in monetary terms such

as revenue, costs, or profits but may also be stated in other terms, such as units produced, number of defective

products, or levels of quality or customer service.

The measurement of performance can be done in several ways, depending on the performance standards,

including financial statements, sales reports, production results, customer satisfaction, and formal performance

appraisals. Managers at all levels engage in the managerial function of controlling to some degree.

The managerial function of controlling should not be confused with control in the behavioral or manipulative

sense. This function does not imply that managers should attempt to control or to manipulate the personalities,

values, attitudes, or emotions of their subordinates. Instead, this function of management concerns the manager’s

role in taking necessary actions to ensure that the work-related activities of subordinates are consistent with and

contributing toward the accomplishment of organizational and departmental objectives.

Effective controlling requires the existence of plans, since planning provides the necessary performance standards

or objectives. Controlling also requires a clear understanding of where responsibility for deviations from standards

lies. Two traditional control techniques are budget and performance audits. An audit involves an examination

1.5 PLANNING, ORGANIZING, LEADING, AND CONTROLLING • 23

and verification of records and supporting documents. A budget audit provides information about where the

organization is with respect to what was planned or budgeted for, whereas a performance audit might try to

determine whether the figures reported are a reflection of actual performance. Although controlling is often

thought of in terms of financial criteria, managers must also control production and operations processes,

procedures for delivery of services, compliance with company policies, and many other activities within the

organization.

The management functions of planning, organizing, leading, and controlling are widely considered to be the best

means of describing the manager’s job, as well as the best way to classify accumulated knowledge about the study

of management. Although there have been tremendous changes in the environment faced by managers and the

tools used by managers to perform their roles, managers still perform these essential functions.

Key Takeaway

The principles of management can be distilled down to four critical functions. These functions areplanning, organizing, leading, and controlling. This P-O-L-C framework provides useful guidance intowhat the ideal job of a manager should look like.

Exercises

1. What are the management functions that comprise the P-O-L-C framework?

2. Are there any criticisms of this framework?

3. What function does planning serve?

4. What function does organizing serve?

5. What function does leading serve?

6. What function does controlling serve?

ReferenesReferenes

Huimfg.com, http://www.huimfg.com/abouthui-yourteams.aspx (accessed October 15, 2008).

Lamond, D, “A Matter of Style: Reconciling Henri and Henry,” Management Decision 42, no. 2 (2004): 330–56.

Mintzberg, H. The Nature of Managerial Work (New York: Harper & Row, 1973); D. Lamond, “A Matter of Style:

Reconciling Henri and Henry,” Management Decision 42, no. 2 (2004): 330–56.

24 • PRINCIPLES OF MANAGEMENT

1.6 Economic, Social, and Environmental Performance

Learning Objectives

1. Be able to define economic, social, and environmental performance.

2. Understand how economic performance is related to social and environmental performance.

Webster’s dictionary defines performance as “the execution of an action” and “something accomplished”

(Merriam Webster, 2008). Principles of management help you better understand the inputs into critical

organizational outcomes like a firm’s economic performance. Economic performance is very important to a firm’s

stakeholders particularly its investors or owners, because this performance eventually provides them with a return

on their investment. Other stakeholders, like the firm’s employees and the society at large, are also deemed

to benefit from such performance, albeit less directly. Increasingly though, it seems clear that noneconomic

accomplishments, such as reducing waste and pollution, for example, are key indicators of performance as

well. Indeed, this is why the notion of the triple bottom line is gaining so much attention in the business

press. Essentially, the triple bottom line refers to The measurement of business performance along social,

environmental, and economic dimensions. We introduce you to economic, social, and environmental performance

and conclude the section with a brief discussion of the interdependence of economic performance with other forms

of performance.

Economic PerformanceEconomic Performance

In a traditional sense, the economic performance of a firm is a function of its success in producing benefits for its

owners in particular, through product innovation and the efficient use of resources. When you talk about this type

of economic performance in a business context, people typically understand you to be speaking about some form

of profit.

The definition of economic profit is the difference between revenue and the opportunity cost of all resources used

to produce the items sold (Albrecht, 1983). This definition includes implicit returns as costs. For our purposes,

it may be simplest to think of economic profit as a form of accounting profit where profits are achieved when

revenues exceed the accounting cost the firm “pays” for those inputs. In other words, your organization makes a

profit when its revenues are more than its costs in a given period of time, such as three months, six months, or a

year.

Before moving on to social and environmental performance, it is important to note that customers play a big role

in economic profits. Profits accrue to firms because customers are willing to pay a certain price for a product or

service, as opposed to a competitor’s product or service of a higher or lower price. If customers are only willing to

make purchases based on price, then a firm, at least in the face of competition, will only be able to generate profit

if it keeps its costs under control.

Social and Environmental PerformanceSocial and Environmental Performance

You have learned a bit about economic performance and its determinants. For most organizations, you saw that

economic performance is associated with profits, and profits depend a great deal on how much customers are

willing to pay for a good or service.

With regard to social and environmental performance, it is similarly useful to think of them as forms of

profit—social and environmental profit to be exact. Increasingly, the topics of social and environmental

performance have garnered their own courses in school curricula; in the business world, they are collectively

referred to as corporate social responsibility (CSR)

CSR is a concept whereby organizations consider the interests of society by taking responsibility for the impact of

their activities on customers, suppliers, employees, shareholders, communities, and the environment in all aspects

of their operations. This obligation is seen to extend beyond the statutory obligation to comply with legislation and

sees organizations voluntarily taking further steps to improve the quality of life for employees and their families,

as well as for the local community and society at large.

Two companies that have long blazed a trail in CSR are Ben & Jerry’s and S. C. Johnson. Their statements about

why they do this, summarized in Table 1.1 “Examples of leading firms with strong CSR orientations”, capture

many of the facets just described.

Table 1.1 Examples of leading firms with strong CSR orientations

Why We Do It?

Ben &Jerry’s

“We’ve taken time each year since 1989 to compile this [Social Audit] report because we continue to believe that it keeps us intouch with our Company’s stated Social Mission. By raising the profile of social and environmental matters inside the Companyand recording the impact of our work on the community, this report aids us in our search for business decisions that support allthree parts of our Company Mission Statement: Economic, Product, and Social. In addition, the report is an important source ofinformation about the Company for students, journalists, prospective employees, and other interested observers. In this way, ithelps us in our quest to keep our values, our actions, and public perceptions in alignment (Benjerrys, 2008).”

S. C.Johnson

“It’s nice to live next door to a family that cares about its neighbors, and at S. C. Johnson we are committed to being a goodneighbor and contributing to the well-being of the countries and the communities where we conduct business. We have a widevariety of efforts to drive global development and growth that benefit the people around us and the planet we all share. Fromexceptional philanthropy and volunteerism to new business models that bring economic growth to the world’s poorestcommunities, we’re helping to create stronger communities for families around the globe” (Scjohnson, 2008).

26 • PRINCIPLES OF MANAGEMENT

Figure 1.9

Environmentally Neutral Design (END) designs shoes with the goal of eliminating the surplus material

needed to make a shoe such that it costs less to make and is lighter than other performance shoes on the

market.

ideowl – Carbon Neutral Shoes – CC BY 2.0.

Integrating Economic, Social, and Environmental PerformanceIntegrating Economic, Social, and Environmental Performance

Is there really a way to achieve a triple bottom line in a way that actually builds up all three facets of

performance—economic, social, and environmental? Advocates of CSR understandably argue that this is possible

and should be the way all firms are evaluated. Increasingly, evidence is mounting that attention to a triple

bottom line is more than being “responsible” but instead just good business. Critics argue that CSR detracts

from the fundamental economic role of businesses; others argue that it is nothing more than superficial window

dressing; still, others argue that it is an attempt to preempt the role of governments as a watchdog over powerful

multinational corporations.

While there is no systematic evidence supporting such a claim, a recent review of nearly 170 research studies on

1.6 ECONOMIC, SOCIAL, AND ENVIRONMENTAL PERFORMANCE • 27

the relationship between CSR and firm performance reported that there appeared to be no negative shareholder

effects of such practices. In fact, this report showed that there was a small positive relationship between CSR

and shareholder returns (Margolis & Elfenbein, 2008). Similarly, companies that pay good wages and offer good

benefits to attract and retain high-caliber employees “are not just being socially responsible; they are merely

practicing good management” (Reich, 2007).

The financial benefits of social or environmental CSR initiatives vary by context. For example, environment-

friendly strategies are much more complicated in the consumer products and services market. For example,

cosmetics retailer The Body Shop and StarKist Seafood Company, a strategic business unit of Heinz Food, both

undertook environmental strategies but only the former succeeded. The Body Shop goes to great lengths to ensure

that its business is ecologically sustainable (Bodyshop, 2008). It actively campaigns against human rights abuses

and for animal and environmental protection and is one of the most respected firms in the world, despite its small

size. Consumers pay premium prices for Body Shop products, ostensibly because they believe that it simply costs

more to provide goods and services that are environmentally friendly. The Body Shop has been wildly successful.

StarKist, too, adopted a CSR approach, when, in 1990, it decided to purchase and sell exclusively dolphin-safe

tuna. At the time, biologists thought that the dolphin population decline was a result of the thousands killed in the

course of tuna harvests. However, consumers were unwilling to pay higher prices for StarKist’s environmental

product attributes. Moreover, since tuna were bought from commercial fishermen, this particular practice afforded

the firm no protection from imitation by competitors. Finally, in terms of credibility, the members of the tuna

industry had launched numerous unsuccessful campaigns in the past touting their interest in the environment,

particularly the world’s oceans. Thus, consumers did not perceive StarKist’s efforts as sincerely “green.”

You might argue that The Body Shop’s customers are unusually price insensitive, hence the success of its

environment-based strategy. However, individuals are willing to pay more for organic produce, so why not

dolphin-safe tuna? One difference is that while the environment is a public good, organic produce produces both

public and private benefits. For example, organic farming is better for the environment and pesticide-free produce

is believed to be better for the health of the consumer. Dolphin-free tuna only has the public environmental

benefits (i.e., preserve the dolphin population and oceans’ ecosystems), not the private ones like personal health.

It is true that personal satisfaction and benevolence are private benefits, too. However, consumers did not believe

they were getting their money’s worth in this regard for StarKist tuna, whereas they do with The Body Shop’s

products.

Somewhere in our dialogue on CSR lies the idea of making the solution of an environmental or social problem

the primary purpose of the organization. Cascade Asset Management (CAM), is a case in point (Cascade,

2008). CAM was created in April 1999, in Madison, Wisconsin, and traces its beginnings to the University of

Wisconsin’s Entrepreneurship program where the owners collaborated on developing and financing the initial

business plan. CAM is a private, for-profit enterprise established to provide for the environmentally responsible

disposition of computers and other electronics generated by businesses and institutions in Wisconsin. With their

experience and relationships in surplus asset disposition and computer hardware maintenance, the founders were

able to apply their skills and education to this new and developing industry.

Firms are willing to pay for CAM’s services because the disposal of surplus personal computers (PCs) is

recognized as risky and highly regulated, given the many toxic materials embedded in most components. CAM’s

story is also credible (whereas StarKist had trouble selling its CSR story). The company was one of the original

28 • PRINCIPLES OF MANAGEMENT

signers of the “Electronic Recyclers Pledge of True Stewardship” (Computertakeback, 2008) Signers of the

pledge are committed to the highest standards of environmental and economic sustainability in their industry

and are expected to live out this commitment through their operations and partnerships. The basic principles

of the pledge are as follows: no export of untested whole products or hazardous components or commodities

(CRTs, circuit boards) to developing countries, no use of prison labor, adherence to an environmental and worker

safety management system, provision of regular testing and audits to ensure compliance, and support efforts to

encourage producers to make their products less toxic. CAM has grown rapidly and now serves over 500 business

and institutional customers from across the country. While it is recognized as one of the national leaders in

responsible, one-stop information technology (IT) asset disposal, its success is attracting new entrants such as

IBM, which view PC recycling as another profitable service they can offer their existing client base (IBM, 2008).

Key Takeaway

Organizational performance can be viewed along three dimensions—financial, social, andenvironmental—collectively referred to as the triple bottom line, where the latter two dimensions areincluded in the definition of CSR. While there remains debate about whether organizations should considerenvironmental and social impacts when making business decisions, there is increasing pressure to includesuch CSR activities in what constitutes good principles of management. This pressure is based onarguments that range from CSR helps attract and retain the best and brightest employees, to showing thatthe firm is being responsive to market demands, to observations about how some environmental and socialneeds represent great entrepreneurial business opportunities in and of themselves.

Exercises

1. Why is financial performance important for organizations?

2. What are some examples of financial performance metrics?

3. What dimensions of performance beyond financial are included in the triple bottom line?

4. How does CSR relate to the triple bottom line?

5. How are financial performance and CSR related?

ReferencesReferences

Albrecht, W. P. Economics (Englewood Cliffs, NJ: Prentice Hall, 1983).

Bodyshop.com, http://www.bodyshop.com (accessed October 15, 2008).

Cascade.com, http://www.cascade-assets.com (accessed October 15, 2008).

Computertakeback.com, http://www.computertakeback.com/the_solutions/recycler_s_pledge.cfm (accessed

October 15, 2008).

1.6 ECONOMIC, SOCIAL, AND ENVIRONMENTAL PERFORMANCE • 29

Ibm.com, http://www.ibm.com/ibm/environment/ (accessed October 15, 2008).

Scjohnson.com, http://www.scjohnson.com/community (accessed October 15, 2008).

Benjerrys.com, http://www.benjerrys.com/our_company/about_us/social_mission/social_audits (accessed

October 15, 2008).

Merriam-webster.com, http://www.merriam-webster.com/dictionary/performance (accessed October 15, 2008).

Margolis, J and Hillary H. Elfenbein, “Doing well by Doing Good? Don’t Count on It,” Harvard Business Review

86 (2008): 1–2.

Reich, R Supercapitalism: The Transformation of Business, Democracy, and Everyday Life (New York: Knopf,

2007).

30 • PRINCIPLES OF MANAGEMENT

1.7 Performance of Individuals and Groups

Learning Objectives

1. Understand the key dimensions of individual-level performance.

2. Understand the key dimensions of group-level performance.

3. Know why individual- and group-level performance goals need to be compatible.

Principles of management are concerned with organization-level outcomes such as economic, social, or

environmental performance, innovation, or ability to change and adapt. However, for something to happen at the

level of an organization, something must typically also be happening within the organization at the individual or

team level. Obviously, if you are an entrepreneur and the only person employed by your company, the organization

will accomplish what you do and reap the benefits of what you create. Normally though, organizations have more

than one person, which is why we introduce to you concepts of individual and group performance.

Individual-Level PerformanceIndividual-Level Performance

Individual-level performance draws upon those things you have to do in your job, or in-role performance, and

those things that add value but which aren’t part of your formal job description. These “extras” are called extra-

role performance or organizational citizenship behaviors (OCBs). At this point, it is probably simplest to consider

an in-role performance as having productivity and quality dimensions associated with certain standards that you

must meet to do your job. In contrast, OCBs can be understood as individual behaviors that are beneficial to

the organization and are discretionary, not directly or explicitly recognized by the formal reward system (Organ,

1988).

In comparison to in-role performance, the spectrum of what constitutes extra-role performance, or OCBs, seems

be great and growing. In a recent review, for example, management researchers identified 30 potentially different

forms of OCB, which they conveniently collapsed into seven common themes: (1) Helping Behavior, (2)

Sportsmanship, (3) Organizational Loyalty, (4) Organizational Compliance, (5) Individual Initiative, (6) Civic

Virtue, and (7) Self-Development (Podsakoff, et. al., 2000). Definitions and examples for these seven themes are

summarized in Table 1.2 “A current survey of organization citizenship behaviors” (Organ, 1990; Graham, 1991;

George & Jones, 1997; George & Jones, 1997; Graham, 1991; Organ, 1994; Moorman & Blakely, 1995).

Table 1.2 A current survey of organization citizenship behaviors

Helping Behavior (Taking on the forms of altruism,interpersonal helping, courtesy, peacemaking, andcheerleading.)

Altruism

• Voluntary actions that help another person with a work problem.

• Instructing a new hire on how to use equipment, helping a coworker catch upwith a backlog of work, fetching materials that a colleague needs and cannotprocure on their own.

Interpersonal helping

• Focuses on helping coworkers in their jobs when such help was needed.

Courtesy

• Subsumes all of those foresightful gestures that help someone else prevent aproblem.

• Touching base with people before committing to actions that will affect them,providing advance notice to someone who needs to know to schedule work.

Peacemaking

• Actions that help to prevent, resolve, or mitigate unconstructive interpersonalconflict.

Cheerleading

• The words and gestures of encouragement and reinforcement of coworkers.

• Accomplishments and professional development.

Sportsmanship A citizenlike posture of tolerating the inevitable inconveniences and impositions of work without whining andgrievances.

OrganizationalLoyalty

Identification with and allegiance to organizational leaders and the organization as a whole, transcending theparochial interests of individuals, work groups, and departments. Representative behaviors include defending theorganization against threats, contributing to its good reputation, and cooperating with others to serve the interests ofthe whole.

OrganizationalCompliance (orObedience)

An orientation toward organizational structure, job descriptions, and personnel policies that recognizes and acceptsthe necessity and desirability of a rational structure of rules and regulations. Obedience may be demonstrated by arespect for rules and instructions, punctuality in attendance and task completion, and stewardship of organizationalresources.

IndividualInitiative (orConscientiousness)

A pattern of going well beyond minimally required levels of attendance, punctuality, housekeeping, conservingresources, and related matters of internal maintenance.

Civic Virtue Responsible, constructive involvement in the political process of the organization, including not just expressingopinions but reading one’s mail, attending meetings, and keeping abreast of larger issues involving the organization.

Self-Development

Includes all the steps that workers take to voluntarily improve their knowledge, skills, and abilities so as to be betterable to contribute to their organizations. Seeking out and taking advantage of advanced training courses, keepingabreast of the latest developments in one’s field and area, or even learning a new set of skills so as to expand therange of one’s contributions to an organization.

As you can imagine, principles of management are likely to be very concerned with individuals’ in-role

performance. At the same time, just a quick glance through Table 1.2 “A current survey of organization citizenship

behaviors” should suggest that those principles should help you better manage OCBs as well.

32 • PRINCIPLES OF MANAGEMENT

Group-Level PerformanceGroup-Level Performance

A group is a collection of individuals. Group-level performance focuses on both the outcomes and process of

collections of individuals, or groups. Individuals can work on their own agendas in the context of a group. Groups

might consist of project-related groups, such as a product group or an entire store or branch of a company. The

performance of a group consists of the inputs of the group minus any process loss that result in the final output,

such as the quality of a product and the ramp-up time to production or the sales for a given month. Process loss is

any aspect of group interaction that inhibits good problem solving.

Figure 1.10 A Contemporary Management Team

geralt – CC0 public domain.

Why do we say group instead of team? A collection of people is not a team, though they may learn to function in

that way. A team is a cohesive coalition of people working together to achieve the team agenda (i.e., teamwork).

Being on a team is not equal to total subordination of personal agendas, but it does require a commitment to the

vision and involves each individual directly in accomplishing the team’s objective. Teams differ from other types

of groups in that members are focused on a joint goal or product, such as a presentation, completing in-class

exercises, discussing a topic, writing a report, or creating a new design or prototype. Moreover, teams also tend to

be defined by their relatively smaller size. For example, according to one definition, “A team is a small number

of people with complementary skills who are committed to a common purpose, performance goals, and approach

for which they are mutually accountable” (Katzenback & Smith, 1993)

The purpose of assembling a team is to accomplish bigger goals that would not be possible for the individual

working alone or the simple sum of many individuals’ independent work. Teamwork is also needed in cases

where multiple skills are needed or where buy-in is required from certain key stakeholders. Teams can, but do not

always, provide improved performance. Working together to further the team agenda seems to increase mutual

cooperation between what are often competing factions. The aim and purpose of a team is to perform, to get

results, and to achieve victory in the workplace and marketplace. The very best managers are those who can gather

together a group of individuals and mold them into an effective team.

1.7 PERFORMANCE OF INDIVIDUALS AND GROUPS • 33

Compatibility of Individual and Group PerformanceCompatibility of Individual and Group Performance

As a manager, you will need to understand the compatibility of individual and group performance, typically

with respect to goals and incentives. What does this mean? Looking at goals first, there should be compatibility

between individual and group goals. For example, do the individuals’ goals contribute to the achievement of

the group goal or are they contradictory? Incentives also need to be aligned between individuals and groups. A

disconnect between these is most likely when individuals are too far insulated from the external environment or

rewarded for action that is not consistent with the goal. For example, individuals may be seeking to perfect a

certain technology and, in doing so, delay its release to customers, when customers would have been satisfied

with the current solution and put a great priority on its timely delivery. Finally, firms need to be careful to match

their goals with their reward structures. For example, if the organization’s goal is to increase group performance

but the firm’s performance appraisal process rewards individual employee productivity, then the firm is unlikely

to create a strong team culture.

Key Takeaway

This section helped you understand individual and group performance and suggested how they might rollup into organizational performance. Principles of management incorporate two key facets of individualperformance: in-role and OCB (or extra-role) performance. Group performance, in turn, was shown to bea function of how well individuals achieved a combination of individual and group goals. A team is a typeof group that is relatively small, and members are willing and able to subordinate individual goals andobjectives to those of the larger group.

Exercises

1. What is in-role performance?

2. What is extra-role performance?

3. What is the relationship between extra-role performance and OCBs?

4. What differentiates a team from a group?

5. When might it be important to understand the implications of individual performance for groupperformance?

ReferencesReferences

George, J. M., and G. R. Jones, “Experiencing work: Values, attitudes, and moods,” Human Relations 50 (1997):

393–416.

George, J. M., and G. R. Jones, “Organizational Spontaneity in Context,” Human Performance 10 (1997): 153–70.

34 • PRINCIPLES OF MANAGEMENT

Graham, J. “An Essay on Organizational Citizenship Behavior,” Employee Responsibilities and Rights Journal 4

(1991): 225, 249–70.

Katzenbach, J. P., and D. K. Smith, The Wisdom of Teams: Creating the High-performance Organization (Boston:

Harvard Business School, 1993).

Moorman, R. H., and G. L. Blakely, “Individualism-Collectivism as An Individual Difference Predictor of

Organizational Citizenship Behavior,” Journal of Organizational Behavior, 16 (1995): 127–42.

Organ, D. W., “The Motivational Basis of Organizational Citizenship Behavior,” in Research in Organizational

Behavior 12 (1990): 43–72.

Organ, D. W.., “Personality and Organizational Citizenship Behavior,” Journal of Management 20 (1994):

465–78.

Organ, D. W. Organizational Citizenship Behavior: The Good Soldier Syndrome (Lexington, M Lexington Books,

1988).

Podsakoff, P. M., S. B. MacKenzie, J. B. Paine, and D. G. Bachrach, “Organizational Citizenship Behaviors: A

Critical Review of the Theoretical and Empirical Literature and Suggestions for Future Research,” Journal of

Management 26 (2000): 513–63.

1.7 PERFORMANCE OF INDIVIDUALS AND GROUPS • 35

1.8 Your Principles of Management Survivor’s Guide

Learning Objectives

1. Know your learning style.

2. Know how to match your style to the circumstances.

3. Use the gauge-discover-reflect framework.

Principles of management courses typically combine knowledge about skills and the development and application

of those skills themselves. For these reasons, it is helpful for you to develop your own strategy for learning about

and developing management skills. The first part of this strategy should be based on your own disposition toward

learning. The second part of this strategy should follow some form of the gauge-discover-reflect process that we

outline at the end of this section.

Assess Your Learning StyleAssess Your Learning Style

You can assess your learning style in a number of ways. At a very general level, you can assess your style

intuitively (see “What Is Your Intuition about Your Learning Style?”); however, we suggest that you use a survey

instrument like the Learning Style Index (LSI), the output from which you can then readily compare with your

intuition. In this section, we discuss the dimensions of the LSI that you can complete easily and quickly online

(Soloman & Felder, 2008). The survey will reveal whether your learning style is active or reflective, sensory or

intuitive, visual or verbal, and sequential or global. 1

What Is Your Intuition About Your Learning Style?What Is Your Intuition About Your Learning Style?

Your learning style may be defined in large part by the answers to four questions:

1. How do you prefer to process information: actively—through engagement in physical activity ordiscussion? Or reflectively—through introspection?

2. What type of information do you preferentially perceive: sensory (external)—sights, sounds,physical sensations? Or intuitive (internal)—possibilities, insights, hunches?

3. Through which sensory channel is external information most effectively perceived:visual—pictures, diagrams, graphs, demonstrations? Or verbal—words, sounds? (Other sensorychannels like touch, taste, and smell are relatively untapped in most educational environments, andare not considered here.)

4. How do you progress toward understanding: sequentially—in continual steps? Or globally—inlarge jumps, holistically?

TRY IT OUT HERE: http://www.engr.ncsu.edu/learningstyles/ilsweb.html

Active and Reflective LearnersActive and Reflective Learners

Everybody is active sometimes and reflective sometimes. Your preference for one category or the other may be

strong, moderate, or mild. A balance of the two is desirable. If you always act before reflecting, you can jump into

things prematurely and get into trouble, while if you spend too much time reflecting, you may never get anything

done.

“Let’s try it out and see how it works” is an active learner’s phrase; “Let’s think it through first” is the reflective

learner’s response. If you are an active learner, you tend to retain and understand information best by doing

something active with it—discussing it, applying it, or explaining it to others. Reflective learners prefer to think

about it quietly first.

Sitting through lectures without getting to do anything physical but take notes is hard for both learning types but

particularly hard for active learners. Active learners tend to enjoy group work more than reflective learners, who

prefer working alone.

Sensing and Intuitive LearnersSensing and Intuitive Learners

Everybody is sensing sometimes and intuitive sometimes. Here too, your preference for one or the other may be

strong, moderate, or mild. To be effective as a learner and problem solver, you need to be able to function both

ways. If you overemphasize intuition, you may miss important details or make careless mistakes in calculations

or hands-on work; if you overemphasize sensing, you may rely too much on memorization and familiar methods

and not concentrate enough on understanding and innovative thinking.

Even if you need both, which one best reflects you? Sensors often like solving problems by well-established

methods and dislike complications and surprises; intuitors like innovation and dislike repetition. Sensors are more

likely than intuitors to resent being tested on material that has not been explicitly covered in class. Sensing learners

tend to like learning facts; intuitive learners often prefer discovering possibilities and relationships.

Sensors tend to be patient with details and good at memorizing facts and doing hands-on (laboratory) work;

intuitors may be better at grasping new concepts and are often more comfortable than sensors with abstractions

1.8 YOUR PRINCIPLES OF MANAGEMENT SURVIVOR’S GUIDE • 37

and mathematical formulations. Sensors tend to be more practical and careful than intuitors; intuitors tend to work

faster and to be more innovative than sensors.

Sensors don’t like courses that have no apparent connection to the real world (so if you are sensor, you should

love principles of management!); intuitors don’t like “plug-and-chug” courses that involve a lot of memorization

and routine calculations.

Visual and Verbal LearnersVisual and Verbal Learners

In most college classes, very little visual information is presented: students mainly listen to lectures and read

material written on whiteboards, in textbooks, and on handouts. Unfortunately, most of us are visual learners,

which means that we typically do not absorb nearly as much information as we would if more visual presentation

were used in class. Effective learners are capable of processing information presented either visually or verbally.

Visual learners remember best what they see—pictures, diagrams, flowcharts, time lines, films, and

demonstrations. Verbal learners get more out of words—written and spoken explanations. Everyone learns more

when information is presented both visually and verbally.

Sequential and Global LearnersSequential and Global Learners

Sequential learners tend to follow logical, stepwise paths in finding solutions; global learners may be able to solve

complex problems quickly or put things together in novel ways once they have grasped the big picture, but they

may have difficulty explaining how they did it. Sequential learners tend to gain understanding in linear steps,

with each step following logically from the previous one. Global learners tend to learn in large jumps, absorbing

material almost randomly without seeing connections, and then suddenly “getting it.”

Many people who read this description may conclude incorrectly that they are global since everyone has

experienced bewilderment followed by a sudden flash of understanding. What makes you global or not is what

happens before the light bulb goes on. Sequential learners may not fully understand the material, but they can

nevertheless do something with it (like solve the homework problems or pass the test) since the pieces they have

absorbed are logically connected. Strongly global learners who lack good sequential thinking abilities, however,

may have serious difficulties until they have the big picture. Even after they have it, they may be fuzzy about the

details of the subject, while sequential learners may know a lot about specific aspects of a subject but may have

trouble relating them to different aspects of the same subject or to different subjects.

Adapt Your StyleAdapt Your Style

OK, so you’ve assessed your learning style. What should you do now? You can apply this valuable and important

information about yourself to how you approach your principles of management course and the larger P-O-L-C

framework.

Active LearnersActive Learners

If you act before you think, you are apt to make hasty and potentially ill-informed judgments. You need to

38 • PRINCIPLES OF MANAGEMENT

concentrate on summarizing situations and taking time to sit by yourself to digest information you have been

given before jumping in and discussing it with others.

If you are an active learner in a class that allows little or no class time for discussion or problem-solving activities,

you should try to compensate for these lacks when you study. Study in a group in which the members take turns

explaining different topics to one another. Work with others to guess what you will be asked on the next test, and

figure out how you will answer. You will always retain information better if you find ways to do something with

it.

Reflective LearnersReflective Learners

If you think too much, you risk doing nothing—ever. There comes a time when a decision has to be made or an

action taken. Involve yourself in group decision making whenever possible, and try to apply the information you

have in as practical a manner as possible.

If you are a reflective learner in a class that allows little or no class time for thinking about new information,

you should try to compensate for this lack when you study. Don’t simply read or memorize the material; stop

periodically to review what you have read and to think of possible questions or applications. You might find it

helpful to write short summaries of readings or class notes in your own words. Doing so may take extra time but

will enable you to retain the material more effectively.

Sensory LearnersSensory Learners

If you rely too much on sensing, you tend to prefer what is familiar and concentrate on facts you know instead of

being innovative and adapting to new situations. Seek out opportunities to learn theoretical information and then

bring in facts to support or negate these theories.

Sensors remember and understand information best if they can see how it connects to the real world. If you are

in a class where most of the material is abstract and theoretical, you may have difficulty. Ask your instructor for

specific examples of concepts and procedures, and find out how the concepts apply in practice. If the teacher does

not provide enough specifics, try to find some in your course text or other references or by brainstorming with

friends or classmates.

Intuitive LearnersIntuitive Learners

If you rely too much on intuition, you risk missing important details, which can lead to poor decision making and

problem solving. Force yourself to learn facts or memorize data that will help you defend or criticize a theory or

procedure you are working with. You may need to slow down and look at detail you would otherwise typically

skim.

Many college lecture classes are aimed at intuitors. However, if you are an intuitor and you happen to be in a class

that deals primarily with memorization and rote substitution in formulas, you may have trouble with boredom.

Ask your instructor for interpretations or theories that link the facts, or try to find the connections yourself. You

may also be prone to careless mistakes on tests because you are impatient with details and don’t like repetition (as

1.8 YOUR PRINCIPLES OF MANAGEMENT SURVIVOR’S GUIDE • 39

in checking your completed solutions). Take time to read the entire question before you start answering, and be

sure to check your results.

Visual LearnersVisual Learners

If you concentrate more on pictorial or graphical information than on words, you put yourself at a distinct

disadvantage because verbal and written information is still the main preferred choice for delivery of information.

Practice your note taking, and seek out opportunities to explain information to others using words.

If you are a visual learner, try to find diagrams, sketches, schematics, photographs, flowcharts, or any other visual

representation of course material that is predominantly verbal. Ask your instructor, consult reference books, and

see whether any videotapes or CD-ROM displays of the course material are available. Prepare a concept map by

listing key points, enclosing them in boxes or circles, and drawing lines with arrows between concepts to show

connections. Color-code your notes with a highlighter so that everything relating to one topic is the same color.

Verbal LearnersVerbal Learners

As with visual learners, look for opportunities to learn through audiovisual presentations (such as CD-ROM and

Webcasts). When making notes, group information according to concepts, and then create visual links with arrows

going to and from them. Take every opportunity you can to create charts, tables, and diagrams.

Write summaries or outlines of course material in your own words. Working in groups can be particularly

effective: you gain understanding of material by hearing classmates’ explanations, and you learn even more when

you do the explaining.

Sequential LearnersSequential Learners

When you break things down into small components you are often able to dive right into problem solving. This

seems to be advantageous but can often be unproductive. Force yourself to slow down and understand why you

are doing something and how it is connected to the overall purpose or objective. Ask yourself how your actions

are going to help you in the long run. If you can’t think of a practical application for what you are doing, then stop

and do some more “big picture” thinking.

Most college courses are taught in a sequential manner. However, if you are a sequential learner and you have

an instructor who jumps around from topic to topic or skips steps, you may have difficulty following and

remembering. Ask the instructor to fill in the skipped steps, or fill them in yourself by consulting references. When

you are studying, take the time to outline the lecture material for yourself in logical order. In the long run, doing

so will save you time. You might also try to strengthen your global-thinking skills by relating each new topic you

study to things you already know. The more you can do so, the deeper your understanding of the topic is likely to

be.

Global LearnersGlobal Learners

If grasping the big picture is easy for you, then you can be at risk of wanting to run before you can walk. You see

40 • PRINCIPLES OF MANAGEMENT

what is needed but may not take the time to learn how best to accomplish it. Take the time to ask for explanations,

and force yourself to complete all problem-solving steps before coming to a conclusion or making a decision. If

you can’t explain what you have done and why, then you may have missed critical details.

If you are a global learner, it can be helpful for you to realize that you need the big picture of a subject before

you can master details. If your instructor plunges directly into new topics without bothering to explain how they

relate to what you already know, it can cause problems for you. Fortunately, there are steps you can take that may

help you get the big picture more rapidly. Before you begin to study the first section of a chapter in a text, skim

through the entire chapter to get an overview. Doing so may be time consuming initially, but it may save you from

going over and over individual parts later. Instead of spending a short time on every subject every night, you might

find it more productive to immerse yourself in individual subjects for large blocks. Try to relate the subject to

things you already know, either by asking the instructor to help you see connections or by consulting references.

Above all, don’t lose faith in yourself; you will eventually understand the new material, and understanding how

it connects to other topics and disciplines may enable you to apply it in ways that most sequential thinkers would

never dream of.

Gauge-Discover-ReflectGauge-Discover-Reflect

You have already begun to apply the spirit of what we recommend in this third part of the development of your

principles of management survival kit, by gauging your learning style. The three essential components are (1)

gauge—take stock of your knowledge and capabilities about a topic; (2) discover—learn enough about a topic

so that you can set specific development goals on which you can apply and practice, and later gauge again your

progress toward your set goals; and (3) reflect—step back and look at the ways you have achieved your goals,

take the opportunity to set new ones, and chronicle this experience and thought process in a daily journal.

GaugeGauge

It is always good to start any self-development process by getting some sense of where you are. That is why

we commence with the gauge stage. For learning and developing in the area of principles of management, such

knowledge is essential. By analogy, let’s say you want to take a road trip out of town. Even if you have a map and

a compass, it still is pretty important to know exactly where you are starting on the map!

Your instructor will likely introduce you to a number of different types of management assessment tools, and you

should experiment with them to see how they work and the degree to which results resonate with your intuition.

A word of caution here—just because some assessment results may clash with your intuition or self-image, do not

immediately assume that they are wrong. Instead, use them as an opportunity and motivation for further probing

(this can fuel your work in the discovery and reflect stages).

The obvious value of commencing your learning process with some form of assessment is that you have a

clear starting point, in terms of knowledge. This also means that you now have a basis for comparing your

achievement to any relevant specific goals that you set. Less obvious perhaps is the experience you will gain

with principles of management skill assessments in general. More and more organizations use some form of

assessment in the recruiting, human resources development, and yes, even promotion processes. Your experience

1.8 YOUR PRINCIPLES OF MANAGEMENT SURVIVOR’S GUIDE • 41

with these different surveys will give you the confidence to take other surveys and the knowledge needed to show

organizations that you are aware of your areas of strength and development opportunities.

DiscoverDiscover

The discovery stage of your principles of management survival kit has four related facets: (1) learn, (2) set goals,

(3) apply, and (4) practice. Let us look at each one in turn.

LearnLearn

You have probably learned a little about a certain subject just by virtue of gauging your depth in it. In some cases,

you might even have read up on the subject a lot to accurately gauge where you were strong or weak. There is not

an existing survey for every subject, and it is beneficial to learn how you might gauge this or that area of interest.

The learning facet essentially asks that you build your knowledge base about a particular topic. As you know,

learning has multiple facets, from simply mastering facts and definitions, to developing knowledge of how you

might apply that knowledge. You will typically want to start with some mastery over facts and definitions and

then build your knowledge base to a more strategic level—that is, be able to understand when, where, and how

you might use those definitions and facts in principles of management.

Set SMART GoalsSet SMART Goals

The combination of gauging and learning about a topic should permit you to set some goals related to your

focal topic. For example, you want to develop better team communication skills or better understand change

management. While your goals should reflect the intersection of your own needs and the subject, we do know that

effective goals satisfy certain characteristics. These characteristics—specific, measurable, aggressive, realistic,

and time bound—yield the acronym SMART.2 Here is how to tell if your goals are SMART goals.

Specific

Specific goals are more likely to be achieved than a general goal. To set a specific goal, you must answer the six

“W” questions:

• Who: Who is involved?

• What: What do I want to accomplish?

• Where: At what location?

• When: In what time frame?

• Which: What are the requirements and constraints?

• Why: What specific reasons, purpose, or benefits are there to the accomplishment of the goal

(Topachievement, 2008)?

EXAMPLE: A general goal would be, “Get a job as a retail store manager.” But a specific goal would say,

“Identify my development needs in the next three weeks to become a retail store manager.” “Are You Ready to

42 • PRINCIPLES OF MANAGEMENT

Be a Great Retail Store Manager?” provides you with an introductory list of survey questions that might help you

accelerate your progress on this particular goal set.

Are You Ready to Be a Great Retail Store Manager?Are You Ready to Be a Great Retail Store Manager?

The service sector employs more than 80% of the U.S. workforce, and the position of retail store manageris in increasing demand. Have you already developed the skills to be a great store manager? Score yourselfon each of these 10 people skills. How close did you get to 100? Identify two areas to develop, and thenmove on to two more areas once that goal is achieved.

1.“I challenge employees to set new performance goals.”

Never: 1 Seldom: 3 Often: 5 Regularly: 10

2.“I coach employees to resolve performance problems.”

Never: 1 Seldom: 3 Often: 5 Regularly: 10

3.“I encourage employees to contribute new ideas.”

Never: 1 Seldom: 3 Often: 5 Regularly: 10

4.“I take an interest in my employees’ personal lives.”

Never: 1 Seldom: 3 Often: 5 Regularly: 10

5.“I delegate well.”

Never: 1 Seldom: 3 Often: 5 Regularly: 10

6.“I communicate my priorities and directions clearly.”

Never: 1 Seldom: 3 Often: 5 Regularly: 10

7.“I resolve conflicts in a productive way.”

Never: 1 Seldom: 3 Often: 5 Regularly: 10

8.“I behave in a professional way at work.”

Never: 1 Seldom: 3 Often: 5 Regularly: 10

9.“I inspire my employees with a dynamic personality.”

Never: 1 Seldom: 3 Often: 5 Regularly: 10

10.“I am a good listener.”

1.8 YOUR PRINCIPLES OF MANAGEMENT SURVIVOR’S GUIDE • 43

Never: 1 Seldom: 3 Often: 5 Regularly: 10

Measurable

When goals are specific, performance tends to be higher (Tubbs, 1986). Why? If goals are not specific and

measurable, how would you know whether you have reached the goal? Any performance level becomes

acceptable. For the same reason, telling someone, “Do your best” is not an effective goal because it is not

measurable and does not give the person a specific target.

Aggressive

This may sound counterintuitive, but effective goals are difficult, not easy. Aggressive goals are also called stretch

goals. Why are effective goals aggressive? Easy goals do not provide a challenge. When goals are aggressive and

when they require people to work harder or smarter, performance tends to be dramatically higher.

Realistic

While goals should be difficult, they should also be based in reality. In other words, if a goal is viewed as

impossible to reach, it does not have any motivational value. Only you can decide which goal is realistic and

which is impossible to achieve; just be sure that the goal you set, while it is aggressive, remains grounded in

reality.

Timely

The goal should contain a statement regarding when the proposed performance level will be reached. This way, it

provides the person with a sense of urgency.

Apply and PracticeApply and Practice

Your knowledge of the subject, plus your SMART goals, give you an opportunity to apply and test your

knowledge. Going back to our road-trip analogy, gauging gives you a starting point, learning gives you a road

map and compass, and goals give you a target destination. Practice, in turn, simply means some repetition of the

application process. Your objective here should be to apply and practice a subject long enough that, when you

gauge it again, you are likely to see some change or progress.

ReflectReflect

This final stage has two parts: (1) gauge again and (2) record.

Gauge AgainGauge Again

As suggested under “Apply and Practice,” you will want to gauge your progress. Have you become more

44 • PRINCIPLES OF MANAGEMENT

innovative? Do you better communicate in teams? Do you have a better understanding of other key principles of

management?

RecordRecord

Many people might stop at the gauge again point, but they would be missing out on an incredibly valuable

opportunity. Specifically, look at what you have learned and achieved regarding your goals, and chronicle your

progress in some form of a journal (Bromley, 1993). A journal may be a required component of a principles of

management course, so there may be extrinsic as well as intrinsic motives for starting to keep a journal.

There are also various exercises that you can partake in through your journaling. These allow you to challenge

yourself and think more creatively and deeply. An effective journal entry should be written with clear images and

feelings. You should aim to include your reactions along with the facts or events related to your developmental

goals. The experience of certain experiments may not necessarily be what you thought it would be, and this is what

is important to capture. You are bound to feel turmoil in various moments, and these feelings are excellent fodder

for journaling. Journaling allows you to vent and understand emotions. These types of entries can be effective at

giving yourself a more rounded perspective on past events.

In addition to the goals you are evaluating, there are numerous things to write about in a journal. You can reflect

on the day, the week, or even the year. You can reflect on events that you have been a part of or people you have

met. Look for conclusions that you may have made or any conflicts that you faced. Most important, write about

how you felt. This will allow you to examine your own emotional responses. You may find that you need to make

a personal action or response to those conflicts. The conclusions that you make from your journal entries are the

ingredients to self-growth. Facing those conflicts may also change your life for the better, as you are able to grow

as a person.

You should also always go back and review what you have written. Think about each journal entry you have

made and what it means. This is the true aspect of self-growth through journaling. It is easy to recognize changes

in yourself through your journaling. You may find that you had a disturbing idea one day, but the next your

attitude was much better. You may also find that your attitude grows and improves day by day. This is what makes

journaling a true self-growth tool.

Journaling may be inexpensive, but it does require time and commitment. The time factor itself can be small, only

about 10 minutes a day or maybe 30 minutes a week, depending on how you would like to summarize your life.

You do, however, have to be motivated to write on a regular basis. Even if you do not have a lot of time to write,

you will still be able to enjoy the large amount of personal growth that is available through journaling. Perhaps

this suggests that your first goal set relates to time set aside for journaling.

Key Takeaway

You have seen how different individuals approach the learning process and that an understanding ofthese differences can help you with your objectives related to principles of management. Beyond thisgeneral understanding of your own learning style, you also have an opportunity to put together your own

1.8 YOUR PRINCIPLES OF MANAGEMENT SURVIVOR’S GUIDE • 45

survival kit for this course. Your kit will have answers and resources based on the gauge-discover-reflectframework. The development of SMART goals are particularly important in the successful application ofthe framework.

Exercises

1. What is your learning style?

2. How does your style compare with your prior intuition?

3. What target learning issue could you use to experiment with the gauge-discover-reflectframework?

4. What does the acronym SMART refer to, in the context of goal setting?

5. What SMART goals could you apply to your target learning issue?

1Felder, Richard K. and Linda K. Silverman. In addition to their research, there is an online instrument used to

assess preferences on four dimensions (active or reflective, sensing or intuitive, visual or verbal, and sequential

or global) of a learning style model formulated by Felder and Soloman of North Carolina State University. The

Learning Styles Index (LSI) may be used at no cost for noncommercial purposes by individuals who wish to

determine their own learning style profile and by educators who wish to use it for teaching, advising, or research.

See R. M. Felder, and R. Brent, “Understanding Student Differences,” Journal of Engineering Education 94,

no. 1 (2005) : 57–72, for an exploration of differences in student learning styles, approaches to learning (deep,

surface, and strategic), and levels of intellectual development, with recommended teaching practices to address all

three categories. R. M. Felder, and J. E. Spurlin, “Applications, Reliability, and Validity of the Index of Learning

Styles,” Journal of Engineering Education 21, no. 1 (2005): 103–12, provides a validation study of the LSI. Also

see T. A. Litzinger, S. H. Lee, J. C. Wise, and R. M. Felder, “A Psychometric Study of the Index of Learning

Styles,” Journal of Engineering Education 96, no. 4 (2007): 309–19.

2In his seminal 1954 work, The Practice of Management (New York: Collins), Peter Drucker coined the usage of

the acronym for SMART objectives while discussing objective-based management.

ReferencesReferences

Bromley, K. Journaling: Engagements in Reading, Writing, and Thinking (New York: Scholastic, 1993).

Soloman, B. A., and R. M. Felder. http://www.engr.ncsu.edu/learningstyles/ilsweb.html (accessed October 15,

2008).

Topachievement.com, http://www.topachievement.com/smart.html (accessed October 15, 2008).

Tubbs, M. E., “Goal setting: A Meta-analytic Examination of the Empirical Evidence,” Journal of Applied

Psychology 71 (1986): 474–83.

46 • PRINCIPLES OF MANAGEMENT

Chapter 2: Personality, Attitudes, and WorkBehaviors

2.1 Chapter Introduction

2.2 Case in Point: SAS Institute Invests in Employees

2.3 Personality and Values

2.4 Perception

2.5 Work Attitudes

2.6 The Interactionist Perspective: The Role of Fit

2.7 Work Behaviors

2.8 Developing Your Positive Attitude Skills

2.1 Chapter Introduction

Figure 2.1

Business people-showing teamwork

Successful organizations depend on getting the right mix of individuals in the right

positions at the right times.

Richard foster – Closeup portrait of a group of business people laughing – CC BY-SA

2.0.

What’s in It for Me?

Reading this chapter will help you do the following:

1. Understand the roles of personality and values in determining work behaviors.

2. Explain the process of perception and how it affects work behaviors.

3. Identify the major work attitudes that affect work behaviors.

4. Define the concept of person-organization fit and how it affects work behaviors.

5. List the key set of behaviors that matter for organizational performance.

6. Be able to develop your positive attitude skills.

Figure 2.2 The P-O-L-C Framework

Individuals bring a number of differences to work. They have a variety of personalities, values, and attitudes.

When they enter into organizations, their stable or transient characteristics affect how they behave and perform.

Moreover, companies hire people with the expectation that they have certain knowledge, skills, abilities,

personalities, and values.

Recall that you are learning about the principles of management through the planning-organizing-leading-

controlling (P-O-L-C) framework. Employees’ personalities, attitudes, and work behaviors affect how managers

approach each P-O-L-C dimension. Here are just a few examples:

• When conducting environmental scanning during the planning process, a manager’s perceptions color the

information that is absorbed and processed.

• Employee preferences for job design and enrichment (aspects of organizing) may be a function of

individuals’ personalities and values.

• Leading effectively requires an understanding of employees’ personalities, values, and attitudes.

• Absenteeism can challenge a manager’s ability to control costs and performance (both at the group and

individual levels).

Therefore, it is important for managers to understand the individual characteristics that matter for employee and

manager behaviors.

2.1 CHAPTER INTRODUCTION • 49

2.2 Case in Point: SAS Institute Invests in Employees

Figure 2.3

Wikimedia Commons – SAS logo horiz – public domain.

Who are your best customers? Which customers are bringing you the most profits and which are theleast profitable? Companies are increasingly relying on complicated data mining software to answer theseand other questions. More than 92% of the top 100 companies on the Fortune Global 500 list are usingsoftware developed by SAS Institute Inc., the world’s largest privately held software company, for theirbusiness intelligence and analytical needs. The Cary, North Carolina, company is doing extremely well byany measure. They have over 10,000 employees worldwide, operate in over 100 countries, ranked number1 on Fortune’s 2010 list of the “Best Companies to Work For,” and reported $2.31 billion in revenue in2009 (their 33rd consecutive year of growth and profitability). They reinvested 23% of their 2009 revenueinto research and development (R&D) activities. The company is quick to attribute their success to theperformance and loyalty of their workforce. This is directly correlated with how they treat their employees.

SAS has perfected the art of employee management. It has been ranked on Fortune magazine’s best placesto work list every year since the list was first published. Employees seem to genuinely enjoy working atSAS and are unusually attached to the company, resulting in a turnover rate that is less than 4% in anindustry where 20% is the norm. In fact, when Google designed their own legendary campus in California,they visited the SAS campus to get ideas.

One thing SAS does well is giving its employees opportunities to work on interesting and challengingprojects. The software developers have the opportunity to develop cutting-edge software to be used aroundthe world. The company makes an effort to concentrate its business in the areas of analytics, which add themost value and help organizations best analyze disparate data for decision making, creating opportunitiesfor SAS workers to be challenged. Plus, the company removes obstacles for employees. Equipment,policies, rules, and meetings that could impede productivity are eliminated.

SAS has treated employees well in bad times as well as in good times. CEO Jim Goodnight is quoted assaying, “For 2010, I make the same promise that I did last year—SAS will have no layoffs. Too many

companies worldwide sacrificed employees and benefits to cut costs in 2009. SAS took the opposite stance,and we have been rewarded in employee loyalty and overall success of the business. Maintaining thisposition throughout the downturn puts us in the best position to meet the expected market upturn.”

In addition, the company has a reputation as a pioneer when it comes to the perks it offers employees,but these perks are not given with a mentality of “offer everything but the kitchen sink.” There is carefulthinking and planning behind the choice of perks the company offers. SAS conducts regular employeesatisfaction surveys, and any future benefits and perks offered are planned in response to the results.The company wants to eliminate stressors and anything that dissatisfies from people’s lives. To keepemployees healthy and fit, there are athletic fields; a full gym; a swimming pool; and tennis, basketball,and racquetball courts on campus. Plus, the company offers free on-site health care for employees, coversdependents at their fully staffed primary medical care center, and offers unlimited sick leave. The companyunderstands that employees have a life and encourages employees to work reasonable hours and then gohome to their families. In fact, a famous motto in the company is, “If you are working for more than 8hours, you are just adding bugs.” SAS is truly one of the industry leaders in leveraging its treatment ofpeople for continued business success.

Case written by [citation redacted per publisher request]. Based on information from Doing well bybeing rather nice. (2007, December 1). Economist. Retrieved April 30, 2010, fromhttp://www.financialexpress.com/news/doing-well-by-being-rather-nice/247090; Cakebread, C. (2005,July). SAS…not SOS. Benefits Canada, 29(7), 18; Florida, R., & Goodnight, J. (2005, July–August).Managing for creativity. Harvard Business Review, 83(7/8), 124–131; Karlgaard, R. (2006, October16). Who wants to be public? Forbes Asia, 2(17), 22; SAS ranks No. 1 on Fortune “Best Companiesto Work For” list in America. (2010, January 21). SAS press release. Retrieved May 27, 2010, fromhttp://www.sas.com/news/preleases/2010fortuneranking.html.

Discussion Questions

1. How would you translate SAS’s art of employee management in terms of the P-O-L-Cframework?

2. SAS is a global company. Do you think that the benefits offered and the strategy used to improveemployee satisfaction vary from country to country?

3. If a company is unable to provide the benefits that SAS does, in what other ways might a firmcreate positive work attitudes?

4. What risks could be associated with giving workplace surveys, as was done at SAS?

5. What are some effective strategies to create a balanced work and home life? Is this more or less ofa challenge when you are starting a new career?

2.2 CASE IN POINT: SAS INSTITUTE INVESTS IN EMPLOYEES • 51

2.3 Personality and Values

Learning Objectives

1. Identify the major personality traits that are relevant to organizational behavior.

2. Explain the potential pitfalls of personality testing.

3. Describe the relationship between personality and work behaviors.

4. Understand what values are.

5. Describe the link between values and work behaviors.

PersonalityPersonality

Personality encompasses a person’s relatively stable feelings, thoughts, and behavioral patterns. Each of us has

a unique personality that differentiates us from other people, and understanding someone’s personality gives us

clues about how that person is likely to act and feel in a variety of situations. To manage effectively, it is helpful to

understand the personalities of different employees. Having this knowledge is also useful for placing people into

jobs and organizations.

If personality is stable, does this mean that it does not change? You probably remember how you have changed

and evolved as a result of your own life experiences, parenting style and attention you have received in early

childhood, successes and failures you experienced over the course of your life, and other life events. In fact,

personality does change over long periods of time. For example, we tend to become more socially dominant, more

conscientious (organized and dependable), and more emotionally stable between the ages of 20 and 40, whereas

openness to new experiences tends to decline as we age (Roberts, 2006). In other words, even though we treat

personality as relatively stable, change occurs. Moreover, even in childhood, our personality matters, and it has

lasting consequences for us. For example, studies show that part of our career success and job satisfaction later in

life can be explained by our childhood personality (Judge & Higgins, 1999; Staw, et. al., 1986).

Is our behavior in organizations dependent on our personality? To some extent, yes, and to some extent, no. While

we will discuss the effects of personality for employee behavior, you must remember that the relationships we

describe are modest correlations. For example, having a sociable and outgoing personality may encourage people

to seek friends and prefer social situations. This does not mean that their personality will immediately affect

their work behavior. At work, we have a job to do and a role to perform. Therefore, our behavior may be more

strongly affected by what is expected of us, as opposed to how we want to behave. Especially in jobs that involve

a lot of autonomy, or freedom, personality tends to exert a strong influence on work behavior (Barrick & Mount,

1993),something to consider when engaging in Organizing activities such as job design or enrichment.

Big Five Personality TraitsBig Five Personality Traits

How many personality traits are there? How do we even know? In every language, there are many words

describing a person’s personality. In fact, in the English language, more than 15,000 words describing personality

have been identified. When researchers analyzed the traits describing personality characteristics, they realized

that many different words were actually pointing to a single dimension of personality. When these words

were grouped, five dimensions seemed to emerge, and these explain much of the variation in our personalities

(Goldberg, 1990). These five are not necessarily the only traits out there. There are other, specific traits that

represent other dimensions not captured by the Big Five. Still, understanding them gives us a good start for

describing personality.

Figure 2.5 The Big Five Personality Traits

Goldberg, L. R. (1990). An alternative “description of personality”: The big-five factor structure. Journal

of Personality & Social Psychology, 59, 1216–1229.

As you can see, the Big Five dimensions are openness, conscientiousness, extraversion, agreeableness, and

Neuroticism—if you put the initials together, you get the acronym OCEAN. Everyone has some degree of each

of these traits; it is the unique configuration of how high a person rates on some traits and how low on others that

produces the individual quality we call personality.

2.3 PERSONALITY AND VALUES • 53

Openness is the degree to which a person is curious, original, intellectual, creative, and open to new ideas. People

high in openness seem to thrive in situations that require flexibility and learning new things. They are highly

motivated to learn new skills, and they do well in training settings (Barrick & Mount, 1991; Lievens, et. al., 2003).

They also have an advantage when they enter into a new organization. Their open-mindedness leads them to seek

a lot of information and feedback about how they are doing and to build relationships, which leads to quicker

adjustment to the new job (Wanberg & Kammeyer-Mueller, 2000). When given support, they tend to be creative

(Baer & Oldham, 2006). Open people are highly adaptable to change, and teams that experience unforeseen

changes in their tasks do well if they are populated with people high in openness (LePine, 2003). Compared with

people low in openness, they are also more likely to start their own business (Zhao & Seibert, 2006). The potential

downside is that they may also be prone to becoming more easily bored or impatient with routine.

Conscientiousness refers to the degree to which a person is organized, systematic, punctual, achievement-oriented,

and dependable. Conscientiousness is the one personality trait that uniformly predicts how high a person’s

performance will be across a variety of occupations and jobs (Barrick & Mount, 1991). In fact, conscientiousness

is the trait most desired by recruiters, and highly conscientious applicants tend to succeed in interviews (Dunn,

et. al., 1995; Tay, et. al., 2006). Once they are hired, conscientious people not only tend to perform well, but

they also have higher levels of motivation to perform, lower levels of turnover, lower levels of absenteeism,

and higher levels of safety performance at work (Judge & Ilies, 2002; Judge, et. al., 1997; Wallace & Chen

2006; Zimmerman, 2008). One’s conscientiousness is related to career success and career satisfaction over time

(Judge & Higgins, 1999).Finally, it seems that conscientiousness is a valuable trait for entrepreneurs. Highly

conscientious people are more likely to start their own business compared with those who are not conscientious,

and their firms have longer survival rates (Certo & Certo, 2005; Zhao & Seibert, 2006). A potential downside is

that highly conscientious individuals can be detail-oriented rather than seeing the big picture.

54 • PRINCIPLES OF MANAGEMENT

Figure 2.6

Studies show that there is a relationship between being extraverted and effectiveness as a salesperson.

TravelCoffeeShop – CC0 public domain.

Extraversion is the degree to which a person is outgoing, talkative, sociable, and enjoys socializing. One of the

established findings is that they tend to be effective in jobs involving sales (Barrick & Mount, 1991; Vinchur,

et. al., 1998). Moreover, they tend to be effective as managers and they demonstrate inspirational leadership

behaviors (Bauer, et. al., 2006; Bono & Judge, 2004). extraverts do well in social situations, and, as a result, they

tend to be effective in job interviews. Part of this success comes from preparation, as they are likely to use their

social network to prepare for the interview (Caldwell & Burger, 1998; Tay & Van Dyne, 2006). Extraverts have an

easier time than introverts do when adjusting to a new job. They actively seek information and feedback and build

effective relationships, which helps them adjust (Wanberg & Kammeyer-Mueller, 2000). Interestingly, extraverts

are also found to be happier at work, which may be because of the relationships they build with the people around

them and their easier adjustment to a new job (Judge & Mount, 2002). However, they do not necessarily perform

well in all jobs; jobs depriving them of social interaction may be a poor fit. Moreover, they are not necessarily

model employees. For example, they tend to have higher levels of absenteeism at work, potentially because they

may miss work to hang out with or attend to the needs of their friends (Judge, et. al., 1997)

Agreeableness is the degree to which a person is affable, tolerant, sensitive, trusting, kind, and warm. In other

words, people who are high in agreeableness are likeable people who get along with others. Not surprisingly,

agreeable people help others at work consistently; this helping behavior does not depend on their good mood

(Ilies, et. al., 2006). They are also less likely to retaliate when other people treat them unfairly (Skarlicki, et. al.,

1999). This may reflect their ability to show empathy and to give people the benefit of the doubt. Agreeable people

2.3 PERSONALITY AND VALUES • 55

may be a valuable addition to their teams and may be effective leaders because they create a fair environment

when they are in leadership positions (Mayer, et. al., 2007). At the other end of the spectrum, people low in

agreeableness are less likely to show these positive behaviors. Moreover, people who are disagreeable are shown

to quit their jobs unexpectedly, perhaps in response to a conflict with a boss or a peer (Zimmerman, 2008). If

agreeable people are so nice, does this mean that we should only look for agreeable people when hiring? You

might expect some jobs to require a low level of agreeableness. Think about it: When hiring a lawyer, would

you prefer a kind and gentle person or someone who can stand up to an opponent? People high in agreeableness

are also less likely to engage in constructive and change-oriented communication (LePine & Van Dyne, 2001).

Disagreeing with the status quo may create conflict, and agreeable people may avoid creating such conflict,

missing an opportunity for constructive change.

Neuroticism refers to the degree to which a person is anxious, irritable, temperamental, and moody. It is perhaps

the only Big Five dimension where scoring high is undesirable. Neurotic people have a tendency to have

emotional adjustment problems and habitually experience stress and depression. People very high in Neuroticism

experience a number of problems at work. For example, they have trouble forming and maintaining relationships

and are less likely to be someone people go to for advice and friendship (Klein, et. al., 2004). They tend to be

habitually unhappy in their jobs and report high intentions to leave, but they do not necessarily actually leave their

jobs (Judge, et. al., 2002; Zimmerman, 2008)) Being high in Neuroticism seems to be harmful to one’s career, as

these employees have lower levels of career success (measured with income and occupational status achieved in

one’s career). Finally, if they achieve managerial jobs, they tend to create an unfair climate at work (Mayer, et. al.,

2007).

In contrast, people who are low on Neuroticism—those who have a positive affective disposition—tend to

experience positive moods more often than negative moods. They tend to be more satisfied with their jobs

and more committed to their companies (Connolly & Viswesvaran, 2000; Throresen, et. al., 2003). This is not

surprising, as people who habitually see the glass as half full will notice the good things in their work environment

while those with the opposite character will find more things to complain about. Whether these people are more

successful in finding jobs and companies that will make them happy, build better relationships at work that

increase their satisfaction and commitment, or simply see their environment as more positive, it seems that low

Neuroticism is a strong advantage in the workplace.

Evaluate Yourself on the Big Five Personality FactorsEvaluate Yourself on the Big Five Personality Factors

Go to http://www.outofservice.com/bigfive to see how you score on these factors.

Other Personality DimensionsOther Personality Dimensions

In addition to the Big Five, researchers have proposed various other dimensions, or traits, of personality. These

include self-monitoring, proactive personality, self-esteem, and self-efficacy.

Self-monitoring refers to the extent to which a person is capable of monitoring his or her actions and appearance

in social situations. People who are social monitors are social chameleons who understand what the situation

56 • PRINCIPLES OF MANAGEMENT

demands and act accordingly, while low social monitors tend to act the way they feel (Snyder, 1974; Snyder,

1987). High social monitors are sensitive to the types of behaviors the social environment expects from them.

Their ability to modify their behavior according to the demands of the situation they are in and to manage

their impressions effectively are great advantages for them (Turnley & Bolino, 2001). They are rated as higher

performers and emerge as leaders (Day, et. al., 2002). They are effective in influencing other people and are able

to get things done by managing their impressions. As managers, however, they tend to have lower accuracy in

evaluating the performance of their employees. It seems that while trying to manage their impressions, they may

avoid giving accurate feedback to their subordinates to avoid confrontations, which could hinder a manager’s

ability to carry out the Controlling function (Jawahar, 2001).

Proactive personality refers to a person’s inclination to fix what is wrong, change things, and use initiative to

solve problems. Instead of waiting to be told what to do, proactive people take action to initiate meaningful

change and remove the obstacles they face along the way. Proactive individuals tend to be more successful in

their job searches (Brown, et. al., 2006). They also are more successful over the course of their careers because

they use initiative and acquire greater understanding of how the politics within the company work (Seibert, 1999;

Seibert, et. al., 2001). Proactive people are valuable assets to their companies because they may have higher

levels of performance (Crant, 1995). They adjust to their new jobs quickly because they understand the political

environment better and make friends more quickly (Kammeyer-Mueller & Wanberg, 2003; Thompson, 2005).

Proactive people are eager to learn and engage in many developmental activities to improve their skills (Major, et.

al., 2006). For all their potential, under some circumstances proactive personality may be a liability for a person

or an organization. Imagine a person who is proactive but is perceived as too pushy, trying to change things other

people are not willing to let go of, or using their initiative to make decisions that do not serve a company’s best

interests. Research shows that a proactive person’s success depends on his or her understanding of the company’s

core values, ability, and skills to perform the job and ability to assess situational demands correctly (Chan, 2006;

Erdogan & Bauer, 2005).

Self-esteem is the degree to which a person has overall positive feelings about himself or herself. People with high

self-esteem view themselves in a positive light, are confident, and respect themselves. In contrast, people with low

self-esteem experience high levels of self-doubt and question their self-worth. High self-esteem is related to higher

levels of satisfaction with one’s job and higher levels of performance on the job (Judge & Bono, 2001). People

with low self-esteem are attracted to situations where they will be relatively invisible, such as large companies

(Turban & Keon, 1993). Managing employees with low self-esteem may be challenging at times because negative

feedback given with the intention of improving performance may be viewed as a negative judgment on their

worth as an employee. Therefore, effectively managing employees with relatively low self-esteem requires tact

and providing lots of positive feedback when discussing performance incidents.

Self-Esteem Around the GlobeSelf-Esteem Around the Globe

Which nations have the highest average self-esteem? Researchers asked this question by surveying almost17,000 individuals across 53 nations, in 28 languages.

On the basis of this survey, these are the top 10 nations in terms of self-reported self-esteem:

2.3 PERSONALITY AND VALUES • 57

1. Serbia

2. Chile

3. Israel

4. Peru

5. Estonia

6. United States of America

7. Turkey

8. Mexico

9. Croatia

10. Austria

The following are the 10 nations with the lowest self-reported self-esteem:

1. South Korea

2. Switzerland

3. Morocco

4. Slovakia

5. Fiji

6. Taiwan

7. Czech Republic

8. Bangladesh

9. Hong Kong

10. Japan

Source: Adapted from information in Denissen, J. J. A., Penke, L., & Schmitt, D. P. (2008, July). Self-esteem reactions to social interactions: Evidence for sociometer mechanisms across days, people, andnations. Journal of Personality & Social Psychology, 95, 181–196; Hitti, M. (2005). Who’s No. 1 inself-esteem? Serbia is tops, Japan ranks lowest, U.S. is no. 6 in global survey. WebMD. RetrievedNovember 14, 2008, from http://www.webmd.com/skin-beauty/news/20050927/whos-number-1-in-self-esteem; Schmitt, D. P., & Allik, J. (2005). The simultaneous administration of the Rosenberg self-esteemscale in 53 nationals: Culture-specific features of global self-esteem. Journal of Personality and SocialPsychology, 89, 623–642.

Self-efficacy is a belief that one can perform a specific task successfully. Research shows that the belief that

we can do something is a good predictor of whether we can actually do it. Self-efficacy is different from other

personality traits in that it is job specific. You may have high self-efficacy in being successful academically,

but low self-efficacy in relation to your ability to fix your car. At the same time, people have a certain level of

generalized self-efficacy, and they have the belief that whatever task or hobby they tackle, they are likely to be

successful in it.

58 • PRINCIPLES OF MANAGEMENT

Research shows that self-efficacy at work is related to job performance (Bauer, et. al., 2007; Judge, et. al., 2007;

Stajkovic & Luthans, 1998). This is probably because people with high self-efficacy actually set higher goals for

themselves and are more committed to their goals, whereas people with low self-efficacy tend to procrastinate

(Phillips & Gully, 1997; Steel, 2007; Wofford, et. al., 1992). Academic self-efficacy is a good predictor of your

grade point average, as well as whether you persist in your studies or drop out of college (Robbins, et. al., 2004).

Is there a way of increasing employee’s self-efficacy? In addition to hiring people who are capable of performing

the required job tasks, training people to increase their self-efficacy may be effective. Some people may also

respond well to verbal encouragement. By showing that you believe they can be successful and effectively playing

the role of cheerleader, a manager may be able to increase self-efficacy beliefs. Empowering people—giving them

opportunities to test their skills so that they can see what they are capable of—is also a good way of increasing

self-efficacy (Ahearne, et. al., 2005).>

Personality Testing in Employee SelectionPersonality Testing in Employee Selection

Personality is a potentially important predictor of work behavior. In job interviews, companies try to assess

a candidate’s personality and the potential for a good match, but interviews are only as good as the people

conducting them. In fact, interviewers are not particularly good at detecting the best trait that predicts

performance: conscientiousness (Barrick, et. al., 2000).

One method some companies use to improve this match and detect the people who are potentially good job

candidates is personality testing. Several companies conduct preemployment personality tests. Companies using

them believe that these tests improve the effectiveness of their selection and reduce turnover. For example,

Overnight Transportation in Atlanta found that using such tests reduced their on-the-job delinquency by

50%–100% (Emmett, 2004; Gale, 2002).

Figure 2.7

2.3 PERSONALITY AND VALUES • 59

Companies such as Kronos and Hogan Assessments conduct preemployment personality tests. Kronos

Incorporated Headquarters is located in Chelmsford, Massachusetts.

Kensavage – Kronos incorporated – public domain.

Yet, are these methods good ways of employee selection? Experts have not yet reached an agreement on this

subject and the topic is highly controversial. Some experts cite data indicating that personality tests predict

performance and other important criteria such as job satisfaction. However, we must understand that how a

personality test is used influences its validity. Imagine filling out a personality test in class. You will probably fill it

out as honestly as you can. Then, if your instructor correlates your personality scores with your class performance,

we could say that the correlation is meaningful. But now imagine that your instructor tells you, before giving you

the test, that based on your test scores, you will secure a coveted graduate assistant position, which comes with a

tuition waiver and a stipend. In that case, would you still fill out the test honestly or would you try to make your

personality look as “good” as possible?

In employee selection, where the employees with the “best” personalities will be the ones receiving a job offer, a

complicating factor is that people filling out the survey do not have a strong incentive to be honest. In fact, they

have a greater incentive to guess what the job requires and answer the questions in a way they think the company

is looking for. As a result, the rankings of the candidates who take the test may be affected by their ability to fake.

Some experts believe that this is a serious problem (Morgeson, et. al., 2007; Morgeson, et. al., 2007). Others point

out that even with faking the tests remain valid—the scores are related to job performance (Barrick & Mount,

1996; Ones, et. al., 2007; Ones, et. al., 1996; Tett & Christansen, 2007). It is even possible that the ability to fake

is related to a personality trait that increases success at work, such as social monitoring.

Scores on personality self-assessments are distorted for other reasons beyond the fact that some candidates

can fake better than others. Do we even know our own personalities? Are we the best person to ask this

question? How supervisors, coworkers, and customers see our personality may matter more than how we see

ourselves. Therefore, using self-report measures of performance may not be the best way of measuring someone’s

personality (Mount, et. al., 1994). We have our blind areas. We may also give “aspirational” answers. If you are

asked whether you are honest, you may think “yes, I always have the intention to be honest.” This actually says

nothing about your actual level of honesty.

Another problem with using these tests is the uncertain relationship between performance and personality. On the

basis of research, personality is not a particularly strong indicator of how a person will perform. According to one

estimate, personality only explains about 10%–15% of variation in job performance. Our performance at work

depends on many factors, and personality does not seem to be the key factor for performance. In fact, cognitive

ability (your overall mental intelligence) is a more powerful predictor of job performance. Instead of personality

tests, cognitive ability tests may do a better job of predicting who will be good performers. Personality is a better

predictor of job satisfaction and other attitudes, but screening people out on the assumption that they may be

unhappy at work is a challenging argument to make in an employee selection context.

In any case, if an organization decides to use these tests for selection, it is important to be aware of their

limitations. If they are used together with other tests, such as tests of cognitive abilities, they may contribute to

making better decisions. The company should ensure that the test fits the job and actually predicts performance.

This is called validating the test. Before giving the test to applicants, the company could give it to existing

60 • PRINCIPLES OF MANAGEMENT

employees to find out the traits that are most important for success in this particular company and job. Then, in

the selection context, the company can pay particular attention to those traits.

Finally, the company also needs to make sure that the test does not discriminate against people on the basis of

sex, race, age, disabilities, and other legally protected characteristics. Rent-a-Center experienced legal difficulties

when the test they used was found to violate the Americans with Disabilities Act (ADA). The company used

the Minnesota Multiphasic Personality Inventory for selection purposes, but this test was developed to diagnose

severe mental illnesses; it included items such as “I see things or people around me others do not see.” In effect,

the test served the purpose of a clinical evaluation and was discriminating against people with mental illnesses,

which is a protected category under ADA (Heller, 2005).

ValuesValues

Figure 2.8 Values Included in Schwartz’s (1992) Value Inventory

Values refer to people’s stable life goals, reflecting what is most important to them. Values are established

throughout one’s life as a result of accumulating life experiences, and values tend to be relatively stable (Lusk

2.3 PERSONALITY AND VALUES • 61

& Oliver, 1974; Rokeach, 1973). The values that are important to a person tend to affect the types of decisions

they make, how they perceive their environment, and their actual behaviors. Moreover, a person is more likely to

accept a job offer when the company possesses the values he or she cares about (Judge & Bretz, 1972; Ravlin &

Meglino, 1987). Value attainment is one reason people stay in a company. When a job does not help them attain

their values, they are likely to decide to leave if they are dissatisfied with the job (George & Jones, 1996).

What are the values people care about? As with personality dimensions, researchers have developed several

frameworks, or typologies, of values. One of the particularly useful frameworks includes 10 values (Schwartz,

1992).

Figure 2.9

62 • PRINCIPLES OF MANAGEMENT

2.3 PERSONALITY AND VALUES • 63

A person who has a strong stimulation orientation may pursue extreme sports.

G B – CCK – ‘Gunks – CC BY-ND 2.0.

Values a person holds will affect their employment. For example, someone who values stimulation highly may

seek jobs that involve fast action and high risk, such as firefighter, police officer, or emergency medicine.

Someone who values achievement highly may be likely to become an entrepreneur or intrapreneur. And an

individual who values benevolence and universalism may seek work in the nonprofit sector with a charitable

organization or in a “helping profession,” such as nursing or social work. Like personality, values have

implications for Organizing activities, such as assigning duties to specific jobs or developing the chain of

command; employee values are likely to affect how employees respond to changes in the characteristics of their

jobs.

In terms of work behaviors, a person is more likely to accept a job offer when the company possesses the values

he or she cares about. A firm’s values are often described in the company’s mission and vision statements, an

element of the Planning function (Judge & Bretz, 1992; Ravlin & Meglino, 1987). Value attainment is one reason

people stay in a company. When a job does not help them attain their values, they are likely to decide to leave if

they are also dissatisfied with the job (George & Jones, 1996).

Key Takeaway

Personality traits and values are two dimensions on which people differ. Personality is the unique,relatively stable pattern of feelings, thoughts, and behavior that each individual displays. Big Fivepersonality dimensions (openness, conscientiousness, extraversion, agreeableness, and Neuroticism) areimportant traits; others that are particularly relevant for work behavior include self-efficacy, self-esteem,social monitoring, and proactive personality. While personality is a stronger influence over job attitudes,its relation to job performance is weaker. Some companies use personality testing to screen out candidates.Companies using personality tests are advised to validate their tests and use them to supplement othertechniques with greater validity, such as tests of cognitive ability. Companies must also ensure that a testdoes not discriminate against any protected group. Values express a person’s life goals; they are similar topersonality traits in that they are relatively stable over time. In the workplace, a person is more likely toaccept a job that provides opportunities for value attainment. People are also more likely to remain in a joband career that satisfy their values.

Exercises

1. Think about the personality traits covered in this section. Can you think of jobs or occupationsthat seem particularly suited to each trait? Which traits would be universally desirable across alljobs?

2. What are the unique challenges of managing employees who have low self-efficacy and self-esteem? How would you deal with this situation?

3. What are some methods that companies can use to assess employee personality?

64 • PRINCIPLES OF MANAGEMENT

4. Have you ever held a job where your personality did not match the demands of the job? How didyou react to this situation? How were your attitudes and behaviors affected?

5. Identify ways in which the Big Five (of the manager and/or the employees) may affect how you asa manager would carry out the Leadership function.

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2.3 PERSONALITY AND VALUES • 69

2.4 Perception

Learning Objectives

1. Understand the influence of biases in the process of perception.

2. Describe how we perceive visual objects and how these tendencies may affect our behavior.

3. Describe the biases of self-perception.

4. Describe the biases inherent in our perceptions of other people.

Our behavior is not only a function of our personality and values but also of the situation. We interpret our

environment, formulate responses, and act accordingly. Perception may be defined as the process by which

individuals detect and interpret environmental stimuli. What makes human perception so interesting is that we

do not solely respond to the stimuli in our environment. We go beyond the information that is present in our

environment, pay selective attention to some aspects of the environment, and ignore other elements that may be

immediately apparent to other people.

Our perception of the environment is not entirely rational. For example, have you ever noticed that while glancing

at a newspaper or a news Web site, information that is especially interesting or important to you jumps out of the

page and catches your eye? If you are a sports fan, while scrolling down the pages, you may immediately see a

news item describing the latest success of your team. If you are the mother of a picky eater, an advice column on

toddler feeding may be the first thing you see when looking at the page. If you were recently turned down for a

loan, an item of financial news may jump out at you. Therefore, what we see in the environment is a function of

what we value, our needs, our fears, and our emotions(Higgins & Bargh, 1987; Keltner, et. al., 1993). In fact, what

we see in the environment may be objectively flat out wrong because of such mental tendencies. For example, one

experiment showed that when people who were afraid of spiders were shown spiders, they inaccurately thought

that the spider was moving toward them (Riskind, et. al., 1995).

In this section, we will describe some common perceptual tendencies we engage in when perceiving objects

or other people and the consequences of such perceptions. Our coverage of these perceptual biases is not

exhaustive—there are many other biases and tendencies that can be found in the way people perceive stimuli.

Visual PerceptionVisual Perception

Figure 2.10

What do you see?

Our visual perception definitely goes beyond the physical information available to us; this phenomenon is

commonly referred to as “optical illusions.” Artists and designers of everything from apparel to cars to home

interiors make use of optical illusions to enhance the look of the product. Managers rely on their visual perception

to form their opinions about people and objects around them and to make sense of data presented in graphical

form. Therefore, understanding how our visual perception may be biased is important.

First, we extrapolate from the information available to us. Take a look at the first figure. The white triangle you see

in the middle is not really there, but we extrapolate from the information available to us and see it there. Similarly,

when we look at objects that are partially blocked, we see the whole (Kellman & Shipley, 1991).

Figure 2.11

2.4 PERCEPTION • 71

What do you see?

Bryan Derksen – Cup or faces paradox – CC BY-SA 3.0.

Now, look at the next figure. What do you see? Most people look at this figure and see two faces or a goblet,

depending on which color—black or white—they focus upon. Our visual perception is often biased because we do

not perceive objects in isolation. The contrast between our focus of attention and the remainder of the environment

may make an object appear bigger or smaller.

This principle is shown here in the third figure. At first glance, the circle on the left may appear bigger, but they

are the same size. This is due to the visual comparison of the middle circle on the left with its surrounding circles,

whereas the middle circle on the right is compared with the bigger circles surrounding it.

How do these tendencies influence behavior in organizations? The fact that our visual perception is faulty means

that managers should not always take what they see at face value. Let’s say that you do not like one of your peers

and you think that you saw this person surfing the Web during work hours. Are you absolutely sure, or are you

simply filling the gaps? Have you really seen this person surf unrelated Web sites, or is it possible that the person

was searching for work-related purposes? The tendency to fill in the gaps also causes our memory to be faulty.

Imagine that you have been at a meeting where several people made comments that you did not agree with. After

the meeting, you may attribute most of these comments to people you did not like. In other words, you may twist

the reality to make your memories more consistent with your opinions of people.

The tendency to compare and contrast objects and people to each other also causes problems. For example, if

you are a manager who has been given an office much smaller than the other offices on the floor, you may feel

that your workspace is crowded and uncomfortable. If the same office is surrounded by smaller offices, you may

actually feel that your office is comfortable and roomy. In short, our biased visual perception may lead to the

wrong inferences about the people and objects around us.

Figure 2.12

72 • PRINCIPLES OF MANAGEMENT

Which of the circles in the middle is bigger?

Self-PerceptionSelf-Perception

Human beings are prone to errors and biases when perceiving themselves. Moreover, the type of bias people have

depends on their personality. Many people suffer from self-enhancement bias. This is the tendency to overestimate

our performance and capabilities and see ourselves in a more positive light than others see us. People who have a

narcissistic personality are particularly subject to this bias, but many others also have this bias to varying degrees

(John & Robins, 1994). At the same time, other people have the opposing extreme, which may be labeled as

self-effacement bias (or modesty bias). This is the tendency to underestimate our performance and capabilities

and to see events in a way that puts ourselves in a more negative light. We may expect that people with low

self-esteem may be particularly prone to making this error. These tendencies have real consequences for behavior

in organizations. For example, people who suffer from extreme levels of self-enhancement tendencies may not

understand why they are not getting promoted or rewarded, while those who have a tendency to self-efface may

project low confidence and take more blame for their failures than necessary.

When human beings perceive themselves, they are also subject to the false consensus error. Simply put, we

overestimate how similar we are to other people (Fields & Schuman, 1976; Ross, et. al., 1977). We assume that

whatever quirks we have are shared by a larger number of people than in reality. People who take office supplies

home, tell white lies to their boss or colleagues, or take credit for other people’s work to get ahead may genuinely

feel that these behaviors are more common than they really are. The problem for behavior in organizations is that,

when people believe that a behavior is common and normal, they may repeat the behavior more freely. Under

some circumstances, this may lead to a high level of unethical or even illegal behaviors.

2.4 PERCEPTION • 73

Social PerceptionSocial Perception

How we perceive other people in our environment is also shaped by our biases. Moreover, how we perceive others

will shape our behavior, which in turn will shape the behavior of the person we are interacting with.

One of the factors biasing our perception is stereotypes. Stereotypes are generalizations based on a group

characteristic. For example, believing that women are more cooperative than men or that men are more assertive

than women are stereotypes. Stereotypes may be positive, negative, or neutral. In the abstract, stereotyping is

an adaptive function—we have a natural tendency to categorize the information around us to make sense of our

environment. Just imagine how complicated life would be if we continually had to start from scratch to understand

each new situation and each new person we encountered! What makes stereotypes potentially discriminatory and

a perceptual bias is the tendency to generalize from a group to a particular individual. If the belief that men are

more assertive than women leads to choosing a man over an equally qualified female candidate for a position, the

decision will be biased, unfair, and potentially illegal.

Stereotypes often create a situation called self-fulfilling prophecy. This happens when an established stereotype

causes one to behave in a certain way, which leads the other party to behave in a way that confirms the stereotype

(Snyder, et. al., 1977). If you have a stereotype such as “Asians are friendly,” you are more likely to be friendly

toward an Asian person. Because you are treating the other person more nicely, the response you get may also

be nicer, which confirms your original belief that Asians are friendly. Of course, just the opposite is also true.

Suppose you believe that “young employees are slackers.” You are less likely to give a young employee high

levels of responsibility or interesting and challenging assignments. The result may be that the young employee

reporting to you may become increasingly bored at work and start goofing off, confirming your suspicions that

young people are slackers!

Stereotypes persist because of a process called selective perception. Selective perception simply means that we

pay selective attention to parts of the environment while ignoring other parts, which is particularly important

during the Planning process. Our background, expectations, and beliefs will shape which events we notice and

which events we ignore. For example, an executive’s functional background will affect the changes he or she

perceives in the environment (Waller, et. al., 1995). Executives with a background in sales and marketing see the

changes in the demand for their product, while executives with a background in information technology may more

readily perceive the changes in the technology the company is using. Selective perception may also perpetuate

stereotypes because we are less likely to notice events that go against our beliefs. A person who believes that men

drive better than women may be more likely to notice women driving poorly than men driving poorly. As a result,

a stereotype is maintained because information to the contrary may not even reach our brain!

Let’s say we noticed information that goes against our beliefs. What then? Unfortunately, this is no guarantee that

we will modify our beliefs and prejudices. First, when we see examples that go against our stereotypes, we tend

to come up with subcategories. For example, people who believe that women are more cooperative when they see

a female who is assertive may classify her as a “career woman.” Therefore, the example to the contrary does not

violate the stereotype and is explained as an exception to the rule (Higgins & Bargh, 1987). Or, we may simply

discount the information. In one study, people in favor of and against the death penalty were shown two studies,

one showing benefits for the death penalty while the other disconfirming any benefits. People rejected the study

that went against their belief as methodologically inferior and ended up believing in their original position even

74 • PRINCIPLES OF MANAGEMENT

more (Lord, et. al., 1979)! In other words, using data to debunk people’s beliefs or previously established opinions

may not necessarily work, a tendency to guard against when conducting Planning and Controlling activities.

Figure 2.13

First impressions are lasting. A job interview is one situation where first impressions formed during the first few minutes may

have consequences for your relationship with your future boss or colleagues.

adabara – CC0 public domain.

One other perceptual tendency that may affect work behavior is first impressions. The first impressions we form

about people tend to have a lasting effect. In fact, first impressions, once formed, are surprisingly resilient to

contrary information. Even if people are told that the first impressions were caused by inaccurate information,

people hold on to them to a certain degree because once we form first impressions, they become independent from

the evidence that created them (Ross, et. al., 1975). Therefore, any information we receive to the contrary does

not serve the purpose of altering them. Imagine the first day that you met your colleague Anne. She treated you in

a rude manner, and when you asked for her help, she brushed you off. You may form the belief that Anne is a rude

and unhelpful person. Later on, you may hear that Anne’s mother is seriously ill, making Anne very stressed. In

reality, she may have been unusually stressed on the day you first met her. If you had met her at a time when her

stress level was lower, you could have thought that she is a really nice person. But chances are, your impression

that she is rude and unhelpful will not change even when you hear about her mother. Instead, this new piece of

information will be added to the first one: She is rude, unhelpful, and her mother is sick.

As a manager, you can protect yourself against this tendency by being aware of it and making a conscious effort

2.4 PERCEPTION • 75

to open your mind to new information. It would also be to your advantage to pay careful attention to the first

impressions you create, particularly during job interviews.

Key Takeaway

Perception is how we make sense of our environment in response to environmental stimuli. Whileperceiving our surroundings, we go beyond the objective information available to us and our perceptionis affected by our values, needs, and emotions. There are many biases that affect human perception ofobjects, self, and others. When perceiving the physical environment, we fill in the gaps and extrapolatefrom the available information. When perceiving others, stereotypes influence our behavior. Stereotypesmay lead to self-fulfilling prophecies. Stereotypes are perpetuated because of our tendency to pay selectiveattention to aspects of the environment and ignore information inconsistent with our beliefs. Understandingthe perception process gives us clues to understanding human behavior.

Exercises

1. What are some of the typical errors, or optical illusions, that we experience when we observephysical objects?

2. What are the problems of false consensus error? How can managers deal with this tendency?

3. Describe a situation where perception biases have or could affect any of the P-O-L-C facets. Usean example you have experienced or observed, or, if you do not have such an example, create ahypothetical situation. How do we manage the fact that human beings develop stereotypes? Is theresuch as thing as a good stereotype? How would you prevent stereotypes from creating unfairness inmanagement decisions?

4. Describe a self-fulfilling prophecy you have experienced or observed in action. Was the prophecyfavorable or unfavorable? If unfavorable, how could the parties have chosen different behavior toproduce a more positive outcome?

ReferencesReferences

Fields, J. M., & Schuman, H. (1976). Public beliefs about the beliefs of the public. The Public Opinion Quarterly,

40 (4), 427–448.

Higgins, E. T., & Bargh, J. A. (1987). Social cognition and social perception. Annual Review of Psychology, 38,

369–425.

John, O. P., & Robins, R. W. (1994). Accuracy and bias in self-perception: Individual differences in self-

enhancement and the role of narcissism. Journal of Personality and Social Psychology, 66, 206–219.

Kellman, P. J., & Shipley, T. F. (1991). A theory of visual interpolation in object perception. Cognitive Psychology,

23, 141–221.

76 • PRINCIPLES OF MANAGEMENT

Keltner, D., Ellsworth, P. C., & Edwards, K. (1993). Beyond simple pessimism: Effects of sadness and anger on

social perception. Journal of Personality and Social Psychology, 64, 740–752.

Lord, C. G., Ross, L., & Lepper, M. R. (1979) Biased assimilation and attitude polarization: The effects of prior

theories on subsequently considered evidence. Journal of Personality and Social Psychology, 37, 2098–2109.

Riskind, J. H., Moore, R., & Bowley, L. (1995). The looming of spiders: The fearful perceptual distortion of

movement and menace. Behaviour Research and Therapy, 33, 171.

Ross, L., Greene, D., & House, P. (1977). The “false consensus effect”: An egocentric bias in social perception

and attribution processes. Journal of Experimental Social Psychology, 13, 279–301.

Ross, L., Lepper, M. R., & Hubbard, M. (1975). Perseverance in self-perception and social perception: Biased

attributional processes in the debriefing paradigm. Journal of Personality and Social Psychology, 32, 880–892.

Snyder, M., Tanke, E. D., & Berscheid, E. (1977). Social perception and interpersonal behavior: On the self-

fulfilling nature of social stereotypes. Journal of Personality and Social Psychology, 35, 656–666.

Waller, M. J., Huber, G. P., & Glick, W. H. (1995). Functional background as a determinant of executives’

selective perception. Academy of Management Journal, 38, 943–974.

2.4 PERCEPTION • 77

2.5 Work Attitudes

Learning Objectives

1. Define what work attitudes are.

2. Define and differentiate between job satisfaction and organizational commitment.

3. List several important factors influencing job satisfaction and organizational commitment.

4. Identify two ways companies can track attitudes in the workplace.

How we behave at work often depends on how we feel about being there. Therefore, making sense of how people

behave depends on understanding their work attitudes. An attitude refers to our opinions, beliefs, and feelings

about aspects of our environment. We have attitudes toward the food we eat, people we meet, courses we take,

and things we do. At work, two job attitudes have the greatest potential to influence how we behave. These are

job satisfaction and organizational commitment.

Job satisfaction refers to the feelings people have toward their job. If the number of studies conducted on job

satisfaction is an indicator, job satisfaction is probably the most important job attitude. Institutions such as Gallup

or the Society for Human Resource Management (SHRM) periodically conduct studies of job satisfaction to track

how satisfied employees are at work. According to a recent Gallup survey, 90% of the employees surveyed said

that they were at least somewhat satisfied with their jobs. A recent SHRM study revealed 40% who were very

satisfied 1.

Organizational commitment is the emotional attachment people have toward the company they work for. A highly

committed employee is one who accepts and believes in the company’s values, is willing to put out effort to

meet the company’s goals, and has a strong desire to remain with the company. People who are committed to

their company often refer to their company as “we” as opposed to “they” as in “in this company, we have great

benefits.” The way we refer to the company indicates the type of attachment and identification we have with the

company.

There is a high degree of overlap between job satisfaction and organizational commitment because things that

make us happy with our job often make us more committed to the company as well. Companies believe that these

attitudes are worth tracking because they often are associated with outcomes that are important to the Controlling

role, such as performance, helping others, absenteeism, and turnover.

What Causes Positive Work Attitudes?What Causes Positive Work Attitudes?

What makes you satisfied with your job and develop commitment to your company? Research shows that people

pay attention to several factors of their work environment, including characteristics of the job (a function of

Organizing activities), how they are treated (related to Leadership actions), the relationships they form with

colleagues and managers (also Leadership related), and the level of stress the job entails.

As we have seen earlier in this chapter, personality and values play important roles in how employees feel about

their jobs.

Figure 2.14 Factors Contributing to Job Satisfaction and Organizational Commitment

Job CharacteristicsJob Characteristics

Employees tend to be more satisfied and committed in jobs that involve certain characteristics. The ability to use

a variety of skills, having autonomy at work, receiving feedback on the job, and performing a significant task are

some job characteristics that are related to satisfaction and commitment. However, the presence of these factors is

not important for everyone. Some people have a high need for growth. These employees tend to be more satisfied

when their jobs help them build new skills and improve (Loher, et. al., 1985; Mathieu & Zajac, 1990).

Organizational Justice and the Psychological ContractOrganizational Justice and the Psychological Contract

A strong influence over our satisfaction level is how fairly we are treated. People pay attention to the fairness of

company policies and procedures, fair and kind treatment from supervisors, and fairness of their pay and other

rewards they receive from the company (Cohen-Charash & Spector, 2001; Colquitt, et. al., 2001; Meyer, et. al.,

2002). Organizational justice can be classified into three categories: (1) procedural (fairness in the way policies

and processes are carried out), (2) distributive (the allocation of resources or compensation and benefits), and (3)

interactional (the degree to which people are treated with dignity and respect). At the root of organizational justice

is trust, something that is easier to break than to repair if broken.

The psychological contract is the unspoken, informal understanding that an employee will contribute certain

2.5 WORK ATTITUDES • 79

things to the organization (e.g., work ability and a willing attitude) and will receive certain things in return (e.g.,

reasonable pay and benefits). Under the psychological contract, an employee may believe that if he or she works

hard and receives favorable performance evaluations, he or she will receive an annual bonus, periodic raises and

promotions, and will not be laid off. Since the “downsizing” trend of the past 20 years, many commentators have

declared that the psychological contract is violated more often than not.

Relationships at WorkRelationships at Work

Two strong predictors of our happiness at work and commitment to the company are our relationships with

coworkers and managers. The people we interact with, how friendly they are, whether we are socially accepted

in our work group, whether we are treated with respect by them are important to our happiness at work. Research

also shows that our relationship with our manager, how considerate the manager is, and whether we build a trust-

based relationship with our manager are critically important to our job satisfaction and organizational commitment

(Bauer, et. al., 2007; Gerstner & Day, 1997; Judge, et. al., 2004; Kinicki, et. al., 2002; Mathieu & Zajac, 1990;

Meyer, et. al., 1990; Rhoades & Eisenberger, 2002). When our manager and overall management listen to us,

care about us, and value our opinions, we tend to feel good at work. When establishing effective relations with

employees, little signals that you care about your employees go a long way. For example, in 2004 San Francisco’s

Hotel Carlton was taken over and renovated by a new management group, Joie de Vivre Hospitality. One of the

small things the new management did that created dramatic results was that, in response to an employee attitude

survey, they replaced the old vacuum cleaners housekeepers were using and started replacing them every year. It

did not cost the company much to replace old machinery, but this simple act of listening to employee problems

and taking action went a long way to make employees feel better 2.

StressStress

Not surprisingly, the amount of stress present in a job is related to employee satisfaction and commitment.

Stressors range from environmental ones (noise, heat, inadequate ventilation) to interpersonal ones (organizational

politics, conflicts with coworkers) to organizational ones (pressure to avoid making mistakes, worrying about the

security of the job). Some jobs, such as intensive care unit nurse and military fighter pilot, are inherently very

stressful.

Another source of stress has to do with the roles people are expected to fulfill on and off the job. Role ambiguity

is uncertainty about what our responsibilities are in the job. Role conflict involves contradictory demands at work;

it can also involve conflict between fulfilling one’s role as an employee and other roles in life, such as the role of

parent, friend, or community volunteer.

Generally speaking, the higher the stress level, the lower job satisfaction tends to be. But not all stress is bad, and

some stressors actually make us happier! For example, working under time pressure and having a high degree

of responsibility are stressful, but they are also perceived as challenges and tend to be related to high levels of

satisfaction (Kinicki, et. al., 2002; Meyer, et. al., 2002; Miller, et. al., 2008; Podsakoff, et. al., 2007).

Assessing Work Attitudes in the WorkplaceAssessing Work Attitudes in the Workplace

Given that work attitudes may give us clues about who will leave or stay, who will perform better, and who

80 • PRINCIPLES OF MANAGEMENT

will be more engaged, tracking satisfaction and commitment levels is a helpful step for companies. If there are

companywide issues that make employees unhappy and disengaged, these need to be resolved. There are at least

two systematic ways in which companies can track work attitudes: through attitude surveys and exit interviews.

Companies such as KFC and Long John Silver restaurants, the SAS Institute, Google, and others give periodic

attitude surveys, which are used to track employee work attitudes. Companies can get more out of these surveys if

responses are held confidential. If employees become concerned that their individual responses will be shared with

their immediate manager, they are less likely to respond honestly. Moreover, success of these surveys depends

on the credibility of management in the eye of employees. If management periodically collects these surveys

but no action comes out of them, employees may adopt a more cynical attitude and start ignoring these surveys,

hampering the success of future efforts. Exit interviews involve a meeting with the departing employee. This

meeting is often conducted by a member of the human resource management department. If conducted well,

this meeting may reveal what makes employees dissatisfied at work and give management clues about areas for

improvement.

How strong is the attitude-behavior link? First of all, it depends on the attitude in question. Your attitudes toward

your colleagues may influence whether you actually help them on a project, but they may not be a good predictor

of whether you quit your job. Second, it is worth noting that attitudes are more strongly related to intentions to

behave in a certain way, rather than actual behaviors. When you are dissatisfied with your job, you will have the

intention to leave. Whether you actually leave will be a different story! Your leaving will depend on many factors,

such as availability of alternative jobs in the market, your employability in a different company, and sacrifices you

have to make while changing jobs. Thus, while the attitudes assessed through employee satisfaction surveys and

exit interviews can provide some basis for predicting how a person might behave in a job, remember that behavior

is also strongly influenced by situational constraints.

Key Takeaway

Work attitudes are the feelings we have toward different aspects of the work environment. Job satisfactionand organizational commitment are two key attitudes that are the most relevant to important outcomes. Inaddition to personality and fit with the organization, work attitudes are influenced by the characteristics ofthe job, perceptions of organizational justice and the psychological contract, relationships with coworkersand managers, and the stress levels experienced on the job. Many companies assess employee attitudesthrough surveys of worker satisfaction and through exit interviews. The usefulness of such information islimited, however, because attitudes create an intention to behave in a certain way, but they do not alwayspredict actual behaviors.

Exercises

1. What is the difference between job satisfaction and organizational commitment? How do the twoconcepts relate to one another?

2. In your opinion, of the factors that influence work attitudes, which three are the most important inmaking people dissatisfied with their jobs? Which three are the most important relating to

2.5 WORK ATTITUDES • 81

organizational commitment?

3. Do you think making employees happier at work is a good way of motivating people? Whenwould high satisfaction not be related to high performance?

4. How important is pay in making people attached to a company and making employees satisfied?

5. Do you think younger and older people are similar in what makes them happier at work andmakes them committed to their companies? Do you think there are male-female differences? Explainyour answers.

1What keeps employees satisfied? HR Focus, 10–13; Sandberg, J. (2008, April 15). For many employees, a dream

job is one that isn’t a nightmare. Wall Street Journal, B1.

2Dvorak, P. (2007, December 17). Theory and practice: Hotelier finds happiness keeps staff checked in; focus on

morale boosts Joie de Vivre’s grades from workers, guests. Wall Street Journal, B3.

ReferencesReferences

Bauer, T. N., Bodner, T., Erdogan, B., Truxillo, D. M., & Tucker, J. S. (2007). Newcomer adjustment during

organizational socialization: A meta-analytic review of antecedents, outcomes, and methods. Journal of Applied

Psychology, 92, 707–721.

Cohen-Charash, Y., & Spector, P. E. (2001). The role of justice in organizations: A meta-analysis. Organizational

Behavior and Human Decision Processes, 86, 278–321.

Colquitt, J. A., Conlon, D. E., Wesson, M. J., Porter, C. O. L. H., & Ng, K. Y. (2001). Justice at the millennium: A

meta-analytic review of 25 years of organizational justice research. Journal of Applied Psychology, 86, 425–445.

Gerstner, C. R., & Day, D. V. (1997). Meta-analytic review of leader-member exchange theory: Correlates and

construct issues. Journal of Applied Psychology, 82(6), 827–844.

Judge, T. A., Piccolo, R. F., & Ilies, R. (2004). The forgotten ones? The validity of consideration and initiating

structure in leadership research. Journal of Applied Psychology, 89, 36–51.

Kinicki, A. J., McKee-Ryan, F. M., Schriesheim, C. A., & Carson, K. P. (2002). Assessing the construct validity

of the job descriptive index: A review and meta-analysis. Journal of Applied Psychology, 87, 14–32.

Loher, B. T., Noe, R. A., Moeller, N. L., & Fitzgerald, M. P. (1985). A meta-analysis of the relation of job

characteristics to job satisfaction. Journal of Applied Psychology, 70, 280–289.

Mathieu, J. E., & Zajac, D. M. (1990). A review and meta-analysis of the antecedents, correlates, and

consequences of organizational commitment. Psychological Bulletin, 108, 171–194.

Meyer, J. P., Stanley, D. J., Herscivitch, L., & Topolnytsky, L. (2002). Affective, continuance, and normative

82 • PRINCIPLES OF MANAGEMENT

commitment to the organization: A meta-analysis of antecedents, correlates, and consequences. Journal of

Vocational Behavior, 61, 20–52.

Miller, B. K., Rutherford, M. A., & Kolodinsky, R. W. (2008). Perceptions of organizational politics: A meta-

analysis of outcomes. Journal of Business and Psychology, 22, 209–222.

Podsakoff, N. P., LePine, J. A., & LePine, M. A. (2007). Differential challenge stressor-hindrance stressor

relationships with job attitudes, turnover intentions, turnover, and withdrawal behavior: A meta-analysis. Journal

of Applied Psychology, 92, 438–454.

Rhoades, L., & Eisenberger, R. (2002). Perceived organizational support: A review of the literature. Journal of

Applied Psychology, 87, 698–714.

2.5 WORK ATTITUDES • 83

2.6 The Interactionist Perspective: The Role of Fit

Learning Objectives

1. Differentiate between person-organization and person-job fit.

2. Understand the relationship between person-job fit and work behaviors.

3. Understand the relationship between person-organization fit and work behaviors.

As we have seen in the earlier sections of this chapter, human beings bring in their personality, values, attitudes,

perceptions, and other stable traits to work. Imagine that you are interviewing an employee who is proactive,

creative, and willing to take risks. Would this person be a good job candidate? What behaviors would you expect

this person to demonstrate?

The questions we pose here are misleading. While human beings bring their traits to work, every organization is

also different, and every job is different. According to the interactionist perspective, behavior is a function of the

person and the situation interacting with each other. Think about it. Would a shy person speak up in class? While

a shy person may not feel like speaking if he or she is very interested in the subject, knows the answers to the

questions, feels comfortable within the classroom environment, and knows that class participation is 30% of the

course grade, this person may speak up in class regardless of his or her shyness. Similarly, the behavior you may

expect from someone who is proactive, creative, and willing to take risks will depend on the situation.

The fit between what we bring to our work environment and the environmental demands influences not only our

behavior but also our work attitudes. Therefore, person-job fit and person-organization fit are positively related

to job satisfaction and commitment. When our abilities match job demands, and when our values match company

values, we tend to be more satisfied with our job and more committed to the company we work for (Kristof-

Brown, et. al., 2005; Verquer, et. al., 2003).

When companies hire employees, they are interested in assessing at least two types of fit. Person-organization

fit refers to the degree to which a person’s personality, values, goals, and other characteristics match those of the

organization. Person-job fit is the degree to which a person’s knowledge, skills, abilities, and other characteristics

match the job demands. (Human resources professionals often use the abbreviation KSAO to refer to these four

categories of attributes.) Thus, someone who is proactive and creative may be a great fit for a company in the

high-tech sector that would benefit from risk-taking individuals but may be a poor fit for a company that puts

a high priority on routine and predictable behavior, such as a nuclear power plant. Similarly, this proactive and

creative person may be a great fit for a field-based job such as marketing manager but a poor fit for an office job

highly dependent on rules such as accountant.

When people fit into their organization, they tend to be more satisfied with their jobs, more committed to

their companies, are more influential in their company, and remain longer in their company (Anderson, et. al.,

2008; Cable & DeRue, 2002; Kristof-Brown, et. al., 2005; O’Reilly, et. al., 1991; Saks & Ashforth, 2002). One

area of controversy is whether these people perform better. Some studies found a positive relationship between

person-organization fit and job performance, but this finding was not present in all studies, so it seems that only

sometimes fitting with a company’s culture predicts job performance (Arthur, et. al., 2006). It also seems that

fitting in with the company values is important to some people more than to others. For example, people who have

worked in multiple companies tend to understand the effect of a company’s culture better and therefore pay closer

attention to whether they will fit in with the company when making their decisions (Kristof-Brown, et. al., 2002).

Also, when they build good relationships with their supervisors and the company, being a misfit does not seem to

matter as much (Erdogan, et. al., 2004).

Key Takeaway

While personality, values, attitudes, perceptions, and KSAOs are important, we need to keep in mind thatbehavior is jointly determined by the person and the situation. Certain situations bring out the best inpeople, and someone who is a poor performer in one job may turn into a star employee in a different job.Therefore, managers need to consider the individual and the situation when making Organizing decisionsabout the job or when engaging in Leadership activities like building teams or motivating employees.

Exercises

1. How can a company assess person-job fit before hiring employees? What are the methods youthink would be helpful?

2. How can a company determine person-organization fit before hiring employees? Which methodsdo you think would be helpful?

3. What can organizations do to increase person-job and person-organization fit after they hireemployees?

ReferencesReferences

Anderson, C., Spataro, S. E., & Flynn, F. J. (2008). Personality and organizational culture as determinants of

influence. Journal of Applied Psychology, 93, 702–710.

2.6 THE INTERACTIONIST PERSPECTIVE: THE ROLE OF FIT • 85

Arthur, W., Bell, S. T., Villado, A. J., & Doverspike, D. (2006). The use of person-organization fit in employment

decision making: An assessment of its criterion-related validity. Journal of Applied Psychology, 91, 786–801.

Cable, D. M., & DeRue, D. S. (2002). The convergent and discriminant validity of subjective fit perceptions.

Journal of Applied Psychology, 87, 875–884.

Erdogan, B., Kraimer, M. L., & Liden, R. C. (2004). Work value congruence and intrinsic career success.

Personnel Psychology, 57, 305–332.

Kristof-Brown, A. L., Jansen, K. J., & Colbert, A. E. (2002). A policy-capturing study of the simultaneous effects

of fit with jobs, groups, and organizations. Journal of Applied Psychology, 87, 985–993.

Kristof-Brown, A. L., Zimmerman, R. D., & Johnson, E. C. (2005). Consequences of individuals’ fit at work: A

meta-analysis of person-job, person-organization, person-group, and person-supervisor fit. Personnel Psychology,

58, 281–342.

O’Reilly, C. A., Chatman, J., & Caldwell, D. F. (1991). People and organizational culture: A profile comparison

approach to assessing person-organization fit. Academy of Management Journal, 34, 487–516.

Saks, A. M., & Ashforth, B. E. (2002). Is job search related to employment quality? It all depends on the fit.

Journal of Applied Psychology, 87, 646–654.

Verquer, M. L., Beehr, T. A., & Wagner, S. H. (2003). A meta-analysis of relations between person-organization

fit and work attitudes. Journal of Vocational Behavior, 63, 473–489.

86 • PRINCIPLES OF MANAGEMENT

2.7 Work Behaviors

Learning Objectives

1. Define job performance, organizational citizenship, absenteeism, and turnover.

2. Explain factors associated with each type of work behavior.

One of the important objectives of the field of organizational behavior is to understand why people behave the way

they do. Which behaviors are we referring to here? We will focus on four key work behaviors: job performance,

organizational citizenship behaviors, absenteeism, and turnover. Note that the first two behaviors are desirable

ones, whereas the other two are often regarded as undesirable. While these four are not the only behaviors

organizational behavior is concerned about, if you understand what we mean by these behaviors and the major

influences over each type of behavior, you will gain more clarity about analyzing the behaviors of others in the

workplace.

Figure 2.15 Factors That Have the Strongest Influence over Work Behaviors

Job PerformanceJob Performance

Job performance refers to the level to which an employee successfully fulfills the factors included in the job

description. For each job, the content of job performance may differ. Measures of job performance include quality

and quantity of work performed by the employee, the accuracy and speed with which the job is performed, and

the overall effectiveness of the person on the job.

In many companies, job performance determines whether a person is promoted, rewarded with pay raises, given

additional responsibilities, or fired from the job. Therefore, most employers observe and track job performance.

This is done by keeping track of data on topics such as the number of sales the employee closes, the number of

clients the employee visits, the number of defects found in the employee’s output, or the number of customer

complaints or compliments received about the person’s work. In some jobs, objective performance data may not

be available, and instead supervisor, coworker, customer, and subordinate assessments of the quality and quantity

of work performed by the person become the indicators of job performance. Job performance is one of the main

88 • PRINCIPLES OF MANAGEMENT

outcomes studied in organizational behavior and is an important variable managers must assess when they are

engaged in the Controlling role.

What Are the Major Predictors of Job Performance?What Are the Major Predictors of Job Performance?

Under which conditions do people perform well, and what are the characteristics of high performers? These

questions receive a lot of research attention. It seems that the most powerful influence over our job performance

is our general mental ability also known as cognitive ability or intelligence, and often abbreviated as “g.” General

mental ability can be divided into several components—reasoning abilities, verbal and numerical skills, and

analytical skills—and it seems to be important across different situations. It seems that “g” starts influencing

us early in our school days because it is strongly correlated with measures of academic success even in

childhood(Kuncel, et. al., 2004). In adult life, “g” is also correlated with different measures of job performance

(Bertua, et. al., 2005; Kuncel, et. al., 2004; Salgado, et. al., 2003; Schmidt & Hunter, 2004; Vinchur, et. al., 1998).

It seems that the influence of “g” on performance is important across different settings, but there is also variation.

In jobs with high complexity, it is much more critical to have high general mental abilities. Examples of such

jobs are manager, sales representative, engineer, and professions such as law and medicine. In jobs such as police

officer and clerical worker, the importance of “g” for high performance is still important but weaker.

Perceptions of organizational justice and interpersonal relationships are factors determining our performance

level. When we feel that we are being fairly treated by the company, that our manager is supportive and rewards

high performance, and when we trust the people we work with, we tend to perform better. Why? It seems that

when we believe we are treated well, we want to reciprocate. Therefore, we treat the company well by performing

our job more effectively.

The stress we experience on the job also determines our performance level. When we are stressed, our mental

energies are drained. Instead of focusing on the task at hand, we start concentrating on the stressor trying to cope

with it. Because our attention and energies are diverted to dealing with stress, our performance suffers. Having

role ambiguity and experiencing conflicting role demands are related to lower performance (Gilboa, et. al., 2008).

Stress that prevents us from doing our jobs does not have to be related to our experiences at work. For example,

according to a survey conducted by Workplace Options, 45% of the respondents said that financial stress affects

work performance. When people are in debt, worrying about their mortgage payments or college payments of

their kids, their performance will suffer.1

Our work attitudes, particularly job satisfaction, are also correlates of job performance but not to as great a

degree as you might expect. Many studies have been devoted to understanding whether happy employees are

more productive. Some studies show weak correlations between satisfaction and performance while others show

higher correlations (what researchers would call “medium sized” correlations of .30) (Iaffaldano & Muchinsky,

1985; Judge, et. al., 2001; Riketta, 2008). The correlation between commitment and performance tends to be even

weaker (Mathieu & Zajac, 1990; Riketta, 2002; Wright & Bonnett, 2002). Even with a correlation of .30, though,

the relationship may be lower than you may have expected. Why is this the case?

It seems that happy workers have an inclination to be more engaged at work. They may want to perform better.

They may be more motivated. But there are also exceptions. Think about this: Because you want to perform, does

this mean that you will actually perform better? Chances are your skill level in performing the job will matter.

There are also some jobs where performance depends on factors beyond an employee’s control, such as the pace

2.7 WORK BEHAVIORS • 89

of the machine they are working on. Because of this reason, in professional jobs such as with engineers and

researchers, we see a stronger link between work attitudes and performance, as opposed to manual jobs such as

assembly-line workers (Riketta, 2002). Also, think about the alternative possibility: If you don’t like your job,

does this mean that you will reduce your performance? Maybe up to a certain point, but there will be factors that

prevent you from reducing your performance: such as the fear of getting fired, the desire to get a promotion so that

you can get out of the job that you dislike so much, or your professional work ethic. As another example, among

nurses, there seems to be a weak correlation between satisfaction and performance. Even when they are unhappy,

nurses put a lot of effort into their work because they feel a moral obligation to help their patients. As a result, we

should not expect a one-on-one relationship between satisfaction and performance. Still, the observed correlation

between work attitudes and performance is important and has practical value.

Finally, job performance has a modest relationship with personality traits, particularly conscientiousness. People

who are organized, reliable, dependable, and achievement-oriented seem to outperform others in various contexts

(Barrick & Mount, 1991; Dudley, et. al., 2006; Vinchur, et. al., 1998).

Organizational Citizenship BehaviorsOrganizational Citizenship Behaviors

While job performance refers to the performance of duties listed in one’s job description, organizational

citizenship behaviors involve performing behaviors that are more discretionary. Organizational citizenship

behaviors (OCB) are voluntary behaviors employees perform to help others and benefit the organization. Helping

a new coworker understand how things work in this company, volunteering to organize the company picnic, and

providing suggestions to management about how to improve business processes are some examples of citizenship

behaviors. These behaviors contribute to the smooth operation of business.

What are the major predictors of citizenship behaviors? Unlike performance, citizenship behaviors do not depend

so much on one’s abilities. Job performance, to a large extent, depends on our general mental abilities. When

you add the education, skills, knowledge, and abilities that are needed to perform well, the role of motivation on

performance becomes more limited. As a result, just because someone is motivated will not mean that the person

will perform well. For citizenship behaviors, in contrast, the motivation-behavior link is clearer. We help others

around us if we feel motivated to do so, and managers, in the Leadership role, are responsible for motivating

employees.

Perhaps the most important factor explaining our citizenship behaviors is organizational justice and interpersonal

relationships. When we have a good relationship with our manager and we are supported by our manager, when

we are treated fairly, when we are attached to our peers, when we trust the people around us, we are more likely

to engage in citizenship behaviors. A high-quality relationship with people we work with will mean that simply

doing our job will not be enough to maintain the relationship. In a high-quality relationship, we feel the obligation

to reciprocate and go the extra mile to help them out (Cohen-Charash & Spector, 2001; Colquitt, et. al., 2001;

Colquitt, et. al., 2007; Fassina, et. al., 2008; Hoffman, et. al., 2007; Ilies, et. al., 2007; Lepine, et. al., 2007; Organ

& Ryan, 1995; Podsakoff, et. al., 1996; Riketta & Van Dick, 2005).

Our personality is yet another explanation for why we perform citizenship behaviors. Personality is a modest

predictor of actual job performance but a much better predictor of citizenship. People who are conscientious,

agreeable, and low on Neuroticism tend to perform citizenship behaviors more often than others (Borman, et. al.,

2001; Dalal, 2005; Diefendorff, et. al., 2002; Organ & Ryan, 1995).

90 • PRINCIPLES OF MANAGEMENT

Job attitudes are also moderately related to citizenship behaviors—more so than they are to job performance.

People who are happier at work, those who are more committed to their companies, and those who have overall

positive attitudes toward their work situation tend to perform citizenship behaviors more often than others. When

people are unhappy, they tend to be disengaged from their jobs and rarely go beyond the minimum that is expected

of them (Dalal, 2005; Diefendorff, et. al., 2002; Fassina, et. al., 2008; Hoffman, et. al., 2007; Lepine, et. al., 2002;

Organ & Ryan, 1995; Riketta, 2002; Riketta & Van Dick, 2005).

Interestingly, age seems to be related to the frequency with which we demonstrate citizenship behaviors. People

who are older are better citizens. It is possible that with age we gain more experiences to share. It becomes easier

to help others because we have more accumulated company and life experiences to draw from (Ng, et. al., 2008).

AbsenteeismAbsenteeism

Absenteeism refers to Unscheduled absences from work. Such absences are costly to companies because of

their unpredictable nature, affecting a manager’s ability to Control the firm’s or department’s budget. When an

employee has an unscheduled absence from work, companies struggle to find replacement workers at the last

minute. This may involve hiring contingent workers, having other employees work overtime, or scrambling to

cover for an absent coworker. The cost of absenteeism to organizations is estimated at $74 billion. According to a

Mercer Human Resource consulting study, 15% of the money spent on payroll is related to absenteeism (Conlin,

2007; Gale, 2003).

What causes absenteeism? First, we need to look at the type of absenteeism. Some absenteeism is unavoidable

and is related to health reasons. For example, reasons such as acute or serious illness, lower back pain, migraines,

accidents one may have on or off the job, or acute stress are important reasons for absenteeism (Farrell & Stamm,

1998; Martocchio, et. al., 2000). Health-related absenteeism is costly, but it would be unreasonable and unfair to

institute organizational policies penalizing it. When an employee has a contagious illness, showing up at work

will infect coworkers and will not be productive. If the illness is not contagious, it is still in the organization’s

best interest for the employee to receive proper medical treatment and rest to promote a full recovery. Indeed,

companies are finding that programs aimed at keeping workers healthy are effective in dealing with this type

of absenteeism. Companies using wellness programs, educating employees about proper nutrition, helping them

exercise, and rewarding them for healthy habits have reported reduced absenteeism (Parks & Steelman, 2008).

2.7 WORK BEHAVIORS • 91

Figure 2.16

Absenteeism costs companies an estimated $74 billion annually. Companies using wellness programs

targeting employee health are found to reduce absenteeism.

David Goehring – Officemate Disappears – CC BY 2.0.

92 • PRINCIPLES OF MANAGEMENT

Work/life balance is another common reason for absences. Staying home to care for a sick family member,

attending the wedding or funeral of a loved one, and skipping work to study for an exam are all common reasons

for unscheduled absences. Companies may deal with these by giving employees more flexibility in work hours. If

employees can manage their own time, they are less likely to be absent. Conversely, when a company has “sick

leave” but no other leave for social and family obligations, they may fake being sick and use their “sick leave.”

One solution is to have a single paid time off policy that would allow workers to balance work and life and allow

companies to avoid unscheduled absences. Organizations such as Lahey Clinic at Burlington, Massachusetts, have

found this to be effective in dealing with unscheduled absences. Some companies such as IBM got rid of sick

leave altogether and instead allow employees to take as much time off as they need, so long as the work gets done

(Cole, 2002; Conlin, 2007; Baltes, et. al., 1999).

Sometimes, absenteeism is a form of work withdrawal and a step followed by turnover. In other words, poor

work attitudes lead to absenteeism. When employees are dissatisfied with their work or have low organizational

commitment, they are likely to be absent more often. Thus, absenteeism is caused by the desire to avoid an

unpleasant work environment. In this case, management may deal with absenteeism by investigating the causes

of dissatisfaction and dealing with them.

Are there personal factors contributing to absenteeism? Research does not reveal a consistent link between

personality and absenteeism, but there is one demographic criterion that predicts absenteeism: age. Interestingly,

and against some stereotypes that increased age would bring more health problems, research shows that age is

negatively related to both frequency and duration of absenteeism. That is, younger workers are the ones more

likely to be absent. Because of reasons that include higher loyalty to their company and a stronger work ethic,

older employees are less likely be absent from work (Martocchio, 1989; Ng & Feldman, 2008).

TurnoverTurnover

Turnover refers to an employee’s leaving an organization. Employee turnover has potentially harmful

consequences, such as poor customer service and poor company-wide performance. When employees leave,

their jobs still need to be performed by someone, so companies spend time recruiting, hiring, and training new

employees, all the while suffering from lower productivity. Yet, not all turnover is bad. Turnover is particularly a

problem when high-performing employees leave, while a poor performer’s leaving may actually give the company

a chance to improve productivity and morale.

Why do employees leave? An employee’s performance level is an important reason. People who perform poorly

are actually more likely to leave. These people may be fired, may be encouraged to quit, or may quit because of

their fear of being fired. Particularly if a company has pay-for-performance systems, poor performers will find that

they are not earning much due to their below-standard performance. This gives poor performers an extra incentive

to leave. This does not mean that high performers will definitely stay with a company. High performers may find

it easier to find alternative jobs, so when they are unhappy, they can leave more quickly.

Work attitudes are often the primary culprit in why people leave. When workers are unhappy at work, and when

they do not feel committed to their companies, they are more likely to leave. Loving the things you do, being

happy with the opportunities for advancement within the company, being happy about pay are all aspects of our

work attitudes relating to turnover. Of course, the link between work attitudes and turnover is not direct. When

employees are unhappy, they will have the intention to leave and may start looking for a job. But their ability to

2.7 WORK BEHAVIORS • 93

actually leave will depend on many factors, such as their employability and the condition of the job market. For

this reason, when national and regional unemployment is high, many people who are unhappy will still continue

to work for their current company. When the economy is doing well, people will start moving to other companies

in response to being unhappy. Understanding the connection between employee happiness and turnover, many

companies make an effort to make employees happy. SAS Institute employees have a 35-hour workweek and

enjoy amenities such as a swimming pool and child care at work. The company’s turnover is around 4%–5%, in

comparison to the industry averages ranging from 12%–20% (Carsten, & Spector, 1987; Cohen, 1991; Cohen,

1993; Cohen & Hudecek, 1993; Griffeth, et. al., 2000; Hom, et. al., 1992; Karlgaard, 2006; Meyer, et. al., 2002;

Steel & Ovalle, 1984; Tett & Meyer, 1993).

People are more likely to quit their jobs if they experience stress at work as well. Stressors such as role conflict

and role ambiguity drain energy and motivate people to seek alternatives. For example, call center employees

experience a great deal of stress because of poor treatment from customers, long work hours, and constant

monitoring of their every action. Companies such as EchoStar realize that one method that is effective in retaining

their best employees is to give them opportunities to move to higher-responsibility jobs elsewhere in the company.

When a stressful job is a step toward a more desirable job, employees seem to stick around longer (Badal, 2006;

Griffeth, et. al., 2000; Podsakoff, et. al., 2007).

There are also individual differences in whether people leave or stay. For example, personality is a factor in the

decision to quit one’s job. People who are conscientious, agreeable, and emotionally stable are less likely to quit

their jobs. Many explanations are possible. People with these personality traits may perform better at work, which

leads to lower quit rates. Or, they may have better relations with coworkers and managers, which is a factor in

their retention. Whatever the reason, it seems that some people are likely to stay longer at any given job regardless

of the circumstances (Salgado, 2002; Zimmerman, 2008).

Whether we leave a job or stay also depends on our age and how long we have been there. It seems that younger

employees are more likely to leave. This is not surprising because people who are younger often have fewer

responsibilities such as supporting a household or having dependents. As a result, they can quit a job they don’t

like much more easily. They may also have higher expectations and thus be more easily disappointed when a job

proves to be less rewarding than they had imagined. Similarly, people who have been with a company for a short

period of time can quit more easily. For example, Sprint Nextel found that many of their new hires were likely

to quit within 45 days of their hiring dates. When they investigated, they found that newly hired employees were

experiencing a lot of stress from avoidable problems such as unclear job descriptions or problems with hooking up

their computers. Sprint was able to solve the turnover problem by paying special attention to orienting new hires.

New employees experience a lot of stress at work, and there is usually not much keeping them in the company

such as established bonds to a manager or colleagues. New employees may even have ongoing job interviews

with other companies when they start working. This, too, gives them the flexibility to leave more easily.

Key Takeaway

Employees demonstrate a wide variety of positive and negative behaviors at work. Among these, four arecritically important and have been extensively studied in the OB literature. Job performance is the degreeof success with which one accomplishes the tasks listed in one’s job description. A person’s abilities,

94 • PRINCIPLES OF MANAGEMENT

particularly general mental ability, are the main predictor of job performance in many occupations. Howwe are treated at work, the level of stress experienced at work, work attitudes, and, to a lesser extent, ourpersonality are also factors relating to one’s job performance. Citizenship behaviors are tasks helpful to theorganization that go above and beyond one’s job description. Performance of citizenship behaviors are lessa function of our abilities and more of motivation. How we are treated at work, personality, work attitudes,and our age are the main predictors of citizenship. Among negative behaviors employees demonstrate,absenteeism and turnover are critically important. People who experience health problems and work/lifebalance issues are prone to more absenteeism. Poor work attitudes are also related to absenteeism, andyounger employees are more likely to be absent from work, especially when dissatisfied. Turnover ishigher among low performers, people who have negative work attitudes, and those who experience a greatdeal of stress. Personality and being younger are personal predictors of turnover.

Exercises

1. What is the difference between performance and organizational citizenship behaviors? As amanager, how would you improve someone’s performance? How would you increase citizenshipbehaviors?

2. Are citizenship behaviors always beneficial to the company? Can you think of any citizenshipbehaviors employees may perform with the intention of helping a company but that may havenegative consequences overall?

3. Given the factors correlated with job performance, which employee selection methods should bebetter at identifying future high performers?

4. What are the major causes of absenteeism at work? How can companies minimize the level ofabsenteeism that takes place?

5. In some companies, managers are rewarded for minimizing the turnover within their departmentor branch. A part of their bonus is directly tied to keeping the level of turnover below a minimum.What do you think about the potential effectiveness of these programs? Do you see any downsides tosuch programs?

1Anonymous. (2008, June). Financial stress: The latest worker risk. HR focus, 85(6), 12.

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2.7 WORK BEHAVIORS • 99

2.8 Developing Your Positive Attitude Skills

Learning Objectives

1. Learn to be happier at work.

2. Leverage your attitudes for optimum work performance.

100

Figure 2.17

Research shows that acting positive at work can actually help you become happier over time as emotions can be influenced by actions.

Anirudh Koul – Jumping Over The 3rd Largest Pyramid In The World – CC BY-NC 2.0.

Have you ever wondered how you could be happier at work and how greater work satisfaction could improve

your overall effectiveness? Here are some ideas that may help you achieve a great sense of peace for yourself as

well as when you are working with a negative coworker.

• Leverage your Big Five traits. Your personality is a big part of your happiness. Which of the Big Five

positive traits are you strongest on? Be aware of them and look for opportunities to express them at work.

Are you high on Neuroticism? If so, work to overcome this challenge: If you choose to find the negative

side of everything, you will.

• Find a job and company that fit you well. Good fit with the job and company are important to your

happiness. This starts with knowing yourself, your chosen career, and the particular job in question: What

do you want from the job? What do you enjoy doing?

• Get accurate information about the job and the company. Ask detailed questions about what life is like in

this company. Do your research. Read about the company; use your social network to understand the

company’s culture.

2.8 DEVELOPING YOUR POSITIVE ATTITUDE SKILLS • 101

• Develop good relationships at work. Make friends. Try to get a mentor if your company does not have a

formal mentoring program. Approach a person you admire and attempt to build a relationship with this

person. An experienced mentor can be a great help in navigating life at a company. Your social network can

help you weather the bad days and provide you with emotional and instrumental support during your time at

a company as well as afterward.

• Pay is important, but job characteristics matter more to your job satisfaction. So don’t sacrifice the job

itself for a bit more money. When choosing a job, look at the level of challenge and the potential of the job

to make you feel engaged.

• Be proactive in managing organizational life. If the job is stressful, cope with it by effective time

management and having a good social network, as well as being proactive in getting to the source of stress.

If you don’t have enough direction, ask for it!

• Know when to leave. If the job makes you unhappy over an extended period of time and there is little hope

of solving the problems, it may be time to look elsewhere.

Key Takeaway

Promoting a positive work attitude will increase your overall effectiveness as a manager. You can increaseyour own happiness at work by knowing yourself as a person, by ensuring that you work at a job andcompany where you fit in, and by building effective work relationships with your manager, coworkers, andsubordinates. Concentrating on the motivating potential of the job when choosing a job and solving theproblems you encounter in a proactive manner may be helpful as well.

Exercises

1. Do you believe that your own happiness at work is in your hands? What have you done in the pastto increase your own satisfaction with work?

2. Consider the most negative person you work or interact with. Why do you think they focus moreon the negative side of life?

3. On the basis of what you have read in this chapter, can you think of ways in which you canimprove your effectiveness in dealing with negative coworkers?

102 • PRINCIPLES OF MANAGEMENT

Chapter 3: History, Globalization, andValues-Based Leadership

3.1 History, Globalization, and Values-Based Leadership

3.2 Case in Point: Hanna Andersson Corporation Changes for Good

3.3 Ancient History: Management Through the 1990s

3.4 Contemporary Principles of Management

3.5 Global Trends

3.6 Globalization and Principles of Management

3.7 Developing Your Values-Based Leadership Skills

103

3.1 History, Globalization, and Values-Based Leadership

What’s in It for Me?

Reading this chapter will help you do the following:

1. Learn about the history of principles of management.

2. Know the context for contemporary principles of management.

3. Understand key global trends.

4. See how globalization is affecting management principles and practices.

5. Appreciate the importance of value-based leadership (ethics) in management.

The planning-organizing-leading-controlling (P-O-L-C) framework is summarized in the following figure. In this

chapter, you’ll learn that some principles of management are enduring, but you’ll also see that managers need to

be continually adapting to changing times. Each facet of the framework—from planning, to organizing, to leading,

to controlling—has to be adapted to take advantage of, and to manage in, our changing world. Global trends affect

both the style and the substance of management. As the world becomes more global, managers find themselves

leading workforces that may be distributed across the country—and the world. Workers are more educated, but

more is expected of them.

Figure 3.2 The P-O-L-C Framework

The realm of managers is expanding. As a leader, you’ll be a role model in the organization, setting the tone not

just for what gets done but how it gets done. Increasingly, good business practice extends to stewardship, not just

104

of the organization but of the environment and community at large. Ethics and values-based leadership aren’t just

good ideas—they’re vital to attracting talent and retaining loyal customers and business partners.

3.1 HISTORY, GLOBALIZATION, AND VALUES-BASED LEADERSHIP • 105

3.2 Case in Point: Hanna Andersson Corporation Changesfor Good

Figure 3.3

Jessica Lucia – pajama time – CC BY-NC-ND 2.0.

Born from a desire to bring quality European-style children’s clothing to the United States, HannaAndersson Corporation has sold colorful clothing and accessories since 1983. Husband and wifecofounders, Tom and Gun (pronounced “gōōn”) Denhart, started the Portland, Oregon–based companyby distributing imported Swedish clothing from their home. Named for Gun’s Swedish grandmother, thecompany now boasts over $100 million in annual sales and employs over 500 people. Growing from anexclusive mail-order catalog business in the early 1980s, today Hanna Andersson also distributes productsonline, in 29 retail stores nationwide, and through select specialty retailers.

Over the years, Hanna Andersson has shown that it deeply values its employees. The company providessupplemental child-care reimbursement to all employees—even part-time sales associates. Additionalemployee benefits include part-time and flexible work hours, considerable paid time off, and 8 hours per

106

year of paid time for employees to volunteer in the community. More important, though, employees feellike they are part of the Hanna Andersson family. In fact, in the beginning many of the employees werefriends and family members of the Denharts.

It was important to the Denharts that they were involved in the decisions of the company and that thosedecisions took quality of life issues into account. Gun states, “If you can create balance among your work,your community, your family, and your friends, then you’re going to be more satisfied.” Examples of thisphilosophy infusing Hanna Andersson include the establishment of HannaDowns, a clothing recyclingprogram where customers can return used clothing and receive a 20% off coupon for their next purchase.The charitable nature of Hanna Andersson has continued through what is now the HannaHelps program.This program awards grants and donates products to schools and nonprofit groups, helping children inthe community and around the world. In addition, under Gun’s leadership Hanna Andersson establishedongoing donations, 5% of pretax profits, to charities that benefit women and children.

The considerable growth and development the business experienced did not come without its challengesand necessary organizational change. In the 1990s and early 2000s, increased competition from otherretailers and the introduction of online commerce posed some challenges for Hanna Andersson. TheDenharts found themselves without a solid growth plan for the future. They worried that they might havelost sight of market forces. Change was necessary if Hanna Andersson was to remain viable.

Realizing the need for help and direction, the Denharts promoted from within the company to help initiatechange and strategic growth, and in 1995, Phil Iosca took the strategic lead as CEO. Hanna Anderssonwas then sold to a private equity firm in 2001 and has since changed ownership several times, leading to anew business direction for the company. After selling the business, Gun remained on the Hanna board ofdirectors until 2007. She also served as chair of the Hanna Andersson Children’s Foundation from 2001 to2006. She still partners with the company from time to time on charitable events in the community.

Under Iosca’s steady leadership, the company opened several retail stores throughout the country in 2002and established online commerce. In 2009, Hanna Andersson began distributing merchandise wholesalethrough retail partners such as Nordstrom and Costco. The implementation of each of these newdistribution avenues required a great deal of change within the company. HR Vice President GretchenPeterson explains, “The growth of the retail business required the greatest shift in our internal processesfrom both technical systems, to inventory planning and buying to distribution processes to ourorganizational communication and HR processes (recruitment, compensation, etc.), as well as ourmarketing communication programs.” Tenured employees throughout the company found themselves inunfamiliar territory, unsure of the company’s future as the board and owners debated the risks and rewardsof retail expansion. Fortunately, the changes were mostly offset by a consistent leadership team. Petersen,who has been with the company since 1994, explains, “From 1995 to 2010, we retained the same CEO(Iosca) and therefore, the face of the company and the management style did not fluctuate greatly.”

When Iosca retired in early 2010, chief operating officer Adam Stone took over as CEO. He helpedhis company weather yet another transition with a calm push for changes within the company. To helpunderstand different points of view at Hanna Andersson, Stone often sat in on inventory and operationalplanning meetings. Step by step, Stone was able to break down work initiatives so the continuing changeswere not so overwhelming to the company and its valued employees. Over time, his and other companyleaders’ presence has helped employees make better, more strategic decisions. Rather than resistingchange, they now feel heard and understood.

The decision to sell wholesale turned out to be a good one, as it has enabled the company to weather therecession’s negative effect on retail and online purchases. Accounting for approximately 10% of total sales,the company’s wholesale business is expected to boost yearly revenue by 5%. With more conscientiousinventory purchases and strategic distribution initiatives, Hanna Andersson has realized a higher sales

3.2 CASE IN POINT: HANNA ANDERSSON CORPORATION CHANGES FOR GOOD • 107

volume, lower inventory at year-end, and less liquidation. Through it all, company management has donean effective job at interpreting the desired growth goals of its owners while inspiring change within thecompany. With continued clear communication, direction, and willingness to try new techniques, HannaAndersson is poised for growth and success in the future while not forgetting to take care of its employees.

Case study based on information from Bollier, D. (1996). Aiming higher: 25 stories of how companiesprosper by combining sound management and social vision (pp. 23–35). New York: The BusinessEnterprise Trust; Boulé, M. (2009, July 16). Hanna Andersson employee can’t say enough of a thank-you to co-workers who helped her through cancer. Oregonian. Retrieved March 4, 2010, fromhttp://www.oregonlive.com/news/oregonian/margie_boule/index.ssf/2009/07/hanna_andersson_employee_cant.html; Information retrieved February 28, 2010, from the HannaAndersson Web site: http://www.hannaandersson.com; Muoio, A. (1998, November 30). Giving back.Fast Company. Retrieved March 1, 2010, from http://www.fastcompany.com/magazine/20/one.html?page=0%2C1; Goldfield, R. (2002, June 14). Hanna sees bricks-and-mortar future. PortlandBusiness Journal; Peterson, G. (2010, March 5 and April 5). Personal communication; Informationretrieved March 1, 2010, from http://www.answers.com/topic/hanna-andersson; Raphel, M., & Raphel, N.(1995). Up the loyalty ladder (pp. 83–90). New York: HarperCollins.

Discussion Questions

1. How has Hanna Andersson applied values-based leadership in terms of the organization’s choicesrelated to P-O-L-C?

2. How did company leaders like Iosca, Petersen, and Stone help facilitate change within thecompany? Did they remain consistent with the values of the founders?

3. What were the reasons for organizational change within Hanna Andersson, both internally andexternally?

4. What unique challenges do family-owned and -operated businesses face?

5. How did the mission of Hanna Andersson evolve over time?

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3.3 Ancient History: Management Through the 1990s

Learning Objectives

1. Early motivation for development of principles.

2. What problems did these principles solve?

3. What were the limitations of these early views?

Early Management PrinciplesEarly Management Principles

Early management principles were born of necessity. The most influential of these early principles were set forth

by Henri Fayol a French mining engineer. In 1888, Fayol became director of a mining company. The company was

in difficulty, but Fayol was able to turn it around and make the company profitable again. When he retired, Fayol

wrote down what he’d done to save the company. He helped develop an “administrative science” and developed

principles that he thought all organizations should follow if they were to run properly.

Fayol’s 14 Principles of ManagementFayol’s 14 Principles of Management

1. Specialization/Division of Labor

By specializing in a limited set of activities, workers become more efficient and increase their output.

2. Authority/Responsibility

Managers must have the authority to issue commands, but with that authority comes the responsibility to

ensure that the work gets done.

3. Discipline

Workers must obey orders if the business is to run smoothly. But good discipline is the result of effective

leadership: workers must understand the rules and management should use penalties judiciously if workers

violate the rules.

109

4. Unity of Command

An employee should receive orders only from one boss to avoid conflicting instructions.

5. Unity of Direction

Each unit or group has only one boss and follows one plan so that work is coordinated.

6. Subordination of Individual Interest

The interests of one person should never take precedence over what is best for the company as a whole.

7. Remuneration

Workers must be fairly paid for their services.

8. Centralization

Centralization refers to decision making: specifically, whether decisions are centralized (made by

management) or decentralized (made by employees). Fayol believed that whether a company should

centralize or decentralize its decision making depended on the company’s situation and the quality of its

workers.

9. Line of Authority

The line of authority moves from top management down to the lowest ranks. This hierarchy is necessary for

unity of command, but communication can also occur laterally if the bosses are kept aware of it. The line

should not be overextended or have too many levels.

10. Order

Orderliness refers both to the environment and materials as well as to the policies and rules. People and

materials should be in the right place at the right time.

11. Equity

Fairness (equity), dignity, and respect should pervade the organization. Bosses must treat employees well,

with a “combination of kindliness and justice.”

12. Stability of Tenure

Organizations do best when tenure is high (i.e., turnover is low). People need time to learn their jobs, and

stability promotes loyalty. High employee turnover is inefficient.

13. Initiative

Allowing everyone in the organization the right to create plans and carry them out will make them more

enthusiastic and will encourage them to work harder.

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14. Esprit de Corps

Harmony and team spirit across the organization builds morale and unity.

Time and MotionTime and Motion

Figure 3.4

Today, coal is mined and moved by heavy machinery like this coal lift. In Taylor’s time, it was moved by

shovel to rail cars or trucks.

PublicDomainPictures – CC0 public domain.

Frederick Winslow Taylor, a contemporary of Fayol’s, formalized the principles of scientific management in

his 1911 book, The Principles of Scientific Management. Taylor described how productivity could be greatly

improved by applying the scientific method to management; for this reason, the scientific approach is sometimes

referred to as Taylorism.

Taylor is most famous for his “time studies,” in which he used a stopwatch to time how long it took a worker

to perform a task, such as shoveling coal or moving heavy loads. Then he experimented with different ways to

do the tasks to save time. Sometimes the improvement came from better tools. For example, Taylor devised the

“science of shoveling,” in which he conducted time studies to determine how much weight a worker could lift with

a shovel without tiring. He determined that 21 pounds was the optimal weight. But since the employer expected

each worker to bring his own shovel, and there were different materials to be shoveled on the job, it was hard to

ensure that 21-pound optimum. So, Taylor provided workers with the optimal shovel for each density of materials,

like coal, dirt, snow, and so on. With these optimal shovels, workers became three or four times more productive,

and they were rewarded with pay increases.

3.3 ANCIENT HISTORY: MANAGEMENT THROUGH THE 1990S • 111

Frank Gilbreth and Lillian Moller Gilbreth, his wife (who outlived Frank by 48 years!), were associates of Taylor

and were likewise interested in standardization of work to improve productivity (Wikipedia, 2009). They went

one better on Taylor’s time studies, devising “motion studies” by photographing the individual movements of each

worker (they attached lights to workers’ hands and photographed their motions at slow speeds). The Gilbreths then

carefully analyzed the motions and removed unnecessary ones. These motion studies were preceded by timing

each task, so the studies were called “time and motion studies.”

