Preface

About OpenStax

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About OpenStax Resources

About *Principles of Management*

*Principles of Management* is designed to meet the scope and sequence requirements of the introductory course on management. This is a traditional approach to management using the leading, planning, organizing, and controlling approach. The table of contents of this book was designed to address two main themes. What are the variables that affect how, when, where, and why managers perform their jobs? What theories and techniques are used by successful managers at a variety of organizational levels to achieve and exceed objectives effectively and efficiently throughout their careers? Management is a broad business discipline, and the Principles of Management course covers many management areas such as human resource management and strategic management, as well behavioral areas such as motivation. No one individual can be an expert in all areas of management, so an additional benefit of this text is that specialists in a variety of areas have authored individual chapters. Finally, we all made an effort to present a balanced approach to gender and diversity throughout the text in the examples used, the photographs selected, and the use of both male (odd-numbered chapters) and female (even-numbered chapters) when referring to generic managers or employees.

Additional Resources

Contributing Authors

David S. Bright, Wright State University

Anastasia H. Cortes, Virginia Tech University

Donald G. Gardner, University of Colorado-Colorado Springs

Eva Hartmann, University of Richmond

Jason Lambert, Texas Woman’s University

Laura M. Leduc, James Madison University

Joy Leopold, Webster University

Jeffrey Muldoon, Emporia State University

James S. O’Rourke, University of Notre Dame

K. Praveen Parboteeah, University of Wisconsin-Whitewater

Jon L. Pierce, University of Minnesota-Duluth

Monique Reece

Amit Shah, Frostburg State University

Siri Terjesen, American University

Joseph Weiss, Bentley University

Margaret A. White, Oklahoma State University

Reviewers

Susan Adams, Bentley University

Shane Bowyer, Minnesota State University

Kim S. Cameron, University of Michigan

Linda Davenport, Klamath Community College

Allyson Foster

John Goldberg, University of California-Davis

Regina Greenwood, Nova University

Gina Hagler

Nai H. Lamb, University of Tennessee at Chattanooga

Kristie J. Loescher, University of Texas

Marcia Marriott, Monroe Community College

Therese Madden, Notre Dame de Namur University

Eleonor Moore, Kirtland Community College

Robert McNulty, Bentley University

Jeffrey Muldoon, Emporia State University

John Parnell, University of North Carolina-Pembroke

Jim Pennypacker

Karli Peterson, Colorado State University

Raymond Pfang, Tarrant Community College

Jodell Raymond, Monroe Community College

Richard Savior, SUNY Empire State

Carolyn Stevenson, Kaplan University

Amit Shah, Frostburg State University

Linda Tancs

Maria Vitale, Chaffey College

Valerie Wallingford, Bemidji State University

Managing and Performing

Introduction

What Do Managers Do?

The Roles Managers Play

Major Characteristics of the Manager's Job

What Varies in a Manager’s Job? The Emphasis

The entrepreneur role is gaining importance. Managers must increasingly be aware of threats and opportunities in their environment. Threats include technological breakthroughs on the part of competitors, obsolescence in a manager’s organization, and dramatically shortened product cycles. Opportunities might include product or service niches that are underserved, out-of-cycle hiring opportunities, mergers, purchases, or upgrades in equipment, space, or other assets. Managers who are carefully attuned to the marketplace and competitive environment will look for opportunities to gain an advantage.

Managerial Responsibilities

An important question often raised about managers is: What responsibilities do managers have in organizations? According to our definition, managers are involved in planning, organizing, directing, and controlling. Managers have described their responsibilities that can be aggregated into nine major types of activity. These include:

Variations in Managerial Work

Although each manager may have a diverse set of responsibilities, including those mentioned above, the amount of time spent on each activity and the importance of that activity will vary considerably. The two most salient perceptions of a manager are (1) the manager’s level in the organizational hierarchy and (2) the type of department or function for which he is responsible. Let us briefly consider each of these.

Managerial Decision-Making

Introduction

Overview of Managerial Decision-Making

Deciding When to Decide

While some decisions are simple, a manager’s decisions are often complex ones that involve a range of options and uncertain outcomes. When deciding among various options and uncertain outcomes, managers need to gather information, which leads them to another necessary decision: how much information is needed to make a good decision? Managers frequently make decisions without complete information; indeed, one of the hallmarks of an effective leader is the ability to determine when to hold off on a decision and gather more information, and when to make a decision with the information at hand. Waiting too long to make a decision can be as harmful for the organization as reaching a decision too quickly. Failing to react quickly enough can lead to missed opportunities, yet acting too quickly can lead to organizational resources being poorly allocated to projects with no chance of success. Effective managers must decide when they have gathered enough information and must be prepared to change course if additional information becomes available that makes it clear that the original decision was a poor one. For individuals with fragile egos, changing course can be challenging because admitting to a mistake can be harder than forging ahead with a bad plan. Effective managers recognize that given the complexity of many tasks, some failures are inevitable. They also realize that it’s better to minimize a bad decision’s impact on the organization and its stakeholders by recognizing it quickly and correcting it.

What’s the Right (Correct) Answer?

It’s also worth noting that making decisions as a manager is not at all like taking a multiple-choice test: with a multiple-choice test there is always one right answer. This is rarely the case with management decisions. Sometimes a manager is choosing between multiple good options, and it’s not clear which will be the best. Other times there are multiple bad options, and the task is to minimize harm. Often there are individuals in the organization with competing interests, and the manager must make decisions knowing that someone will be upset no matter what decision is reached.

What’s the Right (Ethical) Answer?

Sometimes managers are asked to make decisions that go beyond just upsetting someone—they may be asked to make decisions in which harm could be caused to others. These decisions have ethical or moral implications. Ethics and morals refer to our beliefs about what is right vs. wrong, good vs. evil, virtuous vs. corrupt. Implicitly, ethics and morals relate to our interactions with and impact on others—if we never had to interact with another creature, we would not have to think about how our behaviors affected other individuals or groups. All managers, however, make decisions that impact others. It is therefore important to be mindful about whether our decisions have a positive or a negative impact. “Maximizing shareholder wealth” is often used as a rationalization for placing the importance of short-term profits over the needs of others who will be affected by a decision—such as employees, customers, or local citizens (who might be affected, for example, by environmental decisions). Maximizing shareholder wealth is often a short-sighted decision, however, because it can harm the organization’s financial viability in the future.

Lynn Stout. 2012. The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public. San Francisco, CA: Berrett-Koehler Publishers. Bad publicity, customers boycotting the organization, and government fines are all possible long-term outcomes when managers make choices that cause harm in order to maximize shareholder wealth. More importantly, increasing the wealth of shareholders is not an acceptable reason for causing harm to others.

How the Brain Processes Information to Make Decisions: Reflective and Reactive Systems

Reactive Decision-Making

We tend to assume that the logical, analytical route leads to superior decisions, but whether this is accurate depends on the situation. The quick, intuitive route can be lifesaving; when we suddenly feel intense fear, a fight-or-flight response kicks in that leads to immediate action without methodically weighing all possible options and their consequences. Additionally, experienced managers can often make decisions very quickly because experience or expertise has taught them what to do in a given situation. These managers might not be able to explain the logic behind their decision, and will instead say they just went with their “gut,” or did what “felt” right. Because the manager has faced a similar situation in the past and has figured out how to deal with it, the brain shifts immediately to the quick, intuitive decision-making system.

Malcolm Gladwell. 2005. Blink: The Power of Thinking Without Thinking. New York: Back Bay Books.

Reflective Decision-Making

The quick route is not always the best decision-making path to take, however. When faced with novel and complex situations, it is better to process available information logically, analytically, and methodically. As a manager, you need to think about whether a situation requires not a fast, “gut” reaction, but some serious thought prior to making a decision. It is especially important to pay attention to your emotions, because strong emotions can make it difficult to process information rationally. Successful managers recognize the effects of emotions and know to wait and address a volatile situation after their emotions have calmed down. Intense emotions—whether positive or negative—tend to pull us toward the quick, reactive route of decision-making. Have you ever made a large “impulse” purchase that you were excited about, only to regret it later? This speaks to the power our emotions exert on our decision-making. Big decisions should generally not be made impulsively, but reflectively.

Programmed and Nonprogrammed Decisions

Programmed Decisions

Programmed decisions are those that are repeated over time and for which an existing set of rules can be developed to guide the process. These decisions might be simple, or they could be fairly complex, but the criteria that go into making the decision are all known or can at least be estimated with a reasonable degree of accuracy. For example, deciding how many raw materials to order should be a programmed decision based on anticipated production, existing stock, and anticipated length of time for the delivery of the final product. As another example, consider a retail store manager developing the weekly work schedule for part-time employees. The manager must consider how busy the store is likely to be, taking into account seasonal fluctuations in business. Then, they must consider the availability of the workers by taking into account requests for vacation and for other obligations that employees might have (such as school). Establishing the schedule might be complex, but it is still a programmed decision: it is made on a regular basis based on well-understood criteria, so structure can be applied to the process. For programmed decisions, managers often develop heuristics, or mental shortcuts, to help reach a decision. For example, the retail store manager may not know how busy the store will be the week of a big sale, but might routinely increase staff by 30% every time there is a big sale (because this has been fairly effective in the past). Heuristics are efficient—they save time for the decision maker by generating an adequate solution quickly. Heuristics don’t necessarily yield the optimal solution—deeper cognitive processing may be required for that. However, they generally yield a good solution. Heuristics are often used for programmed decisions, because experience in making the decision over and over helps the decision maker know what to expect and how to react. Programmed decision-making can also be taught fairly easily to another person. The rules and criteria, and how they relate to outcomes, can be clearly laid out so that a good decision can be reached by the new decision maker. Programmed decisions are also sometimes referred to as *routine* or *low-involvement* decisions because they don’t require in-depth mental processing to reach a decision. High- and low-involvement decisions are illustrated in **[link]**.

Nonprogrammed Decisions

In contrast, nonprogrammed decisions are novel, unstructured decisions that are generally based on criteria that are not well-defined. With nonprogrammed decisions, information is more likely to be ambiguous or incomplete, and the decision maker may need to exercise some thoughtful judgment and creative thinking to reach a good solution. These are also sometimes referred to as *nonroutine* decisions or as *high-involvement* decisions because they require greater involvement and thought on the part of the decision maker. For example, consider a manager trying to decide whether or not to adopt a new technology. There will always be unknowns in situations of this nature. Will the new technology really be better than the existing technology? Will it become widely accepted over time, or will some other technology become the standard? The best the manager can do in this situation is to gather as much relevant information as possible and make an educated guess as to whether the new technology will be worthwhile. Clearly, nonprogrammed decisions present the greater challenge.

The Decision-Making Process

While decisions makers can use mental shortcuts with programmed decisions, they should use a systematic process with nonprogrammed decisions. The decision-making process is illustrated in **[link]** and can be broken down into a series of six steps, as follows:

Barriers to Effective Decision-Making

Bounded Rationality

While we might like to think that we can make completely rational decisions, this is often unrealistic given the complex issues faced by managers. Nonrational decision-making is common, especially with nonprogrammed decisions. Since we haven’t faced a particular situation previously, we don’t always know what questions to ask or what information to gather. Even when we have gathered all the possible information, we may not be able to make rational sense of all of it, or to accurately forecast or predict the outcomes of our choice. Bounded rationality is the idea that for complex issues we cannot be completely rational because we cannot fully grasp all the possible alternatives, nor can we understand all the implications of every possible alternative. Our brains have limitations in terms of the amount of information they can process. Similarly, as was alluded to earlier in the chapter, even when managers have the cognitive ability to process all the relevant information, they often must make decisions without first having time to collect all the relevant data—their information is incomplete.

Escalation of Commitment

Given the lack of complete information, managers don’t always make the right decision initially, and it may not be clear that a decision was a bad one until after some time has passed. For example, consider a manager who had to choose between two competing software packages that her organization will use on a daily basis to enhance efficiency. She initially chooses the product that was developed by the larger, more well-established company, reasoning that they will have greater financial resources to invest in ensuring that the technology is good. However, after some time it becomes clear that the competing software package is going to be far superior. While the smaller company’s product could be integrated into the organization’s existing systems at little additional expense, the larger company’s product will require a much greater initial investment, as well as substantial ongoing costs for maintaining it. At this point, however, let’s assume that the manager has already paid for the larger company’s (inferior) software. Will she abandon the path that she’s on, accept the loss on the money that’s been invested so far, and switch to the better software? Or will she continue to invest time and money into trying to make the first product work? Escalation of commitment is the tendency of decision makers to remain committed to poor decision, even when doing so leads to increasingly negative outcomes. Once we commit to a decision, we may find it difficult to reevaluate that decision rationally. It can seem easier to “stay the course” than to admit (or to recognize) that a decision was poor. It’s important to acknowledge that not all decisions are going to be good ones, in spite of our best efforts. Effective managers recognize that progress down the wrong path isn’t really progress, and they are willing to reevaluate decisions and change direction when appropriate.

