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# Organizational Structure and Change
## Managing Change
1. How do managers deal with change?
To this point in the chapter, we have focused on factors that influence the need for change. We have also discussed how to think about the dimensions of change that may be needed. In this section, we will describe different approaches to designing and implementing change.
Change management is the process of designing and implementing change. Most leaders are responsible for some degree of change management. In addition, as indicated in the introduction, organizational development (OD) is a specialized field that focuses on how to design and manage change.
An OD consultant is someone who has expertise in change management processes. An internal consultant is someone who works as an employee of an organization and focuses on how to create change from within that organization. An external consultant is an OD specialist hired to provide outside expertise for a short period of time, usually for a major change effort. Leaders are more effective in managing change if they understand the common practices for managing change as well as the perspectives and practices used by OD specialists.
### Basic Assumptions about Change
There are numerous models of change available to managers, and it can be difficult to discern the differences between them when creating a planned change process. Many approaches and methodologies for developing organizations and managing change have been developed and practiced during the last century. Indeed, it can be daunting and confusing to sort through and understand which models are most appropriate and relevant for a particular situation. Every model of change has its strengths and its limitations, and it is important to understand what these may be. The type of change methodology used in a particular situation should be matched to the needs of that situation.
It may be helpful to use several questions when deciding on the appropriate approach to use in a planned change process.
A first question has to do with the starting place for the change: Is the organization in a state of deficiency that needs significant fixing, or is it in a state of high performance, where there exists a need for refining and tweaking?
One common motivation for change is the perception that an organization may be in some state of dysfunction with significant and serious problems, somewhat like a patient in a hospital in need of serious medical attention. A dysfunctional organization may require transformational change, in which the fundamental assumptions, beliefs, and organizing ideas of the organization are thoroughly challenged and altered. This set of perceptions often leads to deficit-based change, in which leaders assume that employees will change if they know they will otherwise face negative consequences.
In contrast, leaders may perceive that an organization is highly functional, much like an Olympic athlete or highly accomplished team. A high-performing organization may require incremental change as the organization continues to build on solid fundamentals to refine and add to its capacity for high performance. This set of perceptions often leads to abundance-based change, in which leaders assume that employees will change if they can be inspired to aim for greater degrees of excellence in their work.
A second important question addresses the mechanisms of change: What are our assumptions about how to create change? This question is crucial, because the answers determine the preferred designs for planned change and the perceptions of the effectiveness of the change.
Top-down change approaches rely on mechanistic assumptions about the nature of an organization. In this approach, a relatively small group of individuals in the organization will design a process and instruct others throughout the organization as to how the process of change should unfold. Most employees in the top-down approach play a passive role during the design process and are generally expected to follow the directions given to them by leaders in the organization. In other words, this approach to change relies on the formal organization to drive the legitimacy of the change.
The opposite of the top-down change approach is the emergent or bottom-up approach. This approach relies on the belief that employees will be more invested in change if they play some role in the process of designing the change. Participatory management, the inclusion of employees in the deliberations about key business decisions, is a common practice that aligns with the emergent approach to change.
The differences between top-down and bottom-up approaches can be dramatic. For example, following the top-down approach, leaders might determine that the organizational structure needs to be reconfigured to better accommodate a significant shift in its business. They might assume that they can implement the new structure and that employee routines and patterns of behavior will then change in a natural progression.
The bottom-up approach may reverse this logic. Employees might first work together to explore the tasks that are essential to a specific business problem, they might experiment with potential changes, and then managers might rearrange structures to match the new, emergent way of doing work. In contrast to the top-down approach, in a bottom-up process a shift in structure may be a last step.
A challenge for many managers in the bottom-up approach is a perception that they cannot directly control planned changes. Rather, they must rely on processes that draw employees together and expect that employees will respond. This requires a leap of faith, trusting that the process of involving people will lead to desirable emergent changes.
In practice, top-down and bottom-up practices often work together. For example, leaders might exercise top-down authority to define and declare what change is necessary. Then, they might design processes that engage and empower employees throughout an organization to design how the change will be brought about. Working toward a generally defined goal, employees at all levels are highly engaged in the change process from beginning to end. This approach has the effect of encourage self-organizing through the informal organization as employees make and implement decisions with minimal direction.
As a general rule of thumb, the more complex the potential change, the greater the need to involve employees in the process of planning and implementing change.
A final question addresses the mindset for change: What are our fundamental beliefs about people and change?
Again, a simplistic dichotomy is helpful for defining the approach that may be employed to create change. In the conventional mindset, leaders assume that most people are inclined to resist change and therefore they need to be managed in a way that encourages them to accept change. In this view, people in an organization may be seen as objects, sometimes even as obstacles, that need to be managed or controlled. When leaders use conventional methods, they demonstrate a tendency to assume that their perspectives are more informed sound and logical than the perspectives of employees. They will work hard to convince employees about the correctness of their decisions, relying on logic to prove the point. They may be inclined to use methods that may be seen by employees as manipulative or coercive. Some authors claim that the conventional mindset is the default, or dominant mode of change in most organizations.
In contrast, in the positive or appreciative mindset, leaders assume that people are inclined to embrace change when they are respected as individuals with intrinsic worth, agency, and capability. In this view, employees in an organization may be seen as partners, sometimes even as champions of change, who can do significant things. When leaders use appreciative methods, they involve employees through meaningful dialogue and seek to lead with a sense of purpose. They may start the change process by highlighting the values that people may hold in common to establish an environment in which employees develop a strong sense of connection with one another. With a strong social infrastructure, they involve employees through participatory processes that allow them to develop common goals and processes for achieving significant changes.
The three questions we have raised here can lead to many variations in the way that leaders design and implement change. For example, it is possible for a change process to be deficit-based, top-down, and conventional, while another change process may be abundance-based, bottom-up, and positive. Other change processes may be mixed in their design and delivery—for example, starting with a deficit-based perspective yet choosing to use an abundance-based design to create transformational change through a bottom-up, participatory, appreciative process. In today’s business environment, it is rare to find an approach that purely fits any of these categories.
We will next turn to a discussion of common change models that may be analyzed through the three questions just raised.
### Common Change Models
In this section, we will share four common approaches to OD and organizational change. Lewin’s model and Kotter’s model are common planned change processes that usually rely on the mechanisms of formal organization. The other two models, Cooperrider’s Appreciative Inquiry model and the Olson and Eoyang Complex Adaptive Systems model, are designed to promote informal organizing and emergent change.
### Lewin's Change Model
Psychologist Kurt Lewin proposed one of the first models of change. Lewin’s change model shows organizational change occurring in three phases (see ).
First, an organization must be "unfrozen" in that existing norms, routines, and practices need to be disrupted. This can be done in several ways. For example, structural changes that cause a disruption in the system can be introduced to the organization. Similarly, the introduction of a new technology or policy can cause an organization to "unfreeze." Whatever the cause, unfreezing sets the stage for change.
Next, changes are introduced in the organization to shift the system to a new state or reality. Typically, people react to moments of disorder by creating a new form of order. As changes are introduced, managers might provide a number of interventions that help people adjust to the new norms of reality they are facing. For example, they might require employees to go through a training program, or they might hold discussion sessions or town-hall meetings with people talk about the changes and troubleshoot. The intent of this phase is to help people adjust to the expected change.
The final phase is to "refreeze" the organization. That is, leaders of the organization reinforce the new norms or practices that should accompany the change. They might adjust the resources, policies, and routines to fit the new expected norms.
Lewin’s model explains a very basic process that accompanies most organizational changes. That is, many people prefer a stable, predictable organization, and they become accustomed to the routines that exist in their organizational environment. For this reason, common routines and behaviors need to be disrupted. When past routines and behaviors are no longer available, people naturally adjust. As they react to a new reality, they establish new routines and patterns of behavior.
However, Lewin’s model is most understandable when we assume that an organization is generally stable unless otherwise acted upon. That is, this model seems to fit in organizations in which any change is likely to last for a long period of time. Such a stable organizational context is increasingly rare in contemporary society.
Still, Lewin’s model really describes a basic pattern of change that plays out in all organizational systems: stability gives way to instability, something shifts in the system, then stability emerges once again. An understanding of this pattern can be viewed through either deficit-based or abundance-based lenses, and it applies in either top-down or bottom-up approaches.
### Kotter’s Change Model
Kotter’s change model is one of the most widely used in organizations today. Generally, it aligns with mechanistic view of structure and thus it may be especially useful in organizations where there is a strong, hierarchical structure. This is an eight-step model, shown in , that relies on a centralized, top-down process for creating planned change.
In the first step, managers establish a sense of urgency. They do this by creating a narrative about why the change is necessary. Top managers often use diagnostic tools to gather data that supports the case for change. They strive to convince key organizational leaders and employees that the change is absolutely necessary. A common metaphor is to “create a burning platform,” or to make it clear that the organization cannot survive if it continues doing what it has done.
In the second step, form a powerful guiding coalition, managers assemble a group of influential people to help shape the planned change. Ideally, the guiding coalition should represent the areas of an organization that will be affected by the change. The guiding coalition should become ambassadors for the change as it unfolds.
In the third phase, create a vision of change, the manager and guiding coalition together create a vision of the expected change. They outline the scope of the change, the reason for the change, and what will be better or different as a result of the change.
The fourth step is to communicate the vision—reach out to all members of the organization and communicate the vision for change. Ideally, they connect with all the key areas of the organization that will be affected. They clearly explain why the change is needed and how the change should unfold. If needed, they answer questions and clarify problems.
The fifth step is to remove any obstacles. This step is intended to reduce the resistance to change and/or to provide the necessary resources to make the change successful. The success of this step helps to smooth the way for successful implementation.
The sixth step is to create small wins. A very powerful way to encourage people to support changes to help them to see the path to success. Short wins signal to the organization that a change is possible and that tangible benefits will come once the change is fully implemented.
The seventh step is to consolidate improvements. Small changes build up over time and become big changes. As the organization successfully moves toward implementation, it is important to consolidate and solidify successes. Managers should reinforce and celebrate small wins and milestones. The unfolding success of the change helps to convince all members of the organization that the change is real and will produce its intended benefits.
The last step is to anchor the changes. In this step, the new norms and practices that accompany the change are standardized and refined. The mode of change moves from transformational to incremental. Refinements are implemented to fine-tune the change and to capture all the intended benefits.
Kotter’s model is especially useful in situations where the desired change is reasonably predictable and where leaders are empowered to drive the change down through an organization. One challenge is that many employees may resist change if they have had no hand in shaping the plans. This is especially true if they do not fully comprehend the urgency of the change or the vision for the change. In this regard, it tends to be used when leaders hold a deficit-based view and are generally inclined to take a top-down approach from a conventional perspective. Still, where leaders need to clearly define and implement a large-scale change, Kotter’s model may work very effectively.
A comparison and contrast of Lewin’s and Kotter’s models is illustrated in .
### Appreciative Inquiry
The Appreciative Inquiry (AI) model is a model specifically designed as an abundance-based, bottom-up, positive approach. An Appreciative Inquiry, broadly defined, can be any question-focused, participatory approach to change that creates an appreciative effective on people and organizations. That is, the process of asking and discussing questions (inquiry) causes people to appreciate the people around them, the strengths of their organization, and the opportunities before them. Simultaneously, the process of having conversations expands the social capital of the organization, or the ability of people to work effectively together.
Developed in the 1980s by David Cooperrider at Case Western Reserve University, AI relies on the assumption that people continuously create their organizations through an emergent process that occurs in the common conversations of organizational life. These conversations are shaped by “narratives” about the reality of the organization in which people find themselves. For example, a dominant narrative might be that an organization’s leaders are corrupt and intent on exploiting employees, or in contrast, that an organization’s leaders are compassionate, forward-thinking, and innovative. Whatever the narrative, employees tend to justify actions that align with their views. Over time, a narrative can become a self-reinforcing reality. Based in this understanding of organizations as a socially constructed system, the key to creating change is to change the dominant narratives of an organization.
In AI, group dialogue is the primary mechanism for helping people to create new narratives. Specifically, appreciative conversations are intense, positively framed discussions that help people to develop common ground as they work together to co-create a positive vision of an ideal future for their organization. When leaders use appreciative inquiry, they intentionally invite dialogue that generates a narrative for a positive organizational reality. This shift in narrative will inspire a shift in the actions that employees initiate in their daily work. While this approach may sound somewhat ambitious and abstract, in reality it is simply an opportunity for employees to envision the future changes they would like to see, then work together to design how they will make these changes a reality.
OD consultants have developed many different variations of AI practices that address different organizational contexts. However, most of them rely on some version of a 5-D cycle: define, discover, dream, design, destiny.
The first phase is define, in which the objective for change and inquiry is established. In this phase, the leaders will create a guiding group, often called a steering committee. This group should include a cross-section of perspectives that represent the different parts of the organization where change is desired. Together, they will decide on a compelling way of describing an objective that invites people to think about ideal possibilities for the organization. In this process, they might turn a problem upside down to inspire a new narrative. For example, British Airlines turned a baggage-claim problem into an exploration of excellent customer service, and Avon turned a problem with sexual harassment into an opportunity to explore what it would take to create exceptional employee engagement. By adjusting the perspective for the inquiry, each company was able to design an OD process that not only solved the original problem but also established a clear vision of what they most wanted as the positive alternative.
The second phase, discover, focuses on questions that explore ideal, existing examples of the desired future. The question “who are we when we are at our best?” is commonly used to encourage this exploration through dialogue among employees. For example, British Airways asked its employees to describe examples of exceptional customer service anywhere in its organization. By sharing stories of exceptional customer service, they found examples of exemplary service, even though the dominant narrative was that they had challenges in this area. Finding existing examples of the desired future—no matter how small—causes people to see that a positive alternative is possible. Such examples also provide the data for documenting the strengths of an organization and the factors that make success possible.
The third phase, dream, is an exploration of ideal future possibilities for the organization. The strengths and factors revealed in the discovery phase provide a foundation this discussion. Employees are invited to think creatively about what the organization might do if it were to build on its strengths. “What could be?” is a commonly used question to encourage this exploration. Many organizations have used creative techniques to encourage employees to innovate about the future. They might have employees work in groups to design prototypes of a process or write a mock newspaper article about a future successful project. The idea of the dream phase is to encourage employees to think as expansively as possible about the possibilities for change, usually in a fun and inviting way.
The fourth phase, design, starts with a process of prioritizing the ideas that have been developed in the dream phase. Employees might work together to brainstorm a list of all the possible areas for action that might help them to accomplish the objective. Then they use a collective process to identify the ideas that have the most promise. Usually senior leaders will add their voice to endorse the ideas that they want to encourage as actual action initiatives. Employees might be invited to join project teams that will carry out specific actions to develop and implement key actions.
The final phase, destiny, occurs as employees implement the plans they have developed. Project groups will continue to work on the agreed-upon action steps for a period of time. Typically, they will meet with other employee-based groups to check in, report on progress, and adjust their plans. Some organizations will also create celebrative events to commemorate key successes.
The appreciative inquiry cycle can become an intrinsic part of an organization’s culture. Some companies will go through the AI process on an annual basis as an integral part of strategic planning. Other organizations use it only as needed when major transformational changes are desired. Though the examples in this section illustrate appreciative inquiry as used to change organizations as a whole, the model can also be applied at any level of organization—for example, in work with individuals and teams.
### Complex Adaptive Systems
The final model we will review builds on the assumption that all organizations are complex adaptive systems (CAS). That is, an organization is constantly developing and adapting to its environment, much like a living organism. A CAS approach emphasizes the bottom-up, emergent approach to the design of change, relying on the ability of people to self-manage and adapt to their local circumstances. Before reviewing the CAS model in more depth, perhaps it would be helpful to examine a change process that is grounded in the CAS model.
One common CAS-based approach is Open Space Technology, a technique in which dozens of people may be involved. To set the stage, let’s suppose that we want to create a series of innovations to improve the culture of innovation in an organization. The first task would be to invite as many interested stakeholders as possible to participate in a discussion on various topics related to the culture of innovation, perhaps over a two-day period. At the beginning of the first session, a leader in the organization might greet the participants and invite them to be part of an open-ended exploration of ideas and solutions. A facilitator would then distribute a single sheet of paper and a marker to each participant. She would ask each person to propose a topic or question for discussion, explaining that the purpose of this exercise is to attract other people to join a discussion.
Then she will go around the room, giving each person in turn up to 30 seconds to propose a topic or question and describe the significance and urgency of the idea. The go-around continues until a variety of topics are identified. Next, the facilitator works with participants to define a list of topics for discussion. The facilitator then designates times and locations for discussions on those topics. Finally, participants “vote with their feet” to choose groups that they want to join for discussion. Typically, each discussion in an Open Space meeting will include an exploration of key questions, actions related to those questions, and proposals for resolving key questions.
As shown by this example, this approach is similar to AI in that it focuses on creating the conditions for people to self-organize in ways that align with the overall objectives of an organizational system. However, one big difference is that it relies less on step-by-step processes for creating change and more on principles that can be applied in many variations to shape the conditions for change in an organization.
The CAS approach provides a useful perspective on how organic organizational structures emerge and develop through the informal organization. An understanding of CAS, therefore, provides leaders with the key knowledge they need to influence the direction of the informal organization, even if they cannot directly control it.
To use the CAS approach, it is essential to understand a few key features about how self-organizing occurs among employees. To begin, the direction of any organization is emergent and requires involvement from many people. Yet, when people react to change, their exact behaviors may be unknowable, unpredictable, and uncontrollable. Most often, people react to change based on the perceptions of the people in their immediate circle of relationships within the organization. Every person in an organization is both influencing others and being influenced by others. This means that a key locus of change must involve the relationships that people have with one another. From the perspective of CAS, a change in the nature or patterns of interpersonal relationships in an organization will lead to changes in the outcomes of that organization. Leaders, in this regard, should think of themselves as facilitators of relationships and as supporters of employees who are constantly engaged in self-organizing to create needed changes.
So, how can a leader (as a facilitator) influence the way in which self-organizing occurs? For starters, a leader needs to pay attention to the key conditions that allow for informal self-organizing to occur. There are three basic questions to consider.
First, to what degree do people feel empowered to act as change agents in the system? Self-organizing originates in the people who comprise the organization. If they view themselves as agents who have discretion to act, they are more likely to take initiative, engaging in nondirected activities that may benefit the organization. Do people feel empowered as agents of the organization? If not, interventions may be designed to help people understand their own capacities and competencies.
Second, how connected are people to one another in the organization? Relationships are the building blocks of all informal organizational activities. The more connected people feel to one another, the more likely they are to work with others in self-directed activity. Do people feel like they have high-quality relationships with coworkers? Are people regularly connecting with other individuals that they do not know very well? If the answers to these questions are negative, then interventions can be designed to strengthen the quality and configurations of connections within and across an organization.
Third, to what extent are flows of information and energy passing through the connections that exist between people? Both informal and formal feedback loops provide a mechanism whereby people receive information about what is working and or not in their activities. Do people quickly receive information about breakdowns or successes in the system? Is the emotional energy in the system generating a positive dynamic that encourages people to be engaged? Again, if the answers to these questions are negative, then processes or initiatives should be designed that will help people to communicate more effectively across their relationships.
Aside from examining these basic conditions for self-organizing, the CAS approach assumes that every organizational outcome is the product of an indeterminable number of variables. No one cause produces a single outcome. For instance, the accurate delivery of a product to a customer is caused by a whole system of interrelated factors, each influencing the other. Therefore, where broad changes in outcomes are desired, the whole system of interrelated factors needs to be engaged at once. The preferred method of doing this is to engage broad groups of stakeholders simultaneously, using dialogue and conversation to help people develop their sense of agency, their connections with others, and the processes that need to be adjusted to create desired changes in outcomes. Appreciative inquiry is one method that works especially well to accomplish all these impacts.
In addition, leaders may also influence the structures that shape patterns of self-organizing. From a CAS perspective, a structure is anything that causes people to engage in a particular pattern of activity. Structures can be physical, such as the work environment, or they can be assumptions or beliefs that are broadly held, such as the ideas about bureaucracy we discussed earlier in this chapter. To create change, leaders can change the structures that are producing current patterns of organization.
There are three ways in which self-organizing structures can be altered. First, a leader can influence the boundary conditions that establish the limits for emergent activity. Boundary conditions define the degree of discretion that is available to employees for self-directed action. Giving employees more responsibility, empowering them to make decisions at the local level, and providing them with more discretion in the work they do are some of the ways that the boundary conditions may be expanded. The more undefined the boundaries, the more self-organizing can be expected.
Second, self-organizing is altered through the introduction of disturbances to the system. Sometimes this can be as simple as helping employees learn about the tensions that exist within an organization around existing patterns of self-organizing activity. For example, there are nearly always significant differences in perspective among different subgroups in an organization. Helping employees to have conversations with others who have significantly different perspectives can introduce a positive disturbance that causes people to reorganize their activities to overcome hidden structures. In manufacturing organizations, for instance, it is common for engineering and production departments to be isolated from one another. Dialogue that includes and connects the employees from such groups can help them overcome and change the structural assumptions that may cause them to self-organize in ways that antagonize the other. The conversation itself can be a catalyst for change.
One final suggestion is a reminder to pay particular attention to the flows and connections that exist among employees across an organizational system. It is essential to healthy organizing to regularly create opportunities for transformational connections, in which employees are able to learn about the perspectives of other areas of an organization. As they develop and maintain healthy connections, they will empathize with and consider those perspectives as they engage in their own self-organizing activities.
The CAS approach, as indicated earlier, provides both a perspective and a set of principles that can be used in many ways. Many methodologies build on the assumptions of the CAS approach. These include appreciative inquiry and others such as Open Space Technology, Whole Systems Change, Future Search, and more. In this section, we have barely scratched the surface of the variety of practices that can be used to catalyze change.
### Planning a Change Management Process
The perspectives we have reviewed in this section provide a very brief menu of the options that are available to leaders as they consider how to manage change. In reality, many of these can be used together, and they should not be considered as mutually exclusive. For example, Kotter’s model can be seen as an overall framework for designing a long-term change process. The Open Space or appreciative inquiry models can be used in certain parts of the Kotter process—for example, in the creation of a guiding coalition or creating a vision for the change.
Moreover, there are many, many practices and methodologies that may align in different ways to the framework of questions provided in this section. These can be used in different combinations to design change processes that meet the needs of a particular context.
1. How do managers deal with change?
As an organization grows and matures, change becomes necessary to its sustained viability. Thus, another key responsibility for most leaders is the task of designing and managing change. We have reviewed several questions that should be considered when designing a change process, and we have explored several approaches that may be used to guide the development of organizational change.
The field of knowledge about how to change and develop organizations is vast and can be somewhat confusing to the novice learner. The material presented in this chapter provides an overview of key ideas, but there is so much more to learn. Should you wish to become an influential leader of change, it is important to learn more about this very important field of research and practice.
### Chapter Review Questions
1. What is an organizational structure?
2. What are different types of organizational structures?
3. What is organizational design?
4. What concepts should guide decisions about how to design structures?
5. What is organizational change?
6. What are the fundamental dimensions of change?
7. What are organizational development (OD) and change management?
8. What questions may be used to guide OD and change management?
9. What are the common models of OD and change management?
### Management Skills Application Exercises
1. Refer to , , and for this exercise. Pick a business that you are familiar with, and draw their existing organizational chart. You may be able to infer much of the information from their website or through a short interview with someone in their organization. After completing this task, construct an alternative organizational chart and comment on why it may be more effective than the current organizational structure and what risks that new structure may have.
2. You have been assigned the task of working with a company that had a traditional, functional organizational structure with sales, marketing, product development, finance and accounting, and operations teams each reporting to a VP, who then reported to the CEO. The company wants to move to a matrix organization that will retain the efficiencies of the functional organization but also groups employees by product teams. You have been asked to comment on how to manage this change and how to communicate and respond to employee concerns. Specifically, you need to address: What are the desired impacts or benefits of this project on the organization? What are the emotions that your employees may have about this organizational change? How could the employee emotions impact the organization or its operations? How can the organization manage these emotions, or in what ways do you think they should manage these emotions to get desired outcome?
### Managerial Decision Exercises
1. Place yourself in the position of a CEO who is contemplating a reorganization of your company and has received conflicting opinions from two of your trusted reports. Presently you are a wholesaler with 45 regional warehouses who acquires products from manufacturers and distributes them to retailers and service establishments. You have over 100,000 SKUs (stock keeping unit) ranging from ACE bandages to Ziploc bags. You have 825 field-based sales representatives who represent all the products within a geographic area.
One of the ideas that has been brought up by the vice president of marketing is to specialize the salesforce into three groups, fashion retail, general retail, and services. Basically, individual sales representatives would be able to specialize with greater expertise and product knowledge to better serve customers. The vice president of sales fears that many of her salespeople will leave due to the expanded geography that this change would require.
What process would you take to address the concerns of your managers? How would you implement the plan? What customer considerations would you need to address?
2. You have recently accepted the position of director for a full-service retirement home that has three components. The first component is for retired individuals and married couples who can still manage on their own but appreciate the amenities such as medical care and having other residents that they interact with through planned activities. The second is for residents who are still relatively healthy but do need assistance for specific tasks such as mobility and the like. The third section is for individuals with chronic health issues and palliative care patients.
You have learned during the interview process that the facility has performance and morale issues and that the previous director had a rigid structure, did not allow workers from different roles to interact, and wanted all decisions to be directed to her. This has led to dramatic staff turnover and a larger number of empty units compared to other facilities.
As the incoming new director, you will need to address the staff, and your new assistant asks whether you would like to address the staff in one large room or in smaller meeting rooms with employees from the different functional units. She also asks how to handle the workers who are from different shifts. Make your communication decisions, and write up an opening statement to make to the employees before you open the meeting to questions.
### Critical Thinking Case
### Danny Meyer Leads His Company through the Challenges of Eliminating Tips
What happens when your CEO wants to remove the tip structure from your restaurant? Do you complain about the new prices as a customer? Do you worry about your paychecks as a server?
Danny Meyer, CEO of Union Square Hospitality (home to some of the most successful New York restaurants), discovered these answers when he began eliminating the tip structure in most of his restaurants. He had seen firsthand the largest negative impact of a tipping culture: employees stuck in front-line positions with no chance to advance to management without taking significant pay cuts.
Meyer began by first involving the affected employees in town-hall talks. These town halls happened months before any publicity was released. Meyer then hosted town halls with customers to explain the importance of fair wages for all his employees at the restaurant, not just the few who served the food. The transition period for each restaurant to eliminate tips was usually three to six months.
As a result of eliminating the tip structure in most of his restaurants, Meyer has been able to increase the pay structure for cooks at those locations, which enables him to fill more cook positions and address a common industry shortage. Meyer has also been able to hire employees with a purpose to deliver exceptional hospitality. Meyer encourages his employees to take care of each other first, and to then take care of the customer, which creates a virtuous cycle of hospitality.
Meyer constantly uses feedback from his employees even after the tip structure was eliminated. He wants to ensure that each employee feels their voice is heard and understood. Employees continue to have access to town-hall meetings and internal feedback channels to offer honest feedback.
2. What type of change is this: transformational or incremental? Why?
3. What level(s) of change is Meyer aiming for in this case?
4. What models are consistent with Meyer’s process for designing and implementing change?
Sources: Mark Matousek, Danny Meyer Banned Tipping at his Restaurants- But Employees Say it has Led to Lower Pay and High Turnover,” Business Insider, October 20, 2017, http://www.businessinsider.com/danny-meyers-no-tip-policy-struggles-2017-10; Loren Feldman, “Danny Meyer On Eliminating Tipping: “It Takes a Year to Get The Math Right,” Forbes, January 14, 2018, https://www.forbes.com/sites/lorenfeldman/2018/01/14/danny-meyer-on-eliminating-tipping-it-takes-a-year-to-get-the-math-right/#189bd5c8431f; Elizabeth Dunn, “The Limitations of American Restaurants’ No-Tipping Experience,” The New Yorker, February 24, 2018, https://www.newyorker.com/culture/annals-of-gastronomy/the-limitations-of-american-restaurants-no-tipping-experiment. |
# Human Resource Management
## Introduction
### Learning Outcomes
After reading this chapter, you should be able to answer these questions:
1. What has been the evolution of human resource management over the years, and what is the current value it provides to an organization?
2. How does the human resources compliance role of HR provide value to a company?
3. How do performance management practices impact company performance?
4. How do companies use rewards strategies to influence employee performance and motivation?
5. What is talent acquisition, and how can it create a competitive advantage for a company?
6. What are the benefits of talent development and succession planning?
Human resource management is an area that has evolved a great deal over the last few decades. From the days of the very tactical “personnel” management to the current and more strategic state of human resources, businesses and HR professionals alike have changed the way they see the function. In the current economy, human capital assets (i.e., people) are the greatest value creators. Companies compete for talent, and they distinguish themselves in their business performance by the talent they have in their ranks. Human resource management, therefore, becomes a key lever companies can utilize to find, recruit, develop, and grow talent for competitive advantage. This chapter discusses the value and benefits that human resource management brings to an organization, as well as the challenges that the function still faces as a strategic partner to the business. |
# Human Resource Management
## An Introduction to Human Resource Management
1. What has been the evolution of human resource management (HRM) over the years, and what is the current value it provides to an organization?
Human resource management over the years has served many purposes within an organization. From its earliest inception as a primarily compliance-type function, it has further expanded and evolved into its current state as a key driver of human capital development. In the book HR From the Outside In (Ulrich, Younger, Brockbank, Younger, 2012), the authors describe the evolution of HR work in “waves”. Wave 1 focused on the administrative work of HR personnel, such as the terms and conditions of work, delivery of HR services, and regulatory compliance. This administrative side still exists in HR today, but it is often accomplished differently via technology and outsourcing solutions. The quality of HR services and HR’s credibility came from the ability to run administrative processes and solve administrative issues effectively. Wave 2 focused on the design of innovative HR practice areas such as compensation, learning, communication, and sourcing. The HR professionals in these practice areas began to interact and share with each other to build a consistent approach to human resource management. The HR credibility in Wave 2 came from the delivery of best-practice HR solutions.
Wave 3 HR, over the last 15–20 years or so, has focused on the integration of HR strategy with the overall business strategy. Human resources appropriately began to look at the business strategy to determine what HR priorities to work on and how to best use resources. HR began to be a true partner to the business, and the credibility of HR was dependent upon HR having a seat at the table when the business was having strategic discussions. In Wave 4, HR continues to be a partner to the business, but has also become a competitive practice for responding to external business conditions. HR looks outside their organizations to customers, investors, and communities to define success—in the form of customer share, investor confidence, and community reputation. HR’s credibility is thus defined in terms of its ability to support and drive these external metrics. Although each “wave” of HR’s evolution is important and must be managed effectively, it is the “outside in” perspective that allows the human resource management function to shine via the external reputation and successes of the organization.
Human resource management provides value to an organization, to a large extent, via its management of the overall employee life cycle that employees follow—from hiring and onboarding, to performance management and talent development, all the way through to transitions such as job change and promotion, to retirement and exit. Human capital is a key competitive advantage to companies, and those who utilize their human resource partners effectively to drive their human capital strategy will reap the benefits.
Human resource management includes the leadership and facilitation of the following key life cycle process areas:
1. Human resources compliance
2. Employee selection, hiring, and onboarding
3. Performance management
4. Compensation rewards and benefits
5. Talent development and succession planning
Human resources is responsible for driving the strategy and policies in these areas to be in accordance with and in support of the overall business strategy. Each of these areas provides a key benefit to the organization and impacts the organization’s value proposition to its employees.
1. What has been the evolution of human resource management over the years, and what is the current value it provides to an organization?
Human resource management began in its first “wave” as a primarily compliance-type function, with the HR staff charged with enforcing compliance of employees and running the ongoing administrative processes. In the second wave, HR became focused on the design of HR practice areas, which could be built upon best-practice models. Wave 3 of HR brought with it the concept that HR should be a true partner to the business and should support the business strategy through its programs and services. Finally, in the fourth wave, HR is still a partner to the business, but it looks outside of the business to customers, investors, and communities to see how it can be competitive in terms of customer share, investor confidence, and community reputation.
Some key areas that HR supports within the employee life cycle process include: human resources compliance, employee selection and hiring, performance management, compensation rewards, and talent development and succession planning. |
# Human Resource Management
## Human Resource Management and Compliance
1. How does the human resources compliance role of HR add value to an organization?
Human resources compliance is an area that traces back to the very origin of the human resources function—to administrative and regulatory functions. Compliance continues to be a very important area that HR manages, and there are numerous regulations and laws that govern the employment relationship. HR professionals must be able to understand and navigate these laws to help their organizations remain compliant and avoid having to pay fines or penalties. The additional threat of reputational harm to the organization is another reason that HR needs to be aware and alert to any potential gaps in compliance.
Some of the most common examples of laws and regulations that govern the employer-employee relationship include the following (SHRM.org):
1. Age Discrimination in Employment Act (ADEA)
2. Americans with Disabilities Act (ADA)
3. Fair Labor Standards Act (FLSA)
4. Family and Medical Leave Act (FMLA)
5. National Labor Relations Act (NLRA)
6. Worker Adjustment and Retraining Notification Act (WARN)
The Age Discrimination in Employment Act (ADEA) of 1967 protects individuals who are 40 years of age or older from employment discrimination based on age. These protections apply to both employees and job applicants. It also makes it unlawful to discriminate based on age with respect to any terms of employment, such as hiring, firing, promotion, layoff, compensation, benefits, job assignments, and training.
The Americans with Disabilities Act (ADA) of 1990 prohibits private employers, state and local governments, employment agencies, and labor unions from discriminating against qualified individuals with disabilities. The ADA defines an individual with a disability as a person who: 1) has a mental or physical impairment that substantially limits one or more major life activities, 2) has a record of such impairment, or 3) is regarded as having such impairment. An employer is required to make a reasonable accommodation to the known disability of a qualified applicant or employee if it would not impose an “undue hardship” on the operation of the employer’s business.
The Fair Labor Standards Act (FLSA) of 1938 establishes the minimum wage, overtime pay, recordkeeping, and youth employment standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments. Special rules apply to state and local government employment involving fire protection and law enforcement activities, volunteer services, and compensatory time off instead of cash overtime pay.
The Family and Medical Leave Act (FMLA) of 1993 entitles eligible employees to take up to 12 weeks of unpaid, job-protected leave in a 12-month period for specified family and medical reasons. FMLA applies to all public agencies, including state, local, and federal employers, local education agencies (schools), and private-sector employers who employed 50 or more employees in 20 or more workweeks in the current or preceding calendar year, including joint employers and successors of covered employers.
The National Labor Relations Act (NLRA) of 1935, which was later amended in 1947, extends rights to many private-sector employees, including the right to organize and bargain with their employer collectively. Employees covered by the act are protected from certain types of employer and union misconduct and have the right to attempt to form a union where none exists.
The Worker Adjustment and Retraining Notification Act (WARN) of 1988 generally covers employers with 100 or more employees, not counting those who have worked less than six months in the last 12 months and those who work an average of less than 20 hours a week. Regular federal, state, and local government entities that provide public services are not covered. WARN protects workers, their families, and communities by requiring employers to provide notification 60 calendar days in advance of plant closings and mass layoffs.
These are just a few of the key regulatory federal statutes, regulations, and guidance that human resources professionals need to understand to confirm organizational compliance. For additional information on HR compliance resources, the Society of Human Resource Management (SHRM) at SHRM.org maintains a plethora of resources for the HR professional and the businesses that they support.
To ensure the successful management and oversight of the many compliance rules and regulations, the human resources team must utilize best practices to inform and hold employees accountable to HR compliance practices. Some of these best practices include education and training, documentation, and audit. Each of these is described in greater detail, and will help HR achieve its important goal of maintaining HR compliance for the organization.
Education and training in the areas of compliance and labor law is critical to ensure that all applicable laws and regulations are being followed. These laws can change from year to year, so the HR professionals in the organization need to ensure that they are engaged in ongoing education and training. It is not just imperative for the HR professional to receive training. In many organizations, managers receive training on key rules and regulations (such as FMLA or ADA, to name a few) so that they have a foundation of knowledge when dealing with employee situations and potential risk areas. Human resources and management need to partner to ensure alignment on compliance issues—especially when there is a risk that an employee situation treads into compliance regulation territory. See for a partial list of federal labor laws by number of employees, as displayed on the Society for Human Resource Management website.
Refer to : Federal Labor Laws by Number of Employees.
Documentation of the rules and regulations—in the form of an employee handbook—can be one of the most important resources that HR can provide to the organization to mitigate compliance risk. The handbook should be updated regularly and should detail the organization’s policies and procedures and how business is to be conducted. Legal counsel should review any such documentation before it is distributed to ensure that it is up-to-date and appropriate for the audience.
Scheduling HR compliance audits should be part of the company’s overall strategy to avoid legal risk. Noncompliance can cause enormous financial and reputational risk to a company, so it is important to have audits that test the organization’s controls and preparedness. When the human resources function takes the lead in implementing audits and other best practices, they create real value for the organization.
1. How does the human resources compliance role of HR provide value to a company?
Human resources helps protect the company and its employees to ensure that they are adhering to the numerous regulations and laws that govern the employment relationship. The impact of noncompliance can be very costly and can be in the form of financial, legal, or reputational cost. Some of the key legislation that HR manages compliance around includes the Fair Labor Standards Act (FLSA), the Age Discrimination in Employment Act (ADEA), the Americans with Disabilities Act (ADA), and the Family and Medical Leave Act (FMLA), among others.
Some of the best practices for informing and holding employees accountable are to provide education and training to explain the regulations, to provide reference documentation for guidance with the regulations, and to schedule regular compliance audits to ensure that processes are being followed. Scheduling regular internal HR audits help the organization plan and feel comfortable with its level of preparedness and illustrates the value that a strong HR group can bring to the organization. |
# Human Resource Management
## Performance Management
1. How do performance management practices impact company performance?
Performance management practices and processes are among the most important that human resources manages, yet they are also among the most contentious processes in an organization. Many people view performance management as a human resources role and believe that it is in some parallel path with the business. On the contrary, for the process to be successful, it should not only be human resources that is responsible for driving performance. For the (typically) annual performance management process, human resources and line management should partner on the implementation and ongoing communication of the process. Although HR is responsible for creating and facilitating the performance management processes, it is the organizational managers that need to strongly support the process and communicate the linkage of performance management to overall organizational goals and performance. In my experience, it was helpful when business leadership emphasized that performance management isn’t a human resources process—it is a mission-critical business process. If a business manager can’t track and drive performance at the individual level, then the overall organization won’t know how it’s tracking on overall organizational goals. Before discussing the state of performance management in the workplace today, it is important to understand the origin of performance management. Performance management began as a simple tool to drive accountability (as it still does) but has evolved more recently into a tool used for employee development.
Performance management can be tracked back to the U.S. military’s “merit rating” system, which was created during World War I to identify poor performers for discharge or transfer (“The Performance Management Revolution,” Harvard Business Review, October 2016). After World War II, about 60% of all U.S. companies were using a performance appraisal process. (By the 1960s nearly 90% of all U.S. companies were using them.) Although the rules around job seniority determined pay increases and promotions for the unionized worker population, strong performance management scores meant good advancement prospects for managers. In the beginning, the notion of using this type of system to improve performance was more of an afterthought, and not the main purpose. By the 1960s or so, when we started to see a shortage of managerial talent, companies began to use performance systems to develop employees into supervisors, and managers into executives.
In 1981, when Jack Welch became CEO of General Electric, he championed the forced-ranking system—another military creation. He did this to deal with the long-standing concern that supervisors failed to label real differences in performance (HBR, The Performance Management Revolution). GE utilized this performance management system to shed the people at the bottom. They equated performance with people’s inherent capabilities and ignored their potential to grow. People were categorized as “A” players (to be rewarded), “B” players (to be accommodated), and “C” players (to be dismissed). In the GE system, development was reserved for the “A” players—and those with high potential were chosen to advance to senior positions. Since the days of GE’s forced ranking, many companies have implemented a similar forced-ranking system, but many have backed away from the practice. After Jack Welch retired, GE backed away from the practice as well. Companies, GE included, saw that it negatively fostered internal competition and undermined collaboration and teamwork and thus decided to drop forced ranking from their performance management processes.
Most people agree, in theory, that performance management is important. What people may not agree on is how performance management should be implemented. As the dissatisfaction with performance management processes began to increase, some companies began to change the way they thought about performance. In 2001, an “Agile Manifesto” was developed by software developers and “emphasized principles of collaboration, self-organization, self-direction, and regular reflection on how to work more effectively, with the aim of prototyping more quickly and responding in real-time to customer feedback and changes in requirements.” (Performance Management Revolution, HBR). The impact on performance management was clear, and companies started to think about performance management processes that were less cumbersome, incorporated frequent feedback, and delivered performance impacts.
In a recent public survey by Deloitte Services, 58% of executives surveyed believed that their current performance management approach drives neither employee engagement nor high performance. They need something more nimble, real-time, and individualized—and focused on fueling performance in the future rather than assessing it in the past. (“Reinventing Performance Management,” Harvard Business Review, Buckingham and Goodall, 2015). In light of this study, Deloitte became one of the companies that has recently sought to redesign their performance processes. As part of their “radical redesign,” they seek to see performance at the individual level, and thus they ask team leaders about their own future actions and decisions with respect to each individual. They ask leaders what they’d do with their team members, not what they think of them (“Reinventing Performance Management,” HBR). The four questions that Deloitte asks of its managers are as follows:
1. Given what I know of this person’s performance, and if it were my money, I would award this person the highest possible compensation increase and bonus.
2. Given what I know of this person’s performance, I would always want him or her on my team.
3. This person is at risk for low performance.
4. This person is ready for promotion today.
Although there has been some discussion over the last several years about some companies wanting to drop performance appraisals completely, most of the research seems to support that the total absence of performance management doesn’t help either. A recent global survey by CEB Global reports that more than 9,000 managers and employees think that not having performance evaluations is worse than having them. (“Let’s Not Kill Performance Evaluations Yet,” HBR, Nov 2016, Goler, Gale, Grant). Their findings indicate that even though every organization has people who are unhappy with their bonuses or disappointed that they weren’t promoted, research shows that employees are more willing to accept an undesirable outcome when the process is fair. The key question really becomes: how can HR help the business create a process to fairly evaluate performance and enhance employee development while not burdening the business with undue bureaucracy and non-value-added activities?
As organizations evaluate their options for a performance management system, human resources and business leadership need to consider several challenges that will need to be addressed—no matter what the system. (“The Performance Management Revolution,” Capelli and Tavis, HBR, pp. 9-11).
The first is the challenge of aligning individual and company goals. Traditionally, the model has been to “cascade” goals down through the organization, and employees are supposed to create goals that reflect and support the direction set at the top. The notion of SMART goals (Specific, Measurable, Achievable, Relevant, Timebound) has made the rounds over the years, but goal setting can still be challenging if business goals are complex or if employee goals seem more relatable to specific project work than to the overall top-line goals. The business and the individual need to be able to respond to goal shifts, which occur very often in response to the rapid rate of change and changing customer needs. This is an ongoing issue that human resources and business leadership will need to reconcile.
The next key challenge to think about when designing a performance management process is rewarding performance. Reward structures are discussed later in this chapter, but reward systems must be rooted in performance management systems. Currently, the companies that are redesigning their performance processes are trying to figure out how their new practices will impact their pay-for-performance models. Companies don’t appear to be abandoning the concept of rewarding employees based on and driven by their performance, so the linkage between the two will need to be redefined as the systems are changed.
The identification of poor performers is a challenge that has existed since the earliest days of performance management, and even the most formal performance management process doesn’t seem to be particularly good at weeding out poor performers. A lot of this is due to the managers who evaluate employees and are reluctant to address the poor performers that they’re seeing. Also, the annual performance management process tends to make some managers feel that the poor performance should be overlooked during the year and only addressed (often ineffectively) during a one-per-year review. Whatever new performance management models an organization adopts, they will have to ensure that poor performance is dealt with in real time and is communicated, documented, and managed closely.
Avoiding legal troubles is another ongoing challenge for organizations and is another reason for real-time communication and documentation of performance issues. Human resources supports managers as they deal with employee relations issues, and the thought of not having a formal, numerical ratings system is unfathomable for some people who worry about defending themselves against litigation. However, because even formal performance processes can be subjective and may reveal ratings bias, neither the traditional formal process nor some of the radical new approaches can guarantee that legal troubles will never develop. From my experience, the best strategy for effective and fair performance management is real-time communication and documentation of issues. The employee is told about his or her performance issues (in as close to real time as possible), and the manager has documented the performance issues and conversations objectively and has engaged human resources with any larger or more complex issues.
“Managing the feedback firehose” and keeping conversations, documentation, and feedback in a place where it can be tracked and utilized is an ongoing challenge. The typical annual performance process is not conducive to capturing ongoing feedback and conversations. There have been some new technologies introduced (such as apps) that can be used to capture ongoing conversations between managers and employees. General Electric uses an app called PD@GE (PD = performance development) that allows managers to pull up notes and materials from prior conversations with employees. IBM has a similar app that allows peer-to-peer feedback. Although there are clearly some technology solutions that can be used to help communicate and collect feedback, human resources will need to continue to communicate and reinforce rules around objectivity and appropriate use of the tools.
Performance management processes—traditional and inventive new approaches alike—will face the same challenges over time. Human resource management professionals need to be aware of these challenges and design a performance management system that addresses them in the format and within the context of their culture.
1. How do performance management practices impact company performance?
Performance management is a critical business process that the human resources group manages for the business. Performance management aligns the work of individual groups with the overall business objectives and enables the business to work toward its goals. Performance management should also help the company differentiate between different levels of employee performance through the management of feedback and a rewards structure.
Performance management also allows a company to identify its poor performers and provides a consistent process for tracking and managing poor performance in a manner that is fair and consistent with the law. There has been much discussion of best practices for a performance management process beyond a formal, annual process that often feels cumbersome to the business. However formal or informal, human resource management needs to ensure that the process helps to differentiate different levels of performance, manages the flow of feedback, and is consistent and fair for all employees. |
# Human Resource Management
## Influencing Employee Performance and Motivation
1. How do companies use rewards strategies to influence employee performance and motivation?
Both performance management and rewards systems are key levers that can be used to motivate and drive individual and group performance ... which leads to overall organizational performance, productivity, and growth. Performance and rewards systems are also “cultural” in that they provide a glimpse into the way a company manages the performance (or nonperformance) of its employees, and to what extent they are willing to differentiate and reward for that performance. There has been a great deal of discussion over the years to identify best practices in the ways we differentiate and reward employees, which will also drive employee performance and motivation.
Before we can talk about best practices and findings in rewards and motivation systems, we must first define the terms. Rewards systems are the framework that an organization (generally via human resources) creates and manages to ensure that employee performance is reciprocated with some sort of reward (e.g., monetary or other extrinsic) that will drive and motivate the employee to continue to perform for the organization. Rewards programs consist primarily of compensation programs and policies, but can also include employee benefits and other extrinsic rewards that fulfill employee needs.
Within human resource management, the primary focus of a rewards program in an organization is to successfully implement a compensation system. Most organizations strive to implement a pay-for-performance compensation program that offers competitive pay in the marketplace and allows differentiation of compensation based on employee performance. Pay for performance begins with a philosophy that an organization adopts that states that they seek to reward the best-performing employees to enhance business performance and take care of those who can have the greatest impact.
In the 2011 SHRM article by Stephen Miller, entitled “Study: Pay for Performance Pays Off,” Miller says that companies’ top four drivers for moving to a pay-for-performance strategy are to:
1. Recognize and reward high performers (46.9%)
2. Increase the likelihood of achieving corporate goals (32.5%)
3. Improve productivity (7.8%)
4. Move away from an entitlement culture (7.8%)
The study also showed that the drivers differed depending on whether the company was high performing or lower performing. Almost half of high-performing organizations indicated that recognizing and rewarding top performers was the main driver of their pay-for-performance strategy, making it number one on the list of primary drivers. Lower-performing organizations did not appear to be as sure about the drivers behind their strategy. The number one driver among this group was achieving corporate goals. It appears that those top-performing organizations that implement a pay-for-performance strategy truly believe in the idea of differentiating among different levels of performance.
According to the 2015 World at Work “Compensation Programs and Practices Report,” pay for performance continues to thrive with better than 7 in 10 (72%) companies saying that they directly tie pay increases to job performance, and two-thirds (67%) indicating increases for top performers are at least 1.5 times the increase for average performers. In addition, the results of the survey seem to indicate that employees’ understanding of the organization’s compensation philosophy improves when there is higher differentiation in increases between average and top performers. The greater differentiation of increases is more visible and drives home the point that the company is serious about pay for performance.
A pay-for-performance program may have many components, and the human resources organization has the challenge of designing, analyzing, communicating, and managing the different components to ensure that the philosophy and the practices themselves are being carried out appropriately and legally. Human resource management’s role in establishing pay for performance is that HR must engage business leadership to establish the following elements of the framework:
1. Define the organization’s pay philosophy. Leadership needs to agree that they will promote a culture that rewards employees for strong performance.
2. Review the financial impacts of creating pay-for-performance changes. How much differentiation of performance will we have? What is the cost of doing this?
3. Identify any gaps that exist in the current processes. If any of the current human resources and compensation policies conflict with pay for performance, they should be reviewed and changed. Examples may lie in the performance management process, the merit increase process, and the short-term and long-term bonus processes. If the performance management process has gaps, these should be corrected before pay for performance is implemented; otherwise this will generate more distrust in the system. The salary structure should also be benchmarked with market data to ensure that the organization is compensating according to where it wishes to be in the marketplace.
4. Update compensation processes with new pay for-performance elements. This includes the design of a merit matrix that ties employee annual pay increases to performance. Other areas of focus should be the design of a short-term bonus matrix and a long-term bonus pay-for-performance strategy. In other words, how does performance drive the bonus payouts? What is the differential (or multiplier) for each level?
5. Communicate and train managers and employees on the pay for-performance philosophy and process changes. Explain the changes in the context of the overall culture of the organization. This is a long-term investment in talent and performance.
Human resource management professionals play a key role in the rewards processes, and employee compensation is only one piece (although a key piece!) of the “total rewards” pie. World at Work defines total rewards as a “dynamic relationship between employers and employees.” World at Work also defines a total rewards strategy as the six elements of total rewards that “collectively define an organization’s strategy to attract, motivate, retain and engage employees.” These six elements include:
1. Compensation—Pay provided by an employer to its employees for services rendered (i.e., time, effort, and skill). This includes both fixed and variable pay tied to performance levels.
2. Benefits—Programs an employer uses to supplement the cash compensation employees receive. These health, income protection, savings, and retirement programs provide security for employees and their families.
3. Work-life effectiveness—A specific set of organizational practices, policies, and programs, plus a philosophy that actively supports efforts to help employees achieve success at both work and home.
4. Recognition—Formal or informal programs that acknowledge or give special attention to employee actions, efforts, behavior, or performance and support business strategy by reinforcing behaviors (e.g., extraordinary accomplishments) that contribute to organizational success.
5. Performance management—The alignment of organizational, team, and individual efforts toward the achievement of business goals and organizational success. Performance management includes establishing expectations, skill demonstration, assessment, feedback, and continuous improvement.
6. Talent development—Provides the opportunity and tools for employees to advance their skills and competencies in both their short- and long-term careers.
Human resource management is responsible for defining and driving the various elements of an organization’s total rewards strategy and ensuring that it is engaging enough to attract and retain good employees. It is easy to see that there are many different types of rewards that can motivate individuals for many different reasons. In the HBR article “Employee Motivation: A Powerful New Model” (Nohria, Groysberg, Lee), August 2008, the authors describe four different drives that underlie motivation. They assert that these are hardwired into our brains and directly affect our emotions and behaviors. These include the drives to acquire, bond, comprehend, and defend. illustrates each of these drives, the primary levers found in an organization to address those drives, and the actions that should be taken to support the primary levers.
The drive to acquire describes the notion that we are all driven to acquire scarce goods that bolster our sense of well-being. This drive also seems to be relative (we compare ourselves to others in what we have) and insatiable (we always want more). Within an organization, the primary lever to address this drive is the reward system, and the actions are to differentiate levels of performance, link performance to rewards, and pay competitively.
The drive to bond describes the idea that humans extend connections beyond just individuals, to organizations, associations, and nations. In organizations, this drive is fulfilled when employees feel proud to be a part of the company and enjoy being a member of their team. Within an organization, the primary lever to address this drive is culture, and the actions are to foster mutual reliance and friendships, to value collaboration and teamwork, and to encourage best practice sharing.
The drive to comprehend is the concept of all of us wanting to make sense of the world around us and producing different theories and accounts to explain things. People are motivated by the idea of figuring out challenges and making a contribution. In organizations, the primary lever to address this drive is job design, and the actions are to design jobs that have distinct and important roles in the organization, as well as jobs that are meaningful and foster a sense of contribution.
The drive to defend is our instinct to defend ourselves, our families, and our friends, and it describes our defensiveness against external threats. This drive also tells us a lot about our level of resistance to change, and why some employees have especially guarded or emotional reactions. In organizations, the primary levers that address this drive are performance management and resource-allocation processes, and the actions are to increase process transparency and fairness, and to build trust by being just in granting rewards, assignments, and other recognition.
Within human resource management, the area of compensation and reward systems is exceedingly complicated. In organizations, we think primarily of compensation rewards, which are very important drivers and motivators for most people. We need to also remember the other aspects of the total rewards strategy, as well as the drives and levers we can utilize to motivate employees.
1. How do companies use rewards strategies to influence employee performance and motivation?
Companies use rewards strategies to influence employee performance and motivation by differentiating between the various levels of performance. This strategy is called pay for performance, and it ties the employee’s performance level to a consistent framework of rewards at each level. Research indicates that the primary reason that companies implement pay for performance is to be able to recognize and reward their high performers.
To implement a pay-for-performance structure, HR and the organization first need to define a compensation philosophy, then perform a review of the financial implications of such a system. Gaps in the current system must be identified, and compensation practices should be updated in accordance with the determined pay-for-performance design. Finally, communication and training are key to help employees understand the context and philosophy, as well as the specific methodology. |
# Human Resource Management
## Building an Organization for the Future
1. What is talent acquisition, and how can it create a competitive advantage for a company?
We’ve discussed some of the key focus areas that human resource management professionals need to address to ensure that employees are performing their roles well and are being fairly rewarded for their contributions. We haven’t yet addressed how we think about where these employees come from—Whom do we hire? What skills do we need now and in the future? Where will we even look for these employees? What are some best practices? Talent acquisition is the area within human resource management that defines the strategy for selection, recruiting, and hiring processes, and helps the organization fight the “war for talent” during good times and bad.
Hiring strong talent is a key source of competitive advantage for a company, yet so many companies do it poorly. Often, the recruiting and hiring processes happen reactively—someone leaves the organization and then people scramble to fill the gap. Very few companies take a longer-term, proactive approach and work to create a strategic plan for talent acquisition. In the article “The Definitive Guide to Recruiting in Good Times and Bad” (Fernandez-Araoz, Groysberg, Nohria, HBR, 2009), the authors advocate for a rigorous and strategic recruiting process that includes the following critical actions:
1. Anticipate your future leadership needs based on your strategic business plan.
2. Identify the specific competencies required in each position you need to fill.
3. Develop a sufficiently large candidate pool.
In organizations today, there are often pieces of the talent acquisition process that are outsourced to external recruiters, as opposed to being managed internally by human resources employees. While outsourcing specific searches is not an issue, there must be internal HR/talent acquisition employees responsible for creating the overall strategic plan for the recruiting function. Contract recruiters may then take responsibility for a piece of the overall process by leveraging the strategy and competencies that the HR team puts forth.
Recruiting and hiring of high-level leadership candidates has special risks and rewards associated with it. The risk that a key leadership position is vacant or becoming vacant poses a risk to the organization if it is left open for too long. These high-level positions are often harder to fill, with fewer candidates being available and the selection of the right talent being so critical to the organization’s future. The reward, however, is that with due diligence and clear goals and competencies/skills defined for the position, the HR/talent acquisition professional can create a competitive advantage through the recruitment of key high-level talent.
The following best practices illustrate the key steps for effective recruiting of key leadership hires. Both human resources and business leadership should partner to discuss and define each of the elements to ensure alignment and support of the recruiting plan and process (Definitive Guide to Recruiting, HBR, 2009).
Anticipate your needs. Every two to three years there should be a review of high-level leadership requirements based on the strategic plan. Some of the questions to answer here are:
1. How many people will we need, and in what positions, in the next few years?
2. What will the organizational structure look like?
3. What must our leadership pipeline contain today to ensure that we find and develop tomorrow’s leaders?
Specify the job. For each leadership position identified, specify competencies needed in each role. For example:
1. Job-based: What capabilities will the job require?
2. Team-based: Will the applicant need to manage political dynamics?
3. Firm-based: What resources (supporting, talent, technology) will the organization need to provide the person who fills this role?
Develop the pool. Cast a wide net for candidates by asking suppliers, customers, board members, professional service provides, and trusted insiders for suggestions. It helps to start this process even before you have a role that you’re hiring for. During succession planning and talent discussions internally, it helps to start making of list of internal and external contacts and potential candidates before the need arises.
Assess the candidates. Have the hiring manager, the second-level manager, and the top HR manager conduct a “behavioral event interview” with each candidate. Candidates will describe experiences they’ve had that are like situations they’ll face in the organization. Gain an understanding of how the candidate acted and the reasoning behind their actions. Make sure to evaluate a broad range of references to ask about results the candidate achieved.
Close the deal. Once you have chosen the final candidate, you can increase the chance that the job offer will be accepted by:
1. Sharing passion about the company and role, and showing genuine interest in the candidate
2. Acknowledging the opportunities and challenges of the role, differentiating the opportunities at your organization from those of your competitor
3. Striking a creative balance between salary, bonuses, and other long-term incentives
Integrate the newcomer. It is important to integrate new hires into the company’s culture:
1. During the first few months, have the managers and the HR team check in with each new hire.
2. Assign a mentor (star employee) to provide ongoing support to each new hire.
3. Check in with the new hire to ensure that they are getting enough support, and inquire about what other support might be needed. Ensure that new hires are adequately building new relationships throughout the organization.
Refer to Hiring Top-Level Executives, adapted from “The Definitive Guide to Recruiting in Good Times and Bad,” from the article “Hiring Top Executives: A Comprehensive End-to-End Process,” Harvard Business Review, May 2009.
By following these best practices, human resources and business leadership can ensure that the new hire is integrating well and has the best possible start in the new role. Talent acquisition is a key element of any human resource management program, and the right process can mean the difference between a poor hire and a distinct competitive advantage gained through top talent.
1. What is talent acquisition, and how can it create a competitive advantage for a company?
Human resource management plays the important role of managing the talent processes for an organization, and it is critical in the process of acquiring talent from the outside. Talent acquisition is the process of determining what roles are still needed in the organization, where to find people, and whom to hire. Hiring top talent is a key source of competitive advantage for a company, and not all organizations are good at doing it.
The impact of hiring is especially magnified when you talk about top leadership talent. The right leadership candidate can make all the difference in an organization’s growth, performance, and trajectory over the years. HR should work with the business to assess need and specifics of the job, develop a pool of candidates, and then assess candidates for the right person to bring into the organization. |
# Human Resource Management
## Talent Development and Succession Planning
1. What are the benefits of talent development and succession planning?
Talent development and succession planning are, in my opinion, two of the most critical human resource management processes within an organization. You can work tirelessly to recruit and hire the right people, and you can spend a lot of time defining and redesigning your performance and rewards programs, but if you can’t make decisions that effectively assess and develop the key talent that you have, then everything else feels like a wasted effort. Talent development describes all process and programs that an organization utilizes to assess and develop talent. Succession planning is the process for reviewing key roles and determining the readiness levels of potential internal (and external!) candidates to fill these roles. It is an important process that is a key link between talent development and talent acquisition/recruiting.
The human resources function facilitates talent development activities and processes, but they are also heavily reliant on business inputs and support. Each of the talent development processes that will be discussed require heavy involvement and feedback from the business. Like performance management, talent development is a process that HR owns and facilitates, but it is a true business process that has a fundamental impact on an organization’s performance. Talent is a competitive advantage, and in the age of the “war for talent,” an organization needs to have a plan for developing its key talent.
One of the key tools that is used in talent development is the talent review. This process generally follows an organization’s performance management process (which is primarily focused on current employee performance) and is more focused on employee development and potential for the future. Talent reviews often employ the use of a 9-box template, which plots employee performance versus employee potential and provides the reviewer with nine distinct options, or boxes, to categorize where the employee is.
Refer to Performance and Potential Grid.
The performance axis ratings are low/medium/high and based on the employee’s recent performance management rating. Low = below target, medium = at target, and high = above target. Like the performance rating, this reflects performance against objectives and the skills and competencies required in the employee’s current role and function. Performance can change over time (for example, with a promotion or job change). Performance is overall a more objective rating than potential, which leaves the rater to make some assumptions about the future.
Potential is defined as an employee’s ability to demonstrate the behaviors necessary to be successful at the next highest level within the company. Competencies and behaviors are a good indicator of an employee’s potential. Higher-potential employees, no matter what the level, often display the following competencies: business acumen, strategic thinking, leadership skills, people skills, learning agility, and technology skills. Other indicators of potential may include:
1. Top performance in current job
2. Success in other positions held (within or outside of the company)
3. Education/certifications
4. Significant accomplishments/events
5. Willingness and desire to advance
In the talent review, the potential axis equates to potential for advancement within the organization: low = not ready to advance, medium = close to ready, and high = ready to advance. Potential does not equate to the value of an individual within the organization, nor does it state the quality of individual. There are likely many strong performers (top contributors) in every company who prefer to stay in their current role for years and be specialists of their own processes. A specialist or expert may not want to manage people, and thus would be rated as low on potential due to the lack of interest in advancement. Advancement may also mean relocation or lifestyle change that an employee is not willing to make at that time, so the employee would be rated low on potential for that reason. Potential can certainly change over time, given people’s individual situations and life circumstances. Potential tends to be the more subjective ratings axis, as it involves some assumptions into what a team member could be capable of based on limited information that is available now.
A human resources team member should absolutely facilitate the talent review process and provide leaders with clear session objectives and specific instructions in order maintain the integrity and confidentiality of this important talent process. The book One Page Talent Management (Effron and Ort, HBS Press, 2010) describes the talent review meeting as a talent review calibration process that “ensures objective performance and potential evaluations, clear development plans, and an understanding of what high potential means in your company. A calibration meeting brings together a manager and her team members to discuss their talent. Each team member presents the performance and potential (PxP) grid that he prepared on direct reports and briefly describes how each person is rated. Other team members contribute their opinions based on their firsthand interactions with that person. The discussion concludes after they have discussed each person, agreed on their final placement, and identified key development steps for them.”
After everyone being discussed has been placed in one of the boxes on the 9-box template, the leadership team should discuss key development actions for each employee. (If there isn’t time to discuss development activities for each employee, the group should start with the high-potential employees.) After the talent review calibration process is complete, human resources should keep a master list of the documented outcomes, as well as the development activities that were suggested for everyone. HR should follow up with each of the leaders to help with the planning and execution of the development activities as needed. The key outputs of the talent review process include:
1. Identification of the “high-potential” employees in the organization
2. Definition of development actions/action plans for each employee
3. Insight into talent gaps and issues
4. Input into the succession planning process
Succession planning generally follows shortly after (if not right after) a talent review because human resources and organizational leadership now have fresh information on the performance and potential of employees in the organization. Succession planning is a key process used to identify the depth of talent on the “bench” and the readiness of that talent to move into new roles. The process can be used to identify gaps or a lack of bench strength at any levels of the organization, but it is usually reserved for leadership roles and other key roles in the organization. In succession planning, human resources will generally sit down with the group leader to discuss succession planning for his group and create a defined list of leadership and other critical roles that will be reviewed for potential successors.
Once the roles for succession planning analysis have been defined, both HR and the business leader will define the following elements for each role:
1. Name of incumbent
2. Attrition risk of incumbent
3. Names of short-term successor candidates (ready in <1 year)
4. Names of mid-term successor candidates (ready in 1–3 years)
5. Names of long-term successor candidates (ready in 3+ years)
6. Optional—9-box rating next to each successor candidate’s name
The names of longer-term successor candidates are not as critical, but it is always helpful to understand the depth of the bench. With the information recently collected during the talent review process, HR and management will have a lot of quality information on the internal successor candidates. It is important to include external successor candidates in the succession planning analysis as well. If there are no candidates that are identified as short-, mid-, or long-term successor candidates for a role, then the word “EXTERNAL” should automatically be placed next to that role. Even if there are internal candidates named, any external successor candidates should still be captured in the analysis as appropriate.
Talent reviews and succession planning processes both generate excellent discussions and very insightful information on the state of talent in the organization. Human resources facilitates both processes, in very close partnership with the business, and ultimately keeps the output information from the sessions—i.e., the final succession plan, the final 9-box, and the follow-up development actions and activities as defined in the talent review session. With this information, human resources possesses a level of knowledge that will allow it to drive talent development and coach managers on the follow-up actions that they need to set in motion. Some examples of follow-up development activities that may be appropriate based on the outputs of the succession and 9-box events include training, stretch assignments, individual assessments, and individual development plans. Training and training plans identify the learning events that an individual would benefit from, either in a classroom or online format. Stretch assignments may be an appropriate development action for an employee who is being tested for or who wants to take on additional responsibility. Individual assessments, such as a 360 assessment for managers, is a good developmental tool to provide feedback from manager, peers, direct reports, customers, or others who interact with the employee regularly. Finally, an individual development plan is an important document that employees should use to map out their personal development goals and actions, and to track their own status and progress toward those goals.
Talent development is a collection of organization-wide processes that help to evaluate talent strengths and gaps within the organization. Although many of the processes are carried out in a group setting, the output of talent development needs to be very individualized via a collection of development tools and strategies to enhance performance. Human resources is a key resource and partner for these tools and strategies, and thus plays a critical role in the future of talent for the organization.
### Conclusion
Human resource management is a complex and often difficult field because of the nature of the key area of focus—people. In working with people, we begin to understand both the expressed and the hidden drives—intentions and emotions that add complexity and additional context to the processes and tasks that we set forth. We also begin to understand that an organization is a group of individuals, and that human resources plays a critical role in ensuring that there are philosophies, structures, and processes in place to guide, teach, and motivate individual employees to perform at their best possible levels.
1. What are the benefits of talent development and succession planning?
Talent development and succession planning processes provide organizations with the systems needed to assess and develop employees and to make the appropriate decisions on their internal movement and development. One important talent development process involves a talent review, in which leadership discusses the employees in its groups in terms of their performance and potential. Performance is based on current performance management evaluations on the current role. Potential is based on behavioral indications that would predict future high performance and promotability in an organization. There is then a discussion on the follow-up actions and development plans for the employees, based on where they fall in the performance/potential matrix. The benefit of this process is that the organization gains a better understanding of where the top talent is within the organization and can make plans to manage the development of that talent.
Another key process for managing talent is succession planning. In this process, leadership and HR meet to identify leadership roles and other critical roles in the organization, and then they discuss a potential pipeline of internal and external successor candidates at different levels of readiness for the role. The output of succession planning is that an organization gets to understand the depth of its talent bench and knows the gap areas where it may need to focus on developing or acquiring additional candidates.
### Chapter Review Questions
1. What are the four “waves” of the human resource management evolution?
2. What are some of the key regulations that human resources must manage compliance with?
3. What are some of the unintended consequences of a forced ranking system?
4. What are some of the performance management challenges that must be addressed, no matter what the system?
5. Why are many companies interested in moving to a pay-for-performance strategy?
6. What are the main process steps for implementing pay for performance?
7. What are some best practices for recruiting new leadership candidates?
8. Describe the steps of a talent review session.
9. What is the difference between performance and potential?
10. How can you tell if a candidate has potential?
### Management Skills Application Exercises
1. How has human resource management’s evolution over the years helped to make it a better partner to the business? In what way would you expect HRM to continue to evolve over the years?
2. Do you believe that a formal, annual performance management process is necessary to help an organization reach its goals? Why or why not? What are the minimum process requirements that must be met to successfully evaluate performance?
3. .Is it possible for an organization to reward people fairly without implementing a pay-for-performance process? Why or why not? Do you see any pitfalls to a pay-for-performance process?
4. How does the “war for talent” impact talent acquisition processes? How can HR be more successful working with the business to navigate the competitive talent landscape?
5. What are the benefits of having talent review calibration processes? What is the downside of the process? Should an organization let employees know what their talent review “rating” is? Why or why not?
### Managerial Decision Exercises
1. You have been hired as a new Finance VP, and you oversee a team of almost 30 people. Your HR manager has recently informed you that there have been several employee relations in your group in the recent past, and you are concerned about the level of knowledge that your management team has around dealing with these issues. What could you do to close the gap in knowledge and mitigate the risk of issues in your group?
2. Your company has decided to drop their formal, annual performance management process and move to a system based on ongoing feedback and communication with employees. You are concerned because you have always been careful to differentiate your employees by performance level, and you’re worried that this will hurt your stronger employees. How can use ensure that your feedback and communication with employees provides performance management, despite the lack of a formal system?
3. Your company has recently implemented a pay-for-performance model for compensation. This worries you because you know that your employees will be even more upset with their performance ratings if they know that they are tied to compensation. What actions can you take to start to prepare for this change?
4. You are the director of an engineering organization and have been fighting the “war for talent” for a while. It seems that whenever you have a role vacancy, you let HR know but it takes forever to find someone—and the candidate often turns down the job. What are some ways to better partner with HR to get ahead of the curve for the next time?
5. You are the VP of a line of business at an international manufacturing company. You and several of your long-time colleagues will be retiring over the next few years, and you need to start thinking about talent and succession planning. You are going into a talent review discussion next week, and you’re realizing that you have a dearth of potential within your organization. What are some actions you (and HR) can take now to ensure that your business unit isn’t floundering when you leave for retirement?
### Critical Thinking Case
### Zappos, Holacracy, and Human Resource Management
In 2013, Zappos was performing well under the leadership of Tony Hsieh and was getting ready to take on a new challenge that would, among other things, push the boundaries of traditional human resource management. Although business was booming, Tony Hsieh was not a man who wanted to be in status quo mode for too long, so he set out to implement an organizational and cultural change called Holacracy. Zappos was the largest and best known of the 300 companies worldwide that had adopted Holacracy—a new form of hierarchy that is a “flexible, self-governing structure, where there are no fixed jobs but simply temporary functional roles.”
In a Holacracy, the main unit is called the “circle,” which is a distinct yet fluid team. Leadership became similarly fluid with the changing circles. Circles are designed to meet certain goals and are created and disbanded as project needs change. The intent is that people self-select to work on projects that they want to work on and that they have the skills for. Tony also removed all previous titles. The role of manager went away and was replaced with three roles: “lead links” would focus on guiding the work in the circles; “mentors” would work on employee growth and development; and “compensation appraisers” would work on determining employees’ salaries. In 2015, he decided to further break down the divisions between many of the functions, changing them all to business-centric circles. There were changes to almost every human resource management structure that you can think of, and there were quite a few growing pains within the organization. Zappos began to look at employee pay, and Holacracy seemed to have a steep learning curve for many people, even though a “constitution” was created to provide guidance. Zappos was also facing 14% attrition, as some of the rapid and excessive changes were wearing on employees. Tony was a visionary, but for a lot of people it was hard to catch up and see the same vision.
From a human resource management perspective, there could be some positive attributes of a Holacracy if it were to succeed—such as building engagement and helping to build talent and skill sets. There were also a few risks that needed to be dealt with carefully. When you create an organization in which people don’t have set teams or projects but instead determine what they want to work on, one of the big challenges is going to be determining the level and nature of their role, as well as the compensation for that role. If Holacracy is compared to a consulting organization, in which consultants are brought into different projects with different requirements, it is critical to first determine the level of their consultant role (based on their education, skills, experience, etc.) so that they can properly move from project to project yet maintain a role of a certain level. That level is then tied to a specific pay scale, so the same consultant will receive the same salary no matter which project they are on. If that consultant is “on the bench,” or not placed on a project (or self-placed, in the case of Holacracy), then after a certain defined period that consultant may be at risk of termination.
Holacracy is in some ways a challenging concept to think about, and self-management may not be able to work in all environments. A company that is implementing a Holacracy may find that they are able to master the process of self-selection of work in the “circles.” The “task” part of the equation may not be much of an issue once people figure out how to navigate the circles. However, the “people” part of the equation may need some work. The greatest challenge may lie in the structures and processes of human resource management that ultimately define the employer-employee relationship.
2. What are some of the human resource management processes that might be enhanced by a Holacracy? What processes will be challenged?
3. Do you think that a Holacracy can be compared to a consulting company? How are they similar,s and how are they different? Can you think of work areas or industries in which Holacracy would be very difficult to implement?
Sources: Askin and Petriglieri, “Tony Hsieh at Zappos: Structure, Culture, and Change”, INSEAD Business School Press, 2016. |
# Diversity in Organizations
## Introduction
### Learning Outcomes
After reading this chapter, you should be able to answer these questions:
1. What is diversity?
2. How diverse is the workforce?
3. How does diversity impact companies and the workforce?
4. What is workplace discrimination, and how does it affect different social identity groups?
5. What key theories help managers understand the benefits and challenges of managing the diverse workforce?
6. How can managers reap benefits from diversity and mitigate its challenges?
7. What can organizations do to ensure applicants, employees, and customers from all backgrounds are valued? |
# Diversity in Organizations
## An Introduction to Workplace Diversity
1. What is diversity?
Diversity refers to identity-based differences among and between two or more people that affect their lives as applicants, employees, and customers. These identity-based differences include such things as race and ethnicity, gender, sexual orientation, and age. Groups in society based on these individual differences are referred to as identity groups. These differences are related to discrimination and disparities between groups in areas such as education, housing, healthcare, and employment. The term managing diversity is commonly used to refer to ways in which organizations seek to ensure that members of diverse groups are valued and treated fairly within organizations in all areas including hiring, compensation, performance evaluation, and customer service activities. The term valuing diversity is often used to reflect ways in which organizations show appreciation for diversity among job applicants, employees, and customers. Inclusion, which represents the degree to which employees are accepted and treated fairly by their organization, is one way in which companies demonstrate how they value diversity. In the context of today’s rapidly changing organizational environment, it is more important than ever to understand diversity in organizational contexts and make progressive strides toward a more inclusive, equitable, and representative workforce.
Three kinds of diversity exist in the workplace (see ). Surface-level diversity represents an individual’s visible characteristics, including, but not limited to, age, body size, visible disabilities, race, or sex. A collective of individuals who share these characteristics is known as an identity group. Deep-level diversity includes traits that are nonobservable such as attitudes, values, and beliefs. Hidden diversity includes traits that are deep-level but may be concealed or revealed at the discretion of individuals who possess them. These hidden traits are called invisible social identities and may include sexual orientation, a hidden disability (such as a mental illness or chronic disease), mixed racial heritage, or socioeconomic status. Researchers investigate these different types of diversity in order to understand how diversity may benefit or hinder organizational outcomes.
Diversity presents challenges that may include managing dysfunctional conflict that can arise from inappropriate interactions between individuals from different groups. Diversity also presents advantages such as broader perspectives and viewpoints. Knowledge about how to manage diversity helps managers mitigate some of its challenges and reap some of its benefits.
1. What is diversity?
Diversity refers to identity-based differences among and between people that affect their lives as applicants, employees, and customers. Surface-level diversity represents characteristics of individuals that are readily visible, including, but not limited to, age, body size, visible disabilities, race, or sex. Deep-level diversity includes traits that are nonobservable such as attitudes, values, and beliefs. Finally, hidden diversity includes traits that are deep-level but may be concealed or revealed at the discretion of individuals who possess them. |
# Diversity in Organizations
## Diversity and the Workforce
1. How diverse is the workforce?
In 1997, researchers estimated that by the year 2020, 14% of the workforce would be Latino, 11% Black, and 6% Asian. Because of an increase in the number of racial minorities entering the workforce over the past 20 years, most of those projections have been surpassed as of 2016, with a workforce composition of 17% Hispanic or Latino of any race, followed by 12% Black and 6% Asian (see ). American Indians, Alaska Natives, Native Hawaiians, and Other Pacific Islanders together made up a little over 1% of the labor force, while people of two or more races made up about 2% of the labor force. Women constitute approximately 47% of the workforce compared to approximately 53% for men, and the average age of individuals participating in the labor force has also increased because more employees retire at a later age. Although White people still predominantly make up the workforce with a 78% share, the U.S. workforce is becoming increasingly more diverse, a trend that presents both opportunities and challenges. These demographic shifts in the labor market affect the workforce in a number of ways due to an increasing variety of workers who differ by sex, race, age, sexual orientation, disability status, and immigrant status.
### Gender
Increasingly more women are entering the workforce. Compared to 59% in 1977, the labor force participation rate for men is now approximately 53% and is expected to decrease through 2024 to 52%. As the labor force participation rate decreases for men, the labor force growth rate for women will be faster. Their percentage of the workforce has steadily risen, as can be seen in , which compares the percentage of the workforce by gender in 1977 to 2017.
Although more women are entering the labor force and earning bachelor’s degrees at a higher rate than men, women still face a number of challenges at work. The lack of advancement opportunities awarded to qualified women is an example of a major challenge that women face called the glass ceiling, which is an invisible barrier based on the prejudicial beliefs that underlie organizational decisions that prevent women from moving beyond certain levels within a company. Additionally, in organizations in which the upper-level managers and decision makers are predominantly men, women are less likely to find mentors, which are instrumental for networking and learning about career opportunities. Organizations can mitigate this challenge by providing mentors for all new employees. Such a policy would help create a more equal playing field for all employees as they learn to orient themselves and navigate within the organization.
One factor that greatly affects women in organizations is sexual harassment. Sexual harassment is illegal, and workers are protected from it by federal legislation. Two forms of sexual harassment that can occur at work are quid pro quo and hostile environment. Quid pro quo harassment refers to the exchange of rewards for sexual favors or punishments for refusal to grant sexual favors. Harassment that creates a hostile environment refers to behaviors that create an abusive work climate. If employees are penalized (for example by being demoted or transferred to another department) for refusing to respond to repeated sexual advances, quid pro quo sexual harassment has taken place. The telling of lewd jokes, the posting of pornographic material at work, or making offensive comments about women in general are examples of actions that are considered to create a hostile work environment. According to the Equal Employment Opportunity Commission, sexual harassment is defined as the “unwelcome sexual advances, requests for sexual favors, and other verbal or physical harassment of a sexual nature. Harassment can also include offensive remarks about a person’s sex.” Although both men and women can be sexually harassed, women are sexually harassed at work more often. In addition, Black and other minority women are especially likely to be subjected to sexual discrimination and harassment.
It is in the organization’s best interest to prevent sexual harassment from occurring. Ways to do this include companies providing ongoing (e.g., annual) training so that employees are able to recognize sexual harassment. Employees should know what constitutes acceptable and unacceptable behavior and what channels and protocols are in place for reporting unacceptable behaviors. Managers should understand their role and responsibilities regarding harassment prevention, and a clear and understandable policy should be communicated throughout the organization.
Just as gender-based discrimination is illegal and inappropriate, so is discrimination or mistreatment based on pregnancy, childbirth, or related medical conditions. While organizations may have different policies regarding maternity and paternity leave, they must comply with both the Pregnancy Discrimination Act and the Family Medical Leave Act.
### Race
Another important demographic shift in workforce diversity is the distribution of race. (Note that we are using categories defined by the U.S. Census Bureau. It uses the term “Black (African American)” to categorize U.S. residents. In this chapter, we use the term “Black.”)
While the White non-Hispanic share of the workforce continues to shrink, the share of racial and ethnic minority groups will continue to grow. Specifically, Hispanic people and Asian people will grow at a faster rate than other racial minorities, and Hispanic people are projected to make up almost one-fifth of the labor force by 2024. The projected changes in labor force composition between 2014 and 2024 are as follows:
White non-Hispanic participation in the labor force will decline by 3%. Other groups’ share of the labor force is expected to increase: Black (10.1%), Hispanic/Latino (28%), Asian (23.2%), and Other groups (i.e., multiracial, American Indian, Alaska Native, Native Hawaiian, and Other Pacific Islanders) labor force share is expected to increase by 22.2%. With the workforce changing, managers will need to be mindful of issues employees encounter that are uniquely tied to their experiences based on race and ethnicity, including harassment, discrimination, stereotyping, and differential treatment by coworkers and decision makers in organizations.
### Discrimination Against Black Employees
Race is one of the most frequent grounds for discrimination. Although Black people do not make up the largest share of the workforce for racial minorities, research studies show they face discrimination more often than other racial minorities. As a matter of fact, some experts believe that hiring discrimination against Black people has not declined over the past 25 years while workplace discrimination against other racial minority groups has declined.
Currently, White men have higher participation rates in the workforce than do Black men, and Black women have slightly higher participation rates than White women. Despite growth and gains in both Black education and Black employment, a Black person is considerably more likely to be unemployed than a White person, even when the White person has a lower level of education or a criminal record.
Black people frequently experience discrimination in the workplace in spite of extensive legislation in place to prohibit such discrimination. Research has shown that stereotypes and prejudices about Black people can cause them to be denied the opportunity for employment when compared to equally qualified White people. It is estimated that about 25% of businesses have no minority workers and another 25% have less than 10% minority workers. In terms of employed Black people, research has shown that, regardless of managers’ race, managers tended to give significantly higher performance ratings to employees who were racially similar to them. Because White people are much more likely to be managers than Black people, this similarity effect tends to advantage White employees over Black employees. Black people are also significantly more likely to be hired in positions that require low skills, offer little to no room for growth, and pay less. These negative employment experiences affect both the mental and physical health of Black employees.
### Hispanic/Latino
Hispanic people are the second-fastest-growing minority group in the United States behind Asian people, and they make up 17% of the labor force. Despite this and the fact that Hispanic people have the highest labor participation rate of all the minority groups, they still face discrimination and harassment in similar ways to other minority groups. (Note that we are again using the categories as defined by the U.S. Census Bureau, which predominantly uses the term "Hispanic" to refer to people of Cuban, Mexican, Puerto Rican, South or Central American, or other Spanish culture or origin.)
Hispanic people can be of any race. As a matter of fact, increasingly more Hispanic people are identifying racially as White. In 2004 almost half of Hispanic people identified themselves racially as White, while just under half identified themselves as “some other race.” More than 10 years later, approximately 66% of Hispanic people now identify themselves racially as White while only 26% identify themselves as “some other race.” The remaining Hispanic population, totaling approximately 7%, identify as either Black, American Indian, Asian, Alaskan Native, Pacific Islander, or Native Hawaiian.
Why would a minority identity group identify racially as White? A Pew study found that the longer Hispanic families lived in the United States, the more likely they were to claim White as their race even if they had not done so in the past. This suggests that upward mobility in America may be perceived by some Hispanic people to be equated with “Whiteness.” Consequently, Hispanic people who self-identify racially as White experience higher rates of education and salary, and lower rates of unemployment. Additionally, only 29% of Hispanic people polled by the Pew Hispanic Center believe they share a common culture. According to the Pew Research Center, this finding may be due to the fact that the Hispanic ethnic group in the United States is made up of at least 14 Hispanic origin groups (such as Puerto Rican, Cuban, Spanish, Mexican, Dominican, and Guatemalan, among many others). Each of these groups has its own culture with different customs, values, and norms.
These cultural differences among the various Hispanic groups, combined with different self-perceptions of race, may also affect attitudes toward their workplace environment. For example, one study found that the absenteeism rate among Black people was related to the level of diversity policies and activities visible in the organization, while the absenteeism rate among Hispanic people was similar to that of White people and not related to those diversity cues. Results from this study suggest that managers need to be aware of how diversity impacts their workplace, namely addressing the relationship between Hispanic job seekers or workers and organizational outcomes concerning diversity policies as it may differ from that of other racial minorities.
### Asian and Asian American
Asian people are the fastest-growing ethnic group in the United States, growing 72% between 2000 and 2015. Compared to the rest of the U.S. population overall, households headed by Asian Americans earn more money and are more likely to have household members who hold a bachelor’s degree. However, there is a wide range of income levels among the Asian population that differs between the more than 19 groups of Asian origin in the United States.
Similar to other racial and ethnic minority groups, Asian people are stereotyped and face discrimination at work. Society through media often stereotypes Asian men as having limited English-speaking skills and as being highly educated, affluent, analytical, and good at math and science. Asian women are often portrayed as weak and docile. For Asian women, and other minority women as well, social stereotypes depicting them as exotic contribute to reports of sexual harassment from women minority groups.
The model minority myth is a reflection of perceptions targeting Asian people and Asian Americans that contrast the stereotypes of “conformity” and “success” of Asian men with stereotypes of “rebelliousness” and “laziness” of other minority men. It also contrasts the stereotyped “exotic” and “obedient” nature of Asian women against the stereotypical beliefs that White women are “independent” and “pure.” These perceptions are used not only to invalidate injustice that occurs among other racial minorities, but also to create barriers for Asian and Asian Americans seeking leadership opportunities as they are steered toward “behind the scenes” positions that require less engagement with others. These stereotypes also relegate Asian women into submissive roles in organizations, making it challenging for Asian men and women to advance in rank at the same rate as White male employees.
### Multiracial
Although the U.S. Census Bureau estimates that approximately 2% of the U.S. population describes themselves as belonging to more than one race, the Pew Research Center estimates that number should be higher, with around 7% of the U.S. population considered multiracial. This is due to the fact that some individuals may claim one race for themselves even though they have parents from different racial backgrounds. To complicate matters even more, when collecting data from multiracial group members, racial identity for individuals in this group may change over time because race is a social construct that is not necessarily based on a shared culture or country of origin in the same way as ethnicity. As a result, multiracial individuals (and Hispanic people) have admitted to changing their racial identity over the course of their life and even based on the situation. Approximately 30% of multiracial individuals polled by the Pew Research Center say that they have varied between viewing themselves as belonging to one race or belonging to multiple races. Within the group polled, the order in which they first racially identified as belonging to one racial group versus belonging to more than one group varied.
Despite the fact that multiracial births have risen tenfold between 1970 and 2013, their participation in the labor force is only around 2%. Additionally, multiracial individuals with a White racial background are still considered a racial minority unless they identify themselves solely as White, and approximately 56% of them on average say they have been subjected to racial jokes and slurs. Discrimination also varies when multiracial groups are broken down further, with Black–American Indians having the highest percentage of individuals reporting discrimination and White–Asian people having the lowest percentage.
At work, multiracial employees are sometimes mistaken for races other than their own. If their racial minority background is visible to others, they may experience negative differential treatment. Sometimes they are not identified as having a racial or ethnic minority background and are privy to disparaging comments from unsuspecting coworkers about their own race, which can be demoralizing and can lead to lower organizational attachment and emotional strain related to concealing their identity.
### Other Groups
Approximately 1% of the labor force identifies as American Indian, Alaska Native, Native Hawaiian or Pacific Islander, or some other race.
### Age
The age distribution of an organization’s workforce is an important dimension of workplace diversity as the working population gets older. Some primary factors contributing to an older population include the aging of the large Baby Boomer generation (people born between 1946 and 1964), lower birth rates, and longer life expectancies due to advances in medical technology and access to health care. As a result, many individuals work past the traditional age of retirement (65 years old) and work more years than previous generations in order to maintain their cost of living.
compares the percentage of the population over the age of 65 to those under the age of 18 between 2010 and 2016. The number of older individuals has increased and is projected to reach 20.6% by the year 2030 while the number of younger individuals has steadily decreased within that time period. These numbers imply that organizations will increasingly have employees across a wide range of ages, and cross-generational interaction can be difficult manage. Although older workers are viewed as agreeable and comfortable to work with, they are also stereotyped by some employees as incompetent and less interested in learning new tasks at work compared to younger workers. Studies have found support for the proposition that age negatively relates to cognitive functioning. However, if managers offer less opportunity to older workers solely because of declining cognitive functioning, it can be detrimental to organizational performance because older workers outperform younger workers on a number of other job performance measures. Compared to younger workers, older workers are more likely to perform above their job expectations and follow safety protocols. They are also less likely to be tardy, absent, or abuse drugs or alcohol at work compared to their younger counterparts.