Applying time and motion studies to bricklaying, for example, the Gilbreths devised a way for workers to lay

bricks that eliminated wasted motion and raised their productivity from 1,000 bricks per day to 2,700 bricks per

day. Frank Gilbreth applied the same technique to personal tasks, like coming up with “the best way to get dressed

in the morning.” He suggested the best way to button the waistcoat, for example, was from bottom up rather than

top down. Why? Because then a man could straighten his tie in the same motion, rather than having to raise his

hands back up from the bottom of the waistcoat.

Limitations of the Early ViewsLimitations of the Early Views

Fayol, Taylor, and the Gilbreths all addressed productivity improvement and how to run an organization smoothly.

But those views presumed that managers were overseeing manual labor tasks. As work began to require less

manual labor and more knowledge work, the principles they had developed became less effective. Worse, the

principles of Taylorism tended to dehumanize workers. The writer Upton Sinclair who raised awareness of

deplorable working conditions in the meatpacking industry in his 1906 book, The Jungle, was one of Taylor’s

vocal critics. Sinclair pointed out the relatively small increase in pay (61%) that workers received compared with

their increased productivity (362%). Frederick Taylor answered Sinclair’s criticism, saying that workers should

not get the full benefit because it was management that devised and taught the workers to produce more. But

Taylor’s own words compare workers to beasts of burden: The worker is “not an extraordinary man difficult to

find; he is merely a man more or less the type of an ox, heavy both mentally and physically” (Sinclair, 1911;

Taylor, 1911)

When work was manual, it made sense for a manager to observe workers doing a task and to devise the most

efficient motions and tools to do that task. As we moved from a manufacturing society to a service-based one, that

kind of analysis had less relevance. Managers can’t see inside the head of a software engineer to devise the fastest

way to write code. Effective software programming depends on knowledge work, not typing speed.

Likewise, a services-based economy requires interactions between employees and customers. Employees have to

be able to improvise, and they have to be motivated and happy if they are to serve the customer in a friendly way.

Therefore, new management theories were developed to address the new world of management and overcome the

shortcomings of the early views.

Finally, early views of management were heavily oriented toward efficiency, at the expense of attention to the

manager-as-leader. That is, a manager basically directs resources to complete predetermined goals or projects. For

example, a manager may engage in hiring, training, and scheduling employees to accomplish work in the most

efficient and cost-effective manner possible. A manager is considered a failure if he or she is not able to complete

the project or goals with efficiency or when the cost becomes too high. However, a leader within a company

develops individuals to complete predetermined goals and projects. A leader develops relationships with his or

her employees by building communication, by evoking images of success, and by eliciting loyalty. Thus, later

112 • PRINCIPLES OF MANAGEMENT

views of management evoke notions of leaders and leadership in discussing the challenges and opportunities for

modern managers.

Management Ideas of the 1990sManagement Ideas of the 1990s

Peter Drucker was the first scholar to write about how to manage knowledge workers, with his earliest work

appearing in 1969. Drucker addressed topics like management of professionals, the discipline of entrepreneurship

and innovation, and how people make decisions. In 1982, Tom Peters and Robert Waterman wrote In Search of

Excellence, which became an international best seller and ushered a business revolution by changing the way

managers viewed their relationships with employees and customers. On the basis of the authors’ research focusing

on 43 of America’s most successful companies in six major industries, the book introduced nine principles of

management that are embodied in excellent organizations:

1. Managing Ambiguity and Paradox

The ability of managers to hold two opposing ideas in mind at the same time and still be able to function

effectively.

2. A Bias for Action

A culture of impatience with lethargy and inertia that otherwise leaves organizations unresponsive.

3. Close to the Customer

Staying close to the customer to understand and anticipate customer needs and wants.

4. Autonomy and Entrepreneurship

Actions that foster innovation and nurture customer and product champions.

5. Productivity through People

Treating rank-and-file employees as a source of quality.

6. Hands-On, Value-Driven

A management philosophy that guides everyday practice and shows management’s commitment.

7. Stick to the Knitting

Stay with what you do well and the businesses you know best.

8. Simple Form, Lean Staff

The best companies have very minimal, lean headquarters staff.

9. Simultaneous Loose-Tight Properties (Peters & Waterman, 1982)

3.3 ANCIENT HISTORY: MANAGEMENT THROUGH THE 1990S • 113

Autonomy in shop-floor activities plus centralized values.

Following up, Peters wrote a Passion for Excellence, which placed further emphasis on leadership, innovation,

and valuing people. His book Thriving on Chaos, published the day of the biggest stock market crash of the

time (“Black Monday,” October 19, 1987), addressed the uncertainty of the times; and Liberation Management,

published in 1992, laid out 45 prescriptions for how to lead companies in a rapidly changing world. The book

called for empowering people by involving everyone in decision making and eliminating bureaucratic rules and

humiliating conditions. Peters urged organizational leaders (i.e., managers) to celebrate and recognize employees

for their contributions. His advice to leaders was to “master paradox” (i.e., develop a level of comfort with

complexity and ambiguity) and establish direction for the company by developing an inspiring vision and leading

by example.

Beginning in the 1970s, Warren Bennis pioneered a new theory of leadership that addressed the need for leaders

to have vision and to communicate that vision. More than just a manager, an effective leader was defined as

someone with the ability to influence and motivate others not only to perform work tasks but also to support the

organization’s values and meet the organization’s goals. Different views of leadership through the ages are shown

next.

Views of Leadership Through the AgesViews of Leadership Through the Ages

A leader is a dealer in hope.

—Napoleon

I suppose that leadership at one time meant muscle; but today it means getting along with people.

—Indira Gandhi

What leaders really do: set direction, align people, and motivate people.

—John Kotter (Kotter, 1990).

Key Takeaway

Early management theorists developed principles for managing organizations that suited the times. Acentury ago, few workers were highly educated; most work was manual, tasks were repetitive, and rates ofchange were slow. Hierarchy brought unity and control, and principles of management in which managersdefined tasks and coordinated workers to move in a unified direction made sense. As the economy movedfrom manufacturing to services, the need for engaging workers’ minds and hearts became more important.Drucker, Peters, and Waterman presented ideas on how managers could achieve excellence in a continuallychanging business environment, while Bennis encouraged managers to become inspiring leaders whoempowered people.

114 • PRINCIPLES OF MANAGEMENT

Exercises

1. What goals seem to dominate early management principles?

2. Do you see any commonalities between Fayol’s principles of management from 1911 and those ofTom Peters in the 1990s?

3. Are there any jobs today for which time and motion studies would make sense to do? Would anyother skills need to be taught as well?

4. What do early management principles leave out?

5. How would you put some of the ideas of the 1990s into practice?

6. What aspects of P-O-L-C would be most likely to change based on what you have learned in thissection?

ReferencesReferences

Kotter, J. P. (1990, May–June). What leaders really do. Harvard Business Review, pp. 85–95.

Peters, T. J., & Waterman, R. H. (1982). In Search of Excellence. New York: Knopf.

Sinclair, U. (1911, June). A criticism. American Magazine, 243–244; Taylor, F. W. (June 1911). An answer to

the criticism. American Magazine, 243–244. Retrieved January 28, 2009, from http://stevens.cdmhost.com/cdm4/

document.php?CISOROOT=/p4100coll1&CISOPTR=244&REC=14&CISOSHOW=242.

Wikipedia, retrieved January 28, 2009, from http://en.wikipedia.org/wiki/Cheaper_by_the_Dozen. Cheaper by the

Dozen was made into a 1950 motion picture starring Clifton Webb and Myrna Loy as Frank and Lillian Gilbreth.

3.3 ANCIENT HISTORY: MANAGEMENT THROUGH THE 1990S • 115

3.4 Contemporary Principles of Management

Learning Objectives

1. Recognize organizations as social movements.

2. Understand the benefits of social networking.

3. Recognize learning organizations.

4. Understand virtual organizations.

Corporations as Social MovementsCorporations as Social Movements

Traditionally, we’ve thought of corporations as organizations that had clear boundaries, formal procedures, and

well-defined authority structures. In contrast, social movements are seen as more spontaneous and fluid. The

term social movement refers to a type of group action that is focused on specific political or social issues;

examples include the civil rights movement, the feminist movement, and the gay rights movement. Leaders of

social movements depend on charisma rather than authority to motivate participants to action. Contemporary

management theory, however, is showing that the lines between the two are blurring: corporations are becoming

more like social movements, and social movements are taking on more permanence. Just as companies are

outsourcing specific jobs, so social movements can contract out tasks like lobbying and fundraising.

Figure 3.5

116

We are more connected, at least virtually, than ever before.

Takashi Hososhima – Traditional cell phone vs Smart phone – CC BY-SA 2.0.

Corporations can implement initiatives that mimic a social movement. Consider how the CEO of one bank

described a program he introduced: “The hierarchical management structure will give way to some collective

activities that will improve our effectiveness in the marketplace. Decisions won’t flow from a management level

to people on the line who are expected to implement those decisions.…We’re telling everyone, choose a process,

figure out what and where the problems are, work together to come up with solutions, and then put your solutions

to work (Davis, et. al., 2005).” Thus, more and more leading businesses are harnessing the mechanics of social

movements to improve how they will manage their businesses in the future.

Social NetworkingSocial Networking

Social networking refers to systems that allow members of a specific site to learn about other members’ skills,

talents, knowledge, or preferences. Companies use these systems internally to help identify experts.

In the world, at large, social networks are groups of individuals who share a common interest or passion. Poker

players, dog lovers, and high school alumni are a few examples of social networks in action. In the corporate

world, a social network is made up of individuals who share an employer and, potentially, other interests as well.

But in the pre-Internet age, managers lacked the tools to recognize or tap the business value of in-house social

3.4 CONTEMPORARY PRINCIPLES OF MANAGEMENT • 117

networks. The company softball team was a social network, sure. But what did that have to do with the bottom

line?

Today, social networks are starting points for corporate innovation: potentially limitless arrangements of

individuals inspired by opportunities, affinities, or tasks. People feel better and work better when they belong

to a group of other people like themselves (Rummler, 2007). This new attitude toward social networks in the

workplace has been fueled by the growth of social networking sites like Facebook.

Facebook was started by then-college student Mark Zuckerberg in 2004 as a way of connecting a social

network—specifically, university students. Since then, Facebook has changed the way organizations connect as

well. Some companies maintain a physical presence on Facebook that allows consumers to chime in about their

passions (or lack of them) for corporate offerings, news, and products. Starbucks has adopted this model, asking

consumers to help them revive their product lines and image.

As Zuckerberg told the Wall Street Journal, “We just want to share information more efficiently (Vara, 2007).”

And, in the information age, that’s what social networks do best. Companies are applying the online social

networking model of open and closed groups to their corporate intranets, creating secure sites for employees in

different locations to collaborate on projects based on common interests, management directives, and incentives.

For example, IBM’s pilot virtual world will let Big Blue employees use chat, instant messaging, and voice

communication programs while also connecting to user-generated content in the public spaces of Second Life,

another large social networking site. IBM also opened a virtual sales center in Second Life and, separately from

the Second Life partnership, is building an internal virtual world where work groups can have meetings.

The use of online social networking principles can open the door to outside collaborations. For example, Netflix

offered a million-dollar reward to anyone in the company’s social network of interested inventors who could

improve the algorithm that matches movie lovers to new titles they might enjoy. Companies like Procter &

Gamble and InnoCentive are tapping social networks of scientists to improve their products.

Social networks fueled by passion can help managers retain, motivate, and educate staff. They might even help

Facebook’s Mark Zuckerberg with an in-house dilemma as his company grows. According to the Wall Street

Journal, the world’s most dynamic social networking site has “little management experience.”

Learning OrganizationsLearning Organizations

In a 1993 article, Harvard Business School professor David Garvin defined a learning organization as “an

organization skilled at creating, acquiring, and transferring knowledge, and at modifying its behavior to reflect

new knowledge and insights (Garvin, 1993).” The five building blocks of learning organizations are

1. Systematic problem solving: The company must have a consistent method for solving problems, using

data and statistical tools rather than assumptions.

2. Experimentation: Experiments are a way to test ideas in small steps. Experiments let companies hunt for

and test new knowledge, such as new ways of recycling waste or of structuring an incentive program.

3. Learning from past experience: It’s essential for companies to review projects and products to learn what

worked and what didn’t. Boeing, for example, systematically gathered hundreds of “lessons learned” from

118 • PRINCIPLES OF MANAGEMENT

previous airplane models, such as the 737 and 747, which it applied to the 757s and 767s, making those the

most successful, error-free launches in Boeing’s history.

4. Learning from others: Recognizing that good ideas come from anywhere, not just inside the company,

learning organizations network with other companies in a continual search for good ideas to adapt and

adopt.

5. Transferring knowledge: Sharing knowledge quickly throughout the organization is the way to make

everyone a smart, contributing member.

Virtual OrganizationsVirtual Organizations

A virtual organization is one in which employees work remotely—sometimes within the same city, but more

often across a country and across national borders. The company relies on computer and telecommunications

technologies instead of physical presence for communication between employees. E-mail, wikis, Web meetings

(i.e., like Webex or GoToMeeting), phone, and Internet relay chat (IRC) are used extensively to keep everyone

in touch. Virtual companies present special leadership challenges because it’s essential for leaders to keep

people informed of what they are supposed to be doing and what other arms of the organization are doing.

Communication in a commons area is preferable to one-on-one communication because it keeps everyone up to

speed and promotes learning across the organization.

The Value of WikisThe Value of Wikis

Wikis provide companies with a number of benefits (Tapscott & Williams, 2006):

• Wikis pool the talent of experts as well as everyone from across the company and beyond it—in all time

zones and geographic locations.

• Input from unanticipated people brings fresh ideas and unexpected connections.

• Wikis let people contribute to a project any time, giving them flexibility in managing their time.

• It’s easy to see the evolution of an idea, and new people can get up to speed quickly by seeing the history of

the project.

• Co-creation of solutions eliminates the need to “sell” those solutions to get buy-in.

• Wikis cut the need for e-mail by 75% and the need for meetings by 50%.

With more and more companies outsourcing work to other countries, managers are turning to tools like wikis

to structure project work globally. A wiki is a way for many people to collaborate and contribute to an online

document or discussion (see “The Value of Wikis”). The document remains available for people to access

anytime. The most famous example is Wikipedia. A wikified organization puts information into everyone’s hands.

Managers don’t just talk about empowering workers—the access to information and communication empowers

workers directly. People who are passionate about an idea can tap into the network to make the idea happen.

Customers, too, can rally around an issue and contribute their opinions.

Many companies that are not solely virtual use the principles of a virtual organization as a way to structure

3.4 CONTEMPORARY PRINCIPLES OF MANAGEMENT • 119

the work of globally distributed teams. VeriFone, one of the largest providers of electronic payment systems

worldwide, has development teams working on software projects around the world. In what the company calls

a “relay race,” developers in Dallas working on a rush project send unfinished work at quitting time to another

development center in Laupahoehoe, Hawaii. When the sun sets there, the project is handed off to programmers in

Bangalore, India, for further work, and by morning, it’s back in Dallas, 16 hours closer to completion. Similarly,

midwestern Paper Converting Machine Co. (PCMC) outsourced some design work to Chennai, India. Having

U.S. and Indian designers collaborate 24/7 has helped PCMC slash development costs and time, enabling the

company to stay in business, according to CEO Robert Chapman. Chapman said, ““We can compete and create

great American jobs, but not without offshoring (Engardio, 2006).”

Virtual organizations also pose management challenges. In practical terms, if everyone is empowered to be a

decision maker but various people disagree, how can decisions be made? If all workers can work at the times they

choose, how can management be sure that workers are doing their work—as opposed to reading Web sites for fun,

shopping, or networking with friends—and that they are taking appropriate breaks from work to avoid burnout?

There are also challenges related to the virtual environment’s dependence on computers and Web security.

Key Takeaway

In today’s fast-changing world, organizations are becoming more like social movements, with more fluidboundaries and more participation in leadership across all levels. Social networks within corporationslet employees find out about one another and access the people who have the skills, knowledge, orconnections to get the job done. Continuous learning is important, not just for individuals but fororganizations as a whole, to transfer knowledge and try out new ideas as the pace of change increases.Virtual organizations can speed up cycle time, but they pose new challenges for managers on howto manage remote workers. Communications technologies and the Web let employees work fromanywhere—around the corner or around the world—and require special attention to managingcommunication.

Exercises

1. What commonalities do you see between organizations and social movements?

2. How would you use a social network to solve a work-related task?

3. Why do social networks inspire employees?

4. How do social networks help managers plan, organize, lead, and control?

5. What steps would you take to help your organization become a learning organization?

6. What are the advantages of a virtual organization?

7. What aspects of P-O-L-C would be most likely to change based on what you have learned in thissection?

120 • PRINCIPLES OF MANAGEMENT

ReferencesReferences

Davis, G. F., McAdam, D., Scott, W. R., & Zald, M. N. (Eds.). (2005). Social Movements and Organization

Theory. Cambridge Studies in Contentious Politics. Cambridge, UK: Cambridge University Press, 283.

Engardio, P. (2006, January 30). The future of outsourcing. BusinessWeek.

Garvin, D. (1993, July–August). Building a learning organization. Harvard Business Review, 78–91.

Rummler, L. (2007, July). Corporate social networking updates definition of women’s groups. Retrieved January

28, 2009, from http://www.talentmgt.com/newsletters/recruitment_perspectives/2007/July/380/index.php.

Tapscott, A., & A. D. Williams. (2006). Wikinomics: How Mass Collaboration Changes Everything. New York:

Portfolio.

Vara, V. (2007, May 21). Facebook opens its pages as a way to fuel growth. Wall Street Journal. Retrieved

January 28, 2009, from http://online.wsj.com/public/article/

SB117971397890009177-wjdKPmjAqS_9ZZbwiRp_CoSqvwQ_20070620.html.

3.4 CONTEMPORARY PRINCIPLES OF MANAGEMENT • 121

3.5 Global Trends

Learning Objectives

1. What are the top 10 ways that the world is changing?

2. What is the pace of these changes?

As the summary “Top Trends” suggests, we are living in exciting times, and you’re at the forefront of it. The world

is changing in dramatic ways, and as a manager, you’re in the best position to take advantage of these changes.

Let’s look at 10 major ways in which the world is changing; we’ll characterize the first five as challenges and the

next five as solutions.

Top TrendsTop Trends

Top 5 Challenge Trends

1. Increasing Concern for the Environment

2. Greater Personalization and Customization

3. Faster Pace of Innovation

4. Increasing Complexity

5. Increasing Competition for Talent

Top 5 Solution Trends

1. Becoming More Connected

2. Becoming More Global

3. Becoming More Mobile

4. Rise of the Creative Class

5. Increasing Collaboration

122

Top 5 Challenge TrendsTop 5 Challenge Trends

Increasing Concern for the EnvironmentIncreasing Concern for the Environment

We all seem to believe that the weather has been getting weirder in recent decades, and analysis by the National

Oceanic and Atmospheric Administration (NOAA) suggests that there have been more catastrophic weather

events in recent years than 10–20 years ago (NCDC, 2008). People are seeing the growing threat of global

warming, which is leading to failing crops, rising sea levels, shortages of drinking water, and increasing death tolls

from disease outbreaks such as malaria and dengue fever. Currently, 175 nations have signed the Kyoto Protocol

on climate change and pledged to begin the long process of reducing greenhouse gas emissions. According

to McKinsey’s Global Survey of Business Executives, executives across the world believe that business plays

a wider role in society and has responsibility to address issues such as environmental concerns beyond just

following the letter of the law to minimize pollution. More and more companies now watch the “triple bottom

line”—the benchmark of how they benefit, not just (1) profits but also (2) employees and (3) the environment as a

whole. Companies realize they have to take bold steps to minimize their carbon footprint, create environmentally

friendly products, and manage the company for more than just the next quarter’s profits. Managers can’t simply

“greenwash” (pretend to be green through tiny steps and heavy advertising).

Figure 3.6

Wind power is a high-growth business that takes advantage of increasing interest in sustainable energy

sources.

TumblingRun – Into the Night – CC BY-ND 2.0.

3.5 GLOBAL TRENDS • 123

Greater Personalization and CustomizationGreater Personalization and Customization

We’re no longer happy with cookie-cutter products. Consumers are demanding more say in products and

services. One size no longer fits all, and that means tailoring products and services to meet specific customer

preferences. And as companies sell their products globally, that tailoring has to meet vastly different needs,

cultural sensitivities, and income levels. Even something simple such as Tide laundry detergent can come in

hundreds of potential variants in terms of formulations (powders, liquids, tablets), additives (whiteners, softeners,

enzymes), fragrances (unscented, mountain fresh, floral), and package sizes (from single-load laundromat sizes

to massive family/economy sizes). Customization and the growing numbers of products mean managing more

services and more products. For example, for just $4.99 plus shipping, you can create your own Kleenex oval

tissue box (Mykleenextissue, 2008)! Managing for mass production won’t suffice in the future.

Faster Pace of InnovationFaster Pace of Innovation

We all want the next new thing, and we want it now. New models, new products, and new variations—companies

are speeding new products to market in response to customer demands. The Finland-based mobile phone maker

Nokia sells 150 different devices, of which 50–60 are newly introduced each year. The new variations are tailored

to local languages, case colors, carriers, add-ons, and content. David Glazer, engineering director at Google,

explained how his company adapts to this fast pace: “Google has a high tolerance for chaos and ambiguity. When

we started OpenSocial [a universal platform for social-network applications], we didn’t know what the outcome

was going to be.” So Google started running a bunch of experiments. “We set an operational tempo: when in

doubt, do something,” Glazer said, “If you have two paths and you’re not sure which is right, take the fastest path

(Fast Company, 2008).”

Increasing ComplexityIncreasing Complexity

Because we want more sustainability, more customization, and more innovation, companies face growing

complexity. Nokia’s 50–60 new phone models a year all have 300–400 components, some of which contain

millions or hundreds of millions of transistors. Those components have to arrive at the right manufacturing

location (Nokia has 10 worldwide) from whichever country they originated and arrive just in time to be

manufactured.

Increasing Competition for TalentIncreasing Competition for Talent

We need people who can solve all these tough problems, and that’s a challenge all by itself. According to

McKinsey’s global survey of trends, business executives think that this trend, among all trends, will have the

greatest effect on their companies in the next five years. Jobs are also getting more complex. Consider people who

work in warehouses doing shipping and receiving. At Intel, these workers were jokingly called “knuckle-dragging

box pushers” and known for using their brawn to move boxes. Now, the field of transportation and shipping has

become known as “supply chain management” and employees need brains as well as brawn—they need to know

science and advanced math. They’re called on to do mathematical models of transportation networks to find the

most efficient trucking routes (to minimize environmental impact) and to load the truck for balance (to minimize

fuel use) and for speed of unloading at each destination. Intel now acknowledges the skills that supply chain

124 • PRINCIPLES OF MANAGEMENT

people need. The company created a career ladder leading to “supply chain master” that recognizes employees for

developing expertise in supply chain modeling, statistics, risk management, and transportation planning. Overall,

demand will grow for new types of talent such as in the green energy industry. At the same time, companies face

a shrinking supply of seasoned managers as baby boomers retire in droves. Companies will have to deal with

shortages of specific skills.

Top 5 Solution TrendsTop 5 Solution Trends

Becoming More ConnectedBecoming More Connected

We can now use the Internet and World Wide Web to connect people with people as never before. By mid-2008,

more than 1.4 billion people were online, and that number continues to increase each year as the developing world

catches up with the developed world on Internet usage (Internetworldstats, 2000). Through over a 100 million

Web sites, we can access information, words, sounds, pictures, and video with an ease previously unimaginable.

Becoming More GlobalBecoming More Global

We can now tap into more global suppliers and global talent. Whatever problem a manager faces, someone in the

world probably has the innovative products, the knowledge, or the talent to address the problem. And the Internet

gives managers to the tools to help problems find solutions, customers find suppliers, and innovators find markets.

The global problems we face will require people to work together to solve them. Ideas need to be shaped and

implemented. Moving ideas around the world is a lot less costly and generates less greenhouse gases than moving

people and products around the world. Organizations and social movements alike are using social networking to

help people find others with the skills and talents to solve pressing problems.

Becoming More MobileBecoming More Mobile

We can now reach employees, suppliers, and customers wherever they are. By the end of 2008, 60% of the

world’s population—4 billion people—were using mobile phones (Itu, 2008). And, like Internet use, mobile

phone adoption continues to grow. The penetration of mobile phones is changing the way we do business because

people are more connected and able to share more information. Two-way, real-time dialogue and collaboration are

available to people anytime, anywhere. The low cost of phones compared with computers puts them in the hands

of more people around the world, and the increasing sophistication of software and services for the phone expands

its use in business settings. Phones are not just a voice communication device—they can send text as well as be a

connective device to send data. The fastest mobile phone growth is in developing countries, bringing connectivity

to the remotest regions. Fisherman off the coast of southern India can now call around to prospective buyers of

their catch before they go ashore, which is increasing their profits by 8% while actually lowering the overall price

consumers have to pay for fish by 4% (Corbett, 2008). In South Africa, 85% of small black-owned businesses

rely solely on mobile phones. Nokia has 120,000 outlets selling phones in India, where half the population lives

in rural areas, not cities.

3.5 GLOBAL TRENDS • 125

Rise of the Creative ClassRise of the Creative Class

With blogs, Flickr, and YouTube, anyone can post their creative efforts. And with open source and wikis, anyone

can contribute ideas and insights. We have ubiquitous opportunities for creativity that are nurturing a new creative

class. For example, OhmyNews, a popular newspaper, is written by 60,000 contributing “citizen reporters.” It has

become one of South Korea’s most influential news sources, with more than 750,000 unique users a day (Hua,

2007; Schonfeld & Vi-Wyn, 2007). The demand for workers and ability for workers to work from anywhere may

lead to an “e-lance economy.” Workers may become free agents, working temporarily on one project and then

moving to another when that project is done. Mobile connectivity means these new workers can live anywhere in

the world and can work from anywhere in their community. For you as a manager, this means managing workers

who might be in a cubicle in Columbus, Ohio, an apartment in Amsterdam, or an Internet café in Bangalore.

Increasing CollaborationIncreasing Collaboration

These solution trends combine to foster a rise in collaboration across space and time. We can now bring more

people together to solve more problems more quickly. To design new products quickly—and make sure they

meet consumer needs—companies are now looking beyond their four walls for innovation. Google, for example,

identifies itself as an organization that believes in open, decentralized innovation. “Google can’t do everything.

And we shouldn’t,” said Andy Rubin, senior director of Mobile Platforms. “That’s why we formed the Open

Handset Alliance with more than 34 partners (Fast Company, 2009).” While the handset alliance is about open

cell phones (i.e., phones that aren’t tied to any particular phone company and can be programmed by users just

like Apple or Palm’s “apps”), collaboration means much more than communications. People can now not just

communicate but actually collaborate, building coalitions, projects, and products (Friedman, 2005). Groups self-

organize on the Web. For example, the MIT-based Vehicle Design Summit is virtual, so students from around the

world can participate. The goal is to make a low-cost, 200-mpg four-seater for the Indian market; in 2008, about

200 students participated in this international open-source project (Fast Company, 2008). A cross section of more

trend predictions follows.

Trends, Trends, TrendsTrends, Trends, Trends

It seems that trend-tracking has become somewhat of a business. Glance over these top trends from theeditors of Wired, McKinsey Quarterly, and USA Today.

Wired 2008 Business Trends

1. Open Source Tycoons

2. Social Networks Grow Up

3. Green on the Outside

4. Invisible Internet

5. Rise of the Instapreneur

6. Building a Better Banner

126 • PRINCIPLES OF MANAGEMENT

7. Invented in China

8. VCs Look for a New Life

9. The Human Touch (Wired, 2008)

Top business trends likely to have the greatest effect on business over the next five years

1. Competition for talent will intensify, become more global.

2. Centers of economic activity will shift globally, regionally.

3. Technological connectivity will increase.

4. Ubiquitous access to information will change economics of knowledge.

5. Demand for natural resources will grow, as will strain on environment.

6. Population in developed economies will age.

7. Consumer landscape will change, expand significantly.

8. Role, behavior of business will come under increasing scrutiny.

9. Organizations will become larger, more complex.

10. New global industry structures will emerge (e.g., private equity, networked)(McKinseyquarterly,2007)

Countdown of the biggest trends in small business

1. Web 2.0

2. Rise of e-marketing

3. Little is the new big

4. The new consumer

5. Fragmentation

6. The world is getting flatter

7. Personalization

8. Work anywhere, any place

9. Global warming may put you out of business (USAtoday, 2009)

Key Takeaway

Today’s world faces many challenges, from the need to protect the natural environment to the rapid paceof innovation and change. Technological connectivity is bringing the world closer together and enablingpeople to work from anywhere. Demand for talent and low-cost workers gives rise to outsourcing andemployees working remotely, whether from home or from remote different countries. At the same time,information is now available to more and more people. This drives demand for personalization. It increasescomplexity but at the same time gives us the collaboration tools needed to solve tough problems.

3.5 GLOBAL TRENDS • 127

Exercises

1. How do you manage innovation if ideas can come from anywhere, including people who aren’tyour direct employees—or aren’t even part of the company?

2. If, according to some trends, you can work anytime and anywhere, how do you decide when towork? When do you stop working?

3. What advantages do you see from a global workforce?

4. What commonalities do you see across the trends presented in “Trends, Trends, Trends”?

5. Which of the trends depend on technology?

6. What aspects of P-O-L-C would be most likely to change based on what you have learned in thissection?

ReferencesReferences

Corbett, S. (2008, April 13). Can the cellphone help end global poverty? New York Times.

Fast company. (2008, March). Retrieved January 28, 2009, from http://www.fastcompany.com/magazine/123/

google.html.

Fastcompany, retrieved April 2008 from http://www.fastcompany.com/magazine/124/the-amazing-race.html.

Friedman, T. (2005). The World Is Flat: A Brief History of the Twenty-first Century. New York: Farrar, Straus &

Giroux, 81.

Hua, V. (2007, March 27). South Korea: Everyone’s a Journalist. http://www.pbs.org/frontlineworld/rough/2007/

03/south_korea.html.

International Telecommunication Union, retrieved October 13, 2008, from http://www.itu.int/newsroom/

press_releases/2008/29.html.

Internet World Stats, retrieved October 7, 2000, from http://www.internetworldstats.com/stats.htm.

My Kleenex Tissue, retrieved October 13, 2008, from

http://www.mykleenextissue.com/?WT.srch=1&WT.mc_id=5659768&iq_id=5659768.

NCDC, retrieved October 7, 2008, from http://www.ncdc.noaa.gov/oa/climate/severeweather/extremes.html.

Schonfeld, & Yi-Wyn Yen. It’s a Web, Web, Web 2.0 world. Business 2.0 Magazinehttp://money.cnn.com/

galleries/2007/biz2/0707/gallery.web_world.biz2/14.html.

The organizational challenges of global trends: A McKinsey Global Survey. (2007, November). McKinsey

Quarterly. http://www.mckinseyquarterly.com/

128 • PRINCIPLES OF MANAGEMENT

Wired. (2008, March). http://www.wired.com/techbiz/it/magazine/16–04/bz_opensource.

USA Today, retrieved January 28, 2009, from http://www.usatoday.com/money/smallbusiness/columnist/strauss/

2007-01-07-trends-2_x.htm.

3.5 GLOBAL TRENDS • 129

3.6 Globalization and Principles of Management

Learning Objectives

1. Why might global trends influence management principles?

2. What is the GLOBE project, and why is it relevant to management?

3. What is a cultural dimension, and how do cultural dimensions affect business dealings andmanagement decisions?

Globalization and Cross-Cultural LessonsGlobalization and Cross-Cultural Lessons

Despite the growing importance of global business, Fortune 500 companies have reported a shortage of global

managers with the necessary skills (GMAC Global Relocation, 2008; Gregersen, et. al., 1998). Some experts

have argued that most U.S. companies are not positioned to implement global strategies due to a lack of global

leadership capabilities (Hollenbeck & McCall, 2003)

It’s easy to understand the problem: communicating and working with people from different countries can be a

challenge—not just because of language issues but also because of different cultural norms. For example, in the

United States, we tend to be direct in our communication. If you ask a U.S. manager a question, you’ll tend to get

a direct answer. In other cultures, particularly in southern Europe and Japan, the answer to a question begins with

background and context—not the bottom line—so that the listener will understand how the person arrived at the

conclusion. Similarly, in some cultures, it is considered rude to deliver bad news or say “no” to a request—instead,

the speaker would give a noncommittal answer like “we’ll see” or “we’ll try.”

Figure 3.7

130

Our places of work are more diverse than ever before.

Oregon Department of Transportation – Diversity – CC BY 2.0.

Country-by-country differences are so prevalent that a worldwide team of scholars proposed to create and validate

a theory of the relationship between culture and societal, organizational, and leadership effectiveness. Called the

GLOBE Project, it included 170 researchers working together for 10 years to collect and analyze data on cultural

values and practices and leadership attributes from more than 17,000 managers in 62 societal cultures. In its 2006

report, GLOBE identified the following nine dimensions of culture (Javidan, et. al., 2006).

Performance OrientationPerformance Orientation

Should you reward people for performance improvement and excellence? In countries like the United States

and Singapore, the answer is yes. Organizations in these countries use employee training and development to

help people improve their skills and performance. In countries like Russia and Greece, however, family and

background count for more than performance.

Uncertainty AvoidanceUncertainty Avoidance

Life often brings unpredictable events, and with them anxiety. Uncertainty avoidance reflects the extent to

which members of a society attempt to cope with anxiety by minimizing uncertainty. Should you establish rules,

procedures, and social norms to help your employees deal with uncertainty? In countries where uncertainty

avoidance is high, like Brazil and Switzerland, the answer is yes. People in such societies want strict rules, laws,

and policies to eliminate or control the unexpected. Employees in these countries tend to seek order, consistency,

and structure. Countries with low uncertainty avoidance, in contrast, are less rule-oriented. They tolerate a variety

3.6 GLOBALIZATION AND PRINCIPLES OF MANAGEMENT • 131

of opinions and are open to change and taking risks. Countries with low uncertainty avoidance include Hong Kong

and Malaysia.

AssertivenessAssertiveness

How assertive, confrontational, or aggressive should you be in relationships with others? In highly assertive

countries like the United States and Austria, competition between individuals and groups is encouraged. Managers

may set up incentives that reward the best idea, even it it’s contrary to established practices. People in less

assertive countries, like Sweden and New Zealand, prefer harmony in relationships and emphasize loyalty and

solidarity.

Power DistancePower Distance

Power distance reflects the extent to which the less powerful members of institutions and organizations expect

and accept that power is distributed unequally. Should you distribute decision-making power equally among the

group? In high-power-distance countries like Thailand, Brazil, and France, the answer is no. People in these

societies expect unequal power distribution and greater stratification, whether that stratification is economic,

social, or political. People in positions of authority in these countries expect (and receive) obedience. Decision

making is hierarchical with limited participation and communication. Australia, in contrast, has a power distance

rating that is much lower than the world average. The Australian view reinforces cooperative interaction across

power levels and stresses equality and opportunity for everyone.

Gender EgalitarianismGender Egalitarianism

Should you promote men rather than women? Counties with low gender egalitarianism are male dominated. Men

hold positions of power to a much greater extent in low-gender-egalitarianism countries like Egypt and South

Korea. Companies operating in more gender-egalitarian countries such as the Nordic countries, Germany, and the

Netherlands encourage tolerance for diversity of ideas and roles regardless of gender.

Institutional CollectivismInstitutional Collectivism

Institutional collectivism refers to the extent to which people act predominantly as a member of a lifelong group or

organization. Should you reward groups rather than individuals? In countries with high institutional collectivism

such as Sweden, the answer is yes. Countries with low institutional collectivism, such as in the United States,

emphasize individual achievement and rewards.

Humane OrientationHumane Orientation

Should you reward people for being fair, altruistic, generous, and kind to others? In countries such as Malaysia,

this practice is more prevalent and encouraged than in low-humane-orientation countries such as Germany.

132 • PRINCIPLES OF MANAGEMENT

Future OrientationFuture Orientation

Will your employees favor activities that involve planning and investing in the future for long-term payoff? Or do

they want to see short-term results? Future orientation is defined as one’s expectations and the degree to which

one is thoughtful about the future. It is a multifaceted concept that includes planning, realism, and a sense of

control. Companies in countries with high future orientation, such as China and Singapore, will have a longer-

term planning horizon, and they will be more systematic about planning. Corporations in countries that are the

least future-oriented, such as Argentina and Russia, will be more opportunistic and less systematic. At the same

time, they’ll be less risk averse.

Global Ventures Gone AwryGlobal Ventures Gone Awry

When Corning proposed a joint venture with a Mexican glass manufacturer, Vitro, the match seemed made in

heaven. But just two years later, the venture was terminated. What happened? Cultural clashes eroded what

could have been a lucrative partnership. To start, American managers were continually frustrated with what

they perceived to be slow decision making by Mexican managers. Mexico ranks higher on the power distance

dimension than the United States—company structures are hierarchical, and decisions are made only by top

managers. Loyalty to these managers is a high priority in Mexico, and trying to work around them is a big taboo.

Mexicans also have a less urgent approach to time. They see time as more abundant than their U.S. counterparts.

As a result, Mexicans thought that Americans wanted to move too fast on decisions, and they perceived American

directness in communication as aggressive (Brake, 1996). Additional vignettes on managing across borders are

shared next.

Managing Across BordersManaging Across Borders

Lines on the Map Miss the Real Story

Diversity is deeper than variations between countries. Sometimes those differences appear in differentregions of the same country. For example, some parts of Mexico don’t use Spanish as the primarylanguage. Wal-Mart’s Mexico’s Juchitan store, therefore, conducts business in the local Zapotec tongue,encourages female employees to wear traditional Zapotec skirts, and does the morning company cheer inZapotec.

Talent Abroad

With so much variation across countries, it’s no surprise that countries vary in level of talent and the supplyof managerial, skilled, and unskilled labor. Companies shouldn’t assume that emerging market countriesoffer inferior labor pools. GM, for instance, found that 50% of its assembly-line workers in India havecollege degrees—a ratio much higher than in other countries.

Local Solutions by People Who Understand Local Needs

Nokia uses local designers to create country-specific handset models. The models designed in India forIndians are dust resistant and have a built-in flashlight. The models designed in China for the Chinese havea touch screen, stylus, and Chinese character recognition. Local designers are more likely to understandthe needs of the local population than headquarters-located designers do.

3.6 GLOBALIZATION AND PRINCIPLES OF MANAGEMENT • 133

Strategies in emerging markets conference, held by the MIT Center for Transportation and Logistics (CTL)on March 7, 2007, Cambridge, MA.

Key Takeaway

Because the business environment increasingly depends on collaboration across regional and nationalborders, a successful global manager needs to be culturally sensitive and have an understanding for howbusiness is done in different cultures. In some countries, loyalty to the group is key. Other countriescelebrate mavericks and rule breakers if they can get things done. Knowing how best to communicate withyour coworkers and employees—whether to be direct or indirect, whether to follow strict protocol or bemore causal, whom to involve in decisions—are all important considerations.

Exercises

1. You’ve just been made a manager in Sweden, known for its institutional collectivism. Whatincentives and reward structures would you use to motivate your employees?

2. How would you prepare workers for an overseas assignment?

3. Your company has 12 branches in the United States and will be opening its first branch in Brazil.Your company prides itself on its self-managed teams. Will you keep this policy in the new country?Why or why not?

4. You’re a manager in Japan, and you’ve just discovered that a team leader under your supervisionhas made a mistake that will result in a quality problem. How will you handle this mistake?

5. You work in Hong Kong for a Swiss-owned firm. The Swiss are known for their high uncertaintyavoidance. What differences might you expect to see from your Swiss bosses compared with yourHong Kong employees?

6. What aspects of P-O-L-C would be most likely to change based on what you have learned in thissection?

ReferencesReferences

Brake, T. (1996). The Global Leader (p. 203). New York: McGraw-Hill. Additional vignettes on managing across

borders are shared next

Global Relocation Trends Survey report 2008. Retrieved October 13, 2008, from

http://www.gmacglobalrelocation.com

Gregersen, H. B., Morrison, A. J., & Black, J. S. (1998, Fall). Developing leaders for the global frontier. Sloan

Management Review, 21–32.

134 • PRINCIPLES OF MANAGEMENT

Hollenbeck, G. P., & McCall, M. W. 2003. Competence, not competencies: Making global executive development

work. In W. Mobley & P. Dorfman (Eds.), Advances in Global Leadership (Vol. 3). Oxford: JAI Press.

Javidan, M., Dorfman, P. W., de Luque, M. S., & House R. J. (2006, February). In the eye of the beholder: Cross

cultural lessons in leadership from Project GLOBE. Academy of Management Perspectives, 20, 67–90.

3.6 GLOBALIZATION AND PRINCIPLES OF MANAGEMENT • 135

3.7 Developing Your Values-Based Leadership Skills

Learning Objectives

1. What ethical challenges do managers likely face?

2. Why are ethics relevant to principles of management?

3. What decision-making framework can you use to help integrate ethics into your own principles ofmanagement?

Ethical Challenges Managers FaceEthical Challenges Managers Face

It’s late at night and the office is quiet—except that you’ve got a nagging voice in your head. Your product is

already two weeks behind schedule. You’ve got to get it out this week or lose the deal. But you’ve discovered a

problem. To correct the problem would mean another 3-week delay—and you know the client won’t go for that.

It’s a small error—it’ll probably never become an issue. What do you do?

Managers face these kinds of issues all the time. Ethical dilemmas can arise from a variety of areas, such as:

• Advertising (desire to present your product or service in the best light)

• Sourcing of raw materials (does the company buy from a supplier who may be underpaying their people or

damaging the environment?)

• Privacy (should the company have access to private e-mails that employees write on company time? or the

Web sites they visit during work hours?)

• Safety (employee and community)

• Pay scales (relation of the pay of top executives to the rest of the company)

• Product pricing policies (variable pricing, discounts)

• Communication (with stockholders, announcements of plant closings, etc.)

It’s easy to think that people who behave unethically are simply bad apples or have a character flaw. But in

136

fact, it’s often the situation or circumstances that create the ethical pressures. A global study of business ethics,

published by the American Management Association, found that the main reasons for a lapse of ethics are:

1. Pressure to meet unrealistic business objectives/deadlines.

2. A desire to further one’s career.

3. A desire to protect one’s livelihood. 1

You may have developed your own personal code of ethics, but the social environment of the organization can

be a barrier to fulfilling that code if management is behaving unethically. At Enron, vice president Sherron

Watkins pointed out the accounting misdeeds, but she didn’t take action beyond sending a memo to the company’s

chairman. Although she was hailed as a hero and whistleblower, she in fact did not disclose the issue to the public.

Similarly, auditors at Arthur Andersen saw the questionable practices that Enron was pursuing, but when the

auditors reported these facts to management, Arthur Andersen’s managers pointed to the $100 million of business

they were getting from the Enron account. Those managers put profits ahead of ethics. In the end, both companies

were ruined, not to mention the countless employees and shareholders left shattered and financially bankrupt.

Since 2002, when the Sarbanes-Oxley Act was passed, companies have been required to write a code of ethics.

The act sought to reform corporate governance practices in large U.S. public companies. The purpose of the rules

is to “define a code of ethics as a codification of standards that is reasonably necessary to deter wrongdoing and

to promote honest and ethical conduct,” including the ethical handling of actual or apparent conflicts of interest,

compliance with laws, and accountability to adhere to the code (SEC, 2009). The U.S. financial crisis of late 2008

pointed out that other areas, particularly in the financial services industry, needed stiffer regulations and regulatory

scrutiny as well, and those moves will begin to take effect in early 2009. Some companies go a step further and

articulate a set of values that drives their code of conduct, as “Procter & Gamble’s Values and Code of Ethics”

shows.

Procter & Gamble’s Values and Code of EthicsProcter & Gamble’s Values and Code of Ethics

Procter & Gamble Company lives by a set of five values that drive its code of business conduct. Thesevalues are:

1.Integrity

We always try to do the right thing.

We are honest and straightforward with each other.

We operate within the letter and spirit of the law.

We uphold the values and principles of P&G in every action and decision.

We are data-based and intellectually honest in advocating proposals, including recognizing risks.

2.Passion for Winning

3.7 DEVELOPING YOUR VALUES-BASED LEADERSHIP SKILLS • 137

We are determined to be the best at doing what matters most.

We have a healthy dissatisfaction with the status quo.

We have a compelling desire to improve and to win in the marketplace.

3.Leadership

We are all leaders in our area of responsibility, with a deep commitment to delivering leadershipresults.

We have a clear vision of where we are going.

We focus our resources to achieve leadership objectives and strategies.

We develop the capability to deliver our strategies and eliminate organizational barriers.

4.Trust

We respect our P&G colleagues, customers and consumers, and treat them as we want to be treated.

We have confidence in each other’s capabilities and intentions.

We believe that people work best when there is a foundation of trust.

5.Ownership

We accept personal accountability to meet our business needs, improve our systems, and help othersimprove their effectiveness.

We all act like owners, treating the Company’s assets as our own and behaving with the Company’slong-term success in mind (Procter & Gamble, 2009).

Importance of Ethics in ManagementImportance of Ethics in Management

138 • PRINCIPLES OF MANAGEMENT

Figure 3.8

Trust is the cornerstone of ethical leadership.

Casa Thomas Jefferson – shaking hands – CC BY-NC-ND 2.0.

Ethical behavior among managers is even more important in organizations because leaders set the moral tone of

the organization and serve as role models. Ethical leaders build trust in organizations. If employees see leaders

behaving unethically, chances are the employees may be less inclined to behave ethically themselves. Companies

may have printed codes of ethics, but the key standard is whether leaders uphold those values and standards.

We tend to watch leaders for cues on appropriate actions and behavior that the company expects. Decisions that

managers make are an indicator of their ethics. If the company says it cares about the safety of employees but

then does not buy enough protective gear for them, it is not behaving in line with its code. Likewise, if managers

exhibit unsafe behavior or look the other way when employees act unsafely, their behavior is not aligned with

their stated code.

Without integrity, there can be no trust. Leadership is based on trust. Ethics drive effectiveness because employees

know they can do the right thing decisively and with confidence. Ethical behavior earns the trust of customers

and suppliers as well. It earns the public’s good will. Ethical managers and ethical businesses tend to be more

trusted and better treated. They suffer less resentment, inefficiency, litigation, and government interference. If top

management cuts corners, however, or if they make shady decisions, then no matter how good the code of ethics

sounds, people will emulate the questionable behavior, not the code.

As a manager, you can make it clear to employees that you expect them to conduct business in an ethical manner

by offering seminars on ethics, having an ethics hotline via which employees can anonymously raise issues, and

having an ombudsman office or ethics committee to investigate issues.

Integrating Ethics into Managerial Decision MakingIntegrating Ethics into Managerial Decision Making

Ethics implies making a choice between decision-making rules. For instance, when choosing between two

3.7 DEVELOPING YOUR VALUES-BASED LEADERSHIP SKILLS • 139

suppliers, do you choose the cheapest (decision rule 1) or the highest quality (decision rule 2). Ethics also implies

deciding on a course of action when no clear decision rule is available. Dilemmas occur when the choices are

incompatible and when one course of action seems to better serve your self-interest but appears to violate a

moral principle. One way to tackle ethical dilemmas is to follow an ethical decision-making process, like the one

described below.

Steps in an Ethical Decision-Making ProcessSteps in an Ethical Decision-Making Process

1. Assess the situation: What are you being asked to do? Is it illegal? Is it unethical? Who might be harmed?

2. Identify the stakeholders and consider the situation from their point of view. For example, consider the

point of view of the company’s employees, top management, stockholders, customers, suppliers, and

community.

Consider the alternatives you have available to you and how they affect the stakeholders:

◦ consequences

◦ duties, rights, and principles

◦ implications for personal integrity and character

4. How does the action make you feel about yourself? How would you feel if your actions were reported

tomorrow in the Wall Street Journal (or your daily newspaper)? How would you explain your actions to

your mother or to your 10-year-old child?

5. Make a decision. This might involve going to your boss or to a neutral third party (such as an

ombudsman or ethics committee). Know your values and your limits. If the company does nothing to rectify

the situation, do you want to continue working for the company?

6. Monitor outcomes. How did the decision work out? How did it turn out for all concerned? If you had it to

do over again, what would you do differently (Hartman & DesJardins, 2008)?

If you see unethical behavior in others, confronting it early is better. Early on, you have more of an opportunity

to talk with the person in a fact-finding (rather than an accusatory) way. The discussion may nip the problem in

the bud and prevent it from escalating. Keeping silent because you want to avoid offending the person may lead

to much greater problems later on. As French playwright Jean-Baptiste Moliere wrote, “It’s not only for what we

do that we are held responsible, but for what we do not do.”

Key Takeaway

Management involves decision making, and decisions often have an ethical component. Beyond personalethics or a moral code, managers face making decisions that reflect the company as a whole, affecting itsfuture success and vitality. Ethics doesn’t just mean following the law but acting in accordance with basicvalues.

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Exercises

1. What are the consequences of unethical behavior?

2. If you were writing a code of ethics for your company, what would you include?

3. In times of economic downturn, is ethical behavior a luxury?

4. How would you handle an ethical violation committed by one of your employees?

5. Nobel laureate economist Milton Friedman said that companies should focus on maximizingprofits, not social responsibilities or purposes. Do you agree with this view? Why or why not?

6. What aspects of P-O-L-C would be most likely to change based on what you have learned in thissection?

1The Ethical Enterprise: A Global Study of Business Ethics. (2005). New York: American Management

Association.

ReferencesReferences

Hartman, L., and DesJardins, J. (2008). Business Ethics: Decision-Making for Personal Integrity and Social

Responsibility. New York: McGraw-Hill.

Procter & Gamble, retrieved January 28, 2009, from http://www.pg.com/company/who_we_are/

ppv.jhtml;jsessionid=MCSCEC20KZGJTQFIASJXKZOAVACJG3MK.

Securities and Exchange Commission, retrieved January 28, 2009, from http://www.sec.gov/news/press/

2002-150.htm.

3.7 DEVELOPING YOUR VALUES-BASED LEADERSHIP SKILLS • 141

Chapter 4: Developing Mission, Vision, andValues

4.1 Developing Mission, Vision, and Values

4.2 Case in Point: Xerox Motivates Employees for Success

4.3 The Roles of Mission, Vision, and Values

4.4 Mission and Vision in the P-O-L-C Framework

4.5 Creativity and Passion

4.6 Stakeholders

4.7 Crafting Mission and Vision Statements

4.8 Developing Your Personal Mission and Vision

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4.1 Developing Mission, Vision, and Values

What’s in It for Me?

Reading this chapter will help you do the following:

1. Understand the roles of mission, vision, and values in the planning process.

2. Understand how mission and vision fit into the planning-organizing-leading-controlling (P-O-L-C) framework.

3. See how creativity and passion are related to vision.

4. Incorporate stakeholder interests into mission and vision.

5. Develop statements that articulate organizational mission and vision.

6. Apply mission, vision, and values to your personal goals and professional career.

As you are reminded in the figure, the letter “P” in the P-O-L-C framework stands for “planning.” Good plans

are meant to achieve something—this something is captured in verbal and written statements of an organization’s

mission and vision (its purpose, in addition to specific goals and objectives). With a mission and vision, you can

craft a strategy for achieving them, and your benchmarks for judging your progress and success are clear goals

and objectives. Mission and vision communicate the organization’s values and purpose, and the best mission and

vision statements have an emotional component in that they incite employees to delight customers. The three

“planning” topics of your principles of management cover (1) mission and vision, (2) strategy, and (3) goals and

objectives. The figure summarizes how these pieces work together.

Figure 4.2 Mission and Vision as P-O-L-C Components

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Figure 4.3 Mission and Vision in the Planning Process

144 • PRINCIPLES OF MANAGEMENT

4.2 Case in Point: Xerox Motivates Employees for Success

Figure 4.4

Anne Mulcahy, Former Xerox Chairman of the Board (left), and Ursula Burns, Xerox CEO (right)

Fortune Live Media – Fortune Most Powerful Women 2012 – CC BY-NC-ND 2.0; Fortune Live Media – Fortune Most Powerful

Women – CC BY-NC-ND 2.0.

As of 2010, Xerox Corporation (NYSE: XRX) is a $22 billion, multinational company founded in 1906and operating in 160 countries. Xerox is headquartered in Norwalk, Connecticut, and employs 130,000people. How does a company of such size and magnitude effectively manage and motivate employees fromdiverse backgrounds and experiences? Such companies depend on the productivity and performance oftheir employees. The journey over the last 100 years has withstood many successes and failures. In 2000,Xerox was facing bankruptcy after years of mismanagement, piles of debt, and mounting questions aboutits accounting practices.

Anne Mulcahy turned Xerox around. Mulcahy joined Xerox as an employee in 1976 and moved up thecorporate ladder, holding several management positions until she became CEO in 2001. In 2005, Mulcahywas named by Fortune magazine as the second most powerful woman in business. Based on a lifetimeof experience with Xerox, she knew that the company had powerful employees who were not motivated

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when she took over. Mulcahy believed that among other key businesses changes, motivating employees atXerox was a key way to pull the company back from the brink of failure. One of her guiding principles wasa belief that in order to achieve customer satisfaction, employees must be treated as key stakeholders andbecome interested and motivated in their work. Mulcahy not only successfully saw the company throughthis difficult time but also was able to create a stronger and more focused company.

In 2009, Mulcahy became the chairman of Xerox’s board of directors and passed the torch to Ursula Burns,who became the new CEO of Xerox. Burns became not only the first African American woman CEO tohead a Standard & Poor’s (S&P) company but also the first woman to succeed another woman as the headof an S&P 100 company. Burns is also a lifetime Xerox employee who has been with the company forover 30 years. She began as a graduate intern and was hired full time after graduation. Because of hertenure with Xerox, she has close relationships with many of the employees, which provides a level ofcomfort and teamwork. She describes Xerox as a nice family. She maintains that Mulcahy created a strongand successful business but encouraged individuals to speak their mind, to not worry about hurting oneanother’s feelings, and to be more critical.

Burns explains that she learned early on in her career, from her mentors at Xerox, the importance ofmanaging individuals in different ways and not intentionally intimidating people but rather relating to themand their individual perspectives. As CEO, she wants to encourage people to get things done, take risks,and not be afraid of those risks. She motivates her teams by letting them know what her intentions andpriorities are. The correlation between a manager’s leadership style and the productivity and motivationof employees is apparent at Xerox, where employees feel a sense of importance and a part of the processnecessary to maintain a successful and profitable business. In 2010, Anne Mulcahy retired from herposition on the board of directors to pursue new projects.

Case written based on information from Tompkins, N. C. (1992, November 1). Employee satisfaction leadsto customer service. AllBusiness. Retrieved April 5, 2010, from http://www.allbusiness.com/marketing/market-research/341288-1.html; 50 most powerful women. (2006). Fortune. Retrieved April 5, 2010,from http://money.cnn.com/popups/2006/fortune/mostpowerfulwomen/2.html; Profile: Anne M. Mulcahy.(2010). Forbes. Retrieved April 5, 2010, from http://people.forbes.com/profile/anne-m-mulcahy/19732;Whitney, L. (2010, March 30). Anne Mulcahy to retire as Xerox chairman. CNET News. RetrievedApril 5, 2010, from http://news.cnet.com/8301-1001_3-20001412-92.html; Bryant, A. (2010, February20). Xerox’s new chief tries to redefine its culture. New York Times. Retrieved April 5, 2010, fromhttp://www.nytimes.com/2010/02/21/business/21xerox.html?pagewanted=18dpc.

Discussion QuestionsDiscussion Questions

1. In terms of the P-O-L-C framework, what values do the promotion and retention of Mulcahy andBurns suggest are important at Xerox? How might these values be reflected in its vision and missionstatements?

2. How do you think Xerox was able to motivate its employees through the crisis it faced in 2000?

3. How do CEOs with large numbers of employees communicate priorities to a worldwideworkforce?

4. How might Ursula Burns motivate employees to take calculated risks?

5. Both Anne Mulcahy and Ursula Burns were lifetime employees of Xerox. How does an

146 • PRINCIPLES OF MANAGEMENT

organization attract and keep individuals for such a long period of time?

4.2 CASE IN POINT: XEROX MOTIVATES EMPLOYEES FOR SUCCESS • 147

4.3 The Roles of Mission, Vision, and Values

Learning Objectives

1. Be able to define mission and vision.

2. See how values are important for mission and vision.

3. Understand the roles of vision, mission, and values in the P-O-L-C framework.

Mission, Vision, and ValuesMission, Vision, and Values

Mission and vision both relate to an organization’s purpose and are typically communicated in some written form.

Mission and vision are statements from the organization that answer questions about who we are, what do we

value, and where we’re going. A study by the consulting firm Bain and Company reports that 90% of the 500

firms surveyed issue some form of mission and vision statements (Bart & Baetz, 1998). Moreover, firms with

clearly communicated, widely understood, and collectively shared mission and vision have been shown to perform

better than those without them, with the caveat that they related to effectiveness only when strategy and goals and

objectives were aligned with them as well (Bart, et. al., 2001).

A mission statement communicates the organization’s reason for being, and how it aims to serve its key

stakeholders. Customers, employees, and investors are the stakeholders most often emphasized, but other

stakeholders like government or communities (i.e., in the form of social or environmental impact) can also be

discussed. Mission statements are often longer than vision statements. Sometimes mission statements also include

a summation of the firm’s values. Values are the beliefs of an individual or group, and in this case the organization,

in which they are emotionally invested. The Starbucks mission statement describes six guiding principles that, as

you can see, also communicate the organization’s values:

1. Provide a great work environment and treat each other with respect and dignity.

2. Embrace diversity as an essential component in the way we do business.

3. Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee.

4. Develop enthusiastically satisfied customers all of the time.

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5. Contribute positively to our communities and our environment.

6. Recognize that profitability is essential to our future success (Starbucks, 2008).

Similarly, Toyota declares its global corporate principles to be:

1. Honor the language and spirit of the law of every nation and undertake open and fair corporate activities

to be a good corporate citizen of the world.

2. Respect the culture and customs of every nation and contribute to economic and social development

through corporate activities in the communities.

3. Dedicate ourselves to providing clean and safe products and to enhancing the quality of life everywhere

through all our activities.

4. Create and develop advanced technologies and provide outstanding products and services that fulfill the

needs of customers worldwide.

5. Foster a corporate culture that enhances individual creativity and teamwork value, while honoring

mutual trust and respect between labor and management.

6. Pursue growth in harmony with the global community through innovative management.

7. Work with business partners in research and creation to achieve stable, long-term growth and mutual

benefits, while keeping ourselves open to new partnerships (Toyota, 2008).

A vision statement, in contrast, is a future-oriented declaration of the organization’s purpose and aspirations.

In many ways, you can say that the mission statement lays out the organization’s “purpose for being,” and the

vision statement then says, “based on that purpose, this is what we want to become.” The strategy should flow

directly from the vision, since the strategy is intended to achieve the vision and thus satisfy the organization’s

mission. Typically, vision statements are relatively brief, as in the case of Starbuck’s vision statement, which

reads: “Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our

uncompromising principles as we grow (Starbucks, 2008).” Or ad firm Ogilvy & Mather, which states their

vision as “an agency defined by its devotion to brands (Ogilvy, 2008).” Sometimes the vision statement is also

captured in a short tag line, such as Toyota’s “moving forward” statement that appears in most communications to

customers, suppliers, and employees (Toyota, 2008). Similarly, Wal-Mart’s tag-line version of its vision statement

is “Save money. Live better (Walmart, 2008).”

Any casual tour of business or organization Web sites will expose you to the range of forms that mission and

vision statements can take. To reiterate, mission statements are longer than vision statements, often because

they convey the organizations core values. Mission statements answer the questions of “Who are we?” and

“What does our organization value?” Vision statements typically take the form of relatively brief, future-

oriented statements—vision statements answer the question “Where is this organization going?” Increasingly,

organizations also add a values statement which either reaffirms or states outright the organization’s values that

might not be evident in the mission or vision statements.

Roles Played by Mission and VisionRoles Played by Mission and Vision

Mission and vision statements play three critical roles: (1) communicate the purpose of the organization to

4.3 THE ROLES OF MISSION, VISION, AND VALUES • 149

stakeholders, (2) inform strategy development, and (3) develop the measurable goals and objectives by which

to gauge the success of the organization’s strategy. These interdependent, cascading roles, and the relationships

among them, are summarized in the figure.

Figure 4.5 Key Roles of Mission and Vision

First, mission and vision provide a vehicle for communicating an organization’s purpose and values to all key

stakeholders. Stakeholders are those key parties who have some influence over the organization or stake in its

future. You will learn more about stakeholders and stakeholder analysis later in this chapter; however, for now,

suffice it to say that some key stakeholders are employees, customers, investors, suppliers, and institutions such as

governments. Typically, these statements would be widely circulated and discussed often so that their meaning is

widely understood, shared, and internalized. The better employees understand an organization’s purpose, through

its mission and vision, the better able they will be to understand the strategy and its implementation.

Second, mission and vision create a target for strategy development. That is, one criterion of a good strategy is

how well it helps the firm achieve its mission and vision. To better understand the relationship among mission,

vision, and strategy, it is sometimes helpful to visualize them collectively as a funnel. At the broadest part of the

funnel, you find the inputs into the mission statement. Toward the narrower part of the funnel, you find the vision

statement, which has distilled down the mission in a way that it can guide the development of the strategy. In the

narrowest part of the funnel you find the strategy —it is clear and explicit about what the firm will do, and not do,

to achieve the vision. Vision statements also provide a bridge between the mission and the strategy. In that sense

the best vision statements create a tension and restlessness with regard to the status quo—that is, they should foster

a spirit of continuous innovation and improvement. For instance, in the case of Toyota, its “moving forward”

vision urges managers to find newer and more environmentally friendly ways of delighting the purchaser of their

cars. London Business School professors Gary Hamel and C. K. Prahalad describe this tense relationship between

vision and strategy as stretch and ambition. Indeed, in a study of such able competitors as CNN, British Airways,

and Sony, they found that these firms displaced competitors with stronger reputations and deeper pockets through

their ambition to stretch their organizations in more innovative ways (Hamel & Prahalad, 1993).

Third, mission and vision provide a high-level guide, and the strategy provides a specific guide, to the goals and

150 • PRINCIPLES OF MANAGEMENT

objectives showing success or failure of the strategy and satisfaction of the larger set of objectives stated in the

mission. In the cases of both Starbucks and Toyota, you would expect to see profitability goals, in addition to

metrics on customer and employee satisfaction, and social and environmental responsibility.

Key Takeaway

Mission and vision both relate to an organization’s purpose and aspirations, and are typicallycommunicated in some form of brief written statements. A mission statement communicates theorganization’s reason for being and how it aspires to serve its key stakeholders. The vision statement isa narrower, future-oriented declaration of the organization’s purpose and aspirations. Together, missionand vision guide strategy development, help communicate the organization’s purpose to stakeholders, andinform the goals and objectives set to determine whether the strategy is on track.

Exercises

1. What is a mission statement?

2. What is a vision statement?

3. How are values important to the content of mission and vision statements?

4. Where does the purpose of mission and vision overlap?

5. How do mission and vision relate to a firm’s strategy?

6. Why are mission and vision important for organizational goals and objectives?

ReferencesReferences

Bart, C. K., & Baetz, M. C. (1998). The relationship between mission statements and firm performance: An

exploratory study. Journal of Management Studies, 35, 823–853.

Bart, C. K., Bontis, N., & Taggar, S. (2001). A model of the impact of mission statements on firm performance.

Management Decision, 39(1), 19–35.

Hamel, G., & Prahalad, C. K. (1993, March–April). Strategy as stretch and leverage. Harvard Business Review,

75–84.

Ogilvy, Retrieved October 27, 2008, from http://www.ogilvy.com/o_mather.

Starbucks, retrieved October 27, 2008, from http://www.starbucks.com/aboutus

Toyota, retrieved October 27, 2008, from http://www.toyota.co.jp/en/vision/philosophy.

Toyota, retrieved October 27, 2008, from http://www.toyota.com/about/our_values/index.html.

4.3 THE ROLES OF MISSION, VISION, AND VALUES • 151

Walmart, retrieved October 27, 2008, from http://www.walmart.com.

152 • PRINCIPLES OF MANAGEMENT

4.4 Mission and Vision in the P-O-L-C Framework

Learning Objectives

1. Understand the role of mission and vision in organizing.

2. Understand the role of mission and vision in leading.

3. Understand the role of mission and vision in controlling.

Mission and vision play such a prominent role in the planning facet of the P-O-L-C framework. However, you

are probably not surprised to learn that their role does not stop there. Beyond the relationship between mission

and vision, strategy, and goals and objectives, you should expect to see mission and vision being related to the

organizing, leading, and controlling aspects as well. Let’s look at these three areas in turn.

Mission, Vision, and OrganizingMission, Vision, and Organizing

Organizing is the function of management that involves developing an organizational structure and allocating

human resources to ensure the accomplishment of objectives. The organizing facet of the P-O-L-C framework

typically includes subjects such as organization design, staffing, and organizational culture. With regard to

organizing, it is useful to think about alignment between the mission and vision and various organizing activities.

For instance, organizational design is a formal, guided process for integrating the people, information, and

technology of an organization. It is used to match the form of the organization as closely as possible to the

purpose(s) the organization seeks to achieve. Through the design process, organizations act to improve the

probability that the collective efforts of members will be successful.

Organization design should reflect and support the strategy—in that sense, organizational design is a set of

decision guidelines by which members will choose appropriate actions, appropriate in terms of their support for

the strategy. As you learned in the previous section, the strategy is derived from the mission and vision statements

and from the organization’s basic values. Strategy unifies the intent of the organization and focuses members

toward actions designed to accomplish desired outcomes. The strategy encourages actions that support the purpose

and discourages those that do not.

To organize, you must connect people with each other in meaningful and purposeful ways. Further, you must

153

connect people—human resources—with the information and technology necessary for them to be successful.

Organization structure defines the formal relationships among people and specifies both their roles and their

responsibilities. Administrative systems govern the organization through guidelines, procedures, and policies.

Information and technology define the process(es) through which members achieve outcomes. Each element must

support each of the others, and together they must support the organization’s purpose, as reflected in its mission

and vision.

Figure 4.6

Pixar’s creative prowess is reinforced by Disney’s organizational design choices.

Tim Norris – Wall•E : What’s out there? – CC BY-NC-ND 2.0.

For example, in 2006, Disney acquired Pixar, a firm is renowned for its creative prowess in animated

entertainment. Disney summarizes the Pixar strategy like this: “Pixar’s [strategy] is to combine proprietary

technology and world-class creative talent to develop computer-animated feature films with memorable characters

and heartwarming stories that appeal to audiences of all ages (Pixar, 2008).” Disney has helped Pixar achieve this

strategy through an important combination of structural design choices. First, Pixar is an independent division of

Disney and is empowered to make independent choices in all aspects of idea development. Second, Pixar gives

its “creatives”—its artists, writers, and designers—great leeway over decision making. Third, Pixar protects its

creatives’ ability to share work in progress, up and down the hierarchy, with the aim of getting it even better.

Finally, after each project, teams conduct “postmortems” to catalog what went right and what went wrong. This

way, innovations gained through new projects can be shared with later projects, while at the same time sharing

knowledge about potential pitfalls (Catmull, 2008).

Organizational culture is the workplace environment formulated from the interaction of the employees in the

workplace. Organizational culture is defined by all of the life experiences, strengths, weaknesses, education,

154 • PRINCIPLES OF MANAGEMENT

upbringing, and other attributes of the employees. While executive leaders play a large role in defining

organizational culture by their actions and leadership, all employees contribute to the organizational culture.

As you might imagine, achieving alignment between mission and vision and organizational culture can be very

powerful, but culture is also difficult to change. This means that if you are seeking to change your vision or

mission, your ability to change the organization’s culture to support those new directions may be difficult, or, at

least, slow to achieve.

For instance, in 2000, Procter & Gamble (P&G) sought to change a fundamental part of its vision in a way

that asked the organization to source more of its innovations from external partners. Historically, P&G had

invested heavily in research and development and internal sources of innovation—so much so that “not invented

here” (known informally as NIH) was the dominant cultural mind-set (Lafley & Charan, 2008). NIH describes a

sociological, corporate, or institutional culture that avoids using products, research, or knowledge that originated

anywhere other than inside the organization. It is normally used in a pejorative sense. As a sociological

phenomenon, the “not invented here” syndrome is manifested as an unwillingness to adopt an idea or product

because it originates from another culture. P&G has been able to combat this NIH bias and gradually change its

culture toward one that is more open to external contributions, and hence in much better alignment with its current

mission and vision.

Social networks are often referred to as the “invisible organization.” They consist of individuals or organizations

connected by one or more specific types of interdependency. You are probably already active in social networks

through such Web communities as MySpace, Facebook, and LinkedIn. However, these sites are really only the tip

of the iceberg when it comes to the emerging body of knowledge surrounding social networks. Networks deliver

three unique advantages: access to “private” information (i.e., information that companies do not want competitors

to have), access to diverse skill sets, and power. You may be surprised to learn that many big companies have

breakdowns in communications even in divisions where the work on one project should be related to work on

another. Going back to our Pixar example, for instance, Disney is fostering a network among members of its

Pixar division in a way that they are more likely to share information and learn from others. The open internal

network also means that a cartoon designer might have easier access to a computer programmer and together they

can figure out a more innovative solution. Finally, since Pixar promotes communication across hierarchical levels

and gives creatives decision-making authority, the typical power plays that might impede sharing innovation and

individual creativity are prevented. Managers see these three network advantages at work every day but might not

pause to consider how their networks regulate them.

Mission, Vision, and LeadingMission, Vision, and Leading

Leading involves influencing others toward the attainment of organizational objectives. Leading and leadership

are nearly synonymous with the notions of mission and vision. We might describe a very purposeful person as

being “on a mission.” As an example, Steve Demos had the personal mission of replacing cow’s milk with soy

milk in U.S. supermarkets, and this mission led to his vision for, and strategy behind, the firm White Wave and its

Silk line of soy milk products (Carpenter & Sanders, 2006). Similarly, we typically think of some individuals as

leaders because they are visionary. For instance, when Walt Disney suggested building a theme park in a Florida

swamp back in the early 1960s, few other people in the world seemed to share his view.

Any task—whether launching Silk or building the Disney empire— is that much more difficult if attempted

4.4 MISSION AND VISION IN THE P-O-L-C FRAMEWORK • 155

alone. Therefore, the more that a mission or vision challenges the status quo—and recognizing that good vision

statements always need to create some dissonance with the status quo—the greater will be the organization’s need

of what leadership researcher Shiba calls “real change leaders”—people who will help diffuse the revolutionary

philosophy even while the leader (i.e., the founder or CEO) is not present. Without real change leaders, a

revolutionary vision would remain a mere idea of the visionary CEO—they are the ones who make the

implementation of the transformation real.

In most cases where we think of revolutionary companies, we associate the organization’s vision with its

leader—for instance, Apple and Steve Jobs, Dell and Michael Dell, or Google with the team of Sergey Brin and

Larry Page. Most important, in all three of these organizations, the leaders focused on creating an organization

with a noble mission that enabled the employees and management team to achieve not only the strategic

breakthrough but to also realize their personal dreams in the process. Speaking to the larger relationship between

mission, vision, strategy, and leadership, are the Eight principles of visionary leadership, derived from Shiba’s

2001 book, Four Practical Revolutions in Management (summarized in “Eight Principles of Visionary

Leadership”)(Shiba & Walden, 2001).

Eight Principles of Visionary LeadershipEight Principles of Visionary Leadership

• Principle 1: The visionary leader must do on-site observation leading to personal perception ofchanges in societal values from an outsider’s point of view.

• Principle 2: Even though there is resistance, never give up; squeeze the resistance between outside-in (i.e., customer or society-led) pressure in combination with top-down inside instruction.

• Principle 3: Revolution is begun with symbolic disruption of the old or traditional system throughtop-down efforts to create chaos within the organization.

• Principle 4: The direction of revolution is illustrated by a symbolically visible image and thevisionary leader’s symbolic behavior.

• Principle 5: Quickly establishing new physical, organizational, and behavioral systems is essentialfor successful revolution.

• Principle 6: Real change leaders are necessary to enable revolution.

• Principle 7: Create an innovative system to provide feedback from results.

• Principle 8: Create a daily operation system, including a new work structure, new approach tohuman capabilities and improvement activities.

Vision That Pervades the OrganizationVision That Pervades the Organization

A broader definition of visionary leadership suggests that, if many or most of an organization’s employees

understand and identify with the mission and vision, efficiency will increase because the organization’s members

“on the front lines” will be making decisions fully aligned with the organization’s goals. Efficiency is achieved

with limited hands-on supervision because the mission and vision serve as a form of cruise control. To make

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frontline responsibility effective, leadership must learn to trust workers and give them sufficient opportunities to

develop quality decision-making skills.

The classic case about Johnsonville Sausage, recounted by CEO Ralph Stayer, documents how that company

dramatically improved its fortunes after Stayer shared responsibility for the mission and vision, and ultimately

development of the actual strategy, with all of his employees. His vision was the quest for an answer to “What

Johnsonville would have to be to sell the most expensive sausage in the industry and still have the biggest market

share (Stayer, 1990)?” Of course, he made other important changes as well, such as decentralizing decision

making and tying individual’s rewards to company-wide performance, but he initiated them by communicating

the organization’s mission and vision and letting his employees know that he believed they could make the choices

and decisions needed to realize them.

Mission and vision are also relevant to leadership well beyond the impact of one or several top executives.

Even beyond existing employees, various stakeholders—customers, suppliers, prospective new employees—are

visiting organizations’ Web sites to read their mission and vision statements. In the process, they are trying to

understand what kind of organization they are reading about and what the organization’s values and ethics are.

Ultimately, they are seeking to determine whether the organization and what it stands for are a good fit for them.

Vision, Mission, and ControllingVision, Mission, and Controlling

Controlling involves ensuring that performance does not deviate from standards. Controlling consists of three

steps: (1) establishing performance standards, (2) comparing actual performance against standards, and (3) taking

corrective action when necessary. Mission and vision are both directly and indirectly related to all three steps.

Performance StandardsPerformance Standards

Recall that mission and vision tell a story about an organization’s purpose and aspirations. Mission and vision

statements are often ambiguous by design because they are intended to inform the strategy not be the strategy.

Nevertheless, those statements typically provide a general compass heading for the organization and its

employees. For instance, vision may say something about innovativeness, growth, or firm performance, and

the firm will likely have set measurable objectives related to these. Performance standards often exceed actual

performance but, ideally, managers will outline a set of metrics that can help to predict the future, not just evaluate

the past.

It is helpful to think about such metrics as leading, lagging, and pacing indicators. A leading indicator actually

serves to predict where the firm is going, in terms of performance. For instance, General Electric asks customers

whether they will refer it new business, and GE’s managers have found that this measure of customer satisfaction

does a pretty good job of predicting future sales. A pacing indicator tells you in real time that the organization is

on track, for example, in on-time deliveries or machinery that is in operation (as opposed to being under repair

or in maintenance). A lagging indicator is the one we are all most familiar with. Firm financial performance,

for instance, is an accounting-based summary of how well the firm has done historically. Even if managers can

calculate such performance quickly, the information is still historic and not pacing or leading. Increasingly, firms

compile a set of such leading, lagging, and pacing goals and objectives and organize them in the form of a

dashboard or Balanced Scorecard.

4.4 MISSION AND VISION IN THE P-O-L-C FRAMEWORK • 157

Actual Versus Desired PerformanceActual Versus Desired Performance

The goals and objectives that flow from your mission and vision provide a basis for assessing actual versus desired

performance. In many ways, such goals and objectives provide a natural feedback loop that helps managers see

when and how they are succeeding and where they might need to take corrective action. This is one reason goals

and objectives should ideally be specific and measurable. Moreover, to the extent that they serve as leading,

lagging, and pacing performance metrics, they enable managers to take corrective action on any deviations from

goals before too much damage has been done.

Corrective ActionCorrective Action

Finally, just as mission and vision should lead to specific and measurable goals and objectives and thus provide

a basis for comparing actual and desired performance, corrective action should also be prompted in cases where

performance deviates negatively from performance objectives. It is important to point out that while mission

and vision may signal the need for corrective action, because they are rather general, high-level statements they

typically will not spell out what specific actions—that latter part is the role of strategy, and mission and vision

are critical for good strategies but not substitutes for them. A mission and vision are statements of self-worth.

Their purpose is not only to motivate employees to take meaningful action but also to give leadership a standard

for monitoring progress. It also tells external audiences how your organization wishes to be viewed and have its

progress and successes gauged.

Strategic human resources management (SHRM) reflects the aim of integrating the organization’s human

capital—its people—into the mission and vision. Human resources management alignment means to integrate

decisions about people with decisions about the results an organization is trying to obtain. Research indicates that

organizations that successfully align human resources management with mission and vision accomplishment do

so by integrating SHRM into the planning process, emphasizing human resources activities that support mission

goals, and building strong human resources/management capabilities and relationships (Gerhart & Rynes, 2003).

Key Takeaway

In addition to being a key part of the planning process, mission and vision also play key roles in theorganizing, leading, and controlling functions of management. While mission and vision start the planningfunction, they are best realized when accounted for across all four functions of management—P-O-L-C. Inplanning, mission and vision help to generate specific goals and objectives and to develop the strategy forachieving them. Mission and vision guide choices about organizing, too, from structure to organizationalculture. The cultural dimension is one reason mission and vision are most effective when they pervadethe leadership of the entire organization, rather than being just the focus of senior management. Finally,mission and vision are tied to the three key steps of controlling: (1) establishing performance standards, (2)comparing actual performance against standards, and (3) taking corrective action when necessary. Sincepeople make the place, ultimately strategic human resources management must bring these pieces together.

158 • PRINCIPLES OF MANAGEMENT

Exercises

1. How might mission and vision influence organizational design?

2. How might mission and vision influence leadership practices?

3. Why might a specific replacement CEO candidate be a good or poor choice for a firm with anexisting mission and vision?

4. Which aspects of controlling do mission and vision influence?

5. Why are mission and vision relevant to the management of internal organizational socialnetworks?

6. What performance standards might reinforce a firm’s mission and vision?

7. What is the role of mission and vision with strategic human resource management?

ReferencesReferences

Carpenter, M. A., & Sanders, W. G. (2006). Strategic management: A dynamic perspective. (1st ed.). Upper

Saddle River, NJ: Pearson/Prentice-Hall.

Catmull, E. (2008, September). How Pixar fosters collective creativity. Harvard Business Review, 1–11.

Gerhart, B. A., & Rynes, S. L. (2003). Compensation: Theory, Evidence, and Strategic Implications. Thousand

Oaks, CA, Sage.

Lafley, A. G., & Charan, R. (2008). The game changer. Upper Saddle River, NJ: Crown Books.

Pixar, retrieved October 27, 2008, from http://www.pixar.com/companyinfo/about_us/overview.htmHarvard

Business Review.

4.4 MISSION AND VISION IN THE P-O-L-C FRAMEWORK • 159

4.5 Creativity and Passion

Learning Objectives

1. Understand how creativity relates to vision.

2. Develop some creativity tools.

3. Understand how passion relates to vision.

Creativity and passion are of particular relevance to mission and vision statements. A simple definition of

creativity is the power or ability to invent. We sometimes think of creativity as being a purely artistic attribute,

but creativity in business is the essence of innovation and progress. Passion at least in the context we invoke

here, refers to an intense, driving, or overmastering feeling or conviction. Passion is also associated with intense

emotion compelling action. We will focus mostly on the relationship between creativity, passion, and vision in

this section because organizational visions are intended to create uneasiness with the status quo and help inform

and motivate key stakeholders to move the organization forward. This means that a vision statement should reflect

and communicate something that is relatively novel and unique, and such novelty and uniqueness are the products

of creativity and passion.

160

Figure 4.7

Entrepreneurs are creative and passionate about their ideas, two characteristics we often associate with

vision and visionaries.

StartupStockPhotos – CC0 public domain.

Creativity and passion can, and probably should, also influence the organization’s mission. In many ways, the

linkages might be clearest between creativity and vision statements and passion and mission statements because

the latter is an expression of the organization’s values and deeply held beliefs. Similarly, while we will discuss

creativity and passion separately in this section, your intuition and experience surely tell you that creativity

eventually involves emotion, to be creative, you have to care about—be passionate about—what you’re doing.

Creativity and VisionCreativity and Vision

More recently, work by DeGraf and Lawrence, suggest a finer-grained view into the characteristics and types

of creativity (DeGraf & Lawrence, 2002). They argued that creativity “types” could be clustered based on

some combination of flexibility versus control and internal versus external orientation. For the manager, their

typology is especially useful as it suggests ways to manage creativity, as in simply hiring creative individuals. As

summarized in the figure, their research suggests that there are four types of creativity: (1) investment (external

orientation with high control), (2) imagination (external orientation with flexibility emphasis), (3) improvement

(internal orientation with high control), and (4) incubation (internal orientation with flexibility emphasis).

The first type of creativity, investment, is associated with speed—being first and being fast. It is also a form of

creativity fostered from the desire to be highly competitive. Perhaps one of the most recent examples of this type

of creativity crucible is the beer wars—the battle for U.S. market share between SABMiller and Anheuser Busch

(AB; Budweiser). Miller was relentless in attacking the quality of AB’s products through its advertisements, and

4.5 CREATIVITY AND PASSION • 161

at the same time launched a myriad number of new products to take business from AB’s stronghold markets (Biz

Journals, 2008).

The second type of creativity, imagination, is the form that most of us think of first. This type of creativity is

characterized by new ideas and breakthroughs: Apple’s stylish design of Macintosh computers and then game-

changing breakthroughs with its iPod and iPhone. Oftentimes, we can tie this type of creativity to the drive or

genius of a single individual, such as Apple’s Steve Jobs.

Figure 4.8 Four Creativity Types

Adapted from DeGraf, J., & Lawrence, K. A. (2002). Creativity at Work: Developing the Right Practices

to Make It Happen. San Francisco: Jossey-Bass.

Where big ideas come from the imagination quadrant, improvement is a type of creativity that involves making an

existing idea better. Two great examples of this are McDonald’s and Toyota. Ray Kroc, McDonald’s founder, had

the idea of creating quality and cooking standards for preparing tasty burgers and fries. While there were many

other burger joints around at the time (the 1950s), Kroc’s unique process-oriented approach gave McDonald’s a

big advantage. Similarly, Toyota has used the refinement of its automaking and auto-assembly processes (called

the Toyota Business System) to be one of the largest and most successful, high-quality car makers in the world.

Finally, the fourth area of creativity is incubation. Incubation is a very deliberate approach that concerns a vision

of sustainability—that is, leaving a legacy. This type of creativity is more complex because it involves teamwork,

empowerment, and collective action. In their chapter on problem solving, David Whetten and Kim Cameron

provide Gandhi as an example of incubation creativity:

162 • PRINCIPLES OF MANAGEMENT

“Mahatma Gandhi was probably the only person in modern history who has single-handedly stopped a war. Lone individuals

have started wars, but Gandhi was creative enough to stop one. He did so by mobilizing networks of people to pursue a clear

vision and set of values. Gandhi would probably have been completely noncreative and ineffective had he not been adept at

capitalizing on incubation dynamics. By mobilizing people to march to the sea to make salt, or to burn passes that demarcated

ethnic group status, Gandhi was able to engender creative outcomes that had not been considered possible. He was a master at

incubation by connecting, involving, and coordinating people (Whetten & Camerson, 2007).”

While no one of these four types of creativity is best, they have some contradictory or conflicting characteristics.

For example, imagination and improvement emphasize different approaches to creativity. The size of the new

idea, for instance, is typically much bigger with imagination (i.e., revolutionary solutions) than with improvement

(i.e., incremental solutions). Investment and incubation also are very different—investment is relatively fast, and

the other relatively slow (i.e., incubation emphasizes deliberation and development).

Creativity ToolsCreativity Tools

In this section, we introduce you to two creativity tools: SCAMPER and the Nominal Group Technique. This set

of tools is not exhaustive but gives you some good intuition and resources to develop new ideas—either to craft a

vision for a new company or revise an existing mission and vision. The first three tools can be used and applied

individually or in groups; Nominal Group Technique is designed to bolster creativity in groups and can build on

individual and group insights provided by the other tools.

All these tools help you to manage two divergent forms of thinking necessary for creativity—programmed

thinking and lateral thinking. Programmed thinking often called left-brained thinking, relies on logical or

structured ways of creating a new product or service. In terms of mission and vision, this means a logical and

deliberate process is used to develop the vision statement. Lateral thinking a term coined by Edward DeBono in

his book The Use of Lateral Thinking (1967), is about changing patterns and perceptions; it is about ideas that may

not be obtainable by using only traditional step-by-step, programmed, logic (De Bono, 1992). Lateral thinking

draws on the right side of our brains.

Each type of approach—programmed versus lateral—has its strength. Logical and disciplined programmed

thinking is enormously effective in making products and services better. It can, however, only go so far before all

practical improvements have been carried out. Lateral thinking can generate completely new concepts and ideas

and brilliant improvements to existing systems. In the wrong place, however, it can be impractical or unnecessarily

disruptive.

SCAMPERSCAMPER

Developed by Bob Eberle, SCAMPER is a checklist tool that helps you to think of changes you can make to an

existing marketplace to create a new one—a new product, a new service, or both (Eberle, 1997). You can use

these changes either as direct suggestions or as starting points for lateral thinking. This, in turn, can inspire a new

vision statement. Table 4.1 “Creativity through SCAMPER” provides you with the SCAMPER question steps and

examples of new products or services that you might create.

Table 4.1 Creativity through SCAMPER

4.5 CREATIVITY AND PASSION • 163

Questions: Examples:

Substitute: What else instead? Who else instead? Other ingredients? Other material? Other time? Otherplace? Vegetarian hot dogs

Combine: How about a blend? Combine purposes? Combine materials? Musical greeting cards

Adapt: What else is like this? What other idea does this suggest? How can I adjust to thesecircumstances? Snow tires

Modify: Different order, form, shape? Minify: What to make smaller? Slower? Lighter? What to dowith less frequency? Magnify: What to make higher? Longer? Thicker? What to do with greaterfrequency?

Scented crayons; Bite-sizedSnickers bars; Super-sizedfrench fries

Put to other uses: New ways to use as is? Other uses I modified? Other places to use an item ormovement? Towel as fly swatter

Eliminate: What to remove? Omit? Understate? Cordless telephone

Rearrange: Other layout? Other sequence? Transpose cause and effect? Transpose positive andnegative? How about opposites? Reverse: Interchange components? Other pattern? Backward? Upsidedown?

Vertical stapler; Reversibleclothing

As shown in the Table 4.1 “Creativity through SCAMPER”, by taking a topic or problem and then using

SCAMPER, you can generate possible new products. It may be some combination of these SCAMPER changes

that lead to highly innovative solutions. For instance, the entertainment company Cirque du Soliel has modeled

its shows on the traditional circus. However, it has adapted aspects of theater and opera, eliminated animals, and

reduced the number of rings from three to one. As a result, it offers a highly stylized (and much more expensive!)

version of what, nostalgically, we call a circus today. Many of the ideas may be impractical. However, some of

these ideas could be good starting points for a new organization or revision of the vision for an existing one.

Nominal Group TechniqueNominal Group Technique

The Nominal Group Technique (NGT) is a method of facilitating a group of people to produce a large number of

ideas in a relatively short time.1 In addition to using NGT to develop a mission and vision statement, it can be

useful:

• To generate numerous creative ideas

• To ensure everyone is heard

• When there is concern that some people may not be vocal

• To build consensus

• When there is controversy or conflict

As shown in “NGT Preparation and Supplies,” preparation and supplies are modest. It encourages contributions

from everyone by allowing for equal participation among group members. A question is posed to the group.

Individually and silently, each participant writes down his or her ideas. In round-robin fashion, each member

supplies an idea until all ideas are shared. Generally, 6 to 10 people participate. “Nominal” means that the

participants form a group in name only. For most of the session, they do not interact as they would in other group

processes.

164 • PRINCIPLES OF MANAGEMENT

NGT Preparation and SuppliesNGT Preparation and Supplies

Formulate your discussion question. Ensure that the wording prevents misunderstanding and is objective.Supplies needed include:

• Flip chart for each table

• Masking tape

• 3 × 5 cards for each participant

• Work tables

• Felt pens

The group is divided into small work groups, each with a leader. A flip chart and markers are needed at each table.

Position the flip chart so that all can see the ideas. The remaining simple procedures are summarized in “NGT

Procedure.”

NGT ProcedureNGT Procedure

1. Introduction: Briefly welcome participants, clarify the purpose of the group exercise, and explainthe procedure to be followed and how results are to be used.

2. Present question: Orally present the question that is written on the flip chart; clarify as needed.

3. Silent generation of ideas: Each participant silently thinks of and writes down (on 3 × 5 card) asmany ideas as possible. Allow 5 to 10 minutes.

4. Record ideas: In turn, each participant reads aloud one idea, and it is recorded on the flip chart forall to see.

5. Continue until all ideas are recorded.

6. Discourage discussion, not even questions for clarification.

7. Encourage “hitchhiking,” that is, expanding on another’s statement. Ideas do not have to be fromthe participant’s written list.

8. Participants may pass a turn and then add an idea at a subsequent turn.

9. Discourage combining ideas from individuals unless they are exactly the same.

10. Group discussion: After all ideas are recorded, the person who suggested the idea is given theopportunity to explain it further.

11. Duplicates may be combined.

12. Wording may be changed if the originator agrees.

13. Ideas are deleted only by unanimous agreement.

14. Restrict discussion to clarify meaning; the value or merit of ideas is not discussed.

4.5 CREATIVITY AND PASSION • 165

Passion and VisionPassion and Vision

Passion as we invoke the term in this chapter, refers to intense, driving, or overmastering feeling or conviction.

Passion is also associated with intense emotion compelling action. Passion is relevant to vision in at least two

ways: (1) Passion about an idea as inspiration of the vision and vision statement and (2) shared passion among

organizational members about the importance of the vision.

Passion as InspirationPassion as Inspiration

Entrepreneur Curt Rosengren makes this observation about the relationship between passion and

entrepreneurship: “Strangely, in spite of its clear importance, very few entrepreneurs or managers consciously

incorporate passion into their decisions, ultimately leaving one of their most valuable assets on their path to

success largely to chance, even though there is little question that passion can be a part of vision creation

(Astroprojects, 2008).” Rosengren comments further that:

“Passion is the essence of the entrepreneurial spirit. It is an entrepreneur’s fuel, providing the drive and inspiration to create

something out of nothing while enduring all the risks, uncertainty, and bumps in the road that that entails.

“Entrepreneurs’ lives consist of a nonstop mission to communicate their vision and inspire others to support their efforts. As

evangelists, salespeople, fundraisers, and cheerleaders they need to breathe life into their vision while enlisting others in their

dream. From creating a vision for the future to selling the idea to investors, from attracting high-quality employees to inspiring

them to do what nobody thought possible, that passion is a key ingredient.

“Passion also plays a key role in their belief that they can achieve the so-called impossible, bouncing back from failure and

ignoring the chorus of No that is inevitably part of the entrepreneurial experience.

“Robin Wolaner, founder of Parenting magazine and author of Naked In The Boardroom: A CEO Bares Her Secrets So You

Can Transform Your Career, put it succinctly when she said, ‘To succeed in starting a business you have to suspend disbelief,

because the odds are against you. Logic is going to stop you.’ Passion, on the other hand, will help you fly (Astroprojects,

2008).”

Passion About the VisionPassion About the Vision

Passion doesn’t just have benefits for the individual entrepreneur or manager when formulating a vision statement,

it can help the whole business thrive. While there is little academic research on the relationship between passion

and vision, studies suggest that fostering engagement, a concept related to passion, in employees has a significant

effect on the corporate bottom line. Gallup, for instance, has been on the forefront of measuring the effect of

what it calls employee engagement. Employee engagement is a concept that is generally viewed as managing

discretionary effort; that is, when employees have choices, they will act in a way that furthers their organization’s

interests. An engaged employee is fully involved in, and enthusiastic about, his or her work (Gallup, 2008). The

consulting firm BlessingWhite offers this description of engagement and its value (and clear relationship with

passion):

“Engaged employees are not just committed. They are not just passionate or proud. They have a line-of-sight on their own

166 • PRINCIPLES OF MANAGEMENT

future and on the organization’s mission and goals. They are ‘enthused’ and ‘in gear’ using their talents and discretionary effort

to make a difference in their employer’s quest for sustainable business success(Employee Engagement Report, 2008).”

Engaged employees are those who are performing at the top of their abilities and happy about it. According

to statistics that Gallup has drawn from 300,000 companies in its database, 75%–80% of employees are either

“disengaged” or “actively disengaged (Gallup, 2008).”

That’s an enormous waste of potential. Consider Gallup’s estimation of the impact if 100% of an organization’s

employees were fully engaged:

• Customers would be 70% more loyal.

• Turnover would drop by 70%.

• Profits would jump by 40%.

Job satisfaction studies in the United States routinely show job satisfaction ratings of 50%–60%. But one recent

study by Harris Interactive of nearly 8,000 American workers went a step further (Age Wave, 2008). What did the

researchers find?

• Only 20% feel very passionate about their jobs.

• Less than 15% agree that they feel strongly energized by their work.

• Only 31% (strongly or moderately) believe that their employer inspires the best in them.

Consciously creating an environment where passion is both encouraged and actively developed can yield an

enormous competitive advantage. That environment starts at the top through the development and active

communication of mission and vision.

Key Takeaway

You learned about the relationship between creativity and passion and mission and vision. You learned thatcreativity relates to the power or ability to create and that passion is intense emotion compelling action.Creativity is important if the desired mission and vision are desired to be novel and entrepreneurial; passionis important both from the standpoint of adding energy to the mission and vision and to key stakeholdersfollowing the mission and vision.

Exercises

1. What is creativity?

2. Why is creativity relevant to vision and vision statements?

3. What are some useful creativity tools?

4.5 CREATIVITY AND PASSION • 167

4. What is passion?

5. Why is passion relevant to vision and vision statements?

6. What is the relationship between passion and engagement?

1This section is reproduced with permission of the University of Wisconsin Extension Program. A circulation

version can be found at http://www.uwex.edu/ces/pdande/resources/pdf/Tipsheet3.pdf (retrieved October 28,

2008). Additional information on NGT can be gained by reading the following: Delbecq, A., Van de Ven, A.,

& Gustafson, D. (1975). Group Techniques for Program Planning: A Guide to Nominal Group and Delphi

Processes. Glenview, IL: Scott, Foresman; Tague, N. (1995). The Quality Toolbox. Milwaukee, WI: ASQC

Quality Press; Witkin, B., & Altschuld, J. (1995). Planning and Conducting Needs Assessment: A Practical

Guide. Thousands Oaks, CA, Sage.

ReferencesReferences

Age Wave, retrieved October 29, 2008, from http://www.agewave.com/media_files/rough.html.http://.

Astroprojects, retrieved October 28, 2008, from http://www.astroprojects.com/media/MSPassion8.html.

Biz Journals, retrieved October 27, 2008, from http://www.bizjournals.com/milwaukee/stories/2004/05/31/

story7.html.

BlessingWhite. (2008, April). 2008 employee engagement report. http://www.blessingwhite.com/eee__report.asp.

De Bono, E. (1992). Serious Creativity. New York: Harper Business; Osborn, A. (1953). Applied Imagination.

New York: Scribner’s.Eberle, R. (1997). Scamper: Creative Games and Activities for Imagination Development.

New York: Prufrock Press.

DeGraf, J., & Lawrence, K. A. (2002). Creativity at Work: Developing the Right Practices to Make It Happen.

San Francisco: Jossey-Bass.

Eberle, R. (1997). Scamper: Creative Games and Activities for Imagination Development. New York: Prufrock

Press.

Gallup, href=”http://www.gallup.com/consulting/52/Employee-Engagement.aspx”>http://www.gallup.com/

consulting/52/Employee-Engagement.aspx.

Gallup, retrieved October 28, 2008, from http://gmj.gallup.com/content/24880/Gallup-Study-Engaged-

Employees-Inspire-Company.aspx.

Whetten, D., & Camerson, K. (2007). Developing Management skills. (7th ed.). Upper Saddle River, NJ: Pearson/

Prentice-Hall, 185.

168 • PRINCIPLES OF MANAGEMENT

4.6 Stakeholders

Learning Objectives

1. Learn about stakeholders and their importance.

2. Understand stakeholder analysis.

3. Be able to map stakeholders and their level of participation.

Figure 4.9

Government tends to be a key stakeholder for every organization.

Kevin Harber – GOVERNMENT – CC BY-NC-ND 2.0.

Stakeholders and Stakeholder AnalysisStakeholders and Stakeholder Analysis

Stakeholders are individuals or groups who have an interest in an organization’s ability to deliver intended results

169

and maintain the viability of its products and services. We’ve already stressed the importance of stakeholders

to a firm’s mission and vision. We’ve also explained that firms are usually accountable to a broad range of

stakeholders, including shareholders, who can make it either more difficult or easier to execute a strategy and

realize its mission and vision. This is the main reason managers must consider stakeholders’ interests, needs, and

preferences.

Considering these factors in the development of a firm’s mission and vision is a good place to start, but first,

of course, you must identify critical stakeholders, get a handle on their short- and long-term interests, calculate

their potential influence on your strategy, and take into consideration how the firms strategy might affect the

stakeholders (beneficially or adversely). Table 4.2 “Stakeholder Categories” provides one way to begin thinking

about the various stakeholder groups, their interests, importance, and influence. Influence reflects a stakeholder’s

relative power over and within an organization; importance indicates the degree to which the organization cannot

be considered successful if a stakeholder’s needs, expectations, and issues are not addressed.

Table 4.2 Stakeholder Categories

Stakeholder Categories Interests Importance Influence

Owners

Managers

Employees

Customers

Environmental

Social

Government

Suppliers

Competitors

Other?

Adapted from http://www.stsc.hill.af.mil/crosstalk/2000/12/smith.html.

As you can imagine, for instance, one key stakeholder group comprises the CEO and the members of the top-

management team. These are key managers, and they might be owners as well. This group is important for at least

three reasons:

1. Its influence as either originator or steward of the organization’s mission and vision.

2. Its responsibility for formulating a strategy that realizes the mission and vision.

3. Its ultimate role in strategy implementation.

Typically, stakeholder evaluation of both quantitative and qualitative performance outcomes will determine

whether management is effective. Quantitative outcomes include stock price, total sales, and net profits, while

qualitative outcomes include customer service and employee satisfaction. As you can imagine, different

stakeholders may place more emphasis on some outcomes than other stakeholders, who have other priorities.

170 • PRINCIPLES OF MANAGEMENT

Stakeholders, Mission, and VisionStakeholders, Mission, and Vision

Stakeholder analysis refers to the range of techniques or tools used to identify and understand the needs and

expectations of major interests inside and outside the organization environment. Managers perform stakeholder

analysis to gain a better understanding of the range and variety of groups and individuals who not only have a

vested interest in the organization, and ultimately the formulation and implementation of a firm’s strategy, but

who also have some influence on firm performance. Managers thus develop mission and vision statements, not

only to clarify the organization’s larger purpose but also to meet or exceed the needs of its key stakeholders.

Stakeholder analysis may also enable managers to identify other parties that might derail otherwise well-

formulated strategies, such as local, state, national, or foreign governmental bodies. Finally, stakeholder analysis

enables organizations to better formulate, implement, and monitor their strategies, and this is why stakeholder

analysis is a critical factor in the ultimate implementation of a strategy.

Identifying StakeholdersIdentifying Stakeholders

The first step in stakeholder analysis is identifying major stakeholder groups. As you can imagine, the groups of

stakeholders who will, either directly or indirectly, be affected by or have an effect on a firm’s strategy and its

execution can run the gamut from employees, to customers, to competitors, to the government. Ultimately, we

will want to take these stakeholders and plot them on a chart, similar to that shown in the following figure.

Figure 4.10 Stakeholder Mapping

Adapted from Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.

Let’s pause for a moment to consider the important constituencies we will be charting on our stakeholder

map. Before we start, however, we need to remind ourselves that stakeholders can be individuals or

groups—communities, social or political organizations, and so forth. In addition, we can break groups down

4.6 STAKEHOLDERS • 171

demographically, geographically, by level and branch of government, or according to other relevant criteria. In so

doing, we’re more likely to identify important groups that we might otherwise overlook.

With these facts in mind, you can see that, externally, a map of stakeholders will include such diverse groups as

governmental bodies, community-based organizations, social and political action groups, trade unions and guilds,

and even journalists. National and regional governments and international regulatory bodies will probably be

key stakeholders for global firms or those whose strategy calls for greater international presence. Internally, key

stakeholders include shareholders, business units, employees, and managers.

Steps in Identifying StakeholdersSteps in Identifying Stakeholders

Identifying all of a firm’s stakeholders can be a daunting task. In fact, as we will note again shortly, a list

of stakeholders that is too long actually may reduce the effectiveness of this important tool by overwhelming

decision makers with too much information. To simplify the process, we suggest that you start by identifying

groups that fall into one of four categories: organizational, capital market, product market, and social. Let’s take

a closer look at this step.

Step 1: Determining Influences on Mission, Vision, and Strategy Formulation. One way to analyze the importance

and roles of the individuals who compose a stakeholder group is to identify the people and teams who should

be consulted as strategy is developed or who will play some part in its eventual implementation. These are

organizational stakeholders, and they include both high-level managers and frontline workers. Capital-market

stakeholders are groups that affect the availability or cost of capital—shareholders, venture capitalists, banks, and

other financial intermediaries. Product-market stakeholders include parties with whom the firm shares its industry,

including suppliers and customers. Social stakeholders consist broadly of external groups and organizations that

may be affected by or exercise influence over firm strategy and performance, such as unions, governments, and

activist groups. The next two steps are to determine how various stakeholders are affected by the firm’s strategic

decisions and the degree of power that various stakeholders wield over the firm’s ability to choose a course of

action.

Step 2: Determining the Effects of Key Decisions on the Stakeholder. Step 2 in stakeholder analysis is to determine

the nature of the effect of the firm’s strategic decisions on the list of relevant stakeholders. Not all stakeholders

are affected equally by strategic decisions. Some effects may be rather mild, and any positive or negative effects

may be secondary and of minimal impact. At the other end of the spectrum, some stakeholders bear the brunt of

firm decisions, good or bad.

In performing step 1, companies often develop overly broad and unwieldy lists of stakeholders. At this stage,

it’s critical to determine the stakeholders who are most important based on how the firm’s strategy affects the

stakeholders. You must determine which of the groups still on your list have direct or indirect material claims

on firm performance or which are potentially adversely affected. For instance, it is easy to see how shareholders

are affected by firm strategies—their wealth either increases or decreases in correspondence with the firm’s

actions. Other parties have economic interests in the firm as well, such as parties the firm interacts with in

the marketplace, including suppliers and customers. The effects on other parties may be much more indirect.

For instance, governments have an economic interest in firms doing well—they collect tax revenue from them.

However, in cities that are well diversified with many employers, a single firm has minimal economic impact on

what the government collects. Alternatively, in other areas, individual firms represent a significant contribution

172 • PRINCIPLES OF MANAGEMENT

to local employment and tax revenue. In those situations, the effect of firm actions on the government would be

much greater.

Step 3: Determining Stakeholders’ Power and Influence over Decisions. The third step of a stakeholder analysis

is to determine the degree to which a stakeholder group can exercise power and influence over the decisions

the firm makes. Does the group have direct control over what is decided, veto power over decisions, nuisance

influence, or no influence? Recognize that although the degree to which a stakeholder is affected by firm decisions

(i.e., step 2) is sometimes highly correlated with their power and influence over the decision, this is often not

the case. For instance, in some companies, frontline employees may be directly affected by firm decisions but

have no say in what those decisions are. Power can take the form of formal voting power (boards of directors and

owners), economic power (suppliers, financial institutions, and unions), or political power (dissident stockholders,

political action groups, and governmental bodies). Sometimes the parties that exercise significant power over firm

decisions don’t register as having a significant stake in the firm (step 2). In recent years, for example, Wal-Mart

has encountered significant resistance in some communities by well-organized groups who oppose the entry of the

mega-retailer. Wal-Mart executives now have to anticipate whether a vocal and politically powerful community

group will oppose its new stores or aim to reduce their size, which decreases Wal-Mart’s per store profitability.

Indeed, in many markets, such groups have been effective at blocking new stores, reducing their size, or changing

building specifications.

Once you’ve determined who has a stake in the outcomes of the firm’s decisions as well as who has power over

these decisions, you’ll have a basis on which to allocate prominence in the strategy-formulation and strategy-

implementation processes. The framework in the figure will also help you categorize stakeholders according to

their influence in determining strategy versus their importance to strategy execution. For one thing, this distinction

may help you identify major omissions in strategy formulation and implementation.

Having identified stakeholder groups and differentiated them by how they are affected by firm decisions and the

power they have to influence decisions, you’ll want to ask yourself some additional questions:

• Have I identified any vulnerable points in either the strategy or its potential implementation?

• Which groups are mobilized and active in promoting their interests?

• Have I identified supporters and opponents of the strategy?

• Which groups will benefit from successful execution of the strategy and which may be adversely affected?

• Where are various groups located? Who belongs to them? Who represents them?

The stakeholder-analysis framework summarized in the figure is a good starting point. Ultimately, because

mission and vision are necessarily long term in orientation, identifying important stakeholder groups will help you

to understand which constituencies stand to gain or to lose the most if they’re realized.

Two ChallengesTwo Challenges

Two of the challenges of performing stakeholder analysis are determining how stakeholders are affected by a

firm’s decisions and how much influence they have over the implementation of the decisions that are made. Many

people have a tendency to fall into the trap of assessing all stakeholders as being important on both dimensions. In

4.6 STAKEHOLDERS • 173

reality, not all stakeholders are affected in the same way and not all stakeholders have the same level of influence

in determining what a firm does. Moreover, when stakeholder analysis is executed well, the resulting strategy has

a better chance of succeeding, simply because the entities you might rely on in the implementation phase were

already involved in the strategy starting with the formulation phase. Thus, you now have a good idea of how to

engage various stakeholders in all the stages of the P-O-L-C framework.

Key Takeaway

This section introduced stakeholders, their roles, and how to begin assessing their roles in the developmentof the organization’s mission and vision. While any person or organization with a stake in yourorganization is a stakeholder, managers are most concerned with those stakeholders who have the mostinfluence on, or will be most influenced by, the organization. On the basis of your assessment ofstakeholders, you now can be proactive in involving them in the P-O-L-C stages.

Exercises

1. What are stakeholders, and why are they relevant to mission and vision?

2. Are stakeholders equally relevant to all parts of P-O-L-C, or only mission and vision?

3. What is stakeholder analysis? What are the three identification steps?

4. How does stakeholder analysis help you craft a mission and vision statement?

5. Which important stakeholders might you intentionally exclude from a mission or visionstatement?

6. What are the risks of not conducting stakeholder analysis as an input to the formulation of yourmission and vision?

174 • PRINCIPLES OF MANAGEMENT

4.7 Crafting Mission and Vision Statements

Learning Objectives

1. Learn about the basics of the mission and vision development process.

2. Understand the content of good mission and vision statements.

Communicating and Monitoring Mission and VisionCommunicating and Monitoring Mission and Vision

At this point, you have an understanding of what a mission and vision statement is and how creativity, passion,

and stakeholder interests might be accounted for. The actual step-by-step process of developing a mission and

vision might start with the mission and vision statements, but you should think of this process more broadly in

terms of multiple steps: (1) the process, (2) the content of the mission and vision statements, (3) communicating

mission and vision to all relevant stakeholders, and (4) monitoring. As shown in “Process, Content, Application,

and Monitoring in Mission and Vision Development,” Information Week contributor Sourabh Hajela breaks out

one way you might manage your mission/vision development checklist. Let’s dive in to the development process

first.

Mission and vision statements are statements of an organization’s purpose and potential; what you want the

organization to become. Both statements should be meaningful to you and your organization. It should be shared

with all of the employees in the organization to create a unified direction for everyone to move in.

175

Figure 4.11

OLYMPUS DIGITAL CAMERA

While crafting a mission and vision is not easy, it helps to follow the right steps.

tanakawho – Stepping stones – CC BY-NC 2.0.

Process, Content, Application, and Monitoring in Mission and Vision DevelopmentProcess, Content, Application, and Monitoring in Mission and Vision Development•

• Let the business drive the mission and vision.

• Involve all stakeholders in its development; otherwise, they won’t consider it theirs.

• Assign responsibility so that it’s clear how each person, including each stakeholder, can contribute.

• Seek expert facilitation to reach a vision supported by all.

• Revise and reiterate; you’ll likely go through multiple iterations before you’re satisfied.•

• Start from where you are to get to where you want to go.

• Build in the values of the organization: Every organization has a soul. Tap into yours, and adjustas needed. Mission and vision built on your values will not just hold promise but also deliver on it.

• Build on the core competencies of the organization: A mission and vision are useless if they can’tbe put into operation. This requires recognition of your organization’s strengths and weaknesses.

176 • PRINCIPLES OF MANAGEMENT

• Factor in your style: A mission and vision must reflect the leader’s style. You can’t sustain actionthat goes against it.

• Make it visual: A picture is worth a thousand words.

• Make it simple to understand: Complex language and disconnected statements have littleimpact—people can’t implement what they don’t understand.

• Make it achievable: A mission and vision are an organization’s dreams for the future. Unachievablegoals discourage people.

• Phase it in: Reach for the sky—in stages.

• Make it actionable: If it’s too abstract, no one knows what to do next.•

• Communicate often: Internal communications are the key to success. People need to see themission and vision, identify with them, and know that leadership is serious about it.

• Create messages that relate to the audience: To adopt a mission and vision, people must see howthey can achieve it, and what’s in it for them.

• Create messages that inspire action: It’s not what you say, but how you say it.•

• Use it: Beyond printing it, posting it, and preaching it, you also need to practice what is laid out inthe mission and vision…“walk the talk”

• Live it: Management must lead by example.

• Be real: It’s better to adjust the mission statement as needed than to not live up to the standards itsets.

•

• Identify key milestones: While traveling to your destination, acknowledge the milestones along theway.

• Monitor your progress: A strategic audit, combined with key metrics, can be used to measureprogress against goals and objectives.

• Use external audit team: An external team brings objectivity, plus a fresh perspective.

Sourabh Hajela

Adapted from http://www.informationweek.com/news/management/showArticle.jhtml?articleID=17500069 (retrieved October 29, 2008).

Mission and Vision-Development ProcessMission and Vision-Development Process

Mission and vision development are analogous to the “P” (planning) in the P-O-L-C framework. Start with the

people. To the greatest extent possible, let those people responsible for executing the mission and vision drive

their development. Sometimes this means soliciting their input and guiding them through the development of the

actual statements, but ideally, it means teaching them how to craft those statements themselves. Involve as many

4.7 CRAFTING MISSION AND VISION STATEMENTS • 177

key stakeholders as possible in its development; otherwise, they won’t consider it theirs. Assign responsibility so

that it’s clear how each person, including each stakeholder, can contribute.

ContentContent

The content of the mission and vision statements are analogous to the O (organizing) part of the P-O-L-C

framework. Begin by describing the best possible business future for your company, using a target of 5 to 10 years

in the future. Your written goals should be dreams, but they should be achievable dreams. Jim Collins (author of

Good to Great) suggests that the vision be very bold, or what he likes to call a BHAG—a big, hairy, audacious

goal—like the United State’s goal in the 1960s to go to the moon by the end of the decade, or Martin Luther

King’s vision for a nonracist America.

Recognizing that the vision statement is derived from aspects of the mission statement, it is helpful to start there.

Richard O’ Hallaron and his son, David R. O’ Hallaron, in The Mission Primer: Four Steps to an Effective

Mission Statement, suggest that you consider a range of objectives, both financial and nonfinancial (O’Hallaron

& O’Hallaron, 2000). Specifically, the O’Hallarons find that the best mission statements have given attention to

the following six areas:

1. What “want-satisfying” service or commodity do we produce and work constantly to improve?

2. How do we increase the wealth or quality of life or society?

3. How do we provide opportunities for the productive employment of people?

4. How are we creating a high-quality and meaningful work experience for employees?

5. How do we live up to the obligation to provide fair and just wages?

6. How do we fulfill the obligation to provide a fair and just return on capital?

When writing your statements, use the present tense, speaking as if your business has already become what

you are describing. Use descriptive statements describing what the business looks like, feels like, using words

that describe all of a person’s senses. Your words will be a clear written motivation for where your business

organization is headed. Mission statements, because they cover more ground, tend to be longer than vision

statements, but you should aim to write no more than a page. Your words can be as long as you would like them

to be, but a shorter vision statement may be easier to remember.

CommunicationsCommunications

The communications step of the mission and vision statements development process is analogous to the “L”

(leading) part of the P-O-L-C framework. Communicate often: Internal communications are the key to success.

People need to see the vision, identify with it, and know that leadership is serious about it.

Managers must evaluate both the need and the necessary tactics for persuasively communicating a strategy in four

different directions: upward, downward, across, and outward (Hambrick & Cannella, 1989).

178 • PRINCIPLES OF MANAGEMENT

Communicating UpwardCommunicating Upward

Increasingly, firms rely on bottom-up innovation processes that encourage and empower middle-level and division

managers to take ownership of mission and vision and propose new strategies to achieve them. Communicating

upward means that someone or some group has championed the vision internally and has succeeded in convincing

top management of its merits and feasibility.

Communicating DownwardCommunicating Downward

Communicating downward means enlisting the support of the people who’ll be needed to implement the mission

and vision. Too often, managers undertake this task only after a strategy has been set in stone, thereby running the

risk of undermining both the strategy and any culture of trust and cooperation that may have existed previously.

Starting on the communication process early is the best way to identify and surmount obstacles, and it usually

ensures that a management team is working with a common purpose and intensity that will be important when it’s

time to implement the strategy.

Communicating Across and OutwardCommunicating Across and Outward

The need to communicate across and outward reflects the fact that realization of a mission and vision will

probably require cooperation from other units of the firm (across) and from key external stakeholders, such as

material and capital providers, complementors, and customers (outward). Internally, for example, the strategy

may call for raw materials or services to be provided by another subsidiary; perhaps it depends on sales leads

from other units. The software company Emageon couldn’t get hospitals to adopt the leading-edge visualization

software that was produced and sold by one subsidiary until its hardware division started cross-selling the software

as well. This internal coordination required a champion from the software side to convince managers on the

hardware side of the need and benefits of working together.

ApplicationApplication

It is the successful execution of this step—actually using the mission and vision statements—that eludes most

organizations. “Yes, it is inconvenient and expensive to move beyond the easy path” and make decisions that

support the mission statement, says Lila Booth, a Philadelphia-area consultant who is on the faculty of the

Wharton Small Business Development Center. But ditching mission for expediency “is short-term thinking,” she

adds, “which can be costly in the end, costly enough to put a company out of business (Krattenmaker, 2002).” That

is not to say that a mission statement is written in stone. Booth cites her own consulting business. It began well

before merger mania but has evolved with the times and now is dedicated in significant part to helping merged

companies create common cultures. “Today, our original mission statement would be very limiting,” she says.

Even the most enthusiastic proponents acknowledge that mission statements are often viewed cynically by

organizations and their constituents. That is usually due to large and obvious gaps between a company’s words and

deeds. “Are there companies that have managers who do the opposite of what their missions statements dictate?

Of course,” says Geoffrey Abrahams, author of The Mission Statement Book. “Mission statements are tools, and

tools can be used or abused or ignored.…Management must lead by example. It’s the only way employees can

4.7 CRAFTING MISSION AND VISION STATEMENTS • 179

live up to the company’s mission statement (Abrahams, 1999).” Ultimately, if you are not committed to using the

mission statement then you are best advised not to create one.

MonitoringMonitoring

The monitoring step of the mission and vision statements development process is analogous to the “C”

(controlling) part of the P-O-L-C framework. Identify key milestones that are implied or explicit in the mission

and vision. Since mission and vision act like a compass for a long trip to a new land, as Information Week’s Hajela

suggests, “while traveling to your destination, acknowledge the milestones along the way. With these milestones

you can monitor your progress: A strategic audit, combined with key metrics, can be used to measure progress

against goals and objectives. To keep the process moving, try using an external audit team. One benefit is that an

external team brings objectivity, plus a fresh perspective (Information Week, 2008).” It also helps motivate your

team to stay on track.

Key Takeaway

This section described some of the basic inputs into crafting mission and vision statements. It explored howmission and vision involved initiation, determination of content, communication, application, and thenmonitoring to be sure if and how the mission and vision were being followed and realized. In many ways,you learned how the development of mission and vision mirrors the P-O-L-C framework itself—fromplanning to control (monitoring).

Exercises

1. Who should be involved in the mission and vision development process?

2. What are some key content areas for mission and vision?

3. Why are organizational values important to mission and vision?

4. Why is communication important with mission and vision?

5. To which stakeholders should the mission and vision be communicated?

6. What role does monitoring play in mission and vision?

ReferencesReferences

Abrahams, J. (1999). The Mission Statement Book: 301 Corporate Mission Statements from America’s Top

Companies. Berkeley: Ten Speed Press.

Hambrick, D. C., & Cannella, A. A. (1989). Strategy implementation as substance and selling. Academy of

Management Executive, 3(4), 278–285.

180 • PRINCIPLES OF MANAGEMENT

Information Week, retrieved October 28, 2008, from http://www.informationweek.com/news/management/

showArticle.jhtml?articleID=17500069.

Krattenmaker, T. (2002). Writing a Mission Statement That Your Company Is Willing to Live. Boston: Harvard

Business School Press.

O’Hallaron, R., & O’Hallaron, D. (2000). The Mission Primer: Four Steps to an Effective Mission Statement,

Richmond: Mission Incorporated. Their approach is based on Gast’s Laws, a set of principles developed in the

1940s and 1950s by the late business professor Walter Gast. Among other ideas, Gast’s Laws hold that businesses

must be dedicated to more than making money if they are to succeed.

4.7 CRAFTING MISSION AND VISION STATEMENTS • 181

4.8 Developing Your Personal Mission and Vision

Learning Objectives

1. Determine what mission and vision mean for you.

2. Develop some guidelines for developing your mission and vision.

Mission and vision are concepts that can be applied to you, personally, well beyond their broader relevance to the

P-O-L-C framework. Personal mission and vision communicate the direction in which you are headed, as well

as providing some explanation for why you are choosing one direction or set of objectives over others. Thinking

about and writing down mission and vision statements for your life can help provide you with a compass as you

work toward your own goals and objectives.

182

Figure 4.12

Your mission and vision reflect your personal and professional purpose and direction.

Shawn Harquail – Kayak Tour of Mangroves, Lucayan National Park. – CC BY-NC 2.0.

Your Mission and VisionYour Mission and Vision

Note that the development of a personal mission and vision, and then a strategy for achieving them, are exactly

the opposite of what most people follow. Most people do not plan further ahead than their next job or activity (if

they plan their career at all). They take a job because it looks attractive, and then they see what they can do with

it. We advocate looking as far into the future as you can and deciding where you want to end up and what steps

will lead you there. In that way, your life and your career fit into some intelligent plan, and you are in control of

your own life.

GuidelinesGuidelines

The first step in planning a career is obviously a long-term goal. Where do you want to end up, ultimately? Do

you really want to be a CEO or president of the United States, now that you know what it costs to be either one?

There are a couple basic parts to this process.

BHAGBHAG

First, set out a bold vision—Jim Collins, author of Good to Great, describes this as a BHAG a big, hairy, audacious

goal.

4.8 DEVELOPING YOUR PERSONAL MISSION AND VISION • 183

Five guiding criteria for good BHAGs is that they:

1. Are set with understanding, not bravado.

2. Fit squarely in the three circles of (a) what you are deeply passionate about (including your core values

and purpose), (b) what drives your economic logic, and (c) what differentiates you (what you can be the

best in the world at).

3. Have a long time frame—10 to 30 years.

4. Are clear, compelling, and easy to grasp.

5. Directly reflect your core values and core purpose.

ValuesValues

Second, sketch out your personal values, or “Guiding Philosophy”—a set of core values and principles like your

own Declaration of Independence.

ScheduleSchedule

Once the vision is set, you have to develop some long-term goal (or goals), then intermediate-term goals, and so

on. If you want to be President, what jobs will you have to take first to get there and when do you have to get

these jobs? Where should you live? What training do you need? What political connections do you need? Then

you have to set up an orderly plan for obtaining the connections and training that you need and getting into these

steppingstone jobs.

Finally, you need to establish short-term goals to fit clearly into a coherent plan for your entire career. Your next

job (if you are now a fairly young person) should be picked not only for its salary or for its opportunities for

advancement but for its chances to provide you with the training and connections you need to reach your long-

term goals. The job that is superficially attractive to you because it has a high salary, offers the opportunity for

immediate advancement, or is located in a desirable place may be a mistake from the standpoint of your long-term

career.

Five StepsFive Steps

Former business school professor, entrepreneur (founder of www.quintcareers.com), and colleague Randall S.

Hansen, PhD, has done a masterful job of assembling resources that aim to help your career, including an excellent

five-step plan for creating personal mission statements. With his generous permission, he has allowed us to

reproduce his five-step plan—adapted by us to encompass both mission and vision—in this section.

The Five-Step PlanThe Five-Step Plan

A large percentage of companies, including most of the Fortune 500, have corporate mission and vision

statements (Quint Careers, 2008). Mission and vision statements are designed to provide direction and thrust to

an organization, an enduring statement of purpose. A mission and vision statement act as an invisible hand that

184 • PRINCIPLES OF MANAGEMENT

guides the people in the organization. A mission and vision statement explains the organization’s reason for being

and answers the question, “What business are we in?”

A personal mission and vision statement is a bit different from a company mission statement, but the fundamental

principles are the same. Writing a personal mission and vision statement offers the opportunity to establish what’s

important and perhaps make a decision to stick to it before we even start a career. Or it enables us to chart a new

course when we’re at a career crossroads. Steven Covey (in First Things First) refers to developing a mission

and vision statement as “connecting with your own unique purpose and the profound satisfaction that comes from

fulfilling it (Covey, 1994).”

A personal mission and vision statement helps job seekers identify their core values and beliefs. Michael

Goodman (in The Potato Chip Difference: How to Apply Leading Edge Marketing Strategies to Landing the Job

You Want) states that a personal mission statement is “an articulation of what you’re all about and what success

looks like to you (Goodman, 2001).” A personal mission and vision statement also allows job seekers to identify

companies that have similar values and beliefs and helps them better assess the costs and benefits of any new

career opportunity.

The biggest problem most job seekers face is not in wanting to have a personal mission and vision statement

but actually writing it. So, to help you get started on your personal mission and vision statement, here is a five-

step mission/vision-building process. Take as much time on each step as you need, and remember to dig deeply

to develop a mission and vision statement that is both authentic and honest. To help you better see the process,

Professor Hansen included an example of one friend’s process in developing her mission and vision statements.

Sample Personal Mission Statement DevelopmentSample Personal Mission Statement Development

1.Past success:

◦ developed new product features for stagnant product

◦ part of team that developed new positioning statement for product

◦ helped child’s school with fundraiser that was wildly successful

◦ increased turnout for the opening of a new local theater company

Themes: Successes all relate to creative problem solving and execution of a solution.

2.Core values:

◦ Hard working

◦ Industrious

◦ Creativity

◦ Problem solving

◦ Decision maker

4.8 DEVELOPING YOUR PERSONAL MISSION AND VISION • 185

◦ Friendly

◦ Outgoing

◦ Positive

◦ Family-oriented

◦ Honest

◦ Intelligent

◦ Compassionate

◦ Spiritual

◦ Analytical

◦ Passionate

◦ Contemplative

Most important values:

◦ Problem solving

◦ Creativity

◦ Analytical

◦ Compassionate

◦ Decision maker

◦ Positive

Most important value:

◦ Creativity

3.Identify Contributions:

◦ the world in general: develop products and services that help people achieve what they want inlife. To have a lasting effect on the way people live their lives.

◦ my family: to be a leader in terms of personal outlook, compassion for others, and maintainingan ethical code; to be a good mother and a loving wife; to leave the world a better place for mychildren and their children.

◦ my employer or future employers: to lead by example and demonstrate how innovative andproblem-solving products can be both successful in terms of solving a problem and successfulin terms of profitability and revenue generation for the organization.

◦ my friends: to always have a hand held out for my friends; for them to know they can alwayscome to me with any problem.

◦ my community: to use my talents in such a way as to give back to my community.

186 • PRINCIPLES OF MANAGEMENT

Identify Goals:

Short term: To continue my career with a progressive employer that allows me to use my skills, talent,and values to achieve success for the firm.

Long term: To develop other outlets for my talents and develop a longer-term plan for diversifyingmy life and achieving both professional and personal success.

5.Mission Statement:

To live life completely, honestly, and compassionately, with a healthy dose of realism mixed with theimagination and dreams that all things are possible if one sets their mind to finding an answer.

Vision Statement:

To be the CEO of a firm that I start, that provides educational exercise experiences to K–6 schools.My company will improve children’s health and fitness, and create a lasting positive impact on theirlives, and that of their children.

Step 1: Identify Past Successes. Spend some time identifying four or five examples where you have had personal

success in recent years. These successes could be at work, in your community, or at home. Write them down. Try

to identify whether there is a common theme—or themes—to these examples. Write them down.

Step 2: Identify Core Values. Develop a list of attributes that you believe identify who you are and what your

priorities are. The list can be as long as you need. Once your list is complete, see whether you can narrow your

values to five or six most important values. Finally, see whether you can choose the one value that is most

important to you. We’ve added “Generating Ideas for Your Mission and Vision” to help jog your memory and

brainstorm about what you do well and really like to do.

Step 3: Identify Contributions. Make a list of the ways you could make a difference. In an ideal situation, how

could you contribute best to:

• the world in general

• your family

• your employer or future employers

• your friends

• your community

Generating Ideas for Your Mission and VisionGenerating Ideas for Your Mission and Vision

A useful mission and vision statement should include two pieces: what you wish to accomplish andcontribute and who you want to be, the character strengths and qualities you wish to develop. While this

4.8 DEVELOPING YOUR PERSONAL MISSION AND VISION • 187

sounds simple, those pieces of information are not always obvious. Try these tools for generating valuableinformation about yourself.

Part I

1. Describe your ideal day. This is not about being practical. It is designed to include as many sidesof you and your enthusiasms as possible: creative, competent, artistic, introverted, extraverted,athletic, playful, nurturing, contemplative, and so on.

2. Imagine yourself 132 years old and surrounded by your descendants or those descendants of yourfriends. You are in a warm and relaxed atmosphere (such as around a fireplace). What would you sayto them about what is important in life? This exercise is designed to access the values and principlesthat guide your life.

3. Imagine that it is your 70th birthday (or another milestone in your life). You have been asked bynational print media to write a press release about your achievements. Consider what you wouldwant your family, friends, coworkers in your profession and in your community to say about you.What difference would you like to have made in their lives? How do you want to be remembered?This is designed to inventory your actions and accomplishments in all areas of your life.

Part II

Review your notes for these three exercises. With those responses in mind, reflect on questions 1, 2, and 3above. Then write a rough draft (a page of any length) of your mission statement. Remember that it shoulddescribe what you want to do and who you want to be. This is not a job description. Carry it with you, postcopies in visible places at home and work, and revise and evaluate. Be patient with yourself. The process isas important as the outcome. After a few weeks, write another draft. Ask yourself whether your statementwas based on proven principles that you believe in, if you feel direction, motivation, and inspiration whenyou read it. Over time, reviewing and evaluating will keep you abreast of your own development.

Step 4: Identify Goals. Spend some time thinking about your priorities in life and the goals you have for yourself.

Make a list of your personal goals, perhaps in the short term (up to three years) and the long term (beyond three

years).

Step 5: Write Mission and Vision Statements. On the basis of the first four steps and a better understanding of

yourself, begin writing your personal mission and vision statements.

Final thoughts: A personal mission and vision statement is, of course, personal. But if you want to see whether you

have been honest in developing your personal mission and vision statement, we suggest sharing the results of this

process with one or more people who are close to you. Ask for their feedback. Finally, remember that mission and

vision statements are not meant to be written once and blasted into stone. You should set aside some time annually

to review your career, job, goals, and mission and vision statements—and make adjustments as necessary.

Key Takeaway

In this section, you learned how to think of mission and vision in terms of your personal circumstances,whether it is your career or other aspects of your life. Just as you might do in developing an organization’s

188 • PRINCIPLES OF MANAGEMENT

vision statement, you were encouraged to think of a big, hairy audacious goal as a starting point. You alsolearned a five-step process for developing a personal vision statement.

Exercises

1. How does a personal mission and vision statement differ from one created for an organization?

2. What time period should a personal mission and vision statement cover?

3. What are the five steps for creating a personal mission and vision statement?

4. What type of goals should you start thinking about in creating a personal mission and vision?

5. How are your strengths and weaknesses relevant to mission and vision?

6. What stakeholders seem relevant to your personal mission and vision?

ReferencesReferences

Covey, S. R. (1994). First Things First. New York: Simon & Schuster.

Goodman, M. (2001). The Potato Chip Difference. New York: Dialogue Press.

Quint Careers, retrieved October 29, 2008, from http://www.quintcareers.com/

creating_personal_mission_statements.html. Reproduced and adapted with written permission from Randall S.

Hansen. The content of this work is his, and any errors or omissions are our responsibility.

4.8 DEVELOPING YOUR PERSONAL MISSION AND VISION • 189

Chapter 5: Strategizing

5.1 Strategizing

5.2 Case in Point: Unnamed Publisher Transforms Textbook Industry

5.3 Strategic Management in the P-O-L-C Framework

5.4 How Do Strategies Emerge?

5.5 Strategy as Trade-Offs, Discipline, and Focus

5.6 Developing Strategy Through Internal Analysis

5.7 Developing Strategy Through External Analysis

5.8 Formulating Organizational and Personal Strategy With the Strategy Diamond

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5.1 Strategizing

What’s in It for Me?

Reading this chapter will help you do the following:

1. See how strategy fits in the planning-organizing-leading-controlling (P-O-L-C) framework.

2. Better understand how strategies emerge.

3. Understand strategy as trade-offs, discipline, and focus.

4. Conduct internal analysis to develop strategy.

5. Conduct external analysis to develop strategy.

6. Formulate organizational and personal strategy with the strategy diamond.

Strategic management, strategizing for short, is essentially about choice—in terms of what the organization will

do and won’t do to achieve specific goals and objectives, where such goals and objectives lead to the realization

of a stated mission and vision. Strategy is a central part of the planning function in P-O-L-C. Strategy is also about

making choices that provide an organization with some measure of competitive advantage or even a sustainable

competitive advantage. For the most part, this chapter emphasizes strategy formulation (answers to the “What

should our strategy be?” question) as opposed to strategy implementation (answers to questions about “How do

we execute a chosen strategy?”). The central position of strategy is summarized in the following figure. In this

chapter, you will learn about strategic management and how it fits in the P-O-L-C framework. You will also learn

some of the key internal and external analyses that support the development of good strategies. Finally, you will

see how the concept of strategy can be applied to you personally, in addition to professionally.

Figure 5.2 The P-O-L-C Framework

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Figure 5.3 Where Strategy Fits in “Planning”

192 • PRINCIPLES OF MANAGEMENT

5.2 Case in Point: Unnamed Publisher TransformsTextbook Industry

Figure 5.4 Cofounder, Jeff Shelstad

Keith Avery – Jeff Shelstad – CC BY-NC 2.0.

Two textbook publishing industry veterans, Jeff Shelstad and Eric Frank, started, a privately held company,in 2007 to be a new and disruptive model for the college textbook market. Traditional business textbookpublishers carry a portfolio of 5 to 10 titles per subject and charge premium prices for new textbooks, anaverage of $1,000 in textbooks for a college student’s first year, according to a recent General AccountingOffice (GAO) report. FWK’s strategy aims to turn the traditional model on its head by providing onlinetextbook access free to students. FWK earns revenues by selling students the digital textbooks in alternateformats, print and audio initially, and also by selling highly efficient and mobile study aids. Despite thefact that professors have rated the academic quality of FWK textbooks as equal to or higher than that oftextbooks from traditional publishers, the cost to students is a fraction of current market prices due to theefficiencies of the FWK business model. Moreover, with FWK’s open-source platform, instructors who

193

adopt FWK books for their classes are able to pick and choose the material provided to their students, evenif it is from earlier versions of textbooks that have since been revised.

Shelstad and Frank founded FWK because they believed that big publishers would continue to experimentand innovate, and enjoy the advantages of scale, capital, content, and brand. But the FWK founders alsobelieved that the pace and nature of change by the big publishers of the textbook industry would remainmodest and marginal, held back by an inflexible go-to market strategy, with a reflexive (and shortsighted)exercise of pricing power, outdated business models, intransigent channel partners, existing contracts, anda fear of price cannibalization, as well as the traditional culture and organizational barriers.

To seize this perceived market opportunity, FWK designed a strategy based on publishing textbooks aroundthe three main pillars of books that are (1) free, (2) open, and (3) authored by highly respected authors.Ultimately students (or parents) pay for books. Between a publisher and the student is a gatekeeper—theinstructor. The first step to revenue is to convince the gatekeeper to assign (“adopt”) an FWK textbookinstead of other choices. Only then does FWK establish a relationship with the gatekeeper’s students andearn the opportunity to monetize those relationships through the sale of print books, study aids, user-generated content, and corporate sponsorship. FWK’s strategy, therefore, aims to provide a compellingvalue proposition to instructors to maximize adoptions and, thus, student relationships.

How is FWK’s strategy working so far? Through the start of 2010, the FWK strategy has proven effective.New customers and books come online daily and the growth trends are positive. Its first term (fall of2009), FWK had 40,000 students using its textbooks. This has continued to rise. Several new projects areunder way in international business, entrepreneurship, legal environment, and mathematical economics.Media attention to the fledgling FWK has generally been favorable. Social media experts also gave thecompany accolades. For example, Chris Anderson devoted a page to the FWK business model in hisbestselling book Free. Moreover, early user reviews of the product were also very positive. For instance,an instructor who adopted Principles of Management noted, “I highly recommend this book as a primarytextbook for…business majors. The overall context is quite appropriate and the search capability withinthe context is useful. I have been quite impressed [with] how they have highlighted the key areas.” At thesame time, opportunities to improve the Web interface still existed, with the same reviewer noting, “Thenavigation could be a bit more user friendly, however.” FWK uses user input like this to better adjust thestrategy and delivery of its model. This type of feedback led the FWK design squad to improve its customWeb interface, so that instructors can more easily change the book. Only time will tell if the $11 millioninvested in FWK by 2010 will result in the establishment of a new titan in textbook publishing or will bean entrepreneurial miss.

Case written based on information from United States Government Accountability Office. (2005, July).College textbooks: Enhanced offering appear to drive recent price increases (GAO-05-806). RetrievedApril 22, 2010, from http://www.gao.gov/cgi-bin/getrpt?GAO-05-806; Web site: Community CollegeOpen Textbook Collaborative. (2009). Business reviews. Retrieved April 22, 2010, fromhttp://www.collegeopentextbooks.org/reviews/business.html; Personal interviews with Jeff Shelstad andEric Frank.

Discussion Questions

1. Planning is a key component to the P-O-L-C framework. What type of planning do you think thefounders of engaged in?

2. What competitive advantages does possess?

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3. What are key strengths, weaknesses, opportunities, and threats?

4. How might the extensive textbook industry experience the founders possess help or hinder theirstrategy formulation and ultimate success or failure?

5. Based on Porter’s strategies summarized in the figure below, which type of strategy do you seeemploying? Support your response.

Figure 5.6

Porter, M. E. (1980). Competitive Strategy. New York: Free Press.

5.2 CASE IN POINT: UNNAMED PUBLISHER TRANSFORMS TEXTBOOK INDUSTRY • 195

5.3 Strategic Management in the P-O-L-C Framework

Learning Objectives

1. Be able to define strategic management.

2. Understand how strategic management fits in the P-O-L-C framework.

3. Broadly identify the inputs for strategy formulation.

What Is Strategic Management?What Is Strategic Management?

As you already know, the P-O-L-C framework starts with “planning.” You might also know that planning is

related to, but not synonymous with, strategic management. Strategic management reflects what a firm is doing to

achieve its mission and vision, as seen by its achievement of specific goals and objectives.

A more formal definition tells us that the strategic management process “is the process by which a firm manages

the formulation and implementation of its strategy (Carpenter & Sanders, 2009).” The strategic management

process is “the coordinated means by which an organization achieves its goals and objectives (Carpenter &

Sanders, 2009).” Others have described strategy as the pattern of resource allocation choices and organizational

arrangements that result from managerial decision making (Mintzberg, 1978). Planning and strategy formulation

sometimes called business planning, or strategic planning, have much in common, since formulation helps

determine what the firm should do. Strategy implementation tells managers how they should go about putting the

desired strategy into action.

The concept of strategy is relevant to all types of organizations, from large, public companies like GE, to religious

organizations, to political parties.

Strategic Management in the P-O-L-C FrameworkStrategic Management in the P-O-L-C Framework

If vision and mission are the heart and soul of planning (in the P-O-L-C framework), then strategy, particularly

strategy formulation, would be the brain. The following figure summarizes where strategy formulation

(strategizing) and implementation fit in the planning and other components of P-O-L-C. We will focus primarily

196

on the strategy formulation aspects of strategic management because implementation is essentially organizing,

leading, and controlling P-O-L-C components.

Figure 5.7 Strategizing in P-O-L-C

You see that planning starts with vision and mission and concludes with setting goals and objectives. In-between

is the critical role played by strategy. Specifically, a strategy captures and communicates how vision and mission

will be achieved and which goals and objectives show that the organization is on the right path to achieving them.

At this point, even in terms of strategy formulation, there are two aspects of strategizing that you should recognize.

The first, corporate strategy answers strategy questions related to “What business or businesses should we be

in?” and “How does our business X help us compete in business Y, and vice versa?” In many ways, corporate

strategy considers an organization to be a portfolio of businesses, resources, capabilities, or activities. You are

probably familiar with McDonald’s, for instance, and their ubiquitous golden arches fast-food outlets. However,

you may be less likely to know that McDonald’s owned the slightly upscale burrito vendor Chipotle for several

years as well (Carpenter & Sanders, 2008).The McDonald’s corporate strategy helped its managers evaluate and

answer questions about whether it made sense for McDonald’s set of businesses to include different restaurants

such as McDonald’s and Chipotle. While other food-service companies have multiple outlets—YUM! Brands,

for example, owns A&W, Taco Bell, Pizza Hut, Long John Silver’s, and Kentucky Fried Chicken—McDonald’s

determined that one brand (McDonald’s) was a better strategy for it in the future, and sold off Chipotle in 2006.

The following figure provides a graphic guide to this kind of planning.

Figure 5.8 Corporate and Business Strategy

5.3 STRATEGIC MANAGEMENT IN THE P-O-L-C FRAMEWORK • 197

The logic behind corporate strategy is one of synergy and diversification. That is, synergies arise when each of

YUM! Brands food outlets does better because they have common ownership and can share valuable inputs into

their businesses. Specifically, synergy exists when the interaction of two or more activities (such as those in a

business) create a combined effect greater than the sum of their individual effects. The idea is that the combination

of certain businesses is stronger than they would be individually because they either do things more cheaply or of

higher quality as a result of their coordination under a common owner.

