Managing now

managing
NOW!
Gary Dessler
Florida International University
Jean Phillips
Rutgers University
Houghton Mifflin Company Boston New York

To Samantha
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1 2 3 4 5 6 7 8 9—CRK—11 10 09 08 07

BRIEF CONTENTS
PREFACE xi
PART ONE THE ENVIRONMENT OF MANAGING NOW 1
1 MANAGING AND THE EVOLUTION OF MANAGEMENT 1
2 ETHICAL AND SOCIAL ISSUES 29
3 MANAGING IN A GLOBAL ENVIRONMENT 59
4 MANAGING ENTREPRENEURSHIP AND INNOVATION 89
PART TWO INFORMATION AND DECISION MAKING NOW 116
5 INFORMATION AND KNOWLEDGE MANAGEMENT 116
6 DECISION MAKING NOW 144
PART THREE PLANNING AND CONTROLLING NOW 175
7 PLANNING AND STRATEGIC MANAGEMENT 175
8 CONTROLLING 208
9 MANAGING OPERATIONS AND SUPPLY CHAINS 233
PART FOUR ORGANIZING NOW 263
10 ORGANIZING 263
11 DESIGNING AND CHANGING ORGANIZATIONS 303
12 HUMAN RESOURCE MANAGEMENT 331
PART FIVE LEADING NOW 372
13 LEADING 372
14 MOTIVATING EMPLOYEES 403
15 IMPROVING COMMUNICATION 435
16 BUILDING TEAMWORK, COMMUNITY, AND CULTURE 466
17 MANAGING TRUST AND COLLABORATION 496
PHOTO CREDITS 516
ENDNOTES 517
NAME INDEX 547
SUBJECT INDEX 552
iii

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CONTENTS
PREFACE xi
PART ONE THE ENVIRONMENT OF MANAGING NOW 1
I MANAGING AND THE EVOLUTION OF MANAGEMENT 1
OPENING VIGNETTE: J. Crew 1
What Managers Do 2
■ WINDOW ON MANAGING NOW: Andrea Jung Turns Avon Around 2
The Managerial Skills 11
The Evolution of Modern Management 12
Managing Now 21
■ PRACTICE IT: J. Crew 24
■ WINDOW ON MANAGING NOW: Virtual Integration at Dell Computer 25
What’s to Come 26
2 ETHICAL AND SOCIAL ISSUES 29
OPENING VIGNETTE: Sarbanes-Oxley Act of 2002 29
Ethics in an Age of Information Technology 30
What Influences Ethical Behavior at Work? 34
Encouraging Ethical Behavior at Work 39
■ IMPROVING YOUR ETHICS-BUILDING SKILLS 42
■ WINDOW ON MANAGING NOW: Complying with Sarbanes-Oxley and Other Regulations 45
■ PRACTICE IT: DTE Energy’s Web-Based Ethics Training System 46
Social Responsibility Now 46
Managing Diversity 51
3 MANAGING IN A GLOBAL ENVIRONMENT 59
OPENING VIGNETTE: Tramco, Inc. 59
Globalization 60
How and Why Do Companies Conduct Business Abroad? 61
■ WINDOW ON MANAGING NOW: Shanghai GM 64
The Manager’s International Environment 66
Planning, Organizing, and Controlling in a Global Environment 75
■ WINDOW ON MANAGING NOW: Global Clustering 78
■ PRACTICE IT: Tramco, Inc. 79
Leading and Motivating in a Multicultural Environment 80
■ WINDOW ON MANAGING NOW: Dräger Safety 81
■ IMPROVING YOUR CULTURAL INTELLIGENCE SKILLS 85
v
CHAPTER SUMMARY 26
DISCUSSION QUESTIONS 27
EXPERIENTIAL EXERCISES 27
CASE STUDY
NO RULES, JUST RIGHT 28
CHAPTER SUMMARY 56
CASE STUDY
ALLSTATE’S DISAPPEARING
AGENTS 58
CHAPTER SUMMARY 86
CASE STUDY
U.S. BOOKSELLER FINDS A STRONG
PARTNER IN GERMAN MEDIA
GIANT 87