### Sexual Orientation and Gender Identity
Sexual orientation diversity is increasing in the workforce. In June, 2020, the Supreme Court ruled that the Civil Rights Act prohibits discrimination based on sexual orientation and gender identity. Until this ruling, only 21 states and Washington D.C. prohibited such discrimination. With this new federal protection, individuals cannot for employment or fired for their sexual orientation , gender identity, or gender expression. However, although the Civil Rights Act does not provide federal protection to lesbian, gay, bisexual and transgender, and queer/questioning (LGBTQ) employees, that protection is not complete. LGBTQ people can still face other types of discrimination inside and outside of the workplace, and some employers and lawmakers may take up the issue in the future. On a positive note, more than half of the Fortune 500 companies have corporate policies that protect sexual minorities from discrimination at work and offer domestic-partner benefits. Many employers are beginning to understand that being perceived as inclusive will make them more attractive to a larger pool of job applicants. Furthermore, many organizations have come to recognize that gender and sexual orientation equity aligns to their mission and ethics.
Unfortunately, the percentage of hate crimes relating to sexual orientation discrimination has increased. Indeed, LGBTQ employees are stigmatized so much that in a recent study, researchers found that straight-identifying participants were more attracted to employers with no job security to offer them compared to gay-friendly employers. In other words, individuals would waive job security to avoid working with sexual minorities. Also, compared to heterosexuals, sexual minorities have higher education levels but still face hiring and treatment discrimination frequently.
LGBTQ employees are often faced with the decision of whether or not to be truthful about their sexual orientation at work for fear of being stigmatized and treated unfairly. To be clear, any stigmatization is the fault of the people who mistreat others, and sometimes even the organization itself. But as a result, LGTBQ and other people may choose to engage in what is sometimes called passing, or the decision not to disclose something about oneself. Passing often involves a great risk of emotional strain that can affect performance and wellbeing. Individuals who pass may distance themselves from coworkers or clients to avoid disclosure about their personal life. This behavior can also result in decreased networking and mentoring opportunities, which over time can limit advancement opportunities. The decision to be transparent about sexual orientation is sometimes called revealing. Just like passing, revealing has its own set of risks including being ostracized, stigmatized, and subjected to other forms of discrimination at work. However, compared to passing, the benefits of building relationships at work and using their identity as a catalyst for tolerance and progressive organizational change may outweigh the risks when LGBTQ employees decide to reveal. The decision to "come out" should be made exclusively by the individual; "outing" someone else as any sexual orientation or gender identity is considered highly inappropriate and hurtful, and may have employment-related consequences.
Research shows that when laws are passed to prevent sexual orientation discrimination, incidents of workplace discrimination decrease. This same effect occurs when firms adopt policies that protect the rights of sexual minority employees. By creating a safe and inclusive work environment for LGBTQ employees, companies can create a culture of tolerance and trust for all employees regardless of their sexual orientation or gender identity.
### Immigrant Workers
Every year a new record is set for the time it takes to reach the U.S. cap of H-1B visas granted to employers. H- 1B visas are a type of work visa, a temporary documented status that authorizes individuals to permanently or temporarily live and work in the United States. As a result of the demand for work visas by employers, the number of immigrant workers in the U.S. workforce has steadily grown within the last decade from 15% in 2005 to 17% in 2016. Compared to those born in the United States, the immigrant population in America is growing significantly faster. This is partly because of the U.S. demand for workers who are proficient in math and science and wish to work in America.
Although a huge demand for immigrant labor exists in the United States, immigrant labor exploitation occurs, with immigrant employees receiving lower wages and working longer hours compared to American workers. Foreign-born job seekers are attracted to companies that emphasize work visa sponsorship for international employees, yet they are still mindful of their vulnerability to unethical employers who may try to exploit them. For example, Lambert and colleagues found that some of the job-seeking MBA students from the Philippines in their study believed that companies perceived to value international diversity and sponsor H-1B visas signaled a company wishing to exploit workers. Others believed that those types of companies might yield diminishing returns to each Filipino in the company because their token value becomes limited. In news stories, companies have been accused of drastically shortchanging foreign student interns on their weekly wages. In another case, Infosys, a technology consulting company, paid $34 million to settle allegations of visa fraud due to suspicion of underpaying foreign workers to increase profits.
### Other Forms of Diversity at Work
Workers with disabilities are projected to experience a 10% increase in job growth through the year 2022. This means that more public and corporate policies will be revised to allow greater access to training for workers with disabilities and employers. Also, more companies will use technology and emphasize educating employees about physical and mental disabilities as workplace accommodations are used more often.
In the past, the United States has traditionally been a country with citizens who predominantly practice the Christian faith. However, over the past almost 30 years the percentage of Americans who identify as Christian has significantly decreased—by approximately 12%. Over that same time period, affiliation with other religions overall increased by approximately 25%. The increase in immigrant workers from Asian and Middle Eastern countries means that employers must be prepared to accommodate religious beliefs other than Christianity. Although federal legislation protects employees from discrimination on the basis of race, religion, and disability status, many employers have put in place policies of their own to deal with the variety of diversity that is increasingly entering the workforce.
1. How diverse is the workforce?
In analyzing the diversity of the workforce, several measures can be used. Demographic measures such as gender and race can be used to measure group sizes. Measures of such things as discrimination toward specific groups can be analyzed to gauge the diversity of the workforce. Other measures of diversity in the workforce can include examination of differences in age and sexual orientation. |
# Diversity in Organizations
## Diversity and Its Impact on Companies
1. How does diversity impact companies and the workforce?
Due to trends in globalization and increasing ethnic and gender diversity, it is imperative that employers learn how to manage cultural differences and individual work attitudes. As the labor force becomes more diverse there are both opportunities and challenges to managing employees in a diverse work climate. Opportunities include gaining a competitive edge by embracing change in the marketplace and the labor force. Challenges include effectively managing employees with different attitudes, values, and beliefs, in addition to avoiding liability when leadership handles various work situations improperly.
### Reaping the Advantages of Diversity
The business case for diversity introduced by Taylor Cox and Stacy Blake outlines how companies may obtain a competitive advantage by embracing workplace diversity. Six opportunities that companies may receive when pursuing a strategy that values diversity include cost advantages, improved resource acquisition, greater marketing ability, system flexibility, and enhanced creativity and better problem solving (see ).
### Cost Advantages
Traits such as race, gender, age, and religion are protected by federal legislation against various forms of discrimination (covered later in this chapter). Organizations that have policies and procedures in place that encourage tolerance for a work climate of diversity and protect female and minority employees and applicants from discrimination may reduce their likelihood of being sued due to workplace discrimination. Cox and Blake identify this decreased liability as an opportunity for organizations to reduce potential expenses in lawsuit damages compared to other organizations that do not have such policies in place.
Additionally, organizations with a more visible climate of diversity experience lower turnover among women and minorities compared to companies that are perceived to not value diversity. Turnover costs can be substantial for companies over time, and diverse companies may ameliorate turnover by retaining their female and minority employees. Although there is also research showing that organizations that value diversity experience a higher turnover of White employees and male employees compared to companies that are less diverse, some experts believe this is due to a lack of understanding of how to effectively manage diversity. Also, some research shows that White people with a strong ethnic identity are attracted to diverse organizations similarly to non-White people.
### Resource Acquisition
Human capital is an important resource of organizations, and it is acquired through the knowledge, skills, and abilities of employees. Organizations perceived to value diversity attract more women and minority job applicants to hire as employees. Studies show that women and minorities have greater job-pursuit intentions and higher attraction toward organizations that promote workplace diversity in their recruitment materials compared to organizations that do not. When employers attract minority applicants, their labor pool increases in size compared to organizations that are not attractive to them. As organizations attract more job candidates, the chances of hiring quality employees increases, especially for jobs that demand highly skilled labor. In summary, organizations gain a competitive advantage by enlarging their labor pool by attracting women and minorities.
### Marketing
When organizations employ individuals from different backgrounds, they gain broad perspectives regarding consumer preferences of different cultures. Organizations can gain insightful knowledge and feedback from demographic markets about the products and services they provide. Additionally, organizations that value diversity enhance their reputation with the market they serve, thereby attracting new customers.
### System Flexibility
When employees are placed in a culturally diverse work environment, they learn to interact effectively with individuals who possess different attitudes, values, and beliefs. Cox and Blake contend that the ability to effectively interact with individuals who differ from oneself builds cognitive flexibility, the ability to think about things differently and adapt one’s perspective. When employees possess cognitive flexibility, system flexibility develops at the organizational level. Employees learn from each other how to tolerate differences in opinions and ideas, which allows communication to flow more freely and group interaction to be more effective.
### Creativity and Problem Solving
Teams from diverse backgrounds produce multiple points of view, which can lead to innovative ideas. Different perspectives lead to a greater number of choices to select from when addressing a problem or issue.
Life experience varies from person to person, sometimes based on race, age, or sex. Creativity has the opportunity to flourish when those experiences are shared. Diverse teams not only produce more alternatives, but generate a broader range of perspectives to address tasks and problems. One way in which diverse teams enhance problem-solving ability is by preventing groupthink, a dysfunction in decision-making that occurs in homogeneous groups as a result of group pressures and group members’ desire for conformity and consensus. Diverse group membership prevents groupthink because individuals from varied backgrounds with different values, attitudes, and beliefs can test the assumptions and reasoning of group members’ ideas.
### Aligning Diversity Programs with an Organization’s Mission and Strategic Goals
Diversity helps organizations perform best when it is aligned with a specific business strategy. For example, when companies use heterogeneous management teams that are directed by an entrepreneurial strategy focusing on innovation, the companies’ productivity increases.
When an entrepreneurial strategy is not present, however, team diversity has little effect on productivity. An entrepreneurial strategy includes innovation that reflects a company’s commitment to being creative, supporting new ideas, and supporting experimentation as a way to gain a competitive advantage. In other words, managers may properly utilize the multiple perspectives that emerge from heterogeneous teams by integrating them as a resource for pursuing the overall strategy of the organization.
### Using Human Resources Tools Strategically
To effectively align diversity with an organization’s strategy, the human resources function must be able to engage employees at dynamic levels. Using a strategic human resources management approach to an organization can successfully integrate diversity with the organization’s goals and objectives. Strategic human resources management (SHRM) is a system of activities arranged to engage employees in a manner that assists the organization in achieving a sustainable competitive advantage. SHRM practices vertically integrate with the mission and strategy of the organization while horizontally integrating human resources activities across its functional areas. By doing so, a unique set of resources can be made available to specific to the needs of the organization. Furthermore, when human resources becomes a part of the strategic planning process instead of just providing ancillary services, improved communication, knowledge sharing, and greater synergy between decision makers can occur within the organization to improve organizational functioning.
The resource-based view of the firm has been used to support the argument for diversity because it demonstrates how a diverse workforce can create a sustainable competitive advantage for organizations. Based on the resource-based view of the firm, when companies possess resources that are rare, valuable, difficult to imitate, and non-substitutable, a sustained competitive advantage can be attained. The SHRM approach assumes that human capital—the current and potential knowledge, skills, and abilities of employees—is instrumental to every organization’s success and sustainability and longevity.
If a diverse composition of employees within organizations is rare, employing minorities in positions of leadership is even rarer. One exception is Northern Trust, an investment management firm that was recently listed on Forbes magazine’s 2018 Best Employers for Diversity list. Thirty-eight percent of Northern Trust’s top executives are women, which is impressive because it matches the average percentage of women in full-time one-year MBA programs over the past five years. The average for S&P 500 companies is just 27%. In addition, African Americans make up 23% of Northern Trust’s board, which also demonstrates the commitment Northern Trust has to diversity. This rare degree of diversity helps Northern Trust become an employer of choice for minorities and women. In turn, attracting minority applicants increases the labor pool available to Northern Trust and increases its ability to find good talent.
Diverse companies may capitalize on the multiple perspectives that employees from different backgrounds contribute to problem solving and idea generation. In group settings, members from collectivist cultures from Asia and South America, for example, engage with others on tasks differently than members from North America. Similarly, Asian, Black, and Hispanic people usually act more collectively and engage more interdependently than White people, who are generally more individualistic. More harmonious working interactions benefit group cohesion and team performance, and employees can grasp better ways of doing things when there is a diverse population to learn from.
For a company to attain a sustained competitive advantage, its human resource practices must be difficult to copy or imitate. As we will see later in the chapter, companies may hold one of three perspectives on workplace diversity. The integration and learning perspective results in the best outcomes for employees and the organization. However, it is not easy to become an employer that can effectively manage diversity and avoid the challenges we learned about earlier in this chapter. Historical conditions and often-complex interplay between various organizational units over time can contribute to a company’s ability to perform effectively as a diverse organization. Best practices for targeting diverse applicants or resolving conflicts based on cultural differences between employees may occur organically and later become codified into the organizational culture. Sometimes, however, the origin of diversity practices is unknown because they arose from cooperation among different functional areas (e.g., marketing and human resources working strategically with leadership to develop recruitment ideas) that occurred so long ago that not even the company itself, let alone other companies, could replicate the process.
### Diversity and Organizational Performance
Research indicates that having diversity in an organization produces mixed results for its success. Some studies show a positive relationship, some show a negative relationship, and others show no relationship between diversity and performance. Some researchers believe that although findings regarding a direct relationship between diversity and success in the marketplace may be inconsistent, the relationship may be due to other variables not taken into account.
Taking the resource-based view perspective, Richard and colleagues demonstrated that racially diverse banking institutions focused on innovation experienced greater performance than did racially diverse banks with a low focus on innovation. These findings suggest that for the potential of racial diversity to be fully realized, companies should properly manage the system flexibility, creativity, and problem-solving abilities used in an innovative strategy. Other studies show that when top management includes female leadership, firm performance improves when organizations are innovation driven.
1. How does diversity impact companies and the workforce?
The demography of the labor force is changing in many ways as it becomes racially diverse and older and includes more women and individuals with disabilities. Diversity affects how organizations understand that employing people who hold multiple perspectives increases the need to mitigate conflict between workers from different identity groups, enhances creativity and problem solving in teams, and serves as a resource to create a competitive advantage for the organization. |
# Diversity in Organizations
## Challenges of Diversity
1. What is workplace discrimination, and how does it affect different social identity groups?
Although diversity has it benefits, there are also challenges that managers must face that can only be addressed with proper leadership. Some of the most common challenges observed in organizations and studied in research include lower organizational attachment and misunderstanding work diversity initiatives and programs.
### Lower Organizational Attachment
Although diversity programs attract and retain women and minorities, they may have the opposite effect on other, nonminority employees. When diversity is not managed effectively, White and male employees can feel alienated from or targeted by the organization as diversity programs are put in place. A study that examined 151 work groups across three large organizations investigated whether the proportion of group membership based on race or sex affected the group members’ absentee rates, psychological attachment to their work group, and turnover intentions, three factors that play significant roles in an employee’s attachment to their organization. Results showed a positive relationship between group heterogeneity and lower organizational attachment, higher turnover intentions, and greater frequency of absences for men and for White group members. In other words, as work group diversity increased, White employees and male employees felt less attached to the organization and were more likely to quit. Because heterogeneous groups improve creativity and judgement, managers should not avoid using them because they may be challenging to manage. Instead, employers need to make sure they understand the communication structure and decision-making styles of their work groups and seek feedback from employees to learn how dominant group members may adjust to diversity.
### Legal Challenges and Diversity
The legal system is used to combat discrimination. Among the ways that we will cover here are reverse discrimination, workplace discrimination, harassment, age discrimination, disability discrimination, national origin discrimination, pregnancy discrimination, race/color discrimination, religious discrimination, sex-based discrimination and other forms of discrimination.
### Reverse Discrimination
As research shows, workplace discrimination against women and racial or ethnic minorities is common. Reverse discrimination is a term that has been used to describe a situation in which dominant group members perceive that they are experiencing discrimination based on their race or sex. This type of discrimination is uncommon, but is usually claimed when the dominant group perceives that members of a protected (diverse) class of citizens are given preference in workplace or educational opportunities based not on their merit or talents, but on a prescribed preferential treatment awarded only on the basis of race or sex.
Research conducted in the 1990s shows that only six federal cases of reverse discrimination were upheld over a four-year period (1990–1994), and only 100 of the 3,000 cases for discrimination over that same four-year period were claims of reverse discrimination. Interestingly, a recent poll administered by the Robert Wood Johnson Foundation and the Harvard T.H. Chan School of Public Health found that a little more than half of White Americans believe that White people face discrimination overall, and 19% believe they have experienced hiring discrimination due to the color of their skin. This misperception stems in part from the recalibration of the labor force as it become more balanced due to increased equal employment opportunities for everyone. Members of dominant identity groups, White people and men, perceive fewer opportunities for themselves when they observe the workforce becoming more diverse. In reality, the workforce of a majority of companies is still predominantly White and male employees. The only difference is that legislation protecting employees from discrimination and improvements in equal access to education have created opportunities for minority group members when before there were none.
### Workplace Discrimination
Workplace discrimination occurs when an employee or an applicant is treated unfairly at work or in the job-hiring process due to an identity group, condition, or personal characteristic such as the ones mentioned above. Discrimination can occur through marital status, for example when a person experiences workplace discrimination because of the characteristics of a person to whom they are married. Discrimination can also occur when the offender is of the same protected status of the victim, for example when someone discriminates against someone based on a national origin that they both share.
The Equal Employment Opportunity Commission (EEOC) was created by Title VII of the Civil Rights Act of 1964 with the primary goal of making it illegal to discriminate against someone in the workplace due to their race, national origin, sex, disability, religion, or pregnancy status., and the 2020 Supreme Court decision upheld the same protections for sexual orientation and gender identity. The EEOC enforces laws and issues guidelines for employment-related treatment. It also has the authority to investigate charges of workplace discrimination, attempt to settle the charges, and, if necessary, file lawsuits when the law has been broken.
All types of workplace discrimination are prohibited under different laws enacted and enforced by the EEOC, which also considers workplace harassment and sexual harassment forms of workplace discrimination and mandates that men and women must be given the same pay for equal work.
The provision for equal pay is covered under the Equal Pay Act of 1963, which was an amendment to the Fair Labor Standards Act of 1938. Virtually all employers are subject to the provisions of the act, which was an attempt to address pay inequities between men and women. More than 50 years later, however, women still earn about 80 cents to every dollar that men earn, even while performing the same or similar jobs.
### Harassment
Harassment is any unwelcome conduct that is based on characteristics such as age, race, national origin, disability, gender, or pregnancy status. Harassment is a form of workplace discrimination that violates Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, and the Americans with Disabilities Act of 1990.
Sexual harassment specifically refers to harassment based on a person’s sex, and it can (but does not have to) include unwanted sexual advances, requests for sexual favors, or physical and verbal acts of a sexual nature. Though members of any sex can be the victim of sexual harassment, women are the primary targets of this type of harassment.
### Age Discrimination
Age discrimination consists of treating an employee or applicant less favorably due to their age. The Age Discrimination in Employment Act (ADEA) forbids discrimination against individuals who are age 40 and above. The act prohibits harassment because of age, which can include offensive or derogatory remarks that create a hostile work environment.
### Disability Discrimination
A person with a disability is a person who has a physical or mental impairment that limits one or more of the person’s life actions. Disability discrimination occurs when an employee or applicant who is covered by the Americans with Disabilities Act (ADA) is treated unfavorably due to their physical or mental disability. The ADA is a civil rights law that prohibits discrimination in employment, public services, public accommodations, and telecommunications against people with disabilities. To be covered under the ADA, individuals must be able to perform the essential functions of their job with or without reasonable accommodations. Research has shown that reasonable accommodations are typically of no or low cost (less than $100) to employers.
### National Origin Discrimination
National origin discrimination involves treating someone unfavorably because of their country of origin, accent, ethnicity, or appearance. EEOC regulations make it illegal to implement an employment practice or policy that applies to everyone if it has a negative impact on people of a certain national origin. For example, employers cannot institute an “English-only” language policy unless speaking English at all times is essential to ensure the safe and efficient operation of the business. Employers also cannot mandate employees be fluent in English unless fluency in English is essential to satisfactory job performance. The EEOC also prohibits businesses from hiring only U.S. citizens or lawful residents unless the business is required by law to do so.
### Pregnancy Discrimination
Pregnancy discrimination involves treating an employee or applicant unfairly because of pregnancy status, childbirth, or medical conditions related to pregnancy or childbirth. The Pregnancy Discrimination Act (PDA) prohibits any discrimination as it relates to pregnancy in any of the following areas: hiring, firing, compensation, training, job assignment, insurance, or any other employment conditions. Further, certain conditions that result from pregnancy may be protected under the ADA, which means employers may need to make reasonable accommodations for any employee with disabilities related to pregnancy.
Under the Family and Medical Leave Act (FMLA), new parents, including adoptive and foster parents, may be eligible for 12 weeks of unpaid leave (or paid leave only if earned by the employee) to care for the new child. Also, nursing mothers have the right to express milk on workplace premises.
### Race/Color Discrimination
Race/color discrimination involves treating employees or applicants unfairly because of their race or because of physical characteristics typically associated with race such as skin color, hair color, hair texture, or certain facial features.
As with national origin discrimination, certain workplace policies that apply to all employees may be unlawful if they unfairly disadvantage employees of a certain race. Policies that specify that certain hairstyles must or must not be worn, for example, may unfairly impact African American employees, and such policies are prohibited unless their enforcement is necessary to the operations of the business.
### Religious Discrimination
Religious discrimination occurs when employees or applicants are treated unfairly because of their religious beliefs. The laws protect those who belong to traditional organized religions and those who do not belong to organized religions but hold strong religious, ethical, or moral beliefs of some kind. Employers must make reasonable accommodations for employees’ religious beliefs, which may include flexible scheduling or modifications to workplace practices. Employees are also permitted accommodation when it comes to religious dress and grooming practices, unless such accommodations will place an undue burden on the employer. Employees are also protected from having to participate (or not participate) in certain religious practices as terms of their employment.
### Sex-Based Discrimination
Sex-based discrimination occurs when employees or applicants are treated unfairly because of their sex. This form of discrimination includes unfair treatment due to gender, transgender status, and sexual orientation. Harassment and policies that unfairly impact certain groups protected under sex discrimination laws are prohibited under EEOC legislation.
The key diversity-related federal laws are summarized in .
### Other Types of Discrimination
Beyond the key types of discrimination outlined by the EEOC, diversity and management scholars have identified other types of discrimination that frequently impact certain identity groups more than others. Access discrimination is a catchall term that describes when people are denied employment opportunities because of their identity group or personal characteristics such as gender, race, age, or other factors. Treatment discrimination describes a situation in which people are employed but are treated differently while employed, mainly by receiving different and unequal job-related opportunities or rewards. Scholars have also identified a form of discrimination called interpersonal or covert discrimination that involves discrimination that manifests itself in ways that are not visible or readily identifiable, yet is serious because it can impact interpersonal interactions between employees, employees and customers, and other important workplace relationships.
This type of discrimination poses unique challenges because it is difficult to identify. For example, one study examining customer service and discrimination found that obese customers were more likely to experience interpersonal discrimination than average-weight customers. Salespersons spent less time interacting with obese customers than average-weight customers, and average-weight customers reported more positive interactions with salespeople when asked about standard customer service metrics such as being smiled at, receiving eye contact, and perceived friendliness.
1. What is workplace discrimination, and how does it affect different social identity groups?
Workplace discrimination occurs when an employee or an applicant is treated unfairly at work or in the job-hiring process due to an identity group, condition, or personal characteristic such as age, race, national origin, sex, disability, religion, or pregnancy status. The Equal Employment Opportunity Commission enforces laws and legislation related to individuals with those protected statuses.
Harassment is any unwelcome conduct that is based on the protected characteristics listed above. Sexual harassment refers specifically to harassment based on a person’s sex, and it can (but does not have to) include unwanted sexual advances, requests for sexual favors, or physical and verbal acts of a sexual nature. |
# Diversity in Organizations
## Key Diversity Theories
1. What key theories help managers understand the benefits and challenges of managing the diverse workforce?
Many theories relevant to managing the diverse workforce center on an individual’s reactions (such as categorization and assessment of the characteristics of others) to people who are different from the individual. Competing viewpoints attempt to explain how diversity is either harmful or beneficial to organizational outcomes.
1. The cognitive diversity hypothesis suggests that multiple perspectives stemming from the cultural differences between group or organizational members result in creative problem solving and innovation.
2. The similarity-attraction paradigm and social identity theory hold that individuals’ preferences for interacting with others like themselves can result in diversity having a negative effect on group and organizational outcomes.
3. The justification-suppression model explains under what conditions individuals act on their prejudices.
### Cognitive Diversity Hypothesis
Some research shows that diversity has no relationship to group performance, and some shows that there is a relationship. Of the latter research, some shows a negative relationship (greater diversity means poorer group performance, less diversity means better group performance) and some shows a positive relationship.
These various findings may be due to the difference in how diversity can affect group members. Cognitive diversity refers to differences between team members in characteristics such as expertise, experiences, and perspectives. Many researchers contend that physical diversity characteristics such as race, age, or sex (also known as bio-demographic diversity) positively influence performance because team members contribute unique cognitive attributes based on their experiences stemming from their demographic background.
There is research that supports the relationship between group performance and task-related diversity as reflected in characteristics not readily detectable such as ability, occupational expertise, or education. However, the relationship between bio-demographic diversity and group performance has produced mixed results. For example, Watson and colleagues studied the comparison of group performance between culturally homogeneous and culturally heterogeneous groups. Groups were assigned business cases to analyze, and their group performance was measured over time based on four factors: the range of perspectives generated, the number of problems identified in the case, the number of alternatives produced, and the quality of the solution. Overall performance was also calculated as the average of all the factors. The factors were measured at four intervals: Interval 1 (at 5 weeks), Interval 2 (at 9 weeks), Interval 3 (at 13 weeks), and Interval 4 (at 17 weeks).
For Intervals 1 and 2, the overall performance of homogeneous groups was higher than heterogeneous groups. However, by Intervals 3 and 4, there were no significant differences in overall performance between the groups, but the heterogeneous group outperformed the homogeneous group in generating a greater range of perspectives and producing a greater number of alternatives.
This research suggests that although homogeneous groups may initially outperform culturally diverse groups, over time diverse groups benefit from a wider range of ideas to choose from when solving a problem. Based on the cognitive diversity hypothesis, these benefits stem from the multiple perspectives generated by the cultural diversity of group members. On the other hand, it takes time for members of diverse groups to work together effectively due to their unfamiliarity with one another, which explains why homogeneous groups outperform heterogeneous groups in the early stages of group functioning. (This is related to the similarity-attraction paradigm, discussed in the next section.) Other studies have shown that ethnically diverse groups cooperate better than homogeneous groups at tasks that require decision-making and are more creative and innovative. While homogeneous groups may be more efficient, heterogeneous groups sacrifice efficiency for effectiveness in other areas.
### Similarity-Attraction Paradigm
The cognitive diversity hypothesis explains how diversity benefits organizational outcomes. The similarity-attraction paradigm explains how diversity can have negative outcomes for an organization.
Some research has shown that members who belong to diverse work units may become less attached, are absent from work more often, and are more likely to quit. There is also evidence that diversity may produce conflict and higher employee turnover. Similarity-attraction theory is one of the foundational theories that attempts to explain why this occurs; it posits that individuals are attracted to others with whom they share attitude similarity.
Attitudes and beliefs are common antecedents to interpersonal attraction. However, other traits such as race, age, sex, and socioeconomic status can serve as signals to reveal deep-level traits about ourselves. For example, numerous studies investigating job-seeker behaviors have shown that individuals are more attracted to companies whose recruitment literature includes statements and images that reflect their own identity group. One study showed that companies perceived to value diversity based on their recruitment literature are more attractive to racial minorities and women compared to White people. Another study showed that when organizations use recruitment materials that target sexual minorities, the attraction of study participants weakened among heterosexuals. Even foreign-born potential job candidates are more attracted to organizations that depict international employees in their job ads.
### Social Cognitive Theory
Social cognitive theory is another theory that seeks to explain how diversity can result in negative outcomes in a group or organization. Social cognitive theory suggests that people use categorization to simplify and cope with large amounts of information. These categories allow us to quickly and easily compartmentalize data, and people are often categorized by their visible characteristics, such as race, sex, and age. Thus, when someone sees a person of a particular race, automatic processing occurs and beliefs about this particular race are activated. Even when the person is not visible, they can be subject to this automatic categorization. For example, when sorting through resumes a hiring manager might engage in gender categorization because the person’s name provides information about the person’s gender or racial categorization because the person’s name provides information about their race. Stereotypes are related to this categorization, and refer to the overgeneralization of characteristics about large groups. Stereotypes are the basis for prejudice and discrimination. In a job-related context, using categorization and stereotyping in employment decision-making is often illegal. Whether illegal or not, this approach is inconsistent with a valuing-diversity approach.
### Social Identity Theory
Social identity theory is another explanation of why diversity may be perceived as a negative outcome. Social identity theory suggests that when we first come into contact with others, we categorize them as belonging to an in-group (i.e., the same group as us) or an out-group (not belonging to our group). We tend to see members of our in-group as heterogeneous but out-group members as homogeneous. That is, we perceive out-group members as having similar attitudes, behaviors, and characteristics (i.e., fitting stereotypes).
Researchers posit that this perspective may occur because of the breadth of interactions we have with people from our in-group as opposed to out-groups. There is often strong in-group favoritism and, sometimes, derogation of out-group members. In some cases, however, minority group members do not favor members of their own group. This may happen because of being continually exposed to widespread beliefs about the positive attributes of White people or men and to common negative beliefs about some minorities and women. When in-group favoritism does occur, majority-group members will be hired, promoted, and rewarded at the expense of minority-group members, often in violation of various laws.
### Schema Theory
Schema theory explains how individuals encode information about others based on their demographic characteristics. Units of information and knowledge experienced by individuals are stored as having patterns and interrelationships, thus creating schemas that can be used to evaluate one’s self or others. As a result of the prior perceived knowledge or beliefs embodied in such schemas, individuals categorize people, events, and objects. They then use these categories to evaluate newly encountered people and make decisions regarding their interaction with them.
Based on schema theory, employees develop schemas about coworkers based on race, gender, and other diversity traits. They also form schemas about organizational policies, leadership, and work climates. Schemas formed can be positive or negative and will affect the attitudes and behaviors employees have toward one another.
### Justification-Suppression Model
The justification-suppression model explains the circumstances in which prejudiced people might act on their prejudices. The process by which people experience their prejudice is characterized as a “two-step” process in which people are prejudiced against a certain group or individual but experience conflicting emotions in regard to that prejudice and are motivated to suppress their prejudice rather than act upon it. Theory about prejudice suggests that all people have prejudices of some sort, that they learn their prejudices from an early age, and that they have a hard time departing from them as they grow older. Prejudices are often reinforced by intimate others, and individuals use different methods to justify those prejudices.
Most people will attempt to suppress any outward manifestations of their prejudices. This suppression can come from internal factors like empathy, compassion, or personal beliefs regarding proper treatment of others. Suppression can also come from societal pressures; overt displays of prejudice are no longer socially acceptable, and in some cases are illegal.
At times, however, prejudiced individuals will look for reasons to justify acting on their prejudiced beliefs. Research has shown people are more likely to act in prejudiced ways when they are physically or emotionally tired, when they can do so and remain anonymous, or when social norms are weak enough that their prejudiced behavior will not be received negatively.
1. What key theories help managers understand the benefits and challenges of managing the diverse workforce?
The cognitive-diversity hypothesis suggests that multiple perspectives stemming from the cultural differences between groups or organizational members result in creative problem solving and innovation. The similarity-attraction paradigm and social identity theory explain how, because individuals prefer to interact with others like themselves, diversity may have a negative effect on group and organizational outcomes. The justification-suppression model explains under what conditions individuals act on their prejudice. |
# Diversity in Organizations
## Benefits and Challenges of Workplace Diversity
1. How can managers reap benefits from diversity and mitigate its challenges?
Much theoretical work has espoused the benefits of workplace diversity, but empirical studies have often had conflicting results, which have shown researchers that certain conditions can affect how successful initiatives to increase and enhance workplace diversity are. Managers can work to make sure that the efforts and initiatives they enact to increase diversity in the workplace come from a perspective that ensures and strives for equity and fairness, and not simply from the perspective of only benefitting the company’s bottom line. By approaching diversity and diversity issues in a thoughtful, purposeful way, managers can mitigate the challenges posed by a diverse workforce and enhance the benefits a diverse workforce can offer.
### Three Perspectives on Workplace Diversity
Ely and Thomas’s work on cultural diversity was designed to theoretically and empirically support some of the hypothesized relationships between diversity and workplace outcomes. Their research yielded a paradigm that identifies three perspectives regarding workplace diversity: integration and learning, access and legitimacy, and discrimination and fairness.
### The Integration-and-Learning Perspective
The integration-and-learning perspective posits that the different life experiences, skills, and perspectives that members of diverse cultural identity groups possess can be a valuable resource in the context of work groups. Under this perspective, the members of a culturally diverse workgroup can use their collective differences to think critically about work issues, strategies, products, and practices in a way that will allow the group to be successful in its business operations. The assumption under this perspective is that members of different cultural identity groups can learn from each other and work together to best achieve shared goals. This perspective values cultural identity and strongly links diversity of the group to the success of the firm.
Downfalls of the integration-and-learning perspective can be that White members of the work group can feel marginalized when they are not asked to join in on diversity-related projects or discussions. Similarly, workforce members of color might experience burnout if they are always expected to work on those projects and discussions that specifically deal with diversity issues.
### The Access-and-Legitimacy Perspective
The access-and-legitimacy perspective focuses on the benefit that a diverse workforce can bring to a business that wishes to operate within a diverse set of markets or with culturally diverse clients. Work groups that operate under this perspective are doing so in order to gain access to diverse markets and because their diversity affords them some level of legitimacy when attempting to gain access to diverse markets. This type of workplace diversity is more of a functional type of diversity that does not attempt to integrate or value diversity at the business’s core. The danger of this diversity perspective is that it can limit the roles of certain minority groups by valuing members of these groups only because they can increase the access to diverse markets and clients and not because they can make other potentially valuable contributions.
### The Discrimination-and-Fairness Perspective
The discrimination-and-fairness perspective stems from a belief that a culturally diverse workforce is a moral duty that must be maintained in order to create a just and fair society. This perspective is characterized by a commitment to equal opportunities in hiring and promotions, and does not directly link a work group’s productivity or success with diversity. Many times firms operating under this perspective will have a spoken or unspoken assumption that assimilation into the dominant (White) culture should take place by the members of other cultural identity groups. One drawback of this perspective is that because it measures progress by the recruitment and retention of diverse people, employees of traditionally underrepresented groups can feel devalued. Often, assimilation is pushed on diverse employees under the guise of reducing conflict or in an effort to demonstrate that differences between cultural identity groups are unimportant.
shows the degrees of effectiveness and benefits for each perspective.
1. How can managers reap benefits from diversity and mitigate its challenges?
By approaching diversity and diversity issues in a thoughtful, purposeful way, managers can mitigate the challenges posed by a diverse workforce and enhance the benefits a diverse workforce can offer.
Managers can work to make sure that the efforts and initiatives they enact to increase diversity in the workplace come from a perspective that ensures and strives for equity and fairness, not simply one that will benefit the company’s bottom line.
Using an integration-and-learning perspective strongly links diversity to the work and success of the firm by viewing cultural identity, different life experiences, skills, and perspectives from members of diverse cultural identity groups as a valuable resource. |
# Diversity in Organizations
## Recommendations for Managing Diversity
1. What can organizations do to ensure applicants, employees, and customers from all backgrounds are valued?
Organizations that are committed to equality and inclusion must take steps to combat the examples of discrimination and harassment that have been covered in this chapter. And they must take steps to make diversity a goal in the pre-employment stages as well as in the post-employment stages. Anyone with managerial or supervisory responsibilities should pay careful attention to hiring and performance-rewarding practices, and make sure to rely on relevant information for making decisions and ignore race-based stereotypes. The following are examples of what leaders and organizations can do make sure employees feel valued.
### Interview Selection Process
To ensure fairness for all applicants, organizations should use highly structured interviews during the selection process to avoid bias based on race or gender. Highly structured interviews consists of the following 15 characteristics: “(1) job analysis, (2) same questions, (3) limited prompting, (4) better questions, (5) longer interviews, (6) control of ancillary information, (7) limited questions from candidates, (8) multiple rating scales, (9) anchored rating scales, (10) detailed notes, (11) multiple interviewers, (12) consistent interviewers, (13) no discussion between interviews, (14) training, and (15) statistical prediction.” Similarity bias can occur when interviewers prefer interviewees with whom they share similar traits. Organizations can mitigate this challenge if all 15 characteristics of a structured interview are used consistently with each job applicant.
### Diversified Mentoring Relationships
Thanks to the rapid growth of international travel and globalization, managers are often called upon to manage a workforce that is increasingly diverse. Research has shown that racially and ethnically diverse firms have better financial performance than more homogeneous firms, because, as mentioned, employees from different backgrounds and with different experiences can give the firm a competitive advantage in various ways. It is necessary, however, that managers and those in positions of power are adequately equipped to manage diverse workforces in ways that are beneficial to all. Diversified mentoring relationships are relationships in which the mentor and the mentee differ in terms of their status within the company and within larger society. The differences could be in terms of race, gender, class, disability, sexual orientation, or other status. Research has found that these types of relationships are mutually beneficial and that the mentor and the mentee both have positive outcomes in terms of knowledge, empathy, and skills related to interactions with people from different power groups.
### Visible Leadership
Another key to ensure that employees are treated fairly is utilizing appropriate leadership strategies. Leadership must sincerely value variety of opinions, and organizational culture must encourage openness and make workers feel valued. Organizations must also have a well-articulated and widely understood mission and a relatively egalitarian, nonbureaucratic structure. Having such a work environment will ensure that the attitudes and values of employees are aligned with those of the organization. In this way culture serves as a control mechanism for shaping behaviors.
### Strategies for Employees
Individuals can increase positive employment outcomes by obtaining high levels of education, because for all groups education is a predictor of employment and increased earnings. Individuals can also seek employment in larger firms, which are more likely to have formal hiring programs and specific diversity provisions in place. Individuals of any race or ethnic background can also take steps to eliminate discrimination by being aware of their own personal stereotypes or biases and taking steps to challenge and address them.
1. What can organizations do to ensure applicants, employees, and customers from all backgrounds are valued?
Organizations should use objective and fair recruitment and selection tools and policies.
Leadership should make employees feel valued, be open to varied perspectives, and encourage a culture of open dialogue. Women and racial minorities can increase positive employment outcomes by pursuing higher levels of education and seeking employment in larger organizations. All individuals should be willing to listen, empathize with others, and seek to better understand sensitive issues that affect different identity groups.
### Chapter Review Questions
1. Define the three types of diversity and compare them using examples for each type.
2. How are demographics of the workforce changing?
3. What are some major challenges that women face in organizations?
4. What is the model minority myth? How does it compare to how Black people and Hispanic people are stereotyped?
5. What are some benefits of hiring older workers?
6. Why would an employee “pass” or “reveal” at work? What are the positive and negative consequences of doing so?
7. Explain the six benefits of workplace diversity described by Cox and Blake’s business case for diversity.
8. Compare how the cognitive diversity hypothesis and the similarity-attraction paradigm relate to diversity outcomes.
9. Based on the justification-suppression model, explain why individuals act on their prejudicial beliefs.
10. Describe challenges that managers must face when managing diversity.
11. How can employees ensure they are compliant with the laws and legislation enforced by the EEOC?
12. What are some recommendations for managing diversity?
### Management Skills Application Exercises
1. Do you agree that diversity can be a source of greater benefit than harm to organizations? Why or why not?
2. Have you ever worked in a diverse team setting before? If so, did you encounter any attitudes or behaviors that could potentially cause conflict? If not, how would you manage conflict stemming from diversity?
3. List three organizational goals you would implement to create an organizational culture of diversity and inclusion.
4. Have you or has someone you know experienced discrimination? How did that affect you or that person emotionally, physically, or financially?
5. Pick an identity group (e.g., gay, Black, or woman) other than your own. Imagine and list the negative experiences and interactions you believe you might encounter at work. What policies or strategies could an organization implement to prevent those negative experiences from occurring?
6. Provide a concrete example of how different perspectives stemming from diversity can positively impact an organization or work group. You may use a real-life personal example or make one up.
### Managerial Decision Exercises
1. As a manager for a hospital, you oversee a staff of marketing associates. Their job is to find doctors and persuade them to refer their patients to your hospital. Associates have a very flexible work schedule and manage their own time. They report to you weekly concerning their activities in the field. Trusting them is very important, and it is impossible to track and confirm all of their activities. Your assistant, Nancy, manages the support staff for the associates, works very closely with them, and often serves as your eyes and ears to keep you informed as to how well they are performing.
One day, Nancy comes into your office crying and tells you that your top-performing associate, Susan, has for the past few weeks repeatedly asked her out to dinner and she has repeatedly refused. Susan is a lesbian and Nancy is not. Today, when she refused, Susan patted her on the bottom and said, “I know, you are just playing hard to get.”
After Nancy calms down, you tell her that you will fill out the paperwork to report a sexual harassment case. Nancy says that she does not want to report it because it would be too embarrassing if word of the incident got out. To impress upon you how strongly she feels, she tells you that she will consider resigning if you report the incident. Nancy is essential to the effective operation of your group, and you dread how difficult it would be to get things done without her assisting you.
What do you do? Do you report the case, lose Nancy’s trust, and jeopardize losing a high-performing employee? Or do you not report it, thereby protecting what Nancy believes to be her right to privacy?
2. Recently your company has begun to promote its diversity efforts, including same-sex (and heterosexual) partner benefits and a nonharassment policy that includes sexual orientation, among other things. Your department now has new posters on the walls with photos of employees who represent different aspects of diversity (e.g., Black, Hispanic, gay). One of your employees is upset about the diversity initiative and has begun posting religious scriptures condemning homosexuality on his cubicle in large type for everyone to see. When asked to remove them, your employee tells you that the posters promoting diversity offend some religious employees. What should you do?
3. You are a recently hired supervisor at a paper mill factory. During your second week on the job, you learn about a White employee who has been using a racial slur during lunch breaks when discussing some of her Black coworkers with others. You ask the person who reported it to you about the woman and learn that she is an older woman, around 67 years old, and has worked at the factory for more than 40 years. You talk to your boss about it, and he tells you that she means no harm by it, she is just from another era and that is just her personality. What would you do in this situation?
4. You are a nurse manager who oversees the triage for the emergency room, and today is a slow day with very few patients. During the downtime, one of your subordinates is talking with another coworker about her new boyfriend. You observe her showing her coworkers explicit images of him that he emailed her on her phone. Everyone is joking and laughing about the ordeal. Even though it appears no one is offended, should you address it? What would you say?
5. You work for a company that has primarily Black and Hispanic customers. Although you employ many racial minorities and women, you notice that all of your leaders are White men. This does not necessarily mean that your organization engages in discriminatory practices, but how would you know if your organization was managing diversity well? What information would you need to determine this, and how would you collect it?
6. Your company’s founder believes that younger workers are more energetic and serve better in sales positions. Before posting a new job ad for your sales division, he recommends that you list an age requirement of the position for applicants between ages 18 and 25. Is his recommendation a good one? Why or why not?
7. You work for a real estate broker who recently hired two gay realtors, Steven and Shauna, to be a part of the team. During a staff meeting, your boss mentions an article she read about gay clients feeling ostracized in the real estate market. She tells the new employees she hired them to help facilitate the home-buying process for gay buyers and sellers. She specifically instructs them to focus on recruiting gay clients, even telling them that they should pass along any straight customers to one of the straight realtors on the team. A few weeks later, Shauna reports that she has made her first sale to a straight couple that is expecting a baby. During the next staff meeting, your boss congratulates Shauna on her sale, but again reiterates that Shauna and Steven should pass along straight clients to another realtor so they can focus on recruiting gay clients. After the meeting, Shauna tells you that she thinks it is unfair that she should have to focus on gay clients and that she is thinking of filing a discrimination complaint with HR. Do you think that Shauna is correct in her assessment of the situation? Is there merit to your boss’s desire to have the gay realtors focus on recruiting gay clients? What might be a better solution to help gay clients feel more comfortable in the home-buying and -selling process?
### Critical Thinking Case
### Uber Pays the Price
Nine years ago, Uber revolutionized the taxi industry and the way people commute. With the simple mission “to bring transportation—for everyone, everywhere,” today Uber has reached a valuation of around $70 billion and claimed a market share high of almost 90% in 2015. However, in June 2017 Uber experienced a series of bad press regarding an alleged culture of sexual harassment, which is what most experts believe caused their market share to fall to 75%.
In February of 2017 a former software engineer, Susan Fowler, wrote a lengthy post on her website regarding her experience of being harassed by a manager who was not disciplined by human resources for his behavior. In her post, Fowler wrote that Uber’s HR department and members of upper management told her that because it was the man’s first offense, they would only give him a warning. During her meeting with HR about the incident, Fowler was also advised that she should transfer to another department within the organization. According to Fowler, she was ultimately left no choice but to transfer to another department, despite having specific expertise in the department in which she had originally been working.
As her time at the company went on, she began meeting other women who worked for the company who relayed their own stories of harassment. To her surprise, many of the women reported being harassed by the same person who had harassed her. As she noted in her blog, “It became obvious that both HR and management had been lying about this being his 'first offense.'” Fowler also reported a number of other instances that she identified as sexist and inappropriate within the organization and claims that she was disciplined severely for continuing to speak out. Fowler eventually left Uber after about two years of working for the company, noting that during her time at Uber the percentage of women working there had dropped to 6% of the workforce, down from 25% when she first started.
Following the fallout from Fowler’s lengthy description of the workplace on her website, Uber’s chief executive Travis Kalanick publicly condemned the behavior described by Fowler, calling it “abhorrent and against everything Uber stands for and believes in.” But later in March, Uber board member Arianna Huffington claimed that she believed “sexual harassment was not a systemic problem at the company.” Amid pressure from bad media attention and the company’s falling market share, Uber made some changes after an independent investigation resulted in 215 complaints. As a result, 20 employees were fired for reasons ranging from sexual harassment to bullying to retaliation to discrimination, and Kalanick announced that he would hire a chief operating officer to help manage the company. In an effort to provide the leadership team with more diversity, two senior female executives were hired to fill the positions of chief brand officer and senior vice president for leadership and strategy.
2. Based on Cox’s business case for diversity, what are some positive outcomes that may result in changes to Uber’s leadership team?
3. Under what form of federal legislation was Fowler protected?
4. What strategies should have been put in place to help prevent sexual harassment incidents like this from happening in the first place?
Sources: Uber corporate Website, https://www.uber.com/newsroom/company-info/ (February, 2017); Marco della Cava, “Uber has lost market share to Lyft during crisis,” USA Today, June 13, 2017, https://www.usatoday.com/story/tech/news/2017/06/13/uber-market-share-customer-image-hit-string-scandals/102795024/; Tracey Lien, “Uber fires 20 workers after harassment investigation,” Los Angeles Times, Jun 6, 2017, http://www.latimes.com/business/la-fi-tn-uber-sexual-harassment-20170606-story.html; Susan Fowler, “Reflecting On One Very, Very Strange Year At Uber,” February 19, 2017, https://www.susanjfowler.com/blog/2017/2/19/reflecting-on-one-very-strange-year-at-uber. |
# Leadership
## Introduction
### Learning Outcomes
After reading this chapter, you should be able to answer these questions:
1. What is the nature of leadership and the leadership process?
2. What are the processes associated with people coming to leadership positions?
3. How do leaders influence and move their followers to action?
4. What are the trait perspectives on leadership?
5. What are the behavioral perspectives on leadership?
6. What are the situational perspectives on leadership?
7. What does the concept “substitute for leadership” mean?
8. What are the characteristics of transactional, transformational, and charismatic leadership?
9. How do different approaches and styles of leadership impact what is needed now? |
# Leadership
## The Nature of Leadership
1. What is the nature of leadership and the leadership process?
The many definitions of leadership each have a different emphasis. Some definitions consider leadership an act or behavior, such as initiating structure so group members know how to complete a task. Others consider a leader to be the center or nucleus of group activity, an instrument of goal achievement who has a certain personality, a form of persuasion and power, and the art of inducing compliance. Some look at leadership in terms of the management of group processes. In this view, a good leader develops a vision for the group, communicates that vision, orchestrates the group’s energy and activity toward goal attainment, “[turns] a group of individuals into a team,” and “[transforms] good intentions into positive actions.”
Leadership is frequently defined as a social (interpersonal) influence relationship between two or more persons who depend on each other to attain certain mutual goals in a group situation. Effective leadership helps individuals and groups achieve their goals by focusing on the group’s maintenance needs (the need for individuals to fit and work together by having, for example, shared norms) and task needs (the need for the group to make progress toward attaining the goal that brought them together).
### Leader versus Manager
The two dual concepts, leader and manager, leadership and management, are not interchangeable, nor are they redundant. The differences between the two can, however, be confusing. In many instances, to be a good manager one needs to be an effective leader. Many CEOs have been hired in the hope that their leadership skills, their ability to formulate a vision and get others to “buy into” that vision, will propel the organization forward. In addition, effective leadership often necessitates the ability to manage—to set goals; plan, devise, and implement strategy; make decisions and solve problems; and organize and control. For our purposes, the two sets of concepts can be contrasted in several ways.
First, we define the two concepts differently. In Management and Organizational Behavior, we defined management as a process consisting of planning, organizing, directing, and controlling. Here we define leadership as a social (interpersonal) influence relationship between two or more people who are dependent on each another for goal attainment.
Second, managers and leaders are commonly differentiated in terms of the processes through which they initially come to their position. Managers are generally appointed to their role. Even though many organizations appoint people to positions of leadership, leadership per se is a relationship that revolves around the followers’ acceptance or rejection of the leader. Thus, leaders often emerge out of events that unfold among members of a group.
Third, managers and leaders often differ in terms of the types and sources of the power they exercise. Managers commonly derive their power from the larger organization. Virtually all organizations legitimize the use of certain “carrots and sticks” (rewards and punishments) as ways of securing the compliance of their employees. In other words, by virtue of the position that a manager occupies (president, vice president, department head, supervisor), certain “rights to act” (schedule production, contract to sell a product, hire and fire) accompany the position and its place within the hierarchy of authority. Leaders can also secure power and the ability to exercise influence using carrots and sticks; however, it is much more common for leaders to derive power from followers’ perception of their knowledge (expertise), their personality and attractiveness, and the working relationship that has developed between leaders and followers.
From the perspective of those who are under the leader’s and manager’s influence, the motivation to comply often has a different base. The subordinate to a manager frequently complies because of the role authority of the manager, and because of the carrots and sticks that managers have at their disposal. The followers of a leader comply because they want to. Thus, leaders motivate primarily through intrinsic processes, while managers motivate primarily through extrinsic processes.
Finally, it is important to note that while managers may be successful in directing and supervising their subordinates, they often succeed or fail because of their ability or inability to lead. As noted above, effective leadership often calls for the ability to manage, and effective management often requires leadership.
1. What is the nature of leadership and the leadership process?
Leadership is a primary vehicle for fulfilling the directing function of management. Because of its importance, theorists, researchers, and practitioners have devoted a tremendous amount of attention and energy to unlocking the secrets of effective leadership. They have kept at this search for perhaps a greater period of time than for any other single issue related to management. |
# Leadership
## The Leadership Process
1. What are the processes associated with people coming to leadership positions?
Leadership is a process, a complex and dynamic exchange relationship built over time between leader and follower and between leader and the group of followers who depend on each other to attain a mutually desired goal. There are several key components to this “working relationship”: the leader, the followers, the context (situation), the leadership process per se, and the consequences (outcomes) (see ). Across time, each component interacts with and influences the other components, and whatever consequences (such as leader-follower trust) are created influence future interactions. As any one of the components changes, so too will leadership.
### The Leader
Leaders are people who take charge of or guide the activities of others. They are often seen as the focus or orchestrater of group activity, the people who set the tone of the group so that it can move forward to attain its goals. Leaders provide the group with what is required to fulfill its maintenance and task-related needs. (Later in the chapter, we will return to the “leader as a person” as part of our discussion of the trait approach to leadership.)
### The Follower
The follower is not a passive player in the leadership process. Edwin Hollander, after many years of studying leadership, suggested that the follower is the most critical factor in any leadership event. It is, after all, the follower who perceives the situation and comes to define the needs that the leader must fulfill. In addition, it is the follower who either rejects leadership or accepts acts of leadership by surrendering his power to the leader to diminish task uncertainty, to define and manage the meaning of the situation to the follower, and to orchestrate the follower’s action in pursuit of goal attainment.
The follower’s personality and readiness to follow determine the style of leadership that will be most effective. For example, individuals with an internal locus of control are much more responsive to participative styles of leadership than individuals with an external locus of control. Individuals with an authoritarian personality are highly receptive to the effectiveness of directive acts of leadership. It is the followers’ expectations, as well as their performance-based needs, that determine what a leader must do in order to be effective.
The strength of the follower’s self-concept has also been linked to the leadership process. High-self-esteem individuals tend to have a strong sense of self-efficacy, that is, a generalized belief they can be successful in difficult situations. They therefore tend to be strongly motivated to perform and persist in the face of adversity. The high-self-esteem follower tends to be responsive to participative styles of leadership. Low-self-esteem individuals, who doubt their competence and worthiness and their ability to succeed in difficult situations, function better with supportive forms of leadership. This helps them deal with the stress, frustration, and anxiety that often emerge with difficult tasks. Followers without a readiness to follow, limited by their inability to perform and lack of motivation and commitment, usually need more directive forms of leadership.
Follower behavior plays a major role in determining what behaviors leaders engage in. For example, followers who perform at high levels tend to cause their leaders to be considerate in their treatment and to play a less directive role. Followers who are poor performers, on the other hand, tend to cause their leaders to be less warm toward them and to be more directive and controlling in their leadership style.
### The Context
Situations make demands on a group and its members, and not all situations are the same. Context refers to the situation that surrounds the leader and the followers. Situations are multidimensional. We discuss the context as it pertains to leadership in greater detail later in this chapter, but for now let’s look at it in terms of the task and task environment that confront the group. Is the task structured or unstructured? Are the goals of the group clear or ambiguous? Is there agreement or disagreement about goals? Is there a body of knowledge that can guide task performance? Is the task boring? Frustrating? Intrinsically satisfying? Is the environment complex or simple, stable or unstable? These factors create different contexts within which leadership unfolds, and each factor places a different set of needs and demands on the leader and on the followers.
### The Process
The process of leadership is separate and distinct from the leader (the person who occupies a central role in the group). The process is a complex, interactive, and dynamic working relationship between leader and followers. This working relationship, built over time, is directed toward fulfilling the group’s maintenance and task needs. Part of the process consists of an exchange relationship between the leader and follower. The leader provides a resource directed toward fulfilling the group’s needs, and the group gives compliance, recognition, and esteem to the leader. To the extent that leadership is the exercise of influence, part of the leadership process is captured by the surrender of power by the followers and the exercise of influence over the followers by the leader. Thus, the leader influences the followers and the followers influence the leader, the context influences the leader and the followers, and both leader and followers influence the context.
### The Consequences
A number of outcomes or consequences of the leadership process unfold between leader, follower, and situation. At the group level, two outcomes are important:
1. Have the group’s maintenance needs been fulfilled? That is, do members of the group like and get along with one another, do they have a shared set of norms and values, and have they developed a good working relationship? Have individuals’ needs been fulfilled as reflected in attendance, motivation, performance, satisfaction, citizenship, trust, and maintenance of the group membership?
2. Have the group’s task needs been met? That is, there are also important consequences of the leadership process for individuals: attendance, motivation, performance, satisfaction, citizenship, trust, and maintenance of their group membership.
The leader-member exchange (LMX) theory of the leadership process focuses attention on consequences associated with the leadership process. The theory views leadership as consisting of a number of dyadic relationships linking the leader with a follower. A leader-follower relationship tends to develop quickly and remains relatively stable over time. The quality of the relationship is reflected by the degree of mutual trust, loyalty, support, respect, and obligation. High- and low-quality relationships between a leader and each of his followers produce in and out groups among the followers. Members of the in group come to be key players, and high-quality exchange relationships tend to be associated with higher levels of performance, commitment, and satisfaction than are low-quality exchange relationships. Attitudinal similarity and extroversion appear to be associated with a high-quality leader-member relationship.
The nature of the leadership process varies substantially depending on the leader, the followers, and the situation and context. Thus, leadership is the function of an interaction between the leader, the follower, and the context.
The leadership context for the leader of a group of assembly line production workers differs from the context for the leader of a self-managing production team and from the context confronted by the lead scientists in a research laboratory. The leadership tactics that work in the first context might fail miserably in the latter two.
1. What are the processes associated with people coming to leadership positions?
Organizations typically have both formal and informal leaders. Their leadership is effective for virtually identical reasons. Leadership and management are not the same. Although effective leadership is a necessary part of effective management, the overall management role is much larger than leadership alone. Managers plan, organize, direct, and control. As leaders, they are engaged primarily in the directing function. |
# Leadership
## Leader Emergence
1. How do leaders influence and move their followers to action?
Leaders hold a unique position in their groups, exercising influence and providing direction. Leonard Bernstein was part of the symphony, but his role as the New York Philharmonic conductor differed dramatically from that of the other symphony members. Besides conducting the orchestra, he created a vision for the symphony. In this capacity, leadership can be seen as a differentiated role and the nucleus of group activity.
Organizations have two kinds of leaders: formal and informal. A formal leader is that individual who is recognized by those outside the group as the official leader of the group. Often, the formal leader is appointed by the organization to serve in a formal capacity as an agent of the organization. Jack Welch was the formal leader of General Electric, and Leonard Bernstein was the formal leader of the symphony. Practically all managers act as formal leaders as part of their assigned role. Organizations that use self-managed work teams allow members of the team to select the individual who will serve as their team leader. When this person’s role is sanctioned by the formal organization, these team leaders become formal leaders. Increasingly, leaders in organizations will be those who “best sell” their ideas on how to complete a project—persuasiveness and inspiration are important ingredients in the leadership equation, especially in high-involvement organizations.
Informal leaders, by contrast, are not assigned by the organization. The informal leader is that individual whom members of the group acknowledge as their leader. Athletic teams often have informal leaders, individuals who exert considerable influence on team members even though they hold no official, formal leadership position. In fact, most work groups contain at least one informal leader. Just like formal leaders, informal leaders can benefit or harm an organization depending on whether their influence encourages group members to behave consistently with organizational goals.
As we have noted, the terms leader and manager are not synonymous. Grace Hopper, retired U.S. Navy admiral, draws a distinction between leading and managing: “You don’t manage people, you manage things. You lead people.” Informal leaders often have considerable leverage over their colleagues. Traditionally, the roles of informal leaders have not included the total set of management responsibilities because an informal leader does not always exercise the functions of planning, organizing, directing, and controlling. However, high-involvement organizations frequently encourage their formal and informal leaders to exercise the full set of management roles. Many consider such actions necessary for self-managing work teams to succeed. Informal leaders are acknowledged by the group, and the group willingly responds to their leadership.
### Paths to Leadership
People come to leadership positions through two dynamics. In many instances, people are put into positions of leadership by forces outside the group. University-based ROTC programs and military academies (like West Point) formally groom people to be leaders. We refer to this person as the designated leader (in this instance the designated and formal leader are the same person). Emergent leaders, on the other hand, arise from the dynamics and processes that unfold within and among a group of individuals as they endeavor to achieve a collective goal.
A variety of processes help us understand how leaders emerge. Gerald Salancik and Jeffrey Pfeffer observe that power to influence others flows to those individuals who possess the critical and scarce resources (often knowledge and expertise) that a group needs to overcome a major problem. They note that the dominant coalition and leadership in American corporations during the 1950s was among engineers, because organizations were engaged in competition based on product design. The power base in many organizations shifted to marketing as competition became a game of advertising aimed at differentiating products in the consumer’s mind. About 10–15 years ago, power and leadership once again shifted, this time to people with finance and legal backgrounds, because the critical contingencies facing many organizations were mergers, acquisitions, hostile takeovers, and creative financing. Thus, Salancik and Pfeffer reason that power and thus leadership flow to those individuals who have the ability to help an organization or group [overcome its critical contingencies]. As the challenges facing a group change, so too may the flow of power and leadership.
Many leaders emerge out of the needs of the situation. Different situations call for different configurations of knowledge, skills, and abilities. A group often turns to the member who possesses the knowledge, skills, and abilities that the group requires to achieve its goals. People surrender their power to individuals whom they believe will make meaningful contributions to attaining group goals. The individual to whom power is surrendered is often a member of the group who is in good standing. As a result of this member’s contributions to the group’s goals, he has accumulated idiosyncrasy credits (a form of competency-based status). These credits give the individual a status that allows him to influence the direction that the group takes as it works to achieve its goals.
It is important to recognize that the traits possessed by certain individuals contribute significantly to their emergence as leaders. Research indicates that people are unlikely to follow individuals who, for example, do not display drive, self-confidence, knowledge of the situation, honesty, and integrity.
### Leadership as an Exercise of Influence
As we have noted, leadership is the exercise of influence over those who depend on one another for attaining a mutual goal in a group setting. But how do leaders effectively exercise this influence? Social or (interpersonal) influence is one’s ability to effect a change in the motivation, attitudes, and/or behaviors of others. Power, then, essentially answers the “how” question: How do leaders influence their followers? The answer often is that a leader’s social influence is the source of his power.
French and Raven provide us with a useful typology that identifies the sources and types of power that may be at the disposal of leaders:
1. Reward power—the power a person has because people believe that they can bestow rewards or outcomes, such as money or recognition that others desire
2. Coercive power—the power a person has because people believe that the person can punish them by inflicting pain or by withholding or taking away something that they value
3. Referent power—the power a person has because others want to associate with or be accepted by him
4. Expert power—the power a person has because others believe that the person has and is willing to share expert knowledge that they need (The concept of resource power extends the idea of expert power to include the power that a person has because others believe that the person possesses and is willing to share resources, such as information, time, or materials that are needed.)
5. Legitimate power—the power a person has because others believe that the person possesses the “right” to influence them and that they ought to obey. This right can originate in tradition; in the charisma or appeal of the person; and in laws, institutional roles within society, moralistic appeal, and rationality (that is, logical arguments, factual evidence, reason, and internally consistent positions).
Not all forms of power are equally effective (see ), nor is a leader’s total power base the simple sum of the powers at his disposal. Different types of power elicit different forms of compliance: Leaders who rely on coercive power often alienate followers who resist their influence attempts. Leaders who rely on reward power develop followers who are very measured in their responses to [what?]; the use of rewards often leads people to think in terms of “How much am I getting?” or “How much should I give?” or “Am I breaking even?” The use of referent power produces identification with the leader and his cause. The use of rationality, expert power, and/or moralistic appeal generally elicits commitment and the internalization of the leader’s goals.
Leaders who use referent and expert power commonly experience a favorable response in terms of follower satisfaction and performance. Research suggests that rationality is the most effective influence tactic in terms of its impact on follower commitment, motivation, performance, satisfaction, and group effectiveness.
Reward and legitimate power (that is, relying on one’s position to influence others) produce inconsistent results. Sometimes these powers lead to follower performance and satisfaction, yet they also sometimes fail. Coercive power can result in favorable performance, yet follower and resistance dissatisfaction are not uncommon.
Good leaders, whether formal or informal, develop many sources of power. Leaders who rely solely on their legitimate power and authority seldom generate the influence necessary to help their organization and its members succeed. In the process of building their power base, effective leaders have discovered that the use of coercive power tends to dilute the effectiveness of other powers, while the development and use of referent power tends to magnify the effectiveness of other forms of power. A compliment or reward from a person we like generally has greater value than one from someone we dislike, and punishment from someone we love (such as “tough love” from a parent) is less offensive than the pain inflicted by someone we dislike.
In sum, one key to effective leadership, especially as it pertains to the exercise of social and interpersonal influence, relates to the type of power employed by the leader. Overall leader effectiveness will be higher when people follow because they want to follow. This is much more likely to happen when the leader’s influence flows out of intrinsic such as rationality, expertise, moralistic appeal, and/or referent power.
Leadership is also about having a vision and communicating that vision to others in such a way that it provides meaning for the follower. Language, ritual, drama, myths, symbolic constructions, and stories are some of the tools leaders use to capture the attention of their “followers to be” to evoke emotion and to manage the meaning “of the task (challenges) facing the group.” These tools help the leader influence the attitudes, motivation, and behavior of their followers.
### Influence-Based Leadership Styles
Many writers and researchers have explored how leaders can use power to address the needs of various situations. One view holds that in traditional organizations members expect to be told what to do and are willing to follow highly structured directions. Individuals attracted to high-involvement organizations, however, want to make their own decisions, expect their leaders to allow them to do so, and are willing to accept and act on this responsibility. This suggests that a leader may use and employ power in a variety of ways.
### The Tannenbaum and Schmidt Continuum
In the 1950s, Tannenbaum and Schmidt created a continuum (see ) along which leadership styles range from authoritarian to extremely high levels of worker freedom. Subsequent to Tannenbaum and Schmidt’s work, researchers adapted the continuum by categorizing leader power styles as autocratic (boss-centered), participative (workers are consulted and involved), or free-rein (members are assigned the work and decide on their own how to do it; the leader relinquishes the active assumption of the role of leadership).
### Theory X and Theory Y Leaders
McGregor’s Theory X and Theory Y posits two different sets of attitudes about the individual as an organizational member. Theory X and Y thinking gives rise to two different styles of leadership. The Theory X leader assumes that the average individual dislikes work and is incapable of exercising adequate self-direction and self-control. As a consequence, they exert a highly controlling leadership style. In contrast, Theory Y leaders believe that people have creative capacities, as well as both the ability and desire to exercise self-direction and self-control. They typically allow organizational members significant amounts of discretion in their jobs and encourage them to participate in departmental and organizational decision-making. Theory Y leaders are much more likely to adopt involvement-oriented approaches to leadership and organically designed organizations for their leadership group.
Theory X and Theory Y thinking and leadership are not strictly an American phenomenon. Evidence suggests that managers from different parts of the global community commonly hold the same view. A study of 3,600 managers from 14 countries reveals that most of them held assumptions about human nature that could best be classified as Theory X. Even though managers might publicly endorse the merits of participatory management, most of them doubted their workers’ capacities to exercise self-direction and self-control and to contribute creatively.
### Directive/Permissive Leadership Styles
Contemplating the central role of problem-solving in management and leadership, Jan P. Muczyk and Bernard C. Reimann of Cleveland State University offer an interesting perspective on four different leadership styles (see ) that revolve around decision-making and implementation processes.
A directive autocrat retains power, makes unilateral decisions, and closely supervises workers’ activities. This style of leadership is seen as appropriate when circumstances require quick decisions and organizational members are new, inexperienced, or underqualified. A doctor in charge of a hastily constructed shelter for victims of a tornado may use this style to command nonmedical volunteers.
The permissive autocrat mixes his or her use of power by retaining decision-making power but permitting organizational members to exercise discretion when executing those decisions. This leader behavior is recommended when decision-making time is limited, when tasks are routine, or when organizational members have sufficient expertise to determine appropriate role behaviors.
Also sharing power is the directive democrat, who encourages participative decision-making but retains the power to direct team members in the execution of their roles. This style is appropriate when followers have valuable opinions and ideas, but one person needs to coordinate the execution of the ideas. A surgeon might allow the entire surgical team to participate in developing a plan for a surgical procedure. Once surgery begins, however, the surgeon is completely in charge.
Finally, the permissive democrat shares power with group members, soliciting involvement in both decision-making and execution. This style is appropriate when participation has both informational and motivational value, when time permits group decision-making, when group members are capable of improving decision quality, and when followers are capable of exercising self-management in their performance of work.
The permissive democratic approach to leadership is characteristic of leadership in high-involvement organizations. Here, leaders act as facilitators, process consultants, network builders, conflict managers, inspirationalists, coaches, teachers/mentors, and cheerleaders. Such is the role of Ralph Stayer, founder, owner, and CEO of Johnsonville Foods. He defines himself as his company’s philosopher. At Quad/Graphics, president Harry V. Quadracci is a permissive democrat because he encourages all Quad employees to play a major role in decision-making and execution as they manage their teams as independent profit centers.
1. How do leaders influence and move their followers to action?
There are many diverse perspectives on leadership. Some managers treat leadership primarily as an exercise of power. Others believe that a particular belief and attitude structure makes for effective leaders. Still others believe it is possible to identify a collection of leader traits that produces a leader who should be universally effective in any leadership situation. Even today, many believe that a profile of behaviors can universally guarantee successful leadership. Unfortunately, such simple solutions fall short of the reality. |
# Leadership
## The Trait Approach to Leadership
1. What are the trait perspectives on leadership?
Ancient Greek, Roman, Egyptian, and Chinese scholars were keenly interested in leaders and leadership. Their writings portray leaders as heroes. Homer, in his poem The Odyssey, portrays Odysseus during and after the Trojan War as a great leader who had vision and self-confidence. His son Telemachus, under the tutelage of Mentor, developed his father’s courage and leadership skills. Out of such stories there emerged the “great man” theory of leadership, and a starting point for the contemporary study of leadership.
The great man theory of leadership states that some people are born with the necessary attributes to be great leaders. Alexander the Great, Julius Caesar, Joan of Arc, Catherine the Great, Napoleon, and Mahatma Gandhi are cited as naturally great leaders, born with a set of personal qualities that made them effective leaders. Even today, the belief that truly great leaders are born is common. For example, Kenneth Labich, writer for Fortune magazine, commented that “the best leaders seem to possess a God-given spark.”
During the early 1900s, scholars endeavored to understand leaders and leadership. They wanted to know, from an organizational perspective, what characteristics leaders hold in common in the hope that people with these characteristics could be identified, recruited, and placed in key organizational positions. This gave rise to early research efforts and to what is referred to as the trait approach to leadership. Prompted by the great man theory of leadership and the emerging interest in understanding what leadership is, researchers focused on the leader—Who is a leader? What are the distinguishing characteristics of the great and effective leaders? The great man theory of leadership holds that some people are born with a set of personal qualities that make truly great leaders. Mahatma Gandhi is often cited as a naturally great leader.
### Leader Trait Research
Ralph Stogdill, while on the faculty at The Ohio State University, pioneered our modern (late 20th century) study of leadership. Scholars taking the trait approach attempted to identify physiological (appearance, height, and weight), demographic (age, education, and socioeconomic background), personality (dominance, self-confidence, and aggressiveness), intellective (intelligence, decisiveness, judgment, and knowledge), task-related (achievement drive, initiative, and persistence), and social characteristics (sociability and cooperativeness) with leader emergence and leader effectiveness. After reviewing several hundred studies of leader traits, Stogdill in 1974 described the successful leader this way:
The [successful] leader is characterized by a strong drive for responsibility and task completion, vigor and persistence in pursuit of goals, venturesomeness and originality in problem solving, drive to exercise initiative in social situations, self-confidence and sense of personal identity, willingness to accept consequences of decision and action, readiness to absorb interpersonal stress, willingness to tolerate frustration and delay, ability to influence other person’s behavior, and capacity to structure social interaction systems to the purpose at hand.
The last three decades of the 20th century witnessed continued exploration of the relationship between traits and both leader emergence and leader effectiveness. Edwin Locke from the University of Maryland and a number of his research associates, in their recent review of the trait research, observed that successful leaders possess a set of core characteristics that are different from those of other people. Although these core traits do not solely determine whether a person will be a leader—or a successful leader—they are seen as preconditions that endow people with leadership potential. Among the core traits identified are:
1. Drive—a high level of effort, including a strong desire for achievement as well as high levels of ambition, energy, tenacity, and initiative
2. Leadership motivation—an intense desire to lead others
3. Honesty and integrity—a commitment to the truth (nondeceit), where word and deed correspond
4. Self-confidence—an assurance in one’s self, one’s ideas, and one’s ability
5. Cognitive ability—conceptually skilled, capable of exercising good judgment, having strong analytical abilities, possessing the capacity to think strategically and multidimensionally
6. Knowledge of the business—a high degree of understanding of the company, industry, and technical matters
7. Other traits—charisma, creativity/originality, and flexibility/adaptiveness
While leaders may be “people with the right stuff,” effective leadership requires more than simply possessing the correct set of motives and traits. Knowledge, skills, ability, vision, strategy, and effective vision implementation are all necessary for the person who has the “right stuff” to realize their leadership potential. According to Locke, people endowed with these traits engage in behaviors that are associated with leadership. As followers, people are attracted to and inclined to follow individuals who display, for example, honesty and integrity, self-confidence, and the motivation to lead.
Personality psychologists remind us that behavior is a result of an interaction between the person and the situation—that is, Behavior = f [(Person) (Situation)]. To this, psychologist Walter Mischel adds the important observation that personality tends to get expressed through an individual’s behavior in “weak” situations and to be suppressed in “strong” situations. A strong situation is one with strong behavioral norms and rules, strong incentives, clear expectations, and rewards for a particular behavior. Our characterization of the mechanistic organization with its well-defined hierarchy of authority, jobs, and standard operating procedures exemplifies a strong situation. The organic social system exemplifies a weak situation. From a leadership perspective, a person’s traits play a stronger role in their leader behavior and ultimately leader effectiveness when the situation permits the expression of their disposition. Thus, personality traits prominently shape leader behavior in weak situations.
Finally, about the validity of the “great person approach to leadership”: Evidence accumulated to date does not provide a strong base of support for the notion that leaders are born. Yet, the study of twins at the University of Minnesota leaves open the possibility that part of the answer might be found in our genes. Many personality traits and vocational interests (which might be related to one’s interest in assuming responsibility for others and the motivation to lead) have been found to be related to our “genetic dispositions” as well as to our life experiences. Each core trait recently identified by Locke and his associates traces a significant part of its existence to life experiences. Thus, a person is not born with self-confidence. Self-confidence is developed, honesty and integrity are a matter of personal choice, motivation to lead comes from within the individual and is within his control, and knowledge of the business can be acquired. While cognitive ability does in part find its origin in the genes, it still needs to be developed. Finally, drive, as a dispositional trait, may also have a genetic component, but it too can be self- and other-encouraged. It goes without saying that none of these ingredients are acquired overnight.
### Other Leader Traits
Sex and gender, disposition, and self-monitoring also play an important role in leader emergence and leader style.
### Sex and Gender Role
Much research has gone into understanding the role of sex and gender in leadership. Two major avenues have been explored: sex and gender roles in relation to leader emergence, and whether style differences exist across the sexes.
Evidence supports the observation that men emerge as leaders more frequently than women. Throughout history, few women have been in positions where they could develop or exercise leadership behaviors. In contemporary society, being perceived as experts appears to play an important role in the emergence of women as leaders. Yet, gender role is more predictive than sex. Individuals with “masculine” (for example, assertive, aggressive, competitive, willing to take a stand) as opposed to “feminine” (cheerful, affectionate, sympathetic, gentle) characteristics are more likely to emerge in leadership roles. In our society males are frequently socialized to possess the masculine characteristics, while females are more frequently socialized to possess the feminine characteristics.
Recent evidence, however, suggests that individuals who are androgynous (that is, who simultaneously possess both masculine and feminine characteristics) are as likely to emerge in leadership roles as individuals with only masculine characteristics. This suggests that possessing feminine qualities does not distract from the attractiveness of the individual as a leader.
With regard to leadership style, researchers have looked to see if male-female differences exist in task and interpersonal styles, and whether or not differences exist in how autocratic or democratic men and women are. The answer is, when it comes to interpersonal versus task orientation, differences between men and women appear to be marginal. Women are somewhat more concerned with meeting the group’s interpersonal needs, while men are somewhat more concerned with meeting the group’s task needs. Big differences emerge in terms of democratic versus autocratic leadership styles. Men tend to be more autocratic or directive, while women are more likely to adopt a more democratic/participative leadership style. In fact, it may be because men are more directive that they are seen as key to goal attainment and they are turned to more often as leaders.
### Dispositional Trait
Psychologists often use the terms disposition and mood to describe and differentiate people. Individuals characterized by a positive affective state exhibit a mood that is active, strong, excited, enthusiastic, peppy, and elated. A leader with this mood state exudes an air of confidence and optimism and is seen as enjoying work-related activities.
Recent work conducted at the University of California-Berkeley demonstrates that leaders (managers) with positive affectivity (a positive mood state) tend to be more competent interpersonally, to contribute more to group activities, and to be able to function more effectively in their leadership role. Their enthusiasm and high energy levels appear to be infectious, transferring from leader to followers. Thus, such leaders promote group cohesiveness and productivity. This mood state is also associated with low levels of group turnover and is positively associated with followers who engage in acts of good group citizenship.
### Self-Monitoring
Self-monitoring as a personality trait refers to the strength of an individual’s ability and willingness to read verbal and nonverbal cues and to alter one’s behavior so as to manage the presentation of the self and the images that others form of the individual. “High self-monitors” are particularly astute at reading social cues and regulating their self-presentation to fit a particular situation. “Low self-monitors” are less sensitive to social cues; they may either lack motivation or lack the ability to manage how they come across to others.
Some evidence supports the position that high self-monitors emerge more often as leaders. In addition, they appear to exert more influence on group decisions and initiate more structure than low self-monitors. Perhaps high self-monitors emerge as leaders because in group interaction they are the individuals who attempt to organize the group and provide it with the structure needed to move the group toward goal attainment.
1. What are the trait perspectives on leadership? |
# Leadership
## Behavioral Approaches to Leadership
1. What are the behavioral perspectives on leadership?
The nearly four decades of research that focused on identifying the personal traits associated with the emergence of leaders and leader effectiveness resulted in two observations. First, leader traits are important—people who are endowed with the “right stuff” (drive, self-confidence, honesty, and integrity) are more likely to emerge as leaders and to be effective leaders than individuals who do not possess these characteristics. Second, traits are only a part of the story. Traits only account for part of why someone becomes a leader and why they are (or are not) effective leaders.
Still under the influence of the great man theory of leadership, researchers continued to focus on the leader in an effort to understand leadership—who emerges and what constitutes effective leadership. Researchers then began to reason that maybe the rest of the story could be understood by looking at what it is that leaders do. Thus, we now turn our attention to leader behaviors and the behavioral approaches to leadership.
It is now common to think of effective leadership in terms of what leaders do. CEOs and management consultants agree that effective leaders display trust in their employees, develop a vision, keep their cool, encourage risk, bring expertise into the work setting, invite dissent, and focus everyone’s attention on that which is important. William Arruda, in a Fortune article, noted that “organizations with strong coaching cultures report their revenue to be above average, compared to their peer group.” Sixty-five percent of employees “from strong coaching cultures rated themselves as highly engaged,” compared to 13 percent of employees worldwide.” Jonathan Anthony calls himself an intrapreneur and corporate disorganizer, because same-old, same-old comms practices are dying in front of our eyes. Apple founder Steve Jobs believed that the best leaders are coaches and team cheerleaders. Similar views have been frequently echoed by management consultant Tom Peters.
During the late 1940s, two major research programs—The Ohio State University and the University of Michigan leadership studies—were launched to explore leadership from a behavioral perspective.
### The Ohio State University Studies
A group of Ohio State University researchers, under the direction of Ralph Stogdill, began an extensive and systematic series of studies to identify leader behaviors associated with effective group performance. Their results identified two major sets of leader behaviors: consideration and initiating structure.
Consideration is the “relationship-oriented” behavior of a leader. It is instrumental in creating and maintaining good relationships (that is, addressing the group’s maintenance needs) with organizational members. Consideration behaviors include being supportive and friendly, representing people’s interests, communicating openly with group members, recognizing them, respecting their ideas, and sharing concern for their feelings.
Initiating structure involves “task-oriented” leader behaviors. It is instrumental in the efficient use of resources to attain organizational goals, thereby addressing the group’s task needs. Initiating structure behaviors include scheduling work, deciding what is to be done (and how and when to do it), providing direction to organizational members, planning, coordinating, problem-solving, maintaining standards of performance, and encouraging the use of uniform procedures.
After consideration and initiating structure behaviors were first identified, many leaders believed that they had to behave one way or the other. If they initiated structure, they could not be considerate, and vice versa. It did not take long, however, to recognize that leaders can simultaneously display any combination of both behaviors.
The Ohio State studies are important because they identified two critical categories of behavior that distinguish one leader from another. Both consideration and initiating structure behavior can significantly impact work attitudes and behaviors. Unfortunately, the effects of consideration and initiating structure are not consistent from situation to situation. In some of the organizations studied, for example, high levels of initiating structure increased performance. In other organizations, the amount of initiating structure seemed to make little difference. Although most organizational members reported greater satisfaction when leaders acted considerately, consideration behavior appeared to have no clear effect on performance.
Initially, these mixed findings were disappointing to researchers and managers alike. It had been hoped that a profile of the most effective leader behaviors could be identified so that leaders could be trained in the best ways to behave. Research made clear, however, that there is no one best style of leader behavior for all situations.
### The University of Michigan Studies
At about the same time that the Ohio State studies were underway, researchers at the University of Michigan also began to investigate leader behaviors. As at Ohio State, the Michigan researchers attempted to identify behavioral elements that differentiated effective from ineffective leaders.
The two types of leader behavior that stand out in these studies are job centered and organizational member centered. Job-centered behaviors are devoted to supervisory functions, such as planning, scheduling, coordinating work activities, and providing the resources needed for task performance. Employee-member-centered behaviors include consideration and support for organizational members. These dimensions of behavior, of course, correspond closely to the dimensions of initiating structure and consideration identified at Ohio State. The similarity of the findings from two independent groups of researchers added to their credibility. As the Ohio State researchers had done, the Michigan researchers also found that any combination of the two behaviors was possible.
The studies at Michigan are significant because they reinforce the importance of leader behavior. They also provide the basis for later theories that identify specific, effective matches of work situations and leader behaviors. Subsequent research at Michigan and elsewhere has found additional behaviors associated with effective leadership: support, work facilitation, goal emphasis, and interaction facilitation.
These four behaviors are important to the successful functioning of the group in that support and interaction facilitation contribute to the group’s maintenance needs, and goal emphasis and work facilitation contribute to the group’s task needs. The Michigan researchers also found that these four behaviors do not need to be brought to the group by the leader. In essence, the leader’s real job is to set the tone and create the climate that ensure these critical behaviors are present.
### The Leadership Grid®
Much of the credit for disseminating knowledge about important leader behaviors must go to Robert R. Blake and Jane S. Mouton, who developed a method for classifying styles of leadership compatible with many of the ideas from the Ohio State and Michigan studies. In their classification scheme, concern for results (production) emphasizes output, cost effectiveness, and (in for-profit organizations) a concern for profits. Concern for people involves promoting working relationships and paying attention to issues of importance to group members. As shown in , the Leadership Grid® demonstrates that any combination of these two leader concerns is possible, and five styles of leadership are highlighted here.
Blake and Mouton contend that the sound (contribute and commit) leader (a high concern for results and people, or 9,9) style is universally the most effective. While the Leadership Grid® is appealing and well structured, research to date suggests that there is no universally effective style of leadership (9,9 or otherwise). There are, however, well-identified situations in which a 9,9 style is unlikely to be effective. Organizational members of high-involvement organizations who have mastered their job duties require little production-oriented leader behavior. Likewise, there is little time for people-oriented behavior during an emergency. Finally, evidence suggests that the “high-high” style may be effective when the situation calls for high levels of initiating structure. Under these conditions, the initiation of structure is more acceptable, favorably affecting follower satisfaction and performance, when the leader is also experienced as warm, supportive, and considerate.
1. What are the behavioral perspectives on leadership?
It is clear that effective leaders are endowed with the “right stuff,” yet this “stuff” is only a precondition to effective leadership. Leaders need to connect with their followers and bring the right configuration of knowledge, skills, ability, vision, and strategy to the situational demands confronting the group. |
# Leadership
## Situational (Contingency) Approaches to Leadership
1. What are the situational perspectives on leadership?
As early as 1948, Ralph Stogdill stated that “the qualities, characteristics, and skills required in a leader are determined to a large extent by the demands of the situation in which he is to function as a leader.” In addition, it had been observed that two major leader behaviors, initiating structure and consideration, didn’t always lead to equally positive outcomes. That is, there are times when initiating structure results in performance increases and follower satisfaction, and there are times when the results are just the opposite. Contradictory findings such as this lead researchers to ask “Under what conditions are the results positive in nature?” and “When and why are they negative at other times?” Obviously, situational differences and key contingencies are at work.
Several theories have been advanced to address this issue. These are Fiedler’s contingency theory of leadership, the path-goal theory of leader effectiveness, Hersey and Blanchard’s life cycle theory, cognitive resource theory, the decision tree, and the decision process theory. We explore two of the better-known situational theories of leadership, Fred Fiedler’s contingency model and Robert J. House’s path-goal theory, here. Victor Vroom, Phillip Yetton, and Arthur Jago’s decision tree model also applies.
### Fiedler’s Contingency Model
One of the earliest, best-known, and most controversial situation-contingent leadership theories was set forth by Fred E. Fiedler from the University of Washington. This theory is known as the contingency theory of leadership. According to Fiedler, organizations attempting to achieve group effectiveness through leadership must assess the leader according to an underlying trait, assess the situation faced by the leader, and construct a proper match between the two.
### The Leader’s Trait
Leaders are asked about their least-preferred coworker (LPC), the person with whom they least like to work. The most popular interpretation of the LPC score is that it reflects a leader’s underlying disposition toward others—for example: pleasant/unpleasant, cold/warm, friendly/unfriendly, and untrustworthy/trustworthy. (You can examine your own LPC score by completing the LPC self-assessment on the following page.)
Fiedler states that leaders with high LPC scores are relationship oriented—they need to develop and maintain close interpersonal relationships. They tend to evaluate their least-preferred coworkers in fairly favorable terms. Task accomplishment is a secondary need to this type of leader and becomes important only after the need for relationships is reasonably well satisfied. In contrast, leaders with low LPC scores tend to evaluate the individuals with whom they least like to work fairly negatively. They are task-oriented people, and only after tasks have been accomplished are low-LPC leaders likely to work on establishing good social and interpersonal relations.
### The Situational Factor
Some situations favor leaders more than others do. To Fiedler, situational favorableness is the degree to which leaders have control and influence and therefore feel that they can determine the outcomes of a group interaction. Several years later, Fiedler changed his situational factor from situational favorability to situational control—where situational control essentially refers to the degree to which a leader can influence the group process. Three factors work together to determine how favorable a situation is to a leader. In order of importance, they are (1) leader-member relations—the degree of the group’s acceptance of the leader, their ability to work well together, and members’ level of loyalty to the leader; (2) task structure—the degree to which the task specifies a detailed, unambiguous goal and how to achieve it; and (3) position power—a leader’s direct ability to influence group members. The situation is most favorable for a leader when the relationship between the leader and group members is good, when the task is highly structured, and when the leader’s position power is strong (cell 1 in ). The least-favorable situation occurs under poor leader-member relations, an unstructured task, and weak position power (cell 8).
### Leader-Situation Matches
Some combinations of leaders and situations work well; others do not. In search of the best combinations, Fiedler examined a large number of leadership situations. He argued that most leaders have a relatively unchangeable or dominant style, so organizations need to design job situations to fit the leader.
While the model has not been fully tested and tests have often produced mixed or contradictory findings, Fiedler’s research indicates that relationship-oriented (high-LPC) leaders are much more effective under conditions of intermediate favorability than under either highly favorable or highly unfavorable situations. Fiedler attributes the success of relationship-oriented leaders in situations with intermediate favorability to the leader’s nondirective, permissive attitude; a more directive attitude could lead to anxiety in followers, conflict in the group, and a lack of cooperation.