Diversification in contrast, is where an organization participates in multiple businesses that are in some way

distinct from each other, as Taco Bell is from Pizza Hut, for instance. Just as with a portfolio of stock, the

purpose of diversification is to spread out risk and opportunities over a larger set of businesses. Some may be

high growth, some slow growth or declining; some may perform worse during recessions, while others perform

better. Sometimes the businesses can be very different, such as when fashion sunglass maker Maui Jim diversified

into property and casualty insurance through its merger with RLI Corporation (SEC Info, 2008). Perhaps more

than a coincidence, RLI was founded some 60 years earlier as Replacement Lens International (later changed

to its abbreviation, RLI, in line with its broader insurance products offerings), with the primary business of

providing insurance for replacement contact lenses. There are three major diversification strategies: (1) concentric

diversification, where the new business produces products that are technically similar to the company’s current

product but that appeal to a new consumer group; (2) horizontal diversification, where the new business produces

products that are totally unrelated to the company’s current product but that appeal to the same consumer group;

and (3) conglomerate diversification, where the new business produces products that are totally unrelated to the

company’s current product and that appeal to an entirely new consumer group.

Whereas corporate strategy looks at an organization as a portfolio of things, business strategy focuses on how a

given business needs to compete to be effective. Again, all organizations need strategies to survive and thrive. A

neighborhood church, for instance, probably wants to serve existing members, build new membership, and, at the

same time, raise surplus monies to help it with outreach activities. Its strategy would answer questions surrounding

the accomplishment of these key objectives. In a for-profit company such as McDonald’s, its business strategy

198 • PRINCIPLES OF MANAGEMENT

would help it keep existing customers, grow its business by moving into new markets and taking customers from

competitors like Taco Bell and Burger King, and do all this at a profit level demanded by the stock market.

Strategic InputsStrategic Inputs

So what are the inputs into strategizing? At the most basic level, you will need to gather information and conduct

analysis about the internal characteristics of the organization and the external market conditions. This means an

internal appraisal and an external appraisal. On the internal side, you will want to gain a sense of the organization’s

strengths and weaknesses; on the external side, you will want to develop some sense of the organization’s

opportunities and threats. Together, these four inputs into strategizing are often called SWOT analysis which

stands for strengths, weaknesses, opportunities, and threats (see the SWOT analysis figure). It does not matter

if you start this appraisal process internally or externally, but you will quickly see that the two need to mesh

eventually. At the very least, the strategy should leverage strengths to take advantage of opportunities and mitigate

threats, while the downside consequences of weaknesses are minimized or managed.

Figure 5.9 SWOT Analysis

SWOT was developed by Ken Andrews in the early 1970s (Andrews, 1971). An assessment of strengths and

weaknesses occurs as a part of organizational analysis; that is, it is an audit of the company’s internal workings,

which are relatively easier to control than outside factors. Conversely, examining opportunities and threats is a

part of environmental analysis—the company must look outside of the organization to determine opportunities

and threats, over which it has lesser control.

Andrews’s original conception of the strategy model that preceded the SWOT asked four basic questions about a

company and its environment: (1) What can we do? (2) What do we want to do? (3) What might we do? and (4)

What do others expect us to do?

5.3 STRATEGIC MANAGEMENT IN THE P-O-L-C FRAMEWORK • 199

Strengths and WeaknessesStrengths and Weaknesses

A good starting point for strategizing is an assessment of what an organization does well and what it does

less well. In general good strategies take advantage of strengths and minimize the disadvantages posed by any

weaknesses. Michael Jordan, for instance, is an excellent all-around athlete; he excels in baseball and golf, but

his athletic skills show best in basketball. As with Jordan, when you can identify certain strengths that set an

organization well apart from actual and potential competitors, that strength is considered a source of competitive

advantage. The hardest thing for an organization to do is to develop its competitive advantage into a sustainable

competitive advantage where the organization’s strengths cannot be easily duplicated or imitated by other firms,

nor made redundant or less valuable by changes in the external environment.

Opportunities and ThreatsOpportunities and Threats

On the basis of what you just learned about competitive advantage and sustainable competitive advantage, you

can see why some understanding of the external environment is a critical input into strategy. Opportunities assess

the external attractive factors that represent the reason for a business to exist and prosper. These are external to

the business. What opportunities exist in its market, or in the environment, from which managers might hope

the organization will benefit? Threats include factors beyond your control that could place the strategy, or the

business, at risk. These are also external—managers typically have no control over them, but may benefit by

having contingency plans to address them if they should occur.

SWOT Analysis of

is a new college textbook company (and the publisher of this POM text!) that operates with the tagline vision of

“Free textbooks. Online. Anytime. Anywhere. Anyone.”

Strengths

1. Great management team.

2. Great college business textbooks.

3. Experienced author pool.

4. Proprietary technology.

Weaknesses

1. Limited number of books.

2. New technology.

3. Relatively small firm size.

Opportunities

1. External pressure to lower higher education costs, including textbook prices.

2. Internet savvy students and professors.

200 • PRINCIPLES OF MANAGEMENT

3. Professors and students largely displeased with current textbook model.

4. Technology allows textbook customization.

Threats

1. Strong competitors.

2. Competitors are few, very large, and global.

3. Substitute technologies exist.

In a nutshell, SWOT analysis helps you identify strategic alternatives that address the following questions:

1. Strengths and Opportunities (SO)—How can you use your strengths to take advantage of the

opportunities?

2. Strengths and Threats (ST)—How can you take advantage of your strengths to avoid real and potential

threats?

3. Weaknesses and Opportunities (WO)—How can you use your opportunities to overcome the weaknesses

you are experiencing?

4. Weaknesses and Threats (WT)—How can you minimize your weaknesses and avoid threats?

Before wrapping up this section, let’s look at a few of the external and internal analysis tools that might help you

conduct a SWOT analysis. These tools are covered in greater detail toward the end of the chapter.

Internal Analysis ToolsInternal Analysis Tools

Internal analysis tools help you identify an organization’s strengths and weaknesses. The two tools that we identify

here, and develop later in the chapter, are the value chain and VRIO tools. The value chain asks you, in effect, to

take the organization apart and identify the important constituent parts. Sometimes these parts take the form of

functions, like marketing or manufacturing. For instance, Disney is really good at developing and making money

from its branded products, such as Cinderella or Pirates of the Caribbean. This is a marketing function (it is also a

design function, which is another Disney strength).

Value chain functions are also called capabilities. This is where VRIO comes in. VRIO stands for valuable, rare,

inimitable, and organization—basically, the VRIO framework suggests that a capability, or a resource, such as a

patent or great location, is likely to yield a competitive advantage to an organization when it can be shown that

it is valuable, rare, difficult to imitate, and supported by the organization (and, yes, this is the same organization

that you find in P-O-L-C). Essentially, where the value chain might suggest internal areas of strength, VRIO helps

you understand whether those strengths will give it a competitive advantage. Going back to our Disney example,

for instance, strong marketing and design capabilities are valuable, rare, and very difficult to imitate, and Disney

is organized to take full advantage of them.

5.3 STRATEGIC MANAGEMENT IN THE P-O-L-C FRAMEWORK • 201

External Analysis ToolsExternal Analysis Tools

While there are probably hundreds of different ways for you to study an organizations’ external environment, the

two primary tools are PESTEL and industry analysis. PESTEL, as you probably guessed, is simply an acronym.

It stands for political, economic, sociocultural, technological, environmental, and legal environments. Simply,

the PESTEL framework directs you to collect information about, and analyze, each environmental dimension

to identify the broad range of threats and opportunities facing the organization. Industry analysis, in contrast,

asks you to map out the different relationships that the organization might have with suppliers, customers, and

competitors. Whereas PESTEL provides you with a good sense of the broader macro-environment, industry

analysis should tell you about the organization’s competitive environment and the key industry-level factors that

seem to influence performance.

Key Takeaway

Strategy formulation is an essential component of planning; it forms the bridge that enables theorganization to progress from vision and mission to goals and objectives. In terms of the P-O-L-Cframework, strategy formulation is the P (planning) and strategy implementation is realized by O-L-C.Corporate strategy helps to answer questions about which businesses to compete in, while business strategyhelps to answer questions about how to compete. The best strategies are based on a thorough SWOTanalysis—that is, a strategy that capitalizes on an organization’s strengths, weaknesses, opportunities, andthreats.

Exercises

1. What is the difference between strategy formulation and strategy implementation?

2. What is the difference between business strategy and corporate strategy?

3. What are some of the forms of diversification, and what do they mean?

4. What do you learn from a SWOT analysis?

5. In SWOT analysis, what are some of the tools you might use to understand the internalenvironment (identify strengths and weaknesses)?

6. In SWOT analysis, what are some of the tools you might use to understand the externalenvironment (identify opportunities and threats)?

ReferencesReferences

Andrews, K. (1971). The concept of corporate strategy. Homewood, IL: R. D. Irwin.

Carpenter, M. A., & Sanders, W. G. (2009). Strategic management (p. 8). Upper Saddle River, NJ: Pearson/

Prentice-Hall.

202 • PRINCIPLES OF MANAGEMENT

Carpenter, M. A., & Sanders, W. G. (2008). Fast food chic? The Chipotle burrito. University of Wisconsin

Business Case.

Mintzberg, H. 1978. Patterns in strategy formulation. Management Science, 24, 934–949.

SEC Information, retrieved October 30, 2008, http://www.secinfo.com/dRqWm.89X3.htm#34f.

5.3 STRATEGIC MANAGEMENT IN THE P-O-L-C FRAMEWORK • 203

5.4 How Do Strategies Emerge?

Learning Objectives

1. Understand the difference between intended and realized strategy.

2. Understand how strategy is made.

3. Understand the need for a balance between strategic design and emergence.

How do the strategies we see in organizations come into being? In this section, you will learn about intended and

realized strategies. The section concludes with discussion of how strategies are made.

Figure 5.10

Strategy provides managers with an organizational compass and a road map for the future.

Calsidyrose – Compass Study – CC BY 2.0.

204

Intended and Realized StrategiesIntended and Realized Strategies

The best-laid plans of mice and men often go awry.

Robert Burns, “To a Mouse,” 1785

This quote from English poet Robert Burns is especially applicable to strategy. While we have been discussing

strategy and strategizing as if they were the outcome of a rational, predictable, analytical process, your own

experience should tell you that a fine plan does not guarantee a fine outcome. Many things can happen between

the development of the plan and its realization, including (but not limited to): (1) the plan is poorly constructed,

(2) competitors undermine the advantages envisioned by the plan, or (3) the plan was good but poorly executed.

You can probably imagine a number of other factors that might undermine a strategic plan and the results that

follow.

How organizations make strategy has emerged as an area of intense debate within the strategy field. Henry

Mintzberg and his colleagues at McGill University distinguish intended, deliberate, realized, and emergent

strategies (Mintzberg, 1987; Mintezberg, 1996; Mintzberg & Waters, 1985).These four different aspects of

strategy are summarized in the following figure. Intended strategy is strategy as conceived by the top management

team. Even here, rationality is limited and the intended strategy is the result of a process of negotiation,

bargaining, and compromise, involving many individuals and groups within the organization. However, realized

strategy—the actual strategy that is implemented—is only partly related to that which was intended (Mintzberg

suggests only 10%–30% of intended strategy is realized).

Figure 5.11 Intended, Deliberate, Realized, and Emergent Strategies

The primary determinant of realized strategy is what Mintzberg terms emergent strategy—the decisions that

emerge from the complex processes in which individual managers interpret the intended strategy and adapt to

changing external circumstances (Mintzberg, 1978; Mintzberg & Waters, 1985; Mintzberg, 1988). Thus, the

realized strategy is a consequence of deliberate and emerging factors. Analysis of Honda’s successful entry into

the U.S. motorcycle market has provided a battleground for the debate between those who view strategy making as

5.4 HOW DO STRATEGIES EMERGE? • 205

primarily a rational, analytical process of deliberate planning (the design school) and those that envisage strategy

as emerging from a complex process of organizational decision making (the emergence or learning school).1

Although the debate between the two schools continues (Mintzberg, et. al., 1996), we hope that it is apparent to

you that the central issue is not “Which school is right?” but “How can the two views complement one another

to give us a richer understanding of strategy making?” Let us explore these complementarities in relation to the

factual question of how strategies are made and the normative question of how strategies should be made.

The Making of StrategyThe Making of Strategy

How Is Strategy Made?How Is Strategy Made?

Robert Grant, author of Contemporary Strategy Analysis, shares his view of how strategy is made as follows

(Grant, 2002). For most organizations, strategy making combines design and emergence. The deliberate design

of strategy (through formal processes such as board meetings and strategic planning) has been characterized as

a primarily top-down process. Emergence has been viewed as the result of multiple decisions at many levels,

particularly within middle management, and has been viewed as a bottom-up process. These processes may

interact in interesting ways. At Intel, the key historic decision to abandon memory chips and concentrate on

microprocessors was the result of a host of decentralized decisions taken at divisional and plant level that were

subsequently acknowledged by top management and promulgated as strategy (Burgelman & Grove, 1996).

In practice, both design and emergence occur at all levels of the organization. The strategic planning systems

of large companies involve top management passing directives and guidelines down the organization and the

businesses passing their draft plans up to corporate. Similarly, emergence occurs throughout the

organization—opportunism by CEOs is probably the single most important reason why realized strategies deviate

from intended strategies. What we can say for sure is that the role of emergence relative to design increases as the

business environment becomes increasingly volatile and unpredictable.

Organizations that inhabit relatively stable environments—the Roman Catholic Church and national postal

services—can plan their strategies in some detail. Organizations whose environments cannot be forecast with any

degree of certainty—a gang of car thieves or a construction company located in the Gaza Strip—can establish

only a few strategic principles and guidelines; the rest must emerge as circumstances unfold.

What’s the Best Way to Make Strategy?What’s the Best Way to Make Strategy?

Mintzberg’s advocacy of strategy making as an iterative process involving experimentation and feedback is

not necessarily an argument against the rational, systematic design of strategy. The critical issues are, first,

determining the balance of design and emergence and, second, how to guide the process of emergence. The

strategic planning systems of most companies involve a combination of design and emergence. Thus, headquarters

sets guidelines in the form of vision and mission statements, business principles, performance targets, and capital

expenditure budgets. However, within the strategic plans that are decided, divisional and business unit managers

have considerable freedom to adjust, adapt, and experiment.

206 • PRINCIPLES OF MANAGEMENT

Key Takeaway

You learned about the processes surrounding strategy development. Specifically, you saw the differencebetween intended and realized strategy, where intended strategy is essentially the desired strategy, andrealized strategy is what is actually put in place. You also learned how strategy is ultimately made.Ultimately, the best strategies come about when managers are able to balance the needs for design(planning) with being flexible enough to capitalize on the benefits of emergence.

Exercises

1. What is an intended strategy?

2. What is a realized strategy?

3. Why is it important to understand the difference between intended and realized strategies?

4. Why is there not a perfect match-up between realized and intended strategies?

5. What might interfere with the realization of an intended strategy?

6. How might you manage the balance between design and emergence strategizing processes in anorganization?

1The two views of Honda are captured in two Harvard cases: Honda [A]. (1989). Boston: Harvard Business

School, Case 384049, and Honda [B]. (1989). Boston: Harvard Business School, Case 384050.

ReferencesReferences

Burgelman, R. A., & Grove, A. (1996, Winter). Strategic dissonance. California Management Review, 38, 8–28.

Grant, R. M. (2002). Contemporary strategy analysis (4th ed., pp. 25–26). New York: Blackwell.

Mintzberg, H. (1987, July–August). Crafting strategy. Harvard Business Review, pp. 66–75.

Mintzberg, H. (1996). The entrepreneurial organization. In H. Mintzberg & J. B. Quinn (Eds.), The strategy

process (3rd ed.). Englewood Cliffs, NJ: Prentice-Hall.

Mintzberg, H., & Waters, J. A. (1985). Of strategies, deliberate and emergent. Strategic Management Journal, 6,

257–272.

Mintzberg, H. Patterns in strategy formulation. (1978). Management Science, 24, 934–948.

Mintzberg, H. (1988). Mintzberg on management: Inside our strange world of organizations. New York: Free

Press.

5.4 HOW DO STRATEGIES EMERGE? • 207

Mintzberg, H., Pascale, R. T., Goold, M., & Rumelt, Richard P. (1996, Summer). The Honda effect revisited.

California Management Review, 38, 78–117.

208 • PRINCIPLES OF MANAGEMENT

5.5 Strategy as Trade-Offs, Discipline, and Focus

Learning Objectives

1. Understand the nature of strategic focus.

2. Strategy as trade-offs (Porter).

3. Strategy as discipline (Treacy and Wiersema).

Figure 5.12

Strategy is ultimately about making choices and making trade-offs among alternatives.

Jim Bauer – Who Ate My Raspberry Caramel – CC BY-ND 2.0.

209

This section helps you understand that a strategy provides a company with focus. Strategy is ultimately about

choice—what the organization does and does not do. As we’ve seen, vision and mission provide a good sense

of direction for the organization, but they are not meant to serve as, or take the place of, the actual strategy.

Strategy is about choices, and that eventually means making trade-offs such that the strategy and the firm are

distinctive in the eyes of stakeholders. In this section, you will learn about strategic focus—that is, how trade-offs

are reconciled—as well as two frameworks for thinking about what such focus might entail.

What Is Strategic Focus?What Is Strategic Focus?

While there are different schools of thought about how strategy comes about, researchers generally agree that

strategic focus is a common characteristic across successful organizations. Strategic focus is seen when an

organization is very clear about its mission and vision and has a coherent, well-articulated strategy for achieving

those. When a once high-flying firm encounters performance problems, it is not uncommon to hear business

analysts say that the firm’s managers have lost focus on the customers or markets where they were once highly

successful. For instance, Dell Computer’s strategy is highly focused around the efficient sale and manufacture

of computers and computer peripheral devices. However, during the mid-2000s, Dell started branching out into

other products such as digital cameras, DVD players, and flat-screen televisions. As a result, it lost focus on its

core sales and manufacturing business, and its performance flagged. As recently as mid-2008, however, Dell has

realized a tremendous turnaround: “We are executing on all points of our strategy to drive growth in every product

category and in every part of the world,” said a press release from Michael Dell, chairman and CEO. “These

results are early signs of our progress against our five strategic priorities. Through a continued focus, we expect

to continue growing faster than the industry and increase our revenue, profitability and cash flow for greater

shareholder value (Dell, 2008).”

Dell provides an excellent example of what is meant by strategic focus. This spirit of focus is echoed in the

following two parts of this section where we introduce you to the complementary notions of strategy as trade-offs

and strategy as discipline.

Strategy as Trade-OffsStrategy as Trade-Offs

Three of the most widely read books on competitive analysis in the 1980s were Michael Porter’s Competitive

Strategy, Competitive Advantage, and Competitive Advantage of Nations (Porter, 1985; Porter, 1989; Porter,

2001). In his various books, Porter developed three generic strategies that, he argues, can be used singly or in

combination to create a defendable position and to outperform competitors, whether they are within an industry

or across nations. The strategies are (1) overall cost leadership, (2) differentiation, and (3) focus on a particular

market niche.

Cost Leadership, Differentiation, and ScopeCost Leadership, Differentiation, and Scope

These strategies are termed generic because they can be applied to any size or form of business. We refer to

them as trade-off strategies because Porter argues that a firm must choose to embrace one strategy or risk not

having a strategy at all. Overall lower cost or cost leadership refers to the strategy where a firm’s competitive

advantage is based on the bet that it can develop, manufacture, and distribute products more efficiently than

210 • PRINCIPLES OF MANAGEMENT

competitors. Differentiation refers to the strategy where competitive advantage is based on superior products or

service. Superiority arises from factors other than low cost, such as customer service, product quality, or unique

style. To put these strategies into context, you might think about Wal-Mart as pursuing a cost-leadership strategy

and Harley Davidson as pursuing a differentiation strategy.

Porter suggests that another factor affecting a company’s competitive position is its competitive scope.

Competitive scope defines the breadth of a company’s target market. A company can have a broad (mass market)

competitive scope or a narrow (niche market) competitive scope. A firm following the focus strategy concentrates

on meeting the specialized needs of its customers. Products and services can be designed to meet the needs of

buyers. One approach to focusing is to service either industrial buyers or consumers but not both. Martin-Brower,

the third-largest food distributor in the United States, serves only the eight leading fast-food chains. It is the

world’s largest distributor of products to the world’s largest restaurant company—McDonald’s. With its limited

customer list, Martin-Brower need only stock a limited product line; its ordering procedures are adjusted to match

those of its customers; and its warehouses are located so as to be convenient to customers.

Firms using a narrow focus strategy can also tailor advertising and promotional efforts to a particular market

niche. Many automobile dealers advertise that they are the largest volume dealer for a specific geographic area.

Other car dealers advertise that they have the highest customer satisfaction scores within their defined market or

the most awards for their service department.

Another differentiation strategy is to design products specifically for a customer. Such customization may range

from individually designing a product for a single customer to offering a menu from which customers can

select options for the finished product. Tailor-made clothing and custom-built houses include the customer in all

aspects of production, from product design to final acceptance, and involve customer input in all key decisions.

However, providing such individualized attention to customers may not be feasible for firms with an industry-

wide orientation. At the other end of the customization scale, customers buying a new car, even in the budget

price category, can often choose not only the exterior and interior colors but also accessories such as CD players,

rooftop racks, and upgraded tires.

By positioning itself in either broad scope or narrow scope and a low-cost strategy or differentiation strategy,

an organization will fall into one of the following generic competitive strategies: cost leadership, cost focus,

differentiation, and focused differentiation.

Figure 5.13 Porter’s Generic Strategies

5.5 STRATEGY AS TRADE-OFFS, DISCIPLINE, AND FOCUS • 211

Source: Porter, M. E. (1980). Competitive Strategy. New York: Free Press.

Cost Leadership/Low CostCost Leadership/Low Cost

Cost leadership is a low-cost, broad-based market strategy. Firms pursuing this type of strategy must be

particularly efficient in engineering tasks, production operations, and physical distribution. Because these firms

focus on a large market, they must also be able to minimize costs in marketing and research and development

(R&D). A low-cost leader can gain significant market share enabling it to procure a more powerful position

relative to both suppliers and competitors. This strategy is particularly effective for organizations in industries

where there is limited possibility of product differentiation and where buyers are very price sensitive.

Overall cost leadership is not without potential problems. Two or more firms competing for cost leadership may

engage in price wars that drive profits to very low levels. Ideally, a firm using a cost-leader strategy will develop

an advantage that others cannot easily copy. Cost leaders also must maintain their investment in state-of-the-

art equipment or face the possible entry of more cost-effective competitors. Major changes in technology may

drastically change production processes so that previous investments in production technology are no longer

advantageous. Finally, firms may become so concerned with maintaining low costs that they overlook needed

changes in production or marketing.

The cost-leadership strategy may be more difficult in a dynamic environment because some of the expenses that

firms may seek to minimize are research and development costs or marketing research costs—expenses the firm

may need to incur to remain competitive.

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Focused Low-CostFocused Low-Cost

A cost-focus strategy is a low-cost, narrowly focused market strategy. Firms employing this strategy may focus on

a particular buyer segment or a particular geographic segment and must locate a niche market that wants or needs

an efficient product and is willing to forgo extras to pay a lower price for the product. A company’s costs can

be reduced by providing little or no service, providing a low-cost method of distribution, or producing a no-frills

product.

DifferentiationDifferentiation

A differentiation strategy involves marketing a unique product to a broad-based market. Because this type of

strategy involves a unique product, price is not the significant factor. In fact, consumers may be willing to pay a

high price for a product that they perceive as different. The product difference may be based on product design,

method of distribution, or any aspect of the product (other than price) that is significant to a broad group of

consumers. A company choosing this strategy must develop and maintain a product perceived as different enough

from the competitors’ products to warrant the asking price.

Several studies have shown that a differentiation strategy is more likely to generate higher profits than a cost-

leadership strategy, because differentiation creates stronger entry barriers. However, a cost-leadership strategy is

more likely to generate increases in market share.

Focused DifferentiationFocused Differentiation

A differentiation-focus strategy is the marketing of a differentiated product to a narrow market, often involving a

unique product and a unique market. This strategy is viable for a company that can convince consumers that its

narrow focus allows it to provide better goods and services than its competitors.

Differentiation does not allow a firm to ignore costs; it makes a firm’s products less susceptible to cost pressures

from competitors because customers see the product as unique and are willing to pay extra to have the product

with the desirable features. Differentiation can be achieved through real product features or through advertising

that causes the customer to perceive that the product is unique.

Differentiation may lead to customer brand loyalty and result in reduced price elasticity. Differentiation may also

lead to higher profit margins and reduce the need to be a low-cost producer. Since customers see the product as

different from competing products and they like the product features, customers are willing to pay a premium for

these features. As long as the firm can increase the selling price by more than the marginal cost of adding the

features, the profit margin is increased. Firms must be able to charge more for their differentiated product than

it costs them to make it distinct, or else they may be better off making generic, undifferentiated products. Firms

must remain sensitive to cost differences. They must carefully monitor the incremental costs of differentiating

their product and make certain the difference is reflected in the price.

Firms pursuing a differentiation strategy are vulnerable to different competitive threats than firms pursuing a cost-

leader strategy. Customers may sacrifice features, service, or image for cost savings. Price-sensitive customers

may be willing to forgo desirable features in favor of a less costly alternative. This can be seen in the growth in

5.5 STRATEGY AS TRADE-OFFS, DISCIPLINE, AND FOCUS • 213

popularity of store brands and private labels. Often, the same firms that produce name-brand products produce

the private-label products. The two products may be physically identical, but stores are able to sell the private-

label products for a lower price because very little money was put into advertising to differentiate the private-label

product.

Imitation may also reduce the perceived differences between products when competitors copy product features.

Thus, for firms to be able to recover the cost of marketing research or R&D, they may need to add a product

feature that is not easily copied by a competitor.

A final risk for firms pursuing a differentiation strategy is changing consumer tastes. The feature that customers

like and find attractive about a product this year may not make the product popular next year. Changes in customer

tastes are especially obvious in the fashion industry. For example, although Ralph Lauren’s Polo has been a very

successful brand of apparel, some younger consumers have shifted to Tommy Hilfiger and other youth-oriented

brands.

For a variety of reasons, including the differences between intended versus realized strategies discussed in an

earlier section, none of these competitive strategies is guaranteed to achieve success. Some companies that

have successfully implemented one of Porter’s generic strategies have found that they could not sustain the

strategy. Several risks associated with these strategies are based on evolved market conditions (buyer perceptions,

competitors, etc.).

Straddling Positions or Stuck in the Middle?Straddling Positions or Stuck in the Middle?

Can forms of competitive advantage be combined? That is, can a firm straddle strategies so that it is

simultaneously the low-cost leader and a differentiator? Porter asserts that a successful strategy requires a firm

to stake out a market position aggressively and that different strategies involve distinctly different approaches to

competing and operating the business. Some research suggests that straddling strategies is a recipe for below-

average profitability compared to the industry. Porter also argues that straddling strategies is an indication that the

firm’s managers have not made necessary choices about the business and its strategy. A straddling strategy may be

especially dangerous for narrow scope firms that have been successful in the past, but then start neglecting their

focus.

An organization pursuing a differentiation strategy seeks competitive advantage by offering products or services

that are unique from those offered by rivals, either through design, brand image, technology, features, or customer

service. Alternatively, an organization pursuing a cost-leadership strategy attempts to gain competitive advantage

based on being the overall low-cost provider of a product or service. To be “all things to all people” can mean

becoming “stuck in the middle” with no distinct competitive advantage. The difference between being “stuck in

the middle” and successfully pursuing combination strategies merits discussion. Although Porter describes the

dangers of not being successful in either cost control or differentiation, some firms have been able to succeed

using combination strategies.

Research suggests that, in some cases, it is possible to be a cost leader while maintaining a differentiated product.

Southwest Airlines has combined cost-cutting measures with differentiation. The company has been able to reduce

costs by not assigning seating and by eliminating meals on its planes. It has also been able to promote in its

advertising that its fares are so low that checked bags fly free, in contrast to the fees that competitors such

214 • PRINCIPLES OF MANAGEMENT

as American and United charge for checked luggage. Southwest’s consistent low-fare strategy has attracted a

significant number of passengers, allowing the airline to succeed.

Another firm that has pursued an effective combination strategy is Nike. You may think that Nike has always been

highly successful, but it has actually weathered some pretty aggressive competitive assaults. For instance, when

customer preferences moved to wide-legged jeans and cargo pants, Nike’s market share slipped. Competitors such

as Adidas offered less expensive shoes and undercut Nike’s price. Nike’s stock price dropped in 1998 to half

its 1997 high. However, Nike achieved a turnaround by cutting costs and developing new, distinctive products.

Nike reduced costs by cutting some of its endorsements. Company research suggested the endorsement by the

Italian soccer team, for example, was not achieving the desired results. Michael Jordan and a few other “big

name” endorsers were retained while others, such as the Italian soccer team, were eliminated, resulting in savings

estimated at over $100 million. Laying off 7% of its 22,000 employees allowed the company to lower costs by

another $200 million, and inventory was reduced to save additional money. As a result of these moves, Nike

reported a 70% increase in earnings for the first quarter of 1999 and saw a significant rebound in its stock price.

While cutting costs, the firm also introduced new products designed to differentiate Nike’s products from the

competition.

Some industry environments may actually call for combination strategies. Trends suggest that executives

operating in highly complex environments, such as health care, do not have the luxury of choosing exclusively

one strategy over another. The hospital industry may represent such an environment, as hospitals must compete

on a variety of fronts. Combination (i.e., more complicated) strategies are both feasible and necessary to

compete successfully. For instance, reimbursement to diagnosis-related groups, and the continual lowering of

reimbursement ceilings have forced hospitals to compete on the basis of cost. At the same time, many of them

jockey for position with differentiation based on such features as technology and birthing rooms. Thus, many

hospitals may need to adopt some form of hybrid strategy to compete successfully (Walters & Bhuian, 2004).

Strategy as DisciplineStrategy as Discipline

While Michael Porter’s generic strategies were introduced in the 1980s and still dominate much of the dialogue

about strategy and strategizing, a complementary approach was offered more recently by CSC Index consultants

Michael Treacy and Fred Wiersema. Their value disciplines model is quite similar to the three generic strategies

from Porter (cost leadership, differentiation, focus). However, there is at least one major difference. According to

the value disciplines model, no discipline may be neglected: threshold levels on the two disciplines that are not

selected must be maintained. According to Porter, companies that act like this run a risk of getting “stuck in the

middle.”

In their book, The Discipline of Market Leaders, they offered four rules that competing companies must obey with

regard to strategy formulation (Treacy & Wiersema, 1997):

1. Provide the best offer in the marketplace, by excelling in one specific dimension of value. Market leaders

first develop a value proposition, one that is compelling and unmatched.

2. Maintain threshold standards on other dimensions of value. You can’t allow performance in other

dimensions to slip so much that it impairs the attractiveness of your company’s unmatched value.

3. Dominate your market by improving the value year after year. When a company focuses all its assets,

5.5 STRATEGY AS TRADE-OFFS, DISCIPLINE, AND FOCUS • 215

energies, and attention on delivering and improving one type of customer value, it can nearly always deliver

better performance in that dimension than another company that divides its attention among more than one.

4. Build a well-tuned operating model dedicated to delivering unmatched value. In a competitive

marketplace, the customer value must be improved. This is the imperative of the market leader. The

operating model is the key to raising and resetting customer expectation.

What Are Value Disciplines?What Are Value Disciplines?

Treacy and Wiersema describe three generic value disciplines: operational excellence, product leadership, and

customer intimacy. As with Porter’s perspective about the importance of making trade-offs, any company must

choose one of these value disciplines and consistently and vigorously act on it, as indicated by the four rules

mentioned earlier.

Operational ExcellenceOperational Excellence

The case study that their book uses to illustrate the “operational excellence” value discipline is AT&T’s experience

in introducing the Universal Card, a combined long-distance calling card and general purpose credit card,

featuring low annual fees and customer-friendly service.

Key characteristics of the strategy are superb operations and execution, often by providing a reasonable quality

at a very low price, and task-oriented vision toward personnel. The focus is on efficiency, streamlined operations,

supply chain management, no frills, and volume. Most large international corporations are operating according to

this discipline. Measuring systems are important, as is extremely limited variation in product assortment.

Product LeadershipProduct Leadership

Firms that do this strategy well are very strong in innovation and brand marketing. Organization leaders

demonstrate a recognition that the company’s current success and future prospects lie in its talented product

design people and those who support them. The company operates in dynamic markets. The focus is on

development, innovation, design, time to market, and high margins in a short time frame. Company cultures are

flexible to encourage innovation. Structure also encourages innovation through small ad hoc working groups, an

“experimentation is good” mind-set, and compensation systems that reward success. Intel, the leading computer

chip company, is a great example of a firm pursuing a successful product leadership strategy.

Customer IntimacyCustomer Intimacy

Companies pursuing this strategy excel in customer attention and customer service. They tailor their products

and services to individual or almost individual customers. There is large variation in product assortment. The

focus is on: customer relationship management (CRM), deliver products and services on time and above customer

expectations, lifetime value concepts, reliability, being close to the customer. Decision authority is given to

employees who are close to the customer. The operating principles of this value discipline include having a full

range of services available to serve customers upon demand—this may involve running what the authors call a

216 • PRINCIPLES OF MANAGEMENT

“hollow company,” where a variety of goods or services are available quickly through contract arrangements,

rather than the supplier business having everything in stock all the time.

The recent partnership between Airborne Express, IBM, and Xerox is a great example of an effective customer

intimacy strategy. Airborne also provides centralized control to IBM and Xerox part-distribution networks.

Airborne provides Xerox and IBM with a central source of shipment data and performance metrics. The air-

express carrier also manages a single, same-day delivery contract for both companies. In addition, Airborne

now examines same-day or special-delivery requirements and recommends a lower-priced alternative where

appropriate (Logistic Management, 2008).

Only One DisciplineOnly One Discipline

Treacy and Wiersema maintain that, because of the focus of management time and resources that is required, a

firm can realistically choose only one of these three value disciplines in which to specialize. This logic is similar

to Porter’s in that firms that mix different strategies run the risk of being “stuck in the middle.” Most companies,

in fact, do not specialize in any of the three, and thus they realize only mediocre or average levels of achievement

in each area.

The companies that do not make the hard choices associated with focus are in no sense market leaders. In today’s

business environment of increased competition and the need more than ever before for competitive differentiation,

their complacency will not lead to increased market share, sales, or profits.

“When we look at these managers’ businesses [complacent firms], we invariably find companies that don’t excel, but are

merely mediocre on the three disciplines…What they haven’t done is create a breakthrough on any one dimension to reach new

heights of performance. They have not traveled past operational competence to reach operational excellence, past customer

responsiveness to achieve customer intimacy, or beyond product differentiation to establish product leadership. To these

managers we say that if you decide to play an average game, to dabble in all areas, don’t expect to become a market leader

(Treacy & Wiersema, 1997).”

Within the context of redesigning the operating model of a company to focus on a particular value discipline,

Treacy and Wiersema discuss creating what they call “the cult of the customer.” This is a mind-set that is oriented

toward putting the customer’s needs as a key priority throughout the company, at all levels. They also review

some of the challenges involved in sustaining market leadership once it is attained (i.e., avoiding the natural

complacency that tends to creep into an operation once dominance of the market is achieved).

Key Takeaway

Strategic focus seems to be a common element in the strategies across successful firms. Two prevalentviews of strategy where focus is a key component are strategy as trade-offs and strategy as discipline.Michael Porter identifies three flavors of strategy: (1) cost leadership, (2) differentiation, or (3) focus ofcost leadership or differentiation on a particular market niche. Firms can straddle these strategies, but such

5.5 STRATEGY AS TRADE-OFFS, DISCIPLINE, AND FOCUS • 217

straddling is likely to dilute strategic focus. Strategy also provides discipline. Treacy and Wiersema’s threestrategic disciplines are (1) operational excellence, (2) product leadership, and (3) customer intimacy.

Exercises

1. What is strategic focus and why is it important?

2. What are Porter’s three generic strategies?

3. Can a firm simultaneously pursue a low-cost and a differentiation strategy?

4. What are the three value disciplines?

5. What four rules underlie the three value disciplines?

6. How do Porter’s generic strategies differ from, and relate to, the Treacy and Wiersemaapproaches?

ReferencesReferences

Dell increases revenue and earnings, lowers operating expenses. (2008, May 28). Dell press release. Retrieved

November 3, 2008, from http://www.dell.com/content/topics/global.aspx/corp/pressoffice/en/2008/

2008_05_29_rr_000?c=us&l=en’s=corp.

Logistic Management, retrieved November 3, 2008, from http://www.logisticsmgmt.com/article/CA145552.html.

Porter, M. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free Press.

Porter, M. (1989). Competitive advantage of nations. New York: Free Press. Porter, M. (1980). Competitive

strategy: Techniques for analyzing industries and companies. New York: Free Press, 1980.

Porter, M. (2001, March). Strategy and the Internet. Harvard Business Review, pp. 63–78, Retrospective on

Michael Porter’s Competitive strategy. (2002). Academy of Management Executive 16(2), 40–65.

Treacy, M., & Wiersema, F. (1997). The discipline of market leaders: Choose your customers, narrow your focus,

dominate your market. Reading, M Addison-Wesley.

Walters, B. A., & Bhuian, S. (2004). Complexity absorption and performance: A structural analysis of acute-care

hospitals. Journal of Management, 30, 97–121.

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5.6 Developing Strategy Through Internal Analysis

Learning Objectives

1. Learn about internal analysis.

2. Understand resources, capabilities, and core competencies.

3. See how to evaluate resources, capabilities, and core competencies using VRIO analysis.

In this section, you will learn about some of the basic internal inputs for strategy formulation—starting with the

organization’s strengths and weaknesses. We will focus on three aspects of internal analysis here, though you

recognize that these should be complemented by external analysis as well. There is no correct order in which to

do internal and external analyses, and the process is likely to be iterative. That is, you might do some internal

analysis that suggests the need for other external analysis, or vice versa. For the internal environment, it is best

to start with an assessment of resources and capabilities and then work your way into the identification of core

competences using VRIO analysis.

Internal AnalysisInternal Analysis

By exploiting internal resources and capabilities and meeting the demanding standards of global competition,

firms create value for customers (McEvily & Chakravarthy, 2002; Buckley & Carter, 2000). Value is measured

by a product’s performance characteristics and by its attributes for which customers are willing to pay.1 Those

particular bundles of resources and capabilities that provide unique advantages to the firm are considered core

competencies (Prahalad & Hamel, 1990). Core competencies are resources and capabilities that serve as a source

of a firm’s competitive advantage over rivals. Core competencies distinguish a company competitively and reflect

its personality. Core competencies emerge over time through an organizational process of accumulating and

learning how to deploy different resources and capabilities. As the capacity to take action, core competencies are

“crown jewels of a company,” the activities the company performs especially well compared with competitors and

through which the firm adds unique value to its goods or services over a long period of time (Hafeez, et. al., 2002;

Prahalad & Hamel, 1990).

Sometimes consistency and predictability provide value to customers, such as the type of value Walgreens

drugstores provides. As a Fortune magazine writer noted, “Do you realize that from 1975 to today, Walgreens

219

beat Intel? It beat Intel nearly two to one, GE almost five to one. It beat 3M, Coke, Boeing, Motorola (Useem,

2001).” Walgreens was able to do this by using its core competencies to offer value desired by its target customer

group. Instead of responding to the trends of the day, “During the Internet scare of 1998 and 1999, when slogans

of ‘Change or Die!’ were all but graffitied on the subway, Walgreens obstinately stuck to its corporate credo of

‘Crawl, walk, run.’ Its refusal to act until it thoroughly understood the implications of e-commerce was deeply

unfashionable, but…Walgreens is the epitome of the inner-directed company (Useem, 2001).” Thus, Walgreens

creates value by focusing on the unique capabilities it has built, nurtured, and continues to improve across time.

Figure 5.14

Internal analysis tells the strategist what is inside the organization—helps answer the question, “what strengths can we leverage?”

Dave Dugdale – Analyzing Financial Data – CC BY-SA 2.0.

During the past several decades, the strategic management process was concerned largely with understanding the

characteristics of the industry in which the firm competed and, in light of those characteristics, determining how

the firm should position itself relative to competitors. This emphasis on industry characteristics and competitive

strategy may have understated the role of the firm’s resources and capabilities in developing competitive

advantage. In the current competitive landscape, core competencies, in combination with product-market

positions, are the firm’s most important sources of competitive advantage (Hitt, et. al., 1999). The core

competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should

drive its selection of strategies. As Clayton Christensen noted, “Successful strategists need to cultivate a deep

understanding of the processes of competition and progress and of the factors that undergird each advantage. Only

thus will they be able to see when old advantages are poised to disappear and how new advantages can be built

in their stead (Christensen, 2001).” By drawing on internal analysis and emphasizing core competencies when

formulating strategies, companies learn to compete primarily on the basis of firm-specific differences, but they

must be aware of how things are changing as well.

220 • PRINCIPLES OF MANAGEMENT

Resources and CapabilitiesResources and Capabilities

ResourcesResources

Broad in scope, resources cover a spectrum of individual, social, and organizational phenomena (Eisenhardt &

Martin, 2000; Michalisin, et. al., 2000). Typically, resources alone do not yield a competitive advantage (West &

DeCastro, 2001; Deeds, et. al., 2000; Chi, 1994). In fact, the core competencies that yield a competitive advantage

are created through the unique bundling of several resources (Berman, et. al., 2002). For example, Amazon.com

has combined service and distribution resources to develop its competitive advantages. The firm started as an

online bookseller, directly shipping orders to customers. It quickly grew large and established a distribution

network through which it could ship “millions of different items to millions of different customers.” Compared

with Amazon’s use of combined resources, traditional bricks-and-mortar companies, such as Toys “R” Us and

Borders, found it hard to establish an effective online presence. These difficulties led them to develop partnerships

with Amazon. Through these arrangements, Amazon now handles online presence and the shipping of goods for

several firms, including Toys “R” Us and Borders, which now can focus on sales in their stores. Arrangements

such as these are useful to the bricks-and-mortar companies because they are not accustomed to shipping so much

diverse merchandise directly to individuals (Shepard, 2001).

Some of a firm’s resources are tangible while others are intangible. Tangible resources are assets that can be

seen and quantified. Production equipment, manufacturing plants, and formal reporting structures are examples

of tangible resources. Intangible resources typically include assets that are rooted deeply in the firm’s history and

have accumulated over time. Because they are embedded in unique patterns of routines, intangible resources are

relatively difficult for competitors to analyze and imitate. Knowledge, trust between managers and employees,

ideas, the capacity for innovation, managerial capabilities, organizational routines (the unique ways people work

together), scientific capabilities, and the firm’s reputation for its goods or services and how it interacts with people

(such as employees, customers, and suppliers) are all examples of intangible resources (Feldman, 2000; Knott &

McKelvey, 1999). The four types of tangible resources are financial, organizational, physical, and technological.

The three types of intangible resources are human, innovation, and reputational.

As a manager or entrepreneur, you will be challenged to understand fully the strategic value of your firm’s tangible

and intangible resources. The strategic value of resources is indicated by the degree to which they can contribute

to the development of core competencies, and, ultimately, competitive advantage. For example, as a tangible

resource, a distribution facility is assigned a monetary value on the firm’s balance sheet. The real value of the

facility, however, is grounded in a variety of factors, such as its proximity to raw materials and customers, but

also in intangible factors such as the manner in which workers integrate their actions internally and with other

stakeholders, such as suppliers and customers (Gavetti & Levinthal, 2000; Coff, 1999; Marsh & Ranft, 1999).

CapabilitiesCapabilities

Capabilities are the firm’s capacity to deploy resources that have been purposely integrated to achieve a desired

end state (Helfat & Raubitschek, 2000). The glue that holds an organization together, capabilities emerge over

time through complex interactions among tangible and intangible resources. Capabilities can be tangible, like

a business process that is automated, but most of them tend to be tacit and intangible. Critical to forming

5.6 DEVELOPING STRATEGY THROUGH INTERNAL ANALYSIS • 221

competitive advantages, capabilities are often based on developing, carrying, and exchanging information and

knowledge through the firm’s human capital (Hitt, et. al., 2001; Hitt, et. al., 2000; Hoopes & Postrel, 1999).

Because a knowledge base is grounded in organizational actions that may not be explicitly understood by all

employees, repetition and practice increase the value of a firm’s capabilities.

The foundation of many capabilities lies in the skills and knowledge of a firm’s employees and, often, their

functional expertise. Hence, the value of human capital in developing and using capabilities and, ultimately, core

competencies cannot be overstated. Firms committed to continuously developing their people’s capabilities seem

to accept the adage that “the person who knows how will always have a job. The person who knows why will

always be his boss.”2

Global business leaders increasingly support the view that the knowledge possessed by human capital is among

the most significant of an organization’s capabilities and may ultimately be at the root of all competitive

advantages. But firms must also be able to use the knowledge that they have and transfer it among their operating

businesses (Argote & Ingram, 2000). For example, researchers have suggested that “in the information age, things

are ancillary, knowledge is central. A company’s value derives not from things, but from knowledge, know-how,

intellectual assets, competencies—all of it embedded in people (Dess & Picken 1999).” Given this reality, the

firm’s challenge is to create an environment that allows people to fit their individual pieces of knowledge together

so that, collectively, employees possess as much organizational knowledge as possible (Coy, 2002).

To help them develop an environment in which knowledge is widely spread across all employees, some

organizations have created the new upper-level managerial position of chief learning officer (CLO). Establishing

a CLO position highlights a firm’s belief that “future success will depend on competencies that traditionally have

not been actively managed or measured—including creativity and the speed with which new ideas are learned and

shared (Baldwin & Danielson, 2000).” In general, the firm should manage knowledge in ways that will support

its efforts to create value for customers (Kuratko, et. al., 2001; Hansen, et. al., 1999).

Figure 5.15 The Value Chain

222 • PRINCIPLES OF MANAGEMENT

Adapted from Porter, M. (1985). Competitive Advantage. New York: Free Press. Exhibit is creative

commons licensed at http://en.wikipedia.org/wiki/Image:ValueChain.PNG.

Capabilities are often developed in specific functional areas (such as manufacturing, R&D, and marketing) or

in a part of a functional area (for example, advertising). The value chain, popularized by Michael Porter’s book

Competitive Advantage, is a useful tool for taking stock of organizational capabilities. A value chain is a chain

of activities. In the value chain, some of the activities are deemed to be primary, in the sense that these activities

add direct value. In the preceding figure, primary activities are logistics (inbound and outbound), marketing, and

service. Support activities include how the firm is organized (infrastructure), human resources, technology, and

procurement. Products pass through all activities of the chain in order, and at each activity, the product gains some

value. A firm is effective to the extent that the chain of activities gives the products more added value than the

sum of added values of all activities.

It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A

diamond cutter can be used as an example of the difference. The cutting activity may have a low cost, but the

activity adds to much of the value of the end product, since a rough diamond is significantly less valuable than

a cut, polished diamond. Research suggests a relationship between capabilities developed in particular functional

areas and the firm’s financial performance at both the corporate and business-unit levels (Hitt & Ireland, 1986;

Hitt & Ireland, 1985; Hitt, et. al., 1982; Hitt;et. al., 1982; Snow & Hrebiniak, 1980), suggesting the need to

develop capabilities at both levels.

VRIO AnalysisVRIO Analysis

Given that almost anything a firm possesses can be considered a resource or capability, how should you attempt

to narrow down the ones that are core competencies, and explain why firm performance differs? To lead to

a sustainable competitive advantage, a resource or capability should be valuable, rare, inimitable (including

nonsubstitutable), and organized. This VRIO framework is the foundation for internal analysis (Wernerfelt, 1984).

VRIO is an acronym for valuable, rare, inimitable, and organization.

If you ask managers why their firms do well while others do poorly, a common answer is likely to be “our people.”

But this is really not an answer. It may be the start of an answer, but you need to probe more deeply—what is it

about “our people” that is especially valuable? Why don’t competitors have similar people? Can’t competitors hire

our people away? Or is it that there something special about the organization that brings out the best in people?

These kinds of questions form the basis of VRIO and get to the heart of why some resources help firms more than

others.

Figure 5.16 VRIO and Relative Firm Performance

5.6 DEVELOPING STRATEGY THROUGH INTERNAL ANALYSIS • 223

Moreover, your ability to identify whether an organization has VRIO resources will also likely explain their

competitive position. In the figure, you can see that a firm’s performance relative to industry peers is likely to vary

according to the level to which resources, capabilities, and ultimately core competences satisfy VRIO criteria. The

four criteria are explored next.

ValuableValuable

A resource or capability is said to be valuable if it allows the firm to exploit opportunities or negate threats in

the environment. Union Pacific’s extensive network of rail-line property and equipment in the Gulf Coast of the

United States is valuable because it allows the company to provide a cost-effective way to transport chemicals.

Because the Gulf Coast is the gateway for the majority of chemical production in the United States, the rail

network allows the firm to exploit a market opportunity. Delta’s control of the majority of gates at the Cincinnati

/ Northern Kentucky International Airport (CVG) gives it a significant advantage in many markets. Travelers

worldwide have rated CVG one of the best airports for service and convenience 10 years running. The possession

of this resource allows Delta to minimize the threat of competition in this city. Delta controls air travel in this

desirable hub city, which means that this asset (resource) has significant value. If a resource does not allow a

firm to minimize threats or exploit opportunities, it does not enhance the competitive position of the firm. In fact,

some scholars suggest that owning resources that do not meet the VRIO test of value actually puts the firm at a

competitive disadvantage (Barney, 1991).

RareRare

A resource is rare simply if it is not widely possessed by other competitors. Of the criteria this is probably the

easiest to judge. For example, Coke’s brand name is valuable but most of Coke’s competitors (Pepsi, 7Up, RC)

224 • PRINCIPLES OF MANAGEMENT

also have widely recognized brand names, making it not that rare. Of course, Coke’s brand may be the most

recognized, but that makes it more valuable, not more rare, in this case.

A firm that possesses valuable resources that are not rare is not in a position of advantage relative to competitors.

Rather, valuable resources that are commonly held by many competitors simply allow firms to be at par with

competitors. However, when a firm maintains possession of valuable resources that are rare in the industry they

are in a position of competitive advantage over firms that do not possess the resource. They may be able to exploit

opportunities or negate threats in ways that those lacking the resource will not be able to do. Delta’s virtual control

of air traffic through Cincinnati gives it a valuable and rare resource in that market.

How rare do the resources need to be for a firm to have a competitive advantage? In practice, this is a difficult

question to answer unequivocally. At the two extremes (i.e., one firm possesses the resource or all firms possess

it), the concept is intuitive. If only one firm possesses the resource, it has significant advantage over all other

competitors. For instance, Monsanto had such an advantage for many years because they owned the patent to

aspartame, the chemical compound in NutraSweet, they had a valuable and extremely rare resource. Because

during the lifetime of the patent they were the only firm that could sell aspartame, they had an advantage in

the artificial sweetener market. However, meeting the condition of rarity does not always require exclusive

ownership. When only a few firms possess the resource, they will have an advantage over the remaining

competitors. For instance, Toyota and Honda both have the capabilities to build cars of high quality at relatively

low cost (Dyer, et. al., 2004). Their products regularly beat rival firms’ products in both short-term and long-

term quality ratings (Dyer & Hatch, 2004). Thus, the criterion of rarity requires that the resource not be widely

possessed in the industry. It also suggests that the more exclusive a firm’s access to a particularly valuable

resource, the greater the benefit for having it.

InimitableInimitable

An inimitable (the opposite of imitable) resource is difficult to imitate or to create ready substitutes for. A resource

is inimitable and nonsubstitutable if it is difficult for another firm to acquire it or to substitute something else

in its place. A valuable and rare resource or capability will grant a competitive advantage as long as other firms

do not gain subsequently possession of the resource or a close substitute. If a resource is valuable and rare

and responsible for a market leader’s competitive advantage, it is likely that competitors lacking the resource

or capability will do all that they can to obtain the resource or capability themselves. This leads us to the

third criterion—inimitability. The concept of imitation includes any form of acquiring the lacking resource or

substituting a similar resource that provides equivalent benefits. The criterion important to be addressed is whether

competitors face a cost disadvantage in acquiring or substituting the resource that is lacking. There are numerous

ways that firms may acquire resources or capabilities that they lack.

As strategy researcher Scott Gallagher notes:

“This is probably the toughest criterion to examine because given enough time and money almost any resource can be imitated.

Even patents only last 17 years and can be invented around in even less time. Therefore, one way to think about this is to

compare how long you think it will take for competitors to imitate or substitute something else for that resource and compare it

to the useful life of the product. Another way to help determine if a resource is inimitable is why/how it came about. Inimitable

5.6 DEVELOPING STRATEGY THROUGH INTERNAL ANALYSIS • 225

resources are often a result of historical, ambiguous, or socially complex causes. For example, the U.S. Army paid for Coke

to build bottling plants around the world during World War II. This is an example of history creating an inimitable asset.

Generally, intangible (also called tacit) resources or capabilities, like corporate culture or reputation, are very hard to imitate

and therefore inimitable (Falcon, 2009).”

OrganizedOrganized

The fourth and final VRIO criterion that determines whether a resource or capability is the source of competitive

advantage recognizes that mere possession or control is necessary but not sufficient to gain an advantage. The

firm must likewise have the organizational capability to exploit the resources. The question of organization is

broad and encompasses many facets of a firm but essentially means that the firm is able to capture any value

that the resource or capability might generate. Organization, essentially the same form as that taken in the P-O-L-

C framework, spans such firm characteristics as control systems, reporting relationships, compensation policies,

and management interface with both customers and value-adding functions in the firm. Although listed as the

last criterion in the VRIO tool, the question of organization is a necessary condition to be satisfied if a firm is

to reap the benefits of any of the three preceding conditions. Thus, a valuable but widely held resource only

leads to competitive parity for a firm if they also possess the capabilities to exploit the resource. Likewise, a firm

that possesses a valuable and rare resource will not gain a competitive advantage unless it can actually put that

resource to effective use.

Many firms have valuable and rare resources that they fail to exploit (the question of imitation is not relevant until

the firm exploits valuable and rare resources). For instance, for many years Novell had a significant competitive

advantage in computer networking based on its core NetWare product. In high-technology industries, remaining

at the top requires continuous innovation. Novell’s decline during the mid- to late 1990s led many to speculate

that Novell was unable to innovate in the face of changing markets and technology. However, shortly after

new CEO Eric Schmidt arrived from Sun Microsystems to attempt to turnaround the firm, he arrived at a

different conclusion. Schmidt commented: “I walk down Novell hallways and marvel at the incredible potential of

innovation here. But, Novell has had a difficult time in the past turning innovation into products in the marketplace

(Haddox, 2003).” He later commented to a few key executives that it appeared the company was suffering from

“organizational constipation.”3 Novell appeared to still have innovative resources and capabilities, but they lacked

the organizational capability (e.g., product development and marketing) to get those new products to market in a

timely manner.

Likewise, Xerox proved unable to exploit its innovative resources. Xerox created a successful research team

housed in a dedicated facility in Palo Alto, California, known as Xerox PARC. Scientists in this group invented an

impressive list of innovative products, including laser printers, Ethernet, graphical interface software, computers,

and the computer mouse. History has demonstrated that these technologies were commercially successful.

Unfortunately, for Xerox shareholders, these commercially successful innovations were exploited by other firms.

Xerox’s organization was not structured in a way that information about these innovations flowed to the right

people in a timely fashion. Bureaucracy was also suffocating ideas once they were disseminated. Compensation

policies did not reward managers for adopting these new innovations but rather rewarded current profits over

long-term success. Thus, Xerox was never able exploit the innovative resources and capabilities embodied in their

off-site Xerox PARC research center (Kearns & Nadler, 1992; Barney, 1995).

226 • PRINCIPLES OF MANAGEMENT

SWOT and VRIOSWOT and VRIO

As you already know, many scholars refer to core competencies. A core competency is simply a resource,

capability, or bundle of resources and capabilities that is VRIO. While VRIO resources are the best, they are quite

rare, and it is not uncommon for successful firms to simply be combinations of a large number of VR _ O or even

V _ _ O resources and capabilities. Recall that even a V _ _ O resource can be considered a strength under a

traditional SWOT analysis.

Key Takeaway

Internal analysis begins with the identification of resources and capabilities. Resources can be tangibleand intangible; capabilities may have such characteristics as well. VRIO analysis is a way to distinguishresources and capabilities from core competencies. Specifically, VRIO analysis should show you theimportance of value, rarity, inimitability, and organization as building blocks of competitive advantage.

Exercises

1. What is the objective of internal analysis?

2. What is the difference between a resource and a capability?

3. What is the difference between a tangible and an intangible resource or capability?

4. What is a core competency?

5. What framework helps you identify those resources, capabilities, or core competencies thatprovide competitive advantage?

6. Why might competitive advantage for a firm be fleeting?

1Pocket Strategy. (1998). Value (p. 165). London: The Economist Books.

2Thoughts on the business of life. (1999, May 17). Forbes, p. 352.

3Personal communication with former executives.

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5.7 Developing Strategy Through External Analysis

Learning Objectives

1. Understand the basics of general environment analysis.

2. See the components of microenvironment analysis that support industry analysis.

3. Learn the features of Porter’s Five Forces industry analysis.

In this section, you will learn about some of the basic external inputs for strategy formulation—the determinants

of a firm’s opportunities and threats. We will focus on three aspects of external analysis here, though you

recognize that these should be complemented by internal analysis as well. For the external environment, it is best

to start with the general environment, and then work your way into the focal industry or industry segment.

231

Figure 5.17

External analysis tells the strategist what is outside the organization—helps answer the question, “what

opportunities can we exploit?”

johnhain – CC0 public domain.

The General EnvironmentThe General Environment

When appraising the external environment of the organization you will typically start with its general

environment. But what does this mean? The general environment is composed of dimensions in the broader

society that influence an industry and the firms within it. (Fahey, 1999; Walters & Priem, 1999) We group these

dimensions into six segments: political, economic, social, technical or technological, environmental, and legal.

You can use the simple acronym, PESTEL, to help remind you of these six general environment segments.

Examples of elements analyzed in each of these segments are shown next.

Table 5.1 PESTEL Analysis

232 • PRINCIPLES OF MANAGEMENT

Political Economic

How stable is the political environment? What are current and forecast interest rates?

What are local taxation policies, and how do these affectyour business?

What is the level of inflation, what is it forecast to be, and how does thisaffect the growth of your market?

Is the government involved in trading agreements such asEU, NAFTA, ASEAN, or others? What are local employment levels per capita and how are they changing?

What are the foreign trade regulations? What are the long-term prospects for the economy gross domestic product(GDP) per capita, and so on?

What are the social welfare policies? What are exchange rates between critical markets and how will they affectproduction and distribution of your goods?

Social or Socio-cultural Technical or Technological

What are local lifestyle trends? What is the level of research funding in government and theindustry, and are those levels changing?

What are the current demographics, and how are they changing? What is the government and industry’s level of interest andfocus on technology?

What is the level and distribution of education and income? How mature is the technology?

What are the dominant local religions and what influence do they have onconsumer attitudes and opinions?

What is the status of intellectual property issues in the localenvironment?

What is the level of consumerism and popular attitudes toward it? Are potentially disruptive technologies in adjacent industriescreeping in at the edges of the focal industry?

What pending legislation is there that affects corporate social policies(e.g., domestic partner benefits, maternity/paternity leave)? How fast is technology changing?

What are the attitudes toward work and leisure? What role does technology play in competitive advantage?

Environmental Legal

What are local environmental issues? What are the regulations regarding monopolies andprivate property?

Are there any ecological or environmental issues relevant to your industry that arepending? Does intellectual property have legal protections?

How do the activities of international pressure groups affect your business (e.g.,Greenpeace, Earth First, PETA)? Are there relevant consumer laws?

Are there environmental protection laws? What are the regulations regarding wastedisposal and energy consumption?

What is the status of employment, heath and safety,and product safety laws?

Firms cannot directly control the general environment’s segments and elements. Accordingly, successful

companies gather the information required to understand each segment and its implications for the selection and

implementation of the appropriate strategies. For example, the terrorist attacks in the United States on September

11, 2001, surprised businesses throughout the world. This single set of events had substantial effects on the U.S.

economy. Although individual firms were affected differently, none could control the U.S. economy. Instead,

companies around the globe were challenged to understand the effects of this economy’s decline on their current

and future strategies. A similar set of events and relationships was seen around the world as financial markets

began to struggle one after the other starting in late 2008.

Although the degree of impact varies, these environmental segments affect each industry and its firms. The

5.7 DEVELOPING STRATEGY THROUGH EXTERNAL ANALYSIS • 233

challenge to the firm is to evaluate those elements in each segment that are of the greatest importance. Resulting

from these efforts should be a recognition of environmental changes, trends, opportunities, and threats.

Analyzing the Organization’s MicroenvironmentAnalyzing the Organization’s Microenvironment

When we say microenvironment we are referring primarily to an organization’s industry, and the upstream and

downstream markets related to it. An industry is a group of firms producing products that are close substitutes.

In the course of competition, these firms influence one another. Typically, industries include a rich mix of

competitive strategies that companies use in pursuing strategic competitiveness and above-average returns. In

part, these strategies are chosen because of the influence of an industry’s characteristics (Spanos & Lioukas,

2001). Upstream markets are the industries that provide the raw material or inputs for the focal industry, while

downstream markets are the industries (sometimes consumer segments) that consume the industry outputs. For

example, the oil production market is upstream of the oil-refining market (and, conversely, the oil refiners are

downstream of the oil producers), which in turn is upstream of the gasoline sales market. Instead of upstream and

downstream, the terms wholesale and retail are often used. Accordingly, the industry microenvironment consists

of stakeholder groups that a firm has regular dealings with. The way these relationships develop can affect the

costs, quality, and overall success of a business.

Porter’s Five-Forces Analysis of Market StructurePorter’s Five-Forces Analysis of Market Structure

Figure 5.18 Porter’s Five Forces

Adapted from Porter, M. (1980). Competitive strategy. New York: Free Press.

234 • PRINCIPLES OF MANAGEMENT

You can distill down the results of PESTEL and microenvironment analysis to view the competitive structure of an

industry using Michael Porter’s five forces. Here you will find that your understanding of the microenvironment

is particularly helpful. Porter’s model attempts to analyze the attractiveness of an industry by considering five

forces within a market. According to Porter, the likelihood of firms making profits in a given industry depends

on five factors: (1) barriers to entry and new entry threats, (2) buyer power, (3) supplier power, (4) threat from

substitutes, and (5) rivalry (Porter, 1980).

Compared with the general environment, the industry environment has a more direct effect on the firm’s strategic

competitiveness and above-average returns, as exemplified in the strategic focus. The intensity of industry

competition and an industry’s profit potential (as measured by the long-run return on invested capital) are a

function of five forces of competition: the threats posed by new entrants, the power of suppliers, the power of

buyers, product substitutes, and the intensity of rivalry among competitors.

Porter’s five-forces model of competition expands the arena for competitive analysis. Historically, when studying

the competitive environment, firms concentrated on companies with which they competed directly. However,

firms must search more broadly to identify current and potential competitors by identifying potential customers as

well as the firms serving them. Competing for the same customers and thus being influenced by how customers

value location and firm capabilities in their decisions is referred to as the market microstructure (Zaheer &

Zaheer, 2001). Understanding this area is particularly important because, in recent years, industry boundaries

have become blurred. For example, in the electrical utilities industry, cogenerators (firms that also produce

power) are competing with regional utility companies. Moreover, telecommunications companies now compete

with broadcasters, software manufacturers provide personal financial services, airlines sell mutual funds, and

automakers sell insurance and provide financing (Hitt, et. al., 1999). In addition to focusing on customers rather

than specific industry boundaries to define markets, geographic boundaries are also relevant. Research suggests

that different geographic markets for the same product can have considerably different competitive conditions

(Pan & Chi, 1999; Brooks, 1995).

The five-forces model recognizes that suppliers can become a firm’s competitors (by integrating forward), as

can buyers (by integrating backward). Several firms have integrated forward in the pharmaceutical industry by

acquiring distributors or wholesalers. In addition, firms choosing to enter a new market and those producing

products that are adequate substitutes for existing products can become competitors of a company.

Another way to think about industry market structure is that these five sets of stakeholders are competing for

profits in the given industry. For instance, if a supplier to an industry is powerful, they can charge higher prices. If

the industry member can’t pass those higher costs onto their buyers in the form of higher prices, then the industry

member makes less profit. For example, if you have a jewelry store, but are dependent on a monopolist like De

Beers for diamonds, then De Beers actually is extracting more relative value from your industry (i.e., the retail

jewelry business).

New EntrantsNew Entrants

The likelihood of new entry is a function of the extent to which barriers to entry exist. Evidence suggests that

companies often find it difficult to identify new competitors (Geroski, 1999). Identifying new entrants is important

because they can threaten the market share of existing competitors. One reason new entrants pose such a threat is

that they bring additional production capacity. Unless the demand for a good or service is increasing, additional

5.7 DEVELOPING STRATEGY THROUGH EXTERNAL ANALYSIS • 235

capacity holds consumers’ costs down, resulting in less revenue and lower returns for competing firms. Often,

new entrants have a keen interest in gaining a large market share. As a result, new competitors may force existing

firms to be more effective and efficient and to learn how to compete on new dimensions (for example, using an

Internet-based distribution channel).

The more difficult it is for other firms to enter a market, the more likely it is that existing firms can make relatively

high profits. The likelihood that firms will enter an industry is a function of two factors: barriers to entry and the

retaliation expected from current industry participants. Entry barriers make it difficult for new firms to enter an

industry and often place them at a competitive disadvantage even when they are able to enter. As such, high-entry

barriers increase the returns for existing firms in the industry (Robinson & McDougall, 2001).

Buyer PowerBuyer Power

The stronger the power of buyers in an industry, the more likely it is that they will be able to force down prices and

reduce the profits of firms that provide the product. Firms seek to maximize the return on their invested capital.

Alternatively, buyers (customers of an industry or firm) want to buy products at the lowest possible price—the

point at which the industry earns the lowest acceptable rate of return on its invested capital. To reduce their costs,

buyers bargain for higher-quality, greater levels of service, and lower prices. These outcomes are achieved by

encouraging competitive battles among the industry’s firms.

Supplier PowerSupplier Power

The stronger the power of suppliers in an industry, the more difficult it is for firms within that sector to make a

profit because suppliers can determine the terms and conditions on which business is conducted. Increasing prices

and reducing the quality of its products are potential means used by suppliers to exert power over firms competing

within an industry. If a firm is unable to recover cost increases by its suppliers through its pricing structure, its

profitability is reduced by its suppliers’ actions.

SubstitutesSubstitutes

This measures the ease with which buyers can switch to another product that does the same thing, such as using

aluminum cans rather than glass or plastic bottles to package a beverage. The ease of switching depends on what

costs would be involved (e.g., while it may be easy to sell Coke or Pepsi in bottles or cans, transferring all your

data to a new database system and retraining staff could be expensive) and how similar customers perceive the

alternatives to be. Substitute products are goods or services from outside a given industry that perform similar

or the same functions as a product that the industry produces. For example, as a sugar substitute, NutraSweet

places an upper limit on sugar manufacturers’ prices—NutraSweet and sugar perform the same function but with

different characteristics.

Other product substitutes include fax machines instead of overnight deliveries, plastic containers rather than

glass jars, and tea substituted for coffee. Recently, firms have introduced to the market several low-alcohol

fruit-flavored drinks that many customers substitute for beer. For example, Smirnoff’s Ice was introduced with

substantial advertising of the type often used for beer. Other firms have introduced lemonade with 5% alcohol

(e.g., Doc Otis Hard Lemon) and tea and lemon combinations with alcohol (e.g., BoDean’s Twisted Tea). These

236 • PRINCIPLES OF MANAGEMENT

products are increasing in popularity, especially among younger people, and, as product substitutes, have the

potential to reduce overall sales of beer (Khermouch, 2001).

In general, product substitutes present a strong threat to a firm when customers face few, if any, switching costs

and when the substitute product’s price is lower or its quality and performance capabilities are equal to or greater

than those of the competing product. Differentiating a product along dimensions that customers value (such as

price, quality, service after the sale, and location) reduces a substitute’s attractiveness.

RivalryRivalry

This measures the degree of competition between existing firms. The higher the degree of rivalry, the more

difficult it is for existing firms to generate high profits. The most prominent factors that experience shows to affect

the intensity of firms’ rivalries are (1) numerous competitors, (2) slow industry growth, (3) high fixed costs, (4)

lack of differentiation, (5) high strategic stakes and (6) high exit barriers.

Numerous or Equally Balanced CompetitorsNumerous or Equally Balanced Competitors

Intense rivalries are common in industries with many companies. With multiple competitors, it is common for a

few firms to believe that they can act without eliciting a response. However, evidence suggests that other firms

generally are aware of competitors’ actions, often choosing to respond to them. At the other extreme, industries

with only a few firms of equivalent size and power also tend to have strong rivalries. The large and often similar-

sized resource bases of these firms permit vigorous actions and responses. The Fuji/Kodak and Airbus/Boeing

competitive battles exemplify intense rivalries between pairs of relatively equivalent competitors.

Slow Industry GrowthSlow Industry Growth

When a market is growing, firms try to use resources effectively to serve an expanding customer base. Growing

markets reduce the pressure to take customers from competitors. However, rivalry in nongrowth or slow-growth

markets becomes more intense as firms battle to increase their market shares by attracting their competitors’

customers.

Typically, battles to protect market shares are fierce. Certainly, this has been the case with Fuji and Kodak. The

instability in the market that results from these competitive engagements reduce profitability for firms throughout

the industry, as is demonstrated by the commercial aircraft industry. The market for large aircraft is expected to

decline or grow only slightly over the next few years. To expand market share, Boeing and Airbus will compete

aggressively in terms of the introduction of new products and product and service differentiation. Both firms are

likely to win some and lose other battles. Currently, however, Boeing is the leader.

High Fixed Costs or High Storage CostsHigh Fixed Costs or High Storage Costs

When fixed costs account for a large part of total costs, companies try to maximize the use of their productive

capacity. Doing so allows the firm to spread costs across a larger volume of output. However, when many firms

attempt to maximize their productive capacity, excess capacity is created on an industry-wide basis. To then

5.7 DEVELOPING STRATEGY THROUGH EXTERNAL ANALYSIS • 237

reduce inventories, individual companies typically cut the price of their product and offer rebates and other

special discounts to customers. These practices, however, often intensify competition. The pattern of excess

capacity at the industry level followed by intense rivalry at the firm level is observed frequently in industries with

high storage costs. Perishable products, for example, lose their value rapidly with the passage of time. As their

inventories grow, producers of perishable goods often use pricing strategies to sell products quickly.

Lack of Differentiation or Low Switching CostsLack of Differentiation or Low Switching Costs

When buyers find a differentiated product that satisfies their needs, they frequently purchase the product loyally

over time. Industries with many companies that have successfully differentiated their products have less rivalry,

resulting in lower competition for individual firms (Deephouse, 1999). However, when buyers view products as

commodities (as products with few differentiated features or capabilities), rivalry intensifies. In these instances,

buyers’ purchasing decisions are based primarily on price and, to a lesser degree, service. Film for cameras is an

example of a commodity. Thus, the competition between Fuji and Kodak is expected to be strong.

The effect of switching costs is identical to that described for differentiated products. The lower the buyers’

switching costs, the easier it is for competitors to attract buyers through pricing and service offerings. High

switching costs, however, at least partially insulate the firm from rivals’ efforts to attract customers. Interestingly,

the switching costs—such as pilot and mechanic training—are high in aircraft purchases, yet, the rivalry between

Boeing and Airbus remains intense because the stakes for both are extremely high.

High Strategic StakesHigh Strategic Stakes

Competitive rivalry is likely to be high when it is important for several of the competitors to perform well in the

market. For example, although it is diversified and is a market leader in other businesses, Samsung has targeted

market leadership in the consumer electronics market. This market is quite important to Sony and other major

competitors such as Hitachi, Matsushita, NEC, and Mitsubishi. Thus, we can expect substantial rivalry in this

market over the next few years.

High strategic stakes can also exist in terms of geographic locations. For example, Japanese automobile

manufacturers are committed to a significant presence in the U.S. marketplace. A key reason for this is that the

United States is the world’s single largest market for auto manufacturers’ products. Because of the stakes involved

in this country for Japanese and U.S. manufacturers, rivalry among firms in the U.S. and global automobile

industry is highly intense. While close proximity tends to promote greater rivalry, physically proximate

competition has potentially positive benefits as well. For example, when competitors are located near one another,

it is easier for suppliers to serve them and they can develop economies of scale that lead to lower production costs.

Additionally, communications with key industry stakeholders such as suppliers are facilitated and more efficient

when they are close to the firm (Chung & Kalnins, 2001).

High Exit BarriersHigh Exit Barriers

Sometimes companies continue competing in an industry even though the returns on their invested capital are

low or negative. Firms making this choice likely face high exit barriers, which include economic, strategic, and

emotional factors, causing companies to remain in an industry when the profitability of doing so is questionable.

238 • PRINCIPLES OF MANAGEMENT

Attractiveness and ProfitabilityAttractiveness and Profitability

Using Porter’s analysis firms are likely to generate higher profits if the industry:

• Is difficult to enter.

• There is limited rivalry.

• Buyers are relatively weak.

• Suppliers are relatively weak.

• There are few substitutes.

Profits are likely to be low if:

• The industry is easy to enter.

• There is a high degree of rivalry between firms within the industry.

• Buyers are strong.

• Suppliers are strong.

• It is easy to switch to alternatives.

Effective industry analyses are products of careful study and interpretation of data and information from multiple

sources. A wealth of industry-specific data is available to be analyzed. Because of globalization, international

markets and rivalries must be included in the firm’s analyses. In fact, research shows that in some industries,

international variables are more important than domestic ones as determinants of strategic competitiveness.

Furthermore, because of the development of global markets, a country’s borders no longer restrict industry

structures. In fact, movement into international markets enhances the chances of success for new ventures as well

as more established firms (Kuemmerle, 2001; Lorenzoni & Lipparini, 1991).

Following study of the five forces of competition, the firm can develop the insights required to determine an

industry’s attractiveness in terms of its potential to earn adequate or superior returns on its invested capital. In

general, the stronger competitive forces are, the lower the profit potential for an industry’s firms. An unattractive

industry has low entry barriers, suppliers and buyers with strong bargaining positions, strong competitive threats

from product substitutes, and intense rivalry among competitors. These industry characteristics make it very

difficult for firms to achieve strategic competitiveness and earn above-average returns. Alternatively, an attractive

industry has high entry barriers, suppliers and buyers with little bargaining power, few competitive threats from

product substitutes, and relatively moderate rivalry (Porter, 1980).

Key Takeaway

External environment analysis is a key input into strategy formulation. PESTEL is an external environmentanalysis framework that helps guide your prospecting in the political, economic, social, technological,environmental, and legal spheres of an organization’s external environment. Working inward to the focalorganization, we discussed the broad dimensions of the stakeholders feeding into the firm. Porter’s five

5.7 DEVELOPING STRATEGY THROUGH EXTERNAL ANALYSIS • 239

forces analysis considers (1) barriers to entry and new entry threats, (2) buyer power, (3) supplier power,(4) threat from substitutes, and (5) rivalry as key external environmental forces in developing strategy.

Exercises

1. What are the six dimensions of the environment that are of broad concern when you conduct aPESTEL analysis?

2. Which of the PESTEL dimensions do you believe to be most important, and why?

3. What are the key dimensions of a firm’s microenvironment?

4. What are the five forces referred to in the Porter framework?

5. Is there a dimension of industry structure that Porter’s model appears to omit?

ReferencesReferences

Brooks, G. R. (1995). Defining market boundaries Strategic Management Journal, 16, 535–549.

Chung, W., & Kalnins, A. (2001). Agglomeration effects and performance: Test of the Texas lodging industry

Strategic Management Journal, 22, 969–988.

Deephouse, D. L. (1999). To be different, or to be the same? It’s a question (and theory) of strategic balance.

Strategic Management Journal, 20, 147–166.

Fahey, L. (1999). Competitors. New York: Wiley; Walters, B. A., &amp.

Geroski, P. A. (1999). Early warning of new rivals. Sloan Management Review, 40(3), 107–116.

Hitt, M. A., Ricart I Costa, J., & Nixon, R. D. (1999). New managerial mindsets. New York: Wiley.

Khermouch, G. (2001, March 5). Grown-up drinks for tender taste buds. Business Week, p. 96.

Kuemmerle, W. (2001). Home base and knowledge management in international ventures. Journal of Business

Venturing, 17, 99–122.

Lorenzoni, G., & Lipparini, A. (1999). The leveraging of interfirm relationships as a distinctive organizational

capability: A longitudinal study. Strategic Management Journal, 20, 317–338.

Pan, Y., & Chi, P. S. K. (1999). Financial performance and survival of multinational corporations in China.

Strategic Management Journal, 20, 359–374.

Porter, M. E. (1980). Competitive strategy. New York: Free Press.

240 • PRINCIPLES OF MANAGEMENT

Priem, R. L. (1999). Business strategy and CEO intelligence acquisition. Competitive Intelligence Review, 10(2),

15–22.

Robinson, K. C., & McDougall, P. P. (2001). Entry barriers and new venture performance: A comparison of

universal and contingency approaches. Strategic Management Journal, 22, 659–685.

Spanos, Y. E., & Lioukas, S. (2001). An examination into the causal logic of rent generation: Contrasting Porter’s

competitive strategy framework and the resource-based perspective. Strategic Management Journal, 22, 907–934.

Zaheer, S., & Zaheer, A. (2001). Market microstructure in a global b2b network, Strategic Management Journal,

22, 859–873.

5.7 DEVELOPING STRATEGY THROUGH EXTERNAL ANALYSIS • 241

5.8 Formulating Organizational and Personal StrategyWith the Strategy Diamond

Learning Objectives

1. Learn about the strategy diamond.

2. See how you can add staging, pacing, and vehicles to the strategy.

3. Use the diamond to formulate your personal strategy.

This section introduces you to the strategy diamond, a tool that will help you understand how clearly and

completely you have crafted a strategy. The diamond relates to both business and corporate strategy, and

regardless of whether you are a proponent of design or emergent schools of strategizing, it provides you with a

good checklist of what your strategy should cover. The section concludes by walking you through the application

of the strategy diamond to the task of developing your personal strategy.

Figure 5.19

242

In life and at work, we hope that you find the [strategy] diamond to be your best friend.

Macroscopic Solutions – Fancy White Diamond – CC BY-NC 2.0.

The Strategy DiamondThe Strategy Diamond

All organizations have strategies. The real question for a business is not whether it has a strategy but rather

whether its strategy is effective or ineffective, and whether the elements of the strategy are chosen by managers,

luck, or by default. You have probably heard the saying, “luck is a matter of being in the right place at the right

time”—well, the key to making sure you are in the right place at the right time is preparation, and in many ways,

strategizing provides that type of preparation. Luck is not a bad thing. The challenge is to recognize luck when

you see it, capitalize on luck, and put the organization repeatedly in luck’s path.

The strategy diamond was developed by strategy researchers Don Hambrick and Jim Fredrickson as a framework

for checking and communicating a strategy (Hambrick & Frederickson, 2001). You have already learned in this

chapter about the need for focus and choice with strategy, but you might also have noticed that generic strategies

and value disciplines do not spell out a strategy’s ingredients. In critiquing the field of strategy, these researchers

noted that “after more than 30 years of hard thinking about strategy, consultants and scholars have provided

executives with an abundance of frameworks for analyzing strategic situations.…Missing, however, has been any

guidance as to what the product of these tools should be—or what actually constitutes a strategy (Hambrick &

Frederickson, 2001).”

Figure 5.20 The Strategy Diamond

5.8 FORMULATING ORGANIZATIONAL AND PERSONAL STRATEGY WITH THE STRATEGY DIAMOND • 243

Adapted from Hambrick, D. C., & Fredrickson, J. W. (2001). Are you sure you have a strategy? Academy

of Management Executive, 19 (4), 51–62.

Because of their critique and analysis, they concluded that if an organization must have a strategy, then the

strategy must necessarily have parts. The figure summarizes the parts of their diamond model, its facets, and some

examples of the different ways that you can think about each facet. The diamond model does not presuppose that

any particular theory should dictate the contents of each facet. Instead, a strategy consists of an integrated set of

choices, but it isn’t a catchall for every important choice a manager faces. In this section, we will tell you a bit

about each facet, addressing first the traditional strategy facets of arenas, differentiators, and economic logic; then

we will discuss vehicles and finally the staging and pacing facet.

Arenas, Differentiators, and Economic LogicArenas, Differentiators, and Economic Logic

We refer to the first three facets of the strategy diamond—arenas, differentiators, and economic logic—as

traditional in the sense that they address three longstanding hallmarks of strategizing. Specifically, strategy

matches up market needs and opportunities (located in arenas) with unique features of the firm (shown by its

differentiators) to yield positive performance (economic logic). While performance is typically viewed in financial

terms, it can have social or environmental components as well.

Let’s start with arenas. Answers to strategy questions about arenas tell managers and employees where the firm

244 • PRINCIPLES OF MANAGEMENT

will be active. For instance, Nike is headquartered in Washington County, on the outskirts of Beaverton, Oregon.

Today, Nike’s geographic market arenas are most major markets around the globe, but in the early 1960s, Nike’s

arenas were limited to Pacific Northwest track meets accessible by founder Phil Knight’s car. In terms of product

markets (another part of where), the young Nike company (previously Blue Ribbon Sports) sold only track shoes

and not even shoes it manufactured.

Beyond geographic-market and product-market arenas, an organization can also make choices about the value-

chain arenas in its strategy. To emphasize the choice part of this value-chain arena, Nike’s competitor New

Balance manufactures nearly all the athletic shoes that it sells in the United States. Thus, these two sports-shoe

companies compete in similar geographic- and product-market arenas but differ greatly in terms of their choice of

value-chain arenas.

What about differentiators? Differentiators are the things that are supposedly unique to the firm such that they

give it a competitive advantage in its current and future arenas. A differentiator could be asset based, that is,

it could be something related to an organization’s tangible or intangible assets. A tangible asset has a value

and physically exists. Land, machines, equipment, automobiles, and even currencies, are examples of tangible

assets. For instance, the oceanfront land on California’s Monterey Peninsula, where the Pebble Beach Golf

Course and Resort is located, is a differentiator for it in the premium golf-course market. An intangible asset is

a nonphysical resource that provides gainful advantages in the marketplace. Brands, copyrights, software, logos,

patents, goodwill, and other intangible factors afford name recognition for products and services. Obviously,

the Nike brand has become a valuable intangible asset because of the broad awareness and reputation for

quality and high performance that it has built. Differentiators can also be found in capabilities, that is, how the

organization does something. Wal-Mart, for instance, is very good at keeping its costs low. Nike, in contrast,

focuses on developing leading-edge, high-performance athletic performance technologies, as well as up-to-the-

minute fashion in active sportswear.

The third facet of the strategy diamond in this traditional view is economic logic, which explains how the

firm makes money. Economic logic tells us how profits will be generated above the firm’s cost of capital. The

collapse in the late 1990s of stock market valuations for Internet companies lacking in profits—or any prospect

of profits—marked a return to economic reality. Profits above the firm’s cost of capital are required to yield

sustained or longer-term shareholder returns. While the economic logic can include environmental and social

profits (benefits reaped by society), the strategy must earn enough financial profits to keep investors (owners, tax

payers, governments, and so on) willing to continue to fund the organization’s costs of doing business. A firm

performs well (i.e., has a strong, positive economic logic) when its differentiators are well aligned with its chosen

arenas.

VehiclesVehicles

You can see why the first three facets of the strategy diamond—arenas, differentiators, and economic

logic—might be considered the traditional facets of strategizing in that they cover the basics: (1) external

environment, (2) internal organizational characteristics, and (3) some fit between them that has positive

performance consequences. The fourth facet of the strategy diamond is called vehicles. If arenas and

differentiators show where you want to go, then vehicles communicate how the strategy will get you there.

Specifically, vehicles refer to how you might pursue a new arena through internal means, through help from a

5.8 FORMULATING ORGANIZATIONAL AND PERSONAL STRATEGY WITH THE STRATEGY DIAMOND • 245

new partner or some other outside source, or even through acquisition. In the context of vehicles, this is where

you determine whether your organization is going to grow organically, acquisitively, or through a combination

of both. Organic growth is the growth rate of a company excluding any growth from takeovers, acquisitions, or

mergers. Acquisitive growth, in contrast, refers precisely to any growth from takeovers, acquisitions, or mergers.

Augmenting either organic or acquisitive growth is growth through partnerships with other organizations.

Sometimes such partnership-based growth is referred to as co-opetition, because an organization cooperates with

others, even some competitors, in order to compete and grow.

Vehicles are considered part of the strategy because there are different skills and competencies associated with

different vehicles. For instance, acquisitions fuel rapid growth, but they are challenging to negotiate and put into

place. Similarly, alliances are a great way to spread the risk and let each partner focus on what it does best. But

at the same time, to grow through alliances also means that you must be really good at managing relationships

in which you are dependent on another organization over which you do not have direct control. Organic growth,

particularly for firms that have grown primarily through partnering or acquisition, has its own distinct challenges,

such as the fact that the organization is on its own to put together everything it needs to fuel its growth.

Staging and PacingStaging and Pacing

Staging and pacing constitute the the fifth and final facet of the strategy diamond. Staging and pacing reflect the

sequence and speed of strategic moves. This powerful facet of strategizing helps you think about timing and next

steps, instead of creating a strategy that is a static, monolithic plan. As an example, the managers of Chuy’s, a

chain of Austin, Texas-based Tex-Mex restaurants, wanted to grow the business outside of Austin, but at the same

time, they knew it would be hard to manage these restaurants that were farther away. How should they identify

in which cities to experiment with new outlets? Their creative solution was to choose cities that were connected

to Austin by Southwest Airlines. Since Southwest is inexpensive and its point-to-point system means that cities

are never much more than an hour apart, the Austin managers could easily and regularly visit their new ventures

out of town. Remember, strategizing is about making choices, and sequencing and speed should be key choices

along with the other facets of the strategy. The staging and pacing facet also helps to reconcile the designed and

emergent portions of your strategy.

The Strategy Diamond and Your Personal Growth and Development StrategyThe Strategy Diamond and Your Personal Growth and Development Strategy

The strategy diamond is a useful professional and personal tool for managers. How might it benefit them

personally? Well, in the same way it can benefit you—the following figure maps out how your strategy fits in the

planning aspect of P-O-L-C. Remember that, like in P-O-L-C, your personal strategy should be guided by your

own mission and vision. Let’s look at how you might apply the strategy diamond to your personal growth and

development objectives.

Figure 5.21 Planning and Your Personal Growth and Development Strategy

246 • PRINCIPLES OF MANAGEMENT

Personal Arenas and DifferentiatorsPersonal Arenas and Differentiators

Your arenas and differentiators will answer such personal growth and development questions as:

• What type of work do I want to do?

• What leisure activities do I like?

• Where do I want to live?

• What capabilities (differentiators) do I need to participate in these arenas?

• What organizations value these capabilities (differentiators)?

• What capabilities (differentiators) do I want to have and excel in?

Your personal arenas can be an activity you want to do, a specific job, or simply a geographic location. For

instance, do you want to be a store manager, an accountant, an entrepreneur, or a CEO? Or do you want to live in

a certain locale? For instance, I will do anything just as long as I can live in Paris! It can also be a combination of

several. For example, perhaps you want to be a software designer for Google and live in San Francisco.

The more specific you are about the arenas in your strategy, the better you will be able to plot out the other facets.

Going back to our Google example, your personal differentiators would likely have to include the demonstration

of excellence in software design and an affinity for the Google corporate culture. More broadly, the differentiators

facet of your personal strategy should map on to your arenas facet—that is, they should clearly fit together. Also,

recognize too that your differentiators are subject to VRIO, in that where your capabilities are valuable and rare,

you may be more likely to economically benefit from them with employers (this foreshadows the link between

personal differentiators and personal economic logic).

5.8 FORMULATING ORGANIZATIONAL AND PERSONAL STRATEGY WITH THE STRATEGY DIAMOND • 247

Personal VehiclesPersonal Vehicles

The personal vehicles facet of your strategy answers questions such as:

• What do I need to accomplish on my own?

• What do I want to accomplish on my own?

• What do I need to accomplish with the help of others?

• Who are they?

We often think that our careers and quality of life are up to us—will be based on our choices and actions alone.

If that is your belief (i.e., you are a rugged individualist), then your personal growth and development strategy

seems to be highly dependent on what you do but not on the contributions of others.

It is true that we have to develop our own knowledge and capabilities to move forward. However, in reality, we

also typically get most things done through and with others. You have friends and family outside of work and

colleagues, employees, and bosses at work.

The vehicles component of your personal strategy diamond should spell out how your growth and development is

a function of what you do (when we talk about organizations, we refer to this as organic growth), and what you

depend on others to do. The better you understand your dependence on others, the better you will likely be able to

manage those relationships.

Personal Staging and PacingPersonal Staging and Pacing

You can think of personal staging and pacing as the implications of your strategy for your own Outlook calendar.

Personal staging and pacing answers questions like:

• What sequence of events does my strategy require?

• What are the financial requirements and consequences of each event?

• What is my deadline for the first event?

• Is the deadline flexible? Can I manage the pacing of the achievement of each event?

• How will timing affect achievement of my personal growth and development strategy?

• Do some events provide an opportunity to reconsider or adjust my strategy?

For instance, if you want to be a manager of a retail store it is likely you might need a related college degree and

experience. Your personal staging and pacing would answer questions about how you would achieve these, the

financial implications of each, as well as their timing.

Personal Economic LogicPersonal Economic Logic

Finally, your personal growth and development strategy will likely have an economic logic. Personal economic

logic answers questions such as:

248 • PRINCIPLES OF MANAGEMENT

• How does achievement of my strategy help me pay the bills?

• What dimensions of my strategy, like arenas or differentiators, is the economic logic of my strategy most

dependent on?

• How sustainable is the economic logic of my strategy?

We can see this most clearly when magazines publish lists of high-demand jobs. When employees have skills

that are in high demand by employers, the price of those skills in the form of paycheck, is usually bid up in

the market. For organizations, economic logic is typically viewed in terms of financial performance. However,

increasingly, firms target social and environmental performance as well—similarly, the economic logic of your

strategy can have implications for what you do to improve social and environmental conditions. This can happen

directly through your volunteer hours or indirectly through your financial support of causes you believe in.

Key Takeaway

In this section, we discussed how to put together a strategy diamond. The first step involves identifyingthe organization’s arenas, differentiators, and economic logic. This step involves a basic understandingof strategy and summarizes many of the traditional views in strategic management. The second stepinvolves contemplating how the organization would compete or grow in existing or new arenas, andthis is where the vehicles came into play. Finally, you considered the sequencing and speed of strategicinitiatives by learning about the strategy diamond facet of staging and pacing. Together, these five facets(i.e., arenas, differentiators, economic logic, vehicles, staging, and pacing) constitute the strategy diamond.We concluded the chapter with an application of the strategy diamond to your personal situation.

Exercises

1. What are the five facets of the Hambrick and Fredrickson strategy diamond?

2. What is the relationship between arenas and differentiators if the strategy yields a positiveeconomic logic?

3. If a firm is performing poorly financially, what might this say about the differentiators, arenas, orboth?

4. Why is it important to consider vehicles as part of an organization’s strategy?

5. What is the difference between staging and pacing in terms of the strategy diamond?

6. What are some ways that you might apply staging and pacing to an organization’s strategy?

ReferencesReferences

Hambrick, D. C., & Fredrickson, J. W. (2001). Are you sure you have a strategy? Academy of Management

Executive, 19(4), 51–62.

5.8 FORMULATING ORGANIZATIONAL AND PERSONAL STRATEGY WITH THE STRATEGY DIAMOND • 249

Chapter 6: Goals and Objectives

6.1 Goals and Objectives

6.2 Case in Point: Nucor Aligns Company Goals With Employee Goals

6.3 The Nature of Goals and Objectives

6.4 From Management by Objectives to the Balanced Scorecard

6.5 Characteristics of Effective Goals and Objectives

6.6 Using Goals and Objectives in Employee Performance Evaluation

6.7 Integrating Goals and Objectives with Corporate Social Responsibility

6.8 Your Personal Balanced Scorecard

250

6.1 Goals and Objectives

Figure 6.1

Progress on goals and objectives should tell you if you and the organization are on the right track.

Melinda Huntley – Hurdles – CC BY-NC-ND 2.0

What’s in It for Me?

Reading this chapter will help you do the following:

1. Understand the nature of goals and objectives and why they are important.

2. See how our thinking about goals and objectives has evolved.

3. Know what characterizes good goals and objectives.

4. Understand the roles of goals and objectives in employee performance reviews.

5. Map out relationships among economic, social, and environmental goals and objectives.

6. Set and manage your own goals and objectives.

251

Goals and objectives are a critical component of management, both in terms of planning and in terms of the

larger planning-organizing-leading-controlling (P-O-L-C) framework. You can see their role summarized in the

P-O-L-C figure. Unfortunately, because their role and importance seem obvious, they also tend to be neglected

in managerial practice or poorly aligned with the organization’s strategy. You can imagine why this might be

problematic, particularly since one of a manager’s functions is to evaluate employee performance—it would

be nice if employees could be evaluated based on how their achievement of individual goals and objectives

contributes to those critical to the organization’s survival and success. In this chapter, we introduce you to the

basics on goals and objectives and provide you with an understanding of how their usage has evolved. We also

show you how to develop a personalized set of goals and objectives to help you achieve your personal and

professional aspirations.

Figure 6.2 Goals and Objectives in the P-O-L-C Framework

252 • PRINCIPLES OF MANAGEMENT

6.2 Case in Point: Nucor Aligns Company Goals WithEmployee Goals

Figure 6.3

Washington State Dept of Transportation – 144-car ferry – CC BY-NC-ND 2.0.

Manufacturing steel is not a glamorous job. The industry is beset by many problems, and more than 40 steelmanufacturers have filed for bankruptcy in recent years. Most young employees do not view working at asteel mill as their dream job. Yet, one company distinguished itself from all the rest by remaining profitablefor over 130 quarters and by providing an over 350% return on investment (ROI) to shareholders. Thecompany is clearly doing well by every financial metric available and is the most profitable in its industry.

How do they achieve these amazing results? For one thing, every one of Nucor Corporation’s (NYSE:NUE) 12,000 employees acts like an owner of the company. The overarching goal is “take care of ourcustomers.” Employees are encouraged to fix the things they see as wrong and have real power on theirjobs. When there is a breakdown in a plant, a supervisor does not have to ask employees to work overtime;employees volunteer for it. In fact, the company is famous for its decentralized structure and for pushing

253

authority and responsibility down to lower levels in the hierarchy. Tasks that previously belonged tomanagement are performed by line workers. Management listens to lower level employees and routinelyimplements their new ideas.

The reward system in place at Nucor is also unique, and its employees may be the highest paid steelworkersin the world. In 2005, the average Nucor employee earned $79,000, followed by a $2,000 bonus decidedby the company’s annual earnings and $18,000 in the form of profit sharing. At the same time, a largepercentage of these earnings are based on performance. People have the opportunity to earn a lot of moneyif the company is doing well, and there is no upward limit to how much they can make. However, they willdo much worse than their counterparts in other mills if the company does poorly. Thus, it is to everyone’sadvantage to help the company perform well. The same incentive system exists at all levels of the company.CEO pay is clearly tied to corporate performance. The incentive system penalizes low performers whileincreasing commitment to the company as well as to high performance.

Nucor’s formula for success seems simple: align company goals with employee goals and give employeesreal power to make things happen. The results seem to work for the company and its employees. Evidenceof this successful method is that the company has one of the lowest employee turnover rates in the industryand remains one of the few remaining nonunionized environments in manufacturing. Nucor is the largestU.S. minimill and steel scrap recycler.

Case written by based on information from Byrnes, N., & Arndt, M. (2006, May 1). The art of motivation.BusinessWeek. Retrieved April 30, 2010, from http://www.businessweek.com/magazine/content/06_18/b3982075.htm; Foust, D. (2008, April 7). The best performers of 2008. BusinessWeek. Retrieved April30, 2010, from http://www.businessweek.com/magazine/toc/08_14/B4078bw50.htm?chan=magazine+channel_top+stories; Jennings, J. (2003). Ways to really motivatepeople: Authenticity is a huge hit with Gen X and Y. The Secured Lender, 59, 62–70; Marks, S. J. (2001).Incentives that really reward and motivate. Workforce, 80, 108–114.

Discussion Questions

1. How do goals and objectives at NUCOR relate to the planning facet of the P-O-L-C framework?

2. What negative consequences might arise at Nucor Corporation as a result of tying pay to companyperformance?

3. What effects do penalizing low performers have on Nucor employees?

4. What other ways can a company motivate employees to increase productivity, in addition tomonetary incentives?

5. How might the different reward systems at Nucor, individual empowerment and economicincentives, motivate people differently? Or do they have the same effect?

6. How would unionization at Nucor impact the dynamic of the organization?

254 • PRINCIPLES OF MANAGEMENT

6.3 The Nature of Goals and Objectives

Learning Objectives

1. Know the difference between goals and objectives.

2. Know the relationship between goals and objectives.

3. See how goals and objectives fit in the P-O-L-C framework.

What Are Goals and Objectives?What Are Goals and Objectives?

Goals and objectives provide the foundation for measurement. Goals are outcome statements that define what an

organization is trying to accomplish, both programmatically and organizationally. Goals are usually a collection of

related programs, a reflection of major actions of the organization, and provide rallying points for managers. For

example, Wal-Mart might state a financial goal of growing its revenues 20% per year or have a goal of growing

the international parts of its empire. Try to think of each goal as a large umbrella with several spokes coming out

from the center. The umbrella itself is a goal.

In contrast to goals, objectives are very precise, time-based, measurable actions that support the completion of a

goal. Objectives typically must (1) be related directly to the goal; (2) be clear, concise, and understandable; (3)

be stated in terms of results; (4) begin with an action verb; (5) specify a date for accomplishment; and (6) be

measurable. Apply our umbrella analogy and think of each spoke as an objective. Going back to the Wal-Mart

example, and in support of the company’s 20% revenue growth goal, one objective might be to “open 20 new

stores in the next six months.” Without specific objectives, the general goal could not be accomplished—just as

an umbrella cannot be put up or down without the spokes. Importantly, goals and objectives become less useful

when they are unrealistic or ignored. For instance, if your university has set goals and objectives related to class

sizes but is unable to ever achieve them, then their effectiveness as a management tool is significantly decreased.

Measures are the actual metrics used to gauge performance on objectives. For instance, the objective of improved

financial performance can be measured using a number metrics, ranging from improvement in total sales,

profitability, efficiencies, or stock price. You have probably heard the saying, “what gets measured, gets done.”

Measurement is critical to today’s organizations. It is a fundamental requirement and an integral part of strategic

planning and of principles of management more generally. Without measurement, you cannot tell where you have

255

been, where you are now, or if you are heading in the direction you are intending to go. While such statements

may sound obvious, the way that most organizations have set and managed goals and objectives has generally not

kept up with this commonsense view.

Measurement ChallengesMeasurement Challenges

There are three general failings that we can see across organizations related to measurement. First, many

organizations still emphasize historic financial goals and objectives, even though financial outcomes are pretty

narrow in scope and are purely historic; by analogy, financial measures let you know where you’ve been, but may

not be a good predictor of where you are going (Frost, 2000).

Second, financial outcomes are often short term in nature, so they omit other key factors that might be important

to the longer-term viability of the organization. For instance, return on sales (ROS, or net profit divided by total

sales) is a commonly used measure of financial performance, and firms set goals and objectives related to return

on sales. However, an organization can increase return on sales by cutting investments in marketing and research

and development (since they are costs that lessen the “return” dimension of ROS). It may be a good thing to

cut such costs, but that type of cost-cutting typically hurts the organization’s longer-term prospects. Decreases in

marketing may reduce brand awareness, and decreases in research and development (R&D) will likely stifle new

product or service development.

Finally, goals and objectives, even when they cover more than short-term financial metrics, are often not tied to

strategy and ultimately to vision and mission. Instead, you may often see a laundry list of goals and objectives

that lack any larger organizing logic. Or the organization may have adopted boilerplate versions of nonfinancial

measurement frameworks such as Kaplan and Norton’s Balanced Scorecard, Accenture’s Performance Prism, or

Skandia’s Intellectual Capital Navigator (Ittner & Larcker, 2003).

Goals and Objectives in P-O-L-CGoals and Objectives in P-O-L-C

Goals and objectives are an essential part of planning. They also have cascading implications for all the aspects

of organizing, leading, and controlling. Broadly speaking, goals and objectives serve to:

• Gauge and report performance

• Improve performance

• Align effort

• Manage accountabilities

Goals, Objectives, and PlanningGoals, Objectives, and Planning

Planning typically starts with a vision and a mission. Then managers develop a strategy for realizing the vision

and mission; their success and progress in achieving vision and mission will be indicated by how well the

underlying goals and objectives are achieved. A vision statement usually describes some broad set of goals—what

the organization aspires to look like in the future. Mission statements too have stated goals—what the organization

aspires to be for its stakeholders. For instance, Mars, Inc., the global food giant, sets out five mission statement

256 • PRINCIPLES OF MANAGEMENT

goals in the areas of quality, responsibility, mutuality, efficiency, and freedom. Thus, goals are typically set for

the organization as a whole and set the stage for a hierarchy of increasingly specific and narrowly set goals and

objectives.

However, unless the organization consists of only a single person, there are typically many working parts in terms

of functional areas and product or service areas. Functional areas like accounting and marketing will need to have

goals and objectives that, if measured and tracked, help show if and how those functions are contributing to the

organization’s goals and objectives. Similarly, product and service areas will likely have goals and objectives.

Goals and objectives can also be set for the way that functions and product or service areas interact. For instance,

are the accounting and marketing functions interacting in a way that is productive? Similarly, is marketing

delivering value to product or service initiatives?

Goals, Objectives, and Organizing, Leading, and ControllingGoals, Objectives, and Organizing, Leading, and Controlling

Within the planning facet of P-O-L-C alone, you can think of goals and objectives as growing in functional or

product/service arena specificity as you move down the organization. Similarly, the time horizon can be shorter

as you move down the organization as well. This relationship between hierarchy and goals and objectives is

summarized in the following figure.

Obviously, the role of goals and objectives does not stop in the planning stage. If goals and objectives are to be

achieved and actually improve the competitive position of the firm, then the organizing, leading, and controlling

stages must address goals and objectives as well.

The way that the firm is organized can affect goals and objectives in a number of ways. For instance, a functional

organizational structure, where departments are broken out by finance, marketing, operations, and so on, will

likely want to track the performance of each department, but exactly what constitutes performance will probably

vary from function to function.

In terms of leadership, it is usually top managers who set goals and objectives for the entire organization. Ideally,

then, lower-level managers would set or have input into the goals and objectives relevant to their respective parts

of the business. For example, a CEO might believe that the company can achieve a sales growth goal of 20% per

year. With this organizational goal, the marketing manager can then set specific product sales goals, as well as

pricing, volume, and other objectives, throughout the year that show how marketing is on track to deliver its part

of organizational sales growth. Goal setting is thus a primary function of leadership, along with holding others

accountable for their respective goals and objectives.

Figure 6.4 Goals and Objectives in Planning

6.3 THE NATURE OF GOALS AND OBJECTIVES • 257

Finally, goals and objectives can provide a form of control since they create a feedback opportunity regarding how

well or how poorly the organization executes its strategy. Goals and objectives also are a basis for reward systems

and can align interests and accountability within and across business units. For instance, in a business with

several divisions, you can imagine that managers and employees may behave differently if their compensation

and promotion are tied to overall company performance, the performance of their division, or some combination

of the two.

Key Takeaway

Goals are typically outcome statements, while objectives are very precise, time-based, and measurableactions that support the completion of goals. Goals and objectives are an essential element in planning andare a key referent point in many aspects of organizing, leading, and controlling. Broadly speaking, withinthe P-O-L-C framework, goals and objectives serve to (1) gauge and report performance, (2) improveperformance, (3) align effort and, (4) manage accountabilities.

Exercises

1. What is the difference between a goal and an objective?

2. What is the relationship between a goal and an objective?

3. What characteristics should a good objective have?

4. What four broad ways do goals and objectives fit in the P-O-L-C framework?

5. Why are goals and objectives relevant to leadership?

258 • PRINCIPLES OF MANAGEMENT

6. In what ways do goals and objectives help managers control the organization?

ReferencesReferences

Frost, B. (2000). Measuring performance. Dallas: Measurement International.

Ittner, C. D., & Larcker, D. (2003, November). Coming up short on nonfinancial performance measurement.

Harvard Business Review, pp. 1–8.

6.3 THE NATURE OF GOALS AND OBJECTIVES • 259

6.4 From Management by Objectives to the BalancedScorecard

Learning Objectives

1. Be able to describe management by objectives.

2. Be able to describe the Balanced Scorecard.

3. Understand the evolution of performance measurement systems.

As you might expect, organizations use a variety of measurement approaches—that is, how they go about setting

and managing goals and objectives. If you have an understanding of how the use of these approaches has evolved,

starting with management by objectives (MBO), you will also have a much better view of how and why the current

incarnations, as seen by variations on the Balanced Scorecard, have many desirable features.

260

Figure 6.5

Goals and objectives are an essential part of any good performance management system.

FEA – Performance Reference Model – public domain.

Management by ObjectivesManagement by Objectives

MBO is a systematic and organized approach that allows management to focus on achievable goals and to attain

the best possible results from available resources. MBO aims to increase organizational performance by aligning

the subordinate objectives throughout the organization with the overall goals that management has set. Ideally,

employees get strong input to identify their objectives, time lines for completion, and so on. MBO includes

ongoing tracking and feedback in the process to reach objectives.

MBO was first outlined by Peter Drucker in 1954 in The Practice of Management. One of Drucker’s core ideas in

MBO was where managers should focus their time and energy. According to Drucker, effective MBO managers

focus on the result, not the activity. They delegate tasks by “negotiating a contract of objectives” with their

subordinates and by refraining from dictating a detailed road map for implementation. MBO is about setting

goals and then breaking these down into more specific objectives or key results. MBO involves (1) setting

company-wide goals derived from corporate strategy, (2) determining team- and department-level goals, (3)

collaboratively setting individual-level goals that are aligned with corporate strategy, (4) developing an action

plan, and (5) periodically reviewing performance and revising goals (Greenwood, 1981; Muczyk & Reimann,

1989; Reif & Bassford, 1975). A review of the literature shows that 68 out of the 70 studies conducted on this

topic showed performance gains as a result of MBO implementation (Rodgers & Hunter, 1991). It also seems that

top management commitment to the process is the key to successful implementation of MBO programs (Rodgers,

et. al., 1993).

The broader principle behind MBO is to make sure that everybody within the organization has a clear

understanding of the organization’s goals, as well as awareness of their own roles and responsibilities in achieving

6.4 FROM MANAGEMENT BY OBJECTIVES TO THE BALANCED SCORECARD • 261

objectives that will help to attain those goals. The complete MBO system aims to get managers and empowered

employees acting to implement and achieve their plans, which automatically achieves the organization’s goals.

Setting ObjectivesSetting Objectives

In MBO systems, goals and objectives are written down for each level of the organization, and individuals are

given specific aims and targets. As consultants Robert Heller and Tim Hindle explain, “The principle behind this

is to ensure that people know what the organization is trying to achieve, what their part of the organization must

do to meet those aims, and how, as individuals, they are expected to help. This presupposes that organization’s

programs and methods have been fully considered. If they have not, start by constructing team objectives and ask

team members to share in the process (Heller & Hindle, 1998).”

Echoing Drucker’s philosophy, “the one thing an MBO system should provide is focus; most people disobey this

rule, try to focus on everything, and end up with no focus at all,” says Andy Grove, who ardently practiced MBO

at Intel. This implies that objectives are precise and few in effective MBO systems.

Similarly, for MBO to be effective, individual managers must understand the specific objectives of their job and

how those objectives fit in with the overall company goals set by the board of directors. As Drucker wrote, “A

manager’s job should be based on a task to be performed in order to attain the company’s goals…the manager

should be directed and controlled by the objectives of performance rather than by his boss (Drucker, 1974).” The

managers of an organization’s various units, subunits, or departments should know not only the objectives of

their unit but should also actively participate in setting these objectives and make responsibility for them. The

review mechanism enables the organization’s leaders to measure the performance of the managers who report to

them, especially in the key result areas: marketing, innovation, human organization, financial resources, physical

resources, productivity, social responsibility, and profit requirements.

Seeking a Balance: The Move Away from MBOSeeking a Balance: The Move Away from MBO

In recent years, opinion has moved away from placing managers into a formal, rigid system of objectives. In

the 1990s, Drucker decreased the significance of this organization management method when he said, “It’s just

another tool. It is not the great cure for management inefficiency (Drucker, 1986).” Recall also that goals and

objectives, when managed well, are tied in with compensation and promotion. In 1975, Steve Kerr published his

critical management article titled, “On the Folly of Rewarding A, While Hoping for B,” in which he lambasted

the rampant disconnect between reward systems and strategy (Kerr, 1975). Some of the common management

reward follies suggested by Kerr and others are summarized in the following table. His criticism included the

objective criteria characteristic of most MBO systems. Kerr went on to lead GE’s human resources function in the

mid-1970’s and is credited with turning that massive organization’s recruiting, reward, and retention systems into

one of its key sources of competitive advantage.

Table 6.1 Common Management Reward Follies

262 • PRINCIPLES OF MANAGEMENT

We hope for… But we often reward…

Long-term growth; environmentalresponsibility Quarterly earnings

Teamwork Individual effort

Setting challenging “stretch” goals Achieving objectives; “making the numbers”

Downsizing; rightsizing; restructuring Adding staffing; adding budget

Commitment to quality Shipping on schedule, even with defects

Commitment to customer service Keeping customers from bothering us1

Candor; surfacing bad news early Reporting good news, whether it’s true or not; agreeing with the boss, whether or not she orhe is right

Even though formal MBO programs have been out of favor since the late 1980s and early 1990s, linking employee

goals to company-wide goals is a powerful idea that benefits organizations. This is where the Balanced Scorecard

and other performance management systems come into play.

The Balanced ScorecardThe Balanced Scorecard

Developed by Robert Kaplan and David Norton in 1992, the Balanced Scorecard approach to management has

gained popularity worldwide since the 1996 release of their text, The Balanced Scorecard: Translating Strategy

into Action. In 2001, the Gartner Group estimated that at least 40% of all Fortune 1000 companies were using

Balanced Scorecard; however, it can be complex to implement, so it is likely that the format of its usage varies

widely across firms.

The Balanced Scorecard is a framework designed to translate an organization’s mission and vision statements

and overall business strategy into specific, quantifiable goals and objectives and to monitor the organization’s

performance in terms of achieving these goals. Among other criticisms of MBO, one was that it seemed

disconnected from a firm’s strategy, and one of Balanced Scorecard’s innovations is explicit attention to vision

and strategy in setting goals and objectives. Stemming from the idea that assessing performance through financial

returns only provides information about how well the organization did prior to the assessment, the Balanced

Scorecard is a comprehensive approach that analyzes an organization’s overall performance in four ways, so that

future performance can be predicted and proper actions taken to create the desired future.

Four Related AreasFour Related Areas

Balanced Scorecard shares several common features. First, as summarized in the following figure, it spells

out goals and objectives for the subareas of customers, learning and growth, internal processes, and financial

performance. The customer area looks at customer satisfaction and retention. Learning and growth explore

the effectiveness of management in terms of measures of employee satisfaction and retention and information

system performance. The internal area looks at production and innovation, measuring performance in terms

of maximizing profit from current products and following indicators for future productivity. Finally, financial

performance, the most traditionally used performance indicator, includes assessments of measures such as

operating costs and return-on-investment.

6.4 FROM MANAGEMENT BY OBJECTIVES TO THE BALANCED SCORECARD • 263

Figure 6.6 The Balanced Scorecard

Adapted from Kaplan, R., & Norton, D. (2001). The Strategy-Focused Organization. Boston: Harvard

Business School Press.

On the basis of how the organization’s strategy is mapped out in terms of customer, learning, internal, and

financial goals and objectives, specific measures, and the specific activities for achieving those are defined

as well. This deeper Balanced Scorecard logic is summarized in the following figure. The method examines

goals, objectives, measures, and activities in four areas. When performance measures for areas such as customer

relationships, internal processes, and learning and growth are added to the financial metrics, proponents of the

Balanced Scorecard argue that the result is not only a broader perspective on the company’s health and activities,

it’s also a powerful organizing framework. It is a sophisticated instrument panel for coordinating and fine-tuning

a company’s operations and businesses so that all activities are aligned with its strategy.

As a structure, Balanced Scorecard breaks broad goals down successively into objectives, measures, and tactical

activities. As an example of how the method might work, an organization might include in its mission or vision

statement a goal of maintaining employee satisfaction (for instance, the mission statement might say something

like “our employees are our most valuable asset”). This would be a key part of the organization’s mission but

264 • PRINCIPLES OF MANAGEMENT

would also provide an “internal” target area for that goal in the Balanced Scorecard. Importantly, this goal, when

done correctly, would also be linked to the organization’s total strategy where other parts of the scorecard would

show how having great employees provides economic, social, and environmental returns. Strategies for achieving

that human resources vision might include approaches such as increasing employee-management communication.

Tactical activities undertaken to implement the strategy could include, for example, regularly scheduled meetings

with employees. Finally, metrics could include quantifications of employee suggestions or employee surveys.

Figure 6.7 Using the Balanced Scorecard to Translate Goals into Activities

Adapted from Kaplan, R., & Norton, D. (2001). The Strategy-Focused Organization. Boston: Harvard

Business School Press.

The Balanced Scorecard in PracticeThe Balanced Scorecard in Practice

In practice, the Balanced Scorecard is supposed to be more than simply a framework for thinking about goals

and objectives, but even in that narrow sense, it is a helpful organizing framework. The Balanced Scorecard’s

own inventors “rightly insist that every company needs to dig deep to discover and track the activities that truly

affect the frameworks’ broad domains (domains such as ‘financial,’ ‘customer,’ ‘internal business processes,’ and

‘innovation and learning’) (Ittner & Larcker, 2003).” In its broadest scope, where the scorecard operates much

like a map of the firm’s vision, mission, and strategy, the Balanced Scorecard relies on four processes to bind

short-term activities to long-term objectives:

1. Translating the vision. By relying on measurement, the scorecard forces managers to come to agreement

on the metrics they will use to translate their lofty visions into everyday realities.

2. Communicating and linking. When a scorecard is disseminated up and down the organizational chart,

strategy becomes a tool available to everyone. As the high-level scorecard cascades down to individual

6.4 FROM MANAGEMENT BY OBJECTIVES TO THE BALANCED SCORECARD • 265

business units, overarching strategic objectives and measures are translated into objectives and measures

appropriate to each particular group. Tying these targets to individual performance and compensation

systems yields “personal scorecards.” Thus, individual employees understand how their own productivity

supports the overall strategy.

3. Business planning. Most companies have separate procedures (and sometimes units) for strategic

planning and budgeting. Little wonder, then, that typical long-term planning is, in the words of one

executive, where “the rubber meets the sky.” The discipline of creating a Balanced Scorecard forces

companies to integrate the two functions, thereby ensuring that financial budgets indeed support strategic

goals. After agreeing on performance measures for the four scorecard perspectives, companies identify the

most influential “drivers” of the desired outcomes and then set milestones for gauging the progress they

make with these drivers.

4. Feedback and learning. By supplying a mechanism for strategic feedback and review, the Balanced

Scorecard helps an organization foster a kind of learning often missing in companies: the ability to reflect

on inferences and adjust theories about cause-and-effect relationships.

Other Peformance Measurement SystemsOther Peformance Measurement Systems

You can imagine that it might be difficult for organizations to change quickly from something like MBO to a

Balanced Scorecard approach. Indeed, both MBO and the Balanced Scorecard fit in the larger collection of tools

called performance management systems. Such systems outline “the process through which companies ensure that

employees are working towards organizational goals (Ghorpade & Chen, 1995).”

Performance management begins with a senior manager linking his or her goals and objectives to the strategic

goals of the organization. The manager then ensures that direct reports develop their goals in relation to the

organization’s overall goals. In a multidivisional or multilocation organization, lower-level managers develop

their goals, and thus their departmental goals, to correspond to the organizational goals. Staff members within each

department then develop their objectives for the year, in cooperation with their managers. Using this pattern for

planning, all activities, goals, and objectives for all employees should be directly related to the overall objectives

of the larger organization.

Performance management systems are more than the performance review because reviews typically are the final

event in an entire year of activity. At the beginning of the year, the manager and employee discuss the employee’s

goals or objectives for the year. This will form the basis for ongoing discussion recorded in a document called the

performance plan. The manager assists employees in developing their objectives by helping them to understand

how their work relates to the department goals and the overall goals of the organization. The employee and

manager also should work together to determine the measurements for evaluating each of the objectives. It is

important that both the manager and employee agree what the objectives are and how they are to be measured.

Employees should not be set up with unrealistic expectations, which will only lead to a sense of failure. If

additional support or education is required during the year to help employees meet their objectives, those can also

be identified and planned for at this time.

The performance plan will contain the section on goals or objectives. It also should include a section that

identifies the organization’s expectations of employee competencies. The set of expectations will involve a range

266 • PRINCIPLES OF MANAGEMENT

of competencies applicable to employees based on their level in the organization. These competencies include

expectations of how employees deal with problems, how proactive they are with respect to changing work, and

how they interact with internal and external customers. While less complex than the Balanced Scorecard, you

can see how the essential components are related. In addition to basic behavioral traits, supervisors and managers

are expected to exhibit leadership and, more senior still, provide vision and strategic direction. It is important to

ensure that employees understand these competencies in respect to themselves.

Throughout the year, the supervisor must participate actively in coaching and assisting all employees to meet their

individual goals and objectives. Should a problem arise—either in the way that success is being measured or in the

nature of the objectives set at the beginning of the year—it can be identified well in advance of any review, and

adjustments to the goals or support for the employee can be provided. This is referred to as continual assessment.

For example, suppose a staff member predicted that he or she would complete a particular project by a particular

date, yet they have encountered problems in receiving vital information from another department. Through active

involvement in staff activities, the supervisor is made aware of the situation and understands that the employee is

intimidated by the supervisor they must work with in the other department. With coaching, the employee develops

a method for initiating contact with the other department and receives the vital information she requires to meet

her objective.

Key Takeaway

The way that goals and objectives are managed in the P-O-L-C process has evolved over time. Whileorganizations can have very simple performance measurement systems, these systems typically trackmultiple goals and objectives. The management by objectives (MBO) approach is perhaps one of theearliest systematic approaches to working with goals and objectives. The Balanced Scorecard is aimed tomake key improvements on a simple MBO system, particularly by more clearly tying goals and objectivesto vision, mission, and strategy and branching out beyond purely financial goals and objectives. MBO andthe Balanced Scorecard belong to the larger family of systems called performance management systems.

Exercises

1. What is Management by objectives (MBO)?

2. What are some of the advantages of MBO?

3. What are some of the disadvantages and criticisms of MBO?

4. What is a Balanced Scorecard?

5. What are some of the advantages of a Balanced Scorecard?

6. What are some of the disadvantages of a Balanced Scorecard?

1This item was not one of Kerr’s originals but is consistent with the spirit of Kerr’s article. We thank our

developmental editor, Elsa Peterson, for this suggestion.

6.4 FROM MANAGEMENT BY OBJECTIVES TO THE BALANCED SCORECARD • 267

ReferencesReferences

Drucker, P. (1974). Management: Tasks, responsibilities, practices. London: Heinemann.

Drucker, P. (1986). The frontiers of management: Where tomorrow’s decisions are being shaped today. New York:

Plume.

Ghorpade, J., & Chen, M. (1995). Creating quality-driven performance appraisal systems. Academy of

Management Executive, 9(1): 23–41.

Greenwood, R. G. (1981). Management by objectives: As developed by Peter Drucker, assisted by Harold

Smiddy. Academy of Management Review, 6, 225–230.

Heller, R., & Hindle, T. (1998). Essential manager’s manual. London: Dorling Kindersley.

Ittner, C. D., & Larcker, D. (2003, November). Coming up short on nonfinancial performance measurement,

Harvard Business Review, pp. 1–8.

Kerr, S. (1975). On the folly of rewarding A, while hoping for B. Academy of Management Journal, 18, 769–783.

Muczyk, J. P., & Reimann, B. C. (1989). MBO as a complement to effective leadership. Academy of Management

Executive, 3, 131–13.

Reif, W. E., & Bassford, G. (1975). What MBO really is: Results require a complete program. Business Horizons,

16, 23–30.

Rodgers, R., & Hunter, J. E. (1991). Impact of management by objectives on organizational productivity. Journal

of Applied Psychology, 76, 322–336.

Rodgers, R., Hunter, J. E., & Rogers, D. L. (1993). Influence of top management commitment on management

program success. Journal of Applied Psychology, 78, 151–155.

268 • PRINCIPLES OF MANAGEMENT

6.5 Characteristics of Effective Goals and Objectives

Learning Objectives

1. Be able to set appropriate goals.

2. Be able to troubleshoot an existing set of goals and objectives.

3. Understand the characteristics of good goals and objectives.

To be clear, this section does not outline which goals or objectives are appropriate or inappropriate, economically,

ethically, morally, or otherwise. Instead, you will learn many of the characteristics of good goals and objectives,

with the aim of becoming a better organizational goal setter (in the last section of this chapter, we remind you

about SMART criteria, which is the application of many of this section’s takeaways to the development of your

personal and professional goals and objectives). At the same time, you should be able to look at a set of goals

and objectives and critique them effectively, such that more appropriate goals and objectives can be developed to

replace them.

Eight Characteristics of Appropriate Goals and ObjectivesEight Characteristics of Appropriate Goals and Objectives

Figure 6.8 Characteristics of Appropriate Goals and Objectives

269

We tend to think that goals and objectives are easy to set, and yet, this intuition is often wrong in the organizational

context. Goals and objectives are difficult to set because we might not know what they should cover or because

we lay out too many of them with the hope that we are covering all the bases. Similarly, goals and objectives

can proliferate in organizations because new ones are set, while old ones are not discarded. Stanford University

management professor Kathleen Eisenhardt noted that there must be a certain balance to the number and type

of goals and objectives: too many goals and objectives are paralyzing; too few, confusing (Eisenhardt & Sull,

2001). In his popular book, Keeping Score, Mark Graham Brown lists several important factors to aid managers in

“rethinking” their approach to setting and managing goals and objectives, what we might call the organization’s

measurement system more broadly (Brown, 1996).

1. Fewer are better. Concentrate on measuring the vital few key variables rather than the trivial many.

2. Measures should be linked to the factors needed for success—key business drivers.

3. Measures should be a mix of past, present, and future to ensure the organization is concerned with all

three perspectives.

4. Measures should be based around the needs of customers, shareholders, and other key stakeholders.

5. Measures should start at the top and flow down to all levels of employees in the organization.

6. Multiple indices can be combined into a single index to give a better overall assessment of performance.

7. Measures should be changed or at least adjusted as the environment and your strategy changes.

8. Measures need to have targets or objectives established that are based on research rather than arbitrary

numbers (Brown, 1996).

Let’s walk through each of these criteria to gain a better understanding of these desirable characteristics of

organizational goals and objectives. It is useful here to start by recognizing that goals, objectives, and measures

270 • PRINCIPLES OF MANAGEMENT

are different animals. As explained at the beginning of this chapter, goals tend to be general statements, whereas

objectives are specific and time bound. Measures are the indicators used to assess achievement of the objective.

In some cases, a goal, an objective, and a measure can be the same thing, but more often you will set a goal, have

a few objectives underlying that goal, and then one or more measures for each of the objectives.

Less Is MoreLess Is More

Less is more, fewer is better, and simple rules are the common mantra here. Eisenhardt suggests that organizations

should have two to seven key goals, or rules, using her vocabulary (Eisenhardt & Sull, 2001). Such goals guide

how the firm operates, identify which opportunities to pursue, set priorities, manage timing of actions, and even

inform business exit decisions.

If the organization should have only two to seven key goals, what about objectives and measures? Metric guru

Graham Brown suggests that managers should not try to follow any more than 20 measures of performance in

terms of performance on objectives. Thus, with two to seven goals, and 20 performance measures, this means

that you will likely have a number of objectives somewhere between the number of set goals and the number of

measures. Why this limit? “No individual can monitor and control more than twenty variables on a regular basis,”

says Graham Brown (Brown, 1996).

Tie Measures to Drivers of SuccessTie Measures to Drivers of Success

One of the key litmus tests for setting goals, objectives, and measures is whether they are linked in some way to

the key factors driving an organization’s success or competitive advantage. This means that they must provide a

verified path to the achievement of a firm’s strategy, mission, and vision. This characteristic of effective goals,

objectives, and measures is one reason that many managers use some form of Balanced Scorecard in their

businesses. The Balanced Scorecard process provides a framework for evaluating the overall measurement system

in terms of what strategic objectives it contributes to. The big challenge, however, is to verify and validate the link

to success factors. Managers who do not scrupulously uncover the fundamental drivers of their units’ performance

face several potential problems. They often end up measuring too many things, trying to fill every perceived gap

in the measurement system.

Don’t Just Measure the PastDon’t Just Measure the Past

For a variety of reasons it is important to capture past performance. After all, many stakeholders such as investors,

owners, customers, and regulators have an interest in how the firm has lived up to it obligations. However,

particularly in the area of objectives and measurement, the best systems track the past, present, and future.

Echoing this observation, Robert Kaplan, co-originator of the Balanced Scorecard framework, published another

book on the subject called The Balanced Scorecard: You Can’t Drive a Car Solely Relying on a Rearview Mirror.

A combination of goals, objectives, and measures that provides such information is sometimes referred to as a

dashboard—like the analogy that a dashboard tells you how the car is running, and through the windshield you

can see where you are going. Indicators on how well the economy is doing, for instance, can suggest whether your

business can experience growing or declining sales. Another leading indicator is customer satisfaction. General

Electric, for instance, asks its customers whether they will refer other customers to GE. GE’s managers have found

6.5 CHARACTERISTICS OF EFFECTIVE GOALS AND OBJECTIVES • 271

that the higher this likelihood of referral, the greater the next quarter’s sales demands. As a result, GE uses this

measure to help it forecast future growth, as well as evaluate the performance of each business unit.

Take Stakeholders Into AccountTake Stakeholders Into Account

While it is important to track the goals and objectives most relevant to the needs of the business, relevance is

subjective. This is why it is valuable to understand who the organization’s key stakeholders are, and set the goals,

objectives, and measures in such a way that stakeholders can be satisfied. Or, at the very least, stakeholders

can gain information relevant to their particular interests. Some stakeholders may never be entirely satisfied

with companies’ performance—for example, some environmental groups may continue to criticize a company’s

environmental impact, but they can be somewhat placated with more transparent reporting of what the company

is doing on the environmental front. Similarly, stakeholders with social concerns will appreciate transparency in

reporting on the organization’s corporate social responsibility efforts.

Cascade Goals Into ObjectivesCascade Goals Into Objectives

The less-is-more concept can apply to the way that goals cascade into objectives, which cascade into measures.

Tying goals and objectives to drivers of success means that vision, mission, and strategy cascade down to goals,

and so on. The first benefit of this cascade approach is that goals and objectives are consistent with the strategy,

vision, and mission. A second benefit is that goals and objectives in lower levels of the organization are more

likely to be vertically and horizontally consistent since they should be designed to achieve the higher-level goals

and objectives and, ultimately, the overarching strategy of the organization.

SimplifySimplify

Information overload is a challenge facing all managers (and students and teachers!), and simplification builds on

the idea that managers can attend to a few things well but many things poorly. Simplification refers both to the use

of fewer, not more, metrics, objectives and goals, and the idea that multiple measures should be distilled down into

single measures like an index or a simple catch-all question. For instance, GE’s use of the single question about

referring customers is a powerful but effective leading metric and a metric that it can reinforce with its rewards

system. When metrics involve multiple dimensions, in areas where the organization wants to gauge customer

satisfaction, for example, a survey can have 10 or more questions. Think about the many customer satisfaction

surveys you are asked to complete after making an online purchase. Which question is the most important? The

challenge, of course, is that a simple average of the customer survey scores, while providing a simpler indicator,

also may hide some key indicator that is now buried in the average score. Therefore, the organization might need

to experiment a bit with different ways of simplifying the measures with the aim of providing one that best reflects

achievement of the key objective.

AdaptAdapt

An organization’s circumstances and strategies tend to change over time. Since goals, objectives, and measures

need to tie directly to the organization’s strategy, they should be changed as well when the strategy changes.

For example, many U.S. automakers set out to dominate certain car and truck segments on the basis of vehicle

272 • PRINCIPLES OF MANAGEMENT

features and price, not fuel efficiency. However, the recent fluctuations in oil prices gave rise to a market for more

fuel-efficient vehicles. Unless the automakers set some aggressive fuel efficiency objectives for their new models,

however, that is unlikely to be a differentiating feature of their cars and trucks. Adaptation of metrics is not the

same as adding more or other metrics. In the spirit of fewer and simpler measures, managers should be asked to

take a measure away if they plan to introduce a new one.

Base Objectives on FactsBase Objectives on Facts

Finally, while goals may sometimes be general (such as performance goals in which managers simply state, grow

profits 10%), the objectives and the metrics that gauge them should be quite specific and set based on facts and

information, not intuition. A fact-based decision-making process starts with the compilation of relevant data about

the particular goal. This in turn typically requires that the organization invest in information and in information-

gathering capabilities.

For example, early in Jack Welch’s tenure as CEO of GE, he set out a financial goal for the company of improving

its return on assets (ROA), a measure of financial efficiency. One of the underlying determinants of ROA is

inventory-turn, that is, how many times a firm can sell its stock of inventory in a given year. So, to improve

ROA, a firm will likely have to also improve its inventory turns. One of GE’s divisions manufactured refrigerators

and turned its inventory seven times per year. What objective should Welch set for the refrigerator division’s

inventory turn? Instead of simply guessing, Welch sent a team of managers into another manufacturing firm (with

permission of the firm’s owners and top managers) in a different industry and learned that it was achieving turns

of 12 to 17 times per year! Armed with this information, Welch could then set a clear and fact-based inventory-

turn objective for that division, which in turn supported one of the overarching financial goals he had set for GE.

Figure 6.9 Steve Jobs Announcing Apple’s Release of the iPhone

David Geller – CC BY 2.0.

6.5 CHARACTERISTICS OF EFFECTIVE GOALS AND OBJECTIVES • 273

Fact-based objectives typically can be clearer and more precise the shorter the relative time to their achievement.

For instance, a firm can likely predict next week’s sales better than next year’s sales. This means that goals and

objectives for the future will likely need to be more specific when they are fairly current but will necessarily be

less precise down the road.

The main challenge with fact-based objectives is that many firms find future opportunities in markets where there

is not an existing set of customers today. For instance, before Apple released the iPhone, how big would you

expect that market to be? There certainly were no facts, aside from general demographics and the technology,

to set fact-based goals and objectives. In such cases, firms will need to conduct “experiments” where they learn

about production and market characteristics, such that the first goals and objectives will be related to learning and

growth, with more specific fact-based objectives to follow. Otherwise, firms will only take action in areas where

there are data and facts, which clearly creates a paradox for managers if the future is uncertain in their particular

industry.

Key Takeaway

This section described eight general characteristics of good goals, objectives, and measures. Fewer andsimpler goals and objectives are better than more and complex ones. Similarly, goals and objectives shouldbe tied to strategy and, ultimately, to vision and mission, in a cascading pattern so that objectives andmeasures support the goals they are aiming to help achieve. Goals and objectives must also change withthe times and, wherever possible, be anchored in facts or fact-finding and learning.

Exercises

1. Why might fewer goals be better than more goals and objectives?

2. Why should managers strive for a balance of history-based, present, and future-oriented metrics ofperformance?

3. What is meant by cascading goals and objectives?

4. What roles do strategy, vision, and mission play with respect to goals and objectives?

5. What are some ways to simplify goals and objectives?

6. When might fact-based objective setting be difficult or inappropriate?

ReferencesReferences

Brown, M. G. (1996). Keeping score. New York: Productivity Press.

Eisenhardt, K., & Sull, D. (2001, January). Strategy as simple rules. Harvard Business Review, pp. 1–11.

274 • PRINCIPLES OF MANAGEMENT

6.6 Using Goals and Objectives in Employee PerformanceEvaluation

Learning Objectives

1. Understand where goals and objectives fit in employee development.

2. See how goals and objectives are part of an effective employee performance evaluation process.

Goals, Objectives, and Performance ReviewsGoals, Objectives, and Performance Reviews

Since leadership is tasked with accomplishing things through the efforts of others, an important part of your

principles of management tool kit is the development and performance evaluation of people. A performance

evaluation is a constructive process to acknowledge an employee’s performance. Goals and objectives are a

critical component of effective performance evaluations, so we need to cover the relationship among them briefly

in this section. For instance, the example evaluation form needs to have a set of measurable goals and objectives

spelled out for each area. Some of these, such as attendance, are more easy to describe and quantify than others,

such as knowledge. Moreover, research suggests that individual and organizational performance increase 16%

when an evaluation system based on specific goals and objectives is implemented (Rynes, et. al., 2002).

Role and Limitations of Performance EvaluationsRole and Limitations of Performance Evaluations

Most organizations conduct employee performance evaluations at least once a year, but they can occur more

frequently when there is a clear rationale for doing so—for instance, at the end of a project, at the end of each

month, and so on. For example, McKinsey, a leading strategy consulting firm, has managers evaluate employees

at the end of every consulting engagement. So, in addition to the annual performance evaluation, consultants

can receive up to 20 mini-evaluations in a year. Importantly, the timing should coincide with the needs of the

organization and the development needs of the employee.

275

Figure 6.10

Performance evaluation based on clear goals and objectives leaves little doubt about the desired outcome.

Pixabay – CC0 public domain.

Performance evaluations are critical. Organizations are hard-pressed to find good reasons why they can’t

dedicate an hour-long meeting at least once a year to ensure the mutual needs of the employee and

organization are being met. Performance reviews help managers feel more honest in their relationships

with their subordinates and feel better about themselves in their supervisory roles. Subordinates are

assured clear understanding of what goals and objectives are expected from them, their own personal

strengths and areas for development, and a solid sense of their relationship with their supervisor. Avoiding

performance issues ultimately decreases morale, decreases credibility of management, decreases the

organization’s overall effectiveness, and wastes more of management’s time to do what isn’t being done

properly.

Finally, it is important to recognize that performance evaluations are a not a panacea for individual

and organizational performance problems. Studies show that performance-appraisal errors are extremely

difficult to eliminate (Rynes, et. al., 2002). Training to eliminate certain types of errors often introduces

other types of errors and sometimes reduces accuracy. The most common appraisal error is leniency, and

managers often realize they are committing it. Mere training is insufficient to eliminate these kinds of

errors: action that is more systematic is required, such as intensive monitoring or forced rankings.

Figure 6.11 Example Employee Evaluation Form

276 • PRINCIPLES OF MANAGEMENT

An Example of the Performance Review ProcessAn Example of the Performance Review Process

For the purpose of this example, let’s assume that the organization has determined that annual performance

evaluations fit the strategic needs of the organization and the developmental needs of employees. This does not

mean however that management and employees discuss goals, objectives, and performance only once a year.

In our example, the organization has opted to have a midyear information meeting and then an end-of-year

performance evaluation meeting.

At some point in the year, the supervisor should hold a formal discussion with each staff member to review

individual activities to date and to modify the goals and objectives that employee is accountable for. This agreed-

upon set of goals and objectives is sometimes called an employee performance plan. There should be no surprises

6.6 USING GOALS AND OBJECTIVES IN EMPLOYEE PERFORMANCE EVALUATION • 277

at this meeting. The supervisor should have been actively involved in continual assessment of his or her staff

through regular contact and coaching. If major concerns arise, the performance plan can be modified or the

employees can receive development in areas in which they may be weak. This also is a time for the employee to

provide formal feedback to the supervisor on the coaching, on the planning, and on how the process seems to be

working.

At the end of the year, a final review of the activities and plans for developing the next year’s objectives begin.

Again, this is a chance to provide constructive and positive feedback and to address any ongoing concerns about

the employee’s activities and competencies. Continuing education opportunities can be identified, and for those

systems linked to compensation, salary raises will be linked to the employee’s performance during the year. Again,

there should be no surprises to either employee or supervisor, as continual assessment and coaching should take

place throughout the year. Supervisors and managers are involved in the same series of activities with their own

supervisors to ensure that the entire organization is developing and focused on the same common objectives.

There are many varieties of performance management systems available, but you must be aware that you will

need to tailor any system to suit the needs of the organization and the staff. As the organization and its competitive

environment change over time, the system will also need to develop to reflect changes to employee competencies,

ranking systems, and rewards linked to the plan.

How do you handle your reviews, that is, when you are the focus of the review process? “Your Performance

Review” summarizes some key ideas you might keep in mind for your next review.

Your Performance ReviewYour Performance Review

There are typically three areas you should think about when having your own performance reviewed: (1)preparation for the review, (2) what to do if the review is negative, and (3) what should you ultimately takeaway from the review.

Prepare for an upcoming review. Document your achievements and list anything you want to discuss atthe review. If you haven’t kept track of your achievements, you may have to spend some time figuringout what you have accomplished since your last review and, most importantly, how your employer hasbenefited, such as increased profits, grown the client roster, maintained older clients, and so on. These areeasier to document when you have had clear goals and objectives.

What should you do if you get a poor review? If you feel you have received an unfair review, you shouldconsider responding to it. You should first try to discuss the review with the person who prepared it.Heed this warning, however. Wait until you can look at the review objectively. Was the criticism youreceived really that off the mark or are you just offended that you were criticized in the first place? If youeventually reach the conclusion that the review was truly unjust, then set an appointment to meet with yourreviewer. If there are any points that were correct, acknowledge those. Use clear examples that counteractthe criticisms made. A paper trail is always helpful. Present anything you have in writing that can back youup. If you didn’t leave a paper trail, remember to do this in the future.

What should you take away from a performance review? Ultimately, you should regard your review as alearning opportunity. For instance, did you have clear goals and objectives such that your performance waseasy to document? You should be able to take away valuable information, whether it is about yourself oryour reviewer.

278 • PRINCIPLES OF MANAGEMENT

Best PracticesBest Practices

While there is no single “best way” to manage performance evaluations, the collective actions across a number of

high-performing firms suggests a set of best practices.

1. Decide what you are hoping to achieve from the system. Is it to reward the stars and to correct problems?

Or is its primary function to be a tool in focusing all staff activities through better planning?

2. Develop goals and objectives that inspire, challenge, and stretch people’s capabilities. Once goals and

objectives are clearly communicated and accepted, enlist broad participation, and do not shut down ideas.

Support participation and goal attainment through the reward system, such as with gainsharing or other

group incentive programs.

3. Ensure you have commitment from the top. Planning must begin at the executive level and be filtered

down through the organization to ensure that employees’ plans are meaningful in the context of the

organization’s direction. Top managers should serve as strong role models for the performance evaluation

process and attach managerial consequences to the quality of performance reviews (for instance, McKinsey

partners are evaluated on how well they develop their consultants, not just the profitability of their

particular practice).

4. Ensure that all key staff are involved in the development of the performance management processes from

the early phases. Provide group orientations to the program to decrease anxiety over the implementation of

a new system. It will ensure a consistent message communicated about the performance management

system.