Time Constraints

Managers often face time constraints that can make effective decision-making a challenge. When there is little time available to collect information and to rationally process it, we are much less likely to make a good nonprogrammed decision. Time pressures can cause us to rely on heuristics rather than engage in deep processing. While heuristics save time, however, they don’t necessarily lead to the best possible solution. The best managers are constantly assessing the risks associated with acting too quickly against those associated with not acting quickly enough.

Uncertainty

In addition, managers frequently make decisions under conditions of uncertainty—they cannot know the outcome of each alternative until they’ve actually chosen that alternative. Consider, for example, a manager who is trying to decide between one of two possible marketing campaigns. The first is more conservative but is consistent with what the organization has done in the past. The second is more modern and edgier, and might bring much better results . . . or it might be a spectacular failure. The manager making the decision will ultimately have to choose one campaign and see what happens, without ever knowing what the results would have been with the alternate campaign. That uncertainty can make it difficult for some managers to make decisions, because committing to one option means forgoing other options.

Personal Biases

Our decision-making is also limited by our own biases. We tend to be more comfortable with ideas, concepts, things, and people that are familiar to us or similar to us. We tend to be less comfortable with that which is unfamiliar, new, and different. One of the most common biases that we have, as humans, is the tendency to like other people who we think are similar to us (because we like ourselves).

Christopher L. Aberson, Michael Healy, & Victoria Romero. 2000. Ingroup Bias and Self-Esteem: A Meta-Analysis. *Personality and Social Psychology Review*, 4: 157-173. While these similarities can be observable (based on demographic characteristics such as race, gender, and age), they can also be a result of shared experiences (such as attending the same university) or shared interests (such as being in a book club together). This “similar to me” bias and preference for the familiar can lead to a variety of problems for managers: hiring less-qualified applicants because they are similar to the manager in some way, paying more attention to some employees’ opinions and ignoring or discounting others, choosing a familiar technology over a new one that is superior, sticking with a supplier that is known over one that has better quality, and so on.

Conflict

Finally, effective decision-making can be difficult because of conflict. Most individuals dislike conflict and will avoid it when possible. However, the best decision might be one that is going to involve some conflict. Consider a manager who has a subordinate who is often late to work, causing others to have to step away from their responsibilities in order to cover for the late employee. The manager needs to have a conversation with that employee to correct the behavior, but the employee is not going to like the conversation and may react in a negative way. Both of them are going to be uncomfortable. The situation is likely to involve conflict, which most people find stressful. Yet, the correct decision is still to have the conversation even if (or especially if) the employee otherwise is an asset to the department.

Improving the Quality of Decision-Making

The Importance of Experience

An often overlooked factor in effective decision-making is experience. Managers with more experience have generally learned more and developed greater expertise that they can draw on when making decisions. Experience helps managers develop methods and heuristics to quickly deal with programmed decisions and helps them know what additional information to seek out before making a nonprogrammed decision.

Techniques for Making Better Programmed Decisions

In addition, experience enables managers to recognize when to minimize the time spent making decisions on issues that are not particularly important but must still be addressed. As discussed previously, heuristics are mental shortcuts that managers take when making programmed (routine, low-involvement) decisions. Another technique that managers use with these types of decisions is satisficing. When satisficing, a decision maker selects the first *acceptable* solution without engaging in additional effort to identify the *best* solution. We all engage in satisficing every day. For example, suppose you are shopping for groceries and you don’t want to overspend. If you have plenty of time, you might compare prices and figure out the price by weight (or volume) to ensure that every item you select is the cheapest option. But if you are in a hurry, you might just select generic products, knowing that they are cheap enough. This allows you to finish the task quickly at a reasonably low cost.

Techniques for Making Better Nonprogrammed Decisions

For situations in which the quality of the decision is more critical than the time spent on the decision, decision makers can use several tactics. As stated previously, nonprogrammed decisions should be addressed using a systematic process. We therefore discuss these tactics within the context of the decision-making steps. To review, the steps include the following:

Group Decision-Making

Advantages of Group Decisions

An advantage to involving groups in decision-making is that you can incorporate different perspectives and ideas. For this advantage to be realized, however, you need a diverse group. In a diverse group, the different group members will each tend to have different preferences, opinions, biases, and stereotypes. Because a variety of viewpoints must be negotiated and worked through, group decision-making creates additional work for a manager, but (provided the group members reflect different perspectives) it also tends to reduce the effects of bias on the outcome. For example, a hiring committee made up of all men might end up hiring a larger proportion of male applicants (simply because they tend to prefer people who are more similar to themselves). But with a hiring committee made up of an equal number of men and women, the bias should be cancelled out, resulting in more applicants being hired based on their qualifications rather than their physical attributes.

Disadvantages of Group Decisions

Group decision-making is not without challenges. Some groups get bogged down by conflict, while others go to the opposite extreme and push for agreement at the expense of quality discussions. Groupthink occurs when group members choose not to voice their concerns or objections because they would rather keep the peace and not annoy or antagonize others. Sometimes groupthink occurs because the group has a positive team spirit and camaraderie, and individual group members don’t want that to change by introducing conflict. It can also occur because past successes have made the team complacent.

How to Form a Quality Group

Effective managers will try to ensure quality group decision-making by forming groups with diverse members so that a variety of perspectives will contribute to the process. They will also encourage everyone to speak up and voice their opinions and thoughts prior to the group reaching a decision. Sometimes groups will also assign a member to play the devil’s advocate in order to reduce groupthink. The devil’s advocate intentionally takes on the role of critic. Their job is to point out flawed logic, to challenge the group’s evaluations of various alternatives, and to identify weaknesses in proposed solutions. This pushes the other group members to think more deeply about the advantages and disadvantages of proposed solutions before reaching a decision and implementing it.

Conclusion

Decision-making is a crucial daily activity for managers. Decisions range from small and simple, with straightforward answers, to big and complex, with little clarity about what the best choice will be. Being an effective manager requires learning how to successfully navigate all kinds of decisions. Expertise, which develops gradually through learning and experience, generally improves managerial decision-making, but managers rarely rely solely on their own expertise. They also conduct research and collect information from others; they pay attention to their own biases and to ethical implications; and they think critically about the information that they have received to make decisions that will benefit the organization and its stakeholders.

The History of Management

Introduction

The Early Origins of Management

The Italian Renaissance

The Industrial Revolution

Taylor-Made Management

Taylor’s Acolytes

In addition to his groundbreaking work on scientific management, Taylor attracted a wide variety of talented individuals who aided him in his research. The first important individual was the mathematician Carl G. Barth (1860–1939). Barth made two notable contributions. The first was his work on employee fatigue. He attempted to find what aspects made a worker tired. The second was his use of the slide rule for calculating how much steel to cut. A slide rule is a ruler with a sliding central strip. It makes it possible to perform calculations rapidly and accurately. Barth developed one for cutting steel. Before Barth’s work, workers were required to make difficult calculations to determine how much steel to cut. Usually, they guessed, which led to a lot of errors and waste. With the slide rule, however, the number of errors decreased, as did the costs associated with them.

Taylor’s Shortcomings

Taylor was a monomaniac on a mission to convert as many people to scientific management as possible. Yet despite his conviction and zealousness, Taylor’s ideas were poorly understood, and he attracted more enemies than followers.

Charles D. Wrege and Ronald G. Greenwood, Frederick W. Taylor: The Father of Scientific Management (Homewood, IL: Business One Irwin, 1991), 253-260. Taylor attracted enmity from unions because he was against them; he believed that unions separated workers from management. Taylor attracted enmity from the workers because he compared them to apes and other beasts of burden. And Taylor gained the distrust and enmity of management because he criticized them for their previous management failures. Taylor had a difficult personality and angered just about everyone.

Administrative and Bureaucratic Management

Human Relations Movement

Barnard and the “Zone of Indifference”

Chester Barnard (1886–1961) was president of the New Jersey Bell Telephone Company.

Gehani, R. Ray (2002) "Chester Barnard's “executive” and the knowledge-based firm", Management Decision 40(10): 980 - 991. As president, he was given an unusual amount of time to conduct research. Barnard had been a student at Harvard, and through his connections there, he found out about some of the industrial research going on. His notable contribution was a book called *The Functions of the Executive*.Chester I. Barnard, *The Functions of the Executive* (Cambridge: Harvard University Press, 1938), Barnard argued that an executive’s purpose is to gain resources from members within the organization by ensuring that they perform their jobs and that cooperation exists between various groups within the organization. The other notable function of an executive is to hire and retain talented employees. Barnard defined a formal organization as consciously coordinated activities between two or more people but noted that such coordination is not likely to last for very long, a factor that may explain why many companies do not survive for long periods of time.

Contingency and System Management

Modern Management

From the 1970s to the present, we have seen the various management schools of thought interwoven. One of the major approaches in modern management is the development of managerial theories. When people hear the word *theory*, they usually assume that it refers to something impractical and disconnected from real life. The reality is that theory is a prediction and an explanation. Since the 1970s, the concept of theory has entered into the management literature and has led to more rigorous research.

Sutton, R., & Staw, B. (1995). What theory is not. Administrative Science Quarterly, 40, 371-384. The body of knowledge explored in this book about concepts such as strategy, organizational behavior, human resource management, and organizational theory has many roots from the 1970s. Management has been enriched over the last 40 years by the contributions from researchers in allied fields such as economics, psychology, and sociology.

External and Internal Organizational Environments and Corporate Culture

Introduction

The Organization's External Environment

Economic forces

Economically, “The strategic challenge of the next decade is navigating a world that is simultaneously integrating and fragmenting. Stock markets have set new records and economic volatility has fallen to historic lows, while political shocks on a scale unseen for generations have taken place. Seemingly contradictory realities do co-exist.”

Rawlinson, Paul, “A prediction for globalization in 2018”, *World Economic Forum*, January 22, 2018. https://www.weforum.org/agenda/2018/01/prediction-globalization-2018/ Overall, while economic data indicates that globalization has had a positive effect on the world economy, a dark side also shows that two-thirds of all households in 25 advanced-economy countries had incomes stagnate and/or decline between 2005 and 2014. Moreover, the U.K. and U.S. witnessed falling wages. Wealth distribution in these countries continues to decline. Income inequality globally is also rising. Other trends that also affect the global, regional, and local economies are discussed in this chapter as well as below.

Technological forces

Technological forces are another ubiquitous environmental influence on organizations. Speed, price, service, and quality of products and services are dimensions of organizations’ competitive advantage in this era. Information technologies and social media powered by the Internet and used by sharing-economy companies such as Airbnb and Uber have democratized and increased, if not leveled, competition across several industries, such as taxis, real estate rentals, and hospitality services. Companies across industry sectors cannot survive without using the Internet, social media, and sophisticated software in R&D (research and development), operations, marketing, finance, and sales. To manage and use big data in all these functional areas, organizations rely on technology.

Government and political forces

Government and political forces also affect industries and organizations. Recent events that have jarred the global economy—and are too early to predict the long-term outcomes of—are the United Kingdom’s exit from the European Union, wars in the Middle East, policies that question and disrupt free trade, health-care reform, and immigration—all of which increase uncertainty for businesses while creating opportunities for some industries and instability in others.

*Sociocultural* forces

Sociocultural environmental forces include different generations’ values, beliefs, attitudes, customs and traditions, habits, and lifestyles. More specifically, other aspects of societal cultures are education, language, religion, law, politics, and social organizations. The millennial (ages 20 to 35) workforce, for example, generally seeks work that engages and interests them. Members of this generation are also health conscious and eager to learn. Since this and the newer generation (Generation Z) are adept and accustomed to using technology—social media in particular—organizations must be ready and equipped to provide wellness, interesting, and a variety of learning and work experiences to attract and retain new talent. Millennials are also estimated to be the United States’ largest living adult generation in 2019. This generation numbered about 71 million compared with 74 million baby boomers (ages 52 to 70) in 2016. By 2019, an estimated 73 million millennials and 72 million boomers are projected. Because of immigration, millennials are estimated to increase until 2036.