For highly favorable and unfavorable situations, task-oriented leaders (those with a low LPC) are very effective. As tasks are accomplished, a task-oriented leader allows the group to perform its highly structured tasks without imposing more task-directed behavior. The job gets done without the need for the leader’s direction. Under unfavorable conditions, task-oriented behaviors, such as setting goals, detailing work methods, and guiding and controlling work behaviors, move the group toward task accomplishment.
As might be expected, leaders with mid-range LPC scores can be more effective in a wider range of situations than high- or low-LPC leaders. Under conditions of low favorability, for example, a middle-LPC leader can be task oriented to achieve performance, but show consideration for and allow organizational members to proceed on their own under conditions of high situational favorability.
### Controversy over the Theory
Although Fiedler’s theory often identifies appropriate leader-situation matches and has received broad support, it is not without critics. Some note that it characterizes leaders through reference to their attitudes or personality traits (LPC) while it explains the leader’s effectiveness through their behaviors—those with a particular trait will behave in a particular fashion. The theory fails to make the connection between the least-preferred coworker attitude and subsequent behaviors. In addition, some tests of the model have produced mixed or contradictory findings. Finally, what is the true meaning of the LPC score—exactly what is being revealed by a person who sees their least-preferred coworker in positive or negative terms? Robert J. House and Ram N. Aditya recently noted that, in spite of the criticisms, there has been substantial support for Fiedler’s theory.
### Path-Goal Theory
Robert J. House and Martin Evans, while on the faculty at the University of Toronto, developed a useful leadership theory. Like Fiedler’s, it asserts that the type of leadership needed to enhance organizational effectiveness depends on the situation in which the leader is placed. Unlike Fiedler, however, House and Evans focus on the leader’s observable behavior. Thus, managers can either match the situation to the leader or modify the leader’s behavior to fit the situation.
The model of leadership advanced by House and Evans is called the path-goal theory of leadership because it suggests that an effective leader provides organizational members with a path to a valued goal. According to House, the motivational function of the leader consists of increasing personal payoffs to organizational members for work-goal attainment, and making the path to these payoffs easier to travel by clarifying it, reducing roadblocks and pitfalls, and increasing the opportunities for personal satisfaction en route.
Effective leaders therefore provide rewards that are valued by organizational members. These rewards may be pay, recognition, promotions, or any other item that gives members an incentive to work hard to achieve goals. Effective leaders also give clear instructions so that ambiguities about work are reduced and followers understand how to do their jobs effectively. They provide coaching, guidance, and training so that followers can perform the task expected of them. They also remove barriers to task accomplishment, correcting shortages of materials, inoperative machinery, or interfering policies.
### An Appropriate Match
According to the path-goal theory, the challenge facing leaders is basically twofold. First, they must analyze situations and identify the most appropriate leadership style. For example, experienced employees who work on a highly structured assembly line don’t need a leader to spend much time telling them how to do their jobs—they already know this. The leader of an archeological expedition, though, may need to spend a great deal of time telling inexperienced laborers how to excavate and care for the relics they uncover.
Second, leaders must be flexible enough to use different leadership styles as appropriate. To be effective, leaders must engage in a wide variety of behaviors. Without an extensive repertoire of behaviors at their disposal, a leader’s effectiveness is limited. All team members will not, for example, have the same need for autonomy. The leadership style that motivates organizational members with strong needs for autonomy (participative leadership) is different from that which motivates and satisfies members with weaker autonomy needs (directive leadership). The degree to which leadership behavior matches situational factors will determine members’ motivation, satisfaction, and performance (see ).
### Behavior Dimensions
According to path-goal theory, there are four important dimensions of leader behavior, each of which is suited to a particular set of situational demands.
1. Supportive leadership—At times, effective leaders demonstrate concern for the well-being and personal needs of organizational members. Supportive leaders are friendly, approachable, and considerate to individuals in the workplace. Supportive leadership is especially effective when an organizational member is performing a boring, stressful, frustrating, tedious, or unpleasant task. If a task is difficult and a group member has low self-esteem, supportive leadership can reduce some of the person’s anxiety, increase his confidence, and increase satisfaction and determination as well.
2. Directive leadership—At times, effective leaders set goals and performance expectations, let organizational members know what is expected, provide guidance, establish rules and procedures to guide work, and schedule and coordinate the activities of members. Directive leadership is called for when role ambiguity is high. Removing uncertainty and providing needed guidance can increase members’ effort, job satisfaction, and job performance.
3. Participative leadership—At times, effective leaders consult with group members about job-related activities and consider their opinions and suggestions when making decisions. Participative leadership is effective when tasks are unstructured. Participative leadership is used to great effect when leaders need help in identifying work procedures and where followers have the expertise to provide this help.
4. Achievement-oriented leadership—At times, effective leaders set challenging goals, seek improvement in performance, emphasize excellence, and demonstrate confidence in organizational members’ ability to attain high standards. Achievement-oriented leaders thus capitalize on members’ needs for achievement and use goal-setting theory to great advantage.
### Cross-Cultural Context
Gabriel Bristol, the CEO of Intelifluence Live, a full-service customer contact center offering affordable inbound customer service, outbound sales, lead generation and consulting services for small to mid-sized businesses, notes “diversity breeds innovation, which helps businesses achieve goals and tackle new challenges.” Multiculturalism is a new reality as today’s society and workforce become increasingly diverse. This naturally leads to the question “Is there a need for a new and different style of leadership?”
The vast majority of the contemporary scholarship directed toward understanding leaders and the leadership process has been conducted in North America and Western Europe. Westerners have “developed a highly romanticized, heroic view of leadership.” Leaders occupy center stage in organizational life. We use leaders in our attempts to make sense of the performance of our groups, clubs, organizations, and nations. We see them as key to organizational success and profitability, we credit them with organizational competitiveness, and we blame them for organizational failures. At the national level, recall that President Reagan brought down Communism and the Berlin Wall, President Bush won the Gulf War, and President Clinton brought unprecedented economic prosperity to the United States during the 1990s.
This larger-than-life role ascribed to leaders and the Western romance with successful leaders raise the question “How representative is our understanding of leaders and leadership across cultures?” That is, do the results that we have examined in this chapter generalize to other cultures?
Geert Hofstede points out that significant value differences (individualism-collectivism, power distance, uncertainty avoidance, masculinity-femininity, and time orientation) cut across societies. Thus, leaders of culturally diverse groups will encounter belief and value differences among their followers, as well as in their own leader-member exchanges.
There appears to be consensus that a universal approach to leadership and leader effectiveness does not exist. Cultural differences work to enhance and diminish the impact of leadership styles on group effectiveness. For example, when leaders empower their followers, the effect for job satisfaction in India has been found to be negative, while in the United States, Poland, and Mexico, the effect is positive. The existing evidence suggests similarities as well as differences in such areas as the effects of leadership styles, the acceptability of influence attempts, and the closeness and formality of relationships. The distinction between task and relationship-oriented leader behavior, however, does appear to be meaningful across cultures. Leaders whose behaviors reflect support, kindness, and concern for their followers are valued and effective in Western and Asian cultures. Yet it is also clear that democratic, participative, directive, and contingent-based rewards and punishment do not produce the same results across cultures. The United States is very different from Brazil, Korea, New Zealand, and Nigeria. The effective practice of leadership necessitates a careful look at, and understanding of, the individual differences brought to the leader-follower relationship by cross-cultural contexts.
1. What are the situational perspectives on leadership?
We now know that there is no one best way to be an effective leader in all circumstances. Leaders need to recognize that how they choose to lead will affect the nature of their followers’ compliance with their influence tactics, and ultimately impacts motivation, satisfaction, performance, and group effectiveness. In addition, the nature of the situation—contextual demands and characteristics of the follower—dictates the type of leadership that is likely to be effective. Fiedler focuses on leader traits and argues that the favorableness of the leadership situation dictates the type of leadership approach needed. He recommends selecting leaders to match the situation or changing the situation to match the leader. Path-goal theory focuses on leader behavior that can be adapted to the demands of a particular work environment and organizational members’ characteristics. Path-goal theorists believe both that leaders can be matched with the situation and that the situation can be changed to match leaders. Together, these theories make clear that leadership is effective when the characteristics and behavior of the leader match the demands of the situation. |
# Leadership
## Substitutes for and Neutralizers of Leadership
1. What does the concept “substitute for leadership” mean?
Several factors have been discovered that can substitute for or neutralize the effects of leader behavior (see ). Substitutes for leadership behavior can clarify role expectations, motivate organizational members, or satisfy members (making it unnecessary for the leader to attempt to do so). In some cases, these substitutes supplement the behavior of a leader. Sometimes it is a group member’s characteristics that make leadership less necessary, as when a master craftsperson or highly skilled worker performs up to his or her own high standards without needing outside prompting. Sometimes the task’s characteristics take over, as when the work itself—solving an interesting problem or working on a familiar job—is intrinsically satisfying. Sometimes the characteristics of the organization make leadership less necessary, as when work rules are so clear and specific that workers know exactly what they must do without help from the leader (see An Inside Look at flat management structure and the orchestra with no leader).
Neutralizers of leadership, on the other hand, are not helpful; they prevent leaders from acting as they wish. A computer-paced assembly line, for example, prevents a leader from using initiating structure behavior to pace the line. A union contract that specifies that workers be paid according to seniority prevents a leader from dispensing merit-based pay. Sometimes, of course, neutralizers can be beneficial. Union contracts, for example, clarify disciplinary proceedings and identify the responsibilities of both management and labor. Leaders must be aware of the presence of neutralizers and their effects so that they can eliminate troublesome neutralizers or take advantage of any potential benefits that accompany them (such as the clarity of responsibilities provided by a union contract). If a leader’s effectiveness is being neutralized by a poor communication system, for example, the leader might try to remove the neutralizer by developing (or convincing the organization to develop) a more effective system.
Followers differ considerably in their focus of attention while at work, thereby affecting the effectiveness of the act of leadership. Focus of attention is an employee’s cognitive orientation while at work. It reflects what and how strongly an individual thinks about various objects, events, or phenomena while physically present at work. Focus of attention reflects an individual difference in that not all individuals have the same cognitive orientation while at work—some think a great deal about their job, their coworkers, their leader, or off-the-job factors, while others daydream. An employee’s focus of attention has both “trait” and “state” qualities. For example, there is a significant amount of minute-by-minute variation in an employee’s focus of attention (the “state” component), and there is reasonable consistency in the categories of events that employees think about while they are at work (the “trait” component).
Research suggests that the more followers focus on off-job (nonleader) factors, the less they will react to the leader’s behaviors. Thus, a strong focus on one’s life “away from work” (for example, time with family and friends) tends to neutralize the motivational, attitudinal, and/or behavioral effects associated with any particular leader behavior. It has also been observed, however, that a strong focus on the leader, either positive or negative, enhances the impact that the leader’s behaviors have on followers.
1. What does the concept of “substitute for leadership” mean?
Characteristics of followers, tasks, and organizations can substitute for or neutralize many leader behaviors. Leaders must remain aware of these factors, no matter which perspective on leadership they adopt. Such awareness allows managers to use substitutes for, and neutralizers of, leadership to their benefit, rather than be stymied by their presence. |
# Leadership
## Transformational, Visionary, and Charismatic Leadership
1. What are the characteristics of transactional, transformational, and charismatic leadership?
Many organizations struggling with the need to manage chaos, to undergo a culture change, to empower organizational members, and to restructure have looked for answers in “hiring the right leader.” Many have come to believe that the transformational, visionary, and charismatic leader represents the style of leadership needed to move organizations through chaos.
### The Transformational and Visionary Leader
Leaders who subscribe to the notion that “if it ain’t broke, don’t fix it” are often described as transactional leaders. They are extremely task oriented and instrumental in their approach, frequently looking for incentives that will induce their followers into a desired course of action. These reciprocal exchanges take place in the context of a mutually interdependent relationship between the leader and the follower, frequently resulting in interpersonal bonding. The transactional leader moves a group toward task accomplishment by initiating structure and by offering an incentive in exchange for desired behaviors. The transformational leader, on the other hand, moves and changes (fixes) things “in a big way”! Unlike transactional leaders, they don’t cause change by offering inducements. Instead, they inspire others to action through their personal values, vision, passion, and belief in and commitment to the mission. Through charisma (idealized influence), individualized consideration (a focus on the development of the follower), intellectual stimulation (questioning assumptions and challenging the status quo), and/or inspirational motivation (articulating an appealing vision), transformational leaders move others to follow.
The transformational leader is also referred to as a visionary leader. Visionary leaders are those who influence others through an emotional and/or intellectual attraction to the leader’s dreams of what “can be.” Vision links a present and future state, energizes and generates commitment, provides meaning for action, and serves as a standard against which to assess performance. Evidence indicates that vision is positively related to follower attitudes and performance. As pointed out by Warren Bennis, a vision is effective only to the extent that the leader can communicate it in such a way that others come to internalize it as their own.
As people, transformational leaders are engaging. They are characterized by extroversion, agreeableness, and openness to experience. They energize others. They increase followers’ awareness of the importance of the designated outcome. They motivate individuals to transcend their own self-interest for the benefit of the team and inspire organizational members to self-manage (become self-leaders). Transformational leaders move people to focus on higher-order needs (self-esteem and self-actualization). When organizations face a turbulent environment, intense competition, products that may die early, and the need to move fast, managers cannot rely solely on organizational structure to guide organizational activity. In these situations, transformational leadership can motivate followers to be fully engaged and inspired, to internalize the goals and values of the organization, and to move forward with dogged determination!
Transformational leadership is positively related to follower satisfaction, performance, and acts of citizenship. These effects result from the fact that transformational leader behaviors elicit trust and perceptions of procedural justice, which in turn favorably impact follower satisfaction and performance. As R. Pillai, C. Schriesheim, and E. Williams note, “when followers perceive that they can influence the outcomes of decisions that are important to them and that they are participants in an equitable relationship with their leader, their perceptions of procedural justice [and trust] are likely to be enhanced.” Trust and experiences of organizational justice promote leader effectiveness, follower satisfaction, motivation, performance, and citizenship behaviors.
### Charismatic Leadership
Ronald Reagan, Jesse Jackson, and Queen Elizabeth I have something in common with Martin Luther King Jr., Indira Gandhi, and Winston Churchill. The effectiveness of these leaders originates in part in their charisma, a special magnetic charm and appeal that arouses loyalty and enthusiasm. Each exerted considerable personal influence to bring about major events.
It is difficult to differentiate the charismatic and the transformational leader. True transformational leaders may achieve their results through the magnetism of their personality. In this case, the two types of leaders are essentially one and the same, yet it is important to note that not all transformational leaders have a personal “aura.”
Sociologist Max Weber evidenced an interest in charismatic leadership in the 1920s, calling charismatic leaders people who possess legitimate power that arises from “exceptional sanctity, heroism, or exemplary character.” Charismatic leaders “single-handedly” effect changes even in very large organizations. Their personality is a powerful force, and the relationship that they forge with their followers is extremely strong.
The charismatic leadership phenomenon involves a complex interplay between the attributes of the leader and followers’ needs, values, beliefs, and perceptions. At its extreme, leader-follower relationships are characterized by followers’ unquestioning acceptance; trust in the leader’s beliefs; affection; willing obedience to, emulation of, and identification with the leader; emotional involvement with his mission; and feelings of self-efficacy directed toward the leader’s mission. This can work to better the welfare of individuals, such as when Lee Iacocca saved thousands of jobs through his dramatic turnaround of a failing corporate giant, the Chrysler Corporation. It also can be disastrous, as when David Koresh led dozens and dozens of men, women, and children to their fiery death in Waco, Texas. Individuals working for charismatic leaders often have higher task performance, greater task satisfaction, and lower levels of role conflict than those working for leaders with considerate or structuring behaviors. What are the characteristics of these people who can exert such a strong influence over their followers? Charismatic leaders have a strong need for power and the tendency to rely heavily on referent power as their primary power base. Charismatic leaders also are extremely self-confident and convinced of the rightness of their own beliefs and ideals. This self-confidence and strength of conviction make people trust the charismatic leader’s judgment, unconditionally following the leader’s mission and directives for action. The result is a strong bond between leader and followers, a bond built primarily around the leader’s personality.
Although there have been many effective charismatic leaders, those who succeed the most have coupled their charismatic capabilities with behaviors consistent with the same leadership principles followed by other effective leaders. Those who do not add these other dimensions still attract followers but do not meet organizational goals as effectively as they could. They are (at least for a time) the pied pipers of the business world, with lots of followers but no constructive direction.
1. What are the characteristics of transactional, transformational, and charismatic leadership?
In recent years, there has been a renewed interest in key leader traits and behaviors. As organizations face increasing amounts of chaos in their external environments, searches for “the right leader” who can bring about major organizational transformations has intensified. This search once again focuses our attention on a set of “key” motives, knowledge, skills, and personality attributes. Emerging from this search has been the identification of the charismatic and transformational leader. |
# Leadership
## Leadership Needs in the 21st Century
1. How do different approaches and styles of leadership impact what is needed now?
Frequent headlines in popular business magazines like Fortune and Business Week call our attention to a major movement going on in the world of business. Organizations are being reengineered and restructured, and network, virtual, and modular corporations are emerging. People talk about the transnational organization, the boundaryless company, the post-hierarchical organization. By the end of the decade, the organizations that we will be living in, working with, and competing against are likely to be vastly different from what we know today.
The transition will not be easy; uncertainty tends to breed resistance. We are driven by linear and rational thinking, which leads us to believe that “we can get there from here” by making some incremental changes in who we are and what we are currently doing. Existing paradigms frame our perceptions and guide our thinking. Throwing away paradigms that have served us well in the past does not come easily.
A look back tells most observers that the past decade has been characterized by rapid change, intense competition, an explosion of new technologies, chaos, turbulence, and high levels of uncertainty. A quick scan of today’s business landscape suggests that this trend is not going away anytime soon. According to Professor Jay A. Conger from Canada’s McGill University, “In times of great transition, leadership becomes critically important. Leaders, in essence, offer us a pathway of confidence and direction as we move through seeming chaos. The magnitude of today’s changes will demand not only more leadership, but newer forms of leadership.”
According to Conger, two major forces are defining for us the genius of the next generation of leaders. The first force is the organization’s external environment. Global competitiveness is creating some unique leadership demands. The second force is the growing diversity in organizations’ internal environments. Diversity will significantly change the relationship between organizational members, work, and the organization in challenging, difficult, and also very positive ways.
What will the leaders of tomorrow be like? Professor Conger suggests that the effective leaders of the 21st century will have to be many things. They will have to be strategic opportunists; only organizational visionaries will find strategic opportunities before competitors. They will have to be globally aware; with 80 percent of today’s organizations facing significant foreign competition, knowledge of foreign markets, global economics, and geopolitics is crucial. They will have to be capable of managing a highly decentralized organization; movement toward the high-involvement organization will accelerate as the environmental demands for organizational speed, flexibility, learning, and leanness increase. They will have be sensitive to diversity; during the first few years of the 21st century, fewer than 10 percent of those entering the workforce in North America will be White, Anglo-Saxon males, and the incoming women, minorities, and immigrants will bring with them a very different set of needs and concerns. They will have to be interpersonally competent; a highly diverse workforce will necessitate a leader who is extremely aware of and sensitive to multicultural expectations and needs. They will have to be builders of an organizational community; work and organizations will serve as a major source of need fulfillment, and in the process leaders will be called on to help build this community in such a way that organizational members develop a sense of ownership for the organization and its mission.
Finally, it is important to note that leadership theory construction and empirical inquiry are an ongoing endeavor. While the study of traits, behavior, and contingency models of leadership provide us with a great deal of insight into leadership, the mosaic is far from complete. During the past 15 years, several new theories of leadership have emerged; among them are leader-member exchange theory, implicit leadership theory, neocharismatic theory, value-based theory of leadership, and visionary leadership, each of which over time will add to our bank of knowledge about leaders and the leadership process.
Leaders of the 21st-century organization have a monumental challenge awaiting them and a wealth of self-enriching and fulfilling opportunities. The challenge and rewards awaiting effective leaders are awesome!
1. How do different approaches and styles of leadership impact what is needed now?
Leadership in the high-involvement organization differs dramatically from that in the traditional and control-oriented organization. Leaders external to the team have as one of their primary roles empowering group members and the teams themselves to self-lead and self-manage. Leaders internal to the team are peers; they work alongside and simultaneously facilitate planning, organizing, directing, controlling, and the execution of the team’s work.
Although we know a great deal about the determinants of effective leadership, we have much to learn. Each theory presented in this chapter is put into practice by managers every day. None provides the complete answer to what makes leaders effective, but each has something important to offer.
Finally, our understanding of leadership has many shortcomings and limitations. The existing literature is largely based on observations from a Western industrialized context. The extent to which our theories of leadership are bound by our culture, limiting generalization to other cultures, is largely unknown. Cross-cultural leadership research will no doubt intensify as the global economy becomes an ever more dominant force in the world.
### Chapter Review Questions
1. Define leadership and distinguish between leadership and management.
2. Discuss the processes associated with people coming to positions of leadership.
3. Discuss the different forms of power available to leaders and the effects associated with each.
4. It has been observed that effective leaders have the “right stuff.” What traits are commonly associated with leader emergence and effective leaders?
5. Both the Ohio State University and University of Michigan leadership studies identified central leader behaviors. What are these behaviors, and how are they different from one another?
6. Blake and Mouton’s work with the Leadership Grid® identified several leadership types. What are they, and how does this leadership model look from the perspective of situation theories of leadership?
7. Identify and describe the three situational variables presented in Fiedler’s contingency theory of leadership.
8. What are the four leadership behaviors in the path-goal theory of leadership?
9. Discuss the differences between the internal and external leadership roles surrounding self-managed work teams.
10. What are substitutes for leadership? What are neutralizers? Give an example of each.
11. What are the distinguishing features of the transformational and the charismatic leader?
### Management Skills Application Exercises
1. Identify a charismatic leader and a leader with little charisma. What are the traits and skills that allow them to succeed in their roles? How can you incorporate the traits that allow them to be successful in their roles into the skills you will need to have in a leadership position?
2. You have just taken a leadership position where 40 percent of the workforce telecommutes. You want to encourage teamwork and want to ensure that telecommuting is not hurting teamwork. What is your plan to discover how things are working and how to communicate your desire to have effective teamwork?
3. You are at a meeting, and during the meeting someone on the team addresses their manager and points out a crucial mistake that could doom the project. The person says that their manager should have caught it and because of that should resign. As a leader of the group, how would you deal with the subordinate, the manager, and communication with the entire team?
### Managerial Decision Exercises
1. You are the newly appointed commissioner of a major sports league that is currently in a very public game three of a best-of-seven-game playoff. After an emotional opening ceremony that recognizes a tragic event in the community that is widely praised, you settle in to enjoy the game. Early in the game, a player on one team is seen celebrating a scoring play by acting out a racially insensitive behavior after the play. How would you act in a leadership position? Read the ESPN article [http://www.espn.com/mlb/story/_/id/21199462/rob-manfred-leadership-was-tested-yuli-gurriel-racially-insensitive-behavior-passed] and comment on how this commissioner acted in this instance.
2. One of the challenges for a new manager in a leadership position is managing stress. Reflect on a time in your life where you have taken a leadership role in a summer job, as a member of a team, or in a study group for this or another course. Develop a stress management plan that includes how you can recognize stress, how you will notice the stress, how you will manage changes to address stress, and how you will seek outside counsel and help, including a mentor to help you manage stress.
3. Few people would want to hire a skilled manager with no leadership skills, and you would not want to hire an inspirational leader who can't manage planning, delegating, or keeping things organized. Draw two "T accounts" with positive attributes on the left and negative attributes on the right for managerial skills and leadership skills that you would look for as a hiring manager for a crucial managerial and leadership position in your organization.
### Critical Thinking Case
### The Leadership Challenge at United
Anyone who has traveled even a little has at least one airline horror story: being stranded at an airport, obnoxious passengers, missed connections, flight delays, or just bad in-flight food. Even the most seasoned travelers would be hard-pressed to match Dr. David Dao’s experience of being forcibly removed, kicking and screaming, from a United Airlines flight. Most airline horror stories don’t end in a concussion, missing teeth, and a broken nose.
United Airlines CEO Oscar Munoz’s strangely detached response only made things worse. The incident was caught on video, and that video went viral almost immediately. Munoz issued a response that mischaracterized what plainly happened in the video and termed the violent assault as a passenger "re-accommodation" (Taylor 2017). Social media erupted with condemnation, which was echoed by late-night monologues. United was left with a damaged reputation, and its management was left wondering why their processes failed, what to do to mitigate the damage, and how to both restore their reputation and ensure that company values are followed in the future.
William Taylor (2017), in a commentary in Fortune, attributes United’s “re-accommodation” disaster as the product of company policy, airport security procedures, pilot protocols, and the “wisdom of crowds.” At each step, the gate agent, pilot, airport security, and the passengers themselves could have intervened but didn’t.
Brian Fielkow, business leader, author, and keynote speaker, writing at Entrepreneur.com, outlined some points that apply to Munoz’s response and the first reactions by United. Citing United’s core values, Fielkow points to Munoz’s failure to address the incident in light of the company’s values, take the blame, or even accurately describe what happened on the plane. Any one of these lapses in leadership would have caused confusion or stymied the recovery process. As a leader, Munoz was setting the tone for thousands of people. Seemingly abandoning United’s core values likely caused a rift in trust or just simple confusion company-wide. Miscasting the situation in a world of smartphones and social media reach only multiplied the effect. As a leader, Munoz was duty-bound to take responsibility for what literally the entire world saw—a breach of social ethics, let alone United’s core values. Failing to do this immediately created a problem larger than poorly planned company policy or just a perfect storm of contributing outside factors. Fielkow is keen to point out another crucial part of a company response— “You can’t walk it back” (2017 n.p.). Before responding, leadership should take time to gather the facts and thoroughly consider the possibilities of how the message will be received. Again, Munoz’s response failed at several key points, leading to the perception that Munoz’s second statement was “an attempt at damage control” (Fielkow 2017 n.p.).
Al Bolea, a leadership trainer, also attributes the incident to leadership failure. In a piece written for Applied Leadership, Bolea writes, “It’s about front line employees getting the wrong messages from the most senior levels of the company.” He contends that the mindset within United put procedures above context in the minds of the employees. What the gate agents should have considered was the company’s reputation, which should have prevented them from doing something most airline customers see as “profoundly immoral” (Bolea 2017 n.p.)
William C. Taylor, cofounder of Fast Company, also criticized the lack of leadership across United. As the presumptive leader of the flight, shouldn’t the pilot have done something? Why didn’t the gate agent think outside the box to solve the problem of getting the crew members from Chicago to Louisville, Kentucky? Why didn’t—or couldn’t—the gate agent use what Taylor refers to as a “common sense and a little bit of creativity” and prevent a highly embarrassing (and ultimately expensive) fiasco? Taylor muses that he would like to think he would have done more than shoot video, but the passengers on the flight remained quiet and submissive, expressing no group outrage. Finally, Taylor questions the weak initial response from United’s CEO, Oscar Munoz, writing, “If CEO Oscar Munoz’s goal was to make a disastrous situation even worse, well, he gets credit as a leader for succeeding at that” (2017 n.p.). And of the board, he questions their response, and says that response will be a “make or break test” of the company’s character (Taylor 2017).
So what will it take to lead United out of such a public mistake?
According to Brian Fielkow, the incident flew in the face of United’s core values, values which should never be sacrificed. United should have acknowledged this and addressed that failure. United should have held itself accountable for the incident rather than try to deflect blame. Fielkow contends that Munoz’s first response was to blame the passenger when Munoz should have accepted responsibility instead. Further, Fielkow writes that companies should anticipate what “can” go wrong, something the gate agents at United failed to do. Increasing passenger compensation to even three times the normal ticket price would have been cheaper than the PR nightmare (and stock price drop) that followed. After Munoz’s tepid response failed to quell general complaints about United’s handling of the passenger, he tried to issue a second “more appropriate” statement, but by then the damage had been done. Fielkow recommends waiting before issuing a response if need be. It’s better to prepared and issue a suitable response than to try to walk back a bad response. Above all, Fielkow recommends leaders “be human.” The first response Munoz gave had little empathy and made him, and United, appear insensitive and callous. A company’s first response should be to empathize with the customer, even if the customer is wrong. He writes, “When triaging a difficult problem, above all recognize the human factor” (Fielkow 2017 n.p.).
Writing in Forbes, Glenn Llopis emphasizes that how managers react to failure shapes their futures as leaders. Not only how leaders respond, but what is learned from a failure, will affect how future decisions are approached. Remember, you have to be doing something to fail, and if you never fail, then you aren’t stretching yourself. Venturing into the unknown and unfamiliar always risks failure (Llopis 2012).
2. How have other airlines handled similar situations?
3. How much was in United Airlines’s control, and how much was actually outside their control? What social or company factors caused a seemingly common practice to escalate to this level?
4. How did the other airlines or the industry respond to the United Airlines incident?
Sources:
Fielkow, Brian. 2017. “5 Leadership Failures that Contributed to the United Fiasco.” Entrepreneur. https://www.entrepreneur.com/article/292820
Bolea, Al. 2017. “United Airlines: A System Failure?” Applied Leadership. http://appliedleadership.co/leadership/united-airlines-system-failure/
Taylor, William C. 2017. “Where was the Pilot on That United Airlines Flight?” Fortune. http://fortune.com/2017/04/11/united-airlines-video/
Llopis, Glenn. 2012. “5 Things Failure Teaches You About Leadership.” Forbes. https://www.forbes.com/sites/glennllopis/2012/08/20/5-things-failure-teaches-you-about-leadership/2/#2f44c3873e70 |
# Work Motivation for Performance
## Introduction
### Learning Outcomes
After reading this chapter, you should be able to answer these questions:
1. Define motivation, and distinguish direction and intensity of motivation.
2. Describe a content theory of motivation, and compare and contrast the main content theories of motivation: manifest needs theory, learned needs theory, Maslow’s hierarchy of needs, Alderfer’s ERG theory, Herzberg’s motivator-hygiene theory, and self-determination theory.
3. Describe the process theories of motivation, and compare and contrast the main process theories of motivation: operant conditioning theory, equity theory, goal theory, and expectancy theory.
4. Describe the modern advancements in the study of human motivation. |
# Work Motivation for Performance
## Motivation: Direction and Intensity
1. Define motivation and distinguish direction and intensity of motivation.
Ability refers to the knowledge, skills, and receptiveness to learning that a person brings to a task or job. Knowledge is what a person knows. Skill is their capacity to perform some particular activity (like welding or accounting), including knowing what is expected of them (called accurate role perceptions). Receptiveness to learning is a function of how quickly a person acquires new knowledge. Some people have more ability than others, and high-ability people generally perform better than low-ability people (although we will see that this is not always the case).
Accurate role perceptions refer to how well an individual understands their organizational role. This includes the goals (outcomes) the person is expected to achieve and the process by which the goals will be achieved. An employee who has accurate role perceptions knows both their expected outcomes and how to go about making those outcomes a reality. Incomplete or inaccurate role perceptions limit employees’ capacity to meet expectations, regardless of their abilities and motivation.
The performance environment refers to those factors that impact employees’ performance but are essentially out of their control. Many environmental factors influence performance. Some factors facilitate performance, while others constrain it. A word processor who has to work with a defective personal computer is certainly not going to perform at peak levels, regardless of ability or desire. Students who are working full time and carrying a full load of classes may not do as well on an exam as they would if they could cut back on their work hours, despite the fact that they have high ability and high motivation.
Motivation is the fourth major factor that determines whether a person will perform a task well. Motivation is a force within or outside of the body that energizes, directs, and sustains human behavior. Within the body, examples might be needs, personal values, and goals, while an incentive might be seen as a force outside of the body. The word stems from its Latin root movere, which means “to move.” Generally speaking, motivation arises as a consequence of a person’s desire to (1) fulfill unmet needs or (2) resolve conflicting thoughts that produce anxiety (an unpleasant experience). There are many ways in which we describe and categorize human needs, as we will see later in this chapter. Certain needs are fundamental to our existence, like the need for food and water. When we are hungry, we are energized to satisfy that need by securing and ingesting food. Our other needs operate in a similar manner. When a need is unfulfilled, we are motivated to engage in behaviors that will satisfy it. The same is true for situations in which we experience conflicting thoughts. When we find ourselves in situations inconsistent with our beliefs, values, or expectations, we endeavor to eliminate the inconsistency. We either change the situation, or we change our perception of it. In both cases, motivation arises out of our interaction with and perception of a particular situation. We perceive the situation as satisfying our needs, or not. Motivation is thus a result of our interacting with situations to satisfy unmet needs or to resolve cognitive dissonance.
Simply stated, work motivation is the amount of effort a person exerts to achieve a certain level of job performance. Some people try very hard to perform their jobs well. They work long hours, even if it interferes with their family life. Highly motivated people go the “extra mile.” High scorers on an exam make sure they know the examination material to the best of their ability, no matter how much midnight oil they have to burn. Other students who don’t do as well may just want to get by—football games and parties are a lot more fun, after all.
Motivation is of great interest to employers: All employers want their people to perform to the best of their abilities. They take great pains to screen applicants to make sure they have the necessary abilities and motivation to perform well. They endeavor to supply all the necessary resources and a good work environment. Yet motivation remains a difficult factor to manage. As a result, it receives the most attention from organizations and researchers alike, who ask the perennial question “What motivates people to perform well?”
In this chapter we look at current answers to this question. What work conditions foster motivation? How can theories of motivation help us understand the general principles that guide organizational behavior? Rather than analyze why a particular student studies hard for a test, we’ll look at the underlying principles of our general behavior in a variety of situations (including test taking). We also discuss the major theories of motivation, along with their implications for management and organizational behavior. By the end of this chapter you should have a better understanding of why some people are more motivated than others. Successful employees know what they want to achieve (direction), and they persist until they achieve their goals (intensity).
Our discussion thus far implies that motivation is a matter of effort. This is only partially true. Motivation has two major components: direction and intensity. Direction is what a person wants to achieve, what they intend to do. It implies a target that motivated people try to “hit.” That target may be to do well on a test. Or it may be to perform better than anyone else in a work group. Intensity is how hard people try to achieve their targets. Intensity is what we think of as effort. It represents the energy we expend to accomplish something. If our efforts are getting nowhere, will we try different strategies to succeed? (High-intensity-motivated people are persistent!)
It is important to distinguish the direction and intensity aspects of motivation. If either is lacking, performance will suffer. A person who knows what they want to accomplish (direction) but doesn’t exert much effort (intensity) will not succeed. (Scoring 100 percent on an exam—your target—won’t happen unless you study!) Conversely, people who don’t have a direction (what they want to accomplish) probably won’t succeed either. (At some point you have to decide on a major if you want to graduate, even if you do have straight As.)
Employees’ targets don’t always match with what their employers want. Absenteeism (some employees call this “calling in well”) is a major example. Pursuing your favorite hobby (your target) on a workday (your employer’s target) is a conflict in direction; below, we’ll examine some theories about why this conflict occurs.
There is another reason why employees’ targets are sometimes contrary to their employers’—sometimes employers do not ensure that employees understand what the employer wants. Employees can have great intensity but poor direction. It is management’s job to provide direction: Should we stress quality as well as quantity? Work independently or as a team? Meet deadlines at the expense of costs? Employees flounder without direction. Clarifying direction results in accurate role perceptions, the behaviors employees think they are expected to perform as members of an organization. Employees with accurate role perceptions understand their purpose in the organization and how the performance of their job duties contributes to organizational objectives. Some motivation theorists assume that employees know the correct direction for their jobs. Others do not. These differences are highlighted in the discussion of motivation theories below.
At this point, as we begin our discussion of the various motivation theories, it is reasonable to ask “Why isn’t there just one motivation theory?” The answer is that the different theories are driven by different philosophies of motivation. Some theorists assume that humans are propelled more by needs and instincts than by reasoned actions. Their content motivation theories focus on the content of what motivates people. Other theorists focus on the process by which people are motivated. Process motivation theories address how people become motivated—that is, how people perceive and think about a situation. Content and process theories endeavor to predict motivation in a variety of situations. However, none of these theories can predict what will motivate an individual in a given situation 100 percent of the time. Given the complexity of human behavior, a “grand theory” of motivation will probably never be developed.
A second reasonable question at this point is “Which theory is best?” If that question could be easily answered, this chapter would be quite short. The simple answer is that there is no “one best theory.” All have been supported by organizational behavior research. All have strengths and weaknesses. However, understanding something about each theory is a major step toward effective management practices.
1. Define motivation, and distinguish direction and intensity of motivation.
This chapter has covered the major motivation theories in organizational behavior. Motivation theories endeavor to explain how people become motivated. Motivation has two major components: direction and intensity. Direction is what a person is trying to achieve. Intensity is the degree of effort a person expends to achieve the target. All motivation theories address the ways in which people develop direction and intensity. |
# Work Motivation for Performance
## Content Theories of Motivation
1. Describe a content theory of motivation.
The theories presented in this section focus on the importance of human needs. A common thread through all of them is that people have a variety of needs. A need is a human condition that becomes “energized” when people feel deficient in some respect. When we are hungry, for example, our need for food has been energized. Two features of needs are key to understanding motivation. First, when a need has been energized, we are motivated to satisfy it. We strive to make the need disappear. Hedonism, one of the first motivation theories, assumes that people are motivated to satisfy mainly their own needs (seek pleasure, avoid pain). Long since displaced by more refined theories, hedonism clarifies the idea that needs provide direction for motivation. Second, once we have satisfied a need, it ceases to motivate us. When we’ve eaten to satiation, we are no longer motivated to eat. Other needs take over and we endeavor to satisfy them. A manifest need is whatever need is motivating us at a given time. Manifest needs dominate our other needs.
Instincts are our natural, fundamental needs, basic to our survival. Our needs for food and water are instinctive. Many needs are learned. We are not born with a high (or low) need for achievement—we learn to need success (or failure). The distinction between instinctive and learned needs sometimes blurs; for example, is our need to socialize with other people instinctive or learned?
### Manifest Needs Theory
One major problem with the need approach to motivation is that we can make up a need for every human behavior. Do we “need” to talk or be silent? The possibilities are endless. In fact, around the 1920s, some 6,000 human needs had been identified by behavioral scientists!
Henry A. Murray recognized this problem and condensed the list into a few instinctive and learned needs. Instincts, which Murray called primary needs, include physiological needs for food, water, sex (procreation), urination, and so on. Learned needs, which Murray called secondary needs, are learned throughout one’s life and are basically psychological in nature. They include such needs as the need for achievement, for love, and for affiliation (see ).
Murray’s main premise was that people have a variety of needs, but only a few are expressed at a given time. When a person is behaving in a way that satisfies some need, Murray called the need manifest. Manifest needs theory assumes that human behavior is driven by the desire to satisfy needs. Lucretia’s chattiness probably indicates her need for affiliation. This is a manifest need. But what if Lucretia also has a need to dominate others? Could we detect that need from her current behavior? If not, Murray calls this a latent need. A latent need cannot be inferred from a person’s behavior at a given time, yet the person may still possess that need. The person may not have had the opportunity to express the need. Or she may not be in the proper environment to solicit behaviors to satisfy the need. Lucretia’s need to dominate may not be motivating her current behavior because she is with friends instead of coworkers.
Manifest needs theory laid the groundwork for later theories, most notably McClelland’s learned needs theory, that have greatly influenced the study of organizational behavior. The major implication for management is that some employee needs are latent. Managers often assume that employees do not have certain needs because the employees never try to satisfy them at work. Such needs may exist (latent needs); the work environment is simply not conducive to their manifestation (manifest needs). A reclusive accountant may not have been given the opportunity to demonstrate their need for achievement because they never received challenging assignments.
### Learned Needs Theory
David C. McClelland and his associates (especially John W. Atkinson) built on the work of Murray for over 50 years. Murray studied many different needs, but very few in any detail. McClelland’s research differs from Murray’s in that McClelland studied three needs in depth: the need for achievement, the need for affiliation, and the need for power (often abbreviated, in turn, as nAch, nAff, and nPow). McClelland believes that these three needs are learned, primarily in childhood. But he also believes that each need can be taught, especially nAch. McClelland’s research is important because much of current thinking about organizational behavior is based on it.
### Need for Achievement
The need for achievement (nAch) is how much people are motivated to excel at the tasks they are performing, especially tasks that are difficult. Of the three needs studied by McClelland, nAch has the greatest impact. The need for achievement varies in intensity across individuals. This makes nAch a personality trait as well as a statement about motivation. When nAch is being expressed, making it a manifest need, people try hard to succeed at whatever task they’re doing. We say these people have a high achievement motive. A motive is a source of motivation; it is the need that a person is attempting to satisfy. Achievement needs become manifest when individuals experience certain types of situations.
To better understand the nAch motive, it’s helpful to describe high-nAch people. You probably know a few of them. They’re constantly trying to accomplish something. One of your authors has a father-in-law who would much rather spend his weekends digging holes (for various home projects) than going fishing. Why? Because when he digs a hole, he gets results. In contrast, he can exert a lot of effort and still not catch a fish. A lot of fishing, no fish, and no results equal failure!
McClelland describes three major characteristics of high-nAch people:
1. They feel personally responsible for completing whatever tasks they are assigned. They accept credit for success and blame for failure.
2. They like situations where the probability of success is moderate. High-nAch people are not motivated by tasks that are too easy or extremely difficult. Instead, they prefer situations where the outcome is uncertain, but in which they believe they can succeed if they exert enough effort. They avoid both simple and impossible situations.
3. They have very strong desires for feedback about how well they are doing. They actively seek out performance feedback. It doesn’t matter whether the information implies success or failure. They want to know whether they have achieved or not. They constantly ask how they are doing, sometimes to the point of being a nuisance.
Why is nAch important to organizational behavior? The answer is, the success of many organizations is dependent on the nAch levels of their employees. This is especially true for jobs that require self-motivation and managing others. Employees who continuously have to be told how to do their jobs require an overly large management team, and too many layers of management spell trouble in the current marketplace. Today’s flexible, cost-conscious organizations have no room for top-heavy structures; their high-nAch employees perform their jobs well with minimal supervision.
Many organizations manage the achievement needs of their employees poorly. A common perception about people who perform unskilled jobs is that they are unmotivated and content doing what they are doing. But, if they have achievement needs, the job itself creates little motivation to perform. It is too easy. There are not enough workers who feel personal satisfaction for having the cleanest floors in a building. Designing jobs that are neither too challenging nor too boring is key to managing motivation. Job enrichment is one effective strategy; this frequently entails training and rotating employees through different jobs, or adding new challenges.
### Need for Affiliation
This need is the second of McClelland’s learned needs. The need for affiliation (nAff) reflects a desire to establish and maintain warm and friendly relationships with other people. As with nAch, nAff varies in intensity across individuals. As you would expect, high-nAff people are very sociable. They’re more likely to go bowling with friends after work than to go home and watch television. Other people have lower affiliation needs. This doesn’t mean that they avoid other people, or that they dislike others. They simply don’t exert as much effort in this area as high-nAff people do.
The nAff has important implications for organizational behavior. High-nAff people like to be around other people, including other people at work. As a result, they perform better in jobs that require teamwork. Maintaining good relationships with their coworkers is important to them, so they go to great lengths to make the work group succeed because they fear rejection. So, high-nAff employees will be especially motivated to perform well if others depend on them. In contrast, if high-nAff people perform jobs in isolation from other people, they will be less motivated to perform well. Performing well on this job won’t satisfy their need to be around other people.
Effective managers carefully assess the degree to which people have high or low nAff. Employees high in nAff should be placed in jobs that require or allow interactions with other employees. Jobs that are best performed alone are more appropriate for low-nAff employees, who are less likely to be frustrated.
### Need for Power
The third of McClelland’s learned needs, the need for power (nPow), is the need to control things, especially other people. It reflects a motivation to influence and be responsible for other people. An employee who is often talkative, gives orders, and argues a lot is motivated by the need for power over others.
Employees with high nPow can be beneficial to organizations. High-nPow people do have effective employee behaviors, but at times they’re disruptive. A high-nPow person may try to convince others to do things that are detrimental to the organization. So, when is this need good, and when is it bad? Again, there are no easy answers. McClelland calls this the “two faces of power.” A personal power seeker endeavors to control others mostly for the sake of dominating them. They want others to respond to their wishes whether or not it is good for the organization. They “build empires,” and they protect them.
McClelland’s other power seeker is the social power seeker. A high social power seeker satisfies needs for power by influencing others, like the personal power seeker. They differ in that they feel best when they have influenced a work group to achieve the group’s goals, and not some personal agenda. High social power seekers are concerned with goals that a work group has set for itself, and they are motivated to influence others to achieve the goal. This need is oriented toward fulfilling responsibilities to the employer, not to the self.
McClelland has argued that the high need for social power is the most important motivator for successful managers. Successful managers tend to be high in this type of nPow. High need for achievement can also be important, but it sometimes results in too much concern for personal success and not enough for the employer’s success. The need for affiliation contributes to managerial success only in those situations where the maintenance of warm group relations is as important as getting others to work toward group goals.
The implication of McClelland’s research is that organizations should try to place people with high needs for social power in managerial jobs. It is critical, however, that those managerial jobs allow the employee to satisfy the nPow through social power acquisition. Otherwise, a manager high in nPow may satisfy this need through acquisition of personal power, to the detriment of the organization.
### Maslow’s Hierarchy of Needs
Any discussion of needs that motivate performance would be incomplete without considering Abraham Maslow. Thousands of managers in the 1960s were exposed to Maslow’s theory through the popular writings of Douglas McGregor. Today, many of them still talk about employee motivation in terms of Maslow’s theory.
Maslow was a psychologist who, based on his early research with primates (monkeys), observations of patients, and discussions with employees in organizations, theorized that human needs are arranged hierarchically. That is, before one type of need can manifest itself, other needs must be satisfied. For example, our need for water takes precedence over our need for social interaction (this is also called prepotency). We will always satisfy our need for water before we satisfy our social needs; water needs have prepotency over social needs. Maslow’s theory differs from others that preceded it because of this hierarchical, prepotency concept.
Maslow went on to propose five basic types of human needs. This is in contrast to the thousands of needs that earlier researchers had identified, and also fewer than Murray identified in his theory. Maslow condensed human needs into a manageable set. Those five human needs, in the order of prepotency in which they direct human behavior, are:
1. Physiological and survival needs. These are the most basic of human needs, and include the needs for water, food, sex, sleep, activity, stimulation, and oxygen.
2. Safety and security needs. These needs invoke behaviors that assure freedom from danger. This set of needs involves meeting threats to our existence, including extremes in environmental conditions (heat, dust, and so on), assault from other humans, tyranny, and murder. In other words, satisfaction of these needs prevents fear and anxiety while adding stability and predictability to life.
3. Social needs. These needs reflect human desires to be the target of affection and love from others. They are especially satisfied by the presence of spouses, children, parents, friends, relatives, and others to whom we feel close. Feelings of loneliness and rejection are symptoms that this need has not been satisfied.
4. Ego and esteem. Esteem needs go beyond social needs. They reflect our need to be respected by others, and to have esteem for ourselves. It is one thing to be liked by others. It is another thing to be respected for our talents and abilities. Ego and esteem needs have internal (self) and external (others) focuses. An internal focus includes desires for achievement, strength, competence, confidence, and independence. An external focus includes desires to have prestige, recognition, appreciation, attention, and respect from others. Satisfaction of external esteem needs can lead to satisfaction of internal esteem needs.
5. Self-actualization. Self-actualization needs are the most difficult to describe. Unlike the other needs, the need for self-actualization is never completely satisfied. Self-actualization involves a desire for self-fulfillment, “to become more and more what one is, to become everything that one is capable of becoming.” Because people are so different in their strengths and weaknesses, in capacities and limitations, the meaning of self-actualization varies greatly. Satisfying self-actualization needs means developing all of our special abilities to their fullest degree.
A protester at an anti-war demonstration in Seattle held up this sign. Where would you place that on Maslow’s hierarchy of needs?
illustrates Maslow’s proposed hierarchy of needs. According to his theory, people first direct their attention to satisfying their lower-order needs. Those are the needs at the bottom of the pyramid (physiological, safety, and security). Once those needs have been satisfied, the next level, social needs, become energized. Once satisfied, we focus on our ego and esteem needs. Maslow believed that most people become fixated at this level. That is, most people spend much of their lives developing self-esteem and the esteem of others. But, once those esteem needs are satisfied, Maslow predicted that self-actualization needs would dominate. There are no higher levels in the pyramid, because self-actualization needs can never be fully satisfied. They represent a continuing process of self-development and self-improvement that, once satisfied on one dimension (painting), create motivation to continue on other dimensions (sculpting). One wonders if athletes like Tim Tebow are self-actualizing when they participate in multiple sporting endeavors at the professional level.
An overriding principle in this theory is that a person’s attention (direction) and energy (intensity) will focus on satisfying the lowest-level need that is not currently satisfied. Needs can also be satisfied at some point but become active (dissatisfied) again. Needs must be “maintained” (we must continue to eat occasionally). According to Maslow, when lower-level needs are reactivated, we once again concentrate on that need. That is, we lose interest in the higher-level needs when lower-order needs are energized.
The implications of Maslow’s theory for organizational behavior are as much conceptual as they are practical. The theory posits that to maximize employee motivation, employers must try to guide workers to the upper parts of the hierarchy. That means that the employer should help employees satisfy lower-order needs like safety and security and social needs. Once satisfied, employees will be motivated to build esteem and respect through their work achievements. shows how Maslow’s theory relates to factors that organizations can influence. For example, by providing adequate pay, safe working conditions, and cohesive work groups, employers help employees satisfy their lower-order needs. Once satisfied, challenging jobs, additional responsibilities, and prestigious job titles can help employees satisfy higher-order esteem needs.
Maslow’s theory is still popular among practicing managers. Organizational behavior researchers, however, are not as enamored with it because research results don’t support Maslow’s hierarchical notion. Apparently, people don’t go through the five levels in a fixed fashion. On the other hand, there is some evidence that people satisfy the lower-order needs before they attempt to satisfy higher-order needs. Refinements of Maslow’s theory in recent years reflect this more limited hierarchy. The self-assessment below will allow you to evaluate the strength of your five needs.
### Alderfer’s ERG Theory
Clayton Alderfer observed that very few attempts had been made to test Maslow’s full theory. Further, the evidence accumulated provided only partial support. During the process of refining and extending Maslow’s theory, Alderfer provided another need-based theory and a somewhat more useful perspective on motivation. Alderfer’s ERG theory compresses Maslow’s five need categories into three: existence, relatedness, and growth. In addition, ERG theory details the dynamics of an individual’s movement between the need categories in a somewhat more detailed fashion than typically characterizes interpretations of Maslow’s work.
As shown in , the ERG model addresses the same needs as those identified in Maslow’s work:
1. Existence needs include physiological and material safety needs. These needs are satisfied by material conditions and not through interpersonal relations or personal involvement in the work setting.
2. Relatedness needs include all of Maslow’s social needs, plus social safety and social esteem needs. These needs are satisfied through the exchange of thoughts and feelings with other people.
3. Growth needs include self-esteem and self-actualization needs. These needs tend to be satisfied through one’s full involvement in work and the work setting.
identifies a number of ways in which organizations can help their members satisfy these three needs.
Four components—satisfaction progression, frustration, frustration regression, and aspiration—are key to understanding Alderfer’s ERG theory. The first of these, satisfaction progression, is in basic agreement with Maslow’s process of moving through the needs. As we increasingly satisfy our existence needs, we direct energy toward relatedness needs. As these needs are satisfied, our growth needs become more active. The second component, frustration, occurs when we attempt but fail to satisfy a particular need. The resulting frustration may make satisfying the unmet need even more important to us—unless we repeatedly fail to satisfy that need. In this case, Alderfer’s third component, frustration regression, can cause us to shift our attention to a previously satisfied, more concrete, and verifiable need. Lastly, the aspiration component of the ERG model notes that, by its very nature, growth is intrinsically satisfying. The more we grow, the more we want to grow. Therefore, the more we satisfy our growth need, the more important it becomes and the more strongly we are motivated to satisfy it.
Alderfer’s model is potentially more useful than Maslow’s in that it doesn’t create false motivational categories. For example, it is difficult for researchers to ascertain when interaction with others satisfies our need for acceptance and when it satisfies our need for recognition. ERG also focuses attention explicitly on movement through the set of needs in both directions. Further, evidence in support of the three need categories and their order tends to be stronger than evidence for Maslow’s five need categories and their relative order.
### Herzberg’s Motivator-Hygiene Theory
Clearly one of the most influential motivation theories throughout the 1950s and 1960s was Frederick Herzberg’s motivator-hygiene theory. This theory is a further refinement of Maslow’s theory. Herzberg argued that there are two sets of needs, instead of the five sets theorized by Maslow. He called the first set “motivators” (or growth needs). Motivators, which relate to the jobs we perform and our ability to feel a sense of achievement as a result of performing them, are rooted in our need to experience growth and self-actualization. The second set of needs he termed “hygienes.” Hygienes relate to the work environment and are based in the basic human need to “avoid pain.” According to Herzberg, growth needs motivate us to perform well and, when these needs are met, lead to the experience of satisfaction. Hygiene needs, on the other hand, must be met to avoid dissatisfaction (but do not necessarily provide satisfaction or motivation).
Hygiene factors are not directly related to the work itself (job content). Rather, hygienes refer to job context factors (pay, working conditions, supervision, and security). Herzberg also refers to these factors as “dissatisfiers” because they are frequently associated with dissatisfied employees. These factors are so frequently associated with dissatisfaction that Herzberg claims they never really provide satisfaction. When they’re present in sufficient quantities, we avoid dissatisfaction, but they do not contribute to satisfaction. Furthermore, since meeting these needs does not provide satisfaction, Herzberg concludes that they do not motivate workers.
Motivator factors involve our long-term need to pursue psychological growth (much like Maslow’s esteem and self-actualization needs). Motivators relate to job content. Job content is what we actually do when we perform our job duties. Herzberg considered job duties that lead to feelings of achievement and recognition to be motivators. He refers to these factors as “satisfiers” to reflect their ability to provide satisfying experiences. When these needs are met, we experience satisfaction. Because meeting these needs provides satisfaction, they motivate workers. More specifically, Herzberg believes these motivators lead to high performance (achievement), and the high performance itself leads to satisfaction.
The unique feature of Herzberg’s theory is that job conditions that prevent dissatisfaction do not cause satisfaction. Satisfaction and dissatisfaction are on different “scales” in his view. Hygienes can cause dissatisfaction if they are not present in sufficient levels. Thus, an employee can be dissatisfied with low pay. But paying him more will not cause long-term satisfaction unless motivators are present. Good pay by itself will only make the employee neutral toward work; to attain satisfaction, employees need challenging job duties that result in a sense of achievement. Employees can be dissatisfied, neutral, or satisfied with their jobs, depending on their levels of hygienes and motivators. Herzberg’s theory even allows for the possibility that an employee can be satisfied and dissatisfied at the same time—the “I love my job but I hate the pay” situation!
Herzberg’s theory has made lasting contributions to organizational research and managerial practice. Researchers have used it to identify the wide range of factors that influence worker reactions. Previously, most organizations attended primarily to hygiene factors. Because of Herzberg’s work, organizations today realize the potential of motivators. Job enrichment programs are among the many direct results of his research.
Herzberg’s work suggests a two-stage process for managing employee motivation and satisfaction. First, managers should address the hygiene factors. Intense forms of dissatisfaction distract employees from important work-related activities and tend to be demotivating. Thus, managers should make sure that such basic needs as adequate pay, safe and clean working conditions, and opportunities for social interaction are met. They should then address the much more powerful motivator needs, in which workers experience recognition, responsibility, achievement, and growth. If motivator needs are ignored, neither long-term satisfaction nor high motivation is likely. When motivator needs are met, however, employees feel satisfied and are motivated to perform well.
### Self-Determination Theory
One major implication of Herzberg’s motivator-hygiene theory is the somewhat counterintuitive idea that managers should focus more on motivators than on hygienes. (After all, doesn’t everyone want to be paid well? Organizations have held this out as a chief motivator for decades!) Why might concentrating on motivators give better results? To answer this question, we must examine types of motivation. Organizational behavior researchers often classify motivation in terms of what stimulates it. In the case of extrinsic motivation, we endeavor to acquire something that satisfies a lower-order need. Jobs that pay well and that are performed in safe, clean working conditions with adequate supervision and resources directly or indirectly satisfy these lower-order needs. These “outside the person” factors are extrinsic rewards.
Factors “inside” the person that cause people to perform tasks, intrinsic motivation, arise out of performing a task in and of itself, because it is interesting or “fun” to do. The task is enjoyable, so we continue to do it even in the absence of extrinsic rewards. That is, we are motivated by intrinsic rewards, rewards that we more or less give ourselves. Intrinsic rewards satisfy higher-order needs like relatedness and growth in ERG theory. When we sense that we are valuable contributors, are achieving something important, or are getting better at some skill, we like this feeling and strive to maintain it.
Self-determination theory (SDT) seeks to explain not only what causes motivation, but also how extrinsic rewards affect intrinsic motivation. In SDT, extrinsic motivation refers to the performance of an activity in order to attain some valued outcome, while intrinsic motivation refers to performing an activity for the inherent satisfaction of the activity itself. SDT specifies when an activity will be intrinsically motivating and when it will not. Considerable numbers of studies have demonstrated that tasks are intrinsically motivating when they satisfy at least one of three higher-order needs: competence, autonomy, and relatedness. These precepts from SDT are entirely consistent with earlier discussions of theories by McClelland, Maslow, Alderfer, and Herzberg.
SDT takes the concepts of extrinsic rewards and intrinsic motivation further than the other need theories. SDT researchers have consistently found that as the level of extrinsic rewards increases, the amount of intrinsic motivation decreases. That is, SDT posits that extrinsic rewards not only do not provide intrinsic motivation, they diminish it. Think of this in terms of hobbies. Some people like to knit, others like to carve wood. They do it because it is intrinsically motivating; the hobby satisfies needs for competence, autonomy, and relatedness. But what happens if these hobbyists start getting paid well for their sweaters and carvings? Over time the hobby becomes less fun and is done in order to receive extrinsic rewards (money). Extrinsic motivation increases as intrinsic motivation decreases! When extrinsic rewards are present, people do not feel like what they do builds competence, is self-determined, or enhances relationships with others.
SDT theory has interesting implications for the management of organizational behavior. Some jobs are by their very nature uninteresting and unlikely to be made interesting. Automation has eliminated many such jobs, but they are still numerous. SDT would suggest that the primary way to motivate high performance for such jobs is to make performance contingent on extrinsic rewards. Relatively high pay is necessary to sustain performance on certain low-skill jobs. On the other hand, SDT would suggest that to enhance intrinsic motivation on jobs that are interesting, don’t focus only on increasing extrinsic rewards (like large pay bonuses). Instead, create even more opportunities for employees to satisfy their needs for competence, autonomy, and relatedness. That means giving them opportunities to learn new skills, to perform their jobs without interference, and to develop meaningful relationships with other customers and employees in other departments. Such actions enhance intrinsic rewards.
You may have noticed that content theories are somewhat quiet about what determines the intensity of motivation. For example, some people steal to satisfy their lower-order needs (they have high intensity). But most of us don’t steal. Why is this? Process theories of motivation attempt to explain this aspect of motivation by focusing on the intensity of motivation as well as its direction. According to self-determination theory, skilled workers who are given a chance to hone their skills and the freedom to practice their craft will be intrinsically motivated.
1. Describe a content theory of motivation, and compare and contrast the main content theories of motivation: manifest needs theory, learned needs theory, Maslow’s hierarchy of needs, Alderfer’s ERG theory, Herzberg’s motivator-hygiene theory, and self-determination theory.
Motivation theories are classified as either content or process theories. Content theories focus on what motivates behavior. The basic premise of content theories is that humans have needs. When these needs are not satisfied, humans are motivated to satisfy the need. The need provides direction for motivation. Murray’s manifest needs theory, McClelland’s learned needs theory, Maslow’s hierarchy of needs, and Herzberg’s motivator-hygiene theory are all content theories. Each has something to say about the needs that motivate humans in the workplace. |
# Work Motivation for Performance
## Process Theories of Motivation
1. Describe the process theories of motivation, and compare and contrast the main process theories of motivation: operant conditioning theory, equity theory, goal theory, and expectancy theory.
Process theories of motivation try to explain why behaviors are initiated. These theories focus on the mechanism by which we choose a target, and the effort that we exert to “hit” the target. There are four major process theories: (1) operant conditioning, (2) equity, (3) goal, and (4) expectancy.
### Operant Conditioning Theory
Operant conditioning theory is the simplest of the motivation theories. It basically states that people will do those things for which they are rewarded and will avoid doing things for which they are punished. This premise is sometimes called the “law of effect.” However, if this were the sum total of conditioning theory, we would not be discussing it here. Operant conditioning theory does offer greater insights than “reward what you want and punish what you don’t,” and knowledge of its principles can lead to effective management practices.
Operant conditioning focuses on the learning of voluntary behaviors. The term operant conditioning indicates that learning results from our “operating on” the environment. After we “operate on the environment” (that is, behave in a certain fashion), consequences result. These consequences determine the likelihood of similar behavior in the future. Learning occurs because we do something to the environment. The environment then reacts to our action, and our subsequent behavior is influenced by this reaction.
### The Basic Operant Model
According to operant conditioning theory, we learn to behave in a particular fashion because of consequences that resulted from our past behaviors. The learning process involves three distinct steps (see ). The first step involves a stimulus (S). The stimulus is any situation or event we perceive that we then respond to. A homework assignment is a stimulus. The second step involves a response (R), that is, any behavior or action we take in reaction to the stimulus. Staying up late to get your homework assignment in on time is a response. (We use the words response and behavior interchangeably here.) Finally, a consequence (C) is any event that follows our response and that makes the response more or less likely to occur in the future. If Colleen Sullivan receives praise from her superior for working hard, and if getting that praise is a pleasurable event, then it is likely that Colleen will work hard again in the future. If, on the other hand, the superior ignores or criticizes Colleen’s response (working hard), this consequence is likely to make Colleen avoid working hard in the future. It is the experienced consequence (positive or negative) that influences whether a response will be repeated the next time the stimulus is presented.
Reinforcement occurs when a consequence makes it more likely the response/behavior will be repeated in the future. In the previous example, praise from Colleen’s superior is a reinforcer. Extinction occurs when a consequence makes it less likely the response/behavior will be repeated in the future. Criticism from Colleen’s supervisor could cause her to stop working hard on any assignment.
There are three ways to make a response more likely to recur: positive reinforcement, negative reinforcement, and avoidance learning. In addition, there are two ways to make the response less likely to recur: nonreinforcement and punishment.
### Making a Response More Likely
According to reinforcement theorists, managers can encourage employees to repeat a behavior if they provide a desirable consequence, or reward, after the behavior is performed. A positive reinforcement is a desirable consequence that satisfies an active need or that removes a barrier to need satisfaction. It can be as simple as a kind word or as major as a promotion. Companies that provide “dinners for two” as awards to those employees who go the extra mile are utilizing positive reinforcement. It is important to note that there are wide variations in what people consider to be a positive reinforcer. Praise from a supervisor may be a powerful reinforcer for some workers (like high-nAch individuals) but not others.
Another technique for making a desired response more likely to be repeated is known as negative reinforcement. When a behavior causes something undesirable to be taken away, the behavior is more likely to be repeated in the future. Managers use negative reinforcement when they remove something unpleasant from an employee’s work environment in the hope that this will encourage the desired behavior. Ted doesn’t like being continually reminded by Philip to work faster (Ted thinks Philip is nagging him), so he works faster at stocking shelves to avoid being criticized. Philip’s reminders are a negative reinforcement for Ted.
Approach using negative reinforcement with extreme caution. Negative reinforcement is often confused with punishment. Punishment, unlike reinforcement (negative or positive), is intended to make a particular behavior go away (not be repeated). Negative reinforcement, like positive reinforcement, is intended to make a behavior more likely to be repeated in the future. In the previous example, Philip’s reminders simultaneously punished one behavior (slow stocking) and reinforced another (faster stocking). The difference is often a fine one, but it becomes clearer when we identify the behaviors we are trying to encourage (reinforcement) or discourage (punishment).
A third method of making a response more likely to occur involves a process known as avoidance learning. Avoidance learning occurs when we learn to behave in a certain way to avoid encountering an undesired or unpleasant consequence. We may learn to wake up a minute or so before our alarm clock rings so we can turn it off and not hear the irritating buzzer. Some workers learn to get to work on time to avoid the harsh words or punitive actions of their supervisors. Many organizational discipline systems rely heavily on avoidance learning by using the threat of negative consequences to encourage desired behavior. When managers warn an employee not to be late again, when they threaten to fire a careless worker, or when they transfer someone to an undesirable position, they are relying on the power of avoidance learning.
### Making a Response Less Likely
At times it is necessary to discourage a worker from repeating an undesirable behavior. The techniques managers use to make a behavior less likely to occur involve doing something that frustrates the individual’s need satisfaction or that removes a currently satisfying circumstance. Punishment is an aversive consequence that follows a behavior and makes it less likely to reoccur.
Note that managers have another alternative, known as nonreinforcement, in which they provide no consequence at all following a worker’s response. Nonreinforcement eventually reduces the likelihood of that response reoccurring, which means that managers who fail to reinforce a worker’s desirable behavior are also likely to see that desirable behavior less often. If Philip never rewards Ted when he finishes stocking on time, for instance, Ted will probably stop trying to beat the clock. Nonreinforcement can also reduce the likelihood that employees will repeat undesirable behaviors, although it doesn’t produce results as quickly as punishment does. Furthermore, if other reinforcing consequences are present, nonreinforcement is unlikely to be effective.
While punishment clearly works more quickly than does nonreinforcement, it has some potentially undesirable side effects. Although punishment effectively tells a person what not to do and stops the undesired behavior, it does not tell them what they should do. In addition, even when punishment works as intended, the worker being punished often develops negative feelings toward the person who does the punishing. Although sometimes it is very difficult for managers to avoid using punishment, it works best when reinforcement is also used. An experiment conducted by two researchers at the University of Kansas found that using nonmonetary reinforcement in addition to punitive disciplinary measures was an effective way to decrease absenteeism in an industrial setting.
### Schedules of Reinforcement
When a person is learning a new behavior, like how to perform a new job, it is desirable to reinforce effective behaviors every time they are demonstrated (this is called shaping). But in organizations it is not usually possible to reinforce desired behaviors every time they are performed, for obvious reasons. Moreover, research indicates that constantly reinforcing desired behaviors, termed continuous reinforcement, can be detrimental in the long run. Behaviors that are learned under continuous reinforcement are quickly extinguished (cease to be demonstrated). This is because people will expect a reward (the reinforcement) every time they display the behavior. When they don’t receive it after just a few times, they quickly presume that the behavior will no longer be rewarded, and they quit doing it. Any employer can change employees’ behavior by simply not paying them!
If behaviors cannot (and should not) be reinforced every time they are exhibited, how often should they be reinforced? This is a question about schedules of reinforcement, or the frequency at which effective employee behaviors should be reinforced. Much of the early research on operant conditioning focused on the best way to maintain the performance of desired behaviors. That is, it attempted to determine how frequently behaviors need to be rewarded so that they are not extinguished. Research zeroed in on four types of reinforcement schedules:
With this schedule, a fixed number of responses (let’s say five) must be exhibited before any of the responses are reinforced. If the desired response is coming to work on time, then giving employees a $25 bonus for being punctual every day from Monday through Friday would be a fixed ratio of reinforcement.
A variable-ratio schedule reinforces behaviors, on average, a fixed number of times (again let’s say five). Sometimes the tenth behavior is reinforced, other times the first, but on average every fifth response is reinforced. People who perform under such variable-ratio schedules like this don’t know when they will be rewarded, but they do know that they will be rewarded.
In a fixed-interval schedule, a certain amount of time must pass before a behavior is reinforced. With a one-hour fixed-interval schedule, for example, a supervisor visits an employee’s workstation and reinforces the first desired behavior she sees. She returns one hour later and reinforces the next desirable behavior. This schedule doesn’t imply that reinforcement will be received automatically after the passage of the time period. The time must pass and an appropriate response must be made.
The variable interval differs from fixed-interval schedules in that the specified time interval passes on average before another appropriate response is reinforced. Sometimes the time period is shorter than the average; sometimes it is longer.
Which type of reinforcement schedule is best? In general, continuous reinforcement is best while employees are learning their jobs or new duties. After that, variable-ratio reinforcement schedules are superior. In most situations the fixed-interval schedule produces the least effective results, with fixed ratio and variable interval falling in between the two extremes. But remember that effective behaviors must be reinforced with some type of schedule, or they may become extinguished.
### Equity Theory
Suppose you have worked for a company for several years. Your performance has been excellent, you have received regular pay increases, and you get along with your boss and coworkers. One day you come to work to find that a new person has been hired to work at the same job that you do. You are pleased to have the extra help. Then, you find out the new person is making $100 more per week than you, despite your longer service and greater experience. How do you feel? If you’re like most of us, you’re quite unhappy. Your satisfaction has just evaporated. Nothing about your job has changed—you receive the same pay, do the same job, and work for the same supervisor. Yet, the addition of one new employee has transformed you from a happy to an unhappy employee. This feeling of unfairness is the basis for equity theory.
Equity theory states that motivation is affected by the outcomes we receive for our inputs compared to the outcomes and inputs of other people. This theory is concerned with the reactions people have to outcomes they receive as part of a “social exchange.” According to equity theory, our reactions to the outcomes we receive from others (an employer) depend both on how we value those outcomes in an absolute sense and on the circumstances surrounding their receipt. Equity theory suggests that our reactions will be influenced by our perceptions of the “inputs” provided in order to receive these outcomes (“Did I get as much out of this as I put into it?”). Even more important is our comparison of our inputs to what we believe others received for their inputs (“Did I get as much for my inputs as my coworkers got for theirs?”).
### The Basic Equity Model
The fundamental premise of equity theory is that we continuously monitor the degree to which our work environment is “fair.” In determining the degree of fairness, we consider two sets of factors, inputs and outcomes (see ). Inputs are any factors we contribute to the organization that we feel have value and are relevant to the organization. Note that the value attached to an input is based on our perception of its relevance and value. Whether or not anyone else agrees that the input is relevant or valuable is unimportant to us. Common inputs in organizations include time, effort, performance level, education level, skill levels, and bypassed opportunities. Since any factor we consider relevant is included in our evaluation of equity, it is not uncommon for factors to be included that the organization (or even the law) might argue are inappropriate (such as age, sex, ethnic background, or social status).
Outcomes are anything we perceive as getting back from the organization in exchange for our inputs. Again, the value attached to an outcome is based on our perceptions and not necessarily on objective reality. Common outcomes from organizations include pay, working conditions, job status, feelings of achievement, and friendship opportunities. Both positive and negative outcomes influence our evaluation of equity. Stress, headaches, and fatigue are also potential outcomes. Since any outcome we consider relevant to the exchange influences our equity perception, we frequently include unintended factors (peer disapproval, family reactions).
Equity theory predicts that we will compare our outcomes to our inputs in the form of a ratio. On the basis of this ratio we make an initial determination of whether or not the situation is equitable. If we perceive that the outcomes we receive are commensurate with our inputs, we are satisfied. If we believe that the outcomes are not commensurate with our inputs, we are dissatisfied. This dissatisfaction can lead to ineffective behaviors for the organization if they continue. The key feature of equity theory is that it predicts that we will compare our ratios to the ratios of other people. It is this comparison of the two ratios that has the strongest effect on our equity perceptions. These other people are called referent others because we “refer to” them when we judge equity. Usually, referent others are people we work with who perform work of a similar nature. That is, referent others perform jobs that are similar in difficulty and complexity to the employee making the equity determination (see ).
Three conditions can result from this comparison. Our outcome-to-input ratio could equal the referent other’s. This is a state of equity. A second result could be that our ratio is greater than the referent other’s. This is a state of overreward inequity. The third result could be that we perceive our ratio to be less than that of the referent other. This is a state of underreward inequity.
Equity theory has a lot to say about basic human tendencies. The motivation to compare our situation to that of others is strong. For example, what is the first thing you do when you get an exam back in class? Probably look at your score and make an initial judgment as to its fairness. For a lot of people, the very next thing they do is look at the scores received by fellow students who sit close to them. A 75 percent score doesn’t look so bad if everyone else scored lower! This is equity theory in action.
Most workers in the United States are at least partially dissatisfied with their pay. Equity theory helps explain this. Two human tendencies create feelings of inequity that are not based in reality. One is that we tend to overrate our performance levels. For example, one study conducted by your authors asked more than 600 employees to anonymously rate their performance on a 7-point scale (1 = poor, 7 = excellent). The average was 6.2, meaning the average employee rated his or her performance as very good to excellent. This implies that the average employee also expects excellent pay increases, a policy most employers cannot afford if they are to remain competitive. Another study found that the average employee (one whose performance is better than half of the other employees and worse than the other half) rated her performance at the 80th percentile (better than 80 percent of the other employees, worse than 20 percent). Again it would be impossible for most organizations to reward the average employee at the 80th percentile. In other words, most employees inaccurately overrate the inputs they provide to an organization. This leads to perceptions of inequity that are not justified.
The second human tendency that leads to unwarranted perceptions of inequity is our tendency to overrate the outcomes of others. Many employers keep the pay levels of employees a “secret.” Still other employers actually forbid employees to talk about their pay. This means that many employees don’t know for certain how much their colleagues are paid. And, because most of us overestimate the pay of others, we tend to think that they’re paid more than they actually are, and the unjustified perceptions of inequity are perpetuated.
The bottom line for employers is that they need to be sensitive to employees’ need for equity. Employers need to do everything they can to prevent feelings of inequity because employees engage in effective behaviors when they perceive equity and ineffective behaviors when they perceive inequity.
### Perceived Overreward Inequity
When we perceive that overreward inequity exists (that is, we unfairly make more than others), it is rare that we are so dissatisfied, guilty, or sufficiently motivated that we make changes to produce a state of perceived equity (or we leave the situation). Indeed, feelings of overreward, when they occur, are quite transient. Very few of us go to our employers and complain that we’re overpaid! Most people are less sensitive to overreward inequities than they are to underreward inequities. However infrequently they are used for overreward, the same types of actions are available for dealing with both types of inequity.
### Perceived Underreward Inequity
When we perceive that underreward inequity exists (that is, others unfairly make more than we do), we will likely be dissatisfied, angered, and motivated to change the situation (or escape the situation) in order to produce a state of perceived equity. As we discuss shortly, people can take many actions to deal with underreward inequity.
### Reducing Underreward Inequity
A simple situation helps explain the consequences of inequity. Two automobile workers in Detroit, John and Mary, fasten lug nuts to wheels on cars as they come down the assembly line, John on the left side and Mary on the right. Their inputs are equal (both fasten the same number of lug nuts at the same pace), but John makes $500 per week and Mary makes $600. Their equity ratios are thus:
As you can see, their ratios are not equal; that is, Mary receives greater outcome for equal input. Who is experiencing inequity? According to equity theory, both John and Mary—underreward inequity for John, and overreward inequity for Mary. Mary’s inequity won’t last long (in real organizations), but in our hypothetical example, what might John do to resolve this?
Adams identified a number of things people do to reduce the tension produced by a perceived state of inequity. They change their own outcomes or inputs, or they change those of the referent other. They distort their own perceptions of the outcomes or inputs of either party by using a different referent other, or they leave the situation in which the inequity is occurring.
1. Alter inputs of the person. The perceived state of equity can be altered by changing our own inputs, that is, by decreasing the quantity or quality of our performance. John can affect his own mini slowdown and install only nine lug nuts on each car as it comes down the production line. This, of course, might cause him to lose his job, so he probably won’t choose this alternative.
2. Alter outcomes of the person. We could attempt to increase outcomes to achieve a state of equity, like ask for a raise, a nicer office, a promotion, or other positively valued outcomes. So John will likely ask for a raise. Unfortunately, many people enhance their outcomes by stealing from their employers.
3. Alter inputs of the referent other. When underrewarded, we may try to achieve a state of perceived equity by encouraging the referent other to increase their inputs. We may demand, for example, that the referent other “start pulling their weight,” or perhaps help the referent other to become a better performer. It doesn’t matter that the referent other is already pulling their weight—remember, this is all about perception. In our example, John could ask Mary to put on two of his ten lug nuts as each car comes down the assembly line. This would not likely happen, however, so John would be motivated to try another alternative to reduce his inequity.
4. Alter outcomes of the referent other. We can “correct” a state of underreward by directly or indirectly reducing the value of the other’s outcomes. In our example, John could try to get Mary’s pay lowered to reduce his inequity. This too would probably not occur in the situation described.
5. Distort perceptions of inputs or outcomes. It is possible to reduce a perceived state of inequity without changing input or outcome. We simply distort our own perceptions of our inputs or outcomes, or we distort our perception of those of the referent other. Thus, John may tell himself that “Mary does better work than I thought” or “she enjoys her work much less than I do” or “she gets paid less than I realized.”
6. Choose a different referent other. We can also deal with both over- and underreward inequities by changing the referent other (“my situation is really more like Ahmed’s”). This is the simplest and most powerful way to deal with perceived inequity: it requires neither actual nor perceptual changes in anybody’s input or outcome, and it causes us to look around and assess our situation more carefully. For example, John might choose as a referent other Bill, who installs dashboards but makes less money than John.
7. Leave the situation. A final technique for dealing with a perceived state of inequity involves removing ourselves from the situation. We can choose to accomplish this through absenteeism, transfer, or termination. This approach is usually not selected unless the perceived inequity is quite high or other attempts at achieving equity are not readily available. Most automobile workers are paid quite well for their work. John is unlikely to find an equivalent job, so it is also unlikely that he will choose this option.
### Implications of Equity Theory
Equity theory is widely used, and its implications are clear. In the vast majority of cases, employees experience (or perceive) underreward inequity rather than overreward. As discussed above, few of the behaviors that result from underreward inequity are good for employers. Thus, employers try to prevent unnecessary perceptions of inequity. They do this in a number of ways. They try to be as fair as possible in allocating pay. That is, they measure performance levels as accurately as possible, then give the highest performers the highest pay increases. Second, most employers are no longer secretive about their pay schedules. People are naturally curious about how much they are paid relative to others in the organization. This doesn’t mean that employers don’t practice discretion—they usually don’t reveal specific employees’ exact pay. But they do tell employees the minimum and maximum pay levels for their jobs and the pay scales for the jobs of others in the organization. Such practices give employees a factual basis for judging equity.
Supervisors play a key role in creating perceptions of equity. “Playing favorites” ensures perceptions of inequity. Employees want to be rewarded on their merits, not the whims of their supervisors. In addition, supervisors need to recognize differences in employees in their reactions to inequity. Some employees are highly sensitive to inequity, and a supervisor needs to be especially cautious around them. Everyone is sensitive to reward allocation. But “equity sensitives” are even more sensitive. A major principle for supervisors, then, is simply to implement fairness. Never base punishment or reward on whether or not you like an employee. Reward behaviors that contribute to the organization, and discipline those that do not. Make sure employees understand what is expected of them, and praise them when they do it. These practices make everyone happier and your job easier.
### Goal Theory
No theory is perfect. If it was, it wouldn’t be a theory. It would be a set of facts. Theories are sets of propositions that are right more often than they are wrong, but they are not infallible. However, the basic propositions of goal theory* come close to being infallible. Indeed, it is one of the strongest theories in organizational behavior.
### The Basic Goal-Setting Model
Goal theory states that people will perform better if they have difficult, specific, accepted performance goals or objectives., The first and most basic premise of goal theory is that people will attempt to achieve those goals that they intend to achieve. Thus, if we intend to do something (like get an A on an exam), we will exert effort to accomplish it. Without such goals, our effort at the task (studying) required to achieve the goal is less. Students whose goals are to get As study harder than students who don’t have this goal—we all know this. This doesn’t mean that people without goals are unmotivated. It simply means that people with goals are more motivated. The intensity of their motivation is greater, and they are more directed.
The second basic premise is that difficult goals result in better performance than easy goals. This does not mean that difficult goals are always achieved, but our performance will usually be better when we intend to achieve harder goals. Your goal of an A in Classical Mechanics at Cal Tech may not get you your A, but it may earn you a B+, which you wouldn’t have gotten otherwise. Difficult goals cause us to exert more effort, and this almost always results in better performance.
Another premise of goal theory is that specific goals are better than vague goals. We often wonder what we need to do to be successful. Have you ever asked a professor “What do I need to do to get an A in this course?” If she responded “Do well on the exams,” you weren’t much better off for having asked. This is a vague response. Goal theory says that we perform better when we have specific goals. Had your professor told you the key thrust of the course, to turn in all the problem sets, to pay close attention to the essay questions on exams, and to aim for scores in the 90s, you would have something concrete on which to build a strategy.
A key premise of goal theory is that people must accept the goal. Usually we set our own goals. But sometimes others set goals for us. Your professor telling you your goal is to “score at least a 90 percent on your exams” doesn’t mean that you’ll accept this goal. Maybe you don’t feel you can achieve scores in the 90s. Or, you’ve heard that 90 isn’t good enough for an A in this class. This happens in work organizations quite often. Supervisors give orders that something must be done by a certain time. The employees may fully understand what is wanted, yet if they feel the order is unreasonable or impossible, they may not exert much effort to accomplish it. Thus, it is important for people to accept the goal. They need to feel that it is also their goal. If they do not, goal theory predicts that they won’t try as hard to achieve it.
Goal theory also states that people need to commit to a goal in addition to accepting it. Goal commitment is the degree to which we dedicate ourselves to achieving a goal. Goal commitment is about setting priorities. We can accept many goals (go to all classes, stay awake during classes, take lecture notes), but we often end up doing only some of them. In other words, some goals are more important than others. And we exert more effort for certain goals. This also happens frequently at work. A software analyst’s major goal may be to write a new program. Her minor goal may be to maintain previously written programs. It is minor because maintaining old programs is boring, while writing new ones is fun. Goal theory predicts that her commitment, and thus her intensity, to the major goal will be greater.
Allowing people to participate in the goal-setting process often results in higher goal commitment. This has to do with ownership. And when people participate in the process, they tend to incorporate factors they think will make the goal more interesting, challenging, and attainable. Thus, it is advisable to allow people some input into the goal-setting process. Imposing goals on them from the outside usually results in less commitment (and acceptance).
The basic goal-setting model is shown in . The process starts with our values. Values are our beliefs about how the world should be or act, and often include words like “should” or “ought.” We compare our present conditions against these values. For example, Randi holds the value that everyone should be a hard worker. After measuring her current work against this value, Randi concludes that she doesn’t measure up to her own value. Following this, her goal-setting process begins. Randi will set a goal that affirms her status as a hard worker. lists the four types of goals. Some goals are self-set. (Randi decides to word process at least 70 pages per day.) Participative goals are jointly set. (Randi goes to her supervisor, and together they set some appropriate goals for her.) In still other cases, goals are assigned. (Her boss tells her that she must word process at least 60 pages per day.) The fourth type of goal, which can be self-set, jointly determined, or assigned, is a “do your best” goal. But note this goal is vague, so it usually doesn’t result in the best performance.
Depending on the characteristics of Randi’s goals, she may or may not exert a lot of effort. For maximum effort to result, her goals should be difficult, specific, accepted, and committed to. Then, if she has sufficient ability and lack of constraints, maximum performance should occur. Examples of constraints could be that her old computer frequently breaks down or her supervisor constantly interferes.
The consequence of endeavoring to reach her goal will be that Randi will be satisfied with herself. Her behavior is consistent with her values. She’ll be even more satisfied if her supervisor praises her performance and gives her a pay increase!
In Randi’s case, her goal achievement resulted in several benefits. However, this doesn’t always happen. If goals are not achieved, people may be unhappy with themselves, and their employer may be dissatisfied as well. Such an experience can make a person reluctant to accept goals in the future. Thus, setting difficult yet attainable goals cannot be stressed enough.
Goal theory can be a tremendous motivational tool. In fact, many organizations practice effective management by using a technique called “management by objectives” (MBO). MBO is based on goal theory and is quite effective when implemented consistently with goal theory’s basic premises.
Despite its many strengths, several cautions about goal theory are appropriate. Locke has identified most of them. First, setting goals in one area can lead people to neglect other areas. (Randi may word process 70 pages per day, but neglect her proofreading responsibilities.) It is important that goals be set for most major duties. Second, goal setting sometimes has unintended consequences. For example, employees set easy goals so that they look good when they achieve them. Or it causes unhealthy competition between employees. Or an employee sabotages the work of others so that only she has goal achievement.
Some managers use goal setting in unethical ways. They may manipulate employees by setting impossible goals. This enables them to criticize employees even when the employees are doing superior work and, of course, causes much stress. Goal setting should never be abused. Perhaps the key caution about goal setting is that it often results in too much focus on quantified measures of performance. Qualitative aspects of a job or task may be neglected because they aren’t easily measured. Managers must keep employees focused on the qualitative aspects of their jobs as well as the quantitative ones. Finally, setting individual goals in a teamwork environment can be counterproductive. Where possible, it is preferable to have group goals in situations where employees depend on one another in the performance of their jobs.
The cautions noted here are not intended to deter you from using goal theory. We note them so that you can avoid the pitfalls. Remember, employees have a right to reasonable performance expectations and the rewards that result from performance, and organizations have a right to expect high performance levels from employees. Goal theory should be used to optimize the employment relationship. Goal theory holds that people will exert effort to accomplish goals if those goals are difficult to achieve, accepted by the individual, and specific in nature.
### Expectancy Theory
Expectancy theory posits that we will exert much effort to perform at high levels so that we can obtain valued outcomes. It is the motivation theory that many organizational behavior researchers find most intriguing, in no small part because it is currently also the most comprehensive theory. Expectancy theory ties together many of the concepts and hypotheses from the theories discussed earlier in this chapter. In addition, it points to factors that other theories miss. Expectancy theory has much to offer the student of management and organizational behavior.
Expectancy theory is sufficiently general that it is useful in a wide variety of situations. Choices between job offers, between working hard or not so hard, between going to work or not—virtually any set of possibilities can be addressed by expectancy theory. Basically, the theory focuses on two related issues:
1. When faced with two or more alternatives, which will we select?
2. Once an alternative is chosen, how motivated will we be to pursue that choice?
Expectancy theory thus focuses on the two major aspects of motivation, direction (which alternative?) and intensity (how much effort to implement the alternative?). The attractiveness of an alternative is determined by our “expectations” of what is likely to happen if we choose it. The more we believe that the alternative chosen will lead to positively valued outcomes, the greater its attractiveness to us.
Expectancy theory states that, when faced with two or more alternatives, we will select the most attractive one. And, the greater the attractiveness of the chosen alternative, the more motivated we will be to pursue it. Our natural hedonism, discussed earlier in this chapter, plays a role in this process. We are motivated to maximize desirable outcomes (a pay raise) and minimize undesirable ones (discipline). Expectancy theory goes on to state that we are also logical in our decisions about alternatives. It considers people to be rational. People evaluate alternatives in terms of their “pros and cons,” and then choose the one with the most “pros” and fewest “cons.”
### The Basic Expectancy Model
The three major components of expectancy theory reflect its assumptions of hedonism and rationality: effort-performance expectancy, performance-outcome expectancy, and valences.
The effort-performance expectancy, abbreviated E1, is the perceived probability that effort will lead to performance (or E ➨ P). Performance here means anything from doing well on an exam to assembling 100 toasters a day at work. Sometimes people believe that no matter how much effort they exert, they won’t perform at a high level. They have weak E1s. Other people have strong E1s and believe the opposite—that is, that they can perform at a high level if they exert high effort. You all know students with different E1s—those who believe that if they study hard they’ll do well, and those who believe that no matter how much they study they’ll do poorly. People develop these perceptions from prior experiences with the task at hand, and from self-perceptions of their abilities. The core of the E1 concept is that people don’t always perceive a direct relationship between effort level and performance level.