4 MANAGING ENTREPRENEURSHIP AND INNOVATION 89
OPENING VIGNETTE: Procter & Gamble 89
Introduction: Entrepreneurship and Innovation 90
Entrepreneurship Today 91
What It Takes to Be an Entrepreneur 94
Getting Started in Business 97
■ WINDOW ON MANAGING NOW: Choosing a Web-Based Business 104
Managing Innovation and New-Product Development 105
■ WINDOW ON MANAGING NOW: Using Computerized Business-Planning Software 106
Innovation Now 109
■ PRACTICE IT: Collaborative Innovation at P&G 112
PART TWO INFORMATION AND DECISION MAKING NOW 116
5 INFORMATION AND KNOWLEDGE MANAGEMENT 116
OPENING VIGNETTE: Caterpillar Inc. 116
Data, Information, and Knowledge 117
Information Systems for Managing Organizations 120
■ WINDOW ON MANAGING NOW: Computers Add Value at Bissett Nursery 124
Enterprise Systems and Knowledge Management 126
Telecommunications and Computerized Networks 130
■ WINDOW ON MANAGING NOW: Ryder System’s Knowledge Management Center 131
■ PRACTICE IT: Caterpillar 132
Managing Now: Managerial Applications of Information Technology 138
6 DECISION MAKING NOW 144
OPENING VIGNETTE: Fortis Bank 144
The Basics of Decision Making 145
How to Make Decisions 149
Managing Now: Technology-Supported Decision Making 154
■ WINDOW ON MANAGING NOW: Analytics Tools 156
■ WINDOW ON MANAGING NOW: Baylor University 158
How to Make Even Better Decisions 159
■ PRACTICE IT: Fortis Bank 160
Avoiding Psychological Traps 165
Chapter 6 Appendix: Quantitative Decision-Making Aids 171
vi Contents
CHAPTER SUMMARY 114
CASE STUDY
GETTING BY WITH A LITTLE HELP
FROM HIS MOTHER’S FRIENDS 115
CHAPTER SUMMARY 141
CASE STUDY
INFORMATION TECHNOLOGY WINS
THE DAY FOR KNITMEDIA 143
CHAPTER SUMMARY 168
CASE STUDY
WHICH ROUTES TO FLY? 170

PART THREE PLANNING AND CONTROLLING NOW 175
7 PLANNING AND STRATEGIC MANAGEMENT 175
OPENING VIGNETTE: Oxford University Press 175
The Nature and Purpose of Planning 176
Forecasting 181
■ WINDOW ON MANAGING NOW: Demand Forecasting at Wal-Mart 182
■ PRACTICE IT: Demand Forecasting and Planning at Oxford University Press 183
■ IMPROVING YOUR FORECASTING SKILLS: Don’t Get Blind-Sided 186
Types of Plans 186
Strategic Planning 188
■ WINDOW ON MANAGING NOW: Pella’s New Competitive Advantage 195
Strategy Execution and Digital Dashboards 198
8 CONTROLLING 208
OPENING VIGNETTE: Controlling the Cappuccino Makers at Starbucks 208
The Fundamentals of Effective Control 209
■ WINDOW ON MANAGING NOW: Using Technology to Stay in Control at UPS 212
Traditional Controls 214
Managing Now: IT-Enabled Control Systems 219
■ WINDOW ON MANAGING NOW: Millipore Corp. Integrates
Its Global Operations with ERP 221
How Do People React to Control? 224
Commitment-Based Control Systems 225
■ PRACTICE IT: Controlling the Cappuccino Makers at Starbucks 230
9 MANAGING OPERATIONS AND SUPPLY CHAINS 233
OPENING VIGNETTE: Will Whirlpool Deliver? 233
The Basics of Operations Management 234
Operations and Inventory Planning and Control 240
Controlling for Quality and Productivity 245
World-Class Operations Management Methods 249
Supply Chain Management 254
■ PRACTICE IT: Whirlpool Delivers 256
■ WINDOW ON MANAGING NOW: Zara 259
Contents vii
CHAPTER SUMMARY 205
CASE STUDY
THE JETBLUE AIRWAYS
STRATEGY 206
CHAPTER SUMMARY 231
CASE STUDY
CONTROLLING RITZ-CARLTON 232
CHAPTER SUMMARY 260
CASE STUDY
THE PRODUCTION PROCESS AT
WHEELED COACH 262