Cilluffo, Anthony and Cohen, D’Vera, “10 demographic trends shaping the U. S. and the World in 2017”, *Pew Research Center*, April 27, 2017. http://www.pewresearch.org/fact-tank/2017/04/27/10-demographic-trends-shaping-the-u-s-and-the-world-in-2017/

Natural disasters and human-related problems

Natural disaster and human induced environmental problems are events such as high-impact hurricanes, extreme temperatures and the rise in CO2 emissions as well as ‘man-made’ environmental disasters such as water and food crises; biodiversity loss and ecosystem collapse; large-scale involuntary migration are a force that affects organizations. The 2018 Global Risks Report identified risks in the environmental category that also affect industries and companies—as well as continents and countries. These risks were ranked higher than average for both likelihood and impact over a 10-year horizon. The report showed that 2017 was characterized by high-impact hurricanes, extreme temperatures, and the first rise in carbon dioxide emissions in four years; “man-made” environmental disasters; water and food crises; biodiversity loss and ecosystem collapse; and large-scale involuntary migration to name a few. Authors of this study noted that “Biodiversity is being lost at mass-extinction rates, agricultural systems are under strain and pollution of the air and sea has become an increasingly pressing threat to human health.”

The Global Economic Report, 13th Edition, *World Economic Forum*, 2018. http://www3.weforum.org/docs/WEF_GRR18_Report.pdf Most vulnerable to rising seas are low-lying islands in the Indian and Pacific Oceans. The Republic of the Marshall Islands has more over 1,100 low-lying islands on 29 atolls that include island nations with hundreds of thousands of people. Predictions indicate that rising sea levels could reach 3 feet worldwide by 2300 or sooner. One report stated that in your child’s lifetime, Miami, Florida, could be underwater.Rice, Doyle, “Thousands of low-lying islands may become 'uninhabitable' within decades as seas rise”, *USA Today*, April 25, 2018. https://www.usatoday.com/story/news/world/2018/04/25/thousands-low-lying-islands-may-become-uninhabitable-within-decades-seas-rise/550659002/ Large sections of Louisiana’s marshes separating the ocean from the coastline are submerging. Oil producers and other related corporations are being sued by that state, claiming that fossil fuel emissions have contributed to natural disasters such as climate change. Many new companies in the United States are already constructing buildings to withstand increasing flooding and predicted rising water levels.

External Environments and Industries

Organizational Complexity

It is important to point out here that external (and internal) organizational complexity is not often as simple as it may seem. It has been defined as “…the amount of complexity derived from the environment where the organisation operates, such as the country, the markets, suppliers, customers and stakeholders; while internal complexity is the amount of complexity that is internal to the organisation itself, i.e. products, technologies, human resources, processes and organisational structure. Therefore, different aspects compose internal and external complexities.”

Eisenhardt, K. M., & Sull, D. N. (2001). “Strategy as simple rules”, *Harvard Business Review*, 79(1): 106-119

Organizational Designs and Structures

Types of Organizational Structures

Within the context of mechanistic versus organic structures, specific types of organizational structures in the United States historically evolved over at least three eras, as we discuss here before explaining types of organizational designs. During the first era, the mid-1800s to the late 1970s, organizations were mechanistic self-contained, top-down pyramids.

Anand, N. and R. Daft. (2007). What is the Right Organization Design? *Organizational Dynamics*, Vol. 36, No. 4, pp. 329–344. Emphasis was placed on internal organizational processes of taking in raw materials, transforming those into products, and turning them out to customers.

The Internal Organization and External Environments

Corporate Cultures

Organizing for Change in the 21st Century

Ethics, Corporate Responsibility, and Sustainability

Introduction

Ethics and Business Ethics Defined

Dimensions of Ethics: The Individual Level

Ethics and Values: Terminal and Instrumental Values

Of the values that make up an organization’s culture, and an individual’s motivations, ethical values are now considered among the most important. For instance, when Google took its company public in 2004, its prospectus included an unusual corporate goal: “Don’t be evil.” That can be a challenge when you’re a multibillion-dollar corporation operating around the world, with investors expecting you to produce a profit. Google’s operations in the United States and overseas have generated controversy and debate as to how well it’s living up to its stated goal. There is a continuing need to integrate ethical values in corporations. The Ethics & Compliance Initiative found 22 percent of global workers reported pressure to compromise their standards.

ECI Connects. (2016). https://connects.ethics.org/search?executeSearch=true&SearchTerm=22+percent&l=1 Top corporate managers are under scrutiny from the public as never before, and even small companies are finding a need to put more emphasis on ethics to restore trust among their customers and the community.

Ethical Principles and Responsible Decision-Making

Utilitarianism: A Consequentialist, “Ends Justifies Means” Approach

The utilitarianism principle basically holds that an action is morally right if it produces the greatest good for the greatest number of people. An action is morally right if the net benefits over costs are greatest for all affected compared with the net benefits of all other possible choices. This, as with all these principles and approaches, is broad in nature and seemingly rather abstract. At the same time, each one has a logic. When we present the specifics and facts of a situation, this and the other principles begin to make sense, although judgement is still required.

Universalism: A Duty-Based Approach

Universalism is a principle that considers the welfare and risks of all parties when considering policy decisions and outcomes. Also needs of individuals involved in a decision are identified as well as the choices they have and the information they need to protect their welfare. This principle involves taking human beings, their needs, and their values seriously. It is not only a method to make a decision; it is a way of incorporating a humane consideration of and for individuals and groups when deciding a course of action. As some have asked, “What is a human life worth?”

Rights: A Moral and Legal Entitlement–Based Approach

This principle is grounded in both legal and moral rights. Legal rights are entitlements that are limited to a particular legal system and jurisdiction. In the United States, the Constitution and Declaration of Independence are the basis for citizens’ legal rights, for example, the right to life, liberty, and the pursuit of happiness and the right to freedom of speech. Moral (and human) rights, on the other hand, are universal and based on norms in every society, for example, the right not to be enslaved and the right to work.

Justice: Procedures, Compensation, and Retribution

This principle has at least four major components that are based on the tenets that (1) all individuals should be treated equally; (2) justice is served when all persons have equal opportunities and advantages (through their positions and offices) to society’s opportunities and burdens; (3) fair decision practices, procedures, and agreements among parties should be practiced; and (4) punishment is served to someone who has inflicted harm on another, and compensation is given to those for a past harm or injustice committed against them.

Virtue Ethics: Character-Based Virtues

Virtue ethics is based on character traits such as being truthful, practical wisdom, happiness, flourishing, and well-being. It focuses on the type of person we ought to be, not on specific actions that should be taken. Grounded in good character, motives, and core values, the principle is best exemplified by those whose examples show the virtues to be emulated.

The Common Good

The common good is defined as “the sum of those conditions of social life which allow social groups and their individual members relatively thorough and ready access to their own fulfillment.” Decision makers must take into consideration the intent as well as the effects of their actions and decisions on the broader society and the common good of the many.

Velasquez, M., Andre, C., Shanks, T., & Meyer, M. (2014). Can Ethics Be Taught? http://www.scu.edu/ethics-center/aboutcenter

Ethical Relativism: A Self-Interest Approach

Ethical relativism is really not a “principle” to be followed or modeled. It is an orientation that many use quite frequently. Ethical relativism holds that people set their own moral standards for judging their actions. Only the individual’s self-interest and values are relevant for judging his or her behavior. Moreover, moral standards, according to this principle, vary from one culture to another. “When in Rome, do as the Romans do.”

Leadership: Ethics at the Organizational Level

Show Respect for Others

Respecting others requires leaders to recognize the intrinsic worth of others and forces them to treat people as ends in themselves—never as means to an end. In other words, people should be seen as valuable because of who they are (a universal principle), not only because of what they can do for others or how they can help others advance. Showing respect for others includes tolerating individual differences and affording followers the freedom to think independently, act as individuals, and pursue their own goals. When a leader shows respect for followers by providing them autonomy, subordinates can feel more useful, valued, and confident. Such a situation often leads to greater loyalty and productivity among subordinates.

Treat All Stakeholders Fairly

Ethical leaders strive to treat everyone their decisions may affect in a fair and just manner. Equality is also a top priority for ethical leaders and needs to factor prominently into their decision-making. Ethical leaders must refrain from offering special treatment to others; failure to do so creates winners and losers—in-groups and out-groups—and can breed resentment between those who receive special treatment and those who do not. The only exception occurs when an individual’s specific situation warrants special treatment in order for a just outcome to be realized.

Work Toward a Common Good

Mahatma Gandhi offers an example of what striving toward a common good entails. Known for his commitment to nonviolent protests and mass civil disobedience, the Indian activist and ideological leader spent 20 years in South Africa opposing legislation that discriminated against Indians. He spent the remainder of his life in India fighting for independence from foreign rule and working to reduce poverty and taxation, liberate women, and end multiple forms of discrimination.

Lelyveld, J. *Great Soul: Mahatma Gandhi and His Struggle with India* , Knopf, 2011. He championed such causes not because he would personally benefit, but because a larger, more substantial population would. Gandhi devoted his life to furthering social causes he believed in and developed a personal sense of purpose and meaning that later translated into a societal and then global ethic.

Build Community

Whole Foods Market, recently purchased by Amazon, is well known for its community outreach programs on both local and global scales. Every Whole Foods store donates to community food banks and shelters and throughout the year holds “5% days,” when 5% of the day’s net sales are donated to local nonprofit or educational organizations. Globally, the company established the Whole Planet Foundation to combat world hunger and supports programs addressing issues such as animal welfare, nutrition, and environmentally friendly production methods.

Be Honest

Honesty is considered desirable by practically everyone, but it is sometimes unclear what honesty actually demands of us. Being honest is not simply telling the truth and avoiding deceitful behaviors; it requires leaders to be as open as possible and to describe reality fully, accurately, and in sufficient detail. Telling the complete truth is not always the most desirable action, however. Leaders must be sensitive to the feelings and beliefs of others and must recognize that the appropriate level of openness and candor varies depending on the situation.

Stewardship and Servant Leadership Styles

Effective leaders, and followers, who lead by example and demonstrate virtuous practices while demonstrating successful practices are more numerous than the media or press reveal. Such examples are also entrepreneurs who practice both stewardship and servant leadership. Their names are not always recognizable nationally, but their companies, communities, and stakeholders know them well. For example, Inc.com’s recent 2017 list of top 10 leaders features four women CEOs who go beyond the “call of duty” to serve others while succeeding in business. For example, Brittany Merrill Underwood started and is CEO of Akola Jewelry and was named in Yahoo’s “Best Person in the World” series in 2014. Her company “reinvests 100 percent of their profits to support work opportunities, training, social programs, and the construction of training centers and water wells in impoverished communities throughout the globe.”

Oates, D., “Young Dallas philanthropist impacts the world from her Deep Ellum shop”, *Culture Map*, October 30, 2014, http://dallas.culturemap.com/news/fashion/10-30-14-akola-project-flagship-store-deep-ellum-brittany-underwood/#slide=0.

Dark Side of Organizational Leadership

However, and as noted earlier, not all leaders lead or model high standards or values. Seven symptoms of the failure of ethical leadership provide a practical lens to examine a leader’s shortsightedness:

Driscoll, D. M., and Hoffman, W. (2000). Ethics matters, 68. Waltham, MA: Center for Business Ethics.

Ethics, Corporate Culture, and Compliance

Compliance and Ethics

As the section above indicates, both a values-based and compliance approach are necessary elements of maintaining an ethical corporate culture. Ethics has been characterized as “doing the right thing” and serving as a motivational force that influences professionals’ values—resembling a “carrot” approach to professionals’ behaviors. Compliance is related to influencing behaviors to act in accordance to the law or face consequences—referred to as a “stick” approach. Studies show that ethical and compliance approaches are interrelated and work best to motivate and sustain lawful and ethical behavior in organizations.

Weller, A. (2017). Exploring Practitioners’ Meaning of “Ethics,” “Compliance,” and “Corporate Social Responsibility” Practices: A Communities of Practice Perspective, Business & Society, pp. 1-27, http://journals.sagepub.com/doi/pdf/10.1177/0007650317719263

Corporate Social Responsibility (CSR)

Stakeholder Management

CSR and stakeholder management are complementary approaches. Stakeholder theory argues that corporations should treat all their constituencies fairly and that doing so can strengthen companies’ reputations, customer relations, and performance in the marketplace.