The performance-outcome expectancy, E2, is the perceived relationship between performance and outcomes (or P ➨ O).Sometimes E2s are called Many things in life happen as a function of how well we perform various tasks. E2 addresses the question “What will happen if I perform well?” Let’s say you get an A in your Classical Mechanics course at Cal Tech. You’ll be elated, your classmates may envy you, and you are now assured of that plum job at NASA. But let’s say you got a D. Whoops, that was the last straw for the dean. Now you’ve flunked out, and you’re reduced to going home to live with your parents (perish the thought!). Likewise, E2 perceptions develop in organizations, although hopefully not as drastically as your beleaguered career at Cal Tech. People with strong E2s believe that if they perform their jobs well, they’ll receive desirable outcomes—good pay increases, praise from their supervisor, and a feeling that they’re really contributing. In the same situation, people with weak E2s will have the opposite perceptions—that high performance levels don’t result in desirable outcomes and that it doesn’t really matter how well they perform their jobs as long as they don’t get fired.
Valences are the easiest of the expectancy theory concepts to describe. Valences are simply the degree to which we perceive an outcome as desirable, neutral, or undesirable. Highly desirable outcomes (a 25 percent pay increase) are positively valent. Undesirable outcomes (being disciplined) are negatively valent. Outcomes that we’re indifferent to (where you must park your car) have neutral valences. Positively and negatively valent outcomes abound in the workplace—pay increases and freezes, praise and criticism, recognition and rejection, promotions and demotions. And as you would expect, people differ dramatically in how they value these outcomes. Our needs, values, goals, and life situations affect what valence we give an outcome. Equity is another consideration we use in assigning valences. We may consider a 10 percent pay increase desirable until we find out that it was the lowest raise given in our work group.
summarizes the three core concepts of expectancy theory. The theory states that our perceptions about our surroundings are essentially predictions about “what leads to what.” We perceive that certain effort levels result in certain performance levels. We perceive that certain performance levels result in certain outcomes. Outcomes can be extrinsic, in that others (our supervisor) determine whether we receive them, or intrinsic, in that we determine if they are received (our sense of achievement). Each outcome has an associated valence (outcome A’s valence is ). Expectancy theory predicts that we will exert effort that results in the maximum amount of positive-valence outcomes. If our E1 or E2 is weak, or if the outcomes are not sufficiently desirable, our motivation to exert effort will be low. Stated differently, an individual will be motivated to try to achieve the level of performance that results in the most rewards.
Vo is the valence of the outcome. The effort level with the greatest force associated with it will be chosen by the individual.
### Implications of Expectancy Theory
Expectancy theory has major implications for the workplace. Basically, expectancy theory predicts that employees will be motivated to perform well on their jobs under two conditions. The first is when employees believe that a reasonable amount of effort will result in good performance. The second is when good performance is associated with positive outcomes and low performance is associated with negative outcomes. If neither of these conditions exists in the perceptions of employees, their motivation to perform will be low.
Why might an employee perceive that positive outcomes are not associated with high performance? Or that negative outcomes are not associated with low performance? That is, why would employees develop weak E2s? This happens for a number of reasons. The main one is that many organizations subscribe too strongly to a principle of equality (not to be confused with equity). They give all of their employees equal salaries for equal work, equal pay increases every year (these are known as across-the-board pay raises), and equal treatment wherever possible. Equality-focused organizations reason that some employees “getting more” than others leads to disruptive competition and feelings of inequity.
In time employees in equality-focused organizations develop weak E2s because no distinctions are made for differential outcomes. If the best and the worst salespeople are paid the same, in time they will both decide that it isn’t worth the extra effort to be a high performer. Needless to say, this is not the goal of competitive organizations and can cause the demise of the organization as it competes with other firms in today’s global marketplace.
Expectancy theory states that to maximize motivation, organizations must make outcomes contingent on performance. This is the main contribution of expectancy theory: it makes us think about how organizations should distribute outcomes. If an organization, or a supervisor, believes that treating everyone “the same” will result in satisfied and motivated employees, they will be wrong more times than not. From equity theory we know that some employees, usually the better-performing ones, will experience underreward inequity. From expectancy theory we know that employees will see no difference in outcomes for good and poor performance, so they will not have as much incentive to be good performers. Effective organizations need to actively encourage the perception that good performance leads to positive outcomes (bonuses, promotions) and that poor performance leads to negative ones (discipline, termination). Remember, there is a big difference between treating employees equally and treating them equitably.
What if an organization ties positive outcomes to high performance and negative outcomes to low performance? Employees will develop strong E2s. But will this result in highly motivated employees? The answer is maybe. We have yet to address employees’ E1s. If employees have weak E1s, they will perceive that high (or low) effort does not result in high performance and thus will not exert much effort. It is important for managers to understand that this can happen despite rewards for high performance.
Task-related abilities are probably the single biggest reason why some employees have weak E1s. Self-efficacy is our belief about whether we can successfully execute some future action or task, or achieve some result. High self-efficacy employees believe that they are likely to succeed at most or all of their job duties and responsibilities. And as you would expect, low self-efficacy employees believe the opposite. Specific self-efficacy reflects our belief in our capability to perform a specific task at a specific level of performance. If we believe that the probability of our selling $30,000 of jackrabbit slippers in one month is .90, our self-efficacy for this task is high. Specific self-efficacy is our judgment about the likelihood of successful task performance measured immediately before we expend effort on the task. As a result, specific self-efficacy is much more variable than more enduring notions of personality. Still, there is little doubt that our state-based beliefs are some of the most powerful motivators of behavior. Our efficacy expectations at a given point in time determine not only our initial decision to perform (or not) a task, but also the amount of effort we will expend and whether we will persist in the face of adversity. Self-efficacy has a strong impact on the E1 factor. As a result, self-efficacy is one of the strongest determinants of performance in any particular task situation.
Employees develop weak E1s for two reasons. First, they don’t have sufficient resources to perform their jobs. Resources can be internal or external. Internal resources include what employees bring to the job (such as prior training, work experience, education, ability, and aptitude) and their understanding of what they need to do to be considered good performers. The second resource is called role perceptions—how employees believe their jobs are done and how they fit into the broader organization. If employees don’t know how to become good performers, they will have weak E1s. External resources include the tools, equipment, and labor necessary to perform a job. The lack of good external resources can also cause E1s to be weak.
The second reason for weak E1s is an organization’s failure to measure performance accurately. That is, performance ratings don’t correlate well with actual performance levels. How does this happen? Have you ever gotten a grade that you felt didn’t reflect how much you learned? This also happens in organizations. Why are ratings sometimes inaccurate? Supervisors, who typically give out ratings, well, they’re human. Perhaps they’re operating under the mistaken notion that similar ratings for everyone will keep the team happy. Perhaps they’re unconsciously playing favorites. Perhaps they don’t know what good and poor performance levels are. Perhaps the measurements they’re expected to use don’t fit their product/team/people. Choose one or all of these. Rating people is rarely easy.
Whatever the cause of rating errors, some employees may come to believe that no matter what they do they will never receive a high performance rating. They may in fact believe that they are excellent performers but that the performance rating system is flawed. Expectancy theory differs from most motivation theories because it highlights the need for accurate performance measurement. Organizations cannot motivate employees to perform at a high level if they cannot identify high performers.
Organizations exert tremendous influence over employee choices in their performance levels and how much effort to exert on their jobs. That is, organizations can have a major impact on the direction and intensity of employees’ motivation levels. Practical applications of expectancy theory include:
1. Strengthening the effort ➨ performance expectancy by selecting employees who have the necessary abilities, providing proper training, providing experiences of success, clarifying job responsibilities, etc.
2. Strengthening the performance ➨ outcome expectancy with policies that specify that desirable behavior leads to desirable outcomes and undesirable behavior leads to neutral or undesirable outcomes. Consistent enforcement of these policies is key—workers must believe in the contingencies.
3. Systematically evaluating which outcomes employees value. The greater the valence of outcomes offered for a behavior, the more likely employees will commit to that alternative. By recognizing that different employees have different values and that values change over time, organizations can provide the most highly valued outcomes.
4. Ensuring that effort actually translates into performance by clarifying what actions lead to performance and by appropriate training.
5. Ensuring appropriate worker outcomes for performance through reward schedules (extrinsic outcomes) and appropriate job design (so the work experience itself provides intrinsic outcomes).
6. Examining the level of outcomes provided to workers. Are they equitable, given the worker’s inputs? Are they equitable in comparison to the way other workers are treated?
7. Measuring performance levels as accurately as possible, making sure that workers are capable of being high performers.
### Expectancy Theory: An Integrative Theory of Motivation
More so than any other motivation theory, expectancy theory can be tied into most concepts of what and how people become motivated. Consider the following examples.
1. Need theories state that we are motivated to satisfy our needs. We positively value outcomes that satisfy unmet needs, negatively value outcomes that thwart the satisfaction of unmet needs, and assign neutral values to outcomes that do neither. In effect, the need theories explain how valences are formed.
2. Operant conditioning theories state that we will probably repeat a response (behavior) in the future that was reinforced in the past (that is, followed by a positively valued consequence or the removal of a negatively valued consequence). This is the basic process involved in forming performance ➨ outcome expectancies. Both operant theories and expectancy theory argue that our interactions with our environment influence our future behavior. The primary difference is that expectancy theory explains this process in cognitive (rational) terms.
3. Equity theories state that our satisfaction with a set of outcomes depends not only on how we value them but also on the circumstances surrounding their receipt. Equity theory, therefore, explains part of the process shown in . If we don’t feel that the outcomes we receive are equitable compared to a referent other, we will associate a lower or even negative valence with those outcomes.
4. Goal theory can be integrated with the expanded expectancy model in several ways. Locke has noted that expectancy theory explains how we go about choosing a particular goal. A reexamination of reveals other similarities between goal theory and expectancy theory. Locke’s use of the term “goal acceptance” to identify the personal adoption of a goal is similar to the “choice of an alternative” in the expectancy model. Locke’s “goal commitment,” the degree to which we commit to reaching our accepted (chosen) goal, is very much like the expectancy description of choice of effort level. Locke argues that the difficulty and specificity of a goal are major determinants of the level of performance attempted (goal-directed effort), and expectancy theory appears to be consistent with this argument (even though expectancy theory is not as explicit on this point). We can reasonably conclude that the major underlying processes explored by the two models are very similar and will seldom lead to inconsistent recommendations.
1. Describe the process theories of motivation, and compare and contrast the main process theories of motivation: operant conditioning theory, equity theory, goal theory, and expectancy theory.
Process theories focus on how people become motivated. Operant conditioning theory states that people will be motivated to engage in behaviors for which they have been reinforced (rewarded). It also states that people will avoid behaviors that are punished. The rate at which behaviors are rewarded also affects how often they will be displayed. Equity theory’s main premise is that people compare their situations to those of other people. If a person feels that they are being treated unfairly relative to a referent other, the person may engage in behaviors that are counterproductive for the organization. Employers should try to develop feelings of fairness in employees. Goal theory is a strong theory. It states that difficult, specific goals will result in high performance if employees accept the goals and are committed to achieving them. |
# Work Motivation for Performance
## Recent Research on Motivation Theories
1. Describe the modern advancements in the study of human motivation.
Employee motivation continues to be a major focus in organizational behavior. We briefly summarize current motivation research here.
### Content Theories
There is some interest in testing content theories (including Herzberg’s two-factor theory), especially in international research. Need theories are still generally supported, with most people identifying such workplace factors as recognition, advancement, and opportunities to learn as the chief motivators for them. This is consistent with need satisfaction theories. However, most of this research does not include actual measures of employee performance. Thus, questions remain about whether the factors that employees say motivate them to perform actually do.
### Operant Conditioning Theory
There is considerable interest in operant conditioning theory, especially within the context of what has been called organizational behavior modification. Oddly enough, there has not been much research using operant conditioning theory in designing reward systems, even though there are obvious applications. Instead, much of the recent research on operant conditioning focuses on punishment and extinction. These studies seek to determine how to use punishment appropriately. Recent results still confirm that punishment should be used sparingly, should be used only after extinction does not work, and should not be excessive or destructive.
### Equity Theory
Equity theory continues to receive strong research support. The major criticism of equity theory, that the inputs and outcomes people use to evaluate equity are ill-defined, still holds. Because each person defines inputs and outcomes, researchers are not in a position to know them all. Nevertheless, for the major inputs (performance) and outcomes (pay), the theory is a strong one. Major applications of equity theory in recent years incorporate and extend the theory into the area called organizational justice. When employees receive rewards (or punishments), they evaluate them in terms of their fairness (as discussed earlier). This is distributive justice. Employees also assess rewards in terms of how fair the processes used to distribute them are. This is procedural justice. Thus during organizational downsizing, when employees lose their jobs, people ask whether the loss of work is fair (distributive justice). But they also assess the fairness of the process used to decide who is laid off (procedural justice). For example, layoffs based on seniority may be perceived as more fair than layoffs based on supervisors’ opinions.
### Goal Theory
It remains true that difficult, specific goals result in better performance than easy and vague goals, assuming they are accepted. Recent research highlights the positive effects of performance feedback and goal commitment in the goal-setting process. Monetary incentives enhance motivation when they are tied to goal achievement, by increasing the level of goal commitment. There are negative sides to goal theory as well. If goals conflict, employees may sacrifice performance on important job duties. For example, if both quantitative and qualitative goals are set for performance, employees may emphasize quantity because this goal achievement is more visible.
### Expectancy Theory
The original formulation of expectancy theory specifies that the motivational force for choosing a level of effort is a function of the multiplication of expectancies and valences. Recent research demonstrates that the individual components predict performance just as well, without being multiplied. This does not diminish the value of expectancy theory. Recent research also suggests that high performance results not only when the valence is high, but also when employees set difficult goals for themselves.
One last comment on motivation: As the world of work changes, so will the methods organizations use to motivate employees. New rewards—time off instead of bonuses; stock options; on-site gyms, cleaners, and dental services; opportunities to telecommute; and others—will need to be created in order to motivate employees in the future. One useful path that modern researchers can undertake is to analyze the previous studies and aggregate the findings into more conclusive understanding of the topic through meta-analysis studies.
1. Describe the modern advancements in the study of human motivation.
Expectancy theory is a process theory. It also is the broadest of the motivation theories. Expectancy theory predicts that employees will be motivated to be high performers if they perceive that high performance leads to valued outcomes. Employees will be motivated to avoid being low performers if they perceive that it leads to negative outcomes. Employees must perceive that they are capable of achieving high performance, and they must have the appropriate abilities and high self-efficacy. Organizations need to provide adequate resources and to measure performance accurately. Inaccurate performance ratings discourage high performance. Overall, expectancy theory draws attention to how organizations structure the work environment and distribute rewards.
### Chapter Review Questions
1. Discuss the benefits that accrue when an organization has a good understanding of employee needs.
2. How might Maslow explain why organizational rewards that motivate workers today may not motivate the same workers in 5 or 10 years?
3. Describe the process by which needs motivate workers.
4. Discuss the importance of Herzberg’s motivators and hygienes.
5. Describe a work situation in which it would be appropriate to use a continuous reinforcement schedule.
6. Discuss the potential effectiveness and limitations of punishment in organizations.
7. How can equity theory explain why a person who receives a high salary might be dissatisfied with their pay?
8. Equity theory specifies a number of possible alternatives for reducing perceived inequity. How could an organization influence which of these alternatives a person will pursue?
9. What goals would be most likely to improve your learning and performance in an organizational behavior class?
10. Identify two reasons why a formal goal-setting program might be dysfunctional for an organization.
11. What steps can an organization take to increase the motivational force for high levels of performance?
12. Discuss how supervisors sometimes unintentionally weaken employees E ➨ P and P ➨ O expectancies.
13. How can an employee attach high valence to high levels of performance, yet not be motivated to be a high performer?
14. Is there “one best” motivation theory? Explain your answer.
### Management Skills Application Exercises
1. Many companies strive to design jobs that are intrinsically motivating. Visit several small and large company websites and search their career section. What job features related to motivation are highlighted? What type of employees do you think the companies will attract with these jobs?
2. You will be paired with another student in this class. Each of you will take one side of the issue and debate:
3. Assume the role of sales manager, and write a memo to two of your reports that have the following situations and job performance.
### Managerial Decision Exercises
1. You are a manager and it’s performance appraisal time, which is a yearly exercise to provide feedback to your direct reports that is often stressful for both the employee and the manager. You feel that the feedback process should be more of an ongoing process than the yearly formal process. What are the benefits of this yearly process, and what, if any, are the drawbacks of providing both positive and remediation feedback to your direct reports?
2. You have been told by a worker on another team that one of your direct reports made an inappropriate comment to a coworker. What do you do to investigate the matter, and what actions would you take with your report, the person that the comment was directed to, and other people in the organization?
3. You learn that an employee who doesn’t report to you has made an inappropriate comment to one of your direct reports. What do you do to investigate the matter, and what actions would you take with your report, the person that made the comment, their manager, and other people in the organization?
4. Your company is considering implementing a 360° appraisal system where up to 10 people in the organization provide feedback on every employee as part of the annual performance appraisal process. This feedback will come from subordinates, peers, and senior managers as well as individuals in other departments. You have been asked to prepare a memo to the director of human resources about the positive and negative effects this could have on the motivation of employees. Note that not all of the employees are on a bonus plan that will be impacted by this feedback.
### Critical Thinking Case
### Motivating Employees at JCPenney, Walmart, and Amazon in the Age of Online Shopping
In the 1980s, Walmart had killed (or was killing) the mom-and-pop store. “Buy local” signs were seen, urging consumers to buy from their local retailers rather than from the low-cost behemoth. Markets have continued to shift and the “buy local” signs are still around, but now the battleground has shifted with the disruptive growth of e-commerce. Even mighty Walmart is feeling some growing pains.
Census Bureau data for 2017 shows that e-commerce, or online shopping, accounted for 8.9 percent of all retail sales in the United States, accounting for $111.5 billion (U.S. Census Bureau 2017). Feeling the pinch, many malls across the country are closing their doors, and their empty retail spaces are being repurposed. Credit Suisse predicts that due to competition from online shopping, 20 to 25 percent of American malls will close within the next five years (Dying Malls Make Room for New Condos Apartment 2017). Furthermore, according to a 2017 study, 23 percent of Americans already purchase their groceries online (Embrace the Internet, Skip the Checkout 2017).
Whether face-to-face with customers or filling orders in a warehouse, motivated employees are essential to business success. And company culture helps drive that motivation. As a 2015 Harvard Business Review article put it, “Why we work determines how well we work” (McGregor & Doshi 2015). Adapting earlier research for the modern workplace, the study found six reasons that people work: play, purpose, potential, emotional pressure, economic pressure, and inertia. The first three are positive motives while that later three are negative. The researchers found that role design, more than any other factor, had the highest impact on employee motivation.
Anecdotally, using role design to motivate employees can be seen across industries. Toyota allows factory workers to innovate new processes on the factory floor. Southwest Airlines encourages a sense of "play" among crewmembers who interact directly with passengers (which has resulted in some humorous viral videos). A sense of the organization’s identity (and a desire to be part of it) and how the career ladder within the company is perceived are second and third in their impact on employee motivation. Unhealthy competition for advancement can do more harm than good to employee motivation, and as a result many large companies are restructuring their performance review and advancement systems (McGregor & Doshi 2015). Conversely, costs from unmotivated employees can be high. In August 2017, retailer JCPenney had an employee arrested who had allegedly cost the company more than $10,000 in stolen cash and under-rung merchandise at a mall store. Another employee had stolen more than $1,000 of clothes from the store less than a month earlier.
Brick-and-mortar retail outlets from Macy’s to Walmart have come under pressure by increased online shopping, particularly at Amazon.com. Walmart has responded by both trying to improve the shopping experience in its stores and creating an online presence of its own. A recent study funded by Walmart found that 60 percent of retails workers lack proficiency in reading and 70 percent have difficulty with math (Class is in session at Walmart Academy 2017). Increasing math and team skills for the employees would increase efficiency and certainly help improve employee self-image and motivation. With this in mind, Walmart has created one of the largest employer training programs in the country, Walmart Academy (McGregor & Doshi 2015). The company expects to graduate more than 225,000 of its supervisors and managers from a program that covers topics such as merchandising and employee motivation. In another program, Pathways, Walmart has created a course that covers topics such as merchandising, communication, and retail math (Walmart 2016 Global Responsibility Report 2016). The Pathways program was expected to see 500,000 entry-level workers take part in 2016 (Walmart 2016). All employees who complete the course receive a dollar an hour pay increase. Educating employees pays off by recognizing that the effort put in pays off with better-motivated and better-educated employees. In the case of Walmart, “upskilling” has become a priority.
Walmart has gone beyond education to motivate or empower employees. In 2016, pay raises for 1.2 million employees took effect as part of a new minimum-wage policy, and it streamlined its paid time off program that same year (Schmid 2017). In its 2016 Global Responsibility Report, Walmart points out that over the course of two years, the company has invested $2.7 billion in wages, benefits, and training in the United States (Staley 2017).
2. A 2015 New York Times article described Amazon as “a soulless, dystopian workplace where no fun is had and no laughter heard” (Cook 2015 n.p.). Employees themselves came to the company’s defense (Ciubotariu 2015). Does this reputation continue to haunt Amazon, or has it been addressed?
3. How do employees differ between a Walmart retail location and an Amazon order fulfillment center? How many white-collar or skilled jobs does Amazon have compared to Walmart?
4. With Amazon moving into the retail market with the purchase of Whole Foods, and with Walmart expanding its e-commerce, how are employee motivation challenges going to shift?
Sources:
Ciubotariu, Nick. 2015. “An Amazonian's response to "Inside Amazon: Wrestling Big Ideas in a Bruising Workplace." LinkedIn. https://www.linkedin.com/pulse/amazonians-response-inside-amazon-wrestling-big-ideas-nick-ciubotariu/?redirectFromSplash=true
Class is in session at Walmart Academy. 2017. Bend Bulletin. http://www.bendbulletin.com/home/5507742-151/class-is-in-session-at-walmart-academy
Cook, John. 2015. “Full memo: Jeff Bezos responds to brutal NYT story, says it doesn’t represent the Amazon he leads.” GeekWire. https://www.geekwire.com/2015/full-memo-jeff-bezos-responds-to-cutting-nyt-expose-says-tolerance-for-lack-of-empathy-needs-to-be-zero/
“Dying Malls Make Room for New Condos Apartment.” 2017. Bend Bulletin. http://www.bendbulletin.com/business/5654908-151/dying-malls-make-room-for-new-condos-apartments
“Embrace the Internet, Skip the Checkout.” 2017. Bend Bulletin. http://www.bendbulletin.com/business/5635713-151/embrace-the-internet-skip-the-checkout
McGregor, Lindsay and Doshi, Neel. 2015. “How Company Culture Shapes Employee Motivation.” Boston, MA: Harvard Business Review. https://hbr.org/2015/11/how-company-culture-shapes-employee-motivation
Schmid, Emily. 2017. “Work That Matters: Looking Back on 2 Years of Investing in People.” Walmart Today. Bentonville, AR: Walmart Digital Communications. https://blog.walmart.com/opportunity/20170223/work-that-matters-looking-back-on-2-years-of-investing-in-people
Staley, Oliver. 2017. “ Walmart—yes, Walmart—is making changes that could help solve America’s wealth inequality problem.” Yahoo! Finance. https://finance.yahoo.com/news/walmart-yes-walmart-making-changes-100102778.html
U.S. Census Bureau. 2017. Quarterly Retail E-Commerce Sales, 2nd Quarter 2017. Washington, DC: U.S. Department of Commerce. https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf
WalMart 2016 Global Responsibility Report. 2016. Bentonville, AR: Walmart. https://corporate.walmart.com/2016grr
Walmart. 2016. “Pathways program infographic. Bentonville, AR: Walmart. https://corporate.walmart.com/photos/pathways-program-infographic |
# Managing Teams
## Introduction
### Learning Outcomes
After reading this chapter, you should be able to answer these questions:
1. What is the benefit of working in teams, and what makes teams effective?
2. How do teams develop over time?
3. What are some key considerations in managing teams?
4. What are the benefits of conflict for a team?
5. How does team diversity enhance decision-making and problem-solving?
6. What are some challenges and best practices for managing and working with multicultural teams?
Much of the work that is performed today in organizations requires a focus on teamwork. The ability to work successfully as a team member, as well as the ability to lead teams, is an ultimate advantage within the workforce. Teams themselves must be managed, in addition to managing just the individuals, to be successful. We’ve all heard the quote originally coined by Aristotle that states that “the whole is greater than the sum of its parts.” This captures the nature of the team perfectly—there is such a synergy that comes from a team that the individuals alone are not able to create. This chapter details the importance of and benefits that you may derive from working as a team, as well as some of the ways we can make our teams more successful. |
# Managing Teams
## Teamwork in the Workplace
1. What is a team, and what makes a team effective?
Teamwork has never been more important in organizations than it is today. Whether you work in a manufacturing environment and utilize self-directed work teams, or if you work in the “knowledge economy” and derive benefits from collaboration within a team structure, you are harnessing the power of a team.
A team, according to Katzenbach and Smith in their Harvard Business Review (HBR) article “The Discipline of Teams,” is defined as “people organized to function cooperatively as a group”. The five elements that make teams function are:
1. Common commitment and purpose
2. Specific performance goals
3. Complementary skills
4. Commitment to how the work gets done
5. Mutual accountability
A team has a specific purpose that it delivers on, has shared leadership roles, and has both individual and mutual accountabilities. Teams discuss, make decisions, and perform real work together, and they measure their performance by assessing their collective work products. This is very different from the classic working group in an organization (usually organized by functional area) in which there is a focused leader, individual accountabilities and work products, and a group purpose that is the same as the broader organizational mission. Think of the finance organization or a particular business unit in your company—these are, in effect, larger working groups that take on a piece of the broader organizational mission. They are organized under a leader, and their effectiveness is measured by its influence on others within the business (e.g., financial performance of the business.)
So, what makes a team truly effective? According to Katzenbach and Smith’s “Discipline of Teams,” there are several practices that the authors have observed in successful teams. These practices include:
Establish urgency, demanding performance standards, and direction. Teams work best when they have a compelling reason for being, and it is thus more likely that the teams will be successful and live up to performance expectations. We’ve all seen the teams that are brought together to address an “important initiative” for the company, but without clear direction and a truly compelling reason to exist, the team will lose momentum and wither.
Select members for their skill and skill potential, not for their personality. This is not always as easy as it sounds for several reasons. First, most people would prefer to have those with good personalities and positive attitudes on their team in order to promote a pleasant work environment. This is fine, but make sure that those individuals have the skill sets needed (or the potential to acquire/learn) for their piece of the project. The second caveat here is that you don’t always know what skills you need on a project until you really dig in and see what’s going on. Spend some time up front thinking about the purpose of the project and the anticipated deliverables you will be producing, and think through the specific types of skills you’ll need on the team.
Pay particular attention to first meetings and actions. This is one way of saying that first impressions mean a lot—and it is just as important for teams as for individuals. Teams will interact with everyone from functional subject-matter experts all the way to senior leadership, and the team must look competent and be perceived as competent. Keeping an eye on your team’s level of emotional intelligence is very important and will enhance your team’s reputation and ability to navigate stakeholders within the organization.
Set some clear rules of behavior. I have been through many meetings and team situations in which we have rushed through “ground rules” because it felt like they were obvious—and everyone always came up with the same list. It is so critical that the team takes the time up front to capture their own rules of the road in order to keep the team in check. Rules that address areas such as attendance, discussion, confidentiality, project approach, and conflict are key to keeping team members aligned and engaged appropriately.
Set and seize upon a few immediate performance-oriented tasks and goals. What does this mean? Have some quick wins that make the team feel that they’re really accomplishing something and working together well. This is very important to the team’s confidence, as well as just getting into the practices of working as a team. Success in the larger tasks will come soon enough, as the larger tasks are really just a group of smaller tasks that fit together to produce a larger deliverable.
Challenge the group regularly with fresh facts and information. That is, continue to research and gather information to confirm or challenge what you know about your project. Don’t assume that all the facts are static and that you received them at the beginning of the project. Often, you don’t know what you don’t know until you dig in. I think that the pace of change is so great in the world today that new information is always presenting itself and must be considered in the overall context of the project.
Spend lots of time together. Here’s an obvious one that is often overlooked. People are so busy that they forget that an important part of the team process is to spend time together, think together, and bond. Time in person, time on the phone, time in meetings—all of it counts and helps to build camaraderie and trust.
Exploit the power of positive feedback, recognition, and reward. Positive reinforcement is a motivator that will help the members of the team feel more comfortable contributing. It will also reinforce the behaviors and expectations that you’re driving within the team. Although there are many extrinsic rewards that can serve as motivators, a successful team begins to feel that its own success and performance is the most rewarding.
Collaboration is another key concept and method by which teams can work together very successfully. Bringing together a team of experts from across the business would seem to be a best practice in any situation. However, Gratton and Erickson, in their article Eight Ways to Build Collaborative Teams, found that collaboration seems to decrease sharply when a team is working on complex project initiatives. In their study, they examined 55 larger teams and identified those with strong collaboration skills, despite the level of complexity. There were eight success factors for having strong collaboration skills:
1. “Signature” relationship practices
2. Role models of collaboration among executives
3. Establishment of “gift” culture, in which managers mentor employees
4. Training in relationship skills
5. A sense of community
6. Ambidextrous leaders—good at task and people leadership
7. Good use of heritage relationships
8. Role clarity and task ambiguity
As teams grow in size and complexity, the standard practices that worked well with small teams don’t work anymore. Organizations need to think about how to make collaboration work, and they should leverage the above best practices to build relationships and trust.
1. What is a team, and what makes teams effective?
A team is defined as “people organized to function cooperatively as a group.” Some of the characteristics of a team are that it has a common commitment and purpose, specific performance goals, complementary skills, commitment to how the work gets done, and mutual accountability.
Some of the practices that make a team effective are that they have a sense of urgency and direction; they set clear rules of behavior; they spend lots of time together; and they utilize feedback, recognition, and reward. |
# Managing Teams
## Team Development Over Time
1. How do teams develop over time?
If you have been a part of a team—as most of us have—then you intuitively have felt that there are different “stages” of team development. Teams and team members often start from a position of friendliness and excitement about a project or endeavor, but the mood can sour and the team dynamics can go south very quickly once the real work begins. In 1965, educational psychologist Bruce Tuckman at Ohio State University developed a four-stage model to explain the complexities that he had witnessed in team development. The original model was called Tuckman’s Stages of Group Development, and he added the fifth stage of “Adjourning” in 1977 to explain the disbanding of a team at the end of a project. The four stages of the Tuckman model are:
1. Forming
2. Storming
3. Norming
4. Performing
The Forming stage begins with the introduction of team members. This is known as the “polite stage” in which the team is mainly focused on similarities and the group looks to the leader for structure and direction. The team members at this point are enthusiastic, and issues are still being discussed on a global, ambiguous level. This is when the informal pecking order begins to develop, but the team is still friendly.
The Storming stage begins as team members begin vying for leadership and testing the group processes. This is known as the “win-lose” stage, as members clash for control of the group and people begin to choose sides. The attitude about the team and the project begins to shift to negative, and there is frustration around goals, tasks, and progress.
After what can be a very long and painful Storming process for the team, slowly the Norming stage may start to take root. During Norming, the team is starting to work well together, and buy-in to group goals occurs. The team is establishing and maintaining ground rules and boundaries, and there is willingness to share responsibility and control. At this point in the team formation, members begin to value and respect each other and their contributions.
Finally, as the team builds momentum and starts to get results, it is entering the Performing stage. The team is completely self-directed and requires little management direction. The team has confidence, pride, and enthusiasm, and there is a congruence of vision, team, and self. As the team continues to perform, it may even succeed in becoming a high-performing team. High-performing teams have optimized both task and people relationships—they are maximizing performance and team effectiveness. Katzenberg and Smith, in their study of teams, have created a “team performance curve” that graphs the journey of a team from a working group to a high-performing team. The team performance curve is illustrated in .
The process of becoming a high-performance team is not a linear process. Similarly, the four stages of team development in the Tuckman model are not linear, and there are also factors that may cause the team to regress to an earlier stage of development. When a team member is added to the group, this may change the dynamic enough and be disruptive enough to cause a backwards slide to an earlier stage. Similarly, if a new project task is introduced that causes confusion or anxiety for the group, then this may also cause a backwards slide to an earlier stage of development. Think of your own experiences with project teams and the backslide that the group may have taken when another team member was introduced. You may have personally found the same to be true when a leader or project sponsor changes the scope or adds a new project task. The team has to re-group and will likely re-Storm and re-Form before getting back to Performing as a team.
1. How do teams develop over time?
Teams go through different stages of team development, which were coined in 1977 as Tuckman’s Stages of Group Development by educational psychologist Bruce Tuckman. Tuckman’s model includes these four stages: Forming, Storming, Norming, and Performing. A fifth stage, Adjourning, was added later to explain the disbanding and closure of a team at the end of a project.
Forming begins with team members being happy and polite as they get to know each other and understand the work they’ll do together. Storming starts once the work is underway and the team is getting to know each other, and conflicts and project stress begins to seep in. During Norming, the team starts to set rules of the road and define how they want to work together. Performing means that the team is underway and is having some successes and gaining traction. This is definitely not a linear process. Teams can regress to earlier stages if there are changes in team members or work orders that cause disruption and loss of momentum and clarity. |
# Managing Teams
## Things to Consider When Managing Teams
1. What are some key considerations in managing teams?
For those of us who have had the pleasure of managing or leading a team, we know that it can feel like a dubious distinction. Leading a team is fulfilling—especially if the task or organizational mandate at hand is so critical to the organization that people are happy to be a part of the team that drives things forward. It can also be an exercise in frustration, as the charge is to lead a group composed of various individuals, which at various times will act both like a group and like a bunch of individuals. Managing teams is no small feat, and the most experience managers truly understand that success ultimately depends on their ability to build a strong and well-functioning team. In J.J. Gabarro’s The Dynamics of Taking Charge (HBS Press, 1987, pp. 85–87), he quotes a manager who had successfully worked to turn around a number of organizations:
“People have to want to work together; they have to see how to do it. There has to be an environment for it and that takes time. It’s my highest priority right now but I don’t write it down anywhere because it’s not like other priorities. If I told corporate that building a team was my prime goal they’d tell me, so what? They’d expect that as part of making things better.”
I love this quotation because it’s so indicative of the state of most organizations today. The focus is on corporate goals and priorities—very task-driven and outcome-driven—but it is the people dynamics and how people work together in the company and in TEAMS that can make a real difference to the goals and outcome.
In Linda A. Hill’s Harvard Business Review article “Managing Your Team” (HBR 1995), she discusses that managing a team means managing paradox. Paradox exists in the fact that teams have both individual and collective identities and goals. Each individual has goals and ideas as to what he wants to accomplish—on the project, in one’s career, and in life. The team itself, of course, has goals and success metrics that it needs to meet in order to be successful. Sometimes these can be in conflict with each other. Competition may arise among team members, and a win-loss attitude may take place over a collaborative and problem-solving team dynamic. The team manager may need to step in to help integrate all of the individual differences to enable them to productively pursue the team goal. Therein lies the primary paradox—balancing individual differences and goals AND the collective identity and goals. Other paradoxes include:
1. Fostering support AND confrontation among team members
2. Focusing on performance AND learning and development
3. Balancing managerial authority AND team member discretion and autonomy
4. Balancing the Triangle of Relationships—manager, team, and individual
Managing a team also means managing its boundaries. Managing the team’s boundaries—or space between the team and its external forces, stakeholders, and pressures—is a delicate balance of strategy, stakeholder management, and organizational behavior. The team manager must serve, in part, as a buffer to these external factors so that they don’t derail or distract the team from its goals. However, the manager must also understand enough about the external environment and have enough emotional intelligence to understand which forces, players, or situations must be synthesized within the team for its own benefit. Think about any medium or large-scale change initiative that you have been a part of in your career. Ideally, there is generally a vision for change and a level of sponsorship at the senior levels of the organization that is supposed to pave the way for that change to take root. The project team is officially “blessed” to kick off the team, create a charter, and identify the needed actions to drive the initiative to successful completion.
The dynamic that ensues after the kickoff is really what will determine the success of the team. There are numerous stakeholders in any organization, and many will be pro–change initiative, but others may be against the initiative—either due to lack of understanding or concerns about losing power, territory, etc. The external environment and business strategy may not be particularly well suited for a change initiative to take place, and so there may be the feeling of forces opposing the project team efforts. A strong team manager needs manage these “boundaries” with the organization to help the team navigate through and with the organizational complexities, goals, nuances, and egos that are a part of any organization. In Linda A. Hill’s Harvard Business Review article “Exercising Influence,” she states that “managers also need to manage relationships with those who are outside their team but inside their organizations. To do so, they must understand the power dynamics of the larger organization and invest time and energy in building and maintaining relationship with those on who the team is dependent.” It is also, in her view, “the manager’s job, at a minimum, to educate other about organizational structures, systems, or politics that interfere with the team’s performance.” With all of the potential external influences on a team, managing a team’s boundaries can truly mean the difference between success and failure.
The final element of managing a team is to manage the team itself—both the people elements and the process elements, or task at hand. The process-focused elements include managing the work plan to reach the overall goal, as well as the incremental meetings and milestones that are a part of the team’s journey to reach the longer-term goal. Keeping the team focused on its objectives—beginning with setting agendas all the way to managing project tasks and celebrating milestones—assures that the team will stay on track. Projects and initiatives vary in size, scope, and complexity, and so the project management tools shouldn’t be prescribed in a general sense. The important takeaway here is to choose an approach and a tool that works for the culture of the team and the organization, and that helps the team understand where they are, where they need to go, and what resources are a part of that process.
In managing the team members and interpersonal dynamics, there is the important element of selecting the right team members, shaping the team’s norms and culture (how are decisions made, what are our rules, how do we manage conflict, etc.), and coaching the team. Defining the right skill sets, functions, perspectives, and expertise of the members will ensure a solid foundation. Helping the team to identify and formalize the ground rules for team engagement will help manage in the face of adversity or team conflict in the future. Finally, playing a role as a supportive coach will help both the individual team members and the group entity think through issues and make progress towards goals. A coach doesn’t solve the individual/team problem, but helps the team think through a solution and move forward. Teams may need guidance on how to work things out within the team, and the manager must provide feedback and hold team members accountable for their behavior and contribution. Continuous improvement is the name of the game. A team may not start out as high performing, but they can certainly achieve that goal if everyone is focused on incremental improvements to communication, collaboration, and performance.
1. What are some key considerations in managing teams?
Managing a team is often more complex than people would admit. Although a team and the team leader may be focused on the task or project work, it is actually the people dynamics and how the team works together that will make a real difference to the goals and outcomes. Managers need to remember that most of their time will be spent managing the people dynamics—not the tasks.
Managing teams also means a certain amount of paradox. A team has both individual and collective goals that need to be managed effectively. A manager needs to foster both team supportiveness and the ability to engage in conflict and confrontation. A team manager also needs to help the team with its boundaries and act as a buffer, a stakeholder manager, or a strategist when the situation calls for each. Exercising influence with key stakeholder groups external to the project group is one of the most critical functions in managing a team. |
# Managing Teams
## Opportunities and Challenges to Team Building
1. What are the benefits of conflict for a team?
There are many sources of conflict for a team, whether it is due to a communication breakdown, competing views or goals, power struggles, or conflicts between different personalities. The perception is that conflict is generally bad for a team and that it will inevitably bring the team down and cause them to spiral out of control and off track. Conflict does have some potential costs. If handled poorly, it can create distrust within a group, it can be disruptive to group progress and morale, and it could be detrimental to building lasting relationships. It is generally seen as a negative, even though constructive conflicts and constructive responses to conflicts can be an important developmental milestone for a team. Some potential benefits of conflict are that it encourages a greater diversity of ideas and perspectives and helps people to better understand opposing points of view. It can also enhance a team’s problem-solving capability and can highlight critical points of discussion and contention that need to be given more thought.
Another key benefit or outcome of conflict is that a team that trusts each other—its members and members’ intentions—will arise from conflict being a stronger and higher-performing team. Patrick Lencioni, in his bestselling book The Five Dysfunctions of a Team (2002, p. 188), writes:
“The first dysfunction is an absence of trust among team members. Essentially, this stems from their unwillingness to be vulnerable within the group. Team members who are not genuinely open with one another about their mistakes and weaknesses make it impossible to build a foundation for trust. This failure to build trust is damaging because it sets the tone for the second dysfunction: fear of conflict. Teams that lack trust are incapable of engaging in unfiltered and passionate debate of ideas. Instead, they resort to veiled discussions and guarded comments.”
Lencioni also asserts that if a team doesn’t work through its conflict and air its opinions through debate, team members will never really be able to buy in and commit to decisions. (This lack of commitment is Lencioni’s third dysfunction.) Teams often have a fear of conflict so as not to hurt any team members’ feelings. The downside of this avoidance is that conflicts still exist under the surface and may resurface in more insidious and back-channel ways that can derail a team. How can a team overcome its fear of conflict and move the team forward? Lencioni names a few strategies that teams can use to make conflict more common and productive. Mining is a technique that can be used in teams that tend to avoid conflict. This technique requires that one team member “assume the role of a ‘miner of conflict’—someone who extracts buried disagreements within the team and sheds the light of day on them. They must have the courage and confidence to call out sensitive issues and force team members to work through them.” Real-time permission is another technique to “recognize when the people engaged in conflict are becoming uncomfortable with the level of discord, and then interrupt to remind them that what they are doing is necessary.” This technique can help the group to focus on the points of conflict by coaching the team not to sweep things under the rug.
The team leader plays a very important role in the team’s ability to address and navigate successfully through conflicts. Sometime a leader will have the attitude that conflict is a derailer and will try to stymie it at any cost. This ultimately leads to a team culture in which conflict is avoided and the underlying feelings are allowed to accumulate below the surface of the discussion. The leader should, by contrast, model the appropriate behavior by constructively addressing conflict and bringing issues to the surface to be addressed and resolved by the team. This is key to building a successful and effective team.
There are a variety of individual responses to conflict that you may see as a team member. Some people take the constructive and thoughtful path when conflicts arise, while others may jump immediately to destructive behaviors. In Managing Conflict Dynamics: A Practical Approach, Capobianco, Davis, and Kraus (2005) recognized that there are both constructive and destructive responses to conflict, as well as active and passive responses that we need to recognize. In the event of team conflict, the goal is to have a constructive response in order to encourage dialogue, learning, and resolution. Responses such as perspective taking, creating solutions, expressing emotions, and reaching out are considered active and constructive responses to conflict. Reflective thinking, delay responding, and adapting are considered passive and constructive responses to conflict. See for a visual of the constructive responses, as well as the destructive responses, to conflict.
In summary, conflict is never easy for an individual or a team to navigate through, but it can and should be done. Illuminating the team about areas of conflict and differing perspectives can have a very positive impact on the growth and future performance of the team, and it should be managed constructively.
1. What are the benefits of conflict for a team?
Conflict during team interactions can feel like it derails progress, but it is one of the most important experiences that a team can have together. A team that can productively work through conflict will end up stronger, building more trust and being more open to sharing opinions. Team members will feel safe buying in and committing to decision-making as a team.
One of the other key benefits of conflict is that it encourages a greater diversity of ideas and perspectives, and it helps people to better understand opposing points of view. If a team doesn’t work through conflict well and doesn’t feel comfortable with the sharing and debating of ideas, it loses the opportunity to effectively vet ideas and potential solutions. The result is that the decision or solution will be limited, as team members haven’t fully shared their concerns and perspectives. |
# Managing Teams
## Team Diversity
1. How does team diversity enhance decision-making and problem-solving?
Decision-making and problem-solving can be much more dynamic and successful when performed in a diverse team environment. The multiple diverse perspectives can enhance both the understanding of the problem and the quality of the solution. As I reflect on some of the leadership development work that I have done in my career, I can say from experience that the team activities and projects that intentionally brought diverse individuals together created the best environments for problem-solving. Diverse leaders from a variety of functions, from across the globe, at varying stages of their careers and experiences with and outside of the company had the most robust discussions and perspectives. Diversity is a word that is very commonly used today, but the importance of diversity and building diverse teams can sometimes get lost in the normal processes of doing business. Let’s discuss why we need to keep these principles front of mind.
In the Harvard Business Review article “Why Diverse Teams are Smarter” (Nov. 2016), David Rock and Heidi Grant support the idea that increasing workplace diversity is a good business decision. A 2015 McKinsey report on 366 public companies found that those in the top quartile for ethnic and racial diversity in management were 35% more likely to have financial returns above their industry mean, and those in the top quartile for gender diversity were 15% more likely to have returns above the industry mean. Similarly, in a global analysis conducted by Credit Suisse, organizations with at least one female board member yielded a higher return on equity and higher net income growth than those that did not have any women on the board.
Additional research on diversity has shown that diverse teams are better at decision-making and problem-solving because they tend to focus more on facts, per the Rock and Grant article. A study published in the Journal of Personality and Social Psychology showed that people from diverse backgrounds “might actually alter the behavior of a group’s social majority in ways that lead to improved and more accurate group thinking.” It turned out that in the study, the diverse panels raised more facts related to the case than homogenous panels and made fewer factual errors while discussing available evidence. Another study noted in the article showed that diverse teams are “more likely to constantly reexamine facts and remain objective. They may also encourage greater scrutiny of each member’s actions, keeping their joint cognitive resources sharp and vigilant. By breaking up workforce homogeneity, you can allow your employees to become more aware of their own potential biases—entrenched ways of thinking that can otherwise blind them to key information and even lead them to make errors in decision-making processes.” In other words, when people are among homogeneous and like-minded (nondiverse) teammates, the team is susceptible to groupthink and may be reticent to think about opposing viewpoints since all team members are in alignment. In a more diverse team with a variety of backgrounds and experiences, the opposing viewpoints are more likely to come out and the team members feel obligated to research and address the questions that have been raised. Again, this enables a richer discussion and a more in-depth fact-finding and exploration of opposing ideas and viewpoints in order to solve problems.
Diversity in teams also leads to greater innovation. A Boston Consulting Group article entitled “The Mix that Matters: Innovation through Diversity” explains a study in which BCG and the Technical University of Munich conducted an empirical analysis to understand the relationship between diversity in managers (all management levels) and innovation. The key findings of this study show that:
1. The positive relationship between management diversity and innovation is statistically significant—and thus companies with higher levels of diversity derive more revenue from new products and services.
2. The innovation boost isn’t limited to a single type of diversity. The presence of managers who are either female or are from other countries, industries, or companies can cause an increase in innovation.
3. Management diversity seems to have a particularly positive effect on innovation at complex companies—those that have multiple product lines or that operate in multiple industry segments.
4. To reach its potential, gender diversity needs to go beyond tokenism. In the study, innovation performance only increased significantly when the workforce included more than 20% women in management positions. Having a high percentage of female employees doesn’t increase innovation if only a small number of women are managers.
5. At companies with diverse management teams, openness to contributions from lower-level workers and an environment in which employees feel free to speak their minds are crucial for fostering innovation.
When you consider the impact that diverse teams have on decision-making and problem-solving—through the discussion and incorporation of new perspectives, ideas, and data—it is no wonder that the BCG study shows greater innovation. Team leaders need to reflect upon these findings during the early stages of team selection so that they can reap the benefits of having diverse voices and backgrounds.
1. How does team diversity enhance team decision-making and problem-solving?
Decision-making and problem-solving is so much more dynamic and successful when performed in a diverse team environment. Much like the benefits of conflict, diversity can bring forward opposing points of view and different perspectives and information that might not have been considered if the team were more homogeneous. Diverse teams are thus made “smarter” by bringing together an array of information, sources, and experiences for decision-making.
Other research on diversity indicates that diverse teams excel at decision-making and problem-solving because they tend to focus more on facts. Studies indicate that diverse team members may actually sway the team’s behavior to focus more on proven data—possibly because of the prospect of having to explain and back up one’s perspectives if a conflict should erupt on the team. In a more homogenous team, there is more risk of “groupthink” and the lack of challenging of ideas. |
# Managing Teams
## Multicultural Teams
1. What are some challenges and best practices for managing and working with multicultural teams?
As globalization has increased over the last decades, workplaces have felt the impact of working within multicultural teams. The earlier section on team diversity outlined some of the highlights and benefits of working on diverse teams, and a multicultural group certainly qualifies as diverse. However, there are some key practices that are recommended to those who are leading multicultural teams so that they can parlay the diversity into an advantage and not be derailed by it.
People may assume that communication is the key factor that can derail multicultural teams, as participants may have different languages and communication styles. In the Harvard Business Review article “Managing Multicultural Teams,” the authors point out four key cultural differences that can cause destructive conflicts in a team. The first difference is direct versus indirect communication. Some cultures are very direct and explicit in their communication, while others are more indirect and ask questions rather than pointing our problems. This difference can cause conflict because, at the extreme, the direct style may be considered offensive by some, while the indirect style may be perceived as unproductive and passive-aggressive in team interactions.
The second difference that multicultural teams may face is trouble with accents and fluency. When team members don’t speak the same language, there may be one language that dominates the group interaction—and those who don’t speak it may feel left out. The speakers of the primary language may feel that those members don’t contribute as much or are less competent. The next challenge is when there are differing attitudes toward hierarchy. Some cultures are very respectful of the hierarchy and will treat team members based on that hierarchy. Other cultures are more egalitarian and don’t observe hierarchical differences to the same degree. This may lead to clashes if some people feel that they are being disrespected and not treated according to their status. The final difference that may challenge multicultural teams is conflicting decision-making norms. Different cultures make decisions differently, and some will apply a great deal of analysis and preparation beforehand. Those cultures that make decisions more quickly (and need just enough information to make a decision) may be frustrated with the slow response and relatively longer thought process.
These cultural differences are good examples of how everyday team activities (decision-making, communication, interaction among team members) may become points of contention for a multicultural team if there isn’t adequate understanding of everyone’s culture. The authors propose that there are several potential interventions to try if these conflicts arise. One simple intervention is adaptation, which is working with or around differences. This is best used when team members are willing to acknowledge the cultural differences and learn how to work with them. The next intervention technique is structural intervention, or reorganizing to reduce friction on the team. This technique is best used if there are unproductive subgroups or cliques within the team that need to be moved around. Managerial intervention is the technique of making decisions by management and without team involvement. This technique is one that should be used sparingly, as it essentially shows that the team needs guidance and can’t move forward without management getting involved. Finally, exit is an intervention of last resort, and is the voluntary or involuntary removal of a team member. If the differences and challenges have proven to be so great that an individual on the team can no longer work with the team productively, then it may be necessary to remove the team member in question.
There are some people who seem to be innately aware of and able to work with cultural differences on teams and in their organizations. These individuals might be said to have cultural intelligence. Cultural intelligence is a competency and a skill that enables individuals to function effectively in cross-cultural environments. It develops as people become more aware of the influence of culture and more capable of adapting their behavior to the norms of other cultures. In the IESE Insight article entitled “Cultural Competence: Why It Matters and How You Can Acquire It” (Lee and Liao, 2015), the authors assert that “multicultural leaders may relate better to team members from different cultures and resolve conflicts more easily. Their multiple talents can also be put to good use in international negotiations.” Multicultural leaders don’t have a lot of “baggage” from any one culture, and so are sometimes perceived as being culturally neutral. They are very good at handling diversity, which gives them a great advantage in their relationships with teammates.
In order to help employees become better team members in a world that is increasingly multicultural, there are a few best practices that the authors recommend for honing cross-cultural skills. The first is to “broaden your mind”—expand your own cultural channels (travel, movies, books) and surround yourself with people from other cultures. This helps to raise your own awareness of the cultural differences and norms that you may encounter. Another best practice is to “develop your cross-cultural skills through practice” and experiential learning. You may have the opportunity to work or travel abroad—but if you don’t, then getting to know some of your company’s cross-cultural colleagues or foreign visitors will help you to practice your skills. Serving on a cross-cultural project team and taking the time to get to know and bond with your global colleagues is an excellent way to develop skills. In my own “past life,” I led a global human resources organization, and my team included employees from China, India, Brazil, Hungary, the Netherlands, and the United States. We would have annual meetings as a global HR team, and it was so rewarding to share and learn about each other’s cultures. We would initiate the week with a gift exchange in a “show and tell” format from our various countries, so that everyone would learn a little bit more about the cultures in which our fellow colleagues were working. This type of interaction within a global team is a great way to facilitate cross-cultural understanding and communication, and to sharpen everyone’s cultural intelligence.
Once you have a sense of the different cultures and have started to work on developing your cross-cultural skills, another good practice is to “boost your cultural metacognition” and monitor your own behavior in multicultural situations. When you are in a situation in which you are interacting with multicultural individuals, you should test yourself and be aware of how you act and feel. Observe both your positive and negative interactions with people, and learn from them. Developing “cognitive complexity” is the final best practice for boosting multicultural skills. This is the most advanced, and it requires being able to view situations from more than one cultural framework. In order to see things from another perspective, you need to have a strong sense of emotional intelligence, empathy, and sympathy, and be willing to engage in honest communications.
In the Harvard Business Review article “Cultural Intelligence,” the authors describe three sources of cultural intelligence that teams should consider if they are serious about becoming more adept in their cross-cultural skills and understanding. These sources, very simply, are head, body, and heart. One first learns about the beliefs, customs, and taboos of foreign cultures via the head. Training programs are based on providing this type of overview information—which is helpful, but obviously isn’t experiential. This is the cognitive component of cultural intelligence. The second source, the body, involves more commitment and experimentation with the new culture. It is this physical component (demeanor, eye contact, posture, accent) that shows a deeper level of understanding of the new culture and its physical manifestations. The final source, the heart, deals with a person’s own confidence in their ability to adapt to and deal well with cultures outside of their own. Heart really speaks to one’s own level of emotional commitment and motivation to understand the new culture.
The authors have created a quick assessment to diagnose cultural intelligence, based on these cognitive, physical, and emotional/motivational measures (i.e., head, body, heart).
Please refer to for a short diagnostic that allows you to assess your cultural intelligence.
Cultural intelligence is an extension of emotional intelligence. An individual must have a level of awareness and understanding of the new culture so that they can adapt to the style, pace, language, nonverbal communication, etc. and work together successfully with the new culture. A multicultural team can only find success if its members take the time to understand each other and ensure that everyone feels included. Multiculturalism and cultural intelligence are traits that are taking on increasing importance in the business world today. By following best practices and avoiding the challenges and pitfalls that can derail a multicultural team, a team can find great success and personal fulfillment well beyond the boundaries of the project or work engagement.
1. What are some challenges and best practices for managing and working with multicultural teams?
With the increase in globalization over the years, teams have seen the addition of multicultural individuals on their teams, who bring with them their own diverse backgrounds and perspectives. There are very positive aspects that result from the added diversity, as discussed in the previous questions. There are also challenges that we need to be aware of when we are managing these teams.
Challenges can arise from communication styles and accents, but can also appear in the form of decision-making norms and attitudes toward hierarchy. There are some team manager interventions that are best practices for addressing these challenges. There are also some best practices for building the cultural intelligence that will make the team more adept at understanding and dealing with differences among cultures.
### Chapter Review Questions
1. What are the key differences between a team and a working group?
2. At what stage of team development does the team finally start to see results?
3. What can cause a team to digress to an earlier stage of team development?
4. What can a team leader do to manage the team’s boundaries?
5. How does managing conflict help a team learn and grow?
6. What are some strategies to make conflict more productive?
7. Why are diverse teams better at decision-making and problem-solving?
8. Why do diverse teams utilize data more often than homogeneous teams?
9. What are some of the challenges that multicultural teams face?
10. What are the key sources of cultural intelligence?
### Management Skills Application Exercises
1. Do you agree with Katzenbach and Smith’s key practices that make teams effective? Why or why not? Which of these practices have you personally experienced? Are there any additional practices that you would add?
2. Have you ever been part of a team that made it through all four stages of team development? In which stage did the team remain the longest? In which stage did the team remain the shortest amount of time? What did you learn?
3. Why do you think it is so important to manage a team’s boundaries? How can external stakeholders impact the function and performance of the team? Why is emotional intelligence such an important skill to have when managing a team?
4. In your experience, have you ever been in a situation in which conflict became a negative thing for a team? How was the conflict handled? How can a team manager ensure that conflict is handled constructively?
5. What is the difference between cultural intelligence and emotional intelligence? How can the cultural intelligence of a team improve performance? Have you ever been on a multicultural team that was high on cultural intelligence? How about a team that was low on cultural intelligence? What were the impacts?
### Managerial Decision Exercises
1. You are a manager of a team that is taking a long time to move through the Storming stage. There are two individuals on the team that seem to be unproductive when dealing with conflict and are holding the team back. What would you do to help the team move through conflict management and begin Norming and Performing?
2. One of your direct reports on your team is very focused on his own personal development. He is a strong employee individually, but hasn’t had as much experience working in a team environment on a project. He wants to do well, but isn’t exactly sure how to work within this context. How would you instruct him?
3. You are leading a team responsible for a very important strategic initiative at your company. You have launched the project, and your team is very motivated and excited to move forward. You have the sense, however, that your sponsor and some other stakeholders are not fully engaged. What do you do to engage them?
4. You are the project manager of a cross-functional team project that was just approved. You have been given several good team members who are from different functions, but many of them think similarly and are unlikely to question each other on team decisions. You have the choice of keeping a homogeneous team that will probably have few team issues or building a diverse team that may well engage in conflict and take much longer to come to decisions. What choice would you make? What other information would you want to know to make the decision?
5. You are the director of a multicultural team with employees across the globe. Your team rarely has the opportunity to meet in person, but you have been given the budget to bring everyone together for a week-long global team meeting and team building. How would you structure the time together? What are some of the activities you would suggest to build stronger relationships among team members?
### Critical Thinking Case
### Diverse Teams Hold Court
Diverse teams have been proven to be better at problem-solving and decision-making for a number of reasons. First, they bring many different perspectives to the table. Second, they rely more on facts and use those facts to substantiate their positions. What is even more interesting is that, according to the Scientific American article “How Diversity Makes Us Smarter,” simply “being around people who are different from us makes more creative, diligent, and harder-working.”
One case in point is the example of jury decision-making, where fact-finding and logical decision-making are of utmost importance. A 2006 study of jury decision-making, led by social psychologist Samuel Sommers of Tufts University, showed that racially diverse groups exchanged a wider range of information during deliberation of a case than all-White groups did. The researcher also conducted mock jury trials with a group of real jurors to show the impact of diversity on jury decision-making.
Interestingly enough, it was the mere presence of diversity on the jury that made jurors consider the facts more, and they had fewer errors recalling the relevant information. The groups even became more willing to discuss the role of race case, when they hadn’t before with an all-White jury. This wasn’t the case because the diverse jury members brought new information to the group—it happened because, according to the author, the mere presence of diversity made people more open-minded and diligent. Given what we discussed on the benefits of diversity, it makes sense. People are more likely to be prepared, to be diligent, and to think logically about something if they know that they will be pushed or tested on it. And who else would push you or test you on something, if not someone who is different from you in perspective, experience, or thinking. “Diversity jolts us into cognitive action in ways that homogeneity simply does not.”
So, the next time you are called for jury duty, or to serve on a board committee, or to make an important decision as part of a team, remember that one way to generate a great discussion and come up with a strong solution is to pull together a diverse team.
2. If you don’t have a diverse group of people on your team, how can you ensure that you will have robust discussions and decision-making? What techniques can you use to generate conversations from different perspectives?
3. Evaluate your own team at work. Is it a diverse team? How would you rate the quality of decisions generated from that group?
Sources: Adapted from Katherine W. Phillips, “How Diversity Makes Us Smarter,” Scientific American, October 2014, p. 7–8. |
# Managerial Communication
## Introduction
### Learning Outcomes
After reading this chapter, you should be able to answer these questions:
1. Understand and describe the communication process.
2. Know the types of communications that occur in organizations.
3. Understand how power, status, purpose, and interpersonal skills affect communications in organizations.
4. Describe how corporate reputations are defined by how an organization communicates to all of its stakeholders.
5. Know why talking, listening, reading, and writing are vital to managing effectively.
We will distinguish between communication between two individuals and communication amongst several individuals (groups) and communication outside the organization. We will show that managers spend a majority of their time in communication with others. We will examine the reasons for communication and discuss the basic model of interpersonal communication, the types of interpersonal communication, and major influences on the communication process. We will also discuss how organizational reputation is defined by communication with stakeholders. |
# Managerial Communication
## The Process of Managerial Communication
1. Understand and describe the communication process.
Interpersonal communication is an important part of being an effective manager:
1. It influences the opinions, attitude, motivation, and behaviors of others.
2. It expresses our feelings, emotions, and intentions to others.
3. It is the vehicle for providing, receiving, and exchanging information regarding events or issues that concern us.
4. It reinforces the formal structure of the organization by such means as making use of formal channels of communication.
Interpersonal communication allows employees at all levels of an organization to interact with others, to secure desired results, to request or extend assistance, and to make use of and reinforce the formal design of the organization. These purposes serve not only the individuals involved, but the larger goal of improving the quality of organizational effectiveness.
The model that we present here is an oversimplification of what really happens in communication, but this model will be useful in creating a diagram to be used to discuss the topic. illustrates a simple communication episode where a communicator encodes a message and a receiver decodes the message.
### Encoding and Decoding
Two important aspects of this model are encoding and decoding. Encoding is the process by which individuals initiating the communication translate their ideas into a systematic set of symbols (language), either written or spoken. Encoding is influenced by the sender’s previous experiences with the topic or issue, her emotional state at the time of the message, the importance of the message, and the people involved. Decoding is the process by which the recipient of the message interprets it. The receiver attaches meaning to the message and tries to uncover its underlying intent. Decoding is also influenced by the receiver’s previous experiences and frame of reference at the time of receiving the message.
### Feedback
Several types of feedback can occur after a message is sent from the communicator to the receiver. Feedback can be viewed as the last step in completing a communication episode and may take several forms, such as a verbal response, a nod of the head, a response asking for more information, or no response at all. As with the initial message, the response also involves encoding, medium, and decoding.
There are three basic types of feedback that occur in communication. These are informational, corrective, and reinforcing. In informational feedback, the receiver provides nonevaluative information to the communicator. An example is the level of inventory at the end of the month. In corrective feedback, the receiver responds by challenging the original message. The receiver might respond that it is not their responsibility to monitor inventory. In reinforcing feedback, the receiver communicated that they have clearly received the message and its intentions. For instance, the grade that you receive on a term paper (either positive or negative) is reinforcing feedback on your term paper (your original communication).
### Noise
There is, however, a variety of ways that the intended message can get distorted. Factors that distort message clarity are noise. Noise can occur at any point along the model shown in , including the decoding process. For example, a manager might be under pressure and issue a directive, “I want this job completed today, and I don’t care what it costs,” when the manager does care what it costs.
1. Understand and describe the communication process.
The basic model of interpersonal communication consists of an encoded message, a decoded message, feedback, and noise. Noise refers to the distortions that inhibit message clarity. |
# Managerial Communication
## Types of Communications in Organizations
1. Know the types of communications that occur in organizations.
In the communication model described above, three types of communication can be used by either the communicator in the initial transmission phase or the receiver in the feedback phase. These three types are discussed next.
### Oral Communication
This consists of all messages or exchanges of information that are spoken, and it’s the most prevalent type of communication.
### Written Communication
This includes e-mail, texts, letters, reports, manuals, and annotations on sticky notes. Although managers prefer oral communication for its efficiency and immediacy, the increase in electronic communication is undeniable. As well, some managers prefer written communication for important messages, such as a change in a company policy, where precision of language and documentation of the message are important.
### Nonverbal Communication
There is also the transformation of information without speaking or writing. Some examples of this are things such as traffic lights and sirens as well as things such as office size and placement, which connote something or someone of importance. As well, things such as body language and facial expression can convey either conscious or unconscious messages to others.
### Major Influences on Interpersonal Communication
Regardless of the type of communication involved, the nature, direction, and quality of interpersonal communication processes can be influenced by several factors.
### Social Influences
Communication is a social process, as it takes at least two people to have a communication episode. There is a variety of social influences that can affect the accuracy of the intended message. For examples, status barriers between employees at different levels of the organization can influence things such as addressing a colleague as at a director level as “Ms. Jones” or a coworker at the same level as “Mike.” Prevailing norms and roles can dictate who speaks to whom and how someone responds. illustrates a variety of communications that illustrate social influences in the workplace.
### Perception
In addition, the communication process is heavily influenced by perceptual processes. The extent to which an employee accurately receives job instructions from a manager may be influenced by her perception of the manager, especially if the job instructions conflict with her interest in the job or if they are controversial. If an employee has stereotyped the manager as incompetent, chances are that little that the manager says will be taken seriously. If the boss is well regarded or seen as influential in the company, everything that they say may be interpreted as important.
### Interaction Involvement
Communication effectiveness can be influenced by the extent to which one or both parties are involved in conversation. This attentiveness is called interaction attentiveness or interaction involvement. If the intended receiver of the message is preoccupied with other issues, the effectiveness of the message may be diminished. Interaction involvement consists of three interrelated dimensions: responsiveness, perceptiveness, and attentiveness.
### Organizational Design
The communication process can also be influenced by the design of the organization. It has often been argued to decentralize an organization because that will lead to a more participative structure and lead to improved communication in the organization. When messages must travel through multiple levels of an organization, the possibility of distortion can also occur, which would be diminished with more face-to-face communication.
1. Know the types of communications that occur in organizations.
Interpersonal communication can be oral, written, or nonverbal. Body language refers to conveying messages to others through such techniques as facial expressions, posture, and eye movements. |
# Managerial Communication
## Factors Affecting Communications and the Roles of Managers
1. Understand how power, status, purpose, and interpersonal skills affect communications in organizations.
### The Roles Managers Play
In Mintzberg’s seminal study of managers and their jobs, he found the majority of them clustered around three core management roles.
### Interpersonal Roles
Managers are required to interact with a substantial number of people during a workweek. They host receptions; take clients and customers to dinner; meet with business prospects and partners; conduct hiring and performance interviews; and form alliances, friendships, and personal relationships with many others. Numerous studies have shown that such relationships are the richest source of information for managers because of their immediate and personal nature.
Three of a manager’s roles arise directly from formal authority and involve basic interpersonal relationships. First is the figurehead role. As the head of an organizational unit, every manager must perform some ceremonial duties. In Mintzberg’s study, chief executives spent 12% of their contact time on ceremonial duties; 17% of their incoming mail dealt with acknowledgments and requests related to their status. One example is a company president who requested free merchandise for a handicapped schoolchild.
Managers are also responsible for the work of the people in their unit, and their actions in this regard are directly related to their role as a leader. The influence of managers is most clearly seen, according to Mintzberg, in the leader role. Formal authority vests them with great potential power. Leadership determines, in large part, how much power they will realize.
Does the leader’s role matter? Ask the employees of Chrysler Corporation (now Fiat Chrysler). When Sergio Marchionne, who passed away in 2018, took over the company in the wake of the financial crisis, the once-great auto manufacturer was in bankruptcy, teetering on the verge of extinction. He formed new relationships with the United Auto Workers, reorganized the senior management of the company, and—perhaps, most importantly—convinced the U.S. federal government to guarantee a series of bank loans that would make the company solvent again. The loan guarantees, the union response, and the reaction of the marketplace, especially for the Jeep brand, were due in large measure to Marchionne’s leadership style and personal charisma. More recent examples include the return of Starbucks founder Howard Schultz to reenergize and steer his company and Amazon CEO Jeff Bezos and his ability to innovate during a downturn in the economy.
Popular management literature has had little to say about the liaison role until recently. This role, in which managers establish and maintain contacts outside the vertical chain of command, becomes especially important in view of the finding of virtually every study of managerial work that managers spend as much time with peers and other people outside of their units as they do with their own subordinates. Surprisingly, they spend little time with their own superiors. In Rosemary Stewart’s (1967) study, 160 British middle and top managers spent 47% of their time with peers, 41% of their time with people inside their unit, and only 12% of their time with superiors. Guest’s (1956) study of U.S. manufacturing supervisors revealed similar findings.
### Informational Roles
Managers are required to gather, collate, analyze, store, and disseminate many kinds of information. In doing so, they become information resource centers, often storing huge amounts of information in their own heads, moving quickly from the role of gatherer to the role of disseminator in minutes. Although many business organizations install large, expensive management information systems to perform many of those functions, nothing can match the speed and intuitive power of a well-trained manager’s brain for information processing. Not surprisingly, most managers prefer it that way.
As monitors, managers are constantly scanning the environment for information, talking with liaison contacts and subordinates, and receiving unsolicited information, much of it because of their network of personal contacts. A good portion of this information arrives in verbal form, often as gossip, hearsay, and speculation.
In the disseminator role, managers pass privileged information directly to subordinates, who might otherwise have no access to it. Managers must decide not only who should receive such information, but how much of it, how often, and in what form. Increasingly, managers are being asked to decide whether subordinates, peers, customers, business partners, and others should have direct access to information 24 hours a day without having to contact the manager directly.
In the spokesperson role, managers send information to people outside of their organizations: an executive makes a speech to lobby for an organizational cause, or a supervisor suggests a product modification to a supplier. Increasingly, managers are also being asked to deal with representatives of the news media, providing both factual and opinion-based responses that will be printed or broadcast to vast unseen audiences, often directly or with little editing. The risks in such circumstances are enormous, but so too are the potential rewards in terms of brand recognition, public image, and organizational visibility.
### Decisional Roles
Ultimately, managers are charged with the responsibility of making decisions on behalf of both the organization and the stakeholders with an interest in it. Such decisions are often made under circumstances of high ambiguity and with inadequate information. Often, the other two managerial roles—interpersonal and informational—will assist a manager in making difficult decisions in which outcomes are not clear and interests are often conflicting.
In the role of entrepreneur, managers seek to improve their businesses, adapt to changing market conditions, and react to opportunities as they present themselves. Managers who take a longer-term view of their responsibilities are among the first to realize that they will need to reinvent themselves, their product and service lines, their marketing strategies, and their ways of doing business as older methods become obsolete and competitors gain advantage.
While the entrepreneur role describes managers who initiate change, the disturbance or crisis handler role depicts managers who must involuntarily react to conditions. Crises can arise because bad managers let circumstances deteriorate or spin out of control, but just as often good managers find themselves in the midst of a crisis that they could not have anticipated but must react to just the same.
The third decisional role of resource allocator involves managers making decisions about who gets what, how much, when, and why. Resources, including funding, equipment, human labor, office or production space, and even the boss’s time, are all limited, and demand inevitably outstrips supply. Managers must make sensible decisions about such matters while still retaining, motivating, and developing the best of their employees.
The final decisional role is that of negotiator. Managers spend considerable amounts of time in negotiations: over budget allocations, labor and collective bargaining agreements, and other formal dispute resolutions. During a week, managers will often make dozens of decisions that are the result of brief but important negotiations between and among employees, customers and clients, suppliers, and others with whom managers must deal.
1. Understand how power, status, purpose, and interpersonal skills affect communications in organizations.
Interpersonal communication is influenced by social situations, perception, interaction involvement, and organizational design. Organizational communication can travel upward, downward, or horizontally. Each direction of information flow has specific challenges. |
# Managerial Communication
## Managerial Communication and Corporate Reputation
1. Describe how corporate reputations are defined by how an organization communicates to its stakeholders.
Management communication is a central discipline in the study of communication and corporate reputation. An understanding of language and its inherent powers, combined with the skill to speak, write, listen, and form interpersonal relationships, will determine whether companies succeed or fail and whether they are rewarded or penalized for their reputations.
At the midpoint of the twentieth century, Peter Drucker wrote, “Managers have to learn to know language, to understand what words are and what they mean. Perhaps most important, they have to acquire respect for language as [our] most precious gift and heritage. The manager must understand the meaning of the old definition of rhetoric as ‘the art which draws men’s hearts to the love of true knowledge.’”
Later, Eccles and Nohria reframed Drucker’s view to offer a perspective of management that few others have seen: “To see management in its proper light, managers need first to take language seriously.” In particular, they argue, a coherent view of management must focus on three issues: the use of rhetoric to achieve a manager’s goals, the shaping of a managerial identity, and taking action to achieve the goals of the organizations that employ us. Above all, they say, “the essence of what management is all about [is] the effective use of language to get things done.” One of the things managers get done is the creation, management, and monitoring of corporate reputation.
The job of becoming a competent, effective manager thus becomes one of understanding language and action. It also involves finding ways to shape how others see and think of you in your role as a manager. Many noted researchers have examined the important relationship between communication and action within large and complex organizations and conclude that the two are inseparable. Without the right words, used in the right way, it is unlikely that the right reputations develop. “Words do matter,” write Eccles and Nohria. “They matter very much. Without words we have no way of expressing strategic concepts, structural forms, or designs for performance measurement systems.” Language, they conclude, “is too important to managers to be taken for granted or, even worse, abused.”
So, if language is a manager’s key to corporate reputation management, the next question is obvious: How good are managers at using language? Managers’ ability to act—to hire a talented workforce, to change an organization’s reputation, to launch a new product line—depends entirely on how effectively they use management communication, both as a speaker and as a listener. Managers’ effectiveness as a speaker and writer will determine how well they are able to manage the firm’s reputation. And their effectiveness as listeners will determine how well they understand and respond to others and can change the organization in response to their feedback.
We will now examine the role management communication plays in corporate reputation formation, management, and change and the position occupied by rhetoric in the life of business organizations. Though, this chapter will focus on the skills, abilities, and competencies for using language, attempting to influence others, and responding to the requirements of peers, superiors, stakeholders, and the organization in which managers and employees work.
Management communication is about the movement of information and the skills that facilitate it—speaking, writing, listening, and processes of critical thinking. It’s also about understanding who your organization is (identity), who others think your organization is (reputation), and the contributions individuals can make to the success of their business considering their organization’s existing reputation. It is also about confidence—the knowledge that one can speak and write well, listen with great skill as others speak, and both seek out and provide the feedback essential to creating, managing, or changing their organization’s reputation.
At the heart of this chapter, though, is the notion that communication, in many ways, is the work of managers. We will now examine the roles of writing and speaking in the role of management, as well as other specific applications and challenges managers face as they play their role in the creation, maintenance, and change of corporate reputation.
1. Describe how corporate reputations are defined by how an organization communicates to all of its stakeholders.
It is important for managers to understand what your organization stands for (identity), what others think your organization is (reputation), and the contributions individuals can make to the success of the business considering their organization’s existing reputation. It is also about confidence—the knowledge that one can speak and write well, listen with great skill as others speak, and both seek out and provide the feedback essential to creating, managing, or changing their organization’s reputation. |
# Managerial Communication
## The Major Channels of Management Communication Are Talking, Listening, Reading, and Writing
1. Know why talking, listening, reading, and writing are vital to managing effectively.
The major channels of managerial communication displayed in are talking, listening, reading, and writing. Among these, talking is the predominant method of communicating, but as e-mail and texting increase, reading and writing are increasing. Managers across industries, according to Deirdre Borden, spend about 75% of their time in verbal interaction. Those daily interactions include the following.
### One-on-One Conversations
Increasingly, managers find that information is passed orally, often face-to-face in offices, hallways, conference rooms, cafeterias, restrooms, athletic facilities, parking lots, and literally dozens of other venues. An enormous amount of information is exchanged, validated, confirmed, and passed back and forth under highly informal circumstances.
### Telephone Conversations
Managers spend an astounding amount of time on the telephone these days. Curiously, the amount of time per telephone call is decreasing, but the number of calls per day is increasing. With the nearly universal availability of cellular and satellite telephone service, very few people are out of reach of the office for very long. The decision to switch off a cellular telephone, in fact, is now considered a decision in favor of work-life balance.
### Video Teleconferencing
Bridging time zones as well as cultures, videoconferencing facilities make direct conversations with employees, colleagues, customers, and business partners across the nation or around the world a simple matter. Carrier Corporation, the air-conditioning manufacturer, is now typical of firms using desktop videoconferencing to conduct everything from staff meetings to technical training. Engineers at Carrier’s Farmington, Connecticut, headquarters can hook up with service managers in branch offices thousands of miles away to explain new product developments, demonstrate repair techniques, and update field staff on matters that would, just recently, have required extensive travel or expensive, broadcast-quality television programming. Their exchanges are informal, conversational, and not much different than they would be if the people were in the same room.
### Presentations to Small Groups
Managers frequently find themselves making presentations, formal and informal, to groups of three to eight people for many different reasons: they pass along information given to them by executives, they review the status of projects in process, and they explain changes in everything from working schedules to organizational goals. Such presentations are sometimes supported by overhead transparencies or printed outlines, but they are oral in nature and retain much of the conversational character of one-to-one conversations.
### Public Speaking to Larger Audiences
Most managers are unable to escape the periodic requirement to speak to larger audiences of several dozen or, perhaps, several hundred people. Such presentations are usually more formal in structure and are often supported by PowerPoint or Prezi software that can deliver data from text files, graphics, photos, and even motion clips from streaming video. Despite the more formal atmosphere and sophisticated audio-visual support systems, such presentations still involve one manager talking to others, framing, shaping, and passing information to an audience.
A series of scientific studies, beginning with Rankin, Nichols and Stevens, and Wolvin and Coakley, confirm: most managers spend the largest portion of their day talking and listening. Werner’s thesis, in fact, found that North American adults spend more than 78% of their communication time either talking or listening to others who are talking.
According to Werner and others who study the communication habits of postmodern business organizations, managers are involved in more than just speeches and presentations from the dais or teleconference podium. They spend their days in meetings, on the telephone, conducting interviews, giving tours, supervising informal visits to their facilities, and at a wide variety of social events.
Each of these activities may look to some managers like an obligation imposed by the job. Shrewd managers see them as opportunities to hear what others are thinking, to gather information informally from the grapevine, to listen in on office gossip, to pass along viewpoints that haven’t yet made their way to the more formal channels of communication, or to catch up with a colleague or friend in a more relaxed setting. No matter what the intention of each manager who engages in these activities, the information they produce and the insight that follows from them can be put to work the same day to achieve organizational and personal objectives. “To understand why effective managers behave as they do,” writes Kotter, “it is essential first to recognize two fundamental challenges and dilemmas found in most of their jobs.” Managers must first figure out what to do, despite an enormous amount of potentially relevant information (along with much that is not), and then they must get things done “through a large and diverse group of people despite having little direct control over most of them.”
### The Role of Writing
Writing plays an important role in the life of any organization. In some organizations, it becomes more important than in others. At Procter & Gamble, for example, brand managers cannot raise a work-related issue in a team meeting unless the ideas are first circulated in writing. For P&G managers, this approach means explaining their ideas in explicit detail in a standard one-to-three-page memo, complete with background, financial discussion, implementation details, and justification for the ideas proposed.
Other organizations are more oral in their traditions—3M Canada is a “spoken” organization—but the fact remains: the most important projects, decisions, and ideas end up in writing. Writing also provides analysis, justification, documentation, and analytic discipline, particularly as managers approach important decisions that will affect the profitability and strategic direction of the company.
Writing is a career sifter. If managers demonstrate their inability to put ideas on paper in a clear, unambiguous fashion, they’re not likely to last. Stories of bad writers who’ve been shown the door early in their careers are legion. Managers’ principal objective, at least during the first few years of their career, is to keep their name out of such stories. Remember: those who are most likely to notice the quality and skill in managers’ written documents are the very people most likely to matter to managers’ future.
Managers do most of their own writing and editing. The days when managers could lean back and thoughtfully dictate a letter or memo to a skilled secretarial assistant are mostly gone. Some senior executives know how efficient dictation can be, especially with a top-notch administrative assistant taking shorthand, but how many managers have that advantage today? Very few, mostly because buying a computer and printer is substantially cheaper than hiring another employee. Managers at all levels of most organizations draft, review, edit, and dispatch their own correspondence, reports, and proposals.
Documents take on lives of their own. Once it’s gone from the manager’s desk, it isn’t theirs anymore. When they sign a letter and put it in the mail, it’s no longer their letter—it’s the property of the person or organization it was sent to. As a result, the recipient is free to do as she sees fit with the writing, including using it against the sender. If the ideas are ill-considered or not well expressed, others in the organization who are not especially sympathetic to the manager’s views may head for the copy machine with the manager’s work in hand. The advice for managers is simple: do not mail the first draft, and do not ever sign your name to a document you are not proud of.
### Communication Is Invention
Without question, communication is a process of invention. Managers literally create meaning through communication. A company, for example, is not in default until a team of auditors sits down to examine the books and review the matter. Only after extended discussion do the accountants conclude that the company is, in fact, in default. It is their discussion that creates the outcome. Until that point, default was simply one of many possibilities.
The fact is managers create meaning through communication. It is largely through discussion and verbal exchange—often heated and passionate—that managers decide who they wish to be: market leaders, takeover artists, innovators, or defenders of the economy. It is only through communication that meaning is created for shareholders, employees, customers, and others. Those long, detailed, and intense discussions determine how much the company will declare in dividends this year, whether the company is willing to risk a strike or labor action, and how soon to roll out the new product line customers are asking for. Additionally, it is important to note that managers usually figure things out by talking about them as much as they talk about the things they have already figured out. Talk serves as a wonderful palliative: justifying, analyzing, dissecting, reassuring, and analyzing the events that confront managers each day.
### Information Is Socially Constructed
If we are to understand just how important human discourse is in the life of a business, several points seem especially important.
Information is created, shared, and interpreted by people. Meaning is a truly human phenomenon. An issue is only important if people think it is. Facts are facts only if we can agree upon their definition. Perceptions and assumptions are as important as truth itself in a discussion about what a manager should do next. Information never speaks for itself. It is not uncommon for a manager to rise to address a group of her colleagues and say, “The numbers speak for themselves.” Frankly, the numbers never speak for themselves. They almost always require some sort of interpretation, some sort of explanation or context. Do not assume that others see the facts in the same way managers do, and never assume that what is seen is the truth. Others may see the same set of facts or evidence but may not reach the same conclusions. Few things in life are self-explanatory.
Context always drives meaning. The backdrop to a message is always of paramount importance to the listener, viewer, or reader in reaching a reasonable, rational conclusion about what they see and hear. What’s in the news these days as we take up this subject? What moment in history do we occupy? What related or relevant information is under consideration as this new message arrives? We cannot possibly derive meaning from one message without considering everything else that surrounds it.
A messenger always accompanies a message. It is difficult to separate a message from its messenger. We often want to react more to the source of the information than we do to the information itself. That’s natural and entirely normal. People speak for a reason, and we often judge their reasons for speaking before analyzing what they have to say. Keep in mind that, in every organization, message recipients will judge the value, power, purpose, intent, and outcomes of the messages they receive by the source of those messages as much as by the content and intent of the messages themselves. If the messages managers send are to have the impact hoped for, they must come from a source the receiver knows, respects, and understands.
### Managers’ Greatest Challenge
Every manager knows communication is vital, but every manager also seems to “know” that she is great at it. Managers’ greatest challenge is to admit to flaws in their skill set and work tirelessly to improve them. First, managers must admit to the flaws.
Larkin and Larkin write, “Deep down, managers believe they are communicating effectively. In ten years of management consulting, we have never had a manager say to us that he or she was a poor communicator. They admit to the occasional screw-up, but overall, everyone, without exception, believes he or she is basically a good communicator.”
### Managers’ Task as Professionals
As a professional manager, the first task is to recognize and understand one’s strengths and weaknesses as a communicator. Until these communication tasks at which one is most and least skilled are identified, there will be little opportunity for improvement and advancement.
Foremost among managers’ goals should be to improve existing skills. Improve one’s ability to do what is done best. Be alert to opportunities, however, to develop new skills. Managers should add to their inventory of abilities to keep themselves employable and promotable.
Two other suggestions come to mind for improving managers’ professional standing. First, acquire a knowledge base that will work for the years ahead. That means speaking with and listening to other professionals in their company, industry, and community. They should be alert to trends that could affect their company’s products and services, as well as their own future.
It also means reading. Managers should read at least one national newspaper each day, including the Wall Street Journal, the New York Times, or the Financial Times, as well as a local newspaper. Their reading should include weekly news magazines, such as U.S. News & World Report, Bloomberg’s Business Week, and the Economist. Subscribe to monthly magazines such as Fast Company and Fortune. And they should read at least one new hardcover title a month. A dozen books each year is the bare minimum on which one should depend for new ideas, insights, and managerial guidance.
Managers’ final challenge is to develop the confidence needed to succeed as a manager, particularly under conditions of uncertainty, change, and challenge.
1. Describe the roles that managers perform in organizations.
There are special communication roles that can be identified. Managers may serve as gatekeepers, liaisons, or opinion leaders. They can also assume some combination of these roles. It is important to recognize that communication processes involve people in different functions and that all functions need to operate effectively to achieve organizational objectives.
### Chapter Review Questions
1. Describe the communication process.
2. Why is feedback a critical part of the communication process?
3. What are some things that managers can do to reduce noise in communication?
4. Compare and contrast the three primary forms of interpersonal communication.
5. Describe the various individual communication roles in organizations.
6. How can managers better manage their effectiveness by managing e-mail communication?
7. Which communication roles are most important in facilitating managerial effectiveness?
8. Identify barriers to effective communication.
9. How can barriers to effective communication be overcome by managers?
### Managerial Skills Application Exercises
1. The e-mails below are not written as clearly or concisely as they could be. In addition, they may have problems in organization or tone or mechanical errors. Rewrite them so they are appropriate for the audience and their purpose. Correct grammatical and mechanical errors. Finally, add a subject line to each.
1. Write a self-evaluation that focuses specifically on your class participation in this course. Making comments during class allows you to improve your ability to speak extemporaneously, which is exactly what you will have to do in all kinds of business situations (e.g., meetings, asking questions at presentations, one-on-one conversations). Thus, write a short memo (two or three paragraphs) in which you describe the frequency with which you make comments in class, the nature of those comments, and what is easy and difficult for you when it comes to speaking up in class.
If you have made few (or no) comments during class, this is a time for us to come up with a plan to help you overcome your shyness. Our experience is that as soon as a person talks in front of a group once or twice, it becomes much easier—so we need to come up with a way to help you break the ice.
Finally, please comment on what you see as the strengths and weaknesses of your discussions and presentations in this class.
2. Refer to the photo in
3. In the movie
### Managerial Decision Exercises
1. Ginni Rometty is the CEO of IBM. Shortly after taking on the role of CEO and being frustrated by the progress and sales performance, Rometty released a five-minute video to all 400,000 plus IBM employees criticizing the lack of securing deals to competitors and lashed out at the sales organization for poor sales in the preceding quarter. Six months later, Rometty sent another critical message, this time via e-mail. How effective will the video and e-mail be in communicating with employees? How should she follow up to these messages?
2. Social media, such as Facebook, is now widespread. Place yourself as a manager that has just received a “friend” request from one of your direct reports. Do you accept, reject, or ignore the request? Why, and what additional communication would you have regarding this with the employee?
3. During a cross-functional meeting, one of the attendees who reports to a manager who is also at the meeting accuses one of your reports of not being fit for the position she is in. You disagree and feel that your report is a good fit for her role. How do you handle this?
### Critical Thinking Case
### Facebook, Inc.
Facebook has been in the news with criticism of its privacy policies, sharing customer information with Fusion GPS, and criticism regarding the attempts to influence the 2016 election. In March 2014, Facebook released a study entitled “Experimental evidence of massive-scale emotional contagion through social networks.” It was published in the Proceedings of the National Academy of Sciences (PNAS), a prestigious, peer-reviewed scientific journal. The paper explains how social media can readily transfer emotional states from person to person through Facebook’s News Feed platform. Facebook conducted an experiment on members to see how people would respond to changes in a percentage of both positive and negative posts. The results suggest that emotional contagion does occur online and that users’ positive expressions can generate positive reaction, while, in turn, negative expression can generate negative reaction.
Facebook has two separate value propositions aimed at two different markets with entirely different goals.