PART FOUR ORGANIZING NOW 263
10 ORGANIZING 263
OPENING VIGNETTE: Staying in Touch at Millipore 263
Departmentalization: Creating Departments 265
Achieving Coordination 276
■ WINDOW ON MANAGING NOW: LG Electronics 278
Authority and the Chain of Command 280
■ WINDOW ON MANAGING NOW: An IT-Based Independent Integrator at Thales 280
■ IMPROVING YOUR DELEGATING SKILLS 283
Organizing to Manage Change 287
Modern Organizations 291
■ IMPROVING YOUR BOUNDARY-MANAGING SKILLS 292
■ WINDOW ON MANAGING NOW: Brady Corp. 297
■ PRACTICE IT: Millipore 299
11 DESIGNING AND CHANGING ORGANIZATIONS 303
OPENING VIGNETTE: Yellow Transportation 303
Types of Organizational Change 304
■ WINDOW ON MANAGING NOW: Baker & McKenzie 306
Managing Now: Reorganizing, Reengineering, and Business
Process Management 308
■ WINDOW ON MANAGING NOW: Reengineering the Loan Process 312
Dealing with Resistance to Change 315
■ PRACTICE IT: Bill Zollars 318
A Process for Leading Organizational Change 318
Organizational Development and Conflict Management 323
12 HUMAN RESOURCE MANAGEMENT 331
OPENING VIGNETTE: Sutter Health 331
Human Resource Management’s Strategic Role 332
■ WINDOW ON MANAGING NOW: Signicast 333
Writing Job Descriptions and Recruiting Employees 335
■ WINDOW ON MANAGING NOW: Cisco Systems Inc. 344
■ PRACTICE IT: Sutter Health 344
■ WINDOW ON MANAGING NOW: City Garage 345
Interviewing and Selecting Employees 345
viii Contents
CHAPTER SUMMARY 300
CASE STUDY
ORGANIZING GREENLEY
COMMUNICATIONS 301
CHAPTER SUMMARY 329
CASE STUDY
IMMELT SPLITS GE CAPITAL 330

Orienting and Training Employees 355
■ IMPROVING YOUR TRAINING SKILLS: On-the-Job Training 358
Appraising and Maintaining Employees 359
■ WINDOW ON MANAGING NOW: GM and NCR 364
Understanding HR’s Legal Framework 364
CHAPTER SUMMARY 369
CASE STUDY
THE OUT-OF-CONTROL
INTERVIEW 371
PART FIVE LEADING NOW 372
13 LEADING 372
OPENING VIGNETTE: Innovation Leadership at Whirlpool 372
What Is Leadership? 374
■ WINDOW ON MANAGING NOW: How Can Technology Help New Leaders? 376
What Characteristics Do Leaders Have? 377
■ WINDOW ON MANAGING NOW: How Does Technology Increase the Importance
of Leaders’ Communication Skills? 384
What Do Leaders Do? 385
What Influences a Leader’s Effectiveness? 389
■ IMPROVING YOUR LEADERSHIP SKILLS: Least Preferred Coworker Scale 392
■ PRACTICE IT: Empowerment Through Technology at Whirlpool 396
■ WINDOW ON MANAGING NOW: E-Leadership 399
14 MOTIVATING EMPLOYEES 403
OPENING VIGNETTE: Mercury Interactive Corporation 403
What Is Motivation and Where Does It Come from? 404
Content Approaches to Motivation 406
■ IMPROVING YOUR MOTIVATION SKILLS: A Job Enrichment Evaluation Form 414
Process Approaches to Motivation 415
■ WINDOW ON MANAGING NOW: Motivating with Digital Dashboards 417
Learning and Reinforcement Approaches to Motivation:
How Consequences Shape Behavior 422
Rewarding Performance 425
■ WINDOW ON MANAGING NOW: Using Internet Tools to Motivate
and Reward Employees 426
■ PRACTICE IT: Online Incentives at Mercury Interactive Corporation 428
■ WINDOW ON MANAGING NOW: Using Technology to Retain Knowledge Workers 432
15 IMPROVING COMMUNICATION 435
OPENING VIGNETTE: Communication at Lucent 435
The Communication Process 436
Contents ix
CHAPTER SUMMARY 400
CASE STUDY
STEVE BENNETT OF INTUIT 401
CHAPTER SUMMARY 432
CASE STUDY
MOTIVATION AT GENERAL
MOTORS 434