5. If the performance management system is not linked to salary, be sure employees are aware of it. For

example, university business school professors are paid salaries based on highly competitive external labor

markets, not necessarily the internal goals and objectives of the school such as high teaching evaluations,

and so on. Make sure employees know the purpose of the system and what they get out of it.

6. Provide additional training for supervisors on how to conduct the midyear and year-end performance

reviews. Ensure that supervisors are proficient at coaching staff. Training, practice, and feedback about how

to avoid appraisal errors are necessary, but often insufficient, for eliminating appraisal errors. Eliminating

errors may require alternative approaches to evaluation, such as forced distribution (for instance, General

Electric must rank the lowest 10% of performers and often ask them to find work with another employer).

7. Plan to modify the performance management system over time, starting with goals and objectives, to

meet your organization’s changing needs. Wherever possible, study employee behaviors in addition to

attitudes; the two do not always converge.

Key Takeaway

This section outlined the relationship between goals and objectives and employee performance evaluation.Performance evaluation is a tool that helps managers align individual performance with organizationalgoals and objectives. You saw that the tool is most effective when evaluation includes well-developedgoals and objectives that are developed with the needs of both the organization and employee in mind.

6.6 USING GOALS AND OBJECTIVES IN EMPLOYEE PERFORMANCE EVALUATION • 279

The section concluded with a range of best practices for the performance evaluation process, including therevision of goals and objectives when the needs of the organization change.

Exercises

1. How are goals and objectives related to employee performance evaluation?

2. How often should performance evaluations be performed?

3. What kinds of goals and objectives might be best for performance evaluation to be most effective?

4. What should be included in an employee performance plan?

5. What performance evaluation best practices appear to most directly involve goals and objectives?

ReferencesReferences

Rynes, S., Brown, K., & Colbert, A. 2002. Seven common misconceptions about human resource practices:

Research findings versus practitioner beliefs. Academy of Management Executive, 16(3): 92–102.

280 • PRINCIPLES OF MANAGEMENT

6.7 Integrating Goals and Objectives with Corporate SocialResponsibility

Learning Objectives

1. Understand the nature of corporate social responsibility.

2. See how corporate social responsibility, like other goals and objectives, can be incorporated usingthe Balanced Scorecard.

3. Understand that corporate social responsibility, like any other goal and objective, helps the firmonly when aligned with its strategy, vision, and mission.

One of the overarching lessons of this chapter is that goals and objectives are only effective to the extent that

they reinforce the organization’s strategy and therefore the realization of its vision and mission. This section is

somewhat integrative in that it provides knowledge about the ways that goals and objectives related to social and

environmental issues can be tied back into strategy using a Balanced Scorecard approach.

281

Figure 6.12

GE combines environmental responsibility with the business strategy of providing the best wind energy

devices.

warrenski – Darling Wind Farm – CC BY-NA 2.0.

Corporate Social ResponsibilityCorporate Social Responsibility

The corporate social responsibility (CSR) movement is not new and has been gathering momentum for well over

a decade (Crawford & Scaletta, 2005). CSR is about how companies manage their business processes to produce

an overall positive effect on society. This growth has raised questions—how to define the concept and how to

integrate it into the larger body of an organization’s goals and objectives. The Dow Jones Sustainability Index

created a commonly accepted definition of CSR: “a business approach that creates long-term shareholder value

by embracing opportunities and managing risks deriving from economic, environmental and social developments

(Sustainability, 2008).” Specifically, the Dow Jones Sustainability Index looks at competence in five areas:

• Strategy: Integrating long-term economic, environmental, and social aspects in their business strategies

while maintaining global competitiveness and brand reputation.

• Financial: Meeting shareholders’ demands for sound financial returns, long-term economic growth, open

communication, and transparent financial accounting.

• Customer and Product: Fostering loyalty by investing in customer relationship management, and product

and service innovation that focuses on technologies and systems, which use financial, natural, and social

282 • PRINCIPLES OF MANAGEMENT

resources in an efficient, effective, and economic manner over the long term.

• Governance and Stakeholder: Setting the highest standards of corporate governance and stakeholder

engagement, including corporate codes of conduct and public reporting.

• Human: Managing human resources to maintain workforce capabilities and employee satisfaction through

best-in-class organizational learning and knowledge management practices and remuneration and benefit

programs.

CSR and the Balanced ScorecardCSR and the Balanced Scorecard

Since you are already familiar with the Balanced Scorecard from the previous section, you will probably already

see how it can be used for CSR (a brief summary of the Balanced Scorecard concept is found in “The Balanced

Scorecard at a Glance”). As experts from GreenBiz.com have observed:

“One of the fundamental opportunities for the CSR movement is how to effectively align consumer and employee values

with strategy to generate long-term benefits—a better understanding of precisely with whom, what, when, where, how

and why an enterprise makes a profit or surplus. CSR requires more holistic strategic thinking and a wider stakeholder

perspective. Because the Balanced Scorecard is a recognized and established management tool, it is well positioned to support

a knowledge-building effort to help organizations make their CSR values and visions a reality. The Balanced Scorecard enables

individuals to make daily decisions based upon values and metrics that can be designed to support these long-term cognizant

benefits (Crawford & Scaletta, 2005).”

Thus, the Balanced Scorecard is an ideal vehicle for integrating CSR concerns with the organization’s mission,

vision, and strategy.

The Balanced Scorecard at a GlanceThe Balanced Scorecard at a Glance

As you know, the Balanced Scorecard is a focused set of key financial and nonfinancial indicators.These indicators include leading, pacing, and lagging measures. The term “balanced” does not meanequivalence among the measures but rather an acknowledgment of other key performance metrics thatare not financial. The now classic scorecard, as outlined by Robert Kaplan and David Norton, has fourquadrants or perspectives: (1) learning and growth, (2) internal, (3) customer, and (4) financial. Moreover,the idea is that each of these perspectives should be linked. For example, increased training for employees(learning and growth) can lead to enhanced operations or processes (internal), which leads to more satisfiedcustomers through either improved delivery time and/or lower prices (customers), which finally leads tohigher financial performance for the organization (financial).

A number of academic authors as well as global management consulting firms like McKinsey and KPMG have

written about the pressures facing firms with regard to social and environmental issues. For instance, KPMG’s

“International Survey of Corporate Responsibility Reporting 2008” reflects the growing importance of corporate

responsibility as a key indicator of nonfinancial performance, as well as a driver of financial performance (KPMG,

2008). In the 2008 survey, KPMG noted a significant increase in the publication of corporate responsibility

6.7 INTEGRATING GOALS AND OBJECTIVES WITH CORPORATE SOCIAL RESPONSIBILITY • 283

reports in the United States, from 37% in their 2005 survey to 74% in 2008. KPMG concluded that the survey

findings also reflect a growing sense of responsibility in the business community to improve transparency and

accountability to the wider community—not just to shareholders (see below for a summary of KPMG’s analysis

of U.S. CSR practices).

Summary of KPMG’s 2008 Report on U.S. Firm CSR PracticesSummary of KPMG’s 2008 Report on U.S. Firm CSR Practices

“The increase in corporate responsibility reporting by the top 100 companies in the United States may beattributed to an increased focus on sustainability issues within US business in the last several years. Thisyear’s survey found that the top three drivers for corporate responsibility reporting remained the same asin ethical considerations, economic considerations, and innovation and learning.

“However, within these drivers, ethical considerations (70 percent) replaced economic considerations(50 percent) as the primary driver. We also noticed a gradual maturation of corporate responsibilityprograms by US companies. Of the 74 percent that reported publicly, 82 percent had a defined corporateresponsibility or sustainability strategy, and 77 percent had implemented management systems for theircorporate responsibility goals. Furthermore, 78 percent had defined specific indicators relating to statedobjectives and 68 percent actually reported on performance against the stated objectives.”

http://www.kpmg.com/Global/IssuesAndInsights/ArticlesAndPublications/Pages/Sustainability-corporate-responsibility-reporting-2008.aspx (accessed November 11, 2008).

The actual effect of these challenges and opportunities was recently identified in an earlier (2006) KPMG’s

“International Survey of Corporate Responsibility Reporting (KPMG, 2005).” This report surveyed more than

1,600 companies worldwide and documented the top 10 motivators driving corporations to engage in CSR for

competitive reasons, which are:

• Economic considerations

• Ethical considerations

• Innovation and learning

• Employee motivation

• Risk management or risk reduction

• Access to capital or increased shareholder value

• Reputation or brand

• Market position or share

• Strengthened supplier relationships

• Cost savings

By creatively responding to these market forces, and others generated by the CSR movement, organizations can

reap considerable benefits. There are many examples of how companies are being affected by CSR drivers and

motivators. The following two examples are just a brief sample of the myriad CSR performance motivators that

are top of mind for managers.

284 • PRINCIPLES OF MANAGEMENT

IKEAIKEA

Swedish home furnishings retailer IKEA discloses a lot of detailed information with regard to supply chain

management in its annual CSR report (Ikea, 2008). As IKEA has suppliers in countries where the risk of labor

rights abuses are perceived as high, they are obligated to work on these issues in a systematic way, which can be

followed up on both internally and externally. IKEA’s 2007 “Social and Environmental Responsibility Report”

is noteworthy because of its transparency on its supply chain. For example, IKEA reported on the top five

purchasing countries as well as on how many IKEA suppliers are IWAY approved (The IKEA Way on Purchasing

Home Furnishing Products) (Ikea, 2009). China is number one in the top five purchasing countries at 22%, yet

at the same time has the lowest number of IWAY-approved suppliers (4%). IKEA seems aware that transparency

also calls for completeness and has disclosed well-developed information about the challenges in Asia in general

and in China specifically.

PEMEXPEMEX

PEMEX (Mexico) is a government-controlled body that was created as a decentralized government agency of the

Federal Public Administration. Its core purpose is to drive the nation’s central and strategic development activities

in the state’s petroleum industry. PEMEX holds the number 11 position as a crude oil producer and is one of

the three main suppliers of crude oil for the U.S. market. In 2007, total sales amounted to approximately $104.5

billion. Active personnel at PEMEX at the end of 2007 rose to 154,802 workers. PEMEX has been publishing

corporate responsibility reports since 1999. The 2007 report complies with the indicators set forth in the Global

Reporting Initiative (GRI) Guidelines and was the first Mexican GRI Application Level A+ report—the highest

level (Pemex, 2008). Moreover, the report meets the guidelines of the United Nations Global Compact for

communication in progress. The report addressed the needs of a complex sector, including the national oil and

gas industry, a vast list of stakeholders, and a citizen participation group composed of highly renowned specialists

to address citizens’ concerns.

Measures and CSRMeasures and CSR

One of the organizational challenges with CSR is that it requires firms to measure and report on aspects of their

operations that were either previously unmonitored or don’t clearly map into the firm’s strategy. Thus, goals and

objectives related to growing revenues through green consumers in the Lifestyles of Health and Sustainability

(LOHAS) marketplace comes with the price of increased transparency—this customer group demands the

necessary data to make informed decisions. Ethical considerations, KPMG’s second driver, are directly linked to

the LOHAS market. LOHAS describes a $226.8 billion marketplace for goods and services focused on health,

the environment, social justice, personal development, and sustainable living. The consumers attracted to this

market have been collectively referred to as “cultural creatives” and represent a sizable group in the United

States (Florida, 2005). Interested stakeholders, such as employees, regulators, investors, and nongovernmental

organizations (NGOs), pressure organizations to disclose more CSR information. Companies in particular are

increasingly expected to generate annual CSR reports in addition to their annual financial reports.

CSR reporting measures an organization’s economic, social, and environmental performance and impacts. The

measurement of CSR’s three dimensions is commonly called the triple bottom line (TBL). The Global Reporting

Initiative (GRI), mentioned in the case of PEMEX, is the internationally accepted standard for TBL reporting.

6.7 INTEGRATING GOALS AND OBJECTIVES WITH CORPORATE SOCIAL RESPONSIBILITY • 285

The GRI was created in 1997 to bring consistency to the TBL reporting process by enhancing the quality, rigor,

and utility of sustainability reporting. GRI issued its first comprehensive reporting guidelines in 2002 and its G3

Reporting Framework in October 2006. Since GRI was established, more than 1,000 international companies had

registered with the GRI and issued corporate sustainability reports using its standards (Global Reporting).

Representatives from business, accounting societies, organized labor, investors, and other stakeholders all

participated in the development of what are now known as the GRI Sustainability Guidelines. The guidelines are

composed of both qualitative and quantitative indicators. The guidelines and indicators were not designed, nor

intended, to replace Generally Accepted Accounting Principles (GAAP) or other mandatory financial reporting

requirements. Rather, the guidelines are intended to complement GAAP by providing the basis for credibility and

precision in non-financial reporting.

Some firms develop and apply their own sets of metrics. Royal Dutch Shell spent in excess of $1 million to

develop its environmental and social responsibility metrics. Instead of picking numbers from established sources,

such as the GRI template, Shell held 33 meetings with stakeholders and shareholders (Juergendaum, 2001). The

derived metrics became a much more accurate reflection of what its customers and other stakeholders wanted, and

thus, a true reflection of its strategy, mission, and vision.

One of the key benefits for an organization using a Balanced Scorecard is improved strategic alignment. The

Balanced Scorecard can be an effective format for reporting TBL indicators, as it illustrates the cause-and-effect

relationship between good corporate citizenship and a successful business. Enterprises can use the combination of

the Balanced Scorecard and CSR to help create a competitive advantage by letting decision makers know whether

they are truly entering into a CSR virtuous cycle in which economic and environmental performance, coupled

with social impacts, combine to improve organizational performance exponentially.

What do we mean by virtuous cycle? A company could begin to compete on cost leadership as a result of

improved technology and effective and efficient processes, which leads to improved ecological protection, which

results in better risk management and a lower cost of capital. Alternatively, a company could differentiate from

its competitors’ values and performance as a result of its community-building activities, which can improve

corporate reputation, result in improved brand equity, creating customer satisfaction, which increases sales. The

move to a broad differentiation strategy can also be achieved through extensive knowledge of green consumers

and leveraging their information needs through appropriate CSR reporting to improve brand equity and reputation.

These examples are designed to illustrate the interrelationships in an organization’s triple bottom line.

Several organizations have already recognized this powerful combination and have adapted or introduced a

Balanced Scorecard that includes CSR elements to successfully implement strategy reflective of evolving societal

values. Many managers are familiar with the Balanced Scorecard and thus have a tool at their disposal to help

them navigate the sometimes foggy worlds of strategy and CSR. The Balanced Scorecard can help organizations

strategically manage the alignment of cause-and-effect relationships of external market forces and impacts with

internal CSR drivers, values, and behavior. It is this alignment combined with CSR reporting that can enable

enterprises to implement either broad differentiation or cost leadership strategies. If managers believe there will

be resistance to stand-alone CSR initiatives, they can use the Balanced Scorecard to address CSR opportunities

and challenges. If you are so motivated, the managerial skills and tools you gain through an understanding of P-

O-L-C will help you to lead your organization toward a CSR virtuous cycle of cognizant benefits, understanding

precisely how and why their company’s profits are made.

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Key Takeaway

This section explored the challenges and opportunities of incorporating social and environmental goalsand objectives into the P-O-L-C process. Many organizations refer to social and environmental activitiesas corporate social responsibility (CSR). For many firms, general operating goals and objectives havenot been well integrated with strategy, vision, and mission, so it may not be surprising that social andenvironmental goals, in particular, have not gained much traction. However, when an organization usestools such as the Balanced Scorecard to manage goals and objectives, then there is a coherent vehicle forincorporating social and environmental objectives in the mix as well.

Exercises

1. What does corporate social responsibility mean?

2. Why might it be challenging for organizations to effectively set and achieve social andenvironmental goals and objectives, in addition to their operating goals and objectives?

3. Why might an organization pay greater attention to adding social and environmental goals andobjectives today than, say, 10 years ago?

4. What is meant by “virtuous cycle” with respect to CSR?

5. How does a Balanced Scorecard help managers develop social and environmental goals andobjectives?

6. In what ways does achievement of CSR goals and objectives strategically differentiate anorganization?

ReferencesReferences

Crawford, D., & Scaletta, T. (2005, November 24). http://www.greenbiz.com/feature/2005/10/24/the-balanced-

scorecard-and-corporate-social-responsibility-aligning-values-profit (accessed November 11, 2008).

Crawford, D., and Scaletta, T. (2005, November 24). www.greenbiz.com/feature/2005/10/24/the-balanced-

scorecard-and-corporate-social-responsibility-aligning-values-profit (accessed November 11, 2008).

Florida, R. (2005). The flight of the creative class: The global competition for talent. New York: HarperCollins.

Global Reporting, http://www.globalreporting.org/Home.

Ikea, http://www.ikea-group.ikea.com/ (accessed November 11, 2008).

Ikea, http://www.ikea.com/ms/en_US/about_ikea/social_environmental/the_ikea_way.html (accessed January 30,

2009).

Juergendaum, The Shell metrics effort was widely reported in a number of newsletters and articles. See, for

example, http://www.juergendaum.com/news/05_12_2001.htm.

6.7 INTEGRATING GOALS AND OBJECTIVES WITH CORPORATE SOCIAL RESPONSIBILITY • 287

KPMG, http://www.kpmg.com/Global/IssuesAndInsights/ArticlesAndPublications/Pages/Sustainability-

corporate-responsibility-reporting-2008.aspx (accessed November 11, 2008). Also see http://www.csrwire.com/

News/13565.html (accessed January 30, 2009).

KPMG, http://www.kpmg.nl/Docs/Corporate_Site/Publicaties/

International_Survey_Corporate_Responsibility_2005.pdf.

Pemex, http://www.pemex.com (accessed 2008, November 11).

Sustainability, http://www.sustainability-index.com/07_htmle/sustainability/corpsustainability.html (accessed

November 11, 2008).

288 • PRINCIPLES OF MANAGEMENT

6.8 Your Personal Balanced Scorecard

Learning Objectives

1. Develop a more personalized understanding of the Balanced Scorecard concept.

2. See how your vision and mission can be linked to your goals and objectives.

3. Be able to develop S-M-A-R-T goals and objectives.

One of the powerful tools in a manager’s tool kit is the Balanced Scorecard, a model that groups goals, objectives,

and metrics into the areas of financial, customer, internal business process, and learning and growth. As you know,

the scorecard is effective because it helps managers link vision, mission, and strategy to the goals and objectives

that employees strive to achieve. What you may not know, however, is that you can apply the scorecard to your

personal and professional objectives. Through this process you might also learn more about where and how a

Balanced Scorecard can be applied in an organizational context in your role as a manager or employee. That is the

purpose of this section.

289

Figure 6.13

Personal goals and objectives are key ingredients in your drive to get ahead.

StartupStockPhotos – Pixabay – CC0 public domain.

From an Organizational Scorecard to a Personal OneFrom an Organizational Scorecard to a Personal One

The Balanced Scorecard, championed by Kaplan and Norton, can be translated into your own individual

scorecard, one that helps you achieve your personal and professional goals and objectives. Recall that the

scorecard for an organization starts with vision and mission, followed by goals (financial, internal business

processes, customer, and learning and growth), which have corresponding objectives, metrics, and tactical

activities. When these components are applied to you as an individual, you might see the pieces of the scorecard

labeled as shown in the following figure. Let’s review each piece together.

Figure 6.14 My Balanced Scorecard

290 • PRINCIPLES OF MANAGEMENT

Personal Mission, Vision, and StrategyPersonal Mission, Vision, and Strategy

As with an organization’s mission and vision, your personal mission and vision reflect who you are and where you

want to go. Mission reflects your values and philosophy of life. Vision captures what you want to achieve. Which

values and principles guide your way? What are your most deeply cherished aspirations? What do you want to

achieve? How do you distinguish yourself in society and among your peers and family? If you were to read your

biography in 20 years, what would you want it to say about you?

Personal Goals and Key RolesPersonal Goals and Key Roles

Goals and roles are set out with respect to the areas of financial, others, individual strengths, and learning

and growth. Financial, for instance, captures your needs and aspirations about money, as well as the financial

obligations that you might have as a result of your role of caring for a parent, sibling, or child. Others reflect

goals that you have in relation to other individuals or society at large. How do you want to be seen? Also, in

terms of roles, what do relations with your partner, children, friends, employer, colleagues, and others imply for

your goals? Individual strengths represent the internal perspective, reflecting goals related to your health and well-

being. This category also reflects those strengths that you wish to be distinguishing features. Finally, learning and

growth refer to your skills, abilities, and aims with regard to personal and professional learning and growth. How

can you learn and remain successful in the future? What type of skills and learning are required now, for future

aspired roles?

Using SMART CriteriaUsing SMART Criteria

These portions of the scorecard get more specific in terms of which measurable short-term personal results you

want to achieve. What are the most important changes you want to tackle in your career? Similarly, you will want

6.8 YOUR PERSONAL BALANCED SCORECARD • 291

to answer how you can measure your personal results. What values do you have to obtain, and what are your

specific targets?

For personal objectives and performance measures to be most effective, you might try seeing how they measure up

to SMART criteria. These characteristics, based on specific, measurable, attainable, realistic, and time bound yield

the acronym SMART (Drucker, 1954). Here is how to tell if your objectives, measures, and targets are SMART.

SpecificSpecific

A specific objective has a much greater chance of being accomplished than a general one. To set a specific

objective, you must answer the six “W” questions:

• Who: Who is involved?

• What: What do I want to accomplish?

• Where: Identify a location.

• When: Establish a time frame.

• Which: Identify requirements and constraints.

• Why: Specific reasons, purpose or benefits of accomplishing the objective.

EXAMPLE: A personal goal would be, “Get in shape.” But a specific objective would say, “Get into good enough

shape that 6 months from now I can hike to the summit of a 14,000-foot mountain and back in one day. To do so,

by next Monday I will join a health club within 5 miles of home and work out for at least 45 minutes 3 days a

week for 3 months, then reassess my progress (Manochio, 2008).”

MeasurableMeasurable

Establish concrete criteria for measuring progress toward the attainment of each objective you set. When you

measure your progress, you stay on track, reach your target dates, and experience the exhilaration of achievement

that spurs you on to continued effort required to reach your objective.

To determine whether your objective is measurable, ask questions such as: How much? How many? How will I

know when it is accomplished? Notice that the specific version of the “get in shape” objective includes metrics of

time and distance.

AttainableAttainable

When you identify objectives that are most important to you, you begin to figure out ways you can make them

come true. You develop the attitudes, abilities, skills, and financial capacity to reach them. You begin seeing

previously overlooked opportunities to bring yourself closer to the achievement of your goals and objectives.

You can attain most any objective you set when you plan your steps wisely and establish a time frame that allows

you to carry out those steps. Goals that may have seemed far away and out of reach eventually move closer and

become attainable, not because your goals shrink but because you grow and expand to match them through the

292 • PRINCIPLES OF MANAGEMENT

achievement of nearer-term objectives. When you list your objectives, you build your self-image. You see yourself

as worthy of these goals and objectives and develop the traits and personality that allow you to possess them.

Notice that the “get in shape” example outlines steps toward being able to climb the mountain.

RealisticRealistic

To be realistic, an objective must represent an objective toward which you are both willing and able to work.

An objective can be both high and realistic; you are the only one who can decide just how high your objective

should be. But be sure that every objective represents substantial progress. A high objective is frequently easier

to reach than a low one because a low objective exerts low motivational force. Some of the hardest jobs you ever

accomplished actually seem easy simply because they were a labor of love.

Your objective is probably realistic if you truly believe that it can be accomplished. Additional ways to know

whether your objective is realistic is to determine whether you have accomplished anything similar in the past or

ask yourself what conditions would have to exist to accomplish this objective.

You might decide whether an objective to climb a 14,000-foot mountain is realistic by considering whether people

of your age and ability have been able to do it.

TimelyTimely

An objective should be grounded within a time frame. With no time frame tied to it, there’s no sense of urgency. If

you want to lose 10 pounds, when do you want to lose it by? “Someday” won’t work. But if you anchor it within a

time frame, “by May 1st,” then you’ve set your unconscious mind into motion to begin working on the objective.

T can also stand for Tangible.

An objective is tangible when you can experience it with one of the senses, that is, taste, touch, smell, sight, or

hearing. When your objective is tangible, you have a better chance of making it specific and measurable and thus

attainable.

The objective of climbing the mountain is both grounded in a time frame—six months from now—and tangible,

in that you will either experience climbing the mountain successfully or not.

Personal Improvement ActivitiesPersonal Improvement Activities

The next step is implementation. One way to think about implementation of your Balanced Scorecard is through

the plan-do-act-dare cycle (PDAD cycle), to be followed continuously (Rampersad, 2005). As summarized in the

following figure, the PDAD cycle consists of the following four phases:

Figure 6.15 The PDAD Cycle

6.8 YOUR PERSONAL BALANCED SCORECARD • 293

PlanPlan

Formulate or update your scorecard, which focuses on your work as well as on your spare time. This spans vision

and mission through personal objectives and performance metrics.

DoDo

Start with a simple objective from your scorecard with corresponding improvement activity, keeping in mind the

priorities that have been identified. Each morning, focus on a selected improvement action that you will strive

to implement during the day. Execute the improvement activity with emotional dedication, self-confidence, and

willpower and concentrate on the action. This must be in concordance with your present skills. Share your good

intentions with a trusted person (spouse, friend, colleague, or manager), who will ask questions and give you

honest feedback. Doing is related to acting with purpose and to deliver efforts to realize your objective. Ask often

for feedback from the trusted person. This gives you the opportunity to measure the progress you have made. Start

with habits, which restrict you, influence your life unfavorably, and deliver poor results.

294 • PRINCIPLES OF MANAGEMENT

ActAct

Check whether the improvement activity is working and take action when it is not. Review the results according to

the defined personal performance measures and targets, measure your progress, and check to what extent you have

realized your personal objectives—as suggested by the “assess my progress” portion of the mountain-climbing

goal. If you have not been able to realize your objective, start again. You will improve steadily as it becomes a

habit to do good things right the first time and evaluate your scorecard each month with your trusted person. Think

of three people who can act as your trusted person, who provide you with inspiration and motivation support

for realizing your objectives and improvement actions. Plan to meet with each one of them regularly. Listen

enthusiastically to them, brainstorm with them, and take their wise counsel. Develop your skills and competencies

to achieve the objectives you selected. Recognize your responsibility to constantly develop yourself. Implement

the proven personal improvements, assess the personal results, document the lessons learned, and improve and

monitor your actions and thinking continuously. Also think about bringing your personal ambition and your

personal behavior into balance, which will result in influencing your ethical behavior. According to Steven Covey,

author of The Seven Habits of Highly Effective People, after a few weeks, you will notice small differences in

yourself. In two months, the behavioral change will become firmly embedded. After five months, the important

personal quality will be yours.

DareDare

Accept larger challenges by daring to take on a more difficult objective and corresponding improvement action

from your scorecard and get on with it. Take a chance and be conscientious to choose a more challenging objective

in line with your improved skills when the current improvement action becomes boring. Enjoy the pleasant

experience, and document what you have learned and unlearned during the execution of the improvement action.

Refine it, and review your scorecard regularly.

Key Takeaway

The purpose of this section was to help you translate the Balanced Scorecard to your own personal andprofessional situation. You learned how you might construct the scorecard, and take action to achievepersonal results. Through this process, you might also learn more about where and how a BalancedScorecard can be applied in an organizational context in your role as a manager or employee.

Exercises

1. What can you achieve by applying the concept of a Balanced Scorecard to your personalsituation?

2. How similar or different does the scorecard seem to function at an individual level as opposed toan organizational level?

3. What are key characteristics of effective objectives?

6.8 YOUR PERSONAL BALANCED SCORECARD • 295

4. Why should personal objectives and measures of performance be specific?

5. What are some of the activities you can undertake to implement your scorecard?

6. When is the implementation of a personal Balanced Scorecard completed?

ReferencesReferences

Drucker, P. (1954). The Practice of management. New York: HarperCollins. Drucker coined the usage of the

acronym for SMART objectives while discussing objective-based management.

Manochio, M. (2008, September 30). http://www.dailyrecord.com/apps/pbcs.dll/article?AID=/20080930/

COMMUNITIES12/809300311 (accessed November 10, 2008).

Rampersad. 2005. Personal Balanced Scorecard: The way to individual happiness, personal integrity, and

organizational effectiveness. Charlotte, NC: Information Age Publishing.

296 • PRINCIPLES OF MANAGEMENT

Chapter 7: Organizational Structure andChange

7.1 Organizational Structure and Change

7.2 Case in Point: Toyota Struggles With Organizational Structure

7.3 Organizational Structure

7.4 Contemporary Forms of Organizational Structures

7.5 Organizational Change

7.6 Planning and Executing Change Effectively

7.7 Building Your Change Management Skills

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7.1 Organizational Structure and Change

Figure 7.1

The structures of organizations vary and influence the ease or challenge of organizational performance and

change.

karanja – Pixabay – CC0 public domain.

What’s in It for Me?

Reading this chapter will help you do the following:

1. Define organizational structure and its basic elements.

2. Describe matrix, boundaryless, and learning organizations.

3. Describe why and how organizations change.

4. Understand reasons why people resist change, and strategies for planning and executing changeeffectively.

5. Build your own organizational design skills.

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Figure 7.2 The P-O-L-C Framework

Creating or enhancing the structure of an organization defines managers’ Organizational Design task.

Organizational design is one of the three tasks that fall into the organizing function in the planning-organizing-

leading-controlling (P-O-L-C) framework. As much as individual- and team-level factors influence work attitudes

and behaviors, the organization’s structure can be an even more powerful influence over employee actions.

7.1 ORGANIZATIONAL STRUCTURE AND CHANGE • 299

7.2 Case in Point: Toyota Struggles With OrganizationalStructure

Figure 7.3

The Toad – Labadie Toyota Building – CC BY-NC 2.0.

Toyota Motor Corporation (TYO: 7203) has often been referred to as the gold standard of the automotiveindustry. In the first quarter of 2007, Toyota (NYSE: TM) overtook General Motors Corporation in salesfor the first time as the top automotive manufacturer in the world. Toyota reached success in part becauseof its exceptional reputation for quality and customer care. Despite the global recession and the tougheconomic times that American auto companies such as General Motors and Chrysler faced in 2009, Toyotaenjoyed profits of $16.7 billion and sales growth of 6% that year. However, late 2009 and early 2010witnessed Toyota’s recall of 8 million vehicles due to unintended acceleration. How could this happen to acompany known for quality and structured to solve problems as soon as they arise? To examine this further,one has to understand about the Toyota Production System (TPS).

TPS is built on the principles of “just-in-time” production. In other words, raw materials and suppliesare delivered to the assembly line exactly at the time they are to be used. This system has little room forslack resources, emphasizes the importance of efficiency on the part of employees, and minimizes wastedresources. TPS gives power to the employees on the front lines. Assembly line workers are empowered topull a cord and stop the manufacturing line when they see a problem.

300

However, during the 1990s, Toyota began to experience rapid growth and expansion. With this success, theorganization became more defensive and protective of information. Expansion strained resources acrossthe organization and slowed response time. Toyota’s CEO, Akio Toyoda, the grandson of its founder, hasconceded, “Quite frankly, I fear the pace at which we have grown may have been too quick.”

Vehicle recalls are not new to Toyota; after defects were found in the company’s Lexus model in 1989,Toyota created teams to solve the issues quickly, and in some cases the company went to customers’ homesto collect the cars. The question on many people’s minds is, how could a company whose success was builton its reputation for quality have had such failures? What is all the more puzzling is that brake problems invehicles became apparent in 2009, but only after being confronted by United States transportation secretaryRay LaHood did Toyota begin issuing recalls in the United States. And during the early months of thecrisis, Toyota’s top leaders were all but missing from public sight.

The organizational structure of Toyota may give us some insight into the handling of this crisis and ideasfor the most effective way for Toyota to move forward. A conflict such as this has the ability to paralyzeproductivity but if dealt with constructively and effectively, can present opportunities for learning andimprovement. Companies such as Toyota that have a rigid corporate culture and a hierarchy of seniorityare at risk of reacting to external threats slowly. It is not uncommon that individuals feel reluctant to passbad news up the chain within a family company such as Toyota. Toyota’s board of directors is composed of29 Japanese men, all of whom are Toyota insiders. As a result of its centralized power structure, authorityis not generally delegated within the company; all U.S. executives are assigned a Japanese boss to mentorthem, and no Toyota executive in the United States is authorized to issue a recall. Most information flowis one-way, back to Japan where decisions are made.

Will Toyota turn its recall into an opportunity for increased participation for its internationalmanufacturers? Will decentralization and increased transparency occur? Only time will tell.

Case written based on information from Accelerating into trouble. (2010, February 11). Economist.Retrieved March 8, 2010, from http://www.economist.com/opinion/displaystory.cfm?story_id=15498249;Dickson, D. (2010, February 10). Toyota’s bumps began with race for growth. Washington Times, p.1; Maynard, M., Tabuchi, H., Bradsher, K., & Parris, M. (2010, February 7). Toyota has pattern ofslow response on safety issues. New York Times, p. 1; Simon, B. (2010, February 24). LaHood voicesconcerns over Toyota culture. Financial Times. Retrieved March 10, 2010, from http://www.ft.com/cms/s/0/11708d7c-20d7-11df-b920-00144feab49a.html; Werhane, P., & Moriarty, B. (2009). Moral imaginationand management decision making. Business Roundtable Institute for Corporate Ethics. Retrieved April30, 2010, from http://www.corporate-ethics.org/pdf/moral_imagination.pdf; Atlman, A. (2010, February24). Congress puts Toyota (and Toyoda) in the hot seat. Time. Retrieved March 11, 2010, fromhttp://www.time.com/time/nation/article/0,8599,1967654,00.html.

Discussion Questions

1. What changes in the organizing facet of the P-O-L-C framework might you make at Toyota toprevent future mishaps like the massive recalls related to brake and accelerator failures?

2. Do you think Toyota’s organizational structure and norms are explicitly formalized in rules, or dothe norms seem to be more inherent in the culture of the organization?

3. What are the pros and cons of Toyota’s structure?

4. What elements of business would you suggest remain the same and what elements might need

7.2 CASE IN POINT: TOYOTA STRUGGLES WITH ORGANIZATIONAL STRUCTURE • 301

revising?

5. What are the most important elements of Toyota’s organizational structure?

302 • PRINCIPLES OF MANAGEMENT

7.3 Organizational Structure

Learning Objectives

1. Explain the roles of formalization, centralization, levels in the hierarchy, and departmentalizationin employee attitudes and behaviors.

2. Describe how the elements of organizational structure can be combined to create mechanistic andorganic structures.

3. Understand the advantages and disadvantages of mechanistic and organic structures fororganizations.

Organizational structure refers to how individual and team work within an organization are coordinated. To

achieve organizational goals and objectives, individual work needs to be coordinated and managed. Structure

is a valuable tool in achieving coordination, as it specifies reporting relationships (who reports to whom),

delineates formal communication channels, and describes how separate actions of individuals are linked together.

Organizations can function within a number of different structures, each possessing distinct advantages and

disadvantages. Although any structure that is not properly managed will be plagued with issues, some

organizational models are better equipped for particular environments and tasks.

Building Blocks of StructureBuilding Blocks of Structure

What exactly do we mean by organizational structure? Which elements of a company’s structure make a

difference in how we behave and how work is coordinated? We will review four aspects of structure that have been

frequently studied in the literature: centralization, formalization, hierarchical levels, and departmentalization. We

view these four elements as the building blocks, or elements, making up a company’s structure. Then we will

examine how these building blocks come together to form two different configurations of structures.

CentralizationCentralization

Centralization is the degree to which decision-making authority is concentrated at higher levels in an organization.

In centralized companies, many important decisions are made at higher levels of the hierarchy, whereas in

303

decentralized companies, decisions are made and problems are solved at lower levels by employees who are closer

to the problem in question.

As an employee, where would you feel more comfortable and productive? If your answer is “decentralized,” you

are not alone. Decentralized companies give more authority to lower-level employees, resulting in a sense of

empowerment. Decisions can be made more quickly, and employees often believe that decentralized companies

provide greater levels of procedural fairness to employees. Job candidates are more likely to be attracted to

decentralized organizations. Because centralized organizations assign decision-making responsibility to higher-

level managers, they place greater demands on the judgment capabilities of CEOs and other high-level managers.

Many companies find that the centralization of operations leads to inefficiencies in decision making. For example,

in the 1980s, the industrial equipment manufacturer Caterpillar suffered the consequences of centralized decision

making. At the time, all pricing decisions were made in the corporate headquarters in Peoria, Illinois. This meant

that when a sales representative working in Africa wanted to give a discount on a product, they needed to check

with headquarters. Headquarters did not always have accurate or timely information about the subsidiary markets

to make an effective decision. As a result, Caterpillar was at a disadvantage against competitors such as the

Japanese firm Komatsu. Seeking to overcome this centralization paralysis, Caterpillar underwent several dramatic

rounds of reorganization in the 1990s and 2000s (Nelson & Pasternack, 2005).

Figure 7.4

Changing their decision-making approach to a more decentralized style has helped Caterpillar compete at

the global level.

Aconcagua – Bauma 2007 Bulldozer Caterpillar 2 CC BY-SA 3.0.

304 • PRINCIPLES OF MANAGEMENT

However, centralization also has its advantages. Some employees are more comfortable in an organization where

their manager confidently gives instructions and makes decisions. Centralization may also lead to more efficient

operations, particularly if the company is operating in a stable environment (Ambrose & Cropanzano, 2000;

Miller, et. al., 1988; Oldham & Hackman, 1981; Pierce & Delbecq, 1977; Schminke, et. al., 2000; Turban & Keon,

1993; Wally & Baum, 1994).

In fact, organizations can suffer from extreme decentralization. For example, some analysts believe that the

Federal Bureau of Investigation (FBI) experiences some problems because all its structure and systems are based

on the assumption that crime needs to be investigated after it happens. Over time, this assumption led to a situation

where, instead of following an overarching strategy, each FBI unit is completely decentralized and field agents

determine how investigations should be pursued. It has been argued that due to the change in the nature of crimes,

the FBI needs to gather accurate intelligence before a crime is committed; this requires more centralized decision

making and strategy development (Brazil, 2007).

Hitting the right balance between decentralization and centralization is a challenge for many organizations. At

the Home Depot, the retail giant with over 2,000 stores across the United States, Canada, Mexico, and China,

one of the major changes instituted by former CEO Bob Nardelli was to centralize most of its operations. Before

Nardelli’s arrival in 2000, Home Depot store managers made a number of decisions autonomously and each store

had an entrepreneurial culture. Nardelli’s changes initially saved the company a lot of money. For example, for

a company of that size, centralizing purchasing operations led to big cost savings because the company could

negotiate important discounts from suppliers. At the same time, many analysts think that the centralization went

too far, leading to the loss of the service-oriented culture at the stores. Nardelli was ousted after seven years

(Charan, 2006; Marquez, 2007).

FormalizationFormalization

Formalization is the extent to which an organization’s policies, procedures, job descriptions, and rules are written

and explicitly articulated. Formalized structures are those in which there are many written rules and regulations.

These structures control employee behavior using written rules, so that employees have little autonomy to decide

on a case-by-case basis. An advantage of formalization is that it makes employee behavior more predictable.

Whenever a problem at work arises, employees know to turn to a handbook or a procedure guideline. Therefore,

employees respond to problems in a similar way across the organization; this leads to consistency of behavior.

While formalization reduces ambiguity and provides direction to employees, it is not without disadvantages. A

high degree of formalization may actually lead to reduced innovativeness because employees are used to behaving

in a certain manner. In fact, strategic decision making in such organizations often occurs only when there is a

crisis. A formalized structure is associated with reduced motivation and job satisfaction as well as a slower pace

of decision making (Frederickson, 1986; Oldham & Hackman, 1981; Pierce & Delbecq, 1977; Wally & Baum,

1994). The service industry is particularly susceptible to problems associated with high levels of formalization.

Sometimes employees who are listening to a customer’s problems may need to take action, but the answer may not

be specified in any procedural guidelines or rulebook. For example, while a handful of airlines such as Southwest

do a good job of empowering their employees to handle complaints, in many airlines, lower-level employees have

limited power to resolve a customer problem and are constrained by stringent rules that outline a limited number

of acceptable responses.

7.3 ORGANIZATIONAL STRUCTURE • 305

Hierarchical LevelsHierarchical Levels

Another important element of a company’s structure is the number of levels it has in its hierarchy. Keeping the

size of the organization constant, tall structures have several layers of management between frontline employees

and the top level, while flat structures consist of only a few layers. In tall structures, the number of employees

reporting to each manager tends to be smaller, resulting in greater opportunities for managers to supervise and

monitor employee activities. In contrast, flat structures involve a larger number of employees reporting to each

manager. In such a structure, managers will be relatively unable to provide close supervision, leading to greater

levels of freedom of action for each employee.

Research indicates that flat organizations provide greater need satisfaction for employees and greater levels of

self-actualization (Ghiselli & Johnson, 1970; Porter & Siegel, 2006). At the same time, there may be some

challenges associated with flat structures. Research shows that when managers supervise a large number of

employees, which is more likely to happen in flat structures, employees experience greater levels of role

ambiguity—the confusion that results from being unsure of what is expected of a worker on the job (Chonko,

1982). This is especially a disadvantage for employees who need closer guidance from their managers. Moreover,

in a flat structure, advancement opportunities will be more limited because there are fewer management layers.

Finally, while employees report that flat structures are better at satisfying their higher-order needs such as self-

actualization, they also report that tall structures are better at satisfying security needs of employees (Porter &

Lawler, 1964). Because tall structures are typical of large and well-established companies, it is possible that when

working in such organizations employees feel a greater sense of job security.

306 • PRINCIPLES OF MANAGEMENT

Figure 7.5

Companies such as IKEA, the Swedish furniture manufacturer and retailer, are successfully using flat

structures within stores to build an employee attitude of job involvement and ownership.

Ikea almhult – Wikimedia Commons – CC BY-SA 3.0.

DepartmentalizationDepartmentalization

Organizational structures differ in terms of departmentalization, which is broadly categorized as either functional

or divisional.

Organizations using functional structures group jobs based on similarity in functions. Such structures may

have departments such as marketing, manufacturing, finance, accounting, human resources, and information

technology. In these structures, each person serves a specialized role and handles large volumes of transactions.

For example, in a functional structure, an employee in the marketing department may serve as an event planner,

planning promotional events for all the products of the company.

In organizations using divisional structures, departments represent the unique products, services, customers, or

geographic locations the company is serving. Thus each unique product or service the company is producing will

have its own department. Within each department, functions such as marketing, manufacturing, and other roles

are replicated. In these structures, employees act like generalists as opposed to specialists. Instead of performing

specialized tasks, employees will be in charge of performing many different tasks in the service of the product.

For example, a marketing employee in a company with a divisional structure may be in charge of planning

promotions, coordinating relations with advertising agencies, and planning and conducting marketing research,

all for the particular product line handled by his or her division.

7.3 ORGANIZATIONAL STRUCTURE • 307

In reality, many organizations are structured according to a mixture of functional and divisional forms. For

example, if the company has multiple product lines, departmentalizing by product may increase innovativeness

and reduce response times. Each of these departments may have dedicated marketing, manufacturing, and

customer service employees serving the specific product; yet, the company may also find that centralizing

some operations and retaining the functional structure makes sense and is more cost effective for roles such as

human resources management and information technology. The same organization may also create geographic

departments if it is serving different countries.

Each type of departmentalization has its advantages. Functional structures tend to be effective when an

organization does not have a large number of products and services requiring special attention. When a company

has a diverse product line, each product will have unique demands, deeming divisional (or product-specific)

structures more useful for promptly addressing customer demands and anticipating market changes. Functional

structures are more effective in stable environments that are slower to change. In contrast, organizations using

product divisions are more agile and can perform better in turbulent environments. The type of employee who will

succeed under each structure is also different. Research shows that when employees work in product divisions in

turbulent environments, because activities are diverse and complex, their performance depends on their general

mental abilities (Hollenbeck, et. al., 2002).

Figure 7.6 An Example of a Pharmaceutical Company with a Functional Departmentalization Structure

Figure 7.7 An Example of a Pharmaceutical Company with a Divisional Departmentalization Structure

Two Configurations: Mechanistic and Organic StructuresTwo Configurations: Mechanistic and Organic Structures

The different elements making up organizational structures in the form of formalization, centralization, number of

308 • PRINCIPLES OF MANAGEMENT

levels in the hierarchy, and departmentalization often coexist. As a result, we can talk about two configurations of

organizational structures, depending on how these elements are arranged.

Mechanistic structures are those that resemble a bureaucracy. These structures are highly formalized and

centralized. Communication tends to follow formal channels and employees are given specific job descriptions

delineating their roles and responsibilities. Mechanistic organizations are often rigid and resist change, making

them unsuitable for innovativeness and taking quick action. These forms have the downside of inhibiting

entrepreneurial action and discouraging the use of individual initiative on the part of employees. Not only do

mechanistic structures have disadvantages for innovativeness, but they also limit individual autonomy and self-

determination, which will likely lead to lower levels of intrinsic motivation on the job (Burns & Stalker, 1961;

Covin & Slevin, 1988; Schollhammer, 1982; Sherman & Smith, 1984; Slevin & Covin, 1990).

Despite these downsides, however, mechanistic structures have advantages when the environment is more

stable. The main advantage of a mechanistic structure is its efficiency. Therefore, in organizations that are

trying to maximize efficiency and minimize costs, mechanistic structures provide advantages. For example,

McDonald’s has a famously bureaucratic structure where employee jobs are highly formalized, with clear lines

of communication and specific job descriptions. This structure is an advantage for them because it allows

McDonald’s to produce a uniform product around the world at minimum cost. Mechanistic structures can also be

advantageous when a company is new. New businesses often suffer from a lack of structure, role ambiguity, and

uncertainty. The presence of a mechanistic structure has been shown to be related to firm performance in new

ventures (Sine & Kirsch, 2006).

In contrast to mechanistic structures, organic structures are flexible and decentralized, with low levels of

formalization. In Organizations with an organic structure, communication lines are more fluid and flexible.

Employee job descriptions are broader and employees are asked to perform duties based on the specific needs of

the organization at the time as well as their own expertise levels. Organic structures tend to be related to higher

levels of job satisfaction on the part of employees. These structures are conducive to entrepreneurial behavior and

innovativeness (Burns & Stalker, 1961; Covin & Slevin, 1988). An example of a company that has an organic

structure is the diversified technology company 3M. The company is strongly committed to decentralization. At

3M, there are close to 100 profit centers, with each division feeling like a small company. Each division manager

acts autonomously and is accountable for his or her actions. As operations within each division get too big and a

product created by a division becomes profitable, the operation is spun off to create a separate business unit. This

is done to protect the agility of the company and the small-company atmosphere.

Key Takeaway

The degree to which a company is centralized and formalized, the number of levels in the companyhierarchy, and the type of departmentalization the company uses are key elements of a company’s structure.These elements of structure affect the degree to which the company is effective and innovative as well asemployee attitudes and behaviors at work. These elements come together to create mechanistic and organicstructures. Mechanistic structures are rigid and bureaucratic and help companies achieve efficiency, whileorganic structures are decentralized, flexible, and aid companies in achieving innovativeness.

7.3 ORGANIZATIONAL STRUCTURE • 309

Exercises

1. What are the advantages and disadvantages of decentralization?

2. All else being equal, would you prefer to work in a tall or flat organization? Why?

3. What are the advantages and disadvantages of departmentalization by product?

ReferencesReferences

Ambrose, M. L., & Cropanzano, R. S. (2000). The effect of organizational structure on perceptions of procedural

fairness. Journal of Applied Psychology, 85, 294–304.

Brazil, J. J. (2007, April). Mission: Impossible? Fast Company, 114, 92–109.

Burns, T., & Stalker, M. G. (1961). The Management of Innovation. London: Tavistock.

Charan, R. (2006, April). Home Depot’s blueprint for culture change. Harvard Business Review, 84(4), 60–70.

Chonko, L. B. (1982). The relationship of span of control to sales representatives’ experienced role conflict and

role ambiguity. Academy of Management Journal, 25, 452–456.

Covin, J. G., & Slevin, D. P. (1988) The influence of organizational structure. Journal of Management Studies,

25, 217–234.

Fredrickson, J. W. (1986). The strategic decision process and organizational structure. Academy of Management

Review, 11, 280–297.

Ghiselli, E. E., & Johnson, D. A. (1970). Need satisfaction, managerial success, and organizational structure.

Personnel Psychology, 23, 569–576.

Hollenbeck, J. R., Moon, H., Ellis, A. P. J., West, B. J., Ilgen, D. R., et al. (2002). Structural contingency theory

and individual differences: Examination of external and internal person-team fit. Journal of Applied Psychology,

87, 599–606.

Marquez, J. (2007, January 15). Big bucks at door for Depot HR leader. Workforce Management, 86(1).

Miller, D., Droge, C., & Toulouse, J. (1988). Strategic process and content as mediators between organizational

context and structure. Academy of Management Journal, 31, 544–569.

Nelson, G. L., & Pasternack, B. A. (2005). Results: Keep what’s good, fix what’s wrong, and unlock great

performance. New York: Crown Business.

Oldham, G. R., & Hackman, R. J. (1981). Relationships between organizational structure and employee reactions:

Comparing alternative frameworks. Administrative Science Quarterly, 26, 66–83.

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Pierce, J. L., & Delbecq, A. L. (1977). Organization structure, individual attitudes, and innovation. Academy of

Management Review, 2, 27–37.

Porter, L. W., & Lawler, E. E. (1964). The effects of tall versus flat organization structures on managerial job

satisfaction. Personnel Psychology, 17, 135–148.

Porter, L. W., & Siegel, J. (2006). Relationships of tall and flat organization structures to the satisfactions of

foreign managers. Personnel Psychology, 18, 379–392.

Schminke, M., Ambrose, M. L., & Cropanzano, R. S. (2000). The effect of organizational structure on perceptions

of procedural fairness. Journal of Applied Psychology, 85, 294–304.

Schollhammer, H. (1982). Internal corporate entrepreneurship. Englewood Cliffs, NJ: Prentice-Hall.

Sherman, J. D., & Smith, H. L. (1984). The influence of organizational structure on intrinsic versus extrinsic

motivation. Academy of Management Journal, 27, 877–885.

Sine, W. D., Mitsuhashi, H., & Kirsch, D. A. (2006). Revisiting Burns and Stalker: Formal structure and new

venture performance in emerging economic sectors. Academy of Management Journal, 49, 121–132.

Slevin, D. P. (1988). The influence of organizational structure. Journal of Management Studies. 25, 217–234.

Slevin, D. P., & Covin, J. G. (1990). Juggling entrepreneurial style and organizational structure—how to get your

act together. Sloan Management Review, 31(2), 43–53.

Turban, D. B., & Keon, T. L. (1993). Organizational attractiveness: An interactionist perspective. Journal of

Applied Psychology, 78, 184–193.

Wally, S., & Baum, J. R. (1994). Personal and structural determinants of the pace of strategic decision making.

Academy of Management Journal, 37, 932–956.

Wally, S., & Baum, R. J. (1994). Strategic decision speed and firm performance. Strategic Management Journal,

24, 1107–1129.

7.3 ORGANIZATIONAL STRUCTURE • 311

7.4 Contemporary Forms of Organizational Structures

Learning Objectives

1. Explain what a matrix structure is and the challenges of working in a structure such as this.

2. Define boundaryless organizations.

3. Define learning organizations, and list the steps organizations can take to become learningorganizations.

For centuries, technological advancements that affected business came in slow waves. Over 100 years passed

between the invention of the first reliable steam engine and the first practical internal combustion engine. During

these early days of advancement, communication would often go hand in hand with transportation. Instead of

delivering mail hundreds of miles by horse, messages could be transported more quickly by train and then later

by plane. Beginning in the 1900s, the tides of change began to rise much more quickly. From the telegraph to the

telephone to the computer to the Internet, each advancement brought about a need for an organization’s structure

to adapt and change.

Business has become global, moving into new economies and cultures. Previously nonexistent industries, such

as those related to high technology, have demanded flexibility by organizations in ways never before seen. The

diverse and complex nature of the current business environment has led to the emergence of several types of

organizational structures. Beginning in the 1970s, management experts began to propose organizational designs

that they believed were better adapted to the needs of the emerging business environment. Each structure has

unique qualities to help businesses handle their particular environment.

Matrix OrganizationsMatrix Organizations

Matrix organizations have a design that combines a traditional functional structure with a product structure.

Instead of completely switching from a product-based structure, a company may use a matrix structure to balance

the benefits of product-based and traditional functional structures. Specifically, employees reporting to department

managers are also pooled together to form project or product teams. As a result, each person reports to a

department manager as well as a project or product manager. In a matrix structure, product managers have control

and say over product-related matters, while department managers have authority over matters related to company

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policy. Matrix structures are created in response to uncertainty and dynamism of the environment and the need

to give particular attention to specific products or projects. Using the matrix structure as opposed to product

departments may increase communication and cooperation among departments because project managers will

need to coordinate their actions with those of department managers. In fact, research shows that matrix structure

increases the frequency of informal and formal communication within the organization (Joyce, W. F., 1986).

Matrix structures also have the benefit of providing quick responses to technical problems and customer demands.

The existence of a project manager keeps the focus on the product or service provided.

Figure 7.8

An example of a matrix structure at a software development company. Business analysts, developers, and

testers each report to a functional department manager and to a project manager simultaneously.

Despite these potential benefits, matrix structures are not without costs. In a matrix, each employee reports to

two or more managers. This situation is ripe for conflict. Because multiple managers are in charge of guiding

the behaviors of each employee, there may be power struggles or turf wars among managers. As managers are

more interdependent compared to a traditional or product-based structure, they will need to spend more effort

coordinating their work. From the employee’s perspective, there is potential for interpersonal conflict with team

members as well as with leaders. The presence of multiple leaders may create role ambiguity or, worse, role

conflict—being given instructions or objectives that cannot all be met because they are mutually exclusive.

The necessity to work with a team consisting of employees with different functional backgrounds increases the

potential for task conflict at work (Ford, R. C. and Randolph, W. A., 1992). Solving these problems requires a

great level of patience and proactivity on the part of the employee.

The matrix structure is used in many information technology companies engaged in software development.

Sportswear manufacturer Nike is another company that uses the matrix organization successfully. New product

7.4 CONTEMPORARY FORMS OF ORGANIZATIONAL STRUCTURES • 313

introduction is a task shared by regional managers and product managers. While product managers are in charge

of deciding how to launch a product, regional managers are allowed to make modifications based on the region

(Anand, N. and Daft, R. L., 2007).

Boundaryless OrganizationsBoundaryless Organizations

Boundaryless organization is a term coined by Jack Welch during his tenure as CEO of GE; it refers to an

organization that eliminates traditional barriers between departments as well as barriers between the organization

and the external environment (Ashkenas, R., et, al., 1995). Many different types of boundaryless organizations

exist. One form is the modular organization, in which all nonessential functions are outsourced. The idea behind

this format is to retain only the value-generating and strategic functions in-house, while the rest of the operations

are outsourced to many suppliers. An example of a company that does this is Toyota. By managing relationships

with hundreds of suppliers, Toyota achieves efficiency and quality in its operations. Strategic alliances constitute

another form of boundaryless design. In this form, similar to a joint venture, two or more companies find an area

of collaboration and combine their efforts to create a partnership that is beneficial for both parties. In the process,

the traditional boundaries between two competitors may be broken. As an example, Starbucks formed a highly

successful partnership with PepsiCo to market its Frappuccino cold drinks. Starbucks has immediate brand-name

recognition in this cold coffee drink, but its desire to capture shelf space in supermarkets required marketing

savvy and experience that Starbucks did not possess at the time. By partnering with PepsiCo, Starbucks gained

an important head start in the marketing and distribution of this product. Finally, boundaryless organizations

may involve eliminating the barriers separating employees; these may be intangible barriers, such as traditional

management layers, or actual physical barriers, such as walls between different departments. Structures such as

self-managing teams create an environment where employees coordinate their efforts and change their own roles

to suit the demands of the situation, as opposed to insisting that something is “not my job” (Dess, G. G., et. al.,

1995; Rosenbloom, B., 2003).

Learning OrganizationsLearning Organizations

A learning organization is one whose design actively seeks to acquire knowledge and change behavior as a result

of the newly acquired knowledge. In learning organizations, experimenting, learning new things, and reflecting

on new knowledge are the norms. At the same time, there are many procedures and systems in place that facilitate

learning at all organization levels.

In learning organizations, experimentation and testing potentially better operational methods are encouraged. This

is true not only in response to environmental threats but also as a way of identifying future opportunities. 3M

is one company that institutionalized experimenting with new ideas in the form of allowing each engineer to

spend one day a week working on a personal project. At IBM, learning is encouraged by taking highly successful

business managers and putting them in charge of emerging business opportunities (EBOs). IBM is a company that

has no difficulty coming up with new ideas, as evidenced by the number of patents it holds. Yet commercializing

these ideas has been a problem in the past because of an emphasis on short-term results. To change this situation,

the company began experimenting with the idea of EBOs. By setting up a structure where failure is tolerated and

risk taking is encouraged, the company took a big step toward becoming a learning organization (Deutschman,

A., 2005).

314 • PRINCIPLES OF MANAGEMENT

Learning organizations are also good at learning from experience—their own or a competitor’s. To learn from

past mistakes, companies conduct a thorough analysis of them. Some companies choose to conduct formal

retrospective meetings to analyze the challenges encountered and areas for improvement. To learn from others,

these companies vigorously study competitors, market leaders in different industries, clients, and customers. By

benchmarking against industry best practices, they constantly look for ways of improving their own operations.

Learning organizations are also good at studying customer habits to generate ideas. For example, Xerox uses

anthropologists to understand and gain insights to how customers are actually using their office products (Garvin,

D. A., 1993). By using these techniques, learning organizations facilitate innovation and make it easier to achieve

organizational change.

Key Takeaway

The changing environment of organizations creates the need for newer forms of organizing. Matrixstructures are a cross between functional and product-based divisional structures. They facilitateinformation flow and reduce response time to customers but have challenges because each employeereports to multiple managers. Boundaryless organizations blur the boundaries between departments or theboundaries between the focal organization and others in the environment. These organizations may takethe form of a modular organization, strategic alliance, or self-managing teams. Learning organizationsinstitutionalize experimentation and benchmarking.

Exercises

1. Have you ever reported to more than one manager? What were the challenges of such a situation?As a manager, what could you do to help your subordinates who have other bosses besides yourself?

2. What do you think are the advantages and disadvantages of being employed by a boundarylessorganization?

3. What can organizations do to institutionalize organizational learning? What practices and policieswould aid in knowledge acquisition and retention?

ReferencesReferences

Anand, N., & Daft, R. L. (2007). What is the right organization design? Organizational Dynamics, 36(4),

329–344.

Ashkenas, R., Ulrich, D., Jick, T., & Kerr, S. (1995). The Boundaryless organization: Breaking the chains of

organizational structure. San Francisco: Jossey-Bass.

Dess, G. G., Rasheed, A. M. A., McLaughlin, K. J., & Priem, R. L. (1995). The new corporate architecture.

Academy of Management Executive, 9(3), 7–18.

Deutschman, A. (2005, March). Building a better skunk works. Fast Company, 92, 68–73.

7.4 CONTEMPORARY FORMS OF ORGANIZATIONAL STRUCTURES • 315

Ford, R. C., & Randolph, W. A. (1992). Cross-functional structures: A review and integration of matrix

organization and project management. Journal of Management, 18, 267–294.

Garvin, D. A. (1993, July/August). Building a learning organization. Harvard Business Review, 71(4), 78–91.

Joyce, W. F. (1986). Matrix organization: A social experiment. Academy of Management Journal, 29, 536–561.

Rosenbloom, B. (2003). Multi-channel marketing and the retail value chain. Thexis, 3, 23–26.

316 • PRINCIPLES OF MANAGEMENT

7.5 Organizational Change

Learning Objectives

1. Identify the external forces creating change on the part of organizations.

2. Understand how organizations respond to changes in the external environment.

3. Understand why people resist change.

Why Do Organizations Change?Why Do Organizations Change?

Organizational change is the movement of an organization from one state of affairs to another. A change in the

environment often requires change within the organization operating within that environment. Change in almost

any aspect of a company’s operation can be met with resistance, and different cultures can have different reactions

to both the change and the means to promote the change. To better facilitate necessary changes, several steps can

be taken that have been proved to lower the anxiety of employees and ease the transformation process. Often, the

simple act of including employees in the change process can drastically reduce opposition to new methods. In

some organizations, this level of inclusion is not possible, and instead organizations can recruit a small number of

opinion leaders to promote the benefits of coming changes.

Organizational change can take many forms. It may involve a change in a company’s structure, strategy, policies,

procedures, technology, or culture. The change may be planned years in advance or may be forced on an

organization because of a shift in the environment. Organizational change can be radical and swiftly alter the way

an organization operates, or it may be incremental and slow. In any case, regardless of the type, change involves

letting go of the old ways in which work is done and adjusting to new ways. Therefore, fundamentally, it is a

process that involves effective people management.

Managers carrying out any of the P-O-L-C functions often find themselves faced with the need to manage

organizational change effectively. Oftentimes, the planning process reveals the need for a new or improved

strategy, which is then reflected in changes to tactical and operational plans. Creating a new organizational

design (the organizing function) or altering the existing design entails changes that may affect from a single

employee up to the entire organization, depending on the scope of the changes. Effective decision making, a

Leadership task, takes into account the change-management implications of decisions, planning for the need to

317

manage the implementation of decisions. Finally, any updates to controlling systems and processes will potentially

involve changes to employees’ assigned tasks and performance assessments, which will require astute change

management skills to implement. In short, change management is an important leadership skill that spans the

entire range of P-O-L-C functions.

Workplace DemographicsWorkplace Demographics

Organizational change is often a response to changes to the environment. For example, agencies that monitor

workplace demographics such as the U.S. Department of Labor and the Organization for Economic Co-operation

and Development have reported that the average age of the U.S. workforce will increase as the baby boom

generation nears retirement age and the numbers of younger workers are insufficient to fill the gap (Lerman, R. I.

and Schmidt, S. R., 2006). What does this mean for companies? Organizations may realize that as the workforce

gets older, the types of benefits workers prefer may change. Work arrangements such as flexible work hours and

job sharing may become more popular as employees remain in the workforce even after retirement. It is also

possible that employees who are unhappy with their current work situation will choose to retire, resulting in a

sudden loss of valuable knowledge and expertise in organizations. Therefore, organizations will have to devise

strategies to retain these employees and plan for their retirement. Finally, a critical issue is finding ways of dealing

with age-related stereotypes which act as barriers in the retention of these employees.

TechnologyTechnology

Sometimes change is motivated by rapid developments in technology. Moore’s law (a prediction by Gordon

Moore, cofounder of Intel) dictates that the overall complexity of computers will double every 18 months with no

increase in cost (Anonymous, 2008). Such change is motivating corporations to change their technology rapidly.

Sometimes technology produces such profound developments that companies struggle to adapt. A recent example

is from the music industry. When music CDs were first introduced in the 1980s, they were substantially more

appealing than the traditional LP vinyl records. Record companies were easily able to double the prices, even

though producing CDs cost a fraction of what it cost to produce LPs. For decades, record-producing companies

benefited from this status quo. Yet when peer-to-peer file sharing through software such as Napster and Kazaa

threatened the core of their business, companies in the music industry found themselves completely unprepared

for such disruptive technological changes. Their first response was to sue the users of file-sharing software,

sometimes even underage kids. They also kept looking for a technology that would make it impossible to copy

a CD or DVD, which has yet to emerge. Until Apple’s iTunes came up with a new way to sell music online, it

was doubtful that consumers would ever be willing to pay for music that was otherwise available for free (albeit

illegally so). Only time will tell if the industry will be able to adapt to the changes forced on it (Lasica, J. D.,

2005).

Figure 7.9

318 • PRINCIPLES OF MANAGEMENT

Kurzweil expanded Moore’s law from integrated circuits to earlier transistors, vacuum tubes, relays, and

electromechanical computers to show that his trend holds there as well.

Wikimedia Commons – Moore’s Law, The Fifth Paradigm – public domain.

GlobalizationGlobalization

Globalization is another threat and opportunity for organizations, depending on their ability to adapt to it. Because

of differences in national economies and standards of living from one country to another, organizations in

developed countries are finding that it is often cheaper to produce goods and deliver services in less developed

countries. This has led many companies to outsource (or “offshore”) their manufacturing operations to countries

such as China and Mexico. In the 1990s, knowledge work was thought to be safe from outsourcing, but in the

21st century we are also seeing many service operations moved to places with cheaper wages. For example, many

companies have outsourced software development to India, with Indian companies such as Wipro and Infosys

emerging as global giants. Given these changes, understanding how to manage a global workforce is a necessity.

Many companies realize that outsourcing forces them to operate in an institutional environment that is radically

different from what they are used to at home. Dealing with employee stress resulting from jobs being moved

overseas, retraining the workforce, and learning to compete with a global workforce on a global scale are changes

companies are trying to come to grips with.

7.5 ORGANIZATIONAL CHANGE • 319

Changes in the Market ConditionsChanges in the Market Conditions

Market changes may also create internal changes as companies struggle to adjust. For example, as of this writing,

the airline industry in the United States is undergoing serious changes. Demand for air travel was reduced after

the September 11 terrorist attacks. At the same time, the widespread use of the Internet to book plane travels made

it possible to compare airline prices much more efficiently and easily, encouraging airlines to compete primarily

based on cost. This strategy seems to have backfired when coupled with the dramatic increases in the cost of

fuel that occurred begining in 2004. As a result, by mid-2008, airlines were cutting back on amenities that had

formerly been taken for granted for decades, such as the price of a ticket including meals, beverages, and checking

luggage. Some airlines, such as Delta and Northwest Airlines, merged to stay in business.

How does a change in the environment create change within an organization? Environmental change does not

automatically change how business is done. Whether the organization changes or not in response to environmental

challenges and threats depends on the decision makers’ reactions to what is happening in the environment.

GrowthGrowth

Figure 7.10

In 1984, brothers Kurt (on the left) and Rob Widmer (on the right) founded Widmer Brothers, which has

merged with another company to become the 11th largest brewery in the United States.

M.O. Stevens – Widmer Brewing Company headquarters – CC BY-SA 3.0.

It is natural for once small start-up companies to grow if they are successful. An example of this growth is the

evolution of the Widmer Brothers Brewing Company, which started as two brothers brewing beer in their garage

to becoming the 11th largest brewery in the United States. This growth happened over time as the popularity of

their key product—Hefeweizen—grew in popularity and the company had to expand to meet demand growing

320 • PRINCIPLES OF MANAGEMENT

from the two founders to the 11th largest brewery in the United States by 2008. In 2007, Widmer Brothers merged

with Redhook Ale Brewery. Anheuser-Busch continues to have a minority stake in both beer companies. So, while

50% of all new small businesses fail in their first year (Get ready, 2008), those that succeed often evolve into

large, complex organizations over time.

Poor PerformancePoor Performance

Change can also occur if the company is performing poorly and if there is a perceived threat from the environment.

In fact, poorly performing companies often find it easier to change compared with successful companies. Why?

High performance actually leads to overconfidence and inertia. As a result, successful companies often keep doing

what made them successful in the first place. When it comes to the relationship between company performance

and organizational change, the saying “nothing fails like success” may be fitting. For example, Polaroid was

the number one producer of instant films and cameras in 1994. Less than a decade later, the company filed

for bankruptcy, unable to adapt to the rapid advances in one-hour photo development and digital photography

technologies that were sweeping the market. Successful companies that manage to change have special practices

in place to keep the organization open to changes. For example, Finnish cell phone maker Nokia finds that it is

important to periodically change the perspective of key decision makers. For this purpose, they rotate heads of

businesses to different posts to give them a fresh perspective. In addition to the success of a business, change in

a company’s upper-level management is a motivator for change at the organization level. Research shows that

long-tenured CEOs are unlikely to change their formula for success. Instead, new CEOs and new top management

teams create change in a company’s culture and structure (Barnett, W. P. and Carroll, G. R., 1995; Boeker, W.,

1997; Deutschman, A., 2005).

Resistance to ChangeResistance to Change

Changing an organization is often essential for a company to remain competitive. Failure to change may influence

the ability of a company to survive. Yet employees do not always welcome changes in methods. According to a

2007 survey conducted by the Society for Human Resource Management (SHRM), employee resistance to change

is one of the top reasons change efforts fail. In fact, reactions to organizational change may range from resistance

to compliance to enthusiastic support of the change, with the latter being the exception rather than the norm

(Anonymous, 2007; Huy, Q. N., 1999).

Figure 7.11

Reactions to change may take many forms.

7.5 ORGANIZATIONAL CHANGE • 321

Active resistance is the most negative reaction to a proposed change attempt. Those who engage in active

resistance may sabotage the change effort and be outspoken objectors to the new procedures. In contrast,

passive resistance involves being disturbed by changes without necessarily voicing these opinions. Instead,

passive resisters may dislike the change quietly, feel stressed and unhappy, and even look for a new job without

necessarily bringing their concerns to the attention of decision makers. Compliance, however, involves going

along with proposed changes with little enthusiasm. Finally, those who show enthusiastic support are defenders

of the new way and actually encourage others around them to give support to the change effort as well.

To be successful, any change attempt will need to overcome resistance on the part of employees. Otherwise,

the result will be loss of time and energy as well as an inability on the part of the organization to adapt to

the changes in the environment and make its operations more efficient. Resistance to change also has negative

consequences for the people in question. Research shows that when people react negatively to organizational

change, they experience negative emotions, use sick time more often, and are more likely to voluntarily leave the

company (Fugate, M., Kinicki, A. J., and Prussia, G. E., 2008). These negative effects can be present even when

the proposed change clearly offers benefits and advantages over the status quo.

The following is a dramatic example of how resistance to change may prevent improving the status quo. Have

you ever wondered why the keyboards we use are shaped the way they are? The QWERTY keyboard, named

after the first six letters in the top row, was actually engineered to slow us down. When the typewriter was first

invented in the 19th century, the first prototypes of the keyboard would jam if the keys right next to each other

were hit at the same time. Therefore, it was important for manufacturers to slow typists down. They achieved this

by putting the most commonly used letters to the left-hand side and scattering the most frequently used letters

all over the keyboard. Later, the issue of letters being stuck was resolved. In fact, an alternative to the QWERTY

developed in the 1930s by educational psychologist August Dvorak provides a much more efficient design and

allows individuals to double traditional typing speeds. Yet the Dvorak keyboard never gained wide acceptance.

The reasons? Large numbers of people resisted the change. Teachers and typists resisted because they would lose

their specialized knowledge. Manufacturers resisted due to costs inherent in making the switch and the initial

inefficiencies in the learning curve (Diamond, J., 2005). In short, the best idea does not necessarily win, and

changing people requires understanding why they resist.

Figure 7.12

322 • PRINCIPLES OF MANAGEMENT

Dvorak keyboard is a more efficient alternative to keyboard design. However, due to resistance from

typists, teachers, manufacturers, and salespeople, a switch never occurred.

John Blackbourne – Sony laptop with Dvorak keyboard layout – CC BY-NC 2.0.

Why Do People Resist Change?Why Do People Resist Change?

Disrupted HabitsDisrupted Habits

People often resist change for the simple reason that change disrupts our habits. When you hop into your car

for your morning commute, do you think about how you are driving? Most of the time probably not, because

driving generally becomes an automated activity after a while. You may sometimes even realize that you have

reached your destination without noticing the roads you used or having consciously thought about any of your

body movements. Now imagine you drive for a living and even though you are used to driving an automatic car,

you are forced to use a stick shift. You can most likely figure out how to drive a stick, but it will take time, and

until you figure it out, you cannot drive on auto pilot. You will have to reconfigure your body movements and

practice shifting until you become good at it. This loss of a familiar habit can make you feel clumsy; you may

even feel that your competence as a driver is threatened. For this simple reason, people are sometimes surprisingly

outspoken when confronted with simple changes such as updating to a newer version of a particular software or a

change in their voice mail system.

PersonalityPersonality

Some people are more resistant to change than others. Recall that one of the Big Five personality traits is Openness

7.5 ORGANIZATIONAL CHANGE • 323

to Experience; obviously, people who rank high on this trait will tend to accept change readily. Research also

shows that people who have a positive self-concept are better at coping with change, probably because those who

have high self-esteem may feel that whatever the changes are, they are likely to adjust to it well and be successful

in the new system. People with a more positive self-concept and those who are more optimistic may also view

change as an opportunity to shine as opposed to a threat that is overwhelming. Finally, risk tolerance is another

predictor of how resistant someone will be to stress. For people who are risk avoidant, the possibility of a change

in technology or structure may be more threatening (Judge, T. A., et. al., 2000; Wanberg, C. R., and Banas, J. T.,

2000).

Feelings of UncertaintyFeelings of Uncertainty

Change inevitably brings feelings of uncertainty. You have just heard that your company is merging with another.

What would be your reaction? Such change is often turbulent, and it is often unclear what is going to happen to

each individual. Some positions may be eliminated. Some people may see a change in their job duties. Things

may get better—or they may get worse. The feeling that the future is unclear is enough to create stress for people

because it leads to a sense of lost control (Ashford, S. J., Lee, C. L., and Bobko, P., 1989; Fugate, M., Kinicki, A.

J., and Prussia, G. E., 2008).

Fear of FailureFear of Failure

Figure 7.13

One reason employees resist change is the fear of failure under the new system.

Intel Free Press – Lindsay van Driel and Anakha Coman Awake at Intel organizers – CC BY-SA 2.0.

324 • PRINCIPLES OF MANAGEMENT

People also resist change when they feel that their performance may be affected under the new system. People

who are experts in their jobs may be less than welcoming of the changes because they may be unsure whether their

success would last under the new system. Studies show that people who feel that they can perform well under the

new system are more likely to be committed to the proposed change, while those who have lower confidence in

their ability to perform after changes are less committed (Herold, D. M., Fedor, D. B., and Caldwell, S., 2007).

Personal Impact of ChangePersonal Impact of Change

It would be too simplistic to argue that people resist all change, regardless of its form. In fact, people tend to

be more welcoming of change that is favorable to them on a personal level (such as giving them more power

over others or change that improves quality of life such as bigger and nicer offices). Research also shows

that commitment to change is highest when proposed changes affect the work unit with a low impact on how

individual jobs are performed (Fedor, D. M., Caldwell, S., and Herold, D. M., 2006).

Prevalence of ChangePrevalence of Change

Any change effort should be considered within the context of all the other changes that are introduced in a

company. Does the company have a history of making short-lived changes? If the company structure went from

functional to product-based to geographic to matrix within the past five years and the top management is in

the process of going back to a functional structure again, a certain level of resistance is to be expected because

employees are likely to be fatigued as a result of the constant changes. Moreover, the lack of a history of

successful changes may cause people to feel skeptical toward the newly planned changes. Therefore, considering

the history of changes in the company is important to understanding why people resist. Another question is, how

big is the planned change? If the company is considering a simple switch to a new computer program, such as

introducing Microsoft Access for database management, the change may not be as extensive or stressful compared

with a switch to an enterprise resource planning (ERP) system such as SAP or PeopleSoft, which require a

significant time commitment and can fundamentally affect how business is conducted (Labianca, G., Gray, B.,

and Brass, D. J., 2000; Rafferty, A. E., and Griffin, M. A., 2006).

Perceived Loss of PowerPerceived Loss of Power

One other reason people may resist change is that change may affect their power and influence in the organization.

Imagine that your company moved to a more team-based structure, turning supervisors into team leaders. In the

old structure, supervisors were in charge of hiring and firing all those reporting to them. Under the new system,

this power is given to the team. Instead of monitoring the progress the team is making toward goals, the job of a

team leader is to provide support and mentoring to the team in general and ensure that the team has access to all

resources to be effective. Given the loss in prestige and status in the new structure, some supervisors may resist

the proposed changes even if it is better for the organization to operate around teams.

In summary, there are many reasons individuals resist change, which may prevent an organization from making

important changes.

7.5 ORGANIZATIONAL CHANGE • 325

Is All Resistance Bad?Is All Resistance Bad?

Resistance to change may be a positive force in some instances. In fact, resistance to change is a valuable feedback

tool that should not be ignored. Why are people resisting the proposed changes? Do they believe that the new

system will not work? If so, why not? By listening to people and incorporating their suggestions into the change

effort, it is possible to make a more effective change. Some of a company’s most committed employees may be the

most vocal opponents of a change effort. They may fear that the organization they feel such a strong attachment

to is being threatened by the planned change effort and the change will ultimately hurt the company. In contrast,

people who have less loyalty to the organization may comply with the proposed changes simply because they do

not care enough about the fate of the company to oppose the changes. As a result, when dealing with those who

resist change, it is important to avoid blaming them for a lack of loyalty (Ford, J. D., Ford, L. W., and D’Amelio,

A., 2008).

Key Takeaway

Organizations change in response to changes in the environment and in response to the way decisionmakers interpret these changes. When it comes to organizational change, one of the biggest obstacles isresistance to change. People resist change because change disrupts habits, conflicts with certain personalitytypes, causes a fear of failure, can have potentially negative effects, can result in a potential for loss ofpower, and, when done too frequently, can exhaust employees.

Exercises

1. Can you think of an organizational or personal change that you had to go through? Have youencountered any resistance to this change? What were the reasons?

2. How would you deal with employees who are resisting change because their habits arethreatened? How would you deal with them if they are resisting because of a fear of failure?

ReferencesReferences

Anonymous. (December 2007). Change management: The HR strategic imperative as a business partner. HR

Magazine, 52(12).

Anonymous. Moore’s Law. Retrieved September 5, 2008, from Answers.com,http://www.answers.com/topic/

moore-s-law.

Ashford, S. J., Lee, C. L., & Bobko, P. (1989). Content, causes, and consequences of job insecurity: A theory-

based measure and substantive test. Academy of Management Journal, 32, 803–829.

Barnett, W. P., & Carroll, G. R. (1995). Modeling internal organizational change. Annual Review of Sociology, 21,

217–236.

326 • PRINCIPLES OF MANAGEMENT

Boeker, W. (1997). Strategic change: The influence of managerial characteristics and organizational growth.

Academy of Management Journal, 40, 152–170.

Deutschman, A. (2005, March). Building a better skunk works. Fast Company, 92, 68–73.

Diamond, J. (2005). Guns, germs, and steel: The fates of human societies. New York: W. W. Norton.

Fedor, D. M., Caldwell, S., & Herold, D. M. (2006). The effects of organizational changes on employee

commitment: A multilevel investigation. Personnel Psychology, 59, 1–29.

Ford, J. D., Ford, L. W., & D’Amelio, A. (2008). Resistance to change: The rest of the story. Academy of

Management Review, 33, 362–377.

Fugate, M., Kinicki, A. J., & Prussia, G. E. (2008). Employee coping with organizational change: An examination

of alternative theoretical perspectives and models. Personnel Psychology, 61, 1–36.

Get ready. United States Small Business Association. Retrieved November 21, 2008, from http://www.sba.gov/

smallbusinessplanner/plan/getready/SERV_SBPLANNER_ISENTFORU.html.

Herold, D. M., Fedor, D. B., & Caldwell, S. (2007). Beyond change management: A multilevel investigation of

contextual and personal influences on employees’ commitment to change. Journal of Applied Psychology, 92,

942–951.

Huy, Q. N. (1999). Emotional capability, emotional intelligence, and radical change. Academy of Management

Review, 24, 325–345.

Judge, T. A., Thoresen, C. J., Pucik, V., & Welbourne, T. M. (1999). Managerial coping with organizational

change. Journal of Applied Psychology, 84, 107–122.

Labianca, G., Gray, B., & Brass D. J. (2000). A grounded model of organizational schema change during

empowerment. Organization Science, 11, 235–257

Lasica, J. D. (2005). Darknet: Hollywood’s war against the digital generation. Hoboken, NJ: Wiley.

Lerman, R. I., & Schmidt, S. R. (2006). Trends and challenges for work in the 21st century. Retrieved September

10, 2008, from U.S. Department of Labor Web site, http://www.dol.gov/oasam/programs/history/herman/reports/

futurework/conference/trends/trendsI.htm.

Rafferty, A. E., & Griffin. M. A. (2006). Perceptions of organizational change: A stress and coping perspective.

Journal of Applied Psychology, 91, 1154–1162.

Wanberg, C. R., & Banas, J. T. (2000). Predictors and outcomes of openness to changes in a reorganizing

workplace. Journal of Applied Psychology, 85, 132–142.

7.5 ORGANIZATIONAL CHANGE • 327

7.6 Planning and Executing Change Effectively

Learning Objectives

1. Describe Lewin’s three-stage model of planned change.

2. Describe how organizations may embrace continuous change.

How do you plan, organize, and execute change effectively? Some types of change, such as mergers, often

come with job losses. In these situations, it is important to remain fair and ethical while laying off otherwise

exceptional employees. Once change has occurred, it is vital to take any steps necessary to reinforce the new

system. Employees can often require continued support well after an organizational change.

One of the most useful frameworks in this area is the three-stage model of planned change developed in the 1950s

by psychologist Kurt Lewin (Lewin, 1951). This model assumes that change will encounter resistance. Therefore,

executing change without prior preparation is likely to lead to failure. Instead, organizations should start with

unfreezing, or making sure that organizational members are ready for and receptive to change. This is followed by

change, or executing the planned changes. Finally, refreezing involves ensuring that change becomes permanent

and the new habits, rules, or procedures become the norm.

Figure 7.14 Lewin’s Three-Stage Process of Change

328

Unfreezing Before ChangeUnfreezing Before Change

Many change efforts fail because people are insufficiently prepared for change. When employees are not prepared,

they are more likely to resist the change effort and less likely to function effectively under the new system. What

can organizations do before change to prepare employees? There are a number of things that are important at this

stage.

Communicating a Plan for ChangeCommunicating a Plan for Change

Do people know what the change entails, or are they hearing about the planned changes through the grapevine or

office gossip? When employees know what is going to happen, when, and why, they may feel more comfortable.

Research shows that those who have more complete information about upcoming changes are more committed

to a change effort (Wanberg & Banas, 2000). Moreover, in successful change efforts, the leader not only

communicates a plan but also an overall vision for the change (Herold, et. al., 2008). When this vision is exciting

and paints a picture of a future that employees would be proud to be a part of, people are likely to be more

committed to change.

Ensuring that top management communicates with employees about the upcoming changes also has symbolic

value (Armenakis, et. al., 1993). When top management and the company CEO discuss the importance of the

changes in meetings, employees are provided with a reason to trust that this change is a strategic initiative. For

example, while changing the employee performance appraisal system, the CEO of Kimberly Clark made sure to

mention the new system in all meetings with employees, indicating that the change was supported by the CEO.

Develop a Sense of UrgencyDevelop a Sense of Urgency

People are more likely to accept change if they feel that there is a need for it. If employees feel their company is

doing well, the perceived need for change will be smaller. Those who plan the change will need to make the case

that there is an external or internal threat to the organization’s competitiveness, reputation, or sometimes even its

survival and that failure to act will have undesirable consequences. For example, Lou Gerstner, the former CEO

of IBM, executed a successful transformation of the company in the early 1990s. In his biography Elephants Can

Dance, Gerstner highlights how he achieved cooperation as follows: “Our greatest ally in shaking loose the past

was IBM’s eminent collapse. Rather than go with the usual impulse to put on a happy face, I decided to keep the

crisis front and center. I didn’t want to lose the sense of urgency (Gerstner, 2002; Kotter, 1996).”

Building a CoalitionBuilding a Coalition

To convince people that change is needed, the change leader does not necessarily have to convince every person

individually. In fact, people’s opinions toward change are affected by opinion leaders or those people who have

a strong influence over the behaviors and attitudes of others (Burkhardt, 1994; Kotter, 1995). Instead of trying

to get everyone on board at the same time, it may be more useful to convince and prepare the opinion leaders.

Understanding one’s own social networks as well as the networks of others in the organization can help managers

identify opinion leaders. Once these individuals agree that the proposed change is needed and will be useful,

they will become helpful allies in ensuring that the rest of the organization is ready for change (Armenakis, et.

7.6 PLANNING AND EXECUTING CHANGE EFFECTIVELY • 329

al., 1993). For example, when Paul Pressler became the CEO of Gap Inc. in 2002, he initiated a culture change

effort in the hope of creating a sense of identity among the company’s many brands such as Banana Republic, Old

Navy, and Gap. For this purpose, employees were segmented instead of trying to reach out to all employees at

the same time. Gap Inc. started by training the 2,000 senior managers in “leadership summits,” who in turn were

instrumental in ensuring the cooperation of the remaining 150,000 employees of the company (Nash, 2005).

Provide SupportProvide Support

Employees should feel that their needs are not ignored. Therefore, management may prepare employees for

change by providing emotional and instrumental support. Emotional support may be in the form of frequently

discussing the changes, encouraging employees to voice their concerns, and simply expressing confidence in

employees’ ability to perform effectively under the new system. Instrumental support may be in the form of

providing a training program to employees so that they know how to function under the new system. Effective

leadership and motivation skills can assist managers to provide support to employees.

Allow Employees to ParticipateAllow Employees to Participate

Studies show that employees who participate in planning change efforts tend to have more positive opinions

about the change. Why? They will have the opportunity to voice their concerns. They can shape the change

effort so that their concerns are addressed. They will be more knowledgeable about the reasons for change,

alternatives to the proposed changes, and why the chosen alternative was better than the others. Finally, they

will feel a sense of ownership of the planned change and are more likely to be on board (Wanberg & Banas,

2000). Participation may be more useful if it starts at earlier stages, preferably while the problem is still being

diagnosed. For example, assume that a company suspects there are problems with manufacturing quality. One way

of convincing employees that there is a problem that needs to be solved would be to ask them to take customer

calls about the product quality. Once employees experience the problem firsthand, they will be more motivated to

solve the problem.

Executing ChangeExecuting Change

The second stage of Lewin’s three-stage change model is executing change. At this stage, the organization

implements the planned changes on technology, structure, culture, or procedures. The specifics of how change

should be executed will depend on the type of change. However, there are three tips that may facilitate the success

of a change effort.

Continue to Provide SupportContinue to Provide Support

As the change is under way, employees may experience high amounts of stress. They may make mistakes more

often or experience uncertainty about their new responsibilities or job descriptions. Management has an important

role in helping employees cope with this stress by displaying support, patience, and continuing to provide support

to employees even after the change is complete.

330 • PRINCIPLES OF MANAGEMENT

Create Small WinsCreate Small Wins

During a change effort, if the organization can create a history of small wins, change acceptance will be more

likely (Kotter, 1996; Germann, 2006). If the change is large in scope and the payoff is a long time away,

employees may not realize change is occurring during the transformation period. However, if people see changes,

improvements, and successes along the way, they will be inspired and motivated to continue the change effort. For

this reason, breaking up the proposed change into phases may be a good idea because it creates smaller targets.

Small wins are also important for planners of change to make the point that their idea is on the right track. Early

success gives change planners more credibility while early failures may be a setback (Hamel, 2000).

Eliminate ObstaclesEliminate Obstacles

When the change effort is in place, many obstacles may crop up along the way. There may be key people who

publicly support the change effort while silently undermining the planned changes. There may be obstacles rooted

in a company’s structure, existing processes, or culture. It is the management’s job to identify, understand, and

remove these obstacles (Kotter, 1995). Ideally, these obstacles would have been eliminated before implementing

the change, but sometimes unexpected roadblocks emerge as change is under way.

RefreezingRefreezing

After the change is implemented, the long-term success of a change effort depends on the extent to which the

change becomes part of the company’s culture. If the change has been successful, the revised ways of thinking,

behaving, and performing should become routine. To evaluate and reinforce (“refreeze”) the change, there are a

number of things management can do.

Publicize SuccessPublicize Success

To make change permanent, the organization may benefit from sharing the results of the change effort with

employees. What was gained from the implemented changes? How much money did the company save? How

much did the company’s reputation improve? What was the reduction in accidents after new procedures were put

in place? Sharing concrete results with employees increases their confidence that the implemented change was a

right decision.

Reward Change AdoptionReward Change Adoption

To ensure that change becomes permanent, organizations may benefit from rewarding those who embrace the

change effort (an aspect of the controlling function). The rewards do not necessarily have to be financial. The

simple act of recognizing those who are giving support to the change effort in front of their peers may encourage

others to get on board. When the new behaviors employees are expected to demonstrate (such as using a new

computer program, filling out a new form, or simply greeting customers once they enter the store) are made part

of an organization’s reward system, those behaviors are more likely to be taken seriously and repeated, making

the change effort successful (Gale, 2003).

7.6 PLANNING AND EXECUTING CHANGE EFFECTIVELY • 331

Embracing Continuous ChangeEmbracing Continuous Change

While Lewin’s three-stage model offers many useful insights into the process of implementing change, it views

each organizational change as an episode with a beginning, middle, and end. In contrast with this episodic

change assumption, some management experts in the 1990s began to propose that change is—or ought to be—a

continuous process.

The learning organization is an example of a company embracing continuous change. By setting up a dynamic

feedback loop, learning can become a regular part of daily operations. If an employee implements a new method

or technology that seems to be successful, a learning organization is in a good position to adopt it. By constantly

being aware of how employee actions and outcomes affect others as well as overall company productivity, the

inevitable small changes throughout organizations can be rapidly absorbed and tailored for daily operations. When

an organization understands that change does indeed occur constantly, it will be in a better position to make use

of good changes and intervene if a change seems detrimental.

Key Takeaway

Effective change effort can be conceptualized as a three-step process in which employees are first preparedfor change, then change is implemented, and finally the new behavioral patterns become permanent.According to emerging contemporary views, it can also be seen as a continuous process that affirms theorganic, ever-evolving nature of an organization.

Exercises

1. What are the benefits of employee participation in change management?

2. Imagine that you are introducing a new system to college students where they would have to use aspecial ID number you create for them for activities such as logging on to campus computers orusing library resources. How would you plan and implement the change? Explain using Lewin’sthree-stage framework.

3. Why are successful companies less likely to change? What should companies do to makeorganizational change part of their culture?

ReferencesReferences

Armenakis, A. A., Harris, S. G., & Mossholder, K. W. (1993). Creating readiness for organizational change.

Human Relations, 46, 681–703.

Burkhardt, M. E. (1994). Social interaction effects following a technological change: A longitudinal investigation.

Academy of Management Journal, 37, 869–898.

Gale, S. F. (2003). Incentives and the art of changing behavior. Workforce Management, 82(11), 48–54.

332 • PRINCIPLES OF MANAGEMENT

Germann, K. (2006). Legitimizing a new role: Small wins and microprocesses of change. Academy of

Management Journal, 49, 977–998.

Gerstner, L. V. (2002). Who says elephants can’t dance? Inside IBM’s historic turnaround. New York:

HarperCollins.

Hamel, G. (2000, July/August). Waking up IBM. Harvard Business Review, 78(4), 137–146.

Herold, D. M., Fedor D. B., Caldwell, S., & Liu, Y. (2008). The effects of transformational and change leadership

on employees’ commitment to a change: A multilevel study. Journal of Applied Psychology, 93, 346–357.

Kotter, J. P. (1995, March–April). Leading change: Why transformations fail. Harvard Business Review, 73(2),

59–67.

Kotter, J. P. (1996). Leading change. Boston: Harvard Business School Press; Reay, T., Golden-Biddle, K., &amp.

Lewin K. (1951). Field theory in social science. New York: Harper & Row.

Nash, J. A. (Nov/Dec 2005). Comprehensive campaign helps Gap employees embrace cultural change.

Communication World, 22(6).

Wanberg, C. R., & Banas, J. T. (2000). Predictors and outcomes of openness to changes in a reorganizing

workplace. Journal of Applied Psychology, 85, 132–142.

7.6 PLANNING AND EXECUTING CHANGE EFFECTIVELY • 333

7.7 Building Your Change Management Skills

Learning Objective

1. Identify guidelines for overcoming resistance to change.

Overcoming Resistance to Your ProposalsOvercoming Resistance to Your Proposals

You feel that a change is needed. You have a great idea. But people around you do not seem convinced. They are

resisting your great idea. How do you make change happen?

• Listen to naysayers. You may think that your idea is great, but listening to those who resist may give you

valuable ideas about why it may not work and how to design it more effectively.

• Is your change revolutionary? If you are trying to change dramatically the way things are done, you will

find that resistance is greater. If your proposal involves incrementally making things better, you may have

better luck.

• Involve those around you in planning the change. Instead of providing the solutions, make them part of the

solution. If they admit that there is a problem and participate in planning a way out, you would have to do

less convincing when it is time to implement the change.

• Assess your credibility. When trying to persuade people to change their ways, it helps if you have a history

of suggesting implementable changes. Otherwise, you may be ignored or met with suspicion. This means

you need to establish trust and a history of keeping promises over time before you propose a major change.

• Present data to your audience. Be prepared to defend the technical aspects of your ideas and provide

evidence that your proposal is likely to work.

• Appeal to your audience’s ideals. Frame your proposal around the big picture. Are you going to create

happier clients? Is this going to lead to a better reputation for the company? Identify the long-term goals

you are hoping to accomplish that people would be proud to be a part of.

• Understand the reasons for resistance. Is your audience resisting because they fear change? Does the

change you propose mean more work for them? Does it affect them in a negative way? Understanding the

consequences of your proposal for the parties involved may help you tailor your pitch to your audience

334

(McGoon, 1995; Michelman, 2007; Stanley, 2002).

Key Takeaway

There are several steps you can take to help you overcome resistance to change. Many of them share thecommon theme of respecting those who are resistant so you can understand and learn from their concerns.

Exercises

1. What do you think are some key reasons why people resist change?

2. Do you think some people are more resistant to change regardless of what it is? Why do you thinkthis is?

ReferencesReferences

McGoon, C. (March 1995). Secrets of building influence. Communication World, 12(3), 16.

Michelman, P. (July 2007). Overcoming resistance to change. Harvard Management Update, 12(7), 3–4.

Stanley, T. L. (January 2002). Change: A common-sense approach. Supervision, 63(1), 7–10.

7.7 BUILDING YOUR CHANGE MANAGEMENT SKILLS • 335

Chapter 8: Organizational Culture

8.1 Organizational Culture

8.2 Case in Point: Google Creates Unique Culture

8.3 Understanding Organizational Culture

8.4 Measuring Organizational Culture

8.5 Creating and Maintaining Organizational Culture

8.6 Creating Culture Change

8.7 Developing Your Personal Skills: Learning to Fit In

336

8.1 Organizational Culture

Figure 8.1

Just as water is invisible to the fish swimming in it, yet affects their actions, culture consists of unseen

elements such as assumptions and values that affect organizational life.

Alexandru Stoian – School of fish – CC BY-NC-ND 2.0.

What’s in It for Me?

Reading this chapter will help you do the following:

1. Describe what organizational culture is and why it is important for an organization.

337

2. Understand the dimensions that make up a company’s culture.

3. Understand the creation and maintenance of organizational culture.

4. Understand the factors that create cultural change.

5. Develop personal culture management skills.

Organizations, just like individuals, have their own personalities—more typically known as organizational

cultures. Understanding how culture is created, communicated, and changed will help you to be a more effective

manager. But first, let’s define organizational culture.

Figure 8.2 The P-O-L-C Framework

338 • PRINCIPLES OF MANAGEMENT

8.2 Case in Point: Google Creates Unique Culture

Figure 8.3

Ardo191 – Googleplex Welcome Sign – public domain.

Google (NASDAQ: GOOG) is one of the best-known and most admired companies around the world, somuch so that “googling” is the term many use to refer to searching information on the Web. What startedout as a student project by two Stanford University graduates—Larry Page and Sergey Brin—in 1996,Google became the most frequently used Web search engine on the Internet with 1 billion searches per dayin 2009, as well as other innovative applications such as Gmail, Google Earth, Google Maps, and Picasa.Google grew from 10 employees working in a garage in Palo Alto to 10,000 employees operating aroundthe world by 2009. What is the formula behind this success?

Google strives to operate based on solid principles that may be traced back to its founders. In a worldcrowded with search engines, they were probably the first company that put users first. Their missionstatement summarizes their commitment to end-user needs: “To organize the world’s information and to

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make it universally accessible and useful.” While other companies were focused on marketing their sitesand increasing advertising revenues, Google stripped the search page of all distractions and presented userswith a blank page consisting only of a company logo and a search box. Google resisted pop-up advertising,because the company felt that it was annoying to end-users. They insisted that all their advertisementswould be clearly marked as “sponsored links.” This emphasis on improving user experience and alwaysputting it before making more money in the short term seems to have been critical to their success.

Keeping their employees happy is also a value they take to heart. Google created a unique workenvironment that attracts, motivates, and retains the best players in the field. Google was ranked as thenumber 1 “Best Place to Work For” by Fortune magazine in 2007 and number 4 in 2010. This is notsurprising if one looks closer to how Google treats employees. On their Mountain View, California, campuscalled the “Googleplex,” employees are treated to free gourmet food options including sushi bars andespresso stations. In fact, many employees complain that once they started working for Google, they tendto gain 10 to 15 pounds! Employees have access to gyms, shower facilities, video games, on-site child care,and doctors. Google provides 4 months of paternal leave with 75% of full pay and offers $500 for take-outmeals for families with a newborn. These perks create a place where employees feel that they are treatedwell and their needs are taken care of. Moreover, they contribute to the feeling that they are working at aunique and cool place that is different from everywhere else they may have worked.

In addition, Google encourages employee risk taking and innovation. How is this done? When a vicepresident in charge of the company’s advertising system made a mistake costing the company millionsof dollars and apologized for the mistake, she was commended by Larry Page, who congratulated her formaking the mistake and noting that he would rather run a company where they are moving quickly anddoing too much, as opposed to being too cautious and doing too little. This attitude toward acting fastand accepting the cost of resulting mistakes as a natural consequence of working on the cutting edge mayexplain why the company is performing much ahead of competitors such as Microsoft and Yahoo! One ofthe current challenges for Google is to expand to new fields outside of their Web search engine business.To promote new ideas, Google encourages all engineers to spend 20% of their time working on their ownideas.

Google’s culture is reflected in their decision making as well. Decisions at Google are made in teams. Eventhe company management is in the hands of a triad: Larry Page and Sergey Brin hired Eric Schmidt to actas the CEO of the company, and they are reportedly leading the company by consensus. In other words,this is not a company where decisions are made by the senior person in charge and then implemented topdown. It is common for several small teams to attack each problem and for employees to try to influenceeach other using rational persuasion and data. Gut feeling has little impact on how decisions are made.In some meetings, people reportedly are not allowed to say “I think…” but instead must say “the datasuggest….” To facilitate teamwork, employees work in open office environments where private offices areassigned only to a select few. Even Kai-Fu Lee, the famous employee whose defection from Microsoft wasthe target of a lawsuit, did not get his own office and shared a cubicle with two other employees.

How do they maintain these unique values? In a company emphasizing hiring the smartest people, it is verylikely that they will attract big egos that may be difficult to work with. Google realizes that its strengthcomes from its “small company” values that emphasize risk taking, agility, and cooperation. Therefore,they take their hiring process very seriously. Hiring is extremely competitive and getting to work atGoogle is not unlike applying to a college. Candidates may be asked to write essays about how they willperform their future jobs. Recently, they targeted potential new employees using billboards featuring brainteasers directing potential candidates to a Web site where they were subjected to more brain teasers. Eachcandidate may be interviewed by as many as eight people on several occasions. Through this scrutiny, theyare trying to select “Googley” employees who will share the company’s values, perform at high levels, andbe liked by others within the company.

340 • PRINCIPLES OF MANAGEMENT

Will this culture survive in the long run? It may be too early to tell, given that the company was onlyfounded in 1998. The founders emphasized that their initial public offering (IPO) would not change theirculture and they would not introduce more rules or change the way things are done in Google to pleaseWall Street. But can a public corporation really act like a start-up? Can a global giant facing scrutiny onissues including privacy, copyright, and censorship maintain its culture rooted in its days in a Palo Altogarage? Larry Page is quoted as saying, “We have a mantra: don’t be evil, which is to do the best things weknow how for our users, for our customers, for everyone. So I think if we were known for that, it would bea wonderful thing.”

Case written by information from Elgin, B., Hof, R. D., & Greene, J. (2005, August 8). Revenge of thenerds—again. BusinessWeek. Retrieved April 30, 2010, from http://www.businessweek.com/technology/content/jul2005/tc20050728_5127_tc024.htm; Hardy, Q. (2005, November 14). Google thinks small.Forbes, 176(10); Lashinky, A. (2006, October 2). Chaos by design. Fortune, 154(7); Mangalindan, M.(2004, March 29). The grownup at Google: How Eric Schmidt imposed better management tactics butdidn’t stifle search giant. Wall Street Journal, p. B1; Lohr, S. (2005, December 5). At Google, cubeculture has new rules. New York Times. Retrieved April 30, 2010, from http://www.nytimes.com/2005/12/05/technology/05google.html; Schoeneman, D. (2006, December 31). Can Google come out to play? NewYork Times. Retrieved April 30, 2010, from http://www.nytimes.com/2006/12/31/fashion/31google.html;Warner, M. (2004, June). What your company can learn from Google. Business 2.0, 5(5).

Discussion Questions

1. Culture is an essential element of organizing in the P-O-L-C framework. Do you think Google hasa strong culture? What would it take to make changes in that culture, for better or for worse?

2. Do you think Google’s unique culture will help or hurt Google in the long run?

3. What are the factors responsible for the specific culture that exists in Google?

4. What type of decision-making approach has Google taken? Do you think this will remain thesame over time? Why or why not?

5. Do you see any challenges Google may face in the future because of its emphasis on having arisk-taking culture?

8.2 CASE IN POINT: GOOGLE CREATES UNIQUE CULTURE • 341

8.3 Understanding Organizational Culture

Learning Objectives

1. Define organizational culture.

2. Understand why organizational culture is important.

3. Understand the different levels of organizational culture.

What Is Organizational Culture?What Is Organizational Culture?

Organizational culture refers to a system of shared assumptions, values, and beliefs that show people what is

appropriate and inappropriate behavior (Chatman & Eunyoung, 2003; Kerr & Slocum, 2005). These values have

a strong influence on employee behavior as well as organizational performance. In fact, the term organizational

culture was made popular in the 1980s when Peters and Waterman’s best-selling book In Search of Excellence

made the argument that company success could be attributed to an organizational culture that was decisive,

customer-oriented, empowering, and people-oriented. Since then, organizational culture has become the subject of

numerous research studies, books, and articles. Organizational culture is still a relatively new concept. In contrast

to a topic such as leadership, which has a history spanning several centuries, organizational culture is a young but

fast-growing area within management.

Culture is largely invisible to individuals just as the sea is invisible to the fish swimming in it. Even though it

affects all employee behaviors, thinking, and behavioral patterns, individuals tend to become more aware of their

organization’s culture when they have the opportunity to compare it to other organizations. It is related to the

second of the three facets that compose the P-O-L-C function of organizing. The organizing function involves

creating and implementing organizational design decisions. The culture of the organization is closely linked to

organizational design. For instance, a culture that empowers employees to make decisions could prove extremely

resistant to a centralized organizational design, hampering the manager’s ability to enact such a design. However,

a culture that supports the organizational structure (and vice versa) can be very powerful.

342

Why Does Organizational Culture Matter?Why Does Organizational Culture Matter?

An organization’s culture may be one of its strongest assets or its biggest liability. In fact, it has been argued

that organizations that have a rare and hard-to-imitate culture enjoy a competitive advantage (Barney, 1986).

In a survey conducted by the management consulting firm Bain & Company in 2007, worldwide business

leaders identified corporate culture to be as important as corporate strategy for business success. 1 This comes

as no surprise to leaders of successful businesses, who are quick to attribute their company’s success to their

organization’s culture.

Culture, or shared values within the organization, may be related to increased performance. Researchers found

a relationship between organizational cultures and company performance, with respect to success indicators such

as revenues, sales volume, market share, and stock prices (Kotter & Heskett, 1992; Marcoulides & heck, 1993).

At the same time, it is important to have a culture that fits with the demands of the company’s environment. To

the extent that shared values are proper for the company in question, company performance may benefit from

culture (Arogyaswamy & Byles, 1987). For example, if a company is in the high-tech industry, having a culture

that encourages innovativeness and adaptability will support its performance. However, if a company in the same

industry has a culture characterized by stability, a high respect for tradition, and a strong preference for upholding

rules and procedures, the company may suffer because of its culture. In other words, just as having the “right”

culture may be a competitive advantage for an organization, having the “wrong” culture may lead to performance

difficulties, may be responsible for organizational failure, and may act as a barrier preventing the company from

changing and taking risks.

In addition to having implications for organizational performance, organizational culture is an effective control

mechanism dictating employee behavior. Culture is a more powerful way of controlling and managing employee

behaviors than organizational rules and regulations. For example, when a company is trying to improve the

quality of its customer service, rules may not be helpful, particularly when the problems customers present are

unique. Instead, creating a culture of customer service may achieve better results by encouraging employees to

think like customers, knowing that the company priorities in this case are clear: Keeping the customer happy is

preferable to other concerns, such as saving the cost of a refund. Therefore, the ability to understand and influence

organizational culture is an important item for managers to have in their tool kit when they are carrying out their

controlling P-O-L-C function as well as their organizing function.

Levels of Organizational CultureLevels of Organizational Culture

Figure 8.5 Three Levels of Organizational Culture

8.3 UNDERSTANDING ORGANIZATIONAL CULTURE • 343

Adapted from Schein, E. H. (1992). Organizational Culture and Leadership. San Francisco: Jossey-Bass.

Organizational culture consists of some aspects that are relatively more visible, as well as aspects that may lie

below one’s conscious awareness. Organizational culture can be thought of as consisting of three interrelated

levels (Schein, 1992).

At the deepest level, below our awareness, lie basic assumptions. These assumptions are taken for granted and

reflect beliefs about human nature and reality. At the second level, values exist. Values are shared principles,

standards, and goals. Finally, at the surface, we have artifacts, or visible, tangible aspects of organizational

culture. For example, in an organization, a basic assumption employees and managers share might be that happy

employees benefit their organizations. This might be translated into values such as egalitarianism, high-quality

relationships, and having fun. The artifacts reflecting such values might be an executive “open door” policy, an

office layout that includes open spaces and gathering areas equipped with pool tables, and frequent company

picnics.

Understanding the organization’s culture may start from observing its artifacts: its physical environment,

employee interactions, company policies, reward systems, and other observable characteristics. When you are

interviewing for a position, observing the physical environment, how people dress, where they relax, and how

they talk to others is definitely a good start to understanding the company’s culture. However, simply looking

at these tangible aspects is unlikely to give a full picture of the organization, since an important chunk of what

makes up culture exists below one’s degree of awareness. The values and, deeper, the assumptions that shape the

organization’s culture can be uncovered by observing how employees interact and the choices they make, as well

as by inquiring about their beliefs and perceptions regarding what is right and appropriate behavior.

344 • PRINCIPLES OF MANAGEMENT

Key Takeaway

Organizational culture is a system of shared assumptions, values, and beliefs that helps individualsunderstand which behaviors are and are not appropriate within an organization. Cultures can be a sourceof competitive advantage for organizations. Strong organizational cultures can be an organizing as wellas a controlling mechanism for organizations. And finally, organizational culture consists of three levels:assumptions that are below the surface, values, and artifacts.

Exercises

1. Why do companies need culture?

2. Give an example of a company culture being a strength and a weakness.

3. In what ways does culture serve as a controlling mechanism?

4. If assumptions are below the surface, why do they matter?

5. Share examples of artifacts you have noticed at different organizations.

1Why culture can mean life or death for your organization. (September, 2007). HR Focus, 84, 9.

ReferencesReferences

Arogyaswamy, B., & Byles, C. H. (1987). Organizational culture: Internal and external fits. Journal of

Management, 13, 647–658.

Barney, J. B. (1986). Organizational culture: Can it be a source of sustained competitive advantage? Academy of

Management Review, 11, 656–665.

Chatman, J. A., & Eunyoung Cha, S. (2003). Leading by leveraging culture. California Management Review, 45,

19–34.

Kotter, J. P., & Heskett, J. L. (1992). Corporate Culture and Performance. New York: Free Press.

Marcoulides, G. A., & Heck, R. H. (1993, May). Organizational culture and performance: Proposing and testing

a model. Organizational Science, 4, 209–225.

Schein, E. H. (1992). Organizational culture and leadership. San Francisco: Jossey-Bass.

Slocum, J. W. (2005). Managing corporate culture through reward systems. Academy of Management Executive,

19, 130–138.

8.3 UNDERSTANDING ORGANIZATIONAL CULTURE • 345

8.4 Measuring Organizational Culture

Learning Objectives

1. Understand different dimensions of organizational culture.

2. Understand the role of culture strength.

3. Explore subcultures within organizations.

Dimensions of CultureDimensions of Culture

Which values characterize an organization’s culture? Even though culture may not be immediately observable,

identifying a set of values that might be used to describe an organization’s culture helps us identify, measure, and

manage culture more effectively. For this purpose, several researchers have proposed various culture typologies.

One typology that has received a lot of research attention is the Organizational Culture Profile (OCP) where

culture is represented by seven distinct values (Chatman & Jehn, 1991; O’Reilly, et. al., 1991).

Figure 8.6 Dimensions of Organizational Culture Profile (OCP)

346

Adapted from information in O’Reilly, C. A., III, Chatman, J. A., & Caldwell, D. F. (1991). People and

organizational culture: A profile comparison approach to assessing person-organization fit. Academy of

Management Journal, 34, 487–516.

Innovative CulturesInnovative Cultures

According to the OCP framework, companies that have innovative cultures are flexible, adaptable, and experiment

with new ideas. These companies are characterized by a flat hierarchy and titles and other status distinctions tend

to be downplayed. For example, W. L. Gore & Associates is a company with innovative products such as GORE-

TEX® (the breathable fabric that is windproof and waterproof), Glade dental floss, and Elixir guitar strings,

earning the company the distinction as the most innovative company in the United States by Fast Company

magazine in 2004. W. L. Gore consistently manages to innovate and capture the majority of market share in a wide

variety of industries, in large part because of its unique culture. In this company, employees do not have bosses

in the traditional sense, and risk taking is encouraged by celebrating failures as well as successes (Deutschman,

2004). Companies such as W. L. Gore, Genentech, and Google also encourage their employees to take risks by

allowing engineers to devote 20% of their time to projects of their own choosing.

8.4 MEASURING ORGANIZATIONAL CULTURE • 347

Aggressive CulturesAggressive Cultures

Companies with aggressive cultures value competitiveness and outperforming competitors; by emphasizing this,

they often fall short in corporate social responsibility. For example, Microsoft is often identified as a company

with an aggressive culture. The company has faced a number of antitrust lawsuits and disputes with competitors

over the years. In aggressive companies, people may use language such as “we will kill our competition.” In the

past, Microsoft executives made statements such as “we are going to cut off Netscape’s air supply…Everything

they are selling, we are going to give away,” and its aggressive culture is cited as a reason for getting into new

legal troubles before old ones are resolved (Greene, et. al., 2004; Schlender, 1998).

Figure 8.7

Microsoft, the company that Bill Gates co-founded, has been described as

having an aggressive culture.

IsaacMao – Bill Gates world’s most “spammed” person – CC BY 2.0.

Outcome-Oriented CulturesOutcome-Oriented Cultures

The OCP framework describes outcome-oriented cultures as those that emphasize achievement, results, and action

as important values. A good example of an outcome-oriented culture may be the electronics retailer Best Buy.

Having a culture emphasizing sales performance, Best Buy tallies revenues and other relevant figures daily by

department. Employees are trained and mentored to sell company products effectively, and they learn how much

money their department made every day (Copeland, 2004). In 2005, the company implemented a Results Oriented

Work Environment (ROWE) program that allows employees to work anywhere and anytime; they are evaluated

based on results and fulfillment of clearly outlined objectives (Thompson, 2005). Outcome-oriented cultures hold

employees as well as managers accountable for success and use systems that reward employee and group output.

In these companies, it is more common to see rewards tied to performance indicators as opposed to seniority

or loyalty. Research indicates that organizations that have a performance-oriented culture tend to outperform

companies that are lacking such a culture (Nohria, et. al., 2003). At the same time, when performance pressures

348 • PRINCIPLES OF MANAGEMENT

lead to a culture where unethical behaviors become the norm, individuals see their peers as rivals, and short-term

results are rewarded, the resulting unhealthy work environment serves as a liability (Probst & Raisch, 2005).

Stable CulturesStable Cultures

Stable cultures are predictable, rule-oriented, and bureaucratic. When the environment is stable and certain,

these cultures may help the organization to be effective by providing stable and constant levels of output

(Westrum, 2004). These cultures prevent quick action and, as a result, may be a misfit to a changing and dynamic

environment. Public sector institutions may be viewed as stable cultures. In the private sector, Kraft Foods is an

example of a company with centralized decision making and rule orientation that suffered as a result of the culture-

environment mismatch (Thompson, 2006). Its bureaucratic culture is blamed for killing good ideas in early stages

and preventing the company from innovating. When the company started a change program to increase the agility

of its culture, one of its first actions was to fight bureaucracy with more bureaucracy: The new position of vice

president of “business process simplification” was created but was later eliminated (Boyle, 2004; Thompson,

2005; Thompson, 2006).

People-Oriented CulturesPeople-Oriented Cultures

People-oriented cultures value fairness, supportiveness, and respecting individual rights. In these organizations,

there is a greater emphasis on and expectation of treating people with respect and dignity (Erdogan, et. al., 2006).

One study of new employees in accounting companies found that employees, on average, stayed 14 months

longer in companies with people-oriented cultures (Sheridan, 1992). Starbucks is an example of a people-oriented

culture. The company pays employees above minimum wage, offers health care and tuition reimbursement

benefits to its part-time as well as full-time employees, and has creative perks such as weekly free coffee for all

associates. As a result of these policies, the company benefits from a turnover rate lower than the industry average

(Weber, 2005).

Team-Oriented CulturesTeam-Oriented Cultures

Companies with a team-oriented culture are collaborative and emphasize cooperation among employees. For

example, Southwest Airlines facilitates a team-oriented culture by cross-training its employees so that they are

capable of helping one another when needed. The company also emphasizes training intact work teams (Bolino

& Turnley, 2003). In Southwest’s selection process, applicants who are not viewed as team players are not hired

as employees (Miles & Mangold, 2005). In team-oriented organizations, members tend to have more positive

relationships with their coworkers and particularly with their managers (Erdogan, et. al., 2006).

Figure 8.8

8.4 MEASURING ORGANIZATIONAL CULTURE • 349

The growth in the number of passengers flying with Southwest Airlines from 1973 until 2007 when

Southwest surpassed American Airlines as the most flown U.S. airline. While price has played a role in

this, their emphasis on service has been a key piece of their culture and competitive advantage.

Adapted from http://upload.wikimedia.org/wikipedia/commons/6/69/Southwest-airlines-passengers.jpg

Detail-Oriented CulturesDetail-Oriented Cultures

Figure 8.9

Remember that, in the end, culture is really about people.

Chris Jones – Culture in the UK – CC BY-NC 2.0.

Organizations with a detail-oriented culture are characterized in the OCP framework as emphasizing precision and

350 • PRINCIPLES OF MANAGEMENT

paying attention to details. Such a culture gives a competitive advantage to companies in the hospitality industry

by helping them differentiate themselves from others. For example, Four Seasons and Ritz Carlton are among

hotels who keep records of all customer requests such as which newspaper the guest prefers or what type of pillow

the customer uses. This information is put into a computer system and used to provide better service to returning

customers. Any requests hotel employees receive, as well as overhear, might be entered into the database to serve

customers better.

Strength of CultureStrength of Culture

A strong culture is one that is shared by organizational members (Arogyaswamy & Byles, 1987; Chatman &

Eunyoung, 2003)).—that is, a culture in which most employees in the organization show consensus regarding

the values of the company. The stronger a company’s culture, the more likely it is to affect the way employees

think and behave. For example, cultural values emphasizing customer service will lead to higher-quality customer

service if there is widespread agreement among employees on the importance of customer-service-related values

(Schneider, et. al., 2002).

It is important to realize that a strong culture may act as an asset or a liability for the organization, depending

on the types of values that are shared. For example, imagine a company with a culture that is strongly outcome-

oriented. If this value system matches the organizational environment, the company may perform well and

outperform its competitors. This is an asset as long as members are behaving ethically. However, a strong

outcome-oriented culture coupled with unethical behaviors and an obsession with quantitative performance

indicators may be detrimental to an organization’s effectiveness. Enron is an extreme example of this

dysfunctional type of strong culture.

One limitation of a strong culture is the difficulty of changing it. In an organization where certain values are

widely shared, if the organization decides to adopt a different set of values, unlearning the old values and learning

the new ones will be a challenge because employees will need to adopt new ways of thinking, behaving, and

responding to critical events. For example, Home Depot had a decentralized, autonomous culture where many

business decisions were made using “gut feeling” while ignoring the available data. When Robert Nardelli became

CEO of the company in 2000, he decided to change its culture starting with centralizing many of the decisions

that were previously left to individual stores. This initiative met with substantial resistance, and many high-level

employees left during Nardelli’s first year. Despite getting financial results such as doubling the sales of the

company, many of the changes he made were criticized. He left the company in January 2007 (Charan, 2006;

Herman & Wernle, 2007).

8.4 MEASURING ORGANIZATIONAL CULTURE • 351

Figure 8.10

Walt Disney created a strong culture at his company that has evolved since its founding in 1923.

NASA – Walt disney portrait – public domain.

A strong culture may also be a liability during a merger. During mergers and acquisitions, companies

inevitably experience a clash of cultures, as well as a clash of structures and operating systems. Culture

clash becomes more problematic if both parties have unique and strong cultures. For example, during the

merger of Daimler-Benz with Chrysler to create DaimlerChrysler, the differing strong cultures of each

company acted as a barrier to effective integration. Daimler had a strong engineering culture that was more

hierarchical and emphasized routinely working long hours. Daimler employees were used to being part of

an elite organization, evidenced by flying first class on all business trips. However, Chrysler had a sales

culture where employees and managers were used to autonomy, working shorter hours, and adhering to

budget limits that meant only the elite flew first class. The different ways of thinking and behaving in these

two companies introduced a number of unanticipated problems during the integration process (Badrtalei

& Bates, 2007; Bower, 2001).

352 • PRINCIPLES OF MANAGEMENT

Do Organizations Have a Single Culture?Do Organizations Have a Single Culture?

So far, we have assumed that a company has a single culture that is shared throughout the organization. In reality

there might be multiple cultures within the organization. For example, people working on the sales floor may

experience a different culture from that experienced by people working in the warehouse. Cultures that emerge

within different departments, branches, or geographic locations are called subcultures. Subcultures may arise from

the personal characteristics of employees and managers, as well as the different conditions under which work is

performed. In addition to understanding the broader organization’s values, managers will need to make an effort

to understand subculture values to see their effect on workforce behavior and attitudes.

Sometimes, a subculture may take the form of a counterculture. Defined as shared values and beliefs that are

in direct opposition to the values of the broader organizational culture (Kerr, et. al., 2005), countercultures are

often shaped around a charismatic leader. For example, within a largely bureaucratic organization, an enclave of

innovativeness and risk taking may emerge within a single department. A counterculture may be tolerated by the

organization as long as it is bringing in results and contributing positively to the effectiveness of the organization.

However, its existence may be perceived as a threat to the broader organizational culture. In some cases, this may

lead to actions that would take away the autonomy of the managers and eliminate the counterculture.

Key Takeaway

Culture can be understood in terms of seven different culture dimensions, depending on what is mostemphasized within the organization. For example, innovative cultures are flexible, adaptable, andexperiment with new ideas, while stable cultures are predictable, rule-oriented, and bureaucratic. Strongcultures can be an asset or liability for an organization but can be challenging to change. Multiple culturesmay coexist in a single organization in the form of subcultures and countercultures.

Exercises

1. Think about an organization you are familiar with. On the basis of the dimensions of OCP, howwould you characterize its culture?

2. Out of the culture dimensions described, which dimension do you think would lead to higherlevels of employee satisfaction and retention? Which one would be related to companyperformance?

3. What are pros and cons of an outcome-oriented culture?

4. When bureaucracies were first invented, they were considered quite innovative. Do you think thatdifferent cultures are more or less effective at different points in time and in different industries?Why or why not?

5. Can you imagine an effective use of subcultures within an organization?

8.4 MEASURING ORGANIZATIONAL CULTURE • 353

ReferencesReferences

Arogyaswamy, B., & Byles, C. M. (1987). Organizational culture: Internal and external fits. Journal of

Management, 13, 647–658.

Badrtalei, J., & Bates, D. L. (2007). Effect of organizational cultures on mergers and acquisitions: The case of

DaimlerChrysler. International Journal of Management, 24, 303–317.

Bolino, M. C., & Turnley, W. H. (2003). Going the extra mile: Cultivating and managing employee citizenship

behavior. Academy of Management Executive, 17, 60–71.

Bower, J. L. (2001). Not all M&As are alike—and that matters. Harvard Business Review, 79, 92–101.

Boyle, M. (2004, November 15). Kraft’s arrested development. Fortune, 150, 144.

Charan, R. (2006, April). Home Depot’s blueprint for culture change. Harvard Business Review, 84, 60–70.

Chatman, J. A., & Eunyoung Cha, S. (2003). Leading by leveraging culture. California Management Review, 45,

20–34.

Chatman, J. A., & Jehn, K. A. (1991). Assessing the relationship between industry characteristics and

organizational culture: How different can you be? Academy of Management Journal, 37, 522–553.

Copeland, M. V. (2004, July). Best Buy’s selling machine. Business 2.0, 5, 92–102.

Deutschman, A. (2004, December). The fabric of creativity. Fast Company, 89, 54–62.

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of organizational culture. Academy of Management Journal, 49, 395–406.

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80–81.

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81, 42.

Kerr, J., & Slocum, J. W., Jr. (2005). Managing corporate culture through reward systems. Academy of

Management Executive, 19, 130–138.

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Horizons, 48, 535–545.

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O’Reilly, C. A., III, Chatman, J. A., & Caldwell, D. F. (1991). People and organizational culture: A profile

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Probst, G., & Raisch, S. (2005). Organizational crisis: The logic of failure. Academy of Management Executive,

19, 90–105.

354 • PRINCIPLES OF MANAGEMENT

Schlender, B. (1998, June 22). Gates’s crusade. Fortune, 137, 30–32.

Schneider, B., Salvaggio, A., & Subirats, M. (2002). Climate strength: A new direction for climate research.

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Thompson, S. (2005, February 28). Kraft simplification strategy anything but. Advertising Age, 76, 3–63.

Thompson, S. (2006, September 18). Kraft CEO slams company, trims marketing staff. Advertising Age, 77, 3–62.

Weber, G. (2005, February). Preserving the counter culture. Workforce Management, 84, 28–34; Motivation

secrets of the 100 best employers. (2003, October). HR Focus, 80, 1–15.

Westrum, R. (2004, August). Increasing the number of guards at nuclear power plants. Risk Analysis: An

International Journal, 24, 959–961.

8.4 MEASURING ORGANIZATIONAL CULTURE • 355

8.5 Creating and Maintaining Organizational Culture

Learning Objectives

1. Understand how cultures are created.

2. Learn how to maintain a culture.

3. Recognize organizational culture signs.

How Are Cultures Created?How Are Cultures Created?

Where do cultures come from? Understanding this question is important in understanding how they can be

changed. An organization’s culture is shaped as the organization faces external and internal challenges and learns

how to deal with them. When the organization’s way of doing business provides a successful adaptation to

environmental challenges and ensures success, those values are retained. These values and ways of doing business

are taught to new members as the way to do business (Schein, 1992).

The factors that are most important in the creation of an organization’s culture include founders’ values,

preferences, and industry demands.

Figure 8.11 Model Describing How Cultures Are Created and Maintained

356

Founder ValuesFounder Values

A company’s culture, particularly during its early years, is inevitably tied to the personality, background, and

values of its founder or founders, as well as their vision for the future of the organization. When entrepreneurs

establish their own businesses, the way they want to do business determines the organization’s rules, the structure

set up in the company, and the people they hire to work with them. For example, some of the existing corporate

values of the ice cream company Ben & Jerry’s Homemade Holdings Inc. can easily be traced to the personalities

of its founders Ben Cohen and Jerry Greenfield. In 1978, the two high school friends opened up their first ice-

cream shop in a renovated gas station in Burlington, Vermont. Their strong social convictions led them to buy only

from the local farmers and devote a certain percentage of their profits to charities. The core values they instilled

in their business can still be observed in the current company’s devotion to social activism and sustainability,

its continuous contributions to charities, use of environmentally friendly materials, and dedication to creating

jobs in low-income areas. Even though Unilever acquired the company in 2000, the social activism component

remains unchanged and Unilever has expressed its commitment to maintaining it (Kiger, 2005; Rubis, et. al., 2005;

Smalley, 2007).

Founder values become part of the corporate culture to the degree to which they help the company be successful.

For example, the social activism of Ben and Jerry’s was instilled in the company because the founders strongly

believed in these issues. However, these values probably would not be surviving 3 decades later if they had not

helped the company in its initial stages. In the case of Ben and Jerry’s, these values helped distinguish their brand

from larger corporate brands and attracted a loyal customer base. Thus, by providing a competitive advantage,

these values were retained as part of the corporate culture and were taught to new members as the right way to do

business.

8.5 CREATING AND MAINTAINING ORGANIZATIONAL CULTURE • 357

Figure 8.12

Ben & Jerry’s has locations around the world, including this store in Singapore.

Waycool27 – BenJerry-UnitedSquare – public domain.

Industry DemandsIndustry Demands

While founders undoubtedly exert a powerful influence over corporate cultures, the industry characteristics also

play a role. Companies within the same industry can sometimes have widely differing cultures. At the same time,

the industry characteristics and demands act as a force to create similarities among organizational cultures. For

example, despite some differences, many companies in the insurance and banking industries are stable and rule-

oriented, many companies in the high-tech industry have innovative cultures, and those in nonprofit industry may

be people-oriented. If the industry is one with a large number of regulatory requirements—for example, banking,

health care, and high-reliability (such as nuclear power plant) industries—then we might expect the presence of

a large number of rules and regulations, a bureaucratic company structure, and a stable culture. The industry

influence over culture is also important to know because this shows that it may not be possible to imitate the

culture of a company in a different industry, even though it may seem admirable to outsiders.

How Are Cultures Maintained?How Are Cultures Maintained?

As a company matures, its cultural values are refined and strengthened. The early values of a company’s culture

exert influence over its future values. It is possible to think of organizational culture as an organism that protects

itself from external forces. Organizational culture determines what types of people are hired by an organization

and what types of people are left out. Moreover, once new employees are hired, the company assimilates new

358 • PRINCIPLES OF MANAGEMENT

employees and teaches them the way things are done in the organization. We call these processes attraction-

selection-attrition and onboarding processes. We will also examine the role of leaders and reward systems in

shaping and maintaining an organization’s culture.

Attraction-Selection-AttritionAttraction-Selection-Attrition

Organizational culture is maintained through a process known as attraction-selection-attrition (ASA). First,

employees are attracted to organizations where they will fit in. Someone who has a competitive nature may feel

comfortable in and may prefer to work in a company where interpersonal competition is the norm. Others may

prefer to work in a team-oriented workplace. Research shows that employees with different personality traits

find different cultures attractive. For example, out of the Big Five personality traits, employees who demonstrate

neurotic personalities were less likely to be attracted to innovative cultures, whereas those who had openness to

experience were more likely to be attracted to innovative cultures (Judge & Cable, 1997).

Of course, this process is imperfect, and value similarity is only one reason a candidate might be attracted to

a company. There may be other, more powerful attractions such as good benefits. At this point in the process,

the second component of the ASA framework prevents them from getting in: selection. Just as candidates are

looking for places where they will fit in, companies are also looking for people who will fit into their current

corporate culture. Many companies are hiring people for fit with their culture, as opposed to fit with a certain job.

For example, Southwest Airlines prides itself for hiring employees based on personality and attitude rather than

specific job-related skills, which they learn after they are hired. Companies use different techniques to weed out

candidates who do not fit with corporate values. For example, Google relies on multiple interviews with future

peers. By introducing the candidate to several future coworkers and learning what these coworkers think of the

candidate, it becomes easier to assess the level of fit.

Even after a company selects people for person-organization fit, there may be new employees who do not fit in.

Some candidates may be skillful in impressing recruiters and signal high levels of culture fit even though they

do not necessarily share the company’s values. In any event, the organization is eventually going to eliminate

candidates eventually who do not fit in through attrition. Attrition refers to the natural process where the

candidates who do not fit in will leave the company. Research indicates that person-organization misfit is one of

the important reasons for employee turnover (Kristof-Brown, et. al., 2005; O’Reilly, et. al., 1991).

Because of the ASA process, the company attracts, selects, and retains people who share its core values, whereas

those people who are different in core values will be excluded from the organization either during the hiring

process or later on through naturally occurring turnover. Thus, organizational culture will act as a self-defending

organism where intrusive elements are kept out. Supporting the existence of such self-protective mechanisms,

research shows that organizations demonstrate a certain level of homogeneity regarding personalities and values

of organizational members (Giberson, et. al., 2005).

New Employee OnboardingNew Employee Onboarding

Another way in which an organization’s values, norms, and behavioral patterns are transmitted to employees is

through onboarding (also referred to as the organizational socialization process). Onboarding refers to the process

through which new employees learn the attitudes, knowledge, skills, and behaviors required to function effectively

8.5 CREATING AND MAINTAINING ORGANIZATIONAL CULTURE • 359

within an organization. If an organization can successfully socialize new employees into becoming organizational

insiders, new employees will feel accepted by their peers and confident regarding their ability to perform; they

will also understand and share the assumptions, norms, and values that are part of the organization’s culture. This

understanding and confidence in turn translate into more effective new employees who perform better and have

higher job satisfaction, stronger organizational commitment, and longer tenure within the company (Bauer, et.

al., 2007). Organizations engage in different activities to facilitate onboarding, such as implementing orientation

programs or matching new employees with mentors.

What Can Employees Do During Onboarding?What Can Employees Do During Onboarding?

New employees who are proactive, seek feedback, and build strong relationships tend to be more successful than

those who do not (Bauer & Green, 1998; Kammeyer-Mueller & Wanberg, 2003; Wanberg & Kammeyer-Mueller,

2000). For example, feedback seeking helps new employees. Especially on a first job, a new employee can make

mistakes or gaffes and may find it hard to understand and interpret the ambiguous reactions of coworkers. By

actively seeking feedback, new employees may find out sooner rather than later any behaviors that need to be

changed and gain a better understanding of whether their behavior fits with the company culture and expectations.

Relationship building or networking (a facet of the organizing function) is another important behavior new

employees may demonstrate. Particularly when a company does not have a systematic approach to onboarding, it

becomes more important for new employees to facilitate their own onboarding by actively building relationships.

According to one estimate, 35% of managers who start a new job fail in the new job and either voluntarily leave

or are fired within one and a half years. Of these, over 60% report not being able to form effective relationships

with colleagues as the primary reason for this failure (Fisher, 2005).

What Can Organizations Do During Onboarding?What Can Organizations Do During Onboarding?

Many organizations, including Microsoft, Kellogg Company, and Bank of America take a more structured and

systematic approach to new employee onboarding, while others follow a “sink or swim” approach where new

employees struggle to figure out what is expected of them and what the norms are.

A formal orientation program indoctrinates new employees to the company culture, as well as introducing them

to their new jobs and colleagues. An orientation program has a role in making new employees feel welcome in

addition to imparting information that may help them be successful in their new jobs. Many large organizations

have formal orientation programs consisting of lectures, videotapes, and written material, while some may follow

more informal approaches. According to one estimate, most orientations last anywhere from one to five days,

and some companies are currently switching to a computer-based orientation. Ritz Carlton, the company ranked

number 1 in Training magazine’s 2007 top 125 list, uses a very systematic approach to employee orientation

and views orientation as the key to retention. In the 2-day classroom orientation, employees spend time with

management, dine in the hotel’s finest restaurant, and witness the attention to customer service detail firsthand.

During these two days, they are introduced to the company’s intensive service standards, team orientation, and its

own language. Later, on their 21st day they are tested on the company’s service standards and are certified (Durett,

2006; Elswick, 2000). Research shows that formal orientation programs are helpful in teaching employees about

the goals and history of the company, as well as communicating the power structure. Moreover, these programs

may also help with a new employee’s integration to the team. However, these benefits may not be realized to

360 • PRINCIPLES OF MANAGEMENT

the same extent in computer-based orientations. In fact, compared to those taking part in a regular, face-to-face

orientation, those undergoing a computer-based orientation were shown to have lower understanding of their job

and the company, indicating that different formats of orientations may not substitute for each other (Klein &

Weaver, 2000; Moscato, 2005; Wesson & Gogus, 2005).

What Can Organizational Insiders Do During Onboarding?What Can Organizational Insiders Do During Onboarding?

One of the most important ways in which organizations can help new employees adjust to a company and a

new job is through organizational insiders—namely, supervisors, coworkers, and mentors. Leaders have a key

influence over onboarding and the information and support they provide determine how quickly employees learn

about the company politics and culture, while coworker influence determines the degree to which employees

adjust to their teams. Mentors can be crucial to helping new employees adjust by teaching them the ropes of

their jobs and how the company really operates. A mentor is a trusted person who provides an employee with

advice and support regarding career-related matters. Although a mentor can be any employee or manager who has

insights that are valuable to the new employee, mentors tend to be relatively more experienced than their protégés.

Mentoring can occur naturally between two interested individuals or organizations can facilitate this process by

having formal mentoring programs. These programs may successfully bring together mentors and protégés who

would not come together otherwise.

Research indicates that the existence of these programs does not guarantee their success, and there are certain

program characteristics that may make these programs more effective. For example, when mentors and protégés

feel that they had input in the mentor-protégé matching process, they tend to be more satisfied with the

arrangement. Moreover, when mentors receive training beforehand, the outcomes of the program tend to be

more positive (Allen, et. al., 2006). Because mentors may help new employees interpret and understand the

company’s culture, organizations may benefit from selecting mentors who personify the company’s values. Thus,

organizations may need to design these programs carefully to increase their chance of success.

LeadershipLeadership

Leaders are instrumental in creating and changing an organization’s culture. There is a direct correspondence

between the leader’s style and an organization’s culture. For example, when leaders motivate employees through

inspiration, corporate culture tends to be more supportive and people-oriented. When leaders motivate by

making rewards contingent on performance, the corporate culture tended to be more performance-oriented and

competitive (Sarros, et. al., 2002). In these and many other ways, what leaders do directly influences the cultures

of their organizations. This is a key point for managers to consider as they carry out their leading P-O-L-C

function.

Part of the leader’s influence over culture is through role modeling. Many studies have suggested that leader

behavior, the consistency between organizational policy and leader actions, and leader role modeling determine

the degree to which the organization’s culture emphasizes ethics (Driscoll & McKee, 2007). The leader’s own

behaviors will signal to individuals what is acceptable behavior and what is unacceptable. In an organization in

which high-level managers make the effort to involve others in decision making and seek opinions of others, a

team-oriented culture is more likely to evolve. By acting as role models, leaders send signals to the organization

about the norms and values that are expected to guide the actions of its members.

8.5 CREATING AND MAINTAINING ORGANIZATIONAL CULTURE • 361

Leaders also shape culture by their reactions to the actions of others around them. For example, do they praise

a job well done or do they praise a favored employee regardless of what was accomplished? How do they

react when someone admits to making an honest mistake? What are their priorities? In meetings, what types of

questions do they ask? Do they want to know what caused accidents so that they can be prevented, or do they

seem more concerned about how much money was lost because of an accident? Do they seem outraged when an

employee is disrespectful to a coworker, or does their reaction depend on whether they like the harasser? Through

their day-to-day actions, leaders shape and maintain an organization’s culture.

Reward SystemsReward Systems

Finally, the company culture is shaped by the type of reward systems used in the organization and the kinds of

behaviors and outcomes it chooses to reward and punish. One relevant element of the reward system is whether

the organization rewards behaviors or results. Some companies have reward systems that emphasize intangible

elements of performance as well as more easily observable metrics. In these companies, supervisors and peers may

evaluate an employee’s performance by assessing the person’s behaviors as well as the results. In such companies,

we may expect a culture that is relatively people- or team-oriented, and employees act as part of a family (Kerr

& Slocum, 2005). However, in companies in which goal achievement is the sole criterion for reward, there is a

focus on measuring only the results without much regard to the process. In these companies, we might observe

outcome-oriented and competitive cultures. Whether the organization rewards performance or seniority would

also make a difference in culture. When promotions are based on seniority, it would be difficult to establish a

culture of outcome orientation. Finally, the types of behaviors that are rewarded or ignored set the tone for the

culture. Which behaviors are rewarded, which ones are punished, and which are ignored will determine how a

company’s culture evolves. A reward system is one tool managers can wield when undertaking the controlling

function.

Signs of Organizational CultureSigns of Organizational Culture

How do you find out about a company’s culture? We emphasized earlier that culture influences the way members

of the organization think, behave, and interact with one another. Thus, one way of finding out about a company’s

culture is by observing employees or interviewing them. At the same time, culture manifests itself in some visible

aspects of the organization’s environment. In this section, we discuss five ways in which culture shows itself to

observers and employees.

Figure 8.13 Visual Elements of Culture

362 • PRINCIPLES OF MANAGEMENT

Mission StatementMission Statement

A mission statement is a statement of purpose, describing who the company is and what it does. It serves an

important function for organizations as part of the first facet of the planning P-O-L-C function. But, while many

companies have mission statements, they do not always reflect the company’s values and its purpose. An effective

mission statement is well known by employees, is transmitted to all employees starting from their first day at

work, and influences employee behavior.

Some mission statements reflect who the company wants to be as opposed to who they actually are. If the

mission statement does not affect employee behavior on a day-to-day basis, it has little usefulness as a tool

for understanding the company’s culture. Enron provided an often-cited example of a disconnect between a

company’s mission statement and how the company actually operated. Their missions and values statement started

with “As a partner in the communities in which we operate, Enron believes it has a responsibility to conduct itself

according to certain basic principles.” Their values statement included such ironic declarations as “We do not

tolerate abusive or disrespectful treatment. Ruthlessness, callousness and arrogance don’t belong here (Kunen,

2002).”

A mission statement that is taken seriously and widely communicated may provide insights into the corporate

culture. For example, the Mayo Clinic’s mission statement is “The needs of the patient come first.” This mission

statement evolved from the founders who are quoted as saying, “The best interest of the patient is the only interest

to be considered.” Mayo Clinics have a corporate culture that puts patients first. For example, no incentives are

given to physicians based on the number of patients they see. Because doctors are salaried, they have no interest

in retaining a patient for themselves, and they refer the patient to other doctors when needed (Jarnagin & Slocum,

8.5 CREATING AND MAINTAINING ORGANIZATIONAL CULTURE • 363

2007). Wal-Mart may be another example of a company that lives its mission statement and therefore its mission

statement may give hints about its culture: “Saving people money so they can live better (Wal-Mart, 2008).”

RitualsRituals

Figure 8.14

Tradition is important at Mary Kay Cosmetics. Pink Cadillacs are given to top performers at large annual

events.

Phillip Pessar – Pink 1963 Cadillac – CC BY 2.0.