Berman, S., Wicks, A., Kotha, S., and Jones, T. (1999). Does stakeholder orientation matter? The relationship between stakeholder management models and firm financial performance. Academy of Management Journal, 42, No. 5,October, pp. 488–506. “If organizations want to be effective, they will pay attention to all and only those relationships that can affect or be affected by the achievement of the organization’s purposes.”Freeman, R. E. (1999). Divergent stakeholder theory. Academy of Management Review, 24, 233–236.

Identifying and Influencing Major Stakeholders

There are several methods for analyzing stakeholder transactions and relationships with an organization that go beyond the purpose of this chapter.

Donaldson T. and L. Preston. (1995), The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications Academy of Manage Review, January 1,Vol. 20 no. 1, pp. 65-91 ; and Weiss, J.W. (2014). Business Ethics, A Stakeholder and Issues Management Approach, 6th ed. Oakland, CA: Berrett-Koehler Publishers. Using an ethical perspective, a goal of this approach is for organizations to employ values of transparency, fairness, and consideration of stakeholder interests in strategic decisions and transactions. Toward that end, the following questions can be used from **[link]**.

Ethics around the Globe

Globalization

The increasing phenomenon of globalization (an integrated global economy consisting of free trade, capital flows, and cheaper foreign labor markets)

Vijay Govindarajan, reported in Gail Dutton, “Building a Global Brain,” Management Review (May 1999), 34–38. also pressures global firms facing international risks to rely on governments, NGOs (nongovernmental organizations), the UN (United Nations), and other business and stakeholder alliances and relationships to help meet nonmarket threats. For example, the ten principles of the UN Global Compact serve as guidelines for international firms doing business in LDCs (least developed countries), and abroad, businesses should (1) support and respect the protection of internationally proclaimed human rights, (2) ensure that they are not complicit in human rights abuses, (3) uphold the freedom of association and the effective recognition of the right to collective bargaining, (4) eliminate of all forms of forced and compulsory labor, (5) abolish child labor, (6) eliminate the discrimination of employment and occupation, (7) support a precautionary approach to environmental challenges, (8) promote greater environmental responsibility through initiatives, (9) encourage the development and diffusion of environmentally friendly technologies, and (10) work against corruption, including extortion and bribery.United nations Global Compact, “The Ten principles of the united Nations Global Compact”, https://www.unglobalcompact.org/what-is-gc/mission/principles.

MNEs Corporate Cultures

MNEs must also create inclusive, ethical corporate cultures while managing both external and internal complexities such as hiring and training a diverse workforce, adapting to local culture norms while balancing home country ethics and values, and ensuring a multicultural approach to doing business across countries. Hanna identified five strategic questions that relate to organizational cultural sensitivities when doing business abroad as well as in a home country:

Hanna, D. (2016). Where can corporate culture and national cultures meet? https://www.insidehr.com.au/where-can-corporate-culture-and-national-cultures-meet/

Emerging Trends in Ethics, CSR, and Compliance

Moral Entrepreneur: A New Component of Ethical Leadership?

An innovative development in ethics and business is the concept of “moral entrepreneur.”

Kaptein, M. (2017). The Moral Entrepreneur: A New Component of Ethical Leadership, Journal of Business Ethics. May, Pp. 1-16. Brown and Trevino found that people who have been exposed to a moral entrepreneur are more likely to become a moral entrepreneur themselves because they have experienced its potential and experienced how it is done. Inspiration certainly takes place, and the person’s well-being is improved.Brown, M and Trevino L., “Ethical leadership: A review and future directions”, *The Leadership Quarterly*, December 2006, Pages 595-616.

Concluding Comments

So, does it pay to be ethical and moral, whether it be entrepreneurs and individuals or corporations and organizations? We have discussed this question in this chapter and presented different arguments with different views. Scholars and ethicists who have debated whether or not corporations can be ethical differ on their responses. One such conference in the INSEAD Business School in France closed with the following statement: “Theoretically, a strong case can be made for the moral responsibility of firms. However, this does not preclude individual moral responsibility for acts as a corporate member. Moreover, it was also evident that considerable concern exists about corporate misconduct going unsanctioned and the possibility that both good and bad corporate behavior is profoundly influenced by the extent to which individuals and corporate entities are held morally responsible.”

Smith, “Could Your Leadership Style be Influencing Bad Behavior?”, *INSEAD Knowledge*, October 14, 2014, https://knowledge.insead.edu/leadership-organisations/could-your-leadership-style-be-influencing-bad-behaviour-3638.

International Management

Introduction

Importance of International Management

Globalization Factor 1: Lowering Trade Barriers

The first critical factor is the lowering of trade barriers through trade agreements, government policies through which countries agree to eliminate cross-border barriers to trade and to promote global integration. To understand the importance of trade agreements, it is necessary to note that countries have long used tariffs to protect local industries and companies. Tariffs are taxes that are added to the price of imported international products. Because these tariffs are usually passed along to the consumer in the form of higher prices, imposing tariffs on imported goods gives domestic companies a price advantage and protects them from foreign competition.

Divesh Kaul, “Eliminating trade barriers through preferential trade agreements: perspectives from South Asia,” *Tulane Journal of International and Comparative Law,* Vol 25, pp. 355-402. The goal of most trade agreements has been to reduce or eliminate tariffs and other barriers to make cross-border trade easier.

Globalization Factor 2: Foreign Direct Investment

Foreign direct investment (FDI) refers to deliberate efforts of a country or company to invest in another country through the form of ownership positions in companies in another country. In 2017, global FDI flows amounted to USD \$1.52 trillion.

Globalization Factor 3: The Internet

Thanks to the pervasiveness of the Internet today, any company in the world can sell its products to anyone in the world. In fact, the developments in information technology and the reduction in costs of technological equipment mean that any multinational can reach anyone in the world. Social media, such as Twitter and Facebook, also provide a means for multinationals to build relationships with customers worldwide. Data also suggests that even countries that previously had little access to the Internet are now experiencing tremendous growth. To give you more insights on Internet growth, consider **[link]**.

Hofstede's Cultural Framework

Cultural Dimension 1: Power Distance

Hofstede’s original survey of the more than 88,000 employees of the 72 countries revealed four major cultural dimensions. The first cultural dimension is power distance, the degree to which members of a society accept differences in power and authority. In societies with **high power distance**, people are more likely to accept that power inequality is good and acceptable. People in high power distance societies are more likely to accept that there are some powerful people who are in charge and that these people are entitled to special benefits. In contrast, societies with **low power distance** tend to consider that all members are equal. **[link]** shows the levels of power distance (and the other cultural dimensions discussed later) in 15 selected societies. Hofstede’s scores range from 100 (the highest power distance) to 0 (the lowest). In the table, we break Hofstede’s scores into high (70–100), medium (40–69), and low (0–39).

Cultural Dimension 2: Individualism and Collectivism

The second cultural dimension we consider here is individualism/collectivism. Individualism refers to the degree to which a society focuses on the relationship of the individual to the group. **Collectivism** refers to the degree to which a society focuses on the relationship of the group as a whole.

Cultural Dimension 3: Uncertainty Avoidance

Hofstede’s third cultural dimension is uncertainty avoidance, the degree to which people in a society are comfortable with risk, uncertainty, and unpredictable situations. People in high uncertainty avoidance societies tend to want to avoid uncertainty and unpredictability. As a result, work environments in such countries try to provide stability and certainty through clear rules and instructions. In contrast, societies with low uncertainty avoidance are comfortable with risk, change, and unpredictability. In these countries, risky and ambiguous situations are less likely to upset people.

Cultural Dimension 4: Masculinity

The fourth and final dimension we consider is masculinity, the degree to which a society emphasizes traditional masculine qualities such as advancement and earnings. In high masculinity societies, work tends to be very important to people, gender roles are clear, and work takes priority over other aspects of a person’s life, such as family and leisure. In addition, masculine societies emphasize earnings and achievements, and employees tend to work very long hours and take very little vacation time.

The GLOBE Framework

Summary

In this section, we have learned about the various tools that managers can use to understand and prepare for cross-national differences and how they impact behaviors of employees across multinational corporations. We’ve also seen that there are many similarities among cultures. Relying solely on such frameworks to understand a culture can be misleading, however. In the next section, we discuss some of the dangers of cultural stereotyping and examine the need to be cautious and to take into account the interaction between a nation’s culture and its social institutions.

Cultural Stereotyping and Social Institutions

The Role of Social Institutions in International Management

Recent research examining Hofstede’s work provides some evidence of the need to be cautious about using culture as the only source of understanding of societies.

Vas Taras, Piers Steel and Bradley L. Kirkman, “Does country equate with culture? Beyond geography in the search for cultural boundaries,” *Management International Review,* 2016, Vol. 56, pp. 455-487. The researchers examined the ongoing assumption that that all residents of a given country will behave according to broad cultural norms and found that 80% of variation in cultural values is actually *within* countries. In other words, the assumption that people between countries are more different than people within a country may not be accurate. The researchers actually found that other cultural factors pertaining to people’s occupations or the country’s wealth also play a critical role. These findings suggest that other factors besides national culture need to be examined. One of these factors is a country’s social institutions.

Summary

This section presented some of the social institutions that may bring a deeper understanding of cross-national differences. Relying solely on national culture dimensions may not be useful in the presence of cultural paradoxes. Carefully understanding a nation’s social institutions can therefore bring additional insights into better international management.

Cross-Cultural Assignments

Cross-Cultural Training through Education and Personal Experience: Low and High Rigor

Current research suggests that cross-cultural training can influence cultural intelligence. At a basic level, you can acquire cultural intelligence by taking classes in your program. Research has shown that taking cross-cultural management courses can enhance cultural intelligence.

Jase R. Ramsey and Melanie Lorenz, “Exploring the impact of cross-cultural management on cultural intelligence, student satisfaction, and commitment,” *Academy of Management Learning and Education, 2016, Vol. 15, pp. 79-99.* For example, in a study of 152 MBA students, researchers found that cultural intelligence of the students increased after they took a cross-cultural management course. In another longitudinal study, researchers found that study abroad has significant impact on the cognitive and metacognitive aspects of cultural intelligence. How do multinationals approach cross-cultural training? The above provides examples of low-rigor training, in which individuals are exposed to critical information to help them understand the realities of a different culture but are not actively and directly engaged with the culture.Tomasz Lenartowicz, James P. Johnson and Robert Konopaske, “The application of learning theories to improve cross-cultural training programs in MNCs,” *International Journal of Human Resource Management,* 2014, Vol. 25, pp. 1697-1719. In such cases, instructors transfer basic information and knowledge to students through lectures, books, and case studies.

When Should Cross-Cultural Training Occur?

Another important aspect of cross-cultural training is the timing of the training. Some multinationals offer predeparture cross-cultural training, which provides individuals with learning opportunities prior to their departure.

Rita Bennett, Anne Aston and Tracy Colquhoun, “Cross-cultural training: A critical step in ensuring the success of international assignments,” *Human Resource Management,* Summer/Fall 2000, Vol. 39, pp. 239-250. Such training can take the form of 1- to 12-week programs, although two- to three-day programs are also very popular. After such training, the expatriate has a good understanding of expectations, what the local culture looks and feels like, and how to manage any local shocks when they arrive. This approach also makes individuals about to go to another country less anxious about the unknown.

Adapting Behavior to the Culture

A final issue that managers need to address is that the training should not focus only on identifying and teaching about differences.

Molinsky, A, “The mistakes most managers make with cross-cultural training,” *Harvard Business Review,* January 15, 2015, pp. 2-4. Experts agree that this focus on differences is a problem in current cross-cultural training approaches. While identifying and understanding cultural differences is useful and necessary, trainers often don’t provide guidance as to how the participants should adapt and react to such cultural differences. It is therefore necessary for the multinational to take the necessary steps to teach cross-cultural sojourners to adapt their behaviors so that they act and react in culturally appropriate ways. Experts also suggest that such training should not be static and limited to web pages or documentation. Training should be integrated with the actual work that the employee is engaging in.

Strategies for Expanding Globally

Global Strategy

Companies can choose to pursue one of three main strategies:

Global strategy

A global strategy is based on the assumption that the world is extremely interconnected and that patterns of consumption and production are fairly homogeneous worldwide.

Alain Verbeke and Christian G. Asmussen, “Global, local, or regional? The locus of MNE strategies,” *Journal of Management Studies,* 2016, Vol. 53, pp. 1051-1075. In such cases, the company simply extends its domestic strategy to the global arena.