Organizational Communication 443
■ WINDOW ON MANAGING NOW: Using Portals to Improve Performance 445
■ PRACTICE IT: Technology-Enabled Communication at Lucent 447
Communication Media 447
■ WINDOW ON MANAGING NOW: Building an Intranet 452
Interpersonal Communication Skills 455
■ IMPROVING YOUR COMMUNICATION SKILLS 460
■ WINDOW ON MANAGING NOW: E-Mail Tips 461
16 BUILDING TEAMWORK, COMMUNITY, AND CULTURE 466
OPENING VIGNETTE: Customer-Service Representatives at Medco 466
Basics of Teamwork 467
Building Teamwork 473
■ IMPROVING YOUR TEAMWORK SKILLS: Are You Emotionally Intelligent? 478
■ WINDOW ON MANAGING NOW: Virtual Team Technology at Steelcase 483
Building Community 483
■ PRACTICE IT: Using Technology to Build Community at Medco 485
■ WINDOW ON MANAGING NOW: How Technology Enables Communities of Practice 487
Building Culture 488
■ WINDOW ON MANAGING NOW: Technology-Assisted Culture at Xerox 492
17 MANAGING TRUST AND COLLABORATION 496
OPENING VIGNETTE: Saturn Corp. 496
Building Trust and Collaboration 497
Examples of Collaborative Efforts 500
Collaboration Technology 503
How to Improve Collaboration 506
■ WINDOW ON MANAGING NOW: Solectron Corp. 509
Building Trust 511
■ PRACTICE IT: Saturn’s Technology Aids Its Customers and Dealers 511
■ WINDOW ON MANAGING NOW: Customer Relationship Management
Collaboration at Audi 513
PHOTO CREDITS 516
ENDNOTES 517
NAME INDEX 547
SUBJECT INDEX 552
x Contents
CHAPTER SUMMARY 463
CASE STUDY
ELECTRONIC MONITORING 464
CHAPTER SUMMARY 493
CASE STUDY
IMPROVING TEAMWORK AT
NOVARTIS 494
CHAPTER SUMMARY 513
CASE STUDY
AT&T 515

I
xi
PREFACE
nformation technology is a familiar aspect of our lives. We use computers,
e-mail, software, cell phones, iPods, fax machines, flash drives, scanners, and
BlackBerry®-type devices every day. We search for travel information on Expedia,
download airline tickets from AA.com, and register for and take college courses
online. Computerized diagnostic tools analyze our autos’ problems, point-of-sale
computers at Target process our credit-card purchases, and computerized traffic
systems manage our trips to work.
Perhaps not so obvious is the extent to which managers rely on information
and information technology to run their companies. For example, how does
Seattle-based Starbucks Coffee Company, with over 12,000 stores globally, control
what’s happening in each of those stores? Its “XPR” global information system
monitors point-of-sale measures at each store and triggers reports back to Seattle
when a store’s measures move out of control. Caterpillar Corporation needed a
better way for its employees to share their knowledge. The company installed a
new Web-based system that its employees now use to collaborate and share
knowledge via chatroom-type discussions and e-mail bulletin boards. Michael
Dell and thousands of other managers use “digital dashboards” with computerized
desktop graphs and charts to get real-time information on how their companies’
plans are progressing. Procter & Gamble no longer relies on its own engineers to
create new products. Its InnovationNet Web portal enables 18,000 outside experts
to share their ideas with P&G’s engineers, and thus bolster the firm’s innovation
efforts. The bottom line is that in any aspect of managing now, it’s impossible to be
world-class without using information technology.
Managing Now
Managing Now! is a basic management textbook for the Principles of Management
course. The book competes with the many popular principles books now on the
market and basically follows the familiar management process theme. However,
Managing Now! recognizes that the nuts and bolts of what managers do is qualita-tively
altered by the Internet and IT. In practice, we think this means that basic
management textbooks need to be more explicit at showing how the Internet and
IT change how managers carry out tasks such as planning, organizing, and man-aging
interunit relations.
Throughout history, some things in management have not and will not quickly
change. Managers still plan, organize, lead, and control. And they still get things
done through people—by communicating, leading, appraising, and coaching.
This is a book on management. We therefore focus our attention on what
managers should know about planning, organizing, leading, controlling, and
dealing with people. However, managers now manage in a fast-changing and
highly competitive global environment. To succeed here, they use information
technology devices including software systems, cell phones, and PDAs to do their
jobs. We therefore include in this book discussions about how managers use these
devices. Every chapter shows, with “Managing Now” examples, how the manager
plans, organizes, leads, and controls, in light of the Internet, IT, and ever-changing
technology.