Rituals refer to repetitive activities within an organization that have symbolic meaning (Anand, 2005). Usually

rituals have their roots in the history of a company’s culture. They create camaraderie and a sense of belonging

among employees. They also serve to teach employees corporate values and create identification with the

organization. For example, at the cosmetics firm Mary Kay Inc., employees attend ceremonies recognizing their

top salespeople with an award of a new car—traditionally a pink Cadillac. These ceremonies are conducted in

large auditoriums where participants wear elaborate evening gowns and sing company songs that create emotional

excitement. During this ritual, employees feel a connection to the company culture and its values such as self-

determination, willpower, and enthusiasm (Jarnagin & Slocum, 2007). Another example of rituals is the Saturday

morning meetings of Wal-Mart. This ritual was first created by the company founder Sam Walton, who used these

meetings to discuss which products and practices were doing well and which required adjustment. He was able

to use this information to make changes in Wal-Mart’s stores before the start of the week, which gave him a

competitive advantage over rival stores who would make their adjustments based on weekly sales figures during

the middle of the following week. Today, hundreds of Wal-Mart associates attend the Saturday morning meetings

364 • PRINCIPLES OF MANAGEMENT

in the Bentonville, Arkansas, headquarters. The meetings, which run from 7:00 a.m. to 9:30 a.m., start and end

with the Wal-Mart cheer; the agenda includes a discussion of weekly sales figures and merchandising tactics. As a

ritual, the meetings help maintain a small-company atmosphere, ensure employee involvement and accountability,

communicate a performance orientation, and demonstrate taking quick action (Schlender, 2005).

Rules and PoliciesRules and Policies

Another way in which an observer may find out about a company’s culture is to examine its rules and policies.

Companies create rules to determine acceptable and unacceptable behavior and, thus, the rules that exist in a

company will signal the type of values it has. Policies about issues such as decision making, human resources, and

employee privacy reveal what the company values and emphasizes. For example, a company that has a policy such

as “all pricing decisions of merchandise will be made at corporate headquarters” is likely to have a centralized

culture that is hierarchical, as opposed to decentralized and empowering. The presence or absence of policies on

sensitive issues such as English-only rules, bullying and unfair treatment of others, workplace surveillance, open-

door policies, sexual harassment, workplace romances, and corporate social responsibility all provide pieces of the

puzzle that make up a company’s culture. This highlights how interrelated the P-O-L-C functions are in practice.

Through rules and policies, the controlling function affects the organization’s culture, a facet of organizing.

Impact of HR Practices on Organizational CultureImpact of HR Practices on Organizational Culture

Below are scenarios of critical decisions you may need to make as a manager one day. Read each questionand select one response from each pair of statements. Then, think about the effect your choice would haveon the company’s culture (your organizing function) as well as on your controlling function.

1.Your company needs to lay off 10 people. Would you

a. lay off the newest 10 people?

b. lay off the 10 people who have the lowest performance evaluations?

2.You’re asked to establish a dress code. Would you

a. ask employees to use their best judgment?

b. create a detailed dress code highlighting what is proper and improper?

3.You need to monitor employees during work hours. Would you

a. not monitor them because they are professionals and you trust them?

b. install a program monitoring their Web usage to ensure that they are spending work hoursactually doing work?

8.5 CREATING AND MAINTAINING ORGANIZATIONAL CULTURE • 365

You’re preparing performance appraisals. Would you

a. evaluate people on the basis of their behaviors?

b. evaluate people on the basis of the results (numerical sales figures, etc.)?

5.Who will be promoted? Would you promote individuals based on

a. seniority?

b. objective performance?

Physical LayoutPhysical Layout

A company’s building, layout of employee offices, and other workspaces communicate important messages about

a company’s culture. For example, visitors walking into the Nike campus in Beaverton, Oregon, can witness

firsthand some of the distinguishing characteristics of the company’s culture. The campus is set on 74 acres and

boasts an artificial lake, walking trails, soccer fields, and cutting-edge fitness centers. The campus functions as a

symbol of Nike’s values such as energy, physical fitness, an emphasis on quality, and a competitive orientation.

In addition, at fitness centers on the Nike headquarters, only those using Nike shoes and apparel are allowed in.

This sends a strong signal that loyalty is expected. The company’s devotion to athletes and their winning spirit are

manifested in campus buildings named after famous athletes, photos of athletes hanging on the walls, and their

statues dotting the campus (Capowski, 1993; Collins & Porras, 1996 Labich & Carvell, 1995; Mitchell, 2002).

The layout of the office space also is a strong indicator of a company’s culture. A company that has an open layout

where high-level managers interact with employees may have a culture of team orientation and egalitarianism,

whereas a company where most high-level managers have their own floor may indicate a higher level of hierarchy.

Microsoft employees tend to have offices with walls and a door because the culture emphasizes solitude,

concentration, and privacy. In contrast, Intel is famous for its standard cubicles, which reflect its egalitarian

culture. The same value can also be observed in its avoidance of private and reserved parking spots (Clark, 2007).

The degree to which playfulness, humor, and fun are part of a company’s culture may be indicated in the office

environment. For example, Jive Software boasts a colorful, modern, and comfortable office design. Their break

room is equipped with a keg of beer, free snacks and sodas, an Xbox 360, and Nintendo Wii. A casual observation

of their work environment sends the message that employees who work there see their work as fun (Jive Software,

2008).

Stories and LanguageStories and Language

Perhaps the most colorful and effective way in which organizations communicate their culture to new employees

and organizational members is through the skillful use of stories. A story can highlight a critical event an

organization faced and the organization’s response to it, or a heroic effort of a single employee illustrating the

company’s values. The stories usually engage employee emotions and generate employee identification with

the company or the heroes of the tale. A compelling story may be a key mechanism through which managers

366 • PRINCIPLES OF MANAGEMENT

motivate employees by giving their behavior direction and by energizing them toward a certain goal (Beslin,

2007). Moreover, stories shared with new employees communicate the company’s history, its values and priorities,

and create a bond between the new employee and the organization. For example, you may already be familiar with

the story of how a scientist at 3M invented Post-it notes. Arthur Fry, a 3M scientist, was using slips of paper to

mark the pages of hymns in his church choir, but they kept falling off. He remembered a superweak adhesive that

had been invented in 3M’s labs, and he coated the markers with this adhesive. Thus, the Post-it notes were born.

However, marketing surveys for the interest in such a product were weak and the distributors were not convinced

that it had a market. Instead of giving up, Fry distributed samples of the small yellow sticky notes to secretaries

throughout his company. Once they tried them, people loved them and asked for more. Word spread and this led

to the ultimate success of the product. As you can see, this story does a great job of describing the core values of

a 3M employee: Being innovative by finding unexpected uses for objects, persevering, and being proactive in the

face of negative feedback (Higgins & McAllester, 2002).

Language is another way to identify an organization’s culture. Companies often have their own acronyms and

buzzwords that are clear to them and help set apart organizational insiders from outsiders. In business, this code

is known as jargon. Jargon is the language of specialized terms used by a group or profession. Every profession,

trade, and organization has its own specialized terms.

Key Takeaway

Organizational cultures are created by a variety of factors, including founders’ values and preferences,industry demands, and early values, goals, and assumptions. Culture is maintained through attraction-selection-attrition, new employee onboarding, leadership, and organizational reward systems. Signs of acompany’s culture include the organization’s mission statement, stories, physical layout, rules and policies,and rituals.

Exercises

1. Do you think it is a good idea for companies to emphasize person-organization fit when hiringnew employees? What advantages and disadvantages do you see when hiring people who fit withcompany values?

2. What is the influence of company founders on company culture? Give examples based on yourpersonal knowledge.

3. What are the methods companies use to aid with employee onboarding? What is the importance ofonboarding for organizations?

4. What type of a company do you feel you would fit in? What type of a culture would be a misfitfor you? In your past work experience, were there any moments when you felt that you did not fitin? Why?

5. What is the role of physical layout as an indicator of company culture? What type of a physicallayout would you expect from a company that is people-oriented? Team-oriented? Stable?

8.5 CREATING AND MAINTAINING ORGANIZATIONAL CULTURE • 367

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Klein, H. J., & Weaver, N. A. (2000). The effectiveness of an organizational level orientation training program in

the socialization of new employees. Personnel Psychology, 53, 47–66.

Kristof-Brown, A. L., Zimmerman, R. D., & Johnson, E. C. (2005). Consequences of individuals’ fit at work:

a meta-analysis of person–job, person–organization, person–group, and person–supervisor fit. Personnel

Psychology, 58, 281–342.

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Mitchell, C. (2002). Selling the brand inside. Harvard Business Review, 80, 99–105.

Moscato, D. (2005, April). Using technology to get employees on board. HR Magazine, 50, 107–109.

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8.5 CREATING AND MAINTAINING ORGANIZATIONAL CULTURE • 369

8.6 Creating Culture Change

Learning Objective

1. Understand the process of culture change.

How Do Cultures Change?How Do Cultures Change?

As emphasized throughout this chapter, culture is a product of its founder’s values, its history, and collective

experiences. Hence, culture is part of a company’s DNA and is resistant to change efforts. Unfortunately,

many organizations realize that their current culture constitutes a barrier against organizational productivity and

performance. Particularly when there is a mismatch between an organization’s values and the demands of its

environment, changing the culture becomes the key to the company turnaround.

Achieving culture change is challenging, and there are many companies that ultimately fail in this mission.

Research and case studies of companies that successfully changed their culture indicate that the following six

steps increase the chances of success (Schein, 1990).

Figure 8.15 Process of Culture Change

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Creating a Sense of UrgencyCreating a Sense of Urgency

For the change effort to be successful, it is important to communicate the need for change to employees. One

way of doing this is to create a sense of urgency on the part of employees, explaining to them why changing

the fundamental way in which business is done is so important. In successful culture change efforts, leaders

communicate with employees and present a case for culture change as the essential element that will lead the

company to eventual success. As an example, consider the situation at IBM in 1993 when Lou Gerstner was

brought in as CEO and chairman. After decades of dominating the market for mainframe computers, IBM was

rapidly losing market share to competitors, and its efforts to sell personal computers—the original PC—were

seriously undercut by cheaper “clones.” In the public’s estimation, the name IBM had become associated with

obsolescence. Gerstner recalls that the crisis IBM was facing became his ally in changing the organization’s

culture. Instead of spreading optimism about the company’s future, he used the crisis at every opportunity to get

buy-in from employees (Gerstner, 2002).

Changing Leaders and Other Key PlayersChanging Leaders and Other Key Players

A leader’s vision is an important factor that influences how things are done in an organization. Thus, culture

change often follows changes at the highest levels of the organization. Moreover, to implement the change effort

quickly and efficiently, a company may find it helpful to remove managers and other powerful employees who are

acting as a barrier to change. Because of political reasons, self-interest, or habits, managers may create powerful

resistance to change efforts. In such cases, replacing these positions with employees and managers giving visible

support to the change effort may increase the likelihood that the change effort succeeds. For example, when Robert

8.6 CREATING CULTURE CHANGE • 371

Iger replaced Michael Eisner as CEO of the Walt Disney Company, one of the first things he did was to abolish

the central planning unit, which was staffed by people close to ex-CEO Eisner. This department was viewed as a

barrier to creativity at Disney and its removal from the company was helpful in ensuring the innovativeness of the

company culture (McGregor, et. al., 2007).

Role ModelingRole Modeling

Role modeling is the process by which employees modify their own beliefs and behaviors to reflect those of

the leader (Kark & Van Dijk, 2007). CEOs can model the behaviors that are expected of employees to change

the culture because these behaviors will trickle down to lower-level employees. For example, when Robert Iger

took over Disney, to show his commitment to innovation, he personally became involved in the process of game

creation, attended summits of developers, and gave feedback to programmers about the games. Thus, he modeled

his engagement in the idea creation process. In contrast, the modeling of inappropriate behavior from the top

will lead to the same behavior trickling down to lower levels. A recent example to this type of role modeling is

the scandal involving Hewlett-Packard board members. In 2006, when board members were suspected of leaking

confidential company information to the press, the company’s top-level executives hired a team of security experts

to find the source of the leak. The investigators sought the phone records of board members, looking for links to

journalists. For this purpose, they posed as board members and called phone companies to obtain itemized home

phone records of board members and journalists. When the investigators’ methods came to light, HP’s chairman

and four other top executives faced criminal and civil charges. When such behavior is modeled at top levels, it is

likely to have an adverse effect on the company culture (Barron, 2007).

TrainingTraining

Well-crafted training programs may be instrumental in bringing about culture change by teaching employees the

new norms and behavioral styles. For example, after the space shuttle Columbia disintegrated on reentry from

a February 2003 mission, NASA decided to change its culture to become more safety sensitive and minimize

decision-making errors that lead to unsafe behaviors. The change effort included training programs in team

processes and cognitive bias awareness. Similarly, when auto repairer Midas felt the need to change its culture

to be more committed to customers, they developed a program to train employees to be more familiar with

customer emotions and connect better with them. Customer reports have been overwhelmingly positive in stores

that underwent this training.1

Changing the Reward SystemChanging the Reward System

The criteria with which employees are rewarded and punished have a powerful role in determining the cultural

values of an organization. Switching from a commission-based incentive structure to a straight salary system may

be instrumental in bringing about customer focus among sales employees. Moreover, by rewarding and promoting

employees who embrace the company’s new values and promoting these employees, organizations can make sure

that changes in culture have a lasting effect. If the company wants to develop a team-oriented culture where

employees collaborate with one another, then using individual-based incentives may backfire. Instead, distributing

bonuses to intact teams might be more successful in bringing about culture change.

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Creating New Symbols and StoriesCreating New Symbols and Stories

Finally, the success of the culture change effort may be increased by developing new rituals, symbols, and stories.

Continental Airlines is a company that successfully changed its culture to be less bureaucratic and more team-

oriented in 1990s. One of the first things management did to show employees that they really meant to abolish

many of the company’s detailed procedures and create a culture of empowerment was to burn the heavy 800-page

company policy manual in their parking lot. The new manual was only 80 pages. This action symbolized the

upcoming changes in the culture and served as a powerful story that circulated among employees. Another early

action was redecorating waiting areas and repainting all their planes, again symbolizing the new order of things

(Higgins & McAllester, 2004). By replacing the old symbols and stories, the new symbols and stories will help

enable the culture change and ensure that the new values are communicated.

Key Takeaway

Organizations need to change their culture to respond to changing conditions in the environment, to remaincompetitive, and to avoid complacency or stagnation. Culture change often begins by the creation of asense of urgency. Next, a change of leaders and other key players may enact change and serve as effectiverole models of new behavior. Training can also be targeted toward fostering these new behaviors. Rewardsystems are changed within the organization. Finally, the organization creates new stories and symbols.Successful culture change requires managers that are proficient at all of the P-O-L-C functions. Creatingand communicating a vision is part of planning; leadership and role modeling are part of leading; designingeffective reward systems is part of controlling; all of which combine to influence culture, a facet oforganizing.

Exercises

1. Can new employees change a company’s culture? If so, how?

2. Are there any conditions under which change is not possible? If so, what would such conditionsbe?

3. Have you ever observed a change process at an organization you were involved with? If so, whatworked well and what didn’t?

4. What recommendations would you have for someone considering a major change of culturewithin their own organization?

1BST to guide culture change effort at NASA. (2004 June). Professional Safety, 49, 16; J. B. (2001, June). The

Midas touch. Training, 38, 26.

8.6 CREATING CULTURE CHANGE • 373

ReferencesReferences

Barron, J. (2007, January). The HP way: Fostering an ethical culture in the wake of scandal. Business Credit, 109,

8–10.

Gerstner, L. V. (2002). Who says elephants can’t dance? New York: HarperCollins.

Higgins, J., & McAllester, C. (2004). If you want strategic change, don’t forget to change your cultural artifacts.

Journal of Change Management, 4, 63–73.

Kark, R., & Van Dijk, D. (2007). Motivation to lead, motivation to follow: The role of the self-regulatory focus in

leadership processes. Academy of Management Review, 32, 500–528.

McGregor, J., McConnon, A., Weintraub, A., Holmes, S., & Grover, R. (2007, May 14). The 25 Most Innovative

Companies. Business Week, 4034, 52–60.

Schein, E. H. (1990). Organizational culture. American Psychologist, 45, 109–119.

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8.7 Developing Your Personal Skills: Learning to Fit In

Learning Objectives

1. Understand what you can proactively do to understand a new organizational environment.

2. Some guidelines for proactive onboarding.

Before You JoinBefore You Join

How do you find out about a company’s culture before you join? Here are several tips that will allow you to more

accurately gauge the culture of a company you are interviewing with.

First, do your research. Talking to friends and family members who are familiar with the company, doing an

online search for news articles about the company, browsing the company’s Web site, and reading its mission

statement would be a good start.

Second, observe the physical environment. Do people work in cubicles or in offices? What is the dress code?

What is the building structure? Do employees look happy, tired, or stressed? The answers to these questions are

all pieces of the puzzle.

Third, read between the lines. For example, the absence of a lengthy employee handbook or detailed procedures

might mean that the company is more flexible and less bureaucratic.

Fourth, reflect on how you are treated. The recruitment process is your first connection to the company. Were you

treated with respect? Do they maintain contact with you or are you being ignored for long stretches at a time?

Fifth, ask questions. What happened to the previous incumbent of this job? What does it take to be successful in

this firm? What would their ideal candidate for the job look like? The answers to these questions will reveal a lot

about the way they do business.

Finally, listen to your gut. Your feelings about the place in general, and your future manager and coworkers in

particular, are important signs that you should not ignore (Daniel & Brandon, 2006; Sacks, 2005).

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You’ve Got a New Job! Now How Do You Get on Board?You’ve Got a New Job! Now How Do You Get on Board?

• Gather information. Try to find as much about the company and the job as you can before your first day.

After you start working, be a good observer, gather information, and read as much as you can to understand

your job and the company. Examine how people are interacting, how they dress, and how they act, in order

to avoid behaviors that might indicate to others that you are a misfit.

• Manage your first impression. First impressions may endure, so make sure that you dress properly, are

friendly, and communicate your excitement to be a part of the team. Be on your best behavior!

• Invest in relationship development. The relationships you develop with your manager and with coworkers

will be essential for you to adjust to your new job. Take the time to strike up conversations with them. If

there are work functions during your early days, make sure not to miss them!

• Seek feedback. Ask your manager or coworkers how well you are doing and whether you are meeting

expectations. Listen to what they are telling you and listen to what they are not saying. Then, make sure to

act on any suggestions for improvement—you may create a negative impression if you consistently ignore

the feedback you receive.

• Show success early on. To gain the trust of your new manager and colleagues, you may want to establish a

history of success early. Volunteer for high-profile projects where you will be able to demonstrate your

skills. Alternatively, volunteer for projects that may serve as learning opportunities or that may put you in

touch with the key people in the company.

Key Takeaway

There are a number of ways to learn about an organization’s culture before you formally join it. Take thetime to consider whether the culture you are observing seems like the right fit for you. Once you get a job,you can do key things to maximize your onboarding success.

Exercises

1. What clues does your college or school give about its culture?

2. What are four things you could do today to learn more about an organization you are interestedin?

3. Imagine that your good friend is starting a new job next week. What recommendations would yougive your friend to help him or her do a great job onboarding into the organization?

ReferencesReferences

Daniel, L., & Brandon, C. (2006). Finding the right job fit. HR Magazine, 51, 62–67.

376 • PRINCIPLES OF MANAGEMENT

Sacks, D. (2005). Cracking your next company’s culture. Fast Company, 99, 85–87.

8.7 DEVELOPING YOUR PERSONAL SKILLS: LEARNING TO FIT IN • 377

Chapter 9: Social Networks

9.1 Social Networks

9.2 Case in Point: Networking Powers Relationships

9.3 An Introduction to the Lexicon of Social Networks

9.4 How Managers Can Use Social Networks to Create Value

9.5 Ethical Considerations With Social Network Analysis

9.6 Personal, Operational, and Strategic Networks

9.7 Mapping and Your Own Social Network

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9.1 Social Networks

Figure 9.1

Social networks are the patterned structure of relationships among people.

Chris Potter – 3D Social Networking – CC BY 2.0.

What’s in It for Me?

Reading this chapter will help you do the following:

1. Understand the social network vocabulary.

2. Know why social networks and networking are valuable.

3. Know some of the ethical considerations related to social network analysis.

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4. Understand the difference between personal, operational, and strategic social networks.

5. Map your own social network and understand its implications.

Most management textbooks do not cover the subject of social networks. This is an unfortunate oversight. Social

networks can be considered “the invisible organization”—they are the pathways through which communication

and resources flow and how work actually gets done. We include this chapter on social networks in the organizing

section of the book because, like organizational design, the management of social networks is important in the

planning-organizing-leading-controlling (P-O-L-C) framework. An organization chart might communicate who

reports to whom, but it is ultimately the internal (within organization) and external (ties between members of

the organization and people outside the organization such as suppliers or customers) social networks that really

explain productivity (or impediments to productivity).

Figure 9.2 The P-O-L-C Framework

You are probably already active in social networks through such Web communities as MySpace, Facebook,

and LinkedIn. However, these sites are really only the tip of the iceberg when it comes to the role of social

networks in management. Networks provide managers with three unique advantages: (1) access to information

and knowledge, (2) access to diverse skill sets, and (3) power. While managers see these advantages at work every

day, they might not pause to consider how their networks regulate them. In this chapter, you will learn about

the role and importance of social networks, and social network analysis, in the organizing facet of the P-O-L-C

framework. You will also have an opportunity to map and evaluate your own social network, and answer questions

about its effectiveness for you personally and professionally.

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9.2 Case in Point: Networking Powers Relationships

Figure 9.3

Marjan Lazarevski – Talking on the Phone – CC BY-ND 2.0.

Networking has the potential to open doors and create possibilities for jobs and partnerships. Networkingestablishes connections between individuals and access to information that one might not normally haveaccess to. Reaching out to strangers can be an intimidating and nerve-racking experience. In business, themore central you are, the more power you have. Creating connections and ties to other people affords youthe opportunity for power and the ability to more closely control your future, so while at times networkingmight feel awkward and uncomfortable, it is a necessary and important part of establishing and maintaininga career.

Online social networking sites play an important role in this networking process for individuals bothprofessionally and personally. With 1,200 employees in 2010, Facebook has 350 million users around theworld, and LinkedIn has over 60 million members in over 200 countries. A new member joins LinkedInevery second, and about half of the members are outside the United States. These online sites havecreated new opportunities for networking and allow individuals to branch out beyond their normal worldof industry, school, and business. The key is to avoid costly missteps as employers have begun to search

381

online for information about prospective and current employees. In 2009, 8% of companies reported thatthey had fired an employee for misuse of social media.

Many of these online sites have become a tool for business. For example, LinkedIn targets workingprofessionals and provides them a way to maintain lists of business connections and to use thoseconnections to gain introduction to people using mutual contacts. Unlike other social networking sites,LinkedIn is almost entirely used by professionals. The power of social networking flows in both directions.Employers can screen applicants through their online accounts and recruiters more than ever are usingthese sites to view background information, individual skill sets, and employment history, which canbe cross-referenced with submitted applications. Job seekers can review the profiles of those at topmanagement firms and search for mutual contacts. LinkedIn also provides statistics about firms, which canbe useful information for individuals looking at potential employers.

Networking is about building your brand and managing relationships. Using social networks as a vehicleto market one’s self and make professional connections is becoming increasingly common, as well as usingloose ties or connections through others to open doors and land jobs. In an increasingly high-tech anddigital world, it is important to be aware and conscience of the digital footprint that we create. But withcareful cultivation these online networks can present many opportunities.

Case written by based on information from Hof, R. (2008, October 28). Facebook in a suit: LinkedInlaunches applications platform. BusinessWeek. Retrieved March 23, 2010, fromhttp://www.businessweek.com/the_thread/techbeat/archives/2008/10/linkedin_launch.html; Horswill, A.(2009). How to get a job online using social networking. The Courier Mail. Retrieved March 23, 2010,from LexisNexis Academic database; Lavenda, D. (2010, March 10). 10 tips for safe and effective socialnetworking. Fast Company. Retrieved March 23, 2010, from http://www.fastcompany.com/1577857/10-tips-for-safe-and-effective-social-networking; How to use social networking sites for marketing andPR. (2008, December 24). AllBusiness. Retrieved April 23, 2010, from http://www.allbusiness.com/marketing-advertising/public-relations/11674037-1.html; Ostrow, A. (2009, August). Facebook fired: 8%of US companies have sacked social media miscreants. Mashable. Retrieved March 30, 2010, fromhttp://mashable.com/2009/08/10/social-media-misuse.

Discussion Questions

1. If social networks are an essential element of the organizing facet of the P-O-L-C framework,should employers track the use of LinkedIn or Facebook among their employees? Why or why not?

2. How is online networking different from or similar to in-person networking? Please describe yourexperience with both.

3. What are the downfalls and benefits of social networking?

4. In what ways are indirect ties as powerful and important as direct ties?

5. To what extent have you built your own brand? Is this something that you have ever consideredbefore?

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9.3 An Introduction to the Lexicon of Social Networks

Learning Objectives

1. Be able to define a social network.

2. Understand the key dimensions of social networks.

3. Identify various types of social networks.

This section draws on extensive social network research to help you understand the managerial implications

of that body of knowledge. Social networks often complement or compete with such aspects of organizations

as formal organization structure (think “org chart”), work processes (think “job description”), human resource

practices, leadership style, and organization culture. This is particularly problematic in knowledge-intensive

settings where management is counting on collaboration among employees with different types of expertise.

People rely heavily on their networks of relationships to find information and solve problems—one of the most

consistent findings in the social science literature is that who you know often has a great deal to do with what you

come to know (Kilduff & Tsai, 2004). Yet both practical experience and scholarly research indicate significant

difficulty in getting people with different expertise, backgrounds, and problem-solving styles to integrate their

unique perspectives effectively.1 From a manager’s standpoint, simply moving boxes on an organizational chart

is not sufficient to ensure effective collaboration among workers.

What Is a Social Network?What Is a Social Network?

If you were asked for a definition of a social network, your intuition would probably provide you with a pretty

close answer. A social network can be characterized as a patterned set of relationships between two or more

people—or, as they are called in the social science literature, actors. It can be depicted in a sociogram, as

shown in the following figure. The term “actors” is broader, as it includes all possible types of information/

knowledge processing entities: the individuals, groups, organizations, or supraorganizations that constitute the

network (Granovetter, 1985; Granovetter, 1995). For instance, all of the people named in the figure are actors, but

you could also consider each work group or department as an actor if you were concerned with the interaction

among these groups rather than with the interaction within the groups or among individuals. The characteristics

of a social network also are the determinants of social capital, that is, the resources—such as ideas, information,

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money, trust—available in and through personal and business networks. You can have social capital, as can

organizations. However, since social capital is based on relationships, no single person can claim ownership of it,

but it is important and manageable.

Figure 9.4 Sociogram: A Simple Social Network

Social Network Analysis and the Quality of Work InteractionsSocial Network Analysis and the Quality of Work Interactions

The mapping and measuring of relationships and flows among people, groups, organizations, computers, Web

sites, and other actors is called social network analysis (SNA), which we will discuss in greater detail later in the

chapter. Each connection, or relationship, between actors is known as a network tie, while each actor, or point

on the network, is referred to as a node. In the previous figure, Thomas is a node and his connections to Albert,

Eric, Martha, and others are network ties. Direct ties are those in which a single link spans two actors; indirect

ties are where connections exist between actors, but only through other actors (hence, indirect ties). You can see

that Thomas has four direct ties and is indirectly tied to everyone in the network. Conceptually, you probably have

indirect ties to everyone on the planet but that does not necessarily mean they come to mind as part of your social

network.

Figure 9.5 Example of a Social Network Based on Information Ties

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Figure 9.6

Actor Kevin Bacon founded sixdegrees.org to help charities network and share resources.

Joan Garvin – Kevinbacongfdl – CC BY-SA 2.5.

Network size would be the number of actors. Though you might be interested in the count of all network

members, you also might want to know how many people are one, two, or three links away. Long before computer

9.3 AN INTRODUCTION TO THE LEXICON OF SOCIAL NETWORKS • 385

networking was invented, psychologists Jeffrey Travers and Stanley Milgram conducted a low-tech experiment

that looked directly at this question (Travers & Milgram, 1969). They asked how many links might be necessary

to get an envelope from one randomly chosen person to another randomly chosen person in the United States.

They found that, on average, there were six links—or “degrees of separation”—between any two people randomly

drawn from the U.S. population (at the time) of 250 million. Flipping the numbers around, Travers and Milgram

then estimated that each individual had a potential network of 3,000 to 10,000 people. You may be familiar with

this larger body of work in terms of “how many degrees of separation are you from Kevin Bacon?” or the notion

of the “six degrees of separation.”

Social Network CharacteristicsSocial Network Characteristics

The extent to which a given actor is in the middle of the network is referred to as centrality (i.e., network

centrality), though the definition of “middle” can vary from who has the most ties, to who is the unique connection

between two other groups. Centrality is good because it puts the actor in a position to gather information, and to

serve as broker between the parties that are connected via that actor.

Another basic network indicator is density, which essentially reflects how many people in a network are connected

(usually directly) to each other. You can imagine that there are a number of possible network configurations based

simply on permutations of network size, centrality, and density. For instance, you can have a large or tiny network,

be central or peripheral in the network, and have a dense or sprawling network. Each of these structures has

implications for how the network might serve its various actors.

The tie between actors can be directional or bidirectional (i.e., reciprocal flows between actors); similarly, a

network can be described as social, personal, professional, informational, and so on, depending on what is of most

interest.

A Sampling of Social Network TypesA Sampling of Social Network Types

As a manager, you might be interested in your employees’ (1) communication network, (2) information network,

(3) problem-solving network, (4) knowledge network, or (5) access network (Cross, et. al., 2002). A

communication network is the informal structure of an organization as represented in ongoing patterns of

interaction, either in general or with respect to a given issue. For instance, people on the same office floor may

periodically congregate in the break room or by the soda machine and engage in informal communication. For this

reason, some descriptions of social networks focus on the informal network. That is, the pattern of interactions

among employees that aren’t a direct consequence of the organization chart, job descriptions, and so on.

An information network shows who goes to whom for advice on work-related matters. For example, if you have a

question about filling out a form, or answering a customer’s question, who do you regularly seek out for answers?

A problem-solving network indicates who goes to whom to engage in dialogue that helps people solve problems

at work. For instance, “whenever this machine breaks down I know I can turn to Pat for help.” A knowledge

network captures who is aware of whose knowledge and skills, and an access network shows who has access to

whose knowledge and expertise.

The example with Pat is also a knowledge network because it appears that you understand that Pat has the needed

386 • PRINCIPLES OF MANAGEMENT

knowledge, and there is no barrier impeding your access to Pat. However, if the organization had rules telling

you that you needed to talk to Pat’s boss before getting assistance from Pat, then the knowledge network and

access network would look different. You can imagine that each of these types of networks might reveal a different

structure, depending on the question—for example, the linkages would be different across iterations of the figure.

You can see that information is flowing back and forth between different actors in the network. However, it

does not appear that information is flowing directly between all network members—for instance, the sales and

marketing, finance, and operations staff do not communicate directly with each other. However, if you were to

combine the staff from those functions in the same office space, you would likely create a new communication

network, which in turn could change the information ties of all the members.

More recent work in social network research has also considered the way that individuals interact, as well as their

potential impact on network relationships (Bavelas, 1950; Leavitt, 1951; Shaw, 1964). Five key dimensions of

work quality can also be taken into account with social networks: (1) activity, (2) control, (3) access, (4) influence,

and (5) power. Activity gauges how active a person is in the network. For example, an individual may be in the

network, but actually do little to affect what is going on. Control gauges how much control a person has over

the flow of information. Centrality is obviously one indicator of control, but there may be other determinants of

control such as intelligence, personality, or even a particular skill set. In highly technical fields, for example, one

individual (a node) can make a big difference on information flow, even if he or she is situated in a fairly open

and balanced network. Access tells you how easily a person in the network can get the resources that he or she

needs to be successful in the organization. How many steps, for instance, are they away from those individuals

or units that are most instrumental for their success? Influence and power are different but related characteristics.

Influence shows how much potential influence a person wields in the network, while power tells you how able

they are to get things done. You may be interested in other dimensions of work quality, so feel free to experiment

with them in SNA.

Key Takeaway

Social networks are the invisible structure in organizations—they capture the actual pathways of howinformation flows and how work is done. Network size, centrality, and density were identified as keyfeatures of social networks, and you have a general understanding of at least five types of social networks:communication, information, problem solving, knowledge, and access.

Exercises

1. What is a social network?

2. What is social network analysis?

3. Why is network size important?

4. Why is network centrality important?

5. Why is network density important?

9.3 AN INTRODUCTION TO THE LEXICON OF SOCIAL NETWORKS • 387

6. What are some key types of social networks?

1It is one problem to learn or act on knowledge with others who think like you (such as in a community

of practice); however, it is an entirely different problem to do this in diverse social contexts, such as cross-

functional teams, where people often do not share a common vision, language, metrics of performance, or even

understanding of the problem. For example, sociologists have demonstrated how correct information can have

little or no effect on critical decision processes. Vaughn, D. (1996). The Challenger launch decision: Risky

technology, culture and deviance at NASA. Chicago: University of Chicago Press. Further, organizational theorists

have shown that a person’s knowledge can be role constrained. March, J., & Olsen, J. (1975). The uncertainty of

the past: Organizational learning under ambiguity. European Journal of Political Research, 3, 147–171.

ReferencesReferences

Bavelas, A. (1950). Communication patterns in task-oriented groups. Journal of Acoustical Society of America,

22, 725–730.

Cross, R., Borgatti, S., & Parker, A. (2002). Making invisible work visible California Management Review, 44(2),

25–46.

Granovetter, M. (1985). Economic action and social structure: The problem of embeddedness. American Journal

of Sociology, 91, 481–510.

Granovetter, M. (1995). Getting a job: A study of contacts and careers (2nd ed.). Chicago: University of Chicago

Press.

Kilduff, M., & Tsai, W. (2004). Social networks and organizations. Beverly Hills, CA; Sage.

Leavitt, H. (1951). Some effects of certain communication patterns on group performance. Journal of Abnormal

and Social Psychology, 46, 38–50.

Shaw, M. (1964). Communication networks. In L. Berkowitz (Ed.), Advances in experimental social psychology.

New York: Academic Press.

Travers, J., & Milgram, S. (1969). An experimental study in the small world problem. Sociometry, 32(4), 425–443.

388 • PRINCIPLES OF MANAGEMENT

9.4 How Managers Can Use Social Networks to CreateValue

Learning Objectives

1. Understand the roles of reciprocity, exchange, and similarity.

2. See how social networks create value in career management.

3. See how social networks create value in and across organizations.

You probably have an intuitive sense of how and why social networks are valuable for you, personally and

professionally. The successful 2008 U.S. presidential campaign of Barack Obama provides a dramatic example of

how individuals can benefit when they understand and apply the principles and power of social networking (Cox,

2008). In this section, we discuss three fundamental principles of social network theory, then help you see how

social networks create value in your career and within and across organizations.

389

Figure 9.7

The principles of reciprocity, exchange, and similarity underlie the way managers create value through

social networks.

PublicDomainPictures – Pixabay – CC0 public domain.

Reciprocity, Exchange, and SimilarityReciprocity, Exchange, and Similarity

Across all social networks, performance depends on the degree to which three fundamental principles are

accounted for (Kilduff & Tsai, 2004). The first is the principle of reciprocity, which simply refers to the degree

to which you trade favors with others. With the principle of reciprocity, managers have the ability to get things

done by providing services to others in exchange for the services they require. For instance, you are more likely

to get assistance with a problem from a colleague at work when you have helped him or her out in the past.

Although the quid pro quo may not be immediate, over time managers will receive only in proportion to what they

give. Unless the exchanges are roughly equivalent over time, hard feelings or distrust will result. In organizations,

few transactions are one-shot deals. Most are ongoing trades of “favors.” Therefore, two outcomes are important:

success in achieving the objective and success in improving the relationship such that the next exchange will be

more productive.

The second principle is the principle of exchange. Like the reciprocity principle, it refers to “trading favors,” but

it is different in this way: the principle of exchange proposes that there may be greater opportunity for trading

favors when the actors are different from one another. In fact, according to network theory, “difference” is what

makes network ties useful in that such difference increases the likelihood that each party brings a complementary

resource to the table. Going back to our example where you sought out assistance from a colleague, you probably

needed that assistance because that person brought a different skill set, knowledge, or other resources to bear on

the problem. That is, since you were different, the value of exchange was greater.

The third principle is the principle of similarity. Psychologists studying human behavior have observed that

relationships, and therefore network ties, tend to develop spontaneously between people with common

390 • PRINCIPLES OF MANAGEMENT

backgrounds, values, and interests. Similarity, to the extent that your network is composed only of like-minded

folks, also makes it more likely that an individual may be dependent on a handful of people with common

interests.

Why is it important to understand these three principles? As a manager, you will find your network useful to the

extent that you can balance the effects of the three principles. Because of similarity, it is easier to build networks

with those with whom you have various things in common, though this similarity makes the network less useful if

you need new ideas or other resources not in the current group. A critical mistake is to become overly dependent

on one person or on only a few network relationships. Not only can those relationships sour but also the manager’s

usefulness to others depends critically on his or her other connections. Those people most likely to be attractive

potential protégés, for example, will also be likely to have alternative contacts and sponsors available to them.

Similarity also means that you have to work harder to build strong exchange networks, since their formation is

not spontaneous. Most personal networks are highly clustered—that is, your friends are likely to be friends with

one another as well. And, if you made those friends by introducing yourself to them, the chances are high that

their experiences and perspectives echo your own. Because ideas generated within this type of network circulate

among the same people with shared views, a potential winner can wither away and die if no one in the group

has what it takes to bring that idea to fruition. But what if someone within that cluster knows someone else who

belongs to a whole different group? That connection, formed by an information broker, can expose your idea to a

new world, filled with fresh opportunities for success. Diversity makes the difference.

Finally, for reciprocity to work, you have to be willing and able to trade or reciprocate favors, and this means

that you might need access to other people or resources outside the current network. For example, you may have

to build relationships with other individuals such that you can use them to help you contribute to your existing

network ties.

Social Networks and CareersSocial Networks and Careers

We owe our knowledge about the relationship between social network characteristics and finding a job to Stanford

sociologist Mark Granovetter. In a groundbreaking study, Granovetter found that job seekers are more likely to

find a job through weak ties than through strong ties (Granovetter, 1974). He demonstrated that while job hunters

use social connections to find work, they don’t use close friends. Rather, survey respondents said they found jobs

through acquaintances: old college friends, former colleagues, people they saw only occasionally or just happened

to run into at the right moment. New information, about jobs or anything else, rarely comes from your close

friends, because they tend to know the same things and people you do. Strong ties, as you might expect, exist

among individuals who know one another well and engage in relatively frequent, ongoing resource exchanges.

Weak ties, in contrast, exist among individuals who know one another, at least by reputation, but who do not

engage in a regular exchange of resources. In fact, Granovetter showed that those who relied on weak ties to get

a job fared better in the market in terms of higher pay, higher occupational status, greater job satisfaction, and

longer job tenure. While much in the world has changed since Granovetter’s 1974 research, subsequent studies

continue to affirm his basic findings on the consequences of social network structure (Goleman, 2006). As you

might expect, for weak ties to be effective though, there must be some basis for affinity between the indirectly

connected individuals, but this affinity can simply be having the same birth month or high school or college alma

mater.

9.4 HOW MANAGERS CAN USE SOCIAL NETWORKS TO CREATE VALUE • 391

Figure 9.8 The Value of Weak Ties

The value of weak ties is highly counterintuitive; we tend to think of relationships being more valuable when we

have strong ties to others. However, if you think about it, the value of a weak tie lies in the fact that it is typically

a bridging tie, that is, a tie that provides nonredundant information and resources. In the case of a job search, the

weak tie serves as a strong bridge. “Social Networking as a Career-Building Strategy” suggests some personal

strategies you might consider with your own social networks.

Social Networking as a Career-Building StrategySocial Networking as a Career-Building Strategy

Penelope Trunk, author of “The Brazen Careerist” column and blog (blog.penelopetrunk.com), views jobhunting not as an event but as a lifestyle. She advises that in today’s business environment, people changejobs so often that they need to keep their eye on the market even if they just started a new job. In her view,“the people who control their destiny most effectively leave their job when they find a better one, not whenthey are tossed out because of layoffs or reorganizations.” This also means that social networking shouldbe a central element in any job-search strategy. And because many jobs are filled by knowing someonewho knows about an open position, Trunk argues that it’s more important to network than it is to read thewant ads. Trunk evokes the principle of reciprocity when she says, “building a network is adding value tolots of peoples’ lives so that they, in turn, will want to add value to yours.” Another useful strategy is tonetwork proactively rather than reacting to concerns about your present job or news of a possible opening.By being proactive, you will increase your chances of being in the right place at the right time.

Career networking opportunities are plentiful; regardless of where you live, you can use the Internet to readblogs, subscribe to e-mail newsletters, and make friends on social networking sites. When you considerthe principle of exchange, you realize that your networking possibilities are not limited to people in yourchosen field—you can actually gain more by networking with those in related fields, or even in jobs farremoved from yours. With the exchange principle in mind, even residents of sparsely populated rural areascan network with their neighbors a few miles down the road.

Adapted from Trunk, P. (2008, March 1). Take control of your career destiny. Wisconsin State Journal, B1.

392 • PRINCIPLES OF MANAGEMENT

Use LinkedIn to Find a Job—or Have a Job Find YouUse LinkedIn to Find a Job—or Have a Job Find You

LinkedIn (http://www.LinkedIn.com) is the largest online network of experienced professionals fromaround the world, representing 150 industries. Other business networking sites include Plaxo.com,Ryze.com, and Xing.com (primarily Europe and China). Here are eight effective networking job-huntingtactics to employ with LinkedIn (or with any networking site):

• Create a Profile. Create a detailed profile on LinkedIn, including employment (current and past),education, industry, and Web sites.

• Consider a Photo. You can add a photo (a headshot is recommended or upload a larger photo andedit it) to your LinkedIn profile. Note that it must be a small photo—no larger than 80 × 80 pixels.

• Keywords and Skills. Include all your resume keywords and skills in your profile, so your profilewill be found.

• Build Your Network. Connect with other members and build your network. The more connectionsyou have, the more opportunities you have, with one caveat, “Connect to people you know and trustor have a business relationship with, no need to go crazy and connect with everyone.”

• Get Recommendations. Recommendations from people you have worked with carry a lot of weight.

• Search Jobs. Use the job search section to find job listings.

• Use Answers. The Answers section of LinkedIn is a good way to increase your visibility. Respond toquestions, and ask a question if you need information or assistance.

• Stay Connected. Use LinkedIn Mobile (m.linkedin.com) to view profiles, invite new connections,and access to LinkedIn Answers from your phone.

But No More Than 150 Ties!But No More Than 150 Ties!

It is important to note here a factor called Dunbar’s number. That is, there is some natural upper limit to the size

of network you can effectively maintain, even with online tools like Facebook and LinkedIn. The existence of

an upper boundary makes sense if you think about it—each contact you add to your network will likely require

some amount of time to sustain. In 1993, Oxford anthropologist Robin Dunbar theorized that “this limit is a direct

function of relative neocortex size [your brain’s center of higher brain functions], and that this in turn limits group

size…the limit imposed by neocortical processing capacity is simply on the number of individuals with whom a

stable inter-personal relationship can be maintained (Bialik, 2007).” On the periphery, the number also includes

past colleagues such as high school friends with whom a person would want to get reacquainted if they met again.

9.4 HOW MANAGERS CAN USE SOCIAL NETWORKS TO CREATE VALUE • 393

Figure 9.9

Mark Zuckerberg, cofounder of Facebook, helped to bring social networking to 90 million users.

Joe Goldberg – Zuckerberg2 – CC BY-SA 2.0.

Making Invisible Work VisibleMaking Invisible Work Visible

In 2002, organizations researchers Rob Cross, Steve Borghatti, and Andrew Parker published the results of their

study of the social networking characteristics of 23 Fortune 500 firms (Cross, et. al., 2002). These researchers

were concerned that traditional analysis of organizational structure might miss the true way that critical work was

being done in modern firms—that is, they theorized that social networks, and not the structure presented on the

organization chart, might be a better indicator of the flow of knowledge, information, and other vital strategic

resources in the organization. One goal of their research was to better define scenarios where conducting a social

network analysis would likely yield sufficient benefit to justify the investment of time and energy on the part of

the organization.

Cross and colleagues found that SNA was particularly valuable as a diagnostic tool for managers attempting

to promote collaboration and knowledge sharing in important networks. Specifically, they found SNA uniquely

effective in:

• Promoting effective collaboration within a strategically important group.

• Supporting critical junctures in networks that cross functional, hierarchical, or geographic boundaries.

394 • PRINCIPLES OF MANAGEMENT

• Ensuring integration within groups following strategic restructuring initiatives.

Connect and DevelopConnect and Develop

Consumer product giant Procter & Gamble (P&G) pioneered the idea of connect and develop, which refers to

developing new products and services through a vast social network spanning parts of P&G and many other

external organizations. Like many companies, P&G historically relied on internal capabilities and those of a

network of trusted suppliers to invent, develop, and deliver new products and services to the market. It did not

actively seek to connect with potential external partners. Similarly, the P&G products, technologies and know-

how it developed were used almost solely for the manufacture and sale of P&G’s core products. Beyond this,

P&G seldom licensed them to other companies.

However, around 2003 P&G woke up to the fact that, in the areas in which its does business, there are millions

of scientists, engineers, and other companies globally. Why not collaborate with them? P&G now embraces open

innovation, and it calls this approach “Connect + Develop.” It even has a Web site with Connect + Develop as its

address (http://www.pgconnectdevelop.com). This open innovation network at P&G works both ways—inbound

and outbound—and encompasses everything from trademarks to packaging, marketing models to engineering,

and business services to design.

On the inbound side, P&G is aggressively looking for solutions for its needs, but also will consider any

innovation—packaging, design, marketing models, research methods, engineering, and technology—that would

improve its products and services. On the outbound side, P&G has a number of assets available for license:

trademarks, technologies, engineering solutions, business services, market research methods and models, and

more.

As of 2005, P&G’s Connect + Develop strategy had already resulted in more than 1,000 active agreements. Types

of innovations vary widely, as do the sources and business models. P&G is interested in all types of high-quality,

on-strategy business partners, from individual inventors or entrepreneurs to smaller companies and those listed

in the FORTUNE 500—even competitors. Inbound or out, know-how or new products, examples of success are

as diverse as P&G’s product categories. Some of these stories are shown in “P&G Connect + Develop Success

Stories.”

P&G Connect + Develop Success StoriesP&G Connect + Develop Success Stories

Bringing Technology Into P&G

Olay Regenerist

How a small French company became part of P&G Beauty’s $2 billion brand

A few years ago, the folks in P&G’s skin care organization were looking both internally and externally forantiwrinkle technology options for next-generation Olay products. At a technical conference in Europe,P&G first learned of a new peptide technology that wound up being a key component used in theblockbuster product, Olay Regenerist.

The technology was developed by a small cosmetics company in France. They not only developed the

9.4 HOW MANAGERS CAN USE SOCIAL NETWORKS TO CREATE VALUE • 395

peptide but also the in vitro and clinical data that convinced P&G to evaluate this material. After theyshared some of their work at a conference attended by P&G’s skin-care researchers, they accepted aninvitation for their technologists to visit P&G and present their entire set of data on the antiwrinkle effectsof the new peptide. This company now continues to collaborate with P&G on new technology upstreamidentification and further upstream P&G projects.

Taking Technology Out of P&G

Calsura

Not all calcium is created equal.

When P&G was in the juice business, it discovered Calsura, a more absorbable calcium that helps buildstronger bones faster, and keeps them stronger for life. The addition of Calsura calcium makes any foodor drink a great source of the daily calcium needed for building stronger bones faster in kids, and keepingbones stronger throughout adulthood; Calsura is proven to be 30% more absorbable than regular calcium.Today, P&G licenses the Calsura technology to several companies.

University Collaboration

University of Cincinnati Live Well Collaborative

Collaborating with a university in a new way

P&G has partnered with the prestigious design school at the University of Cincinnati to develop productsspecifically for consumers over age 50. Using design labs, university students and P&G researcherscollaborate to study the unique needs of the over-50 consumer. The goal is to develop and commercializeproducts that are designed for this consumer bracket.

Adapted from http://www.pg.com (retrieved June 4, 2008).

The Innovation NetworkThe Innovation Network

Strategy consultant McKinsey & Company points to recent academic research that finds differences in individual

creativity and intelligence matter far less for organizational innovation than connections and networks. That is,

networked employees can realize their innovations and make them catch on more quickly than nonnetworked

employees can (Fleming & Marx, 2006).

On the basis of what was found by Cross and colleagues across many large firms, within P&G in particular, and in

their own research, McKinsey has observed four important steps in the innovation network process.1 These four

critical steps in designing, implementing, and managing an innovation network are summarized in the following

figure.

Figure 9.10 Managing the Innovation Network

396 • PRINCIPLES OF MANAGEMENT

Adapted from http://www.mckinseyquarterly.com (retrieved June 4, 2008).

The first step, connect, involves the identification of key people in the organization with an innovation mind-set.

Such individuals are not wed to the status quo and are comfortable with change and uncertainty. It is important to

involve individuals with different backgrounds and approaches to innovation. For instance, some individuals are

great at generating ideas while others may be better at researching and validating them. This group of individuals

would then be defined as a network. The second step, set boundaries and engage, is where the network’s goals

and objectives are defined. It is important to make it clear how the network’s goals and objectives will contribute

to the organization’s goals and larger strategy, mission, and vision. Time frames and desired target outcomes are

stated as well.

In the third step, support and govern, the leadership structure for the network is decided on, along with any

protocols for meeting, sharing ideas, and decision making. With these process guidelines in place, the network

members can then make sure that they have identified the resources necessary to conduct their work. This includes

gaining sponsorship and buy-in from other parts of the organization, including upper management. Finally, the

fourth step involves managing and tracking. This last step covers a spectrum of needs, ranging from how network

members will be recognized and rewarded for their contributions, the agreement about process-tracking criteria,

and some guidelines on how new members join the network and others leave.

9.4 HOW MANAGERS CAN USE SOCIAL NETWORKS TO CREATE VALUE • 397

As mentioned in the connect stage of developing an innovation network, you can fine-tune the network’s goals

by identifying the appropriate mix and balance of employees. Innovation networks, like cross-functional teams,

require different skills and attitudes. In McKinsey’s experience, they include combinations of several archetypes.

Which one are you?

• Idea generators prefer to come up with ideas, believe that asking the right questions is more important than

having the right answers, and are willing to take risks on high-profile experiments.

• Researchers mine data to find patterns, which they use as a source of new ideas. They are the most likely

members of the network to seek consumer insights and to regard such insights as a primary input.

• Experts value proficiency in a single domain and relish opportunities to get things done.

• Producers orchestrate the activities of the network. Others come to them for new ideas or to get things

done. They are also the most likely members of the network to be making connections across teams and

groups.

Key Takeaway

This section showed how social networks create value. We started by introducing the social network theoryconcepts of reciprocity, exchange, and similarity. We then discussed using social networks as a vehiclefor advancing your own career. The section concluded by explaining how social networks create value inand across organizations, with specific examples of making invisible work visible, Procter & Gamble’sConnect + Develop, and McKinsey’s “innovation network” concept.

Exercises

1. What does the social network concept of reciprocity mean, and what are its pros and cons?

2. What does the social network concept of exchange mean, and what are its pros and cons?

3. What does the social network concept of similarity mean, and what are its pros and cons?

4. How do social networks create value in a career management setting?

5. How do social networks create value in an organizational setting?

6. What are some ways that an organization can manage the social network to be more innovative?

1How companies approach innovation: A McKinsey global survey. (2007). McKinsey Quarterly.

ReferencesReferences

Bialik, C. (2007, November 16). Sorry, you may have gone over your limit of network friends. Wall Street Journal.

Cox, C. (2008, October 7). Retrieved November 13, 2008, from http://blog.styleapple.com/styleapple-creative-

398 • PRINCIPLES OF MANAGEMENT

design-blog-the-place-where-creative-pros-flex-their-muscles/bid/5866/Arguably-The-Most-Effective-Branding-

Campaign-Ever.

Cross, R., Borgatti, S., & Parker, A. (2002). Making invisible work visible. California Management Review, 44(2),

25–46.

Fleming, L., & Marx, M. (2006). Managing creativity in small worlds. California Management Review, 48(4),

6–27.

Goleman. D. (2006). Social intelligence. New York: Bantam.

Granovetter, M. (1974). Getting a job: A study of contacts and careers (2nd ed.). Chicago: University of Chicago

Press.

Kilduff, M., & Tsai, W. (2004). Social networks and organizations. Beverly Hills, CA; Sage.

9.4 HOW MANAGERS CAN USE SOCIAL NETWORKS TO CREATE VALUE • 399

9.5 Ethical Considerations With Social Network Analysis

Learning Objectives

1. Understanding the ethics of social network analysis.

2. Developing a toolkit for managing the ethical issues.

3. Suggest why ignoring social networks may be unethical.

What Is Social Network Analysis?What Is Social Network Analysis?

Before delving into the ethical issues, let’s revisit social network analysis. Social networking is built on the

idea that there is a determinable structure to how people know each other, whether directly or indirectly.

Notions such as six degrees of separation—that everyone on earth is separated from everyone else by no

more than six intermediate personal relationships—have popularized the idea that people can be (however

unknowingly) connected through common associates. As we mentioned at the beginning of this chapter, social

network analysis (SNA) is the mapping and measuring of relationships and flows between people, groups,

organizations, computers, Web sites, and other information/knowledge processing entities. This can be done with

paper and pencil surveys, software programs, and even comparing e-mail and phone logs, but the desired output

is essentially the same. Social networks are the invisible organization. That is, they are the actual organization

behind the printed organization chart.

400

Figure 9.11

Ethics are not simply a matter of the law; they are a prescription for doing good.

Orietta.sberla – Ethics049webIV – CC BY-SA 3.0.

Ethical ImplicationsEthical Implications

Application of the principles behind P-O-L-C should help managers lead their organizations to bigger and better

things, and social networks are a key ingredient in the “organizing” component (Borgatti & Molina, 2003; Borgatti

& Molina, 2005). So, what harm can there be if a manager uses SNA to uncover the invisible structure in their

organization? Three top ethical concerns are (1) violation of privacy, (2) psychological harm, and (3) harm to

individual standing. Let’s look at each of these three ethical concerns in turn.

Violation of PrivacyViolation of Privacy

Managers typically use surveys (sometimes with the aid of consultants) to capture and map the structure of a

social network. If each employee has consented to the survey, then the manager is on much more solid ground.

Care must be taken, however, that participants are aware of the survey’s objectives and applications. Recall that

a network diagram reflects a pattern or relationship among people, such that survey participants will actually be

reporting, by definition, on what other individuals are doing. For instance, if a communication network in your

organization is being mapped, you might be asked who you initiate communication with and who initiates it with

you. You might also be asked for some indication of communication frequency. So, even if you agreed to complete

the survey, the other people that you identify as part of your network may have not.

Surveys are not the only basis for mapping social networks. Indeed, think about the network that might be

reflected by the contacts on your cell phone or e-mail lists. Given technology today this data could be readily

converted into a social network map showing who corresponded with whom and the length of such

correspondence. Moreover, with content coding software, even the content of the e-mails could be coded. This

9.5 ETHICAL CONSIDERATIONS WITH SOCIAL NETWORK ANALYSIS • 401

type of social network mapping has more obvious ethical implications because participants of the map may never

know that they are actually being mapped!

In both the survey-based and electronic mapping approaches, you might keep the identities of individuals

confidential, thereby protecting their privacy. However, it may be possible to guess the names of individuals by

virtue of their location in the network. For example, if a certain type of information can only originate with one

part of an organization, it might be pretty obvious to inside observers how such information flowed internally

and externally. Similarly, “organizations are typically quite small, so that even a small number of attributes can

uniquely identify individuals (Borghatti & Molina, 2005).” Second, demographic information on each person is

often available in the human resources database or is common knowledge because everyone knows everyone else.

Even if the outcome of such informal information flows is positive, the actual communication may be prohibited

internally by organizational rules and procedures. For example, you are likely familiar with the way Post-its were

developed at 3M through internal entrepreneurial actions—at the time, however, some of those actions were not an

explicit part of 3M’s rules and procedures (though, fortunately for 3M, its “bootlegging policy” gave the inventors

an opportunity to explore market options for the adhesive that did not stick).1

Harm to Individual StandingHarm to Individual Standing

The two remaining ethical issues are somewhat related. As you can imagine from the previous examples,

violation of privacy might lead to unforeseen, and possibly unwarranted, disciplinary action. This would harm an

individual’s standing. For instance, if a social network map revealed that one individual or an entire department is

the bottleneck for information flowing from one part of the organization to another, action might be taken against

that individual or members of the department. It may truly be the case that this person or department is a roadblock

to progress; but it may just as likely be the case that managers on one side or the other (in terms of social network)

of the apparent bottleneck are not very good at delegating or eliciting information. Similarly, the organization may

just be trying to run too much through one particular individual in the network. What one views as an indication

of individual incompetency may, in fact, be a need for training or the addition of staff to move the information

more effectively.

The possible harm to individual standing should be noted if 3M had used a social network map to understand

the roots of its Post-it homerun and had internal policies prohibiting the use of time and money on nonapproved

projects. If a network survey revealed that 3M’s breakthrough was caused by rogue employees—that is,

employees who were not following the rules about new product development and so on—the individual credited

with that innovation might have been reprimanded or fired. This, of course, was not the case in 3M, but you

can imagine how organizational policies meant to foster internal efficiencies might prohibit an individual from

contravening them, regardless of the benefits of the eventual outcome.

Finally, the purpose of the network analysis may be to identify areas of the firm that just aren’t critical to its

mission, vision, and strategy. As social network researchers Steve Borgatti and Jose-Luis Molina note, “This

introduces dangers for the respondents because management may make job or personnel changes (e.g., firing non-

central workers) based on the network analysis. In fact, in the case of a consulting engagement, this may be the

explicit purpose of the research, at least from the point of view of management (Borghatti & Molina, 2005).”

Obviously, one of the roles of management is to determine the efficient and effective allocation of resources. SNA

402 • PRINCIPLES OF MANAGEMENT

can be a useful tool in this determination, but the purpose of the analysis should be made clear to participants from

the outset.

Psychological HarmPsychological Harm

This third area can be subtle, but it is very important as well. Psychological harm might arise when information

is used in a way that manipulates the behavior of individuals. For instance, managers are likely to develop

maps of social networks because their managers believe that there might be better ways of planning, organizing,

leading, and controlling. As Borgatti and Molina point out, however, SNA in this context is explicitly part of a

transformation process in which the group is shown data about itself, such as network diagrams, and asked to react

to it. Experience suggests that this technique serves as a powerful catalyst for change. “It is dangerous, however,

because of the powerful emotions it engenders in a group setting and this can put the researcher in the position of

practicing therapy without a license (Borghatti & Molina, 2005).”

A Framework for Managing the Ethical Issues of SNAA Framework for Managing the Ethical Issues of SNA

Now that you understand some of the ethical issues arising from SNA you are in a better position to anticipate

and manage them. Of course, we should refresh your memory on the general ethical decision-making guidelines

before delving into more SNA-specific ones. In brief, the following are the six steps (Hartman & DesJardins,

2008):

1. Assess the situation. What are you being asked to do? Is it illegal? Is it unethical? Who might be harmed?

2. Identify the stakeholders and consider the situation from their point of view. For example, consider the

point of view of the company’s employees, top management, stockholders, customers, suppliers, and

community.

Consider the alternatives you have available to you and how they affect the stakeholders. These include:

a. consequences

b. duties, rights, and principles

c. implications for personal integrity and character

4. Consider the effects of your actions. How does the action make you feel about yourself? How would you

feel if your actions were reported tomorrow in the Wall Street Journal (or your daily newspaper)? How

would you explain your actions to your mother or to your 10-year-old child?

5. Make a decision. This might involve going to your boss or to a neutral third party (such as an

ombudsman or ethics committee). Know your values and your limits. If the company does nothing to rectify

the situation, do you want to continue working for the company?

6. Monitor outcomes. Track what actually happens and compare it to what you expected.

Beyond these general guidelines, there are three specific ways that you might manage SNA related ethical

9.5 ETHICAL CONSIDERATIONS WITH SOCIAL NETWORK ANALYSIS • 403

concerns. These are (1) full disclosure, (2) anonymization and opt-out options, and (3) participant training and

feedback. Let’s look at each of these in turn.

First, you might consider some way of applying the notion of informed consent to the participants of an exercise

that maps the organization’s social networks. This means that each person included in the mapping process would

be told the purpose of the exercise, along with what the outcome would look like. We provide an example

disclosure form where they would also be apprised of the possible risks. For instance, one SNA informed consent

form includes the following paragraph:

Risks and costs Since management will see the results of this study, there is a chance that someone in management could

consider your set of communication contacts to be inappropriate for someone in your position, and could think less of you.

Please note, however, that the researchers have obtained a signed agreement from management stipulating that the data will be

used for improving communication in the company and will not be used in an evaluative way (Borghatti & Molina, 2005).

Second, managers can consider different ways of making the process anonymous or giving individuals the option

to opt-out of the mapping process. For example, department-level network information could be presented instead

of individual-level information. Where it is impossible to protect the privacy wishes of one individual, then an

op-out option is the only way to protect their privacy, though this will clearly affect the accuracy of the SNA. If

an individual opts out, this should mean that their name appears nowhere on the social network diagram (even if

they are identified by another individual as being part of their social network). For instance, in the sample map,

you can see that the map would be very disjointed if John and Holly opted out of the SNA.

Figure 9.12 A Social Network Survey Participant Disclosure Form

404 • PRINCIPLES OF MANAGEMENT

Reproduced with permission of Borghatti, S. P., & Molina, J.-L. (2005). Toward ethical guidelines for

network research in organizations. Social Networks, 27, 107–117.

Finally, managers can consider the application of SNA in conjunction with a larger employee development

program where participants are taught about social network analysis and then their results are debriefed with

them one on one. Where there are still concerns for privacy, individuals can map their own social networks and

then act on them personally. It is management’s responsibility to steward the organization’s resources in a way

that is consistent with the mission and vision. In that sense, SNA is a valuable tool for understanding how the

organization’s work actually gets done. However, because it is such a powerful and revealing tool, managers must

be thoughtful in its ethical application.

The Ethical Argument in Favor of Managing Social NetworksThe Ethical Argument in Favor of Managing Social Networks

We close this section with some discussion of why it might actually be unethical to neglect the organization’s

9.5 ETHICAL CONSIDERATIONS WITH SOCIAL NETWORK ANALYSIS • 405

social network. Be sensitive to the ethical issues surrounding the management of social networks, but that does

not mean leaving social network relationships to chance. For instance, if you know that your department would

be more productive if person A and person B were connected, as a manager wouldn’t you want to make that

connection happen? In many firms, individuals are paid based on performance, so this connection might not only

increase the department’s performance, but its personal incomes as well.

The broader issue is that social networks exist and that the social capital they provide is an important and powerful

vehicle for getting work done. That means that the ethical manager should not neglect them. Wayne Baker, author

of Achieving success through Social Capital, puts it this way:

“The ethics of social capital [i.e., social network relationships] requires that we all recognize our moral duty to consciously

manage relationships. No one can evade this duty—not managing relationships is managing them. The only choice is how to

manage networks of relationships. To be an effective networker, we can’t directly pursue the benefits of networks, or focus on

what we can get from our networks. In practice, using social capital means putting our networks into action and service for

others. The great paradox is that by contributing to others, you are helped in return, often far in excess of what anyone would

expect or predict (Baker, 2000).”

Key Takeaway

Now that you have a better understanding of social networks and SNA you need to understand someof the ethical implications of the application of such knowledge. You learned that SNA gives rise toconcerns about privacy, harm to individual standing, and psychological harm. You were reminded that thegeneral ethical decision-making framework applies to your use of SNA, but you also learned some specificapproaches to managing SNA-related ethical issues. Finally, you were presented with arguments about whyneglect of an organization’s social network also can have negative ethical implications.

Exercises

1. What is social network analysis?

2. Why should managers be concerned about the ethical implications of social network analysis?

3. What might be some of the unforeseen consequences of SNA for you as an employee?

4. How would the privacy of employees be affected even if they are not directly surveyed as part ofthe SNA?

5. What steps can you take to improve the ethical bases for conducting SNA?

6. Why might it be unethical for managers to neglect the organization’s social networks?

1To foster creativity, 3M encourages technical staff members to spend up to 15% of their time on projects of their

own choosing. Also known as the “bootlegging” policy, the 15% rule has been the catalyst for some of 3M’s most

famous products, such as Scotch Tape and—of course—Post-it notes. Retrieved November 17, 2008, from source.

406 • PRINCIPLES OF MANAGEMENT

ReferencesReferences

Baker, W. (2000). Achieving success through social capital. San Francisco: Jossey-Bass.

Borgatti, S. P., & Molina, J.-L. (2003). Ethical and strategic issues in organizational network analysis. Journal of

Applied Behavioral Science, 39(3), 337–349.

Borghatti, S. P., & Molina, J.-L. (2005) Toward ethical guidelines for network research in organizations. Social

Networks, 27, 107–117.

Hartman, L., & DesJardins, J. (2008). Business ethics: Decision-making for personal integrity and social

responsibility. New York: McGraw-Hill.

9.5 ETHICAL CONSIDERATIONS WITH SOCIAL NETWORK ANALYSIS • 407

9.6 Personal, Operational, and Strategic Networks

Learning Objectives

1. See networks as something you can, and need to, manage.

2. Know about different network forms—personal, operational, and strategic.

3. Understand some of the actions you need to take to move your network forward.

This section draws heavily on recent research by Herminia Ibarra, Brian Uzzi, and others, to help you understand

the different forms that social networks can take. Ibarra and Uzzi have been studying the social networks and

social networking tactics and strategies of managers for more than 20 years and are considered thought-leaders

in the field (Ibarra & Hunter, 2007; Ibarra, 2006). Their most recent work suggests that strong, useful networks

don’t just happen at the watercooler. They have to be carefully constructed.

What separates successful managers from the rest of the pack? Networking: creating a fabric of personal contacts

to provide the support, feedback, and resources needed to get things done. Yet many managers avoid networking.

Some think they don’t have time for it. Others disdain it as manipulative. To succeed as a manager, Ibarra

recommends building three types of networks:

• Personal—kindred spirits outside your organization who can help you with personal advancement.

• Operational—people you need to accomplish your assigned, routine tasks.

• Strategic—people outside your control who will enable you to reach key organizational objectives.

These networks, their purpose, and how to build network membership, are summarized in “Personal, Operational,

and Strategic Networks.” Most importantly, Ibarra’s work suggests that leaders need to possess all three types of

networks, and not just one or two. Let’s take a look at each one of these networks.

Table 9.1 Personal, Operational, and Strategic Networks

408

The purpose of this network is to… If you want to find network members, try…

Personalnetwork

exchange important referrals and neededoutside information; develop professionalskills through coaching and mentoring

participating in alumni groups, clubs, professional associations, and personalinterest communities.

Operationalnetwork

get your work done, and get it doneefficiently. identifying individuals who can block or support a project.

Strategicnetwork

figure out future priorities and challenges;get stakeholder support for them.

identifying lateral and vertical relationships with other functional and businessunit managers—people outside your immediate control—who can help youdetermine how your role and contribution fit into the overall picture.

Personal NetworksPersonal Networks

“Personal networks are largely external, made up of discretionary links to people outside the workplace with whom we

have something in common. As a result, what makes a personal network powerful is its referral potential. According to the

famous six degrees of separation principle, our personal contacts are valuable to the extent that they help us reach, in as few

connections as possible, the far-off person who has the information we need (Ibarra & Hunter, 2007).”

Figure 9.13

Social networks can serve personal, operational, or strategic purposes.

Agência Brasil – A working dinner at the summit – CC BY 3.0.

9.6 PERSONAL, OPERATIONAL, AND STRATEGIC NETWORKS • 409

Personal networking engages kindred spirits from outside an organization in an individual’s efforts to learn and

find opportunities for personal advancement. Personal networks are one’s circle of casual acquaintances, typically

composed of people outside of the company you work for. Before you have a job in a particular company, many

of your network ties are personal, oriented toward current interests and future potential interests. Key contacts are

typically discretionary—that is, it is not always clear who is most relevant.

Most personal networks are highly clustered—that is, your friends are likely to be friends with one another as

well. And, if you made those friends by introducing yourself to them (as opposed to being introduced by a mutual

acquaintance), the chances are high that their experiences and perspectives echo your own. Ideas generated within

a personal network typically circulate among the same people with shared views. This creates the risk that a

potential winning idea can go unexploited if no one in the group has what it takes to bring that idea to fruition.

But what if someone within that cluster knows someone else who belongs to a whole different group? That

connection, formed by an information broker, can expose your idea to a new world, filled with fresh opportunities

for success. Diversity and breadth, that is, reaching out to contacts who can make referrals, makes the difference.

Through professional associations, alumni groups, clubs, and personal interest communities, managers gain new

perspectives that allow them to advance in their careers. This is what we mean by personal networking.

While personal networks are important, particularly to the extent that they provide you with valuable resources

and access to needed resources, the challenge is to convert them into network resources that also help with

operational and strategic needs. Too often, however, those individuals in the personal network just aren’t the right

types of ties to be beneficial operationally or strategically, which is why you need to look at broadening your

network to address operating and strategic needs.

Operational NetworksOperational Networks

“All managers need to build good working relationships with the people who can help them do their jobs. The number and

breadth of people involved can be impressive—such operational networks include not only direct reports and superiors but

also peers within an operational unit, other internal players with the power to block or support a project, and key outsiders such

as suppliers, distributors, and customers. The purpose of this type of networking is to ensure coordination and cooperation

among people who have to know and trust one another in order to accomplish their immediate tasks…Either you’re necessary

to the job and helping to get it done, or you’re not (Ibarra & Hunter, 2007).”

On the basis of a close study of 30 emerging leaders, Ibarra and Hunter found that operational networking was

geared toward doing one’s assigned tasks more effectively. It involves cultivating stronger relationships with

colleagues whose membership in the network is clear; their roles define them as stakeholders. The previous quote

provides you with a good working definition of operational network: “Either you’re necessary to the job and

helping get it done, or you’re not.” That is, anyone who satisfies this criterion should be considered part of your

operational network.

So, now you have two networking bases covered. At least you know how to identify the gaps in your personal and

operational network. Your personal network provides access to external resources and referrals; your operational

network helps you get the work done. Thus, most operational networking occurs within an organization, and ties

are determined in large part by routine, short-term demands. Relationships formed with outsiders, such as board

410 • PRINCIPLES OF MANAGEMENT

members, customers, and regulators, are directly task-related and tend to be bounded and constrained by demands

determined at a higher level. But as a manager moves into a leadership role, his or her network must reorient itself

externally and toward the future. This is the role played by strategic networking.

Strategic NetworksStrategic Networks

“Making a successful leadership transition requires a shift from the confines of a clearly defined operational network…It is

a challenge to make the leap from a lifetime of functional contributions and hands-on control to the ambiguous process of

building and working through networks. Leaders must accept that networking is one of the most important requirements of

their new leadership roles and continue to allocate enough time and effort to see it pay off (Ibarra & Hunter, 2007).”

Whereas an operational network is fairly narrowly focused, with the locus of contacts formed around specific

objectives, a strategic network necessarily involves lateral and vertical ties to stakeholders inside and outside of

the firm. As Ibarra and Hunter found in their research, strategic networking is the ability to marshal information,

support, and resources from one sector of a network to achieve results in another. Pushed to its logical limit, the

basis of this difference is that effective leaders are highly dependent on others to get things done. The irony here is

that the individuals in your network, who are the lifeline for building up the big picture, are also individuals who

are likely to be outside of your immediate control. While this may seem obvious, it is often difficult to transition

from a purely operational network to a strategic one, either due to simple time constraints (strategic networking

takes time, often without immediate or obvious benefits) or because of negative personal attitudes toward strategic

networking (for instance, “that’s too political and goes against my values”).

Making It HappenMaking It Happen

Networks create value, but networking takes real work. Beyond that obvious point, accept that networking is one

of the most important requirements of a leadership role. To overcome any qualms about it, identify a person you

respect who networks effectively and ethically. Observe how he or she uses networks to accomplish goals. You

probably will also have to reallocate your time. This means becoming a master at the art of delegation, to liberate

time you can then spend on cultivating networks.

Building a network obviously means that you need to establish connections. Create reasons for interacting with

people outside your function or organization; for instance, by taking advantage of social interests to set the stage

for addressing strategic concerns. Ibarra and Hunter found that personal networking will not help a manager

through the leadership transition unless he or she learns how to bring those connections to bear on organizational

strategy. In “Guy Kawasaki’s Guide to Networking through LinkedIn,” you are introduced to a number of network

growth strategies using that powerful Web-based tool.

Finally, remind yourself that networking requires you to apply the principle of reciprocity. That is, give and

take continually—though a useful mantra in networking is “give, give, give.” Don’t wait until you really need

something badly to ask for a favor from a network member. Instead, take every opportunity to give to—and

receive from—people in your networks, regardless of whether you need help.

9.6 PERSONAL, OPERATIONAL, AND STRATEGIC NETWORKS • 411

Guy Kawasaki’s Guide to Networking Through LinkedInGuy Kawasaki’s Guide to Networking Through LinkedIn

LinkedIn (http://www.Linkedin.com) is the top business social networking site. With more than 30 millionmembers by the end of 2008, its membership dwarfs that of the second-largest business networking site,Plaxo. LinkedIn is an online network of experienced professionals from around the world representing150 industries (LinkedIn, 2008). Yet, it’s still a tool that is underutilized, so entrepreneur Guy Kawasakicompiled a list of ways to increase the value of LinkedIn (Guy Kawaski, 2008). Some of Kawasaki’s keypoints are summarized here that can help you develop the strategic side of your social network (though itwill help you with job searches as well):

Increase your visibility. By adding connections, you increase the likelihood that people will see yourprofile first when they’re searching for someone to hire or do business with. In addition to appearing at thetop of search results, people would much rather work with people who their friends know and trust.

Improve your connectability. Most new users put only their current company in their profile. By doing so,they severely limit their ability to connect with people. You should fill out your profile like it’s a resume,so include past companies, education, affiliations, and activities. You can also include a link to your profileas part of an e-mail signature. The added benefit is that the link enables people to see all your credentials.

Perform blind, “reverse,” and company reference checks. Use LinkedIn’s reference check tool to input acompany name and the years the person worked at the company to search for references. Your search willfind the people who worked at the company during the same time period. Since references provided by acandidate will generally be glowing, this is a good way to get more balanced data.

Make your interview go more smoothly. You can use LinkedIn to find the people that you’re meeting.Knowing that you went to the same school, play hockey, or share acquaintances is a lot better than anawkward silence after, “I’m doing fine, thank you.”

Gauge the health of a company. Perform an advanced search for company name and uncheck the “CurrentCompanies Only” box. This will enable you to scrutinize the rate of turnover and whether key people areabandoning ship. Former employees usually give more candid opinions about a company’s prospects thansomeone who’s still on board.

Key Takeaway

In this section, you were introduced to a different slant on social networks—a slant that helps you manageyour networks based on where you might be in an organization. Personal networks are important and tendto follow you everywhere. In this section, we stressed the access-to-information and referral benefits ofpersonal networks. Operational networks are those that help you get your immediate work done, and ifthe key stakeholders in the work process aren’t already in your operational network, then you have somenetwork rework in order. Finally, strategic networks are those that involved a much broader stakeholdergroup and typically involved individuals who are out of your direct control. One key takeaway from thissection is that effective leaders are effective networkers, and you will need to figure out the style ofnetworking that works for you as you move higher in an organization.

412 • PRINCIPLES OF MANAGEMENT

Exercises

1. What characterizes a personal social network?

2. What benefits do members of a personal social network provide to each other?

3. What characterizes an operational social network?

4. What is a simple rule of thumb for determining if someone should be in your operationalnetwork?

5. What characterizes a strategic social network?

6. What two barriers interfere with the development of strategic networks?

ReferencesReferences

Guy Kawaski, retrieved June 4, 2008, from http://blog.guykawasaki.com.

Ibarra, H., & Hunter, M. (2007, January). How leaders build and use networks. Harvard Business Review, 40–47.

Ibarra, H. (2006). Career Change. In J. H. Greenhaus & G. A. Callanan (Eds.), The encyclopedia of career

development, 7782. Beverly Hills, CA; Sage.

LinkedIn, retrieved June 4, 2008, from http://www.linkedin.com/static?key=company_info&trk=hb_ft_abtli.

9.6 PERSONAL, OPERATIONAL, AND STRATEGIC NETWORKS • 413

9.7 Mapping and Your Own Social Network

Learning Objectives

1. Understand what is involved in social network analysis.

2. Be able to analyze your own social network.

3. Be able to identify the gaps in your network and develop a plan to fill those gaps.

As you have already learned, the mapping and measuring of relationships and flows between people, groups,

organizations, computers, Web sites, and other information/knowledge processing entities is called social network

analysis. Social network analysis is not the same thing as networking, where networking is the activities you

might engage in to build your social network. In this section, you will learn the basics of mapping your own social

network. It will give you a sense of the size of your network, along with some other useful characteristics to work

with such as density.

Figure 9.14

414

You can map your social network to understand its structure.

Kat Masback – BC-4 World Primary Network – CC BY-SA 2.0.

Step One: What Purpose Should the Network Serve?Step One: What Purpose Should the Network Serve?

There are a number of possible purposes for a social network.1 As a manager, you are probably most concerned

with these six (Cross, et. al., 2002). First, a communication network is the informal structure of an organization

as represented in ongoing patterns of interaction, either in general or with respect to a given issue. Second, an

information network shows who goes to whom for advice on work-related matters. Third, a problem-solving

network indicates who goes to whom to engage in dialogue that helps people solve problems at work. Fourth, a

knowledge network captures who is aware of whose knowledge and skills, and an access network (fifth) shows

who has access to whose knowledge and expertise. The sixth and final purpose is a career network, which

reflects those individuals in your network who are likely to be helpful in your search for a new job or quest for

a promotion. Given that you are reading a principles of management book, a career network may be the most

interesting to you.

Step Two: Who Are Your Contacts and What Is Your Relationship with Them?Step Two: Who Are Your Contacts and What Is Your Relationship with Them?

Let’s assume that we are mapping your career network. A career network is simply those individuals who might

be instrumental in helping you secure a new job or promotion. You can simply draft out a list of names, using

9.7 MAPPING AND YOUR OWN SOCIAL NETWORK • 415

names or just initials, but the goal is to develop a fairly complete list. The list can be as long or as short as you

want to make it, though keep in mind that there is probably a limit to how effectively you can maintain a large

network where you expect each relationship to be strong and meaningful, or at least one where the contact would

probably respond to your request for assistance. Managers with 15 years of experience might list 30 to 50 names,

while a college student might list 15 to 25 names. These are just averages, though, and individuals can be much

higher or lower, depending on their situation.

The following three questions are sometimes useful in drafting out this initial list.

1. If you look back over the last two to three years, who are the people with whom you have discussed

important school or work matters? This may have been for bouncing around ideas for important projects,

getting support or cooperation for your initiatives, evaluating opportunities, or any other matters of

importance to you.

2. What people have been most helpful and useful in accomplishing your job, in a work, school, or

volunteer setting? Consider people who have provided leads, made introductions, offered advice in your

decision making, or provided resources.

3. Who has directly influenced your career? List those people who have contributed most significantly to

your professional development and career advancement during the past two to three years.

Now that you have your list, briefly categorize the names based on (1) the strength of your relationship (very

close, close, not very close, distant) and (2) who they are and where they come from. For this second facet, you

might want to consider the following:

Total no. of ties _______ No. Ties % of Total

1. Your senior (higher up in your or another organization) _____ _____

2. Your peer (at your level in your or another organization) _____ _____

3. Your junior (below you in your or another organization) _____ _____

4. From a different functional or product area _____ _____

5. From a different business unit or office in your firm _____ _____

6. From a different firm _____ _____

7. The same gender as you are _____ _____

8. Members of the same racial or ethnic group as you are _____ _____

9. The same nationality as you are _____ _____

You will come back to this information after the next step, but you already have a better picture of your network

just after this second step. For instance, you know how many people are in this network, and the relative presence

of different types of network members.

Step Three: Who Knows Whom? Computing Network DensityStep Three: Who Knows Whom? Computing Network Density

Transfer your list of names to a grid like the one shown in the Sample Network Grid. Be sure to note your

416 • PRINCIPLES OF MANAGEMENT

relationship with them, in terms ranging from very close to distant. To complete the grid you place a check in the

box where one individual knows another. For instance, in this exhibit, Mary knows Zachary, Wesley, and Gerry.

Figure 9.15 Sample Network Grid

Computing Network DensityComputing Network Density

Once you have finished check-marking who knows whom, compute the density of your network using the

following:

a. Total number of people in your network

To follow our example, N = 10 (i.e., there are 10 names)N = __10_

b. Maximum Density (i.e., if everyone in your network knew each other). Our maximum density is (10 × 9) ÷ 2 = 45

[N × (N – 1)] ÷ 2 = MM = __45_

c. Total number of checkmarks on your network grid (i.e., the number of relationships among people in your network).

In our example, C = 19.C = __19_

d. Density of Your Network. Our D = 19 ÷ 45 = .42

C ÷ M = DD = __.42_

In our example, if our calculations are correct, the density of this network is .42. If each person in this network

knew every other person, then the density would be 1.0; if no one knew one another, outside of the person whose

network this was, then the density would be 0.0. In our example, the network density is close to the middle, which

means that about fewer than half the people have common network ties, while a little more than half have unique

relationships. You might also want to run this calculation for a subset of the ties based on whether they are very

9.7 MAPPING AND YOUR OWN SOCIAL NETWORK • 417

strong, distant, and so on. If you do use a subset, though, then remember to use that number as your starting point

(N = no. very close ties, for instance).

What Is a Good Number?What Is a Good Number?

There is little research to tell us exactly how big (or small) or how dense (or sparse) the ideal network should be,

although there are some facts to consider. Remember Dunbar’s number from earlier in the chapter? Some studies

have suggested an upper limit of 150 network ties, but, again, that is a pretty big number if you also characterize

those ties as “very close.” It is perhaps more reasonable if a few are very close and the rest are spread out in the

“close” to “distant” categories. If you have a network of 15 to 20 people whose names come to mind quickly, that

is probably a useful size, particularly if your network density is around the middle. Remember, you just set up a

network where you were sort of the center point, and each member of your network, even if he/she is peripheral

to yours, is the center of his/her own network.

A good number for density is between .40 and .60—that is, some people know one another, and some do not.

The advantage of having people in your network who know one another is that they are likely to communicate

more frequently and provide a set of shared relationships that you can use to move information, ideas, and other

resources forward. Also, if any one of your network members, who knows no one else in the network, leaves the

network for some reason, you will no longer have access to the stuff he or she provided for you.

You also want a number of unique ties though, since those relationships provide you access to unique information,

resources, and ideas. Because of the network theory principles of reciprocity and exchange your network is likely

to be more responsive when you have helped others in the network (reciprocate favors), and such reciprocation is

most likely when you have access to unique resources (the exchange principle).

Step Four: Assess and Take ActionStep Four: Assess and Take Action

Let’s take a look at the information you now have about your network. From step 2 you have the size of your

network, and the percentage of ties that break out by relationship (very strong to distant) and characteristics

(company, demographics, and so on). From step 3 you have the density of your network, and that helps shed

additional light on the information generated in step 2.

This puts you in a pretty good position. If you think your network is too small, you have a way to identify the

gaps in your network that, if filled, would both grow your network and fill those key gaps. If density is too high,

then the pathway is similar as well. If you think that you have a great network already, then you can validate this

with the information generated in steps 2 and 3. In all likelihood, you will see opportunities to shore up gaps and

develop strategies for doing so.

Here are some pointers from effective managers on how to make sure your network is creating value for you:

• When entering a new position, effective managers identify the people on whom they depend for getting

things done and focus their energies on cultivating relationships with those people.

• Effective managers consider others as potential allies, even when they may appear to be adversaries. They

develop awareness of key goals and resources valued by the potential ally and attempt to find areas of

418 • PRINCIPLES OF MANAGEMENT

mutual benefit.

• Relationships with people who are dissimilar on multiple dimensions (e.g., a senior manager in another

division) are the most difficult to cultivate and therefore require the most explicit strategies.

• Effective managers tend to be keenly aware of their personal preferences and interaction styles for

developing their networks. For example, those who are not comfortable with extracurricular socializing

may make extra time for informal conversations at work.

Key Takeaway

You now have a good understanding of how to analyze the basic characteristics of your social networkor that of another individual. In this section you were introduced to a pencil-and-paper approach to socialnetwork analysis, though you can also use electronic forms that map more complex relationships, andperhaps show how multiple networks are tied (or not tied) together. This section closed with showing youhow to bolster the value created by your social network.

Exercises

1. How might social network analysis help you find a new job?

2. What are the basis steps in social network analysis?

3. What information do you need to analyze your social network?

4. Why is the size of your network important?

5. Why is the density of your network important?

6. What can you do to create value through your social network?

1The first author, Mason A. Carpenter, has been using social networking mapping in his classes for the past 15

years. This particular mapping tool has evolved over that time and is inspired by the larger body of social network

research. There is no magic to this particular grid tool, and you are welcome to use and adapt it as the need arises.

This grid simply asks students to identify who might be helpful in their network, the nature of their relationship

with these individuals, and which members know each other.

ReferencesReferences

Cross, R., Borgatti, S., & Parker, A. (2002). Making invisible work visible. California Management Review, 44(2),

25–46.

9.7 MAPPING AND YOUR OWN SOCIAL NETWORK • 419

Chapter 10: Leading People and Organizations

10.1 Leading People and Organizations

10.2 Case in Point: Indra Nooyi Draws on Vision and Values to Lead

10.3 Who Is a Leader? Trait Approaches to Leadership

10.4 What Do Leaders Do? Behavioral Approaches to Leadership

10.5 What Is the Role of the Context? Contingency Approaches to Leadership

10.6 Contemporary Approaches to Leadership

10.7 Developing Your Leadership Skills

420

10.1 Leading People and Organizations

Figure 10.1

Leaders give their followers direction. Leaders are key players in determining the success or failure of coordinated tasks and organizational

initiatives.

Anthony Quintano – Long Island Air Show at Jones Beach Memorial Day Weekend 2015 – CC BY 2.0.

421

What’s in It for Me?

Reading this chapter will help you do the following:

1. Define what leadership is and identify traits of effective leaders.

2. Describe behaviors that effective leaders demonstrate.

3. Specify the contexts in which various leadership styles are effective.

4. Explain the concepts of transformational, transactional, charismatic, servant, and authenticleadership.

5. Develop your own leadership skills.

Figure 10.2 The P-O-L-C Framework

Perhaps this is obvious, but leadership is the first of five facets constituting a manager’s leading function in the

P-O-L-C framework. Leadership may be defined as the act of influencing others to work toward a goal. Leaders

exist at all levels of an organization. Some leaders hold a position of authority and may use the power that comes

from their position, as well as their personal power, to influence others; they are called formal leaders. In contrast,

informal leaders are without a formal position of authority within the organization but demonstrate leadership by

influencing others through personal forms of power. One caveat is important here: Leaders do not rely on the use

of force to influence people. Instead, people willingly adopt the leader’s goal as their own goal. If a person is

relying on force and punishment, the person is a dictator, not a leader.

What makes leaders effective? What distinguishes people who are perceived as leaders from those who are not

perceived as leaders? More importantly, how do we train future leaders and improve their leadership ability?

These are important questions that have attracted scholarly attention in the past several decades. In this chapter,

we will review the history of leadership studies and summarize the major findings relating to these important

questions. Around the world, we view leaders as at least partly responsible for their team’s or company’s success

and failure. Company chief executive officers (CEOs) are paid millions of dollars in salaries and stock options

with the assumption that they hold their company’s future in their hands. In politics, education, sports, and profit

and nonprofit sectors, influence of leaders over the behaviors of individuals and organizations is rarely questioned.

When people and organizations fail, managers and CEOs are often viewed as responsible. Some people criticize

the assumption that leadership always matters and call this belief “the romance of leadership.” However, research

evidence pointing to the importance of leaders for organizational success is accumulating (Hogan, et. al., 1994).

422 • PRINCIPLES OF MANAGEMENT

ReferencesReferences

Hogan, R., Curphy, G. J., & Hogan, J. (1994). What we know about leadership: Effectiveness and personality.

American Psychologist, 49, 493–504.

10.1 LEADING PEOPLE AND ORGANIZATIONS • 423

10.2 Case in Point: Indra Nooyi Draws on Vision andValues to Lead

Figure 10.3

Penn State – Indra Nooyi – CC BY-NC 2.0.

She is among the top 100 most influential people according to Time magazine’s 2008 list. She has alsoranked number 4 in Forbes’s “Most Influential Women in the World” (2010), number 1 in Fortune’s “50Most Powerful Women” (2006 through 2009), and number 22 in Fortune’s “25 Most Powerful People inBusiness” (2007). The lists go on and on. To those familiar with her work and style, this should comeas no surprise: Even before she became the CEO of PepsiCo Inc. (NYSE: PEP) in 2006, she was one ofthe most powerful executives at PepsiCo and one of the two candidates being groomed for the covetedCEO position. Born in Chennai, India, Nooyi graduated from Yale’s School of Management and worked incompanies such as the Boston Consulting Group Inc., Motorola Inc., and ABB Inc. She also led an all-girlsrock band in high school, but that is a different story.

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What makes her one of the top leaders in the business world today? To start with, she has a clear visionfor PepsiCo, which seems to be the right vision for the company at this point in time. Her vision isframed under the term “performance with purpose,” which is based on two key ideas: tackling the obesityepidemic by improving the nutritional status of PepsiCo products and making PepsiCo an environmentallysustainable company. She is an inspirational speaker and rallies people around her vision for the company.She has the track record to show that she means what she says. She was instrumental in PepsiCo’sacquisition of the food conglomerate Quaker Oats Company and the juice maker Tropicana Products Inc.,both of which have healthy product lines. She is bent on reducing PepsiCo’s reliance on high-sugar, high-calorie beverages, and she made sure that PepsiCo removed trans fats from all its products before itscompetitors. On the environmental side, she is striving for a net zero impact on the environment. Amongher priorities are plans to reduce the plastic used in beverage bottles and find biodegradable packagingsolutions for PepsiCo products. Her vision is long term and could be risky for short-term earnings, but it isalso timely and important.

Those who work with her feel challenged by her high-performance standards and expectation ofexcellence. She is not afraid to give people negative feedback—and with humor, too. She pushes peopleuntil they come up with a solution to a problem and does not take “I don’t know” for an answer. Forexample, she insisted that her team find an alternative to the expensive palm oil and did not stop urgingthem forward until the alternative arrived: rice bran oil.

Nooyi is well liked and respected because she listens to those around her, even when they disagree withher. Her background cuts across national boundaries, which gives her a true appreciation for diversity, andshe expects those around her to bring their values to work. In fact, when she graduated from college, shewore a sari to a job interview at Boston Consulting, where she got the job. She is an unusually collaborativeperson in the top suite of a Fortune 500 company, and she seeks help and information when she needs it.She has friendships with three ex-CEOs of PepsiCo who serve as her informal advisors, and when she wasselected to the top position at PepsiCo, she made sure that her rival for the position got a pay raise and wasgiven influence in the company so she did not lose him. She says that the best advice she received wasfrom her father, who taught her to assume that people have good intentions. Nooyi notes that expectingpeople to have good intentions helps her prevent misunderstandings and show empathy for them. It seemsthat she is a role model to other business leaders around the world, and PepsiCo is well positioned to tacklethe challenges the future may bring.

Case written based on information from Birger, J., Chandler, C., Frott, J., Gimbel, B., Gumbel, P., etal. (2008, May 12). The best advice I ever got. Fortune, 157(10), 70–80; Brady, D. (2007, June 11).Keeping cool in hot water. BusinessWeek. Retrieved April 30, 2010, from http://www.businessweek.com/magazine/content/07_24/b4038067.htm; Compton, J. (2007, October 15). Performance with purpose.Beverage World, 126(10), 32; McKay, B. (2008, May 6). Pepsi to cut plastic used in bottles. Wall StreetJournal, Eastern edition, p. B2; Morris, B., & Neering, P. A. (2008, May 3). The Pepsi challenge: Canthis snack and soda giant go healthy? CEO Indra Nooyi says yes but cola wars and corn prices willtest her leadership. Fortune, 157(4), 54–66; Schultz, H. (2008, May 12). Indra Nooyi. Time, 171(19),116–117; Seldman, M. (2008, June). Elevating aspirations at PepsiCo. T+D, 62(6), 36–38; The Pepsichallenge (2006, August 19). Economist. Retrieved April 30, 2010, from http://www.economist.com/business-finance/displaystory.cfm?story_id=7803615.

10.2 CASE IN POINT: INDRA NOOYI DRAWS ON VISION AND VALUES TO LEAD • 425

Discussion Questions

1. How might a leader like Nooyi influence PepsiCo’s use of P-O-L-C tools beyond her obvious rolein the leadership dimension?

2. Do you think Indra Nooyi’s vision of “performance with purpose” has been effective? Why orwhy not?

3. How does charisma relate to leadership? Do you think the CEO of PepsiCo possesses thischaracteristic?

4. What makes Indra Nooyi so successful at her job? Is it her level of authority, or is it somethingelse?

5. What do the types of advisors that Indra Nooyi relies on tell you about her values?

6. How much passion does Indra Nooyi seem to bring to her role as CEO of PepsiCo?

426 • PRINCIPLES OF MANAGEMENT

10.3 Who Is a Leader? Trait Approaches to Leadership

Learning Objectives

1. Learn the position of trait approaches in the history of leadership studies.

2. Explain the traits that are associated with leadership.

3. Discuss the limitations of trait approaches to leadership.

The earliest approach to the study of leadership sought to identify a set of traits that distinguished leaders from

nonleaders. What were the personality characteristics and physical and psychological attributes of people who are

viewed as leaders? Because of the problems in measurement of personality traits at the time, different studies used

different measures. By 1940, researchers concluded that the search for leadership-defining traits was futile. In

recent years, though, after advances in personality literature such as the development of the Big Five personality

framework, researchers have had more success in identifying traits that predict leadership (House & Aditya,

1997). Most importantly, charismatic leadership, which is among the contemporary approaches to leadership, may

be viewed as an example of a trait approach.

The traits that show relatively strong relations with leadership are as follows (Judge, et. al., 2002):

IntelligenceIntelligence

General mental ability, which psychologists refer to as “g” and which is often called IQ in everyday language,

has been related to a person’s emerging as a leader within a group. Specifically, people who have high mental

abilities are more likely to be viewed as leaders in their environment (House & Aditya, 1997; Ilies, et. al., 2004;

Lord, et. al., 1986; Taggar, et. al., 1999). We should caution, though, that intelligence is a positive but modest

predictor of leadership. In addition to having high IQ, effective leaders tend to have high emotional intelligence

(EQ). People with high EQ demonstrate a high level of self-awareness, motivation, empathy, and social skills. The

psychologist who coined the term emotional intelligence, Daniel Goleman, believes that IQ is a threshold quality:

it matters for entry- to high-level management jobs, but once you get there, it no longer helps leaders because

most leaders already have high IQ. According to Goleman, what differentiates effective leaders from ineffective

ones becomes their ability to control their own emotions and understand other people’s emotions, their internal

motivation, and their social skills (Goleman, 2004). Many observers believe that Carly Fiorina, the ousted CEO

427

of HP, demonstrated high levels of intelligence but low levels of empathy for the people around her, which led to

an overreliance on numbers while ignoring the human cost of her decisions (Karlgaard, 2002).

Figure 10.4 Big Five Personality Traits

Goldberg, L. R. (1990). An alternative “description of personality”: The big-five factor structure. Journal

of Personality & Social Psychology, 59, 1216–1229.

Psychologists have proposed various systems for categorizing the characteristics that make up an individual’s

unique personality; one of the most widely accepted is the Big Five model, which rates an individual according to

openness to experience, conscientiousness, extraversion, agreeableness, and Neuroticism. Several of the Big Five

personality traits have been related to leadership emergence (whether someone is viewed as a leader by others)

and leadership effectiveness.

428 • PRINCIPLES OF MANAGEMENT

Figure 10.5

Steve Ballmer, CEO of Microsoft, is an extraverted leader. For example, to celebrate Microsoft’s 25th

anniversary, Ballmer enthusiastically popped out of the anniversary cake to surprise the audience.

Martin Olsson – Steve ballmer 2007 outdoors2 – CC BY-SA 2.0.

For example, extraversion is related to leadership. extraverts are sociable, assertive, and energetic people. They

enjoy interacting with others in their environment and demonstrate self-confidence. Because they are both

dominant and sociable in their environment, they emerge as leaders in a wide variety of situations. Out of all

personality traits, extraversion has the strongest relationship to both leader emergence and leader effectiveness.

Research shows that conscientious people are also more likely to be leaders. This is not to say that all effective

leaders are extraverts, but you are more likely to find extraverts in leadership positions. An example of an

introverted leader is Jim Buckmaster, the CEO of Craigslist. He is known as an introvert, and he admits to not

having meetings because he does not like them (Buckmaster, 2008).

Another personality trait related to leadership is conscientiousness. Conscientious people are organized, take

initiative, and demonstrate persistence in their endeavors. Conscientious people are more likely to emerge as

leaders and be effective as leaders. Finally, people who have openness to experience—those who demonstrate

originality, creativity, and are open to trying new things—tend to emerge as leaders and tend to be effective as

leaders.

10.3 WHO IS A LEADER? TRAIT APPROACHES TO LEADERSHIP • 429

Self-EsteemSelf-Esteem

Self-esteem is not one of the Big Five personality traits, but it is an important aspect of one’s personality. The

degree to which people are at peace with themselves and have an overall positive assessment of their self-worth

and capabilities seems to be relevant to whether they will be viewed as a leader. Leaders with high self-esteem

support their subordinates more, and when punishment needs to be administered, they punish more effectively

(Atwater, et. al., 1998; Niebuhr & Davis, 1984). It is possible that those with high self-esteem have greater levels

of self-confidence and this affects their image in the eyes of their followers. Self-esteem may also explain the

relationship between some physical attributes and emerging as a leader. For example, research shows a strong

relationship between height and being viewed as a leader (as well as one’s career success over life). It is proposed

that self-esteem may be the key to the connection of height with leadership, because people who are taller are also

found to have higher self-esteem and therefore may project greater levels of charisma as well as confidence to

their followers (Judge & Cable, 2004).

IntegrityIntegrity

Figure 10.6 Traits Associated with Leadership

430 • PRINCIPLES OF MANAGEMENT

Research also shows that people who are effective as leaders tend to have a moral compass and demonstrate

honesty and integrity (Reave, 2005). Leaders whose integrity is questioned lose their trustworthiness, and they

hurt their company’s business along the way. For example, when it was revealed that Whole Foods CEO John

Mackey was using a pseudonym to make negative comments online about the company’s rival Wild Oats, his

actions were heavily criticized, his leadership was questioned, and the company’s reputation was affected (Farrell

& Davidson, 2007).

Figure 10.7

Condoleezza Rice had different responsibilities as the provost of Stanford University compared with her

role as secretary of state for the United States. Do you think these differences affected her behavior as a

leader?

Wikimedia Commons – Condoleezza Rice cropped – public domain.

There are also some traits that are negatively related to emerging as a leader and being successful as a leader.

For example, agreeable people who are modest, good natured, and avoid conflict are less likely to be perceived

as leaders (Judge, et. al., 2002). The key to benefiting from the findings of trait researchers is to be aware that

not all traits are equally effective in predicting leadership potential across all circumstances. Some organizational

situations allow leader traits to make a greater difference (House & Aditya, 1997). For example, in small,

entrepreneurial organizations where leaders have a lot of leeway to determine their own behavior, the type of traits

leaders have may make a difference in leadership potential. In large, bureaucratic, and rule-bound organizations,

such as the government and the military, a leader’s traits may have less to do with how the person behaves and

whether the person is a successful leader (Judge, et. al., 2002). Moreover, some traits become relevant in specific

circumstances. For example, bravery is likely to be a key characteristic in military leaders but not necessarily in

10.3 WHO IS A LEADER? TRAIT APPROACHES TO LEADERSHIP • 431

business leaders. Scholars now conclude that instead of trying to identify a few traits that distinguish leaders from

nonleaders, it is important to identify the conditions under which different traits affect a leader’s performance, as

well as whether a person emerges as a leader (Hackman & Wageman, 2007).

Key Takeaway

Many studies searched for a limited set of personal attributes, or traits, which would make someone beviewed as a leader and be successful as a leader. Some traits are consistently related to leadership, such asintelligence (both mental ability and emotional intelligence), personality (extraversion, conscientiousness,openness to experience, self-esteem), and integrity. The main limitation of the trait approach was that itignored the situation in which leadership occurred. Therefore, it is more useful to specify the conditionsunder which different traits are needed.

Exercises

1. Think of a leader you admire. What traits does this person have? Are they consistent with thetraits discussed in this chapter? If not, why is this person effective despite the presence of differenttraits?

2. Can the findings of trait approaches be used to train potential leaders? Which traits seem easier toteach? Which are more stable?

3. How can organizations identify future leaders with a given set of traits? Which methods would beuseful for this purpose?

4. What other traits can you think of that would be relevant to leadership?

ReferencesReferences

Atwater, L. E., Dionne, S. D., Camobreco, J. F., Avolio, B. J., & Lau, A. (1998). Individual attributes and

leadership style: Predicting the use of punishment and its effects. Journal of Organizational Behavior, 19,

559–576.

Buckmaster, Jim. (2008, May). How does he manage? Classified Web site boss. Management Today, 15.

Farrell, G., & Davidson, P. (2007, July 13). Whole Foods’ CEO was busy guy online. USA Today, Section: Money,

04B.

Goleman, D. (2004, January). What makes a leader? Harvard Business Review, 82(1), 82–91.

Hackman, J. R., & Wageman, R. (2007). Asking the right questions about leadership: Discussion and conclusions.

American Psychologist, 62, 43–47.

432 • PRINCIPLES OF MANAGEMENT

House, R. J., & Aditya, R. N. (1997). The social scientific study of leadership: Quo Vadis? Journal of

Management, 23, 409–473.

Ilies, R., Gerhardt, M. W., & Huy, L. (2004). Individual differences in leadership emergence: Integrating meta-

analytic findings and behavioral genetics estimates. International Journal of Selection and Assessment, 12,

207–219.

Judge, T. A., & Cable, D. M. (2004). The effect of physical height on workplace success and income: Preliminary

test of a theoretical model. Journal of Applied Psychology, 89, 428–441.

Judge, T. A., Bono, J. E., Ilies, R., & Gerhardt, M. W. (2002). Personality and leadership: A qualitative and

quantitative review. Journal of Applied Psychology, 87, 765–780.

Karlgaard, R. (2/18/2002). Vote Carly, Forbes, 169(4), 37.

Lord, R. G., De Vader, C. L., & Alliger, G. M. (1986). A meta-analysis of the relation between personality traits

and leadership perceptions: An application of validity generalization procedures. Journal of Applied Psychology,

71, 402–410.

Niebuhr, R. E., & Davis, K. R. (1984). Self-esteem: Relationship with leader behavior perceptions as moderated

by the duration of the superior-subordinate dyad association, Personality and Social Psychology Buletin, 10,

51–59.

Reave, L. (2005). Spiritual values and practices related to leadership effectiveness. Leadership Quarterly, 16,

655–687.

Taggar, S., Hackett, R., & Saha, S. (1999). Leadership emergence in autonomous work teams: Antecedents and

outcomes. Personnel Psychology, 52, 899–926.

10.3 WHO IS A LEADER? TRAIT APPROACHES TO LEADERSHIP • 433

10.4 What Do Leaders Do? Behavioral Approaches toLeadership

Learning Objectives

1. Explain the behaviors that are associated with leadership.

2. Identify the three alternative decision-making styles leaders use and the conditions under whichthey are more effective.

3. Discuss the limitations of behavioral approaches to leadership.

When the trait researchers became disillusioned in 1940s, their attention turned to studying leader behaviors.

What did effective leaders actually do? Which behaviors helped them to be perceived as leaders? Which behaviors

increased their success?

Leader BehaviorsLeader Behaviors

In order to understand behaviors of effective leaders, researchers at Ohio State University and University of

Michigan used many different techniques such as observing leaders in laboratory settings as well as surveying

them. This research stream led to the discovery of two broad categories of behaviors: task-oriented behaviors

(sometimes called initiating structure) and people-oriented behaviors (also called consideration). Task-oriented

leader behaviors involve structuring the roles of subordinates, providing them with instructions, and behaving in

ways that will increase the performance of the group. Task-oriented behaviors are directives given to employees to

get things done and to ensure that organizational goals are met. People-oriented leader behaviors include showing

concern for employee feelings and treating employees with respect. People-oriented leaders genuinely care about

the well-being of their employees and they demonstrate their concern in their actions and decisions. At the time,

researchers thought that these two categories of behaviors were the keys to the puzzle of leadership (See House &

Aditya, 1997). However, research did not support the argument that demonstrating both of these behaviors would

necessarily make leaders effective (Nystrom, 1978).

Figure 10.8

434

Behavioral approaches to leadership showed that task-oriented and people-oriented behaviors are two key aspects of leadership.

BlueOlive – Pixabay – CC0 public domain.

When we look at the overall findings regarding these leader behaviors, it seems that both types of behaviors, in

the aggregate, are beneficial to organizations but for different purposes. For example, when leaders demonstrate

people-oriented behaviors, employees tend to be more satisfied and react more positively. However, when leaders

are task-oriented, productivity tends to be a bit higher (Judge, et. al., 2004). Moreover, the situation in which these

behaviors are demonstrated seems to matter. In small companies, task-oriented behaviors were found to be more

effective than in large companies (Miles & Petty, 1977). There is also some evidence that working under a leader

with very high levels of task-oriented behaviors may cause burnout on the part of employees (Seltzer & Numerof,

1988).

Leader Decision MakingLeader Decision Making

Another question behavioral researchers focused on was how leaders actually make decisions, and the influence

of decision-making styles on leader effectiveness and employee reactions. Three types of decision-making styles

were studied. In authoritarian decision making, leaders make the decision alone without necessarily involving

employees in the decision-making process. When leaders use democratic decision making, employees participate

in the making of the decision. Finally, leaders using laissez-faire decision making leave employees alone to make

the decision; the leader provides minimum guidance and involvement in the decision.

As with other lines of research on leadership, research did not identify one decision-making style as the best

one. It seems that the effectiveness of the style the leader is using depends on the circumstances. A review of

10.4 WHAT DO LEADERS DO? BEHAVIORAL APPROACHES TO LEADERSHIP • 435

the literature shows that when leaders use more democratic decision-making styles, employees tend to be more

satisfied, but the effects on decision quality or employee productivity are weaker. Moreover, instead of expecting

to be involved in every single decision, employees seem to care more about the overall participativeness of the

organizational climate (Miller & Monge, 1986). Different types of employees may also expect different levels

of involvement. In a study conducted in a research organization, scientists viewed democratic leadership most

favorably and authoritarian leadership least favorably (Baumgartel, 1957), but employees working in large groups

where opportunities for member interaction was limited preferred authoritarian leader decision making (Vroom &

Mann, 1960).

Finally, the effectiveness of each style seems to depend on who is using it. There are examples of effective leaders

using both authoritarian and democratic styles. For example, Larry Page and Sergey Brin at Google are known

for their democratic decision-making styles. At Hyundai USA, high-level managers use authoritarian decision-

making styles, and the company is performing well (Deutschman, 2004; Welch, et. al., 2008).

Figure 10.9

Google cofounders Larry Page and Sergey Brin (shown here) are known for their democratic decision-

making styles.

Guety – Sergey Brin, Web 2.0 Conference – CC BY 2.0.

The track record of the laissez-faire decision-making style is more problematic. Research shows that this style is

negatively related to employee satisfaction with leaders and leader effectiveness (Judge & Piccolo, 2004). Laissez-

faire leaders create high levels of ambiguity about job expectations on the part of employees, and employees also

engage in higher levels of conflict when leaders are using the laissez-faire style (Skogstad, et. al., 2007).

436 • PRINCIPLES OF MANAGEMENT

Limitations of Behavioral ApproachesLimitations of Behavioral Approaches

Behavioral approaches, similar to trait approaches, fell out of favor because they neglected the environment in

which behaviors are demonstrated. The hope of the researchers was that the identified behaviors would predict

leadership under all circumstances, but it may be unrealistic to expect that a given set of behaviors would work

under all circumstances. What makes a high school principal effective on the job may be very different from

what makes a military leader, which would be different from behaviors creating success in small or large business

enterprises. It turns out that specifying the conditions under which these behaviors are more effective may be a

better approach.

Key Takeaway

When researchers failed to identify a set of traits that would distinguish effective from ineffective leaders,research attention turned to the study of leader behaviors. Leaders may demonstrate task-oriented andpeople-oriented behaviors. Both seem to be related to important outcomes, with task-oriented behaviorsmore strongly relating to leader effectiveness and people-oriented behaviors leading to employeesatisfaction. Leaders can also make decisions using authoritarian, democratic, or laissez-faire styles. Whilelaissez-faire has certain downsides, there is no best style and the effectiveness of each style seems to varyacross situations. Because of the inconsistency of results, researchers realized the importance of the contextin which leadership occurs, which paved the way to contingency theories of leadership.

Exercises

1. Give an example of a leader you admire whose behavior is primarily task-oriented, and one whosebehavior is primarily people-oriented.

2. What are the limitations of authoritarian decision making? Under which conditions do you thinkauthoritarian style would be more effective?

3. What are the limitations of democratic decision making? Under which conditions do you thinkdemocratic style would be more effective?

4. What are the limitations of laissez-faire decision making? Under which conditions do you thinklaissez-faire style would be more effective?

5. Examine your own leadership style. Which behaviors are you more likely to demonstrate? Whichdecision-making style are you more likely to use?

ReferencesReferences

Baumgartel, H. (1957). Leadership style as a variable in research administration. Administrative Science

Quarterly, 2, 344–360.

Deutschman, A. (2004, September). Googling for courage. Fast Company, 86, 58–59.

10.4 WHAT DO LEADERS DO? BEHAVIORAL APPROACHES TO LEADERSHIP • 437

Judge, T. A., & Piccolo, R. F. (2004). Transformational and transactional leadership: A meta-analytic test of their

relative validity. Journal of Applied Psychology, 89, 755–768.

Judge, T. A., Piccolo, R. F., & Ilies, R. (2004). The forgotten ones? The validity of consideration and initiating

structure in leadership research. Journal of Applied Psychology, 89, 36–51.

Miles, R. H., & Petty, M. M. (1977). Leader effectiveness in small bureaucracies. Academy of Management

Journal, 20, 238–250.

Miller, K. I., & Monge, P. R. (1986). Participation, satisfaction, and productivity: A meta-analytic review.

Academy of Management Journal, 29, 727–753.

Nystrom, P. C. (1978). Managers and the hi-hi leader myth. Academy of Management Journal, 21, 325–331.

See House, R. J., & Aditya, R. N. (1997). The social scientific study of leadership: Quo Vadis? Journal of

Management, 23, 409–473.

Seltzer, J., & Numerof, R. E. (1988). Supervisory leadership and subordinate burnout. Academy of Management

Journal, 31, 439–446.

Skogstad, A., Einarsen, S., Torsheim, T., Aasland, M. S., & Hetland, H. (2007). The destructiveness of laissez-

faire leadership behavior. Journal of Occupational Health Psychology, 12, 80–92.

Vroom, V. H., & Mann, F. C. (1960). Leader authoritarianism and employee attitudes. Personnel Psychology, 13,

125–140.

Welch, D., Kiley, D., & Ihlwan, M. (2008, March 17). My way or the highway at Hyundai. Business Week, 4075,

48–51.

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10.5 What Is the Role of the Context? ContingencyApproaches to Leadership

Learning Objectives

1. Learn about the major situational conditions that determine the effectiveness of differentleadership styles.

2. Identify the conditions under which highly task-oriented and highly people-oriented leaders canbe successful based on Fiedler’s contingency theory.

3. Discuss the main premises of the Path-Goal theory of leadership.

4. Describe a method by which leaders can decide how democratic or authoritarian their decisionmaking should be.

What is the best leadership style? By now, you must have realized that this may not the right question to ask.

Instead, a better question might be: under which conditions are different leadership styles more effective? After

the disappointing results of trait and behavioral approaches, several scholars developed leadership theories that

specifically incorporated the role of the environment. Researchers started following a contingency approach to

leadership—rather than trying to identify traits or behaviors that would be effective under all conditions, the

attention moved toward specifying the situations under which different styles would be effective.

Fiedler’s Contingency TheoryFiedler’s Contingency Theory

The earliest and one of the most influential contingency theories was developed by Frederick Fiedler (Fiedler,

1967). According to the theory, a leader’s style is measured by a scale called Least Preferred Coworker (LPC)

scale. People who are filling out this survey are asked to think of a person who is their least preferred coworker.

Then, they rate this person in terms of how friendly, nice, and cooperative this person is. Imagine someone you

did not enjoy working with. Can you describe this person in positive terms? In other words, if you can say that

the person you hated working with was still a nice person, you would have a high LPC score. This means that you

have a people-oriented personality and you can separate your liking of a person from your ability to work with

that person. However, if you think that the person you hated working with was also someone you did not like on

439

a personal level, you would have a low LPC score. To you, being unable to work with someone would mean that

you also dislike that person. In other words, you are a task-oriented person.

According to Fiedler’s theory, different people can be effective in different situations. The LPC score is akin

to a personality trait and is not likely to change. Instead, placing the right people in the right situation or

changing the situation is important to increase a leader’s effectiveness. The theory predicts that in “favorable” and

“unfavorable” situations, a low LPC leader—one who has feelings of dislike for coworkers who are difficult to

work with—would be successful. When situational favorableness is medium, a high LPC leader—one who is able

to personally like coworkers who are difficult to work with—is more likely to succeed.

How does Fiedler determine whether a situation is favorable, medium, or unfavorable? There are three conditions

creating situational favorableness: (1) leader-subordinate relations, (2) position power, and (3) task structure. If the

leader has a good relationship with most people, has high position power, and the task is structured, the situation

is very favorable. When the leader has low-quality relations with employees, has low position power, and the task

is relatively unstructured, the situation is very unfavorable.

Research partially supports the predictions of Fiedler’s contingency theory (Peter, et. al., 1985; Strube & Garcia,

1981; Vecchio, 1983). Specifically, there is more support for the theory’s predictions about when low LPC

leadership should be used, but the part about when high LPC leadership would be more effective received less

support. Even though the theory was not supported in its entirety, it is a useful framework to think about when

task- versus people-oriented leadership may be more effective. Moreover, the theory is important because of its

explicit recognition of the importance of the context of leadership.

Figure 10.10 Situational Favorableness

Based on information in Fiedler, F. (1967). A Theory of Leadership Effectiveness. New York: McGraw-

Hill; Fiedler, F. E. (1964). A contingency model of leader effectiveness. In L. Berkowitz (Ed.), Advances

in Experimental Social Psychology (Vol. 1, pp. 149–190). New York: Academic Press.

Situational LeadershipSituational Leadership

Another contingency approach to leadership is Kenneth Blanchard and Paul Hersey’s Situational Leadership

Theory (SLT) which argues that leaders must use different leadership styles depending on their followers’

440 • PRINCIPLES OF MANAGEMENT

development level (Hersey, et. al., 2007). According to this model, employee readiness (defined as a combination

of their competence and commitment levels) is the key factor determining the proper leadership style. This

approach has been highly popular with 14 million managers across 42 countries undergoing SLT training and 70%

of Fortune 500 companies employing its use (Situational).

The model summarizes the level of directive and supportive behaviors that leaders may exhibit. The model

argues that to be effective, leaders must use the right style of behaviors at the right time in each employee’s

development. It is recognized that followers are key to a leader’s success. Employees who are at the earliest stages

of developing are seen as being highly committed but with low competence for the tasks. Thus, leaders should

be highly directive and less supportive. As the employee becomes more competent, the leader should engage

in more coaching behaviors. Supportive behaviors are recommended once the employee is at moderate to high

levels of competence. And finally, delegating is the recommended approach for leaders dealing with employees

who are both highly committed and highly competent. While the SLT is popular with managers, relatively easy to

understand and use, and has endured for decades, research has been mixed in its support of the basic assumptions

of the model (Blank, et. al., 1990; Graeff, 1983; Fernandez & Vecchio, 2002). Therefore, while it can be a useful

way to think about matching behaviors to situations, overreliance on this model, at the exclusion of other models,

is premature.

Table 10.1

Competence (Low) Competence (Low) Competence (Moderate to High) Competence (High)Follower Readiness Level

Commitment (High) Commitment (Low) Commitment (Variable) Commitment (High)

Recommended Leader Style Directing Behavior Coaching Behavior Supporting Behavior Delegating Behavior

Situational Leadership Theory helps leaders match their style to follower readiness levels.

Path-Goal Theory of LeadershipPath-Goal Theory of Leadership

Robert House’s path-goal theory of leadership is based on the expectancy theory of motivation (House, 1971).

Expectancy theory of motivation suggests that employees are motivated when they believe—or expect—that (1)

their effort will lead to high performance, (2) their high performance will be rewarded, and (3) the rewards they

will receive are valuable to them. According to the path-goal theory of leadership, the leader’s main job is to make

sure that all three of these conditions exist. Thus, leaders will create satisfied and high-performing employees by

making sure that employee effort leads to performance, and their performance is rewarded. The leader removes

roadblocks along the way and creates an environment that subordinates find motivational.

The theory also makes specific predictions about what type of leader behavior will be effective under which

circumstances (House, 1996; House & Mitchell, 1974). The theory identifies four leadership styles. Each of these

styles can be effective, depending on the characteristics of employees (such as their ability level, preferences,

locus of control, achievement motivation) and characteristics of the work environment (such as the level of role

ambiguity, the degree of stress present in the environment, the degree to which the tasks are unpleasant).

10.5 WHAT IS THE ROLE OF THE CONTEXT? CONTINGENCY APPROACHES TO LEADERSHIP • 441

Four Leadership StylesFour Leadership Styles

Path-goal theory of leadership identifies four styles leaders may adopt. Directive leaders provide specific

directions to their employees. They lead employees by clarifying role expectations, setting schedules, and making

sure that employees know what to do on a given workday. The theory predicts that the directive style will work

well when employees are experiencing role ambiguity on the job. If people are unclear about how to go about

doing their jobs, giving them specific directions will motivate them. However, if employees already have role

clarity, and if they are performing boring, routine, and highly structured jobs, giving them direction does not help.

In fact, it may hurt them by creating an even more restricting atmosphere. Directive leadership is also thought

to be less effective when employees have high levels of ability. When managing professional employees with

high levels of expertise and job-specific knowledge, telling them what to do may create a low empowerment

environment, which impairs motivation.

Supportive leaders provide emotional support to employees. They treat employees well, care about them on a

personal level, and are encouraging. Supportive leadership is predicted to be effective when employees are under

a lot of stress or when they are performing boring and repetitive jobs. When employees know exactly how to

perform their jobs but their jobs are unpleasant, supportive leadership may also be effective.

Participative leaders make sure that employees are involved in making important decisions. Participative

leadership may be more effective when employees have high levels of ability and when the decisions to be made

are personally relevant to them. For employees who have a high internal locus of control, or the belief that they can

control their own destinies, participative leadership gives employees a way of indirectly controlling organizational

decisions, which will be appreciated.

Achievement-oriented leaders set goals for employees and encourage them to reach their goals. Their style

challenges employees and focuses their attention on work-related goals. This style is likely to be effective when

employees have both high levels of ability and high levels of achievement motivation.

Figure 10.12 Predictions of Path-Goal Theory

On the basis of information presented in House, R. J. (1996). Path-goal theory of leadership: Lessons,

442 • PRINCIPLES OF MANAGEMENT

legacy, and a reformulated theory. Leadership Quarterly, 7, 323–352; House, R. J., & Mitchell, T. R.

(1974). Path-goal theory of leadership. Journal of Contemporary Business, 3, 81–97.

The path-goal theory of leadership has received partial but encouraging levels of support from researchers.

Because the theory is highly complicated, it has not been fully and adequately tested (House & Aditya, 1997;

Stinson & Johnson, 1975; Wofford & Liska, 1993). The theory’s biggest contribution may be that it highlights the

importance of a leader’s ability to change styles, depending on the circumstances. Unlike Fiedler’s contingency

theory, in which the leader’s style is assumed to be fixed and only the environment can be changed, House’s path-

goal theory underlines the importance of varying one’s style, depending on the situation.

Vroom and Yetton’s Normative Decision ModelVroom and Yetton’s Normative Decision Model

Yale School of Management professor Victor Vroom and his colleagues Philip Yetton and Arthur Jago developed

a decision-making tool to help leaders determine how much involvement they should seek when making decisions

(Vroom, 2000; Vroom & Yetton, 1973; Jago & Vroom, 1980; Vroom & Jago, 1988). The model starts by having

leaders answer several key questions and working their way through a funnel based on their responses.

Let’s try it. Imagine that you want to help your employees lower their stress so that you can minimize employee

absenteeism. There are a number of approaches you could take to reduce employee stress, such as offering gym

memberships, providing employee assistance programs, establishing a nap room, and so forth. Let’s refer to

the model and start with the first question. As you answer each question as high (H) or low (L), follow the

corresponding path down the funnel.

1. Decision significance. The decision has high significance because the approach chosen needs to be

effective at reducing employee stress for the insurance premiums to be lowered. In other words, there is a

quality requirement to the decision. Follow the path through H.

2. Importance of commitment. Does the leader need employee cooperation to implement the decision? In

our example, the answer is high, because employees may simply ignore the resources if they do not like

them. Follow the path through H.

3. Leader expertise. Does the leader have all the information needed to make a high-quality decision? In our

example, leader expertise is low. You do not have information regarding what your employees need or what

kinds of stress reduction resources they would prefer. Follow the path through L.

4. Likelihood of commitment. If the leader makes the decision alone, what is the likelihood that the

employees would accept it? Let’s assume that the answer is Low. Based on the leader’s experience with this

group, they would likely ignore the decision if the leader makes it alone. Follow the path from L.

5. Goal alignment. Are the employee goals aligned with organizational goals? In this instance, employee

and organizational goals may be aligned because you both want to ensure that employees are healthier. So

let’s say the alignment is high, and follow H.

6. Group expertise. Does the group have expertise in this decision-making area? The group in question has

little information about which alternatives are costlier or more user friendly. We’ll say group expertise is

low. Follow the path from L.

7. Team competence. What is the ability of this particular team to solve the problem? Let’s imagine that this

10.5 WHAT IS THE ROLE OF THE CONTEXT? CONTINGENCY APPROACHES TO LEADERSHIP • 443

is a new team that just got together and they have little demonstrated expertise to work together effectively.

We will answer this as low, or L.

Based on the answers to the questions we gave, the normative approach recommends consulting employees as a

group. In other words, the leader may make the decision alone after gathering information from employees and

is not advised to delegate the decision to the team or to make the decision alone with no input from the team

members.

Figure 10.13

Vroom and Yetton’s leadership decision tree shows leaders which styles will be most effective in different

situations.

Wikimedia Commons – Vroom-Yetton Leader Styles – CC BY-SA 3.0.

Vroom and Yetton’s model is somewhat complicated, but research results support the validity of the model. On

average, leaders using the style recommended by the model tend to make more effective decisions compared with

leaders using a style not recommended by the model (Vroom & Jago, 1978).

444 • PRINCIPLES OF MANAGEMENT

Key Takeaway

The contingency approaches to leadership describe the role the situation would play in choosing the mosteffective leadership style. Fiedler’s contingency theory argued that task-oriented leaders would be mosteffective when the situation was the most and the least favorable, whereas relationship-oriented leaderswould be effective when situational favorableness was moderate. Situational Leadership Theory takes thematurity level of followers into account. House’s path-goal theory states that the leader’s job is to ensurethat employees view their effort as leading to performance and increase the belief that performance wouldbe rewarded. For this purpose, leaders would use directive, supportive, participative, and achievement-oriented leadership styles, depending on what employees needed to feel motivated. Vroom and Yetton’snormative decision model is a guide leaders can use to decide how participative they should be givendecision environment characteristics.

Exercises

1. Do you believe that the least preferred coworker technique is a valid method of measuringsomeone’s leadership style? Why or why not?

2. Do you believe that leaders can vary their style to demonstrate directive, supportive, achievement-oriented and participative styles with respect to different employees? Or does each leader tend tohave a personal style that he or she regularly uses toward all employees?

3. What do you see as the limitations of the Vroom-Yetton leadership decision-making approach?

4. Which of the leadership theories covered in this section do you think are most useful, and leastuseful, to practicing managers? Why?

ReferencesReferences

Blank, W., Green, S.G., ‘ Weitzel, J.R. (1990). A test of the situational leadership theory. Personnel Psychology,

43, 579–597.

Fernandez, C.F., ‘ Vecchio, R.P. (2002). Situational leadership theory revisited: A test of an across-jobs

perspective. Leadership Quarterly, 8, 67–84.

Fiedler, F. (1967). A theory of leadership effectiveness, New York: McGraw-Hill; Fiedler, F. E. (1964). A

contingency model of leader effectiveness. In L. Berkowitz (ed.), Advances in experimental social psychology

(Vol. 1, 149–190). New York: Academic Press.

Graeff, C. L. (1983). The situational leadership theory: A critical review. Academy of Management Review, 8,

285–291.

Hersey, P.H., Blanchard, K.H., ‘ Johnson, D.E. (2007). Management of Organizational Behavior: Leadership

human resources. Upper Saddle River, NJ: Prentice Hall.

10.5 WHAT IS THE ROLE OF THE CONTEXT? CONTINGENCY APPROACHES TO LEADERSHIP • 445

House, R. J. (1971). A path goal theory of leader effectiveness. Administrative Science Quarterly, 16(3), 321–338.

House, R. J. (1996). Path-goal theory of leadership: Lessons, legacy, and a reformulated theory. Leadership

Quarterly, 7, 323–352.

House, R. J., & Aditya, R. N. (1997). The social scientific study of leadership: Quo Vadis? Journal of

Management, 23, 409–473.

House, R. J., & Mitchell, T. R. (1974). Path-goal theory of leadership. Journal of Contemporary Business, 3,

81–97.

Jago, A., & Vroom, V. H. (1980). An evaluation of two alternatives to the Vroom/Yetton Normative Model.

Academy of Management Journal, 23, 347–355.

Peters, L. H., Hartke, D. D., & Pohlmann, J. T. (1985). Fiedler’s contingency theory of leadership: An application

of the meta-analysis procedures of Schmidt and Hunter. Psychological Buletin, 97, 274–285.

Situational, http://www.situational.com/Views/SituationalLeadership/RightHereRightNow.aspx.

Stinson, J. E., & Johnson, T. W. (1975). The path-goal theory of leadership: A partial test and suggested

refinement. Academy of Management Journal, 18, 242–252.

Strube, M. J., & Garcia, J. E. (1981). A meta-analytic investigation of Fiedler’s contingency model of leadership

effectiveness. Psychological Buletin, 90, 307–321.

Vecchio, R. P. (1983). Assessing the validity of Fiedler’s contingency model of leadership effectiveness: A closer

look at Strube and Garcia. Psychological Buletin, 93, 404–408.

Vroom, V. H. (2000). Leadership and the decision making process. Organizational Dynamics, 68, 82–94.

Vroom, V. H., & Jago, A. G. 1988. The new leadership: Managing participation in organizations. Englewood

Cliffs, NJ: Prentice Hall.

Vroom, V. H., & Jago, G. (1978). On the validity of the Vroom Yetton model. Journal of Applied Psychology, 63,

151–162.

Vroom, V. H., & Yetton, P. W. (1973). Leadership and Decision-Making. Pittsburgh: University of Pittsburgh

Press.

Wofford, J. C., & Liska, L. Z. (1993). Path-goal theories of leadership: A meta-analysis. Journal of Management,

19, 857–876.

446 • PRINCIPLES OF MANAGEMENT

10.6 Contemporary Approaches to Leadership

Learning Objectives

1. Learn about the difference between transformational and transactional leaders.

2. Find out about charismatic leadership and how it relates to leader performance.

3. Describe how high-quality leader-subordinate relationships develop.

4. Define servant leadership and evaluate its potential for leadership effectiveness.

5. Define authentic leadership and evaluate its potential for leadership effectiveness.

What leadership theories make the greatest contributions to today’s business environment? In this section, we will

review the most recent developments in the field of leadership.

Transformational LeadershipTransformational Leadership

Transformational leadership theory is a recent addition to the literature, but more research has been conducted

on this theory than all the contingency theories combined. The theory distinguishes between transformational

and transactional leaders. Transformational leaders lead employees by aligning employee goals with the leader’s

goals. Thus, employees working for transformational leaders start focusing on the company’s well-being rather

than on what is best for them as individual employees. However, transactional leaders ensure that employees

demonstrate the right behaviors because the leader provides resources in exchange (Bass, 1985; Burns, 1978).

Transformational leaders have four tools in their possession, which they use to influence employees and create

commitment to the company goals (Bass, 1985; Burns, 1978; Row, 1995; Judge & Piccolo, 2004). First,

transformational leaders are charismatic. Charisma refers to behaviors leaders demonstrate that inspire

confidence, commitment, and admiration toward the leader (Shamir, et. al., 1993). Charismatic individuals have

a “magnetic” personality that is appealing to followers. Leaders such as Barack Obama, John F. Kennedy, Ronald

Reagan, Mahatma Gandhi, Mustafa Kemal Ataturk (founder of the Republic of Turkey), and Winston Churchill

are viewed as charismatic. Second, transformational leaders use inspirational motivation or come up with a

vision that is inspiring to others. Third is the use of intellectual stimulation, which means that they challenge

organizational norms and status quo, and they encourage employees to think creatively and work harder. Finally,

447

they use individualized consideration, which means that they show personal care and concern for the well-being

of their followers. Examples of transformational business leaders include Steve Jobs of Apple; Lee Iacocca, who

transformed Chrysler in the 1980s; and Jack Welch, who was the CEO of General Electric for 20 years. Each of

these leaders is charismatic and is held responsible for the turnarounds of their companies.

While transformational leaders rely on their charisma, persuasiveness, and personal appeal to change and inspire

their companies, transactional leaders use three other methods. Contingent rewards mean rewarding employees

for their accomplishments. Active management by exception involves leaving employees to do their jobs without

interference, but at the same time proactively predicting potential problems and preventing them from occurring.

Passive management by exception is similar in that it involves leaving employees alone, but in this method, the

manager waits until something goes wrong before coming to the rescue.

Which leadership style do you think is more effective, transformational or transactional? Research shows that

transformational leadership is a powerful influence over leader effectiveness as well as employee satisfaction

(Judge & Piccolo, 2004). In fact, transformational leaders increase the intrinsic motivation of their followers,

build more effective relationships with employees, increase performance and creativity of their followers, increase

team performance, and create higher levels of commitment to organizational change efforts (Herold, et. al., 2008;

Piccolo & Colquitt, 2006; Schaubroeck, et. al., 2007; Shin & Zhou, 2003; Wang, et. al., 2005). However, except

for passive management by exception, the transactional leadership styles are also effective, and they also have

positive influences over leader performance as well as employee attitudes (Judge & Piccolo, 2004). To maximize

their effectiveness, leaders are encouraged to demonstrate both transformational and transactional styles. They

should also monitor themselves to avoid demonstrating passive management by exception or leaving employees

to their own devices until problems arise.

Why is transformational leadership more effective? The key factor may be trust. Trust is the belief that the

leader will show integrity, fairness, and predictability in his or her dealings with others. Research shows that

when leaders demonstrate transformational leadership behaviors, followers are more likely to trust the leader. The

tendency to trust in transactional leaders is substantially lower. Because transformational leaders express greater

levels of concern for people’s well-being, and appeal to people’s values, followers are more likely to believe that

the leader has a trustworthy character (Dirks & Ferrin, 2002).

Is transformational leadership genetic? Some people assume that charisma is something people are born with.

You either have charisma or you don’t. However, research does not support this idea. We must acknowledge

that there is a connection between some personality traits and charisma. Specifically, people who have a neurotic

personality tend to demonstrate lower levels of charisma, and people who are extraverted tend to have higher

levels of charisma. However, personality explains only around 10% of the variance in charisma (Bono & Judge,

2004). A large body of research has shown that it is possible to train people to increase their charisma and increase

their transformational leadership (Barling, et. al., 1996; Dvir, et. al., 2002; Frese, et. al., 2003).

448 • PRINCIPLES OF MANAGEMENT

Figure 10.14

Mustafa Kemal Ataturk, the founder of Turkish Republic and its first president, is known as a charismatic

leader. He is widely admired and respected in Turkey and around the world. His picture appears in all

schools, state buildings, denominations of Turkish lira, and in many people’s homes in Turkey.

Wikimedia Commons – Ataturk and the flag of Turkey – public domain.

Even if charisma may be teachable, a more fundamental question remains: is it really needed? Charisma is only

one element of transformational leadership and leaders can be effective without charisma. In fact, charisma has a

dark side. For every charismatic hero such as Lee Iacocca, Steve Jobs, and Virgin’s Sir Richard Branson, there are

charismatic personalities who harmed their organizations or nations, such as Adolph Hitler of Germany and Jeff

Skilling of Enron. Leadership experts warn that when organizations are in a crisis, a board of directors or hiring

manager may turn to heroes who they hope will save the organization and sometimes hire people who have no

other particular qualifications outside of perceived charisma (Khurana, 2002).

An interesting study shows that when companies have performed well, their CEOs are perceived as charismatic,

but CEO charisma has no relation to the future performance of a company (Agle, et. al., 2006). So, what we view

as someone’s charisma may be largely because of their association with a successful company, and the success

of a company depends on a large set of factors, including industry effects and historical performance. While it

is true that charismatic leaders may sometimes achieve great results, the search for charismatic leaders under all

circumstances may be irrational.

Leader-Member Exchange TheoryLeader-Member Exchange Theory

Leader-member exchange (LMX) theory proposes that the type of relationship leaders have with their followers

(members of the organization) is the key to understanding how leaders influence employees. Leaders form

different types of relationships with their employees. In high-quality LMX relationships, the leader forms a trust-

based relationship with the member. The leader and member like each other, help each other when needed, and

10.6 CONTEMPORARY APPROACHES TO LEADERSHIP • 449

respect one another. In these relationships, the leader and the member are both ready to go above and beyond their

job descriptions to promote the other’s ability to succeed. In contrast, in low-quality LMX relationships, the leader

and the member have lower levels of trust, liking, and respect toward each other. These relationships do not have

to involve actively disliking each other, but the leader and member do not go beyond their formal job descriptions

in their exchanges. In other words, the member does his or her job, the leader provides rewards and punishments,

and the relationship does not involve high levels of loyalty or obligation toward each other (Dansereau, et. al.,

1975; Erdogan & Liden, 2002; Gerstner, 1997; Graen & Uhl-Bien 1995; Liden & Maslyn, 1998).

Figure 10.15 Factors Contributing to the Development of a High-Quality Leader-Member Exchange and

Its Consequences

If you have work experience, you may have witnessed the different types of relationships managers form with

their employees. In fact, many leaders end up developing differentiated relationships with their followers. Within

the same work group, they may have in-group members who are close to them and out-group members who are

more distant. If you have ever been in a high-quality LMX relationship with your manager, you may attest to its

advantages. Research shows that high-quality LMX members are more satisfied with their jobs, more committed

to their companies, have higher levels of clarity about what is expected of them, and perform at a higher level

(Gerstner & Day, 1997; Hui, et. al., 1999; Kraimer, et. al., 2001; Liden, et. al., 2000; Settoon, et. al., 1996;

Tierney, 1999; Wayne, et. al., 1997). Their high levels of performance may not be a surprise because they may

receive higher levels of resources and help from their managers as well as more information and guidance. If they

have questions, these employees feel more comfortable seeking feedback or information (Chen, et. al., 2007).

Because of all the help, support, and guidance they receive, those employees who have a good relationship with

the manager are in a better position to perform well. Given all they receive, these employees are motivated to

reciprocate to the manager, and therefore they demonstrate higher levels of citizenship behaviors such as helping

the leader and coworkers (Ilies, et. al., 2007). Being in a high-quality LMX relationship is also advantageous

because a high-quality relationship is a buffer against many stressors, such as being a misfit in a company, having

personality traits that do not match job demands, and having unmet expectations (Bauer, et. al., 2006; Erdogan,

et. al., 2004; Major, et. al., 1995). The list of benefits high-quality LMX employees receive is long, and it is not

surprising that these employees are less likely to leave their jobs (Ferris, 1985; Graen, et. al., 1982).

The problem, of course, is that not all employees have a high-quality relationship, and those who are in the

leader’s out-group may suffer as a result. But how do you end up developing such a high-quality relationship with

the leader? That seems to depend on many factors. Managers can help develop such a high-quality and trust-based

relationship by treating their employees in a fair and dignified manner (Masterson, et. al., 2000). They can also test

to see whether the employee is trustworthy by delegating certain tasks when the employee first starts working with

the manager (Bauer, et. al., 1996). Employees also have an active role in developing the relationship. Employees

can seek feedback to improve their performance, be open to learning new things on the job, and engage in political

450 • PRINCIPLES OF MANAGEMENT

behaviors such as flattery (Colella & Varma, 2001; Maslyn & Uhl-Bien, 2001; Janssen & Van Yperen, 2004;

Wing, et. al., 2007).

Interestingly, high performance on the employee’s part does not seem to be enough to develop a high-quality

exchange with the leader. Instead, interpersonal factors such as personality similarity and liking are more powerful

influences over how the relationship develops (Engle & Lord, 1997; Liden, et. al., 1993; Wayne, et. al., 1997).

Finally, the relationship development occurs in a slightly different manner in different types of companies;

corporate culture matters in how leaders develop these relationships. In performance-oriented cultures, how the

leader distributes rewards seem to be the relevant factor, whereas in people-oriented cultures, whether the leader

treats people with dignity is more relevant (Erdogan, et. al., 2006).

Should you worry if you do not have a high-quality relationship with your manager? One problem in a low-

quality exchange is that you may not have access to the positive work environment available to the high-quality

LMX members. Second, low LMX employees may feel that their situation is unfair. Even when their objective

performance does not warrant it, those who have a good relationship with the leader tend to receive positive

performance appraisals (Duarte, et. al., 1994). Moreover, they are more likely to be given the benefit of the doubt.

For example, when they succeed, the manager is more likely to think that they succeeded because they put forth

a lot of effort and they had high abilities, whereas for low LMX members who perform objectively well, the

manager is less likely to think so (Heneman, 1989). In other words, the leader may interpret the same situation

differently, depending on which employee is involved and may reward low LMX employees less even when

they are performing well. In short, those with a low-quality relationship with the leader may experience a work

environment that may not be very supportive or fair.

Despite its negative consequences, we cannot say that all employees want to have a high-quality relationship

with the leader. Some employees may genuinely dislike the leader and may not value the rewards in the leader’s

possession. If the leader is not well liked in the company and is known as abusive or unethical, being close to

such a person may imply guilt by association. For employees who have no interest in advancing their careers

in the current company (such as a student employee who is working in retail but has no interest in retail as a

career), having a low-quality exchange may afford the opportunity to just do one’s job without having to go above

and beyond these job requirements. Finally, not all leaders are equally capable of influencing their employees

by having a good relationship with their employees: It also depends on the power and influence of the leader in

the overall company and how the leader himself or herself is treated within the company. Leaders who are more

powerful will have more to share with employees who are close to them (Erdogan & Enders, 2007; Sparrowe &

Liden, 2005; Tangirala, et. al., 2007).