Regional Strategy

A regional strategy is one in which the company decides that it makes sense to organize its functional activities, such as marketing, finance, etc., around geographical regions that play a critical role in terms of sales. Toyota is an example of a company that has successfully implemented a regional strategy. Because regions such as Europe and North America are sufficiently large but different markets, Toyota has decided that it is worth customizing its operations by regions. In this case, the company has several regional offices that operate independently of Japanese headquarters.

Local Strategy

The local strategy is the one in which a company adapts its products to meet the needs of the local market. For instance, experts argue that despite the perception that customers want global products, significant cultural and national value differences still suggest that some level of customization is necessary. This is especially critical for some functional areas, such as marketing. People across cultures have different purchasing and usage habits. Furthermore, they respond differently to promotional campaigns and other advertising messages. In such cases, a local strategy may be necessary.

Summary

Companies choose international strategies based on their capabilities and skills as well as on the structure and nature of the industry in which they operate. Companies choose regional strategies if they feel that the regions have differences significant enough to justify such an approach. In contrast, companies elect a global strategy if they believe they have global products that can satisfy global consumer needs.

The Necessity of Global Markets

Reasons for Internationalization

Before we get into how companies can go international, let’s look at why a company might want to expand internationally in the first place. Because navigating cross-cultural environments is fraught with dangers but holds the possibility of great success, we must understand the compelling reasons to go international.

How to Go International 1: Exporting

Given that it is critical for companies to go global, there are various means that companies can use to do so. The most basic and cost-effective approach is exporting, whereby a company sends its product to an international market and fills the order just as it fills a domestic order. Our earlier example of Dmitrii Dvornikov (who was selling jewelry and table clocks made from Russian semiprecious stones to international customers on Russia’s eBay) is a simple example of exporting. However, companies can also become more involved in the process and have dedicated offices in another country to tackle exports. In fact, some companies may find that exporting is so critical that they create a dedicated export department.

How to Go International 2: Strategic Alliances

Because of some of the dangers of licensing and franchising, companies can often get even more involved in global operations by engaging in strategic alliances. International strategic alliances occur when two or more companies from different countries enter into an agreement to conduct joint business activities. Strategic alliances are often the preferred means of entry in emerging markets because they make it easier to do business in the country. A strategic alliance is a way for a foreign company to bypass barriers imposed by local governments.

How to Go International 3: Foreign Direct Investment

Given the difficulties associated with strategic alliances, some companies elect to be wholly vested in the host country. This final form of international entry, which we discussed at the beginning of the chapter, is foreign direct investment (FDI), which occurs when a company invests in another country by constructing facilities and buildings in that country. FDI can also occur through mergers and acquisitions, whereby a multinational company fully acquires a company in another country. Many car companies, such as Toyota, Honda, BMW, and Nissan, have fully operational plants in the United States. For example, many of the BMW SUVs, such as the BMW X3 and X5, are fully built in the BMW plant in Spartanburg, South Carolina.

The Incremental Path to Internationalization: The Uppsala Model

The above sections also provided some insights into how some companies can start small (say, with exporting) and eventually have FDI activities in some countries. One of the most popular ways to understand this development path of internationalization is the Uppsala model, which argues that “as firms learn more about a specific market, they become more committed by investing more resources into that market.”

Sylvie Chetty and Colin Campbell-Hunt, “A strategic approach to internationalization: A traditional versus a “born-global” approach,” *Journal of International Marketing,* 2004, Vol 12, pp. 57-81. In this model, companies adopt an incremental approach to internationalizing. First, they develop a solid domestic market base. After they have a strong domestic foundation, they start exploring international markets and eventually export products to markets that they feel have close psychic distance. **Psychic distance** refers to the many differences that exist between countries because of language, cultural characteristics, social institutions, and business practices. Countries with close psychic distance are similar to each other in all these variables; those with greater psychic distance are less similar. As a firm continues to gain international experience, it will start exporting to countries with greater psychic distance. As the firm gains even more international experience and knowledge of international markets, it will eventually want to have production facilities in the overseas market.Sylvie Chetty and Colin Campbell-Hunt, “A strategic approach to internationalization: A traditional versus a “born-global” approach,” *Journal of International Marketing,* 2004, Vol 12, pp. 57-81.

The All-In Approach to Internalization: Born Globals

Born globals are considered key to most countries’ economic development. A recent report suggests that born globals were significant contributors to exports in countries such as Poland and Australia. Additionally, the Organisation for Economic Co-operation and Development (OECD), a leading international organization comprising many of the world’s leading economies, has argued that born globals were key engines that tackled the economic downturn that occurred after the financial crisis of 2007. It is therefore critical for the international management student to understand born globals.

Summary

In the above sections, you have learned about the different ways in which a company can go international. Some companies have minimal engagement and only export. Others are fully vested and build production plants overseas. Yet others choose to go global from inception. Each entry mode has its benefits and costs, advantages and disadvantages. How do companies choose among these entry types?

Entrepreneurship

Introduction

Entrepreneurship

Entrepreneur or Small-Business Owner?

The term *entrepreneur* is often used in a broad sense to include most small-business owners. The two groups share some of the same characteristics, and we’ll see that some of the reasons for becoming an entrepreneur or a small-business owner are very similar. But there is a difference between entrepreneurship and small-business management. Entrepreneurship involves taking a risk, either to create a new business or to greatly change the scope and direction of an existing one. Entrepreneurs typically are innovators who start companies to pursue their ideas for a new product or service. They are visionaries who spot trends.

Types of Entrepreneurs

Entrepreneurs fall into several categories: classic entrepreneurs, multipreneurs, and intrapreneurs.

Why Become an Entrepreneur?

As the examples in this chapter show, entrepreneurs are found in all industries and have different motives for starting companies. The most common reason cited by CEOs of the *Inc.* 500, the magazine’s annual list of fastest-growing private companies, is the challenge of building a business, followed by the desire to control their own destiny. Other reasons include financial independence and the frustration of working for someone else. Two important motives mentioned in other surveys are a feeling of personal satisfaction with their work, and creating the lifestyle that they want. Do entrepreneurs feel that going into business for themselves was worth it? The answer is a resounding yes. Most say they would do it again.

Characteristics of Successful Entrepreneurs

The Entrepreneurial Personality

Studies of the entrepreneurial personality find that entrepreneurs share certain key traits. Most entrepreneurs are

Managerial Ability and Technical Knowledge

A person with all the characteristics of an entrepreneur might still lack the necessary business skills to run a successful company. Entrepreneurs need the technical knowledge to carry out their ideas and the managerial ability to organize a company, develop operating strategies, obtain financing, and supervise day-to-day activities. Jim Crane, who built Eagle Global Logistics from a start-up into a \$250 million company, addressed a group at a meeting saying, “I have never run a \$250 million company before so you guys are going to have to start running this business.”

Keith McFarland, “What Makes Them Tick,” *Inc. 500,* October 19, 2005, http://www.inc.com.

Small Business

What Is a Small Business?

How many small businesses are there in the United States? Estimates range from 5 million to over 22 million, depending on the size limits government agencies and other groups use to define a small business or the number of businesses with or without employees. The Small Business Administration (SBA) established size standards to define whether a business entity is small and therefore eligible for government programs and preferences that are reserved for “small businesses.” Size standards are based on the types of economic activity or industry, generally matched to the North American Industry Classification System (NAICS).

U.S. Small Business Administration, “Make Sure You Meet SBA Size Standards,” https://www.sba.gov, accessed February 1, 2018.

Start Your Own Business

Getting Started

The first step in starting your own business is a self-assessment to determine whether you have the personal traits you need to succeed and, if so, what type of business would be best for you. **[link]** provides a checklist to consider before starting your business.

Financing the Business

Once the business plan is complete, the next step is to obtain financing to set up your company. The funding required depends on the type of business and the entrepreneur’s own investment. Businesses started by lifestyle entrepreneurs require less financing than growth-oriented businesses, and manufacturing and high-tech companies generally require a large initial investment.

Buying a Small Business

Another route to small-business ownership is buying an existing business. Although this approach is less risky, many of the same steps for starting a business from scratch apply to buying an existing company. It still requires careful and thorough analysis. The potential buyer must answer several important questions: Why is the owner selling? Does he or she want to retire or move on to a new challenge, or are there problems with the business? Is the business operating at a profit? If not, can this be corrected? On what basis has the owner valued the company, and is it a fair price? What are the owner’s plans after selling the company? Will he or she be available to provide assistance through the change of ownership of the business? And depending on the type of business it is, will customers be more loyal to the owner than to the product or service being offered? Customers could leave the firm if the current owner decides to open a similar business. To protect against this, many purchasers include a *noncompete clause* in the contract of sale, which generally means that the owner of the company being sold may not be allowed to compete in the same industry of the acquired business for a specific amount of time.

Risky Business

Running your own business may not be as easy as it sounds. Despite the many advantages of being your own boss, the risks are great as well. Over a period of five years, nearly 50% percent of small businesses fail according to the Kauffman Foundation.

“The Kauffman Index,” http://www.kauffman.org, accessed February 2, 2018.

Managing a Small Business

Using Outside Consultants

One way to ease the burden of managing a business is to hire outside consultants. Nearly all small businesses need a good certified public accountant (CPA) who can help with financial record keeping, decision-making, and tax planning. An accountant who works closely with the owner to help the business grow is a valuable asset. An attorney who knows about small-business law can provide legal advice and draw up essential contracts and documents. Consultants in areas such as marketing, employee benefits, and insurance can be used on an as-needed basis. Outside directors with business experience are another way for small companies to get advice. Resources such as these free the small-business owner to concentrate on medium- and long-range planning and day-to-day operations.

Hiring and Retaining Employees

It is important to identify all the costs involved in hiring an employee to make sure your business can afford it. Recruiting, help-wanted ads, extra space, and taxes will easily add about 10–15 percent to their salary, and employee benefits will add even more. Hiring an employee may also mean more work for you in terms of training and management. It’s a catch-22: To grow you need to hire more people, but making the shift from solo worker to boss can be stressful.

Going Global with Exporting

More and more small businesses are discovering the benefits of looking beyond the United States for market opportunities. The global marketplace represents a huge opportunity for U.S. businesses, both large and small. Small businesses’ decision to export is driven by many factors, one of which is the desire for increased sales and higher profits. U.S. goods are less expensive for overseas buyers when the value of the U.S. dollar declines against foreign currencies, and this creates opportunities for U.S. companies to sell globally. In addition, economic conditions such as a domestic recession, foreign competition within the United States, or new markets opening up in foreign countries may also encourage U.S. companies to export.

The Large Impact of Small Business

Why Stay Small?

Owners of small businesses recognize that being small offers special advantages. Greater flexibility and an uncomplicated company structure allow small businesses to react more quickly to changing market forces. Innovative product ideas can be developed and brought to market more quickly, using fewer financial resources and personnel than would be needed in a larger company. And operating more efficiently keeps costs down as well. Small companies can also serve specialized markets that may not be cost-effective for large companies. Another feature is the opportunity to provide a higher level of personal service. Such attention brings many customers back to small businesses such as gourmet restaurants, health clubs, spas, fashion boutiques, and travel agencies.

The Small Business Administration

Financial Assistance Programs

The SBA offers financial assistance to qualified small businesses that cannot obtain financing on reasonable terms through normal lending channels. This assistance takes the form of guarantees on loans made by private lenders. (The SBA no longer provides direct loans.) These loans can be used for most business purposes, including purchasing real estate, equipment, and materials. The SBA has been responsible for a significant amount of small-business financing in the United States. In the fiscal year ending on September 30, 2017, the SBA backed more than \$25 billion in loans to almost 68,000 small businesses, including about \$9 billion to minority-owned firms and \$7.5 billion in loans to businesses owned by women. It also provided more than \$1.7 billion in home and business disaster loans.

“SBA Lending Activity in FY 2017 Shows Consistent Growth,” https://www.sba.gov, October 13, 2017.

SCORE-ing with Management Assistance Programs

The SBA also provides a wide range of management advice. Its Business Development Library has publications on most business topics. Its “Starting Out” series offers brochures on how to start a wide variety of businesses—from ice-cream stores to fish farms.

Assistance for Women and Minorities

The SBA is committed to helping women and minorities increase their business participation. It offers a minority small-business program, microloans, and the publication of Spanish-language informational materials. It has increased its responsiveness to small businesses by giving regional offices more decision authority and creating high-tech tools for grants, loan transactions, and eligibility reviews.