Originally, Facebook’s main market was its end users—people looking to connect with family and friends. At first, it was aimed only at college students at a handful of elite schools. The site is now open to anyone with an Internet connection. Users can share status updates and photographs with friends and family. And all of this comes at no cost to the users.
Facebook’s other major market is advertisers, who buy information about Facebook’s users. The company regularly gathers data about page views and browsing behavior of users in order to display targeted advertisements to users for the benefit of its advertising partners.
The value proposition of the Facebook News Feed experiment was to determine whether emotional manipulation would be possible through the use of social networks. This clearly could be of great value to one of Facebook’s target audiences—its advertisers.
The results suggest that the emotions of friends on social networks influence our own emotions, thereby demonstrating emotional contagion via social networks. Emotional contagion is the tendency to feel and express emotions similar to and influenced by those of others. Originally, it was studied by psychologists as the transference of emotions between two people.
According to Sandra Collins, a social psychologist and University of Notre Dame professor of management, it is clearly unethical to conduct psychological experiments without the informed consent of the test subjects. While tests do not always measure what the people conducting the tests claim, the subjects need to at least know that they are, indeed, part of a test. The subjects of this test on Facebook were not explicitly informed that they were participating in an emotional contagion experiment. Facebook did not obtain informed consent as it is generally defined by researchers, nor did it allow participants to opt out.
When information about the experiment was released, the media response was overwhelmingly critical. Tech blogs, newspapers, and media reports reacted quickly.
Josh Constine of TechCrunch wrote:
The New York Times quoted Brian Blau, a technology analyst with the research firm Gartner, “Facebook didn’t do anything illegal, but they didn’t do right by their customers. Doing psychological testing on people crosses the line.” Facebook should have informed its users, he said. “They keep on pushing the boundaries, and this is one of the reasons people are upset.”
While some of the researchers have since expressed some regret about the experiment, Facebook as a company was unapologetic about the experiment. The company maintained that it received consent from its users through its terms of service. A Facebook spokesperson defended the research, saying, “We do research to improve our services and make the content people see on Facebook as relevant and engaging as possible. . . . We carefully consider what research we do and have a strong internal review process.”
With the more recent events, Facebook is changing the privacy settings but still collects an enormous amount of information about its users and can use that information to manipulate what users see. Additionally, these items are not listed on Facebook’s main terms of service page. Users must click on a link inside a different set of terms to arrive at the data policy page, making these terms onerous to find. This positioning raises questions about how Facebook will employ its users’ behaviors in the future.
2. How should Facebook respond to the 2014 research situation? How could an earlier response have helped the company avoid the 2018 controversies and keep the trust of its users?
3. Should the company promise to never again conduct a survey of this sort? Should it go even further and explicitly ban research intended to manipulate the responses of its users?
4. How can Facebook balance the concerns of its users with the necessity of generating revenue through advertising?
5. What processes or structures should Facebook establish to make sure it does not encounter these issues again?
6. Respond in writing to the issues presented in this case by preparing two documents: a communication strategy memo and a professional business letter to advertisers.
Sources: Kramer, Adam; Guillory, Jamie; and Hancock, Jeffrey, “Experimental evidence of massive scale emotional contagion through social networks,” PNAS (Proceedings of the National Academy of Sciences of the United States of America). March 25, 2014 http://www.pnas.org/content/111/24/8788.full; Laja, Peep. “Useful Value Proposition Examples (and How to Create a Good One), ConversionXL, 2015 http://conversionxl.com/value-proposition-examples-how-to-create/; Yadav, Sid. “Facebook - The Complete Biography,” Mashable, Aug. 25, 2006. http://mashable.com/2006/08/25/facebook-profile/#orb9TmeYHiqK; Felix, Samantha, “This Is How Facebook Is Tracking Your Internet Activity,” Business Insider, Sept. 9, 2012 http://www.businessinsider.com/this-is-how-facebook-is-tracking-your-internet-activity-2012-9; |
# Organizational Planning and Controlling
## Introduction
### Learning Outcomes
After reading this chapter, you should be able to answer these questions:
1. Understand the importance of planning and why organizations need to plan and control.
2. Outline the planning and controlling processes.
3. Identify different types of plans and control systems employed by organizations.
4. Explain the individual and organizational effects associated with goal setting and planning.
5. Understand how planning occurs in today’s organizations.
6. Discuss the impact that control has on organizational members.
7. Describe management by objectives as a philosophy and as a management tool/technique; describe its effects.
8. Differentiate between the execution of the planning and controlling activities under control- and involvement-oriented management practices. |
# Organizational Planning and Controlling
## Is Planning Important
1. Understand the importance of planning and why organizations need to plan and control.
Planning is the process by which managers establish goals and specify how these goals are to be attained. Plans have two basic components: outcome or goal statements and action statements. Outcome or goal statements represent the end state—the targets and outcomes managers hope to attain. Action statements reflect the means by which organizations move forward to attain their goals. British prime minister Theresa May is determined to change the way that public companies’ boards are comprised by advocating that employees be part of every board. As a part of her action statement, she advocated putting an employee representative in every boardroom, just like Mick Barker, a railway worker since the 1970s, has been quietly helping to shape decision-making as a member of the board of directors at the top of transport giant First Group.
Planning is an intellectual activity. It is difficult to see managers plan, because most of this activity unfolds in the mind of those doing the planning. While planning, managers have to think about what has to be done, who is going to do it, and how and when they will do it. Planners think both retrospectively (about past events) and prospectively (about future opportunities and impending threats). Planning involves thinking about organizational strengths and weaknesses, as well as making decisions about desired states and ways to achieve them.
Planning for organizational events, whether in the internal or external environment, should be an ongoing process—part of a manager’s daily, weekly, and monthly duties and a routine task for all members of high-involvement organizations. Plans should be continually monitored. Managers and other organizational members should check to see if their plans need to be modified to accommodate changing conditions, new information, or new situations that will affect the organization’s future. Plans need to be administered with flexibility, as organizations learn about new and changing conditions. Clearly, the Calico Candy Company failed to monitor its plans in this way. By thinking of planning as a continuous activity, methods can be formulated for handling emerging and unforeseen opportunities and threats. Planning is one process through which organizational activity can be given meaning and direction.
### Why Should Managers Plan?
Managers have several reasons for formulating plans for themselves, their employees, and various organizational units: (1) to offset uncertainty and change; (2) to focus organizational activity on a set of objectives; (3) to provide a coordinated, systematic road map for future activities; (4) to increase economic efficiency; and (5) to facilitate control by establishing a standard for later activity.
Several forces contribute to the necessity for organizational planning. First, in the internal environment, as organizations become larger and more complex, the task of managing becomes increasingly complex. Planning maps out future activities in relation to other activities in the organization. Second, as the external environment becomes increasingly complex and turbulent, the amount of uncertainty faced by a manager increases. Planning enables organizations to approach their environment systematically.
A study out of Cornell University and Indiana University found that absenteeism cost companies $40 billion per year; the absence of planning was one of the biggest problems businesses face. Firms that follow a clearly defined plan in their day-to-day operations will be more successful than those that do not. The authors state, “organizational controlled consequences that would tend to deter absenteeism.” Interestingly, this may be as simple as inspecting the organizational policies that provide the “rules” for employee absenteeism.
### Do Managers Really Plan?
Managers should plan formally, but do they? Some observers contend that managers typically are too busy to engage in a regular form of systematic planning. McGill University management professor Henry Mintzberg notes:
Others disagree. After reviewing a number of studies focused on the degree to which planning and other managerial activities are inherent parts of managing, management professors J. Carroll and J. Gillen state that “the classical management functions of Fayol, Urwick, and others are not folklore as claimed by some contemporary management writers but represent valid abstractions of what managers actually do and what managers should do.” Barbara Allen, president of Sunbelt Research Associates, notes that she did a considerable amount of planning before launching her new business. Now that she is operating successfully, she reviews and updates her plans periodically.
Managers often are very busy people. Some act without a systematic plan of action; however, many managers do plan systematically. For example, many managers develop systematic plans for how their organization will react to a crisis. United Airlines, for example, created a crisis planning group. The group developed United’s crisis contingency plan book, which specifies what the airline’s crisis management team should do in the event of a crisis. Keri Calagna, principal, Deloitte Risk and Financial Advisory, Deloitte & Touche LLP, comments that up to 20.7% of a firm’s value resides in reputation but that CEOs and 77% of board of directors members identified reputation risk as the area about which they felt most vulnerable and that only 39% had a plan to address it.
The question about whether managers really plan and the observation that many times they are simply too busy to retreat to the mountaintop and reflect on where the organization should be going and how it should get there miss the point: there are different types of planning.
1. Understand the importance of planning and why organizations need to plan and control.
Planning is the process through which managers establish goals and detail how these goals will be attained. |
# Organizational Planning and Controlling
## The Planning Process
1. Outline the planning and controlling processes.
Planning is a process. Ideally it is future oriented, comprehensive, systematic, integrated, and negotiated. It involves an extensive search for alternatives and analyzes relevant information, is systematic in nature, and is commonly participative. The planning model described in this section breaks the managerial function of planning into several steps, as shown in . Following this step-by-step procedure helps ensure that organizational planning meets these requirements.
### Step 1: Developing an Awareness of the Present State
According to management scholars Harold Koontz and Cyril O’Donnell, the first step in the planning process is awareness. It is at this step that managers build the foundation on which they will develop their plans. This foundation specifies an organization’s current status, pinpoints its commitments, recognizes its strengths and weaknesses, and sets forth a vision of the future. Because the past is instrumental in determining where an organization expects to go in the future, managers at this point must understand their organization and its history. It has been said—“The further you look back, the further you can see ahead.”
### Step 2: Establishing Outcome Statements
The second step in the planning process consists of deciding “where the organization is headed, or is going to end up.” Ideally, this involves establishing goals. Just as your goal in this course might be to get a certain grade, managers at various levels in an organization’s hierarchy set goals. For example, plans established by a university’s marketing department curriculum committee must fit with and support the plans of the department, which contribute to the goals of the business school, whose plans must, in turn, support the goals of the university. Managers therefore develop an elaborate network of organizational plans, such as that shown in , to achieve the overall goals of their organization.
### Goal vs. Domain Planning
Outcome statements can be constructed around specific goals or framed in terms of moving in a particular direction toward a viable set of outcomes. In goal planning, people set specific goals and then create action statements. For example, freshman Kristin Rude decides that she wants a bachelor of science degree in biochemistry (the goal). She then constructs a four-year academic plan that will help her achieve this goal. Kristin is engaging in goal planning. She first identifies a goal and then develops a course of action to realize her goal.
Another approach to planning is domain/directional planning, in which managers develop a course of action that moves an organization toward one identified domain (and therefore away from other domains). Within the chosen domain may lie a number of acceptable and specific goals. For example, high-school senior Neil Marquardt decides that he wants to major in a business-related discipline in college. During the next four years, he will select a variety of courses from the business school curriculum yet never select a major. After selecting courses based on availability and interest, he earns a sufficient number of credits within this chosen domain that enables him to graduate with a major in marketing. Neil never engaged in goal planning, but in the end he will realize one of many acceptable goals within an accepted domain.
The development of the Post-it® product by the 3M Corporation demonstrates how domain planning works. In the research laboratories at 3M, efforts were being made to develop new forms and strengths of cohesive substances. One result was cohesive material with no known value because of its extremely low cohesive level. A 3M division specialist, Arthur L. Fry, frustrated by page markers falling from his hymn book in church, realized that this material, recently developed by Spencer F. Silver, would stick to paper for long periods and could be removed without destroying the paper. Fry experimented with the material as page markers and note pads—out of this came the highly popular and extremely profitable 3M product Scotch Post-it®. Geoff Nicholson, the driving force behind the Post-it® product, comments that rather than get bogged down in the planning process, innovations must be fast-tracked and decisions made whether to continue or move on early during the product development process.
Situations in which managers are likely to engage in domain planning include (1) when there is a recognized need for flexibility, (2) when people cannot agree on goals, (3) when an organization’s external environment is unstable and highly uncertain, and (4) when an organization is starting up or is in a transitional period. In addition, domain planning is likely to prevail at upper levels in an organization, where managers are responsible for dealing with the external environment and when task uncertainty is high. Goal planning (formulating goals compatible with the chosen domain) is likely to prevail in the technical core, where there is less uncertainty.
### Hybrid Planning
Occasionally, coupling of domain and goal planning occurs, creating a third approach, called hybrid planning. In this approach, managers begin with the more general domain planning and commit to moving in a particular direction. As time passes, learning occurs, uncertainty is reduced, preferences sharpen, and managers are able to make the transition to goal planning as they identify increasingly specific targets in the selected domain. Movement from domain planning to goal planning occurs as knowledge accumulates, preferences for a particular goal emerge, and action statements are created.
### Consequences of Goal, Domain, and Hybrid Planning
Setting goals not only affects performance directly, but also encourages managers to plan more extensively. That is, once goals are set, people are more likely to think systematically about how they should proceed to realize the goals. When people have vague goals, as in domain planning, they find it difficult to draw up detailed action plans and are therefore less likely to perform effectively. When studying the topic of motivation, you will learn about goal theory. Research suggests that goal planning results in higher levels of performance than does domain planning alone.
### Step 3: Premising
In this step of the planning process, managers establish the premises, or assumptions, on which they will build their action statements. The quality and success of any plan depends on the quality of its underlying assumptions. Throughout the planning process, assumptions about future events must be brought to the surface, monitored, and updated.
Managers collect information by scanning their organization’s internal and external environments. They use this information to make assumptions about the likelihood of future events. As Kristin considers her four-year pursuit of her biochemistry major, she anticipates that in addition to her savings and funds supplied by her parents, she will need a full-time summer job for two summers in order to cover the cost of her undergraduate education. Thus, she includes finding full-time summer employment between her senior year of high school and her freshman year and between her freshman and sophomore years of college as part of her plan. The other two summers she will devote to an internship and finding postgraduate employment—much to mom and dad’s delight! Effective planning skills can be used throughout your life. The plan you develop to pay for and complete your education is an especially important one.
### Step 4: Determining a Course of Action (Action Statements)
In this stage of the planning process, managers decide how to move from their current position toward their goal (or toward their domain). They develop an action statement that details what needs to be done, when, how, and by whom. The course of action determines how an organization will get from its current position to its desired future position. Choosing a course of action involves determining alternatives by drawing on research, experimentation, and experience; evaluating alternatives in light of how well each would help the organization reach its goals or approach its desired domain; and selecting a course of action after identifying and carefully considering the merits of each alternative.
### Step 5: Formulating Supportive Plans
The planning process seldom stops with the adoption of a general plan. Managers often need to develop one or more supportive or derivative plans to bolster and explain their basic plan. Suppose an organization decides to switch from a 5-day, 40-hour workweek (5/40) to a 4-day, 40-hour workweek (4/40) in an attempt to reduce employee turnover. This major plan requires the creation of a number of supportive plans. Managers might need to develop personnel policies dealing with payment of daily overtime. New administrative plans will be needed for scheduling meetings, handling phone calls, and dealing with customers and suppliers.
### Planning, Implementation, and Controlling
After managers have moved through the five steps of the planning process and have drawn up and implemented specific plans, they must monitor and maintain their plans. Through the controlling function (to be discussed in greater detail later in this chapter), managers observe ongoing human behavior and organizational activity, compare it to the outcome and action statements formulated during the planning process, and take corrective action if they observe unexpected and unwanted deviations. Thus, planning and controlling activities are closely interrelated (planning ➨ controlling ➨ planning . . .). Planning feeds controlling by establishing the standards against which behavior will be evaluated during the controlling process. Monitoring organizational behavior (the control activity) provides managers with input that helps them prepare for the upcoming planning period—it adds meaning to the awareness step of the planning process.
Influenced by total quality management (TQM) and the importance of achieving continuous improvement in the processes used, as well as the goods and services produced, organizations such as IBM-Rochester have linked their planning and controlling activities by adopting the Deming cycle (also known as the Shewhart cycle).
It has been noted on numerous occasions that many organizations that do plan fail to recognize the importance of continuous learning. Their plans are either placed on the shelf and collect dust or are created, implemented, and adhered to without a systematic review and modification process. Frequently, plans are implemented without first measuring where the organization currently stands so that future comparisons and evaluations of the plan’s effectiveness cannot be determined. The Deming cycle, shown in , helps managers assess the effects of planned action by integrating organizational learning into the planning process. The cycle consists of four key stages: (1) Plan—create the plan using the model discussed earlier. (2) Do—implement the plan. (3) Check—monitor the results of the planned course of action; organizational learning about the effectiveness of the plan occurs at this stage. (4) Act—act on what was learned, modify the plan, and return to the first stage in the cycle, and the cycle begins again as the organization strives for continuous learning and improvement.
1. Outline the planning and controlling processes.
There are five major stages in the planning process. First, an organization establishes its preplanning foundation, which reviews past events and describes the current situation. In the second step, the organization sets forth goals based on the preplanning foundation. In the third step, managers forecast what is likely to happen in the organization’s internal and external environments in order to develop alternative courses of action. Then, managers identify possible courses of action for meeting their objectives, evaluate each alternative, and select a course of action. Finally, planners develop the supportive plans necessary to accomplish the organization’s major plan of action. Once implemented, that plan is monitored and controlled so that it meets the goals established in the second step. |
# Organizational Planning and Controlling
## Types of Plans
1. Identify different types of plans and control systems employed by organizations.
From an activity perspective, organizations are relatively complex systems, as they are involved in numerous activities. Many of these activities require management’s attention from both a planning and controlling perspective. Managers therefore create different types of plans to guide operations and to monitor and control organizational activities. In this section, we introduce several commonly used plans. The major categories are hierarchical, frequency-of-use (repetitiveness), time-frame, organizational scope, and contingency. provides a closer look at many types of plans that fall in each of these categories.
### Hierarchical Plans
Organizations can be viewed as a three-layer cake, with its three levels of organizational needs. Each of the three levels—institutional, administrative, and technical core—is associated with a particular type of plan. As revealed in , the three types of hierarchical plans are strategic, administrative, and operating (technical core). The three hierarchical plans are interdependent, as they support the fulfillment of the three organizational needs. In the organization’s hierarchy, the technical core plans day-to-day operations.
### Strategic Plans
Strategic management is that part of the management process concerned with the overall integration of an organization’s internal divisions while simultaneously integrating the organization with its external environment. Strategic management formulates and implements tactics that try to match an organization as closely as possible to its task environment for the purpose of meeting its objectives.
Strategic plans address the organization’s institutional-level needs. Strategic plans outline a long-term vision for the organization. They specify the organization’s reason for being, its strategic objectives, and its operational strategies—the action statements that specify how the organization’s strategic goals are to be achieved.
Part of strategic planning involves creating the organization’s mission, a statement that specifies an organization’s reason for being and answers the question “What business(es) should we undertake?” The mission and the strategic plan are major guiding documents for activities that the organization pursues. Strategic plans have several defining characteristics: They are long-term and position an organization within its task environment; they are pervasive and cover many organizational activities; they integrate, guide, and control activities for the immediate and the long term; and they establish boundaries for managerial decision-making.
Operating plans provide direction and action statements for activities in the organization’s technical core. Administrative plans work to integrate institutional-level plans with the operating plans and tie together all of the plans created for the organization’s technical core.
### Frequency-of-Use Plans
Another category of plans is frequency-of-use plans. Some plans are used repeatedly; others are used for a single purpose. Standing plans, such as rules, policies, and procedures, are designed to cover issues that managers face repeatedly. For example, managers may be concerned about tardiness, a problem that may occur often in the entire work force. These managers might decide to develop a standing policy to be implemented automatically each time an employee is late for work. The procedure invoked under such a standing plan is called a standard operating procedure (SOP).
Single-use plans are developed for unique situations or problems and are usually replaced after one use. Managers generally use three types of single-use plans: programs, projects, and budgets. See for a brief description of standing and single-use plans.
### Time-Frame Plans
The organization’s need to address the future is captured by its time-frame plans. This need to address the future through planning is reflected in short-, medium-, and long-range plans. Given the uniqueness of industries and the different time orientations of societies—study Hofstede’s differentiation of cultures around the world in terms of their orientation toward the future—the times captured by short, medium, and long range vary tremendously across organizations of the world. Konosuke Matsushita’s 250-year plan, which he developed for the company that bears his name, is not exactly typical of the long-range plans of U.S. companies!
Short-, medium-, and long-range plans differ in more ways than the time they cover. Typically, the further a plan projects into the future, the more uncertainty planners encounter. As a consequence, long-range plans are usually less specific than shorter-range plans. Also, long-range plans are usually less formal, less detailed, and more flexible than short-range plans in order to accommodate such uncertainty. Long-range plans also tend to be more directional in nature.
### Organizational Scope Plans
Plans vary in scope. Some plans focus on an entire organization. For example, the president of the University of Minnesota advanced a plan to make the university one of the top five educational institutions in the United States. This strategic plan focuses on the entire institution. Other plans are narrower in scope and concentrate on a subset of organizational activities or operating units, such as the food services unit of the university. For further insight into organizational scope plans, see .
### Contingency Plans
Organizations often engage in contingency planning (also referred to as scenario or “what if” planning). You will recall that the planning process is based on certain premises about what is likely to happen in an organization’s environment. Contingency plans are created to deal with what might happen if these assumptions turn out to be wrong. Contingency planning is thus the development of alternative courses of action to be implemented if events disrupt a planned course of action. A contingency plan allows management to act immediately if an unplanned occurrence, such as a strike, boycott, natural disaster, or major economic shift, renders existing plans inoperable or inappropriate. For example, airlines develop contingency plans to deal with terrorism and air tragedies. Most contingency plans are never implemented, but when needed, they are of crucial importance.
1. Identify different types of plans and control systems employed by organizations.
Managers create many types of plans based on hierarchical level, frequency of use, time frame, and organizational scope. Contingency plans to be used in case of unexpected events or wrong assumptions are critical for effective management in highly turbulent environments. |
# Organizational Planning and Controlling
## Goals or Outcome Statements
1. Explain the individual and organizational effects associated with goal setting and planning.
Creating goals is an inherent part of effective managerial planning. There are two types of organizational goals that are interrelated—official and operational goals. Official goals are an organization’s general aims as expressed in public statements, in its annual report, and in its charter. One official goal of a university, for example, might be to be “the school of first choice.” Official goals are usually ambiguous and oriented toward achieving acceptance by an organization’s constituencies. Operational goals reflect management’s specific intentions. These are the concrete goals that organization members are to pursue. For example, an operational goal for a hospital might be to increase the number of patients treated by 5 percent or to reduce readmission.
The importance of goals is apparent from the purposes they serve. Successful goals (1) guide and direct the efforts of individuals and groups; (2) motivate individuals and groups, thereby affecting their efficiency and effectiveness; (3) influence the nature and content of the planning process; and (4) provide a standard by which to judge and control organizational activity. In short, goals define organizational purpose, motivate accomplishment, and provide a yardstick against which progress can be measured.
### Goal Formulation—Where Do Organizational Goals Come From?
There are two different views about how organizational goals are formulated. The first view focuses on an organization and its external environment. You will recall that there are many stakeholders (e.g., owners, employees, managers) who have a vested interest in the organization. Organizational goals emerge as managers try to maintain the delicate balance between their organization’s needs and those of its external environment. The second view concentrates on the set of dynamics in the organization’s internal environment. Internally, an organization is made up of many individuals, coalitions, and groups who continually interact to meet their own interests and needs. They bargain, trade, and negotiate, and through these political processes, organizational goals eventually emerge.
Neither approach to goal formulation can alone provide for long-term organizational success. Goals must fit an organization into its external environment while satisfying the needs of external constituencies. In addition, goals must enable an organization’s internal components to work in harmony. For example, the goals of its marketing department need to mesh with those of its production and finance departments. The challenge for managers is to balance these forces and preserve the organization.
### Multiple Goals and the Goal Hierarchy
Consistent with the two views of goal emergence, Peter Drucker offers the perspective that organizations must simultaneously pursue multiple goals. A well-known management scholar, consultant, and writer, Drucker believes that to achieve organizational success, managers must try to achieve multiple goals simultaneously—namely, market standing, innovation, productivity, profitability; physical and financial resources, manager performance and development, employee performance and attitude, and public responsibility. Reflecting his concerns, the Hewlett-Packard Corporation has established the seven corporate goals listed in . Sometimes units within organizations may pursue goals that actually conflict with the goals of other internal units. The innovation goal of a research and development department, for example, might conflict with the production department’s goal of efficiency. Managers must strive to integrate the network of goals and resolve internal conflicts when they arise.
Broad organizational goals, such as productivity, innovation, and profitability, are likely to be broken into subgoals at various organizational levels. The complexities posed by many interrelated systems of goals and major plans can be illustrated by a goal hierarchy. Thus, an organization sets organizational-level, divisional-level, departmental-level, and job-related goals. In the process, managers must make sure that lower-level goals combine to achieve higher-level goals.
1. Explain the individual and organizational effects associated with goal setting and planning.
Goal development is an important part of the planning process. Goals developed for employees, for departments, and for entire organizations greatly enhance organizational effectiveness. Evidence reveals that performance is higher when organizations, as well as individuals, operate under difficult (but attainable), specific goals. |
# Organizational Planning and Controlling
## Formal Organizational Planning in Practice
1. Understand how planning occurs in today’s organizations.
Studies indicate that, in the 1950s, approximately 8.3 percent of all major U.S. firms (1 out of every 12) employed a full-time long-range planner. By the late 1960s, 83 percent of major U.S. firms used long-range planning. Today it is estimated that nearly all U.S. corporations with sales over $100 million prepare formal long-range plans. Most formal plans extend five years into the future, and about 20 percent extend at least ten years.
### Encouraging Planning
In spite of the advantages to be gained by planning, many managers resist it. Some feel that there is not enough time to plan or that it is too complicated and costs too much. Others worry about the possible consequences of failing to reach the goals they set. Instead of preplanning, sometimes referred to as blueprint planning (that is, formulating outcome and action statements before moving forward), many managers simply fail to plan or at best engage in in-process planning (they read events and think about the next step just before acting). In-process planning works extremely well when individuals have a sense of what it is that they want to achieve and can improvise as they move forward in a sea of uncertainty and turbulence. This is much like skilled hockey players relying on their instincts, reading the defense, and improvising as they move up the ice and toward the opponent’s net. This process often works better than attempting to implement a detailed preplan, as often characterizes plays in football.
In situations where we want to encourage preplanning, certain techniques facilitate the process:
1. Develop an organizational climate that encourages planning.
2. Top managers support lower-level managers’ planning activities—for example, by providing such resources as personnel, computers, and funds—and serve as role models through their own planning activities.
3. Train people in planning.
4. Create a reward system that encourages and supports planning activity and carefully avoids punishment for failure to achieve newly set goals.
5. Use plans once they are created.
In order for managers to invest the time and energy needed to overcome resistance to planning, they must be convinced that planning does in fact pay off.
### Does Planning Really Pay Off?
Managers of organizations in complex and unstable environments may find it difficult to develop meaningful plans, yet it is precisely conditions of environmental complexity and instability that produce the greatest need for a good set of organizational plans. Yet the question remains, does planning really pay off?
We know from our earlier discussion that setting goals is an important part of the planning process. Today, much is known about what characterizes effective individual goals. (We discuss this issue in greater detail later in this chapter.) Although group and organizational goals have been studied less, it is probably safe to assume that most of our knowledge about individual goals also applies to group and organizational goals. The research suggests that effective organizational goals should (1) be difficult but reachable with effort, (2) be specific and clearly identify what is desired, (3) be accepted by and have the commitment of those who will help achieve them, (4) be developed by employees if such participation will improve the quality of the goals and their acceptance, and (5) be monitored for progress regularly.
While the evidence is not abundant, studies suggest that firms that engage in planning are more financially successful than those that do not. For example, one study reports that the median return on investment for a five-year period is 17.1 percent for organizations engaged in strategic planning, versus 5.9 percent for those that do not. Similarly, of 70 large commercial banks, those that had strategic planning systems outperformed those that did not.
Although planning clearly has observable benefits, it can be expensive. The financial commitment can be large for organizations with a formal planning staff. Even so, research suggests that planning is warranted.
### The Location of the Planning Activity
Classical management thinking advocates a separation of “planning” and “doing.” According to this school of thought, managers plan for technical core employees and formulate most of the plans for the upper levels of the organization, with little participation from lower-level managers and workers. In contrast, behavioral management theorists suggest involving organization members in drawing up plans that affect them. Implementation of a management-by-objectives program (to be discussed later in this chapter), for example, is one means by which this participative planning can be realized. Researchers at the Tavistock Institute in England promote the idea of self-managed work groups as a means of expanding the level of employee involvement. According to their socio-technical model, work groups assume a major role in planning (as well as in organizing, directing, and controlling) the work assigned to them. Many organizations—for example, the John Lewis Partnership, Volvo, and Motorola—have had successful experiences with employee involvement in planning and controlling activities.
### Planning Specialists
To keep pace with organizational complexity, technological sophistication, and environmental uncertainty, many organizations use planning specialists. Professional planners develop organizational plans and help managers plan. Boeing and Ford are among the many organizations with professional planning staffs. Planning specialists at United Airlines developed United’s crisis management plan.
Organizations have planning specialists and planning departments in place for a variety of reasons. These specialized roles have emerged because planning is time-consuming and complex and requires more attention than line managers can provide. In rapidly changing environments, planning becomes even more complex and often necessitates the development of contingency plans, once again demanding time for research and special planning skills. At times, effective planning requires an objectivity that managers and employees with vested interests in a particular set of organizational activities cannot provide.
A planning staff’s goals are varied. Their primary responsibility is to serve as planning advisors to top management and to assist lower-level line managers in developing plans for achieving their many and varied organizational objectives. Frequently, they coordinate the complex array of plans created for the various levels within an organization. Finally, a planning staff provides encouragement, support, and skill for developing formal organizational plans.
1. Understand how planning occurs in today’s organizations.
Plans reduce uncertainty and risk, focus attention on goals, and enhance understanding of the external environment. Although most major organizations engage in formal planning, many managers fail to plan appropriately. Lack of time, uncertainty about the future, and fear of failure are among the reasons given by managers for their failure to plan. |
# Organizational Planning and Controlling
## Employees' Responses to Planning
1. Discuss the impact that control has on organizational members.
Managers, of course, want their employees to work hard. However, effort alone is not enough; it must be directed toward the appropriate target and executed in a proper manner. The question we explore here is, do planning, goal setting, and the development of action statements have a favorable impact on employee motivation, performance, and job satisfaction?
We turn to goal theory for our answer. Research provides us with a clear and unequivocal picture of the effects of setting goals for organizational members. Goal theory specifies that certain types of goals motivate employee behavior and thereby contribute to the level of employee performance. Goal theory, while somewhat narrow in scope, is the most completely supported theory of motivation. You have learned or will learn about the implications of goal setting as a fundamental part of the planning process and as a standard for the exercise of control when studying motivation. For goals to be effective, they must be difficult, specific, and accepted by the employee, and they must be met with feedback from management. Manufacturers often use production goals to motivate employees.
### Characteristics of Goals That Motivate Performance
Goal theory (and the research related to it) highlights several important goal attributes—goal difficulty, goal specificity, goal acceptance and commitment, and goal feedback. As shows, workers who have a goal, even if it is quite general, usually perform better than those with no goals. Yet certain types of goals are more effective than others. Two primary characteristics of goals that enhance their motivating potential are goal specificity and goal difficulty. With regard to goal specificity, a goal that states “improve your performance” or “do your best” is generally not very effective because it is too general. Weyerhaeuser, for example, observed that its truck drivers hauling logs significantly increased their performance level when they were instructed to load their trucks to 94 percent of legal weight capacity, as opposed to simply “doing their best.” The drivers found the specific goal to be motivating, and they often competed with one another to achieve the prescribed goal. In the first nine months following the introduction of the 94 percent target, Weyerhaeuser estimated its savings to be approximately $250,000.
The second component of an effective goal is goal difficulty. People with difficult goals perform better than those with easy goals (note the third and fourth bars in ). If goals are perceived as too difficult or impossible, however, they lose their motivating effectiveness. Ideally, goals will be both specific and difficult. Thus, setting specific and challenging goals contributes more to planning effectiveness and organizational performance than does working under “no-goal” or “do your best” goal conditions.
Even a goal that is both difficult and specific, however, is not going to be effective unless it is accepted by the person who is expected to achieve it. Goal acceptance is the degree to which people accept a goal as their own (“I agree that this report must be finished by 5 p.m.”). Goal commitment is more inclusive, referring to our level of attachment to or determination to reach a goal (“I want to get that report done on time”). Goals sometimes fail to motivate people when managers assign them without making sure that workers have accepted or committed to the goals. summarizes the conditions necessary to maximize goal-directed effort (motivation 5 direction 1 intensity), a major contributor to subsequent performance, while summarizes the three sets of factors that facilitate goal commitment.
Goal feedback is the last important goal attribute. Goal feedback provides us with knowledge about the results of our efforts. This information can come from a variety of sources, such as supervisors, peers, subordinates, customers, inanimate performance monitoring systems, and self-assessment. Regardless of the source, the right kind of feedback serves two important functions: directional and effort. Directionally, good feedback tells employees whether they are on the right path and on target or suggests the need for redirection. In addition, it should provide information that suggests the adequacy or inadequacy of the employee’s level of effort. Thus, feedback is of critical importance!
### The Negative Side of Goals
There is, however, a negative side to goal setting. Total quality management (TQM) pioneer W. Edwards Deming fears that goals tend to narrow the performer’s vision and invite people to slack off once the goal is achieved. TQM is also oriented more toward process (means) than toward success (goals, outcomes). Organizational learning and continuous improvement, a central component of TQM, is oriented toward continually finding problems in the production process that when eliminated will result in performance increases. Performance goals, on the other hand, generally focus the performer’s attention on successfully achieving a specified level of accomplishment at some future point.
Evidence also reveals a negative side to an employee’s commitment to difficult goals. When organizational members are strongly committed to achieving difficult goals, their involvement in acts of good organizational citizenship is likely to decline. This negative relationship is unfortunate because organizations operating in highly turbulent, competitive, and uncertain environments are extremely fragile social systems. They need the commitment and the sense of ownership that propel organizational members to spontaneously engage in behaviors that are not specified in their job descriptions but that are important to the organization’s success and well-being.
There are several other negative effects associated with goals: The methods and means created to accomplish organizational goals may themselves become the goal (means-ends inversion). Organizational goals may be in conflict with personal or societal goals. Goals that are too specific may inhibit creativity and innovation. Ambiguous goals may fail to provide adequate direction, and goals and reward systems are often incompatible. For example, universities commonly encourage faculty members to be better teachers, but their reward systems primarily encourage good research.
### Goal Setting and Employee Job Satisfaction
The statement “goal setting enhances job satisfaction” is not exactly accurate. The relationship between goal setting and planning and job satisfaction is somewhat more complex. Goal setting, and therefore planning, impacts job satisfaction by working through the employee’s level of performance and level of aspiration. Job satisfaction (or dissatisfaction) is most likely determined by the level of performance and not by the goals that have been set.
An employee’s affective reaction to performance is determined not by the performance level itself but by the level of performance in relation to his aspiration level. Job satisfaction, therefore, stems from the employee’s evaluation of his actual performance in comparison to his aspiration level (or performance goal). In cases (see ) where performance reaches or passes the level aspired to, a positive emotion (job satisfaction) is likely to be produced. Performance that fails to reach aspirations causes a negative emotion (job dissatisfaction). In addition, if performance is valued by the employee because of the extrinsic rewards tied to it, high performance will create job satisfaction only if achieving the performance goal leads to the receipt of these valued extrinsic rewards. Thus, goal setting is indirectly and contingently related to job satisfaction. If goal setting contributes to employees reaching their performance aspirations and/or the outcomes that are associated with that performance, job satisfaction is a likely by-product.
### Managing through Goal Setting
What can managers do to motivate employees through goal setting? First, it is important to encourage goal acceptance and commitment. This can be accomplished by working with organizational members to set difficult, specific, and reasonable goals and to make certain that members perceive them as reasonable. If necessary, provide training and other support needed to make the goals attainable. Offer feedback that lets people know when they are approaching the goal. Avoid using threats. Feedback that criticizes without providing insight into ways to contribute to performance improvements is both frustrating and unlikely to be effective. One of Deming’s concerns about goal setting is that it creates fear in employees—fear of the failure to reach the goal. He sees fear as a serious disease that contributes to poor organizational performance. Instead, a positive, success-oriented approach is almost always more effective. If and when negative feedback is needed to correct errors, a manager’s criticisms of an employee should be credible, constructive, and objective. In addition, it is important to recall that feedback that simply criticizes, without providing insight into how to make the needed corrections, will produce few if any positive results. Finally, keep in mind that, whereas goal acceptance occurs before people work on a task and can be encouraged through promises of reward, goal commitment can be nurtured throughout the performance period as workers receive rewards for progress.
Encourage the development of work-group norms that contribute to goal commitment. Use legitimate authority to encourage the setting of specific and difficult goals. Stimulate workers to develop a sense of ownership in goals, thus producing goal acceptance and commitment. There are those who believe goal acceptance and commitment can be nurtured when workers come together as members of a family working toward the common goal of proving their worth.
### Controlling as an Organizational Activity
A few years ago, the Duluth Police Department found itself struggling with employee morale. The summer had passed, and the department discovered that it had allowed too much vacation time given the volume of summer activity facing the department. As it developed its staffing plans for the upcoming summer, it would have to grant fewer requests for summer vacations. Management soon learned that there would actually be more requests for summer vacation than the previous summer. A conflict between management and the police union appeared inevitable.
The department turned to creative problem solving. In the process, it came up with the idea of moving from a seven-day week to an eight-day week. Under the old schedule, a police officer worked a traditional five days a week, eight hours a day, 40 hours, with two days off each week. Under the new schedule, officers would work 12 hours a day and 48 hours a week. In addition, officers would work four days and then have four days off. This would in effect give officers half the upcoming summer off without taking a single day of vacation. The plan was endorsed by both the police union and the city council. Following the endorsement of the new staffing plan, the department developed a plan for monitoring the effectiveness of this new schedule and collected baseline data so that subsequent assessment of the schedule could be compared to previous work schedules.
In January, the new compressed work schedule was implemented. This was accompanied by a control system that would monitor the effectiveness of the new schedule. The department was particularly concerned about the impact of the schedule on stress levels, job satisfaction, and the overall effectiveness of its policing function. That is, would the 12-hour workday negatively affect performance? Periodically during the next couple of years, the department monitored the consequences of its new work schedule. There were several positive results. The level of stress appeared to decline along with the increases in hours worked and leisure time satisfaction, without any negative performance effects. Now, several years later, there is virtually no desire to return to the old, more traditional work schedule.
In effective organizations, the activities of planning and controlling are intricately interwoven. For each plan deemed important to the functioning of the organization, a system to monitor the plan’s effectiveness must be designed and implemented. In the remainder of this chapter, we explore the nature of control, the control process, and its effects on the organization and its members.
### Controlling and the Control Process
Controlling is a managing activity. Controlling is defined as the process of monitoring and evaluating organizational effectiveness and initiating the actions needed to maintain or improve effectiveness. Thus, managers who engage in the controlling activity watch, evaluate, and when needed, suggest corrective action.
Like the managerial functions of planning, organizing, and directing, controlling is a complex activity that is performed at many organizational levels. Upper-level managers, for example, monitor their organization’s overall strategic plans, which can be implemented only if middle-level managers control the organization’s divisional and departmental plans, which, in turn, rely on lower-level managers’ control of groups and individual employees (see our earlier discussion of the goal hierarchy).
### The Need for Control
Although there is a continual and universal need for control in organizations, the importance, amount, and type of control vary across organizational situations. Probably the most important influence on the nature of an organization’s control systems is the amount of environmental change and complexity it faces.
Organizations that operate with relatively stable external environments usually need to change very little, so managers eventually are able to control their organizations by using a set of routine procedures. With greater levels of environmental change and the accompanying uncertainty, however, controlling requires continual attention from managers. Routines and rigid control systems are simply not adequate for such conditions.
Environmental complexity also affects the nature of control systems. Simple environments contain a limited number of highly similar components that are relatively easy to control through common sets of rules and procedures. The same bureaucratic control system, for example, can be used at most branch offices of a large bank. As complexity increases through organizational growth, product diversification, and so on, managers’ needs for up-to-date information and coordination among organizational activities intensify. The complexity that calls for increased control, however, also requires open, organic systems that can respond quickly and effectively to complex environments. In such complicated situations, organizations often specify the development of flexible systems as a means goal: “To allow us to manage the complexities of our organization, we must remain flexible and open.” Other control activities shift to ends goals, such as “We want to increase market share 10 percent in each of our divisions.” Flexibility allows substantial choice as to how ends goals will be met: “Each division may decide how to achieve its 10 percent increase in market share.” shows the level of control organizations need under different environmental conditions.
### A Control Model
In essence, control affects every part of an organization. Among some of the major targets of the organization’s control efforts are the resources it receives, the output it generates, its environmental relationships, its organizational processes, and all managerial activities. Especially important targets of control include the functional areas of operations, accounting, marketing, finance, and human resources.
Traditional control models (see ) suggest that controlling is a four-step process.
1. Establish standards. Standards are the ends and means goals established during the planning process; thus, planning and controlling are intricately interwoven. Planning provides the basis for the control process by providing the standards of performance against which managers compare organizational activities. Subsequently, the information generated as a part of the control process (see the subsequent steps in the control model) provides important input into the next planning cycle.
2. Monitor ongoing organizational behavior and results. After determining what should be measured, by whom, when, and how, an assessment of what has actually taken place is made.
3. Compare actual behavior and results against standards. Ongoing behavior is compared to standards. This assessment involves comparing actual organizational accomplishments relative to planned ends (what an organization is trying to accomplish) and means (how an organization intended for actions to unfold). The outcome of this comparison provides managers with the information they will evaluate in the final step.
4. Evaluate and take action. Using their comparative information, managers form conclusions about the relationships found between expectations and reality and then decide whether to maintain the status quo, change the standard, or take corrective action.
### Variations in Control Systems
Although all good control systems follow the process described above, this doesn’t mean that all control systems are identical. Control systems differ in terms of the degree to which they are self-managing, as opposed to externally managed, and by the point in the process at which control is exercised.
### Cybernetic and Noncybernetic Systems
Control systems differ in the amount of outside attention required for them to operate effectively. Systems using cybernetic control are based on self-regulating procedures that automatically detect and correct deviations from planned activities and effectiveness levels. Few organizational control systems are totally cybernetic, but some come close. The control system for a coal-fired electrical generating station at Detroit Edison, for example, uses computers to monitor the flow of pulverized coal into the burning chamber. The computers speed up or reduce the flow as necessary to maintain adequate fuel supplies.
Merely automating a work system does not necessarily mean that the control system is cybernetic. The drone submarine sent to explore and photograph the sunken Titanic was fully automated, but humans on the surface monitored the effectiveness of the sub’s operations and its adherence to the planned mission. To be classified as a cybernetic system, a work system must have built-in automatic control capabilities, although the built-in control need not be machine-based. A group of workers who control their own activities without outside assistance constitute a cybernetic system.
Control systems that are operated completely independently from the work system itself involve noncybernetic control. They rely on external monitoring systems in much the same way that a manufacturing company uses a separate quality assurance department to monitor and enforce quality standards rather than allowing production crews to perform this activity. Cybernetic control systems automatically detect and correct deviations, but automating a control system does not mean it is cybernetic. This technician is adjusting the mixture in the vat, so this system is not self-regulating and thus is not cybernetic.
### Time Perspectives
Organizations can introduce the control activity at three stages in the work process: prior to, during, or after the performance of a work activity. In practice, most managers use a hybrid control system that incorporates control at each of these intervals so that managers can prepare for a job, guide its progress, and assess its results.
Managers use precontrols (or preaction controls) to prevent deviation from a desired plan of action before work actually begins. For example, Butch Ledworowski, owner of Lil’ America Building Contractors, inspects all construction materials to see that they meet industry standards. Managers can use two types of concurrent controls (steering and screening control) to prevent deviation from the planned course of action while work is in progress. Steering controls are reactive concurrent controls; they occur after work has begun but before it is completed. At Lil’ America, for instance, Butch visits each construction site and watches his carpenters, offering advice and instruction as they work. Screening controls (also referred to as yes/no, go/no-go controls) are preventive concurrent controls. As activity at a critical stage is completed, managers use screening controls to assess work performed to that point and to judge whether progress is adequate. If it is, a yes decision is made to proceed to the next stage. At Lil’ America, for example, Butch always inspects carpentry work after walls have been framed. Unless he approves the work, electricians cannot begin wiring the structure.
Managers use postaction controls after the product or service is complete to examine the output. After each remodeling job, Butch assesses the work to determine whether it meets specifications, was completed on time, and came in at or under budget. Postaction controls play an important role in future planning, but their primary function is to provide feedback by describing the degree to which previous activities have succeeded.
### Characteristics of Effective Control Systems
Successful control systems have certain common characteristics. First, a good control system follows the prescriptions in the control model (see ) and adequately addresses each organizational target. Next, to the extent possible, an effective control system takes a hybrid approach so that precontrol, concurrent, and postaction control systems can be used to monitor and correct activities at all points in an organization’s operations. Other characteristics of a good control system include its treatment of information, its appropriateness, and its practicality.
The control process itself and, certainly, all effective control systems are based on information. Without good information, managers cannot assess whether ends and means goals are met. They cannot determine the relationship between them or provide feedback to planners. To be effective, information must be accurate, objective, timely, and distributed to organization members who need it. High-involvement organizations work to make sure that virtually all organizational information is accessible by any employee who needs it in order to make quality decisions. Oticon, a Danish manufacturer of hearing aids, for example, scans all company communications and places them in its information system that all employees can access.
Another characteristic of a good control system is its focus on issues of importance to the organization. Managers who develop control procedures for virtually all work activities and outcomes waste resources and, as will be discussed later in this chapter, risk creating a control system that produces negative feelings and reactions.
A final characteristic of a good control system is its practicality. Something that works well for another organization or looks wonderful in print still has to fit your organization to work well there. Some practical considerations to look for in a control system include feasibility, flexibility, the likelihood that organization members will accept it, and the ease with which the system can be integrated with planning activities.
### The Impact of Control on Organizational Members
Thus far, you have been learning about the importance of the controlling function. Consider now what the controlling function does for—or to—the organization’s members. If designed well, control systems have many positive effects both for organizations and for the people who work in them (see ). Unfortunately, sometimes control systems can produce a number of negative effects.
### Positive Effects
Organizational control systems can provide many positive effects for organization members in terms of motivation, performance, and satisfaction. This occurs by providing adequate structure, appropriate feedback, and effective goal-setting programs.
When workers want clarification of what they are expected to do, a leader can improve both their performance and satisfaction by providing structure. The guidance provided by both precontrol and concurrent control systems can likewise be received favorably. Another potential and related benefit for employees with an uncertainty avoidance or low tolerance for ambiguity personality is that the structure of a good control system reduces the uncertainty of a work situation.
A good control system also provides constructive feedback. Most employees react quite favorably to the timely provision of accurate feedback about their effectiveness. Feedback helps workers correct ineffective behaviors. Perhaps more importantly, feedback can be very rewarding. People who have a need to succeed (individuals with a high need for achievement) are gratified when feedback tells them that they are, in fact, succeeding. Feedback can improve job performance if workers use it to adjust their goals, approach, or effort levels appropriately. Both concurrent and postaction controls provide employees with feedback about the appropriateness of their behavior and the degree to which their work is producing successful results.
You have already seen that goal setting can be an important contributor to effective management. A good control system is very useful for identifying appropriate goals. Consider the control system used by the sales company where Maria Castro works. It specifies an expected sales approach (means goal) that helps her work toward a specific, difficult sales goal (ends goal). Precontrols help her understand how to achieve the desired sales level by providing such means goals as specific sales calls to make and promotional specials to offer. Concurrent controls and postcontrols provide feedback that helps Maria monitor her progress. The combined effects of goal setting and feedback about goal progress are particularly powerful.
### Negative Effects
Unfortunately, control systems don’t always function well. Excessive controls are a waste of money and energy. Donald Pemble, for example, needs a larger travel budget because he must personally inspect bridges under his new control system. His inspectors spend the time they could have used to inspect bridges in logging entries, painting numbers, and griping about the unfairness of the situation. Not only do excessive controls waste money because they fail to enhance effectiveness, but they can also create additional problems. For example, Shannon and her coworkers have changed from good corporate citizens who kept accurate records and conducted comprehensive inspections into harried workers who falsify log entries. Worse, unsuspecting motorists travel over what might be unsafe bridges.
The vast amount of paperwork and documentation called for by an excessive control system can also cause frustration and helplessness. The red tape created by many universities’ control systems, for example, wastes students’ time. Standing in lines for hours, they wait to pay dorm fees, purchase meal tickets, rent parking spaces, pay tuition, and register for classes. Their frustration and dissatisfaction are mirrored by many university employees who question the competence, the reasonableness, and perhaps even the intelligence of supervisors who insist on maintaining excessive control.
Another dysfunctional result of poor control systems can be seen in their effect on goal-setting programs. Whereas a good control system can help design and monitor valuable goal-setting programs, a poor control system can accomplish quite the opposite. A control system focused on unreasonable ends and means goals can motivate workers to establish inappropriate individual goals. For instance, the ends goal Donald Pemble established of having all bridges inspected within two years was unreachable, and his monthly inspection quotas (means goals) were unobtainable. Donald’s insistence on maintaining these inappropriate goals was evident in his reactions when the inspectors failed to meet them. Consequently, Shannon and her coworkers focused on preserving their jobs as a primary goal, rather than on conducting quality inspections.
In addition to encouraging the formation of inappropriate goals, poor control systems emphasize and reward behaviors that, although not necessarily inappropriate, may hinder more productive behavior. Managers who concentrate on workers’ attendance, for example, may not promote such desirable behaviors as creativity, cooperation, and team building. Although there is nothing wrong with encouraging attendance, a control system that fosters attendance (by punishing tardiness) because it is easier to measure than creativity encourages rigid, uncreative behavior (on the part of employees who are almost always at work). An advertising agency that controls attendance but not creativity, for example, would soon be in serious trouble.
Even when control systems help identify appropriate goals and encourage appropriate behavior, rigid adherence to narrow goals can create problems. A large number of specific, concrete goals, for example, can inhibit creativity. The vast amount of time organization members must spend tending to concrete goals leaves them little time or energy to create. It is not only creativity that suffers, however. Every minute used taking attendance in a classroom is one less minute available for teaching. Every hour a police officer spends completing paperwork is one less hour available for public service. Managers should use only the goals they need, no more.
### The Need for Personal Control
Organizations clearly have a need to control their members and operations, but individuals also have a need for personal control, a need to believe that they have the “ability to effect a change, in a desired direction, on the environment.” Sometimes organizations, through their structures and management processes, make people feel they have too little control. For example, managers can execute the control function by designing and demanding strict adherence to organizational rules and standard operating procedures. Colleges and universities, for example, tell students which classes they are allowed to take and when, what grades they have to maintain, how to behave outside the classroom, and so on. Companies tell employees when to come to work, how many hours to work, what to wear, when to take breaks, how to perform their jobs, and many other things. The challenge facing managers is to strike a balance between the amount of control their organization needs and the amount of personal control needed by its members. Studies suggests that, when this balance is reached, both the satisfaction and performance of organization members can be enhanced. In addition, evidence reveals that a number of other organizationally undesirable consequences can result from low or less than desired levels of personal control, such as withdrawal and health-related effects (stress, frustration, and depression).
Finding the optimal balance between organizational and personal control is not an easy task, however, because most employees desire more personal control than their organizations allow. People will strive to gain greater control “in spite of (and frequently because of) the barriers and constraints the organization places on the attainment of personal control.” Repeated failures to gain personal control may cause workers to develop what has been called learned helplessness. People who learn that they are helpless to influence their work environment are likely to be the source of low productivity, low quality, high absenteeism, dissatisfaction, and turnover. They tend to react with depression, anxiety, stress, frustration, hostility, anger, and alienation. Furthermore, once helplessness has been learned, people often continue to behave helplessly, even if the environment changes to permit them greater control. Managers must thus prevent employees from developing learned helplessness because reversing it is very difficult. They should allow workers to control the aspects of their work lives that they can adequately control and use only the necessary amount of organizational control.
### In Search of Balance
At this point, it might seem that managers should just accede to workers’ persistent demands for greater control. Research shows, however, that indiscriminately giving employees larger amounts of control actually causes performance to suffer if such control exceeds their capacity to use it.
If a control system that is too excessive does not work, and if giving workers all of the personal control they desire is not effective, what do managers do to achieve the proper balance? First, people need to possess personal control; therefore, give them the amount of control they are able to handle. Second, make certain that workers given control believe they can use it effectively. Help them translate their effort into successful performance. Third, recognize that organizational control systems influence the personal control perceptions of organizational members. These, in turn, change behavior and attitudes.
By interviewing and/or surveying employees, managers can learn more about employees’ needs for control. Through organizational scans, managers can determine the amount and location of control already existing in the organization, as well as the areas needing control. The objective then becomes one of achieving the best possible match between employees and their work environment.
1. Discuss the impact that control has on organizational members.
The primary purposes of the controlling function are to monitor the extent to which an organization’s plans are being followed and their effectiveness and to identify when and where it is necessary to take corrective action. To accomplish these ambitious tasks, managers construct control systems that touch most aspects of an organization’s functional areas, its relationship with the external and internal environments, and its relationships across different hierarchical levels.
The control process consists of four steps. In Steps 1 and 2, managers create standards and monitor ongoing organizational behavior. In Step 3, they examine the degree to which ongoing activity is consistent with their goals and means objectives and the relationship between the two. In Step 4, managers develop prescriptions to correct problems, to maintain strengths, and to provide feedback to an organization’s planners.
Whereas all control systems have the same general purposes, they differ in their specifics. Some are self-managing cybernetic systems; noncybernetic systems require regular external supervision to be effective. Other variations in control systems include the point at which control activities are applied: before the work has begun (precontrols), while work is in progress (concurrent controls), and after work has been completed (postaction controls). A hybrid control system engages a variety of control activities at many points in time.
Although there are variations in control systems, all good systems have characteristics that enable them to work well in a given organization. Managers evaluating a control system might thus gauge its adequacy in providing accurate, timely, objective information to appropriate people in the organization. They also should examine whether the system focuses on the most critical aspects of their organization’s conditions in a feasible, flexible manner that will be accepted by organizational members. Because of the importance of the information it provides, a good control system should also be integrated with planning activities.
Any control system can produce both positive and negative effects. If it is well designed, a control system provides needed structure and feedback and facilitates the development and execution of effective goal-setting programs. The result can be a satisfied, motivated, and productive workforce. Inappropriate control systems, however, can cause frustration, dissatisfaction, and poor performance. Being aware of a control system’s potential effects on organization members helps managers capitalize on its positive aspects, reduce the impact of negative effects, and promote workers’ acceptance of the system.
The effort to maintain control is not restricted to managers. All employees have a need for personal control, a need that sometimes conflicts with their organization’s need to maintain control. To achieve effectiveness, managers must balance the control needs of both the organization and its members. |
# Organizational Planning and Controlling
## Management by Objectives: A Planning and Control Technique
1. Describe management by objectives as a philosophy and as a management tool/technique; describe its effects.
When people are personally committed to their organization’s plans, those plans are more likely to be accomplished. This truism is the philosophy underlying management by objectives.
Management by objectives (MBO) is a philosophy of management, a planning and controlling technique, and an employee-involvement program. As a management philosophy, MBO stems from the human resource model and Theory Y’s assumption that employees are capable of self-direction and self- control. MBO also is anchored in Maslow’s need theory. The reasoning is that employee involvement in the planning and control processes provides opportunities for the employee to immerse the self in work-related activities, to experience work as more meaningful, and to satisfy higher-order needs (such as self-esteem), which leads to increased motivation and job performance (see ). It is hypothesized that, through involvement, employee commitment to a planned course of action will be enhanced and job satisfaction will be increased.
Although there are many variations in the practice of MBO, it is basically a process by which an organization’s goals, plans, and control systems are defined through collaboration between managers and their employees. Together they identify common goals, define the results expected from each individual, and use these measurements to guide the operation of their unit and to assess individual contributions. In this process, the knowledge and skills of many organizational members are used. Rather than managers telling workers “These are your goals”—the approach of classical management philosophy—managers ask workers to join them in deciding what their goals should be.
After an acceptable set of goals has been established for each employee through a give-and-take, collaborative process, employees play a major role in developing an action plan for achieving these goals. In the final stage in the MBO process, employees develop control processes, monitor their own performance, and recommend corrections if unplanned deviations occur. At this stage, the entire process begins again. depicts the major stages of the MBO process.
### The Theory of MBO
MBO has the potential to enhance organizational effectiveness. The following four major components of the MBO process are believed to contribute to its effectiveness: (1) setting specific goals; (2) setting realistic and acceptable goals; (3) joint participation in goal setting, planning, and controlling; and (4) feedback. First, as we saw earlier, employees working with goals outperform employees working without goals. Second, it is assumed that participation contributes to the setting of realistic goals for which there is likely to be goal acceptance and commitment. Setting realistic and acceptable goals is an important precondition for successful outcomes, especially if the goals are difficult and challenging in nature. Finally, feedback plays an important role. It is only through feedback that employees learn whether they should sustain or redirect their efforts in order to reach their goal, and it is only through feedback that they learn whether or not they are investing sufficient effort.
Thus, from a theoretical perspective, there are several reasons why MBO should produce a positive impact on employee performance, motivation, commitment, and job satisfaction. In the next section, we briefly look at what the research tells us about the effectiveness of MBO programs.
### The Evidence
In both the public and private sectors, MBO is a widely employed management tool. A recent review of the research on MBO provides us with a clear and consistent view of the effects of these programs. In the 70 cases studied by Robert Rodgers and John Hunter, 68 showed increased productivity gains, and only 2 showed losses. In addition, the increases in performance were significant. Rodgers and Hunter report that the mean increase exceeded 40 percent.
While the results are generally positive in nature, differences in performance effects appear to be associated with the level of top management commitment. In those cases where top management is emotionally, intellectually (that is, top management espouses the value and importance of MBO), and behaviorally (top management actually uses MBO themselves) committed, the performance effects tend to be the strongest. The weakest MBO effects appear when top management does very little to “talk the value/importance of MBO” and they don’t use the system themselves, even as they implement it for others. This evidence tells us that “the processes” used to implement MBO may render a potentially effective program ineffective. Thus, not only should managers pay attention to the strategies used to facilitate planning and controlling (like MBO), they should also be concerned with how they go about implementing the plans. MBO requires top management commitment, and it should be initiated from the top down.
Research shows that an MBO program can play a meaningful role in achieving commitment to a course of action and improving performance. In fact, research clearly documents instances where MBO programs have increased organizational effectiveness. Still, there have been failures. After reviewing 185 studies of MBO programs, one researcher concluded that they are effective under some circumstances but not all. For example, MBO tends to be more effective in the short term (less than two years), in the private sector, and in organizations removed from direct contact with customers. These factors also affect the success of an MBO program:
1. The intensity of upper-level managers’ commitment: Half-hearted commitment to an MBO system is associated with a higher failure rate.
2. The time element: Is there enough time for employees to learn how to participate in an MBO process, that is, to learn how to set meaningful goals, develop good action statements, and develop effective monitoring systems? Is there enough time for employees to learn how to assume responsibility in a new context? Is there enough time for employees and managers to collaborate in a joint planning and controlling process?
3. The legitimacy of the system: Is it integrated into an overall philosophy of management? Or does it seem like a gimmick to seduce employees into being more productive?
4. The integration of employees’ goals: Are goals for each employee integrated well enough into the goals of their larger work unit?
To be truly effective over the long haul, MBO programs probably need to be coupled with some type of gainsharing program (that is, programs whereby organizations share some of the financial gains accrued from the ideas, productivity improvements, and cost savings that stem from employee participation). Based on his extensive observation of involvement-oriented organizations, Edward E. Lawler III notes that information, knowledge, power, and rewards are four key components of an effective and sustained high involvement. Typically, MBO systems don’t provide mechanisms through which employees share in the economic gains that may accrue to the organization as a result of their expanded role and responsibility. In light of the conditions that influence the effectiveness of MBO programs, management is challenged to provide an appropriate context for the design and maintenance of an effective MBO system.
1. Describe management by objectives as a philosophy and as a management tool/technique; describe its effects.
Management by objectives (MBO), with its emphasis on goal setting, participation, and feedback, frequently contributes to increased employee goal commitment, motivation, and performance. If performance matches the employee’s aspirations, job satisfaction is likely to be an important by-product of the organization’s planning and controlling activities. |
# Organizational Planning and Controlling
## The Control- and Involvement-Oriented Approaches to Planning and Controlling
1. Differentiate between the execution of the planning and controlling activities under control- and involvement-oriented management practices.
Planning and controlling are approached with distinctive differences under control-oriented and involvement-oriented approaches to management. In the mechanistic organization, both activities tend to be lodged with management in the organizational hierarchy, often above the point in the organization where the plans are being carried out. The hierarchy plays an active role in both the planning and controlling process, and the employee is often a passive player carrying out the planning directives and the target of the control activity.
The organic organization, with its involvement-oriented management practices, places the employee as an active player in both the planning and controlling activity. Management’s role becomes one of a consultant, facilitator, enabler, philosopher, teacher, coach, and resource provider as employees take on active roles in planning and controlling and in assuming responsibility for the execution of both activities.
Upper-level managers assume responsibility for planning and controlling their units while employees assume the right and responsibility for planning and controlling at their job level. As upper-level managers carry out their planning and controlling activities, they do so by soliciting input from those below them in the organizational hierarchy.
Systems such as MBO are much more likely to characterize the planning and controlling process in involvement-oriented organizations than in control-oriented organizations. Control in high-involvement organizations is diffused through many groups and is commonly focused on task accomplishment and overcoming obstacles, with a de-emphasis on fixing blame with a particular individual for performance failures. In many control-oriented management systems, the reins of control are firmly held by the hierarchy, and the activities of individuals are carefully controlled. Performance failures, therefore, tend to become focused on the individual who fails to perform.
Finally, mechanistic organizations are more likely to create large planning departments and to centralize the planning function with specialists. As organizations confront increasing environmental or technology-induced uncertainty, rapid environmental change, and turbulence, planning and controlling move closer to the point in the organization where the plans are implemented and carried out on a day-to-day basis. In place of hierarchy-based control, organizations rely more on professional employees and groups of employees to control their own actions as they execute organizational plans.
1. Differentiate between the execution of the planning and controlling activities under control- and involvement-oriented management practices.
Planning and controlling are approached with distinctive differences under control-oriented and involvement-oriented approaches to management. In the mechanistic organization, both activities tend to be lodged with management in the organizational hierarchy, often above the point in the organization where the plans are being carried out. The hierarchy plays an active role in both the planning and controlling process, and the employee is often a passive player carrying out the planning directives and the target of the control activity.
### Chapter Review Questions
1. Define managerial planning and controlling.
2. Discuss the relationship between the two managerial functions of planning and controlling.
3. Identify and briefly describe each stage in the planning and controlling processes.
4. There are five types of plans discussed in this chapter, compare and contrast three of these.
5. What are multiple goals? What is a goal hierarchy? How are these concepts related?
6. Briefly describe the two views of the goal formulation process, and explain how they differ.
7. Describe the MBO process, the philosophy behind it, and its relationship with performance.
8. Distinguish between cybernetic and noncybernetic control and between pre, concurrent, and postaction control systems.
9. Identify and discuss three positive and three negative effects often associated with control systems.
10. How does the desire for personal control affect managers, and how can they balance it with organizational control systems?
### Management Skills Application Exercises
1. Use the tools described in this chapter to write a plan that will help you set goals, plans on how to achieve them (e.g., achieve an A average in all of my core concentration courses and A– in all courses I am taking). Also account for personal time and other activities you are involved in and goals that you have for these, such as keeping physically fit, etc.
2. You are managing a small manufacturing operation that involved the final assembly of Children sippy cups. There are two components to the sippy cup: the cup, a lid, and a straw as well as the box that will hold the product. You have 2 direct reports who you can assign to assemble the product. You also have a dotted-line report with the purchasing agent for the company that procures the components of the product (a dotted-line report is where one employee must work for and report to more than one manager) as well as the boxes and material needed (e.g., plastic that is used on the shrink-wrapping machine) to complete the product for sale. You have been given the following metrics.
Write up a plan that has achievable goals for your two direct reports and your dotted-line report. Also prepare a memo to your supervisor about how you plan on achieving your goal.
3. You and another student will engage in a role-play exercise. One will be the manager, and one will be an employee who is not happy with the aggressive goals that he has been given. After a 10-minute discussion, you both report on what was resolved, what was not, and how this would affect job satisfaction and performance for the employee.
### Managerial Decision Exercises
1. You are a manager, and your direct report is complaining about not being involved in the planning process. How do you respond?
2. You are a sales manager and have reviewed the monthly sales goals and conclude that the targets can’t be achieved without additional hires or paying employees overtime to secure additional orders. Also, you think that the product could have an 8% price increase without hindering sales units. You review the operational plans and want to provide an alteration of the plans to your boss. What should you do to plan that discussion?
### Critical Thinking Case
### How Do Amazon, UPS, and FedEx Manage Peak Seasons?
Typically, the day after Thanksgiving (Black Friday) marks the beginning of the holiday shopping season in the United States. Holiday sales, typically defined as sales occurring in November and December, account for roughly 30 percent of annual sales for U.S. retailers (Holiday Forecasts and Historical Sales 2015). For 2016, total online sales from November 10 to December 31 amounted to 91.7 billion dollars. And the top retailers for this period were eBay, Amazon, Walmart, and Target (Tasker 2016). The growth in online sales appears inevitable, but how do the top shippers, UPS and FedEx, manage the sudden upsurge?
Not always so well. In 2013, both FedEx and UPS underestimated holiday demand, and with bad weather conditions as well, struggled to deliver packages as promised. Since then, both carriers have worked hard to keep adequate resources available to handle the end-of-year upsurge. But in 2014, UPS overcompensated and had too much capacity, once again damaging profitability (Livengood 2017).
Matching retailer expectations to reality is a challenge, and not just for the shipping companies. Although retailers would prefer to know how much to expect in sales, forecasts will be inaccurate, sometimes wildly so. In preparing its forecast for the 2017 peak season, Logistics Management examined economic factors, such as GDP, job growth, retail sales, and inventory levels. It also looked at imports. An informal survey of logistical professionals found that 93.5 percent expect the 2017 season to be the same as 2016 (35.5 percent) or more active (58 percent) (Berman 2017).
In June 2017, UPS announced that it would be adding a surcharge to some peak season rates. According to the UPS website, “During the 2016 holiday season, the company’s average daily volume exceeded 30 million packages on more than half of the available shipping days. In contrast, on an average nonpeak day, the company ships more than 19 million packages” (UPS Establishes New Peak Shipping Charge 2017). The rate for the 2017 peak season would apply to select services and to oversize shipments, primarily (UPS Establishes New Peak Shipping Charge 2017). Analysts see the surcharge as a signal that UPS is the rate setter in parcel delivery. Such an assessment is not surprising given that the increase in parcel delivery as an outcome of increased e-commerce is seen as a core driver of earnings for UPS (Franck 2017).
Second-ranked FedEx, in contrast, announced that it would not follow suit but instead would “forgo most holiday surcharges on home deliveries this year” (Schlangenstein 2017). The surcharges levied by UPS are aimed primarily at small shippers, not the larger contract shippers. By not adding a seasonal surcharge, FedEx might hope to capture sales from individuals and small businesses that are deterred by the UPS surcharge (Schlangenstein 2017).
Kevin Sterling, a Seaport Global Holdings analyst, believes that FedEx has the existing capacity to absorb additional ground shipments. “[FedEx is] going to let UPS be Scrooge at Christmas” (Schlangenstein 2017). UPS already has a contract with Amazon, the de facto behemoth of online shopping, for normal shipping, leaving room for FedEx to pick up the slack during the holiday rush (Schlangenstein 2017).
In contrast, UPS reports that the additional charge is needed to offset the costs of additional resources necessary to achieve expected upsurges in capacity. UPS spokesperson Glenn Zaccara commented, “UPS’s peak season pricing positions the company to be appropriately compensated for the high value we provide at a time when the company must double daily delivery volume for six to seven consecutive weeks to meet customer demands” (Schlangenstein 2017).
With or without surcharges, price structures at both companies strive to discourage shipment of heavy, odd-sized, or oversized packages because such packages won’t flow through either company’s sorting systems and require special handling. All the same, FedEx has seen a 240 percent increase in such shipments over the last 10 years, which make up roughly 10 percent of all packages shipped using its ground services. And although FedEx is not adding a holiday surcharge, per se, it has added charges for packages that require extra handling, particularly shipments between November 20 through December 24 (Schlangenstein 2017).
2. What do you think are some of the difficulties of adding 25 percent more employees for the holiday season? What kind of planning do you think would be needed?
3. China effectively shuts down for two weeks each year and celebrates the lunar new year. How does that resemble (or not) peak season in Western countries?
4. The case focuses on U.S. markets. How are European markets affected by holiday shopping?
5. Have your own shopping habits changed with the ease of online shopping? If so, how? Do you expect them to change when you graduate and have more disposable income?
Sources:
Berman, Jeff. 2017. “Prospects for Peak Season appear to be cautiously optimistic.” Logistics Management. http://www.logisticsmgmt.com/article/prospects_for_peak_season_appear_to_be_cautiously_optimistic
Franck, Thomas. 2017. “UPS set to make a boatload on its new surcharges during holiday season, Citi predicts.” CNBC. https://www.cnbc.com/2017/08/08/ups-set-to-make-a-boatload-on-its-new-surcharges-during-holiday-season-citi-predicts.html
Holiday Forecasts and Historical Sales. 2015. National Retail Federation. https://nrf.com/resources/holiday-headquarters/holiday-forecasts-and-historical-sales
Livengood, Anna. 2017. “UPS’ Peak Season Surprise.” Veriship Resource Center. https://veriship.com/resources/ups-peak-season-surprise/
Schlangenstein, Mary. 2017. “FedEx Will Shun Most Home Holiday Fees, Unlike UPS.” Transport Topics. http://www.ttnews.com/articles/fedex-will-shun-most-home-holiday-fees-unlike-ups
Tasker, Becky. 2016. “2016 Holiday Shopping: Up-To-The-Minute Data From ADI.” CMO.com. http://www.cmo.com/adobe-digital-insights/articles/2016/11/8/2016-holiday-shopping-up-to-the-minute-data-from-adi.html
UPS Establishes New Peak Shipping Charge.” 2017. UPS Pressroom. https://www.pressroom.ups.com/pressroom/ContentDetailsViewer.page?ConceptType=PressReleases&id=1497873904827-900 |
# Management of Technology and Innovation
## Introduction
### Learning Outcome
After reading this chapter, you should be able to answer these questions:
1. What do we mean by management of technology and innovation (MTI), and why is it crucial?
2. How do organizations develop technology and innovation?
3. What are external sources of technology and innovation development, and when are they best used?
4. What are internal sources of technology and innovation development, and when are they best used?
5. How and why do entrepreneurs develop MTI skills?
6. No matter what method is used, what skills do you need to successfully manage technology and innovation?
7. How do you look into the future to keep pace? |
# Management of Technology and Innovation
## MTI—Its Importance Now and In the Future
1. What do we mean by management of technology and innovation (MTI), and why is it crucial?
Management of technology and innovation is critical to the organization. Because of innovations and new technologies, we have historically seen the emergence of innovative organizational structures and new ways of performing work. For example, the Industrial Revolution ushered in the functional structure for organizations. As business moved from small craft businesses like Black peoplemiths to railroads, there was a need to introduce a more complex business structure. Today, we see the innovations in information technology changing structures to more network based with people being able to work remotely. The changes in structure are innovations in the technology of how work is accomplished; the innovations brought on by the invention of new products influence the technology we use and how we use it.
Technology can be defined in a number of ways. The basic purpose of a system (such as an organization) is to convert inputs into outputs. Therefore, we will define organizational technology as the processes within the organization that help to convert inputs into outputs as well as the supporting evaluation and control mechanisms. The management of technology involves the planning, implementation, evaluation, and control of the organization’s resources and capabilities in order to create value and competitive advantage. This involves managing:
1. Technology strategy—the logic of how technology will be used and what role technology will have in the organization. For example, will innovation (first-to-market strategies dominate) be the focus, or will the firm want to do things better to obtain market share and value (let others take the initial risks)?
2. Technology forecasting—the use of tools to study the environment for potential technological changes that can both positively and negatively affect the firm’s value proposition. Digitization of a variety of products such as watches and cameras provided great opportunities for some firms and caused others to go bankrupt. Forecasting (or at least keeping an eye on the changes in technology) is very important in management of technology.
3. Technology roadmapping—the process of taking an innovation or technology and trying to build more value by looking for ways to use the technology in different markets and places.
4. Technology project portfolio—the use of portfolio techniques in development and use of technology enhances the potential value of technologies being developed and the technologies that are currently part of a firm’s portfolio. Disney was a leading producer of animated films. However, Disney did not stop there—the portfolio of characters in the films are now marketed as products and displayed in Disney theme parks, and Disney very carefully manages the availability of the animated films.
Innovation activities are an important subset of technology activities. Innovation includes “newness” in the development and use of products and/or processes within a firm and within an industry. Invention, new product development, and process-improvement methods are all examples of innovation. Management of innovation includes both change management and managing organizational processes that encourage innovation. The management of innovation is more than just planning new products, services, brand extensions, or technology inventions—it is about imagining, mobilizing, and competing in new ways. For the organization, innovation management involves setting up systems and processes that allow newness that adds value to emerge. Some firms, like Google and 3M, give some employees time during the workweek to work on their own ideas with the hope of sparking new ideas that will add value. Google News and 3M Post-it Notes are products that emerged from this practice. In order to manage innovation processes successfully, the firm must undertake several activities (these can involve the study of technologies currently in use).
1. Casting a wide net while trying to keep up with potential changes in the firm, the market, the competition, etc. is crucial. Eastman Kodak was the dominant U.S. camera manufacturer. On several occasions in their history they missed opportunities to take advantage of innovations in their product line—they did not cast their net out. Land, the founder of Polaroid, went to Kodak with his invention of instant photographs—Kodak said no. Kodak did not see the telephone as a potential competitor until it was too late. Kodak was especially vulnerable because the firm was a late entrant into the digital camera market. As a result of failure to cast a wide net in keeping up with trends and innovations, Kodak went bankrupt.
2. Creating newness with existing products can expand the portfolio of value of a product. 3M has done this with all kinds of tape and with different formats and forms of Post-it Notes. Asking “how else can the product be altered or used?” is critical to developing platforms of products.
3. Creating a culture open to newness is critical to cultivating ideas. If the leadership of the firm is open to ideas from all over the organization, then the firm will be more innovative. Some large firms such as Texas Instruments encourage employees to start new businesses if TI does not want to keep a product in house. Often, TI is the first investor and customer of these small firms.
4. Communicating knowledge throughout the firm is important. This knowledge can be positive and negative at first glance. For Post-it Notes, the glue used emerged from the laboratory efforts to create a stronger glue to compete with Elmer’s Super Glue. Obviously, the outcome did not meet the original goal, but the communication of the new formula’s characteristics—tacky and leaves no residue—triggered other usage.
5. Changing with courage is necessary if a firm is going to manage innovation and stay competitive. Too often firms get comfortable with where they are, narrow their focus in studying the environment, and focus on building strength in their current market. This leads to strategic inertia—not innovating and losing customers and market share to more innovative companies. Just as Kodak failed to change, so did IBM—famously, the CEO of IBM was quoted as saying “who wants a computer on their desk?” as IBM continued manufacturing mainframes while desktops and then laptops were emerging.
There are six critical areas that affect society and business and thus require firms to practice good management of technology and innovation. Each of these must be managed for value to be created and captured:
1. Management of Human Resources. Work environment (tools and structures) are much different today than they were at the turn of the millennium. For example, the iPhone was first introduced in 2007. Cell phone technology in the year 2000 was not for everyone—most people still had landline telephones. The introduction of cell phone technology and its use in business has made many employees feel like they are on 24-hour call. Because workers tend to carry their phones everywhere, they are available to be called, texted, or e-mailed.
Providing learning opportunities (whether online or traditional training and development) has become a more important part of human resources management—employees need to be given time to adjust to the introduction of new ways of working, new software, etc. For example, it is the rare 45-year-old manager today that owned or used a laptop computer before graduating college.
2. Cooperative Model Expansion. The more rapidly innovation occurs, the more rapidly technology occurs within firms, within industries, and within economies. These changes require that cooperatives be developed. These cooperatives can take a variety of forms, both internal and external to the firm. We will discuss internal and external MTI as well entrepreneurial MTI.
3. Internationalization. There is much more internationalization of products and markets. Sometimes, the innovations spread in ways that were not predicted. For example, GE wanted to develop a portable MRI machine to be used in less-developed countries. The machine would be portable and would use a laptop interface to send images for diagnoses. It was successful developed and a plant was built overseas, and then GE discovered there were markets in more-developed economies that they had not considered. For example, large-animal veterinarians wanted to use the machines on farms and ranches. Finding the best markets and the best production options has become an important part of MTI.
4. Issues around Environmental Concerns. Environmental concerns can be important throughout the whole life cycle of a product. From development to manufacturing to usage to disposal, are all concerns for MTI. For example, energy production is a cause of great concern. The use of fossil fuels such as coal, oil, and natural gas have impacted carbon levels in the atmosphere. Nuclear power does not have that impact, but accidents at such facilities can be catastrophic. Use of wind, water, waves, and sunlight to produce energy does not lead to carbon emissions, but there are other environmental concerns. Building large dams such as Hoover Dam in the United States is much more difficult now because society is much more aware of the changes in the ecosystem such large projects cause.
5. Growth of Service Industries. As economies become more knowledge and information based, service industries will continue to grow. The services provided by Internet suppliers, specialists in network security, etc. will influence how business will grow for the foreseeable future—especially in developing economies. The emergence of a more knowledge- and information-based global economy means that services will become more critical and service industries will continue to grow at a faster pace than product-based industries.
6. Use of Intellectual Property Rights (IPR) as a Strategic Resource. Because many new products and processes are based on intellectual property rights (patents, copyrights, and trademarks), it is crucial that organizations manage their IPR as a valuable asset. This requires value articulation through value transference, translation, and transportation.
Organizations have to be flexible in the management of technology and innovation. Acer, in the opening case, has used a variety of methods to acquire new technology and to innovate and expand its platforms. When Acer started out, the management realized that being a domestic company in Taiwan was very limiting, so they cast their net widely. They originally used internal R&D to grow. Then they expanded their markets and their product lines through mergers and acquisitions. They have increased their product offerings as the laptop market has matured. They are now using services platforms to continue their expansion and growth.
1. What do we mean by management of technology and innovation (MTI), and why is it crucial?
Management of technology and innovation is critical to the organization. Because of innovations and new technologies, we have historically seen the emergence of innovative organizational structures and new ways of performing work. The management of technology involves the planning, implementation, evaluation, and control of the organization’s resources and capabilities in order to create value and competitive advantage. Management of innovation includes both change management and managing organizational processes that encourage innovation. |
# Management of Technology and Innovation
## Developing Technology and Innovation
1. How do organizations develop technology and innovation?
There are a number of ways that organizations can develop and manage technology and innovation. We will focus on organization-level activities and the three strategic processes in this section of the chapter.
In order for a firm to develop a successful management of technology and innovation strategy, it is imperative that the organization be readied for the effort. This requires agility because changes and adjustments to products and processes are filled with risk and uncertainty. However, agility is inherently less efficiency if it is to be effective. Therefore, the management of technology and innovation must balance short-term efficiency with long-term effectiveness in the market if the firm is to add value and thrive in a changing environment. Strong dynamic capabilities are needed if the organization is going to be able to address the challenges of innovation and dynamic competition. There are four things the firm should do to balance the conflicting demands of being agile in a dynamic environment. These are:
1. Design systems and processes that can identify, assess, and develop technology based opportunities (or protect from new technology threats). The systems and processes should be able to sense what is coming.
2. Identify communication needs and efficiently turn data into information so that the right information can be available to make the best decision in a timely fashion. The current interest in big data and what it can tell firms is tied to the notion that we have a lot of bytes of data available because of computer technology that are not being used effectively or efficiently.
3. Develop employees through training and learning opportunities. This becomes more critical as the competitive environment for the organization becomes more dynamic. The management of technology and innovation requires that all levels of the organization are involved and that efforts are made to ensure that employees are allowed to enhance their skills for themselves and the organization. The more dynamic the environment, the more important skill enhancement is for the firm and the individual.
4. Use good change management processes to help the firm succeed in introducing newness into the organization. Many firms learned expensive lessons when desktop computers were introduced into the workplace. First, most managers did not type, so they did not adopt the new technology. Second, younger staff members were more likely to be comfortable with the new computers (even elated because the computer was better than they could afford at home), so knowledge power was turned upside down from the hierarchy and seniority. Third, many firms installed desktops with little or no training (because they were “upgraded typewriters”) while leaving the typewriters easily accessible. The result was that some companies deemed desktops a failure and sold the equipment at a loss. Obviously, desktop computers are now a vital tool in the workplace, but this just illustrates what happens when a good change management process that includes proper support systems, communication, and training is not implemented.
There are three basic organizational processes—buying and partnering, developing newness within the firm, and entrepreneurially exploiting a space in the environment. delineates the three types. Buying and partnering includes mergers and acquisitions, joint ventures, contractual agreements, and other forms of acquiring technology/innovation from external sources. Internal sources of new technology/innovation for the organization include research and development of new products as well as reconfiguring or developing new processes—ways of doing things. This can be organization structure or redesigning an assembly line. Adding robotics to a manufacturing process may be an internally driven process, or a firm may buy a robotics manufacturer to acquire the capability to add robotics to the assembly process.
The third type of creating new technologies/innovations involves exploiting a space in the environment through entrepreneurial or new-business development activities. Michael Dell started Dell in his dormitory room at University of Texas. He wanted a better computer than he could buy, so he bought parts and assembled his own. Friends asked him to build one for them. He realized there was an innovative process of customizing computers and delivering directly from the manufacturer to the customer. Michael Dell’s exploitation of the custom-built, direct manufacturer-to-customer delivery led to a multibillion dollar business. lists the advantages and disadvantages of each of the technology/innovation creation methods.
1. How do organizations develop technology and innovation?
There are four things the firm should do to balance the conflicting demands of being agile in a dynamic environment. These are: design systems and processes, identify communication needs and efficiently turn data into information, develop employees through training and learning, and use good change management processes. There are three basic organizational processes—buying and partnering, developing newness within the firm, and entrepreneurially exploiting a space in the environment. |
# Management of Technology and Innovation
## External Sources of Technology and Innovation
1. What are external sources of technology and innovation development, and when are they best used?
The external processes for developing and acquiring technology and innovation include a variety of options. They are most successfully used under the following circumstances:
1. The product line or the processes of the firm have fallen behind those of its competitors.
2. A new entrant into the market of the industry has changed the competitive dynamics.
3. A firm believes that its product mix or way of doing things is not going to be successful in the long run.
The major advantage of using an external process is speed—for the focal firm, the time needed to blend an acquired technology or innovation is usually much shorter than the time required to try to make a discovery and bring it to market or implement it within the firm. Often, the external processes are less costly. The disadvantages are tied to the need to blend different firms or bring “others” into the activities of the firm. For example, there may be cultural conflicts in an acquisition or there may be resistance to acceptance of the newness that is brought into the firm.
The most common types of external processes used to enhance technology and innovation in a firm include:
1. Mergers/acquisitions (M&A), which involve ownership changes within the firms. For an acquisition, one firm buys another; for a merger, the two firms come together and form a new firm. The essence of both of these approaches is that a new, larger organizational entity is formed. The new firm should have more market power (be larger) and should gain knowledge about a technology or domain of activity. The blending of two cultures, two sets of processes, and two structures are all potential disadvantages of M&A activity.
2. Joint ventures are long-term alliances that involve the creation of a new entity to specifically carry out a product/process innovation. The entity is usually governed by a contractual relationship that specifies the contributions and obligations of the partners in the joint venture. There are potential culture clashes as well as the potential for strategic drift—losing strategic focus on the reasons for the joint venture.
3. Franchise agreements are usually long-term agreements that involve long payoffs for the sharing of known technology. Fast food restaurants, such as McDonald’s, use franchise agreements with store owners. McDonald’s provides R&D for new processes and new products. The store owners (franchisees) pay a fee for the use of the name and the marketing of the product. The contract and monitoring costs associated with franchise agreements are the big disadvantage of this type of alliance.
4. Licensing agreements involve technology acquisition without R&D. For example, Dolby contracts with producers of various type of sound equipment to allow them to use their technology to have better sound quality. Licensing agreements are quite common in high-tech industries. The contract costs and constraints are the disadvantages of licensing agreements.
5. Formal and informal contracts are used to allow firms to share technology between them. For formal contracts, the length of time the contract is enforceable is a defining characteristic. The more formal a contract, usually the longer it is, and it usually includes more details about the usage and limitations of the technology. For the informal contract, the advantage is that if the activity is no longer beneficial, it is much easier to disband.
All of the methods are of use to firms large and small. In the opening case, Acer used a number of methods to externally acquire technology.
1. What are external sources of technology and innovation development, and when are they best used?
The external processes for developing and acquiring technology and innovation include a variety of options. They are most successfully used under the following circumstances:
1. The product line or the processes of the firm have fallen behind those of its competitors.
2. A new entrant into the market of the industry has changed the competitive dynamics.
3. A firm believes that its product mix or way of doing things is not going to be successful in the long run.
The most common types of external processes used to enhance technology and innovation in a firm include: mergers/acquisitions (M&A), joint ventures, franchise agreements, licensing agreements, and formal and informal contracts. |
# Management of Technology and Innovation
## Internal Sources of Technology and Innovation
1. What are internal sources of technology and innovation development, and when are they best used?
The most common type of internal process for technology and innovation in the organization is research and development (R&D). R&D involves the seeking and developing of new technologies, products, and/or processes through creative efforts within the firm. The benefits of internal processes include ownership of the technology/innovation that provide legal protections (i.e., patents and trademarks). In addition, the understanding and the knowledge gained from the process of R&D can give the firm a head start on the next generation of technology. Apple’s place as a first mover in the technology of laptops and telephones allowed it to maintain a creative advantage for a number of years. The disadvantages of R&D are that it is usually slower and more costly and can be disrupted by the departure of key personnel. The death of Steve Jobs has slowed the innovation of Apple in the eyes of many consumers.
1. What are internal sources of technology and innovation development, and when are they best used?
The most common type of internal process for technology and innovation in the organization is research and development (R&D). R&D involves the seeking and developing of new technologies, products, and/or processes through creative efforts within the firm. The disadvantages of R&D are that it is usually slower and more costly and can be disrupted by the departure of key personnel. |
# Management of Technology and Innovation
## Management Entrepreneurship Skills for Technology and Innovation
1. How and why do entrepreneurs need to develop MTI skills?
Entrepreneurial activities in the marketplace often signal newness in a product or process. For an entrepreneurial firm, the value proposition is a key factor. The value proposition answers the follow two questions:
1. How will the firm make money on the product and/or services offered?
2. How will the firm be positioned in the marketplace?
New business entities (a type of entrepreneurial activity) are usually more flexible and agile in the marketplace. The entrepreneur is very dedicated to the success of the firm because the new business is the “baby” of the entrepreneur. The starting of a new business is the riskiest approach for introducing new products and processes. The failure rate for entrepreneurs is high. Because the firm is new, there is usually very little slack in resources available—money is tight, labor is limited, and time is fleeting. Therefore, entrepreneurial activities are most successful when the lean start-up process can be used. It is applicable where development costs are low and revisions are not very costly. One reason there are many startups in the development of applications for mobile phones is that the costs are low and improvement of the product (once successful) is relatively easy. Entrepreneurs have the ability to adapt their plans incrementally, especially when using lean start-up methods. For entrepreneurs, the capabilities to sense, seize, and transform can be an advantage if they stay agile and avoid overcommitting to a course of action. Entrepreneurs, by definition, are more agile than the more-established organizations.