What LMX theory implies for leaders is that one way of influencing employees is through the types of

relationships leaders form with their employees. These relationships develop naturally because of the work-

related and personal interactions between the manager and the employee. Because they occur naturally, some

leaders may not be aware of the power that lies in them. These relationships have an important influence over

employee attitudes and behaviors. In the worst case, they have the potential to create a negative work environment

characterized by favoritism and unfairness. Therefore, managers are advised to be aware of how they build these

relationships; put forth effort in cultivating these relationships consciously; be open to forming good relationships

to people from all backgrounds regardless of their permanent characteristics such as sex, race, age, or disability

status; and prevent these relationships from leading to an unfair work environment.

10.6 CONTEMPORARY APPROACHES TO LEADERSHIP • 451

Self-Assessment: Rate Your LMXSelf-Assessment: Rate Your LMX

Answer the following questions using 1 = not at all, 2 = somewhat, 3 = fully agree

1. _____ I like my supervisor very much as a person.

2. _____ My supervisor is the kind of person one would like to have as a friend.

3. _____ My supervisor is a lot of fun to work with.

4. _____ My supervisor defends my work actions to a superior, even without complete knowledge ofthe issue in question.

5. _____ My supervisor would come to my defense if I were “attacked” by others.

6. _____ My supervisor would defend me to others in the organization if I made an honest mistake.

7. _____ I do work for my supervisor that goes beyond what is specified in my job description.

8. _____ I am willing to apply extra efforts, beyond those normally required, to further the interestsof my work group.

9. _____ I do not mind working my hardest for my supervisor.

10. _____ I am impressed with my supervisor’s knowledge of his/her job.

11. _____ I respect my supervisor’s knowledge of and competence on the job.

12. _____ I admire my supervisor’s professional skills.

Scoring:

Add your score for 1, 2, 3 = _____ This is your score on the Liking factor of LMX.

A score of 3 to 4 indicates a low LMX in terms of liking. A score of 5 to 6 indicates an average LMX interms of liking. A score of 7+ indicates a high-quality LMX in terms of liking.

Add your score for 4, 5, 6 = _____ This is your score on the Loyalty factor of LMX.

A score of 3 to 4 indicates a low LMX in terms of loyalty. A score of 5 to 6 indicates an average LMX interms of loyalty. A score of 7+ indicates a high-quality LMX in terms of loyalty.

Add your score for 7, 8, 9 = _____ This is your score on the Contribution factor of LMX.

A score of 3 to 4 indicates a low LMX in terms of contribution. A score of 5 to 6 indicates an average LMXin terms of contribution. A score of 7+ indicates a high-quality LMX in terms of contribution.

Add your score for 10, 11, 12 = _____ This is your score on the Professional Respect factor of LMX.

A score of 3 to 4 indicates a low LMX in terms of professional respect. A score of 5 to 6 indicates anaverage LMX in terms of professional respect. A score of 7+ indicates a high-quality LMX in terms ofprofessional respect.

Source: Adapted from Liden, R. C., & Maslyn, J. M. (1998). Multidimensionality of leader-memberexchange: An empirical assessment through scale development. Journal of Management, 24, 43–72. Usedby permission of Sage Publications.

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Servant LeadershipServant Leadership

The early 21st century has been marked by a series of highly publicized corporate ethics scandals: between

2000 and 2003, we witnessed Enron, WorldCom, Arthur Andersen, Qwest, and Global Crossing shake investor

confidence in corporations and leaders. The importance of ethical leadership and keeping long-term interests of

stakeholders in mind is becoming more widely acknowledged.

Servant leadership approach defines the leader’s role as serving the needs of others. According to this approach,

the primary mission of the leader is to develop employees and help them reach their goals. Servant leaders put

their employees first, understand their personal needs and desires, empower them, and help them develop in

their careers. Unlike mainstream management approaches, the overriding objective in servant leadership is not

necessarily getting employees to contribute to organizational goals. Instead, servant leaders feel an obligation to

their employees, customers, and the external community. Employee happiness is seen as an end in itself, and

servant leaders sometimes sacrifice their own well-being to help employees succeed. In addition to a clear focus

on having a moral compass, servant leaders are also interested in serving the community. In other words, their

efforts to help others are not restricted to company insiders, and they are genuinely concerned about the broader

community surrounding their company (Greenleaf, 1977; Liden, et. al., 2008). According to historian Doris

Kearns Goodwin, Abraham Lincoln was a servant leader because of his balance of social conscience, empathy,

and generosity (Goodwin, 2005).

Even though servant leadership has some overlap with other leadership approaches such as transformational

leadership, its explicit focus on ethics, community development, and self-sacrifice are distinct characteristics of

this leadership style. Research shows that servant leadership has a positive effect on employee commitment,

employee citizenship behaviors toward the community (such as participating in community volunteering), and job

performance (Liden, et. al., 2008). Leaders who follow the servant leadership approach create a climate of fairness

in their departments, which leads to higher levels of interpersonal helping behavior (Erhart, 2004).

Servant leadership is a tough transition for many managers who are socialized to put their own needs first, be

driven by success, and tell people what to do. In fact, many of today’s corporate leaders are not known for their

humility! However, leaders who have adopted this approach attest to its effectiveness. David Wolfskehl, of Action

Fast Print in New Jersey, founded his printing company when he was 24. He marks the day he started asking

employees what he can do for them as the beginning of his company’s new culture. In the next two years, his

company increased its productivity by 30% (Buchanan, 2007).

Authentic LeadershipAuthentic Leadership

Leaders have to be a lot of things to a lot of people. They operate within different structures, work with different

types of people, and they have to be adaptable. At times, it may seem that a leader’s smartest strategy would be

to act as a social chameleon, changing his or her style whenever doing so seems advantageous. But this would

lose sight of the fact that effective leaders have to stay true to themselves. The authentic leadership approach

embraces this value: its key advice is “be yourself.” Think about it: We all have different backgrounds, different

life experiences, and different role models. These trigger events over the course of our lifetime that shape our

values, preferences, and priorities. Instead of trying to fit into societal expectations about what a leader should be

like, act like, or look like, authentic leaders derive their strength from their own past experiences. Thus, one key

10.6 CONTEMPORARY APPROACHES TO LEADERSHIP • 453

characteristic of authentic leaders is that they are self-aware. They are introspective, understand where they are

coming from, and have a thorough understanding of their own values and priorities. Second, they are not afraid to

act the way they are. In other words, they have high levels of personal integrity. They say what they think. They

behave in a way consistent with their values—they practice what they preach. Instead of trying to imitate other

great leaders, they find their style in their own personality and life experiences (Avolio & Gardner, 2005; Gardner,

et. al., 2005; George, 2007; Ilies, et. al., 2005; Sparrowe, 2005).

One example of an authentic leader is Howard Schultz, the founder of Starbucks coffeehouses. As a child, Schultz

witnessed the job-related difficulties his father experienced because of medical problems. Even though he had

no idea he would have his own business one day, the desire to protect people was shaped in those years and

became one of his foremost values. When he founded Starbucks, he became an industry pioneer in providing

health insurance and retirement coverage to part-time as well as full-time employees (Shamir & Eilam, 2005).

454 • PRINCIPLES OF MANAGEMENT

Figure 10.16

An example of an authentic leader is Howard Schultz, the founder of Starbucks coffeehouses. Witnessing

his father losing jobs because of medical problems, he became passionate about a company’s need to care

for its employees.

Sillygwailo – Howard Schultz Starbucks – CC BY 2.5.

10.6 CONTEMPORARY APPROACHES TO LEADERSHIP • 455

Authentic leadership requires understanding oneself. Therefore, in addition to self-reflection, feedback from

others is needed to gain a true understanding of one’s behavior and effect on others. Authentic leadership is viewed

as a potentially influential style because employees are more likely to trust such a leader. Moreover, working

for authentic leaders is likely to lead to greater levels of satisfaction, performance, and overall well-being on

the part of employees (Walumbwa, et. al., 2008). Best-selling author Jim Collins studied companies that had,

in his opinion, gone from good to great, and he found they had one thing in common (Collins, 2001). All of

these companies had what he calls Level 5 leaders who build organizations through their personal humility and

professional will. He notes that Level 5 leaders are modest and understated. In many ways, they can be seen as

truly authentic leaders.

Key Takeaway

Contemporary approaches to leadership include transformational leadership, leader-member exchange,servant leadership, and authentic leadership. The transformational leadership approach highlights theimportance of leader charisma, inspirational motivation, intellectual stimulation, and individualizedconsideration as methods of influence. Its counterpart is the transactional leadership approach, in whichthe leader focuses on getting employees to achieve organizational goals. According to leader-memberexchange (LMX) approach, the unique, trust-based relationships leaders develop with employees is the keyto leadership effectiveness. Recently, leadership scholars started to emphasize the importance of servingothers and adopting a customer-oriented view in leadership; another recent focus is on the importanceof being true to oneself as a leader. While each leadership approach focuses on a different element ofleadership, effective leaders will need to change their style based on the demands of the situation as wellas using their own values and moral compass.

Exercises

1. What are the characteristics of transformational leaders? Are transformational leaders moreeffective than transactional leaders?

2. What is charisma? What are the advantages and disadvantages of charismatic leadership? Shouldorganizations look for charismatic leaders when selecting managers?

3. What are the differences (if any) between a leader having a high-quality exchange with employeesand being friends with employees?

4. What does it mean to be a servant leader? Do you know any leaders whose style resembles servantleaders? What are the advantages of adopting such a leadership style?

5. What does it mean to be an authentic leader? How would such a style be developed?

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456 • PRINCIPLES OF MANAGEMENT

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10.7 Developing Your Leadership Skills

Learning Objectives

1. Develop your charismatic leadership.

2. Learn how to be a servant leader.

3. Follow a process to develop your own authentic leadership.

Figure 10.17

The CEO of PepsiCo, Indra Nooyi, is a leader who demonstrates passion for her vision and energizes those

around her toward her vision for the company and causes she believes in.

World Economic Forum – Indra Nooyi – World Economic Forum Annual Meeting Davos 2008 – CC BY-

SA 2.0.

461

In this section, we will give you tips to help you develop your charismatic, servant, and authentic leadership skills.

Each of these contemporary approaches to leadership is believed to be related to employee attitudes and a healthy

work environment.

Develop Your Charismatic Leadership SkillsDevelop Your Charismatic Leadership Skills

Charismatic individuals have a “magnetic” personality that is appealing to followers. While many people assume

that charisma is inborn, it is possible to improve your charisma by following these suggestions (Frese, et. al.,

2003; Shamir, et. al., 1993):

Have a vision around which people can gather. When framing requests or addressing to others, instead of

emphasizing short-term goals, stress the importance of the long-term vision. When giving a message, think about

the overarching purpose. What is the ultimate goal? Why should people care? What are you trying to achieve?

Tie the vision to history. In addition to stressing the ideal future, charismatic leaders bring up the history and how

the shared history ties to the future.

Watch your body language. Charismatic leaders are energetic and passionate about their ideas. This involves truly

believing in your own ideas. When talking to others, you may want to look confident, look them in the eye, and

express your belief in your ideas.

Make sure that employees have confidence in themselves. You can achieve this by showing that you believe in

them and trust their abilities. If they have real reason to doubt their abilities, make sure that you help them address

the underlying issue, such as through training and mentoring.

Figure 10.18

462 • PRINCIPLES OF MANAGEMENT

The various theories of leadership covered in this chapter highlight the interrelationships among the facets of the leading functions. In

particular, leadership, decision making, and motivation are very closely linked. Leadership skills span the other P-O-L-C functions as well.

Sgerbic – Tabash toast at CFI Student Leadership Conference 2013 – CC BY-SA 3.0.

Challenge the status quo. Charismatic leaders solve current problems by radically rethinking the way things are

done and suggesting alternatives that are risky, novel, and unconventional.

Develop Your Servant Leadership SkillsDevelop Your Servant Leadership Skills

One of the influential leadership paradigms involves leaders putting others first. This could be a hard transition

for an achievement-oriented and success-driven manager who rises to high levels. Here are some tips to achieve

servant leadership (Buchanan, 2007; Douglas, 2005; Ramsey, 2005).

Don’t ask what your employees can do for you. Think of what you can do for them. Your job as a leader is to be

of service to them. How can you relieve their stress? Protect them from undue pressure? Pitch in to help them?

Think about creative ways of helping ease their lives.

One of your key priorities should be to help employees reach their goals. This involves getting to know them.

Learn about who they are and what their values and priorities are.

Be humble. You are not supposed to have all the answers and dictate to others. One way of achieving this

humbleness may be to do volunteer work.

10.7 DEVELOPING YOUR LEADERSHIP SKILLS • 463

Be open with your employees. Ask them questions. Give them information so that they understand what is going

on in the company.

Find ways of helping the external community. Giving employees opportunities to be involved in community

volunteer projects or even thinking and strategizing about making a positive impact on the greater community

would help.

Develop Your Authentic Leadership SkillsDevelop Your Authentic Leadership Skills

Authentic leaders have high levels of self-awareness and their behavior is driven by their core personal values.

This leadership approach recognizes the importance of self-reflection and understanding one’s life history.

Address the following questions to gain a better understanding of your own core values and authentic leadership

style.

Understand Your HistoryUnderstand Your History

• Review your life history. What are the major events in your life? How did these events make you the person

you are right now?

• Think about your role models. Who were your role models as you were growing up? What did you learn

from your role models?

Take Stock of Who You Are NowTake Stock of Who You Are Now

• Describe your personality. How does your personality affect your life?

• Know your strengths and weaknesses. What are they and how can you continue to improve yourself?

Reflect on Your Successes and ChallengesReflect on Your Successes and Challenges

• Keep a journal. Research shows that journaling is an effective tool for self-reflection. Write down

challenges you face and how you will surmount them; periodically review your entries to check your

progress.

Make Integrity a PriorityMake Integrity a Priority

• Understand your core values. What are your core values? Name three of your most important values.

• Do an ethics check. Are you being consistent with your core values? If not, how can you get back on track?

Understand the Power of WordsUnderstand the Power of Words

• Words shape reality. Keep in mind that the words you use to describe people and situations matter. For

464 • PRINCIPLES OF MANAGEMENT

example, how might the daily reality be different if you refer to those you manage as associates or team

members rather than employees or subordinates?

In view of your answers to the questions above, what kind of a leader would you be if you truly acted out your

values? How would people working with you respond to such a leadership style?

Key Takeaway

The various leadership styles have their pros and cons. It is valuable to be able to assess them in light ofyour situation and your personal style. Authenticity has become recognized as being important regardlessof the other leadership styles one uses. Anyone can be an authentic leader if he or she develops those skills.There is no time like the present to start!

Exercises

1. What is the connection between leadership and ethics?

2. Do you believe that ethical leaders are more successful in organizations?

3. Have you ever had an authentic leader? What did this person do that made you consider him orher to be authentic? How effective was his or her leadership?

ReferencesReferences

Buchanan, L. (May, 2007). In praise of selflessness: Why the best leaders are servants. Inc, 29(5), 33–35.

Douglas, M. E. (2005, March). Service to others. Supervision, 66(3), 6–9.

Frese, M., Beimel, S., & Schoenborg, S. (2003). Action training for charismatic leadership: Two evaluations of

studies of a commercial training module on inspirational communication of a vision. Personnel Psychology, 56,

671–697.

Ramsey, R. D. (2005, October). The new buzz word. Supervision, 66(10), 3–5.

Shamir, B., House, R. J., & Arthur, M. B. (1993). The motivational effects of charismatic leadership: A self-

concept based theory. Organization Science, 4, 577–594.

10.7 DEVELOPING YOUR LEADERSHIP SKILLS • 465

Chapter 11: Decision Making

11.1 Decision Making

11.2 Case in Point: Bernard Ebbers Creates Biased Decision Making at WorldCom

11.3 Understanding Decision Making

11.4 Faulty Decision Making

11.5 Decision Making in Groups

11.6 Developing Your Personal Decision-Making Skills

466

11.1 Decision Making

Figure 11.1

Effective decision making helps you put the right pieces together.

jugbo – puzzle perspective – CC BY-NC-ND 2.0.

What’s in It for Me?

Reading this chapter will help you do the following:

467

1. Understand what decision making is.

2. Know key causes of faulty decision making.

3. Compare and contrast individual and group decision making.

4. Understand how to develop your own personal decision-making skills.

Figure 11.2 The P-O-L-C Framework

While leadership is a combination of many things, your characterization of particular leaders and their leadership

effectiveness is often a reflection of the decisions that they have made or not made. In this chapter, you’ll learn

that while decisions are made every day within organizations, the process does not always go as well as it could.

Understanding how decisions are made, how they can be biased, and how to make the decision-making process

run smoothly will help you to be a more effective manager. But first, let’s define decision making.

468 • PRINCIPLES OF MANAGEMENT

11.2 Case in Point: Bernard Ebbers Creates BiasedDecision Making at WorldCom

Figure 11.3

US National Communications System – Bernard Ebbers – public domain.

You could argue that Bernard Ebbers, of the now defunct WorldCom, created a culture of poor decisionmaking. As CEO, Ebbers avoided internal company conflict at all costs, and he ultimately avoidedthe reality that WorldCom, once the dominant company in the telecommunications industry, was inserious economic trouble. Notorious for his temper, employees were reluctant to present Ebbers withcompany information that he didn’t like. A 2002 Economist article describes Ebbers as “parochial,stubborn, preoccupied with penny-pinching.…Mr. Ebbers was a difficult man to work for.” Under Ebbers,WorldCom’s $9 billion accounting fraud grew in order to avoid facing its worsening economic reality.

WorldCom’s roots stem from a Mississippi telecom company called LDDS where Ebbers was CEO.Growing to over 80,000 employees through multiple acquisitions of other telecom businesses, WorldCombecame the overwhelming industry leader. However, many of WorldCom’s executives had worked withEbbers since his start as CEO 2 decades before. Ebbers, who was regularly seen in cowboy boots and a

469

10-gallon hat, led his close-knit staff in a “shoot from the hip” style. He was resistant to new technologyand famously refused to use e-mail to communicate with his employees. A well-known company mantrawas “That’s the way we did it at LDDS.” Ebbers lead WorldCom through over 60 acquisitions over aperiod of 15 years. He grew annual revenues from $1 million in 1984 to over $17 billion in 1998. However,Ebbers had little regard for long-term plans and avoided making larger strategic decisions as his companyaccumulated increasing debt.

As WorldCom acquired new companies, its accounting procedures, computer systems, and customerservice issues became increasingly more complex, and industry experts note that WorldCom struggled tokeep up with the growth. Company employees who tried to bring initial problems to Ebbers’s attentionwere discouraged; Ebbers made it clear he only wanted to hear good news and then based decisionson this good news. This avoidance of factoring in potential problems during decision making created acompany culture that demanded success at all costs. That ultimately included falsifying financial reports.For example, former employees admitted to registering “rolling revenue” to inflate earnings, recording asingle sale multiple times. Another 2002 Economist article reports that this and other dishonest techniqueswere “endemic in the sales hierarchy of WorldCom.…Increasing reported revenues came above all else.”

Despite efforts to inflate the books, WorldCom’s stock prices dramatically declined, and Ebbers leftthe company in 2002 after pressure from WorldCom’s board of directors. What came to light after hisdeparture, however, highlighted the significant problems he avoided confronting. Under new CEO JohnSidgmore, internal auditor Cynthia Cooper uncovered multiple instances of financial dishonesty and illegalactivity overseen by CFO Scott Sullivan, a close confidant of Ebbers. A 2002 Wall Street Journal articlereports, “As she pursued the trail of fraud, Ms. Cooper time and again was obstructed by fellow employees,some of whom disapproved of WorldCom’s accounting methods but were unwilling to contradict theirbosses or thwart the company’s goals.”

Ultimately Cooper’s investigation revealed the fraud that took place under Sullivan and Ebbers. Sullivanlater admitted to having booked $3.8 billion of costs as capital expenditures and that five quarters’ worthof profits should have been recorded as losses. Ebbers’s refusal to honestly face the harsh economic truthfor WorldCom was ultimately highlighted to be a source of WorldCom’s financial problems. In 2005, hewas found guilty of fraud, conspiracy, and filing false documentation. WorldCom was purchased for $7.6billion and subsequently integrated into Verizon (NYSE: VE) in 2006, and Ebbers began serving a 25-yearjail sentence in 2005.

Case written based on information from Markham, J. W. (2006). A financial history of modern U.S.corporate scandals: From Enron to reform. New York: M. E. Sharpe Inc.; Pulliam, S., & Solomon,D. (2002, October 30). Uncooking the books. Wall Street Journal, Eastern edition. Retrieved April4, 2010, from http://proquest.umi.com.proxy.lib.pdx.edu/pqdweb?RQT=318&mid=7510&S=1270430724&lientId=11319&Inst=PROD&Name=PQD&Type=PQD; The big lie: Inside the rise and fraud of WorldCom. (2005). CNBC.Retrieved April 4, 2010, from http://www.hulu.com/watch/46528/cnbc-originals-the-big-lie#s-p9-so-i0;When something is rotten: The best defence against “infectious greed” is a healthy corporate culture.(2002, July 25). Economist. Retrieved April 4, 2010, from http://www.economist.com; Yesterday’s man:WorldCom’s Bernie Ebbers typified the lionised chief executive. Now he is an ex-lion. (2002, May 2).Economist. Retrieved April 4, 2010, from http://www.economist.com.

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Discussion Questions

1. Decision making is a key component of the leading facet of the P-O-L-C framework. Whatdecision-making traps might WorldCom’s board have succumbed to? Why might the concept ofgroupthink be especially relevant to boards?

2. What potential causes of poor decision making existed at WorldCom during Bernard Ebbers’administration?

3. What might have happened if Ebbers had been prone to a different conflict-handling style, such ascompromise or collaboration?

4. How did having a small “inner circle” of leadership affect the decision-making culture atWorldCom?

5. What key decisions did Cynthia Cooper make?

6. What responsibility did the board of directors have to detect and confront the decision-makingproblems at WorldCom?

11.2 CASE IN POINT: BERNARD EBBERS CREATES BIASED DECISION MAKING AT WORLDCOM • 471

11.3 Understanding Decision Making

Learning Objectives

1. Define decision making.

2. Understand different types of decisions.

What Is Decision Making?What Is Decision Making?

Decision making refers to making choices among alternative courses of action—which may also include inaction.

While it can be argued that management is decision making, half of the decisions made by managers within

organizations fail (Ireland & Miller, 2004; Nutt, 2002; Nutt, 1999). Therefore, increasing effectiveness in decision

making is an important part of maximizing your effectiveness at work. This chapter will help you understand how

to make decisions alone or in a group while avoiding common decision-making traps.

Individuals throughout organizations use the information they gather to make a wide range of decisions. These

decisions may affect the lives of others and change the course of an organization. For example, the decisions made

by executives and consulting firms for Enron ultimately resulted in a $60 billion loss for investors, thousands

of employees without jobs, and the loss of all employee retirement funds. But Sherron Watkins, a former

Enron employee and now-famous whistleblower, uncovered the accounting problems and tried to enact change.

Similarly, the decisions made by firms to trade in mortgage-backed securities is having negative consequences for

the entire U.S. economy. Each of these people made a decision, and each person, as well as others, is now living

with the consequences of his or her decisions.

Because many decisions involve an ethical component, one of the most important considerations in management

is whether the decisions you are making as an employee or manager are ethical. Here are some basic questions

you can ask yourself to assess the ethics of a decision (Blanchard & Peale, 1988).

• Is this decision fair?

• Will I feel better or worse about myself after I make this decision?

• Does this decision break any organizational rules?

472

• Does this decision break any laws?

• How would I feel if this decision was broadcast on the news?

Types of DecisionsTypes of Decisions

Despite the far-reaching nature of the decisions in the previous example, not all decisions have major

consequences or even require a lot of thought. For example, before you come to class, you make simple and

habitual decisions such as what to wear, what to eat, and which route to take as you go to and from home

and school. You probably do not spend much time on these mundane decisions. These types of straightforward

decisions are termed programmed decisions; these are decisions that occur frequently enough that we develop

an automated response to them. The automated response we use to make these decisions is called the decision

rule. For example, many restaurants face customer complaints as a routine part of doing business. Because

this is a recurring problem for restaurants, it may be regarded as a programmed decision. To deal with this

problem, the restaurant might have a policy stating that every time they receive a valid customer complaint, the

customer should receive a free dessert, which represents a decision rule. Making strategic, tactical, and operational

decisions is an integral part of the planning function in the P-O-L-C (planning-organizing-leading-controlling)

model.

However, decisions that are unique and important require conscious thinking, information gathering, and careful

consideration of alternatives. These are called nonprogrammed decisions. For example, in 2005, McDonald’s

became aware of a need to respond to growing customer concerns regarding foods high in fat and calories. This is

a nonprogrammed decision because for several decades, customers of fast-food restaurants were more concerned

with the taste and price of the food, rather than the healthiness. In response, McDonald’s decided to offer healthier

alternatives, such as substituting apple slices in Happy Meals for French fries and discontinuing the use of trans

fats. A crisis situation also constitutes a nonprogrammed decision for companies. For example, the leadership of

Nutrorim was facing a tough decision. They had recently introduced a new product, ChargeUp with Lipitrene,

an improved version of their popular sports drink powder, ChargeUp. But a phone call came from a state health

department to inform them that several cases of gastrointestinal distress had been reported after people consumed

the new product. Nutrorim decided to recall ChargeUp with Lipitrene immediately. Two weeks later, it became

clear that the gastrointestinal problems were unrelated to ChargeUp with Lipitrene. However, the damage to the

brand and to the balance sheets was already done. This unfortunate decision caused Nutrorim to rethink the way

decisions were made under pressure so that they now gather information to make informed choices even when

time is of the essence (Garvin, 2006).

11.3 UNDERSTANDING DECISION MAKING • 473

Figure 11.5

To ensure consistency around the globe such as at this St. Petersburg, Russia, location, McDonald’s trains

all restaurant managers (over 65,000 so far) at Hamburger University where they take the equivalent of

two years of college courses and learn how to make decisions. The curriculum is taught in 28 languages.

Wikimedia Commons – McDonalds in St Petersburg 2004 – CC BY-SA 1.0.

Decision making can also be classified into three categories based on the level at which they occur. Strategic

decisions set the course of organization. Tactical decisions are decisions about how things will get done. Finally,

operational decisions are decisions that employees make each day to run the organization. For example, remember

the restaurant that routinely offers a free dessert when a customer complaint is received. The owner of the

restaurant made a strategic decision to have great customer service. The manager of the restaurant implemented

the free dessert policy as a way to handle customer complaints, which is a tactical decision. And, the servers at

the restaurant are making individual decisions each day evaluating whether each customer complaint received is

legitimate to warrant a free dessert.

Figure 11.6 Decisions Commonly Made within Organizations

474 • PRINCIPLES OF MANAGEMENT

In this chapter, we are going to discuss different decision-making models designed to understand and evaluate

the effectiveness of nonprogrammed decisions. We will cover four decision-making approaches starting with the

rational decision-making model, moving to the bounded rationality decision-making model, the intuitive decision-

making model, and ending with the creative decision-making model.

Making Rational DecisionsMaking Rational Decisions

The rational decision-making model describes a series of steps that decision makers should consider if their goal

is to maximize the quality of their outcomes. In other words, if you want to make sure you make the best choice,

going through the formal steps of the rational decision-making model may make sense.

Let’s imagine that your old, clunky car has broken down and you have enough money saved for a substantial

down payment on a new car. It is the first major purchase of your life, and you want to make the right choice. The

first step, therefore, has already been completed—we know that you want to buy a new car. Next, in step 2, you’ll

need to decide which factors are important to you. How many passengers do you want to accommodate? How

important is fuel economy to you? Is safety a major concern? You only have a certain amount of money saved,

and you don’t want to take on too much debt, so price range is an important factor as well. If you know you want

to have room for at least five adults, get at least 20 miles per gallon, drive a car with a strong safety rating, not

11.3 UNDERSTANDING DECISION MAKING • 475

spend more than $22,000 on the purchase, and like how it looks, you’ve identified the decision criteria. All of the

potential options for purchasing your car will be evaluated against these criteria.

Figure 11.7

Using the rational decision-making model to make major purchases can help avoid making poor choices.

Lars Plougmann – Headshift business card discussion – CC BY-SA 2.0.

Before we can move too much further, you need to decide how important each factor is to your decision in step 3.

If each is equally important, then there is no need to weight them, but if you know that price and gas mileage are

key factors, you might weight them heavily and keep the other criteria with medium importance. Step 4 requires

you to generate all alternatives about your options. Then, in step 5, you need to use this information to evaluate

each alternative against the criteria you have established. You choose the best alternative (step 6) and you go out

and buy your new car (step 7).

Of course, the outcome of this decision will be related to the next decision made; that is where the evaluation in

step 8 comes in. For example, if you purchase a car but have nothing but problems with it, you are unlikely to

consider the same make and model in purchasing another car the next time!

Figure 11.8 Steps in the Rational Decision-Making Model

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While decision makers can get off track during any of these steps, research shows that limiting the search for

alternatives in the fourth step can be the most challenging and lead to failure. In fact, one researcher found that no

alternative generation occurred in 85% of the decisions studied (Nutt, 1994). Conversely, successful managers are

clear about what they want at the outset of the decision-making process, set objectives for others to respond to,

carry out an unrestricted search for solutions, get key people to participate, and avoid using their power to push

their perspective (Nutt, 1998).

The rational decision-making model has important lessons for decision makers. First, when making a decision

you may want to make sure that you establish your decision criteria before you search for all alternatives. This

would prevent you from liking one option too much and setting your criteria accordingly. For example, let’s say

you started browsing for cars before you decided your decision criteria. You may come across a car that you think

really reflects your sense of style and make an emotional bond with the car. Then, because of your love for this car,

you may say to yourself that the fuel economy of the car and the innovative braking system are the most important

criteria. After purchasing it, you may realize that the car is too small for all of your friends to ride in the back

seat when you and your brother are sitting in front, which was something you should have thought about! Setting

criteria before you search for alternatives may prevent you from making such mistakes. Another advantage of the

rational model is that it urges decision makers to generate all alternatives instead of only a few. By generating

a large number of alternatives that cover a wide range of possibilities, you are likely to make a more effective

decision in which you do not need to sacrifice one criterion for the sake of another.

Despite all its benefits, you may have noticed that this decision-making model involves a number of unrealistic

assumptions. It assumes that people understand what decision is to be made, that they know all their available

11.3 UNDERSTANDING DECISION MAKING • 477

choices, that they have no perceptual biases, and that they want to make optimal decisions. Nobel Prize–winning

economist Herbert Simon observed that while the rational decision-making model may be a helpful tool for

working through problems, it doesn’t represent how decisions are frequently made within organizations. In fact,

Simon argued that it didn’t even come close!

Think about how you make important decisions in your life. Our guess is that you rarely sit down and complete

all eight steps in the rational decision-making model. For example, this model proposed that we should search for

all possible alternatives before making a decision, but this can be time consuming and individuals are often under

time pressure to make decisions. Moreover, even if we had access to all the information, it could be challenging

to compare the pros and cons of each alternative and rank them according to our preferences. Anyone who has

recently purchased a new laptop computer or cell phone can attest to the challenge of sorting through the different

strengths and limitations of each brand, model, and plans offered for support and arriving at the solution that best

meets their needs.

In fact, the availability of too much information can lead to analysis paralysis, where more and more time is spent

on gathering information and thinking about it, but no decisions actually get made. A senior executive at Hewlett-

Packard admits that his company suffered from this spiral of analyzing things for too long to the point where data

gathering led to “not making decisions, instead of us making decisions (Zell, et. al., 2007).” Moreover, you may

not always be interested in reaching an optimal decision. For example, if you are looking to purchase a house, you

may be willing and able to invest a great deal of time and energy to find your dream house, but if you are looking

for an apartment to rent for the academic year, you may be willing to take the first one that meets your criteria of

being clean, close to campus, and within your price range.

Making “Good Enough” DecisionsMaking “Good Enough” Decisions

The bounded rationality model of decision making recognizes the limitations of our decision-making processes.

According to this model, individuals knowingly limit their options to a manageable set and choose the best

alternative without conducting an exhaustive search for alternatives. An important part of the bounded rationality

approach is the tendency to satisfice, which refers to accepting the first alternative that meets your minimum

criteria. For example, many college graduates do not conduct a national or international search for potential job

openings; instead, they focus their search on a limited geographic area and tend to accept the first offer in their

chosen area, even if it may not be the ideal job situation. Satisficing is similar to rational decision making, but

it differs in that rather than choosing the best choice and maximizing the potential outcome, the decision maker

saves time and effort by accepting the first alternative that meets the minimum threshold.

Making Intuitive DecisionsMaking Intuitive Decisions

The intuitive decision-making model has emerged as an important decision-making model. It refers to arriving

at decisions without conscious reasoning. Eighty-nine percent of managers surveyed admitted to using intuition

to make decisions at least sometimes, and 59% said they used intuition often (Burke & Miller, 1999). When

we recognize that managers often need to make decisions under challenging circumstances with time pressures,

constraints, a great deal of uncertainty, highly visible and high-stakes outcomes, and within changing conditions,

it makes sense that they would not have the time to formally work through all the steps of the rational decision-

making model. Yet when CEOs, financial analysts, and healthcare workers are asked about the critical decisions

478 • PRINCIPLES OF MANAGEMENT

they make, seldom do they attribute success to luck. To an outside observer, it may seem like they are making

guesses as to the course of action to take, but it turns out that they are systematically making decisions using a

different model than was earlier suspected. Research on life-or-death decisions made by fire chiefs, pilots, and

nurses finds that these experts do not choose among a list of well-thought-out alternatives. They don’t decide

between two or three options and choose the best one. Instead, they consider only one option at a time. The

intuitive decision-making model argues that, in a given situation, experts making decisions scan the environment

for cues to recognize patterns (Breen, 2000; Klein, 2003; Salas & Klein, 2001). Once a pattern is recognized,

they can play a potential course of action through to its outcome based on their prior experience. Due to training,

experience, and knowledge, these decision makers have an idea of how well a given solution may work. If they

run through the mental model and find that the solution will not work, they alter the solution and retest it before

setting it into action. If it still is not deemed a workable solution, it is discarded as an option and a new idea is

tested until a workable solution is found. Once a viable course of action is identified, the decision maker puts the

solution into motion. The key point is that only one choice is considered at a time. Novices are not able to make

effective decisions this way because they do not have enough prior experience to draw upon.

Making Creative DecisionsMaking Creative Decisions

In addition to the rational decision making, bounded rationality models, and intuitive decision making, creative

decision making is a vital part of being an effective decision maker. Creativity is the generation of new,

imaginative ideas. With the flattening of organizations and intense competition among organizations, individuals

and organizations are driven to be creative in decisions ranging from cutting costs to creating new ways of doing

business. Please note that, while creativity is the first step in the innovation process, creativity and innovation

are not the same thing. Innovation begins with creative ideas, but it also involves realistic planning and follow-

through.

The five steps to creative decision making are similar to the previous decision-making models in some keys ways.

All of the models include problem identification, which is the step in which the need for problem solving becomes

apparent. If you do not recognize that you have a problem, it is impossible to solve it. Immersion is the step

in which the decision maker thinks about the problem consciously and gathers information. A key to success

in creative decision making is having or acquiring expertise in the area being studied. Then, incubation occurs.

During incubation, the individual sets the problem aside and does not think about it for a while. At this time, the

brain is actually working on the problem unconsciously. Then comes illumination or the insight moment, when

the solution to the problem becomes apparent to the person, usually when it is least expected. This is the “eureka”

moment similar to what happened to the ancient Greek inventor Archimedes, who found a solution to the problem

he was working on while he was taking a bath. Finally, the verification and application stage happens when the

decision maker consciously verifies the feasibility of the solution and implements the decision.

A NASA scientist describes his decision-making process leading to a creative outcome as follows: He had been

trying to figure out a better way to de-ice planes to make the process faster and safer. After recognizing the

problem, he had immersed himself in the literature to understand all the options, and he worked on the problem

for months trying to figure out a solution. It was not until he was sitting outside of a McDonald’s restaurant

with his grandchildren that it dawned on him. The golden arches of the “M” of the McDonald’s logo inspired his

solution: he would design the de-icer as a series of M’s!1 This represented the illumination stage. After he tested

and verified his creative solution, he was done with that problem except to reflect on the outcome and process.

11.3 UNDERSTANDING DECISION MAKING • 479

Figure 11.9 The Creative Decision-Making Process

How Do You Know If Your Decision-Making Process Is Creative?How Do You Know If Your Decision-Making Process Is Creative?

Researchers focus on three factors to evaluate the level of creativity in the decision-making process. Fluency

refers to the number of ideas a person is able to generate. Flexibility refers to how different the ideas are from one

another. If you are able to generate several distinct solutions to a problem, your decision-making process is high

on flexibility. Originality refers to an idea’s uniqueness. You might say that Reed Hastings, founder and CEO of

Netflix, is a pretty creative person. His decision-making process shows at least two elements of creativity. We do

not exactly know how many ideas he had over the course of his career, but his ideas are fairly different from one

another. After teaching math in Africa with the Peace Corps, Hastings was accepted at Stanford University, where

he earned a master’s degree in computer science. Soon after starting work at a software company, he invented

a successful debugging tool, which led to his founding the computer troubleshooting company Pure Software in

1991. After a merger and the subsequent sale of the resulting company in 1997, Hastings founded Netflix, which

revolutionized the DVD rental business through online rentals with no late fees. In 2007, Hastings was elected to

Microsoft’s board of directors. As you can see, his ideas are high in originality and flexibility (Conlin, 2007).

Figure 11.10 Dimensions of Creativity

Some experts have proposed that creativity occurs as an interaction among three factors: (1) people’s personality

traits (openness to experience, risk taking), (2) their attributes (expertise, imagination, motivation), and (3) the

context (encouragement from others, time pressure, and physical structures) (Amabile, 1988; Amabile, et. al.,

1996; Ford & Gioia, 2000; Tierney, et. al., 1999; Woodman, et. al., 1993). For example, research shows that

individuals who are open to experience, are less conscientious, more self-accepting, and more impulsive, tend to

be more creative (Feist, 1998).

There are many techniques available that enhance and improve creativity. Linus Pauling, the Nobel prize winner

who popularized the idea that vitamin C could help build the immunity system, said, “The best way to have a

480 • PRINCIPLES OF MANAGEMENT

good idea is to have a lot of ideas.” One popular way to generate ideas is to use brainstorming. Brainstorming

is a group process of generated ideas that follows a set of guidelines that include no criticism of ideas during

the brainstorming process, the idea that no suggestion is too crazy, and building on other ideas (piggybacking).

Research shows that the quantity of ideas actually leads to better idea quality in the end, so setting high idea

quotas where the group must reach a set number of ideas before they are done, is recommended to avoid process

loss and to maximize the effectiveness of brainstorming. Another unique aspect of brainstorming is that the more

people are included in brainstorming, the better the decision outcome will be because the variety of backgrounds

and approaches give the group more to draw from. A variation of brainstorming is wildstorming where the group

focuses on ideas that are impossible and then imagines what would need to happen to make them possible (Scott,

et. al., 2004).

Ideas for Enhancing Organizational CreativityIdeas for Enhancing Organizational Creativity

We have seen that organizational creativity is vital to organizations. Here are some guidelines for enhancing

organizational creativity within teams (Amabile, 1998; Gundry, et. al., 1994; Keith, 2008; Pearsall, et. al., 2008;

Thompson, 2003).

Team Composition (Organizing/Leading)Team Composition (Organizing/Leading)

• Diversify your team to give them more inputs to build on and more opportunities to create functional

conflict while avoiding personal conflict.

• Change group membership to stimulate new ideas and new interaction patterns.

• Leaderless teams can allow teams freedom to create without trying to please anyone up front.

Team Process (Leading)Team Process (Leading)

• Engage in brainstorming to generate ideas—remember to set a high goal for the number of ideas the group

should come up with, encourage wild ideas, and take brainwriting breaks.

• Use the nominal group technique in person or electronically to avoid some common group process pitfalls.

Consider anonymous feedback as well.

• Use analogies to envision problems and solutions.

Leadership (Leading)Leadership (Leading)

• Challenge teams so that they are engaged but not overwhelmed.

• Let people decide how to achieve goals, rather than telling them what goals to achieve.

• Support and celebrate creativity even when it leads to a mistake. But set up processes to learn from

mistakes as well.

• Model creative behavior.

11.3 UNDERSTANDING DECISION MAKING • 481

Culture (Organizing)Culture (Organizing)

• Institute organizational memory so that individuals do not spend time on routine tasks.

• Build a physical space conducive to creativity that is playful and humorous—this is a place where ideas can

thrive.

• Incorporate creative behavior into the performance appraisal process.

And finally, avoiding groupthink can be an important skill to learn (Janis, 1972).

The four different decision-making models—rational, bounded rationality, intuitive, and creative—vary in terms

of how experienced or motivated a decision maker is to make a choice. Choosing the right approach will make

you more effective at work and improve your ability to carry out all the P-O-L-C functions.

Figure 11.11

Which decision-making model should I use?

Key Takeaway

Decision making is choosing among alternative courses of action, including inaction. There are differenttypes of decisions, ranging from automatic, programmed decisions to more intensive nonprogrammeddecisions. Structured decision-making processes include rational decision making, bounded rationality,intuitive, and creative decision making. Each of these can be useful, depending on the circumstances andthe problem that needs to be solved.

482 • PRINCIPLES OF MANAGEMENT

Exercises

1. What do you see as the main difference between a successful and an unsuccessful decision? Howmuch does luck versus skill have to do with it? How much time needs to pass to answer the firstquestion?

2. Research has shown that over half of the decisions made within organizations fail. Does thissurprise you? Why or why not?

3. Have you used the rational decision-making model to make a decision? What was the context?How well did the model work?

4. Share an example of a decision where you used satisficing. Were you happy with the outcome?Why or why not? When would you be most likely to engage in satisficing?

5. Do you think intuition is respected as a decision-making style? Do you think it should be? Why orwhy not?

1Interview by author Talya Bauer at Ames Research Center, Mountain View, CA, 1990.

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11.4 Faulty Decision Making

Learning Objectives

1. Understand overconfidence bias and how to avoid it.

2. Understand hindsight bias and how to avoid it.

3. Understand anchoring and how to avoid it.

4. Understand framing bias and how to avoid it.

5. Understand escalation of commitment and how to avoid it.

No matter which model you use, you need to know and avoid the decision-making traps that exist. Daniel

Kahnemann (another Nobel prize winner) and Amos Tversky spent decades studying how people make decisions.

They found that individuals are influenced by overconfidence bias, hindsight bias, anchoring bias, framing bias,

and escalation of commitment.

Potential Challenges to Decision MakingPotential Challenges to Decision Making

Overconfidence BiasOverconfidence Bias

Overconfidence bias occurs when individuals overestimate their ability to predict future events. Many people

exhibit signs of overconfidence. For example, 82% of the drivers surveyed feel they are in the top 30% of safe

drivers, 86% of students at the Harvard Business School say they are better looking than their peers, and doctors

consistently overestimate their ability to detect problems (Tilson, 1999). Much like a friend who is always 100%

sure he can pick the winners of this week’s football games despite evidence to the contrary, these individuals are

suffering from overconfidence bias. People who purchase lottery tickets as a way to make money are probably

suffering from overconfidence bias. It is three times more likely for a person driving 10 miles to buy a lottery

ticket to be killed in a car accident than to win the jackpot (Orkin, 1991). To avoid this bias, take the time to stop

and ask yourself whether you are being realistic in your judgments.

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Hindsight BiasHindsight Bias

Hindsight bias is the opposite of overconfidence bias, as it occurs when looking backward in time where mistakes

made seem obvious after they have already occurred. In other words, after a surprising event occurred, many

individuals are likely to think that they already knew this was going to happen. This may be because they are

selectively reconstructing the events. Hindsight bias becomes a problem especially when judging someone else’s

decisions. For example, let’s say a company driver hears the engine making unusual sounds before starting her

morning routine. Being familiar with this car in particular, the driver may conclude that the probability of a serious

problem is small and continue to drive the car. During the day, the car malfunctions, stranding her away from the

office. It would be easy to criticize her decision to continue to drive the car because, in hindsight, the noises heard

in the morning would make us believe that she should have known something was wrong and she should have

taken the car in for service. However, the driver may have heard similar sounds before with no consequences, so

based on the information available to her at the time, she may have made a reasonable choice. Therefore, it is

important for decision makers to remember this bias before passing judgments on other people’s actions.

AnchoringAnchoring

Anchoring refers to the tendency for individuals to rely too heavily on a single piece of information. Job seekers

often fall into this trap by focusing on a desired salary while ignoring other aspects of the job offer such as

additional benefits, fit with the job, and working environment. Similarly, but more dramatically, lives were lost in

the Great Bear Wilderness Disaster when the coroner declared all five passengers of a small plane dead within five

minutes of arriving at the accident scene, which halted the search effort for potential survivors, when, in fact, the

next day two survivors walked out of the forest. How could a mistake like this have been made? One theory is that

decision biases played a large role in this serious error; anchoring on the fact that the plane had been consumed

by flames led the coroner to call off the search for any possible survivors (Becker, 2007).

Framing BiasFraming Bias

Framing bias refers to the tendency of decision makers to be influenced by the way that a situation or problem

is presented. For example, when making a purchase, customers find it easier to let go of a discount as opposed

to accepting a surcharge, even though they both might cost the person the same amount of money. Similarly,

customers tend to prefer a statement such as “85% lean beef” as opposed to “15% fat” (Li, et. al., 2007)! It is

important to be aware of this tendency because, depending on how a problem is presented to us, we might choose

an alternative that is disadvantageous simply because of how it is framed.

Escalation of commitment occurs when individuals continue on a failing course of action after information reveals

this may be a poor path to follow. It is sometimes called sunk costs fallacy because the continuation is often based

on the idea that one has already invested in this course of action. For example, imagine a person purchases a used

car that turns out to need another repair every few weeks. An effective way of dealing with this situation might

be to sell the car without incurring further losses, donate the car, or drive it without repairing it until it falls apart.

However, many people spend hours of their time and hundreds, even thousands of dollars repairing the car in the

hopes that they will justify their initial investment in buying the car.

A classic example of escalation of commitment from the corporate world may be Motorola’s Iridium project. In

486 • PRINCIPLES OF MANAGEMENT

1980s, the phone coverage around the world was weak—it could take hours of dealing with a chain of telephone

operators in several different countries to get a call through from, say, Cleveland to Calcutta. Thus, there was a real

need within the business community to improve phone access around the world. Motorola envisioned solving this

problem using 66 low-orbiting satellites, enabling users to place a direct call to any location around the world. At

the time of idea development, the project was technologically advanced, sophisticated, and made financial sense.

Motorola spun off Iridium as a separate company in 1991. It took researchers 15 years to develop the product from

idea to market release. However, in the 1990s, the landscape for cell phone technology was dramatically different

from the 1980s, and the widespread cell phone coverage around the world eliminated a large base of the projected

customer base for Iridium. Had they been paying attention to these developments, the decision makers would

probably have abandoned the project at some point in the early 1990s. Instead, they released the Iridium phone to

the market in 1998. The phone cost $3,000 and it was literally the size of a brick. Moreover, it was not possible

to use the phone in moving cars or inside buildings! Not surprisingly, the launch was a failure and Iridium filed

for bankruptcy in 1999 (Finkelstein & Sanford, 2000). The company was ultimately purchased for $25 million by

a group of investors (whereas it cost the company $5 billion to develop its product), scaled down its operations,

and modified it for use by the Department of Defense to connect soldiers in remote areas not served by landlines

or cell phones.

Why does escalation of commitment occur? There may be many reasons, but two are particularly important. First,

decision makers may not want to admit that they were wrong. This may be because of personal pride or being

afraid of the consequences of such an admission. Second, decision makers may incorrectly believe that spending

more time and energy might somehow help them recover their losses. Effective decision makers avoid escalation

of commitment by distinguishing between when persistence may actually pay off versus when persistence might

mean escalation of commitment. To avoid escalation of commitment, you might consider having strict turning

back points. For example, you might determine up front that you will not spend more than $500 trying to repair

the car and will sell the car when you reach that point. You might also consider assigning separate decision makers

for the initial buying and subsequent selling decisions. Periodical evaluations of an initially sound decision to see

whether the decision still makes sense is also another way of preventing escalation of commitment. This becomes

particularly important in projects such as the Iridium where the initial decision is not immediately implemented

but instead needs to go through a lengthy development process. In such cases, it becomes important to assess

the soundness of the initial decision periodically in the face of changing market conditions. Finally, creating an

organizational climate where individuals do not fear admitting that their initial decision no longer makes economic

sense would go a long way in preventing escalation of commitment, as it could lower the regret the decision maker

may experience (Wong & Kwong, 2007).

Figure 11.13

11.4 FAULTY DECISION MAKING • 487

Motorola released the Iridium phone to the market in 1998. The phone cost $3,000 and was literally the

size of a brick. This phone now resides at the Smithsonian Air and Space Museum in Dulles, Virginia.

Raul654 – Iridium phone – CC BY-SA 3.0.

So far we have focused on how individuals make decisions and how to avoid decision traps. Next we shift our

focus to the group level. There are many similarities and many differences between individual and group decision

making. There are many factors that influence group dynamics and also affect the group decision-making process.

We will discuss some of them in the next section.

Key Takeaway

Understanding decision-making traps can help you avoid and manage them. Overconfidence bias can causeyou to ignore obvious information. Hindsight bias can similarly cause a person to incorrectly believe intheir ability to predict events. Anchoring and framing biases show the importance of the way problemsor alternatives are presented in influencing one’s decision. Escalation of commitment demonstrates howindividuals’ desire for consistency, or to avoid admitting a mistake, can cause them to continue to invest ina decision that is not prudent.

Exercises

1. Describe a time when you fell into one of the decision-making traps. How did you come to realizethat you had made a poor decision?

2. How can you avoid escalation of commitment?

3. Share an example of anchoring.

4. Which of the traps seems the most dangerous for decision makers and why?

ReferencesReferences

Becker, W. S. (2007). Missed opportunities: The Great Bear Wilderness Disaster. Organizational Dynamics, 36,

363–376.

Finkelstein, S., & Sanford, S. H. (2000, November). Learning from corporate mistakes: The rise and fall of

Iridium. Organizational Dynamics, 29(2), 138–148.

Li, S., Sun, Y., & Wang, Y. (2007). 50% off or buy one get one free? Frame preference as a function of consumable

nature in dairy products. Journal of Social Psychology, 147, 413–421.

Orkin, M. (1991). Can you win? The real odds for casino gambling, sports betting and lotteries. New York: W.

H. Freeman.

488 • PRINCIPLES OF MANAGEMENT

Tilson, W. (1999, September 20). The perils of investor overconfidence. Retrieved March 1, 2008, from

http://www.fool.com/BoringPort/1999/BoringPort990920.htm.

Wong, K. F. E., & Kwong, J. Y. Y. (2007). The role of anticipated regret in escalation of commitment. Journal of

Applied Psychology, 92, 545–554.

11.4 FAULTY DECISION MAKING • 489

11.5 Decision Making in Groups

Learning Objectives

1. Understand the pros and cons of individual and group decision making.

2. Learn to recognize the signs of groupthink.

3. Recognize different tools and techniques for making better decisions.

When It Comes to Decision Making, Are Two Heads Better Than One?When It Comes to Decision Making, Are Two Heads Better Than One?

When it comes to decision making, are two heads better than one? The answer to this question depends on several

factors. Group decision making has the advantages of drawing from the experiences and perspectives of a larger

number of individuals. Hence, they have the potential to be more creative and lead to a more effective decision.

In fact, groups may sometimes achieve results beyond what they could have done as individuals. Groups also

make the task more enjoyable for members in question. Finally, when the decision is made by a group rather

than a single individual, implementation of the decision will be easier because group members will be invested

in the decision. If the group is diverse, better decisions may be made because different group members may

have different ideas based on their background and experiences. Research shows that for top management teams,

groups that debate issues and that are diverse make decisions that are more comprehensive and better for the

bottom line in terms of profitability and sales (Simons, et. al., 1999).

Despite its popularity within organizations, group decision making suffers from a number of disadvantages.

We know that groups rarely outperform their best member (Miner, 1984). While groups have the potential to

arrive at an effective decision, they often suffer from process losses. For example, groups may suffer from

coordination problems. Anyone who has worked with a team of individuals on a project can attest to the difficulty

of coordinating members’ work or even coordinating everyone’s presence in a team meeting. Furthermore, groups

can suffer from social loafing, or the tendency of some members to put forth less effort while working within

a group. Groups may also suffer from groupthink, the tendency to avoid critical evaluation of ideas the group

favors. Finally, group decision making takes a longer time compared with individual decision making, given that

all members need to discuss their thoughts regarding different alternatives.

Thus, whether an individual or a group decision is preferable will depend on the specifics of the situation. For

490

example, if there is an emergency and a decision needs to be made quickly, individual decision making might be

preferred. Individual decision making may also be appropriate if the individual in question has all the information

needed to make the decision and if implementation problems are not expected. However, if one person does not

have all the information and skills needed to make the decision, if implementing the decision will be difficult

without the involvement of those who will be affected by the decision, and if time urgency is more modest, then

decision making by a group may be more effective.

Figure 11.14 Advantages and Disadvantages of Different Levels of Decision Making

GroupthinkGroupthink

Have you ever been in a decision-making group that you felt was heading in the wrong direction, but you didn’t

speak up and say so? If so, you have already been a victim of groupthink. Groupthink is a group pressure

phenomenon that increases the risk of the group making flawed decisions by leading to reduced mental efficiency,

reality testing, and moral judgment. Groupthink is characterized by eight symptoms that include (Janis, 1972):

1. Illusion of invulnerability shared by most or all of the group members that creates excessive optimism

and encourages them to take extreme risks.

2. Collective rationalizations where members downplay negative information or warnings that might cause

them to reconsider their assumptions.

3. An unquestioned belief in the group’s inherent morality that may incline members to ignore ethical or

moral consequences of their actions.

4. Stereotyped views of out-groups are seen when groups discount rivals’ abilities to make effective

responses.

5. Direct pressure on any member who expresses strong arguments against any of the group’s stereotypes,

illusions, or commitments.

6. Self-censorship when members of the group minimize their own doubts and counterarguments.

7. Illusions of unanimity based on self-censorship and direct pressure on the group; the lack of dissent is

11.5 DECISION MAKING IN GROUPS • 491

viewed as unanimity.

8. The emergence of self-appointed mindguards where one or more members protect the group from

information that runs counter to the group’s assumptions and course of action.

Figure 11.15

Avoiding groupthink can be a matter of life or death. In January 1986, the space shuttle Challenger

exploded 73 seconds after liftoff, killing all seven astronauts aboard. The decision to launch Challenger

that day, despite problems with mechanical components of the vehicle and unfavorable weather conditions,

is cited as an example of groupthink.

NASA – Challenger flight 51-1 crew – public domain.

While research on groupthink has not confirmed all of the theory, groups do tend to suffer from symptoms of

groupthink when they are large and when the group is cohesive because the members like each other (Esser,

1998; Mullen, et. al., 1994). The assumption is that the more frequently a group displays one or more of the eight

symptoms, the worse the quality of their decisions will be.

However, if your group is cohesive, it is not necessarily doomed to engage in groupthink.

492 • PRINCIPLES OF MANAGEMENT

Recommendations for Avoiding GroupthinkRecommendations for Avoiding Groupthink

Groups Should:Groups Should:

• Discuss the symptoms of groupthink and how to avoid them.

• Assign a rotating devil’s advocate to every meeting.

• Invite experts or qualified colleagues who are not part of the core decision-making group to attend

meetings, and get reactions from outsiders on a regular basis and share these with the group.

• Encourage a culture of difference where different ideas are valued.

• Debate the ethical implications of the decisions and potential solutions being considered.

Individuals Should:Individuals Should:

• Monitor their own behavior for signs of groupthink and modify behavior if needed.

• Check themselves for self-censorship.

• Carefully avoid mindguard behaviors.

• Avoid putting pressure on other group members to conform.

• Remind members of the ground rules for avoiding groupthink if they get off track.

Group Leaders Should:Group Leaders Should:

• Break the group into two subgroups from time to time.

• Have more than one group work on the same problem if time and resources allow it. This makes sense for

highly critical decisions.

• Remain impartial and refrain from stating preferences at the outset of decisions.

• Set a tone of encouraging critical evaluations throughout deliberations.

• Create an anonymous feedback channel where all group members can contribute to if desired.

Tools and Techniques for Making Better DecisionsTools and Techniques for Making Better Decisions

Nominal Group Technique (NGT) was developed to help with group decision making by ensuring that all

members participate fully. NGT is not a technique to be used at all meetings routinely. Rather, it is used to

structure group meetings when members are grappling with problem solving or idea generation. It follows four

steps (Delbecq, et. al., 1975). First, each member of the group engages in a period of independently and silently

writing down ideas. Second, the group goes in order around the room to gather all the ideas that were generated.

This goes on until all the ideas are shared. Third, a discussion takes place around each idea and members ask for

and give clarification and make evaluative statements. Finally, individuals vote for their favorite ideas by using

11.5 DECISION MAKING IN GROUPS • 493

either ranking or rating techniques. Following the four-step NGT helps to ensure that all members participate fully

and avoids group decision-making problems such as groupthink.

Delphi Technique is unique because it is a group process using written responses to a series of questionnaires

instead of physically bringing individuals together to make a decision. The first questionnaire asks individuals

to respond to a broad question, such as stating the problem, outlining objectives, or proposing solutions. Each

subsequent questionnaire is built from the information gathered in the previous one. The process ends when

the group reaches a consensus. Facilitators can decide whether to keep responses anonymous. This process is

often used to generate best practices from experts. For example, Purdue University professor Michael Campion

used this process when he was editor of the research journal Personnel Psychology and wanted to determine the

qualities that distinguished a good research article. Using the Delphi Technique, he was able to gather responses

from hundreds of top researchers from around the world without ever having to leave his office and distill them

into a checklist of criteria that he could use to evaluate articles submitted to the journal (Campion, 1993).

Majority rule refers to a decision-making rule where each member of the group is given a single vote, and

the option that receives the greatest number of votes is selected. This technique has remained popular, perhaps

because of its simplicity, speed, ease of use, and representational fairness. Research also supports majority rule as

an effective decision-making technique (Hastie & Kameda, 2005). However, those who did not vote in favor of

the decision will be less likely to support it.

Consensus is another decision-making rule that groups may use when the goal is to gain support for an idea

or plan of action. While consensus tends to take longer in the first place, it may make sense when support is

needed to enact the plan. The process works by discussing the issues, generating a proposal, calling for consensus,

and discussing any concerns. If concerns still exist, the proposal is modified to accommodate them. These steps

are repeated until consensus is reached. Thus, this decision-making rule is inclusive, participatory, cooperative,

and democratic. Research shows that consensus can lead to better accuracy (Roch, 2007), and it helps members

feel greater satisfaction with decisions (Mohammed & Ringseis, 2001) and to have greater acceptance. However,

groups take longer with this approach and groups that cannot reach consensus become frustrated (Peterson, 1999).

Group decision support systems (GDSS) are interactive computer-based systems that are able to combine

communication and decision technologies to help groups make better decisions. Organizations know that having

effective knowledge management systems to share information is important. Research shows that a GDSS can

actually improve the output of group collaborative work through higher information sharing (Lam & Schaubroeck,

2000). Organizations know that having effective knowledge management systems to share information is

important, and their spending reflects this reality. According to a 2002 article, businesses invested $2.7 billion into

new systems in 2002 and projections were for this number to double every five years. As the popularity of these

systems grows, they risk becoming counterproductive. Humans can only process so many ideas and information at

one time. As virtual meetings grow larger, it is reasonable to assume that information overload can occur and good

ideas will fall through the cracks, essentially recreating a problem that the GDSS was intended to solve that is to

make sure every idea is heard. Another problem is the system possibly becoming too complicated. If the systems

evolve to a point of uncomfortable complexity, it has recreated the problem of the bully pulpit and shyness. Those

who understand the interface will control the narrative of the discussion, while those who are less savvy will only

be along for the ride (Nunamaker, et. al., 1991). Lastly, many of these programs fail to take into account the factor

of human psychology. These systems could make employees more reluctant to share information due to lack of

494 • PRINCIPLES OF MANAGEMENT

control, lack of immediate feedback, the fear of “flaming” or harsher than normal criticism, and the desire to have

original information hence more power (Babock, 2004).

Figure 11.16

Healthy communication and trust are key elements to effective group decision making.

Teamwork and team spirit – CC BY-ND 2.0.

Decision trees are diagrams in which answers to yes or no questions lead decision makers to address additional

questions until they reach the end of the tree. Decision trees are helpful in avoiding errors such as framing bias

(Wright & Goodwin, 2002). Decision trees tend to be helpful in guiding the decision maker to a predetermined

alternative and ensuring consistency of decision making—that is, every time certain conditions are present, the

decision maker will follow one course of action as opposed to others if the decision is made using a decision tree.

Figure 11.17

Using decision trees can improve investment decisions by optimizing them for maximum payoff. A decision tree consists of three types

of nodes. Decision nodes are commonly represented by squares. Chance nodes are represented by circles. End nodes are represented by

triangles.

Michael Coté – Cloud buying decision tree – CC BY 2.0.

11.5 DECISION MAKING IN GROUPS • 495

Key Takeaway

There are trade-offs between making decisions alone and within a group. Groups have greater diversityof experiences and ideas than individuals, but they also have potential process losses such as groupthink.Groupthink can be avoided by recognizing the eight symptoms discussed. Finally, there are a varietyof tools and techniques available for helping to make more effective decisions in groups, includingthe Nominal Group Technique, Delphi Technique, majority rule, consensus, GDSS, and decision trees.Understanding the link between managing teams and making decisions is an important aspect of amanager’s leading function.

Exercises

1. Do you prefer to make decisions in a group or alone? What are the main reasons for yourpreference?

2. Have you been in a group that used the brainstorming technique? Was it an effective tool forcoming up with creative ideas? Please share examples.

3. Have you been in a group that experienced groupthink? If so, how did you deal with it?

4. Which of the decision making tools discussed in this chapter (NGT, Delphi, etc.) have you used?How effective were they?

ReferencesReferences

Babock, P. (2004, May). Shedding light on knowledge management. HR Magazine, pp. 47–50.

Campion, M. A. (1993). Article review checklist: A criterion checklist for reviewing research articles in applied

psychology. Personnel Psychology, 46, 705–718.

Delbecq, A. L., Van de Ven, A. H., & Gustafson, D. H. (1975). Group techniques for program planning: A guide

to nominal group and Delphi processes. Glenview, IL: Scott, Foresman.

Esser, J. K. (1998). Alive and well after 25 years: A review of groupthink research. Organizational Behavior and

Human Decision Processes, 73, 116–141.

Hastie, R., & Kameda, T. (2005). The robust beauty of majority rules in group decisions. Psychological Review,

112, 494–508.

Janis, I. L. (1972). Victims of groupthink. New York: Houghton Mifflin.

Lam, S. S. K., & Schaubroeck, J. (2000). Improving group decisions by better pooling information: A comparative

advantage of group decision support systems. Journal of Applied Psychology, 85, 565–573.

496 • PRINCIPLES OF MANAGEMENT

Miner, F. C. (1984). Group versus individual decision making: An investigation of performance measures,

decision strategies, and process losses/gains. Organizational Behavior and Human Performance, 33, 112–124.

Mohammed, S., & Ringseis, E. (2001). Cognitive diversity and consensus in group decision making: The role of

inputs, processes, and outcomes. Organizational Behavior and Human Decision Processes, 85, 310–335.

Mullen, B., Anthony, T., Salas, E., & Driskell, J. E. (1994). Group cohesiveness and quality of decision making:

An integration of tests of the groupthink hypothesis. Small Group Research, 25, 189–204.

Nunamaker, J. F., Jr., Dennis, A. R., Valacich, J. S., Vogel, D. R., George, J. F. (1991, July). Electronic meetings

to support group work. Communications of the ACM, 34(7), 40–61.

Peterson, R. (1999). Can you have too much of a good thing? The limits of voice for improving satisfaction with

leaders. Personality and Social Psychology, 25, 313–324.

Roch, S. G. (2007). Why convene rater teams: An investigation of the benfits of anticipated discussion, consensus,

and rater motivation. Organizational Behavior and Human Decision Processes, 104, 14–29.

Simons, T., Pelled, L. H., & Smith, K. A. (1999). Making use of difference: Diversity, debate, decision

comprehensiveness in top management teams. Academy of Management Journal, 42, 662–673.

Wright, G., & Goodwin, P. (2002). Eliminating a framing bias by using simple instructions to “think harder” and

respondents with managerial experience: Comment on “breaking the frame.” Strategic Management Journal, 23,

1059–1067.

11.5 DECISION MAKING IN GROUPS • 497

11.6 Developing Your Personal Decision-Making Skills

Learning Objectives

1. Understand what you can do to avoid making poor decisions.

2. Learn what a project premortem is.

Perform a Project “Premortem” to Fix Problems Before They HappenPerform a Project “Premortem” to Fix Problems Before They Happen

Doctors routinely perform postmortems to understand what went wrong with a patient who has died. The idea

is for everyone to learn from the unfortunate outcome so that future patients will not meet a similar fate. But,

what if you could avoid a horrible outcome before it happened by identifying project risks proactively—before

your project derails? Research suggests that the simple exercise of imagining what could go wrong with a given

decision can increase your ability to identify reasons for future successes or failures by 30% (Mitchell, et. al.,

1989). A “premortem” is a way to imagine and to avoid what might go wrong before spending a cent or having to

change course along the way (Breen, 2000; Klein, 2007; Klein, 2003; Pliske, et. al., 2001).

Gary Klein, an expert on decision making in fast-paced, uncertain, complex, and critical environments,

recommends that decision makers follow this six-step premortem process to increase their chances of success.

1. A planning team comes up with an outline of a plan, such as the launching of a new product.

2. Either the existing group or a unique group is then told to imagine looking into a crystal ball and seeing

that the new product failed miserably. They then write down all the reasons they can imagine that might

have led to this failure.

3. Each team member shares items from their list until all the potential problems have been identified.

4. The list is reviewed for additional ideas.

5. The issues are sorted into categories in the search for themes.

6. The plan should then be revised to correct the flaws and avoid these potential problems.

The premortem technique allows groups to truly delve into “what if” scenarios. For example, in a premortem

498

session at a Fortune 50 company, an executive imagined that a potential billion-dollar environmental

sustainability project might fail because the CEO had retired.

Key Takeaway

There are a number of ways to learn about decision making that can help make you more effective. If thedecision is important, conduct a premortem to anticipate what might go wrong. When a decision is going toinvolve others, be proactive in getting them to buy in before the decision is made. Individuals and groupscan suffer from decision-making traps and process losses. Understanding that you can spot and avoid thesetraps is important in helping to make you a more effective manager.

Exercises

1. How might you use the premortem technique to be more effective within groups at school orwork?

2. Imagine that your good friend is starting a new job next week as a manager. Whatrecommendations would you give your friend to be successful with decision making at work?

ReferencesReferences

Breen, B. (2000, August). What’s your intuition? Fast Company, 290.

Klein, G. (September 2007). Performing a project premortem. Harvard Business Review, 18–19.

Klein, G. (2003). The power of intuition: How to use your gut feelings to make better decisions at work. New

York: Random House.

Mitchell, D. J., Russo, J., & Pennington, N. (1989). Back to the future: Temporal perspective in the explanation

of events. Journal of Behaviorial Decision Making, 2, 25–38.

Pliske, R., McCloskey, M., & Klein, G. (2001). Decision skills training: Facilitating learning from experience. In

E. Salas & G. Klein (Eds.), Linking expertise and naturalistic decision making 37–53. Mahwah, NJ: Lawrence

Erlbaum.

11.6 DEVELOPING YOUR PERSONAL DECISION-MAKING SKILLS • 499

Chapter 12: Communication in Organizations

12.1 Communication in Organizations

12.2 Case in Point: Edward Jones Communicates Caring

12.3 Understanding Communication

12.4 Communication Barriers

12.5 Different Types of Communication

12.6 Communication Channels

12.7 Developing Your Personal Communication Skills

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12.1 Communication in Organizations

Figure 12.1

A sender’s choice of communication channel affects the quality of what is actually understood by the

receiver.

PIX1861 – Pixabay – CC0 public domain.

What’s in It for Me?

Reading this chapter will help you do the following:

1. Define communication and understand the communication process.

2. Understand and overcome barriers to effective communication.

3. Compare and contrast different types of communication.

501

4. Compare and contrast different communication channels.

5. Develop your own communication skills.

Figure 12.2 The P-O-L-C Framework

502 • PRINCIPLES OF MANAGEMENT

12.2 Case in Point: Edward Jones Communicates Caring

Figure 12.3

stevepb – Pixabay – CC0 public domain.

Because of the economic turmoil that most financial institutions find themselves in today, it might come as a surprise that an

individual investment company came in at number 2 on Fortune magazine’s “100 Best Companies to Work For” list in 2010, behind

software giant SAS Institute Inc. Edward Jones Investments (a limited partnership company) was originally founded in St. Louis,

Missouri, where its headquarters remain today. With more than 10,000 offices across the United States and Canada, they are able to

serve nearly 7 million investors. This is the 10th year Edward Jones has made the Best Companies list. In addition, Edward Jones

ranked highest with client satisfaction among full-service investment firms, according to an annual survey released by J. D. Power and

Associates in 2009. How has Edward Jones maintained this favorable reputation in the eyes of both its employees and its customers?

It begins with the perks offered, including profit sharing and telecommuting. But if you ask the company’s CEO, Tim Kirley, he

will likely tell you that it goes beyond the financial incentives, and at the heart of it is the culture of honest communication that he

adamantly promotes. Kirley works with senior managers and team members in what makes up an open floor plan and always tries to

maintain his approachability. Examples of this include direct communication, letters to staff and video, and Internet-posted talks. In

503

addition, regular meetings are held to celebrate achievements and reinforce the firm’s ethos. Staff surveys are frequently administered

and feedback is widely taken into consideration so that the 10,000 employees feel heard and respected.

According to Fortune’s managing editor, Hank Gilman, “The most important considerations for this year’s list were hiring and the

ways in which companies are helping their employees weather the recession.” Edward Jones was able to persevere through the

trauma of the recent financial crisis with no layoffs and an 8% one-year job growth. While a salary freeze was enacted, profit sharing

continued. Kirley insists that the best approach to the recent economic downturn is to remain honest with his employees even when

the news he is delivering is not what they want to hear.

Edward Jones was established in 1922 by Edward D. Jones Sr., and long ago, the company recognized the importance of a satisfied

workforce and how that has the ability to translate into customer satisfaction and long-term growth. The company’s internal policy

of open communication seems to carry over to how advisors value their relationship with individual customers. Investors are most

likely to contact their advisor by directly visiting them at a local branch or by picking up the phone and calling them. Edward Jones’s

managing partner, Jim Weddle, explains it best himself: “We are able to stay focused on the long-term because we are a partnership

and we know who we are and what we do. When you respect the people who work here, you take care of them—not just in the good

times, but in the difficult times as well.”

Case written based on information from 100 best companies to work for. (2010, February 8). Fortune. Retrieved February 2, 2010,

from http://money.cnn.com/magazines/fortune/bestcompanies/2010/full_list; St. Louis firms make Fortune’s best workplaces. (2009,

January 22). St. Louis Business Journal. Retrieved February 3, 2010, from http://www.bizjournals.com/stlouis/stories/2009/01/19/

daily40.html; Rodrigues, N., & Clayton, C. (2009). A positive difference in the office and the world. Sunday Times, pp. 10, 11.

Retrieved from LexisNexis Academic database; Lawlor, A. (2008, March 13). Edward Jones is one to work for. Sunday Times,

Financial Adviser. Retrieved February 2, 2010, from LexisNexis Academic database; Keeping clients happy. (2009, August 1).

Registered Rep. Retrieved February 2, 2010, from http://registeredrep.com/planner-ria-practice/finance-keeping-clients-happy-0801

Discussion Questions

1. Communication is a key part of the leading facet of the P-O-L-C framework. What otherthings could Edward Jones do to increase its effectiveness in the area of communications?

2. As an organization, what qualities do you think Edward Jones looks for when hiring newfinancial advisors? How do you think that affects its culture over time?

3. With its success in North America, why do you think Edward Jones has not expandedacross the Pacific or Atlantic Oceans?

4. How has technology enabled Edward Jones to become more effective at communicatingwith its employees and customers?

5. What types of customer service policies do think Edward Jones has in place? How do theserelate to its culture over time?

504 • PRINCIPLES OF MANAGEMENT

12.3 Understanding Communication

Learning Objectives

1. Define communication.

2. Understand the communication process.

Communication supports each of a manager’s P-O-L-C functions. The ability to effectively communicate is

a necessary condition for successfully planning, organizing, leading, and controlling. Communication is vital

to organizations—it’s how we coordinate actions and achieve goals. It is defined in the Merriam-Webster’s

dictionary as “a process by which information is exchanged between individuals through a common system of

symbols, signs, or behavior (Merriam-Webster, 2008).” We know that 50%–90% of a manager’s time is spent

communicating (Schnake, et. al., 1990) and that communication ability is related to a manager’s performance

(Penley, et. al., 1991). In most work environments, a miscommunication is an annoyance—it can interrupt

workflow by causing delays and interpersonal strife. And in some work arenas, like operating rooms and airplane

cockpits, communication can be a matter of life and death.

So, just how prevalent is the problem of miscommunication in the workplace? You may be surprised to learn that

the relationship between miscommunication and negative outcomes is strong. A recent NASA study suggests that

deficient interpersonal communication was a causal factor in approximately 70%–80% of aviation accidents over

a 20-year period (Baron, 2004).

Poor communication can also lead to lawsuits. For example, you might think that malpractice suits are filed

against doctors based on the outcome of their treatments alone. But a 1997 study of malpractice suits found that

a primary influence on whether a doctor is sued is that doctor’s communication style. While the combination of a

bad outcome and patient unhappiness can quickly lead to litigation, a warm, personal communication style leads

to greater patient satisfaction. And satisfied patients are less likely to sue.1

Figure 12.4

505

Success on complicated missions at NASA depends on strong communication.

Wikimedia Commons – Orion briefing model – public domain.

For leaders and organizations, poor communication costs money and wastes time. One study found that 14% of

each workweek is wasted on poor communication (Armour, 1998). In contrast, effective communication is an

asset for organizations and individuals alike. Effective communication skills, for example, are an asset for job

seekers. A recent study of recruiters at 85 business schools ranked communication and interpersonal skills as

the highest skills they were looking for, with 89% of the recruiters saying they were important (Alsop, 2006).

Good communication can also help a company retain its star employees. Surveys find that when employees

think their organizations do a good job of keeping them informed about matters that affect them and they

have ready access to the information they need to do their jobs, they are more satisfied with their employers

(Mercer, 2003). So, can good communication increase a company’s market value? The answer seems to be yes.

“When you foster ongoing communications internally, you will have more satisfied employees who will be better

equipped to effectively communicate with your customers,” says Susan Meisinger, President/CEO of the Society

for Human Resource Management, citing research findings that for organizations that are able to improve their

communication integrity, their market value increases by as much as 7.1% (Meisinger, 2003). We will explore the

definition and benefits of effective communication in our next section.

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The Communication ProcessThe Communication Process

Figure 12.5

Lee Iacocca, past president and CEO of Chrysler

until his retirement in 1992, said, “You can have

brilliant ideas, but if you can’t get them across,

your ideas won’t get you anywhere.”

Lee Iacocca at the White House in 1993 – public

domain.

Communication fulfills three main functions within an organization: (1) transmitting information, (2) coordinating

effort, and (3) sharing emotions and feelings. All these functions are vital to a successful organization.

Transmitting information is vital to an organization’s ability to function. Coordinating effort within the

organization helps people work toward the same goals. Sharing emotions and feelings bonds teams and unites

people in times of celebration and crisis. Effective communication helps people grasp issues, build rapport with

coworkers, and achieve consensus. So, how can we communicate effectively? The first step is to understand the

communication process.

We all exchange information with others countless times a day, by phone, e-mail, printed word, and of course,

in person. Let’s take a moment to see how a typical communication works using the Process Model of

Communication as a guide.

Figure 12.6 The Process Model of Communication

12.3 UNDERSTANDING COMMUNICATION • 507

A Sender, such as a boss, coworker, or customer, originates the Message with a thought. For example, the boss’s

thought could be: “Get more printer toner cartridges!”

The Sender encodes the Message, translating the idea into words.

The boss may communicate this thought by saying, “Hey you guys, we need to order more printer toner

cartridges.”

The medium of this encoded Message may be spoken words, written words, or signs.

The receiver is the person who receives the Message.

The Receiver decodes the Message by assigning meaning to the words.

In this example, our Receiver, Bill, has a to-do list a mile long. “The boss must know how much work I already

have.” the Receiver thinks. Bill’s mind translates his boss’s Message as, “Could you order some printer toner

cartridges, in addition to everything else I asked you to do this week…if you can find the time?”

The meaning that the Receiver assigns may not be the meaning that the Sender intended because of such factors

as noise. Noise is anything that interferes with or distorts the Message being transformed. Noise can be external in

the environment (such as distractions) or it can be within the Receiver. For example, the Receiver may be highly

nervous and unable to pay attention to the Message. Noise can even occur within the Sender: the Sender may be

unwilling to take the time to convey an accurate Message or the words she chooses can be ambiguous and prone

to misinterpretation.

Picture the next scene. The place: a staff meeting. The time: a few days later. The boss believes her Message has

been received.

“Are the printer toner cartridges here yet?” she asks.

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“You never said it was a rush job!” the Receiver protests.

“But!”

Miscommunications like these happen in the workplace every day. We’ve seen that miscommunication does occur

in the workplace. But how does a miscommunication happen? It helps to think of the communication process. The

series of arrows pointing the way from the Sender to the Receiver and back again can, and often do, fall short of

their target.

Key Takeaway

Communication is vital to organizations. Poor communication is prevalent and can have seriousrepercussions. Communication fulfills three functions within organizations: transmitting information,coordinating, and sharing emotions and feelings. Noise can disrupt or distort communication.

Exercises

1. Where have you seen the communication process break down—at work? At school? At home?

2. Explain how miscommunication might be related to an accident at work.

3. Give an example of noise during the communication process.

1Communications skills cut malpractice risk—study reveals most important reason that patients decide to file

malpractice suits is because of poor communication by physicians and not medical errors. (1997, October). USA

Today.

ReferencesReferences

Alsop, R. (2006, September 20). The top business schools: Recruiters’ M.B.A. picks. Wall Street Journal Online.

Retrieved September 20, 2006 from http://online.wsj.com/article/SB115860376846766495.html?mod=2_1245_1.

Armour, S. (1998, September 30). Failure to Communicate Costly for Companies. USA Today, 1A.

Baron, R. (2004). Barriers to effective communication: Implications for the cockpit. Retrieved July 3, 2008, from

AirlineSafety.com: http://www.airlinesafety.com/editorials/BarriersToCommunication.htm.

Meisinger, S. (2003, February). Enhancing communications—ours and yours. HR Magazine. Retrieved July 1,

2008, from http://www.shrm.org/hrmagazine/archive/0203toc.asp.

12.3 UNDERSTANDING COMMUNICATION • 509

Mercer, What are the bottom line results of communicating? (2003, June). Pay for Performance Report, p. 1.

Retrieved July 1, 2008, from http://www.mercerHR.com.

Merriam-Webster online dictionary. (2008). Retrieved December 1, 2008, from http://www.merriam-webster.com/

dictionary/communication.

Penley, L. E., Alexander, E. R., Jernigan, I. E., & Henwood, C. I. (1991). Communication abilities of managers:

The relationship of performance. Journal of Management, 17, 57–76.

Schnake, M. E., Dumler, M. P., Cochran, D. S., & Barnett, T. R. (1990). Effects of differences in subordinate

perceptions of superiors’ communication practices. The Journal of Business Communication, 27, 37–50.

510 • PRINCIPLES OF MANAGEMENT

12.4 Communication Barriers

Learning Objectives

1. Understand different ways that the communication process can be sidetracked.

2. Understand the problem of poor listening and how to promote active listening.

Barriers to Effective CommunicationBarriers to Effective Communication

Communicating can be more of a challenge than you think, when you realize the many things that can stand in the

way of effective communication. These include filtering, selective perception, information overload, emotional

disconnects, lack of source familiarity or credibility, workplace gossip, semantics, gender differences, differences

in meaning between Sender and Receiver, and biased language. Let’s examine each of these barriers.

FilteringFiltering

Filtering is the distortion or withholding of information to manage a person’s reactions. Some examples of

filtering include a manager who keeps her division’s poor sales figures from her boss, the vice president, fearing

that the bad news will make him angry. The old saying, “Don’t shoot the messenger!” illustrates the tendency of

Receivers (in this case, the vice president) to vent their negative response to unwanted Messages on the Sender. A

gatekeeper (the vice president’s assistant, perhaps) who doesn’t pass along a complete Message is also filtering.

The vice president may delete the e-mail announcing the quarter’s sales figures before reading it, blocking the

Message before it arrives.

As you can see, filtering prevents members of an organization from getting a complete picture of the way things

are. To maximize your chances of sending and receiving effective communications, it’s helpful to deliver a

Message in multiple ways and to seek information from multiple sources. In this way, the effect of any one

person’s filtering the Message will be diminished.

Since people tend to filter bad news more during upward communication, it is also helpful to remember that those

below you in an organization may be wary of sharing bad news. One way to defuse the tendency to filter is to

reward employees who clearly convey information upward, regardless of whether the news is good and bad.

511

Here are some of the criteria that individuals may use when deciding whether to filter a Message or pass it on:

• Past experience: Was the Sender rewarded for passing along news of this kind in the past, or was she

criticized?

• Knowledge, perception of the speaker: Has the Receiver’s direct superior made it clear that “no news is

good news?”

• Emotional state, involvement with the topic, level of attention: Does the Sender’s fear of failure or criticism

prevent him from conveying the Message? Is the topic within his realm of expertise, increasing his

confidence in his ability to decode it, or is he out of his comfort zone when it comes to evaluating the

Message’s significance? Are personal concerns impacting his ability to judge the Message’s value?

Once again, filtering can lead to miscommunications in business. Each listener translates the Message into his or

her own words, creating his or her own version of what was said (Alessandra, 1993).

Selective PerceptionSelective Perception

Selective perception refers to filtering what we see and hear to suit our own needs. This process is often

unconscious. Small things can command our attention when we’re visiting a new place—a new city or a new

company. Over time, however, we begin to make assumptions about the way things are on the basis of our past

experience. Often, much of this process is unconscious. “We simply are bombarded with too much stimuli every

day to pay equal attention to everything so we pick and choose according to our own needs (Pope, 2008).”

Selective perception is a time-saver, a necessary tool in a complex culture. But it can also lead to mistakes.

Think back to the earlier example conversation between Bill, who was asked to order more toner cartridges, and

his boss. Since Bill found his boss’s to-do list to be unreasonably demanding, he assumed the request could wait.

(How else could he do everything else on the list?) The boss, assuming that Bill had heard the urgency in her

request, assumed that Bill would place the order before returning to the other tasks on her list.

Both members of this organization were using selective perception to evaluate the communication. Bill’s

perception was that the task of ordering could wait. The boss’s perception was that her time frame was clear,

though unstated. When two selective perceptions collide, a misunderstanding occurs.

Information OverloadInformation Overload

Information overload can be defined as “occurring when the information processing demands on an individual’s

time to perform interactions and internal calculations exceed the supply or capacity of time available for

such processing (Schick, et. al., 1990).” Messages reach us in countless ways every day. Some are

societal—advertisements that we may hear or see in the course of our day. Others are professional—e-mails, and

memos, voice mails, and conversations from our colleagues. Others are personal—messages and conversations

from our loved ones and friends.

Add these together and it’s easy to see how we may be receiving more information than we can take in. This state

of imbalance is known as information overload. Experts note that information overload is “A symptom of the

high-tech age, which is too much information for one human being to absorb in an expanding world of people and

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technology. It comes from all sources including TV, newspapers, and magazines as well as wanted and unwanted

regular mail, e-mail and faxes. It has been exacerbated enormously because of the formidable number of results

obtained from Web search engines (PC Magazine, 2008).” Other research shows that working in such fragmented

fashion has a significant negative effect on efficiency, creativity, and mental acuity (Overholt, 2001).

Going back to our example of Bill. Let’s say he’s in his cubicle on the phone with a supplier. While he’s talking,

he hears the chime of e-mail alerting him to an important message from his boss. He’s scanning through it quickly,

while still on the phone, when a coworker pokes his head around the cubicle corner to remind Bill that he’s late

for a staff meeting. The supplier on the other end of the phone line has just given Bill a choice among the products

and delivery dates he requested. Bill realizes he missed hearing the first two options, but he doesn’t have time to

ask the supplier to repeat them all or to try reconnecting to place the order at a later time. He chooses the third

option—at least he heard that one, he reasons, and it seemed fair. How good was Bill’s decision amid all the

information he was processing at the same time?

Emotional disconnectsEmotional disconnects

Emotional disconnects happen when the Sender or the Receiver is upset, whether about the subject at hand or

about some unrelated incident that may have happened earlier. An effective communication requires a Sender

and a Receiver who are open to speaking and listening to one another, despite possible differences in opinion

or personality. One or both parties may have to put their emotions aside to achieve the goal of communicating

clearly. A Receiver who is emotionally upset tends to ignore or distort what the Sender is saying. A Sender who

is emotionally upset may be unable to present ideas or feelings effectively.

Lack of Source CredibilityLack of Source Credibility

Lack of source familiarity or credibility can derail communications, especially when humor is involved. Have

you ever told a joke that fell flat? You and the Receiver lacked the common context that could have made it funny.

(Or yes, it could have just been a lousy joke.) Sarcasm and irony are subtle, and potentially hurtful, commodities

in business. It’s best to keep these types of communications out of the workplace as their benefits are limited, and

their potential dangers are great. Lack of familiarity with the Sender can lead to misinterpreting humor, especially

in less-rich information channels like e-mail. For example, an e-mail from Jill that ends with, “Men, like hens,

should boil in vats of oil,” could be interpreted as antimale if the Receiver didn’t know that Jill has a penchant for

rhyme and likes to entertain coworkers by making up amusing sayings.

Similarly, if the Sender lacks credibility or is untrustworthy, the Message will not get through. Receivers may be

suspicious of the Sender’s motivations (“Why am I being told this?”). Likewise, if the Sender has communicated

erroneous information in the past, or has created false emergencies, his current Message may be filtered.

Workplace gossip, also known as the grapevine, is a lifeline for many employees seeking information about their

company (Kurland & Pelled, 2000). Researchers agree that the grapevine is an inevitable part of organizational

life. Research finds that 70% of all organizational communication occurs at the grapevine level (Crampton, 1998).

Employees trust their peers as a source of Messages, but the grapevine’s informal structure can be a barrier to

12.4 COMMUNICATION BARRIERS • 513

effective communication from the managerial point of view. Its grassroots structure gives it greater credibility in

the minds of employees than information delivered through official channels, even when that information is false.

Some downsides of the office grapevine are that gossip offers politically minded insiders a powerful tool for

disseminating communication (and self-promoting miscommunications) within an organization. In addition, the

grapevine lacks a specific Sender, which can create a sense of distrust among employees—who is at the root of the

gossip network? When the news is volatile, suspicions may arise as to the person or persons behind the Message.

Managers who understand the grapevine’s power can use it to send and receive Messages of their own. They also

decrease the grapevine’s power by sending official Messages quickly and accurately, should big news arise.

SemanticsSemantics

Semantics is the study of meaning in communication. Words can mean different things to different people, or

they might not mean anything to another person. For example, companies often have their own acronyms and

buzzwords (called business jargon) that are clear to them but impenetrable to outsiders. For example, at IBM, GBS

is focusing on BPTS, using expertise acquired from the PwC purchase (which had to be sold to avoid conflicts of

interest in light of SOX) to fend other BPO providers and inroads by the Bangalore tiger. Does this make sense

to you? If not, here’s the translation: IBM’s Global Business Services (GBS) division is focusing on offering

companies Business Process Transformation Services (BPTS), using the expertise it acquired from purchasing the

management consulting and technology services arm of PricewaterhouseCoopers (PwC), which had to sell the

division because of the Sarbanes-Oxley Act (SOX, enacted in response to the major accounting scandals like the

Enron). The added management expertise puts it above business process outsourcing (BPO) vendors who focus

more on automating processes rather than transforming and improving them. Chief among these BPO competitors

is Wipro, often called the “Bangalore tiger” because of its geographic origin and aggressive growth.

Given the amount of Messages we send and receive every day, it makes sense that humans try to find shortcuts—a

way to communicate things in code. In business, this code is known as jargon. Jargon is the language of

specialized terms used by a group or profession. It is common shorthand among experts and if used sensibly

can be a quick and efficient way of communicating. Most jargon consists of unfamiliar terms, abstract words,

nonexistent words, acronyms, and abbreviations, with an occasional euphemism thrown in for good measure.

Every profession, trade, and organization has its own specialized terms (Wright, 2008). At first glance, jargon

seems like a good thing—a quicker way to send an effective communication, the way text message abbreviations

can send common messages in a shorter, yet understandable way. But that’s not always how things happen.

Jargon can be an obstacle to effective communication, causing listeners to tune out or fostering ill-feeling between

partners in a conversation. When jargon rules the day, the Message can get obscured.

A key question to ask before using jargon is, “Who is the Receiver of my Message?” If you are a specialist

speaking to another specialist in your area, jargon may be the best way to send a message while forging a

professional bond—similar to the way best friends can communicate in code. For example, an information

technology (IT) systems analyst communicating with another IT employee may use jargon as a way of sharing

information in a way that reinforces the pair’s shared knowledge. But that same conversation should be held in

standard English, free of jargon, when communicating with staff members outside the IT group.

514 • PRINCIPLES OF MANAGEMENT

Online Follow-UpOnline Follow-Up

Here is a Web site of 80 buzz words in business:

http://www.amanet.org/movingahead/editorial2002_2003/nov03_80buzzwords.htm

and a discussion of why slang is a problem:

http://sbinfocanada.about.com/od/speakforsuccesscourse/a/speechlesson5.htm.

Gender DifferencesGender Differences

Gender differences in communication have been documented by a number of experts, including linguistics

professor Deborah Tannen in her best-selling book You Just Don’t Understand: Women and Men in Conversation

(Tannen, 1991). Men and women work together every day. But their different styles of communication can

sometimes work against them. Generally speaking, women like to ask questions before starting a project, while

men tend to “jump right in.” A male manager who’s unaware of how many women communicate their readiness

to work may misperceive a ready employee as not ready.

Another difference that has been noticed is that men often speak in sports metaphors, while many women use

their home as a starting place for analogies. Women who believe men are “only talking about the game” may be

missing out on a chance to participate in a division’s strategy and opportunities for teamwork and “rallying the

troops” for success (Krotz, 2008).

“It is important to promote the best possible communication between men and women in the workplace,” notes

gender policy adviser Dee Norton, who provided the above example. “As we move between the male and female

cultures, we sometimes have to change how we behave (speak the language of the other gender) to gain the

best results from the situation. Clearly, successful organizations of the future are going to have leaders and team

members who understand, respect and apply the rules of gender culture appropriately (Norton, 2008).”

Being aware of these gender differences can be the first step in learning to work with them, as opposed to

around them. For example, keep in mind that men tend to focus more on competition, data, and orders in their

communications, while women tend to focus more on cooperation, intuition, and requests. Both styles can be

effective in the right situations, but understanding the differences is a first step in avoiding misunderstandings

based on them.

Differences in meaning often exist between the Sender and Receiver. “Mean what you say, and say what you

mean.” It’s an easy thing to say. But in business, what do those words mean? Different words mean different

things to different people. Age, education, and cultural background are all factors that influence how a person

interprets words. The less we consider our audience, the greater our chances of miscommunication will be.

When communication occurs in the cross-cultural context, extra caution is needed given that different words

will be interpreted differently across cultures and different cultures have different norms regarding nonverbal

communication. Eliminating jargon is one way of ensuring that our words will convey real-world concepts to

12.4 COMMUNICATION BARRIERS • 515

others. Speaking to our audience, as opposed to about ourselves, is another. Nonverbal Messages can also have

different meanings.

Table 12.1 Gestures Around the Globe

516 • PRINCIPLES OF MANAGEMENT

Figure 12.8

1. “V” for victory. Use this gesture with caution! While in North America it signs victoryor peace, in England and Australia it means something closer to “take this!”

Figure 12.9

2. The “OK” gesture. While in North America it means things are going well, in France itmeans a person is thought to be worthless, in Japan it refers to money, and in Brazil,Russia, and Germany it means something really not appropriate for the workplace.

Figure 12.10

3. The “thumbs up” means one in Germany, five in Japan, but a good job in NorthAmerica. This can lead to confusion.

Figure 12.11

4. “Hook ‘em horns.” This University of Texas rallying call looks like the horns of a bull.However, in Italy it means you are being tricked, while in Brazil and Venezuela it meansyou are warding off evil.

12.4 COMMUNICATION BARRIERS • 517

Figure 12.12

5. Waving your hand. In much of Europe waving your hand indicates a disagreement.However, in North America it is routinely used as a way to signal greetings or to getsomeone’s attention.

Adapted from information in Axtell, R. E. (1998). Gestures: The do’s and taboos of body language around the

world. New York: John Wiley.

Managers who speak about “long-term goals and profits” to a staff that has received scant raises may find their

core Message (“You’re doing a great job—and that benefits the folks in charge!”) has infuriated the group they

hoped to inspire. Instead, managers who recognize the “contributions” of their staff and confirm that this work

is contributing to company goals in ways “that will benefit the source of our success—our employees as well as

executives,” will find their core Message (“You’re doing a great job—we really value your work”) is received as

opposed to being misinterpreted.

Biased language can offend or stereotype others on the basis of their personal or group affiliation. The figure

below provides a list of words that have the potential to be offensive in the left-hand column. The right-hand

column provides more neutral words that you can use instead (Ashcraft & Mumby, 2003; Swift, 2007).

Figure 12.13 Avoiding Biased Language

Effective communication is clear, factual, and goal-oriented. It is also respectful. Referring to a person by one

adjective (a brain, a diabetic, an invalid) reduces that person to that one characteristic. Language that belittles or

stereotypes a person poisons the communication process. Language that insults an individual or group based on

age, ethnicity, sexual preference, or political beliefs violates public and private standards of decency, ranging from

civil rights to corporate regulations.

The effort to create a neutral set of terms to refer to heritage and preferences has resulted in a debate over the

518 • PRINCIPLES OF MANAGEMENT

nature of “political correctness.” Proponents of political correctness see it as a way to defuse the volatile nature

of words that stereotyped groups and individuals in the past. Critics of political correctness see its vocabulary as

stilted and needlessly cautious.

Many companies offer new employees written guides on standards of speech and conduct. These guides,

augmented by common sense and courtesy, are solid starting points for effective, respectful workplace

communication. Tips for appropriate workplace speech include but are not limited to

• Alternating the use of “he” and “she” when referring to people in general.

• Relying on human resources–generated guidelines.

• Remembering that terms that feel respectful or comfortable to us may not be comfortable or respectful to

others.

Poor Listening and Active ListeningPoor Listening and Active Listening

Former Chrysler CEO Lee Iacocca lamented, “I only wish I could find an institute that teaches people how

to listen. After all, a good manager needs to listen at least as much as he needs to talk (Iacocca & Novak,

1984).” Research shows that listening skills are related to promotions (Sypher, et. al., 1989). A Sender may

strive to deliver a Message clearly. But the Receiver’s ability to listen effectively is equally vital to effective

communication. The average worker spends 55% of her workdays listening. Managers listen up to 70% each day.

But listening doesn’t lead to understanding in every case. Listening takes practice, skill, and concentration.

According to University of San Diego professor Phillip Hunsaker, “The consequences of poor listening are lower

employee productivity, missed sales, unhappy customers, and billions of dollars of increased cost and lost profits.

Poor listening is a factor in low employee morale and increased turnover because employees do not feel their

managers listen to their needs, suggestions, or complaints (Alessandra, et. al., 1993).” Clearly, if you hope to have

a successful career in management, it behooves you to learn to be a good listener.

Alan Gulick, a Starbucks spokesperson, puts better listening to work in pursuit of better profits. If every Starbucks

employee misheard one $10 order each day, he calculates, their errors would cost the company a billion dollars

annually. To teach its employees to listen, Starbucks created a code that helps employees taking orders hear the

size, flavor, and use of milk or decaf coffee. The person making the drink echoes the order aloud.

How can you improve your listening skills? The Roman philosopher Cicero said, “Silence is one of the great arts

of conversation.” How often have we been in conversation with someone else where we are not really listening but

itching to convey our portion? This behavior is known as “rehearsing.” It suggests the Receiver has no intention

of considering the Sender’s Message and intends to respond to an earlier point instead. Clearly, rehearsing is an

impediment to the communication process. Effective communication relies on another kind of listening: active

listening.

Active listening can be defined as giving full attention to what other people are saying, taking time to understand

the points being made, asking questions as appropriate, and not interrupting at inappropriate times (Onet Center,

2008).Active listening creates a real-time relationship between the Sender and the Receiver by acknowledging the

content and receipt of a Message. As we’ve seen in the Starbucks example, repeating and confirming a Message’s

12.4 COMMUNICATION BARRIERS • 519

content offers a way to confirm that the correct content is flowing between colleagues. The process creates a bond

between coworkers while increasing the flow and accuracy of messaging.

Carl Rogers, founder of the “person-centered” approach to psychology, formulated five rules for active listening:

1. Listen for message content

2. Listen for feelings

3. Respond to feelings

4. Note all cues

5. Paraphrase and restate

The good news is that listening is a skill that can be learned (Brownell, 1990). The first step is to decide that

we want to listen. Casting aside distractions, such as by reducing background or internal noise, is critical. The

Receiver takes in the Sender’s Message silently, without speaking. Second, throughout the conversation, show

the speaker that you’re listening. You can do this nonverbally by nodding your head and keeping your attention

focused on the speaker. You can also do it verbally, by saying things like, “Yes,” “That’s interesting,” or other

such verbal cues. As you’re listening, pay attention to the Sender’s body language for additional cues about how

they’re feeling. Interestingly, silence plays a major role in active listening. During active listening, we are trying

to understand what has been said, and in silence, we can consider the implications. We can’t consider information

and reply to it at the same time. That’s where the power of silence comes into play. Finally, if anything is not clear

to you, ask questions. Confirm that you’ve heard the message accurately, by repeating back a crucial piece like,

“Great, I’ll see you at 2 p.m. in my office.” At the end of the conversation, a “thank you” from both parties is an

optional but highly effective way of acknowledging each other’s teamwork.

In summary, active listening creates a more dynamic relationship between a Receiver and a Sender. It strengthens

personal investment in the information being shared. It also forges healthy working relationships among

colleagues by making Speakers and Listeners equally valued members of the communication process.

Key Takeaway

Many barriers to effective communication exist. Examples include filtering, selective perception,information overload, emotional disconnects, lack of source familiarity or credibility, workplace gossip,semantics, gender differences, differences in meaning between Sender and Receiver, and biased language.The Receiver can enhance the probability of effective communication by engaging in active listening,which involves (1) giving one’s full attention to the Sender and (2) checking for understanding by repeatingthe essence of the Message back to the Sender.

Exercises

1. Most people are poor listeners. Do you agree or disagree with this statement? Please support your

520 • PRINCIPLES OF MANAGEMENT

position.

2. Please share an example of how differences in shared meaning have affected you.

3. Give an example of selective perception.

4. Do you use jargon at or in your classes? If so, do you think it helps or hampers communication?Why or why not?

5. In your experience, how is silence used in communication? How does your experience comparewith the recommended use of silence in active listening?

ReferencesReferences

Alessandra, T. (1993). Communicating at work. New York: Fireside.

Alessandra, T., Garner, H., & Hunsaker, P. L. (1993). Communicating at work. New York: Simon & Schuster.

Ashcraft, K., & Mumby, D. K. (2003). Reworking gender. Thousand Oaks, CA, Sage; Miller, C., &amp.

Brownell, J. (1990). Perceptions of effective listeners: A management study. Journal of Business

Communications, 27, 401–415.

Crampton, S. M. (1998). The informal communication network: factors influencing grapevine activity. Public

Personnel Management. Retrieved July 2, 2008, from http://www.allbusiness.com/management/735210-1.html.

Iacocca, L., & Novak, W. (1984). Iacocca: An autobiography. New York: Bantam Press.

Krotz, J. L. (n.d.). 6 tips for bridging the communication gap. Retrieved July 2, 2008, from Microsoft Small

Business Center Web site, http://www.microsoft.com/smallbusiness/resources/management/leadership-training/

women-vs-men-6-tips-for-bridging-the-communication-gap.aspx.

Kurland, N. B., & Pelled, L. H. (2000). Passing the word: Toward a model of gossip and power in the workplace.

Academy of Management Review, 25, 428–438.

Norton, D. Gender and communication—finding common ground. Retrieved July 2, 2008, from

http://www.uscg.mil/leadership/gender.htm.

O*NET Resource Center, the nation’s primary source of occupational information. Retrieved July 2, 2008, from

http://online.onetcenter.org/skills.

Overholt, A. (2001, February). Intel’s got (too much) mail. Fast Company. Retrieved July 2, 2008, from

http://www.fastcompany.com/online/44/intel.html and http://blogs.intel.com/it/2006/10/

information_overload.php.

PC Magazine, retrieved July 1, 2008, from PC Magazine encyclopedia Web site, http://www.pcmag.com/

encyclopedia_term/0,2542,t=information+overload&i=44950,00.asp, and reinforced by information in Dawley,

12.4 COMMUNICATION BARRIERS • 521

D. D., & Anthony, W. P. (2003). User perceptions of e-mail at work. Journal of Business and Technical

Communication, 17, 170–200.

Pope, R. R. Selective perception. Illinois State University. Retrieved December 1, 2008, from http://lilt.ilstu.edu/

rrpope/rrpopepwd/articles/perception3.html.

Schick, A. G., Gordon, L. A., & Haka, S. (1990). Information overload: A temporal approach. Accounting,

Organizations, and Society, 15, 199–220.

Swift, K. (1980). The handbook of nonsexist writing. New York: Lippincott & Crowell; Procter, M. (2007,

September 11). Unbiased language. Retrieved July 2, 2008, from http://www.utoronto.ca/writing/unbias.html.

Sypher, B. D., Bostrom, R. N., & Seibert, J. H. (1989). Listening, communication abilities, and success at work.

Journal of Business Communication, 26, 293–303.

Tannen, D. (1991). You just don’t understand: Women and men in conversation. New York: Ballantine.

Wright, N. Keep it jargon-free. Retrieved July 2, 2008, from http://www.plainlanguage.gov/howto/

wordsuggestions/jargonfree.cfm.

522 • PRINCIPLES OF MANAGEMENT

12.5 Different Types of Communication

Learning Objectives

1. Understand the features and advantages of verbal communication.

2. Understand the features and advantages of written communication.

3. Understand the features of nonverbal communication and how it interacts with verbal and writtencommunications.

Communication can be categorized into three basic types: (1) verbal communication, in which you listen to

a person to understand their meaning; (2) written communication, in which you read their meaning; and (3)

nonverbal communication, in which you observe a person and infer meaning. Each has its own advantages,

disadvantages, and even pitfalls.

Verbal CommunicationVerbal Communication

Verbal communications in business take place over the phone or in person. The medium of the Message is oral.

Let’s return to our printer cartridge example. This time, the Message is being conveyed from the Sender (the

Manager) to the Receiver (an employee named Bill) by telephone. We’ve already seen how the Manager’s request

to Bill (“We need to buy more printer toner cartridges”) can go awry. Now let’s look at how the same Message

can travel successfully from Sender to Receiver.

Manager (speaking on the phone): “Good morning, Bill!”

(By using the employee’s name, the manager is establishing a clear, personal link to the Receiver.)

Manager: “Your division’s numbers are looking great.”

(The Manager’s recognition of Bill’s role in a winning team further personalizes and emotionalizes the

conversation.)

Manager: “Our next step is to order more printer toner cartridges. Could you place an order for 1,000 printer toner

523

cartridges with Jones Computer Supplies? Our budget for this purchase is $30,000, and the cartridges need to be

here by Wednesday afternoon.”

(The Manager breaks down the task into several steps. Each step consists of a specific task, time frame, quantity,

or goal.)

Bill: “Sure thing! I’ll call Jones Computer Supplies and order 1,000 more printer toner cartridges, not exceeding

a total of $30,000, to be here by Wednesday afternoon.”

(Bill, who is good at active listening, repeats what he has heard. This is the Feedback portion of the

communication, and verbal communication has the advantage of offering opportunities for immediate feedback.

Feedback helps Bill to recognize any confusion he may have had hearing the manager’s Message. Feedback also

helps the manager to tell whether she has communicated the Message correctly.)

StorytellingStorytelling

Storytelling has been shown to be an effective form of verbal communication; it serves an important

organizational function by helping to construct common meanings for individuals within the organization. Stories

can help clarify key values and help demonstrate how things are done within an organization, and story frequency,

strength, and tone are related to higher organizational commitment (McCarthy, 2008). The quality of the stories

entrepreneurs tell is related to their ability to secure capital for their firms(Martens, et. al., 2007). Stories can serve

to reinforce and perpetuate an organization’s culture, part of the organizing P-O-L-C function.

Crucial ConversationsCrucial Conversations

While the process may be the same, high-stakes communications require more planning, reflection, and skill

than normal day-to-day interactions at work. Examples of high-stakes communication events include asking for

a raise or presenting a business plan to a venture capitalist. In addition to these events, there are also many

times in our professional lives when we have crucial conversations—discussions where not only the stakes

are high but also where opinions vary and emotions run strong (Patterson, et. al., 2002). One of the most

consistent recommendations from communications experts is to work toward using “and” instead of “but” as

you communicate under these circumstances. In addition, be aware of your communication style and practice

flexibility; it is under stressful situations that communication styles can become the most rigid.

Written CommunicationWritten Communication

In contrast to verbal communications, written business communications are printed messages. Examples of

written communications include memos, proposals, e-mails, letters, training manuals, and operating policies.

They may be printed on paper, handwritten, or appear on the screen. Normally, a verbal communication takes

place in real time. Written communication, by contrast, can be constructed over a longer period of time. Written

communication is often asynchronous (occurring at different times). That is, the Sender can write a Message that

the Receiver can read at any time, unlike a conversation that is carried on in real time. A written communication

can also be read by many people (such as all employees in a department or all customers). It’s a “one-to-many”

communication, as opposed to a one-to-one verbal conversation. There are exceptions, of course: a voicemail is

524 • PRINCIPLES OF MANAGEMENT

an oral Message that is asynchronous. Conference calls and speeches are oral one-to-many communications, and

e-mails may have only one recipient or many.

Figure 12.14

Communication mediums have come a long way since Alexander Graham Bell’s original

telephone.

Wikimedia Commons – First Bell telephone 1875 – public domain.

Most jobs involve some degree of writing. According to the National Commission on Writing, 67% of salaried

employees in large American companies and professional state employees have some writing responsibility. Half

of responding companies reported that they take writing into consideration when hiring professional employees,

and 91% always take writing into account when hiring (for any position, not just professional-level ones) (Flink,

2007).

Luckily, it is possible to learn to write clearly. Here are some tips on writing well. Thomas Jefferson summed

up the rules of writing well with this idea “Don’t use two words when one will do.” One of the oldest myths in

business is that writing more will make us sound more important; in fact, the opposite is true. Leaders who can

communicate simply and clearly project a stronger image than those who write a lot but say nothing.

Nonverbal CommunicationNonverbal Communication

What you say is a vital part of any communication. But what you don’t say can be even more important. Research

also shows that 55% of in-person communication comes from nonverbal cues like facial expressions, body stance,

and tone of voice. According to one study, only 7% of a Receiver’s comprehension of a Message is based on the

12.5 DIFFERENT TYPES OF COMMUNICATION • 525

Sender’s actual words; 38% is based on paralanguage (the tone, pace, and volume of speech), and 55% is based

on nonverbal cues (body language) (Mehrabian, 1981).

Research shows that nonverbal cues can also affect whether you get a job offer. Judges examining videotapes of

actual applicants were able to assess the social skills of job candidates with the sound turned off. They watched

the rate of gesturing, time spent talking, and formality of dress to determine which candidates would be the most

successful socially on the job (Gifford, et. al., 1985). For this reason, it is important to consider how we appear

in business as well as what we say. The muscles of our faces convey our emotions. We can send a silent message

without saying a word. A change in facial expression can change our emotional state. Before an interview, for

example, if we focus on feeling confident, our face will convey that confidence to an interviewer. Adopting a

smile (even if we’re feeling stressed) can reduce the body’s stress levels.

To be effective communicators, we need to align our body language, appearance, and tone with the words we’re

trying to convey. Research shows that when individuals are lying, they are more likely to blink more frequently,

shift their weight, and shrug (Siegman, 1985).

Listen Up and Learn More!Listen Up and Learn More!

To learn more about facial language from facial recognition expert Patrician McCarthy as she speakswith Senior Editor Suzanne Woolley at Business Week, view the online interview athttp://feedroom.businessweek.com/index.jsp?fr_chl=1e2ee1e43e4a5402a862f79a7941fa625f5b0744.

Another element of nonverbal communication is tone. A different tone can change the perceived meaning of a

message demonstrates how clearly this can be true, whether in verbal or written communication. If we simply

read these words without the added emphasis, we would be left to wonder, but the emphasis shows us how the

tone conveys a great deal of information. Now you can see how changing one’s tone of voice or writing can incite

or defuse a misunderstanding.

Table 12.2 Don’t Use That Tone with Me!

Placement of the emphasis What it means

I did not tell John you were late. Someone else told John you were late.

I did not tell John you were late. This did not happen.

I did not tell John you were late. I may have implied it.

I did not tell John you were late. But maybe I told Sharon and José.

I did not tell John you were late. I was talking about someone else.

I did not tell John you were late. I told him you still are late.

I did not tell John you were late. I told him you were attending another meeting.

Changing your tone can dramatically change your meaning.

Source: Based on ideas in Kiely, M. (1993, October). When “no” means “yes.” Marketing, 7–9.

526 • PRINCIPLES OF MANAGEMENT

For an example of the importance of nonverbal communication, imagine that you’re a customer interested in

opening a new bank account. At one bank, the bank officer is dressed neatly. She looks you in the eye when

she speaks. Her tone is friendly. Her words are easy to understand, yet she sounds professional. “Thank you for

considering Bank of the East Coast. We appreciate this opportunity and would love to explore ways that we can

work together to help your business grow,” she says with a friendly smile.

At the second bank, the bank officer’s tie is stained. He looks over your head and down at his desk as he speaks.

He shifts in his seat and fidgets with his hands. His words say, “Thank you for considering Bank of the West

Coast. We appreciate this opportunity and would love to explore ways that we can work together to help your

business grow,” but he mumbles, and his voice conveys no enthusiasm or warmth.

Which bank would you choose?

The speaker’s body language must match his or her words. If a Sender’s words and body language don’t match—if

a Sender smiles while telling a sad tale, for example—the mismatch between verbal and nonverbal cues can cause

a Receiver to actively dislike the Sender.

Here are a few examples of nonverbal cues that can support or detract from a Sender’s Message.

Body LanguageBody Language

A simple rule of thumb is that simplicity, directness, and warmth convey sincerity. And sincerity is key to effective

communication. A firm handshake, given with a warm, dry hand, is a great way to establish trust. A weak, clammy

handshake conveys a lack of trustworthiness. Gnawing one’s lip conveys uncertainty. A direct smile conveys

confidence.

Eye ContactEye Contact

In business, the style and duration of eye contact considered appropriate vary greatly across cultures. In the United

States, looking someone in the eye (for about a second) is considered a sign of trustworthiness.

Facial ExpressionsFacial Expressions

The human face can produce thousands of different expressions. These expressions have been decoded by

experts as corresponding to hundreds of different emotional states (Ekman, et. al., 2008). Our faces convey basic

information to the outside world. Happiness is associated with an upturned mouth and slightly closed eyes; fear

with an open mouth and wide-eyed stare. Flitting (“shifty”) eyes and pursed lips convey a lack of trustworthiness.

The effect of facial expressions in conversation is instantaneous. Our brains may register them as “a feeling” about

someone’s character.

PosturePosture

The position of our body relative to a chair or another person is another powerful silent messenger that conveys

interest, aloofness, professionalism—or lack thereof. Head up, back straight (but not rigid) implies an upright

12.5 DIFFERENT TYPES OF COMMUNICATION • 527

character. In interview situations, experts advise mirroring an interviewer’s tendency to lean in and settle back in

her seat. The subtle repetition of the other person’s posture conveys that we are listening and responding.

TouchTouch

The meaning of a simple touch differs between individuals, genders, and cultures. In Mexico, when doing

business, men may find themselves being grasped on the arm by another man. To pull away is seen as rude. In

Indonesia, to touch anyone on the head or touch anything with one’s foot is considered highly offensive. In the Far

East, according to business etiquette writer Nazir Daud, “it is considered impolite for a woman to shake a man’s

hand (Daud, 2008).” Americans, as we have noted, place great value in a firm handshake. But handshaking as a

competitive sport (“the bone-crusher”) can come off as needlessly aggressive, at home and abroad.

SpaceSpace

Anthropologist Edward T. Hall coined the term proxemics to denote the different kinds of distance that occur

between people. These distances vary between cultures. The figure below outlines the basic proxemics of

everyday life and their meaning (Hall, 1966):

Figure 12.15 Interpersonal Distances

Standing too far away from a colleague (such as a public speaking distance of more than seven feet) or too close

to a colleague (intimate distance for embracing) can thwart an effective verbal communication in business.

Key Takeaway

Types of communication include verbal, written, and nonverbal. Verbal communications have theadvantage of immediate feedback, are best for conveying emotions, and can involve storytelling andcrucial conversations. Written communications have the advantage of asynchronicity, of reaching manyreaders, and are best for conveying information. Both verbal and written communications convey

528 • PRINCIPLES OF MANAGEMENT

nonverbal messages through tone; verbal communications are also colored by body language, eye contact,facial expression, posture, touch, and space.

Exercises

1. When you see a memo or e-mail full of typos, poor grammar, or incomplete sentences, how doyou react? Does it affect your perception of the Sender? Why or why not?

2. How aware of your own body language are you? Has your body language ever gotten you intotrouble when you were communicating with someone?

3. If the meaning behind verbal communication is only 7% words, what does this imply for writtencommunication?

ReferencesReferences

Daud, N. (n.d.). Business etiquette. Retrieved July 2, 2008, from http://ezinearticles.com/?Business-

Etiquette—Shaking-Hands-around-the-World&id=746227.

Ekman, P., Friesen, W. V., & Hager, J. C. The facial action coding system (FACS). Retrieved July 2, 2008, from

http://face-and-emotion.com/dataface/facs/manual.

Flink, H. (2007, March). Tell it like it is: Essential communication skills for engineers. Industrial Engineer, 39,

44–49.

Gifford, R., Ng, C. F., & Wilkinson, M. (1985). Nonverbal cues in the employment interview: Links between

applicant qualities and interviewer judgments. Journal of Applied Psychology, 70, 729–736.

Hall, E. T. (1966). The hidden dimension. New York: Doubleday.

Martens, M. L., Jennings, J. E., & Devereaux, J. P. (2007). Do the stories they tell get them the money they need?

The role of entrepreneurial narratives in resource acquisition. Academy of Management Journal, 50, 1107–1132.

McCarthy, J. F. (2008). Short stories at work: Storytelling as an indicator of organizational commitment. Group &

Organization Management, 33, 163–193.

Mehrabian, A. (1981). Silent messages. New York: Wadsworth.

Patterson, K., Grenny, J., McMillan, R., & Switzler, A. (2002). Crucial conversations: Tools for talking when

stakes are high. New York: McGraw-Hill.

Siegman, A. W. (1985). Multichannel integrations of nonverbal behavior. Hillsdale, NJ: Lawrence Erlbaum.

12.5 DIFFERENT TYPES OF COMMUNICATION • 529

12.6 Communication Channels

Learning Objectives

1. Understand how communication channels affect communication.

2. Recognize different communication directions within organizations.

The channel, or medium, used to communicate a message affects how accurately the message will be received.

Verbal, written, and nonverbal communications have different strengths and weaknesses. In business, the decision

to communicate verbally or in written form can be a powerful one. In addition, a smart manager is aware

of the nonverbal messages conveyed by either type of communication—as noted earlier, only 7% of verbal

communication comes from the words themselves.

Information RichnessInformation Richness

Channels vary in their information richness. Information-rich channels convey more nonverbal information.

As you may be able to guess from our earlier discussion of verbal and written communications, verbal

communications are richer than written ones. Research shows that effective managers tend to use more

information-rich communication channels than less effective managers (Allen & Griffeth, 1997; Fulk & Boyd,

1991; Yater & Orlikowski, 1992). The figure below illustrates the information richness of different information

channels.

Figure 12.16 Information Richness

530

Adapted from information in Daft, R. L., & Lenge, R. H. (1984). Information richness: A new approach

to managerial behavior and organizational design. In B. Staw & L. Cummings (Eds.), Research in

organizational behavior (Vol. 6, pp. 191–233). Greenwich, CT: JAI Press; and Lengel, R. H., & Daft, D. L.

(1988). The selection of communication media as an executive skill. Academy of Management Executive,

11, 225–232.

Like face-to-face and telephone conversation, videoconferencing has high information richness because Receivers

and Senders can see or hear beyond just the words—they can see the Sender’s body language or hear the tone

of their voice. Handheld devices, blogs, and written letters and memos offer medium-rich channels because they

convey words and pictures/photos. Formal written documents, such as legal documents, and spreadsheets, such

as the division’s budget, convey the least richness because the format is often rigid and standardized. As a result,

nuance is lost.

In business, the decision to communicate verbally or in written form can be powerful. In addition, a smart manager

is aware of the nonverbal messages conveyed by either type of communication—as noted earlier, only 7% of a

verbal communication comes from the words themselves.

When determining whether to communicate verbally or in writing, ask yourself: Do I want to convey facts or

feelings? Verbal communications are a better way to convey feelings. Written communications do a better job of

conveying facts.

Picture a manager making a speech to a team of 20 employees. The manager is speaking at a normal pace.

The employees appear interested. But how much information is being transmitted? Not as much as the speaker

believes! Humans listen much faster than they speak. The average public speaker communicates at a speed of

about 125 words a minute. And that pace sounds fine to the audience. (In fact, anything faster than that probably

would sound weird. To put that figure in perspective, someone having an excited conversation speaks at about

150 words a minute.) On the basis of these numbers, we could assume that the employees have more than enough

12.6 COMMUNICATION CHANNELS • 531

time to take in each word the manager delivers. And that’s the problem. The average person in the audience can

hear 400–500 words a minute (Lee & Hatesohl, 2008). The audience has more than enough time to hear. As a

result, they will each be processing many thoughts of their own, on totally different subjects, while the manager

is speaking. As this example demonstrates, oral communication is an inherently flawed medium for conveying

specific facts. Listeners’ minds wander! It’s nothing personal—in fact, it’s totally physical. In business, once we

understand this fact, we can make more intelligent communication choices based on the kind of information we

want to convey.

The key to effective communication is to match the communication channel with the goal of the communication

(Barry & Fulmer, 2004). For example, written media may be a better choice when the Sender wants a record

of the content, has less urgency for a response, is physically separated from the Receiver, doesn’t require a lot

of feedback from the Receiver, or the Message is complicated and may take some time to understand. Oral

communication, however, makes more sense when the Sender is conveying a sensitive or emotional Message,

needs feedback immediately, and does not need a permanent record of the conversation. Use the guide provided

for deciding when to use written versus verbal communication.

Figure 12.17 Guide for When to Use Written Versus Verbal Communication

Business Use of E-MailBusiness Use of E-Mail

The growth of e-mail has been spectacular, but it has also created challenges in managing information and an

ever-increasing speed of doing business. Over 100 million adults in the United States use e-mail regularly (at least

once a day) (Taylor, 2002). Internet users around the world send an estimated 60 billion e-mails every day, and

many of those are spam or scam attempts (CNET, 2006). That makes e-mail the second most popular medium of

communication worldwide, second only to voice. A 2005 study estimated that less than 1% of all written human

communications even reached paper—and we can imagine that this percentage has gone down even further since

then (Isom, 2005). To combat the overuse of e-mail, companies such as Intel have even instituted “no e-mail

Fridays” where all communication is done via other communication channels. Learning to be more effective in

your e-mail communications is an important skill. To learn more, check out the business e-mail do’s and don’ts.

532 • PRINCIPLES OF MANAGEMENT

Business E-Mail Do’s and Don’tsBusiness E-Mail Do’s and Don’ts

1. DON’T send or forward chain e-mails.

2. DON’T put anything in an e-mail that you don’t want the world to see.

3. DON’T write a Message in capital letters—this is the equivalent of SHOUTING.

4. DON’T routinely “cc” everyone all the time. Reducing inbox clutter is a great way to increasecommunication.

5. DON’T hit Send until you spell-check your e-mail.

6. DO use a subject line that summarizes your Message, adjusting it as the Message changes overtime.

7. DO make your request in the first line of your e-mail. (And if that’s all you need to say, stopthere!)

8. DO end your e-mail with a brief sign-off such as, “Thank you,” followed by your name andcontact information.

9. DO think of a work e-mail as a binding communication.

10. DO let others know if you’ve received an e-mail in error.

Source: Adapted from information in Leland, K., & Bailey, K. (2000). Customer service for dummies.New York: Wiley; Information Technology Services (1997). Top 10 email dos and top ten email don’ts.Retrieved July 1, 2008, from the University of Illinois at Chicago Medical Center Web site:http://www.uic.edu/hsc/uicmc/its/customers/email-tips.htm; Kawasaki, G. (2006, February 3). Theeffective emailer. Retrieved July 1, 2008, from How to Change the World Web site:http://blog.guykawasaki.com/2006/02/the_effective_e.html.

An important, although often ignored, rule when communicating emotional information is that e-mail’s lack

of richness can be your loss. As we saw in the chart above, e-mail is a medium-rich channel. It can convey

facts quickly. But when it comes to emotion, e-mail’s flaws make it far less desirable a choice than oral

communication—the 55% of nonverbal cues that make a conversation comprehensible to a listener are missing.

E-mail readers don’t pick up on sarcasm and other tonal aspects of writing as much as the writer believes they

will, researchers note in a recent study (Kruger, 2005).

The Sender may believe she has included these emotional signifiers in her Message. But, with words alone, those

signifiers are not there. This gap between the form and content of e-mail inspired the rise of emoticons—symbols

that offer clues to the emotional side of the words in each Message. Generally speaking, however, emoticons are

not considered professional in business communication.

You might feel uncomfortable conveying an emotionally laden message verbally, especially when the message

contains unwanted news. Sending an e-mail to your staff that there will be no bonuses this year may seem easier

than breaking the bad news face-to-face, but that doesn’t mean that e-mail is an effective or appropriate way to

deliver this kind of news. When the Message is emotional, the Sender should use verbal communication. Indeed,

a good rule of thumb is that the more emotionally laden messages require more thought in the choice of channel

and how they are communicated.

12.6 COMMUNICATION CHANNELS • 533

Direction of Communication Within OrganizationsDirection of Communication Within Organizations

Information can move horizontally, from a Sender to a Receiver, as we’ve seen. It can also move vertically,

down from top management or up from the front line. Information can also move diagonally between and among

levels of an organization, such as a Message from a customer service representative up to a manager in the

manufacturing department, or a Message from the chief financial officer sent down to all department heads.

Figure 12.18

Communication flows in many different directions within an organization.

There is a chance for these arrows to go awry, of course. As Mihaly Csikszentmihalyi, author of best-selling books

such as Flow, has noted, “In large organizations the dilution of information as it passes up and down the hierarchy,

and horizontally across departments, can undermine the effort to focus on common goals.” Managers need to keep

this in mind when they make organization design decisions as part of the organizing function.

The organizational status of the Sender can affect the Receiver’s attentiveness to the Message. For example,

consider: A senior manager sends a memo to a production supervisor. The supervisor, who has a lower status

within the organization, is likely to pay close attention to the Message. The same information, conveyed in the

opposite direction, however, might not get the attention it deserves. The Message would be filtered by the senior

manager’s perception of priorities and urgencies.

Requests are just one kind of communication in business. Other communications, both verbal or written, may

seek, give, or exchange information. Research shows that frequent communications with one’s supervisor is

534 • PRINCIPLES OF MANAGEMENT

related to better job performance ratings and overall organizational performance (Snyder & Morris, 1984; Kacmar,

et. al., 2003). Research also shows that lateral communication done between peers can influence important

organizational outcomes such as turnover (Krackhardt & Porter, 1986).

Figure 12.19 Who Managers Spend Time Communicating with at Work

Adapted from information in Luthans, F., & Larsen, J. K. (1986). How managers really communicate.

Human Relations, 39, 161–178.

External CommunicationsExternal Communications

External communications deliver specific business messages to individuals outside an organization. They may

announce changes in staff or strategy, earnings, and more. The goal of an external communication is to create a

specific Message that the Receiver will understand and share with others. Examples of external communications

include the following:

Press ReleasesPress Releases

Public relations professionals create external communications about a client’s product, services or practices for

specific Receivers. These Receivers, it is hoped, will share the Message with others. In time, as the Message

is passed along, it should appear to be independent of The Sender, creating the illusion of an independently

generated consumer trend, public opinion, and so on.

The Message of a public relations effort may be b2b (business to business), b2c (business to consumer), or

media related. The Message can take different forms. Press releases try to convey a newsworthy message, real

or manufactured. It may be constructed like a news item, inviting editors or reporters to reprint the Message in

part, or as a whole, with or without acknowledgment of the Sender’s identity. Public relations campaigns create

Messages over time, through contests, special events, trade shows, and media interviews in addition to press

releases.

12.6 COMMUNICATION CHANNELS • 535

AdsAds

Advertising places external business Messages before target Receivers through media buys. A media buy is a fee

that is paid to a television network, Web site, or magazine by an advertiser for an on-air, site, or publication ad.

The fee is based on the perceived value of the audience who watches, reads, or frequents the space where the ad

will appear.

In recent years, Receivers have begun to filter advertiser’s Messages, a phenomenon that is perceived to be the

result of the large amount of ads the average person sees each day and a growing level of consumer wariness of

paid Messaging. Advertisers, in turn, are trying to create alternative forms of advertising that Receivers won’t

filter. The advertorial is one example of an external communication that combines the look of an article with the

focused Message of an ad. Product placements in videos, movies, and games are other ways that advertisers strive

to reach Receivers with commercial Messages.

Web PagesWeb Pages

A Web page’s external communication can combine elements of public relations, advertising, and editorial

content, reaching Receivers on multiple levels and in multiple ways. Banner ads, blogs, and advertiser-driven

“click-through” areas are just a few of the elements that allow a business to deliver a Message to a Receiver online.

The perceived flexibility of online communications can impart a less formal (and, therefore, more believable)

quality to an external communication. A Message relayed in a daily blog post will reach a Receiver differently

than if it is delivered in an annual report, for example. The popularity and power of blogs is growing, with 11%

of Fortune 500 companies having official blogs (up from 4% in 2005). In fact, blogs have become so important

to some companies as Coca-Cola, Kodak, and Marriott that they have created official positions within their

organizations titled “Chief Blogging Officer (Workforce, 2008).”

The “real-time” quality of Web communications may appeal to Receivers who might filter out a traditional ad and

public relations message because of its “prefab” quality. Despite their “spontaneous” feel, many online pages can

be revisited in perpetuity. For this reason, clear and accurate external communications are as vital for online use

as they are in traditional media.

Customer CommunicationsCustomer Communications

Customer communications can include letters, catalogs, direct mail, e-mails, text messages, and telemarketing

messages. Some Receivers automatically filter bulk messages like these. Others will be receptive. The key to

a successful external communication to customers is to convey a business message in a personally compelling

way—dramatic news, a money-saving coupon, and so forth.

Key Takeaway

Different communication channels are more or less effective at transmitting different kinds of information.Some types of communication are information rich while others are medium rich. In addition,

536 • PRINCIPLES OF MANAGEMENT

communications flow in different directions within organizations. A major internal communicationchannel is e-mail, which is convenient but needs to be handled carefuly. External communication channelsinclude PR/press releases, ads, Web pages, and customer communications such as letters and catalogs.

Exercises

1. How could you use your knowledge of communication richness to be more effective in your owncommunications?

2. What are the three biggest advantages and disadvantages you see regarding technology andcommunications?

3. Explain the difference between internal and external communications in an organization, givingexamples of each.

ReferencesReferences

Allen, D. G., & Griffeth, R. W. (1997). Vertical and lateral information processing.

Barry, B., & Fulmer, I. S. (2004). The medium and the Message: The adaptive use of communication media in

dyadic influence. Academy of Management Review, 29, 272–292.

CNET, 60 Billion emails sent daily worldwide. (2006, April 26). Retrieved July 2, 2008, from CNET.UK:.

Fulk, J., & Boyd, B. (1991). Emerging theories of communication in organizations. Journal of Management, 17,

407–446.

Isom, David. http://www.sims.berkeley.edu/research/projects/how-much-info/index.htm, as cited in David K.

Isom. (2005, October 19). Electronic discovery: New power, new risks. Retrieved July 2, 2008, from

http://utahbar.org/barjournal2000/html/november_2003_2.html.

Kacmar, K. M., Witt, L. A., Zivnuska, S., & Guly, S. M. (2003). The interactive effect of leader-member exchange

and communication frequency on performance ratings. Journal of Applied Psychology, 88, 764–772.

Krackhardt, D., & Porter, L. W. (1986). The snowball effect: Turnover embedded in communication networks.

Journal of Applied Psychology, 71, 50–55.

Kruger, J. (2005). Egocentrism over email: Can we communicate as well as we think? Journal of Personality and

Social Psychology, 89, 925–936.

Lee, D., & Hatesohl, D. Listening: Our most used communication skill. University of Missouri. Retrieved July 2,

2008, from http://extension.missouri.edu/explore/comm/cm0150.htm.

12.6 COMMUNICATION CHANNELS • 537

Snyder, R. A., & Morris, J. H. (1984). Organizational communication and performance. Journal of Applied

Psychology, 69, 461–465.

Taylor, C. (2002, June 10). 12 steps for email addicts. Time.com. Retrieved July 2, 2008, from

http://www.time.com/time/magazine/article/0,9171,1002621,00.html.

Workforce, Chief blogging officer title catching on with corporations. (2008, May 1). Workforce Management

News in Brief. Retrieved July 2, 2008, from http://www.workforce.com/section/00/article/25/50/77.html.

Yates, J., & Orlikowski, W. J. (1992). Genres of organizational communication: A structurational approach to

studying communication and media. Academy of Management Review, 17, 299–326.

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12.7 Developing Your Personal Communication Skills

Learning Objectives

1. Learn how to improve your own listening habits.

2. Learn how to handle personal communications in a career-friendly manner.

3. Learn what communication freezers are and how to avoid them.

Figure 12.20

Communication can be formal or informal as seen here.

US Army Africa – U.S. Africa Command C4ISR Senior Leaders Conference, Vicenza, Italy, February 2011 – CC BY 2.0.

By being sensitive to the errors outlined in this chapter and adopting active listening skills, you may increase

your communication effectiveness, increasing your ability to carry out the managerial functions of planning,

organizing, leading, and controlling. The following are additional tools for helping you increase your

communication effectiveness.

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Ten Ways to Improve Your Listening HabitsTen Ways to Improve Your Listening Habits

1. Start by stopping. Take a moment to inhale and exhale quietly before you begin to listen. Your jobas a listener is to receive information openly and accurately.

2. Don’t worry about what you’ll say when the time comes. Silence can be a beautiful thing.

3. Join the Sender’s team. When she pauses, summarize what you believe she has said. “What I’mhearing is that we need to focus on marketing as well as sales. Is that correct?” Be attentive tophysical as well as verbal communications. “I hear you saying that we should focus on marketing.But the way you’re shaking your head tells me the idea may not really appeal to you—is that right?”

4. Don’t multitask while listening. Listening is a full-time job. It’s tempting to multitask when youand the Sender are in different places, but doing that is counterproductive. The human mind can onlyfocus on one thing at a time. Listening with only half your brain increases the chances that you’llhave questions later, requiring more of the Speaker’s time. (And when the speaker is in the sameroom, multitasking signals a disinterest that is considered rude.)

5. Try to empathize with the Sender’s point of view. You don’t have to agree; but can you findcommon ground?

6. Confused? Ask questions. There’s nothing wrong with admitting you haven’t understood theSender’s point. You may even help the Sender clarify the Message.

7. Establish eye contact. Making eye contact with the speaker (if appropriate for the culture) isimportant.

8. What is the goal of this communication? Ask yourself this question at different points during thecommunication to keep the information flow on track. Be polite. Differences in opinion can be thestarting point of consensus.

9. It’s great to be surprised. Listen with an open mind, not just for what you want to hear.

10. Pay attention to what is not said. Does the Sender’s body language seem to contradict herMessage? If so, clarification may be in order.

Adapted from information in Barrett, D. J. (2006). Leadership communication. New York: McGraw-Hill/Irwin; Improving verbal skills. Retrieved July 2, 2008, from http://www.itstime.com/aug97.htm;Ten tips: Active Listening from Communication at work. (2007, June 4). Retrieved July 2, 2008, fromhttp://communication.atwork-network.com/2007/06/04/ten-tips-active-listening.

Career-Friendly CommunicationsCareer-Friendly Communications

Communication can occur without your even realizing it. Consider the following: Is your e-mail name

professional? The typical convention for business e-mail contains some form of your name. While an e-mail name

like “LazyGirl” or “DeathMonkey” may be fine for chatting online with your friends, they may send the wrong

signal to individuals you e-mail such as professors and prospective employers.

• Is your outgoing voice mail greeting professional? If not, change it. Faculty and prospective recruiters will

draw certain conclusions if, upon calling you, they hear a message that screams, “Party, party, party!”

• Do you have a “private” social networking Web site on MySpace.com, Facebook.com, or Xanga.com? If so,

540 • PRINCIPLES OF MANAGEMENT

consider what it says about you to employers or clients. If it is information you wouldn’t share at work, it

probably shouldn’t be there.

• Googled yourself lately? If not, you probably should. Potential employers have begun searching the Web as

part of background checking and you should be aware of what’s out there about you.

Communication FreezersCommunication Freezers

Communication freezers put an end to effective communication by making the Receiver feel judged or defensive.

Typical communication stoppers include critizing, blaming, ordering, judging, or shaming the other person. The

following are some examples of things to avoid saying (Tramel & Reynolds, 1981; Saltman & O’Dea, 2008):

Telling people what to do:

◦ “You must…”

◦ “You cannot…”

Threatening with “or else” implied:

◦ “You had better…”

◦ “If you don’t…”

Making suggestions or telling other people what they ought to do:

◦ “You should…”

◦ “It’s your responsibility to…”

Attempting to educate the other person:

◦ “Let me give you the facts.”

◦ “Experience tells us that…”

Judging the other person negatively:

◦ “You’re not thinking straight.”

◦ “You’re wrong.”

12.7 DEVELOPING YOUR PERSONAL COMMUNICATION SKILLS • 541

Giving insincere praise:

◦ “You have so much potential.”

◦ “I know you can do better than this.”

Psychoanalyzing the other person:

◦ “You’re jealous.”

◦ “You have problems with authority.”

Making light of the other person’s problems by generalizing:

◦ “Things will get better.”

◦ “Behind every cloud is a silver lining.”

Asking excessive or inappropriate questions:

◦ “Why did you do that?”

◦ “Who has influenced you?”

10.

Making light of the problem by kidding:

◦ “Think about the positive side.”

◦ “You think you’ve got problems!”

Key Takeaway

By practicing the skills associated with active listening, you can become more effective in your personaland professional relationships. Managing your online communications appropriately can also help youavoid career pitfalls. Finally, be aware of the types of remarks that freeze communication and try not to usethem.

542 • PRINCIPLES OF MANAGEMENT

Exercises

1. How can you assess if you are engaging in active listening?

2. How does it feel when someone does not seem to be listening to you?

3. Some companies have MySpace pages where employees can mingle and share ideas andinformation. Do you think this practice is a good idea? Why or why not?

4. What advice would you give to someone who is going to become a first time manager in terms ofcommunication?

ReferencesReferences

Saltman, D., & O’Dea, N. (n.d.). Conflict management workshop powerpoint presentation. Retrieved July 1, 2008,

from http://www.nswrdn.com.au/client_images/6806.PDF; Communication stoppers. Retrieved July 1, 2008,

from Mental Health Today Web site: http://www.mental-health-today.com/Healing/communicationstop.htm.

Tramel, M., & Reynolds, H. (1981). Executive leadership. Englewood Cliffs, NJ: Prentice Hall.

12.7 DEVELOPING YOUR PERSONAL COMMUNICATION SKILLS • 543

Chapter 13: Managing Groups and Teams

13.1 Managing Groups and Teams

13.2 Case in Point: General Electric Allows Teamwork to Take Flight

13.3 Group Dynamics

13.4 Understanding Team Design Characteristics

13.5 Organizing Effective Teams

13.6 Barriers to Effective Teams

13.7 Developing Your Team Skills

544

13.1 Managing Groups and Teams

Figure 13.1

The coordination needed by a symphony to perform in unison is a prime example of teamwork.

TravelCoffeeBook – Pixabay – CC0 public domain.

What’s in It for Me?

Reading this chapter will help you do the following:

1. Recognize and understand group dynamics and development.

2. Understand the difference between groups and teams.

3. Understand how to organize effective teams.

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4. Recognize and address common barriers to team effectiveness.

5. Build and maintain cohesive teams.

Figure 13.2 The P-O-L-C Framework

Groups and teams are ubiquitous on the organizational landscape and managers will find that team management

skills are required within each of the planning-organizing-leading-controlling (P-O-L-C) functions. For instance,

planning may often occur in teams, particularly in less centralized organizations or toward the higher levels of

the firm. When making decisions about the structure of the firm and individual jobs, managers conducting their

organizing function must determine how teams will be used within the organization. Teams and groups have

implications for the controlling function because teams require different performance assessments and rewards.

Finally, teams and groups are a facet of the leading function. Today’s managers must be both good team members

and good team leaders. Managing groups and teams is a key component of leadership.

In your personal life, you probably already belong to various groups such as the group of students in your

management class; you may also belong to teams, such as an athletic team or a musical ensemble. In your career,

you will undoubtedly be called on to be part of, and mostly likely to manage, groups and teams.

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13.2 Case in Point: General Electric Allows Teamwork toTake Flight

Figure 13.3

KONICA MINOLTA DIGITAL CAMERA

Storm Cript – Checking the Engines – CC BY-NC-ND 2.0.

In Durham, North Carolina, Robert Henderson was opening a factory for General Electric Company(NYSE: GE). The goal of the factory was to manufacture the largest commercial jet engine in the world.Henderson’s opportunity was great and so were his challenges. GE hadn’t designed a jet engine from theground up for over 2 decades. Developing the jet engine project had already cost GE $1.5 billion. Thatwas a huge sum of money to invest—and an unacceptable sum to lose should things go wrong in themanufacturing stage.