Trends in Entrepreneurship and Small-Business Ownership

Into the Future: Start-ups Drive the Economy

Did new business ventures drive the economic recovery from the 2001–2002 and 2007–2009 to recessions, and are they continuing to make significant contributions to the U.S. economy? The economists who review Department of Labor employment surveys and SBA statistics think so. “Small business drives the American economy,” says Dr. Chad Moutray, former chief economist for the SBA’s Office of Advocacy. “Main Street provides the jobs and spurs our economic growth. American entrepreneurs are creative and productive.” Numbers alone do not tell the whole story, however. Are these newly self-employed workers profiting from their ventures, or are they just biding their time during a period of unemployment?

Changing Demographics Create Entrepreneurial Diversity

The mantra, “60 is the new 40,” describes today’s Baby Boomers who indulge in much less knitting and golf in their retirement years. The AARP predicts that silver-haired entrepreneurs will continue to rise in the coming years. According to a recent study by the Kauffman Foundation, Baby Boomers are twice as likely as Millennials to start a new business. In fact, close to 25 percent of all new entrepreneurs fall between the ages of 55 and 64.

Steve Strauss, “Boomers’ Role in Entrepreneurship Is, Well, Booming,” *USA Today,* https://www.usatoday.com, August 25, 2017. This has created a ripple effect in the way we work. Boomers have accelerated the growing acceptance of working from home, adding to the millions of U.S. workers already showing up to work in their slippers. In addition, the ongoing corporate brain drain could mean that small businesses will be able to tap into the expertise of seasoned free agents at less-than-corporate prices—and that seniors themselves will become independent consultants to businesses of all sizes.Scott Hanson, “Baby Boomers Are Rewriting Retirement History,” *Kiplinger,* https://www.kiplinger.com, January 3, 2018.

How Far Will You Go to Get Rich?

With enough intelligence and determination, people can get rich almost anywhere in the United States. Whether you own chains of dry cleaners in Queens, car dealerships in Chicago, or oil wells in West Texas, fortunes have been made in every state in the Union. There are some places, however, where the chances of creating wealth are much greater than others. That is the reason why people who hope to strike it rich move to places such as Manhattan or Palo Alto. It’s not because the cost of living is low or the quality of life as a struggling entrepreneur is fun. Whether starting a software or soft-drink company, entrepreneurs tend to follow the money

Strategic Analysis: Understanding a Firm’s Competitive Environment

Introduction

Gaining Advantages by Understanding the Competitive Environment

The Competitive Environment

A firm’s competitive environment includes components inside the firm and outside the firm. External factors are things in the global environment that may impact a firm’s operations or success, examples are a rise in interest rates, or a natural disaster. External factors cannot be controlled, but they must be managed effectively and to understand them so that the firm can be as successful. For example, the unemployment rate will affect a firm’s ability to hire qualified employees at a reasonable rate of pay. If unemployment is high, meaning that a lot of people are looking for jobs, then a firm will probably have a lot of applicants for any positions it needs to fill. It will be able to choose more highly qualified applicants to hire and may be able to hire them at a lower pay rate because the employee would rather work for a lower pay rate than not have a job at all. On the other hand, when unemployment is low, meaning that not many people are looking for jobs, firms may have to offer higher pay or settle for lower qualifications to find someone to fill a position.

Using SWOT for Strategic Analysis

Strengths

A firm’s strengths are, to put it simply, what it is good at. Nike is good at marketing sports products, McDonald’s is good at making food quickly and inexpensively, and Ferrari is good at making beautiful fast cars. When a firm analyzes its strengths, it compiles a list of its capabilities and assets. Does the firm have a lot of cash available? That is a strength. Does the firm have highly skilled employees? Another strength. Knowing exactly what it is good at allows a firm to make plans that exploit those strengths. Nike can plan to expand its business by making products for a sport it doesn’t currently serve. Its sports marketing expertise will help it successfully launch that new product line.

Weaknesses

A firm’s weaknesses are what it is not good at—things that it does not have the capabilities to perform well. Weaknesses are not necessarily faults—remember that not all firms can be great at all things. When a firm understands its weaknesses, it will avoid trying to do things it does not have the skills or assets to succeed in, or it will find ways to improve its weaknesses before undertaking something new. A firm’s weaknesses are simply gaps in capabilities, and those gaps do not always have to be filled within the firm.

Opportunities

While strengths and weaknesses are internal to an organization, but opportunities and threats are always external. An opportunity is a potential situation that a firm is equipped to take advantage of. Think of opportunities in terms of things that happen in the market. Opportunities offer positive potential, however sometimes a firm is not equipped to take advantage of an opportunity which is why considering the entire SWOT is important before deciding what to do. For example, as cities are becoming more populated, parking is becoming scarcer. Younger consumers who live in cities are starting to question whether it makes sense to own a car at all, when public transportation is available and parking is not. Sometimes, however, a person might need a car to travel outside the city or transport a special purchase. Daimler, the manufacturer of Mercedes-Benz and Smart cars, started a car-sharing service in Europe, North America, and China called Car2Go to offer cars to this new market of part-time drivers. By establishing Car2Go, Daimler has found a way to sell the use of its products to people who would not buy them outright.

Threats

When a manager assesses the external competitive environment, they label anything that would make it harder for their firm to be successful as a threat. A wide variety of situations and scenarios can threaten a firm’s chances of success, from a downturn in the economy to a competitor launching a better version of a product the firm also offers. A good threat assessment looks thoroughly at the external environment and identifies threats to the firm’s business so it can be prepared to meet them. Opportunities and threats can also be a matter of perspective or interpretation: the Car2Go service that Daimler developed to serve young urban customers who don’t own cars could also be cast as a defensive response to the trend away from car ownership in this customer group. Daimler could have identified decreasing sales among young urban professionals as a threat and developed Car2Go as an alternative way to gain revenue from these otherwise lost customers.

The Limitations of SWOT Analysis

Although a SWOT analysis can identify important factors and situations that affect a firm, it only works as well as the person doing the analysis. SWOT can generate a good evaluation of the firm’s internal and external environments, but it is more likely to overlook key issues because it is difficult to identify or imagine everything that could, for example, be a threat to the firm. That’s why the remainder of this chapter will present tools for developing a strategic analysis that is more thorough and systematic in examining both the internal and external environments that firms operate in.

A Firm's External Macro Environment: PESTEL

PESTEL

PESTEL is a tool that reminds managers to look at several distinct categories in the macro environment. Like SWOT, PESTEL is an acronym. In this case, the letters represent the categories to examine: **p**olitical factors, **e**conomic factors, **s**ociocultural factors, **t**echnological factors, **e**nvironmental factors, and **l**egal factors. When using PESTEL to analyze a specific firm’s situation, overlap between different categories of PESTEL factors can sometimes happen just as it can with SWOT.

A Firm's Micro Environment: Porter's Five Forces

Industry Rivalry

Industry rivalry, the first of Porter’s forces, is in the center of the diagram. Note that the arrows in the diagram show two-way relationships between rivalry and all of the other forces. This is because each force can affect how hard firms in an industry must compete against each other to gain customers, establish favorable supplier relationships, and defend themselves against new firms entering the industry.

The Threat of New Entrants

In an industry, there are incumbent (existing) firms that compete against each other as rivals. If an industry has a growing market or is very profitable, however, it may attract new entrants. These either are firms that start up in the industry as new companies or are firms from another industry that expand their capabilities or target markets to compete in an industry that is new to them.

Threat of Substitutes

In the context of Porter’s model, a substitute is any other product or service that can satisfy the same need for a customer as an industry’s offerings. Be careful not to confuse substitutes with rivals. Rivals offer similar products or services and directly compete with one another. Substitutes are completely different products or services that consumers would be willing to use instead of the product they currently use. For example, the fast food industry offers quickly prepared, convenient, low-cost meals. Customers can go to McDonald’s, Wendy’s, Burger King, or Taco Bell—all of these firms compete against each other for business. However, their customers are really just hungry people. What else could you do if you were hungry? You could go to the grocery store and buy food to prepare at home. McDonald’s does not directly compete against Kroger for customers, because they are in different industries, but McDonald’s does face a threat from grocery stores because they both sell food. How does McDonald’s defend itself from the threat of Kroger as a substitute? By making sure their food is already prepared and convenient to purchase—your burger or salad is ready to eat and available without even getting out of your car.

Supplier Power

Virtually all firms have suppliers who sell parts, materials, labor, or products. Supplier power refers to the balance of power in the relationship between firms and their suppliers in an industry. Suppliers can have the upper hand in a relationship if they offer specialized products or control rare resources. For example, when Sony develops a new PlayStation model, it often works with a single supplier to develop the most advanced processor chip it can for their game console. That means its supplier will be able to command a fairly high price for the processors, an indication that the supplier has power. On the other hand, a firm that needs commodity resources such as oil, wheat, or aluminum in its operations will have many suppliers to choose from and can easily switch suppliers if price or quality is better from a new partner. Commodity suppliers usually have low power.

Buyer Power

The last of Porter’s forces is buyer power, which refers to the balance of power in the relationship between a firm and its customers. If a firm provides a unique good or service, it will have the power to charge its customers premium prices, because those customers have no choice but to buy from the firm if they need that product. In contrast, when customers have many potential sources for a product, firms will need to attract customers by offering better prices or better value for the money if they want to sell their products. One protection firms have against buyer power is switching costs, the penalty consumers face when they choose to use a particular product made by a different company. Switching costs can be financial (the extra price paid to choose a different product) or practical (the time or hassle required to switch to a different product). For example, think about your smartphone. If you have an iPhone now, what would be the penalty for you to switch to a non-Apple smartphone? Would it just be the cost of the new phone? Smartphones are not inexpensive, but even when cell phone service providers offer free phones to new customers, many people still don’t switch. The loss of compatibility with other Apple products, the need to transfer apps and phone settings to another system, and the loss of favorite iPhone features, such as iMessage, are enough to keep many people loyal to their iPhones.

The Internal Environment

Resources and Capabilities

A firm’s resources and capacities are the unique skills and assets it possesses. Resources are things a firm has to work with, such as equipment, facilities, raw materials, employees, and cash. Capabilities are things a firm can do, such as deliver good customer service or develop innovative products to create value. Both are the building blocks of a firm’s plans and activities, and both are required if a firm is going to compete successfully against its rivals. Firms use their resources and leverage their capabilities to create products and services that have some advantage over competitors’ products. For example, a firm might offer its customers a product with higher quality, better features, or lower prices. Not all resources and capabilities are equally helpful in creating success, though. Internal analysis identifies exactly which assets bring the most value to the firm.

The Value Chain

Before examining the role of resources and capabilities in firm success, let’s take a look at the importance of how a firm uses those factors in its operations. A firm’s value chain is the progression of activities it undertakes to create a product or service that consumers will pay for. A firm should be adding value at each of the chain of steps it follows to create its product. The goal is for the firm to add enough value so that its customers will believe that the product is worth buying for a price that is higher than the costs the firm incurs in making it. As an example, **[link]** illustrates a hypothetical value chain for some of Walmart’s activities.

Using Resources and Capabilities to Build an Advantage over Rivals

A firm’s resources and capabilities are not just a list of equipment and things it can do. Instead, resources and capabilities are the distinctive assets and activities that separate firms from each other. Firms that can amass critical resources and develop superior capabilities will succeed in competition over rivals in their industry. Strategists evaluate firm resources and capabilities to determine if they are sufficiently special to help the firm succeed in a competitive industry.

Competition, Strategy, and Competitive Advantage

Competition

Porter’s Five Forces model is centered around rivalry, a synonym for competition. In any industry, multiple firms compete against each other for customers by offering better or cheaper products than their rivals. Firms use PESTEL to understand what consumers are interested in and use VRIO to evaluate their own resources and capabilities so that they can figure out how to offer products and services that match those consumer interests and that are better in quality and price than the products offered by their competitors.

Generic Business-Level Competitive Strategies

When discussing business strategy, a business is a firm or a unit of a firm that centers its activities around one primary type of product or service line. Business-level strategy is the general way that a business organizes its activities to compete against rivals in its product’s industry. Michael Porter (the same Harvard professor who developed the Five Forces Model) defined three generic business-level strategies that outline the basic methods of organizing to compete in a product market. He called the strategies “generic” because these ways of organizing can be used by any firm in any industry.

Strategic Groups

When managers analyze their competitive environment and examine rivalry within their industry, they are not confronted by an infinite variety of competitors. Although there are millions of businesses of all sizes around the globe, a single business usually competes mainly against other businesses offering similar products or services and following the same generic competitive strategy. Groups of businesses that follow similar strategies in the same industry are called strategic groups, and it is important that a manager know the other firms in their strategic group. Rivalry is fiercest within a strategic group, and the actions of one firm in a group will elicit responses from other group members, who don’t want to lose market share in the industry. Take a look at **[link]**: although all of the firms shown are in the retail industry, they don’t all compete directly against one another.