This agility is true within large firms that want to continue to be entrepreneurial in their activities. Firms such as Google and 3M allow their employees to work on innovative projects during their working hours. Google modeled their policy of allowing employees time to explore other potential products and processes after 3M’s longtime policy. Both of these firms are known as innovative firms because they encourage employees to look for and test innovative and valuable propositions. The flexibility allowed employees gives both Google and 3M the agility to find new ways of doing things.
1. How and why do entrepreneurs develop MTI skills?
For an entrepreneurial firm, the value proposition is a key factor. New business entities (a type of entrepreneurial activity) are usually more flexible and agile in the marketplace; however, the failure rate for new entrepreneurial firms is high. Entrepreneurs, by definition, are more agile than the more-established organizations. Agility is crucial within large firms that want to continue to be entrepreneurial in their activities. |
# Management of Technology and Innovation
## Skills Needed for MTI
1. No matter what method is used, what skills do you need to successfully manage technology and innovation?
There are a number of skills needed to successfully manage technology and innovation in the organization. No matter what organization you are a part of, there are two skills the organization must develop to be successful—the ability to manage learning and knowledge processes, and the ability to analyze and forecast future trends. Individual skills that are critical to the organization’s success include leadership/followship and creative thinking.
Organizational skills involve how the firm puts people and resources together to create value—building capabilities. With the right capabilities, the organization can develop a competitive advantage. In the world of technology and innovation, the management of learning and knowledge processes is critical. The organization needs to have systems in place that allow it to collect data that can be analyzed to form information. The information needs to be used to gain knowledge and insight. At each step, learning takes place. Organizational learning is the acquisition of knowledge through the collection of data that is analyzed to gather information, which is then transferred and shared through communication among members of the organization. This communication process provides the foundation for knowledge acquisition and enhancement within the firm. There are two types of knowledge that must be managed: explicit knowledge (codified or written down as rules or guidelines) and tacit knowledge (which emerges from experience of an individual). Tacit knowledge can become explicit at some point if the expert is able to codify the knowledge for others. However, it is not always possible to codify tacit knowledge. For example, Henry Bessemer was sued by the patent purchasers who could not get his steel-making process to work. In the end Bessemer set up his own steel company because he knew how to gauge when to add and subtract heat based on the impurities in the iron ore, even though he could not convey it to his patent users. Bessemer’s company became one of the largest in the world and changed the face of steelmaking. After the introduction of the Bessemer process, steel and wrought iron became similarly priced, and some users, primarily railroads, turned to steel. The insights and experiences that are gained from the gathering of data and converting that data into information are key to successful MTI. Organizational knowledge is the sharing and utilization of the learning that takes place in the firm.
The ability to forecast the future is another key organizational skill in the management of technology and innovation. This involves scanning the environment for trends and possible areas of value-creation opportunities. It also involves understanding the risk involved with newness in the firm and the risk involved in not seeking newness—both can cause the firm to lose value. Any method of forecasting comes with limitations. These include:
1. Forecasting methods, by definition, are uncertain in their outcomes. Usually the firm is trying to develop scenarios concerning best, worst, and most likely outcomes. With this information, risk can be assessed.
2. Forecasts are imperfect—the firm cannot predict all potential influences in the competitive marketplace. Bessemer knew he had a better process, but he did not predict the problems he had licensing his patent.
3. Forecasts are at best an educated guess. Many forecast techniques rely on statistical analysis, but the numbers used in the analysis are forecasts themselves or rely on patterns of behavior continuing in the marketplace.
4. With all the issues with forecasting, a company that produces excellent forecasts will most likely formulate better strategy and capture more value.
The knowledge-management system of the firm can help the ability of the firm to forecast. Experience and learning about industry and general environment trends can help individuals and teams forecast more accurately.
Individuals within the firm also need to have certain skills to enhance the management of technology and innovation processes. These skills include a balance of leadership and followship and the ability to think creatively.
Most individuals in the organization understand what leadership is. For MTI, it is important that the right person be in the leadership position when needed. For example, in new product development, the leader during the design phase is likely to be an engineer, the leader in the prototype development phase may be an engineer or a production person, and as the product is introduced to the marketplace the leader may be a marketing person. It is necessary for these individuals to communicate, and they may all be on a project team that is under the direction/coordination of a dedicated project manager. However, the leadership on the project shifts within the creation-to-market process. While leadership is critical, so is followship. Followship is the mirror image of leadership. Most will never have taken a class in followship. You cannot have leaders without followers. There is a skill set for leadership and a skill set for followship. It is the actions of followers that determine the success of a leader. The success of organizations is more the result of good followship than of great leadership. Leadership is influencing others, and followship is seeking or accepting influence. In the case of new product development outlined above, each of the individuals were leaders during some point in the project and each were followers during the project. Individuals spend a lot of time seeking and learning about leadership, but followship is also critical to organizational success. Innovative companies are often lead by a combination of two individuals who lead and follow each other. For example, Microsoft was founded by Bill Gates and Paul Allen. The names of firms started or built by two people are common: Sears & Roebuck, Proctor & Gamble, Marks and Spencer. The characteristics of a good follower include:
1. They are truthful. Followers who tell the truth and leaders who listen are an unbeatable combination.
2. They are supportive. Don’t blame your boss for an unpopular decision or policy. “I know this is an unpopular decision, but…” Absent person example of trust. [I call it confessing the sins of the boss in the hallway after the meeting.]
3. They give the boss the benefit of their knowledge and experience. Your job is to make the organization successful.
4. They take the Initiative to solve problems by providing solutions, not just issues.
5. They keep the leader Informed. The higher a manager is in an organization, the more people are less inclined to talk openly with them. Great followers provide the good, the bad, and the ugly of information, knowledge, and experience.
1. No matter what method is used, what skills do you need to successfully manage technology and innovation?
There are two skills the organization must develop to be successful—the ability to manage learning and knowledge processes, and the ability to analyze and forecast future trends. Individual skills that are critical to the organization’s success include leadership/followship and creative thinking. There are two types of knowledge that must be managed: explicit knowledge and tacit knowledge. |
# Management of Technology and Innovation
## Managing Now for Future Technology and Innovation
1. How do you look into the future to keep pace?
To keep pace with changes in technology and to keep up with needed innovation processes, individuals within the firm must keep track of what competitors are doing as well as what inventions or discoveries may usurp an industry’s place in the market. This is an external process, and that involves scanning the environment. The information gathered during scanning should inform the firm about the general trends and opportunities to create new value. Internally, the firm wants to understand the task and processes as well as understand the skills that currently exist in the organization. By identifying potential future scenarios in the external environment and understanding what resources and capabilities the firm has, the task for those managing technology and innovation becomes answering the key questions:
1. Where are we now?
2. Where do we want to be?
3. What do we need to move from here to there?
1. How do you look into the future to keep pace?
To keep pace with changes in technology and to keep up with needed innovation processes, individuals within the firm must keep track of what competitors are doing as well as what inventions or discoveries may usurp an industry’s place in the market. This is an external process, and that involves scanning the environment.
### Chapter Review Questions
1. How do we define technology and innovation, and how are they related?
2. What are the four areas that need to be managed by the firm if it is going to take advantage of the technology it has and the technology it needs to create?
3. What are the five Cs of managing innovation, and how do they help direct a firm’s innovation activities?
4. How does an organization enhance its agility? When is more agility needed in the firm?
5. Compare and contrast the advantages and disadvantages of the three approaches for technology and innovation development.
6. What circumstances indicate a firm should consider an external process for developing/acquiring technology?
7. How does a firm determine the type of external process for developing/acquiring technology it should pursue?
8. What are the benefits of using internal sources for developing new technologies, products, and/or processes? What are the potential disadvantages?
9. How does an entrepreneurial firm identify and utilize a value proposition?
10. How does knowledge management impact the management of technology and innovation?
11. Followship is critical to MTI—how does the quality of followship in the organization impact the ability of leadership to create value?
12. How does the management of technology and innovation help a firm create value? Why should the firm strive to have a unique value proposition?
### Management Skills Application Exercises
1. Assess the education that you have received from grade school up to this course. What technology has been used to provide education to you? What technology and innovation would improve the “product” of education?
2. Come up with 50 alternative uses for the following products: day-old newspapers, old television sets, ballpoint pens, used Dixie cups. Share your results with other students as see if that develops new ideas.
3. Think of the best experience you have had using a smartphone app (e.g., banking, rideshare, etc.) and a bad experience that could be improved through an app. Describe the features and functionality and the benefits for both the customers and organization that would use the app.
### Managerial Decision Exercises
1. You are a manager at a traditional automobile manufacturer (Ford, GM, Daimler-Chrysler). You know that Tesla is an up-and-coming competitor, and you’re also working on electric cars for your company. An article in the Wall Street Journal about electric cars and the future of gas stations has caught your interest. One sentence has caught your eye: “Until you drive an EV, you are colored by 135 years of going to the gas station. Under that scenario, you say ‘Where is the new company that’s doing EV charging on street corners or in my highway entrance?,’ but that isn’t really how this works.” What innovations regarding recharging or other aspects of traditional “driving” could be incorporated into the electric vehicles you are developing?
2. You are a sales manager and know that technologies like automation, robotics, artificial intelligence, and the Internet of things are changing the way that you use and interact with the products that you use. You sense that your customers might be a good source for forecasting future product innovations. You decide to ask your salespeople to interview their toughest customers to generate ideas. Write up eight questions that your sales representatives can use to gather the information.
3. In October 2015, Google restructured into Alphabet, a holding company, which analysts said would facilitate innovation among its diverse subsidiaries. What are the benefits and risks of this decision, and would you have made a similar or alternative decision?
### Critical Thinking Case
### Novartis’s Prescription for Invoice Processing
What do you do when you have more than 600 business units operating through 360 independent affiliates in 140 countries around the world—processing complex invoices in various languages and currencies? You seek out the best technology solution to make the job easier.
At global pharmaceutical giant Novartis, the IT department is a strategic resource, a community of 2,000 people serving 63,000 customers in 200 locations and 25 data centers. Because most of the company’s invoices come from international suppliers, they have differences in design, language, taxes, and currency. Consequently, many ended up as “query items” requiring manual resolution by Novartis accounting staff—which delayed payments and made those invoices extremely costly to process. In fact, finance personnel spent so much of their time resolving queried invoices that other work suffered. A solution was badly needed.
To maximize its investment, Novartis needed a flexible solution that would meet its current and future needs and function in other business departments in a variety of geographic locations. It should provide fast, accurate document capture and multilanguage support, and should extend to other types of information—such as faxes and electronic data—in addition to paper documents. Finally, in order to obtain financing for the project, return on investment (ROI) was required within nine months of project implementation.
Input Accel for Invoices from EMC/Captiva was the answer. The software extracts data from paper documents, applies intelligent document recognition (IDR) technology to convert them to digital images, and sends relevant data to enterprise resource planning, accounts payable (A/P), and other back-end management systems. The specialized Input Accel server manages output by recognizing and avoiding holdups in the workflow process. It also ensures if a server goes offline, others will carry on functioning, thus avoiding downtime.
Now Novartis scans incoming invoices at a centrally located site, and the images are transmitted to the Input Accel for Invoices server for image improvement. Invoice data is then extracted and validated against supplier information. Most invoices are transferred directly for payment, with relatively few invoices requiring transfer to one of three accounts payable clerks who deal with queries manually. Novartis is a global leader in research and development of products that improve health issues. Input Accel was selected by Novartis to be part of its accounting system.
Thanks to IT, overall efficiency has increased, processing errors are reduced, and accounting personnel can use their time and expert knowledge for more meaningful tasks than resolving invoice errors. For Novartis, it is “mission accomplished.”
2. What factors contributed to Novartis’s invoice processing being so complex?
3. How did IT help the company solve that problem?
4. What other uses and functions does Input Accel serve, and how will this be useful to Novartis over the long term? (You may want to visit the EMC/Captiva website, https://www.emc.com, for more information on Input Accel’s capabilities.)
Sources: “OpenText Acquires EMC Enterprise Division,” MetaSource, http://www.metasource.com, September 20, 2016; Novartis corporate website, http://www.novartis.com, March 20, 2006; “Processing Invoices From Around the World,” ECM Connection, https://www.ecmconnection, February 2, 2006; Kathryn Balint, “Captiva’s Paper Chase Paying Off,” San Diego Union-Tribune, December 9, 2005, pp. C1, C5. |
# Patent Basics
## The Foundations of Patent Protection
### Learning Objectives
After completing this section, you will be able to
1. Describe the philosophical logic behind granting patents.
2. Describe the role of patents in fostering invention.
### Do Patents Really Promote Innovation?
Before reading this section, please watch the overview video below covering the usefulness of patents - how ironic that a system for granting exclusive rights to inventors is the greatest vehicle for knowledge-sharing and technology transfer ever devised by human beings.
### What Is a Patent?
A patent is an intellectual property right granted by the government of a nation to an inventor that gives them the exclusive right to the invention for up to 20 years, in exchange for disclosing the details of the new technology to society for its ultimate benefit.
In the United States, a patent is a legal instrument in the form of a document issued by the United States Patent and Trademark Office (USPTO). It gives the inventor of any new, useful, and non-obvious machine, process, manufacture, or composition of matter the right “to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States” for a limited time in exchange for public disclosure of the invention. United States Patent and Trademark Office. (2012, January 26). Patents. Retrieved from www.uspto.gov/patents/index.jsp A U.S. patent is only recognized domestically, and cannot be enforced in another country.
### History of Patents in the United States
The legal foundation for U.S. intellectual property rights was laid by the Founders in 1787, in the very first Article of the U.S. Constitution, which outlined the precepts of our democratic society. In Article 1, Section 8, Clause 8 of the Constitution, Congress was given the authority to “promote the progress of Science and useful Arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries”.U.S. Constitution Arr. 1, § 8
America was the first country in the world to enshrine intellectual property rights in its national constitution. And the Founders did this quite deliberately, says B. Zorina Khan, an economic historian at Bowdoin College whose book, The Democratization of Invention: Patents and Copyrights in American Economic Development, was awarded the Alice Hanson Jones Prize for an outstanding work in economic history.B. Zorina Khan, “To the men who gathered in Philadelphia to ‘promote the general welfare,’” Khan wrote, “it was self-evident that ideas, industrial and cultural inventions, and democratic values were integrally related. American democratic institutions would ensure that rewards accrued to the deserving based on [merit] rather than on the arbitrary basis of class, patronage, or privilege.”
Indeed, the Founders viewed intellectual property rights as vital to the new nation’s economic survival. As George Washington himself stated in his first annual address to Congress in 1790, “The advancement of agriculture, commerce, and manufactures by all proper means will not, I trust, need recommendation. But I cannot forbear intimating to you the expediency of giving effectual encouragement to the introduction of new and useful inventions.”
The question is, with all the challenges they faced, why did the Founders think it so crucial to create a strong intellectual property system? Their reasons were both universal—i.e., applying to all societies—and also very particular to America’s revolutionary experience.
### “Bargain” Theory vs. “Natural Rights” Theory
Every society that affirms intellectual property rights offers two justifications for doing so: the bargain or contract theory and the natural rights theory.
### “Bargain” Theory
The “bargain” theory starts with the commonsense premise that people will be encouraged to invent new products and services that benefit society if they are likely to profit by doing so. The U.S. Constitution thus offers inventors a bargain: If you invent something useful—e.g., a cotton gin in 1794 that boosted agricultural production a hundredfold, or a semiconductor 163 years later that sparked the creation of a trillion-dollar new industry and millions of jobs—then the Constitution and statutes say that, as a quid pro quo, you can have the exclusive right to that invention for a “limited time,” after which it goes into the public domain and belongs to society.
There is something so simple yet economically potent about this concept. As Abraham Lincoln—America’s only presidential patentee (No. 6469 for a device to lift boats over shoals)—noted, the beauty of the patent system is that it “added the fuel of interest to the fire of genius.”
### “Natural Rights” Theory
The “natural rights” theory, meanwhile, invokes another commonsense premise that most of us instinctively hold to be true: that the product of mental labor is by all rights the property of its creator, no less than the product of physical labor is the property of its creator (or of the person who purchases it from that creator). This is what Daniel Webster was referring to when he said, “The American Constitution does not attempt to give an inventor a right to their invention, or an author a right to his composition; it recognizes an original, pre-existing, inherent right of property in such invention or composition.”
This right is not absolute, of course, and inventors’ inherent rights may at times be circumscribed by national security or other concerns. But in exchange for disclosing to the public the nature and details of the invention, the Constitution authorizes the government to enforce the inventor’s exclusive property right to that invention for a limited time.
Two important public policy goals are thus served. The inherent property rights of inventors and authors to their creations are protected, thereby helping to ensure that the wellsprings of creation and productivity do not dry up for lack of incentive. And yet the benefits derived from these inventions and creations are ultimately harnessed to the public good through disclosure, thus promoting the progress of the nation and “the general welfare” of its citizens.
### How Patents Foster Innovation
To help understand why patent rights not only encourage inventors but also promote the wider diffusion of new technology for the benefit of society, economic historians Naomi Lamoreaux and the late Kenneth Sokoloff suggested the following thought experiment:
Imagine a world in which there was no patent system to guarantee inventors property rights to their discoveries. In such a world, inventors would have every incentive to be secretive and to guard jealously their discoveries from competitors [because those discoveries] could, of course, be copied with impunity. “By contrast, in a world where property rights in invention were protected, the situation would be very different. Inventors would now feel free to promote their discoveries as widely as possible so as to maximize returns either from commercializing their ideas themselves or from [licensing] rights to the idea to others. The protections offered by the patent system would thus be an important stimulus to the exchange of technological information in and of themselves. Moreover, it is likely that the cross -fertilization that resulted from these information flows would be a potent stimulus to technological change. Naomi R. Lamoreaux and Kenneth L. Sokoloff,
It’s more than just “likely.” Extensive research in the United States and other nations shows that patents have served as a powerful stimulant to technological knowledge sharing. A 2006 survey published by the French economists Francois Leveque and Yann Meniere, for example, found that 88 percent of U.S., European, and Japanese businesses rely upon the information disclosed in patents to keep up with technology advances and direct their own R&D efforts. Francois Leveque and Yann Meniere, “Patents and Innovation: Friends or Foes?” CERNA (Centre d’economie industrielle Ecole Nationale Superieure des Mines de Paris), December, 2006.
### Patents Don’t Block Innovation, They Promote It
From the earliest days of the United States, patent and legal records show how inventors (including Thomas Edison) regularly kept abreast of developments in their fields. They did this by studying patent descriptions published by both the USPTO as well as by industry publications such as Scientific American, which was founded in 1845 by Munn and Company, the leading patent agency of the nineteenth century, expressly to spread new technological knowledge and facilitate the buying and selling of patents. For example, Elias E. Reis—inventor of a number of devices to exploit the heat generated by electrical currents—reported that when he read in the Official Gazette in 1886 about a patent issued to Elihu Thomson for a new method of electric welding, “there immediately opened up to my mind a field of new applications to which I saw I could apply my system of producing heat in large quantities.” See “Record of Elias E. Reis,” 8, In many industries, specialized journals kept readers informed about new patents of interest.
In fact, new research in 2012 discovered that rather than blocking development, Thomas Edison’s seminal 1880 incandescent lamp patent (No. 223,898) actually “stimulated downstream development work” that resulted in “new technologies of commercial significance [including] the Tesla coil, hermetically sealed connectors, chemical vapor deposition process, tungsten lamp filaments and phosphorescent lighting that led to today’s fluorescent lamps.” Ron D. Katznelson, “Inventing Around Edison’s Incandescent Lamp Patent: Evidence of Patents’ Role in Stimulating Downstream Development,” May, 2012, derived from: http://works.bepress.com/cgi/viewcontent.cgi?article=1073&context=rkatznelson
Even the word “patent” signifies its social purpose of disclosure. It is derived from the Latin patent meaning “open,” and is the present participle of “pate¯re,” meaning “to stand wide open.”
This explains the origin of the term “letters patent” (“letters that lie open”), which refer to the patent documents issued by the English Crown. These were not closed with a seal but were instead kept open, with the seal hanging at the bottom, notifying all not to infringe upon the patent.
As with any economic and legal instrument, patents have the potential to slow innovation if their grant of exclusive rights is too broad. But the overwhelming preponderance of economic research and real-world experience demonstrate that, on balance, intellectual property rights tend to stimulate invention, economic growth, and the diffusion of new technological knowledge in every country where they exist.
This fact by itself, however, does not explain why the U.S. patent system became a model for much of the world. To understand why it did—and how it helped build the most successful economy in the history of the world—we must examine the revolutionary design of the U.S. patent system itself and the ways in which it overcame the weaknesses of earlier patent systems.
### Assessment Questions
|
# Patent Basics
## The Weakness of Early Patent Systems
### Learning Objectives
After completing this section, you will be able to
1. Outline the history of patents from antiquity through the 1700s.
2. Identify flaws in early European patent systems.
### History of Patents: 500 BC to the 1700s
Given the commonsense logic of granting patents to stimulate invention, it comes as no surprise that patent- like incentives date all the way back to antiquity. In the ancient Greek city of
Sybaris (located in what is now southern Italy) in 500 BC, “encouragement was held out to all who should discover any new refinement in luxury, the profits arising from which were secured to the inventor by patent for the space of a year.”
Charles Anthon,
“
The first formal patent legal institutions were developed in the Republic of Venice in the mid-1400s. The Venetian Statute of 1474 decreed that the inventors of new and useful devices would be protected from infringers and copiers
for ten years so long as they disclosed the details of their inventions. Most Venetian patents were granted in the field of glass making, and when a large number of these glass makers emigrated to other countries in Europe, they sought similar
protections from the local authorities. This is how the notion of patent rights, and their expression in patent legal systems, began to spread and gain acceptance throughout Europe.
Initially, however, English and French monarchs used patents not simply to stimulate invention, but also to grant exclusive trade monopolies to those favored by the court. In the reign of Elizabeth I in the latter 1500s, some 50
patent monopolies were granted over the trade in such staples as salt, soap, starch, iron, and paper. Critics said these “enriched the monopolist and robbed the community” while doing absolutely nothing to stimulate new technology or industry.
A growing public outcry ultimately forced Elizabeth’s successor James I to revoke these grants of trade monopolies in 1610. In 1624, the Statute of Monopolies formally repealed the practice and henceforth restricted patent rights
solely to new inventions.
European countries made several other important innovations in their early patent systems. In the mid-1500s, France became the first to publish patent descriptions from inventors who chose to submit them. England under the reign of
Queen Anne (1702–1714) was the first to require inventors to submit a written description of their patent to “describe and ascertain the nature of the invention and the manner in which it is to be performed.” And in 1729, France began to publish
abbreviated digests of patent descriptions, but these were intermittent and subject to delays of up to 60 years after the patents were originally granted. As might be expected, this lack of regularity limited the technological knowledge sharing that
is one of the great benefits of a patent system.
### Flaws of Early Patent Systems
Old World patent systems suffered from other major weaknesses as well. Patents for inventions imported from other countries were regularly granted, increasing the incentive for would-be patentees to copy
the creative work of others rather than invent for themselves. And there was generally no systematic examination of patents by technical experts, in part because this was viewed as an intrusion upon the prerogatives of the Crown.
But the biggest problem with early patent systems was that they all shared a tendency to reinforce the wealth and prerogatives of elites, not the welfare and productive capacity of the whole of society. In Britain, patents were
favors granted “by grace of the Crown” and were often only secured through court connections. They were also “subject to any restrictions the government cared to impose, including the expropriation of the patent without compensation.”
Op. cit., Khan.
What’s more, patent application fees were prohibitively high—more than 11 times the per capita annual income of the average British citizen—which put the system out of reach of all but the wealthy. Yet ironically, in the
parliamentary debates over the patent system, the exclusion of the “working classes” was regarded as one of the chief virtues of the British patent system.
British patent law also severely limited the ability of inventors to sell or license the rights to their discoveries, as noted in a contemporary 1832 book entitled
A Practical Treatise on the Law of Patents for Inventions.
Richard. Godson, A Practical Treatise on the Law of Patents for Inventions and of Copyright, Saunders and Benning, 1832. Retrieved from Google books, at bit.ly/QmPhaZ
This restriction, along with “working requirements”—these were regulations that forced patentees to manufacture products based on their patents within two or three years of issuance or lose their patent rights—limited innovation activity mainly to
those who had the factories (or the ready capital to build them) needed to produce such products.
These rules had two significant effects upon the British economy. They restricted innovation to only a small sector of the population rather than unleashing the creativity and productivity of the whole people. And they created a
bias toward inventions that enhanced the market dominance of incumbent, capital-intensive industries rather than opening up new markets for the sorts of disruptive new industries that usually drive economic progress.
“European societies were organized in ways that concentrated power in the hands of elites and facilitated [parasitic] rent-seeking by favored producers,” notes historian B. Zorina Khan. “The organization of invention was no
exception. A society that restricts [invention] to elites can generate exceptional gains early on, but the initial spurt is unlikely to be maintained.”
Indeed, the result in Britain was unbalanced and narrowly focused economic growth. Inventors faced high transaction and monetary costs, a limited market for their inventions, and a great deal of uncertainty. Diffusion of new
technological knowledge was severely inhibited, and the rate of technological change was adversely affected as a result. Eventually, Britain’s initial leadership of the Industrial Revolution had more to do with its large existing commercial holdings
and manufacturing base, and its vast stores of amassed capital, than with systemic or broad-based encouragement of innovation within British society.
### The Changing Tide
The elitist nature of early patent systems reflected the feudal economic relations that dominated that era. But by the late eighteenth century, capitalist economies were beginning to emerge across Europe, and in
Britain, nationwide lobbies of manufacturers and patentees called for an overhaul of the patent system to bring it in line with this new economy. The needed reinvention would come not from Britain, however, nor even from France, which had its own
democratic revolution soon after America’s. Instead, it took place in the newly liberated United States, where a vibrant capitalism unburdened by centuries of entrenched feudalism was developing.
This, then, is the story of one of the most admired of all American inventions—the modern democratized patent system, now used widely throughout the world. |
# Patent Basics
## America’s Uniquely Democratic Patent System
### Learning Objectives
After completing this section, you will be able to
1. Explain the role of the Founding Fathers in developing the U.S. patent system.
2. Explain the six unique features of the U.S. patent system. Never mind that intellectual capital accounts
### A Patent System For Everyone
Before reading this section, please watch the overview video below covering why America developed the world’s first patent system for the common man, and what we got out of it as a result (hint: the strongest economy on the face of the earth).
Never mind that intellectual capital accounts for 55 percent of total U.S. GDP today.
Kevin A. Hassett and Robert J. Shapiro,
“
Or that it represents up to 80 percent of the market value of all public companies in the U.S.
“Intangible Asset Market Value,” Ocean Tomo, derived from http://bit.ly/bAPJVH
To most citizens today, patents and other intellectual property are inscrutable mysteries. But to America’s Founding Fathers, they were matters of the highest national importance.
### The Challenge Facing the Founders
The people who led the revolution and were later tasked with writing a Constitution were not concerned simply with creating lasting political structures that could defend the hard-won freedom and
sovereignty of the newly liberated colonies. They also struggled to stimulate the rapid growth of industry to ensure the new nation’s economic survival.
The survival of the United States of America was far from certain in those days. It was a backward agrarian economy, dependent on imports and lacking major domestic industry, with a population of barely three million inhabitants.
Britain, meanwhile, with whom the United States had just fought a war and would soon fight another, had three times the U.S. population, boasted the most powerful economy on Earth, and was the unrivaled leader of the emerging Industrial Revolution.
It was, therefore, a critical task of the leaders of the new American nation to design institutions—including a patent system—that would encourage economic activity and investments to spur the growth of America’s primitive economy.
It’s important to note that although the Founders deeply believed in democratic ideals of government, they were not wild-eyed idealists. They were very practical people who faced an overwhelming challenge: How do you build a national
economy from scratch, one that can prosper without British imports? To do that, they needed to mobilize every asset they had.
Unlike Britain, however, America had no significant capital or commercial assets. In fact, the American standard of living at that time was actually lower than in many of their South American neighbors.
Stanley Engerman and Kenneth Sokoloff,“
All America had was abundant, but still untapped, natural resources, and a population widely regarded in the world as uniquely enterprising and independent minded.
Ours was the world’s fastest-growing population, doubling in size every 20 years. Americans were also widely literate (albeit mostly lacking in higher education) and informed by what Washington Irving called “the general diffusion of knowledge.”
Most important, unlike the tenant farmers and laborers who made up the bulk of England’s rigid class society, the vast majority of Americans were free-holding small farmers, merchants, shopkeepers, artisans, and mechanics—the
forerunners of what we today call the middle class—who were possessed with what publisher Hezekiah Niles called “a universal ambition to go forward.”
This was America’s principal asset, their ace in the hole. And men such as George Washington, Thomas Jefferson, and James Madison knew they had to find a way to unleash the creative and productive potential of these independent
citizens if the country was to industrialize and survive.
### Incentives Needed to Spur Economic Growth
As Jefferson wrote to his daughter Martha in 1787, it was precisely because America was bereft of Europe’s vast resources and left to its own devices that “we are obliged to invent and execute;
to find means within ourselves, and not to lean on others.”
But how to do that? From the historical record, it appears that the Founders quite consciously sought to construct a patent system that would do what no other patent system in the world had ever done before—namely, stimulate the
inventive genius and entrepreneurial energy of the common man.
As noted earlier, the first thing they did was to affirm inventors’ and authors’ rights in the U.S.Constitution itself. Although the intellectual property clause was ultimately adopted by unanimous consent of the delegates on September 5, 1787, there had been some debate about the issue. Thomas Jefferson in particular had expressed reservations about the wisdom of granting “temporary monopolies” (i.e., patent rights), given that Americans had just waged a bloody war of independence to overthrow the British monopoly of trade and political power. But as other delegates noted, and Jefferson eventually came to realize, a monopoly of trade is a far cry from the temporary incentives granted to inventors in return for the benefits they provide society.
“How can the exclusive right of an invention be compared with a monopoly in trade?” D.P. Holloway, a Commissioner of Patents, would later argue in his 1863 annual report to Congress. “How can the exclusive privilege to sell salt in
Elizabeth’s time, which added not one bushel to the production, but which enriched the monopolist and robbed the community, and the exclusive right of Whitney to his cotton gin, which has added hundreds of millions [of dollars] to the products and
exports of the country, be both branded, with equal justice, with the odious name of monopoly?”
United States Patent Office, Annual Report of the Commissioner of Patents 1863. Retrieved from Google Books at http:// bit.ly/Meh0Pv
In the words of Louis Wolowski, Chair of Industrial Economics at the Conservatoire des Arts et Métiers: “[Inventors’] rights under patents, are called ‘monopolies’ only from the poverty of language, which has failed to express in
words a distinction which no less clearly exists.”
The Founders understood this distinction clearly. “Rather than monopolists,” says historian Khan, “patentees were viewed as beneficent contributors to progress, and the consistent goal of those who shaped the system was to
encourage domestic ingenuity, whatever the social class of the inventor.”
Opt. cit., Khan.
Or as James Madison put it in Federalist Paper 43, “The public good fully coincides with the [patent rights] of individuals.”
### Creating a New Type of Patent System
The real genius of the Founders, however, lay in the way they consciously integrated democratic principles into the design of the world’s first modern patent system—principles that had a profound
impact on the pace and direction of U.S. economic growth. These were reflected in six fundamental innovations in our patent system that departed from European practice.
### Low Fees: Making Patents Affordable
The original patent law passed by Congress on April 10, 1790, deliberately set patent fees to a level any ordinary citizen could afford—initially $3.70, but three years later raised to $30. This was
still less than 5 percent of the rate in Britain. Patent fees remained $30 for the next 70 years, ensuring that virtually any citizen could participate in the Industrial Revolution.
The results were dramatic. Whereas most of Britain’s handful of inventors came from privilege, the vast majority of America’s thousands of inventors came from humble beginnings. They included farmers, factory workers, merchants,
mechanics, and other artisans.
Of the 160 so-called “great inventors” of nineteenth-century America, over 70 percent had only a primary or secondary school education. Many had no formal schooling at all. And some of the most famous names in American
invention—Matthias Baldwin (locomotive), George Eastman (roll film), Elias Howe (sewing machine), and Thomas Edison (electric light and phonograph)—had to leave school early to support their families.
What’s more, in another sign of economic democratization, most U.S. inventors had no formal scientific or technical training. They had only the general knowledge common to citizens of the day, plus whatever they taught themselves.
What distinguished them was their ingenuity in applying that general knowledge to the practical problems of daily existence, and then exploiting the commercial opportunities that arose as a result. In short, they were entrepreneurial.
The rapid growth of inventive activity during early American industrialization was characterized by a disproportionate increase in the involvement of segments of the population with relatively common sets of skills and knowledge,”
note Sokoloff and Khan. “Rather than being accounted for by an elite who possessed rare technical knowledge or commanded large amounts of financial resources, the rise in patenting coincided with a broadening of the ranks of patentees to encompass
many individuals, occupations, and geographic districts.”
Kenneth Sokoloff and B. Zorina Khan,
“
Making the patent system inexpensive invited everyone’s participation. In the words of Englishman John Standfield, quoted in an 1880 issue of
Scientific American, “The cheap patent law of the United States has been and still is the secret of the great success of that country.”
### Simplifying Application Procedures
The Founders greatly simplified administrative procedures in applying for a patent. This was no small thing when you consider that British applicants were forced to seek approval from seven different
offices, and then twice—twice!—obtain the signature of the King. If they wanted a patent that covered Scotland and Ireland as well, they needed approval from ten more offices. British patent procedures were so Byzantine, in fact, that author Charles
Dickens wrote a spoof of them entitled
A Poor Man’s Tale of a Patent, in which his main character, an inventor, is forced to seek approvals from 34 offices, some of which had been abolished years before and no longer existed. Obviously, few inventors could hope to run
this gauntlet successfully unless they had the wherewithal to hire very expensive patent agents to assist them.
In the United States, on the other hand, applications only needed the approval of a single patent office, which created repositories throughout the country where inventors could drop off their applications and models and have them
forwarded to the patent office at government expense. Rural inventors could even apply for a patent through the mail—postage free!
This last perk for rural inventors turned out to have a big impact on the course of U.S. economic development. While most British industrial breakthroughs were confined to London or other big cities, U.S. inventions were widely
distributed across the country, in urban and rural areas both. The result was broader- based economic growth and less income inequality in the United States.
### Spreading New Technological Knowledge
Another unique feature of the U.S. patent system was its systematic effort to spread new technological knowledge throughout society, thereby creating a virtuous circle of innovation begetting more
innovation. In Britain, patents were only open to public inspection after paying a fee, and until 1852 were not even officially printed, published, or indexed. In France, printed information about patents was limited to brief titles in patent
indexes, intermittently published and only available in the office in which these had been originally filed.
By contrast, the first U.S. patent law explicitly stated that “copies of patent Specification together with similar Models [are] to be made at the public Expence and lodged in each state.”
Patent Act of 1790, HR-41,
In addition, as noted in the previous section, a plethora of publications by government and industry enabled any citizen with an interest to keep abreast of the latest patented technologies.
### Examining Patents for Validity
In a very crucial departure from Old World practice, the Founders created the world’s first examination system for patents to ensure their
novelty,
non-obviousness, and
utility. The examinations were initially conducted by a committee composed of the Secretary of State (Thomas Jefferson), Secretary of War (Henry Knox), and Attorney General (Edmund Randolph). But this was found to be cumbersome, so in 1793 a simple registration system was established. It turned out, however, that without the examination of applications for novelty, non-obviousness, and utility, the validity of issued patents began to be questioned. So the reforms of the 1836 Patent Act specified that henceforth applications would be scrutinized by technically trained examiners to ensure that the invention represented a genuine advance in the state of the art.
For the first time anywhere in the world, the criteria for granting a patent depended solely upon the merits of the application rather than the identity or the mere say-so of the inventor.
The situation was very different in Europe. In France, the following caveat was printed on each patent: “The government, in granting a patent without prior examination, does not in any manner guarantee either the priority, merit or success of an invention.” Imagine trying to interest a group of investors in your new invention with that kind of warning label attached to it!
In Britain, meanwhile, the lack of any examination of patent validity made the purchase of a patent right highly speculative and costly, thereby limiting investment in new technology.
By contrast, says Khan, “the U.S. examination system reduced uncertainty about the validity of patents, and provided [interested parties] with a signal of [their] potential value.” This proved to be crucial in facilitating the growth of an extensive market in the sale and licensing of valuable patent rights—the first large-scale market of this type in the world.
### No “Working Requirements” Reduced Monopoly Control
The fifth distinguishing feature of the U.S. patent system was the lack of any sort of “working requirements.” In the debate over HR-41, the bill that became the first U.S. patent law in 1790, “the Senate suggested requiring patentees to make products based on the patent or license others to do so. But the House rejected this as an infringement of patentees’ rights.”Op. cit., Khan.
Indeed, the Founders believed working requirements would only strengthen monopoly power and skew invention toward incumbent industry by limiting patents to those with the factories (or the capital to build them) needed to manufacture products from their inventions.
B. Zorina Khan,
“
In short, the Founding Fathers of this nation deliberately and quite consciously created what we now call “non-practicing entities” (NPEs) in order to expand the pool of inventors in their then backward economy to include ordinary citizens without the wealth or resources to commercialize their own inventions. And it worked, leading to a dramatic surge in innovation in nineteenth-century America as large numbers of ordinary citizens started inventing and then licensing their discoveries to enterprises for commercialization.
By 1865, the U.S. per capita patenting rate was more than triple that of Britain’s, according to the annual reports from the commissioners of patents in both countries, and by 1885, it was more than quadruple that of Britain. Each
U.S. patentee was also far more prolific than their British counterpart, so by mid-century, the United States was patenting five times the number of inventions as Britain each year, even though the populations were then equal in size.
### Creating a Market for New Technology
The sixth unique feature of the U.S. patent system—and along with the refusal to impose working requirements, the one that had the greatest impact on future U.S. economic growth—was “an explicit
provision for the sale of patent rights [that] both the courts and the U.S. Patent Office acted to facilitate.”
Naomi R. Lamoreaux and Kenneth L. Sokoloff,
“
Why facilitate the buying and selling of patents? Because doing so enabled ordinary worker or farmer inventors without the capital to commercialize their own discoveries to still participate in inventive activity and earn income by
licensing or selling their patents to enterprises that could. This ability to license patent rights (along with the low application fees) turned inventing into a new career path for thousands of poor but technically creative citizens.B. Zorina Khan,
“
It also proved to be a powerful means of mobilizing capital for investment in new technologies and their commercialization into new products and services for society.
That patents could be used as tradable assets by non-practicing entities without the wealth to commercialize their own discoveries was a wholly unique feature of the American patent system. By 1880, 85 percent of all U.S. patents
were licensed by their inventors, compared with 30 percent of British patents.
B.Zorina Khan,
Patent licensing, in fact, was the principal means by which new discoveries were commercialized in the decades before the early twentieth- century emergence of in-house corporate R&D departments. Publications such as
Scientific American
were founded specifically to facilitate the trade in patents, and it regularly featured lists of new and interesting patents, which commercial enterprises then licensed or purchased to use in their product development efforts.
American Bell Telephone’s new product pipeline, for example, operated like most others at the time. According to its 1894 annual report, the company’s R&D department licensed 73 patents from outside inventors, while developing
only 12 from its own employees.
Thomas Blanchard was a typical inventor-licensor. He was the son of a small farmer who invented and patented a mechanical tack-maker in 1806 that could fabricate five hundred tacks per minute, each superior to tacks made by hand.
He sold the rights to his machine for $5,000, quite a sum in those days. He then invented a lathe to produce uniform gun stocks, and the patent he received for it enabled him to attract investors for the production of those gun stocks for the local
Boston market. Blanchard also leased his patent rights to gun producers nationwide, as well as to manufacturers of tool handles and wheel spokes. The income he generated from patent licensing enabled him to make inventing his full-time career. He
went on to invent a wood-bending machine, an upriver steamboat, and a steam wagon that was used until the introduction of railroads in the United States, and received a total of 25 patents during his career.
According to a 2013 Congressionally mandated Government Accountability Office (GAO) report on NPEs, “History is filled with examples of successful inventors who did not develop products based on the technologies they patented.” It
specifically cited the case of Elias Howe, who patented a method of making a lockstitch but did not produce sewing machines. Instead, Howe licensed his patents to the Singer Company, which then deployed Howe’s invention in its sewing machines.
“
Patent licensing, scholars have found, was facilitated by an array of intermediaries—lawyers, venture financiers, and patent licensing agents—who “lowered the transaction costs and improved the efficiency” of the trade in and
commercialization of patented technology. “By enabling, indeed encouraging, inventors to focus on what they did best [i.e., invention], this division of labor gave rise to the most technologically fertile period in American history.”
Naomi Lamoreayx and Kenneth Sokoloff,
“
### The Positive Effects of Licensing
The Founders’ decision to foster NPEs and patent licensing proved crucial to America’s rapid technological progress and economic growth. Indeed, patent records from the nineteenth century reveal that
more than two-thirds of the “great inventors” of the Industrial Revolution, including Thomas Edison and Elias Howe, were NPEs who specialized in invention and licensed some or all of their patents to outside enterprises for development into new
products.
B.Zorina Khan and Kenneth L.Sokoloff,
Had the United States followed the approach of older European patent systems and limited patent rights solely to inventors who made or sold products—or prevented them from licensing their patents—America might not have even had an
Industrial Revolution.
In any event, the result of this division of labor between invention and production was exactly as Adam Smith predicted:
The benefits of that division of labor remain visible today, embodied in the thousands of university and other NPE patents licensed by companies large and small each year, as well as by the positive U.S. balance of trade in patent
licensing, estimated to be worth at least $150 billion annually as of 2006. More than 5,000 new products and 7,000 new companies have been created with the help of university NPE patents alone in the last 30 years.
Joseph Hornett and David Johnson, Purdue Research Foundation. Derived from: bit.ly/O7iA18
And licensors of patented technology help the United States maintain its technology leadership in critical economic sectors.
### A New Species called “Patent Trolls”
To be sure, there is new a species of NPE known as “patent trolls” who use low-quality patents to extort so-called “license fees” from small businesses unable to pay the cost of standing up to them
in court. But their activities have nothing in common with real patent licensing.
Typically, these patent owners send form letters to hundreds, or in some cases thousands, of random small businesses, claiming with little or no evidence that they are “infringing” their patents. These letters then demand so-called
“licensing fees” ranging from one to several thousands of dollars to avoid a patent infringement lawsuit that could cost those businesses far more to defend against in court—even if the business owner is innocent of any infringement.
Beginning in mid-2013, a torrent of bad faith demand letters began targeting small businesses, sparking wide protest. The National Federation of Independent Businesses (NFIB) and many other business groups and trade associations
demanded action, and Washington responded in 2014 with several pieces of proposed reform legislation. By early 2015, the Federal Trade Commission (FTC) had acted against one sender of bad faith demand letters, and federal legislation to rein in such
abuses seemed likely to pass.
At the state level, meanwhile, by early 2015, 15 states had enacted laws to curb abusive patent demand letters, and 11 others were actively considering similar bills. In addition, the attorneys general of several states have used
consumer protection laws against making false claims to force these “patent trolls” to stop sending their extortionist demand letters.
These abusive patent litigants should not be confused with legitimate NPEs, however, whose primary business is invention and technology licensing, not extorting so-called “license fees” from innocent businesses. Patent licensing
facilitates the transfer and commercialization of technology into new products and services and promotes U.S. economic growth.
### A Patent System for Everyone
In sum, these six unique features of the U.S. patent system—low fees, simplified procedures, examination of applications by trained experts, systematic disclosure of new technological knowledge, lack of
“working requirements,” and encouragement of robust trade in patent rights—all had a powerfully beneficial impact on the nation’s economic growth.
But none of that would have been possible were it not for the broad-based democratic rule of law in the United States and the critical role played by the U.S. legal system in interpreting and enforcing America’s revolutionary patent laws. |
# Patent Basics
## The Role of the U.S. Legal System
### Learning Objectives
After completing this section, you will be able to
1. Describe the differences between U.S. and European patent laws.
2. Describe the history of patent litigation in the United States.
### U.S. Patent Law vs. European Patent Law
Just as with any other property right, patent rights would be meaningless without the ability to enforce them in court. And from the earliest days of the patent system, says Khan, “Our legal
system remained true to the Constitution in the belief that the defense of rights in patented invention was important in fostering industrial and economic development.”
In Britain and other European countries, patents were viewed as “pernicious monopolies that restricted community rights and [Had] to be carefully monitored and narrowly construed.”
B.Zorina Khan,
The enforcement and interpretation of patent laws by the courts in Europe also tended to be highly variable and dependent upon the whims of each individual judge.
In the United States, however, early courts treated inventors’ patent rights with deference, just as they did the rights of other property owners. Famed Supreme Court Justice Joseph Story repeatedly declared that patent rights were
“sacred” and were the just reward for inventive ingenuity. As he noted in
(1817), “the proper duty of the court” is to ensure that “wrongdoers may not reap the fruits of the labor and genius of other men.”
The relative uniformity and certainty of enforcement of patent rights by the courts also proved critical in encouraging capital to invest in commercializing those patent rights.
Contrasting the patent laws and policies of the United States and Britain, Supreme Court Justice Henry Baldwin went to some lengths in
(1831) to show how English courts saw patents as a zero-sum trade-off between private rights and the public good. The explicit intention of U.S. patent law, however, was “to benefit the inventor, in the belief that maximizing individual
welfare leads to maximum social welfare.”
Nonetheless, U.S. intellectual property laws did try to strike a balance between the needs of the many and the few. “Patent laws ensured the security of private property rights in invention. However, it was also necessary to
balance the just claims of inventors against the dangers of exclusive monopolies that might restrict the scope of current and future invention.”
Op. cit., Khan.
### Changes in U.S. Patent Law Through the Years
Over the years, of course, that balance has moved back and forth between relatively stronger versus weaker enforcement of patent rights. With the rise of the robber barons in the late
nineteenth century, government and the courts increasingly viewed patents through the prism of antitrust, in some cases even compelling large firms like IBM to license their patents to competitors. Then with the advent of the high-tech revolution in
the 1980s, antitrust concerns faded and the courts began once again to view stronger patent rights as helpful in fostering innovation.
Interestingly, the U.S. legal system has always operated on the theory that the best way to achieve the proper balance between private rights and public interest was not through government decree, centralized management, or
compulsory licensing but rather through the decentralized decision making and market interactions of inventors themselves. The court’s role was to resolve the inevitable conflicts that arose, on a case by case basis.
Throughout all the twists and turns in patent enforcement over the centuries, however, the federal courts have remained unwavering on four key principles of U.S. patent law.
### An “Explosion” of Patent Litigation?
Patent litigation, of course, has always been an integral feature of the U.S. patent system. The first patent case on record was that of Benjamin Folger, whose patent for the production of candles
was invalidated by the district federal court for New York in 1792. This was merely the first of many hundreds (and eventually thousands) of cases in which patent litigation served the important function of settling either the validity or the
disputed ownership of the rights to critical new technologies—the litigation between telephone inventors Alexander Graham Bell and Elisha Gray being perhaps the most famous case in point. By doing so, the courts provided greater certainty regarding
the value of such rights to entrepreneurs and investors alike.
Today, some critics contend that an “explosion of patent litigation” unlike any in history is harming business and diverting resources better spent on innovation. No responsible observer would deny that the courts have seen an
increase in patent infringement suits in recent years, just as they have seen a rise in personal injury claims and product liability suits. But that said, the evidence shows that the rate of patent litigation today is actually below historical norms.
According to
USCourts.gov
figures, the number of patent infringement suits filed in the United States increased 59 percent between 2001 and 2011—from 2,520 cases in 2001 to 4,015 cases in 2011. Meanwhile, the number of patents granted in that same period increased by only 35
percent, which supports the view that patent litigation has become more frequent over the last decade as the role and value of intellectual property has increased in the Knowledge Economy.
Statistics from
USCourts.gov
show an even sharper rise in the number of patent suits filed in 2012, to 5,189 cases. But analysts attribute most of this increase to the anti-joinder provisions of the Patent Act of 2011, which curtailed the practice of naming multiple defendants
in a single infringement suit. According to Carla Rydholm of the patent analytics firm Lex Machina, “Plaintiffs must [now] meet more stringent requirements to file a case against multiple defendants. So instead of Plaintiff X filing one case naming
20 defendants, Plaintiff X might file 20 lawsuits (one per defendant) each with unique civil action numbers.”
When looked at over the longer term, however, it turns out that 96 percent of all the increase in patent infringement suits since 1991 can be explained by a corresponding increase in patents granted, reports the
PricewaterhouseCoopers’s 2013 Patent Litigation Study.
Http://www.pwc.com/en_US/us/forensic-services/publications/assets/2012-patent- litigation-study.pdf
In case you’re wondering if the increase in patents granted is itself a sign of a patent system being increasingly gamed by speculators wanting to cash in on the new “patent gold rush,” note that the average number of patents
issued per billion dollars of GDP has remained at or below the same level—13 patents per billion dollars of GDP—since 1963.
Sean Connolly, “Patent Litigation Rates: What They Tell Us and What They Don’t,” derived from: http://connollyip.com/patent-litigation-rates-what-they-tell-us-and-what-they-dont/
Interestingly, although the number of suits filed has increased in rough correlation to patent grants, the number that actually go to trial has remained fairly constant over the last 30 years. About 90 percent of the suits filed
each year are abandoned or settled. Of the three hundred that remain, two-thirds never go to trial, and are adjudicated on summary judgment (of noninfringement in most cases).
The nation is thus left with, at most, between 90 and 112 patent infringement trials per year—exactly the same number that went to trial 10, 20, and even 30 years ago.
Gene Quinn, “Patent Litigation Statistics: 1980- 2010,
To be sure, there can be significant costs to business even in litigating and settling patent suits that never go to trial. But no one has shown that the relative cost of patent litigation today is higher than it was historically,
or that the cost of patent litigation is more burdensome than other customary legal costs in business, especially the huge cost of regulatory compliance.
The evidence does not suggest that patent litigation is “out of control” today. As retired Chief Judge Paul Michel of the U.S. Court of Appeals for the Federal Circuit, the main court for patent appeals since 1982, notes, “The
level of patent litigation today is rather modest for a nation with two million active patents and hundreds of thousands of businesses competing against each other.”
History supports Judge Michel on this point. The estimated 124-plus smartphone patent suits filed between 2009 and 2012
http://en.wikipedia.org/wiki/Smartphone_wars.
are less than one- quarter the number of patent suits filed during the first “Telephone Wars” of Alexander Graham Bell’s time. Back then, the American Bell Telephone Company and its successor, AT&T, litigated 587 patent cases alone.
“The Telephone Cases,” Wikipedia, http://en.wikipedia.org/wiki/The_T elephone_Cases.
Even more surprising, given the common belief in a patent litigation “explosion” today, patent and legal records from the golden age of invention during the mid-nineteenth century U.S. Industrial Revolution show that the patent
litigation rate at that time—defined as the number of patent suits filed in a decade divided by the number of patents issued in that decade—reached 3.6 percent.B. Zorina Khan,
“
In contrast,
USCourts.gov
figures show the patent litigation rate during the decade 2001 to 2011 was less than half that—only 1.52 percent. From 2002 to 2012, reflecting the increased suits but also the increased (276,788) patents issued, the litigation rate was 1.57 percent.
Over the entire period from 1790 to 1860, the patent litigation rate averaged 1.65 percent.
Today’s smartphone wars, then, are simply “back to the future” when it comes to the ways in which disruptive new industries are developed. Historians have noted that every major industrial breakthrough of the last 150 years—from the
development of the sewing machine, telephone, automobile, radio, aircraft, medical stent, and even disposable diaper industries, to the birth of the semiconductor and Internet e-commerce industries—witnessed exactly the same surge in patenting and
patent litigation that we see in today’s smartphone field.
Adam Mossoff, “The Rise and Fall of the First American Patent Thicket: The Sewing Machine War of the 1850s,
”
And just as with smartphones today, the most competitive technology arenas have always been the most litigious. In Edison’s time, the inventors of electrical discoveries were four times more likely than other inventors to be
involved in patent litigation, and accounted for 41 percent of all patent suits filed during that period.
B.Zorina Khan,
In any event, by early 2015, it had already become clear that a noticeable decline in patent litigation was under way. Most analysts attributed the decline to a series of U.S. Supreme Court rulings in 2014 limiting the
patentability of software and increasing the ability of the courts to impose sanctions on abusive litigants, which will be discussed later in this chapter. Also driving this decline in litigation was the availability of new post-grant review
proceedings under the new America Invents Act, which allow third parties to challenge patents and, if the evidence so warrants, have their claims invalidated by the USPTO’s Patent Trial and Appeal Board.
Although patent litigation is costly, the historical record suggests that it serves a vital function by settling the validity and disputed ownership of patent rights so these can be commercialized into new products, new services,
and new medical treatments.
This is, in fact, the proper role of the courts. |
# Patent Basics
## What the U.S. Patent System Wrought
### Learning Objectives
After completing this section, you will be able to
1. Explain the effects of the U.S. patent system on American economic development.
2. Describe trends in U.S. patenting over the years.
### Creating the World’s Most Successful Economy
In 1630, the puritan John Winthrop, future governor of Massachusetts colony, declared that “We shall be as a city upon a hill, the eyes of all people are upon us.”
One hundred and fifty years later, the Founders of the United States of America proved Winthrop right, offering the world a vision of liberty and democratic governance that continues to inspire people to this day. As noted
previously, the men who led the Revolution and wrote the Constitution were not wild-eyed revolutionaries. They were eminently practical people who managed to create the longest- living modern democratic political and economic system on the planet.
In other words, they must have done something right. And one of those things was surely the patent system they created. Because almost from the moment of its inception, it began to spark innovation and economic growth on a scope and
scale never before seen in the world.
Only two months after America’s first patent law was signed in 1790, in fact, Thomas Jefferson himself noted that it had “given a spring to invention beyond my conception.” Within 13 years, America surpassed Britain—until then,
the unrivaled leader of the industrial revolution—in the number of new inventions patented, even though Britain still had more than twice America’s population. By 1870, as noted earlier, the United States was patenting more than five times the number
of inventions as Britain, although their populations were by then roughly equal in size.
At first, most British observers were dismissive of American innovation efforts, declaring that the former colony would never be able to progress beyond the simple imitation of superior European technologies. But eventually Britain
and other nations took note of the way the U.S. patent system seemed to be stimulating invention and economic growth at an unheard-of pace.
Sir William Thompson (pictured above), a British inventor and scientist attending the 1876 Centennial Exhibition in Philadelphia, looked at the amazing array of American inventions—including Bell’s telephone, the Westinghouse airbrake, Singer’s
sewing machines, and Edison’s improved telegraph—and had this to say: “If Europe does not amend its patent laws, America will speedily become the nursery of useful inventions for the world.”
Meanwhile, the Swiss Commissioner in attendance, the shoe manufacturer Edward Bally, offered a similar warning to his Old World countrymen: “American industry has taken a lead which in a few years may cause Europe to feel its
consequences in a very marked degree.”
Then, there’s Japan’s Assistant Secretary of State Korekiyo Takahashi, who visited the U.S. Patent Office. Upon his return home, he said, “What is it that makes the United States such a great nation? We investigated, and we found
it was patents. And we will have patents.”
Even the British jurist Sir Henry Sumner Maine, who had once argued that “the establishment of the masses in power is the blackest omen” for the future of invention, later changed his tune. He conceded that the U.S. patent system
was “one of the provisions of the Constitution that have most influenced the destinies of the American people” and that it had made the United States “the first in the world for the number and ingenuity of [its] inventors”.
Henry Sumner Maine,
As historians Lamoreaux and Sokoloff noted, “[Foreign] observers attributed much of the country’s rapid technological progress to its distinctive patent system. Quite revolutionary in design at inception, the U.S. patent system
came to be much admired for providing broad access to property rights in new technological knowledge and for facilitating trade in patented technologies. These features attracted the technologically creative, even those who lacked the capital to
directly exploit [i.e., commercialize] their inventions . . . and also fostered a division of labor between the conduct of inventive activity and the application of technical discoveries to actual production. It is no coincidence that Britain and
many other European countries [later] began to modify their patent institutions to make them more like those of the Americans.”
Naomi R. Lamoreaux and Kenneth L. Sokoloff,
“
### Every Breakthrough Spurs Patenting Spikes
The patent system’s central role in fostering innovation can be seen in the patenting spikes that occur with every major industrial breakthrough. A major surge in patenting took place in the
1880s, for example, when the number of new patents issued each year jumped 56 percent to about 20,000, compared with the 12,000 issued yearly during the previous decade. This patent boom corresponded with rapid advances in the emerging railroad,
telegraph, telephone, and electric light and power industries that signaled the industrialization of the U.S. economy.
The next sharp surge in patent issuances began around 1902 and lasted until 1916 or so, when the number of patents granted doubled from 20,000 per year to around 40,000 per year. This was the period of the newborn automobile and
aircraft industries’ most rapid early-stage growth. Patenting levels then remained relatively stable at about 40,000 per year until around 1960 or so, when the revolution in plastics and other synthetic materials along with boom-time growth in the
aerospace and computer industries pushed patenting levels to 60,000 per year. There they remained until the mid- 1980s, when the personal computer and emerging high-tech industries of Silicon Valley began to power the whole of the U.S. economy and
propel us toward the age of the Internet. Patenting levels then rose to around 80,000 to 100,000 yearly
With the rise of the Internet, social media, mobile telephony, and smartphones over the last two decades, the number of patent applications filed each year with the U.S. Patent and Trademark Office (USPTO) has surged fourfold. In
2014, the USPTO received 578,802 applications, finding 300,678 of these applications worthy of receiving a patent. This is but the latest spike in innovation and patenting.
Clearly, whenever the United States has undergone a major industrial renaissance during which technology advances lead not only to the birth of new industries, but also to the reshaping of existing ones, patenting levels rise
dramatically. It is no surprise, therefore, that Silicon Valley, midwife of many of the new Knowledge Economy industries of the past 60 years, is home to less than 1 percent of the nation’s population but earns 12 percent of its patents each year.
The Valley is now the site of a new USPTO satellite office serving high-tech innovators there.
“
The patent system has also been crucial in facilitating the growth of new start-up businesses, with 67 percent of entrepreneurs reporting that they find patents valuable in obtaining venture financing.
“
This is important because although large companies contribute enormously to American innovation and industrial growth through their in-house research and development operations as well as via their partnerships with research universities, start-up
companies play a particularly strong role in the creation of entirely new industries. Indeed, virtually every innovative new industry of the last 150 years—From the telegraph, telephone, and electric power industries of the 1800s, to the auto,
aircraft, materials, and aerospace industries of the twentieth century, to the semiconductor, personal computer, software, biotech and Internet e-commerce industries of the last 60 years—was launched by an entrepreneurial start-up company.
The Founders would not be surprised by this. They created the world’s first democratized patent system, after all, for a reason: to stimulate the ingenuity of the common man. They had asked themselves a question—the same question
reiterated two generations later by Supreme Court Justice Joseph Story when he spoke before an audience of ordinary mechanics: “Ask yourselves, what would be the result of one hundred thousand minds ... urged on by the daily motives of interest, to
acquire new skill, or invent new improvements.”
Reported in
The result was the most successful economy on the face of the earth.
### Patents and the American Dream
It’s not only the economy that the patent system helped shape, but the culture and consciousness as well. As the eminent historian Gordon S. Wood observed in his 2010 book
Empire of Liberty,
And for the first time in human history, a nation had come to see its greatness not in empire or military might or royal lineage, but in its capacity for technological progress.
There was nothing preordained about America’s economic success, no special “Yankee ingenuity” gene in their hereditary stock. As Scientific American noted in 1876, the United States advanced “not because we are by nature more
inventive than other men. Every nationality becomes inventive the moment it comes under our laws.”
Rather, the secret of America’s success was a uniquely democratic patent system that “added the fuel of interest to the fire of genius” in generations of ordinary citizens—and in so doing, helped in a very real way to give birth to
the American Dream itself.
Ironically, few people today even know the origin of the term “the American Dream.” In fact, it was coined in 1931, by the historian James Truslow Adams in his book
Epic of America, and it is instructive to read what Adams meant by it:
Only in America could a working class youth named Thomas Edison with less than three years of schooling develop himself into the world’s greatest inventor—a visionary who gave the world some of the most important technologies of
late nineteenth- and early twentieth-century life.
This is exactly what the Founders had in mind when they created the U.S. patent system. |
# Patent Basics
## Patent-Eligible Inventions
### Learning Objectives
After completing this section, you will be able to
1. Identify the characteristics of a patentable invention.
2. Understand what is not patentable and why.
### What, Exactly, Can You Patent?
Title 35 of the United States Code (the Patent Act) allows anyone who invents or discovers any new, non-obvious, and useful machine, manufacture, process, or composition of matter—or who makes an improvement of any of the above—to obtain a patent.
35 U.S.C § 101.
These four kinds of patentable inventions fall into one of two categories: They are products or processes.
Arthur R. Millerand Michael H. Davis,
### Product or Process?
Products are physical things—whether they be machines (a new type of robotic welder), manufactures (an artificial knee made of titanium), or compositions of matter (a new chemical “superglue” for binding materials
together). In this photo, Elon Musk observes the robotic arms in the Tesla Motors factory. Specialized manufacturing equipment like this are patentable products.
Processes (or methods), on the other hand, are a means to an end—either a means of doing something new (being able to pay for purchases directly from your smartphone), or a new way of doing something old (using “pinch, swipe, and
zoom” gestures on a touchscreen, rather than clicking drop-down menus, to manipulate text, music, and images on a smartphone).
### You Cannot Patent Ideas
All patented inventions fit into one of these four categories: machine, manufacture, process, or composition of matter. But not everything that fits in one of these four categories can be patented. And the most
important reason why one thing is patentable and another is not lies in the difference between ideas and applications.
You cannot patent an idea for a better mousetrap—not unless it can be developed into a new, non-obvious, and useful machine, manufacture, process, or composition of matter that can actually accomplish the task. You may have a
genius idea for faster-than-light travel, but that will not get you a patent unless you can outline how to develop a tangible process or device for actually doing so, in which case you can seek to patent it.
Put another way, “talk is cheap” when it comes to securing a patent. The U.S. Patent and Trademark Office offers no judgment as to the wisdom or desirability of any particular invention—patent No. 2,882,858
for a bird diaper is certainly proof of that. But it absolutely will insist that every invention include a tangible device or process for achieving its intended purpose before it deems the invention worthy of a patent.
### Mathematical Formulas Not Patentable
There are other discoveries that fall into the broad category of abstract ideas and are thus unpatentable. You cannot patent a mathematical formula. You cannot patent a law of nature, such as Einstein’s E=MC2. And you cannot patent natural phenomena like electricity (discovered by William Gilbert in 1600) or the Higgs particle that gives all matter its mass (discovered by researchers at the Large Hadron Collider on July 4, 2012). These all exist independently of human intervention, whether we have discovered them or formulated their rules yet or not, and must be freely available to all of humanity for its understanding and betterment.
To restate the distinction, you cannot patent electromagnetism but you can patent a telegraph that uses electromagnetism to communicate rapidly over great distances, as Samuel Morse did in 1840 with patent no. 1647. And although
you cannot patent light waves, you can patent a fiber optic wire that employs light waves to communicate even more rapidly and over greater distances, as Corning Glass researchers did in 1970 with patent no. 3,711,262.
### Can You Patent Computer Software?
The boundary between ideas and applications might seem clear, but it has become blurred since the advent of computer technology 40 years ago, especially regarding the patentability of software.
To learn more, watch this video from PBS Digital Studios about the first software patent ever awarded and to learn a bit about the debate around software patentability.
### Mixed Verdicts on Software Patentability
The federal courts and the U.S. Supreme Court have tried to clarify the limits of patentability in the computer age. Three Supreme Court cases in particular—often called the “patent-eligibility
trilogy”—reveal the evolution of its thinking about software patentability.
In 1972, the Supreme Court held in
that an algorithm in a computer program—in this case, a mathematical procedure executed electronically that was similar to long division with paper and pencil—was in and of itself not patentable. Phenomena of nature, mental processes, and abstract
intellectual concepts are the basic tools of scientific and technical research, the court noted, and therefore could not be patented lest it foreclose others from using the algorithm and thereby stifle rather than promote technological progress.
Granting a patent in this case, the court said, would be analogous to having granted Samuel Morse a patent covering all possible uses of electromagnetism in communications, rather than for the specific method and apparatus he actually invented.
The court made a point of saying, however, that its decision did not mean that computer software could not be patented—only that software whose only useful characteristic was an abstract algorithm could not be patented.
The Supreme Court further refined its thinking on software patentability in the 1978 case
.
Unlike the attempt to patent all uses of an algorithm in the Benson case, here the use of a software algorithm was limited to a specific application—setting off an alarm during the catalytic chemical conversion of hydrocarbons. This was a specific
and tangible use of an algorithm, but the Court still ruled the software unpatentable because it felt the application itself was not inventive.
But once again, the Court left the door open: “Even though a phenomenon of nature or mathematical formula may be well known, an inventive application ... may be patented.”
Three years later, the Supreme Court made its third attempt to define the patent-eligibility of software. In
, the Court ruled that although algorithms by themselves are not patentable, a software program that used algorithms to govern the molding of raw synthetic rubber into cured precision products was in fact patentable because it involved
“transforming or reducing an article to a different state or thing.”
### The Software Picture Blurs Even More
Taken together, the three rulings appeared for a time to arrive finally at a coherent definition of software patentability—namely, that although algorithms by themselves are abstract concepts and
therefore unpatentable, software programs may be patented if they employ algorithms to produce a tangible and inventive or transformative result. This view was further augmented by a 1998 U.S. Court of Appeals for the Federal Circuit decision in
, which extended software patentability to software-enabled methods of doing business so long as these produced a “useful, concrete, and tangible result.”
But this definitional equilibrium was not to last. The “useful, concrete, and tangible result” test in
State Street Bank
was rejected ten years later by the same court in
, which upheld the USPTO’s denial of a patent for a method of hedging risk in commodities trading. The court instead offered a “machine or transformation” test, which allows a software program or business method to be patented only if it
is implemented on a specific machine to achieve a special purpose that is novel, non-obvious, and useful; it transforms an article from one thing or state to another.
But in its review of
, the Supreme Court ruled that while the “machine or transformation” test was useful, it was not the only test for patentability. In addition to the “machine or transformation” test, the court decreed (rather vaguely) that any future test
should be “grounded in the examples and concepts” expressed in its original “patent-eligibility trilogy” of opinions. They thus reaffirmed that business methods may indeed be patentable.
### Finally, a “Pretty Clear” Message
While businesses and the courts were trying to figure out what the other tests for patentability might be, the Supreme Court provided further input with its March 2012 decision in
. Here, the court ruled that a process enabling physicians to correlate blood test results with medication levels to achieve the most appropriate dosages was ineligible for patent protection.”
But then in June of 2014, The Supreme Court issued what may prove to be its most consequential decision on the patentability of software in the 33 years since
Diamond v. Diehr.
In
Alice v. CLS Bank,
the Court ruled that taking some activity that people have been doing for centuries—in this case, holding funds in escrow until a transaction is completed—and then merely “doing it through a computer” did not turn this age-old activity into a
patentable new invention.
At first, many observers believed that the effects of the
Alice v. CLS Bank
ruling would be very limited. Only the patent in the suit was invalidated, after all, not all software patents. What’s more, the abstract reasoning of the court in its decision did not provide clarity on how the ruling may or may not apply to other
kinds of software patents—for example, the sort of software used in manufacturing that was ruled patentable in the 1981
Diamond v. Diehr
case.
But by October of 2014, a series of lower court decisions applying the new
Alice v. CLS Bank
standard had invalidated 13 additional software patents. As technology policy journalist Timothy B. Lee noted, “The courts are sending a pretty clear message: you can’t take a commonplace human activity, do it with a computer, and call that a
patentable invention.”
How far reaching will the impact of
Alice v. CLS Bank
be? “This doesn’t necessarily mean that all software patents are in danger,” Lee noted, because the patents involved “were particularly vulnerable to challenge under the new
Alice
precedent. But it does mean that the pendulum of patent law is clearly swinging in an anti-[software] patent direction.”
### Overcoming the Alice Paradox
By late 2015, however, it was clear that the
Alice
ruling was having an impact not only on patent law, but also on the innovation process itself within corporate America.
As John Cronin, a former top inventor at IBM and now the CEO of the innovation-on-demand firm ipCreate, observes: “The highest-value products and services today—the ones that increasingly drive margins in business—involve cloud
computing, Big Data, machine learning, connectivity, mobility and location-based services, and on-demand and anything-as-a-service software applications and business processes. But ironically, these high-value innovations are also the most difficult
to patent nowadays as a result of the Supreme Court’s
Alice
decision.”
Cronin calls this the “Alice
Paradox,” and it has left many in-house patent groups struggling for a solution. One thing is clear: To be patentable nowadays, software has to take a genuinely-inventive step and either trigger an action, employ a device, or in some other way
produce a tangible transformative result.
In addition, smart companies are trying to address patentability issues involving software and business processes much earlier in the innovation cycle, before huge investments are made in R&D that may turn out to be not patentable.
Overall, addressing the “Alice
Paradox” will be critical for many companies because patenting clearly adds value to a new product or service. In a groundbreaking joint study from Carnegie Mellon University, Georgia Institute of Technology, and Duke University entitled “R&D and
the Patent Premium,” economists found that “the patent premium for innovations that were patented is substantial. Firms earn on average a 50% premium over the no patenting case, ranging from 60% in the health-related industries to 40% in
electronics.”
Ashish Arora, Marco Ceccagnoli, and Wesley M. Cohen,
“
### The Debate on Software Continues
The debate over the dividing line between patentable versus unpatentable computer software-related inventions continues—in corporate R&D labs and in the courts.
However, there are some who don’t believe that software and business methods should be patented under any conditions. They argue first of all that software is different from other industries—more iterative and more incremental,
with each advance building upon thousands of previous advances. Therefore, their thinking goes, software should not be entitled to patents that ought to be more properly reserved for truly breakthrough or revolutionary inventions.
There are two problems with this argument. First, as anyone in the semiconductor, chemical, or medical device industries can attest, innovation is no more iterative, incremental, or cumulative in software than is innovation in many
other industries. Indeed, there are probably just as many or more patents for incremental semiconductor inventions that build modestly upon earlier work as there are patents for incremental software inventions that do the same.
As patent scholar and veteran practitioner Paul Janicke of the University of Houston put it, “There really are no breakthrough inventions—at least not in the sense imagined by these critics. Everything moves one step at a time. In
fact, every time I thought I encountered a large leap, it turned out that I didn’t know the full extent of the prior art.”
The second problem with their logic is that the Founding Fathers specifically designed the patent system to encourage precisely this kind of incremental invention, so that ordinary people—using only the basic technical skills
possessed by most citizens—could participate in rapidly developing the economy from the ground up. This was a very different approach than that of elitist European patent systems of the day, and it produced results that the rest of the world very
soon came to envy (see “Section 1.5: What the U.S. Patent System Wrought”).
As the October 21, 1876, issue of Scientific American noted, “In the aggregate the little things—which in England or the continent would not or could not be patented—probably add more to the wealth and wellbeing of the community …
than the great things do.” Or to quote Thomas Jefferson himself: “A smaller [invention], applicable to our daily concerns, is infinitely more valuable than the greatest which can only be used for great objects.”
From Jefferson’s letter to George Fleming in 1815, excerpt from
Any uncertainty over the validity of incremental patenting was removed once and for all by the Patent Act of 1952. Consistent with the Founders’ intentions, U.S. law now explicitly holds that patent eligibility is not restricted solely to
revolutionary inventions or “flash of genius” discoveries, but also includes more iterative advances in the state of the technological art so long as these meet the requisite novelty, non-obviousness, and utility criteria.
### Evidence Shows Software Patents Don’t Hinder Innovation
Another argument made by critics of software patenting is that patents stifle innovation and foster monopolization in the software industry. Research, however, suggests that this is decidedly not the case.
Robert Merges,
“
If anything, in fact, the software industry has become even more innovative, more diversified, and more start-up friendly since patenting became common in the 1990s. You need only look at the huge proliferation of highly innovative start-ups in
today’s social media and apps software fields to see just how erroneous the claim is that software patents stifle innovation. Or consider for a moment the fate of the Blackberry, once dominant but within the space of a couple of years superseded by
more innovative competing smartphone makers.
Finally, some critics insist that the intangible nature of software ought to disqualify it from patentability. But as noted earlier, the Supreme Court has affirmed repeatedly that although abstract concepts cannot be patented,
software that employs algorithms to produce a tangible and inventive result—e.g., software that governs the molding of raw synthetic rubber into cured precision products—may be patented.
It’s also helpful to view this issue in a larger context. Forty years ago, 80 percent of the market value of all public companies resided in their tangible physical assets—their plant, equipment, and raw materials. In today’s
Knowledge Economy, however, it is intangible assets—intellectual property—that make up 80 percent of the market value of public companies.
Op. cit., Ocean Tomo.
Indeed, the entire history of economic progress on our planet may be described as one long climb by humanity up the ladder of abstraction—from brute force to the subtle use of energy, from wealth derived from tangible resources and
industrial machinery to wealth derived from ever-more ingenious ways to deploy that energy and those resources. It seems only logical, therefore, to expect that invention itself should follow a similar trajectory—from the realm of the tangible to the
realm of the intangible.
Ironically, the debate over patents for software, business methods, and other intangible inventions is nowhere more heated than on the Internet, itself an intangible realm in which “virtual” businesses launched with little more
than hope and electrons (e.g., Facebook) are creating real and substantial wealth in the form of new products, new services, new jobs, and new economic growth for society. Yet strangely, those who have no trouble accepting the Internet as the
intangible fruit of information age invention seem to get stuck in industrial age conceptions of what should and should not be patentable.
Odd perhaps, but not surprising. The expansion of patentable subject matter into new and more intangible realms has always met with resistance. Patents involving the use of electricity were condemned 140 years ago, as were
biotechnology patents 30 years ago, and of course software patents when they began to appear in large numbers 20 years ago. In each case, critics warned that these new kinds of patents would hold back further scientific discovery and innovation. Yet
in each case, innovation and discovery actually intensified and their benefits to society multiplied.
### When Gene-Related Inventions Are Patentable
A similar resistance is also developing toward gene-related patents. These began to be issued in significant numbers after the Supreme Court’s 1980 ruling in
Diamond v. Chakrabarty, which upheld the first patent on a newly-created living organism—a bacterium for digesting crude oil in oil spills. Since then, patents have been granted for isolated gene sequences, but so far only on
those with known functions and not on naturally- occurring genes in humans or other organisms. Patents have also been granted for gene sequences used in diagnostic testing, and on gene sequences that have been altered to make them more useful in a
specific application.
In March of 2010, however, a federal district court judge ruled in the case of
Myriad Genetics
that even isolated DNA is fundamentally the same as naturally- occurring DNA and is therefore ineligible for patenting. His ruling was reversed by the U.S. Court of Appeals for the Federal Circuit in July, 2011. But the Supreme Court then set aside
that decision and directed the appeals court to once again review the case in light of its March, 2012
Prometheus
decision. On August 16, 2012, however, the U.S. Court of Appeals for the Federal Circuit once again reaffirmed Myriad’s right to patent the isolated genes BCRA1 and BCRA2, which are involved in most inherited forms of breast and ovarian cancer.
On June 13, 2013, however, the U.S. Supreme Court finally determined in a unanimous decision that a naturally occurring DNA segment is a product of nature and cannot be patented merely because it has been isolated, thereby
invalidating Myriad’s patents on the BRCA1 and BRCA2 genes. The Court did rule, however, that the manipulation of a gene to create something not found in nature—such as a strand of synthetically-produced complementary DNA (cDNA)—could still be
eligible for patent protection.
To the average citizen—and perhaps to many patent lawyers as well—all this legal hairsplitting over the limits of patentability in the computer age must seem a bit like the debates in medieval times over how many angels can dance
on the head of a pin. But two critical points must be borne in mind regarding these debates.
First, no matter what anyone thinks the limits of patentability in an ideal world ought to be, out in the real world where we actually live, software, business method, and gene patents are multi- billion-dollar facts of life that
businesses ignore only at their peril.
Second, whatever confusion may exist today, the debates over patentability in the computer age will almost certainly be resolved eventually to most people’s satisfaction, just as all previous debates over patentability have. For if
nothing else, the two hundred year-plus history of the courts and the patent office demonstrate a remarkable ability on the part of these institutions to adapt to the challenges posed by new technologies and new economic conditions. |
# Patent Basics
## Criteria for Patenting
### Learning Objectives
After completing this section, you will be able to
1. Identify the criteria that an invention must meet to earn a patent.
2. Understand why non-obviousness is the most difficult hurdle to overcome.
### Can I Patent That?
Before reading this section, please watch the overview video below covering what you can and cannot patent. You can’t patent an idea (like an idea for a better mousetrap), only an application of that idea in a practical invention. Novelty, utility, and non-obviousness—the holy trinity of patents.
Now that you’ve learned what can be patented and what cannot, we will next examine the criteria for determining if a patent-eligible invention actually merits one. These criteria center around three concepts mentioned in the
previous section and enumerated in the Patent Act: novelty, utility, and non- obviousness.
35 U.S.C.§101, §102, and §103
Let’s discuss these three concepts in greater detail.
### Novelty
The requirement in Sections 101 and 102 of the Patent Act for novelty in an invention means that to qualify for a patent, a machine, manufacture, process, or composition of matter must not have been previously described or known. Specifically, it must not have been patented, described in an unpublished or published
patent application, explained in a printed publication such as an article or technical paper, or publicly known prior to the filing date of the new patent application. In addition, it must not have been published, used in public, or offered for sale by the applicant or their colleagues more than 12 months prior to the filing of a patent application.
If any of the above is true of an invention, it is said to have been “anticipated” and cannot be patented. These novelty requirements exist whether the “prior art”—the catchall term for any previous patent, publication, or use—is domestic or foreign.
This does not mean, of course, that your faster-than-light warp drive is unpatentable simply because it was envisioned in a general way in episodes of
Star Trek
and its successors’ television shows, and in many
Star Trek
books.
“It is not enough that an invention be suggested by the literature,” explains the eminent New York University scholar Arthur R. Miller and his coauthor Michael H. Davis’ in their textbook for law students.
Op. cit., Miller & Davis.
“Nor is it sufficient that the literature made the invention inevitable—that bears on the question of non-obviousness. The test, with one major exception, is whether enough of the invention has been disclosed to enable a person skilled in the
applicable art to duplicate the product or process.”
That one exception, writes Miller and Davis, is public use of the invention. In that case, even a limited disclosure that does not reveal the secrets of the invention can still foreclose a patent if the public use of it “discloses
the invention’s benefits.”
### Prior Art Must Be Enabling
In the era of social media, the previously mentioned requirements could pose a novelty barrier if not handled properly.
For instance, if you develop a new watch that displays information from an iPhone, and then disclose it on the crowdsourced funding site Kickstarter in order to raise capital from thousands of small-time investors, then you will
probably want to file a patent application prior to, or certainly no later than a year after, your disclosure of the benefits of your watch to the public.
But in the absence of such public use, disclosure in prior art must be substantial and enabling to be disqualifying.
As patent attorney and writer of the widely read
IP Watchdog
blog Gene Quinn explains:
### Utility
As the
Star Trek
example suggests, the novelty issue can also touch on the question of utility—the second patentability criteria. Utility has a special meaning in patent law, which is simply that an invention must function and be of some benefit
qualitatively—although no minimum quantum of benefit is necessary. The landscape of business is littered with companies that have invented not very useful or necessary products. But these may satisfy the requirement for utility if at least someone
would find them useful.
But snake oil medicines and other products that do not work in any meaningful way will not meet the requirement for utility. “The inventor of an ineffective drug may not obtain a patent merely because he convinces gullible patients
that it has a non-existent curative effect,” Miller and Davis note. “It is not so much that it lacks a minimum quantum of benefit (the patients may find it subjectively useful), but it is, instead, that it has an impermissible fraudulent quality.”
Even when no fraud is intended, the utility of a product or process must be demonstrate in a patent application—not presumed, but affirmatively demonstrated. Simply put, the thing or the method you have invented must actually work
as it is intended and claimed to work.
“Forget
Star Trek
for a moment,” says Quinn. “On a more mundane level, the USPTO used to deny patents for methods and compositions for re-growing hair. These were seen as lacking utility because re-growing hair was believed to be impossible. Finally, someone was able
to prove that his method and composition actually re-grew hair on a bald scalp. The patent examiners withdrew their rejection, and patents for such products have issued ever since.”
Interestingly, Quinn explains, since the earlier patent applications on hair-growing products didn’t describe anything that actually worked, they could not be used under the novelty bar to block later patent applications for
hair-growing products that did work.
### Non-Obviousness
An invention may be new. It may also have utility. But to meet the criteria for a patent, it must also be non-obvious under Section 103 of the Patent Act.
Let’s now dig deeper into the requirements of the concept of non-obviousness.
### Requirements
The requirement for non-obviousness may be illustrated with a fanciful example. If the number 4 were an invented product rather than a mathematical symbol, then even though the number 4 had never been invented before and
was thus novel, it would still not be patentable. That’s because someone skilled in the art could have put 2 and 2 together to come up with it.
But to offer a more practical example, say you invent a wheeled cart to move office supplies more easily between departments. If this is the first such wheeled office cart in history, you can get a patent for it. But if you then
decide, “Hey, why not put those wheels on a chair?” you won’t get a patent for it. That’s because combining two such widely-known and available elements would be obvious to anyone skilled in the art of office furniture design.
But things are not so obvious when it comes to inventing a camera phone. Even though it’s composed of well-known and widely-available components, combining the two did satisfy the requirement for non-obviousness because it became
more than the sum of its parts and met a large and previously-unfilled need in the marketplace. The millions of people who take selfies everyday is certainly proof of that.
There are various ways of presenting evidence that your invention satisfies the non-obvious requirement for patentability. You can demonstrate that the existing elements of your invention, although individually already known, yield
an unexpected or hidden result. Or you can show that your invention, although composed of well- known and widely available components, when combined satisfies a long-felt but previously unfilled need in the marketplace, thus indicating its
non-obviousness. Both of these demonstrations of non-obviousness apply to the camera phone example above.
### The One-Click Patent
Some people criticized the so-called “one-click” patent granted by the USPTO to Amazon.com in 1999 for Amazon’s system enabling customers to buy an item with a single click of the mouse—with the payment information
needed to complete the purchase already having been entered by the user previously.
They contended that although Amazon might have been the first company to employ the process, it was an obvious and inevitable iteration of already- existing mouse-clicking procedures for making a purchase online. The patent office
reexamined the patent, however, and in 2007 upheld the validity and the bulk of its major claims.
It is important to note that it’s an invention’s function that is often examined to determine obviousness. “Even though it may be obvious that a certain object can be constructed in a certain way, its utility and novelty may lie in
its functional use, not its construction,” write Miller and Davis. “Therefore, the prior art must be used to determine whether the invention’s new and useful function, not its construction, is non-obvious.”
During the first half of the twentieth century, the courts often saw an invention as obvious when it lacked a “flash of genius” and was merely an incremental advance over the state of the art as opposed to what they imagined would
be a “revolutionary” breakthrough discovery. But that subjective interpretation of inventiveness was overturned by the 1952 Patent Act, which codified a more objective standard—namely, that whether an invention is developed through laborious trial
and error or through a eureka flash-of-genius moment has no bearing on its obviousness or non-obviousness.
### Overcoming Patent Hurdles
Taken together, the three patenting criteria—novelty, utility, and non-obviousness—function like the obstacles in an Olympic hurdles race. The utility hurdle is easiest to overcome. The novelty hurdle less so.
But by far, the highest hurdle facing inventors is non-obviousness.
“The vast majority of all rejections at the patent office are for obviousness reasons,” explains retired Chief Judge Paul Michel of the U.S. Court of Appeals for the Federal Circuit, the main court that handles patent appeals. “And
it’s not very difficult to see why. Given the millions of patented inventions over the decades, the tens of millions of past and current products on the market, it’s not all that easy to come up with an invention that is not only novel but also truly
non-obvious to someone with ordinary skill in the state of the art.”
Many believe that the criteria for patenting weakened in the late 1990s and early 2000s, and that as a result, too many poor-quality patents were issued. To the extent this problem exists, one of its likeliest causes is the
fivefold increase in patent applications that has taken place over the last 30 years without a commensurate increase in USPTO funding, resources, and capabilities.
Despite these challenges, the USPTO has made substantial progress in the last five years in improving examiner training and tools, reducing the backlog of pending applications, and strengthening the quality of the examination
process for patent applications. This progress has been made despite oftentimes-unclear or contradictory patentability rulings from the courts.
Patent quality is essential to the maintenance of public confidence in the patent system. After all, when property rights (either real or intellectual) are seen as overbroad, ill-defined, or illegitimate, individuals and businesses
are more willing to trespass on them. |
# Patent Basics
## Other Types of Patents
### Learning Objectives
After completing this section, you will be able to
1. Explain the diff ences among utility, plant, and design patents.
2. Describe common patent misconceptions.
Up to this point, we have focused only on the most common types of patents, called
utility patents, which preclude others from making, using, or selling the invention during the term of the patent, which begins on the grant date and ends 20 years from the filing date (for an average of 17 to 18 years). But in
addition to these, the Patent Act also provides for two other types of patents—plant patents
and
design patents.
### Plant Patents
Plant patents were first created by the
Patent Act of 1930, which had been proposed by Luther Burbank to protect new species of asexually reproduced plants, mostly
flowers. These are different than the utility patents granted to bioengineered plants used in agriculture. The United States was the first country in the world to grant plant patents, and even today many countries continue to deny protection for
plants. Indeed, even some signatories to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) administered by the World Trade Organization (WTO) reserve the right to deny patents for plants.
Although the requirements for plant and design patents are substantially the same as those for utility patents, there are some crucial differences. The most important of these is the substitution of a different test for one of the
three criteria for patentability discussed in the previous section.
Instead of novelty, utility, and non-obviousness, the criteria for plant patentability are novelty,
distinctiveness, and non-obviousness. To be patentable, plants must be cultivated rather than found in the wild, and plant patents are granted only to protect a new, distinct, and non-obvious variety of asexually reproduced
plant—i.e., those grown not with seeds but by grafting, budding, or cutting. A plant need not be useful to qualify for a patent, but it must be distinctive in its color, habit, soil, flavor, productivity, form, or other aspects.
### Design Patents
Design patents are granted to protect new, original, and non-obvious ornamental designs for articles of manufacture. Examples include Apple’s 2009 and 2010 patents—No. D593087
and
No. D618677—which covered among other things the unique, rounded-corner design of the iPhone, as well as its 2005 design patent
No. D504889
for the look and feel of the iPad. Design patents can be just as valuable as utility patents, as Apple discovered when a jury awarded it $1 billion in damages against Samsung in August 2012, for the latter’s infringement of Apple’s utility and design
patents. The case is currently on appeal.
Like plant patents, design patents also substitute a different test than utility in their requirements for patentability. Instead of the novelty, utility, and non-obvious requirements for utility patents, the criteria for design patents are novelty,
ornamentality, and non-obviousness.
It was on the subject of design patents that one example of media confusion appeared. The
New York Times
published an article November 16, 2012, declaring in a sensational headline that “Apple Now Owns the Page Turn.” The article claimed that a new Apple design patent “gives Apple the exclusive rights to the page turn in an e-reader application.” According to the article’s author, this showed “just how broken the patent system is.”