How could one person fulfill such a vital corporate mission? The answer, Henderson decided, was that oneperson couldn’t fulfill the mission. Even Jack Welch, GE’s CEO at the time, said, “We now know whereproductivity comes from. It comes from challenged, empowered, excited, rewarded teams of people.”

Empowering factory workers to contribute to GE’s success sounded great in theory. But how to accomplish

547

these goals in real life was a more challenging question. Factory floors, traditionally, are unempoweredworkplaces where workers are more like cogs in a vast machine than self-determining team members.

In the name of teamwork and profitability, Henderson traveled to other factories looking for places whereworker autonomy was high. He implemented his favorite ideas at the factory at Durham. Instead of hiringgeneric “mechanics,” for example, Henderson hired staffers with FAA (Federal Aviation Administration)mechanic’s licenses. This superior training created a team capable of making vital decisions with minimaloversight, a fact that upped the factory’s output and his workers’ feelings of worth.

Henderson’s “self-managing” factory functioned beautifully. And it looked different, too. Plant managerJack Fish described Henderson’s radical factory, saying Henderson “didn’t want to see supervisors, hedidn’t want to see forklifts running all over the place, he didn’t even want it to look traditional. There’sclutter in most plants, racks of parts and so on. He didn’t want that.”

Henderson also contracted out non-job-related chores, such as bathroom cleaning, that might have beenassigned to workers in traditional factories. His insistence that his workers should contribute their highesttalents to the team showed how much he valued them. And his team valued their jobs in turn.

Six years later, a Fast Company reporter visiting the plant noted, “GE/Durham team members take suchpride in the engines they make that they routinely take brooms in hand to sweep out the beds of the18-wheelers that transport those engines—just to make sure that no damage occurs in transit.” For his part,Henderson, who remained at GE beyond the project, noted, “I was just constantly amazed by what wasaccomplished there.”

GE’s bottom line showed the benefits of teamwork, too. From the early 1980s, when Welch became CEO,until 2000, when he retired, GE generated more wealth than any organization in the history of the world.

Case written based on information from Fishman, C. (1999, September). How teamwork took flight. FastCompany. Retrieved August 1, 2008, from http://www.fastcompany.com/node/38322/print; Lear, R. (1998,July–August). Jack Welch speaks: Wisdom from the world’s greatest business leader. Chief Executive;Guttman, H. (2008, January–February). Leading high-performance teams: Horizontal, high-performanceteams with real decision-making clout and accountability for results can transform a company. ChiefExecutive, pp. 231–233.

Discussion Questions

1. Teams are an essential part of the leading facet of the P-O-L-C framework. Looking at the teamrole typology, how might you categorize the roles played by the teams in this case?

2. What do you think brought individuals at GE together to work as a cohesive team?

3. In the case of GE, do you view the team members or the management leaders as the mostimportant part of the story?

4. How do you think Henderson held his team members accountable for their actions?

5. Do you think that GE offered a support system for its employees in order to create this type ofteam cohesion? If so, how might this have been accomplished?

6. What are the benefits of creating a team whose members are educated to make vital decisions withminimal oversight, as GE did in hiring staffers with FAA mechanic’s licenses?

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13.3 Group Dynamics

Learning Objectives

1. Understand the difference between informal and formal groups.

2. Learn the stages of group development.

3. Identify examples of the punctuated equilibrium model.

4. Learn how group cohesion, social loafing, and collective efficacy can affect groups.

Because many tasks in today’s world have become so complex, groups and teams have become an essential

component of an organization’s success. The success of the group depends on the successful management of its

members and making sure all aspects of work are fair for each member. Being able to work in a group is a key

skill for managers and employees alike.

Types of Groups: Formal and InformalTypes of Groups: Formal and Informal

What is a group? A group is a collection of individuals who interact with each other such that one person’s actions

have an impact on the others. In organizations, most work is done within groups, and managing groups is key to

each of the P-O-L-C functions. How groups function has important implications for organizational productivity.

Groups where people get along, feel the desire to contribute, and are capable of coordinating their efforts may have

high performance levels, whereas those characterized by extreme levels of conflict or hostility may demoralize

members of the workforce.

In organizations, groups can be classified into two basic types: informal and formal. Informal work groups are

made up of two or more individuals who are associated with one another in ways not prescribed by the formal

organization. For example, a few people in the company who get together to play tennis on the weekend would

be considered an informal group. A formal work group is made up of managers, subordinates, or both with close

associations among group members that influence the behavior of individuals in the group. We will discuss many

different types of formal work groups later on in this chapter.

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Stages of Group DevelopmentStages of Group Development

American organizational psychologist Bruce Tuckman presented a robust model in 1965 that is still widely used

today. On the basis of his observations of group behavior in a variety of settings, he proposed a four-stage map

of group evolution, known as the Forming-Storming-Norming-Performing Model (Tuckman, 1965). Later he

enhanced the model by adding a fifth and final stage, adjourning. The phases are illustrated in the Stages of the

Group Development Model. Interestingly enough, just as an individual moves through developmental stages such

as childhood, adolescence, and adulthood, so does a group, although in a much shorter period of time.

According to this theory, to facilitate a group successfully, the leader needs to move through various leadership

styles over time. Generally, this is accomplished by first being more direct, eventually serving as a coach, and

later, once the group is able to assume more power and responsibility for itself, shifting to delegator.

While research has not confirmed that this is descriptive of how groups progress, knowing and following these

steps can help groups be more effective. For example, groups that do not go through the storming phase early

on will often return to this stage toward the end of the group process to address unresolved issues. Another

example of the validity of the group development model involves groups that take the time to get to know each

other socially in the forming stage. When this socialization occurs, groups tend to handle future challenges better

because the individuals have an understanding of each other’s needs.

Figure 13.4 Stages of the Group Development Model

FormingForming

In the Forming stage, the group comes together for the first time. The members may already know each other or

they may be total strangers. In either case, there is a level of formality, some anxiety, and a degree of guardedness

as group members are not sure what is going to happen next. “Will I be accepted? What will my role be? Who has

the power here?” These are some of the questions participants think about during this stage of group formation.

Because of the large amount of uncertainty, members tend to be polite, conflict avoidant, and observant. They are

trying to figure out the “rules of the game” without being too vulnerable. At this point, they may also be quite

excited and optimistic about the task, perhaps experiencing a level of pride at being chosen to join a particular

group.

Group members are trying to achieve several goals at this stage, although this may not necessarily be done

consciously. First, they are trying to get to know one another. Often this can be accomplished by finding

some common ground. Members also begin to explore group boundaries to determine what will be considered

acceptable behavior. “Can I interrupt? Can I leave when I feel like it?” This trial phase may also involve testing

the appointed leader or seeing whether a leader emerges from the group. At this point, group members are also

discovering how the group will work in terms of what needs to be done and who will be responsible for each task.

This stage is often characterized by abstract discussions about issues to be addressed by the group; those who like

550 • PRINCIPLES OF MANAGEMENT

to get moving can become impatient with this part of the process. This phase is usually short in duration, perhaps

a meeting or two.

StormingStorming

Once group members feel sufficiently safe and included, they tend to enter the Storming phase. Participants focus

less on keeping their guard up as they shed social facades, becoming more authentic and more argumentative.

Group members begin to explore their power and influence, and they often stake out their territory by

differentiating themselves from the other group members rather than seeking common ground. Discussions can

become heated as participants raise conflicting points of view and values, or disagree over how tasks should be

done and who is assigned to them. It is not unusual for group members to become defensive, competitive, or

jealous. They may take sides or begin to form cliques within the group. Questioning and resisting direction from

the leader is also quite common. “Why should I have to do this? Who designed this project in the first place? What

gives you the authority to tell me what to do?”

Although little seems to get accomplished at this stage, it actually serves an important purpose: group members

are becoming more authentic as they express their deeper thoughts and feelings. What they are really exploring

is “Can I truly be me, have power, and be accepted?” During this chaotic stage, a great deal of creative energy

that was previously buried is released and available for use, but it takes skill to move the group from Storming to

Norming. In many cases, the group gets stuck in the Storming phase.

Once group members discover that they can be authentic and that the group is capable of handling differences

without dissolving, they are ready to enter the next stage, Norming.

NormingNorming

“We survived!” is the common sentiment as this stage. Group members often feel elated at this point, and they

are much more committed to each other and the group’s goal. Feeling energized by knowing they can handle the

“tough stuff,” group members are now ready to get to work. Finding themselves more cohesive and cooperative,

participants find it easy to establish their own ground rules (or norms) and define their operating procedures and

goals. The group tends to make big decisions, while subgroups or individuals handle the smaller decisions. It

is hoped at this point the group members are more open and respectful toward each other and willing to ask

one another for both help and feedback. They may even begin to form friendships and share more personal

information.

At this point, the leader should become more of a facilitator by stepping back and letting the group assume more

responsibility for its goal. Since the group’s energy is running high, this is an ideal time to host a social or team-

building event.

PerformingPerforming

Galvanized by a sense of shared vision and a feeling of unity, the group is ready to go into high gear. Members

are more interdependent, individuality and differences are respected, and group members feel themselves to be

part of a greater entity. At the Performing stage, participants are not only getting the work done, but they also pay

13.3 GROUP DYNAMICS • 551

greater attention to how they are doing it. They ask such questions as, “Do our operating procedures best support

productivity and quality assurance? Do we have suitable means for addressing differences that arise so we can

preempt destructive conflicts? Are we relating to and communicating with each other in ways that enhance group

dynamics and help us achieve our goals? How can I further develop as a person to become more effective?” By

now, the group has matured, becoming more competent, autonomous, and insightful.

Group leaders can finally move into coaching roles and help members grow in skill and leadership. These

leadership shifts are essential for managers enacting the Leadership function to keep in mind. In fact, a manager

who leads multiple teams may find it necessary to shift leadership styles not only over time but between teams at

different stages.

AdjourningAdjourning

Just as groups form, so do they end. For example, many groups or teams formed in a business context are project-

oriented and therefore are temporary. Alternatively, a working group may dissolve because of an organizational

restructuring. As with graduating from school or leaving home for the first time, these endings can be bittersweet,

with group members feeling a combination of victory, grief, and insecurity about what is coming next. For those

who like routine and bond closely with fellow group members, this transition can be particularly challenging.

Group leaders and members alike should be sensitive to handling these endings respectfully and compassionately.

An ideal way to close a group is to set aside time to debrief (“How did it all go? What did we learn?”),

acknowledge one another, and celebrate a job well done.

The Punctuated-Equilibrium ModelThe Punctuated-Equilibrium Model

As you may have noted, the five-stage model we have just reviewed is a linear process. According to the model,

a group progresses to the Performing stage, at which point it finds itself in an ongoing, smooth-sailing situation

until the group dissolves. In reality, subsequent researchers, most notably Joy H. Karriker, have found that the life

of a group is much more dynamic and cyclical in nature (Karriker, 2005). For example, a group may operate in

the Performing stage for several months. Then, because of a disruption, such as a competing emerging technology

that changes the rules of the game or the introduction of a new CEO, the group may move back into the Storming

phase before returning to Performing. Ideally, any regression in the linear group progression will ultimately result

in a higher level of functioning. Proponents of this cyclical model draw from behavioral scientist Connie Gersick’s

study of punctuated equilibrium (Gersick, 1991).

The concept of punctuated equilibrium was first proposed in 1972 by paleontologists Niles Eldredge and Stephen

Jay Gould, who both believed that evolution occurred in rapid, radical spurts rather than gradually over time.

Identifying numerous examples of this pattern in social behavior, Gersick found that the concept applied to

organizational change. She proposed that groups remain fairly static, maintaining a certain equilibrium for long

periods. Change during these periods is incremental, largely due to the resistance to change that arises when

systems take root and processes become institutionalized. In this model, revolutionary change occurs in brief,

punctuated bursts, generally catalyzed by a crisis or a problem that breaks through the systemic inertia and shakes

up the deep organizational structures in place. At this point, the organization or group has the opportunity to

learn and create new structures that are better aligned with current realities. Whether the group does this is

not guaranteed. In sum, in Gersick’s model, groups can repeatedly cycle through the Storming and Performing

552 • PRINCIPLES OF MANAGEMENT

stages, with revolutionary change taking place during short transitional windows. For organizations and groups

who understand that disruption, conflict, and chaos are inevitable in the life of a social system, these disruptions

represent opportunities for innovation and creativity.

Figure 13.5 The Punctuated Equilibrium Model

Cohesion, Social Loafing, and Collective EfficacyCohesion, Social Loafing, and Collective Efficacy

Cohesion can be thought of as a kind of social glue. It refers to the degree of camaraderie within the group.

Cohesive groups are those in which members are attached to each other and act as one unit. The more cohesive

a group, the more productive it will be and the more rewarding the experience will be for the group’s members

(Beal, et. al., 2003; Evans & Dion, 1991). Cohesive groups tend to have the following characteristics: they

have a collective identity; they experience a moral bond and a desire to remain part of the group; they share

a sense of purpose, working together on a meaningful task or cause; and they establish a structured pattern of

communication.

The fundamental factors affecting group cohesion include the following:

• Similarity. The more similar group members are in terms of age, sex, education, skills, attitudes, values, and

beliefs, the more likely the group will bond.

• Stability. The longer a group stays together, the more cohesive it becomes.

• Size. Smaller groups tend to have higher levels of cohesion.

• Support. When group members receive coaching and are encouraged to support their fellow team members,

group identity strengthens.

• Satisfaction. Cohesion is correlated with how pleased group members are with one another’s performance,

behavior, and conformity to group norms.

As you might imagine, there are many benefits in creating a cohesive group. Members are generally more

personally satisfied and feel greater self-confidence and self-esteem in a group where they feel they belong. For

13.3 GROUP DYNAMICS • 553

many, membership in such a group can be a buffer against stress, which can improve mental and physical well-

being. Because members are invested in the group and its work, they are more likely to regularly attend and

actively participate in the group, taking more responsibility for the group’s functioning. In addition, members can

draw on the strength of the group to persevere through challenging situations that might otherwise be too hard to

tackle alone.

Can a Group Have Too Much Cohesion?Can a Group Have Too Much Cohesion?

Despite the advantages of cohesion, too much cohesion can be detrimental to a group. Because members can

come to value belonging over all else, an internal pressure to conform may arise where some members modify

their behavior to adhere to group norms. Members may become conflict avoidant, focusing on trying to please

one another so as not to be ostracized. In some cases, members might censor themselves to maintain the party

line. As such, the group is dominated by a superficial sense of harmony and discourages diversity of thought.

Having less tolerance for deviants, who threaten the group’s static identity, cohesive groups will often disapprove

of members who dare to disagree. Members attempting to make a change may be criticized, undermined, or even

ostracized by other members, who perceive their attempts as a threat to the status quo. The painful possibility of

being marginalized can keep many members in line with the majority.

The more strongly members identify with the group, the easier it is to see outsiders as inferior or, in extreme cases,

as enemies. It is easy to see how this can lead to increased insularity. This form of prejudice can have a downward

spiral effect. The group is not getting corrective feedback from within its own confines, and it is closing itself off

from input and a cross-fertilization of ideas from the outside. In such an environment, groups can easily adopt

extreme ideas that will not be challenged. Denial increases as problems are ignored and failures are blamed on

external factors. With limited, often biased, information and no internal or external opposition, groups like these

can make disastrous decisions.

Groupthink is a group pressure phenomenon that increases the risk of the group making flawed decisions by

allowing reductions in mental efficiency, reality testing, and moral judgment. A famous example of groupthink

is the decision to invade Cuba made by President John F. Kennedy and his cabinet in 1961. In a matter of days,

Cuban forces repelled the invaders, whose objective was to overthrow the entire Cuban government, resulting in

many casualties and captured troops. In retrospect, there were many reasons why the Bay of Pigs invasion was

doomed from the start, but the planning and approval were characterized by a belief that the insiders knew best

and did not need to consider “devil’s advocate” points of view. As this example illustrates, groupthink is a serious

risk in highly cohesive groups (Janis, 1972).

Cohesive groups can go awry in much milder ways. For example, group members can value their social

interactions so much that they have fun together but spend little time on accomplishing their assigned task. Or a

group’s goal may begin to diverge from the larger organization’s goal and those trying to uphold the organization’s

goal may be criticized (for example, students may tease the class “brain” for doing well in school).

In addition, research shows that cohesion leads to acceptance of group norms (Goodman, et. al., 1987). Groups

with high task commitment tend to do well, but suppose you belong to a group in which the norms are to work as

little as possible! As you might imagine, these groups accomplish little and can actually work together against the

organization’s goals.

554 • PRINCIPLES OF MANAGEMENT

Figure 13.6

Groups with high cohesion and high task commitment tend to be the most effective.

Social LoafingSocial Loafing

Social loafing refers to the tendency of individuals to put in less effort when working in a group context.

This phenomenon, also known as the Ringelmann effect, was first noted by French agricultural engineer Max

Ringelmann in 1913. In one study, he had people pull on a rope individually and in groups. He found that as the

number of people pulling increased, the group’s total pulling force was less than the sum of individual efforts had

been when measured alone (Karau & Williams, 1993).

Why do people work less hard when they are working with other people? Observations show that as the size of

the group grows, this effect becomes larger as well (Karau & Williams, 1993). The social loafing tendency is not

so much a matter of laziness as a matter of perceiving that one will receive neither one’s fair share of rewards

if the group is successful nor blame if the group fails. Rationales for this behavior include, “My own effort will

have little effect on the outcome.” “Others aren’t pulling their weight, so why should I?” Or “I don’t have much

to contribute, and no one will notice anyway.” This is a consistent effect across a great number of group tasks

and countries (Gabrenya, et. al., 1983; Harkins & Petty, 1982; Taylor & Faust, 1952; Ziller, 1957). Research also

shows that perceptions of fairness are related to less social loafing (Price, et. al., 2006). Therefore, teams that are

deemed as more fair should also see less social loafing.

Collective EfficacyCollective Efficacy

Collective efficacy refers to a group’s perception of its ability to successfully perform well (Bandura, 1997).

A group with high collective efficacy is one whose members share a belief in the group’s capability to pursue

its agreed-upon course of action and attain its goals. Collective efficacy is influenced by a number of factors,

including watching others (“that group did it and we’re better than them”), verbal persuasion (“we can do this”),

and how a person feels (“this is a good group”). Research shows that a group’s collective efficacy is positively

related to its performance (Gully, et. al., 2002; Porter, 2005; Tasa, et. al., 2007). In addition, this relationship is

stronger when task interdependence (the degree an individual’s task is linked to someone else’s work) is high

rather than low.

13.3 GROUP DYNAMICS • 555

Key Takeaway

Groups may be either formal or informal. Groups go through developmental stages much like individualsdo. The Forming-Storming-Norming-Performing-Adjourning Model is useful in prescribing stages thatgroups should pay attention to as they develop. The punctuated-equilibrium model of group developmentargues that groups often move forward during bursts of change after long periods without change. Groupsthat are similar, stable, small, supportive, and satisfied tend to be more cohesive than groups that are not.Cohesion can help support group performance if the group values task completion, but too much cohesioncan also be a concern for groups. Social loafing increases as groups become larger. When collectiveefficacy is high, groups tend to perform better.

Exercises

1. How do the tactics related to group dynamics involve the managerial functions outlined by the P-O-L-C framework?

2. If you believe the punctuated-equilibrium model is true about groups, how can you use thisknowledge to help your own group?

3. Think about the most cohesive group you have ever been in. How did it compare to less cohesivegroups in terms of similarity, stability, size, support, and satisfaction?

4. Why do you think social loafing occurs within groups? What can be done to combat it?

5. Have you seen instances of collective efficacy helping or hurting a team? Please explain youranswer.

ReferencesReferences

Bandura, A. (1997). Self-efficacy: The exercise of control. San Francisco: Jossey-Bass.

Beal, D. J., Cohen, R. R., Burke, M. J., & McLendon, C. L. (2003). Cohesion and performance in groups: A meta-

analytic clarification of construct relations. Journal of Applied Psychology, 88, 989–1004.

Evans, C. R., & Dion, K. L. (1991). Group cohesion and performance: A meta-analysis. Small Group Research,

22, 175–186.

Gabrenya, W. L., Latane, B., & Wang, Y. (1983). Social loafing in cross-cultural perspective. Journal of Cross-

Cultural Perspective, 14, 368–384.

Gersick, C. J. G. (1991). Revolutionary change theories: A multilevel exploration of the punctuated equilibrium

paradigm. Academy of Management Review, 16(1), 10–36.

Goodman, P. S., Ravlin, E., & Schminke, M. (1987). Understanding groups in organizations. Research in

Organizational Behavior, 9, 121–173.

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Gully, S. M., Incalcaterra, K. A., Joshi, A., & Beaubien, J. M. (2002). A meta-analysis of team-efficacy, potency,

and performance: Interdependence and level of analysis as moderators of observed relationships. Journal of

Applied Psychology, 87, 819–832.

Harkins, S., & Petty, R. E. (1982). Effects of task difficulty and task uniqueness on social loafing. Journal of

Personality and Social Psychology, 43, 1214–1229.

Janis, I. L. (1972). Victims of groupthink. New York: Houghton Mifflin.

Karau, S. J., & Williams, K. D. (1993). Social loafing: A meta-analytic review and theoretical integration. Journal

of Personality and Social Psychology, 65, 681–706.

Karriker, J. H. (2005). Cyclical group development and interaction-based leadership emergence in autonomous

teams: an integrated model. Journal of Leadership & Organizational Studies, 11(4), 54–64.

Porter, C. O. L. H (2005). Goal orientation: Effects on backing up behavior, performance, efficacy, and

commitment in teams. Journal of Applied Psychology, 90, 811–818.

Price, K. H., Harrison, D. A., & Gavin, J. H. (2006). Withholding inputs in team contexts: Member composition,

interaction processes, evaluation structure, and social loafing. Journal of Applied Psychology, 91, 1375–1384.

Tasa, K., Taggar, S., & Seijts, G. H. (2007). The development of collective efficacy in teams: A multilevel and

longitudinal perspective. Journal of Applied Psychology, 92, 17–27.

Taylor, D. W., & Faust, W. L. (1952). Twenty questions: Efficiency of problem-solving as a function of the size

of the group. Journal of Experimental Psychology, 44, 360–363.

Tuckman, B. (1965). Developmental sequence in small groups. Psychological Bulletin, 63, 384–399.

Ziller, R. C. (1957). Four techniques of group decision-making under uncertainty. Journal of Applied Psychology,

41, 384–388.

13.3 GROUP DYNAMICS • 557

13.4 Understanding Team Design Characteristics

Learning Objectives

1. Understand the difference between groups and teams.

2. Understand the factors leading to the rise in the use of teams.

3. Understand how tasks and roles affect teams.

4. Identify different types of teams.

5. Identify team design considerations.

Effective teams give companies a significant competitive advantage. In a high-functioning team, the sum is truly

greater than the parts. Team members not only benefit from one another’s diverse experiences and perspectives

but also stimulate each other’s creativity. Plus, for many people, working in a team can be more fun than working

alone. Let’s take a closer look at what a team is, the different team characteristics, types of teams companies use,

and how to design effective teams.

Differences Between Groups and TeamsDifferences Between Groups and Teams

Organizations consist of groups of people. What exactly is the difference between a group and a team? A group

is a collection of individuals. Within an organization, groups might consist of project-related groups such as a

product group or division or they can encompass an entire store or branch of a company. The performance of a

group consists of the inputs of the group minus any process losses such as the quality of a product, ramp-up time

to production, or the sales for a given month. Process loss is any aspect of group interaction that inhibits group

functioning.

Why do we say group instead of team? A collection of people is not a team, though they may learn to function

in that way. A team is a particular type of group: a cohesive coalition of people working together to achieve

mutual goals. Being on a team does not equate to a total suppression of personal agendas, but it does require

a commitment to the vision and involves each individual working toward accomplishing the team’s objective.

Teams differ from other types of groups in that members are focused on a joint goal or product, such as a

presentation, discussing a topic, writing a report, creating a new design or prototype, or winning a team Olympic

558

medal. Moreover, teams also tend to be defined by their relatively smaller size. For instance, according to one

definition, “A team is a small number of people with complementary skills who are committed to a common

purpose, performance goals, and approach for which they are mutually accountable (Katzenbach & Smith, 1993).”

Figure 13.7

Teams are only as good as their weakest link. While Michael Phelps has been dubbed “the world’s greatest

swimmer” and received a great deal of personal attention, such as meeting President George W. Bush,

he could not have achieved his record eight gold medals in one Olympic games without the help of his

teammates Aaron Peirsol, Brendan Hansen, and Jason Lezak.

White House – Michael Phelps with President Bush – public domain.

The purpose of assembling a team is to accomplish larger, more complex goals than what would be possible for an

individual working alone or even the simple sum of several individuals working independently. Teamwork is also

needed in cases where multiple skills are tapped or where buy-in is required from several individuals. Teams can,

but do not always, provide improved performance. Working together to further a team agenda seems to increase

13.4 UNDERSTANDING TEAM DESIGN CHARACTERISTICS • 559

mutual cooperation between what are often competing factions. The aim and purpose of a team is to perform, get

results, and achieve victory in the workplace. The best managers are those who can gather together a group of

individuals and mold them into an effective team.

The key properties of a true team include collaborative action where, along with a common goal, teams have

collaborative tasks. Conversely, in a group, individuals are responsible only for their own area. They also share

the rewards of strong team performance with their compensation based on shared outcomes. Compensation of

individuals must be based primarily on a shared outcome, not individual performance. Members are also willing

to sacrifice for the common good in which individuals give up scarce resources for the common good instead

of competing for those resources. For example, teams occur in sports such as soccer and basketball, in which

the individuals actively help each other, forgo their own chance to score by passing the ball, and win or lose

collectively as a team.

Teams in OrganizationsTeams in Organizations

The early 1990s saw a dramatic rise in the use of teams within organizations, along with dramatic results such as

the Miller Brewing Company increasing productivity 30% in the plants that used self-directed teams compared

with those that used the traditional organization. This same method allowed Texas Instruments in Malaysia to

reduce defects from 100 parts per million to 20 parts per million. In addition, Westinghouse reduced its cycle time

from 12 weeks to 2 weeks, and Harris Electronics was able to achieve an 18% reduction in costs (Welins, et. al.,

1994). The team method has served countless companies over the years through both quantifiable improvements

and more subtle individual worker-related benefits.

Companies such as Square D, a maker of circuit breakers, switched to self-directed teams and found that overtime

on machines like the punch press dropped 70% under teams. Productivity increased because the setup operators

were able to manipulate the work in much more effective ways than a supervisor could dictate (Moskal, 1988).

In 2001, clothing retailer Chico’s FAS was looking to grow its business. The company hired Scott Edmonds as

president, and two years later revenues had almost doubled from $378 million to $760 million. By 2006, revenues

were $1.6 billion, and Chico’s had nine years of double-digit same-store sales growth. What did Edmonds do

to get these results? He created a horizontal organization “ruled by high-performance teams with real decision-

making clout and accountability for results, rather than by committees that pass decisions up to the next level or

toss them over the wall into the nearest silo.”

The use of teams also began to increase because advances in technology have resulted in more complex systems

that require contributions from multiple people across the organization. Overall, team-based organizations have

more motivation and involvement, and teams can often accomplish more than individuals (Cannon-Bowers &

Salas, 2001). It is no wonder organizations are relying on teams more and more.

Do We Need a Team?Do We Need a Team?

Teams are not a cure-all for organizations. To determine whether a team is needed, organizations should consider

whether a variety of knowledge, skills, and abilities are needed, whether ideas and feedback are needed from

different groups within the organization, how interdependent the tasks are, if wide cooperation is needed to get

things done, and whether the organization would benefit from shared goals (Rees, 1997). If the answer to these

560 • PRINCIPLES OF MANAGEMENT

questions is “yes,” then a team or teams might make sense. For example, research shows that the more team

members perceive that outcomes are interdependent, the better they share information and the better they perform

(De Dreu, 2007).

Team Tasks and RolesTeam Tasks and Roles

Teams differ in terms of the tasks they are trying to accomplish and the roles team members play.

Figure 13.8

Production tasks include actually making something such as a team of construction workers creating a new

building.

Roger – Construction Workers on a Break, Rockefeller Plaza Lobby Picture NYC NY – CC BY-NC-ND

2.0.

As early as the 1970s, J. R. Hackman identified three major classes of tasks: (1) production tasks, (2) idea

generation tasks, and (3) problem-solving tasks (Hackman, 1976). Production tasks include actually making

something, such as a building, a product, or a marketing plan. Idea generation tasks deal with creative tasks,

such as brainstorming a new direction or creating a new process. Problem-solving tasks refer to coming up with

plans for actions and making decisions, both facets of managerial P-O-L-C functions (planning and leading).

For example, a team may be charged with coming up with a new marketing slogan, which is an idea generation

task, while another team might be asked to manage an entire line of products, including making decisions about

products to produce, managing the production of the product lines, marketing them, and staffing their division.

The second team has all three types of tasks to accomplish at different points in time.

13.4 UNDERSTANDING TEAM DESIGN CHARACTERISTICS • 561

Task InterdependenceTask Interdependence

Another key to understanding how tasks are related to teams is to understand their level of task interdependence.

Task interdependence refers to the degree that team members depend on one another to get information, support,

or materials from other team members to be effective. Research shows that self-managing teams are most effective

when their tasks are highly interdependent (Langfred, 2005; Liden, et. al., 1997).

There are three types of task interdependence. Pooled interdependence exists when team members may work

independently and simply combine their efforts to create the team’s output. For example, when students meet to

divide the sections of a research paper and one person simply puts all the sections together to create one paper,

the team is using the pooled interdependence model. However, they might decide that it makes more sense to start

with one person writing the introduction of their research paper, then the second person reads what was written

by the first person and, drawing from this section, writes about the findings within the paper. Using the findings

section, the third person writes the conclusions. If one person’s output becomes another person’s input, the team

would be experiencing sequential interdependence. And finally, if the student team decided that in order to create

a top notch research paper they should work together on each phase of the research paper so that their best ideas

would be captured at each stage, they would be undertaking reciprocal interdependence. Another important type

of interdependence that is not specific to the task itself is outcome interdependence, where the rewards that an

individual receives depend on the performance of others.

Team RolesTeam Roles

While relatively little research has been conducted on team roles, recent studies show that individuals who are

more aware of team roles and the behavior required for each role perform better than individuals that do not. This

fact remains true for both student project teams as well as work teams, even after accounting for intelligence and

personality (Mumford, et. al., 2008). Early research found that teams tend to have two categories of roles: those

related to the tasks at hand and those related to the team’s functioning. For example, teams that only focus on

production at all costs may be successful in the short run, but if they pay no attention to how team members feel

about working 70 hours a week, they are likely to experience high turnover.

On the basis of decades of research on teams, 10 key roles have been identified (Bales, 1950; Sheats, 1948; Belbin,

1993). Team leadership is effective when leaders are able to adapt the roles they are contributing to or asking

others to contribute to fit what the team needs, given its stage and the tasks at hand (Kozlowski, et. al., 1996;

Kozlowski, et. al., 1996). Ineffective leaders might always engage in the same task role behaviors when what they

really need to do is focus on social roles, put disagreements aside, and get back to work. While these behaviors

can be effective from time to time, if the team doesn’t modify its role behaviors as things change, they most likely

will not be effective.

Figure 13.9

562 • PRINCIPLES OF MANAGEMENT

Teams are based on many roles being carried out as summarized by the Team Role Typology. These 10

roles include task roles (green), social roles (yellow), and boundary spanning roles (orange).

Mumford, T. V., Van Iddekinge, C. H., Morgeson, F. P., & Campion, M. A. (2008). The team role test:

Development and validation of a team role knowledge situational judgment test. Journal of Applied

Psychology, 93, 250–267; Mumford, T. V., Campion, M. A., & Morgeson, F. P. (2006). Situational

judgments in work teams: A team role typology. In J. A. Weekley & R. E. Ployhart (Eds.), Situational

judgment tests: Theory, measurement (pp. 319–343). Mahwah, NJ: Lawrence Erlbaum.

Task RolesTask Roles

Five roles make up the task portion of the role typology. The contractor role includes behaviors that serve to

organize the team’s work, including creating team time lines, production schedules, and task sequencing. The

creator role deals more with changes in the team’s task process structure. For example, reframing the team goals

and looking at the context of goals would fall under this role. The contributor role is important because it brings

information and expertise to the team. This role is characterized by sharing knowledge and training those who

have less expertise to strengthen the team. Research shows that teams with highly intelligent members and evenly

distributed workloads are more effective than those with uneven workloads (Ellis, et. al., 2003). The completer

role is also important as it is often where ideas are transformed into action. Behaviors associated with this role

include following up on tasks such as gathering needed background information or summarizing the team’s ideas

into reports. Finally, the critic role includes “devil’s advocate” behaviors which go against the assumptions being

made by the team.

13.4 UNDERSTANDING TEAM DESIGN CHARACTERISTICS • 563

Social RolesSocial Roles

Social roles serve to keep the team operating effectively. When the social roles are filled, team members feel more

cohesive and the group is less prone to suffer process losses or biases, such as social loafing, groupthink, or a

lack of participation from all members. Three roles fall under the umbrella of social roles. The cooperator role

includes supporting those with expertise toward the team’s goals. This is a proactive role. The communicator

role includes behaviors that are targeted at collaboration such as practicing good listening skills and appropriately

using humor to diffuse tense situations. Having a good communicator helps the team to feel more open to sharing

ideas. And the calibrator role is an important one and serves to keep the team on track in terms of suggesting

any needed changes to the team’s process. This role includes initiating discussions about potential team problems

such as power struggles or other tensions. Similarly, this role may involve settling disagreements or pointing out

what is working and what is not in terms of team process.

Boundary-Spanning RolesBoundary-Spanning Roles

The final two roles are related to activities outside of the team that help to connect the team to the larger

organization (Anacona, 1990; Anacona, 1992; Druskat & Wheeler, 2003). Teams that engage in a greater level of

boundary-spanning behaviors increase their team effectiveness (Marrone, et. al., 2007). The consul role includes

gathering information from the larger organization and informing those within the organization about team

activities, goals, and successes. Often the consul role is filled by team managers or leaders. The coordinator role

includes interfacing with others within the organization so that the team’s efforts are in line with other individuals

and teams within the organization.

Types of TeamsTypes of Teams

There are many different types of teams, and a given team may be described according to multiple types. For

example, a team of scientists writing a research article for publication may be temporary, virtual, and cross-

functional.

Teams may be permanent or long term, but more typically, a team exists for a limited time. In fact, one-third of

all teams in the United States are temporary (Gordon, 1992). An example of a temporary team is a task force

that addresses a specific issue or problem until it is resolved. Other teams may be temporary or ongoing such as

product development teams. In addition, matrix organizations have cross-functional teams where individuals from

different parts of the organization staff the team, which may be temporary or long-standing.

Virtual TeamsVirtual Teams

Virtual teams are teams in which members are not located in the same physical place. They may be in different

cities, states, or even different countries. Some virtual teams are formed by necessity, such as to take advantage

of lower labor costs in different countries; one study found that upward of 8.4 million individuals worldwide

work virtually in at least one team (Ahuja & Galvin, 2003). Often, virtual teams are formed to take advantage of

distributed expertise or time—the needed experts may be living in different cities. A company that sells products

around the world, for example, may need technologists who can solve customer problems at any hour of the day or

564 • PRINCIPLES OF MANAGEMENT

night. It may be difficult to find the caliber of people needed who would be willing to work at 2 a.m. on a Saturday,

for example. So companies organize virtual technical support teams. BakBone Software, for instance, has a

13-member technical support team. Each member has a degree in computer science and is divided among offices

in California, Maryland, England, and Tokyo. BakBone believes it has been able to hire stronger candidates by

drawing from a diverse talent pool and hiring in different geographic regions rather than limiting hiring to one

region or time zone (Alexander, 2000).

Despite potential benefits, virtual teams present special management challenges, particularly to the controlling

function. Managers often think that they have to see team members working to believe that work is being done.

Because this kind of oversight is impossible in virtual team situations, it is important to devise evaluation schemes

that focus on deliverables. Are team members delivering what they said they would? In self-managed teams, are

team members producing the results the team decided to measure itself on?

Another special challenge of virtual teams is building trust. Will team members deliver results just as they would

in face-to-face teams? Can members trust one another to do what they said they would do? Companies often invest

in bringing a virtual team together at least once so members can get to know one another and build trust (Kirkman,

et. al., 2002). In manager-led virtual teams, managers should be held accountable for their team’s results and

evaluated on their ability as a team leader.

Finally, communication is especially important in virtual teams, through e-mail, phone calls, conference calls, or

project management tools that help organize work. If individuals in a virtual team are not fully engaged and tend

to avoid conflict, team performance can suffer (Montoya-Weiss, et. al., 2001). A wiki is an Internet-based method

for many people to collaborate and contribute to a document or discussion. Essentially, the document remains

available for team members to access and amend at any time. The most famous example is Wikipedia, which is

gaining traction as a way to structure project work globally and get information into the hands of those that need

it. Empowered organizations put information into everyone’s hands (Kirkman & Rosen, 2000). Research shows

that empowered teams are more effective than those that are not empowered (Mathieu, et. al., 2006).

Top Management TeamsTop Management Teams

Top management teams are appointed by the chief executive officer (CEO) and, ideally, reflect the skills and

areas that the CEO considers vital for the company. There are no formal rules about top management team design

or structure. The top management team often includes representatives from functional areas, such as finance,

human resources, and marketing or key geographic areas, such as Europe, Asia, and North America. Depending

on the company, other areas may be represented such as legal counsel or the company’s chief technologist. Typical

top management team member titles include chief operating officer (COO), chief financial officer (CFO), chief

marketing officer (CMO), or chief technology officer (CTO). Because CEOs spend an increasing amount of time

outside their companies (i.e., with suppliers, customers, regulators, and so on), the role of the COO has taken

on a much higher level of internal operating responsibilities. In most American companies, the CEO also serves

as chairman of the board and can have the additional title of president. Companies have top management teams

to help set the company’s vision and strategic direction, key tasks within the planning P-O-L-C function. Top

teams make decisions on new markets, expansions, acquisitions, or divestitures. The top team is also important

for its symbolic role: how the top team behaves dictates the organization’s culture and priorities by allocating

resources and by modeling behaviors that will likely be emulated lower down in the organization. Importantly, the

13.4 UNDERSTANDING TEAM DESIGN CHARACTERISTICS • 565

top team is most effective when team composition is functionally and demographically diverse and when it can

truly operate as a team, not just as group of individual executives (Carpenter, et. al., 2004).

That “the people make the place” holds especially true for members of the top management team. In a study of 15

firms that demonstrated excellence, defined as sustained performance over a 15-year period, leadership researcher

Jim Collins noted that those firms attended to people first and strategy second. “They got the right people on the

bus, moved the wrong people off the bus, ushered the right people to the right seats—then they figured out where

to drive it (Collins, 2001).” The best teams plan for turnover. Succession planning is the process of identifying

future members of the top management team. Effective succession planning allows the best top teams to achieve

high performance today and create a legacy of high performance for the future.

Team Leadership and AutonomyTeam Leadership and Autonomy

Teams also vary in terms of how they are led. Traditional or manager-led teams are teams in which the manager

serves as the team leader. The manager assigns work to other team members. These types of teams are the most

natural to form, wherein managers have the power to hire and fire team members and are held accountable for the

team’s results.

Self-managed teams are a new form of team that rose in popularity with the Total Quality Movement in the 1980s.

Unlike manager-led teams, these teams manage themselves and do not report directly to a supervisor. Instead,

team members select their own leader, and they may even take turns in the leadership role. Self-managed teams

also have the power to select new team members. As a whole, the team shares responsibility for a significant task,

such as assembly of an entire car. The task is ongoing rather than temporary such as a charity fund drive for a

given year.

Organizations began to use self-managed teams as a way to reduce hierarchy by allowing team members to

complete tasks and solve problems on their own. The benefits of self-managed teams extend much further.

Research has shown that employees in self-managed teams have higher job satisfaction, increased self-esteem,

and grow more on the job. The benefits to the organization include increased productivity, increased flexibility,

and lower turnover. Self-managed teams can be found at all levels of the organization, and they bring particular

benefits to lower-level employees by giving them a sense of ownership of their jobs that they may not otherwise

have. The increased satisfaction can also reduce absenteeism because employees do not want to let their team

members down.

Typical team goals are improving quality, reducing costs, and meeting deadlines. Teams also have a “stretch”

goal, which is difficult to reach but important to the business unit. Many teams also have special project goals.

Texas Instruments (TI), a company that makes semiconductors, used self-directed teams to make improvements

in work processes (Welins, et. al., 1994). Teams were allowed to set their own goals in conjunction with managers

and other teams. TI also added an individual component to the typical team compensation system. This individual

component rewarded team members for learning new skills that added to their knowledge. These “knowledge

blocks” include topics such as leadership, administration, and problem solving. The team decides what additional

skills people might need to help the team meet its objectives. Team members would then take classes or otherwise

demonstrate their proficiency in that new skill on the job to be certified for mastering the skill. Individuals could

then be evaluated based on their contribution to the team and how they are building skills to support the team.

566 • PRINCIPLES OF MANAGEMENT

Self-managed teams are empowered, which means that they have the responsibility as well as the authority to

achieve their goals. Team members have the power to control tasks and processes and to make decisions. Research

shows that self-managed teams may be at a higher risk of suffering from negative outcomes due to conflict,

so it is important that they are supported with training to help them deal with conflict effectively (Alper, et.

al., 2000; Langfred, 2007). Self-managed teams may still have a leader who helps them coordinate with the

larger organization (Morgeson, 2005). For a product team composed of engineering, production, and marketing

employees, empowerment means that the team can decide everything about a product’s appearance, production,

and cost without having to get permission or sign-off from higher management. As a result, empowered teams

can more effectively meet tighter deadlines. At AT&T, for example, the model-4200 phone team cut development

time in half while lowering costs and improving quality by using the empowered team approach (Parker, 1994). A

special form of self-managed teams are self-directed teams in which they also determine who will lead them with

no external oversight.

Figure 13.10

Team leadership is a major determinant of how autonomous a team can be.

Designing Effective TeamsDesigning Effective Teams

Designing an effective team means making decisions about team composition (who should be on the team),

team size (the optimal number of people on the team), and team diversity (should team members be of similar

background, such as all engineers, or of different backgrounds). Answering these questions will depend, to a large

extent, on the type of task that the team will be performing. Teams can be charged with a variety of tasks, from

problem solving to generating creative and innovative ideas to managing the daily operations of a manufacturing

plant.

Who Are the Best Individuals for the Team?Who Are the Best Individuals for the Team?

A key consideration when forming a team is to ensure that all the team members are qualified for the roles they

will fill for the team. This process often entails understanding the knowledge, skills, and abilities (KSAs) of team

members as well as the personality traits needed before starting the selection process (Humphrey, et. al., 2007).

When talking to potential team members, be sure to communicate the job requirements and norms of the team.

To the degree that this is not possible, such as when already existing groups are used, think of ways to train the

13.4 UNDERSTANDING TEAM DESIGN CHARACTERISTICS • 567

team members as much as possible to help ensure success. In addition to task knowledge, research has shown

that individuals who understand the concepts covered in this chapter and in this book such as conflict resolution,

motivation, planning, and leadership actually perform better on their jobs. This finding holds for a variety of

jobs, including officer in the United States Air Force, an employee at a pulp mill, or a team member at a box

manufacturing plant (Hirschfeld, et. al., 2006; Stevens & Campion, 1999).

How Large Should My Team Be?How Large Should My Team Be?

Interestingly, research has shown that regardless of team size, the most active team member speaks 43% of the

time. The difference is that the team member who participates the least in a three-person team is still active 23%

of the time versus only 3% in a 10-person team (McGrath, 1984). When deciding team size, a good rule of thumb

is a size of 2 to 20 members. The majority of teams have 10 members or less because the larger the team, the

harder it is to coordinate and interact as a team. With fewer individuals, team members are more able to work

through differences and agree on a common plan of action. They have a clearer understanding of others’ roles

and greater accountability to fulfill their roles (remember social loafing?). Some tasks, however, require larger

team sizes because of the need for diverse skills or because of the complexity of the task. In those cases, the best

solution is to create subteams where one member from each subteam is a member of a larger coordinating team.

The relationship between team size and performance seems to greatly depend on the level of task interdependence,

with some studies finding larger teams outproducing smaller teams and other studies finding just the opposite

(Campion, et.al., 1993; Magjuka & Baldwin, 1991; Vinokur-Kaplan, 1995). The bottom line is that team size

should be matched to the goals of the team.

Figure 13.11

The ideal size for a team depends on the task. Groups larger than 10 members tend to be harder to

coordinate and often break into subteams to accomplish the work.

568 • PRINCIPLES OF MANAGEMENT

Melanie Holtsman – 32 – There’s No I in Team – CC BY-NC 2.0.

How Diverse Should My Team Be?How Diverse Should My Team Be?

Team composition and team diversity often go hand in hand. Teams whose members have complementary skills

are often more successful because members can see each other’s blind spots. One team member’s strengths

can compensate for another’s weaknesses (Jackson, et. al., 2003; Van Knippenberg, et. al., 2004). For example,

consider the challenge that companies face when trying to forecast future sales of a given product. Workers who

are educated as forecasters have the analytic skills needed for forecasting, but these workers often lack critical

information about customers. Salespeople, in contrast, regularly communicate with customers, which means

they’re in the know about upcoming customer decisions. But salespeople often lack the analytic skills, discipline,

or desire to enter this knowledge into spreadsheets and software that will help a company forecast future sales.

Putting forecasters and salespeople together on a team tasked with determining the most accurate product forecast

each quarter makes the best use of each member’s skills and expertise.

Diversity in team composition can help teams come up with more creative and effective solutions. Research shows

that teams that believe in the value of diversity performed better than teams that do not (Homan, et. al., 2007).

The more diverse a team is in terms of expertise, gender, age, and background, the more ability the group has to

avoid the problems of groupthink (Surowiecki, 2005). For example, different educational levels for team members

were related to more creativity in research and development teams and faster time to market for new products

(Eisenhardt, 1995; Shin & Zhou, 2007). Members will be more inclined to make different kinds of mistakes,

which means that they’ll be able to catch and correct those mistakes.

Key Takeaway

Teams, though similar to groups, are different in both scope and composition. A team is a particular type ofgroup: a cohesive coalition of people working together to achieve mutual goals. In the 21st century, manycompanies have moved toward the extensive use of teams. The task a team is charged with accomplishingaffects how they perform. In general, task interdependence works well for self-managing teams. Team rolesconsist of task, social, and boundary-spanning roles. Different types of teams include task forces, productdevelopment teams, cross-functional teams, and top management teams. Team leadership and autonomyvaries depending on whether the team is traditionally managed, self-managed, or self-directed. Teams aremost effective when teams consist of members with the right KSAs for the tasks, are not too large, containdiversity across team members. Decisions about where and how to use teams, the leadership of teams, andthe structure of teams illustrate the overlap in the design and leading P-O-L-C functions.

Exercises

1. Think of the last team you were in. Did the task you were asked to do affect the team? Why orwhy not?

2. Which of the 10 work roles do you normally take in a team? How difficult or easy do you think it

13.4 UNDERSTANDING TEAM DESIGN CHARACTERISTICS • 569

would be for you to take on a different role?

3. Have you ever worked in a virtual team? If so, what were the challenges and advantages ofworking virtually?

4. How large do you think teams should be and why?

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Alexander, S. (2000, November 10). Virtual teams going global. Infoworld. Retrieved February 12, 2009, from

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Alper, S., Tjosvold, D., & Law, K. S. (2000). Conflict management, efficacy, and performance in organizational

teams. Personnel Psychology, 53, 625–642.

Anacona, D. G. (1990). Outward bound: Strategies for team survival in an organization. Academy of Management

Journal, 33, 334–365.

Anacona, D. G. (1992). Bridging the boundary: External activity and performance in organizational teams.

Administrative Science Quarterly, 37, 634–665.

Bales, R. F. (1950). Interaction process analysis: A method for the study of small groups. Cambridge, MA:

Addison-Wesley.

Belbin, R. M. (1993). Management teams: Why they succeed or fail. Oxford: Butterworth-Heinemann.

Benne, K. D., & Sheats, P. (1948). Functional roles of group members. Journal of Social Issues, 4, 41–49.

Campion, M. A., Medsker, G. J., & Higgs, A. C. (1993). Relations between work group characteristics and

effectiveness: Implications for designing effective work groups. Personnel Psychology, 46, 823–850.

Cannon-Bowers, J. A. and Salas, E. (2001, February). Team effectiveness and competencies. In W. Karwowski

(Ed.), International encyclopedia of ergonomics and human factors (1383). London: CRC Press.

Carpenter, M. A., Geletkanycz, M. A., & Sanders, W. G. (2004). The upper echelons revisited: The antecedents,

elements, and consequences of TMT composition. Journal of Management, 30, 749–778.

Collins, J. (2001, July–August). Level leadership. Harvard Business Review, 66–76.

De Dreu, C. K. W. (2007). Cooperative outcome interdependence, task reflexivity, and team effectiveness: A

motivated information processing perspective. Journal of Applied Psychology, 92, 628–638.

Druskat, V. U., & Wheeler, J. V. (2003). Managing from the boundary: The effective leadership of self-managing

work teams. Academy of Management Journal, 46, 435–457.

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Eisenhardt, K. M., & Tabrizi, B. N. (1995). Accelerating adaptive processes: Product innovation in the global

computer industry. Administrative Science Quarterly, 4, 84–110.

Ellis, A. P. J., Hollenbeck, J. R., Ilgen, D. R., Porter, C. O. L. H., West, B. J., & Moon, H. (2003). Team learning:

Collectively connecting the dots. Journal of Applied Psychology, 88, 821–835.

Gordon, J. (1992). Work teams: How far have they come? Training, 29, 59–62.

Hackman, J. R. (1976). Group influences on individuals. In M. D. Dunnette (Ed.), Handbook of industrial and

organizational psychology. Chicago: Rand-McNally.

Hirschfeld, R. R., Jordan, M. H., Field, H. S., Giles, W. F., & Armenakis, A. A. (2006). Becoming team players:

Team members’ mastery of teamwork knowledge as a predictor of team task proficiency and observed teamwork

effectiveness. Journal of Applied Psychology, 91, 467–474.

Homan, A. C., van Knippenberg, D., Van Kleef, G. A., & De Dreu, C. K. W. (2007). Bridging faultlines by valuing

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Psychology, 92, 1189–1199.

Humphrey, S. E., Hollenbeck, J. R., Meyer, C. J., & Ilgen, D. R. (2007). Trait configurations in self-managed

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Jackson, S. E., Joshi, A., & Erhardt, N. L. (2003). Recent research on team and organizational diversity: SWOT

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13.5 Organizing Effective Teams

Learning Objectives

1. Understand how to create team norms, roles, and expectations.

2. Identify keys to running effective team meetings.

When a team is well organized, it tends to perform well. Well-designed teams are able to capitalize on positive

events while maintaining composure when facing a negative event. There are several strategies that can boost

team effectiveness through effective organization.

Establishing Team Norms and ContractsEstablishing Team Norms and Contracts

A key to successful team design is to have clear norms, roles, and expectations among team members. Problems

such as social loafing or groupthink can be avoided by paying careful attention to team member differences and

providing clear definitions for roles, expectancy, measurement, and rewards.

Team NormsTeam Norms

Norms are shared expectations about how things operate within a group or team. Just as new employees learn

to understand and share the assumptions, norms, and values that are part of an organization’s culture, they also

must learn the norms of their immediate team. This understanding helps teams be more cohesive and perform

better. Norms are a powerful way of ensuring coordination within a team. For example, is it acceptable to be late

to meetings? How prepared are you supposed to be at the meetings? Is it acceptable to criticize someone else’s

work? These norms are shaped early during the life of a team and affect whether the team is productive, cohesive,

and successful.

Explore some ideas about team norms by doing the Square Wheels exercise.

573

Square Wheels Exercise and Group DiscussionSquare Wheels Exercise and Group Discussion

Sometimes it can be challenging to start a conversation around team ground rules and performance. Thefollowing exercise can be used to get a team talking about what works and what doesn’t in teams they’veworked in and how your team can be designed most effectively.

Figure 13.12

This picture of a cart with square wheels is an illustration of how many organizations seem to operate.

Print out the illustration and have everyone in your team write on the paper, identifying as many of the key

issues and opportunities for improvement as you can. Following this, have a conversation around what this

illustration might mean for your own team.

ell brown – Thinktank Science Garden – car with square wheels – CC BY-SA 2.0.

Team ContractsTeam Contracts

Scientific research as well as experience working with thousands of teams show that teams that are able to

articulate and agree on established ground rules, goals, and roles and develop a team contract around these

standards are better equipped to face challenges that may arise within the team (Katzenback & Smith, 1993; Porter

& Lilly, 1996). Having a team contract does not necessarily mean that the team will be successful, but it can

serve as a road map when the team veers off course. Questions that can help to create a meaningful team contract

include:

• Team Values and Goals: What are our shared team values? What is our team goal?

574 • PRINCIPLES OF MANAGEMENT

• Team Roles and Leadership: Who does what within this team? (Who takes notes at the meeting? Who sets

the agenda? Who assigns tasks? Who runs the meetings?) Does the team have a formal leader? If so, what

are his or her roles?

• Team Decision Making: How are minor decisions made? How are major decisions made?

• Team Communication: Who do you contact if you cannot make a meeting? Who communicates with

whom? How often will the team meet?

• Team Performance: What constitutes good team performance? What if a team member tries hard but does

not seem to be producing quality work? How will poor attendance/work quality be dealt with?

Team MeetingsTeam Meetings

Anyone who has been involved in a team knows it involves team meetings. While few individuals relish meetings,

they serve an important function in terms of information sharing and decision making. They also serve an

important social function and can help to build team cohesion and a task function in terms of coordination.

Unfortunately, we’ve all attended lengthy meetings that were a waste of time and where little happened that

couldn’t have been accomplished by reading an e-mail in five minutes. To run effective meetings, it helps to think

of meetings in terms of three sequential steps (Haynes, 1997).

Before the MeetingBefore the Meeting

Much of the effectiveness of a meeting is determined before the team gathers. There are three key things you can

do to ensure the team members get the most out of their meeting.

First, ask yourself: Is a meeting needed? Leaders should do a number of things before the meeting to help make

it effective. The first thing is to be sure a meeting is even needed. If the meeting is primarily informational, ask

yourself whether it is imperative that the group fully understands the information and whether future decisions

will be built on this information. If so, a meeting may be needed. If not, perhaps simply communicating with

everyone in a written format will save valuable time. Similarly, decision-making meetings make the most sense

when the problem is complex and important, there are questions of fairness to be resolved, and commitment is

needed moving forward.

Second, create and distribute an agenda. An agenda is important in helping to inform those invited about the

purpose of the meeting. It also helps organize the flow of the meeting and keep the team on track.

Third, send a reminder before the meeting. Reminding everyone of the purpose, time, and location of the meeting

helps everyone prepare themselves. Anyone who has attended a team meeting only to find there is no reason

to meet because members haven’t completed their agreed-upon tasks knows that, as a result, team performance

or morale can be negatively affected. Follow up to make sure everyone is prepared. As a team member, inform

others immediately if you will not be ready with your tasks so they can determine whether the meeting should be

postponed.

13.5 ORGANIZING EFFECTIVE TEAMS • 575

During the MeetingDuring the Meeting

During the meeting, there are several things you can do to make sure the team starts and keeps on track.

Start the meeting on time. Waiting for members who are running late only punishes those who are on time and

reinforces the idea that it’s OK to be late. Starting the meeting promptly sends an important signal that you are

respectful of everyone’s time.

Follow the meeting agenda. Veering off agenda communicates to members that it is not important. It also makes

it difficult for others to keep track of where you are in the meeting and can facilitate important points not being

addressed.

Manage group dynamics for full participation. As you’ve seen in this chapter, there are a number of group

dynamics that can limit a team’s functioning. Be on the lookout for full participation and engagement from all

team members as well as any potential problems such as social loafing, group conflict, or groupthink.

Summarize the meeting with action items. Be sure to clarify team member roles moving forward. If individual’s

tasks are not clear, chances are role confusion will arise later. There should be clear notes from the meeting

regarding who is responsible for each action item and the timeframes associated with next steps.

End the meeting on time. This is vitally important as it shows that you respect everyone’s time and are organized.

If another meeting is needed to follow up, schedule it later, but don’t let the meeting run over.

After the MeetingAfter the Meeting

Follow up on action items. After the meeting you probably have several action items. In addition, it is likely that

you’ll need to follow up on the action items of others.

Figure 13.14

576 • PRINCIPLES OF MANAGEMENT

October 09, 2010 – Washington DC., IMF/World Bank 2010 Annual Meetings. Development Committee meeting.

Conducting meetings standing up saves time yet keeps information flowing across the team (Bluedorn, et.

al., 1999).

World Bank Photo Collection – IMF/World Bank 2010 Annual Meetings Development Committee

meeting – CC BY-NC-ND 2.0.

Key Takeaway

Much like group development, team socialization takes place over the life of the team. The stages movefrom evaluation to commitment to role transition. Team norms are important for the team process and helpto establish who is doing what for the team and how the team will function. Creating a team contract helpswith this process. Keys to address in a team contract are team values and goals, team roles and leadership,team decision making, team communication expectations, and how team performance is characterized.Team meetings can help a team coordinate and share information. Effective meetings include preparation,management during the meeting, and follow up on action items generated in the meeting.

Exercises

1. Have the norms for most of the teams you have belonged to been formal or informal? How do youthink that has affected these teams?

2. Have you ever been involved in creating a team contract? Explain how you think that may have

13.5 ORGANIZING EFFECTIVE TEAMS • 577

influenced how the team functioned?

3. Should the person requesting a meeting always prepare a meeting agenda? Why or why not?

4. Do you think conducting team meetings standing up is a good idea? Why or why not?

ReferencesReferences

Bluedorn, A. C., Turban, D. B., & Love, M. S. (1999). The effects of stand-up and sit-down meeting formats on

meeting outcomes. Journal of Applied Psychology, 84, 277–285. This technique is used by Johnson & Johnson,

Ritz-Carlton, ThoughtWorks, Agile Software, and Corning.

Haynes, M. E. (1997). Effective meeting skills. Menlo Park, C Crisp.

Katzenback, J. R., & Smith, D. K. (1993). The wisdom of teams. Boston: Harvard Business School Press; Porter,

T. W., &amp.

Porter, T. W., & Lilly, B. S. (1996). The effects of conflict, trust, and task commitment on project team

performance. International Journal of Conflict Management, 7, 361–376.

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13.6 Barriers to Effective Teams

Learning Objective

1. Recognize common barriers to effective teams and how to address them

Problems can arise in any team that will hurt the team’s effectiveness. Here are some common problems faced by

teams and how to deal with them.

Common Barriers to Effective TeamsCommon Barriers to Effective Teams

Challenges of Knowing Where to BeginChallenges of Knowing Where to Begin

At the start of a project, team members may be at a loss as to how to begin. Also, they may have reached the end

of a task but are unable to move on to the next step or put the task to rest.

Floundering often results from a lack of clear goals, so the remedy is to go back to the team’s mission or plan and

make sure that it is clear to everyone. Team leaders can help move the team past floundering by asking, “What is

holding us up? Do we need more data? Do we need assurances or support? Does anyone feel that we’ve missed

something important?”

Dominating Team MembersDominating Team Members

Some team members may have a dominating personality that encroaches on the participation or airtime of others.

This overbearing behavior may hurt the team morale or the momentum of the team.

A good way to overcome this barrier is to design a team evaluation to include a “balance of participation” in

meetings. Knowing that fair and equitable participation by all will affect the team’s performance evaluation will

help team members limit domination by one member and encourage participation from all members, even shy or

reluctant ones. Team members can say, “We’ve heard from Mary on this issue, so let’s hear from others about

their ideas.”

579

Poor Performance of Some Team MembersPoor Performance of Some Team Members

Research shows that teams deal with poor performers in different ways, depending on members’ perceptions of

the reasons for poor performance (Jackson & LePine, 2003). In situations in which the poor performer is perceived

as lacking in ability, teams are more likely to train the member. In situations in which members perceive the

individual as simply being low on motivation, they are more likely to try to motivate or reject the poor performer.

Keep in mind that justice is an important part of keeping individuals working hard for the team (Colquitt, 2004).

Be sure that poor performers are dealt with in a way that is deemed fair by all the team members.

Poorly Managed Team ConflictPoorly Managed Team Conflict

Disagreements among team members are normal and should be expected. Healthy teams raise issues and discuss

differing points of view because that will ultimately help the team reach stronger, more well-reasoned decisions.

Unfortunately, sometimes disagreements arise because of personality issues or feuds that predated the teams’

formation.

Ideally, teams should be designed to avoid bringing adversaries together on the same team. If that is not possible,

the next best solution is to have adversaries discuss their issues privately, so the team’s progress is not disrupted.

The team leader or other team member can offer to facilitate the discussion. One way to make a discussion

between conflicting parties meaningful is to form a behavioral contract between the two parties. That is, if one

party agrees to do X, the other will agree to do Y (Scholtes, 1988).

Key Takeaway

Barriers to effective teams include the challenges of knowing where to begin, dominating team members,the poor performance of team members, and poorly managed team conflict.

Exercises

1. Have you ever been involved in a team where one or more dominating team members hurt theteam’s performance? Share what happened and how the team dealt with this.

2. Have you ever been involved in a team where conflict erupted between team members? How wasthe situation handled?

ReferencesReferences

Colquitt, J. A. (2004). Does the justice of the one interact with the justice of the many? Reactions to procedural

justice in teams. Journal of Applied Psychology, 89, 633–646.

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Jackson, C. L., & LePine, J. A. (2003). Peer responses to a team’s weakest link: A test and extension of LePine

and Van Dyne’s model. Journal of Applied Psychology, 88, 459–475.

Scholtes, P. (1988). The team handbook. Madison, WI: Joiner Associates.

13.6 BARRIERS TO EFFECTIVE TEAMS • 581

13.7 Developing Your Team Skills

Learning Objective

1. Identify guidelines for developing cohesion in your team.

Steps to Creating and Maintaining a Cohesive TeamSteps to Creating and Maintaining a Cohesive Team

There are several steps you can take as a manager to help build a cohesive team. For example, you can work to:

• Align the group with the greater organization. Establish common objectives in which members can get

involved.

• Let members have choices in setting their own goals. Include them in decision making at the organizational

level.

• Define clear roles. Demonstrate how each person’s contribution furthers the group goal—everyone is

responsible for a special piece of the puzzle.

• Situate group members in proximity to one another. This builds familiarity.

• Give frequent praise, both to individuals and to the group, and encourage them to praise each other. This

builds individual self-confidence, reaffirms positive behavior, and creates an overall positive atmosphere.

• Treat all members with dignity and respect. This demonstrates that there are no favorites and everyone is

valued.

• Celebrate differences. This highlights each individual’s contribution while also making diversity a norm.

• Establish common rituals. Thursday morning coffee, monthly potlucks—these reaffirm group identity and

create shared experiences.

582

Key Takeaway

There are many things you can do to help build a cohesive team. One key thing to remember is that toomuch cohesion without strong performance norms can be a problem. Many of the ways to build cohesivegroups are also fun, such as celebrating successes and creating rituals.

Exercises

1. Think of the most cohesive group you have ever been in. What factors made the group so close?

2. What are some challenges you see to creating a cohesive group?

3. How does team size affect cohesion?

13.7 DEVELOPING YOUR TEAM SKILLS • 583

Chapter 14: Motivating Employees

14.1 Motivating Employees

14.2 Case in Point: Zappos Creates a Motivating Place to Work

14.3 Need-Based Theories of Motivation

14.4 Process-Based Theories

14.5 Developing Your Personal Motivation Skills

584

14.1 Motivating Employees

Figure 14.1

Rewards are more effective than punishments in altering individual behavior.

swong95765 – Bunches of Carrots – CC BY 2.0./p>

What’s in It for Me?

Reading this chapter will help you do the following:

1. Understand need-based theories of motivation.

2. Understand process-based theories of motivation.

3. Describe how fairness perceptions are determined and their consequences.

585

4. Learn to use performance appraisals in a motivational way.

5. Learn to apply organizational rewards in a motivational way.

6. Develop your personal motivation skills.

Motivation is defined as “the intention of achieving a goal, leading to goal-directed behavior (Columbia

Encyclopedia, 2004).” When we refer to someone as being motivated, we mean that the person is trying hard

to accomplish a certain task. Motivation is clearly important for someone to perform well. However, motivation

alone is not sufficient. Ability—having the skills and knowledge required to perform the job—is also important

and is sometimes the key determinant of effectiveness. Finally, environmental factors—having the resources,

information, and support one needs to perform well—are also critical to determine performance.

Figure 14.2 The P-O-L-C Framework

What makes employees willing to “go the extra mile” to provide excellent service, market a company’s products

effectively, or achieve the goals set for them? Answering questions like this is of utmost importance to understand

and manage the work behavior of our peers, subordinates, and even supervisors. As with many questions

involving human beings, the answers are anything but simple. Instead, there are several theories explaining the

concept of motivation.

Figure 14.3

According to this equation, motivation, ability, and environment are the major influences over employee

performance.

Mitchell, T. R. (1982). Motivation: New directions for theory, research, and practice. The Academy

586 • PRINCIPLES OF MANAGEMENT

of Management Review, 7, 80–88; Porter, L. W. & Lawler, E. E. (1968). Managerial attitudes and

performance. Homewood, IL: Dorsey Press

ReferencesReferences

Columbia encyclopedia. (2004). New York: Columbia University Press.

14.1 MOTIVATING EMPLOYEES • 587

14.2 Case in Point: Zappos Creates a Motivating Place toWork

Figure 14.4

Thomas Bunton – Vegas 2014 Winter Zappos Pop Up Store – CC BY-NC 2.0.

It is unique to hear about a CEO who studies happiness and motivation and builds those principles intothe company’s core values or about a company with a 5-week training course and an offer of $2,000 toquit anytime during that 5 weeks if you feel the company is not a good fit. Top that off with an on-sitelife coach who also happens to be a chiropractor, and you are really talking about something you don’thear about every day. Zappos is known as much for its 365-day return policy and free shipping as it isfor its innovative corporate culture. Although acquired in 2009 by Amazon (NASDAQ: AMZN), Zapposmanaged to move from number 23 in 2009 on Fortune magazine’s “100 Best Companies to Work For” listto 15 in 2010.

Performance is a function of motivation, ability, and the environment in which you work. Zappos seemsto be creating an environment that encourages motivation and builds inclusiveness. The company delivers

588

above and beyond basic workplace needs and addresses the self-actualization needs that most individualsdesire from their work experience. CEO Tony Hsieh believes that the secret to customer loyalty is to makea corporate culture of caring a priority. This is reflected in the company’s 10 core values and its emphasison building a team and a family. During the interview process, applicants are asked questions relating to thecompany’s values, such as gauging their own weirdness, open-mindedness, and sense of family. Althoughthe offer to be paid to quit during the training process has increased from its original number of $400, only1% of trainees take the offer. Work is structured differently at Zappos as well. For example, there is nolimit to the time customer service representatives spend on a phone call, and they are encouraged to makepersonal connections with the individuals on the other end rather than try to get rid of them.

Although Zappos has over 1,300 employees, the company has been able to maintain a relatively flatorganizational structure and prides itself on its extreme transparency. In an exceptionally detailed andlengthy letter to employees, Hsieh spelled out what the new partnership with Amazon would mean for thecompany, what would change, and more important, what would remain the same. As a result of this typeof company structure, individuals have more freedom, which can lead to greater satisfaction.

Although Zappos pays its employees well and offers attractive benefits such as employees receiving fullhealth-care coverage and a compressed workweek, the desire to work at Zappos seems to go beyond that.As Hsieh would say, happiness is the driving force behind almost any action an individual takes. Whetheryour goals are for achievement, affiliation, or simply to find an enjoyable environment in which to work,Zappos strives to address these needs.

Case written based on information from Robischon, N. (2009, July 22). Amazon buys Zappos for $847million. Fast Company. Retrieved February 28, 2010, from http://www.fastcompany.com/blog/noah-robischon/editors-desk/amazon -buys-zappos-807-million; Walker, A. (2009, March 14). Zappos’ TonyHsieh on Twitter, phone calls and the pursuit of happiness. Fast Company. Retrieved February 27, 2010,from http://www.fastcompany.com/blog/alissa-walker/member-blog/tony-hsiehs-zapposcom; Happyfeet—Inside the online shoe utopia. (2009, September 14). New Yorker. Retrieved February 28, 2010,from http://about.zappos.com/press-center/media-coverage/happy-feet-inside-online-shoe-utopia; 100 bestcompanies to work for. (2010, February 8). Fortune. Retrieved February 26, 2010, fromhttp://money.cnn.com/magazines/fortune/bestcompanies/2010/snapshots/15.html.

Discussion Questions

1. Motivation is an essential element of the leading facet of the P-O-L-C framework. What are othermeans that organizations use to motivate employees besides those used by Zappos?

2. What potential organizational changes might result from the acquisition by Amazon?

3. Why do you think Zappos’ approach is not utilized more often? In other words, what are thechallenges to these techniques?

4. Why do you think Zappos offers a $2,000 incentive to quit?

5. Would you be motivated to work at Zappos? Why or why not?

14.2 CASE IN POINT: ZAPPOS CREATES A MOTIVATING PLACE TO WORK • 589

14.3 Need-Based Theories of Motivation

Learning Objectives

1. Explain how employees are motivated according to Maslow’s hierarchy of needs.

2. Explain how ERG theory addresses the limitations of Maslow’s hierarchy.

3. Describe the difference between factors contributing to employee motivation and how these differfrom factors contributing to dissatisfaction.

4. Describe the needs for achievement, power, and affiliation, and how these needs affect workbehavior.

The earliest answer to motivation involved understanding individual needs. Specifically, early researchers thought

that employees try hard and demonstrate goal-driven behavior to satisfy needs. For example, an employee who

is always walking around the office talking to people may have a need for companionship and his behavior may

be a way of satisfying this need. There are four major theories in the need-based category: Maslow’s hierarchy of

needs, ERG theory, Herzberg’s dual factor theory, and McClelland’s acquired needs theory.

Maslow’s Hierarchy of NeedsMaslow’s Hierarchy of Needs

Abraham Maslow is among the most prominent psychologists of the 20th century and the hierarchy of needs,

accompanied by the pyramid representing how human needs are ranked, is an image familiar to most business

students and managers. Maslow’s theory is based on a simple premise: Human beings have needs that are

hierarchically ranked (Maslow, 1943; Maslow, 1954). There are some needs that are basic to all human beings,

and in their absence, nothing else matters. As we satisfy these basic needs, we start looking to satisfy higher-order

needs. Once a lower-level need is satisfied, it no longer serves as a motivator.

The most basic of Maslow’s needs are physiological needs. Physiological needs refer to the need for air, food, and

water. Imagine being very hungry. At that point, all your behavior may be directed at finding food. Once you eat,

though, the search for food ceases and the promise of food no longer serves as a motivator. Once physiological

needs are satisfied, people tend to become concerned about safety. Are they safe from danger, pain, or an uncertain

future? One level up, social needs refer to the need to bond with other human beings, to be loved, and to form

lasting attachments. In fact, having no attachments can negatively affect health and well-being (Baumeister &

590

Leary, 1995). The satisfaction of social needs makes esteem needs more salient. Esteem needs refer to the desire to

be respected by one’s peers, feeling important, and being appreciated. Finally, at the highest level of the hierarchy,

the need for self-actualization refers to “becoming all you are capable of becoming.” This need manifests itself by

acquiring new skills, taking on new challenges, and behaving in a way that will lead to the satisfaction of one’s

life goals.

Figure 14.5 Maslow’s Hierarchy of Needs

Source: Adapted from Maslow, A. H. (1954). Motivation and personality. New York: Harper.

Maslow’s hierarchy is a systematic way of thinking about the different needs employees may have at any given

point and explains different reactions they may have to similar treatment. An employee who is trying to satisfy

her esteem needs may feel gratified when her supervisor praises her. However, another employee who is trying

to satisfy his social needs may resent being praised by upper management in front of peers if the praise sets him

apart from the rest of the group.

So, how can organizations satisfy their employees’ various needs? By leveraging the various facets of the

planning-organizing-leading-controlling (P-O-L-C) functions. In the long run, physiological needs may be

satisfied by the person’s paycheck, but it is important to remember that pay may satisfy other needs such as safety

and esteem as well. Providing generous benefits, including health insurance and company-sponsored retirement

plans, as well as offering a measure of job security, will help satisfy safety needs. Social needs may be satisfied

by having a friendly environment, providing a workplace conducive to collaboration and communication with

others. Company picnics and other social get-togethers may also be helpful if the majority of employees are

motivated primarily by social needs (but may cause resentment if they are not and if they have to sacrifice a

Sunday afternoon for a company picnic). Providing promotion opportunities at work, recognizing a person’s

14.3 NEED-BASED THEORIES OF MOTIVATION • 591

accomplishments verbally or through more formal reward systems, job titles that communicate to the employee

that one has achieved high status within the organization are among the ways of satisfying esteem needs. Finally,

self-actualization needs may be satisfied by providing development and growth opportunities on or off the job,

as well as by assigning interesting and challenging work. By making the effort to satisfy the different needs each

employee may have at a given time, organizations may ensure a more highly motivated workforce.

ERG TheoryERG Theory

ERG theory of Clayton Alderfer is a modification of Maslow’s hierarchy of needs (Alderfer, 1969). Instead

of the five needs that are hierarchically organized, Alderfer proposed that basic human needs may be grouped

under three categories, namely, Existence, Relatedness, and Growth (see the following figure). Existence need

corresponds to Maslow’s physiological and safety needs, relatedness corresponds to social needs, and growth need

refers to Maslow’s esteem and self actualization.

Figure 14.7 ERG Theory

592 • PRINCIPLES OF MANAGEMENT

Source: Based on Alderfer, C. P. (1969). An empirical test of a new theory of human needs. Organizational

Behavior and Human Performance, 4, 142–175.

ERG theory’s main contribution to the literature is its relaxation of Maslow’s assumptions. For example, ERG

theory does not rank needs in any particular order and explicitly recognizes that more than one need may operate

at a given time. Moreover, the theory has a “frustration-regression” hypothesis, suggesting that individuals who

are frustrated in their attempts to satisfy one need may regress to another one. For example, someone who is

frustrated by the lack of growth opportunities in his job and slow progress toward career goals may regress to

relatedness needs and start spending more time socializing with one’s coworkers. The implication of this theory is

that we need to recognize the multiple needs that may be driving an individual at a given point to understand his

behavior and to motivate him.

Two-Factor TheoryTwo-Factor Theory

Frederick Herzberg approached the question of motivation in a different way. By asking individuals what satisfies

them on the job and what dissatisfies them, Herzberg came to the conclusion that aspects of the work environment

that satisfy employees are very different from aspects that dissatisfy them (Herzberg, et. al., 1959; Herzberg,

1965). Herzberg labeled factors causing dissatisfaction of workers as “hygiene” factors because these factors were

part of the context in which the job was performed, as opposed to the job itself. Hygiene factors included company

policies, supervision, working conditions, salary, safety, and security on the job. To illustrate, imagine that you

are working in an unpleasant work environment. Your office is too hot in the summer and too cold in the winter.

You are being harassed and mistreated. You would certainly be miserable in such a work environment. However,

if these problems were solved (your office temperature is just right and you are not harassed at all), would you be

motivated? Most likely, you would take the situation for granted. In fact, many factors in our work environment

are things that we miss when they are absent, but take for granted if they are present.

In contrast, motivators are factors that are intrinsic to the job, such as achievement, recognition, interesting work,

increased responsibilities, advancement, and growth opportunities. According to Herzberg’s research, motivators

are the conditions that truly encourage employees to try harder.

Figure 14.8 Two-Factor Theory of Motivation

Source: Based on Herzberg, F., Mausner, B., & Snyderman, B. (1959). The motivation to work. New York:

Wiley; Herzberg, F. (1965). The motivation to work among Finnish supervisors. Personnel Psychology,

18, 393–402.

Herzberg’s research, which is summarized in the figure above, has received its share of criticism (Cummings &

14.3 NEED-BASED THEORIES OF MOTIVATION • 593

Elsalmi, 1968; House & Wigdor, 1967). One criticism relates to the classification of the factors as hygiene or

motivator. For example, pay is viewed as a hygiene factor. However, pay is not necessarily a contextual factor

and may have symbolic value by showing employees that they are being recognized for their contributions as

well as communicating to them that they are advancing within the company. Similarly, quality of supervision

or relationships employees form with their supervisors may determine whether they are assigned interesting

work, whether they are recognized for their potential, and whether they take on more responsibilities. Despite

its limitations, the two-factor theory can be a valuable aid to managers because it points out that improving the

environment in which the job is performed goes only so far in motivating employees.

Figure 14.9

Plaques and other recognition awards may motivate employees if these awards fit with the company

culture and if they reflect a sincere appreciation of employee accomplishments.

phjakroon – Pixabay – CC0 public domain.

Acquired Needs TheoryAcquired Needs Theory

Among the need-based approaches to motivation, Douglas McClelland’s acquired needs theory is the one that has

received the greatest amount of support. According to this theory, individuals acquire three types of needs as a

result of their life experiences. These needs are need for achievement, need for affiliation, and need for power. All

individuals possess a combination of these needs.

Those who have high need for achievement have a strong need to be successful. A worker who derives great

satisfaction from meeting deadlines, coming up with brilliant ideas, and planning his or her next career move

may be high in need for achievement. Individuals high on need for achievement are well suited to positions such

as sales where there are explicit goals, feedback is immediately available, and their effort often leads to success

(Harrell & Stahl, 1981; Trevis & Certo, 2005; Turban & Keon, 1993). Because of their success in lower-level

594 • PRINCIPLES OF MANAGEMENT

jobs, those in high need for achievement are often promoted to higher-level positions (McClelland & Boyatzis,

1982). However, a high need for achievement has important disadvantages in management. Management involves

getting work done by motivating others. When a salesperson is promoted to be a sales manager, the job description

changes from actively selling to recruiting, motivating, and training salespeople. Those who are high in need for

achievement may view managerial activities such as coaching, communicating, and meeting with subordinates as

a waste of time. Moreover, they enjoy doing things themselves and may find it difficult to delegate authority. They

may become overbearing or micromanaging bosses, expecting everyone to be as dedicated to work as they are,

and expecting subordinates to do things exactly the way they are used to doing (McClelland & Burnham, 1976).

Individuals who have a high need for affiliation want to be liked and accepted by others. When given a choice,

they prefer to interact with others and be with friends (Wong & Csikszentmihalyi, 1991). Their emphasis

on harmonious interpersonal relationships may be an advantage in jobs and occupations requiring frequent

interpersonal interaction, such as social worker or teacher. In managerial positions, a high need for affiliation may

again serve as a disadvantage because these individuals tend to be overly concerned about how they are perceived

by others. Thus, they may find it difficult to perform some aspects of a manager’s job such as giving employees

critical feedback or disciplining poor performers.

Finally, those with high need for power want to influence others and control their environment. Need for power

may be destructive of one’s relationships if it takes the form of seeking and using power for one’s own good and

prestige. However, when it manifests itself in more altruistic forms, such as changing the way things are done so

that the work environment is more positive or negotiating more resources for one’s department, it tends to lead to

positive outcomes. In fact, need for power is viewed as important for effectiveness in managerial and leadership

positions (Mcclelland & Burnham, 1976; Spangler & House, 1991; Spreier, 2006).

McClelland’s theory of acquired needs has important implications for motivating employees. While someone who

has high need for achievement may respond to goals, those with high need for affiliation may be motivated to

gain the approval of their peers and supervisors, whereas those who have high need for power may value gaining

influence over the supervisor or acquiring a position that has decision-making authority. And, when it comes to

succeeding in managerial positions, individuals who are aware of the drawbacks of their need orientation can take

steps to overcome these drawbacks.

Key Takeaway

Need-based theories describe motivated behavior as individual efforts to meet needs. According to thisperspective, the manager’s job is to identify what people need and then to make sure that the workenvironment becomes a means of satisfying these needs. Maslow’s hierarchy categorizes human needsinto physiological, safety, social, esteem, and self-actualization needs. ERG theory is a modification ofMaslow’s hierarchy, where the five needs are collapsed into three categories (existence, relatedness, andgrowth). The two-factor theory differentiates between factors that make people dissatisfied on the job(hygiene factors) and factors that truly motivate employees. Finally, acquired-needs theory argues thatindividuals possess stable and dominant motives to achieve, acquire power, or affiliate with others. Eachof these theories explains characteristics of a work environment that motivate employees.

14.3 NEED-BASED THEORIES OF MOTIVATION • 595

Exercises

1. Many managers assume that if an employee is not performing well, the reason must be lack ofmotivation. What is the problem with this assumption?

2. Review Maslow’s hierarchy of needs. Do you agree with the particular ranking of employeeneeds?

3. Review the hygiene and motivators in the two-factor theory. Are there any hygiene factors thatyou would consider to be motivators and vice versa?

4. A friend of yours is competitive, requires frequent and immediate feedback, and enjoysaccomplishing things. She has recently been promoted to a managerial position and seeks youradvice. What would you tell her?

5. Which motivation theory have you found to be most useful in explaining why people behave in acertain way? Why?

ReferencesReferences

Alderfer, C. P. (1969). An empirical test of a new theory of human needs. Organizational Behavior and Human

Performance, 4, 142–175.

Baumeister, R. F., & Leary, M. R. (1995). The need to belong: Desire for interpersonal attachments as a

fundamental human motivation. Psychological Bulletin, 117, 497–529.

Cummings, L. L., & Elsalmi, A. M. (1968). Empirical research on the bases and correlates of managerial

motivation. Psychological Bulletin, 70, 127–144.

Harrell, A. M., & Stahl, M. J. (1981). A behavioral decision theory approach for measuring McClelland’s

trichotomy of needs. Journal of Applied Psychology, 66, 242–247.

Herzberg, F. (1965). The motivation to work among Finnish supervisors. Personnel Psychology, 18, 393–402.

Herzberg, F., Mausner, B., & Snyderman, B. (1959). The motivation to work. New York: Wiley.

House, R. J., & Wigdor, L. A. (1967). Herzberg’s dual-factor theory of job satisfaction and motivation: A review

of the evidence and a criticism. Personnel Psychology, 20, 369–389.

Maslow, A. H. (1943). A theory of human motivation. Psychological Review, 50, 370–396.

Maslow, A. H. (1954). Motivation and personality. New York: Harper.

McClelland, D. C., & Boyatzis, R. E. (1982). Leadership motive pattern and long-term success in management.

Journal of Applied Psychology, 67, 737–743.

McClelland, D. C., & Burnham, D. H. (1976). Power is the great motivator. Harvard Business Review, 25,

159–166.

596 • PRINCIPLES OF MANAGEMENT

Spangler, W. D., & House, R. J. (1991). Presidential effectiveness and the leadership motive profile. Journal of

Personality and Social Psychology, 60, 439–455.

Spreier, S. W. (2006). Leadership run amok. Harvard Business Review, 84, 72–82.

Trevis, C. S., & Certo, S. C. (2005). Spotlight on entrepreneurship. Business Horizons, 48, 271–274.

Turban, D. B., & Keon, T. L. (1993). Organizational attractiveness: An interactionist perspective. Journal of

Applied Psychology, 78, 184–193.

Wong, M. M., & Csikszentmihalyi, M. (1991). Affiliation motivation and daily experience: Some issues on gender

differences. Journal of Personality and Social Psychology, 60, 154–164.

14.3 NEED-BASED THEORIES OF MOTIVATION • 597

14.4 Process-Based Theories

Learning Objectives

1. Explain how employees evaluate the fairness of reward distributions.

2. List the three questions individuals consider when deciding whether to put forth effort at work.

3. Describe how managers can use learning and reinforcement principles to motivate employees.

4. Learn the role that job design plays in motivating employees.

5. Describe why goal setting motivates employees.

In contrast to the need-based theories we have covered so far, process-based theories view motivation as a rational

process. Individuals analyze their environment, develop reactions and feelings, and react in certain ways. Under

this category, we will review equity theory, expectancy theory, and reinforcement theory. We will also discuss the

concepts of job design and goal setting as motivational strategies.

Equity TheoryEquity Theory

Imagine that your friend Marie is paid $10 an hour working as an office assistant. She has held this job for

six months. She is very good at what she does, she comes up with creative ways to make things easier in the

workplace, and she is a good colleague who is willing to help others. She stays late when necessary and is flexible

if asked to rearrange her priorities or her work hours. Now imagine that Marie finds out her manager is hiring

another employee, Spencer, who is going to work with her, who will hold the same job title and will perform the

same type of tasks. Spencer has more advanced computer skills, but it is unclear whether these will be used on

the job. The starting pay for Spencer will be $14 an hour. How would Marie feel? Would she be as motivated as

before, going above and beyond her duties?

If your reaction to this scenario was along the lines of “Marie would think it’s unfair,” your feelings may be

explained using equity theory (Adams, 1965). According to this theory, individuals are motivated by a sense

of fairness in their interactions. Moreover, our sense of fairness is a result of the social comparisons we make.

Specifically, we compare our inputs and outputs with someone else’s inputs and outputs. We perceive fairness if

we believe that the input-to-output ratio we are bringing into the situation is similar to the input/output ratio of a

598

comparison person, or a referent. Perceptions of inequity create tension within us and drive us to action that will

reduce perceived inequity. This process is illustrated in the Equity Formula.

14.4 PROCESS-BASED THEORIES • 599

Figure 14.10 The Equity Formula

Based on Adams, J. S. (1965). Inequity in social exchange. In L. Berkowitz (Ed.), Advances in

Experimental Social Psychology (Vol. 2, pp. 267–299). New York: Academic Press.

What Are Inputs and Outputs?What Are Inputs and Outputs?

Inputs are the contributions the person feels he or she is making to the environment. In the previous example, the

hard work Marie was providing, loyalty to the organization, the number of months she has worked there, level of

education, training, and her skills may have been relevant inputs. Outputs are the rewards the person feels he or

she is receiving from the situation. The $10 an hour Marie is receiving was a salient output. There may be other

outputs, such as the benefits received or the treatment one gets from the boss. In the prior example, Marie may

reason as follows: “I have been working here for six months. I am loyal and I perform well (inputs). I am paid $10

an hour for this (outputs). The new guy, Spencer, does not have any experience here (referent’s inputs) but will be

paid $14 (referent’s outcomes). This situation is unfair.”

We should emphasize that equity perceptions develop as a result of a subjective process. Different people may

look at exactly the same situation and perceive different levels of equity. For example, another person may look

at the same scenario and decide that the situation is fair because Spencer has computer skills and the company is

paying extra for these skills.

Who Is the Referent?Who Is the Referent?

The referent other may be a specific person or an entire category of people. For example, Marie might look at

want ads for entry-level clerical workers and see whether the pay offered is in the $10 per hour range; in this

case, the referent other is the category of entry-level clerical workers, including office assistants, in Marie’s local

area. Referents should be comparable to us—otherwise the comparison is not meaningful. It would be illogical for

Marie to compare herself to the CEO of the company, given the differences in the nature of inputs and outcomes.

Instead, she would logically compare herself to those performing similar tasks within the same organization or a

different organization.

600 • PRINCIPLES OF MANAGEMENT

Reactions to UnfairnessReactions to Unfairness

The theory outlines several potential reactions to perceived inequity, which are summarized in Table 14.1

“Potential Responses to Inequity”. Oftentimes, the situation may be dealt with perceptually, by distorting our

perceptions of our own or referent’s inputs and outputs. For example, Marie may justify the situation by

downplaying her own inputs (“I don’t really work very hard on this job”), valuing the outputs more highly (“I am

gaining valuable work experience, so the situation is not that bad”), distorting the other person’s inputs (“Spencer

really is more competent than I am and deserves to be paid more”) or distorting the other person’s outputs

(“Spencer gets $14 but will have to work with a lousy manager, so the situation is not unfair”).

Table 14.1 Potential Responses to Inequity

Reactions to inequity Example

Distort perceptions Changing one’s thinking to believe that the referent actually is more skilled than previously thought

Increase referent’s inputs Encouraging the referent to work harder

Reduce own input Deliberately putting forth less effort at work. Reducing the quality of one’s work

Increase own outcomes Negotiating a raise for oneself or using unethical ways of increasing rewards such as stealing from the company

Change referent Comparing oneself to someone who is worse off

Leave the situation Quitting one’s job

Seek legal action Suing the company or filing a complaint if the unfairness in question is under legal protection

Source: Based on research findings reported in Carrell, M. R., & Dittrich, J. E. (1978). Equity theory: The recent

literature, methodological considerations, and new directions. Academy of Management Review, 3, 202–210;

Goodman, P. S., & Friedman, A. (1971). An examination of Adams’s theory of inequity. Administrative Science

Quarterly, 16, 271–288; Greenberg, J. (1993). Stealing in the name of justice: Informational and interpersonal

moderators of theft reactions to underpayment inequity. Organizational Behavior and Human Decision Processes,

54, 81–103; Schmidt, D. R., & Marwell, G. (1972). Withdrawal and reward reallocation as responses to inequity.

Journal of Experimental Social Psychology, 8, 207–211.

Another way of addressing perceived inequity is to reduce one’s own inputs or increase one’s own outputs.

If Marie works less hard, perceived inequity would be reduced. And, indeed, research shows that people who

perceive inequity tend to reduce their work performance or reduce the quality of their inputs (Carrell & Dittrich,

1978; Goodman & Friedman, 1971). Increasing one’s outputs can be achieved through legitimate means such as

negotiating a pay raise. At the same time, research shows that those feeling inequity sometimes resort to stealing to

balance the scales (Greenberg, 1993). Other options include changing the comparison person (for example, Marie

may learn that others doing similar work in different organizations are paid only minimum wage) and leaving

the situation by quitting one’s job (Schmidt & Marwell, 1972). We might even consider taking legal action as a

potential outcome of perceived inequity. For example, if Marie finds out that the main reason behind the pay gap

is gender, she may react to the situation by taking legal action because sex discrimination in pay is illegal in the

United States.

14.4 PROCESS-BASED THEORIES • 601

Overpayment InequityOverpayment Inequity

What would you do if you felt you were overrewarded? In other words, how would you feel if you were the

new employee, Spencer (and you knew that your coworker Marie was being paid $4 per hour less than you)?

Originally, equity theory proposed that overrewarded individuals would experience guilt and would increase their

effort to restore perceptions of equity. However, research does not provide support for this argument. Instead, it

seems that individuals experience less distress as a result of being overrewarded (Austin & Walster, 1974). It is

not hard to imagine that individuals find perceptual ways to deal with a situation like this, such as believing that

they have more skills and bring more to the situation compared with the referent person. Therefore, research does

not support equity theory’s predictions with respect to people who are overpaid (Evan & Simmons, 1969).

Individual Differences in Reactions to InequityIndividual Differences in Reactions to Inequity

So far, we have assumed that once people feel that the situation is inequitable, they will be motivated to react.

However, does inequity disturb everyone equally? Researchers identified a personality trait that explains different

reactions to inequity and named this trait equity sensitivity (Huseman, et. al., 1987). Equity sensitive individuals

experience distress when they feel they are overrewarded or underrewarded and expect to maintain equitable

relationships. At the same time, there are some individuals who are benevolents who give without waiting to

receive much in return and entitleds who expect to receive a lot without giving much in return. Thus, the theory

is more useful in explaining the behavior of equity sensitive individuals, and organizations will need to pay

particular attention to how these individuals view their relationships.

Fairness Beyond Equity: Procedural and Interactional JusticeFairness Beyond Equity: Procedural and Interactional Justice

Equity theory looks at perceived fairness as a motivator. However, the way equity theory defines fairness is limited

to fairness regarding rewards. Starting in the 1970s, researchers of workplace fairness began taking a broader view

of justice. Equity theory deals with outcome fairness, and therefore, it is considered to be a distributive justice

theory. Distributive justice refers to the degree to which the outputs received from the organization are fair. Two

other types of fairness have been identified: Procedural justice and interactional justice.

Let’s assume that Marie found out she is getting a promotion that will include a pay raise, increased

responsibilities, and prestige. If Marie feels she deserves to be promoted, she would perceive high distributive

justice (“getting the promotion is fair”). However, Marie later found out that the department manager picked her

name out of a hat! What would she feel? She might still like the outcome but feel that the decision-making process

was unfair since it wasn’t based on performance. This response would involve feelings of procedural injustice.

Procedural justice refers to the degree to which fair decision-making procedures are used. Research shows that

employees care about procedural justice for many organizational decisions, including layoffs, employee selection,

surveillance of employees, performance appraisals, and pay decisions (Alge, 2001; Bauer, et. al., 1998; Kidwell,

1995). They tend to care about procedural justice particularly when they do not get the outcome they feel they

deserve (Brockner & Wiesenfeld, 1996). If Marie does not get the promotion and finds out that management chose

the candidate by picking a name out of a hat, she may view this as adding insult to injury. When people do not

get the rewards they want, they tend to hold management responsible if procedures are not fair (Brockner, et. al.,

2007).

602 • PRINCIPLES OF MANAGEMENT

Research has identified many ways of achieving procedural justice. For example, giving employees advance

notice before laying them off, firing them, or disciplining them is perceived as fairer (Kidwell, 1995). Allowing

employees voice into decision making is also important (Alge, 2001; Kernan & Hanges, 2002; Lind, et. al., 1990).

When designing a performance appraisal system or implementing a reorganization, asking employees for their

input may be a good idea because it increases perceptions of fairness. Even when it is not possible to have

employees participate, providing explanations is helpful in fostering procedural justice (Schaubroeck, et. al.,

1994). Finally, people expect consistency in treatment (Bauer, et. al., 1998). If one person is given extra time when

taking a test while another is not, individuals would perceive decision making as unfair.

Now let’s imagine Marie’s boss telling her she is getting the promotion. The manager’s exact words: “Yes,

Marie, we are giving you the promotion. The job is so simple that we thought even you can handle it.” Now

what is Marie’s reaction? The unpleasant feelings she may now experience are explained by interactional justice.

Interactional justice refers to the degree to which people are treated with respect, kindness, and dignity in

interpersonal interactions. We expect to be treated with dignity by our peers, supervisors, and customers. When

the opposite happens, we feel angry. Even when faced with negative outcomes such as a pay cut, being treated

with dignity and respect serves as a buffer and alleviates our stress (Greenberg, 2006).

Employers would benefit from paying attention to all three types of justice perceptions. In addition to being

the right thing to do, justice perceptions lead to outcomes companies care about. Injustice is directly harmful

to employee psychological health and well-being and contributes to stress (Greenberg, 2004; Tepper, 2001).

High levels of justice create higher levels of employee commitment to organizations, are related to higher job

performance, higher levels of organizational citizenship (behaviors that are not part of one’s job description but

help the organization in other ways such as speaking positively about the company and helping others), and higher

levels of customer satisfaction, whereas low levels of justice lead to retaliation and supporting union certification

movements (Blader, 2007; Cohen-Charash & Spector, 2001; Colquitt, et. al., 2001; Cropanzano, et. al., 2001;

Masterson, et. al., 2000; Moorman, 1991; Skarlicki & Folger, 1997).

Expectancy TheoryExpectancy Theory

According to expectancy theory, individual motivation to put forth more or less effort is determined by a rational

calculation (Porter & Lawler, 1968; Vroom, 1964). According to this theory, individuals ask themselves three

questions.

Figure 14.11 Summary of Expectancy Theory

Based on Porter, L. W., & Lawler, E. E. (1968). Managerial attitudes and performance. Homewood, IL:

Irwin; Vroom, V. H. (1964). Work and motivation. New York: Wiley.

14.4 PROCESS-BASED THEORIES • 603

The first question is whether the person believes that high levels of effort will lead to desired outcomes. This

perception is labeled as expectancy. For example, do you believe that the effort you put forth in a class is related

to learning worthwhile material and receiving a good grade? If you do, you are more likely to put forth effort.

The second question is the degree to which the person believes that performance is related to secondary outcomes

such as rewards. This perception is labeled as instrumentality. For example, do you believe that passing the class

is related to rewards such as getting a better job, or gaining approval from your instructor, from your friends, or

parents? If you do, you are more likely to put forth effort.

Finally, individuals are also concerned about the value of the rewards awaiting them as a result of performance.

The anticipated satisfaction that will result from an outcome is labeled as valence. For example, do you value

getting a better job or gaining approval from your instructor, friends, or parents? If these outcomes are desirable

to you, you are more likely to put forth effort.

As a manager, how can you influence these perceptions to motivate employees? In fact, managers can influence all

three perceptions (Cook, 1980). To influence their expectancy perceptions, managers may train their employees,

or hire people who are qualified for the jobs in question. Low expectancy may also be due to employees feeling

that something other than effort predicts performance, such as political behaviors on the part of employees. In this

case, clearing the way to performance and creating an environment in which employees do not feel blocked will

be helpful. The first step in influencing instrumentality is to connect pay and other rewards to performance using

bonuses, award systems, and merit pay. Publicizing any contests or award programs is helpful in bringing rewards

to the awareness of employees. It is also important to highlight that performance and not something else is being

rewarded. For example, if a company has an employee-of-the-month award that is rotated among employees,

employees are unlikely to believe that performance is being rewarded. In the name of being egalitarian, such a

reward system may actually hamper the motivation of highest performing employees by eroding instrumentality.

Finally, to influence valence, managers will need to find out what their employees value. This can be done by

talking to employees, or surveying them about what rewards they find valuable.

Reinforcement TheoryReinforcement Theory

Reinforcement theory is based on the work of Ivan Pavlov in behavioral conditioning and the later work B.

F. Skinner did on operant conditioning (Skinner, 1953). According to this theory, behavior is a function of its

consequences. Imagine that even though no one asked you to, you stayed late and drafted a report. When the

manager found out, she was ecstatic and took you out to lunch and thanked you genuinely. The consequences

following your good deed were favorable, and therefore you are more likely to do similar good deeds in the future.

In contrast, if your manager had said nothing about it and ignored the sacrifice you made, you would be less likely

to demonstrate similar behaviors in the future, or your behavior would likely become extinct.

Despite the simplicity of reinforcement theory, how many times have you seen positive behavior ignored or,

worse, negative behavior rewarded? In many organizations, this is a familiar scenario. People go above and

beyond the call of duty, and yet their behaviors are ignored or criticized. People with disruptive habits may receive

no punishments because the manager is afraid of the reaction the person will give when confronted. They may

even receive rewards such as promotions so that the person is transferred to a different location and becomes

someone else’s problem! Moreover, it is common for people to be rewarded for the wrong kind of behavior. Steven

Kerr labeled this phenomenon as “the folly of rewarding A while hoping for B (Kerr, 1995).” For example, a

604 • PRINCIPLES OF MANAGEMENT

company may make public statements about the importance of quality. Yet, they choose to reward shipments on

time regardless of the number of known defects contained in the shipments. As a result, employees are more likely

to ignore quality and focus on hurrying the delivery process.

Reinforcement InterventionsReinforcement Interventions

Figure 14.12 Reinforcement Methods

Reinforcement theory describes four interventions to modify employee behavior. Two of these are methods of

increasing the frequency of desired behaviors while the remaining two are methods of reducing the frequency of

undesired behaviors.

Positive reinforcement is a method of increasing the desired behavior (Beatty & Schneier, 1975). Positive

reinforcement involves making sure that behavior is met with positive consequences. Praising an employee for

treating a customer respectfully is an example of positive reinforcement. If the praise immediately follows the

positive behavior, the employee will see a link between behavior and positive consequences and will be motivated

to repeat similar behaviors.

Negative reinforcement is also used to increase the desired behavior. Negative reinforcement involves removal

of unpleasant outcomes once desired behavior is demonstrated. Nagging an employee to complete a report is an

example of negative reinforcement. The negative stimulus in the environment will remain present until positive

behavior is demonstrated. The problem with negative reinforcement may be that the negative stimulus may lead to

unexpected behaviors and may fail to stimulate the desired behavior. For example, the person may start avoiding

the manager to avoid being nagged.

Extinction occurs when a behavior ceases as a result of receiving no reinforcement. For example, suppose an

14.4 PROCESS-BASED THEORIES • 605

employee has an annoying habit of forwarding e-mail jokes to everyone in the department, cluttering up people’s

in-boxes and distracting them from their work. Commenting about the jokes, whether in favorable or unfavorable

terms, may be encouraging the person to keep forwarding them. Completely ignoring the jokes may reduce their

frequency.

Punishment is another method of reducing the frequency of undesirable behaviors. Punishment involves

presenting negative consequences following unwanted behaviors. Giving an employee a warning for consistently

being late to work is an example of punishment.

Reinforcement SchedulesReinforcement Schedules

In addition to types of reinforcements, the timing or schedule on which reinforcement is delivered has a bearing

on behavior (Beatty & Schneier, 1975). Reinforcement is presented on a continuous schedule if reinforcers follow

all instances of positive behavior. An example of a continuous schedule would be giving an employee a sales

commission every time he makes a sale. Fixed ratio schedules involve providing rewards every nth time the right

behavior is demonstrated, for example, giving the employee a bonus for every 10th sale he makes. Fixed interval

schedules involve providing a reward after a specified period of time, such as giving a sales bonus once a month

regardless of how many sales have been made. Variable ratio involves a random pattern, such as giving a sales

bonus every time the manager is in a good mood.

A systematic way in which reinforcement theory principles are applied is called Organizational Behavior

Modification (or OB Mod) (Luthans & Stajkovic, 1999). This is a systematic application of reinforcement theory

to modify employee behaviors. The model consists of five stages. The process starts with identifying the behavior

that will be modified. Let’s assume that we are interested in reducing absenteeism among employees. In step 2,

we need to measure the baseline level of absenteeism. In step 3, the behavior’s antecedents and consequences are

determined. Why are employees absent? More importantly, what is happening when an employee is absent? If the

behavior is being unintentionally rewarded, we may expect these to reinforce absenteeism behavior. For example,

suppose that absences peak each month on the days when a departmental monthly report is due, meaning that

coworkers and supervisors must do extra work to prepare the report. To reduce the frequency of absenteeism, it

will be necessary to think of financial or social incentives to follow positive behavior and negative consequences

to follow negative behavior. In step 4, an intervention is implemented. Removing the positive consequences of

negative behavior may be an effective way of dealing with the situation, for example, starting the monthly report

preparation a few days earlier, or letting employees know that if they are absent when the monthly report is

being prepared, their contribution to the report will be submitted as incomplete until they finish it. Punishments

may be used in persistent cases. Finally, in step 5 the behavior is measured periodically and maintained. Studies

examining the effectiveness of OB Mod have been supportive of the model in general. A review of the literature

found that OB Mod interventions resulted in an average of 17% improvement in performance (stajkovic &

Luthans, 1997).

606 • PRINCIPLES OF MANAGEMENT

Figure 14.13

Properly designed sales commissions are widely used to motivate sales employees. The blend of straight salary and commissions should

be carefully balanced to achieve optimum sales volume, profitability, and customer satisfaction.

Laura Cummins – Salesman & New Owner – CC BY-ND 2.0.

Figure 14.14 Stages of OB Modification

Based on information presented in Stajkovic, A. D., & Luthans, F. (1997). A meta-analysis of the effects of

organizational behavior modification on task performance, 1975-1995. Academy of Management Journal,

40, 1122–1149.

14.4 PROCESS-BASED THEORIES • 607

Job DesignJob Design

Many of us assume that the most important motivator at work would be pay. Yet, studies point to a different factor

as the major influence over worker motivation: Job design. How a job is designed has a major impact on employee

motivation, job satisfaction, commitment to organization, as well as absenteeism and turnover. Job design is just

one of the many organizational design decisions managers must make when engaged in the organizing function.

The question of how to properly design jobs so that employees are more productive and more satisfied has

received managerial and research attention since the beginning of the 20th century.

Scientific Management and Job SpecializationScientific Management and Job Specialization

Perhaps the earliest attempt to design jobs was presented by Frederick Taylor in his 1911 book Principles of

Scientific Management. Scientific management proposed a number of ideas that have been influential in job

design. One idea was to minimize waste by identifying the best method to perform the job to ensure maximum

efficiency. Another one of the major advances of scientific management was job specialization, which entails

breaking down tasks to their simplest components and assigning them to employees so that each person would

perform few tasks in a repetitive manner. While this technique may be very efficient in terms of automation and

standardization, from a motivational perspective, these jobs will be boring and repetitive and therefore associated

with negative outcomes such as absenteeism (Campion & Thayer, 1987). Job specialization is also an ineffective

way of organizing jobs in rapidly changing environments where employees close to the problem should modify

their approach based on the demands of the situation (Wilson, 1999).

608 • PRINCIPLES OF MANAGEMENT

Figure 14.15

Prefect Assembly Line 1950’s, Dagenham.

This Ford panel assembly line in Berlin, Germany, is an example of specialization. Each person on the line

has a different job.

Ford Europe – Ford Prefect production during the mid 1950s – CC BY-NC 2.0.

Rotation, Job Enlargement, and EnrichmentRotation, Job Enlargement, and Enrichment

One of the early alternatives to job specialization was job rotation, which involves moving employees from job

to job at regular intervals, thereby relieving the monotony and boredom typical in repetitive jobs. For example,

Maids International, a company that provides cleaning services to households and businesses, uses job rotation

such that maids cleaning the kitchen in one house would clean the bedroom in another house (Denton, 1994).

Using this technique, among others, the company was able to reduce its turnover level. In a study conducted in a

supermarket, cashiers were rotated to work in different departments. As a result of the rotation, employee stress

level was reduced as measured by their blood pressure. Moreover, they reported fewer pain symptoms in their

neck and shoulders (Rissen, et. al., 2002).

Job rotation has a number of advantages for organizations. It is an effective way for employees to acquire new

skills, as the rotation involves cross-training to new tasks; this means that organizations increase the overall skill

level of their employees (Campion, et. al., 1994). In addition, job rotation is a means of knowledge transfer

between departments (Kane, et. al., 2005). For the employees, rotation is a benefit because they acquire new skills,

which keeps them marketable in the long run.

Anecdotal evidence suggests that companies successfully rotate high-level employees to train their managers and

increase innovativeness in the company. For example, Nokia uses rotation at all levels, such as assigning lawyers

to act as country managers or moving network engineers to handset design. These approaches are thought to bring

14.4 PROCESS-BASED THEORIES • 609

a fresh perspective to old problems (Wylie, 2003). India’s information technology giant Wipro, which employs

about 80,000 employees, uses a 3-year plan to groom future leaders of the company by rotating them through

different jobs (Ramamurti, 2001).

Job enlargement refers to expanding the tasks performed by employees to add more variety. Like job rotation, job

enlargement can reduce boredom and monotony as well as use human resources more effectively. When jobs are

enlarged, employees view themselves as being capable of performing a broader set of tasks (Parker, 1998). Job

enlargement is positively related to employee satisfaction and higher-quality customer services, and it increases

the chances of catching mistakes (Campion & McClelland, 1991). At the same time, the effects of job enlargement

may depend on the type of enlargement. For example, exclusively giving employees simpler tasks had negative

consequences on employee satisfaction with the job of catching errors, whereas giving employees more tasks

that require them to be knowledgeable in different areas seemed to have more positive effects (Campion &

McClelland, 1993).

Job enrichment is a job redesign technique that allows workers more control over how they perform their own

tasks, giving them more responsibility. As an alternative to job specialization, companies using job enrichment

may experience positive outcomes such as reduced turnover, increased productivity, and reduced absences

(McEvoy & Cascio, 1985; Locke, et. al., 1976). This may be because employees who have the authority and

responsibility over their own work can be more efficient, eliminate unnecessary tasks, take shortcuts, and overall

increase their own performance. At the same time, there is some evidence that job enrichment may sometimes

cause employees to be dissatisfied (Locke, et. al., 1976). The reason may be that employees who are given

additional autonomy and responsibility may expect greater levels of pay or other types of compensation, and if

this expectation is not met, they may feel frustrated. One more thing to remember is that job enrichment may not

be suitable for all employees (Cherrington & Lynn, 1980; Hulin & Blood, 1968). Not all employees desire to have

control over how they work, and if they do not have this desire, they may feel dissatisfied in an enriched job.

Job Characteristics ModelJob Characteristics Model

The job characteristics model is one of the most influential attempts to design jobs to increase their motivational

properties (Hackman & Oldham, 1975). Proposed in the 1970s by Hackman and Oldham, the model describes

five core job dimensions, leading to three critical psychological states, which lead to work-related outcomes. In

this model, shown in the following figure, there are five core job dimensions.

Figure 14.16 Job Characteristics Model

Adapted from Hackman, J. R., & Oldham, G. R. (1975). Development of the job diagnostic survey.

Journal of Applied Psychology, 60, 159–170.

610 • PRINCIPLES OF MANAGEMENT

Skill variety refers to the extent to which the job requires the person to use multiple high-level skills. A car wash

employee whose job consists of directing employees into the automated carwash demonstrates low levels of skill

variety, whereas a car wash employee who acts as a cashier, maintains carwash equipment, and manages the

inventory of chemicals demonstrates high skill variety.

Task identity refers to the degree to which the person completes a piece of work from start to finish. A Web

designer who designs parts of a Web site will have low task identity because the work blends in with other Web

designers’ work, and in the end, it will be hard for the person to claim responsibility for the final output. The

Webmaster who designs the entire Web site will have high task identity.

Task significance refers to whether the person’s job substantially affects other people’s work, health, or well-

being. A janitor who cleans the floor at an office building may find the job low in significance, thinking it is not an

important job. However, janitors cleaning the floors at a hospital may see their role as essential in helping patients

recover in a healthy environment. When they see their tasks as significant, employees tend to feel that they are

making an impact on their environment and their feelings of self worth are boosted (Grant, 2008).

Autonomy is the degree to which the person has the freedom to decide how to perform tasks. As an example, a

teacher who is required to follow a predetermined textbook, cover a given list of topics, and use a specified list of

classroom activities has low autonomy, whereas a teacher who is free to choose the textbook, design the course

content, and use any materials she sees fit has higher levels of autonomy. Autonomy increases motivation at work,

but it also has other benefits. Autonomous workers are less likely to adopt a “this is not my job” attitude and

instead be proactive and creative (Morgeson, et. al., 2005; Parker, et. al., 1997; Parker, et. al., 2006; Zhou, 1998).

Giving employees autonomy is also a great way to train them on the job. For example, Gucci’s CEO Robert Polet

describes autonomy he received while working at Unilever as the key to his development of leadership talents

(Gumbel, 2008).

Feedback refers to the degree to which the person learns how effective he or she is at work. Feedback may come

from other people such as supervisors, peers, subordinates, customers, or from the job. A salesperson who makes

informational presentations to potential clients but is not informed whether they sign up has low feedback. If this

salesperson receives a notification whenever someone who has heard his presentation becomes a client, feedback

will be high.

The mere presence of feedback is not sufficient for employees to feel motivated to perform better, however.

In fact, in about one-third of the cases, feedback was detrimental to performance (Kluger & DeNisi, 1996). In

addition to whether feedback is present, the character of the feedback (positive or negative), whether the person is

ready to receive the feedback, and the manner in which feedback was given will all determine whether employees

feel motivated or demotivated as a result of feedback.

Goal Setting TheoryGoal Setting Theory

Goal setting theory (Locke & Latham, 1990) is one of the most influential and practical theories of motivation.

It has been supported in over 1,000 studies with employees, ranging from blue-collar workers to research and

development employees, and there is strong evidence that setting goals is related to performance improvements

(Ivancevich & McMahon, 1982; Latham & Locke, 2006; Umstot, et. al., 1976). In fact, according to one estimate,

goal setting improves performance between 10% and 25% or more (Pritchard, et. al., 1988). On the basis of

14.4 PROCESS-BASED THEORIES • 611

evidence such as this, thousands of companies around the world are using goal setting in some form, including

companies such as Coca-Cola, PricewaterhouseCoopers, Nike, Intel, and Microsoft to name a few.

Setting SMART GoalsSetting SMART Goals

The mere presence of a goal does not motivate individuals. Think about New Year’s resolutions that you may

have made and failed to keep. Maybe you decided that you should lose some weight but then never put a concrete

plan in action. Maybe you decided that you would read more but didn’t. Why did you, like 97% of those who set

New Year’s resolutions, fail to meet your goal?

Accumulating research evidence indicates that effective goals are SMART. SMART goals are specific,

measurable, achievable, realistic, and timely. Here is a sample SMART goal: Wal-Mart recently set a goal to

eliminate 25% of the solid waste from its U.S. stores by the year 2009. This goal meets all the conditions of being

SMART if we assume that it is an achievable goal (Heath & Heath, 2008). Even though it seems like a simple

concept, in reality many goals that are set within organizations may not be SMART. For example, Microsoft

recently conducted an audit of its goal-setting and performance review system and found that only about 40% of

the goals were specific and measurable (Shaw, 2004).

Why Do SMART Goals Motivate?Why Do SMART Goals Motivate?

Figure 14.17

612 • PRINCIPLES OF MANAGEMENT

Why do SMART goals motivate?

Based on information contained in Latham, G. P. (2004). The motivational benefits of goal setting.

Academy of Management Executive, 18, 126–129; Seijts, G. H., & Latham, G. P. (2005). Learning versus

performance goals: When should each be used? Academy of Management Executive, 19, 124–131; Shaw,

K. N. (2004). Changing the goal-setting process at Microsoft. Academy of Management Executive, 18,

139–142.

There are at least four reasons why goals motivate (Latham, 2004; Seijts & Latham, 2005; Shaw, 2004). First,

goals give us direction; therefore, goals should be set carefully. Giving employees goals that are not aligned with

company goals will be a problem because goals will direct employee’s energy to a certain end. Second, goals

energize people and tell them not to stop until they reach that point. Third, having a goal provides a challenge.

When people have goals and when they reach them, they feel a sense of accomplishment. Finally, SMART goals

urge people to think outside the box and rethink how they are working. If a goal is substantially difficult, merely

working harder will not get you the results. Instead, you will need to rethink the way you usually work and devise

a creative way of working. It has been argued that this is how designers and engineers in Japan came up with the

bullet train. Having a goal that went way beyond the current speed of trains prevented engineers from making

minor improvements and urged them to come up with a radically different concept (Kerr & Landauer, 2004).

14.4 PROCESS-BASED THEORIES • 613

Are There Downsides to Goal Setting?Are There Downsides to Goal Setting?

As with any management technique, there may be some downsides to goal setting (Locke, 2004; Pritchard, et.

al., 1988; Seijts & Latham, 2005). First, setting goals for specific outcomes may hamper employee performance

if employees lack skills and abilities to reach the goals. In these situations, setting goals for behaviors and for

learning may be more effective than setting goals for outcomes. Second, goal setting may motivate employees

to focus on a goal and ignore the need to respond to new challenges. For example, one study found that when

teams had difficult goals and when employees within the team had high levels of performance orientation, teams

had difficulty adapting to unforeseen circumstances (Lepine, 2005). Third, goals focus employee attention on the

activities that are measured, which may lead to sacrificing other important elements of performance. When goals

are set for production numbers, quality may suffer. As a result, it is important to set goals touching on all critical

aspects of performance. Finally, aggressive pursuit of goals may lead to unethical behaviors. Particularly when

employees are rewarded for goal accomplishment but there are no rewards whatsoever for coming very close to

reaching the goal, employees may be tempted to cheat.

None of these theories are complete by themselves, but each theory provides us with a framework we can use

to analyze, interpret, and manage employee behaviors in the workplace, which are important skills managers use

when conducting their leading function. In fact, motivation is important throughout the entire P-O-L-C framework

because most managerial functions involve accomplishing tasks and goals through others.

Key Takeaway

Process-based theories use the mental processes of employees as the key to understanding employeemotivation. According to equity theory, employees are demotivated when they view reward distributionas unfair. In addition to distributive justice, research identified two other types of fairness (proceduraland interactional), which also affect worker reactions and motivation. According to expectancy theory,employees are motivated when they believe that their effort will lead to high performance (expectancy),that their performance will lead to outcomes (instrumentality), and that the outcomes followingperformance are desirable (valence). Reinforcement theory argues that behavior is a function of itsconsequences. By properly tying rewards to positive behaviors, eliminating rewards following negativebehaviors and punishing negative behaviors, leaders can increase the frequency of desired behaviors. Injob design, there are five components that increase the motivating potential of a job: Skill variety, taskidentity, task significance, autonomy, and feedback. These theories are particularly useful in designingreward systems within a company. Goal-setting theory is one of the most influential theories of motivation.To motivate employees, goals should be SMART (specific, measurable, achievable, realistic, and timely).Setting goals and objectives is a task managers undertake when involved in the planning portion of theP-O-L-C function.

Exercises

1. Your manager tells you that the best way of ensuring fairness in reward distribution is to keep thepay a secret. How would you respond to this assertion?

614 • PRINCIPLES OF MANAGEMENT

2. What are the distinctions among procedural, interactional, and distributive justice? List ways inwhich you could increase each of these justice perceptions.

3. Using an example from your own experience in school or at work, explain the concepts ofexpectancy, instrumentality, and valence.

4. Some practitioners and researchers consider OB Mod as unethical because it may be viewed asemployee manipulation. What would be your reaction to this criticism?

5. Consider a job you held in the past. Analyze the job using the framework of job characteristicsmodel.

6. If a manager tells you to “sell as much as you can,” is this goal likely to be effective? Why or whynot?

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Austin, W., & Walster, E. (1974). Reactions to confirmations and disconfirmations of expectancies of equity and

inequity. Journal of Personality and Social Psychology, 30, 208–216.

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14.4 PROCESS-BASED THEORIES • 619

14.5 Developing Your Personal Motivation Skills

Learning Objectives

1. Understand what you can do to give feedback through an effective performance appraisal.

2. Learn guidelines for proactively seeking feedback.

Guidelines for Giving Feedback in a Performance Appraisal Meeting (Ryan, 2007; Stone, 1984;Guidelines for Giving Feedback in a Performance Appraisal Meeting (Ryan, 2007; Stone, 1984;Sulkowicz, 2007)Sulkowicz, 2007)

Before the meeting, ask the person to complete a self-appraisal. This is a great way of making sure that employees

become active participants in the process and are heard. Complete the performance appraisal form and document

your rating using several examples. Be sure that your review covers the entire time since the last review, not just

recent events. Handle the logistics. Be sure that you devote sufficient time to each meeting. If you schedule them

tightly back to back, you may lose your energy in later meetings. Be sure that the physical location is conducive

to a private conversation.

During the meeting, be sure to recognize effective performance through specific praise. Do not start the meeting

with a criticism. Starting with positive instances of performance helps establish a better mood and shows that you

recognize what the employee is doing right. Give employees opportunities to talk. Ask them about their greatest

accomplishments, as well as opportunities for improvement. Show empathy and support. Remember: your job as

a manager is to help the person solve performance problems. Identify areas where you can help. Conclude by

setting goals and creating an action plan for the future.

After the meeting, continue to give the employee periodic and frequent feedback. Follow through on the goals that

were set.

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Five Guidelines for Seeking Feedback (Jackman & Strober, 2003; Wing, et. al., 2007; Lee, et. al.,Five Guidelines for Seeking Feedback (Jackman & Strober, 2003; Wing, et. al., 2007; Lee, et. al.,2007).2007).

Research shows that receiving feedback is a key to performing well. If you are not receiving enough feedback on

the job, it is better to seek it instead of trying to guess how well you are doing.

1. Consider seeking regular feedback from your boss. This also has the added benefit of signaling to the

manager that you care about your performance and want to be successful.

2. Be genuine in your desire to learn. When seeking feedback, your aim should be improving yourself as

opposed to creating the impression that you are a motivated employee. If your manager thinks that you are

managing impressions rather than genuinely trying to improve your performance, feedback seeking may

hurt you.

3. Develop a good relationship with your manager as well as the employees you manage. This would have

the benefit of giving you more feedback in the first place. It also has the upside of making it easier to ask

direct questions about your own performance.

4. Consider finding trustworthy peers who can share information with you regarding your performance.

Your manager is not the only helpful source of feedback.

5. Be gracious when you receive unfavorable feedback. If you go on the defensive, there may not be a next

time. Remember, even if it may not feel like it sometimes, feedback is a gift. You can improve your

performance by using feedback constructively. Consider that the negative feedback giver probably risked

your goodwill by being honest. Unless there are factual mistakes in the feedback, do not try to convince the

person that the feedback is inaccurate.

Key Takeaway

Giving effective feedback is a key part of a manager’s job. To do so, plan the delivery of feedback before,during, and after the meeting. In addition, there are a number of ways to learn about your own performance.Take the time to seek feedback and act on it. With this information, you can do key things to maximizeyour success and the success of those you manage.

Exercises

1. Why can discussing performance feedback with employees be so hard?

2. What barriers do you perceive in asking for feedback?

3. How would you react if one of your employees came to you for feedback?

4. Imagine that your good friend is starting a new job next week. What recommendations would yougive to help your friend do a great job seeking feedback?

14.5 DEVELOPING YOUR PERSONAL MOTIVATION SKILLS • 621

ReferencesReferences

Jackman, J. M., & Strober, M. H. (2003, April). Fear of feedback. Harvard Business Review, 81(4), 101–107.

Lee, H. E., Park, H. S., Lee, T. S., & Lee, D. W. (2007). Relationships between LMX and subordinates’ feedback-

seeking behaviors. Social Behavior & Personality: An International Journal, 35, 659–674.

Ryan, L. (2007, January 1). Coping with performance-review anxiety. Business Week Online, p. 6.

Stone, D. L. (1984). The effects of feedback sequence and expertise of the rater on perceived feedback accuracy.

Personnel Psychology, 37, 487–506.

Sulkowicz, K. (2007, September 10). Straight talk at review time. Business Week, 16.

Wing, L., Xu, H., & Snape, E. (2007). Feedback-seeking behavior and leader-member exchange: Do supervisor-

attributed motives matter? Academy of Management Journal, 50, 348–363.

622 • PRINCIPLES OF MANAGEMENT

Chapter 15: The Essentials of Control

15.1 The Essentials of Control

15.2 Case in Point: Newell Rubbermaid Leverages Cost Controls to Grow

15.3 Organizational Control

15.4 Types and Levels of Control

15.5 Financial Controls

15.6 Nonfinancial Controls

15.7 Lean Control

15.8 Crafting Your Balanced Scorecard

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15.1 The Essentials of Control

Figure 15.1

Control lets managers monitor and regulate actions to align performance with expectations.

Samuel M. Livingston – Mixer board – CC BY 2.0.

What’s in It for Me?

Reading this chapter will help you do the following:

1. Understand what is meant by organizational control.

2. Differentiate among different levels, types, and forms of control.

3. Know the essentials of financial controls.

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4. Know the essentials of nonfinancial controls.

5. Know the basics of lean control systems.

6. Craft a Balanced Scorecard for an organization or yourself.

This chapter helps you to understand the key elements of organizational control, often seen in the form of internal

systems and processes, as they relate to the planning-organizing-leading-controlling (P-O-L-C) framework. While

there are many possible forms and formats, organizational controls should serve two basic functions. First, they

should help managers determine whether and why their strategy is achieving the desired results. Second, they

should be an early warning system in cases where the organization is getting a little (or a lot) off track.

Figure 15.2 The P-O-L-C Framework

15.1 THE ESSENTIALS OF CONTROL • 625

15.2 Case in Point: Newell Rubbermaid Leverages CostControls to Grow

Newell Company grew to be a diversified manufacturer and marketer of simple household items, cookware, and

hardware. In the early 1950s, Newell Company’s business consisted solely of manufactured curtain rods that were

sold through hardware stores and retailers like Sears. Since the 1960s, however, the company has diversified

extensively through acquisitions of businesses for paintbrushes, writing pens, pots and pans, hairbrushes, and

the like. Over 90% of its growth can be attributed to these many small acquisitions, whose performance Newell

improved tremendously through aggressive restructuring and its corporate emphasis on cost cutting and cost

controls. Usually within a year of the acquisition, Newell would bring in new leadership and install its own

financial controller in the acquired unit. Then, three standard sets of controls were introduced: an integrated

financial accounting system, a sales and order processing and tracking system, and a flexible manufacturing

system. Once these systems were in place, managers were able to control costs by limiting expenses to those

previously budgeted. Administration, accounting, and customer-related financial accounting aspects of the

acquired business were also consolidated into Newell’s corporate headquarters to further reduce and control costs.

While Newell Company’s 16 different lines of business may appear quite different, they all share the common

characteristics of being staple manufactured items sold primarily through volume retail channels like Wal-

Mart, Target, and Kmart. Because Newell operates each line of business autonomously (separate manufacturing,

research and development [R&D], and selling responsibilities for each), it is perhaps best described as pursuing

a related, linked diversification strategy. The common linkages are both internal (accounting systems, product

merchandising skills, and acquisition competency) and external (distribution channel of volume retailers). Beyond

its internal systems and processes, Newell was also able to control costs through outcome controls. That is,

business managers were paid a bonus based on the profitability of their particular unit—in fact, the firm’s strategy

is to achieve profits, not simply growth at the expense of profits. Newell managers could expect a base salary

equal to the industry average but could earn bonuses ranging from 35% to 100% based on their rank and unit

profitability.

In 1999, Newell acquired Rubbermaid, a U.S.-based manufacturer of flexible plastic products like trash cans,

reheatable and freezable food containers, and a broad range of other plastic storage containers designed for home

and office use. While Rubbermaid was highly innovative (over 80% of its growth has come from internal new

product development), it had difficulty controlling costs and was losing ground against powerful customers like

Wal-Mart. Newell believed that the market power it wielded with retailers like Wal-Mart would help it turn

Rubbermaid’s prospects around. The acquisition deal between these two companies resulted in a single company

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that was twice as big and became known as Newell Rubbermaid Inc. (NYSE: NWL). In 2010, Fortune named

Newell Rubbermaid the number 7 “Most Admired Company” in the home equipment and furnishings category.

Case written based on information retrieved April 3, 2010, from http://www.bain.com/masteringthemerger/

case_example_new_rbbmd_trans.asp and from the Newell Rubbermaid Web site:

http://www.newellrubbermaid.com/public/Our-Company/Our-History.aspx.

Discussion Questions

1. The controlling facet of the P-O-L-C framework introduces you to a variety of controls. What doother organizations you are familiar with do with regard to control that is similar to or different fromwhat we see in the case of Newell?

2. What types of controls does Newell use?

3. Does Newell use behavioral controls? What are some examples?

4. Does Newell use outcome controls? What are some examples?

5. How do the controls Newell uses fit its strategy?

6. At the end of the case, how has Newell adjusted its strategy? What changes in controls has it madeas a result?

15.2 CASE IN POINT: NEWELL RUBBERMAID LEVERAGES COST CONTROLS TO GROW • 627

15.3 Organizational Control

Learning Objectives

1. Know what is meant by organizational control.

2. Recognize that controls have costs.

3. Understand the benefits of controls.

Up to this point you have probably become familiar with the planning, organizing, and leading components of the

P-O-L-C framework. This section addresses the controlling component, often taking the form of internal systems

and process, to complete your understanding of P-O-L-C. As you know, planning comprises all the activities

associated with the formulation of your strategy, including the establishment of near- and long-term goals and

objectives. Organizing and leading are the choices made about the way people work together and are motivated to

achieve individual and group goals and objectives.

What Is Organizational Control?What Is Organizational Control?

The fourth facet of P-O-L-C, organizational control, refers to the process by which an organization influences its

subunits and members to behave in ways that lead to the attainment of organizational goals and objectives. When

properly designed, such controls should lead to better performance because an organization is able to execute its

strategy better (Kuratko, et. al., 2001). As shown in the the P-O-L-C framework figure, we typically think of or

talk about control in a sequential sense, where controls (systems and processes) are put in place to make sure

everything is on track and stays on track. Controls can be as simple as a checklist, such as that used by pilots,

flight crews, and some doctors (The Health Care Blog, 2008). Increasingly, however, organizations manage the

various levels, types, and forms of control through systems called Balanced Scorecards. We will discuss these in

detail later in the chapter.

Organizational control typically involves four steps: (1) establish standards, (2) measure performance, (3)

compare performance to standards, and then (4) take corrective action as needed. Corrective action can include

changes made to the performance standards—setting them higher or lower or identifying new or additional

standards. Sometimes we think of organizational controls only when they seem to be absent, as in the 2008

meltdown of U.S. financial markets, the crisis in the U.S. auto industry, or the much earlier demise of Enron and

628

MCI/Worldcom due to fraud and inadequate controls. However, as shown in the figure, good controls are relevant

to a large spectrum of firms beyond Wall Street and big industry.

The Need for Control in Not-for-Profit OrganizationsThe Need for Control in Not-for-Profit Organizations

We tend to think about controls only in the for-profit organization context. However, controls are relevantto a broad spectrum of organizations, including governments, schools, and charities. Jack Siegel, authorof A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good,outlines this top 10 list of financial controls that every charity should put in place:

Control 1—Require two signatures for checks written on bank and investment accounts. This preventsunapproved withdrawals and payments.

Control 2—The organization’s bank statements should be reconciled on a monthly basis by someonewho does not have signature authority over the accounts. This is a further check against unapprovedwithdrawals and payments.

Control 3—Since cash is particularly susceptible to theft, organizations should eliminate the use of cash tothe extent possible.

Control 4—Organizations should only purchase goods from an approved list of vendors. This providesprotection from phony invoices submitted by insiders.

Control 5—Many charities have discovered “ghost employees” on their payrolls. To minimize this risk,organizations should tightly control the payroll list by developing a system of reports between payroll/accounting and the human resources department.

Control 6—Organizations should require all otherwise reimbursable expenses to be preauthorized. Traveland entertainment expenses should be governed by a clearly articulated written policy that is provided toall employees.

Control 7—Physical inventories should be taken on a regular and periodic basis and then be reconciledagainst the inventories carried on the books. Besides the possible detection of theft, this control alsoprovides a basis for an insurance claim in the case of a fire, flood, or other disaster.

Control 8—Every organization should develop an annual budgeting process. The nonprofit’s employeesshould prepare the budget, but the board should review and approve it.

Control 9—Organizations should use a competitive bidding process for purchases above a certainthreshold. In reviewing bids, organizations should look for evidence of collusion.

Control 10—Organizations that regularly received grants with specific requirements should have someonewho is thoroughly versed in grant administration.

Retrieved January 30, 2009, from http://www.charitygovernance.com/charity_governance/2007/10/ten-financial-c.html#more.

The Costs and Benefits of Organizational ControlsThe Costs and Benefits of Organizational Controls

Organizational controls provide significant benefits, particularly when they help the firm stay on track with

respect to its strategy. External stakeholders, too, such as government, investors, and public interest groups have

an interest in seeing certain types or levels of control are in place. However, controls also come at a cost. It is

15.3 ORGANIZATIONAL CONTROL • 629

useful to know that there are trade-offs between having and not having organizational controls, and even among

the different forms of control. Let’s look at some of the predominant costs and benefits of organizational controls,

which are summarized in the following figure.

CostsCosts

Controls can cost the organization in several areas, including (1) financial, (2) damage to culture and reputation,

(3) decreased responsiveness, and (4) botched implementation. An example of financial cost is the fact that

organizations are often required to perform and report the results of a financial audit. These audits are typically

undertaken by external accounting firms, which charge a substantial fee for their services; the auditor may be

a large firm like Accenture or KPMG, or a smaller local accounting office. Such audits are a way for banks,

investors, and other key stakeholders to understand how financially fit the organization is. Thus, if an organization

needs to borrow money from banks or has investors, it can only obtain these benefits if it incurs the monetary and

staffing costs of the financial audit.

Controls also can have costs in terms of organization culture and reputation. While you can imagine that

organizations might want to keep track of employee behavior, or otherwise put forms of strict monitoring in

place, these efforts can have undesirable cultural consequences in the form of reduced employee loyalty, greater

turnover, or damage to the organization’s external reputation. Management researchers such as the late London

Business School professor Sumantra Ghoshal have criticized theory that focuses on the economic aspects of

man (i.e., assumes that individuals are always opportunistic). According to Ghoshal, “A theory that assumes that

managers cannot be relied upon by shareholders can make managers less reliable (Ghoshal & Moral, 1996).” Such

theory, he warned, would become a self-fulfilling prophecy.

Less theoretical are practical examples such as Hewlett-Packard’s (HP) indictment on charges of spying on its own

board of directors. In a letter to HP’s board, director Tom Perkins said his accounts were “hacked” and attached

a letter from AT&T explaining how the breach occurred. Records of calls made from Perkins’s home phone were

obtained simply with his home phone number and the last four digits of his Social Security number. His long-

distance account records were obtained when someone called AT&T and pretended to be Perkins, according to

the letter from AT&T (IN, 2009).

The third potential cost of having controls is that they can afford less organizational flexibility and responsiveness.

Typically, controls are put in place to prevent problems, but controls can also create problems. For instance, the

Federal Emergency Management Agency (FEMA) is responsible for helping people and business cope with the

consequences of natural disasters, such as hurricanes. After Hurricane Katrina devastated communities along the

U.S. Gulf Coast in 2005, FEMA found that it could not provide prompt relief to the hurricane victims because of

the many levels of financial controls that it had in place (US Government Printing Office, 2006).

The fourth area of cost, botched implementation, may seem obvious, but it is more common than you might think

(or than managers might hope). Sometimes the controls are just poorly understood, so that their launch creates

significant unintended, negative consequences. For example, when Hershey Foods put a new computer-based

control system in place in 1999, there were so many problems with its installation that it was not able to fulfill a

large percentage of its Halloween season chocolate sales that year. It did finally get the controls in working order,

but the downtime created huge costs for the company in terms of inefficiencies and lost sales (Greenspun, 2009).

630 • PRINCIPLES OF MANAGEMENT

Some added controls may also interfere with others. For instance, a new quality control system may improve

product performance but also delay product deliveries to customers.

BenefitsBenefits

Although organizational controls come at some cost, most controls are valid and valuable management tools.

When they are well designed and implemented, they provide at least five possible areas of benefits, including

(1) improved cost and productivity control, (2) improved quality control, (3) opportunity recognition, (4) better

ability to manage uncertainty and complexity, and (5) better ability to decentralize decision making. Let’s look at

each one of these benefits in turn.

Summary of Control Costs and BenefitsSummary of Control Costs and Benefits

• Key Costs

◦ Financial costs—direct (i.e., paying for an accountant for an audit) and indirect (i.e., peoplesuch as internal quality control the organization employs whose primary function is related tocontrol).

◦ Culture and reputation costs—the intangible costs associated with any form of control.Examples include damaged relationships with employees, or tarnished reputation with investorsor government.

◦ Responsiveness costs—downtime between a decision and the actions required to implement itdue to compliance with controls.

◦ Poorly implemented controls—implementation is botched or the implementation of a newcontrol conflicts with other controls.

• Key Benefits

◦ Cost and productivity control—ensures that the firm functions effectively and efficiently.

◦ Quality control—contributes to cost control (i.e., fewer defects, less waste), customersatisfaction (i.e., fewer returns), and greater sales (i.e., repeat customers and new customers).

◦ Opportunity recognition—helps managers identify and isolate the source of positive surprises,such as a new growth market. Though opportunities can also be found in internal comparisonsof cost control and productivity across units.

◦ Manage uncertainty and complexity—keeps the organization focused on its strategy, and helpsmanagers anticipate and detect negative surprises and respond opportunistically to positivesurprises.

◦ Decentralized decision making—allows the organization to be more responsive by movingdecision making to those closest to customers and areas of uncertainty.

First, good controls help the organization to be efficient and effective by helping managers to control costs and

productivity levels. Cost can be controlled using budgets, where managers compare actual expenses to forecasted

ones. Similarly, productivity can be controlled by comparing how much each person can produce, in terms of

15.3 ORGANIZATIONAL CONTROL • 631

service or products. For instance, you can imagine that the productivity of a fast-food restaurant like McDonald’s

depends on the speed of its order takers and meal preparers. McDonald’s can look across all its restaurants to

identify the target speed for taking an order or wrapping a burger, then measure each store’s performance on these

dimensions.

Quality control is a second benefit of controls. Increasingly, quality can be quantified in terms of response time

(i.e., How long did it take you to get that burger?) or accuracy (Did the burger weigh one-quarter pound?).

Similarly, Toyota tracks the quality of its cars according to hundreds of quantified dimensions, including the

number of defects per car. Some measures of quality are qualitative, however. For instance, Toyota also tries

to gauge how “delighted” each customer is with its vehicles and dealer service. You also may be familiar

with quality control through the Malcolm Baldrige National Quality Program Award. The Baldrige award is

given by the president of the United States to businesses—manufacturing and service, small and large—and to

education, health care, and nonprofit organizations that apply and are judged to be outstanding in seven areas:

leadership; strategic planning; customer and market focus; measurement, analysis, and knowledge management;

human resource focus; process management; and results (National Institute of Standards and Technology, 2009).

Controlling—how well the organization measures and analyzes its processes—is a key criterion for winning the

award. The Baldrige award is given to organizations in a wide range of categories and industries, from education

to ethics to manufacturing.

The third area by which organizations can benefit from controls is opportunity recognition. Opportunities can

come from outside of the organization and typically are the result of a surprise. For instance, when Nestlé

purchased the Carnation Company for its ice cream business, it had also planned to sell off Carnation’s pet food

line of products. However, through its financial controls, Nestlé found that the pet food business was even more

profitable than the ice cream, and kept both. Opportunities can come from inside the organization too, as would

be the case if McDonald’s finds that one of its restaurants is exceptionally good at managing costs or productivity.

It can then take this learned ability and transfer it to other restaurants through training and other means.

Controls also help organizations manage uncertainty and complexity. This is a fourth area of benefit from well-

designed and implemented controls. Perhaps the most easily understood example of this type of benefit is how

financial controls help an organization navigate economic downturns. Without budgets and productivity controls

in place, the organization might not know it has lost sales or expenses are out of control until it is too late.

Control Criteria for the Baldrige National Quality AwardControl Criteria for the Baldrige National Quality Award

Measurement, Analysis, and Improvement of Organizational Performance: How Do You Measure,Analyze, and then Improve Organizational Performance? (45 points)

Describe how your organization measures, analyzes, aligns, reviews, and improves its performance usingdata and information at all levels and in all parts of your organization. Describe how you systematicallyuse the results of reviews to evaluate and improve processes.

Within your response, include answers to the following questions:

632 • PRINCIPLES OF MANAGEMENT

Performance Measurement

a. How do you select, collect, align, and integrate data and information for tracking dailyoperations and for tracking overall organizational performance, including progress relative tostrategic objectives and action plans? What are your key organizational performance measures,including key short-term and longer-term financial measures? How do you use these data andinformation to support organizational decision making and innovation?

b. How do you select and ensure the effective use of key comparative data and information tosupport operational and strategic decision making and innovation?

c. How do you keep your performance measurement system current with business needs anddirections? How do you ensure that your performance measurement system is sensitive to rapidor unexpected organizational or external changes?

2.Performance Analysis, Review, and Improvement

a. How do you review organizational performance and capabilities? What analyses do youperform to support these reviews and to ensure that the conclusions are valid? How do you usethese reviews to assess organizational success, competitive performance, and progress relativeto strategic objectives and action plans? How do you use these reviews to assess yourorganization’s ability to respond rapidly to changing organizational needs and challenges inyour operating environment?

b. How do you translate organizational performance review findings into priorities forcontinuous and breakthrough improvement and into opportunities for innovation? How arethese priorities and opportunities deployed to work group and functional-level operationsthroughout your organization to enable effective support for their decision making? Whenappropriate, how are the priorities and opportunities deployed to your suppliers, partners, andcollaborators to ensure organizational alignment?

c. How do you incorporate the results of organizational performance reviews into the systematicevaluation and improvement of key processes?