Strategic Positioning

The Strategic Management Process: Achieving and Sustaining Competitive Advantage

Introduction

Strategic Management

Firm Vision and Mission

The Role of Strategic Analysis in Formulating a Strategy

Strategic Objectives and Levels of Strategy

Strategic objectives

Strategic objectives are the big-picture goals for the company: they describe what the company will do to try to fulfill its mission. Strategic objectives are usually some sort of performance goal—for example, to launch a new product, increase profitability, or grow market share for the company’s product.

Levels of Strategies

Once a firm has set its objectives, it then must turn to the question of how it will achieve them. A business-level strategy is the framework a firm uses to organize its activities, and it is developed by the firm’s top managers. Examples of business-level strategies include cost leadership and differentiation. These strategies are pursued by businesses with a single product or a range of products.

The Grand Strategy

At all three levels, companies choose a **grand strategy** in response to the first question they should ask themselves: does the firm want to grow, strive for stability, or take a defensive position in the marketplace? Often, the choice of a grand strategy is based on conditions in the business environment because firms generally want to grow unless something (like a recession) makes that difficult. Note that a grand strategy and a corporate strategy can overlap significantly.

Planning Firm Actions to Implement Strategies

Goal Setting

To examine the planning process, we need to start by understanding what the planning is for. A goal is something that you are trying to accomplish, and any firm will have many items on its list of things to accomplish. Consider the situation of a Walmart store in a college town. When it’s time for students to arrive back to school in the fall, the store needs to be ready with all the products students need when they move in. The Walmart store manager will plan months in advance and use information learned from the previous year’s sales to decide what products to order and how many, and when to have extra staff in the store to efficiently check out increased numbers of shoppers. Note that since Walmart is a global firm, goals will likely be prescribed from a higher level and the store manager’s responsibility would be to functional strategy response.

The Planning Process

**[link]** illustrates the planning cycle. It looks a lot like the strategy cycle shown in **[link]** because they have a lot in common. In fact, the planning process is an integral part of the strategy cycle, since developing objectives, creating strategies, and implementing firm-wide activities all require extensive planning.

Implementing Plans for Different Levels of Firm Activity and Time Horizons

Developing plans happens simultaneously at multiple levels in any company. Plans, as in our earlier grade example, often require different steps in order to achieve a large-scale objective. If a firm decides on growth as a grand strategy, actions at every level of firm activity should contribute to firm growth, and managers at all of those levels should develop plans so that their part of the firm is working to implement the growth strategy. A grand strategy cascades throughout the company, becoming more and more specific, until front-line employees are working on specific tasks that support the grand strategy.

Scale Levels of Planning

Another dimension that impacts strategic planning is scale. We have already looked at some large-scale planning concepts, such as business-level and grand strategies. However, the day-to-day planning that managers do to take steps toward those bigger objectives is key to achieving success. **[link]** shows the typical levels of planning going on in a company at any given time.

Implementing Planned Strategies

Implementation of planned strategies refers to the execution of a strategy by assigning tasks for people to carry out to accomplish the company’s strategic goals. Although a manager may talk about “implementing a differentiation strategy,” the real implementation of a strategy happens at the bottom of not just the strategy hierarchy, but the organizational hierarchy, in the actions of operational employees who carry out planned tasks that add value to the company’s product. Such tasks include research and development to add unique features, monitoring manufacturing to ensure company products meet high quality standards, and marketing the product to add brand value in the eyes of consumers.

Measuring and Evaluating Strategic Performance

Organizational Structure and Change

Introduction

Organizational Structures and Design

Types of Formal Organizational Structures

Now, Justin will need to choose and implement an administrative system for delegating duties, establishing oversight, and reporting on performance. They will do this by designing a formal structure that defines the responsibilities and accountability that correspond to specific duties throughout an organizational system. In this section, we’ll discuss the factors that any manager should consider when designing an organizational structure.

Mechanistic and Organic Structures

Using the principles of bureaucracy outlined above, managers like Justin have experimented with many different structures as way to shape the formal organization and potentially to capture some of the advantages of the informal organization. Generally, the application of these principles leads to some combination of the two kinds of structures that can be seen as anchors on a continuum (see **[link]**).

Business Structures

Aside from the considerations outlined above, organizations will often set structures according to the functional needs of the organization. A functional need refers to a feature of the organization or its environment that is necessary for organizational success. A business structure is designed to address these organizational needs. There are two common examples of functional structures illustrated here.

Organizational Change

Types of Change

There are many different types of changes in organizations. The first, consistent with what we talked about so far in this chapter, is structural change. This has to do with the changes in the overall formal relationships within an organization. Examples of structural change include reorganizing departments or business units, adding employee positions, or revising job roles and assignments. These changes should be made to support broader objectives such as to centralize or decentralize operations, empower employees, or find greater efficiencies.

The Organizational Life Cycle

Most organizations begin as very small systems that feature very loose structures. In a new venture, nearly every employee might contribute to many aspects of an organization’s work. As the business grows, the workload increases, and more workers are needed. Naturally, as the organization hires more and more people, employees being to specialize. Over time, these areas of specialization mature through differentiation, the process of organizing employees into groups that focus on specific functions in the organization. Usually, differentiated tasks should be organized in a way that makes them complementary, where each employee contributes an essential activity that supports the work and outputs of others in the organization.

Dimensions of Change

When considering how to assess the need for change in an organization, it can be helpful to think of three dimensions: the scope of change, the level of change, and the intentionality of change.

Managing Change

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.

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.

Lewin, K., *Field Theory in Social Science*, Harper & Row, 1951; and Kotter, J., *Leading Change*, Harvard Business School Press, 2012. The other two models, Cooperrider’s Appreciative Inquiry modelCooperrider, David L., *The Appreciative Inquiry Handbook: For Leaders of Change*, Berrett-Koehler Publishers, 2008.  and the Olson and Eoyang Complex Adaptive Systems model,Olson, Edwin E. and Eoyang, Glenda H., *Facilitating Organizational Change: Lessons from Complexity Science*, Pfeiffer, 2001. are designed to promote informal organizing and emergent 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.

Human Resource Management

Introduction

An Introduction to Human Resource Management

Human Resource Management and Compliance

Performance Management

Influencing Employee Performance and Motivation

Building an Organization for the Future

Talent Development and Succession Planning

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.

Diversity in Organizations

Introduction

An Introduction to Workplace Diversity

Diversity and the Workforce

Gender

Increasingly more women are entering the workforce.

U.S. Department of Labor, Bureau of Labor Statistics. (2017). Table 2: Employment status of the civilian noninstitutional population 16 years and over by sex, 1977 to date 11. Retrieved from https://www.bls.gov/cps/cpsaat02.pdf. 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%.Toosi, Mitra,"Labor force projections to 2024: the labor force is growing, but slowly," Monthly Labor Review, U.S. Bureau of Labor Statistics, December 2015, https://doi.org/10.21916/mlr.2015.48. 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 **[link]**, which compares the percentage of the workforce by gender in 1977 to 2017.U.S. Department of Labor, Bureau of Labor Statistics. (2017). Table 2: Employment status of the civilian noninstitutional population 16 years and over by sex, 1977 to date 11. Retrieved from https://www.bls.gov/cps/cpsaat02.pdf.

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.”)

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

Alley, D., & Crimmins, E. 2007. The demography of aging and work. In K. S. Shultz & G. A. Adams (Eds.), Aging and work in the 21st century: 7-23. New York: Psychology Press. 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.

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.

Human Rights Campaign. (2018). State maps of laws and policies. Retrieved from http://www.hrc.org/state-maps/employment With this new federal protection, individuals cannot for employment or fired for their sexual orientation , gender identity, or gender expression.Ragins, B.R., Cornwell, J.M. and Miller, J.S. (2003), “Heterosexism in the workplace: do race and gender matter?”, Group & Organization Management, Vol. 28, pp. 45-74. 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.Human Rights Campaign Foundation (2018), “Corporate equality index 2018 ”, available at:https://assets2.hrc.org/files/assets/resources/CEI-2018-FullReport.pdf?_ga=2.120762824.1791108882.1521675202-2105331900.1521675202 Many employers are beginning to understand that being perceived as inclusive will make them more attractive to a larger pool of job applicants.Button, S.B. (2001), “Organizational efforts to affirm sexual diversity: a cross-level examination”, Journal of Applied Psychology, Vol. 86 No. 1, pp. 17-28. Furthermore, many organizations have come to recognize that gender and sexual orientation equity aligns to their mission and ethics.

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.

Trautwein, C. Apr 7 2017. H-1B Visa applications just hit their limit for the year in less than a week. Time. Retrieved 4/21/2017 from http://time.com/4731665/h1b-visa-application-cap/; U.S. Citizenship and Immigration Services. (2017, Apr 7). USCIS reaches FY 2018 H-1B Cap. Retrieved on 4/21/2017 at https://www.uscis.gov/news/news-releases/uscis-reaches-fy-2018-h-1b-cap 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.U.S. Citizenship and Immigration Services. (2013). Working in the U.S. Retrieved from http://www.uscis.gov/working-united-states/working-us; U.S. Department of State, Bureau of Consular Affairs. (2014). Directory of Visa Categories. Retrieved from http://travel.state.gov/content/visas/english/general/all-visa-categories.html#iv 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.Bureau of Labor Statistics, U.S. Department of Labor. (2016, May 19). Labor force characteristics of foreign-born workers summary. Economic News Release. Retrieved online at https://www.bls.gov/news.release/forbrn.nr0.htm Compared to those born in the United States, the immigrant population in America is growing significantly faster.Kandel, W. A. (2011). The US foreign-born population: Trends and selected characteristics. Congressional Research Service Report. Retrieved from http://www.fas.org/sgp/crs/misc/R41592.pdf This is partly because of the U.S. demand for workers who are proficient in math and scienceBound, J., Demirci, M., Khanna, G., & Turner, S. (2014). Finishing degrees and finding jobs: U.S. higher education and the flow of foreign IT workers (NBER Working Paper No. 20505). Retrieved January 4, 2015, from http://www.nber.org/papers/w20505 and wish to work in America.

Other Forms of Diversity at Work

Workers with disabilities are projected to experience a 10% increase in job growth through the year 2022.

U.S. Department of Labor. (2012). Key points on Disability and Occupational Projections Tables. Retrieved from https://www.dol.gov/odep/pdf/20141022-KeyPoints.pdf This means that more public and corporate policies will be revised to allow greater access to training for workers with disabilities and employers.Ibid. Also, more companies will use technology and emphasize educating employees about physical and mental disabilities as workplace accommodations are used more often.

Diversity and Its Impact on Companies

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.

Cox, T.H. & Blake, S. (1991). Managing cultural diversity: Implications for organizational competitiveness. Academy of Management Executive, 5(3): 45-56. 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 **[link]**).

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.

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.

McMahan, G.C., Bell, M.P., & Virick, M. (1998). Strategic human resource management: Employee involvement, diversity, and international issues. Human Resource Management Review, 8 (3): 193-214. 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.

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.

Challenges of Diversity

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,

Tsui, A.S., Egan, T. D., & O’Reilly, C.A. 1992. Being different: relational demography and organizational attachment. Administrative Science Quarterly, 37: 549-579. 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.

Key Diversity Theories

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.

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.

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.

Bertrand, Marianne, and Sendhil Mullainathan. "Are Emily and Greg more employable than Lakisha and Jamal? A field experiment on labor market discrimination." *The American Economic Review* 94, no. 4 (2004): 991-1013. 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).

Tajfel, H. 1974. Social identity and intergroup behavior. Social Science Information, 15: 1010-118.; Tajfel H, Turner JC. (1985). The social identity theory of intergroup behavior. In S. Worchel, and W.G. Austin (Eds.), Psychology of Intergroup Relations (2nd ed., pp. 7–24). Chicago:Nelson-Hall. 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).

Schema Theory

Schema theory explains how individuals encode information about others based on their demographic characteristics.

Fiske ST, Taylor SE. (1991). Social cognition (2nd ed.). New York: McGraw-Hill. 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.

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.

Crandall, Christian S., and Amy Eshleman. "A justification-suppression model of the expression and experience of prejudice." Psychological bulletin 129.3 (2003): 414. 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.