Syllabus Flexibility
Managing Now! also includes several new topics, including certain selected topics
in Chapters 5 (the role of information systems/IT, knowledge management, and
the Internet in managing companies), 9 (managing supply chains and opera-tions),
16 (building community, culture, and teamwork), and 17 (encouraging
sharing and collaboration).
However, we recognize that few professors have the luxury of assigning 17 full
chapters. We’ve therefore included summary descriptions of core technology top-ics
such as supply chain, enterprise, and knowledge management systems in
Chapter 1, as well as in Chapters 5 (Information and Knowledge Management)
and 9 (Managing Operations and Supply Chains). We touch on collaboration in
several chapters, including Chapters 3 (Managing in a Global Environment),
9 (ManagingOperations and Supply Chains), and 17 (ManagingTrust and Collabo-ration).
The professor can therefore assign this book without covering one or more
of Chapters 5 , 9, and 17, with no loss of continuity.
The Human Element Remains Crucial
Interestingly, the Internet and information technology haven’t diminished the
manager’s leadership role—quite the opposite. When Brady Corp. installed a new
Web-based ordering system, its managers wisely anticipated that the system
would fail unless they had employees in self-managing teams with the skills and
commitment to do the new high-tech jobs. Listening, communicating, motivat-ing,
and encouraging trust and collaboration have never been more important.
Managing Now! fully addresses, comprehensively and with the most recent re-search
findings, the human side of managing, including a new and unique chap-ter
(17),Managing Trust and Collaboration.
The Book’s Learning Features
We’ve included many exciting learning features in each chapter. Each chapter
starts with an opening vignette, which challenges students to solve an actual man-agement
problem. The chapter’s Practice IT feature then shows how the manager
used information technology to solve the problem.
Each chapter also starts with Behavioral Objectives that are broken out into
the Learn It, Practice It, and Apply It models. Students are not just given a list of
theoretical objectives. They are also urged to put these concepts into practice.
The Learn It objectives refer to the major concepts in the text. The Practice It ob-jectives
refer students to the end-of-chapter exercises and case study. And, finally,
the Apply It objectives refer students to the online simulation, Managing Now!
LIVE.
The Managing Now! LIVE simulation highlights and reviews key topics
from each chapter and provides self-paced interactive tools for reinforcing and
practicing what students will learn in the book. The simulation mirrors the peda-gogically
sound Learn It, Practice It, and Apply It models.
Boxed Window on Managing Now features illustrate how actual managers
have used IT to improve their operations. Various Managing Now chapter outline
headings highlight managers’ use of technology in real situations. Boxed Improv-ing
Your Skills features provide readers with practical managerial skills.
xii Preface
Online Study Center
ACE the Test
Managing Now! LIVE