Retrieved January 30, 2009, from http://www.quality.nist.gov.

The fifth area of benefit in organizational control is related to decentralized decision making. Organization

researchers have long argued that performance is best when those people and areas of the organization that are

closest to customers and pockets of uncertainty also have the ability (i.e., the information and authority) to respond

to them (Galbraith, 1974). Going back to our McDonald’s example, you can imagine that it would be hard to give

a store manager information about her store’s performance and possible choices if information about performance

were only compiled at the city, region, or corporate level. With store-level performance tracking (or, even better,

tracking of performance by the hour within a store), McDonald’s gives store managers the information they need

to respond to changes in local demand. Similarly, it equips McDonald’s to give those managers the authority

to make local decisions, track that decision-making performance, and feed it back into the control and reward

systems.

15.3 ORGANIZATIONAL CONTROL • 633

Key Takeaway

This chapter introduced the basics of controls, the process by which an organization influences its subunitsand members to behave in ways that lead to attaining organizational goals and objectives. When properlydesigned, controls lead to better performance by enabling the organization to execute its strategy better.Managers must weigh the costs and benefits of control, but some minimum level of control is essential fororganizational survival and success.

Exercises

1. What do properly conceived and implemented controls allow an organization to do?

2. What are three common steps in organizational control?

3. What are some of the costs of organizational controls?

4. What are some of the benefits of organizational controls?

5. How do managers determine when benefits outweigh costs?

ReferencesReferences

Galbraith, J. R. (1974). Organization design: An information processing view. Interfaces, 4, 28–36. Galbraith

believes that “the greater the uncertainty of the task, the greater the amount of information that must be processed

between decision makers during the execution of the task to get a given level of performance.” Firms can reduce

uncertainty through better planning and coordination, often by rules, hierarchy, or goals. Galbraith states that “the

critical limiting factor of an organizational form is the ability to handle the non-routine events that cannot be

anticipated or planned for.”

Ghoshal S., & Moran, P. (1996). Bad for practice: A critique of the transaction cost theory. Academy of

Management Review. 21(1), 13–47.

Greenspun, retrieved January 30, 2009, from Hershey profits for 4Q 1999 down 11% due to SAP implementation

problem. http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=002SUM.

IN, retrieved January 30, 2009, from http://i.n.com.com/pdf/ne/2006/perkins_letter.pdf HP Chairman Patricia

Dunn defended this rather extreme form of control as legal, but the amount of damage to the firm’s reputation

from these charges led the firm to discontinue the practice. It also prompted the resignation of several directors

and corporate officers.1

Kuratko, D. F., Ireland, R. D., & Hornsby. J. S. (2001). Improving firm performance through entrepreneurial

actions: Acordia’s corporate entrepreneurship strategy. Academy of Management Executive, 15(4), 60–71.

1. Retrieved January 30, 2009, from http://news.zdnet.com/2100-9595_22-149452.html.

634 • PRINCIPLES OF MANAGEMENT

National Institute of Standards and Technology, retrieved January 30, 2009, from http://www.nist.gov/

public_affairs/factsheet/baldfaqs.htm.

The Health Care Blog, Retrieved December 9, 2008, from http://www.thehealthcareblog.com/

the_health_care_blog/2007/12/pilots-use-chec.html.

U.S. Government Printing Office. (2006, February 15). Executive summary. Select Bipartisan Committee to

Investigate the Preparation for and Response to Hurricane Katrina.

15.3 ORGANIZATIONAL CONTROL • 635

15.4 Types and Levels of Control

Learning Objectives

1. Know the difference between strategic and operational controls.

2. Understand the different types of controls.

3. Be able to differentiate between financial and nonfinancial controls.

Figure 15.4

Controls allow you to align the pieces with the big picture.

Jason7825 – A 3D Jigsaw Puzzle – public domain.

636

Recognizing that organizational controls can be categorized in many ways, it is helpful at this point to distinguish

between two sets of controls: (1) strategic controls and (2) management controls, sometimes called operating

controls (Harrison & St. John, 2002).

Two Levels of Control: Strategic and OperationalTwo Levels of Control: Strategic and Operational

Imagine that you are the captain of a ship. The strategic controls make sure that your ship is going in the right

direction; management and operating controls make sure that the ship is in good condition before, during, and

after the voyage. With that analogy in mind, strategic control is concerned with tracking the strategy as it is being

implemented, detecting any problem areas or potential problem areas suggesting that the strategy is incorrect, and

making any necessary adjustments (Venkataraman & Saravathy, 2001). Strategic controls allow you to step back

and look at the big picture and make sure all the pieces of the picture are correctly aligned.

Ordinarily, a significant time span occurs between initial implementation of a strategy and achievement of its

intended results. For instance, if you wanted to captain your ship from San Diego to Seattle you might need a crew,

supplies, fuel, and so on. You might also need to wait until the weather lets you make the trip safely! Similarly,

in larger organizations, during the time you are putting the strategy into place, numerous projects are undertaken,

investments are made, and actions are undertaken to implement the new strategy. Meanwhile, the environmental

situation and the firm’s internal situation are developing and evolving. The economy could be booming or perhaps

falling into recession. Strategic controls are necessary to steer the firm through these events. They must provide

some means of correcting direction on the basis of intermediate performance and new information.

Operational control, in contrast to strategic control, is concerned with executing the strategy. Where operational

controls are imposed, they function within the framework established by the strategy. Normally these goals,

objectives, and standards are established for major subsystems within the organization, such as business units,

projects, products, functions, and responsibility centers (Mattews, 1999). Typical operational control measures

include return on investment, net profit, cost, and product quality. These control measures are essentially

summations of finer-grained control measures. Corrective action based on operating controls may have

implications for strategic controls when they involve changes in the strategy.

Types of ControlTypes of Control

It is also valuable to understand that, within the strategic and operational levels of control, there are several types

of control. The first two types can be mapped across two dimensions: level of proactivity and outcome versus

behavioral. The following table summarizes these along with examples of what such controls might look like.

ProactivityProactivity

Proactivity can be defined as the monitoring of problems in a way that provides their timely prevention, rather

than after the fact reaction. In management, this is known as feedforward control; it addresses what can we do

ahead of time to help our plan succeed. The essence of feedforward control is to see the problems coming in time

to do something about them. For instance, feedforward controls include preventive maintenance on machinery

and equipment and due diligence on investments.

15.4 TYPES AND LEVELS OF CONTROL • 637

Table 15.1 Types and Examples of Control

Control Proactivity Behavioral control Outcome control

Feedforward control Organizational culture Market demand or economic forecasts

Concurrent control Hands-on management supervision during a project The real-time speed of a production line

Feedback control Qualitative measures of customer satisfaction Financial measures such as profitability, sales growth

Concurrent ControlsConcurrent Controls

The process of monitoring and adjusting ongoing activities and processes is known as concurrent control. Such

controls are not necessarily proactive, but they can prevent problems from becoming worse. For this reason, we

often describe concurrent control as real-time control because it deals with the present. An example of concurrent

control might be adjusting the water temperature of the water while taking a shower.

Feedback ControlsFeedback Controls

Finally, feedback controls involve gathering information about a completed activity, evaluating that information,

and taking steps to improve the similar activities in the future. This is the least proactive of controls and is

generally a basis for reactions. Feedback controls permit managers to use information on past performance to

bring future performance in line with planned objectives.

Control as a Feedback LoopControl as a Feedback Loop

In this latter sense, all these types of control function as a feedback mechanism to help leaders and managers

make adjustments in the strategy, as perhaps is reflected by changes in the planning, organizing, and leading

components. This feedback loop is characterized in the following figure.

Figure 15.5 Controls as Part of a Feedback Loop

638 • PRINCIPLES OF MANAGEMENT

Why might it be helpful for you to think of controls as part of a feedback loop in the P-O-L-C process? Well, if

you are the entrepreneur who is writing the business plan for a completely new business, then you would likely

start with the planning component and work your way to controlling—that is, spell out how you are going to tell

whether the new venture is on track. However, more often, you will be stepping into an organization that is already

operating, and this means that a plan is already in place. With the plan in place, it may be then up to you to figure

out the organizing, leading, or control challenges facing the organization.

Outcome and Behavioral ControlsOutcome and Behavioral Controls

Controls also differ depending on what is monitored, outcomes or behaviors. Outcome controls are generally

preferable when just one or two performance measures (say, return on investment or return on assets) are good

gauges of a business’s health. Outcome controls are effective when there’s little external interference between

managerial decision making on the one hand and business performance on the other. It also helps if little or no

coordination with other business units exists.

Behavioral controls involve the direct evaluation of managerial and employee decision making, not of the results

of managerial decisions. Behavioral controls tie rewards to a broader range of criteria, such as those identified

in the Balanced Scorecard. Behavioral controls and commensurate rewards are typically more appropriate when

15.4 TYPES AND LEVELS OF CONTROL • 639

there are many external and internal factors that can affect the relationship between a manager’s decisions and

organizational performance. They’re also appropriate when managers must coordinate resources and capabilities

across different business units.

Financial and Nonfinancial ControlsFinancial and Nonfinancial Controls

Finally, across the different types of controls in terms of level of proactivity and outcome versus behavioral, it

is important to recognize that controls can take on one of two predominant forms: financial and nonfinancial

controls. Financial control involves the management of a firm’s costs and expenses to control them in relation to

budgeted amounts. Thus, management determines which aspects of its financial condition, such as assets, sales,

or profitability, are most important, tries to forecast them through budgets, and then compares actual performance

to budgeted performance. At a strategic level, total sales and indicators of profitability would be relevant strategic

controls.

Without effective financial controls, the firm’s performance can deteriorate. PSINet, for example, grew rapidly

into a global network providing Internet services to 100,000 business accounts in 27 countries. However,

expensive debt instruments such as junk bonds were used to fuel the firm’s rapid expansion. According to a

member of the firm’s board of directors, PSINet spent most of its borrowed money “without the financial controls

that should have been in place (Woolley, 2001).” With a capital structure unable to support its rapidly growing

and financially uncontrolled operations, PSINet and 24 of its U.S. subsidiaries eventually filed for bankruptcy

(PSINet, 2001). While we often think of financial controls as a form of outcome control, they can also be used as

a behavioral control. For instance, if managers must request approval for expenditures over a budgeted amount,

then the financial control also provides a behavioral control mechanism as well.

Increasing numbers of organizations have been measuring customer loyalty, referrals, employee satisfaction,

and other such performance areas that are not financial. In contrast to financial controls, nonfinancial controls

track aspects of the organization that aren’t immediately financial in nature but are expected to lead to positive

performance outcomes. The theory behind such nonfinancial controls is that they should provide managers with a

glimpse of the organization’s progress well before financial outcomes can be measured (Ittner & Larcker, 2003).

And this theory does have some practical support. For instance, GE has found that highly satisfied customers are

the best predictor of future sales in many of its businesses, so it regularly tracks customer satisfaction.

Key Takeaway

Organizational controls can take many forms. Strategic controls help managers know whether a chosenstrategy is working, while operating controls contribute to successful execution of the current strategy.Within these types of strategy, controls can vary in terms of proactivity, where feedback controls were theleast proactive. Outcome controls are judged by the result of the organization’s activities, while behavioralcontrols involve monitoring how the organization’s members behave on a daily basis. Financial controlsare executed by monitoring costs and expenditure in relation to the organization’s budget, and nonfinancialcontrols complement financial controls by monitoring intangibles like customer satisfaction and employeemorale.

640 • PRINCIPLES OF MANAGEMENT

Exercises

1. What is the difference between strategic and operating controls? What level of managementwould be most concerned with operating controls?

2. If feedforward controls are the most proactive, then why do organizations need or use feedbackcontrols?

3. What is the difference between behavioral and outcome controls?

4. What is the difference between nonfinancial and financial controls? Is a financial control abehavioral or an outcome control?

ReferencesReferences

Harrison, J. S., & St. John, C. H. (2002). Foundations in Strategic Management (2nd ed., 118–129). Cincinnati,

OH: South-Western College.

Ittner, C., & Larcker, D. F. (2003, November). Coming up short on nonfinancial performance measurement.

Harvard Business Review, 2–8.

Matthews, J. (1999). Strategic moves. Supply Management, 4(4), 36–37.

PSINet, retrieved January 30, 2009, from PSINet announces NASDAQ delisting. (2001, June 1).

http://www.psinet.com.

Venkataraman, S., & Sarasvathy, S. D. (2001). Strategy and entrepreneurship: Outlines of an untold story. In M. A.

Hitt, R. E. Freeman, & J. S. Harrison (Eds.), Handbook of strategic management (650–668). Oxford: Blackwell.

Woolley, S. (2001, May). Digital hubris. Forbes, 66–70.

15.4 TYPES AND LEVELS OF CONTROL • 641

15.5 Financial Controls

Learning Objectives

1. Understand the nature of financial controls.

2. Know how a balance sheet works.

3. Know how an income profit and loss statement works.

4. See the sources of cash flow.

As we discussed in the previous section, financial controls are a key element of organizational success and

survival. There are three basic financial reports that all managers need to understand and interpret to manage their

businesses successfully: (1) the balance sheet, (2) the income/profit and loss (P&L) statement, and (3) the cash

flow statement. These three reports are often referred to collectively as “the financials.” Banks often require a

projection of these statements to obtain financing.

642

Figure 15.6

Financial controls tell you when good organizational performance is reflected in good financial outcomes.

stevepb – Pixabay – CC0 public domain.

Financial controls provide the basis for sound management and allow managers to establish guidelines and

policies that enable the business to succeed and grow. Budgeting, for instance, generally refers to a simple listing

of all planned expenses and revenues. On the basis of this listing, and a starting balance sheet, you can project

a future one. The overall budget you create is a monthly or quarterly projection of what the balance sheet and

income statement will look like but again based on your list of planned expenses and revenues.

While you do not need to be an accountant to understand this section, good managers have a good grasp of

accounting fundamentals. You might want to open a window to AccountingCoach.com or a similar site as you

work through this section to begin to build your accounting knowledge tool kit (Accounting Coach, 2008).

The Nature of Financial ControlsThe Nature of Financial Controls

Imagine that you are on the board of Success-R-Us, an organization whose financial controls are managed in

an excellent manner. Each year, after the organization has outlined strategies to reach its goals and objectives,

funds are budgeted for the necessary resources and labor. As money is spent, statements are updated to reflect

how much was spent, how it was spent, and what it obtained. Managers, who report to the board, use these

financial statements, such as an income statement or balance sheet, to monitor the progress of programs and

plans. Financial statements provide management with information to monitor financial resources and activities.

The income statement shows the results of the organization’s operations, such as revenues, expenses, and profit

or loss. The balance sheet shows what the organization is worth (assets) at a single point in time, and the extent to

which those assets were financed through debt (liabilities) or owner’s investment (equity).

Success-R-Us conducts financial audits, or formal investigations, to ensure that financial management practices

follow generally accepted procedures, policies, laws, and ethical guidelines. In Success-R-Us, audits are

15.5 FINANCIAL CONTROLS • 643

conducted both internally—by members of the company’s accounting department—and externally by Green

Eyeshade Inc., an accounting firm hired for this purpose.

Financial ratio analysis examines the relationship between specific figures on the financial statements and helps

explain the significance of those figures: By analyzing financial reports, the managers at Success-R-Us are able

to determine how well the business is doing and what may need to be done to improve its financial viability.

While actual financial performance is always historical, Success-R-Us’s proactive managers plan ahead for

the problems the business is likely to encounter and the opportunities that may arise. To do this, they use

pro forma financials, which are projections; usually these are projected for three fiscal years. Being proactive

requires reading and analyzing the financial statements on a regular basis. Monthly, and sometimes daily or

weekly, financial analysis is preferred. (In the business world as a whole, quarterly is more common, and some

organizations do this only once a year, which is not often enough.) The proactive manager has financial data

available based on actual results and compares them to the budget. This process points out weaknesses in

the business before they reach crisis proportion and allows the manager to make the necessary changes and

adjustments before major problems develop.

Years ago, Success-R-Us experienced problems because its management style was insufficiently proactive. A

reactive manager waits to react to problems and then solves them by crisis management. This type of manager

goes from crisis to crisis with little time in between to notice opportunities that may become available. The

reactive manager’s business is seldom prepared to take advantage of new opportunities quickly. Businesses that

are managed proactively are more likely to be successful, and this is the result that Success-R-Us is experiencing

since it instituted a company-wide initiative to promote proactive controls.

Like most organizations, Success-R-Us uses computer software programs to do record keeping and develop

financials. These programs provide a chart of accounts that can be individualized to the business and the templates

for each account ledger, the general ledgers, and the financial reports. These programs are menu driven and user-

friendly, but knowing how to input the data correctly is not enough. A manager must also know where to input

each piece of data and how to analyze the reports compiled from the data. Widely accepted accounting guidelines

dictate that if you have not learned a manual record-keeping system, you need to do this before attempting to use

a computerized system.

The Balance SheetThe Balance Sheet

The balance sheet is a snapshot of the business’s financial position at a certain point in time. This can be any

day of the year, but balance sheets are usually done at the end of each month. With a budget in hand, you project

forward and develop pro forma statements to monitor actual progress against expectations.

As shown in the following table, this financial statement is a listing of total assets (what the business owns—items

of value) and total liabilities (what the business owes). The total assets are broken down into subcategories of

current assets, fixed assets, and other assets. The total liabilities are broken down into subcategories of current

liabilities, long-term liabilities/debt, and owner’s equity.

644 • PRINCIPLES OF MANAGEMENT

AssetsAssets

Current assets are those assets that are cash or can be readily converted to cash in the short term, such as accounts

receivable or inventory. In the balance sheet shown for Success-R-Us, the current assets are cash, petty cash,

accounts receivable, inventory, and supplies.

Table 15.2 Sample Balance Sheet

Success-R-Us Balance Sheet

December 31, 2009

Assets Liabilities

Current Assets Current Liabilities

Cash $12,300 Notes Payable $5,000

Petty Cash 100 Accounts Payable 35,900

Wages Payable 14,600

Accounts Receivable 40,500 Interest Payable 2,900

Inventory 31,000 Warranty Liability 1,100

Supplies 5,300

Total Current Assets 89,000 Total Current Liabilities 61,000

Investments 36,000 Long-term Liabilities

Notes Payable 20,000

Property, Plant and Equipment Bonds Payable 400,000

Land 5,500 Total Long-term Liabilities 420,000

Land Improvements 6,500

Buildings 180,000

Equipment 201,000 Total Liabilities 481,000

Less Accum. Depreciation (56,000)

Prop., Plant, and Equipment net 337,000

Intangible Assets Stockholders’ Equity

Goodwill 105,000 Common Stocks 110,000

Trade Names 200,000 Retained Earnings 229,000

Total Intangible Assets 305,000 Less Treasury Stock (50,000)

Other Assets 3,000

Total Assets $770,000 Total Liability and Stockholder Equity $770,000

Some business people define current assets as those the business expects to use or consume within the coming

fiscal year. Thus, a business’s noncurrent assets would be those that have a useful life of more than 1 year. These

include fixed assets and intangible assets.

15.5 FINANCIAL CONTROLS • 645

Fixed assets are those assets that are not easily converted to cash in the short term; that is, they are assets that

only change over the long term. Land, buildings, equipment, vehicles, furniture, and fixtures are some examples

of fixed assets. In the balance sheet for Success-R-Us, the fixed assets shown are furniture and fixtures and

equipment. These fixed assets are shown as less accumulated depreciation.

Intangible assets (net) may also be shown on a balance sheet. These may be goodwill, trademarks, patents,

licenses, copyrights, formulas, and franchises. In this instance, net means the value of intangible assets minus

amortization.

LiabilitiesLiabilities

Current liabilities are those coming due in the short term, usually the coming year. These are accounts payable;

employment, income and sales taxes; salaries payable; federal and state unemployment insurance; and the current

year’s portion of multiyear debt. A comparison of the company’s current assets and its current liabilities reveals its

working capital. Many managers use an accounts receivable aging report and a current inventory listing as tools

to help them in management of the current asset structure.

Long-term debt, or liabilities, may be bank notes or loans made to purchase the business’s fixed asset structure.

Long-term debt/liabilities come due in a period of more than 1 year. The portion of a bank note that is not payable

in the coming year is long-term debt/liability.

For example, Success-R-Us’s owner may take out a bank note to buy land and a building. If the land is valued at

$50,000 and the building is valued at $50,000, the business’s total fixed assets are $100,000. If $20,000 is made

as a down payment and $80,000 is financed with a bank note for 15 years, the $80,000 is the long-term debt.

Owner’s EquityOwner’s Equity

Owner’s equity refers to the amount of money the owner has invested in the firm. This amount is determined by

subtracting current liabilities and long-term debt from total assets. The remaining capital/owner’s equity is what

the owner would have left in the event of liquidation, or the dollar amount of the total assets that the owner can

claim after all creditors are paid.”

The Income Profit and Loss Statement (P&L)The Income Profit and Loss Statement (P&L)

The profit and loss statement (P&L) shows the relation of income and expenses for a specific time interval. The

income/P&L statement is expressed in a 1-month format, January 1 through January 31, or a quarterly year-to-

date format, January 1 through March 31. This financial statement is cumulative for a 12-month fiscal period, at

which time it is closed out. A new cumulative record is started at the beginning of the new 12-month fiscal period.

The P&L statement is divided into five major categories: (1) sales or revenue, (2) cost of goods sold/cost of sales,

(3) gross profit, (4) operating expenses, and (5) net income. Let’s look at each category in turn.

Table 15.3 Sample Income Statement

646 • PRINCIPLES OF MANAGEMENT

Success-R-Us Income Statement

For the year ended December 31, 2009

Sales/Revenues (all on credit) $500,000

Cost of Goods Sold 380,000

Gross Profit 120,000

Operating Expenses

Selling Expenses 35,000

Administrative Expenses 45,000

Total Operating Expenses 80,000

Operating Income 40,000

Interest Expense 12,000

Income before Taxes 28,000

Income Tax Expense 5,000

Net Income after Taxes 23,000

Sales or RevenueSales or Revenue

The sales or revenue portion of the income statement is where the retail price of the product is expressed in terms

of dollars times the number of units sold. This can be product units or service units. Sales can be expressed in

one category as total sales or can be broken out into more than one type of sales category: car sales, part sales,

and service sales, for instance. In our Success-R-Us example, the company sold 20,000 books at a retail price

of $25 each, for total revenues of $500,000. Because Success-R-Us sells all of its books on credit (i.e., you can

charge them on your credit card), the company does not collect cash for these sales until the end of the month, or

whenever the credit card company settles up with Success-R-Us.

Cost of Goods Sold/Cost of SalesCost of Goods Sold/Cost of Sales

The cost of goods sold/sales portion of the income statement shows the cost of products purchased for resale,

or the direct labor cost (service person wages) for service businesses. Cost of goods sold/sales also may include

additional categories, such as freight charges cost or subcontract labor costs. These costs also may be expressed

in one category as total cost of goods sold/sales or can be broken out to match the sales categories: car purchases,

parts, purchases, and service salaries, for example.

Breaking out sales and cost of goods sold/sales into separate categories can have an advantage over combining

all sales and costs into one category. When you break out sales, you can see how much each product you have

sold costs and the gross profit for each product. This type of analysis enables you to make inventory and sales

decisions about each product individually.

15.5 FINANCIAL CONTROLS • 647

Gross ProfitGross Profit

The gross profit portion of the income/P&L statement tells the difference between what you sold the product or

service for and what the product or service cost you. The goal of any business is to sell enough units of product or

service to be able to subtract the cost and have a high enough gross profit to cover operating expenses, plus yield

a net income that is a reasonable return on investment. The key to operating a profitable business is to maximize

gross profit.

If you increase the retail price of your product too much above the competition, you might lose units of sales to

the competition and not yield a high enough gross profit to cover your expenses. However, if you decrease the

retail price of your product too much below the competition, you might gain additional units of sales but not make

enough gross profit per unit sold to cover your expenses.

While this may sound obvious, a carefully thought out pricing strategy maximizes gross profit to cover expenses

and yield a positive net income. At a very basic level, this means that prices are set at a level where marginal and

operating costs are covered. Beyond this, pricing should carefully be set to reflect the image you want portrayed

and, if desired, promote repeat business.

Operating ExpensesOperating Expenses

The operating expense section of the income/P&L statement is a measurement of all the operating expenses of the

business. There are two types of expenses, fixed and variable. Fixed expenses are those expenses that do not vary

with the level of sales; thus, you will have to cover these expenses even if your sales are less than the expenses.

The entrepreneur has little control over these expenses once they are set. Some examples of fixed expenses are rent

(contractual agreement), interest expense (note agreement), an accounting or law firm retainer for legal services

of X amount per month for 12 months, and monthly charges for electricity, phone, and Internet connections.

Variable expenses are those expenses that vary with the level of sales. Examples of variable expenses include

bonuses, employee wages (hours per week worked), travel and entertainment expenses, and purchases of supplies.

(Note: categorization of these may differ from business to business.) Expense control is an area where the

entrepreneur can maximize net income by holding expenses to a minimum.

Net IncomeNet Income

The net income portion of the income/P&L statement is the bottom line. This is the measure of a firm’s ability to

operate at a profit. Many factors affect the outcome of the bottom line. Level of sales, pricing strategy, inventory

control, accounts receivable control, ordering procedures, marketing of the business and product, expense control,

customer service, and productivity of employees are just a few of these factors. The net income should be enough

to allow growth in the business through reinvestment of profits and to give the owner a reasonable return on

investment.

The Cash Flow StatementThe Cash Flow Statement

The cash flow statement is the detail of cash received and cash expended for each month of the year. A projected

648 • PRINCIPLES OF MANAGEMENT

cash flow statement helps managers determine whether the company has positive cash flow. Cash flow is probably

the most immediate indicator of an impending problem, since negative cash flow will bankrupt the company if it

continues for a long enough period. If company’s projections show a negative cash flow, managers might need to

revisit the business plan and solve this problem.

You may have heard the joke: “How can I be broke if I still have checks in my check book (or if I still have a

debit/credit card, etc.)?” While perhaps poor humor, many new managers similarly think that the only financial

statement they need to manage their business effectively is an income/P&L statement; that a cash flow statement

is excess detail. They mistakenly believe that the bottom-line profit is all they need to know and that if the

company is showing a profit, it is going to be successful. In the long run, profitability and cash flow have a direct

relationship, but profit and cash flow do not mean the same thing in the short run. A business can be operating at a

loss and have a strong cash flow position. Conversely, a business can be showing an excellent profit but not have

enough cash flow to sustain its sales growth.

The process of reconciling cash flow is similar to the process you follow in reconciling your bank checking

account. The cash flow statement is composed of: (1) beginning cash on hand, (2) cash receipts/deposits for the

month, (3) cash paid out for the month, and (4) ending cash position.

Key Takeaway

The financial controls provide a blueprint to compare against the actual results once the business is inoperation. A comparison and analysis of the business plan against the actual results can tell you whetherthe business is on target. Corrections, or revisions, to policies and strategies may be necessary to achievethe business’s goals. The three most important financial controls are: (1) the balance sheet, (2) the incomestatement (sometimes called a profit and loss statement), and (3) the cash flow statement. Each gives themanager a different perspective on and insight into how well the business is operating toward its goals.Analyzing monthly financial statements is a must since most organizations need to be able to pay their billsto stay in business.

Exercises

1. What are financial controls? In your answer, describe how you would go about building a budgetfor an organization.

2. What is the difference between an asset and a liability?

3. What is the difference between the balance sheet and an income statement? How are the balancesheet and income statement related?

4. Why is it important to monitor an organization’s cash flow?

15.5 FINANCIAL CONTROLS • 649

ReferencesReferences

Accounting Coach, retrieved October 21, 2008, from http://www.accountingcoach.com.

650 • PRINCIPLES OF MANAGEMENT

15.6 Nonfinancial Controls

Learning Objectives

1. Become familiar with nonfinancial controls.

2. Learn about common mistakes associated with nonfinancial controls.

3. Be able to devise possible solutions to common mistakes in nonfinancial controls.

If you have ever completed a customer satisfaction survey related to a new product or service purchase, then you

are already familiar with nonfinancial controls. Nonfinancial controls are defined as controls where nonfinancial

performance outcomes are measured. Why is it important to measure such outcomes? Because they are likely to

affect profitability in the long term.

651

Figure 15.7

Customer satisfaction is an increasingly important metric in strong nonfinancial controls.

Epic Fireworks – Customer Satisfaction Guaranteed ? – CC BY 2.0.

How do we go about identifying nonfinancial controls? In some areas it is easy to do, and in others more difficult.

For instance, if Success-R-Us were having trouble retaining employees (meaning that turnover is high), it might

be incurring higher recruiting and training costs and lower customer satisfaction, as a result. Some possible

nonfinancial controls are described next.

Examples of Nonfinancial Performance ControlsExamples of Nonfinancial Performance Controls

• Human Resources

◦ Employee satisfaction

◦ Average tenure

◦ Turnover

• Marketing

◦ New products launched

◦ Customer satisfaction

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◦ Brand power

• Production

◦ Number of defects

◦ Product returns

◦ Capacity utilization

• Purchasing

◦ New products introduced by suppliers

◦ Quality of purchased inputs

• Research and Development

◦ New patents

◦ Number of employees with PhDs

• Customer Service

◦ Average complaint response time

◦ Average wait time

Common Mistakes with Nonfinancial ControlsCommon Mistakes with Nonfinancial Controls

In a review of current nonfinancial control practices, Harvard professors Chris Ittner and David Larcker

commented, “Tracking things like customer satisfaction and employee turnover can powerfully supplement

traditional bookkeeping. Unfortunately, most companies botch the job (Ittner & Larcker, 2003).”

Ittner and Larcker somewhat cynically conclude their study by stating, “The original purpose of nonfinancial

performance measures was to fill out the picture provided by traditional accounting. Instead, such measures have

become a shabby substitute for financial performance (Ittner & Larcker, 2003).” However, research also shows

that those firms that put these nonfinancial controls in place, and can validate them, earn much higher profits than

those that don’t (Ittner & Larcker, 2003). With the aim of working toward an understanding of how to put such

controls into place, let’s first look at common mistakes that organizations make.

Not Using Nonfinancial ControlsNot Using Nonfinancial Controls

While poorly conceived and implemented nonfinancial controls are certainly a cost for organizations, such

ineptness is no defense for not including them in every modern organization’s system of controls. If management

were a poker game, then the ability to use nonfinancial controls would be a table stake in the game—that is,

you only get to play if you have skills with them. The world is simply changing too fast, and competitors’

capabilities are evolving too quickly, such that managers who relied only on financial controls would soon find

15.6 NONFINANCIAL CONTROLS • 653

their organizations in trouble. You can help us come up with plenty of examples here, but let’s simply look at the

relationship between customer satisfaction and a retail store’s sales. A dissatisfied customer is hard to get back

(and may have been dissatisfied enough to leave the store before even making that first purchase)!

While interest in nonfinancial controls is exploding, it seems somewhat disappointing that they aren’t living up to

the job. Why do so many companies appear to misunderstand how to set and use nonfinancial controls effectively?

Let’s take a look at four additional top mistakes Ittner and Larcker identified in their research.

Not Linked to StrategyNot Linked to Strategy

This mistake appears to be a common one but its root cause—failure to adapt the control system to the specific

strategy of the organization—is not obvious. Growth in interest in nonfinancial controls has led to widespread

adoption of such systems as the Balanced Scorecard, Performance Prism, or the Intellectual Capital Navigator.

However, because these systems are complex, managers tend to put them in place without tailoring them to the

specific needs and characteristics of their organization.

Several things can go wrong when nonfinancial controls are not linked to the strategy. First, control systems tend

to be tied to reward systems, and if managers and employees are being paid based on the achievement of certain

nonstrategic, nonfinancial outcomes, then the firm’s strategy and, hence, performance, could suffer. Second, if the

controls are not linked to the strategy, or the linkages are unclear, then managers do not really understand which

nonfinancial controls are the most important. This leads us to the second common mistake.

Failing to Validate the LinksFailing to Validate the Links

There are two big challenges that organizations face when trying to use nonfinancial controls. First, nonfinancial

controls are indirectly related to financial performance; the relationship is like a sequence of nonfinancial

outcomes that cascade down to financial performance. For instance, (1) good employee recruiting leads to (2)

satisfied employees, which leads to (3) an employee base that creates value, which leads to (4) satisfied customers,

which leads to (5) profitable customer buying patterns, which lead to (6) good profitability. Yikes! You can see

how these six nonfinancial outcomes might lead to good financial performance, but you can also imagine that it

might be challenging to identify and manage the inputs to each step.

The second challenge is, once you’ve taken the step of identifying these linkages, to show that the linkages

actually exist. However, while more companies are putting such models into place, few are collecting the

information to test and validate the actual relationships in their organization. In fact, Ittner and Larcker found that

less than a quarter of the firms that they surveyed actually did any formal validation of the nonfinancial model

they had developed.

You can imagine the possible problems that might be created with such an unvalidated system. For one, the

organization might be investing in all these steps, without any evidence of their effectiveness. Worse, some of the

steps might actually lead to lower performance—unfortunately, without validation, managers just don’t know. For

example, an organization might believe that better technology in a product leads to more sales. If this technology

also leads to a higher-cost product, and customers are very price-sensitive, then the new technology nonfinancial

control could lead to worse financial performance.

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Failing to Set Appropriate Performance TargetsFailing to Set Appropriate Performance Targets

The third common area of weakness in the use of nonfinancial controls is somewhat related to the second. Our

example with technology shows this relationship well. For instance, managers might not have validated the link

between better technology and downstream customer purchasing preferences; or, technology might have been

important, but only up to the point that it did not affect product price. So, while technology was a valid part

of our nonfinancial controls, we also need to consider the appropriate level of technology—that is, set the right

nonfinancial objective for level of technology, customer service, or whatever nonfinancial control is of interest.

You can imagine that a firm might want to set high goals, and therefore control, for such things as customer

satisfaction or employee turnover. But you can probably also imagine what the costs might be of getting 100%

customer satisfaction or zero employee turnover. At some point, you have to make some cost-benefit decisions

unless your resources (time, money, etc.) are unlimited.

Failing to set appropriate performance targets can take on another form. In such cases, instead of setting

inappropriate nonfinancial controls and related targets, the organization simply has set too many (Brown, 1996).

This can happen when a new control system is put in place, but the old one is not removed. Just as often, it can

occur because management has not made the hard choices about which nonfinancial controls are most important

and invested in validating their usage.

Measurement FailureMeasurement Failure

We have seen so far that the first three common failings are (1) failure to tie nonfinancial controls to the strategy,

(2) failure to validate the relationships between nonfinancial and financial controls, and (3) failure to set the

appropriate nonfinancial control targets. The fourth failing is somewhat technical, but it also relates to validity

and validation—that is, in many cases, an inappropriate measure is used to assess whether a targeted nonfinancial

control is being achieved.

This can happen for a number of reasons. First, different parts of the business may assess customer satisfaction

differently. This makes it very hard to evaluate consistently the relationship between customer satisfaction (a

nonfinancial control) and financial performance. Second, even when a common basis for evaluation is used, the

meaning may not be clear in the context of how it is measured. For example, if you created a simple survey of

customer satisfaction, where you were scored on a range from 1 (satisfied) to 7 (unsatisfied), what does each

individual score between 1 and 7 mean? Finally, sometimes the nonfinancial control or objective is complex.

Customer or employee satisfaction, for instance, are not necessarily easily captured on a scale of 1 to 7. Now

imagine trying to introduce controls for leadership ability (i.e., we know if we have strong leaders, they make

good choices, which eventually lead to good financial performance) or innovativeness (i.e., cool products lead

to more customer enthusiasm, which eventually leads to financial performance). Such intangibles are extremely

difficult to measure and to track.

Possible SolutionsPossible Solutions

Now that you have an understanding of the common challenges and mistakes that organizations face when

working with nonfinancial controls, including the omission of them entirely, you have the foundation for

15.6 NONFINANCIAL CONTROLS • 655

understanding how to use them effectively. For organizations that manage well with nonfinancial controls, the

benefits definitely outweigh the costs. Since we outlined five possible areas for mistakes, let’s work briefly

through five possible solution areas.

Use Nonfinancial ControlsUse Nonfinancial Controls

As we mentioned earlier in this section, the delayed and historic nature of financial controls makes it risky to rely

on them alone. Step back and reflect on the organization’s strategy, then pick one or several nonfinancial controls

such as customer or employee satisfaction as a starting point. It is critical that you start with a conceptual model

using simple boxes and arrows in terms of what nonfinancial control leads to another, and so on.

The following figure shows a working model of these relationships for a retail store that sells unique products.

This leads us to our second solution.

Figure 15.8 Sample Mix of Nonfinancial and Financial Controls

Tie the Controls to the StrategyTie the Controls to the Strategy

Be sure to confirm that whichever nonfinancial controls are in place, they reflect and reinforce the unique strategy

of the organization. This also should remind you that, if the strategy ever changes, you should go back and

revalidate the links between the nonfinancial controls and the strategy. For instance, in our retail store example,

part of the strategy is to sell unique products, which means that employees with particular work experience and

education may provide better customer service than inexperienced employees. If the store changed its strategy to

sell more generic products, however, it might not need such experienced or educated employees anymore.

Validate the Links Between Nonfinancial and Financial ControlsValidate the Links Between Nonfinancial and Financial Controls

As you recall, organizations often use more than one nonfinancial control with the assumption that they cascade

656 • PRINCIPLES OF MANAGEMENT

down to bottom-line financial performance. Of course, when there are fewer nonfinancial controls, it is easier to

detect relationships among them. Regardless, with information collected about the controls, management must

seek to use simple statistical techniques to verify the causal relationship between one control and another, and

eventually financial performance. For instance, if nonfinancial controls were functioning as assumed, you might

find that when employees are more satisfied, customers are more satisfied, and when both are more satisfied,

more higher-profit-margin products are sold. If such relationships can’t be proved, then managers must revisit

their choice of nonfinancial controls.

Set Appropriate Performance TargetsSet Appropriate Performance Targets

Extending the prior example, you would want to be sure that you set employee and customer satisfaction control

targets appropriately. Assuming that you validated the linkages, while it might be nice to reach 100% satisfaction

levels across employees and customers, it might not be cost-effective. This does not mean that you abandon the

use of such controls; instead you must determine whether 90% satisfaction (or some other number) still leads to

greater product sales.

Validate the Performance MeasuresValidate the Performance Measures

Finally, make sure that what you ultimately measure fits well with the control objectives. For instance, with our

retail store example, would you measure work experience by the number of years that an applicant has worked?

Or would you want experience with a particular type of product or service? Similarly, with regard to education,

you would want to make a choice as to measuring grade-point average, standardized test score, or major. As

a reminder, this type of validation is relevant to nonfinancial and financial measures alike. For instance, if our

hypothetical store’s sales are growing, but profitability is going down, then we would want to figure out why these

financial controls aren’t painting the same picture. For example, it might be that we’ve hired more salespeople,

who help us sell more, but that we are not selling enough to cover the additional costs of the added people’s

salaries. These examples should help you see the point about using the right measure.

Key Takeaway

Nonfinancial controls, such as those related to employee satisfaction, customer service, and so on, arean important and increasingly applied form of organizational control. While firms that use nonfinancialcontrols well also perform much better than firms that don’t use them, there is a plethora of managerialmistakes made with regard to their conceptualization, implementation, or both. Beyond simply usingnonfinancial controls, best practices around such controls include aligning them with the strategy,validating the links between nonfinancial controls and financial controls, setting appropriate controlperformance targets, and confirming the right measure of the desired control.

15.6 NONFINANCIAL CONTROLS • 657

Exercises

1. What are nonfinancial controls? Name some examples.

2. What should be the relationship between nonfinancial and financial controls?

3. What are some common mistakes made by managers with regard to nonfinancial controls?

4. What are some solutions to the common mistakes you identified?

ReferencesReferences

Brown, M. G. (1996). Keeping score. New York: Productivity Press.

Ittner, C., & Larcker, D. F. (2003, November). Coming up short on nonfinancial performance measurement.

Harvard Business Review, 2–8.

658 • PRINCIPLES OF MANAGEMENT

15.7 Lean Control

Learning Objectives

1. Know what is meant by lean controls, and why the subject can be confusing.

2. Understand the application of lean.

3. Know the five core principals of lean.

Lean control, or simply lean, has become an immensely popular business control and improvement methodology

in recent years. Lean control is a highly refined example of nonfinancial controls in action. Lean is a system of

nonfinancial controls used to improve product and service quality and decrease waste. Research suggests that

up to 70% of manufacturing firms are using some form of lean in their business operations (What They Think,

2008). Lean was initially focused on improving manufacturing operations but is now used to improve product

development, order processing, and a variety of other nonmanufacturing processes (sometimes called “lean in the

office”).

What Is Meant by Lean Control?What Is Meant by Lean Control?

Lean’s popularity has both resulted from, and been driven by, an explosion in the volume of lean-related

educational resources. Amazon offers almost 1,800 books and other materials about lean, and Yahoo! hosts over

90 online discussion groups relating to lean. Colleges and universities, industry trade associations, and private

consulting firms routinely offer courses, seminars, and conferences to explain what lean is and how to use it.

Lean control is a number of things. According to James Womack, “it is a process for measuring and reducing

inventory and streamlining production. It is a means for changing the way a company measures plant performance.

It is a knowledge-based system. It takes years of hard work, preparation and support from upper management.

Lean is so named because it purports to use much less of certain resources (space, inventory, workers, etc.) than

is used by normal mass-production systems to produce comparable output.” The term came into widespread use

with the 1990 publication of the book The Machine That Changed the World, by James P. Womack, Daniel T.

Jones, and Daniel Roos (Womack, et. al., 1990).

This abundance of education resources on the topic of lean is actually a mixed blessing for managers who are

659

just now becoming interested in lean. On the one hand, today’s managers don’t have to search far to find lean

materials or programs. But the wealth of lean resources can also be a source of confusion for two main reasons.

First, there is no universal definition of lean and little agreement about what the truly core principles of lean are.

For instance, quality programs such as Six-Sigma, or even lean Six Sigma, are other titles competing for the “lean”

intellectual space. Therefore, lean experts often approach the subject from differing perspectives and describe lean

in different ways. To make matters worse, lean is a topic that produces a significant amount of zealotry. So, many

experts strongly argue that their particular “brand” of lean is the one right way to implement and use lean. In these

circumstances, it’s no wonder that managers become confused about where and how to begin.

Lean ApplicationsLean Applications

Lean will always be associated with Toyota Motor Corporation because most lean tools and techniques were

developed by Toyota in Japan beginning in the 1950s. After World War II, Toyota’s leaders were determined to

make the company a full-range car and truck manufacturing enterprise, but they faced several serious challenges.

The Japanese motor vehicle market was small and yet demanded a fairly wide range of vehicle types. This meant

that Toyota needed to find a way to earn a profit while manufacturing a variety of vehicles in low volumes. In

addition, capital was extremely scarce, which made it impossible for Toyota to make large purchases of the latest

production equipment. To succeed, or even survive, Toyota needed a way to build vehicles that would require

fewer resources. To achieve this goal, Toyota’s leaders, principally Eiji Toyoda and Taiichi Ohno, began to create

and implement the production techniques and tools that came to be known as lean (Toyota, 2009).

660 • PRINCIPLES OF MANAGEMENT

Figure 15.9

Lean organizations strive to improve flow by reducing the size of production batches, and in the process,

they increase flexibility and lower costs.

Krones – Filling machine for PET bottles – CC BY-SA 3.0.

To gain the most benefits from lean, managers must be able to determine what specific lean tools and techniques

will be effective in their particular business. And to make that determination, they must clearly understand what

lean is designed to accomplish (its primary objectives) and what core principles lean is based on. With this

understanding, managers can decide which lean tools will work well in their business, which lean tools will need

to be modified or adapted to work well, and which tools are simply not appropriate.

What, then, are the major objectives and core principles of lean? Despite the arguments and debates that often

surround attempts to define and describe lean, it is clear that the ultimate objective of lean is the avoidance of

muda, or wasteful activity, in all business operations. As shown in the following figure, muda comprises seven

deadly wastes. In the lean world, waste means any activity or condition that consumes resources but creates no

value for customers. Therefore, waste includes the production of defective products that must be remade or fixed,

the production of more products than the market will buy, excessive work-in-process inventories, overprocessing

(processing steps that aren’t really needed or that add no value), unnecessary movement of people or products,

and unnecessary waiting by employees.

15.7 LEAN CONTROL • 661

Elimination of Waste Is the Soul of LeanElimination of Waste Is the Soul of Lean

Muda is a Japanese term for activity that is wasteful and doesn’t add value. It is also a key concept in leancontrol. Waste reduction is an effective way to increase profitability. Here are the seven deadly wastes,along with their definitions:

1. Defects prevent the customer from accepting the product produced. The effort to create thesedefects is wasted. New waste management processes must be added in an effort to reclaim somevalue for the otherwise scrap product.

2. Overproduction is the production or acquisition of items before they are actually required. It isthe most dangerous waste of the company because it hides the production problems. Overproductionmust be stored, managed, and protected.

3. Transportation is a cost with no added value. In addition, each time a product is moved it standsthe risk of being damaged, lost, and delayed. Transportation does not transform the product in anyway that the consumer is willing to pay for.

4. Waiting refers to both the time spent by the workers waiting for resources to arrive, the queue fortheir products to empty as well as the capital sunk in goods and services that are not yet delivered tothe customer. It is often the case that there are processes to manage this waiting.

5. Inventory in the form of raw materials, work-in-progress, or finished goods represents a capitaloutlay that has not yet produced an income either by the producer or for the consumer. Any of thesethree items not being actively processed to add value is waste.

6. Motion refers to the actions performed by the producer, worker, or equipment. Motion hassignificance to damage, wear, and safety. It also includes the fixed assets and expenses incurred inthe production process.

7. Overprocessing is defined as using a more expensive or otherwise valuable resource than isneeded for the task or adding features that are designed for but unneeded by the customer. There is aparticular problem with this item regarding people. People may need to perform tasks that they areoverqualified for to maintain their competency. This training cost can be used to offset the wasteassociated with overprocessing.

The Five Core Principles of LeanThe Five Core Principles of Lean

Lean methodologies are lean because they enable a business to do more with less. A lean organization uses less

human effort, less equipment, less facilities space, less time, and less capital—while always coming closer to

meeting customers’ exact needs. Therefore, lean is not just another cost-cutting program of the kind we often see

in business organizations. Lean is much more about the conservation of valuable resources than it is about cost

cutting.

In their best-selling book, Lean Thinking, James Womack and Daniel Jones identified five core principles of lean

(Womack & Jones, 2003). Let’s examine them one by one.

662 • PRINCIPLES OF MANAGEMENT

Define Value from the Customer’s PerspectiveDefine Value from the Customer’s Perspective

The first core principle in the Womack/Jones lean framework is that value must be defined and specified from

the customer’s perspective. While this seems simple enough, it requires much more than high-sounding, generic

statements. To be meaningful, value must be defined in terms of specific products. This means that managers must

understand how each specific product meets the needs of specific customers at a specific price and at a specific

time.

Describe the Value Stream for Each Product or ServiceDescribe the Value Stream for Each Product or Service

The second core principle of lean is to describe the value stream for each product or service (or, in some cases, for

groups or families of similar products). The value stream is the set of activities that the business is performing to

bring a finished product to a customer. It includes both direct manufacturing activities and indirect activities such

as order processing, purchasing, and materials management. Developing a detailed description or map of each

value stream usually reveals huge amounts of waste. It enables managers to identify which value stream activities

add value to the product, which activities add no value but cannot be immediately eliminated for various reasons,

and which activities create no value and can be immediately eliminated (or at least reduced substantially).

Create Flow in Each Value StreamCreate Flow in Each Value Stream

The third essential principle of lean is embodied in the word flow. When a value stream has been completely

described as unnecessary, non-value-adding activities have been eliminated, the basic idea of flow is to arrange

the remaining activities sequentially, so that products will move smoothly and continuously from one activity to

the next. However, flow means more than ease of movement. Flow is the lean principle that directly challenges the

traditional “batch-and-queue” model of manufacturing, where people and equipment are organized and located

by function, and products (and component parts) are manufactured in large batches. Lean organizations strive to

improve flow by reducing the size of production batches, and in the process, they increase flexibility and lower

costs.

Produce at the Pace (Pull) of Actual Customer DemandProduce at the Pace (Pull) of Actual Customer Demand

Producing at the pace or pull of actual customer demand is the fourth key principle of lean. One of the greatest

benefits of moving from traditional batch-and-queue manufacturing to continuous flow production is that lead

times fall dramatically. Reduced lead times and increased flexibility mean that lean organizations can respond to

actual customer demand rather than attempt to predict in advance what that level of demand will be. This allows

lean organizations to substantially lower both finished goods and work-in-process inventories.

Strive to Continuously Improve All Business OperationsStrive to Continuously Improve All Business Operations

The fifth core principle of lean is continuous improvement, expressed in Japanese by the word kaizen. Companies

that implement lean adopt the mind-set that it is always possible to improve any business activity, and they

regularly conduct kaizen events throughout their organizations to improve specific processes or operations. Today,

15.7 LEAN CONTROL • 663

Toyota is recognized as one of the most “lean” business enterprises in the world. Even more daunting, and

humbling, is the fact that Toyota is still striving to improve.

Key Takeaway

Lean control, or simply lean, is the system of nonfinancial controls used to improve product and servicequality and decrease waste. While popularized through the dramatic successes of Toyota in automanufacturing, lean processes are used to improve quality and decrease waste in most service andmanufacturing industries around the world. In this section, you saw examples of the seven deadly wastes(muda) and the five core principles of lean which culminate in continuous improvement, or kaizen.

Exercises

1. What is lean control?

2. What types of industries might find lean controls valuable?

3. What does muda mean and what are some examples of it?

4. What are the five lean principles?

5. Pick a company you are familiar with—what would it need to do differently to comply with thefive lean principles?

ReferencesReferences

Toyota, retrieved January 30, 2009, from http://www.toyota.co.jp/en/history/index.html.

What They Think, PrintPlanet launches lean manufacturing forum. (2008, August 11). Retrieved January 30,

2009, from http://members.whattheythink.com/home/wttnews080811.cfm.

Womack, J. P., Jones, D. T., & Roos, D. (1990). The machine that changed the world. New York: Rawson

Associates, 1990.

Womack, J. P., & Jones, D. T. (2003). Lean thinking. New York: Simon & Schuster.

664 • PRINCIPLES OF MANAGEMENT

15.8 Crafting Your Balanced Scorecard

Learning Objectives

1. Understand the Balanced Scorecard concept.

2. See how the Balanced Scorecard integrates nonfinancial and financial controls.

3. Be able to outline a personal Balanced Scorecard.

An Introduction to the Balanced ScorecardAn Introduction to the Balanced Scorecard

You have probably learned a bit about Balanced Scorecards already from this book or other sources. The Balanced

Scorecard was originally introduced to integrate financial and nonfinancial controls in a way that provided a

balanced understanding of the determinants of firm performance. It has since evolved into a strategic performance

management tool of sorts because it helps managers identify and understand the way that operating controls

are tied to strategic controls, and ultimately, firm performance. In this broader sense, a Balanced Scorecard is a

control system that translates an organization’s vision, mission, and strategy into specific, quantifiable goals and

to monitor the organization’s performance in terms of achieving these goals.

According to Robert S. Kaplan and David P. Norton, the Balanced Scorecard approach “examines performance in

four areas. Financial analysis, the most traditionally used performance indicator, includes assessments of measures

such as operating costs and return-on-investment. Customer analysis looks at customer satisfaction and retention.

Internal analysis looks at production and innovation, measuring performance in terms of maximizing profit from

current products and following indicators for future productivity. Finally, learning and growth analysis explores

the effectiveness of management in terms of measures of employee satisfaction and retention and information

system performance (Kaplan & Norton, 2001).”

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Figure 15.10

Just as tasters can rate a wine on numerous dimensions, the Balanced Scorecard integrates a variety of measures of organizational quality and

performance.

fs999 – Good Wine – CC BY-NC-ND 2.0.

Whereas the scorecard identifies financial and nonfinancial areas of performance, the second step in the scorecard

process is the development of a strategy map. The idea is to identify key performance areas in learning and growth

and show how these cascade forward into the internal, customer, and financial performance areas. Typically,

this is an iterative process where managers test relationships among the different areas of performance. If the

organization is a for-profit business like IBM, then managers would want to be able to show how and why the

choice made in each area ultimately led to high profitability and stock prices.

Figure 15.11 The Balanced Scorecard Hierarchy

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With the scorecard and strategy map in hand, managers then break broad goals down successively into vision,

strategies, strategic initiatives, and metrics. As an example, imagine that an organization has a goal of maintaining

employee satisfaction in its vision and mission statements. This would be the organization’s vision in the domain

of learning and growth, since employee satisfaction is indirectly related to financial performance. Strategies for

achieving that learning and growth vision might include approaches such as increasing employee-management

communication. Initiatives undertaken to implement the strategy could include, for example, regularly scheduled

meetings with employees. Metrics could include quantifications of employee suggestions or employee surveys.

Finally, managers would want to test their assumptions about the relationship between employee satisfaction and

the downstream areas such as internal, customer, and financial performance. For example, satisfied employees

may be more productive and less likely to quit (internal), which leads to better products or services and customer

relations (customer), which leads to lower employee recruiting and training costs and greater sales and repeat sales

(financial). This sequence of causal relationships is summarized in the following figure.

Figure 15.12 The Strategy Map: A Causal Relationship between Nonfinancial and Financial Controls

15.8 CRAFTING YOUR BALANCED SCORECARD • 667

Your Personal Balanced ScorecardYour Personal Balanced Scorecard

Now that you have an understanding of nonfinancial and financial controls, and specific cases such as lean control

systems and the Balanced Scorecard, it’s time to apply the notion of the Balanced Scorecard to your personal

situation. Recall that the figure shows your position in the context of the Balanced Scorecard—it asks you to

state your personal objectives, in the context of the organization’s objectives. However, in developing your own

Balanced Scorecard, you will be laying out a road map to achieve your personal and professional objectives

(or mission and vision more broadly), which may overlap a lot or very little with the organization’s objectives.

While you can choose to focus the scorecard more narrowly on something like your career, you will be much

better served by the personal Balanced Scorecard if you pursue a holistic (personal + professional) approach. For

example, you may have particular personal goals about financial independence, and this would relate to other

choices you might want to make about your personal and professional priorities.

Social psychologist Hubert Rampersad has sought to translate the business Balanced Scorecard into a personal

balanced score by providing you with the following four suggestions(Rampersad, 2006).

1. Learning and growth: your skills and learning ability. How do you learn, and how can you be successful

in the future? For example, the course that you are taking in conjunction with this book may lead to a

degree, be a prerequisite for other courses, and so on.

2. Internal: your physical health and mental state. How can you control these to create value for yourself

and others? How can you remain feeling good at work as well as in your spare time? For instance, your

objectives and activities related to physical and emotional fitness.

3. Customer (external): relations with your spouse, children, friends, employer, colleagues, and others. How

do they see you?

4. Financial: financial stability. To what degree are you able to fulfill your financial needs? Again, do you

seek financial independence, resources to fund other endeavors?

The best way to put these suggestions into action is to work on the scorecard in several sessions, as there is

a wide range of factors to consider. Your objective for the first session should be to develop your personal

668 • PRINCIPLES OF MANAGEMENT

vision statement and list several areas of development in learning, internal, customer, and financial facets of the

scorecard. You should be able to fit the scorecard on a single page, for easy and frequent reference. You can

use your next session with the scorecard to refine your developmental objectives and set relevant measures and

near-term objectives. Post the scorecard where you can refer to it often. And, just as with organizations, if your

circumstances change, then that is the critical time to revalidate or revise your personal Balanced Scorecard.

Key Takeaway

You learned about the essential components of the Balanced Scorecard and saw how, when correctlyconceived and implemented, it integrates an organization’s vision, mission, and strategy with itsnonfinancial and financial controls. As with correctly implemented nonfinancial controls, the componentsof the Balanced Scorecard need to be clearly tied to the strategy, and relationships among nonfinancial andfinancial controls validated. Appropriate control performance targets need to be set, and the appropriateindicators of performance used to gauge nonfinancial and financial performance. This section concludedby outlining for you the steps you might follow in building a personal Balanced Scorecard.

Exercises

1. What is a Balanced Scorecard? What is the difference between a Balanced Scorecard and a simplelist of nonfinancial and financial controls?

2. What roles do vision, mission, and strategy play in the development of a Balanced Scorecard?

3. What might be some of the differences between an organization’s Balanced Scorecard and yourpersonal Balanced Scorecard? What might be some of the similarities?

4. Under what circumstances should an organization’s or an individual’s Balanced Scorecard berevised?

ReferencesReferences

Kaplan, R., & Norton, D. (2001). The strategy-focused organization. Boston: Harvard Business School Press.

Rampersad, H. K. (2006). The personal Balanced Scorecard: The way to individual happiness, personal integrity,

and organizational effectiveness. Greenwich, CT: Information Age.

15.8 CRAFTING YOUR BALANCED SCORECARD • 669

Chapter 16: Strategic Human ResourceManagement

16.1 Strategic Human Resource Management

16.2 Case in Point: Kronos Uses Science to Find the Ideal Employee

16.3 The Changing Role of Strategic Human Resource Management in Principles of Management

16.4 The War for Talent

16.5 Effective Selection and Placement Strategies

16.6 The Roles of Pay Structure and Pay for Performance

16.7 Designing a High-Performance Work System

16.8 Tying It All Together—Using the HR Balanced Scorecard to Gauge and Manage Human Capital, Including

Your Own

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16.1 Strategic Human Resource Management

Figure 16.1

Strategic human resource management ensures that the organization’s human resources are in the right

place at the right time to secure competitive advantage.

Peter Miller – Chess Pieces – CC BY-NC-ND 2.0.

What’s in It for Me?

Reading this chapter will help you do the following:

1. Understand the scope and changing role of strategic human resource management (SHRM) inprinciples of management.

2. Visualize the battlefield in the war for talent.

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3. Engage in effective selection and placement strategies.

4. Understand the roles of pay structure and pay for performance.

5. Design a high-performance work system.

6. Use the human resources Balanced Scorecard to gauge and proactively manage human capital,including your own.

You have probably heard the saying, people make the place. In today’s fast-changing environment, organizations

need employees who understand the organization’s strategy and are empowered to execute it. To achieve this,

organizations need to follow a strategic human resource management (SHRM) approach. SHRM ensures that

people are a key factor in a firm’s competitive advantage. Thus, as summarized in the following figure, SHRM is

an integral part of the control portion of the planning-organizing-leading-controlling (P-O-L-C) framework.

Figure 16.2 The P-O-L-C Framework

Organizations need human resources (HR) to be a partner in identifying, attracting, and hiring the type of

employees who will be most qualified to help the company achieve its goals. SHRM requires attracting the right

employees to the company, identifying metrics to help employees stay on target to meet the company’s goals,

and rewarding them appropriately for their efforts so that they stay engaged and motivated. Having all these

components in place—designing a high-performance work system—improves organizational performance and

unleashes employee talent.

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Figure 16.3

Strategic human resource management is concerned with the “people” factor as a source of competitive

advantage.

sheriyates – Pixabay – CC0 public domain.

16.1 STRATEGIC HUMAN RESOURCE MANAGEMENT • 673

16.2 Case in Point: Kronos Uses Science to Find the IdealEmployee

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Figure 16.4

Kensavage – Kronos incorporated – public domain.

You are interviewing a candidate for a position as a cashier in a supermarket. You need someone polite,courteous, patient, and dependable. The candidate you are talking to seems nice. But how do you knowwho is the right person for the job? Will the job candidate like the job or get bored? Will they have alot of accidents on the job or be fired for misconduct? Don’t you wish you knew before hiring? Onecompany approaches this problem scientifically, saving companies time and money on hiring hourly wageemployees.

Retail employers do a lot of hiring, given their growth and high turnover rate. According to one estimate,replacing an employee who leaves in retail costs companies around $4,000. High turnover also endangerscustomer service. Therefore, retail employers have an incentive to screen people carefully so that theyhire people with the best chance of being successful and happy on the job. Unicru, an employee selectioncompany, developed software that quickly became a market leader in screening hourly workers. Thecompany was acquired by Massachusetts-based Kronos Inc. (NASDAQ: KRON) in 2006 and is currentlyowned by a private equity firm.

The idea behind the software is simple: If you have a lot of employees and keep track of your data overtime, you have access to an enormous resource. By analyzing this data, you can specify the profile of the“ideal” employee. The software captures the profile of the potential high performers, and applicants arescreened to assess their fit with this particular profile. More important, the profile is continually updated asstudies that compare employee profiles to job performance are conducted. As the number of studies getslarger, the software does a better job of identifying the right people for the job.

If you applied for a job in retail, you may have already been a part of this database: the users of this systeminclude giants such as Universal Studios, Costco Wholesale Corporation, Burger King, and other retailersand chain restaurants. In companies such as Albertsons or Blockbuster, applicants can either use a kiosk inthe store to answer a list of questions and to enter their background, salary history, and other information orapply online from their home computers. The software screens people on basic criteria such as availabilityin scheduling as well as personality traits.

16.2 CASE IN POINT: KRONOS USES SCIENCE TO FIND THE IDEAL EMPLOYEE • 675

Candidates are asked to agree or disagree with statements such as “I often make last-minute plans” or “Iwork best when I am on a team.” Additionally, questions about how an applicant would react in specificjob-related situations and about person-job fit are included. After the candidates complete the questions,hiring managers are sent a report complete with a color-coded suggested course of action. Red means thecandidate does not fit the job, yellow indicates the hiring manager should proceed with caution, and greenmeans the candidate is likely a good fit. Because of the use of different question formats and complexscoring methods, the company contends that faking answers to the questions of the software is not easybecause it is difficult for candidates to predict the desired profile.

Matching candidates to jobs has long been viewed as a key way of ensuring high performance and lowturnover in the workplace, and advances in computer technology are making it easier and more efficientto assess candidate–job fit. Companies using such technology are cutting down the time it takes to hirepeople, and it is estimated that using such technologies lowers their turnover by 10%–30%.

Case written based on information from Berta, D. (2002, February 25). Industry increases applicantscreening amid labor surplus, security concerns. Nation’s Restaurant News, 36(8), 4; Frauenheim, E.(2006, March 13). Unicru beefs up data in latest screening tool. Workforce Management, 85(5), 9–10;Frazier, M. (2005, April). Help wanted. Chain Store Age, 81(4), 37–39; Haaland, D. E. (2006, April 17).Safety first: Hire conscientious employees to cut down on costly workplace accidents. Nation’s RestaurantNews, 40(16), 22–24; Overholt, A. (2002, February). True or false? You’re hiring the right people. FastCompany, 55, 108–109; Rafter, M. V. (2005, May). Unicru breaks through in the science of “smart hiring.”Workforce Management, 84(5), 76–78.

Discussion Questions

1. Strategic human resource management (SHRM) is included in your P-O-L-C framework asan essential element of control. Based on what you have learned about Kronos, how mightSHRM be related to the planning, organizing, and leading facets of the P-O-L-C framework?

2. What can a company do in addition to using techniques like these to determine whether aperson is a good candidate for a job?

3. What are potential complicating factors in using personality testing for employee selection?

4. Why do you think that retail companies are particularly prone to high turnover rates?

5. What steps do you take as a job seeker to ensure that an organization is a good fit for you?

676 • PRINCIPLES OF MANAGEMENT

16.3 The Changing Role of Strategic Human ResourceManagement in Principles of Management

Learning Objectives

1. Understand how HR is becoming a strategic partner.

2. Understand the importance of an organization’s human capital.

3. List the key elements of SHRM.

4. Explain the importance of focusing on outcomes.

The role of HR is changing. Previously considered a support function, HR is now becoming a strategic partner in

helping a company achieve its goals. A strategic approach to HR means going beyond the administrative tasks like

payroll processing. Instead, managers need to think more broadly and deeply about how employees will contribute

to the company’s success.

HR as a Strategic PartnerHR as a Strategic Partner

Strategic human resource management (SHRM) is not just a function of the HR department—all managers and

executives need to be involved because the role of people is so vital to a company’s competitive advantage

(Becker & Huselid, 2006). In addition, organizations that value their employees are more profitable than those

that do not (Huselid, 1995; Pfeffer, 1998; Pfeffer & Veiga, 1999; Welbourne & Andrews, 1996). Research shows

that successful organizations have several things in common, such as providing employment security, engaging in

selective hiring, using self-managed teams, being decentralized, paying well, training employees, reducing status

differences, and sharing information (Pfeffer & Veiga, 1999). When organizations enable, develop, and motivate

human capital, they improve accounting profits as well as shareholder value in the process (Brian, et. al., 2002).

The most successful organizations manage HR as a strategic asset and measure HR performance in terms of its

strategic impact.

Here are some questions that HR should be prepared to answer in this new world (Ulrich, 1998).

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• Competence: To what extent does our company have the required knowledge, skills, and abilities to

implement its strategy?

• Consequence: To what extent does our company have the right measures, rewards, and incentives in place

to align people’s efforts with the company strategy?

• Governance: To what extent does our company have the right structures, communications systems and

policies to create a high-performing organization?

• Learning and Leadership: To what extent can our company respond to uncertainty and learn and adapt to

change quickly?

The Importance of Human CapitalThe Importance of Human Capital

Employees provide an organization’s human capital. Your human capital is the set of skills that you have acquired

on the job, through training and experience, and which increase your value in the marketplace. The Society

of Human Resource Management’s Research Quarterly defined an organization’s human capital as follows: “A

company’s human capital asset is the collective sum of the attributes, life experience, knowledge, inventiveness,

energy and enthusiasm that its people choose to invest in their work (Weatherly, 2003).”

Focus on OutcomesFocus on Outcomes

Unfortunately, many HR managers are more effective in the technical or operational aspects of HR than they are

in the strategic, even though the strategic aspects have a much larger effect on the company’s success (Huselid,

et. al., 1999). In the past, HR professionals focused on compliance to rules, such as those set by the federal

government, and they tracked simple metrics like the number of employees hired or the number of hours of

training delivered. The new principles of management, however, require a focus on outcomes and results, not just

numbers and compliance. Just as lawyers count how many cases they’ve won—not just how many words they

used—so, too must HR professionals track how employees are using the skills they’ve learned to attain goals, not

just how many hours they’ve spent in training (Ulrich, 1998).

John Murabito, executive vice president and head of HR and Services at Cigna, says that HR executives need to

understand the company’s goals and strategy and then provide employees with the skills needed. Too often, HR

execs get wrapped up in their own initiatives without understanding how their role contributes to the business.

That is dangerous, because when it comes to the HR department, “anything that is administrative or transactional

is going to get outsourced,” Murabito says (Marquez, 2007). Indeed, the number of HR outsourcing contracts

over $25 million has been increasing, with 2,708 active contracts under way in 2007 (Shared Xpertise, 2009).

For example, the Bank of America outsourced its HR administration to Arinso. Arinso will provide timekeeping,

payroll processing, and payroll services for 10,000 Bank of America employees outside the U.S (HRO Europe,

2009). To avoid outsourcing, HR needs to stay relevant and accept accountability for its business results. In short,

the people strategy needs to be fully aligned with the company’s business strategy and keep the focus on outcomes.

Key Elements of HRKey Elements of HR

Beyond the basic need for compliance with HR rules and regulations, the four key elements of HR are summarized

678 • PRINCIPLES OF MANAGEMENT

in the following figure. In high-performing companies, each element of the HR system is designed to reflect best

practice and to maximize employee performance. The different parts of the HR system are strongly aligned with

company goals.

Figure 16.5 Key HR Elements

Selection and PlacementSelection and Placement

When hiring, acquaint prospective new hires with the nature of the jobs they will be expected to fulfill. This

includes explaining the technical competencies needed (for example, collecting statistical data) and defining

behavioral competencies. Behavioral competencies may have a customer focus, such as the ability to show

empathy and support of customers’ feelings and points of view, or a work management focus, such as the ability

to complete tasks efficiently or to know when to seek guidance.

In addition, make the organization’s culture clear by discussing the values that underpin the

organization—describe your organization’s “heroes.” For example, are the heroes of your company the people

who go the extra mile to get customers to smile? Are they the people who toil through the night to develop new

code? Are they the ones who can network and reach a company president to make the sale? By sharing such

16.3 THE CHANGING ROLE OF STRATEGIC HUMAN RESOURCE MANAGEMENT IN PRINCIPLES OF MANAGEMENT • 679

stories of company heroes with your potential hires, you’ll help reinforce what makes your company unique. This,

in turn, will help the job candidates determine whether they’ll fit into your organization’s culture.

Job DesignJob Design

Design jobs that involve doing a whole piece of work and are challenging but doable. Job design refers to the

process of putting together various elements to form a job, bearing in mind organizational and individual worker

requirements, as well as considerations of health, safety, and ergonomics. Train employees to have the knowledge

and skills to perform all parts of their job and give them the authority and accountability to do so (Lawler, 1992).

Job enrichment is important for retaining your employees.

One company that does training right is Motorola. As a global company, Motorola operates in many countries,

including China. Operating in China presents particular challenges in terms of finding and hiring skilled

employees. In a recent survey conducted by the American Chamber of Commerce in Shanghai, 37% of U.S.-

owned enterprises operating in China said that recruiting skilled employees was their biggest operational problem

(Lane & Pollner, 2008). Indeed, more companies cited HR as a problem than cited regulatory concerns,

bureaucracy, or infringement on intellectual property rights. The reason is that Chinese universities do not turn

out candidates with the skills that multinational companies need. As a result, Motorola has created its own

training and development programs to bridge the gap. For example, Motorola’s China Accelerated Management

Program is designed for local managers. Another program, Motorola’s Management Foundation program, helps

train managers in areas such as communication and problem solving. Finally, Motorola offers a high-tech MBA

program in partnership with Arizona State University and Tsinghua University so that top employees can earn an

MBA in-house (Lane & Pollner, 2008). Such programs are tailor-made to the low-skilled but highly motivated

Chinese employees.

Compensation and RewardsCompensation and Rewards

Evaluate and pay people based on their performance, not simply for showing up on the job. Offer rewards for

skill development and organizational performance, emphasizing teamwork, collaboration, and responsibility for

performance. Help employees identify new skills to develop so that they can advance and achieve higher pay and

rewards. Compensation systems that include incentives, gainsharing, profit-sharing, and skill-based pay reward

employees who learn new skills and put those skills to work for the organization. Employees who are trained in

a broad range of skills and problem solving are more likely to grow on the job and feel more satisfaction. Their

training enables them to make more valuable contributions to the company, which, in turn, gains them higher

rewards and greater commitment to the company (Barnes, 2001). The company likewise benefits from employees’

increased flexibility, productivity, and commitment.

When employees have access to information and the authority to act on that information, they’re more involved

in their jobs and more likely to make the right decision and take the necessary actions to further the organization’s

goals. Similarly, rewards need to be linked to performance, so that employees are naturally inclined to pursue

outcomes that will gain them rewards and further the organization’s success at the same time.

680 • PRINCIPLES OF MANAGEMENT

Diversity ManagementDiversity Management

Another key to successful SHRM in today’s business environment is embracing diversity. In past decades,

“diversity” meant avoiding discrimination against women and minorities in hiring. Today, diversity goes far

beyond this limited definition; diversity management involves actively appreciating and using the differing

perspectives and ideas that individuals bring to the workplace. Diversity is an invaluable contributor to innovation

and problem-solving success. As James Surowiecki shows in The Wisdom of Crowds, the more diverse the group

in terms of expertise, gender, age, and background, the more ability the group has to avoid the problems of

groupthink (Surowiecki, 2005). Diversity helps company teams to come up with more creative and effective

solutions. Teams whose members have complementary skills are often more successful because members can see

one another’s blind spots. Members will be more inclined to make different kinds of mistakes, which means that

they’ll be able to catch and correct those mistakes.

Key Takeaway

Human resources management is becoming increasingly important in organizations because today’sknowledge economy requires employees to contribute ideas and be engaged in executing the company’sstrategy. HR is thus becoming a strategic partner by identifying the skills that employees need and thenproviding employees with the training and structures needed to develop and deploy those competencies.All the elements of HR—selection, placement, job design, and compensation—need to be aligned with thecompany’s strategy so that the right employees are hired for the right jobs and rewarded properly for theircontributions to furthering the company’s goals.

Exercises

1. What are the advantages of the new SHRM approach?

2. Name three elements of HR.

3. What must HR do to be a true strategic partner of the company?

4. What benefits does a diverse workforce provide the company?

5. If you were an HR manager, what steps would you take to minimize the outsourcing of jobs inyour department?

ReferencesReferences

Barnes, W. F. (2001). The challenge of implementing and sustaining high performance work systems in the United

States: An evolutionary analysis of I/N Tek and Kote. PhD dissertation, University of Notre Dame.

Becker, B. E., & Huselid, M. A. (2006). Strategic human resources management: Where do we go from here?

Journal of Management, 32(6): 898–925.

16.3 THE CHANGING ROLE OF STRATEGIC HUMAN RESOURCE MANAGEMENT IN PRINCIPLES OF MANAGEMENT • 681

Brian E., Becker, B. E., Huselid, M. A., & Ulrich, D. (2002). Six key principles for measuring human capital

performance in your organization. University of Maryland Working Paper.

HRO Europe, August 23, 2006. Retrieved January 30, 2009, from http://www.hroeurope.com.

Huselid, M. A. (1995). The impact of human resource management practices on turnover, productivity, and

corporate financial performance. Academy of Management Journal, 38, 635–672.

Huselid, M. A., Jackson, S. E., & Schuler, R. S. (1997). Technical and strategic human resource management

effectiveness as determinants of firm performance. Academy of Management Journal, 40(1), 171–188.

Lane K., & Pollner, F. (2008, August 15). How to address China’s growing talent shortage. McKinsey Quarterly,

17–25.

Lane K., & Pollner, F. (2008, August 15). How to address China’s growing talent shortage. McKinsey Quarterly,

36–41.

Lawler, E. (1992). The ultimate advantage. San Francisco: Jossey-Bass.

Marquez, J. (2007, September 10). On the front line: A quintet of 2006’s highest-paid HR leaders discuss how they

are confronting myriad talent management challenges as well as obstacles to being viewed by their organizations

as strategic business partners. Workforce Management, 86(5), 22.

Pfeffer, J. (1998). The human equation: Building profits by putting people first. Boston: Harvard Business School

Press.

Pfeffer, J., & Veiga, J. F. (1999). Putting people first for organizational success. Academy of Management

Executive, 13, 37–48.

Shared Xpertise, TPI Counts 2700+ Outsourcing Contracts. (2007, December). Retrieved January 30, 2009, from

http://www.sharedxpertise.org/file/230/trends–research.html.

Surowiecki. J. (2005). The wisdom of crowds. New York: Anchor Books.

Ulrich, D. (1998.) Delivering results. Boston: Harvard Business School Press.

Weatherly, L. (2003, March). Human capital—the elusive asset; measuring and managing human capital: A

strategic imperative for HR. Research Quarterly, Society for Human Resource Management. Retrieved June 1,

2003, from http://www.shrm.org/research/quarterly/0301capital.pdf.

Welbourne, T., & Andrews, A. (1996). Predicting performance of initial public offering firms: Should HRM be in

the equation? Academy of Management Journal, 39, 910–911.

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16.4 The War for Talent

Learning Objectives

1. Define talent management.

2. Attract the right workers to your organization.

3. Understand how to keep your stars.

4. Understand the benefits of good talent management.

You have likely heard the term, the war for talent, which reflects competition among organizations to attract and

retain the most able employees. Agencies that track demographic trends have been warning for years that the

U.S. workforce will shrink in the second and third decades of the 21st century as the baby boom generation (born

1945–1961) reaches retirement age. According to one source, there will be 11.5 million more jobs than workers

in the United States by 2010.1 Even though many boomers say they want to (or have to) continue working past

the traditional age of retirement, those who do retire or who leave decades-long careers to pursue “something I’ve

always wanted to do” will leave employers scrambling to replace well-trained, experienced workers. As workers

compete for the most desirable jobs, employers will have to compete even more fiercely to find the right talent.

683

Figure 16.6

The war for talent is about attracting, developing, and retaining the most capable employees.

Wikimedia Commons – United Kingdom Labour Law – CC BY-SA 2.0.

What Talent Management MeansWhat Talent Management Means

Peter Cappelli of the Wharton School (Cappelli, 2008) defines talent management as anticipating the need for

human capital and setting a plan to meet it. It goes hand in hand with succession planning, the process whereby an

organization ensures that employees are recruited and developed to fill each key role within the company. Most

companies, unfortunately, do not plan ahead for the talent they need, which means that they face shortages of

critical skills at some times and surpluses at other times. Other companies use outdated methods of succession

planning that don’t accurately forecast the skills they’ll need in the future.

Interestingly, however, techniques that were developed to achieve productivity breakthroughs in manufacturing

can be applied to talent management. For example, it is expensive to develop all talent internally; training

people takes a long time and requires accurate predictions about which skill will be needed. Such predictions

are increasingly difficult to make in our uncertain world. Therefore, rather than developing everyone internally,

companies can hire from the outside when they need to tap specific skills. In manufacturing, this principle is

known as “make or buy.” In HR, the solution is to make and buy; that is, to train some people and to hire others

from the external marketplace. In this case, “making” an employee means hiring a person who doesn’t yet have

all the needed skills to fulfill the role, but who can be trained (“made”) to develop them. The key to a successful

“make” decision is to distinguish between the high-potential employees who don’t yet have the skills but who

can learn them from the mediocre employees who merely lack the skills. The “buy” decision means hiring an

employee who has all the necessary skills and experience to fulfill the role from day one. The “buy” decision is

useful when it’s too difficult to predict exactly which skills will be needed in the future (Buhler, 2008).

684 • PRINCIPLES OF MANAGEMENT

Another principle from manufacturing that works well in talent management is to run smaller batch sizes. That is,

rather than sending employees to 3-year-long training programs, send them to shorter programs more frequently.

With this approach, managers don’t have to make the training decision so far in advance. They can wait to decide

exactly which skills employees will learn closer to the time the skill is needed, thus ensuring that employees are

trained on the skills they’ll actually use.

Attracting the Right Workers to the OrganizationAttracting the Right Workers to the Organization

Winning the war for talent means more than simply attracting workers to your company. It means attracting the

right workers—the ones who will be enthusiastic about their work. Enthusiasm for the job requires more than

having a good attitude about receiving good pay and benefits—it means that an employee’s goals and aspirations

also match those of the company. Therefore, it’s important to identify employees’ preferences and mutually assess

how well they align with the company’s strategy. To do this, the organization must first be clear about the type of

employee it wants. Companies already do this with customers: marketing executives identify specific segments

of the universe of buyers to target for selling products. Red Bull, for example, targets college-age consumers,

whereas SlimFast goes for adults of all ages who are overweight. Both companies are selling beverages but to

completely different consumer segments. Similarly, companies need to develop a profile of the type of workers

they want to attract. Do you want entrepreneurial types who seek autonomy and continual learning, or do you

want team players who enjoy collaboration, stability, and structure? Neither employee type is inherently “better”

than another, but an employee who craves autonomy may feel constrained within the very same structure in which

a team player would thrive.

Earlier, we said that it was important to “mutually assess” how well employees’ preferences aligned with the

company’s strategy. One-half of “mutual” refers to the company, but the other half refers to the job candidates.

They also need to know whether they’ll fit well into the company. One way to help prospective hires make this

determination is to describe to them the “signature experience” that sets your company apart. As Tamara Erickson

and Lynda Gratton define it, your company’s signature experience is the distinctive practice that shows what it’s

really like to work at your company (Erickson & Gratton, 2007).

For example, here are the signature experiences of two companies, Whole Foods and Goldman Sachs: At Whole

Foods, team-based hiring is a signature experience—employees in each department vote on whether a new

employee will be retained after a 4-week trial period. This demonstrates to potential hires that Whole Foods is

all about collaboration. In contrast, Goldman Sachs’s signature experience is multiple one-on-one interviews. The

story often told to prospective hires is of the MBA student who went through 60 interviews before being hired.

This story signals to new hires that they need to be comfortable meeting endless new people and building networks

across the company. Those who enjoy meeting and being interviewed by so many diverse people are exactly the

ones who will fit into Goldman’s culture.

The added benefit of hiring workers who match your organizational culture and are engaged in their work is that

they will be less likely to leave your company just to get a higher salary.

Keeping Star EmployeesKeeping Star Employees

The war for talent stems from the approaching shortage of workers. As we mentioned earlier in this chapter, the

16.4 THE WAR FOR TALENT • 685

millions of baby boomers reaching retirement age are leaving a gaping hole in the U.S. workforce. What’s more,

workers are job-hopping more frequently than in the past. According to the U.S. Bureau of Labor Statistics, the

average job tenure has dropped from 15 years in 1980 to 4 years in 2007. As a manager, therefore, you need to give

your employees reasons to stay with your company. One way to do that is to spend time talking with employees

about their career goals. Listen to their likes and dislikes so that you can help them use the skills they like using

or develop new ones they wish to acquire (Kaye, 2008).

Don’t be afraid to “grow” your employees. Some managers want to keep their employees in their department.

They fear that helping employees grow on the job will mean that employees will outgrow their job and leave

it (Field, 2008). But, keeping your employees down is a sure way to lose them. What’s more, if you help your

employees advance, it’ll be easier for you to move up because your employees will be better able to take on the

role you leave behind.

In some cases, your employees may not be sure what career path they want. As a manager, you can help them

identify their goals by asking questions such as:

• What assignments have you found most engaging?

• Which of your accomplishments in the last six months made you proudest?

• What makes for a great day at work (Butler, 2007)?

What Employees WantWhat Employees Want

Employees want to grow and develop, stretching their capabilities. They want projects that engage their heads

as well as their hearts, and they want to connect with the people and things that will help them achieve their

professional goals (Deloitte Research, 2007). Here are two ways to provide this to your employees: First,

connect people with mentors and help them build their networks. Research suggests that successful managers

dedicate 70% more time to networking activities and 10% more time to communication than their less successful

counterparts (Luthans, et. al., 1988). What makes networks special? Through networks, people energize one

another, learn, create, and find new opportunities for growth. Second, help connect people with a sense of purpose.

Focusing on the need for purpose is especially important for younger workers, who rank meaningful work and

challenging experiences at the top of their job search lists (Sheahan, 2006).

Benefits of Good Talent ManagementBenefits of Good Talent Management

Global consulting firm McKinsey & Company conducted a study to identify a possible link between a company’s

financial performance and its success in managing talent. The survey results, reported in May 2008, show that

there was indeed a relationship between a firm’s financial performance and its global talent management practices.

Three talent management practices in particular correlated highly with exceptional financial performance:

• Creating globally consistent talent evaluation processes.

• Achieving cultural diversity in a global setting.

• Developing and managing global leaders (McKinsey Quarterly, 2007).

686 • PRINCIPLES OF MANAGEMENT

The McKinsey survey found that companies achieving scores in the top third in any of these three areas had a

70% chance of achieving financial performance in the top third of all companies (Gurthridge & Kom, 1988).

Let’s take a closer look at what each of these three best practices entail. First, having consistent talent evaluation

means that employees around the world are evaluated on the same standards. This is important because it means

that if an employee from one country transfers to another, his or her manager can be assured that the employee has

been held to the same level of skills and standards. Second, having cultural diversity means having employees who

learn something about the culture of different countries, not just acquire language skills. This helps bring about

open-mindedness across cultures. Finally, developing global leaders means rotating employees across different

cultures and giving them international experience. Companies who do this best also have policies of giving

managers incentives to share their employees with other units.

Key Takeaway

The coming shortage of workers makes it imperative for managers to find, hire, retain, and develop theiremployees. Managers first need to define the skills that the company will need for the future. Then, theycan “make or buy”—that is, train or hire—employees with the needed skills. Retaining these employeesrequires engaging them on the job. Good talent management practices translate to improved financialperformance for the company as a whole.

Exercises

1. How might a manager go about identifying the skills that the company will need in the future?

2. Describe the “make or buy” option and how it can be applied to HR.

3. How would you go about attracting and recruiting talented workers to your organization? Suggestideas you would use to retain stars and keep them happy working for you.

4. What skills might an organization like a bank need from its employees?

1Extreme talent shortage makes competition fierce for key jobs and highlights needs for leadership development.

(2007, November 26). Business Wire, 27.

ReferencesReferences

Buhler, Patricia M. (2008, March). Managing in the new millennium; succession planning: Not just for the c suite.

Supervision, 69(3), 19-23.

Butler, T. (2007). Getting unstuck. Boston: Harvard Business School Press.

Cappelli, P. (2008, March). Talent management for the 21st century, Boston. Harvard Business Review, 17–36.

16.4 THE WAR FOR TALENT • 687

Deloitte Research. (2007). It’s Do you know where your talent is? why acquisition and retention strategies don’t

work. Geneva, Switzerland: Deloitte-Touch Research Report.

Erickson, T., & Gratton, L. (2007, March). What it means to work here. Harvard Business Review, 23–29.

Field, A. (2008, June). Do your stars see a reason to stay? Harvard Management Update,.

Guthridge, M., & Komm, A. B. (1988, May). Why multinationals struggle to manage talent. McKinsey Quarterly,

19–25.

Kaye, B. (2008). Love ’em or lose ’em. San Francisco: Barrett-Koehler.

Luthans, F., Yodgetts, R., & Rosenkrantz, S. (1988). Real managers. Cambridge: Ballinger.

McKinsey Quarterly, McKinsey global-talent-management survey of over 450 executives. (2007, December).

Retrieved January 30, 2009, from http://www.mckinseyquarterly.com/

article_print.aspx?L2=18&L3=31&ar=2140.

Sheahan, P. (2006). Generation Y: Thriving (and surviving) with generation Y at work. Victoria, Australia: Hardie

Grant Books.

688 • PRINCIPLES OF MANAGEMENT

16.5 Effective Selection and Placement Strategies

Learning Objectives

1. Explain why a good job description benefits the employer and the applicant.

2. Describe how company culture can be used in selecting new employees.

3. Discuss the advantages and disadvantages of personnel testing.

4. Describe some considerations in international staffing and placement

Selecting the right employees and placing them in the right positions within the company is a key HR function and

is vital to a company’s success. Companies should devote as much care and attention to this “soft” issue as they

do to financial planning because errors will have financial impact and adverse effects on a company’s strategy.

Job-Description Best PracticesJob-Description Best Practices

Walt has a problem. He works as a manager in a medium-sized company and considers himself fortunate that

the organizational chart allows him a full-time administrative assistant (AA). However, in the two years Walt has

been in his job, five people have held this AA job. The most recent AA, who resigned after four weeks, told Walt

that she had not known what the job would involve. “I don’t do numbers, I’m not an accountant,” she said. “If you

want someone to add up figures and do calculations all day, you should say so in the job description. Besides, I

didn’t realize how long and stressful my commute would be—the traffic between here and my house is murder!”

Taken aback, Walt contacted the company’s HR department to clarify the job description for the AA position.

What he learned was that the description made available to applicants was, indeed, inadequate in a number of

ways. Chances are that frequent turnover in this AA position is draining Walt’s company of resources that could

be used for much more constructive purposes.

An accurate and complete job description is a powerful SHRM tool that costs little to produce and can save

a bundle in reduced turnover. While the realistic description may discourage some applicants (for example,

those who lack an affinity for calculations might not bother to apply for Walt’s AA position), those who follow

through with the application process are much more likely to be satisfied with the job once hired. In addition to

689

summarizing what the worker will actually be doing all day, here are some additional suggestions for writing an

effective job description:

• List the job requirements in bullet form so that job seekers can scan the posting quickly.

• Use common industry terms, which speak to knowledgeable job seekers.

• Avoid organization-specific terms and acronyms, which would confuse job seekers.

• Use meaningful job titles (not the internal job codes of the organization).

• Use key words taken from the list of common search terms (to maximize the chance that a job posting

appears on a job seeker’s search).

• Include information about the organization, such as a short summary and links to more detailed

information.

• Highlight special intangibles and unusual benefits of the job and workplace (e.g., flextime, travel, etc.).

• Specify the job’s location (and nearest large city) and provide links to local community pages (to entice job

seekers with quality-of-life information).

Tailoring Recruitment to Match Company CultureTailoring Recruitment to Match Company Culture

Managers who hire well don’t just hire for skills or academic background; they ask about the potential employee’s

philosophy on life or how the candidate likes to spend free time. These questions help the manager assess whether

the cultural fit is right. A company in which all work is done in teams needs team players, not just “A” students.

Ask questions like, “Do you have a personal mission statement? If not, what would it be if you wrote one today

(Pfeffer, 1998)?” to identify potential hires’ preferences.

At Google, for example, job candidates are asked questions like, “If you could change the world using Google’s

resources, what would you build (slater, 2008)?” Google wants employees who will think and act on a grand scale,

employees who will take on the challenges of their jobs, whatever their job may be. Take Josef DeSimone, who’s

Google’s executive chef. DeSimone, who’s worked everywhere from family-style restaurants to Michelin-caliber

ones, was amazed to learn that Google had 17 cafes for its employees. “Nobody changes the menu daily on this

scale,” he says. “It’s unheard of.” When he was hired, DeSimone realized, “Wow, you hire a guy who’s an expert

in food and let him run with it! You don’t get in his way or micromanage (Slater, 2008).” Google applies this

approach to all positions and lets employees run with the challenge.

Traditionally, companies have built a competitive advantage by focusing on what they have—structural

advantages such as economies of scale, a well-established brand, or dominance in certain market segments.

Companies such as Southwest Airlines, by contrast, see its people as their advantage: “Our fares can be matched;

our airplanes and routes can be copied. But we pride ourselves on our customer service,” said Sherry Phelps,

director of corporate employment. That’s why Southwest looks for candidates who generate enthusiasm and

leans toward extraverted personalities (Bruce, 1997; Freiberg & Freiberg, 2003; Hallowell, 1996; Heskett &

Hallowell, 1993; LaBarre, 1996; Labich, 1994; McNerney, 1996; Tomkins, 1996). Southwest hires for attitude.

Flight attendants have been known to sing the safety instructions, and pilots tell jokes over the public address

system.

690 • PRINCIPLES OF MANAGEMENT

Southwest Airlines makes clear right from the start the kind of people it wants to hire. For example, recruitment

ads showed Southwest founder Herb Kelleher dressed as Elvis and read: “Work in a Place Where Elvis Has Been

Spotted…The qualifications? It helps to be outgoing. Maybe even a bit off-center. And be prepared to stay awhile.

After all, we have the lowest employee turnover rate in the industry.” People may scoff or question why Southwest

indulges in such showy activities or wonder how an airline can treat its jobs so lightly. Phelps answers, “We do

take our work seriously. It’s ourselves that we don’t.” People who don’t have a humane, can-do attitude are fired.

Southwest has a probationary period during which it determines the compatibility of new hires with the culture.

People may be excellent performers, but if they don’t match the culture, they are let go. As Southwest’s founder

Kelleher once said, “People will write me and complain, ‘Hey, I got terminated or put on probation for purely

subjective reasons.’ And I’ll say, ‘Right! Those are the important reasons.’”

In many states, employees are covered under what is known as the at-will employment doctrine. At-will

employment is a doctrine of American law that defines an employment relationship in which either party can

break the relationship with no liability, provided there was no express contract for a definite term governing the

employment relationship and that the employer does not belong to a collective bargaining unit (i.e., a union)

(Rothstein, et. al., 1987). However, there are legal restrictions on how purely subjective the reasons for firing

can be. For instance, if the organization has written hiring and firing procedures and does not follow them in

selective cases, then those cases might give rise to claims of wrongful termination. Similarly, in situations where

termination is clearly systematic, for example, based on age, race, religion, and so on, wrongful termination can

be claimed.

Tools and Methods: Interviewing and TestingTools and Methods: Interviewing and Testing

To make good selection and placement decisions, you need information about the job candidate. Two time-tested

methods to get that information are testing and interviewing.

A detailed interview begins by asking the candidate to describe his work history and then getting as much

background on his most recent position (or the position most similar the open position). Ask about the candidate’s

responsibilities and major accomplishments. Then, ask in-depth questions about specific job situations. Called

situational interviews, these types of interviews can focus on past experience or future situations. For example,

experienced-based questions are “Tell me about a major initiative you developed and the steps you used to get it

adopted.” Or, “Describe a problem you had with someone and how you handled it.” In contrast, future-oriented

situation interview questions ask candidates to describe how they would handle a future hypothetical situation,

such as: “Suppose you came up with a faster way to do a task, but your team was reluctant to make the change.

What would you do in that situation?”

In addition to what is asked, it is also important that interviewers understand what they should not ask, largely

because certain questions lead to answers that may be used to discriminate. There are five particularly sensitive

areas. First, the only times you can ask about age are when it is a requirement of a job duty or you need to

determine whether a work permit is required. Second, it is rarely appropriate or legal to ask questions regarding

race, color, national origin, or gender. Third, although candidates may volunteer religious or sexually-orientated

information in an interview, you still need to be careful not to discriminate. Ask questions that are relevant to

work experience or qualifications. Fourth, firms cannot discriminate for health or disabilities; you may not ask

about smoking, health-related questions, or disabilities in an interview. Finally, you may not ask questions about

16.5 EFFECTIVE SELECTION AND PLACEMENT STRATEGIES • 691

marital status, children, personal life, pregnancy, or arrest record. These kinds of questions could be tempting to

ask if you are interviewing for a position requiring travel; however, you can only explain the travel requirements

and confirm that the requirements are acceptable.

In addition to interviews, many employers use testing to select and place job applicants. Any tests given to

candidates must be job related and follow guidelines set forth by the Equal Opportunity Employment Commission

to be legal. For the tests to be effective, they should be developed by reputable psychologists and administered

by professionally qualified personnel who have had training in occupations testing in an industrial setting. The

rationale behind testing is to give the employer more information before making the selection and placement

decision—information vital to assessing how well a candidate is suited to a particular job. Most preemployment

assessment tests measure thinking styles, behavioral traits, and occupational interests. The results are available

almost immediately after a candidate completes the roughly hour-long questionnaire. Thinking styles tests can tell

the potential employer how fast someone can learn new things or how well he or she can verbally communicate.

Behavioral traits assessments measure energy level, assertiveness, sociability, manageability, and attitude. For

example, a high sociability score would be a desirable trait for salespeople (Mrosko, 2006).

International Staffing and PlacementInternational Staffing and Placement

In our increasingly global economy, managers need to decide between using expatriates or hiring locals when

staffing international locations. On the surface, this seems a simple choice between the firm-specific expertise of

the expatriate and the cultural knowledge of the local hire. In reality, companies often fail to consider the high

probability and high cost of expatriates failing to adapt and perform in their international assignments.

692 • PRINCIPLES OF MANAGEMENT

Figure 16.7

Living and working in another place, such as São Paulo, Brazil, can be exciting, rewarding, and

challenging.

Luiz Henrique Varga Assunção – Lua em São Paulo – CC BY-NC-ND 2.0.

For example, cultural issues can easily create misunderstandings between expatriate managers and employees,

suppliers, customers, and local government officials. At an estimated cost of $200,000 per failed expatriate,

international assignment decisions are often made too lightly in many companies. The challenge is to overcome

the natural tendency to hire a well-known, corporate insider over an unknown local at the international site. Here

are some indications to use to determine whether an expatriate or a local hire would be best.

Managers may want to choose an expatriate when:

• Company-specific technology or knowledge is important.

• Confidentiality in the staff position is an issue.

• There is a need for speed (assigning an expatriate is usually faster than hiring a local).

• Work rules regarding local workers are restrictive.

• The corporate strategy is focused on global integration/

Managers may want to staff the position with a local hire when:

• The need to interact with local customers, suppliers, employees, or officials is paramount.

• The corporate strategy is focused on multidomestic/market-oriented operations.

• Cost is an issue (expatriates often bring high relocation/travel costs).

16.5 EFFECTIVE SELECTION AND PLACEMENT STRATEGIES • 693

• Immigration rules regarding foreign workers are restrictive.

• There are large cultural distances between the host country and candidate expatriates (Weems, 1998).

Key Takeaway

Effective selection and placement means finding and hiring the right employees for your organization andthen putting them into the jobs for which they are best suited. Providing an accurate and complete jobdescription is a key step in the selection process. An important determination is whether the candidate’spersonality is a good fit for the company’s culture. Interviewing is a common selection method. Situationalinterviews ask candidates to describe how they handled specific situations in the past (experience-based situational interviews) and how they would handle hypothetical questions in the future (future-oriented situational interviews.) Other selection tools include cognitive tests, personality inventories, andbehavioral traits assessments. Specific personalities may be best suited for positions that require sales,teamwork, or entrepreneurship, respectively. In our increasingly global economy, managers need to decidebetween using expatriates or hiring locals when staffing international locations.

Exercises

1. What kind of information would you include in a job description?

2. Do you think it is important to hire employees who fit into the company culture? Why or whynot?

3. List questions that you would ask in a future-oriented situational interview.

4. What requirements must personnel tests meet?

5. If you were hiring to fill a position overseas, how would you go about selecting the bestcandidate?

ReferencesReferences

Bruce, A. (1997, March). Southwest: Back to the FUNdamentals. HR Focus, 74(3), 11.

Freiberg, K., & Freiberg, J. (2003). Nuts! Southwest Airlines’s crazy recipe for business and personal success.

Austin, TX: Bard.

Hallowell, R. (1996, Winter). Southwest Airlines: A case study linking employee needs satisfaction and

organizational capabilities to competitive advantage. Human Resource Management, 35(4), 513–529.

Heskett J. L., & Hallowell, R. (1993). Southwest Airlines—1993 (A). Harvard Business School Case; Southwest

Airlines’ Herb Kelleher: Unorthodoxy at work. (1995, January). Management Review, 2–9.

LaBarre, P. (1996, February 5). Lighten up! Blurring the line between fun and work not only humanizes

organizations but strengthens the bottom line. Industry Week, 245(3), 53–67.

694 • PRINCIPLES OF MANAGEMENT

Labich, K. (1994, May 2). Is Herb Kelleher America’s best CEO? Fortune, 44–45.

McNerney, D. J. (1996 August). Employee motivation: creating a motivated workforce. HR Focus, 73(8), 1.

Mrosko, T. (2006, August). The personnel puzzle: Preemployment testing can help your bottom line. Inside

Business, 8(8), 60–73.

Pfeffer, J. (1998). The human equation. Boston: Harvard Business School Press.

Rothstein, M. A., Knapp, Andria S., & Liebman, Lance. (1987). Cases and materials on employment law (p. 738).

New York: Foundation Press.

Slater, C. (2008, March). Josef DeSimone—executive chef. Fast Company, 46–48.

Slater, C. (2008, March). The faces and voices of Google. Fast Company, 37–45.

Tomkins, R. (1996, November 11). HR: The seriously funny airline. Financial Times (33137), 14, A1–A5.

Weems, Rebecca E. (1998). Ethnocentric staffing and international assignments: a transaction cost theory

approach. Presentation at the Academy of Management Conference, August 9–12.

16.5 EFFECTIVE SELECTION AND PLACEMENT STRATEGIES • 695

16.6 The Roles of Pay Structure and Pay for Performance

Learning Objectives

1. Explain the factors to be considered when setting pay levels.

2. Understand the value of pay for performance plans.

3. Discuss the challenges of individual versus team-based pay.

Pay can be thought of in terms of the “total reward” that includes an individual’s base salary, variable pay, share

ownership, and other benefits. A bonus, for example, is a form of variable play. A bonus is a one-time cash

payment, often awarded for exceptional performance. Providing employees with an annual statement of all these

benefits they receive can help them understand the full value of what they are getting (Anderson, 2007).

Pay System ElementsPay System Elements

As summarized in the following table, pay can take the form of direct or indirect compensation. Nonmonetary

pay can include any benefit an employee receives from an employer or job that does not involve tangible value.

This includes career and social rewards, such as job security, flexible hours and opportunity for growth, praise and

recognition, task enjoyment, and friendships. Direct pay is an employee’s base wage. It can be an annual salary,

hourly wage, or any performance-based pay that an employee receives, such as profit-sharing bonuses.

Table 16.1 Elements of a Pay System

696

Nonmonetary pay Includes benefits that do not involve tangible value.

Direct pay Employee’s base wage

Indirect pay Everything from legally required programs to health insurance, retirement, housing, etc.

Basic pay Cash wage paid to the employee. Because paying a wage is a standard practice, the competitive advantage can onlycome by paying a higher amount.

Incentive pay A bonus paid when specified performance objectives are met. May inspire employees to set and achieve a higherperformance level and is an excellent motivator to accomplish goals.

Stock options A right to buy a piece of the business that may be given to an employee to reward excellent service. An employee whoowns a share of the business is far more likely to go the extra mile for the operation.

Bonuses A gift given occasionally to reward exceptional performance or for special occasions. Bonuses can show an employerappreciates his or her employees and ensures that good performance or special events are rewarded.

Indirect compensation is far more varied, including everything from legally required public protection programs

such as social security to health insurance, retirement programs, paid leave, child care, or housing. Some indirect

compensation elements are required by law: social security, unemployment, and disability payments. Other

indirect elements are up to the employer and can offer excellent ways to provide benefits to the employees and the

employer as well. For example, a working parent may take a lower-paying job with flexible hours that will allow

him or her to be home when the children get home from school. A recent graduate may be looking for stable work

and an affordable place to live. Both of these individuals have different needs and, therefore, would appreciate

different compensation elements.

Setting Pay LevelsSetting Pay Levels

When setting pay levels for positions, managers should make sure that the pay level is fair relative to what other

employees in the position are being paid. Part of the pay level is determined by the pay level at other companies.

If your company pays substantially less than others, it’s going to be the last choice of employment unless it

offers something overwhelmingly positive to offset the low pay, such as flexible hours or a fun, congenial work

atmosphere. Besides these external factors, companies conduct a job evaluation to determine the internal value

of the job—the more vital the job to the company’s success, the higher the pay level. Jobs are often ranked

alphabetically—“A” positions are those on which the company’s value depends, “B” positions are somewhat

less important in that they don’t deliver as much upside to the company, and “C” positions are those of least

importance—in some cases, these are outsourced.

The most vital jobs to one company’s success may not be the same as in other companies. For example,

information technology companies may put top priority on their software developers and programmers, whereas

for retailers such as Nordstrom, the “A” positions are those frontline employees who provide personalized service.

For an airline, pilots would be a “B” job because, although they need to be well trained, investing further in

their training is unlikely to increase the airline’s profits. “C” positions for a retailer might include back office bill

processing, while an information technology company might classify customer service as a “C” job.

When setting reward systems, it’s important to pay for what the company actually hopes to achieve. Steve Kerr,

vice president of corporate management at General Electric, talks about the common mistakes that companies

make with their reward systems, such as saying they value teamwork but only rewarding individual effort.

Similarly, companies say they want innovative thinking or risk taking, but they reward people who “make the

16.6 THE ROLES OF PAY STRUCTURE AND PAY FOR PERFORMANCE • 697

numbers (Kerr, 1995).” If companies truly want to achieve what they hope for, they need payment systems aligned

with their goals. For example, if retention of star employees is important to your company, reward managers who

retain top talent. At Pepsico, for instance, one-third of a manager’s bonus is tied directly to how well the manager

did at developing and retaining employees. Tying compensation to retention makes managers accountable (Field,

2008).

Figure 16.8

Regardless of country, pay is a critical managerial control.

Moyan Brenn – Money – CC BY 2.0.

Pay for PerformancePay for Performance

As its name implies, pay for performance ties pay directly to an individual’s performance in meeting specific

business goals or objectives. Managers (often together with the employees themselves) design performance targets

to which the employee will be held accountable. The targets have accompanying metrics that enable employees

and managers to track performance. The metrics can be financial indicators, or they can be indirect indicators such

as customer satisfaction or speed of development. Pay-for-performance schemes often combine a fixed base salary

with a variable pay component (such as bonuses or stock options) that vary with the individual’s performance.

Innovative Employee Recognition ProgramsInnovative Employee Recognition Programs

In addition to regular pay structures and systems, companies often create special programs that reward exceptional

employee performance. For example, the financial software company Intuit, Inc., instituted a program called

Spotlight. The purpose of Spotlight is to “spotlight performance, innovation and service dedication (Hoyt, 2008).”

Unlike regular salaries or year-end bonuses, spotlight awards can be given on the spot for specific behavior that

meets the reward criteria, such as filing a patent, inventing a new product, or meeting a milestone for years of

698 • PRINCIPLES OF MANAGEMENT

service. Rewards can be cash awards of $500 to $3,000 and can be made by managers without high-level approval.

In addition to cash and noncash awards, two Intuit awards feature a trip with $500 in spending money (How To

Manage Human Resources, 2008).

Pay Structures for Groups and TeamsPay Structures for Groups and Teams

So far, we have discussed pay in terms of individual compensation, but many employers also use compensation

systems that reward all of the organization’s employees as a group or various groups and teams within the

organization. Let’s examine some of these less traditional pay structures.

GainsharingGainsharing

Sometimes called profit sharing, gainsharing is a form of pay for performance. In gainsharing, the organization

shares the financial gains with employees. Employees receive a portion of the profit achieved from their efforts.

How much they receive is determined by their performance against the plan. Here’s how gainsharing works:

First, the organization must measure the historical (baseline) performance. Then, if employees help improve

the organization’s performance on those measures, they share in the financial rewards achieved. This sharing is

typically determined by a formula.

The effectiveness of a gainsharing plan depends on employees seeing a relationship between what they do and

how well the organization performs. The larger the size of the organization, the harder it is for employees to see the

effect of their work. Therefore, gainsharing plans are more effective in companies with fewer than 1,000 people

(Lawler, 1992). Gainsharing success also requires the company to have good performance metrics in place so that

employees can track their process. The gainsharing plan can only be successful if employees believe and see that

if they perform better, they will be paid more. The pay should be given as soon as possible after the performance

so that the tie between the two is established.

When designing systems to measure performance, realize that performance appraisals need to focus on

quantifiable measures. Designing these measures with input from the employees helps make the measures clear

and understandable to employees and increases their buy-in that the measures are reasonable.

Team-Based PayTeam-Based Pay

Many managers seek to build teams, but face the question of how to motivate all the members to achieve the

team’s goals. As a result, team-based pay is becoming increasingly accepted. In 1992, only 3% of companies had

team-based pay. By 1996, 9% did, and another 39% were planning such systems (Flannery, 1996). With increasing

acceptance and adoption come different choices and options of how to structure team-based pay. One way to

structure the pay is to first identify the type of team you have—parallel, work, project, or partnership—and then

choose the pay option that is most appropriate to that team type. Let’s look at each team type in turn and the pay

structures best suited for each.

Parallel teams are teams that exist alongside (parallel to) an individual’s daily job. For example, a person may be

working in the accounting department but also be asked to join a team on productivity. Parallel teams are often

interdepartmental, meet part time, and are formed to deal with a specific issue. The reward for performance on

16.6 THE ROLES OF PAY STRUCTURE AND PAY FOR PERFORMANCE • 699

this team would typically be a merit increase or a recognition award (cash or noncash) for performance on the

team.

A project team is likewise a temporary team, but it meets full time for the life of the project. For example, a team

may be formed to develop a new project and then disband when the new product is completed. The pay schemes

appropriate for this type of team include profit sharing, recognition rewards, and stock options. Team members

evaluate each other’s performance.

A partnership team is formed around a joint venture or strategic alliance. Here, profit sharing in the venture is the

most common pay structure. Finally, with the work team, all individuals work together daily to accomplish their

jobs. Here, skill-based pay and gainsharing are the payment schemes of choice, with team members evaluating

one another’s performance.

Pay Systems That Reward Both Team and Individual PerformancePay Systems That Reward Both Team and Individual Performance

There are two main theories of how to reward employees. Nancy Katz (Katz, 1998) characterized the theories

as two opposing camps. The first camp advocates rewarding individual performance, through plans such as

commissions-sales schemes and merit-based-pay. The claim is that this will increase employees’ energy, drive,

risk taking, and task identification. The disadvantages of rewarding individual performance are that employees

will cooperate less, that high performers may be resented by others in the corporation, and that low performers

may try to undermine top performers.

The second camp believes that organizations should reward team performance, without regard for individual

accomplishment. This reward system is thought to bring the advantages of increased helping and cooperation,

sharing of information and resources, and mutual-respect among employees. The disadvantages of team-based

reward schemes are that they create a lack of drive, that low performers are “free riders,” and that high performers

may withdraw or become tough cops.

Katz sought to identify reward schemes that achieve the best of both worlds. These hybrid pay systems would

reward individual and team performance, promoting excellence at both levels. Katz suggested two possible hybrid

reward systems. The first system features a base rate of pay for individual performance that increases when the

group reaches a target level of performance. In this reward system, individuals have a clear pay-for-performance

incentive, and their rate of pay increases when the group as a whole does well. In the second hybrid, the pay-for-

performance rate also increases when a target is reached. Under this reward system, however, every team member

must reach a target level of performance before the higher pay rate kicks in. In contrast with the first hybrid,

this reward system clearly incentivizes the better performers to aid poorer performers. Only when the poorest

performer reaches the target does the higher pay rate kick in.

Key Takeaway

Compensation plans reward employees for contributing to company goals. Pay levels should reflect thevalue of each type of job to the company’s overall success. For some companies, technical jobs are themost vital, whereas for others frontline customer service positions determine the success of the company

700 • PRINCIPLES OF MANAGEMENT

against its competitors. Pay-for-performance plans tie an individual’s pay directly to his or her abilityto meet performance targets. These plans can reward individual performance or team performance or acombination of the two.

Exercises

1. What factors would you consider when setting a pay level for a particular job?

2. What might be the “A” level positions in a bank?

3. If you were running a business decision, would you implement a pay-for-performance scheme?Why or why not?

4. Describe the difference between a base salary, a bonus, and a gainsharing plan.

5. Discuss the advantages and disadvantages of rewarding individual versus team performance.

ReferencesReferences

Anderson, I. (2007, August 1). Human resources: War or revolution? Mondaq Business Briefing, p. n.a.

Field, A. (2008, June). Do your starts see a reason to stay? Harvard Management Update, 5–6.

Flannery, T. (1996). People, performance, and pay (p. 117). New York: Free Press.

How to Manage Human Resources, Intuit spotlights strategic importance of global employee recognition. (2008,

August 15). Retrieved January 30, 2009, from http://howtomanagehumanresources.blogspot.com/2008/08/intuit-

spotlights-strategic-importance.html.

Hoyt, David. (2008, March). Employee recognition at Intuit; and Spotlight. Global Strategic Recognition

Program. Stanford Graduate School of Business Case Study. Retrieved January 30, 2009, from

http://www.globoforce.com/corporate/eng/our-customers/case-studies/

intuit.html?KeepThis=true&TB_iframe=true&height=400&width=600.

Katz, N. R. (1998). Promoting a healthy balance between individual achievement and team success: The impact of

hybrid reward systems. Presented at the Do Rewards Make a Difference? session at the Academy of Management

Conference, August 9–12.

Kerr, S. (1995). On the folly of rewarding for A, while hoping for B. Academy of Management Executive, 9(1),

25–37.

Lawler, E. (1992). The ultimate advantage. San Francisco: Jossey-Bass.

16.6 THE ROLES OF PAY STRUCTURE AND PAY FOR PERFORMANCE • 701

16.7 Designing a High-Performance Work System

Learning Objectives

1. Define a high-performance work system.

2. Describe the role of technology in HR.

3. Describe the use of HR systems to improve organizational performance.

4. Describe succession planning and its value.

Now it is your turn to design a high-performance work system (HPWS). HPWS is a set of management practices

that attempt to create an environment within an organization where the employee has greater involvement and

responsibility. Designing a HPWS involves putting all the HR pieces together. A HPWS is all about determining

what jobs a company needs done, designing the jobs, identifying and attracting the type of employee needed to fill

the job, and then evaluating employee performance and compensating them appropriately so that they stay with

the company.

e-HRMe-HRM

702

Figure 16.9

Computers and the Internet are revolutionizing HR practices.

PublicDomainPictures – Pixabay – CC0 public domain.

At the same time, technology is changing the way HR is done. The electronic human resource management (e-

HRM) business solution is based on the idea that information technologies, including the Web, can be designed

for human resources professionals and executive managers who need support to manage the workforce, monitor

changes, and gather the information needed in decision making. At the same time, e-HRM can enable all

employees to participate in the process and keep track of relevant information. For instance, your place of work

provides you with a Web site where you can login; get past and current pay information, including tax forms

(i.e., 1099, W-2, and so on); manage investments related to your 401(k); or opt for certain medical record-keeping

services.

More generally, for example, many administrative tasks are being done online, including:

• providing and describing insurance and other benefit options

• enrolling employees for those benefits

• enrolling employees in training programs

• administering employee surveys to gauge their satisfaction

Many of these tasks are being done by employees themselves, which is referred to as employee self-service. With

all the information available online, employees can access it themselves when they need it.

Part of an effective HR strategy is using technology to reduce the manual work performance by HR employees.

Simple or repetitive tasks can be performed self-service through e-HRM systems that provide employees with

16.7 DESIGNING A HIGH-PERFORMANCE WORK SYSTEM • 703

information and let them perform their own updates. Typical HR services that can be formed in an e-HRM system

include:

• Answer basic compensation questions.

• Look up employee benefits information.

• Process candidate recruitment expenses.

• Receive and scan resumes into recruiting software.

• Enroll employees in training programs.

• Maintain training catalog.

• Administer tuition reimbursement.

• Update personnel files.

Organizations that have invested in e-HRM systems have found that they free up HR professionals to spend

more time on the strategic aspects of their job. These strategic roles include employee development, training, and

succession planning.

The Value of High-Performance Work SystemsThe Value of High-Performance Work Systems

Employees who are highly involved in conceiving, designing, and implementing workplace processes are more

engaged and perform better. For example, a study analyzing 132 U.S. manufacturing firms found that companies

using HPWSs had significantly higher labor productivity than their competitors. The key finding was that when

employees have the power to make decisions related to their performance, can access information about company

costs and revenues, and have the necessary knowledge, training, and development to do their jobs—and are

rewarded for their efforts—they are more productive (Konrad, 2006).

For example, Mark Youndt and his colleagues (Youndt, et. al., 1996) demonstrated that productivity rates were

significantly higher in manufacturing plants where the HRM strategy focused on enhancing human capital. Delery

and Doty found a positive relationship between firm financial performance and a system of HRM practices

(Delery & Doty, 1996). Huselid, Jackson, and Schuler found that increased HRM effectiveness corresponded to

an increase in sales per employee, cash flow, and company market value (Huselid, et. al., 1997).

HPWS can be used globally to good result. For example, Fey and colleagues studied 101 foreign-based firms

operating in Russia and found significant linkages between HRM practices, such as incentive-based

compensation, job security, employee training, and decentralized decision making, and subjective measures of

firm performance (Fey, et. al., 2000).

Improving Organizational PerformanceImproving Organizational Performance

Organizations that want to improve their performance can use a combination of HR systems to get these

improvements. For example, performance measurement systems help underperforming companies improve

performance. The utility company Arizona Public Service used a performance measurement system to rebound

from dismal financial results. The company developed 17 “critical success indicators,” which it measures

704 • PRINCIPLES OF MANAGEMENT

regularly and benchmarks against the best companies in each category. Of the 17, nine were identified as “major

critical success indicators.” They are:

• cost to produce kilowatt hour

• customer satisfaction

• fossil plants availability

• operations and maintenance expenditures

• construction expenditures

• ranking as corporate citizen in Arizona

• safety all-injury incident rate

• nuclear performance

• shareholder value return on assets

Each department sets measurable goals in line with these indicators, and a gainsharing plan rewards employees

for meeting the indicators.

In addition, companies can use reward schemes to improve performance. Better-performing firms tend to invest

in more sophisticated HRM practices, which further enhances organizational performance (Shih, et. al., 2006).

Currently, about 20% of firms link employee compensation to the firm’s earnings. They use reward schemes such

as employee stock ownership plans, gainsharing, and profit sharing. This trend is increasing.

Researcher Michel Magnan wanted to find out: Is the performance of an organization with a profit-sharing plan

better than other firms? And, does adoption of a profit-sharing plan lead to improvement in an organization’s

performance?

The reasons profit-sharing plans would improve organizational performance go back to employee motivation

theory. A profit-sharing plan will likely encourage employees to monitor one another’s behavior because “loafers”

would erode the rewards for everyone. Moreover, profit sharing should lead to greater information sharing, which

increases the productivity and flexibility of the firm.

Magnan studied 294 Canadian credit unions in the same region (controlling for regional and sector-specific

economic effects). Of the firms studied, 83 had profit sharing plans that paid the bonus in full at the end of the

year. This meant that employees felt the effect of the organizational performance reward immediately, so it had

a stronger motivational effect than a plan that put profits into a retirement account, where the benefit would be

delayed (and essentially hidden) until retirement.

Magnan’s results showed that firms with profit-sharing plans had better performance on most facets of

organizational performance. They had better performance on asset growth, market capitalization, operating costs,

losses on loans, and return on assets than firms without profit-sharing plans. The improved performance was

especially driven by activities where employee involvement had a quick, predictable effect on firm performance,

such as giving loans or controlling costs.

Another interesting finding was that when firms adopted a profit-sharing plan, their organizational performance

16.7 DESIGNING A HIGH-PERFORMANCE WORK SYSTEM • 705

went up. Profit-sharing plans appear to be a good turnaround tool because the firms that showed the greatest

improvement were those that had not been performing well before the profit-sharing plan. Even firms that had

good performance before adopting a profit-sharing plan had better performance after the profit-sharing plan

(Magnan & St-Ogne, 1998).

Succession PlanningSuccession Planning

Succession planning is a process whereby an organization ensures that employees are recruited and developed

to fill each key role within the company. In a recent survey, HR executives and non-HR executives were asked

to name their top human capital challenge. Nearly one-third of both executive groups cited succession planning

(Buhler, 2008), but less than 20% of companies with a succession plan addressed nonmanagement positions.

Slightly more than 40% of firms didn’t have a plan in place.

Looking across organizations succession planning takes a number of forms (including no form at all). An absence

of succession planning should be a red flag, since the competitive advantage of a growing percentage of firms is

predicated on their stock of human capital and ability to manage such capital in the future. One of the overarching

themes of becoming better at succession is that effective organizations become much better at developing and

promoting talent from within. The figure “Levels of Succession Planning” summarizes the different levels that

firms can work toward.

Levels of Succession PlanningLevels of Succession Planning

• Level 1: No planning at all.

• Level 2: Simple replacement plan. Typically the organization has only considered what it will do ifkey individuals leave or become debilitated.

• Level 3: The company extends the replacement plan approach to consider lower-level positions,even including middle managers.

• Level 4: The company goes beyond the replacement plan approach to identify the competencies itwill need in the future. Most often, this approach is managed along with a promote-from-withininitiative.

• Level 5: In addition to promoting from within, the organization develops the capability to identifyand recruit top talent externally. However, the primary source of successors should be from within,unless there are key gaps where the organization does not have key capabilities.

Dow Chemical exemplifies some best practices for succession planning:

• Dow has a comprehensive plan that addresses all levels within the organization, not just executive levels.

• CEO reviews the plan, signaling its importance.

• Managers regularly identify critical roles in the company and the competencies needed for success in those

roles.

• Dow uses a nine-box grid for succession planning, plotting employees along the two dimensions of

706 • PRINCIPLES OF MANAGEMENT

potential and performance.

• High potential employees are recommended for training and development, such as Dow Academy or an

MBA.

Interpublic Group, a communications and advertising agency, established a formal review process in 2005 in

which the CEOs of each Interpublic business would talk with the CEO about the leaders in their organization. The

discussions span the globe because half of the company’s employees work outside the United States. A key part

of the discussions is to then meet with the individual employees to tell them about the opportunities available to

them. “In the past, what I saw happen was that an employee would want to leave and then all of a sudden they

hear about all of the career opportunities available to them,” he says. “Now I want to make sure those discussions

are happening before anyone talks about leaving,” said Timothy Sompolski, executive vice president and chief

human resources officer at Interpublic Group (Marquez, 2007).

The principles of strategic human resource management and high-performance work systems apply to nonprofit

enterprises as well as for-profit companies, and the benefits of good HR practices are just as rewarding. When

it comes to succession planning, nonprofits face a particularly difficult challenge of attracting workers to a field

known for low pay and long hours. Often, the people attracted to the enterprise are drawn by the cause rather than

by their own aspirations for promotion. Thus, identifying and training employees for leadership positions is even

more important. What’s more, the talent shortage for nonprofits will be even more acute: A study by the Meyer

Foundation and CompassPoint Nonprofit Service found that 75% of nonprofit executive directors plan to leave

their jobs by 2011 (Damast, 2008).

Key Takeaway

A high-performance work system unites the social and technical systems (people and technology) andaligns them with company strategy. It ensures that all the interrelated parts of HR are aligned with oneanother and with company goals. Technology and structure supports employees in their ability to applytheir knowledge and skills to executing company strategy. HR decisions, such as the type of compensationmethod chosen, improve performance for organizations and enterprises of all types.

Exercises

1. What are some ways in which HR can improve organizational performance?

2. What is the most important aspect of high performance work systems? Name three benefits ofhigh performance work systems.

3. How does e-HRM help a company?

4. If you were designing your company’s succession planning program, what guidelines would yousuggest?

16.7 DESIGNING A HIGH-PERFORMANCE WORK SYSTEM • 707

ReferencesReferences

Buhler, P. M. (2008, March). Managing in the new millennium; succession planning: not just for the c suite.

Supervision, 69(3), 19.

Damast, A. (2008, August 11). Narrowing the nonprofit gap. BusinessWeek, p. 58.

Delery, J., & Doty, H. (1996). Modes of theorizing in strategic human resource management: Tests of

universalistic, contingency, and configurational performance predictions. Academy of Management Journal 39,

802–835.

Fey, C., Bjorkman, I., & Pavlovskaya, A. (2000). The effect of human resource management practices on firm

performance in Russia. International Journal of Human Resource Management, 11, 1–18.

Huselid, M., Jackson, S., and Schuler, R. (1997). Technical and strategic human resource management

effectiveness as determinants of firm performance. Academy of Management Journal 40, 171–188.

Konrad, A. M. (2006, March/April). Engaging employees through high-involvement work practices. Ivey

Business Journal Online, 1–6. Retrieved January 30, 2009, from http://www.iveybusinessjournal.com.

Magnan, M., & St-Onge, S. (1998). Profit sharing and firm performance: A comparative and longitudinal analysis.

Presented at the Academy of Management Conference, August 9–12.

Marquez, J. (2007, September 10). On the front line; A quintet of 2006’s highest-paid HR leaders discuss how they

are confronting myriad talent management challenges as well as obstacles to being viewed by their organizations

as strategic business partners. Workforce Management, 86(5), 22.

Shih, H.-A., Chiang, Y.-H., & Hsu, C.-C. (2006, August). Can high performance work systems really lead to better

performance? International Journal of Manpower, 27(8), 741–763.

Youndt, M., Snell, S., Dean, J., & Lepak, K. (1996). Human resource management, manufacturing strategy, and

firm performance. Academy of Management Journal, 39, 836–866.

708 • PRINCIPLES OF MANAGEMENT

16.8 Tying It All Together—Using the HR BalancedScorecard to Gauge and Manage Human Capital, IncludingYour Own

Learning Objectives

1. Describe the Balanced Scorecard method and how it can be applied to HR.

2. Discuss what is meant by “human capital.”

3. Understand why metrics are important to improving company performance.

4. Consider how your human capital might be mapped on an HR Balanced Scorecard.

You may already be familiar with the Balanced Scorecard, a tool that helps managers measure what matters to

a company. Developed by Robert Kaplan and David Norton, the Balanced Scorecard helps managers define the

performance categories that relate to the company’s strategy. The managers then translate those categories into

metrics and track performance on those metrics. Besides traditional financial measures and quality measures,

companies use employee performance measures to track their people’s knowledge, skills, and contribution to the

company (Kaplan & Norton, 1996).

The employee performance aspects of Balanced Scorecards analyze employee capabilities, satisfaction, retention,

and productivity. Companies also track whether employees are motivated (for example, the number of suggestions

made and implemented by employees) and whether employee performance goals are aligned with company goals.

Applying the Balanced Scorecard Method to HRApplying the Balanced Scorecard Method to HR

Because the Balanced Scorecard focuses on the strategy and metrics of the business, Mark Huselid and his

colleagues took the Balanced Scorecard concept a step further and developed the HR and Workforce Scorecard

to provide framework specific to HR. According to Huselid, the Workforce Scorecard identifies and measures

the behaviors, skills, mind-sets, and results required for the workforce to contribute to the company’s success.

709

Specifically, as summarized in the figure, the Workforce Scorecard has four key sequential elements (Huselid, et.

al., 2005):

• Workforce Mind-Set and Culture: First, does the workforce understand the strategy, embrace it, and does it

have the culture needed to support strategy execution?

• Workforce Competencies: Second, does the workforce, especially in the strategically important or “A”

positions, have the skills it needs to execute strategy? (“A” positions are those job categories most vital to

the company’s success.)

• Leadership and Workforce Behaviors: Third, are the leadership team and workforce consistently behaving

in a way that will lead to attaining the company’s key strategic objectives?

• Workforce Success: Fourth, has the workforce achieved the key strategic objectives for the business? If the

organization can answer “yes” to the first three elements, then the answer should be yes here as well

(Huselid, et. al., 2005).

Figure 16.10

The HR Balanced Scorecard bridges HR best practices and the firm’s comprehensive Balanced Scorecard.

Human CapitalHuman Capital

Implementing the HR scorecard requires a change in perspective, from seeing people as a cost to seeing people as

the company’s most important asset to be managed—human capital. According to the Society of Human Resource

Management’s Research Quarterly, “A company’s human capital asset is the collective sum of the attributes,

life experience, knowledge, inventiveness, energy and enthusiasm that its people choose to invest in their work

710 • PRINCIPLES OF MANAGEMENT

(Weatherly, 2003).” As you can tell by the definition, such an asset is difficult to measure because it is intangible,

and factors like “inventiveness” are subjective and open to interpretation. The challenge for managers, then, is

to develop measurement systems that are more rigorous and provide a frame of reference. The metrics can range

from activity-based (transactional) metrics to strategic ones. Transactional metrics are the easiest to measure and

include counting the number of new people hired, fired, transferred, and promoted. The measures associated with

these include the cost of each new hire, the length of time and cost associated with transferring an employee, and

so forth. Typical ratios associated with transactional metrics include the training cost factor (total training cost

divided by the employees trained) and training cost percentage (total training cost divided by operating expense)

(Weatherly, 2003). But, these transactional measures don’t get at the strategic issues, namely, whether the right

employees are being trained and whether they are remembering and using what they learned. Measuring training

effectiveness requires not only devising metrics but actually changing the nature of the training.

The Bank of Montreal has taken this step. “What we’re trying to do at the Bank of Montreal is to build learning

into what it is that people are doing,” said Jim Rush of the Bank of Montreal’s Institute for Learning. “The

difficulty with training as we once conceived it is that you’re taken off your job, you’re taken out of context,

you’re taken away from those things that you’re currently working on, and you go through some kind of training.

And then you’ve got to come back and begin to apply that. Well, you walk back to that environment and it hasn’t

changed. It’s not supportive or conducive to you behaving in a different kind of way, so you revert back to the way

you were, very naturally.” To overcome this, the bank conducts training such that teams bring in specific tasks

on which they are working, so that they learn by doing. This removes the gap between learning in one context

and applying it in another. The bank then looks at performance indices directly related to the bottom line. “If we

take an entire business unit through a program designed to help them learn how to increase the market share of a

particular product, we can look at market share and see if it improved after the training,” Rush said (Rush, 1995).

Motorola has adopted a similar approach, using action learning in its Senior Executives Program. Action learning

teams are assigned a specific project by Motorola’s CEO and are responsible for implementing the solutions they

design. This approach not only educates the team members but also lets them implement the ideas, so they’re in a

position to influence the organization. In this way, the training seamlessly supports Motorola’s goals.

As we can see in these examples, organizations need employees to apply the knowledge they have to activities

that add value to the company. In planning and applying human capital measures, managers should use both

retrospective (lagging) and prospective (leading) indicators. Lagging indicators are those that tell the company

what it has accomplished (such as the Bank of Montreal’s documenting the effect that training had on a business

unit’s performance). Leading indicators are forecasts that help an organization see where it is headed. Leading

indicators include employee learning and growth indices (Weatherly, 2003).

The PayoffThe Payoff

Given the complexity of what we’ve just discussed, some managers may be inclined to ask, “Why bother doing

all this?” Research by John Lingle and William Schiemann provides a clear answer: Companies that make

a concerted effort to measure intangibles such as employee performance, innovation, and change in addition

to measuring financial measures perform better. Lingle and Schiemann examined how executives measured

six strategic performance areas: financial performance, operating efficiency, customer satisfaction, employee

performance, innovation and change, and community/environment issues. To evaluate how carefully the measures

16.8 TYING IT ALL TOGETHER—USING THE HR BALANCED SCORECARD TO GAUGE AND MANAGE HUMAN CAPITAL,INCLUDING YOUR OWN • 711

were tracked, the researchers asked the executives, “How highly do you value the information in each strategic

performance area?” and “Would you bet your job on the quality of the information on each of these areas?”

The researchers found that the companies that paid the closest attention to the metrics and had the most credible

information were the ones identified as industry leaders over the previous three years (74% of measurement-

managed companies compared with 44% of others) and reported financial performance in the top one-third of

their industry (83% compared with 52%).

The scorecard is vital because most organizations have much better control and accountability over their raw

materials than they do over their workforce. For example, a retailer can quickly identify the source of a bad

product, but the same retailer can’t identify a poor-quality manager whose negative attitude is poisoning morale

and strategic execution (Becker & Huselid, 2006).

Applying the Balanced Scorecard Method to Your Human CapitalApplying the Balanced Scorecard Method to Your Human Capital

Let’s translate the HR scorecard to your own Balanced Scorecard of human capital. As a reminder, the idea behind

the HR scorecard is that if developmental attention is given to each area, then the organization will be more likely

to be successful. In this case, however, you use the scorecard to better understand why you may or may not be

effective in your current work setting. Your scorecard will comprise four sets of answers and activities.

1. What is your mind-set and values? Do you understand the organization’s strategy and embrace it, and

do you know what to do in order to implement the strategy? If you answered “no” to either of these

questions, then you should consider investing some time in learning about your firm’s strategy. For the

second half of this question, you may need additional coursework or mentoring to understand what it takes

to move the firm’s strategy forward.

2. What are your work-related competencies? Do you have the skills and abilities to get your job done?

If you have aspirations to key positions in the organization, do you have the skills and abilities for those

higher roles?

3. What are the leadership and workforce behaviors? If you are not currently in a leadership position, do

you know how consistently your leaders are behaving with regard to the achievement of strategic

objectives? If you are one of the leaders, are you behaving strategically?

4. Your success? Can you tie your mind-set, values, competencies, and behaviors to the organization’s

performance and success?

This simple scorecard assessment will help you understand why your human capital is helping the organization or

needs additional development itself. With such an assessment in hand, you can act to help the firm succeed and

identify priority areas for personal growth, learning, and development.

Key Takeaway

The Balanced Scorecard, when applied to HR, helps managers align all HR activities with the company’sstrategic goals. Assigning metrics to the activities lets managers track progress on goals and ensure

712 • PRINCIPLES OF MANAGEMENT

that they are working toward strategic objectives. It adds rigor and lets managers quickly identify gaps.Companies that measure intangibles such as employee performance, innovation, and change perform betterfinancially than companies that don’t use such metrics. Rather than investing equally in training for alljobs, a company should invest disproportionately more in developing the people in the key “strategic”(“A”) jobs of the company on which the company’s success is most dependent.

Exercises

1. Define the Balanced Scorecard method.

2. List the elements of a Workforce Scorecard.

3. Discuss how human capital can be managed like a strategic asset.

4. Why is it important to align HR metrics with company strategy?

5. What kind of metrics would be most useful for HR to track?

ReferencesReferences

Becker, B., & Huselid, M. (2006). Strategic human resources management: Where do we go from here? Journal

of Management, 32, 898–925.

Huselid, M., Becker, B., & Beatty, D. (2005). The workforce scorecard: Managing human capital to execute

strategy. Boston: Harvard Business School Press.

Huselid, M.A., Beatty, R.W., & Becker, B.E (2005, December). “A players” or “A positions”? The strategic logic

of workforce management. Harvard Business Review.

Kaplan, R., & Norton, D. (1996). The Balanced Scorecard. Boston: Harvard Business School Press.

Rush, J. (1995 July). Interview backgrounder for Fast Company.

Weatherly, L. (2003, March). Human capital—the elusive asset; measuring and managing human capital: A

strategic imperative for HR. Research Quarterly, Society for Human Resource Management. Retrieved June 1,

2003, from http://www.shrm.org/research/quarterly/0301capital.pdf.

Weatherly, L. (2003). The value of people: The challenges and opportunities of human capital measurement and

reporting. SHRM Research Quarterly, 3, 14–25.

16.8 TYING IT ALL TOGETHER—USING THE HR BALANCED SCORECARD TO GAUGE AND MANAGE HUMAN CAPITAL,INCLUDING YOUR OWN • 713

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Principles of Management
Principles of Management

Contents
Publisher Information
Chapter 1: Introduction to Principles of Management

1.1 Introduction to Principles of Management
1.2 Case in Point: Doing Good as a Core Business Strategy
1.3 Who Are Managers?
1.4 Leadership, Entrepreneurship, and Strategy
1.5 Planning, Organizing, Leading, and Controlling
1.6 Economic, Social, and Environmental Performance
1.7 Performance of Individuals and Groups
1.8 Your Principles of Management Survivor’s Guide

Chapter 2: Personality, Attitudes, and Work Behaviors

2.1 Chapter Introduction
2.2 Case in Point: SAS Institute Invests in Employees
2.3 Personality and Values
2.4 Perception
2.5 Work Attitudes
2.6 The Interactionist Perspective: The Role of Fit
2.7 Work Behaviors
2.8 Developing Your Positive Attitude Skills

Chapter 3: History, Globalization, and Values-Based Leadership

3.1 History, Globalization, and Values-Based Leadership
3.2 Case in Point: Hanna Andersson Corporation Changes for Good
3.3 Ancient History: Management Through the 1990s
3.4 Contemporary Principles of Management
3.5 Global Trends
3.6 Globalization and Principles of Management
3.7 Developing Your Values-Based Leadership Skills

Chapter 4: Developing Mission, Vision, and Values

4.1 Developing Mission, Vision, and Values
4.2 Case in Point: Xerox Motivates Employees for Success
4.3 The Roles of Mission, Vision, and Values
4.4 Mission and Vision in the P-O-L-C Framework
4.5 Creativity and Passion
4.6 Stakeholders
4.7 Crafting Mission and Vision Statements
4.8 Developing Your Personal Mission and Vision

Chapter 5: Strategizing

5.1 Strategizing
5.2 Case in Point: Unnamed Publisher Transforms Textbook Industry
5.3 Strategic Management in the P-O-L-C Framework
5.4 How Do Strategies Emerge?
5.5 Strategy as Trade-Offs, Discipline, and Focus
5.6 Developing Strategy Through Internal Analysis
5.7 Developing Strategy Through External Analysis
5.8 Formulating Organizational and Personal Strategy With the Strategy Diamond

Chapter 6: Goals and Objectives

6.1 Goals and Objectives
6.2 Case in Point: Nucor Aligns Company Goals With Employee Goals
6.3 The Nature of Goals and Objectives
6.4 From Management by Objectives to the Balanced Scorecard
6.5 Characteristics of Effective Goals and Objectives
6.6 Using Goals and Objectives in Employee Performance Evaluation
6.7 Integrating Goals and Objectives with Corporate Social Responsibility
6.8 Your Personal Balanced Scorecard

Chapter 7: Organizational Structure and Change

7.1 Organizational Structure and Change
7.2 Case in Point: Toyota Struggles With Organizational Structure
7.3 Organizational Structure
7.4 Contemporary Forms of Organizational Structures
7.5 Organizational Change
7.6 Planning and Executing Change Effectively
7.7 Building Your Change Management Skills

Chapter 8: Organizational Culture

8.1 Organizational Culture
8.2 Case in Point: Google Creates Unique Culture
8.3 Understanding Organizational Culture
8.4 Measuring Organizational Culture
8.5 Creating and Maintaining Organizational Culture
8.6 Creating Culture Change
8.7 Developing Your Personal Skills: Learning to Fit In

Chapter 9: Social Networks

9.1 Social Networks
9.2 Case in Point: Networking Powers Relationships
9.3 An Introduction to the Lexicon of Social Networks
9.4 How Managers Can Use Social Networks to Create Value
9.5 Ethical Considerations With Social Network Analysis
9.6 Personal, Operational, and Strategic Networks
9.7 Mapping and Your Own Social Network

Chapter 10: Leading People and Organizations

10.1 Leading People and Organizations
10.2 Case in Point: Indra Nooyi Draws on Vision and Values to Lead
10.3 Who Is a Leader? Trait Approaches to Leadership
10.4 What Do Leaders Do? Behavioral Approaches to Leadership
10.5 What Is the Role of the Context? Contingency Approaches to Leadership
10.6 Contemporary Approaches to Leadership
10.7 Developing Your Leadership Skills

Chapter 11: Decision Making

11.1 Decision Making
11.2 Case in Point: Bernard Ebbers Creates Biased Decision Making at WorldCom
11.3 Understanding Decision Making
11.4 Faulty Decision Making
11.5 Decision Making in Groups
11.6 Developing Your Personal Decision-Making Skills

Chapter 12: Communication in Organizations

12.1 Communication in Organizations
12.2 Case in Point: Edward Jones Communicates Caring
12.3 Understanding Communication
12.4 Communication Barriers
12.5 Different Types of Communication
12.6 Communication Channels
12.7 Developing Your Personal Communication Skills

Chapter 13: Managing Groups and Teams

13.1 Managing Groups and Teams
13.2 Case in Point: General Electric Allows Teamwork to Take Flight
13.3 Group Dynamics
13.4 Understanding Team Design Characteristics
13.5 Organizing Effective Teams
13.6 Barriers to Effective Teams
13.7 Developing Your Team Skills

Chapter 14: Motivating Employees

14.1 Motivating Employees
14.2 Case in Point: Zappos Creates a Motivating Place to Work
14.3 Need-Based Theories of Motivation
14.4 Process-Based Theories
14.5 Developing Your Personal Motivation Skills

Chapter 15: The Essentials of Control

15.1 The Essentials of Control
15.2 Case in Point: Newell Rubbermaid Leverages Cost Controls to Grow
15.3 Organizational Control
15.4 Types and Levels of Control
15.5 Financial Controls
15.6 Nonfinancial Controls
15.7 Lean Control
15.8 Crafting Your Balanced Scorecard

Chapter 16: Strategic Human Resource Management

16.1 Strategic Human Resource Management
16.2 Case in Point: Kronos Uses Science to Find the Ideal Employee
16.3 The Changing Role of Strategic Human Resource Management in Principles of Management
16.4 The War for Talent
16.5 Effective Selection and Placement Strategies
16.6 The Roles of Pay Structure and Pay for Performance
16.7 Designing a High-Performance Work System
16.8 Tying It All Together—Using the HR Balanced Scorecard to Gauge and Manage Human Capital, Including Your Own

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