Benefits and Challenges of Workplace Diversity

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:

Ely, Robin J., and David A. Thomas. "Cultural diversity at work: The effects of diversity perspectives on work group processes and outcomes." Administrative science quarterly. 46.2 (2001): 229-273. integration and learning, access and legitimacy, and discrimination and fairness.

Recommendations for Managing Diversity

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.

McCarthy, J.M, Van Iddekinge, C.H., & Campion, M.(2010). Are highly structured job interviews resistant to demographic similarity effects?: *Personnel Psychology, 63*: 325-359. 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.”McCarthy, J.M, Van Iddekinge, C.H., & Campion, M.(2010). Are highly structured job interviews resistant to demographic similarity effects?: *Personnel Psychology, 63*: 325-359, p.333.; Campion M.A., Palmer D.K., Campion J.E. (1997). A review of structure in the selection interview. *Personnel Psychology, 50*, 655–702. 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.

Young, Cheri A., Badiah Haffejee, and David L. Corsun. "Developing Cultural Intelligence and Empathy Through Diversified Mentoring Relationships." *Journal of Management Education* (2017): 1052562917710687.

Visible Leadership

Another key to ensure that employees are treated fairly is utilizing appropriate leadership strategies.

Thoms, D.A., & Ely, R.J. (Sep 1996). Making differences matter: A new paradigm for managing diversity. Harvard Business Review. 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.

Leadership

Introduction

The Nature of Leadership

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.

The Leadership Process

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.

Hollander, 1964. 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 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.

Hollander & Julian, 1969. 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:

Leader Emergence

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.

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.

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 Trait Approach to Leadership

Leader Trait Research

Ralph Stogdill, while on the faculty at The Ohio State University, pioneered our modern (late 20th century) study of leadership.

Stogdill, 1948; R. M. Stogdill. 1974. *Handbook of leadership: A survey of theory and research.* New York: Free Press. 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:

Other Leader Traits

Sex and gender, disposition, and self-monitoring also play an important role in leader emergence and leader style.

Behavioral Approaches to Leadership

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.

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.

D. Katz & R.L. Kahn. 1952. Some recent findings in human relations research. In E. Swanson, T. Newcomb, & E. Hartley (eds.), *Readings in social psychology,* New York: Holt, Rinehart, & Winston; D. Katz, N. Macoby, & N. Morse. 1950. *Productivity, supervision, and morale in an office situation,* Ann Arbor, MI: Institute for Social Research; F.C. Mann & J. Dent. 1954. The supervisor: Member of two organizational families. *Harvard Business Review* 32:103–112.

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.

R.R. Blake & J.S. Mouton. 1964. *The managerial grid.* Houston: Gulf; R.R. Blake & J.S. Mouton. 1981. *The versatile manager: A grid profile,* Homewood, IL: Dow Jones-Irwin; R.R. Blake & J.S. Mouton. 1984. *The new managerial grid III.* Houston: Gulf. 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 **[link]**, the Leadership Grid® demonstrates that any combination of these two leader concerns is possible, and five styles of leadership are highlighted here.

Situational (Contingency) Approaches to Leadership

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.

F.E. Fiedler & M.M. Chemers. 1974. *Leadership and effective management.* Glenview, IL: Scott, Foresman. 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.

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.

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.”

G. Bristol. 2016. Why Diversity in the Workplace is Imperrative. *Entrepreneur,* March 25. (Accessed august 4, 2017) https://www.entrepreneur.com/article/270110 *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?”

Substitutes for and Neutralizers of Leadership

Transformational, Visionary, and Charismatic Leadership

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.

G.A. Yukl. 1981. *Leadership in organizations.* Englewood Cliffs, NJ: Prentice-Hall. These reciprocal exchanges take place in the context of a mutually interdependent relationship between the leader and the follower, frequently resulting in interpersonal bonding.B. Kellerman. 1984. *Leadership: Multidisciplinary perspectives.* Englewood Cliffs, NJ: Prentice-Hall; F. L. Landy. 1985. *Psychology of work behavior.* Homewood, IL: Dorsey Press. 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.J.M. Burns. 1978. *Leadership.* New York: Harper & Row; B. M. Bass. 1985. *Leadership and performance beyond expectations.* New York: Free Press. 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.

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.

Leadership Needs in the 21st Century

Work Motivation for Performance

Introduction

Motivation: Direction and Intensity

Content Theories of Motivation

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!

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).

Representative references include J.W. Atkinson & D.C. McClelland. 1948. The projective expression of needs. II. The effect of different intensities of the hunger drive on thematic apperception. *Journal of Experimental Psychology* 38:643–658; D.C. McClelland, J.W. Atkinson, R.A. Clark, & E.L. Lowell. 1953. *The achievement motive.* New York: Appleton-Century-Crofts; R.C. DeCharms. 1957. Affiliation motivation and productivity in small groups. *Journal of Abnormal Psychology* 55:222– 276; D.C. McClelland. 1961. *The achieving society.* Princeton, NJ: Van Nostrand; and D.C. McClelland. 1975. *Power: The inner experience.* New York: Irvington. 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.

Maslow’s Hierarchy of Needs

Any discussion of needs that motivate performance would be incomplete without considering Abraham Maslow.

A.H. Maslow. 1943. A theory of human motivation. *Psychological Bulletin* 50:370–396; A.H. Maslow. 1954. *Motivation and personality.* New York: Harper & Row; A. H. Maslow. 1965. *Eupsychian management.* Homewood, IL: Irwin. Thousands of managers in the 1960s were exposed to Maslow’s theory through the popular writings of Douglas McGregor.D. McGregor. 1960. *The human side of enterprise.* New York: McGraw-Hill; D. McGregor. 1967. *The professional manager.* New York: McGraw-Hill. Today, many of them still talk about employee motivation in terms of Maslow’s theory.

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.

D.T. Hall & K.E. Nougaim. 1968. An examination of Maslow’s need hierarchy in an organizational setting. *Organizational Behavior and Human Performance* 3:12–35; E.E. Lawler, III & J.L. Suttle. 1972. A causal correlational test of the need hierarchy concept. *Organizational Behavior and Human Performance* 7:265–287; M.A. Wahba & L.G. Bridwell. 1973. Maslow reconsidered: A review of research on the need hierarchy theory. *Proceedings of the thirty-third annual meeting of the Academy of Management,* 514–520. Alderfer’s ERG theory compresses Maslow’s five need categories into three: existence, relatedness, and growth.C.P. Alderfer. 1972. *Existence, relatedness, and growth: Human needs and organizational settings.* New York: Free Press. 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.

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.

Note that Herzberg’s theory has often been labeled the “two-factor theory” because it focuses on two continua. This name, however, implies that only two factors are involved, which is not correct. Herzberg prefers not to use the term “two-factor theory” because his two *sets* of needs identify a much larger *number* of needs. 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).F. Herzberg, B. Mausner, & B. Snyderman. 1959. *The motivation to work.* New York: Wiley; F. Herzberg. 1966. *Work and the nature of man.* New York: Crowell; F. Herzberg. 1968. One more time: How do you motivate employees? *Harvard Business Review* 46:54–62.

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*.

Process Theories of Motivation

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.

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.

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.

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.

Recent Research on Motivation Theories

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.

Managing Teams

Introduction

Teamwork in the Workplace

Team Development Over Time

Things to Consider When Managing Teams

Opportunities and Challenges to Team Building

Team Diversity

Multicultural Teams

Managerial Communication

Introduction

The Process of Managerial Communication

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.

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 **[link]**, 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.

Types of Communications in Organizations

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.

F. M. Jablin and Linda L. Putnam, *The New Handbook of Organizational Communication*, Sage, 2005.

Factors Affecting Communications and the Roles of Managers

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.

Mintzberg, H. (1973). *The Nature of Managerial Work*. New York: Harper & Row, p. 31.

Managerial Communication and Corporate Reputation

The Major Channels of Management Communication Are Talking, Listening, Reading, and Writing

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.

Ziegler, B. (1994). “Video Conference Calls Change Business,” *Wall Street Journal*, October 13, 1994, pp. B1, B12.

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.

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.

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.

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.

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.

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.

Organizational Planning and Controlling

Introduction

Is Planning Important

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.

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:

The Planning Process

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.

Koontz & O’Donnell, 1972, 124–128. 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.”Amy Edmondson, “Strategies for learning from Failure,” *Harvard Business Review,* April 2011 Issue, https://hbr.org/2011/04/strategies-for-learning-from-failure.

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 **[link]**, to achieve the overall goals of their organization.

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.

R.H. Kilman. 1984. *Beyond the quick fix.* San Francisco: Jossey-Bass, 50–51.

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.

Types of Plans

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 **[link]**, 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.

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).

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!

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 **[link]**.

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.

Goals or Outcome Statements

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.

J.D. Thompson & W.J. McEwen. 1958. Organizational goals and environment. *American Sociological Review* 23:23–30. 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.Richard L. Daft, *Organization Theory and Design,* Boston, MA, Cengage Learning, 2016, P. 142-146. They bargain, trade, and negotiate, and through these political processes, organizational goals eventually emerge.

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.

P. F. Drucker. 1954. *The practice of management.* New York: Harper. Reflecting his concerns, the Hewlett-Packard Corporation has established the seven corporate goals listed in **[link]**. 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.J. Hage. 1965. An axiomatic theory of organizations. *Administrative Science Quarterly* 10:289–320. Managers must strive to integrate the network of goals and resolve internal conflicts when they arise.

Formal Organizational Planning in Practice

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.

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?

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.

Bill Taylor, “Companies That Do Right by Their Workers Start by Elevating Their Definition of Success,” *Harvard Business Review*, January 18, 2018, https://hbr.org/2018/01/companies-that-do-right-by-their-workers-start-by-elevating-their-definition-of-success.

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.

Employees' Responses to Planning

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 **[link]** 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.

E.A. Locke. 1982. Relation of goal performance with a short work period and multiple goal levels. *Journal of Applied Psychology* 67:512–514; G.P. Latham & J.J. Baaldes. 1975. The practical significance of Locke’s theory of goal setting. *Journal of Applied Psychology* 60:187–90; G.P. Latham & E.A. Locke. 1979. Goal setting—A motivational technique that works. *Organizational Dynamics,* 68–80. 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 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.

R.R. Hackman & R. Wageman. 1995. Total quality management: Empirical, conceptual, and practical issues. *Administrative Science Quarterly* 40:309–342; W.E. Deming. 1993. *The new economics for industry, government, education.* Cambridge, MA: MIT Center for Advanced Engineering Study; W.E. Deming. 1986. *Out of the crises.* Cambridge, MA: MIT Center for Advanced Engineering Study. Performance goals, on the other hand, generally focus the performer’s attention on successfully achieving a specified level of accomplishment at some future point.

Goal Setting and Employee Job Satisfaction

The statement “goal setting enhances job satisfaction” is not exactly accurate.

Locke & Latham, 1990. 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.

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.

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.

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.

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.

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 **[link]**) 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.

W.H. Newman. 1984. Managerial control. In J.E. Rosenzweig & F. E. Kast (eds.), *Modules in management series.* Chicago: Science Research Associates, 1-42; W.H. Newman, J.R. Logan, & W.H. Hegarty. 1985. *Strategy, policy, and central management.* Cincinnati: Southwestern; W.H. Sihler. 1979. Toward better management control systems. *California Management Review,* 14:33–39; E.P. Strong & R.D. Smith. 1968. *Management control models.* New York: Holt, Rinehart & Winston.

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 **[link]**).

M.S. Taylor, C.D. Fisher, & D.R. Ilgen. 1984. Individuals’ reactions to performance feedback in organizations: A control theory perspective. In K. M. Rowland & G. R. Ferris (eds.), *Research in Personnel and Human Resources Management.* Greenwich, CT: JAI Press, 81–124. Unfortunately, sometimes control systems can produce a number of negative effects.

Management by Objectives: A Planning and Control Technique

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.

R. Rodgers & J.E. Hunter. 1991. Impact of management by objectives on organizational productivity. *Journal of Applied Psychology Monograph* 76:322–336. 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.

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.

Ibid. In addition, the increases in performance were significant. Rodgers and Hunter report that the mean increase exceeded 40 percent.

The Control- and Involvement-Oriented Approaches to Planning and Controlling

Management of Technology and Innovation

Introduction

MTI—Its Importance Now and In the Future

Developing Technology and Innovation

External Sources of Technology and Innovation

Internal Sources of Technology and Innovation

Management Entrepreneurship Skills for Technology and Innovation

Skills Needed for MTI

Managing Now for Future Technology and Innovation