Had the author of the article even read an obvious and easily-available source as the Wikipedia entry on design patents, however, he would have learned that design patents are granted only for nonfunctional ornamental designs. In
fact, says Wikipedia, “design patents can be invalidated if the design has practical utility.”
What Apple actually “owns,” therefore, is not the “page turn” function itself but merely the particular ornamental design of the way a page turn is executed in their devices.
Another example of confused media reporting on patent matters was the February 6, 2013,
Forbes
article headlined: “Is the Patent System Broken? Well, Amazon’s Just Patented the Sale of Second Hand Goods.” Amazon actually did no such
thing, but the author of that article probably made this assumption after reading the abstract of the patent describing its general subject matter. Like many reporters new to patent issues, the author didn’t realize that the abstract tells you
literally nothing about the exclusive rights conferred by a patent. Only the claims of the patent detail the specific exclusionary rights of the patent holder.
Indeed, when you read the claims of the Amazon patent in question, you discover that Amazon hasn’t claimed ownership of the idea of a “market in second-hand digital goods” at all. Instead, the claims involve merely a very specific
and novel method of conducting such a market. Meanwhile, Apple, ReDigi, and other firms have patented their own alternative methods of conducting a secondary digital market. |
# Patent Basics
## The Patenting Process
### Learning Objectives
After completing this section, you will be able to
1. Describe the steps in the patent application process.
2. Discuss the importance of proper claims drafting.
### Applying for a Patent
Much is at stake in the process of applying for a patent. Depending upon how you draft the claims and write the specification of your application, you could win or lose patent rights at any point in the examination
process. In addition, any patent rights you win can be worth a considerable amount of money, and can be enforced by the U.S. federal courts.
An applicant must first determine whether to file an application for a utility, design, or plant patent. Then, the applicant must determine their filing status: large entity, small entity, or the new category of micro entity created by the
America Invents Act of 2011 (AIA). Small entities, which are universities,
non-profits, and small businesses with fewer than 500 employees who also meet certain other criteria, receive a 50 percent discount on the application fees paid by large entities. Micro entities, which are small entities who have a gross income less
than three times U.S. median household income or meet certain other criteria, receive a 75 percent discount. These discounts on USPTO fees for small and micro entities do not apply to the attorneys’ fees often involved in applying for a patent, which
can be significant.
### Provisional vs. Nonprovisional Patent Application
Finally, the applicant must decide whether to file an abbreviated, “provisional” patent application or a complete, “nonprovisional” one. A provisional application consists only of the
specification describing the invention for which a patent is sought, as well as any drawings that might be necessary to understand the invention. A provisional application is not subject to examination, and is viable for one year.
The chief benefits of a provisional application are twofold. It is much less expensive to file than a regular nonprovisional application—only $1,000 in official fees for large entities, $500 for small entities, and $250 for micro
entities. It also gives the inventor the benefit of the earlier provisional filing date of the nonprovisional application based on the same specification, while measuring the term of the patent from the nonprovisional application’s filing date.
In a sense, the provisional application serves as a placeholder for up to one year while the inventor does all the prior art searching, claims drafting, and other work required of a full and complete nonprovisional application.
This priority date placeholder function can be important given that many companies and inventors are working on new products and services aimed at the same markets. This is especially so under the United States’ new “first inventor to file” rather
than “first to invent” priority regime, which some fear may give an edge to large companies with the legal and financial resources to file early and often. To the extent this concern may be valid, provisional applications can serve to mitigate any
large company filing advantage.
The main disadvantage of a provisional application is that because the written description cannot be changed when filing the follow-on, nonprovisional application, all the subsequent claims in that follow-on application must be
completely consistent with the earlier description language. As most inventors can attest, the understanding of an invention and its potential market—as well as the claims best suited to protect it—inevitably evolves and matures over time.
Here’s how an experienced entrepreneur describes the value of a provisional application in the “first inventor to file” environment:
A year might not seem very long. But a lot can happen to markets and to technology in that amount of time. Thanks to the rapid rise of smartphones, for example, it took merely a year for netbooks to go from the “next big thing” to “who cares?”
### The Critical Importance of the Claims
When it comes to filing a full nonprovisional application, the most critical task of the inventor (and patent attorney) is to draft the claims. This is an art in and of itself, one that
will determine the inventor’s rights and an infringer’s liability.
Each claim serves as a stand-alone definition of the patent coverage—as a sort of mini-patent unto itself. After a patent is granted, a claim is the only thing that someone can be accused of infringing. Accordingly, broad claim
language is essential if a commercially meaningful patent is to be obtained.
On the other hand, the broader the claim, the more likely it is that prior art may exist somewhere that anticipates the claim or renders it obvious and, therefore, invalidates the claim. So the competent draftsperson submits a
dozen or more claims, typically moving from broader to narrower scope, in case the broader claims turn out to be disallowed by the USPTO or later invalidated by a court.
Some applicants make the opposite mistake and draft claims that are too narrow—“a programmable multifunction computer in the shape of a metal clamshell,” for example. Such a claim is of little value because others can easily design
around it simply by using plastic or other nonmetal materials in the design. Some claims are so narrow they are even referred to as “picture claims” because they paint a literal and limiting picture of the invention. You may get a patent with such
picture claims, but it probably won’t be worth the paper it’s printed on.
The strongest claims usually define powerful functionality. They capture something fundamental or seminal in the functioning of the invention.
A good example is the claims in the aforementioned Amazon one-click patent. The algorithms for “one-click” shopping are not very complicated. Yet the claims capture a very profound functionality—the idea that a user should not have
to type in credit card and shipping information every time he or she wants to buy something. The consumer-friendly functionality captured in that patent’s claims has won Amazon a lot of customers and made it a lot of money.
### Reviewing the Patent Application
Once the patent application with all necessary forms is filed and all fees are paid, the
patent examiner
will review the patent application to determine if the invention meets the statutory requirements for patentability. The examiner will also conduct a search of patent and other databases to determine if the invention appears to be truly novel and
non-obvious. Once a determination has been made, the patent examiner will send the applicant a document known as a
first office action, in which the patent examiner approves, rejects, or requires additional information about the claims and/or other elements of the application.
If all the claims are allowed, which is rare in a first office action, the patent prosecution process is complete. A more common next step requires the applicant to respond to the patent examiner’s rejections and requests for more
information. In this response, the applicant will address all of the examiner’s concerns and either rebut them or amend the application, typically by revising some or all of the claims.
But according to the Manual of Patenting Examination Procedure (MPEP) Section 1.121, “No amendment may introduce new matter into the disclosure of an application.”
United States Patent and Trademark Office. (2010, July 21).
Thus, an applicant cannot file an application disclosing a new compound and how to make it, and then later, after discovering that the compound’s structure and method are incorrect, amend the description.
After responding to the office action by perhaps amending the application, the examination process continues until the patent examiner either allows all of the claims or finally rejects them. If all claims are allowed, then the
patent prosecution process is complete. If some claims are finally rejected, then the applicant’s options at this point are more limited.
According to MPEP Section 706.07, “In the second or any subsequent examination or consideration by the examiner, the rejection can be made final.”
United States Patent and Trademark Office. (2010, July 21).
At that point, the applicant must usually choose one of three approaches: Cancel the rejected claims, leaving only allowed claims to issue as a patent; continue the fight by filing what is called a “continuation application” and drafting new claims;
or appeal to the Patent Trial and Appeals Board arguing that the patent examiner erred in not allowing the claims.
37 CFR Part 41. Department of Commerce, United States Patent and Trademark Office. (2008).
Any appeal to the Patent Trial and Appeals Board, as with any other office action, must occur within six months.
37 CFR § 1.134
Finally, if the patent has been vetted through the patent prosecution process and is ready for issuance, the patent holder must pay the applicable fee. If the applicant pays the issue fee, the USPTO will issue the patent in due
course. Additionally, utility patents are subject to maintenance fees. These fees are due 3 years and 6 months, 7 years and 6 months, and 11 years and 6 months from the date of the original patent grant. Plant and design patents are also required to
pay maintenance fees.
37 CFR § 1.362
|
# Patent Enforcement
## The Right to Enforce Patents
### Learning Objectives
After completing this section, you will be able to
1. Understand the basic rights of patent owners.
2. Gain an appreciation of the complex process of patent litigation.
Patents issued by the United States Patent and Trademark Office (USPTO) can be enforced by their owners in U.S. federal courts. The USPTO is responsible only for examining and issuing patents—it does not enforce them. It is up to the owner of the patent to enforce it against infringers by filing a civil case in federal court for patent infringement.
A patent owner is called the “patentee.” The patentee has the statutory right to exclude others from making, using, offering for sale, selling, or importing the invention covered by the patent throughout the United States.35 U.S.C. §154(a)(1).ecall that these are rights to exclude others from using the patentee’s invention. The Patent Act does not grant the patent owner the right to practice the invention covered by the patent. Indeed, it may be that the invention, if practiced in the United States, could infringe someone else’s patent! For example, if you obtain a patent on an improvement to a patented product (e.g., a faster-acting version of a patented painkiller), you might not be able to sell the improved product unless you obtain a license under the patent for the underlying product.
Infringement is a strict liability violation—you do not need to know that you are infringing a patent, or that a patent even exists, to be liable for patent infringement. If someone makes, uses, offers for sale, sells, or imports what is covered by a claim of a valid patent, that person is an infringer. Neither lack of knowledge of the patent, nor lack of intent to infringe it, is a defense to patent infringement. 35 U.S.C. §271(a). An exception, where lack of knowledge may be a defense, is indirect infringement, of which there are two principal types: (1) actively inducing someone else to infringe, which requires knowledge of the patent and an intent to cause the infringement (35 U.S.C. §271(b)), and (2) contributing to someone else’s infringement, which requires selling or offering for sale a component to a patented combination knowing that it is specially made or adapted for use as a material part of an infringing combination and that it is not suitable for substantial noninfringing use. 35 U.S.C. §271(c).
Enforcing a patent is almost invariably a long and expensive process. The first step is to decide whether someone is infringing your patent—i.e., making, using, selling, offering to sell, or importing your invention without your permission. To decide whether someone is infringing your patent, the elements of each claim of the patent must be compared with the elements of the potential infringer’s device or process. If the elements of a patent claim match (or “read on”) the elements of the device or process, an infringement has occurred.
Even if some elements of a claim do not literally read on the infringing device, but are sufficiently equivalent in what the device does and how the device does it, they may nevertheless be infringed under the legal rule called the “doctrine of equivalents.”This doctrine prevents an infringer from copying the essence of the invention, but making insignificant modifications in an effort to avoid infringement. If the accused device or process performs substantially the same function in substantially the same way and yields substantially the same result, infringement exists so long as any differences between the claim elements and the accused device are not substantial. A patent calling for an “adhesive” connection (describing glue as the preferred adhesive) could be infringed by a device using a hook-and-loop fastener(e.g.,Velcro). That’s because the hook-and-loop fastener arguably performs substantially the same adhesive function in substantially the same way and with substantially the same result as the glue adhesive.
If a patent owner believes their patents are being infringed, the person typically hires a patent trial lawyer who specializes in enforcing patents. Often, but not always, this is a different person at a different law firm than the lawyer or agent who previously assisted the inventor(s) in obtaining a patent from the USPTO. Once the patent trial lawyer is retained, that lawyer will evaluate the patent and the accused device or process, and will provide the patentee a legal opinion about whether or not an infringement exists. If an infringement is found, the patentee then must decide how to proceed. Several options exist.
2. Demand that the alleged infringer stop infringing, and pay damages for past infringement.
3. Offer the alleged infringer a license to practice your invention for money, called a “royalty.”
4. Ignore the infringement, or postpone any action for a time.
5. File a patent infringement lawsuit in federal court against the alleged infringer.
Each option has benefits and risks, which should be carefully considered before proceeding. |
# Patent Enforcement
## Deciding Whether and How to Enforce a Patent
### Learning Objectives
After completing this section, you will be able to
1. Understand the variety of options one has in enforcing patent rights.
2. Appreciate the time and expense involved in doing so.
The decision of how to proceed depends on the patentee’s objectives and a clear understanding of the risks and rewards of each potential course of action. If you do not know your objectives, you cannot decide on a course of action to achieve them.
For example, if your goal is to stop a competitor from offering a competing product that infringes your patent, you have little choice but to file a lawsuit and pursue it to completion. This can easily cost from $1 million to over
$10 million, depending upon the complexity of the case and the intensity of the defense. If you do not have the resources to pursue such expensive litigation on your own, there are contingency fee lawyers, who may be willing to take your case in
return for a share of any damages (typically 30 to 40+ percent) that are collected from the infringer. As of 2014, a wide variety of litigation finance firms exist that may be willing to fund your litigation in return for a share of any damage award
or settlement payment you receive.
See, e.g., http://www.tennessean.com/story/money/2014/05/20/lawsuit-financingcarves-niche/9306059/
and
http://www.patentlitigationfunding.com/litigation-funding.
However, if your goal is to obtain a royalty for the use of your invention, you may be able to negotiate a license agreement without the need for litigation. Even if the infringer balks at an agreement unless you initiate a
lawsuit, often the lawsuit can be settled via a license agreement short of trial. About 95 percent of patent lawsuits settle before trial, many with the defendant(s) taking a license for which they pay a royalty.
Jay P. Kesan and Gwendolyn G. Ball, How Are Patent Cases Resolved? An Empirical Examination of the Adjudication and Settlement of Patent Disputes, 84 Wash. U. L. Rev. 237, 254 (2006). Available at: http://digitalcommons.law.wustl.edu/lawreview/vol84/iss2/1
Even small entities and individuals can successfully license a patent without filing a lawsuit if they have a good patent and a reasonable licensing plan. Most prospective licensees know that lawsuits are very expensive and would
prefer to settle a dispute with a license rather than fight a lawsuit and end up taking a license later. The key is to have a plan, and implement it diligently, with good counsel supporting the effort.
Thus, the first step in deciding if and how you will enforce your patent is deciding what you want to achieve and how much effort, and money, you are willing to devote to the endeavor. The “costs” of enforcement are not limited to
the out-of-pocket expenses for lawyers and litigation expenses. Any enforcement effort requires the time and attention of the patentee, whether an individual or company, which disrupts normal business activities. The time and attention required
includes providing information and documents, reviewing pleadings prepared by your lawyers, analyzing information received from your opponent during the litigation, appearing for depositions and other pretrial proceedings, and appearing at trial.
Just the information and document gathering can consume hundreds, even thousands, of person hours and disrupt the normal operations of virtually every part of an organization.
Enforcing a patent also takes time. Lawsuits typically take two to four years to reach trial. Post-trial proceedings can take another six months to a year, and appeals take several additional years before the lawsuit is “finished.”
On the positive side, successful patentees can reap huge monetary damages for another’s patent infringement, including lost profits, treble damages (i.e., triple the amount of money damages found), and, in exceptional cases, an
award of the patentee’s attorneys’ fees. Awards of tens to hundreds of millions, and occasionally even billions, of dollars can be achieved, even if they are not typical. If you sell a product or service and are asserting your patent against a
competitor, you can also obtain an injunction barring your competitor from continuing its infringement. This can reap huge additional rewards, measured in increased market share and pricing power.
Patents not only offer patentees the opportunity to play offense in the marketplace, but also provide a very potent defense against charges of infringement (or other claims) by others. Competitors are wary of attacking businesses
with extensive patent portfolios. The recent “smartphone wars” are a timely example. After becoming embroiled in patent litigation with Apple and Oracle over its Android operating system and the phones that use it, Google spent $12.5 billion to
acquire Motorola Mobility in August 2011 to gain access to its extensive patent portfolio so that it would have patent weapons of its own.
http://techcrunch.com/2011/08/15/breakinggoogle-buys-motorola-for-12-5-billion/
Google also acquired 1,023 more patents from IBM for an undisclosed amount around the same time.
http://www.bloomberg.com/news/2011-09-14/google-purchases-1-023-patents-from-ibm-tobolster-portfolio.html.
Perhaps this was also partly in response to Apple joining with BlackBerry maker Research In Motion (RIM), Microsoft, Ericsson, Sony, and EMC to buy 6,000 patents owned by Nortel for $4.5 billion in July 2011, largely to keep them from falling into
the hands of competitors like Google and Samsung.
http://gadgets.ndtv.com/apple/news/apple-ledgroup-buys-nortel-patents-for-4-5-bn-225830.
Expert assistance in making the decision to enforce your patent, and to map out the “who, what, where, when, and how” of doing so, is critically important. A variety of lawyers and law firms specialize in patent trials, from solo
practitioners to multinational law firms. The choice depends on your needs, means, and objectives. |
# Patent Enforcement
## Patent Litigation
### Learning Objectives
After completing this section, you will be able to
1. Understand the pros and cons in deciding who, what, where, when, and how to sue an infringer.
Once a decision is made to enforce a patent via litigation, a complex series of steps begins that determine the “who, what, where, when, and how” of events that will unfold.
### Who
First you decide whom to sue. Many options may exist. If the infringer is a corporation, you can sue it. But you can also sue its owners and/or officers if it is a closely held company or is dominated by a single shareholder or
manager. If the infringer has subsidiaries, you must choose which of them to include as defendants. Recall that your patent gives you the right to exclude others from making, using, selling, offering for sale, or importing your invention in the
territory the patent covers. (We will assume for simplicity that you own a U.S. patent; foreign patents can be obtained in other countries and enforcement of those foreign patents is subject to their local laws.) Any person or entity that violates
one of these exclusive rights is a potential defendant.
Strategic issues should be considered in deciding whom to sue. For example, the location of one or more defendants may make it hard to include them in a lawsuit filed in a place (“forum”) convenient to you. Although the infringer’s
customers are also infringers (i.e., they “use” the infringing product or service), most patentees disfavor suing customers because these are also the patentee’s customers or potential customers—and suing them may be bad for business. Often, the
manufacturer or seller of the infringing product or service indemnifies and defends its customers. In other words, in many cases the manufacturer or seller of a product will agree to “cover” its customers in the event of a patent infringement claim.
So, if the infringing manufacturer and/or seller is already a defendant, you gain little by suing customers, except their ire! Thus, select your defendants carefully, with your desired end result in mind.
Another strategic decision, when more than one infringer exists, is whether to sue them one at a time or collectively.
Prior to the America Invents Act (AIA) in 2011, joinder rules allowed you to sue multiple infringers in the same lawsuit, even if their products were different. The AIA limited this ability by restricting joinder. Nevertheless, you can still file a
separate lawsuit against each alleged infringer, and ask the court to consolidate them for discovery and other pretrial purposes. Courts are usually eager to do this because it simplifies their work. The practical effect is almost the same as a
single case with multiple defendants.
Common sense might suggest suing them one at a time, to avoid having them gang up on you. But experience shows that suing multiple defendants simultaneously is often a better strategy. It turns out that, in many cases, rather than encouraging them to
gang up on you, they spend most of their energy trying to sort out differences among themselves and trying to present a united front.
Although the America Invents Act narrowed the joinder rule in patent cases beginning in September, 2011 to cases where a plaintiff can show a “common question of law or fact” as well as a true “transaction or occurrence” between
the defendants (which must be more than infringement of the same patent), judges still typically consolidate separate cases involving the same patent for their own convenience in handling discovery and pre-trial issues. Thus, proceeding
simultaneously against multiple defendants can still be an effective strategy.
### What
Which patents (if you have more than one) and which claims of those patents you assert in a lawsuit is another important decision you must make. Twenty years ago, you could simply file a lawsuit against an alleged infringer,
listing your patent(s) and little more. You could defer deciding which claims to assert against which allegedly infringing products or services until after you received information from the defendant(s) through discovery in the litigation. However,
courts now routinely require that you provide details in the
complaint
you file, or shortly after, about which patent claims are asserted against which product or service, and also that you provide a “claim chart” that details those assertions precisely. Although it is possible to revise these assertions after receiving
more information during the discovery process, your initial assertions remain in the court’s record and can come back to haunt you if they are not consistent with your revised assertions. Therefore, careful pre-filing investigation and analysis is
crucial to a successful pursuit of the infringers.
Ideally, hire not only an experienced patent trial lawyer to guide this effort, but also the experts you will rely on in the litigation, and who will testify during the trial on how and why the accused products or services infringe
your patent(s). Experts can provide essential evidence of the infringement during the trial. Good experts are critical to success in litigation, as much as experienced trial lawyers, but are sometimes surprisingly hard to find. First, you must find
an expert who is neutral, or at least appears so. Most experts are employed in the same field as the patentee and the alleged infringer, making them potentially unsuitable candidates because they have allegiances to existing companies that suggest
the possibility of bias. Second, a good expert must not only know their subject thoroughly, but also be able to communicate it to a lay audience (i.e., the nonexpert judge and jury). Such communication skills are not always found in experts with
strong technical credentials. Finally, you want an expert who has the right skills, but not one who appears to be a hired gun (exemplified by someone who spends most of their time testifying for a fee).
Thus, prepare in advance, and hire experts early in the process, both to assist your preparations and to remain available during the progress of the lawsuit and for trial.
### Where
The selection of where to file is an important, perhaps determinative, decision. As we have noted, patent infringement cases seeking damages can only be filed in U.S. federal courts (as opposed to state courts). If your defendant
is a private party, the proper location for the case (called “venue”) is the federal district court in the geographic location where the defendant is incorporated or resides, or where the claim arose.
If the alleged infringer is the federal government itself, or a government contractor, the proper venue is the Court of Federal Claims. 28 U.S.C. §1491 Another forum for enforcing a U.S. patent against imported goods exists at the U.S. International
Trade Commission (ITC) in Washington, D.C. 19 U.S.C. §1330. The ITC has the power to investigate alleged infringement and bar goods found to infringe from entering the country. This can be a very effective tool against infringing imports, especially
if all the sources of those imports are unknown. The ITC’s jurisdiction is “quasi in rem” so that the infringing goods themselves provide the basis for jurisdiction, allowing their adjudication and prohibition even if the source of the goods is
unknown. Proceedings before the ITC are extremely expedited, usually taking 18 months or less, and can be very expensive.
The first two criteria are usually easily determined—i.e., a company’s state of incorporation is a matter of public record, as are the places where it has facilities. The place where the claim arose includes every place the
infringing product or service is made, sold, offered for sale, used, or imported. If it is a low volume product or service, or is very new or lightly distributed, the proper venues may be quite limited. But typically products or services with enough
sales to justify a multimillion dollar patent infringement lawsuit are broadly available throughout the country, opening up virtually any federal court as a possible venue.
Thus, you can, and should, select a venue that meets your objectives as closely as possible. Some venues (e.g., the Eastern District of Virginia and the Western District of Wisconsin) have reputations (and rules) for moving cases
through to trial very quickly, often in less than a year. Speed is desirable in terms of reaching a conclusion quickly, but has its downsides in terms of accelerated costs and maximum disruption to the normal business operations of you and your
opponent. Other districts exhibit much slower progress toward trial, which may be desirable or undesirable in meeting your particular objectives.
Another factor is experience. Some district courts have handled many complex patent cases, have detailed rules about what must be done to get the case ready for trial, and an excellent track record on appeal. Still other districts
have reputations for being “plaintiff friendly” or “defendant friendly,” although these reputations are often more “urban legend” than accurate. In any given case, the outcome is dependent on the parties, the facts, the lawyers, and the judge/jury
assigned.
Experienced patent trial counsel can assist you in making an appropriate choice of venue for your case, taking into account the myriad factors pertinent to your case.
### When
The timing of filing suit is often dictated by when you discover the existence of the infringement and have gathered the required information for drafting a complaint and the necessary initial disclosures. But other considerations
may be relevant also, such as the timing of industry trade shows, holiday sales pushes, or the financing activities of your opponent. Absent any other constraints or objectives, lawsuits should usually be filed as soon after the infringing activity
is discovered as possible, given the need to investigate and prepare before filing a complaint.
At the outside, any suit filed more than six years after the infringement began and was reasonably capable of being discovered can give rise to a defense of “laches” and/or “estoppel”by your opponent. In other words,the accused infringer is arguing that you waited too long to bring your infringement claim. It may be necessary for you to prove that the defendant was not prejudiced by your delay. If laches applies, which simply means you waited an unreasonable time tomake your claim, prejudicing your opponent, your damages will be limited to those that arise after you filed your lawsuit. If estoppel applies, which means that you not only delayed, but affirmatively misled your opponent into believing you would not file suit, your claim is barred altogether.
Another issue you face is whether to notify the alleged infringer before filing suit. This seems prudent—demand that the infringer cease the infringement before filing a lawsuit aimed at enforcing such cessation. But such a
strategy is fraught with pitfalls. First, accusing someone of infringement allows them to sue you preemptively, asking the court for a quick decision that no infringement exists. This type of judicial decision is called a declaratory judgment of
noninfringement.
28 U.S.C. § 2201(a); See
If the accused infringer sues you before you sue them, the accused infringer becomes the plaintiff and can sue in a forum of their choice. Ceding to your opponent the initiative and the choice of forum for the litigation is a strategic blunder that
could cost you not just that battle, but the war. Second, an old adage applies here: If you are going to kick someone, don’t warn them, because they will prepare to deflect the blow. Patent litigation (like all litigation) is like war, albeit
civilized war. Ceding to your opponent important strategic advantages, such as the choice of forum and the element of surprise, is costly and can be fatal.
So, do these considerations dictate that you ambush your opponent and appear to be unreasonable by suing without notice? No, a middle ground does exist. Consider filing the lawsuit simultaneously with, or immediately after, making
a demand that the infringer cease the infringing activities. You can defer formally “serving” the lawsuit on your opponent (that is, providing notice by delivering the complaint) for at least 30 days, and as long as 90 days in some courts. This
allows you to negotiate with your opponent from a position of strength and with your choice of forum firmly established, without appearing unreasonable.
### How
Once you choose to file suit in federal court, the how is largely dictated by the Federal Rules of Civil Procedure, the Federal Rules of Evidence, and the loal rules of the chosen venue. However, one important decision remains-judge or jury.
See Rules 38-39, Fed. R. Civ. P.
Until the 1990s, almost all patent cases were tried to a judge because they were thought to be too complex for juries. but then some enterprising plaintiffs' lawyers decided to request that a jury decide their case, perhaps seeking to take advantage
of the complexity of the cases and the belief that juries trust patents because they are issued by the federal government after examination by USPTO experts. That has led to the current reality, which is that almost all patent cases filed now request
a jury trial. Interestingly, statistics show that this trend does not always benefit plaintiffs. Depending on the venue, plaintiffs only win 60 to 75 percent of the time, despite having the advantage of being able to pick what cases they file
(presumably they self-select only the strongest cases) and where they file them (i.e., they can select what they think is the most favorable forum—often their own hometown).
PricewaterhouseCoopers, 2013 Patent Litigation Study, at 9;
https://www.pwc.com/us/en/forensicservices/publications/assets/2012-patentlitigation-study.html.
Of course, the outcome of a particular case depends on a myriad of factors unique to that case. No party can be assured victory when a jury is involved. |
# Patent Enforcement
## Getting Started
### Learning Objectives
After completing this section, you will be able to
1. Understand the various pretrial motions available to parties in a litigation.
Once the decision to file suit is made, and all the factors noted above are considered, the complaint is filed in the clerks’ office of the selected federal court and served in due course on the defendant(s).
See Rules 3-5, and 7-8, Fed. R. Civ. P.
The defendant(s) must then decide whether to move to dismiss or transfer the case to a different venue, or file an answer (a response to the infringement claim).
See Rules 7-8, and 12, Fed. R. Civ. P.
The defendant(s) can also file a counterclaim, asserting claims back against the plaintiff.
See Rule 13, Fed. R. Civ. P.
Motions to dismiss may be based on any number of issues—improper jurisdiction (e.g., the court does not have power over the defendant because it does not reside or do business within the geographic jurisdiction of that court), improper venue (e.g.,
the defendant does not reside or did not commit any act of infringement in the jurisdiction of the court), failure to state a proper claim, etc.
See Rule 12(b), Fed. R. Civ. P.
Such a motion must be accompanied by a legal brief explaining the reasons for the motion, to which the plaintiff can file an opposing brief. The defendant who filed the motion usually has an opportunity to file a reply brief. After the briefing is
completed, which can take one to two months, the court will decide the motion with an order, either granting or denying it.
Motions to transfer can be filed by a defendant who believes another court would be a “better” place to proceed with the case.
See 28 U.S.C. §1404(a)
The factors considered by the court as to whether it or another court is “better” include which court is most convenient in terms of the location of necessary witnesses and/or documents, and whether another court already has experience with the
subject matter because a related case is pending or was handled there and it can handle the new case more efficiently. Such motions usually fail, but can delay the progress of the case by several months, sometimes longer, while the court considers
how to rule on the motion. The parties must present detailed arguments about why the case should be moved, or not, and often the court will order oral argument during which each party can present its position and answer questions the court may have.
If no motions are filed by the defendant(s), or if they are denied, the defendant(s) must file an answer, which responds to the allegations in the complaint and sets forth any defenses the defendant(s) may have.
See Rules 8-9, Fed. R. Civ. P.
Such defenses can include that the patent is not infringed, that the patent is invalid, that the defendant has a license, that the plaintiff waited too long to file suit (laches) or misled the defendant into believing he or she would not complain
about the alleged infringement (estoppel), that the alleged infringer is entitled to prior user rights,
35 U.S.C §273, which provides a defense to patent infringement for someone who can prove, by clear and convincing evidence, that they acted in good faith and commercially used the subject matter of the patent in the U.S. at least one year before the
effective filing date of the patent or the invention’s first public disclosure.
or myriad other defenses that may be available.
See Rules 8-9, and 12, Fed. R. Civ. P.
The defendant(s) may also file one or more
counterclaims, which are essentially new charges filed against the plaintiff.
See Rule 13, Fed. R. Civ. P.
If such counterclaims are related to the subject matter of the initial case, they may be tried at the same time. If not, they may be severed and tried separately, either before or after the initial case.
The plaintiff has an opportunity to file a reply to the answer and an answer to any counterclaim that the defendant(s) file.
See Rule 7, Fed. R. Civ. P.
If a counterclaim is filed, followed by an answer, then the defendant(s) can file a reply to the plaintiff’s answer.
See Rules 8 and 13, Fed. R. Civ. P.
Once these initial pleadings are filed, which usually takes about 60 days from when the initial complaint is filed, the case is considered “at issue” and the pretrial proceedings commence.
Defendants in patent cases are increasingly turning to a strategy of filing requests for
post-grant review
in the PTO to derail a patentee’s efforts to enforce the patent. Although beyond the scope of this chapter, a post-grant review essentially asks the PTO to take another look at whether the patent is valid, i.e., whether it should have been granted in
the first place. The requestor of any post-grant review must present supporting evidence to show that some issue renders one or more of the patent’s claims invalid. The post-grant review request can be either
ex parte reexamination
(meaning the patentee does not get to participate) or
inter partes review
(in which the patentee is allowed to participate), or
covered business methods review
(to review patents that claim a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service). Complex rules govern these proceedings, and
they changed in 2011 under the
America Invents Act (AIA), which substantially revised the nation’s patent laws in a number of important ways.
See the PTO’s discussion of the AIA at
http://www.uspto.gov/aia_implementation/index.jsp.
The significance to a patentee of an opponent requesting post-grant review is twofold. First, the patentee risks losing its patent if the PTO finds it is invalid, and this is exactly what has happened in a majority of
inter partes review
hearings as of March, 2016. Second, a defendant requesting post-grant review usually asks the court to
stay
(i.e., temporarily suspend) the patent case filed against it while the PTO evaluates the patent, arguing that the result of the PTO’s actions may either invalidate or modify the patent such that the court should await the outcome before proceeding
with the litigation. This strategy has been successful in many courts. |
# Patent Enforcement
## Pretrial Procedures
### Learning Objectives
After completing this section, you will be able to
1. Understand the multiple procedures involved in the pretrial phase of patent litigation.
2. Appreciate the costs involved and the ways they affect the ultimate trial outcome.
The first steps in the pretrial procedure are the filing by the parties of their “initial disclosures” and the holding of the preliminary pretrial conference.
See Rules 12, 16, and 26, Fed. R. Civ. P.
Initial disclosures must provide preliminary information about each party’s positions in the case, and disclose the identity and location of witnesses and documents likely to be relevant to the issues in the case.
See Rule 26(a), Fed. R. Civ. P.
These disclosures help frame the “discovery,” or information that the parties can request of each other, which is one of the hallmarks of litigation in the United States and one of the drivers of the expense of litigation. The concept is
laudable—require each party to disclose the information it has relevant to the case to preclude a “trial by ambush.” But, in practice, discovery can become an endless game of cat and mouse, with costs escalating exponentially. We will talk more about
discovery shortly.
The preliminary pretrial conference is usually the first time the parties appear in court before the judge, unless there has been a hearing on a pretrial motion (as discussed above). At this conference, the judge discusses with the
parties the issues likely to arise in the case, the time that pretrial discovery is expected to take, and any issues that make the case unique (such as witnesses in foreign countries that require extraordinary means to obtain their testimony for
trial). Each party is usually required to submit a report to the court in advance of this conference, proposing what the timeline for the case should be and identifying any unique issues. The court typically issues a
scheduling order
at, or shortly after, the pretrial conference, specifying dates by which certain activities must be concluded. This order often “splits the baby” between the plaintiff’s and defendant’s proposed schedules (the plaintiff usually seeks speed while the
defendant usually seeks delay). The figure below shows a typical scheduling order.
The scheduling order will also usually specify a length of the trial (e.g., 8 trial days), subject to revision at the final pretrial conference. A typical patent trial is scheduled to last from 5 to 20 trial days, but some can take
much longer. Let’s look at each step of this schedule to understand what is happening.
### Protective Order
Before information is shared between the parties, they usually agree on a protective order, which they will ask the court to enter, that specifies who has access to the confidential information produced during discovery in the litigation.
See Rule 26(c), Fed. R. Civ. P.
This is important to all parties, and even third parties that may be asked to produce information during discovery, because sensitive business, technical, and financial information is routinely requested by and produced to each party during the
lawsuit. The protective order proscribes that the disclosure of confidential information during discovery is limited to lawyers involved in handling the case, outside experts retained by the lawyers to assist them, and court reporters (who record
testimony during the case), videographers (who videotape deposition testimony, as is now common), and court personnel. It is also typical that certain employees of each party (usually in-house lawyers and/or business people directly involved in the
oversight of the case) are also permitted to review certain materials, but not financial information of a competitor or future business plans, which are usually excluded from being disclosed to any party employees.
Everyone authorized to see confidential information is under court order to restrict use of the information to the pending lawsuit, not to disclose it to anyone not authorized by the protective order to see it, and requiring that
all copies be returned or destroyed at the end of the case.
### Discovery
After the preliminary pretrial conference, discovery begins, which results in the exchange of documents, written responses, and witness testimony.
See Rules 26-37, Fed. R. Civ. P.
A request for production allows a party to demand that another party turn over relevant documents and electronically stored information in its possession or control, as well as an inspection of property (such as a manufacturing
facility) to take photographs, measurements, and the like.
See Rule 34, Fed. R. Civ. P.
Documents and other tangible items can also be requested from third parties (i.e., people and entities not named as a party in the lawsuit) via subpoena.
See Rule 45, Fed. R. Civ. P.
Interrogatories are written questions that a party can ask of other parties in the litigation, but not of third parties. Such questions can request any nonprivileged information that is relevant to any party’s claim or
defense—including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable information that may be relevant to the subject
matter of the litigation.
See Rules 26(b) and 33(a)(2), Fed. R. Civ. P.
Interrogatories may also ask for opinions or the legal contentions of another party. The initial limit on the number of interrogatories is 25, including subparts. However, upon a showing of good cause, courts routinely permit additional
interrogatories in patent litigation because the issues are usually complex.
See Rule 33(a), Fed, R. Civ. P.
Answers to interrogatories are binding on the party providing them and may be used as admissions in the litigation, including at trial.
Depositions are interviews used to elicit testimony from witnesses having relevant knowledge.
See Rules 27-30, Fed. R. Civ. P.
This is similar to eliciting testimony during a trial, but occurs in a conference room with a court reporter present to record what is said. The judge is not present at depositions, but may intervene if a controversy arises. Testimony can also be
requested by written questions to a witness, which the witness then answers and returns to the requesting party, called a deposition by written questions.
See Rule 31, Fed. R. Civ. P.
Although in the United States, it is usually required that testimony at trial be presented live, with the opportunity for the opposing party to cross-examine the witness and for the jury and/or judge to assess each witness’s
demeanor in person, testimony elicited via depositions during discovery may be used at trial under certain circumstances.
See Rule 32, Fed. R. Civ. P.
For example, if a witness dies before trial, or is unavailable through no fault of the party seeking to use the deposition testimony, the deposition may be used as testimony at trial in lieu of live testimony from the witness. Also, the deposition
testimony of an opposing party or an officer or manager of the opposing party corporation may be used at trial for any purpose. Usually, however, deposition testimony is used primarily to “impeach” a witness testifying live at trial—that is, to show
that the witness at trial has changed prior testimony from when they gave the deposition. Videotaped deposition testimony is very effective to show to a judge or jury during trial that the witness has changed the testimony—such
as from “No” to “Yes” or the equivalent!
The parties can also demand that another party admit, for purposes of the pending litigation only, the truth of any facts, opinions, or conclusions, or the genuineness of any documents relevant to any party’s claim or defense. Such
demands are called requests for admission.
See Rule 36, Fed. R. Civ. P.
The responses to these demands are binding on the responding party and can be used to conclusively establish the matters admitted in the litigation, including at trial.
### Amendments to the Pleadings
Once initial information is obtained via discovery, the parties may be permitted to amend or supplement their pleadings (i.e., the complaint, answer, counterclaim, etc.) to address information or issues uncovered during the initial discovery.
See Rule 15, Fed. R. Civ. P.
For example, the plaintiff may uncover information about other companies, products, or services involved in the infringement and seek to add them to the lawsuit. A defendant may uncover information about invalidity defenses not previously known to it
and want to add those to its answer.
### Close of Discovery
This is the date by which all requests for documents, information, and depositions must be complete. It is usually interpreted as requiring that all responses to requests for production, interrogatories, and requests
for admissions be answered by the end date set by the court, which means that the actual requests must be made sufficiently in advance of this date (typically 31 days—because responses are due to most discovery requests within 30 days) to allow the
responses to be due before the cutoff date. Any depositions must also be completed by the date for the close of discovery (although the parties usually agree to finish select depositions after this date in order to accommodate scheduling problems).
### Claim Construction Briefing and Hearing
In virtually every patent case, a dispute arises over the meaning of certain language used in the asserted claims of the patents at issue. These are called “claim construction” disputes, and must
be resolved by the judge before trial. The parties are permitted to provide their competing arguments in briefs to the court, usually after discovery is completed, and make an oral argument on their respective positions to the court at a claim
construction hearing. These hearings are often called
Markman hearings, after the name of the case that established that the judge, and not the jury, must decide the proper meaning of disputed claim language.
This is a critical juncture in every patent case because the opposing parties try to craft an interpretation of the claim language that supports their respective positions. Most patent claims are drafted using a range of language,
from specific to general, in an effort by the patentee (and lawyer) to cover as much territory for the claim as possible. The PTO interprets proposed claims in the broadest reasonable way possible, and then compares their scope with the
prior art, before allowing them. The goal of the patentee in dealing with the PTO is to get allowed the broadest claims possible, in order to get the broadest patent coverage possible. But the use of broad, general language in claims permits the
parties in later litigation to argue for different interpretations, depending on their interests at the time of litigation. Thus, a plaintiff seeks an interpretation that is broad enough to encompass the defendant’s products and services so that
infringement can be proven. In contrast, the defendant proposes a narrow interpretation (or “construction”) that excludes its products and services.
The court resolves the dispute over the meaning of the contested claim terms by referring to the language of the claims, the language and drawings in the patent, and the history of the proceedings in the PTO that led to the
issuance of the patent. The written record of that history is preserved in what is call a “file wrapper,” so named because all the written documents making up the history are contained in a three-part file folder, the two outer portions of which fold
over and “wrap” the documents within it. The patentee is bound by what it told the PTO to secure allowance of the patent. The court interprets the language according to its ordinary meaning to someone of ordinary skill in the art to which the
invention pertains, unless the patentee specially defined the language within the patent or its file wrapper.
Once the claim construction decision is made by the court, the scope of the patent(s) in the case is fixed, and the only remaining issue for trial is whether the claims of the patent(s) as interpreted by the court are broad enough
to include the accused products and services of the defendant(s).
### Summary Judgment Briefing and Hearing
Summary judgment
is a procedure that obviates a trial where one of the parties can show that its opponent cannot win—as a matter of law.
See Rule 56, Fed. R. Civ. P.
That is, if one party can show that the evidence is so clear that no fact dispute exists (i.e., no reasonable fact finder, whether judge or jury, could decide otherwise) and that the law requires the case be decided in favor of the party moving for
summary judgment, the court can decide the case without holding a trial. The judge must decide such motions based only on the applicable law (which the judge determines), the evidence (i.e., documents, interrogatory answers, admissions, and
deposition testimony) developed during discovery, and the court’s claim construction decision, giving the benefit of any doubt about the facts to the nonmoving party. If the court finds that a fact relevant to the outcome is in dispute, summary
judgment must be denied and a trial held to resolve that factual dispute.
Understandably, these are hotly contested motions. The moving party hopes to avoid the need for a trial, and the uncertainty a jury introduces, by having the judge decide the case in its favor early on. The nonmoving party wants to
go to trial, and hope that the fluid events that are the essence of a jury trial will convince the jury to decide the case in its favor.
In recent years, most patent cases are resolved on summary judgment and only a handful go to trial (about 100 per year throughout the country). The primary reason for this phenomenon is the advent of the claim construction
(Markman) hearing and the decision by the court, before trial, about how the language of the asserted claims must be interpreted. The court’s claim construction decision resolves most of the uncertainty in a patent case, because what the accused
products or services are, and how they operate, is rarely in dispute by the time discovery concludes.
The end result is that the case is often either settled after the claim construction decision, or decided in favor of one side or the other at the summary judgment stage. If summary judgment is granted, the losing party can appeal
the decision to the United States Court of Appeals for the Federal Circuit, which is the appellate court to which all decisions in patent cases are appealed.
### Final Pretrial Order and Conference
The final pretrial order is the document that sets forth the “ground rules” for the trial.
See Rule 16(e), Fed. R. Civ. P.
It typically identifies all the positions of each party, every issue in dispute in the case that must be resolved by order of the court or at trial, all the documents the parties may seek to introduce into evidence at the trial, and each witness that
is expected to be called to testify, either live or via their deposition. The judge issues the order based on a draft prepared by the parties and once issued, it defines the issues that may be raised at the trial. If there is to be a jury trial, the
order can rarely be modified after the final pretrial conference. If the trial is before the judge only (referred to as a “bench trial”), the judge may be more lenient in allowing modifications to the final pretrial order because he is the person
deciding the case and can adjust more readily than a jury. |
# Patent Enforcement
## Trial
### Learning Objectives
After completing this section, you will be able to
1. Understand the importance of jury selection and opposing arguments.
2. Grasp why patent trials are often called “morality plays.”
The following describes a jury trial. A bench trial is essentially the same, but without the elements involving the jury.
See generally, Rules 40-63, Fed. R. Civ. P.
### Jury Selection
The trial begins with the selection of the jury. The jury is selected (or “picked”) from a group of prospective jurors called to court to serve in accordance with the laws and practices of the local jurisdiction.
Each judge has a procedure for picking a jury. Most involve a questionnaire that each prospective juror must complete and provide to the judge and the parties’ lawyers. The answers are intended to reveal whether any
reason exists why a prospective juror should not serve on the jury. Typical reasons for excluding a prospective juror include that the juror works for or knows one of the lawyers in the case, works for or does business with one of the parties, has a
close relative that works for one of the parties, knows something about the subject matter of the case, or is unable to serve because of a disability or a previously planned vacation for which they have already purchased a nonrefundable ticket.
The judge also typically asks the prospective jurors whether they have a bias or prejudice that would prevent them from making a fair decision.
Once the judge has “excused” from serving any prospective jurors for “cause” (i.e., because of one of the reasons listed above or some other reason that court believes provides good cause for excusing that person), the clerk
selects at random from the remaining prospective jurors the number that will be seated as the jury, plus six. The number of jurors seated in a case depends on the expected length of the trial and the practices of that judge. At least six and no more
than twelve jurors must decide a case, but any number between six and twelve can be seated.
See Rule 48, Fed. R. Civ. P.
The reason a court usually seats more than six jurors is to assure that the trial will end with at least the minimum of six jurors necessary to decide the case even if one or more jurors need to be excused during the trial, such as for illness or
emergency. Judges typically seat seven to nine jurors for this reason. Only rarely do judges in civil patent cases seat a full twelve jurors, because once seated a juror must participate in reaching the decision (unless excused for cause), and all
jury decisions in federal cases, including patent cases, must be unanimous.
See Rule 48(a) and (b), Fed. R. Civ. P.
The general rule is, the more jurors there are, the longer it takes for them to reach a unanimous verdict, and the higher the likelihood that the case will result in a “hung” jury (i.e., an inability for the jury to reach a unanimous decision).
The clerk selects the designated number for the jury, plus six, because each party gets three “peremptory challenges” to the proposed jury panel, whereby a party can remove a juror without having to give a reason why. Thus, if the
judge has decided the jury should begin with eight jurors, the clerk will select 14 so that the plaintiff and defendant (collectively if there is more than one plaintiff and/or defendant) are each able to strike or eliminate three prospective jurors,
leaving eight to hear the case.
Once the jury is picked and sworn in, the judge will give the jury preliminary jury instructions. These explain what the case is about, how the trial will proceed, and a description of what a patent is and how the patent system
works. Occasionally, judges opt to show the jury the video below, entitled “An Introduction to the Patent System,” which was created by the Federal Judicial Center and is intended to be neutral.
You can see this video at
https://archive.org/details/gov.ntis.ava21157vnb1.
### Opening Statements
The next step is the opening statements by the opposing parties, starting with the plaintiff and followed by the defendant. If there are multiple plaintiffs or defendants, the judge will give equal time to each side
and let the individual parties work out the allocation of time. The opening statement is intended to provide a road map for the jury about what the party intends to prove, and is expected to be devoid of argument. But lawyers rarely present an
opening statement without some argument. The judge can intercede, and an opposing party may object, if a party crosses the “no argument” line too far.
The opening statements are where many believe the trial is won or lost because the jury forms initial opinions about who is right and who is wrong in the case based on what they hear at this beginning stage. Thus, each party’s
trial lawyer tries to craft a story to tell that casts their client in the best possible light. Trials can be likened to a morality play, in which each party tries to cast themselves as in the right, and the opponent as doing them wrong. In patent
cases, plaintiffs often portray defendants as thieving freeloaders, attempting to benefit unfairly from the inventiveness of the plaintiff rather than invest in developing their own products. Defendants, on the other hand, often portray patentees as
greedy monopolists, trying to stifle competition and deny consumers choice and less-expensive alternatives.
Whether or not the common wisdom is correct, it is with the opening statements that the jurors begin their struggle to find truth among the competing stories they will hear during the trial.
### The Evidence is Presented
The plaintiff then presents its case, calling witnesses and introducing exhibits that support its positions. Each opposing party has the opportunity to object to exhibits and testimony, and to cross-examine
witnesses. The judge rules on all objections and generally oversees the proceedings to assure that the trial is conducted properly. After the plaintiff rests its case, the defendant presents its defense, again by introducing exhibits and offering
testimony from witnesses. The trial concludes with the plaintiff calling rebuttal witnesses, who are limited to rebutting testimony from the defendant’s witnesses. Each side usually calls one or more experts to testify on the issues of infringement
and validity (or invalidity), as well as on damages.
### Closing Arguments
After the evidence has been presented, the parties make their closing arguments. Usually the plaintiff goes first, followed by the defendant. The plaintiff has the opportunity to reserve time for rebuttal if it
chooses. In some jurisdictions, the defendant must go first and the plaintiff next. In this case, the plaintiff has the last word, and the defendant does not have any opportunity for rebuttal.
Closing arguments give each party the opportunity to highlight what they believe is the critical evidence in their favor, and attack the deficiencies in their opponent’s case. It is here that an observer would see the greatest
geographic diversity in style and practice. Quite apart from the different styles of trial lawyers and judges across the country, jurors in different parts of the country expect different things from trials, and especially from closing arguments.
Thus, an observer would see a very different “show” during a closing argument in the Eastern District of Texas than in the District of Maine.
After closing arguments are concluded, the judge reads the final jury instructions. These set forth the law to which the jury must apply the facts they determine during their deliberations.
See Rule 51, Fed. R. Civ. P.
Thereafter, the jury retires to the jury room, with copies of the exhibits admitted into evidence, to decide the case.
### Deliberation and Verdict
In most patent cases, the jury must answer detailed questions listed in a verdict form, called a special verdict.
See Rule 49, Fed. R. Civ. P.
These questions typically list the accused product(s) and the asserted claim(s) and require the jury to decide infringement and validity for each claim and accused product separately. If appropriate, the jury may also be asked to decide what damages,
if any, are to be awarded the plaintiff and whether any infringement they may have found to exist was willful or not.
The jury deliberates as long as it takes to reach a unanimous decision on each question. During their deliberations, the jury may ask questions of the judge in writing, which the judge answers after consulting with the parties.
Should the jury tell the judge that it cannot reach a unanimous verdict, the judge may provide additional instructions and return the jury to its deliberations to “try harder.” Most juries reach a unanimous decision, which is recorded on the verdict
form and read by the clerk in open court with the parties present. |
# Patent Enforcement
## Post-Trial Procedures
### Learning Objectives
After completing this section, you will be able to
1. Grasp the significance of equitable proceedings in the post-trial phase.
Following the jury’s decision, the court will set a schedule for any equitable proceedings required and for post-trial motions. Equitable proceedings deal with matters to be decided by the judge, not the jury. In terms of
post-trial motions, the winning party will ask for entry of judgment.
See Rule 54, Fed. R. Civ. P.
The losing party will file a motion for judgment as a matter of law and usually also a motion for a new trial.
See Rule 50, Fed. R. Civ. P.
### Equitable Proceedings
Issues arise in most patent cases that must be decided by the judge and not the jury. Many of these are called “equitable” issues because they are left to the sound, equitable discretion of the court. The most
common equitable issues are the defense of inequitable conduct and the affirmative claims of willfulness and exceptional case.
### Inequitable Conduct
Misconduct by the patentee in dealing with the Patent and Trademark Office, through which the patentee or its attorney deceives or misleads the patent examiner in an effort to persuade the examiner to grant the
patent, was historically called “fraud on the Patent Office,” but more recently has been renamed “inequitable conduct.” A defendant can raise this issue as a defense, which if proven results in the patent being unenforceable—that is, the patentee is
unable to enforce the patent or recover any damages for its infringement. Many different types of inequitable conduct have been found to render patents unenforceable, from outright fabrications of alleged evidence of unexpected results in the
development of the invention, to hiding relevant prior art showing prior solutions to the problem solved by the patent, to failing to tell the patent examiner that another patent examiner had rejected a related application.
Most district courts defer ruling on inequitable conduct defenses until after the liability trial addressing infringement, validity, and damages. This is a commonsense attempt at efficiency because if the patent is found invalid or
not infringed at trial, the inequitable conduct issues became moot. Only if the patent is found valid and infringed does the court need to hold a separate hearing to adduce evidence of alleged inequitable conduct. The court then decides whether such
conduct had been proven, which is exceedingly rare. Nevertheless, because the consequences of such a finding essentially kill the patent, defendants assert inequitable conduct whenever possible in a final effort to avoid liability.
By 1988, the Federal Circuit Court of Appeals stated: “the habit of charging inequitable conduct in almost every major patent case has become an absolute plague.”
In an effort to stem the spread of this plague, the Federal Circuit sought to restrict its use by holding that inequitable conduct must be established by clear and convincing evidence of deceptive intent. Gross negligence does not suffice and “does
not of itself justify an inference of an intent to deceive.”
Nevertheless, the plague continued, leading a Federal Circuit judge to write:
Still the plague continued, leading Federal Circuit Judge Gajarsa in 2010 to then refer to it as a “pandemic.”
Research showed that the percentage of patent cases in which inequitable conduct was charged grew from less than 5 percent in 2000 to 40 percent by 2009.
http://www.patentlyo.com/patent/2010/06/measuring-the-plague-of-inequitable-conduct.html.
Finally, on May 25, 2011, the Federal Circuit restricted the doctrine of inequitable conduct by changing the standard for materiality and clarifying the requirements for finding intent to deceive.
To find inequitable conduct, the court held that the party alleging unenforceability must prove a specific intent to deceive the USPTO by clear and convincing evidence. Moreover, the decision to deceive the USPTO must be knowing and deliberate. The
court also clarified that district courts may not use a “sliding scale” to find intent. In other words, the Federal Circuit held it improper to find that a weak showing of intent was sufficient based on a strong showing that the information was
material, or that a weak showing of materiality was sufficient based on a strong showing of intent. Although intent can be inferred to meet the clear and convincing evidence standard, specific intent to deceive must be “the single most reasonable
inference able to be drawn from the evidence.”
Regarding materiality, the court required a “but- for materiality” standard. In other words, the standard for materiality now requires that “but for” the alleged deception, the USPTO would not have allowed the claim. Further, “[i]n
making this patentability determination, the court should apply the preponderance of the evidence standard and give claims their broadest reasonable construction.” The court also recognized an exception to the requirement for but-for materiality,
finding that “[w]hen the patentee has engaged in affirmative acts of egregious misconduct, such as the filing of an unmistakably false affidavit, the misconduct is material.”
The number of successful inequitable conduct defenses asserted has plummeted due to the strict new requirements for pleading and proving inequitable conduct imposed by the
Therasense
decision. District courts are dispensing with many allegations of inequitable conduct now at the pleading stage, eliminating the need for separate hearings on inequitable conduct issues.
Misuse of a patent is sometimes treated as a form of inequitable conduct, but it is more commonly treated as a separate affirmative defense. The elements of misuse are either a violation of antitrust laws or an effort to expand the
scope or term of a patent beyond appropriate limits. For example, it is patent misuse for a patentee to file suit against products of a defendant that are far beyond the proper scope of any claims of the patentee’s patent, or to seek damages or an
injunction beyond the expiration of the patent. Often such unreasonable demands are accompanied by threats to the defendant’s customers. If the misuse is proved, the patentee could be barred from recovering any damages until it has “purged” the
misuse by abandoning its unreasonable assertions and dissipating any negative effects they caused.
### Willfulness
If the jury (or judge, in a bench trial) finds that the asserted patent has been infringed, it is often asked to determine whether such infringement was “willful.”A finding of willful infringement allows the judge to award enhanced damages under 35 U.S.C. § 284, which provides in relevant part that the court may increase the damages award by up to three times the amount found. This is a potent consequence of a showing that a defendant’s infringement was willful.
The standard for showing willfulness has evolved over the years, but in 2007, the Federal Circuit significantly altered the standard governing willful infringement by requiring the patentee to prove that (1) the accused infringer
“acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,” and (2) the “objectively defined risk . . . was either known or so obvious that it should have been known to the accused infringer.”
The first prong of this test is objective, whereas the second prong is subjective and involves the accused infringer’s actual state of mind. Each prong requires that the infringer knew the patent existed at the time it infringed.
Because an infringer cannot be shown to have willfully infringed if it did not know the patent existed, some companies have adopted a “head in the sand” approach to others’ patents. This practice is thought to make sense when the
field is very crowded (i.e., there are many patents owned by different patentees covering many different aspects of a product or service) because trying to uncover all the potentially relevant patents that could be asserted against a new product or
service is extremely costly, if not impossible. This practice is used most frequently by large companies that can afford to deal with a patent infringement lawsuit should one be filed. Small companies and entrepreneurs, especially in emerging fields,
often take great care to search for and work around any existing patents that might be close to their new product or service because they can ill afford patent litigation. Of course, searching for potentially troublesome patents and trying to avoid
them is no guarantee of not getting sued. Not only are there more than two million patents in force,
See Dennis Crouch,
but creative patentees are not above taking a patent that was thought to cover one product and arguing it is broad enough to cover what a new market entrant has introduced.
In 2012, the Federal Circuit again addressed the willfulness standard, and adjusted it again.
With regard to the objective prong of the willful infringement test, the Federal Circuit concluded:
This further restricts the opportunity for a patentee to prove that a defendant’s infringement was willful. The patentee must first convince the district court that the defendant acted despite an objectively high likelihood that
its actions constituted infringement of a valid patent. Only after that will the patentee be able to present evidence of the defendant’s alleged subjective intent to the jury in an effort to convince the jury that the infringement was willful.
Patentees preferred the pre-Bard
opportunity to present all of their willfulness evidence to the jury during the liability trial. They wanted this ability because they believed, probably correctly, that it helped the jury conclude not only that the defendant was a “bad actor” who
willfully ignored the patentee’s rights, but also bolstered the underlying issue of infringement itself. Post-Bard, the patentee can only present willfulness evidence if it is able to convince a more dispassionate judge that the defendant acted objectively recklessly, which is a higher hurdle to overcome.
If the patentee convinces the judge on the objective prong, and the jury on the subjective prong, resulting in a jury verdict of willful infringement, the issue of enhanced damages passes back to the court for determination after the trial.
Because the
Bard
case was decided in mid-2012, little empirical evidence exists on its effect on the frequency with which significant enhanced damages are awarded by the courts. However, even before
Bard, the evidence suggests that such awards were falling. Before the Seagate restrictions were imposed in 2007, 81.4 percent of cases finding willful infringement resulted in an award of enhanced damages, but after Seagate, that
number fell to 54.9 percent.
Christopher B. Seaman,
### Exceptional Case
Courts have discretion to award reasonable attorneys’ fees in patent infringement cases that are deemed “exceptional.”
35 U.S.C. § 285
The Federal Circuit has referred to this provision as a deterrent to bringing of clearly unwarranted suits on invalid or unenforceable patents.
Normally, the losing party is not liable to pay the winner’s attorneys’ fees—a practice referred to as the “American Rule.” The rationale for this is that any party should be able to approach the court for relief without fear of having to pay an adversary's attorney's fees. Thus, the provision of the Patent Act that permits an award of attorneys’ fees is an exception to the rule that each party bears its own costs in litigation.
Congress said that it intended the rule allowing an award of attorneys’ fees to be applied sparingly and “that recovery of attorneys’ fees will not become an ordinary thing in patent suits.
S. Rep. No. 1503, 79th Cong., 2d Sess. (1946) (discussing the predecessor statute to 35 U.S.C. § 285)
The Federal Circuit repeatedly limited district court discretion to award attorneys’ fees to only those cases in which the district court found clear and convincing evidence of bad faith or at least gross negligence by the losing party in bringing or
maintaining the suit, and any such determination was reviewable
de novo
on appeal.
But in April 2014, the Supreme Court struck down these restrictive Federal Circuit interpretations and held:
In a companion case, the Supreme Court also rejected the rule that exceptional case determinations should be reviewed
de novo
on appeal.
There are increasing calls for a change to the American Rule, to require losing parties to pay the winner’s attorneys’ fee. The principal purpose of such a change would be to deter so-called “patent trolls,” entities that acquire
patents for the sole purpose of making money by filing lawsuits, threatening crippling litigation expenses, and demanding settlements at or slightly more than the cost of litigation.
See Section 2.10,
It is questionable whether such a change would in fact deter the so-called trolls or instead preclude small entities and entrepreneurs from pursuing legitimate claims due to the uncertainty of the outcome of any lawsuit. Even the most “bulletproof”
patent can be subject to unexpected challenges from previously undiscovered prior art or the vagaries of a jury decision favoring the defendant for reasons other than the merits. Enforcing a patent requires resources, or the availability of a
contingency fee lawyer willing to take the outsized costs, and risks that patent litigation can entail. Thus, shifting the responsibility for the winner’s attorneys’ fees to the losing party could effectively preclude small entities and individuals
from even filing a lawsuit. The 2014 Supreme Court’s
Octane Fitness
and
Highmark
cases, and how district courts exercise their newly expanded discretion in finding a patent case exception under 35 U.S.C. § 285, may dissuade Congress from enacting a “loser pays” exception for patent cases.
### Entry of Judgment
The winning party seeks entry of a judgment that grants it the relief to which it is entitled, based on the jury’s verdict and the rulings of the court. First, the judgment will declare who the winning party is. Then,
it will set forth the relief or remedies to which the winning party is entitled. The relief may include damages, as awarded by the jury and supplemented by the court if there was a timing difference in the calculation of the damages by the jury and
the date on which they are finally awarded. A winning patentee is also entitled to prejudgment interest on the damage award, calculated at the rate specified by law, to compensate for the time value of money lost due to the delay in obtaining
damages. The judgment may also set forth the post judgment interest due, for any delay between the entry of the judgment and the payment of the award to the patentee by the losing parties.
A successful patentee may also be entitled to injunctive relief, barring further sales of the infringing product or service. This is the most potent relief available to patentees. Prior to 2006, it was presumed that a patentee who
proved patent infringement was irreparably injured and entitled to an automatic injunction. But in 2006, the Supreme Court rejected the presumption and ruled that, in all other kinds of cases, a successful patentee is required to prove each of the
following requirements for injunctive relief: (1) that it has suffered an irreparable injury; (2) that remedies available at law are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and
defendant, a remedy in equity is warranted; (4) that the public interest would not be disserved by a permanent injunction.
Usually, patentees who are competitors of the infringer can meet these requirements. However, patentees who are not competitors of the infringer are usually unsuccessful in convincing courts that they are entitled to injunctive
relief, and are left with only money damages(usually an on going reasonable royalty) to compensate for future infringement. This removes the most serious risk an alleged infringer faces—being barred from the market—making fighting cases through trial
more palatable than before. This new rule from the Supreme Court has driven many plaintiffs out of federal court and into the International Trade Commission (ITC), when the allegedly infringing products are imported, because the ITC issues exclusion
orders and cease and desist orders (roughly equivalent to federal court injunctions barring further sales) without regard to the requirements the Supreme Court laid down in the
eBay
decision.
See footnote 7,
### Motion for Judgment as a Matter of Law
Called a “JMOL” motion, the premise of a motion for judgment as a matter of law is that the jury did not have a legally sufficient evidentiary basis for deciding the case as it did, and the court
should intervene and decide the case in favor of the party moving for the JMOL. The moving party must explain in detail what legally required evidence is missing from the trial record. The opposing party (i.e., the party that won the jury verdict)
then has the opportunity to identify in the trial record where the allegedly missing evidence is found, and the judge decides who is correct. The court must consider the evidence in the light most favorable to the nonmoving party. Thus, most JMOL
motions fail. But the losing party always files such a motion because it is a chance to challenge the jury’s verdict and avoid the remedies the winning party is demanding.
### Motion for a New Trial
JMOL motions are usually accompanied by a motion for a new trial, arguing that the jury’s verdict was against the manifest weight of the evidence or the jury’s verdict was grossly inadequate or excessive.
See Rules 50 and 59, Fed. R. Civ. P.
Other grounds also exist, such as newly discovered evidence that could not have reasonably been discovered earlier.
The decision to grant or deny a new trial rests with the sound discretion of the judge, who typically presided during the trial and has a keen understanding of the evidence that was introduced and whether the jury’s verdict was
against the weight of that evidence. The court’s decision is not whether the court would have decided the case the same way, but whether there is sufficient evidence in the record to support the jury’s verdict. The court must view the evidence in the
light most favorable to the nonmoving party. Thus, most new trial motions, like most JMOLs, are unsuccessful.
|
# Patent Enforcement
## Appeals
### Learning Objectives
After completing this section, you will be able to
1. Understand what happens after a jury verdict is entered.
2. Appreciate the chances of success of appeals based on fact versus legal issues.
Once the post-trial motions are decided and the judgment entered, the losing party may appeal to the Federal Circuit Court of Appeals. This is the one federal appellate court in the United States that hears all appealed cases
involving patent disputes. Almost all patent cases that conclude with a trial, or after a decision on summary judgment, are appealed. This is partly because the cost of an appeal is orders of magnitude less than the case up to that point (e.g., tens
or hundreds of thousands of dollars vs. hundreds of thousands or millions of dollars). In addition, overall the Federal Circuit affirms in full less than 60 percent of the patent cases it decides on the merits.
http://www.patentlyo.com/files/caseload_patent_infringement_affirmance_and_reversal_rates_2001-2010.pdf.
Thus, it is well worth it for the losing party to pursue an appeal, because overall it has a 40+ percent chance of partial or full relief from the judgment below. Of course, the reversal rate varies by the nature of the issues before the Federal
Circuit and the standard of review the court applies. Legal issues (such as claim construction, summary judgment, and jury instructions) are reviewed
de novo, without deference to the district court’s or jury’s decision. This makes it much more likely that the Federal Circuit will reverse a decision because it need not give any deference to the decision of the district court.
Fact issues (like infringement, many aspects of validity, and damages) are reviewed on a less flexible standard (i.e., does substantial evidence support the decision), such that the Federal Circuit (like the district court) is not free to substitute
its own judgment for that of the jury. Evidentiary rulings, and other issues associated with how the trial was conducted are reviewed under the least flexible standard of review—abuse of discretion. It is rare that the Federal Circuit finds that a
district court abused its discretion.
For a deeper understanding of appellate standards of review in patent cases, see Michel, Paul R., Circuit Judge, CAFC, “Appellate Advocacy—One Judge’s Point of View, The Federal Circuit Bar Journal, Vol. 1, No. 2, Summer 1991 (makes analogy to
baseball and is readable).
For example, the Federal Circuit reverses claim construction decisions at a rate nearly twice as high as decisions without claim construction issues (32 percent vs. 18 percent).
Ted Sichelman, Myths of (Un)Certainty at the Federal Circuit, 43 Loy. L.A. L. Rev. 1161 (2010). Available at:
http://digitalcommons.lmu.edu/llr/vol43/iss3/27.
It is not surprising, then, that most appeals to the Federal Circuit focus at least in part on claim construction as a basis for the appeal.
Appeals at the Federal Circuit are usually resolved within 18–24 months. Oral argument is usually scheduled within a year, depending on how much time the parties take to file their appeal briefs. Oral argument is requested and
granted in almost all patent appeals. The argument occurs in the Federal Circuit courthouse in Washington, D.C., before a panel of three judges, although yearly the Federal Circuit travels to other cities to hear arguments at local law schools, which
allows students, local practitioners, and the public to attend more easily. The parties are typically given 15 minutes per side to make their arguments, and after the argument, the court renders a written decision within 3–6 months.
|
# Patent Enforcement
## Litigation Alternatives
### Learning Objectives
After completing this section, you will be able to
1. Understand the various alternative methods of dispute resolution.
2. Distinguish the pros and cons of arbitration versus mediation.
The high cost, delay, and disruption of litigation motivate many adversaries to seek alternatives to litigation to resolve their disputes. Mediation and arbitration are two popular alternative dispute resolution (ADR)
methodologies. A thriving business exists in the United States providing adversaries the resources to conduct mediations or arbitrations. Retired or former judges or lawyers are available to serve as mediators or arbitrators.
ADR is an increasingly popular way to resolve disputes because it is often faster, less expensive, and private, as compared with the public lawsuit procedures outlined above. The interactions among the parties and the
mediators/arbitrators can be kept confidential, as can any settlements reached. Confidentiality is a driving force behind ADR.
### Mediation
Mediation is simply an exchange between adversaries overseen (i.e., “mediated”) by an individual with expertise and/ or training in helping parties reach agreement. Often, the mediator will require the parties to submit their
positions and relevant documents in a pre-mediation brief. Usually, each pre-mediation brief is confidential and only seen by the mediator and the party submitting it (i.e., the opposing party does not see the other side’s mediation brief). The
mediator will review the materials submitted and then set a date for the parties to meet with the mediator, usually in the mediator’s offices or a neutral location (such as a hotel conference room). Each party commits to bring to the mediation one or
more people with the authority to settle, so that the people at the mediation can discuss the dispute and reach an agreement settling it without having to seek approval from others.
At the mediation, the mediator typically starts by meeting with all the parties together, and reviews the dispute and the issues that require settlement. The mediator will then meet with each party separately, engaging in “shuttle
diplomacy,” in an attempt to bring the parties to a common middle ground. Occasionally, when it may appear that the parties’ respective positions leave a gap between them, the mediator may make a “mediator’s proposal” that tries to bridge that gap.
If the parties agree, typically a written agreement will be signed before they end the mediation—which may be a list of terms for later fleshing out in a full agreement or an actual final settlement agreement. Because anything left to later
discussion can give rise to further disputes, most mediators try to get the parties to a full, signed agreement before they depart the mediation.
Perhaps surprisingly to some, mediation often succeeds, if not the first time, then weeks or months later, after the parties have a chance to think things through. Mediations can be conducted while litigation is pending, or before
litigation is filed. In the latter case, often the parties will sign a “standstill agreement” that promises that neither will file a lawsuit against the other on the subject matter of the mediation until they agree the mediation has failed.
District courts and the Federal Circuit often have mediation programs that attempt to help the parties resolve their disputes voluntarily. Increased attention is given to these programs as the resources of the courts have dwindled
and the caseloads increased because each successful mediation is one less case that requires the resources of the court.
### Arbitration
The principal difference between mediation and arbitration is decisiveness. Mediations result in settlements only if all parties agree to a resolution. In most arbitrations (so-called “binding arbitrations”), the parties
agree to be bound by the decision of the arbitrator(s). There is a nonbinding version of arbitration, where the parties ask the arbitrator(s) to render a decision, but do not agree to be bound by it. In practice, these are actually mediations because
they result in a settlement only if all parties agree to the result. Such nonbinding arbitrations are most often used when the parties have attempted to reach a mediated settlement but reach an impasse on one or more critical issues. They may then
agree to submit those impasses to nonbinding arbitration, where one or more arbitrators (usually experts on the subject matter of the impasse issues) evaluate the facts, as presented by the parties, and render a decision that the parties can review
to understand how an impartial third party looks at the issues. This often helps the parties craft a mediated settlement on their own.
Most arbitrations are binding, and resemble lawsuits and trials more than mediations. The parties may agree to submit their dispute to a single arbitrator (like a retired judge), but most often a panel of three arbitrators is
appointed to hear the case. The parties may agree on all three arbitrators, drawn from a list of suitable candidates provided by the American Arbitration Associationhttp://www.adr.org/aaa.
or some other entity in the arbitration business, or each party selects one arbitrator and those two arbitrators pick the third.
The parties agree on the rules that govern the arbitration, which can limit discovery, evidence, witnesses, and trial time, in whatever manner the parties agree. Once the parties agree on the rules, the arbitration is controlled by
the arbitration panel, which enforces the rules and renders a binding decision. Usually, arbitration decisions are not appealable (except for gross malfeasance by the arbitrators), but the parties can provide for appeal rights if they choose. But
prolonging the resolution of the dispute by allowing an appeal is contrary to the cost and time-savings objectives of most arbitrations.
Arbitrations have become particularly popular for resolving patent disputes that cross international borders and involve multiple patents issued by different countries. No one court can resolve such disputes, so international
arbitration, with arbitrators expert in different countries’ laws can fill the gap. |
# Patent Enforcement
## Patent Trolls and Efforts to Thwart Them
### Learning Objectives
After completing this section, you will be able to
1. Appreciate the threat posed by patent trolls to innocent businesses.
2. Understand the difference between legitimate patent holders enforcing their rights and extortionist patent trolls who try to game the legal system.
Starting in the 1990s, but increasing in the new millennium, a type of plaintiff with a particular litigation and settlement strategy gained notoriety in the United States—the so- called “patent troll.” By 2012, the majority of
patent suits were brought not by businesses making products covered by patents they owned and seeking to halt competitors believed to be infringing their patents, or even by small entities and entrepreneurs pursuing legitimate claims, but instead by
what some detractors call “patent trolls” (after the mythical creatures that demanded payment for safe passage over a bridge).
In 2012, one article suggests 56 percent of patent infringement cases filed in the United States were Filed by trolls:
https://lexmachina.com/2013/04/09/lex-machina-releases-the-aia-500-expanded/. Another put the number at 62 percent:
http://www.lexology.com/library/detail.aspx?g=1e1a0e7bd9a6-4366-818f-a6935ab0fabe&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+Federal+section&utm_campaign=Calibar+IP+section+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2013-04-29&utm_term.
Although some have more recently attempted to discern a difference between what they consider “good” and “bad” trolls by labeling the former “non-practicing entities” (NPEs) or “patent monetization entities” (PMEs), for the purposes of this section,
we will refer to such entities as trolls.
As plaintiffs, trolls seek to take advantage of the fact that U.S. patent litigation costs have become so high that many defendants are willing to pay to make such cases go away. Trolls file lawsuits not to protect a business from
an infringing competitor, but to derive settlement revenue from defendants willing to settle for less than litigation costs. Trolls often acquire patents of ambiguous scope and questionable value, file suit against multiple defendants, and rely on
the presumption of validity accorded all issued patents to extract settlements for less than it would cost any one defendant to defend against the infringement claim. Because trolls have few documents other than the patents and their file histories,
and even fewer employees, they are not subject to the outsized expense of discovery that a commercial business with warehouses of documents and scores of employees faces in patent litigation. Because discovery costs for such defendants are so much
greater than for troll plaintiffs, defendants feel pressure to settle for less than the cost of litigation, lining the pockets of trolls. Such activities in the aggregate have proven very profitable for trolls, and expensive for defendants.
Spurred by target companies, the America Invents Act legislation in 2011 (see infra, Section X.3.3) included a change in rules governing the joinder of parties, stating:
This eliminated a tool of trolls—namely, filing a single case against scores or even hundreds of alleged infringers.
See,
http://www.americanbar.org/publications/landslide/2012_13/march_april/joinder_over_year_after_america_invents_act.html.
However, trolls simply adapted by filing multiple lawsuits and seeking consolidation for discovery, which increases their costs somewhat but avoids the purpose of the change.
More recently, politicians have scrambled to propose a myriad of different legislative fixes, from shifting the cost of unsuccessful litigation to plaintiffs, to staying litigation against customers of another’s product until a
suit against the manufacturer is concluded.
“See http://www.ipo.org/wp-content/uploads/2013/06/Patent-Litigation-Bills-Summary-Comparison-Chart-EXPANDED.pdf,
http://patentlyo.com/patent/2013/03/guesteDitorial-throwing-trolls-off-the-bridge.html,
http://www.ipwatchdog.com/2013/08/13/congress-sirens-song-patent-litigation/id=44573/,
https://truthonthemarket.com/2013/03/15/the-shield-act-when-bad-studiesmake-bad-laws/.”
Even President Obama was involved, asserting his administration’s own views for a solution.
http://www.nytimes.com/2013/06/05/business/president-moves-to-curb-patent-suits.html?_r=0.
Not everyone thinks legislation is appropriate, or even necessary. A panel at Yale Law School in April 2013 yielded decidedly mixed views.
http://www.patentlyo.com/patent/2013/05/patent-troll-panel-at-yale-law-school.html.
And then Chief Judge Rader of the Federal Circuit Court of Appeals coauthored an op-ed piece in the
New York Times, recommending that judges should use 35 U.S.C. §285 to foil patent trolls by imposing costs and sanctions at the judicial level.
http://www.nytimes.com/2013/06/05/opinion/make-patent-trolls-pay-in-court.html.
But again, not everyone thinks that is realistic.
http://www.techdirt.com/articles/20130605/09065423327/chief-patent-judge-speaks-outagainst-patent-trolls.shtml.
The Supreme Court embraced Judge Rader’s recommendation in its 2014 decisions in
Octane Fitness
and
Highmark, significantly broadening the district court’s discretion in finding a case exceptional and awarding attorneys’ fees. (See
supra, Section 2.7, “Exceptional Case.”) But even with such expanded discretion and power, trial judges cannot rule on the merits of a case without some basis for it, and that requires money spent by defendants. Thus, it is not
easy for a district court judge to stop what trolls rely upon, namely the use of litigation expense and leverage to extract settlements. Getting to the merits of the claims takes time and significant expense—often more than the cost to settle, with
no assurance as to outcome.
As of early 2015, the problem of trolls remains a subject of widespread discussion and debate. Legislation that was proposed in 2014 to address the problem is stalled, and although new legislation is still being discussed, many
experts believe that the state and federal actions already taken to rein in abusive patent litigation—including important U.S. Supreme Court decisions in 2015 regarding software patentability and fee-shifting in exceptional cases—make it less likely
that new legislation will be introduced any time soon.
District courts, for example, have already begun applying the standards recently announced by the Supreme Court in
Octane Fitness
and
Highmark, and may be more willing to make abusive patent litigants pay attorneys’ fees. Time will tell if the new fee-award judicial regime will lessen the pressure to implement legislation against abusive litigants. The Eastern
District of Texas, one of the most popular venues for patent litigation in the United States, has added a new Track B docket, which specifically addresses a number of proposals considered by Congress, including early disclosure of certain
information, such as licensing information, as well as very early disclosure of both the damages sought and the method of calculating those damage.
http://mcsmith.blogs.com/eastern_district_of_texas/2014/02/eastern-district-of-texas-resumescase-tracking-with-track-b-for-patent-cases.html.
Meanwhile, a growing number of state legislatures and state attorneys general have also begun using consumer protection laws to clamp down on patent trolls.
http://www.conversantip.com/blog/states-stepup-fight-against-patent-trolls/.
And the White House in 2014 issued a series of Executive Orders intended to further curb patent litigation abuse and strengthen the patent system.
http://www.conversantip.com/blog/usadministration-takes-smart-steps-to-strengthenthe-patent-system/.
Finally, a movement is taking hold within the patent licensing industry itself to develop a voluntary code of conduct or standards of ethical behavior. Companies like Conversant and Dominion Harbor Group have committed themselves
publicly to a set of ethical guidelines for patent licensing, and other companies are also considering doing so.
http://www.conversantip.com/news-article/iam-guidelines-for-ethical-patent-licensingprovide-basis-for-new-approach-to-thetroll-debate/
and
http://finance.yahoo.com/news/finjan-holdings-commits-licensingbest-130000509.html
The Licensing Executives Society of the U.S. and Canada (LES), the industry’s principal professional organization, is also developing a set of “best practice” guidelines for ethical patent licensing activity.
The importance of patents to America’s economic prosperity and competitiveness ensures that competing interests will continue to strive for an advantage commercially, legislatively, and judicially. Change will continue after the
publication of this chapter. The status quo does not last long in our field. |
# Copyright Basics
## The Basics of Copyright
### Learning Objectives
After completing this section, you will be able to
1. Understand the theoretical and legal underpinnings of copyright.
2. Appreciate the important differences between copyrights and patents.
A copyright is an intellectual property right granted by a government to the author of an original literary, dramatic, musical, artistic, or other eligible creative work that gives them the exclusive right to control how the
work is published, reproduced, performed, or displayed—as well as whether or not derivative works (e.g., a movie version of a novel) may be produced.
In the United States, the legal foundation for copyright is set forth, along with that for patents, in Article 1, Section 8, Clause 8 of the U.S. Constitution. This clause gives Congress the authority to “promote the progress of
Science and useful Arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”
U.S. Constitution Arr. 1, § 8
Congress and the courts have interpreted the terms “authors” and “writings” very broadly so as to include the creators of a wide variety of artistic and intellectual works. Title 17 of the United States Code authorizes the grant of
a copyright to the authors of “original works of authorship”—including literary works, dramatic works, choreographic works, graphic works, audiovisual works, sound recordings, and architectural works. In most cases, a copyright lasts for the life of
the author plus 70 years.
### How to Obtain a Copyright
In America, the copyright system is administered by the U.S. Copyright Office, which is part of the Library of Congress and maintains a registry of copyrighted works. Interestingly, registration is not required to obtain a copyright. It is
automatically granted to an author at the moment of creation—i.e., as soon as the work is expressed in a tangible form that allows it to be seen or copied, such as being written on paper or on a computer, or recorded as video or audio.
Registration is only required if a copyright holder wants to initiate a copyright infringement suit in federal court.
### Copyrights vs. Patents
Unlike the case with patents, the United States never developed an examination system for determining whether or not a creative work merits copyright protection. That’s because while the validity of an invention can be evaluated fairly objectively
based on its utility, novelty, and non- obviousness, the merit of any cultural work is a far more subjective affair, as demonstrated by the frequency with which publishers reject novels that later go on to become literary classics.
What the patent and copyright systems share, however, is the recognition that unless the inherent property rights of inventors and authors to their creations are protected, the wellsprings of creation and productivity would be
negatively affected by the reduced incentive. Both systems also share the public policy goal of marshaling the benefits of individual creativity—whether technological, as in the case of inventions, or cultural, as in literary works—to the public good
so that these promote the progress of the nation and the “general welfare” of its citizens.
How to promote that general welfare, however, was approached very differently by the Founders in the case of patents than it was with copyright.
The explicit intention of patent law, explained Supreme Court Justice Henry Baldwin in
(1831), was “to benefit the inventor, in the belief that maximizing individual welfare leads to maximum social welfare.” Inventors, after all, created tools that enabled the new nation to free itself from dependency on foreign imports and
develop industries of its own. Whatever incentives were needed to prod these technologically creative people to take on the challenge and succeed were well worth the bargain (see Chapter 1).
### The Rights of Authors and the Public Interest
When it came to copyright, however, the rights of authors were thought to conflict with those of the public to a far greater extent. “Democratic values emphasized equal and widespread access to learning and the importance of information flows for
maintaining political freedom, whereas strong copyrights impinged on the fullest attainment of these objectives,” notes Bowdoin College historian Zorina Khan, author of
The Democratization of Invention: Patents and Copyright in American Economic Development,
which won the Alice Hanson Jones prize for outstanding work in economic history in 2005.B. Zorina Khan,
As an example, a copyright owner’s right to prevent unauthorized use of their work may at times be constrained by the public’s First Amendment right of free speech—hence the doctrine of “fair use” (more on this later).
It was believed that a strategy of strong patent rights but weaker copyrights also better reflected the differing incentives that motivated inventors and authors. Inventors, many felt, were driven primarily by economic gain,
whereas authors were often interested as much in the prospect of celebrity and reputation as they were in monetary reward.
Supreme Court Justice John McLean emphasized that this distinction between patents and copyrights exists in the structure of U.S. intellectual property law itself. In , the first high court ruling on copyright, he wrote:
To understand why the Founders gave greater weight to the public domain in copyright law than they did in patent law, it’s important to examine the origin and development of early copyright systems and their political and economic impact on society. |
# Copyright Basics
## Early Copyright Systems
### Learning Objectives
After completing this section, you will be able to
1. Understand the role early copyright systems played in enforcing monopolies.
2. Appreciate the degree to which authors’ rights were ignored at that time.
As was the case with patents, the granting of book privileges (now called copyrights) began in the Republic of Venice in the fifteenth century. Prior to that, printed books were considered part of the public domain and anyone could
copy or reproduce them. But in 1492—the same year Columbus sailed the Santa Maria to the New World—a Milanese author named Donatus Bossius petitioned the sixth duke of Milan, Gian Galeazzo Sforza, for an exclusive privilege for his book, arguing that
without such a privilege he would be unjustly deprived of the fruit of his effort. He was granted a ten-year privilege, and the practice soon spread throughout Europe.
The French copyright system was introduced in 1498. Exclusive rights to not only books but also translations, maps, type designs, engravings, and artwork were granted by the monarch for periods initially ranging from two to ten
years. There were stipulations attached to such grants, sometimes including even price controls on the published works.
It is important to realize, however, that authorship was not required for the granting of early copyrights. In fact, the early copyright systems of Europe more often than not enabled printers and publishers to establish quite
effective monopolies over the commerce in books, the arts, and other cultural works that limited the diffusion of culture in society. The owners of such privileges may have waxed poetic about “droit d’auteur” (authors’ rights), but this was often
just a way of deflecting public criticism of their monopolistic power and superprofits.
Indeed, this was most glaringly revealed in the grant of exclusive privileges to French opera. According to a 1929 book by Henry Prunières,
Henry Prunières,
Louis XIV in 1669 granted a perpetual monopoly over all operatic performances in France to Jean-Baptiste Lully, the director of the Paris Opera. Lully also gained sole publication rights to opera librettos, and sold shares in the rights to printers.
He then used his copyright privilege to limit the number of musicians who could perform outside the Paris Opera and to suppress competitors like the Comédie Francaise. In the end, Lully became fabulously rich and bequeathed his monopoly rights to his
heirs.
Not exactly your starving artist asking merely to enjoy the fruits of his work.
Early copyright systems also quickly evolved into means of censorship and surveillance of the population’s reading habits. The 1566 Edict of Moulins in France, for example, required that any new book had to be approved and licensed
by the Crown. Manuscripts first had to be read and approved by a censor before a permit was granted to print a book. The permit could be revoked if officials or influential citizens later complained about the book’s content.
Interestingly, a decree in 1777 enabled authors who did not sell off their rights to gain a copyright in perpetuity. But like the A.J. Liebling quote about freedom of the press belonging only to those with enough wealth to own one,
so, too, were authors’ inalienable rights often just a lofty theory trumped by harsh economic reality. Because few authors had the capital required to print a book, they usually sold off their “exclusive rights” to commercial publishers.
Much the same situation prevailed in the English copyright system, where copyright law began as a monopoly grant to benefit favored guilds and as a means to censor public opinion on behalf of the Crown.
### The Statute of Anne
In 1557, the Worshipful Company of Stationers was granted a royal privilege that enabled it to control the book trade for the next 150 years. Only in 1709 did a new copyright statute, the
Statute of Anne, begin to erode the monopolistic power of the Stationers Company. It stipulated that a copyright could be obtained by anyone, and instead of a perpetual right, the term was limited to 14 years with the right to
renew for one additional 14-year term. According to Professor John Feather of Loughborough University in Britain, the statute “wholly ignored the authors of books, and certainly was not intended to confer any additional rights on them.”
John Feather,
Assessing early European copyright systems as a whole, Zorina Khan observes that they “resulted in ‘odious monopolies,’ higher prices and greater scarcity, large transfers [of money] to officials of the Crown and their allies, and
pervasive censorship [while it also] disadvantaged smaller book producers, provincial publishers, and the academic and broader community.”
Op. cit., Khan.
It wasn’t until 1774 in England, in the landmark case
Donaldson v. Beckett,
that a court ruled that authors have a fundamental right to their writings—at least until publication, after which the Statute of Anne still gave the rights to the publishers. The immediate claim in the case was whether Scottish bookseller Alexander
Donaldson had acted as a pirate when he published an edition of James Thomson’s
The Seasons,
a work for which Thomas Beckett and other London booksellers claimed the copyright. But the larger principle at issue was whether copyright was a limited right granted by government under the Statute of Anne, or a common law right of publishers that
existed in perpetuity despite the limitations of the statute.
The case would prove pivotal in deciding not only the future of publishing, but also of authors, in whose name the London publishers claimed to be acting. The court took the claim of authors’ rights further than the publishers ever
intended, however. It reaffirmed the limited statutory nature of copyright and also recognized that authors—with the decline of patronage, authors were only then emerging as independent professionals writing for a mass market of book buyers—were the
true originators and proprietors of the product of their own creative labors.
As Michel Foucault would put it nearly two centuries later,
In the century after
Donaldson v. Beckett,
European copyright systems expanded to include sheet music, maps, design, sculpture, and even lectures. The doctrines of “work for hire” and “fair use” would emerge (more on these later), but the law would still remain largely arbitrary, confused,
and frequently injurious to the public until late in the nineteenth century.
However, the process of transforming copyright from a scheme of monopoly privileges for publishers into a property right for the actual creators of cultural works had begun. |
# Copyright Basics
## Copyright in America
### Learning Objectives
After completing this section, you will be able to
1. See the origins of copyright law in the United States.
2. Appreciate the importance the Founding Fathers attached to the public need for widespread access to learning and information.
Ever practical, the Founding Fathers sought to construct an intellectual property regime that above all else would encourage the growth of commerce and industry in order to ensure the survival of the young American nation during
its precarious beginnings.
For patent law, this meant creating the maximum possible incentives to those whose ingenuity would spur the development of agriculture and domestic industry. As economist Jonathan Hughes once noted, entrepreneur-inventors like Eli
Whitney, who developed a cotton gin in 1793 that increased agricultural production a hundredfold, were“the vital few” upon whom the nation depended for progress. That’s why early Supreme Court Justice Joseph Story argued that patent rights were
“sacred,” and the just reward for their contributions to society.
But in copyright law, a different approach was taken—one that acknowledged authors’ rights but placed far greater emphasis on the public’s need for widespread access to learning and on the growth of markets. James Gilreath, the
Library of Congress historian who in the late nineteenth century painstakingly reconstructed Thomas Jefferson’s massive library catalog burned by the British in 1814, explained the Founders’ view this way:
This emphasis was certainly in tune with the realities of American book trade. Domestic publishers mainly produced newspapers, almanacs, and practical guides—reading material of useful value to a nation that needed to build an
entire economy from scratch. Most important literary works, on the other hand, were imported from Britain and France.
As a result, even in colonial times, states that passed copyright laws did so only with explicit rules that ensured widespread public access to knowledge and information.
Take colonial Connecticut’s 1783 copyright law, for example. It certainly contained all the right rhetoric about authors’ natural rights:
But it also made it quite clear that copyrighted books had to be offered at reasonable prices or the state would issue a compulsory license enabling anyone to copy these at will. No one failed to get the point.
After the Constitutional Convention and the establishment of Congress, the first federal copyright statute was signed into law by President George Washington on May 31, 1790, less than two months after the first patent law was approved.
The law stipulated that “the author and authors of any map, chart, book or books already printed within these United States, being a citizen or citizens thereof, shall have the sole right and liberty of printing, reprinting,
publishing and vending such map, chart, book or books” for a period of 14 years, with the right of renewal for another 14 years. The Founders’ belief that 28 years was the proper maximum copyright term stands in sharp contrast to today’s
controversial maximum copyright term of life-plus-70 years, an issue we will discuss later in this chapter.
Anyone violating a copyright “shall forfeit all and every copy and all and every sheet to the author or proprietor who shall forthwith destroy the same.” What’s more, “offenders shall also forfeit and pay the sum of fifty cents for
every sheet which shall be found in his or her possession.” As a final disincentive to infringers, the law allowed copyright owners to file suit “in any court of record in the United States within one year after the cause of action.”
Still, the law’s focus on the public interest was clear in the first five words of the text:
“An Act for the Encouragement of Learning,
by securing the Copies of Maps, Charts and Books, to the Authors and Proprietors of such Copies, during the Times therein mentioned.”
The failure in the text to distinguish between “authors” and “proprietors” (i.e., publishers, printers, and booksellers), of course, also suggested that Congress did not view copyright as an innate or moral right of authors. In
fact, copyright was conditional upon the author or proprietor depositing a copy of the work in the district court and paying a fee of 60 cents.
Another sign that the emphasis of U.S. copyright law was to facilitate the diffusion of knowledge over the protection of authors’ inherent property rights was provided by this sentence:
In other words, America’s first copyright law explicitly authorized the piracy of foreign cultural works in order to promote widespread citizen access to the benefits of learning.
And that’s exactly what Americans did, unabashedly pirating European culture and resisting for a century all attempts to alter what Europeans called its “obnoxious laws.”
The first American to receive a U.S. copyright, one month after the Copyright Act was signed into law, was John Barry for his spelling book. The first woman granted a copyright was Mrs. Mercy Warren of Massachusetts for her
Poems, Dramatic and Miscellaneous.
Over the next decade, half of all copyrights went to proprietors, proving yet again that the law’s concern was not chiefly with the rights of authors. Most of these were for practical books such as atlases, dictionaries, and
textbooks, as one would expect in a society hungering for practical knowledge and lacking in homegrown literary works equal in sophistication to those of the Europeans.
### The Pirates of Copyright
As late as 1835, 65 percent of science books, 92 percent of business texts, and 75 percent of law books published in the United States were written by Americans. But even then, a half century after independence,
only a third of poetry and drama books published in America were written by Americans.
Op. cit., Khan.
“A nation of artificers and innovators, both as consumers and producers, American citizens were confident of their global competitiveness in technology, and took an active role in international patent conventions,” explains Khan.
“Although they excelled at pragmatic contrivances, Americans were advisedly less sanguine about their efforts in the realm of music, art, literature and drama.”
According to Ainsworth Spofford, the Librarian of Congress from 1864 to 1897, “a group of publishing houses in the [U.S.], which made a specialty of cheap books, vied with each other in the business of appropriating English and
continental trash, and printed this under villainous covers, in type ugly enough to risk a serious increase of opthalmia among American readers.”
“
And not just “trash,” either. America gained a notorious reputation internationally for its piracy of English and European literary classics—a practice greatly encouraged by the protectionist levying of tariffs as high as 25
percent on imported books.
Put another way, America in those days was seen as a nation of technological innovators and cultural pirates.
Between 1790 and 1875, more than a hundred petitions were submitted to Congress to bring the United States in line with international copyright laws. All were defeated by publishers’ and printers’ lobbies. It wasn’t until 1891 that
the Chace Act granted copyright protection to select foreign authors—but only if their work was published in the United States on or before the publication date in their own countries, and only if the actual printing was done here. The United States
failed to qualify for admission to the Berne Convention on copyright until 1988, an astonishing 102 years after the convention.
Such piracy had its costs, however—and not just to foreign authors and publishers. According to Arthur Schlesinger, “So long as publishers … could reprint, or pirate, popular English authors without payment of royalty, and so long
as readers could buy such volumes far cheaper than books written by Americans, native authorship was at a marked disadvantage.”
Arthur M. Schlesinger,
Some believe this helps to explain why no great American novels were written in the early nineteenth century. Only in the mid-1800s, with the emergence of novelists like James Fenimore Cooper, Nathaniel Hawthorne, and Henry
Wadsworth Longfellow did a change in the relative balance of authorship between Americans and foreigners begin to take place. More and more authors took up the pen and influenced American culture, including Harriet Beecher Stowe, who copyrighted
Uncle Tom’s Cabin in 1851. Nonetheless, it wasn’t until the early twentieth century, after the United States began to comply with international copyright standards, that Americans became the majority of best-selling authors in the United States.
Alice Hackett and James Burke,
It would be far too simplistic, of course, to ascribe the late- blooming of American literature simply to weak copyright laws and the prevalence of cheap pirated foreign literature. There are organic reasons why a young nation, and
a new culture, needs time to develop its own literary voices. But it is also true, as research worldwide has repeatedly demonstrated, that where weak intellectual property protections exist in developing nations (like today’s China or early
nineteenth-century America), citizens have an excessive incentive to copy and insufficient incentive to invent and create for themselves. |
# Copyright Basics
## Eligible Works
### Learning Objectives
After completing this section, you will be able to
1. Know what kinds of creative work are eligible for
2. Grasp the broad definition of "authors" and "literary works."
### Can I Copyright That?
Before reading this section, please watch the overview video covering the basics of copyright law—eligible works, the distinction between ideas and their expression, the rights granted to copyright owners, and
is copyright term—life plus 70 years.
Title 17 of the United States Code Section 102 explicitly delineates eight categories of original works that are eligible for copyright.
This list, while broad, actually includes a far more extensive range of work than the average citizen might imagine. For example, copyrightable works also include software.
### Copyrighting Software
Why is software copyrightable? It’s because an appellate ruling in the 1983 case of
held that software was a kind of “literary work” and therefore eligible for copyright.
The court noted that the Copyright Act defined the term “literary work” as follows:
Based on this definition, the court determined that a computer software program “is an appropriate subject of copyright.”
Note, however, that copyright does not extend to the elements of works of authorship that are potentially patentable processes. And indeed, beginning in the 1990s, software companies began increasingly to patent those elements of
their new software that could be described as patentable processes, precisely in order to secure the stronger protections of patent law.
In any event, software is but one example of how the courts have tended to interpret broadly the eight categories of eligible subject matter. Just as technology drove the expansion of eligible subject matter into ever new
realms—e.g., first photographs and then motion pictures—the courts have also expanded the definitions of all eight categories of eligible subject matter to include maps, games, puzzles, toys, fabric design, and many other creations.
### Ideas to Copyrightable Works
However, not everything is copyrightable—far from it. Just as patent law makes a sharp distinction between ideas and their application—i.e., you cannot patent an idea for a better mousetrap but you most
certainly can patent a new, non-obvious, and useful apparatus that catches mice—so, too, does copyright law differentiate between ideas and their expression. You cannot copyright, for example, the idea of an epic space opera in which a mystical cadre
of Jedi knights wielding laser swords battle galactic evil, but you can copyright the particular expression of that idea in the screenplay and motion picture
Star Wars.
Because it is an abstract concept or idea, Einstein’s formula E = MC2
is also not copyrightable. It is true that Einstein was the first to derive the famous formula involving mass and energy, which at first blush seems to fit the requirement for creative authorship in a copyrightable work. But the formula was derived
from observation of natural physical laws, and must remain in the public domain lest private intellectual property rights create a blockade that prevents scientists and mathematicians from continuing their research and teaching.
Also noncopyrightable are names, addresses, and other known facts that are not creatively compiled. That’s why a phone book cannot be copyrighted, whereas the
creative
compilation of facts in a Chinese-American phone directory listing “Bean Curd & Bean Sprout Shops” may be under certain conditions, as a judge ruled in the 1991 case
.
To be copyrightable, a creative work must not only be expressed in a tangible form that allows it to be seen or copied (i.e., put to paper or some other medium), but it must also be
original.
The requirement for originality in copyright has its parallel in the necessity for novelty in patents. But this parallel works only to a point, for a copyrighted work need not be novel in the strictest sense to be original.
As Arthur R. Miller and Michael H. Davis explain in their textbook on intellectual property for law students:
To reiterate, a copyrightable work must not only fit under one of the eight broad categories of eligible subject matter, but it must also be:
|
# Copyright Basics
## Rights and Term
### Learning Objectives
After completing this section, you will be able to
1. Discern the specific rights granted to copyright owners.
2. Understand the term of those rights as well as in some cases their limitations.
Just as common law property rights grant owners’ exclusive powers of possession, use, and distribution, so, too, does copyright law provide for six roughly analogous exclusive rights:
Derived from 17 U.S.C., § 106 Retrieved from
http://www.law.cornell.edu/uscode/text/17/106
These rights are exclusive to copyright owners—only they or those to whom they have legally assigned their rights can act upon them. Only the author of a copyrighted book, for example, can decide to make copies of (i.e., publish)
the work and prepare derivatives of the book, such as a movie version of it. If any person other than the author and copyright owner were to make a movie based on the book, that person would infringe the copyright.
The term or time period of a copyright varies. For an individual, the term of a copyright is the life of the author plus 70 years after the author is deceased. For a work with two or more authors, the term expires 70 years after
the last author’s death. Finally, for works that are “made for hire,” or anonymous or pseudonymous works, the copyright term lasts 95 years from the first publication or 120 years from the year of the work’s creation, whichever comes first.
Derived from 17 U.S.C., § 302 (c) Retrieved from
http://www.law.cornell.edu/uscode/text/17/302
As examples, assume a musical artist writes a song that is published and performed under their name. The copyright will last 70 years beyond their death, and could conceivably be quite valuable to their heirs.
On the other hand, imagine that an anonymous Korean War soldier’s diary, dated “December 1951” is discovered in an antique shop in the year 2013 and published that same year. Ordinarily, the copyright for an anonymous work would
last for 95 years from the date of first publication, expiring in the year 2108. But because the date of creation is known to be 1951, the copyright would expire in 2071, or 120 years after it was written.
As noted earlier and discussed later in Section 3.9 of this chapter, these lengthy terms for copyright are controversial and opposed even by many supporters of copyright.
### Work for Hire
According to U.S. law, a
work for hire
is:
Imagine that you are an employee of a company, and you are asked to write one section of a white paper on a subject of interest to the industry. Or let’s say you’re a contractor hired to perform that same task under a “work for
hire” arrangement. You will not own the copyright to that section of the white paper when it is completed, nor can you publish or use it if you leave the company and go to work for someone else. Although it is your creation, it is owned by the
employer, who often uses your work product as part of an integrated project involving other contributors. The copyright for this particular white paper will last for 95 years from the year of first publication, or for 120 years from the year of its
creation, whichever expires first.
### First-Sale Doctrine
It is important to note, however, that an author’s distribution rights (No. 3 above) are strictly limited by what is known as the first-sale doctrine, which terminates those distribution rights once he sells or
distributes the work to someone else. For example, once the author of a copyrighted novel lets a publisher distribute copies of that novel to a bookstore, the author’s distribution rights to those copies are ended and the bookstore can do whatever
it wants with them—sell them, rent them, give them away, or throw them in the dumpster. The bookstore owner cannot, however, make additional copies of the book because the first-sale doctrine does not limit a copyright owner’s
reproduction
right (the first right listed above).
The first-sale doctrine was first delineated in the 1908 Supreme Court case
. The Bobbs-Merrill Co. distributed copies of a novel titled
The Castaway
to retailers with the proviso that these be sold for exactly one dollar. Printed right in the book itself, in fact, right after the title page, was the following notice:
Retailers, however, sold the book for less than a dollar and the Bobbs-Merrill Co. sued one of them. The high court found that once copies of the book were sold, the distribution rights of the author terminated as to those copies.
Derived from
The ruling came to be known as the first-sale doctrine and was codified into law as 17 U.S.C., § 109. The statute distinctly draws the line at distribution rights, leaving all other rights to the copyright owner.
It’s the first-sale doctrine that explains why Amazon.com and eBay allow users to resell secondhand copies of printed books, music, and movies at prices of their own choosing—but only if those copies were legally obtained. It is
still illegal to sell pirated works.
In 2011, however, a new case in the United States Court of Appeals for the Second Circuit—
—waived the first-sale doctrine in cases where the copies of the copyrighted work were manufactured abroad.
But in March of 2013, the U.S. Supreme Court overturned that ruling in a 6-to-3 decision that affirmed that Mr. Kirtsaeng’s rights after first sale trumped the publisher’s right to ban imports. He couldn’t make unauthorized copies of the book. But
just as with secondhand books or Gucci bags bought at a flea market, if the books had been bought legally (regardless of whether they had been imported or sold originally in the United States), Mr. Kirtsaeng had a right to sell them.
The first-sale doctrine was also limited by
, when an appeals court in 2010 ruled that software was not subject to the first-sale doctrine because purchasers of software were actually only licensees and therefore could not resell the software to others.
Does the first-sale doctrine apply to digital music, such as your iTunes library? In a case involving the start-up company ReDigi, U.S. District Court Judge Richard J. Sullivan ruled on March 30, 2013, that a resale of digital
music that involved creating a new copy on someone else’s computer while erasing the copy on your computer actually concerned the reproduction right, not the distribution right, and the first-sale doctrine therefore did not apply. (You could sell
your hard drive that has your music files on it, but most people would not want to do that!) But this decision is likely only the first round in what many feel will ultimately be a successful effort to create legal markets for secondhand digital
goods.
### First-Sale vs. Moral Rights
The first-sale doctrine does not affect an author’s moral rights, which under U.S. copyright law are limited only to certain works of visual art but under European copyright statutes are more broadly applied
to other kinds of copyrightable work. Derived from the French concept of droit d’auteur, these give authors the power to protect the integrity of their work as well as the right of attribution.
Zemer, L. (2011). Moral Rights: Limited Edition. Boston University Law Review, 91(4), 1524. Retrieved from
http://www.bu.edu/law/central/jd/organizations/journals/bulr/volume91.
Preserving the integrity of a work means that the author has the right to prevent its intentional distortion, mutilation, or modification by others. Authors also have the right to control the use of their name in relation to the work.
Both of these rights, however, have limitations. Under U.S. law, because moral rights are
personal, they exist only for the life of the author. Only the author can enforce those rights; they cannot be transferred by the author to heirs or anyone else.
As noted at the beginning of this chapter, registration is not required in order to enjoy copyright protection. Once an author puts words to paper, paint to canvas, or software code into a digital file, it is immediately protected
by copyright and nothing more is required.
Although the requirement of registration as a condition of federal copyright protection was discarded over a century ago, when Congress passed the Copyright Act of 1909, the requirement that proper copyright notice be affixed to
copies of published works survived much longer. It was only dropped in 1989, when the United States joined the Berne Convention and had to amend its copyright law to comply with the terms of that convention. Notice and registration of copyright are
now discretionary, but recommended. Registration of a copyright provides a legal record of copyright ownership in cases where infringement is alleged, and in fact is required before the author can even file suit for infringement.
17 U.S.C., § 411
To register a published work, an author will usually need to submit two copies of the work to the U.S. Copyright Office. |
# Copyright Basics
## Infringement and Remedies
### Learning Objectives
After completing this section, you will be able to
1. Discuss the specific requirements for proving copyright infringement.
2. Understand how copyright is affecting a changing music industry.
### What If Someone Infringes Your Copyright?
Before reading this section, please watch the overview video below covering what you can do if your novel, blog post, photograph, or song is used by another without permission, and what the famous “Blurred Lines” copyright trial means to you.
Derived from the common law of trespass,
infringement
of a copyright or any other intellectual property right occurs when a person violates the exclusive rights of its owner. The term gets its meaning from the word “fringe”—implying a boundary that cannot be crossed. As laid out in Sections 106 through
122 of Title 17 of the U.S. Code and subject to certain exclusions, infringement occurs when a person copies, distributes, performs, or displays all or part of a copyrighted work (or in the world of television, conducts a secondary transmission of a
cable system without the express consent of the cable system owner). Copyright infringement requires proof of two things. First, it requires proof that the defendant actually copied from the plaintiff’s work. That makes it different than patent
infringement, which can take place even if the defendant independently came up with the invention that was patented by the plaintiff. Proof of copying can be obtained either directly, by the defendant admitting the act, or, indirectly, by showing
that he had access to the plaintiff’s work, and that there are similarities between the works that make independent creation unlikely. Second, infringement requires proof that the allegedly infringing work is substantially similar to the plaintiff’s
work.
Derived from
The second requirement is there to make clear that not all copying amounts to infringement. For example, copying of a general theme, such as a detective solving a murder mystery, would not be considered infringement.
There are two ways to demonstrate the similarity of an allegedly infringing work and the original copyrighted work. “Fragmented literal similarity” may be shown by demonstrating that the infringing work contains specific copied
elements of the original work. For example, suppose that one travel writer wrote a guide to Florida that contained a chapter on Key West, and a second writer copied that chapter and included it in their otherwise independently researched and written
guide to Florida. In that case, we could point to specific sentences and paragraphs in the two works that were identical, even if other sentences and paragraphs were not.
Or, to take another example, in today’s music scene, certain genres of music use pieces or “samples” of previous sound recordings that are then mixed into a new sound recording. Unless the artist doing the sampling licenses the
sound recording (and maybe the underlying musical work as well), the sampling could be considered infringing.
### Copyright Infringement in the Music Industry
Take Kanye West, for example. He was recently sued for sampling Sly Johnson’s song “Different Strokes” and using it in a new song called “The Joy” on Kanye’s and Jay-Z’s
Watch the Throne Album.
The case was settled out of court for an undisclosed amount.
The second type of similarity—called comprehensive nonliteral similarity—involves the borrowing of patterns without necessarily borrowing specific elements. In the case of a novel, for example, one author might infringe by copying
the plot of another novel, even though he used different words to describe the action taking place. Similarly, a composer of a song might write lyrics and music that closely borrowed patterns from another song, even though he did not use the exact
same words and notes.
Again, take Kanye West. He was also recently sued by Vincent Peters, a local Chicago artist, not for sampling his music but rather for employing substantially similar concepts and wording in Kanye’s megahit “Stronger.” The judge
did not agree, finding that Kanye’s song had actually used concepts and phrasing that were “common ideas” and in the public domain—specifically, Friedrich Nietzsche’s phrase, “That which does not kill us makes us stronger.”
Mitchell, D. (2011, November 28).
But by far, the most significant copyright infringement case in recent years concerning music was the March 10, 2015, verdict against Robin Thicke and Pharrell Williams, the performer and primary songwriter-producer of the 2013 pop
hit “Blurred Lines.” A federal jury ruled that Thicke and Williams committed copyright infringement by using elements of the 1977 Marvin Gaye classic R&B hit “Got to Give It Up.” The jury awarded Gaye’s family $7.3 million—a very significant
penalty—but the Gaye family announced that they will also seek an injunction against further radio and concert performances of the song, which will certainly give them leverage in negotiating future royalties and songwriting credit.
The case is significant, even beyond the outsize monetary award, because it challenges the growing practice in contemporary music production of incorporating elements, features, themes, and even the “feel” and “mood” of the work of
other artists and genres.
Larry Iser, an intellectual property lawyer who has represented artists like Jackson Browne and David Byrne, criticized the verdict. “Although [Marvin] Gaye was the Prince of Soul,” Iser told the
New York Times, “he didn’t own a copyright to the genre, and Thicke and Williams’ homage to the feel of Marvin Gaye is not infringing.”
Despite the critics, musicians and producers will likely be more cautious in the future. In addition to the “Blurred Lines” case, singers Sam Smith and Tom Petty reached a settlement in 2015 granting songwriting credit and
royalties to Petty on Smith’s song “Stay With Me,” which bore some resemblance to Petty’s hit “I Won’t Back Down.”
### Actual and Statutory Damages
As we see in the above case, infringing a copyrighted work can carry very significant penalties. The copyright owner has the right to recoup damages and lost profits from infringement. There are two kinds of
damages—actual and statutory. The copyright owner may only receive one or the other form of damages.
Derived from 17 U.S.C., § 504 Retrieved from
http://www.law.cornell.edu/uscode/text/17/504.
The Recording Industry Association of America (RIAA), for example, was awarded major damages from Jammie Thomas in 2009 for her willful statutory infringement of 24 copyrighted songs that she had uploaded to the music sharing site
Kazaa. Because the infringement was found to be willful, the court in its discretion raised the damages maximum from its usual $30,000 per act of infringement to $80,000 per infringement. That $80,000, times 24 songs that were infringed, resulted in
a damage award of $1,920,000
Kravets, D. (2009, June 18).
After several trials and appeals, however, the damages assessed against Thomas were reduced to $222,000.
Take note, infringers—the risks can be very great, indeed.
Only the owners of registered copyrights may file for statutory damages. That’s another reason why it’s a good idea to register your copyright.
Sometimes, though, the copyright owner’s most important remedy for infringement will be an injunction that forces the infringer to stop illegal actions that cause continuing damage to their rights. The grounds for getting that injunction, however, have tightened in recent years and now require the plaintiff, or copyright owner, to provide substantial evidence of infringement that cannot be repaired without an injunction.
As the court of appeals for the ninth circuit put it in 2011:
Individuals who infringe copyrighted material face not only restitution for damages and lost profits and impoundment and destruction of materials, but strict criminal penalties as well. To be subject to criminal penalties, the
infringer must have willfully infringed the copyright. For those doing so for commercial advantage or private financial gain, the sentence may be up to five years for a first offense, and ten years for a second offense.
Derived from 18 U.S.C., § 2319 Retrieved from
http://www.law.cornell.edu/uscode/text/18/2319
We have focused solely on the federal penalties for infringement. That’s because, with the passage of the 1976 Copyright Act, federal copyright law now preempts state laws. State laws governing breach of contract, violations of
trust, trespassing, conversion, invasion of privacy, defamation, and deceptive trade practices still exist, however, and these may also be employed by a copyright owner seeking redress for other harms caused by infringing activity. |
# Copyright Basics
## The Fair Use Defense
### Learning Objectives
After completing this section, you will be able to
1. Understand the nature of fair use and how it serves the public interest.
2. Appreciate the continuing debate over just vagaries in what is considered fair use.
### Is It Fair Use or Infringement?
Before reading this section, please watch the overview video below covering Fair Use is an enigma—indeed, no one even knows how many words of a copyrighted work one can legally copy as “fair use.” Here, at last, is everything you need to know about Fair Use.
Title 17 of the United States Code allows the copying and use of copyrighted material for specific
purposes—including criticism, comment, news reporting, teaching (involving multiple copies for classroom use), scholarship, or research. The statute also describes four
factors
that draw on the precepts first discussed by Supreme Court Justice Story 150 years earlier to determine if the use of a copyrighted work is infringement or “fair use.”
17 U.S.C., § 107 Retrieved from
http://www.law.cornell.edu/uscode/text/17/107.
Based on these factors, which are not meant to be all inclusive, a judge must determine if the use of copyrighted material is within the bounds of fair use. What makes that determination sometimes difficult is the challenge of
weighing a variety of purposes—was the work used for criticism, comment, news reporting, teaching, scholarship, or research?—in concert with various factors (such as how much was used, and whether it was for commercial gain or not).
In the crucial 1973 Supreme Court case of
, for example, the divided justices affirmed a lower U.S. Court of Claims decision that the benefits of freely distributing photocopies of medical journal
articles to nonprofit government research libraries outweighed the reduction of potential revenue to the publisher of those journals.
### Parody
One of the purposes for which copyrighted work may at times be freely used is parody. As a federal court ruled in one 1993 case:
And the greater the “transformative” nature of the new work, the less likely it infringes the original work.
A case involving the Fox TV show
Family Guy
illustrates the point. In
, the court found that a Family Guy episode in which the character Peter Griffin sang a revised version of the song “When You Wish Upon a
Star” called “I Need a Jew” was a parody and thereby a fair use of the original material. The outrageous if not offensive visuals and words employed in the
Family Guy
parody were so substantially different in character and form from the original use of the song in the Walt Disney movie
Pinocchio
that no one could ever confuse the two or fail to realize that Fox’s use was a parody.
### Transformative or Theft?
A very interesting case involving fair use was decided by the U.S. Court of Appeals for the Second Circuit on April 25, 2013. It overturned a 2011 district court ruling that artist Richard Prince had acted
illegally by using another artist’s photographs to create a series of collages and paintings. Such borrowing of another’s work is considered fair use only if it is “transformative” in some substantial way, and the district judge held that it was not because the collages did not comment on the original work explicitly. The federal circuit disagreed, holding that explicit references to the original work are not required so long as the required “transformation” is manifested by “an entirely different aesthetic” in the secondary work.
According to the appeals court:
### Fair Use for Public Good
The fair use clause also allows libraries and archives that are open to the public, or researchers in a specialized field, to use copyrighted materials for the purpose of preservation and security of the material or as a deposit for research. These libraries and archives can keep up to three copies of a copyrighted work, but a copyright notice must be included on each copy. Libraries and archives will not be held liable for “unsupervised use of reproducing equipment located on its premises” if there is a notice on the equipment that a copy may be subject to copyright law.
17 U.S.C. § 108 Retrieved from
http://www.law.cornell.edu/uscode/text/17/108.
Any use of photocopied copyrighted materials must be specifically for private study, scholarship, or research, and any other use constitutes infringement. Photocopying copyrighted materials in a business setting is also infringing if used outside of
research.
Academic institutions also are protected by specific rules regarding fair use, pursuant to an agreement between representatives of the publishing industry and of academic institutions negotiated in the 1970s. The photocopying of a
copyrighted work for the classroom is permitted if it is limited to:
Library of Congress. (2009, November). Reproduction of Copyrighted Works By Educators And Librarians. Retrieved from
http://www.copyright.gov/circs/circ21.pdf.
But even in the above academic uses, limitations apply regarding the size of both the audience and the content to be copied. For example, teachers may photocopy works only for students enrolled in the class. The photocopied
material must also pass brevity, spontaneity, and other tests. “Brevity” means no more than 250 words of a poem, 2,500 words of a prose work, or 10 percent or 1,000 words of an excerpt of a prose work may be used. In addition, the decision to photocopy the material must be spontaneous; the photocopied material must be used only for one course and one class term; no more than one poem, article, story, or essay—and no more than two excerpts—may be copied from the same author; and such bulk photocopying must be limited to nine instances per class during one term.
Derived from The President and Fellows of Harvard College. (2008).
Finally, copyrighted works may not be photocopied and used in educational settings as a substitute for required texts, photocopies may not be mandatory, and you cannot charge for the photocopied work (although you may recoup the costs of photocopying).
Copyright Law Revision (House Report No. 94-1476) Retrieved from
http://uscode.house.gov/download/pls/17C1.txt.
|
# Copyright Basics
## Changes in Copyright Law
### Learning Objectives
After completing this section, you will be able to
1. See how copyright law has continually adapted to technological change.
2. Note how digital entertainment industries in particular have been affected by changes in copyright law.
Throughout the more than 226-year history of copyright in the United States, technological innovation and changes in consumer behavior have continuously forced Congress and the courts to embrace new forms of copyrighted media and
new ways of distributing and consuming it.
### The Copyright Act of 1976
As noted earlier, the nineteenth century saw copyright expand to include a variety of new technologies, such as mechanical reproductions of musical compositions (player pianos and phonographs), photography, and
eventually motion pictures. But those changes were small compared with the enormous advances of the twentieth century. The invention of radio, broadcast television, cable television, the video cassette recorder (VCR), personal computers, computer
software and video games, digital audio recorders, compact discs, the digital video recorder (DVR), the Internet, iTunes media players, and now the streaming of music and movies all offered consumers new forms of creative content—and offered creators
a new means of reproducing and distributing it. Each of these required an adjustment in U.S. copyright law.
Take the advent of cable television in the 1960s and 1970s. Early court cases like
in 1968 and
in 1974 held that the rebroadcast of broadcast television shows over cable television systems did not constitute a “performance” and therefore did not infringe the copyright in those shows. The
Copyright Act of 1976—the most significant revision of copyright law since 1909—remedied this failure to see cable broadcasts as performances and extended copyright protection to works performed over cable TV.
The
Copyright Act of 1976
made several other major changes to the law. It also codified “fair use” into the statutes rather than simply the common law, granted statutory copyright protection as soon as a work was reduced to a concrete form rather than only when registered,
and began to bring the United States into compliance with international copyright law rather than continue to stand apart from it.
Arthur R. Millerand Michael H. Davis,
### The Computer Software Rental Act of 1990
The next major copyright issue arose with the emergence of personal computer software in the 1980s. Software companies and independent developers lobbied Congress to curtail the illegal copying
of copyrighted software. As a result, the Computer Software Rental Act of 1990 was passed, prohibiting the unauthorized rental, lease, or lending of a computer program for commercial gain. Individuals, however, could still make personal copies for
their own use, and libraries were permitted to lend software.
Library of Congress. (2003).
The hope was that this would curb the rampant software piracy then costing U.S. firms roughly $1 billion per year in lost sales and rentals. The law probably did slow piracy inside the United States. But by 2010, software piracy
worldwide had grown into a $10 billion a year business.
### The Audio Home Recording Act of 1992
Hoping to prevent similar piracy in the emerging digital audio field, the Audio Home Recording Act of 1992 amended copyright law to require manufacturers and importers of digital audio recording
devices to install technology to prevent the illegal copying of copyrighted music. It also mandated that royalties be paid to copyright owners for every device sold.
When it came to performance rights—one of the six exclusive rights of copyright owners—the last 150 years have witnessed major changes in the way musical performances are distributed and consumed. The American Society of
Composers, Authors and Publishers (ASCAP) was formed in 1914 to develop a system whereby royalties could be obtained for composers whose songs were performed live—and later on, over the newly invented technology of radio. Today, 435,000 U.S.
composers, songwriters, lyricists, and music publishers rely upon ASCAP to secure royalties for their work performed over TV, CD, and every new media that has come after radio.
The other three performing rights organizations are SESAC, formed in 1930; Broadcast Music, Inc. (BMI), formed in 1939; and SoundExchange, which in 2007 was granted the sole right by the Copyright Royalty Board to represent
performers whose music airs on satellite radio (such as SIRIUS XM), Internet radio (like Pandora), cable TV music channels, and similar platforms for streaming sound recordings. The Recording Industry of America Association (RIAA), formed in 1952,
represents record labels and music distributors and has played an important role in ensuring that their rights are respected even as new technologies for distributing recorded music have emerged.
The RIAA lobbied Congress to enact the
No Electronic Theft Act of 1997, for example, which made it a criminal offense to reproduce or distribute music by electronic means (i.e., over the Internet). Nonetheless, by 2002, some 3.6 billion songs a month were still being
downloaded illegally, thanks to music sharing sites like Napster, which had been launched in 1999 and at its peak facilitated the downloading (much of it illegal) of 80 million songs. Indeed, many college dormitory networks became overloaded with MP3
musical file transfers.
At the time, many Internet pundits, enthralled with the misquoted notion that “information wants to be free” online, insisted that downloading technology made it impossible for musicians and their labels to enforce their copyrights
on the Internet. For its part, Napster claimed that they should not be held responsible for any illegal downloading committed by users.
But the RIAA and musicians brought suits for contributory infringement. In court cases like
and
, judges and juries repeatedly found Napster guilty of infringement and it was forced into bankruptcy in 2002.
Music piracy still exists, of course. But in place of Napster, music consumers now have legal music download sites such as Apple’s iTunes music store that sell digital music with permission from, and appropriate royalties to, their
copyright owners. Surveys show that most consumers don’t really want to steal music. They just want convenient, low-cost online access to it. Most consumers also appear to recognize that if music creators cannot make a living from their work, they
won’t be able to keep making music.
Meanwhile, digital rights management (DRM) technologies had been developed that have the potential to limit the piracy of copyrighted content. Companies in various content industries lobbied Congress to pass the
Digital Millennium Copyright Act of 1998 (DMCA). This law made it a crime to disseminate technology or services that could circumvent DRM measures used to control access to copyrighted movies, music, and books. It also increased penalties for copyright infringement on the Internet.
But in an appropriate concession to online services that merely hosted user content, the DMCA limited the liability of online services for copyright infringement committed by their users, so long as they acted to remove the
offending content once informed of it.
### Viacom vs. YouTube
In 2007, however, Viacom filed suit against YouTube and its corporate parent Google for copyright infringement, claiming that the popular video-sharing site was committing “massive intentional copyright infringement”
for not taking sufficient steps to prevent or remove some 160,000 unauthorized clips of Viacom’s entertainment programming posted by users. Google argued that the DMCA’s “safe harbor” provisions shielded them from liability for the actions of its
users, and a district court judge ruled in favor of Google in 2010. But in April of 2012, a court of appeals vacated that decision and ruled that Viacom had presented enough evidence to warrant a trial. Viacom was seeking more than $1
billion
in damages from YouTube, but in March of 2014, the parties quietly settled the seven-year-old case.
A key factor in spurring the settlement is that Google has in the interim addressed the concerns of content owners like Viacom by creating a system that allows them to track their content when posted on YouTube and then request it
be taken down or run with ads.
### Extending Copyrights
The same year that saw passage of the DMCA also witnessed the passage of the
Sonny Bono Copyright Term Extension Act, which added an additional 20 years to the term of copyright—extending it for most works to the life of the author plus 70 years after the author is deceased. Critics called it the “Mickey
Mouse Protection Act” because it effectively extended the copyrights of many of the characters and content of the Walt Disney Company, which lobbied strongly for the bill. They argued that copyright law was historically designed to serve a public
purpose and ought to defer to the public interest, as it has throughout U.S. history. As the
New York Times
put it:
Even a staunch defender of intellectual property rights like Professor Richard Epstein of the NYU School of Law—he was rated one of the top legal thinkers of modern times by the journal
Legal Affairs—believes that the copyright term of life- plus-70s years is too long.
“My own view is that no commercial property right should ever be tied to life, and the extra 70 years is far too long,” he argues. “It has the potential to create an anti-commons that deprives the public of its rights to freely
access cultural works. Copyrighted works should pass into the public domain after 28 years, which was the approach of the Founders.”
The debate over the Copyright Term Extension Act, not surprisingly, continues.
In the international sphere, meanwhile, the late twentieth century also saw the United States finally agree to the
Berne Convention
in 1988, joining the following year. The purpose of the convention is to ensure fair and reciprocal copyright protection for member nations. Although it did not create an international copyright per se, it did require the United States to amend its
copyright law to comply with certain Berne provisions, such as a ban on registration as a condition of copyright. But overall, the convention facilitated the reciprocal cross-border protection of creative works while leaving most details of each
nation’s copyright laws to member states.
One proposed bill that didn’t make it into law was the
Consumer Broadband and Digital Television Promotion Act of 2002. It attempted to deal with continuing piracy of copyrighted works by requiring every medium and every device for the consumption of copyrighted works to implement
digital rights management (DRM) technology. But the bill was considered too draconian—too
1984, if you will—and failed to pass.
To be sure, many companies have voluntarily implemented elements of DRM technology, to the chagrin of many consumers. Some electronic book readers (e-books) limit the ability of users to read books only on those devices, preventing
interoperability between Kindle and iPad e-book readers, for example. Some music labels install software on their CDs to prevent copying of the music. And some Blu-ray and DVD movie players do not allow for the creation of transformative copies. In
fact, iTunes, a very popular way to manage music and other media, used to employ a DRM system that limited the transfer of songs to five authorized computers.
Groups like the Free Software Foundation argue that “The motive for DRM schemes is to increase profits for those who impose them, but their profit is a side issue when millions of people’s freedom is at stake.” But their argument
is undercut by the simple reality that if content creators can’t make a living from it, most will stop creating and take day jobs to pay the rent. This has always been the copyright bargain in America—protection for the rights of creators but only so
long as it serves the public interest.
And enabling creators to keep creating is clearly in the public interest.
### E-Books
A more legitimate concern regarding DRM is that, whatever its perceived benefits for publishers and distributors, it is holding back innovation and consumer rights in digital content industries. This is especially evident in the
burgeoning e-book market, which exploded from barely 10 percent of U.S. book sales in 2011 to 30 percent of all book sales by 2013. But a growing number of e-book publishers have now concluded that unless they meet consumer demands to ease these DRM
anti-piracy provisions, further growth could be constrained.
According to Microsoft’s Chief Intellectual Property Strategy Counsel Tom Rubin, a leading voice on this issue, that’s because DRM makes the e-book reader experience much less enjoyable and useful than that for printed books. According to Rubin:
Rubin says the fault here lies not in the technology, which already exists to enable these capabilities in e-books and also augment them with rich audio, video, and social media. Rather, it lies in the business arrangements
underlying the publication and distribution of e-books.
The e-book you buy, for example, is often available from only one source—and usually only readable on one proprietary device. You can’t access it from any device you want, nor can you use the e-reader app of your choice. This
balkanization of the market diverts resources from enhancing the user experience into defending the turf of incumbent players.
But it’s not just the balkanization of the market that hinders competition and innovation. Some publishers now believe that the digital rights management (DRM) controls they employ to prevent piracy are actually preventing many
consumers from fully embracing e-books. After all, as many book buyers have angrily noted, you can’t even download the digital version of a print book that you’ve already purchased unless you pay a second time.
### Publishing DRM Free
In response to consumer complaints, some publishers have dispensed with DRM controls.
Harry Potter
author J. K. Rowling has launched her own website,
Pottermore.com, to sell her e-books DRM free, enabling readers to enjoy them on any device they choose. Interestingly, the piracy of
Harry Potter
books has declined by 25 percent since DRM was dropped in 2012.
Also in 2012, Tor Books, a major science fiction publisher owned by MacMillan, went DRM free as well, with no apparent harm to its sales—and to the delight of its customers.
Then there’s the big U.S. tech publisher O’Reilly, which has been DRM free since its inception. O’Reilly, which has one of the most loyal customer bases in publishing, signed a deal on April 16 of 2013 with Elsevier, the world’s
largest publisher of scientific and health information, to distribute more than 1,200 titles DRM free. (It also distributes all Microsoft e-books DRM free.)
“The consumer ebook market is an emerging and changing one, and we want to offer customers as many choices as possible,” explained Elsevier spokeswoman Suzanne BeDell.
And finally, although the prestigious Harvard Business Press still sells its books on Amazon with DRM restrictions, it recently started selling books on its own site DRM free.
These early publisher moves to dispense with DRM restrictions parallel what happened in the digital music industry a decade ago. For the first few years after the launch of the iTunes music store in 2003, piracy-wary music
publishers required Apple to sell its songs with DRM controls that limited the kind and number of devices consumers could play them on.
But on February 6, 2007, Apple CEO Steve Jobs wrote an open letter to the industry urging music publishers to let iTunes sell music DRM free:
This, said Jobs, would obviously be “positive for the music companies.”
And sure enough, once publishers agreed to license digital music DRM free later that same year, the market exploded. In 2013, iTunes announced the sale of its twenty-fifth billionth song!
Ultimately, argues Rubin:
### Recent Copyright Laws
The debate over DRM in e-books is likely to be center stage in the copyright debate in coming years. In the meantime, it’s worth mentioning three other copyright-related laws that were passed during the last decade or so.
One, the Technology, Education, and Copyright Harmonization (TEACH) Act of 2002 enabled educators to use certain copyrighted performances and displays for educational purposes.
Technology, Education, and Copyright Harmonization (TEACH) Act of 2002, Div. C, Tit. III, Subtitle C of the 21st Century Department of Justice Appropriations Authorization Act, Pub. L. No. 107-273, 116 Stat. 1758, 1910 (Nov. 2, 2002) Retrieved from
http://thomas.loc.gov/cgi-bin/query/z?c107:S.487.ES.
The bill was focused on the fast-growing arena of distance education, whose students number 12 million and are growing rapidly.
Also that year, the Small Webcaster Settlement Act of 2002 eased royalty burdens for small webcasters who don’t have the resources of the major content distributors.
Derived from Small Webcaster Settlement Act of 2002 (SWSA), Pub. L. No. 107-321, 116 Stat. 2780 (Dec. 4, 2002) Retrieved from
http://thomas.loc.gov/cgi-bin/query/z?c107:H.R.5469.ENR.
Finally, the Family Entertainment and Copyright Act of 2005 mandated fines and possible imprisonment for the unauthorized recording of motion pictures in theaters. It also enabled consumers to use new technologies to screen out or
skip over some 14 different categories of objectionable content in movies played on DVD players and other devices.
Family Entertainment and Copyright Act of 2005, Pub. L. No. 109-9, 119 Stat. 218 (Apr. 27, 2005), codified at various sections of Titles 17 and 18 U.S. Code. Retrieved from
http://www.copyright.gov/legislation/pl109-9.html.
|
# Copyright Basics
## New Technology Challenges to Copyright
### Learning Objectives
After completing this section, you will be able to
1. See how a changing music industry has been affected by copyright.
2. Appreciate the challenges that continued technology advances may pose for copyright in the future.
One of the newest technology challenges facing copyright law concerns royalty rates for streaming music online. As it stands, royalty rates are much lower for music played over satellite and cable radio outlets like Sirius XM than
they are for music streaming services like Pandora.
### Music Streaming
Rates are set by the federal Copyright Royalty Board (CRB), a three-judge panel, but currently they apply a different rate for streaming music than they do for satellite and cable music. Sirius pays about 8 percent of
its revenue to record companies and artists. Pandora, however, claims it must pay a rate per song streamed that amounts to 44 percent of revenue. So it pushed for the introduction in September 2012 of the Internet Radio Fairness Act, which would make
the rates for Internet radio companies the same as those for satellite and cable radio.
This bill was opposed not only by many musical artists and their organizations, but by many copyright experts as well. In November of 2012, a who’s who of musicians and singers—including stars from Motown, rock and roll, country,
rap, and jazz—published an open letter in
Billboard
magazine opposing Pandora’s plan to cut artists’ pay and make more money, as they put it in the letter, “on the backs of hard working musicians and singers.”
In November of 2013, Pandora quietly abandoned efforts to seek legislation that would help reduce the royalties paid to rights holders. Instead of pursuing legislation, Pandora said it will focus its efforts on lobbying the CRB.
In early December 2015, the music industry waited breathlessly for the CRB’s decision on royalty rates. Pandora had petitioned the CRB to reduce the current statutory rate of 14 cents per 100 songs to 11 cents per 100 songs
starting in 2016. But music labels and artists represented by a royalty collection organization called SoundExchange wanted the statutory royalty rate raised to 25 cents per 100 songs—an 80 percent increase—and then by 1 cent every year after that
until 2020. Collectively, music streaming services have a combined listenership of 100 million people and are the fastest-growing revenue source for artists and music labels.
On December 16, 2015, in a victory for record labels and artists, the CRB ruled that online radio firms will have to pay 17 cents per 100 plays of songs through 2020.
### TV Streaming
Another new technology challenge to copyright involved television broadcasters and an upstart television service called Aereo that at one point rented dime-sized antennas for $8 per month that act like long-range rabbit
ears to people with digital video recorders, enabling them to watch and record over-the-air network channels like NBC or Fox without paying the much-larger fees for cable or satellite service.
TV broadcasters argued that Aereo violated their copyrights by rebroadcasting their TV signals. Aereo, however, claimed that it was the subscribers who were doing the transmitting, and that Aereo merely rented a tool that enabled
people to watch a private performance—much like they do when they tape a TV show and watch it in their living room.
The case, which had the TV and technology industries on edge, was decided in their favor on June 25, 2014, by the U.S. Supreme Court, which ruled that Aereo had infringed the rights of copyright holders. Five months later, Aereo declared bankruptcy. |
# Copyright Basics
## Alternative Forms of Copyright
### Learning Objectives
After completing this section, you will be able to
1. Understand how alternative forms of copyright are emerging in today’s increasingly digital ecosystem.
Up to now, we have focused on traditional copyright situations in which an author usually pursues some sort of monetary gain in exchange for the use of their creative work as well as situations in which the author also wants to prevent any alteration of their work. But what if an author simply wants to get their work out before the broadest possible readership and monetary gain is not an issue? What if an author would welcome others adding to the original work? In these cases, there are new kinds of copyright licenses that may be employed by authors.
### Creative Commons
The development of the
Creative Commons
represents a voluntary private sector alternative to traditional copyright that coordinates the creation and consumption of content among a wide variety of individuals and institutions—all without a hint of government intervention. In doing so,
Creative Commons captures a whole section of the market for which broad dissemination of content and not financial gain is key, which is something that could not be done as effectively by either traditional copyright or the public domain.
The Creative Commons License is currently available in six flavors:
All of these licenses require the work to be copyrighted because the Creative Commons license is based on copyright. Although Creative Commons licenses can provide authors with added opportunities to have their work distributed and
used, these licenses do not allow authors to limit any of the rights otherwise available under copyright law, such as fair use.
Creative Commons licenses also cannot be revoked, which means that if copies of your work are distributed under a Creative Commons license, they will always be distributed that way. If, for example, you distribute your amazing new
video under a Creative Commons license and it generates five million page views on YouTube—and then 20th
Century Fox offers you a seven-figure deal for exclusive rights to distribute your video—you will not be able to prevent everyone on the planet from continuing to distribute your video for free on the Internet.
### Open Access
Another alternative copyright approach is called open access, founded by the Budapest Open Access Initiative in 2002. Open access encourages scholars to provide the fruits of their research online without expectation of payment.
Chan, L., Cuplinskas, D., Eisen, M., Friend, F., Genova, Y., Guedon, J., Hagemann, M., Harnad, S., Johnson R., Kupryte, R., Manna, M., Rev I., Segbert, M., Souza, S., Suber, P., & Velterop J. (2002, February 24).
The aim here is to open up scholarly research far more widely than is currently the case, but open access adherents face a key challenge in the fact that many scholarly articles are published in expensive journals as “works made for hire.” This means
that the rights belong to the journals, not the authors. But open access supporters are working with publishers to try to overcome this limitation and create more opportunities for scholarly research to be made more widely accessible at lower cost.
Finally, open source software licensing also offers an alternative to traditional copyright. An open source license for computer software allows the source code to be used, modified, and/or shared under certain defined terms and
conditions set by the Open Source Initiative, an educational, advocacy, and stewardship organization formed in 1998. An open source license allows end users to modify the source code for their own purposes. Open source licensed software is mostly
available free of charge, though this does not always have to be the case. |
# Copyright Basics
## Copyright in a Changing World
### Learning Objectives
After completing this section, you will be able to
1. Understand how copyright law is showing signs of strain today.
2. Realize that it may very well need to adapt to an increasingly mobile world.
Comprehensive copyright reform may soon be on the horizon. On March 20, 2013, Register of Copyrights at the United States Copyright Office Maria A. Pallante testified before the House Judiciary Committee that the time had come for
a comprehensive review and updating of the Copyright Act.
According to Pallante:
The list of issues requiring attention is long, involving everything from copyright term and digital rights management restrictions on digital content to the legality of developing secondary resale markets for digital content as
exist with traditional printed content.
The debates may be contentious, as they always are when intellectual property rights are involved. But U.S. copyright law has throughout our history demonstrated a remarkable ability to adapt to new economic, social, and
technological realities, and there is no reason to doubt that it will continue to do so. |
# Trademark Basics
## Core Concepts
### Learning Objectives
After completing this section, you will be able to
1. Understand trademarks and their properties.
2. Identify differences between trademarks and other intellectual property rights.
A
trademark
is an intellectual property right granted by a government to an individual, business, or legal entity that creates and uses a distinctive word, name, symbol, or device to distinguish its products or services from those from any other entity in the
marketplace.
The original purpose of a trademark was to indicate the origin of goods and services. Trademarks thus protected the public by preventing mistakes, confusion, or deception by those who would “palm off” their goods as those of
another. But it also served to protect the market and reputation (or goodwill) of the producers of goods. As modern markets evolved, trademarks also developed into guarantees of quality as well as potent marketing and advertising devices.
### Trademarks as Branding
Consider, for example, the role that Nike’s “Swoosh” logo plays in its $106 billion shoe, equipment, and apparel business. In 1971, Nike founder Phil Knight paid graphic design student Carolyn Davidson a mere $35
to design the “Swoosh” logo for the fledgling new company. According to the Portland
Oregonian
newspaper, when Knight saw her design, he reportedly told her, “I don’t love it, but maybe it will grow on me.” Nike attorneys nonetheless registered the logo with the U.S. Patent and Trademark Office (USPTO) on June 18, 1971.
Allen Brettman,
“
Today, this one logo is estimated to be worth as much as $20 billion, and is recognized around the world as a symbol of Nike’s quality workmanship and design. Indeed, its vital role in protecting Nike’s market share and reputation
explains why the company so strenuously protects its trademark rights from being infringed by counterfeiters. As for design student Carolyn Davidson, Phil Knight gave her Nike stock in 1983 that is today worth more than $850,000.
### Trademarks vs. Other Intellectual Property Rights
Trademarks share with other intellectual property rights the power to encourage and reward creative enterprise. Trademarks also share with patent rights and copyrights the public policy
goal of marshaling the benefits of creative endeavor—in this case, the distinctive branding of one’s products and services from those of others—to the public good. They do this by protecting the consumer from deception and encouraging sellers to
provide quality products.
But trademarks are different from other intellectual property rights in three key respects. In the first place, the legal foundation for U.S. trademark law comes not from rights expressly enumerated in the Constitution, as is the case with patent rights and copyrights. Rather, it lies in the Commerce Clause of the Constitution, which gives Congress the authority to regulate interstate commerce and enact whatever necessary and proper legislation is required to do that.
Trademarks are also different from other intellectual property rights in that they are not limited in duration. Patents and copyright are granted only for limited periods of time because society benefits by putting an invention or literary work into the public domain once the inventor or artistic creator has recouped the costs of innovation and been rewarded for the pioneering endeavor. Trademarks, however, never hinder the sales of other products or services, so they are granted in perpetuity so long as they are not abandoned by the trademark owner.
### Trademarks Mean Business
Finally, trademarks exist only in conjunction with commercial activity. An inventor may receive a patent for a new invention and never employ or “practice” that invention in a business or research endeavor.
Similarly, an author can receive a copyright for an original literary or artistic work and yet never publish, display, or sell it. A trademark, however, cannot exist by itself, apart from commercial activity.
Thus a trademark cannot be obtained by mere adoption. It can only be acquired through commercial use or in anticipation thereof—i.e., through the sale of goods and services. |
# Trademark Basics
## Early Trademark Systems
### Learning Objectives
After completing this section, you will be able to
1. Discuss the origins of trademarks.
2. Analyze examples of early forms of trademarks.
### Bronze Age Origins
Scholars of antiquity give Early Bronze Age potters the credit for creating the world’s first trademarks by imprinting their works with distinctive markings. We assume that these marks were meant to indicate the
origin of a particular work or the identity of its craftsman, but the historical record is not conclusive on this point. But an examination of the potters’ seals found on Corinthian artifacts dating to 2000 BC suggests this is a reasonable
supposition. Trade and commerce between the tribes and early civilizations of that era were expanding rapidly, and in order to be mutually beneficial, trade requires a certain amount of trust in the provenance and quality of goods. These early
potters’ trademarks seemed to have served that purpose by distinguishing the goods of quality craftsmen from those of unknown or uncertain sources.
Trademarks have always been inextricably bound up with commerce. And as commerce grew and developed over the centuries, so did the use of trademarks. Marks have been found, for example, on works ranging from Egyptian pots to the
swords of Roman blacksmiths. But it was in the medieval period, with the emergence of powerful craft guilds, that trademark usage really expanded. Their marks identified a work as being made by a particular guild or member of that guild, and
therefore continued the long tradition of identifying the origin of goods. But medieval trademarks also served other functions. They became a means by which guilds could control the quality of work of fellow guild members and, because of a
trademark’s association with quality, ultimately, a source of competitive advantage in the market.
Arthur R. Miller and Michael H. Davis,
Trademarks thus began to acquire something akin to the existential “moral rights” found in later copyright statutes—i.e., the right of a creator to defend the quality, originality, and “personality” of their work.
Trademark use in medieval times also acquired a public interest function. As Arthur R. Miller and Michael H. Davis note in
Intellectual Property: Patents, Trademarks, and Copyright in a Nutshell,
“Statutes dating back as early as the thirteenth century show that [trademark] was eventually recognized as having social consequence. These statutes were meant to protect the public by preventing the sale of unidentified goods whose quality could
not be ascertained.”
One notable trademark from the time was that of Löwenbräu Brewery, which claims to have used its lion mark since its founding in 1383.
Gary Richardson,
### Early Trademark Cases
Scholars had until only recently attributed the first reported trademark case in Anglo-American law to be
Southern v. How,
which was decided in 1618. This despite the fact that the case involved not a trademark but the sale of counterfeit jewels.
McKenna, M.
Its connection to trademark came from a reference by the presiding judge to an earlier, unnamed, and unreported case in 1584 involving a suit brought by a cloth maker against another cloth maker who had used his mark. That earlier clothier case, only
recently discovered and now known as
Sanforth’s Case,
is now held to be the earliest reported trademark case in Anglo- American law. It establishes beyond a doubt that even 250 years before the Industrial Revolution, trademark infringement was viewed as a tort of deceit and a violation of the laws
against unfair competition.
Keith M. Stolte,
To quote from a contemporary 1656 legal report:
In the more than four centuries since then, as commerce and industry have evolved into an $80
trillion
a year global marketplace unimaginable to the people of
Sanforth’s Case
time, its verdict that trademark infringement is competition most unfair and demands redress still serves as the foundation and wellspring of worldwide trademark policies and statutes today. |
# Trademark Basics
## U.S. Trademark Law
### Learning Objectives
After completing this section, you will be able to
1. Grasp the basics of trademark law.
2. Analyze notable trademark cases.
As the young United States rapidly developed its commerce and industry in the late eighteenth and early nineteenth centuries, propelled in no small part by the nation’s unusually democratic and effective patent laws (see
Chapter 1, “Section 1.5: What the U.S. Patent System Wrought”), the states developed increasingly sophisticated and complex trademark laws. Eventually, however, the transformation of America’s many local and regional markets into
a single, unified, national economy propelled Congress to try to federalize trademark law despite the lack of any express constitutional authority to do so. So Congress passed the first national trademark laws in 1870 and 1876. But in a set of three
court challenges consolidated into a single appeal before the U.S. Supreme Court in 1879, Justice Samuel Freeman Miller ruled for the majority that the
of the Constitution gave Congress no explicit authority to regulate trademarks, and declared the 1870 and 1876 trademark laws unconstitutional.
See
### The Commerce Clause and the Lanham Act of 1946
Two years later, Congress instead acted under the
of the Constitution to pass the Trade Mark Act of 1881. This first national trademark law, however, only regulated trademarks used in commerce with other nations and with Indian tribes. It wasn’t until 1905 that Congress passed another trademark
statute regulating the use of marks within the United States.
Those two trademark laws were subsequently overhauled by the
, which remains the principal law of the land on trademarks in the United States to this day.
Harvard University. (2012).
It broadened national registration of trademarks, and also gave owners of unregistered marks access for the first time to the federal courts. The act also established remedies such as bars on the sale or importation of infringing products, and
required the renewal of trademarks every ten years to weed out the registry trademarks that are no longer in commercial use (known as the “deadwood” prevision).
Op. cit., Miller and Davis.
After 119 years in business, for example, the world-famous retailer Woolworth’s went bankrupt in 1997 and its trademark was no longer protected. The 83-year-old Hostess Twinkies brand, however, was acquired by two private equity
firms for $410 million because they see future profit in the iconic brand—and the customers who love it.
### Requirements for a U.S. Trademark
The requirement that a trademark must be actively used or intended to be used in commercial activity in order to be protected by law has been a fundamental feature of U.S. trademark law since its
inception. The Lanham Act specifically requires applicants to submit “a verified statement that the mark is in use in commerce, specifying the date of the applicant’s first use of the mark in commerce and those goods or services specified in the
notice of allowance on or in connection with which the mark is used in commerce.”
15 U.S.C. §1051 Retrieved from
http://www.law.cornell.edu/uscode/text/15/1051.
A trademark is presumed to have been abandoned when its owner ceases to use it for three or more years, after which anyone else can register and use the mark. |
# Trademark Basics
## The Four Types of Trademarks
### Learning Objectives
After completing this section, you will be able to
1. Identify the four types of trademarks.
2. Compare differences between types of trademarks.
### Can I Trademark That?
Before reading this section, please watch the overview video below covering the four types of trademarks and what they are used for, the subject matter of trademarks, and why trademarks are important—not just to their
owners, but even more so, to the general public.
The term “trademark” is usually used to describe any of the four types of marks that can be registered with the U.S. Patent and Trademark Office. The two primary types of marks are
trademarks
and
service marks. The two other marks—certification marks
and
collective marks—occur much less frequently and must meet different requirements for registration.
United States Patent and Trademark Office. (2012, May 24). Trademarks. Retrieved from
http://www.uspto.gov/inventors/trademarks.jsp
### Trademarks
Trademarks identify
products—i.e., physical goods and commodities—that are either manufactured, produced, grown, or that exist naturally. A trademark is a word, name, symbol, or device—or combination of these—used to identify and distinguish the
source of that product. Examples of trademarks include the Nike “Swoosh” symbol, the arched “M” for McDonalds, and the apple symbol with a small curved bite taken out of it for Apple Computer.
### Service Marks
Service marks are exactly the same in principle as trademarks except that these words, names, symbols, or devices identify and distinguish the source of a
service. Examples of service marks include the sleek silver greyhound dog on Greyhound buses, and United Parcel Service’s brown shield emblazoned with the bold yellow letters “UPS.”
### Certification Marks
A certification mark is any word, phrase, symbol, or design—or a combination of any of these—owned by one party that certifies the goods and services of others when they meet certain standards or requirements.
United States Patent and Trademark Office. (2012, March 09).
A certification mark identifies either the nature of a product or service—for example, that it meets the quality standards needed to receive the “Good Housekeeping Seal of Approval”—or the
origin
of products or services, as in the certification mark “Washington State” given to apples grown in that state.
### Collective Marks
Collective marks come in one of two varieties: collective trademarks and service marks, and collective membership marks. A collective trade or service mark is any word, phrase, symbol, or design that is owned by a
cooperative, association, collective group, or organization and is used by its members to indicate the source of goods or services.
United States Patent and Trademark Office. (2012, March 09). Frequently Asked Questions About Trademarks. Retrieved from
http://www.uspto.gov/faq/trademarks.jsp
An example of a collective trademark is the “Girl Scouts” mark seen on cookies every February, or the designation “CPA” to identify the services provided by a Certified Public Accountant.
A collective membership mark, by contrast, is used to indicate that a person is a member of some organization, such as a trade union or an association like the Rotary Club, but is not used to identify the source of goods and services. |
# Trademark Basics
## The Subject Matter of Trademarks
### Learning Objectives
After completing this section, you will be able to
1. Learn the subject matter of trademarks.
2. Analyze characteristics of various forms of trademarks.
As discussed, there are four types of trademarks: trademarks, service marks, certification marks, and collective marks. But what does it mean to say that a trademark may be a “word [or phrase], name, symbol [or design], or device.”
The answers may in some cases surprise you.
### Words, Phrases, and Names
There is little confusion about what is meant by a trademarkable
word, phrase,
or
name.
The only point to remember here is that words, names, and phrases that are simply descriptive of the goods or services with which they are associated do not necessarily qualify for registration as a trademark.
United States Patent and Trademark Office. (2012, August 09).
They must be distinctive and indicate the origin of a product or service. What is meant by distinctive—and how distinctive they must be—will be discussed in the next section.
### Symbols and Devices
Symbols
and
devices
are where things start to get interesting in trademark law. The language of the Lanham Act does not specify what is meant by a “symbol” or a “device” that can be trademarked. The U.S. Supreme Court took careful note of that fact, ruling in 1995 that,
“Since human beings might use as a ‘symbol’ or ‘device’ almost anything at all that is capable of carrying meaning, this language, read literally, is not restrictive.”
In the United States, therefore, trademarks can include almost anything that carries distinctive meaning and identifies the origin of products and services. This includes slogans, letters, numbers, logos, three-dimensional
designs—even colors, scents, and sounds that indicate the source of a good or service to consumers.
Henderson, C.
A trademarkable symbol can be a
number. The number 5, for example, is a trademarked symbol of Chanel No. 5 perfume (No. 73788555). So is the number 31, which is the trademarked symbol of Baskin-Robbins 31 Flavors (No. 72172718).
No trademark can block the use of the numbers 5 or 31 in math. Nor have the courts allowed the trademarking of mere part numbers,
See
model numbers,
See
or grades,
See
because these are not distinctive enough and do not indicate the origin of the goods in question. Regular gas, also known as “87 octane,” also cannot be trademarked because it doesn’t tell you whether that gas comes from Exxon, Shell, or BP.
Yet despite the above, one of the most iconic trademarked numbers is 501. Originally, the number 501 was simply the lot number Levi’s assigned to the famous copper-riveted waist overalls. But over time, 501 acquired meaning in the
minds of consumers and came to be very strongly associated with
Levi’s
brand jeans. How otherwise un-trademarkable symbols (or words and designs) can acquire secondary (trademark) meaning will be discussed in the next section.
As for
scents,
the fundamental case for trademarking these came about when the USPTO denied Celia Clarke’s request in 1990 for a trademark for scented yarns and threads with a “fresh, floral fragrance reminiscent of Plumeria blossoms.” She appealed, and the
Trademark Trial and Appeal Board overruled the examiner, granting her a trademark for the scent.
“[F]ragrance is not an inherent attribute or natural characteristic of applicant’s goods but is rather a feature supplied by applicant,” the board noted. “Moreover, applicant has emphasized this characteristic of her goods in
advertising, promoting the scented feature of her goods. Applicant has demonstrated that customers, dealers and distributors of her scented yarns and threads have come to recognize applicant as the source of these goods. . . . In her advertisements
and at craft fairs, applicant has promoted her products as having a scented nature. We believe that applicant has presented a prima facie case of distinctiveness of her fragrance mark.”
In re Clarke, 17 U.S.P.Q.2d 1238 (T.T.A.B. 1990) Retrieved from
http://ipmall.info/hosted_resources/TTAB_Decisions/TTAB_Appeal_758429.asp
On the other hand, a trademark cannot be granted for any scent that serves a function other than identifying the product’s source. The scent of perfumes and air fresheners, therefore, cannot be registered, nor can the sulfurous
smell that serves as a warning for natural gas leaks.
Still, there remains a good deal of uncertainty about when a scent is trademarkable and when it is not. Consider the world-famous Cinnabon smell—that sweet, sugary, cinnamon-infused scent that is absolutely unmistakable (if not
also irresistible). But it is not trademarked because even though it is certainly distinctive, it cannot be easily distinguished from the smell of cinnamon buns made by any number of other bakeries.
Sounds
can also be trademarked provided they indicate the source of the product or service with which they are associated, and indeed, there are approximately 700 trademarked sounds registered at the USPTO.
See Constine, J. (2011, December 20).
These include Tarzan’s Yell, the THX theme heard at the beginning of a movie, MGM’s roaring lion, America Online’s “You’ve got mail” announcement, the sequence of chimes heard with the display of the NBC logo on TV, and, naturally, the sound of a
duck quacking “Aflac!” for the American Family Life Assurance Company.
### Designs and Trade Dress
A
design,
like a logo, can also be trademarked, provided it distinguishes the origin of the product or service from any other source or producer. In these trademarks, the logo must be unique and consist of more than simple stylization.
Bacardi for using a similar stylized “O” on its label for orange-flavored vodka. The court ruled against Geogri, however, because its design consisted merely of a stylized symbol that had not acquired a distinguishing (or
secondary) meaning in the minds of consumers that enabled them to identify the producer.
Examples of pure trademarked designs, without any associated words, include Nike’s “Swoosh” and Apple’s famous logo of an apple with a bite taken out of it.
This is why design trademarks often take a “design plus words” approach, as in the trademarked Lacoste logo featuring the word “Lacoste” above the famous green alligator.
Trade dress, on the other hand, refers to the
overall appearance
of a product or service that indicates its source. Trade dress can include features such as size, shape, color or color combinations, texture, graphics, or even particular sales techniques. The key to claiming trade dress protection is that the
attributes must be distinctive. For example, Taco Cabana has trademarked its distinctive and “festive eating atmosphere having interior dining and patio areas decorated with artifacts, bright colors, paintings and murals,” and won an infringement
case against a competitor restaurant called Two Pesos. By creating a theme that was similar to Taco Cabana, Two Pesos created confusion in the minds of consumers.
932 F.2d 1113, 1117 (CA5 1991), derived from:
http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=us&vol=505&invol=763
A design trademark may be one part of a product’s trade dress, but it is distinct from trade dress because it only covers the stylization of words, letters, numbers, or of a specific design like the Lacoste green alligator.
Imagine that an Apple competitor opened a retail store with the same colors, lighting, atmosphere, and overall look and feel as the Apple store but sold their own products. The goal would not be to stop the sale of the goods, which
are not necessarily infringing any of Apple’s design trademarks or patents, but to stop the competitor from infringing the look and feel of the Apple store. In this case, Apple would file a trade dress suit.
Both design trademarks and trade dress are different from design patents. Although all three cover only
nonfunctional
designs and appearances, design patents strictly protect only the new and original ornamental design of an article of manufacture, and the actual drawing of a design patent limits what is protected. A design trademark, on the other hand, protects a
particular word, name, symbol, or design used in commerce to distinguish a product’s source. And trade dress protects the overall appearance of the product and can include anything that gives a product or service meaning and distinguishes it from
those of any other producer.
A design patent might protect the new and original ornamental design of a lamp, for example, so long as that appearance does not affect the lamp’s function. A design trademark would protect the words or symbols used on the lamp
that identify it as coming from a particular producer. And trade dress protects the overall “look and feel” of the lamp.
Sometimes both forms of protection can be obtained, providing an extra advantage to the owner of these rights. Examples of products with both design trademarks and design patents include the
Dustbuster
vacuum cleaner, the
Pepsi
bottle, and the
Honeywell
round thermostat. |
# Trademark Basics
## The Spectrum of Distinctiveness
### Learning Objectives
After completing this section, you will be able to
1. Discover the elements of distinctiveness within trademarks.
2. Identify the various kinds of marks used.
The fundamental and overriding requirement for a trademark is
distinctiveness. The requirement for distinctiveness is analogous to the requirement for
novelty
in patent rights and
originality
in copyright. Without distinctiveness, there can be no trademark.
As Miller and Davis note, “Naturally, a trademark must be distinctive if it is to serve the function of identifying the origin of goods and thereby avoid confusion, deception, or mistake. If a trademark is to protect purchasers
from confusion over what they are purchasing, then the trademark somehow must be recognizable, identifiable, and different from other marks.”
Op. cit., Miller and Davis.
Some trade and service marks achieve distinction via their inherent nature—Nike’s curved “Swoosh” check mark suggesting speed and agility, for example.
But other marks gain distinctiveness as a result of marketing, eventually forming a powerful association over time in the minds of consumers. As an example, the term “Raisin Bran” is merely descriptive of the foods used in the
cereal and would not be eligible for trademark registration had Kellogg Company not demonstrated through evidence of use (including sales, advertising expenditures, and consumer surveys) that the buying public had come to distinctively associate
Raisin Bran with this particular Kellogg’s cereal.
The public’s distinct association of a trademark to a company is known as secondary meaning, and that is something that can only be established over time. An understanding of secondary meaning is crucial when discussing the
spectrum of distinctiveness.
In
in 1976, Judge Henry Jacob Friendly established five basic categories of marks along a spectrum of distinctiveness, ranging from “fanciful” marks that are inherently distinctive on one end and on the other end “generic” marks that are never
distinctive and thus not eligible for trademark registration.
### Fanciful Marks
Fanciful marks
are invented words, symbols, or devices that have no relation to the good or service being sold and have no meaning other than to distinctly identify the product or service and distinguish it in the minds of consumers from those of any other vendor.
“Xerox” is a good example of a fanciful mark, as are “Google” and “Kodak.” Fanciful marks are considered the strongest type of mark and are prima facie registrable with the USPTO.
### Arbitrary Marks
Arbitrary marks
are real words in common usage that have no descriptive relationship to the product or service being sold. Examples of arbitrary marks include “Apple” (for the computer company), “Oracle” (for the software company), and “Galaxy” (for the mobile
phone). Arbitrary marks are also unreservedly eligible for trademark registration.
### Suggestive Marks
Suggestive marks
are marks that suggest or imply a quality or characteristic of the goods and services being sold. They require imagination, insight, or perception on the part of the consumer as to the nature of the article.
Derived from:
http://www.bitlaw.com/trademark/degrees.html
Examples include “iPad” for the tablet computer and “Coppertone” for the sunscreen lotion.
A suggestive mark is the minimum required for a mark to be unconditionally registrable absent a secondary meaning. Or in the words of Judge Friendly, “The validity of the mark ends where
suggestion
ends and
description
begins.”
Op. cit.,
From this point on along the spectrum of distinctiveness, things get a bit tricky.
### Descriptive Marks
A
descriptive mark
explicitly describes the purpose, nature, or an attribute of a product or service and is, therefore, not eligible for trademark registration unless a secondary meaning or association has been developed in the public’s mind through usage.
United States Patent and Trademark Office. (2011, January).
Ineligible descriptive marks include “Lightweight” and “Faster.” However, if a descriptive mark takes on a secondary meaning in the public mind—“Sharp” televisions, for example, or “Windows” for windowing software—then it can be eligible for
trademark registration.
The bar against descriptive marks is designed to protect for public use common concepts and language that everyone needs to use. Imagine having to pay the coiner of the term “reverse mortgage” every time you wanted to describe such
a financial arrangement. It would create a nightmare of social costs, which can be prevented simply by allowing the descriptive term to remain in the public domain. The bar against descriptive marks spotlights the overall social purpose of
trademarks, which is to prevent fraud and confusion in the market while not conferring a monopoly on anyone.
### Generic Marks
The last and least distinctive category of marks are
generic marks
that are simply the common name for the goods and services being sold. Examples of generic marks might be “Aspirin” for the analgesic, or the use of the word “Baskets” for a basket store without any accompanying logo or other design element to
distinguish from a merely generic description of the items sold. A generic mark is never eligible for registration no matter how much evidence a mark owner offers that it has acquired a secondary meaning through advertising and marketing.
Ironically, a product or service can become so successful in the marketplace that the public begins to associate its trademark with an entire category of similar products and services. When this happens, a valid trademark can
become a generic name and the trademark will be lost, as happened with both “Cellophane” and “Aspirin.” To prevent this from happening, companies like “Kleenex,” “Xerox,” and more recently “Google” have gone to great legal and advertising expense to
prevent the generic misuse of their trademarks so these remain valid.
There are many companies that sell aspirin, but aspirin itself can no longer be trademarked.
Adobe, for example, sent emails to many web authors advising them to discontinue using the term “photoshopped” and instead say that their photos were “modified by Adobe Photoshop software.” Similarly, Xerox spent heavily on
advertisements warning that “you cannot Xerox a document, but you can copy it on a Xerox brand copying machine.” |
# Trademark Basics
## Bars to Trademark
### Learning Objectives
After completing this section, you will be able to
1. Identify the bars to trademark.
2. Dissect criteria for trademark registration.
### The Prior Use Bar
No one can register a trademark if it has been used by other parties prior to its use by the applicant. Indeed, if the applicant uses such a mark, he or she may be liable for trademark infringement.
15 U.S.C. §1115.
The only exception to the prior use bar is when the mark has been used in an entirely different market or field of business, as in the trademark “Progressive” granted to two companies, one a backpack manufacturer and the other an auto insurance
company.
### The Functionality Bar
To be trademarked, no word, symbol, design, device, scent, or sound may purely or primarily serve a functional purpose. Nor can it be trademarked if its absence in or on the product inflates its cost or reduces its quality.
Thus as noted earlier, the scent of a perfume cannot be trademarked because the core requirement of a perfume is that it have a pleasant and distinctive smell.
The design of a chair presents an interesting dilemma, however. Does the design enable a person to sit—i.e., does it have a functional purpose? Or does the design distinctively mark an otherwise perfectly functional chair as coming
from an identifiable producer?
This “chicken and egg” question has confronted many applicants, trademark examiners, judges, and juries over the years. The issue is usually decided by asking whether the appearance of a product or its components is inspired more by
design or by function?
The issue is most easily decided when the functionality of an item resides in a specific part of the product, and the design elements are found in other parts of the product. A great example of this is the “A Christmas Story Leg
Lamp” based on the classic 1983 film comedy. The functional part of the lamp is its electronics and light fixture sitting atop the base. The base, however, is in the shape of a woman’s stocking-clad leg, and is thus clearly a design feature that
distinguishes the lamp from any other on the market, and it is trademarked (No. 77105065).
### Subject Matter Bars
In addition to prior use and functionality, certain kinds of subject matter are generally not eligible for trademark registration. These are surnames, geographic marks, and ornamental, immoral, or offensive marks.
United States Patent and Trademark Office.(2012, March 09).
Surnames or family names such as “Smith” and “Johnson” cannot be trademarked except under certain conditions. The USPTO assesses five factors in determining whether a surname is eligible for a trademark:
“If the mark’s character as a surname predominates in terms of its ‘primary significance to the purchasing public,’ then it is prohibited,” write Miller and Davis.
Op. cit., Miller and Davis.
But over time, if the surname becomes associated in the public mind with the distinctive origin of products or services, then it may be eligible for a trademark, as is the case with “Sears” and “Macy’s.”
Geographic marks must also be evaluated for eligibility on the basis of several factors. If a geographic mark is simply
descriptive,
the following tests apply:
The test above determines whether there is a literal association to the name or not. For example, if an entrepreneur launches a company called “Los Angeles Shoes” to produce shoes in Los Angeles, the name would not pass the test
for trademark eligibility because the primary significance of the mark is that it is a generally known location, the product is produced in the location stated in the mark, and consumers would believe the shoes were made in Los Angeles.
The goal of the bar against geographically
descriptive
marks, then, is to protect one party from seizing ownership of a geographic term that ought to remain in the public domain.
If a geographic mark is deceptively
misdescriptive,
however, the test is as follows:
The goal of this test for geographically
misdescriptive
marks is to prevent the confusion and deception of the consumer. For example, if an entrepreneur launches a fashionable shoe business called “New York Shoes” but actually manufactures the shoes in China, he will not receive a trademark for the name
because it will likely confuse or deceive consumers.
Sometimes, however, a geographic name may be trademarked, as was the case with the online retailing giant’s trademark “Amazon.” In this case, the geographic name “Amazon” is not indicative of the source of goods, nor are consumers
under the impression that the goods sold by the retailer come from the Amazonian region of South America. In addition, the geographic nature of the name “Amazon” is not a significant factor in whether or not consumers decide to purchase books,
clothing, electronics, or anything else from the company.
Nor can
ornamental, immoral,
or
offensive
marks be trademarked. Ornamental marks such as a “smiley face” logo are merely decorative and are too vague to distinguish the origin of a product or service. Immoral or offensive marks—e.g., an online dating service with a logo depicting two naked
people having sex—also cannot be registered. |
# Trademark Basics
## Establishing Trademark Protection
### Learning Objectives
After completing this section, you will be able to
1. Identify the reasons for establishing trademark registration.
2. Understand the process of trademark protection.
### Establishing Your Trademark Protection
Before reading this section, please watch the overview video below covering the “spectrum of distinctiveness” and other fancy-sounding legal terms and what they really mean in the real world of commerce and consumerism.
As in the case with copyrights, trademarks do not necessarily have to be registered with the federal government, but doing so has benefits. The owners of unregistered trademarks have the exclusive right to use the mark concerning
similar goods and services in the geographic area of actual use of the mark, the right to bring civil action against infringers, and protection against false advertising. Unregistered trademarks are usually identified by the “TM” symbol displayed on
the product, package, or advertising used to promote them. Trademarks formally registered with the USPTO, however, receive additional benefits:
Because registration costs money, many small businesses choose to rely upon the common law protections afforded trademarks, especially when just starting up. A case in point was Google, which used an unregistered trademark for its
first six years in operation. Only in 2006 did the company formally apply for a registered trademark for “Google.” It was registered in 2012.
But trademark protection can be vital to a small business, as one recent case amply demonstrates. Payam “Peter” Tabibian first registered the 1950s-style red, white, and yellow logo for his start-up Z-Burger chain in 2007, a few
months before he opened his first restaurant the next year in a hip Washington neighborhood. As the
New York Times
reported, “his first restaurant was an immediate hit, attracting students from nearby American University. The place [later] drew public praise when it gave free food to federal workers who were furloughed from their jobs during government budget
cutbacks.”
But Mr. Tabibian eventually fell out with his partners, who then tried to stop him from continuing to use his Z-Burger brand with his expanding chain of restaurants; they also demanded he transfer the trademarks to them.
But because Mr. Tabibian had done his homework and taken the time to properly register his trademarks, a federal judge ruled in August of 2015 that he was the legitimate owner of the trademarks and could continue to use them.
As James Gibson, law professor at the University of Richmond School of Law, told the
New York Times,
the Z-Burger case shows why “it is very important early on to pick a trademark that’s going to work, and make sure ownership is sewn on. That’s particularly true if nobody knows who you are and you’re operating in a limited area. The federal
trademark gives you a lot of nationwide rights.”
In order for your trademark to be eligible for registration with the USPTO, however, you must actually use it in conjunction with commercial activity—i.e., with the marketing and sale of products and services—or be about to use it
within six months. Absent the selling of athletic shoes and other sports attire, Nike’s $20 billion “Swoosh” logo would be nothing more than a worthless doodle.
When applying for trademark registration, the applicant must file an affidavit attesting to the date the mark was first used in commerce as well as a specimen showing how the mark was first used, whether in advertising or on the
product in a store setting. It is imperative that the applicant identify the earliest provable date of first use in commerce, to lessen the likelihood that another party can claim prior use of that mark and invalidate the trademark.
The USPTO also offers an “intent-to-use” application, which allows an entity to apply for a trademark that is not yet used in commerce.
“If you have not yet used the mark but plan to do so in the future, you may file based on a good faith or bona fide intent to use the mark in commerce,” notes a USPTO publication. “A bona fide intent to use the mark is more than an
idea, [but] less than market ready. For example, having a business plan, creating sample products, or performing other initial business activities may reflect a bona fide intent to use the mark.”
The mark must then be put into use within six months of receiving a “notice of allowance” from the USPTO or the applicant risks having to pay extension fees or losing the mark entirely.
If the trademark is still in commercial use five years after registration, the owner is eligible to receive an additional protection known as “incontestability,” which immunizes the mark from many challenges, including challenges
to validity, ownership, registration, and descriptiveness. (Incontestable marks can still be challenged on some grounds, such as genericism, functionality, and abandonment.) To receive incontestability status, a § 15 Declaration must be submitted to
the USPTO.
Once incontestability is achieved, no one can contest the validity, ownership, or registration of the mark, nor can anyone contest the owner’s exclusive right to use the mark. An individual or a corporate entity can register a mark.
A trademark can be assigned to others in the event of purchase or acquisition by another entity.
2. The registration number and the date of registration.
3. The fee for each class of goods/services in the registration to which the Declaration pertains.
4. A statement that declares:
-The mark has been in continuous use in commerce for a period of five years and is still in use in commerce -No final decision exists adverse to the owner’s claim of ownership of the mark for the goods/services, or to the owner’s right to register
the mark or to keep the same on the register -No pending proceeding exists involving the claimed rights in the USPTO or in the courts
5. A signed and dated affidavit or declaration under 37 C.F.R. §2.20
United States Patent and Trademark Office. (21 August, 2012).
There are other reasons why an owner might assign trademarks to another party, including a business name change, a security agreement, a license, a lien, as collateral for a loan, or as a result of a bankruptcy procedure. Ford used
its trademarks as collateral for a $23.5 billion loan. Ford was still able to use its trademarks, but if the company had defaulted on the loan, the trademarks would have been assigned to the lender.
CBS News. (23 May, 2012).
Just like tangible assets, trademarks and other intellectual property such as patents and copyrights often have enormous value. In fact, some sources estimate that in contrast to 40 years ago, when plant, equipment, and other
tangible assets comprised 80 percent of the market value of most public companies, today it is intangible assets like intellectual property, business methods, and know-how that make up roughly 80 percent of the value of public companies.
“Intangible Asset Market Value,” Ocean Tomo, Retrieved from:
http://bit.ly/1gldnWL
Trademarks can also be licensed to others. In 2012, licensed trademarks generated $5.45 billion for North American owners, reported the Licensing Industry Merchandisers’ Association. That same year, the top 150 global brand
licensors earned $230 billion in sales of trademarked products, with the Walt Disney Company alone accounting for nearly $40 billion in sales.
Abandonment of a mark results in loss of ownership and the associated rights of the mark. For a mark to be considered abandoned, it must be discontinued from active use in commerce with no intent to resume the commercial use of the
mark. Evidence of nonuse for three consecutive years is usually considered to be sufficient proof of abandonment. Upon abandonment, the trademark owner loses the right to prevent others from infringing the mark. |
# Trademark Basics
## Trademark Infringement
### Learning Objectives
After completing this section, you will be able to
1. Identify the factors involved in trademark infringement.
2. Understand the basis for determining similarity.
### Trademark Infringement and Remedies
Before reading this section, please watch the overview video below covering similarity, market confusion, vicarious infringement, and getting back what’s yours.
The purpose of trademarks is to enable consumers to distinguish the source of products and services as well as help businesses defend the quality and reputation of those goods. Trademarks benefit society by protecting consumers and
businesses alike, and by preventing confusion in the marketplace. This principle lies at the heart of the trademark system.
It is also the basis on which the courts rule on claims of trademark infringement. The most common way that trademark infringement causes confusion is through
similarity. In the words of the Lanham Act, no trademark may be registered “which so resembles” another name or mark that it will be likely “to cause confusion, or to cause mistake, or to deceive.”
See 15 U.S.C. § 1052 Retrieved from
http://www.law.cornell.edu/uscode/text/15/1052
To determine similarity, the mark must be evaluated as a whole rather than through its individual components. This is important because there are only a limited number of parts—words, names, shapes, symbols, or devices—that can be
used separately or together to create a unique and distinctive trademark that indicates the origin of goods.
The courts generally look at five key factors to determine if a defendant’s use of your mark is likely to cause confusion among consumers.
2. The similarity in the overall impression created by the two marks (including the marks’ look, phonetic similarities, and underlying meanings)
3. The similarities of the goods and services involved.
2. The strength of your mark.
3. Any evidence of actual confusion by consumers.
4. The intent of the defendant in adopting its mark.
The basis for determining similarity, again, is not an assessment of the similarity between each component of two trademarks but of their totality as seen and experienced by the consumer. And the key test for similarity is
resemblance, not
sameness. In short, two marks do not have to be exact mirror images of each other to be legally similar. According to a 2003 decision by the U.S. Court of Appeals for the Federal Circuit, “Similarity is not a binary factor but is a matter of degree."
In re Coors Brewing Co., Fed. Cir. 2003 Retrieved from:
http://www.ipo.org/AM/Template.cfm?Section=Federal_Circuit_Opinions&ContentID=4174&template=/CM/ContentDisplay.cfm.
Each and every attribute of a mark need not be replicated exactly by those of another mark to be deemed similar. But the more one mark’s attributes are similar to those of another, the greater the likelihood that there is legal similarity between the
marks as a whole.
The social networking site LinkedIn, for example, sports a logo made up of the joined words “Linked” and “in” displayed in a white font with the “in” component surrounded by a blue colored square with rounded edges. If a new
networking site for professionals was launched that featured a logo with the same words except that the “in” component was surrounded by a red colored square, there would likely be enough similarity between the two logos to justify a case for
infringement. The colors of one component of the logo may be different, but when the concept, wording, font style, and design are considered as a whole, any judge or jury would probably find the similarity between the marks so substantial as to
constitute infringement.
But similarity is not the only basis for assessing infringement. The question is also whether any similarity between marks is likely to cause confusion in the minds of consumers. This takes into account such factors as the
similarity of the goods and services on which the two marks are being used. If a company that made metal chains called itself “LinkedIn,” that would less likely cause consumers to believe that the chains came from the same source as the social
networking site, because the manufacture of chains is a very different line of business than running a social networking site.
An entity can be guilty of
contributory infringement
if it intentionally encourages the infringement of a valid mark by a third party. One can also be liable for contributory infringement if one continues to produce or distribute a product with knowledge that the beneficiary is infringing a mark. As
the Supreme Court held in the 1982 case
, “If a manufacturer or distributor intentionally induces another to infringe a trademark, or if it continues to supply its product to one whom it knows
or has reason to know is engaging in trademark infringement, the manufacturer or distributor is contributorily responsible for any harm done as a result of the deceit.”
Another type of infringement is
vicarious infringement. The definition of vicarious infringement is somewhat convoluted, but Cornell University’s Legal Information Institute describes it thusly:
Vicarious infringement most often occurs on Internet sites that allow outside parties to post or upload files. One such example was
., in which third parties uploaded unauthorized games that displayed the Sega mark to the Maphia site with the knowledge and consent of—and to the profit of—Maphia owners.
Finally, there is a form of harm called
trademark dilution, which is described by the International Trademark Association as “the weakening of a famous mark’s ability to identify and distinguish goods or services, regardless of competition in the marketplace or the
likelihood of confusion. Dilution typically occurs as the result of blurring or tarnishment of the famous mark. . . . The concept of dilution developed from the idea that because some marks are so well-known and famous, they deserve an extra level of
protection beyond the likelihood-of-confusion analysis. Dilution theory seeks to prevent the coexistence of a mark that is sufficiently similar to a famous mark, regardless of the goods and/or services associated with the allegedly diluting mark.”
The Federal Trademark Dilution Act of 1995 and the Federal Dilution Revision Act of 2006 created a federal cause of action for trademark dilution that is separate from infringement. Generally speaking, an owner of a trademark
eligible for dilution protection can prevent another company from using that mark no matter how dissimilar the goods and services of the two companies are. That makes dilution protection potentially broader in scope than infringement protection.
After the 2006 revision, however, only marks that are “widely recognized by the general consuming public of the United States” are eligible for dilution protection, which means that only a very small percentage of trademarks used in the United
States—undoubtedly less than 1 percent—qualify for that protection. Google has protection against dilution. Your local dry cleaner does not. |
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