Preface xiii
Finally, each chapter concludes with a numbered summary, discussion ques-tions,
experiential exercises, and a case study with questions. All of these features
are meant to reinforce concepts from within the chapter and make students prac-tice
what they’ve learned in the chapter.
Acknowledgments
We are very grateful to the many people who supported us in making Managing
Now! a reality. At Houghton Mifflin, we are grateful to George Hoffman and Lisé
Johnson for their advice, dedication, intelligence, insight, creativity, and courage
in bringing this book to the market. Thanks to Julia Perez and Nancy Blodget for
making the book’s editorial and production process a smooth and pleasant one.
We thank Nicole Hamm and the Houghton Mifflin marketing and sales staff for
their hard work and dedication to making adopters aware of Managing Now!.
We are grateful to Managing Now! ’s academic reviewers for their support, dili-gence,
and many helpful suggestions.
John Anstey, University of Nebraska,Omaha
Karen Barr, Penn State, Beaver Campus
Bret Becton, Winthrop University
James D. Bell, Texas State University
Keith Benson, Winthrop University
Mauritz Blonder, Hofstra University
Bruce Bloom, DeVry University, Chicago
Lon Doty, San Jose State University
Bret R. Fund, Penn State University
Melissa Gruys, Wright State University
Rebecca Guidice, University of Nevada, Las Vegas
J.W. Haddad, Seneca College of Applied Arts and Technology
James Hess, Ivy Tech State University
Nancy B. Higgins, Montgomery College
Phillip Jeck, University of Central Oklahoma
Carol Jensen, Northeast Iowa Community College
Stephen Jones, Southwest Missouri State University
Cynthia Lengnick-Hall, University of Texas, San Antonio
Susan Looney, Delaware Technical & Community College
Grace McLaughlin, University of California, Irvine
Mark Miller, Carthage College
LaVelle Mills, West Texas A&M University
Benham Nakhai, Millersville University of Pennsylvania
Muhammed Obeidat, Southern Poly State University
Leah Ritchie, Salem State College
Stephen Schuster, California State University,Northridge
Marianne Sebok, Community College of Southern Nevada
Mansour Sharifzadeh, California State Poly University, Pomona
Leslie Shore, Concordia University
Gary Springer, Texas State University, San Marcos
Charles Stubbart, Southern Illinois University
Robert Tanner, California State University, East Bay
On a personal note, we want to thank our families. Gary’s mother, Laura
Dessler, was always a source of support, and would have been very proud to see

and hold this book. His wife Claudia’s managerial expertise helped make it possi-ble
for Gary to concentrate on his writing. As usual, the advice and support of his
son, Derek, the best people manager he knows, were invaluable. Jean’s husband,
Stan, and sons, Tyler and Ryan, provided the love and support that enabled Jean to
complete her work on this book.
About the Authors
Gary Dessler
Jean Phillips
Gary Dessler is a Founding Professor in the College of Business at Florida Interna-tional
University, where he teaches courses in human resource management,
management, and strategic management, and where he also served for twelve
years as associate dean and department chair. He has degrees from New York
University (B.S.), Rensselaer Polytechnic Institute (M.S.), and the Baruch School of
Business of the City University of New York (Ph.D.). Dessler’s other books include
Management: Modern Principles and Practices for Tomorrow’s Leaders, Revised
Third Edition (Houghton Mifflin 2007), Framework for Human Resource Manage-ment
(Prentice Hall), and Winning Commitment: How to Build and Keep a Com-petitive
Workforce (McGraw-Hill). Students around the world use his best-selling
Human Resource Management, Tenth Edition (Pearson/Prentice Hall 2005) in var-ious
languages, including Chinese. He has published articles on employee com-mitment,
leadership, and quality improvement in journals, including Academy of
Management Executive and SAM Advanced Management Journal. He is a visiting
professor at Renmin University of China and served for three years on the Institute
of International Education’s national selection committee for the Fulbright stu-dent
awards. Dessler consults in strategic planning, management, and human re-source
management.
Jean Phillips is a professor in the School of Management and Labor Relations at
Rutgers University. For over fifteen years, she has taught classroom and hybrid
classroom/online courses in strategic human resource management, organiza-tional
behavior, management, staffing, and teams and leadership in the United
States and in Singapore. Jean earned both her B.A. and Ph.D. in Business Adminis-tration
from Michigan State University. Her research interests focus on recruit-ment
and staffing, leadership and team effectiveness, and issues related to learn-ing
organizations. Her work has appeared in Academy of Management Journal,
Journal of Applied Psychology, Organizational Behavior and Human Decision
Processes, Personnel Psychology, Small Group Research, Business and Psychology,
and International Journal of Human Resource Management. Jean was among the
top 5% of published authors in Journal of Applied Psychology and Personnel Psy-chology
during the 1990s and received the 2004 Cummings Scholar Award from
the Organizational Behavior Division of the Academy of Management. She has
served on the Editorial Boards of Journal of Applied Psychology, Journal of Man-agement,
and Personnel Psychology. She is a member of the Academy of Manage-ment
and the Society for Industrial and Organizational Psychology. Her consulting
work includes the creation and evaluation of strategic staffing programs, coaching
on enhancing leadership and team performance, and strategic human resource
management.
xiv Preface

1
1
CHAPTER OUTLINE
Opening Vignette: J. Crew
● What Managers Do
WINDOW ON MANAGING NOW:
Andrea Jung Turns Avon Around
Organization Defined
Management Defined
What Else Do Managers Do?
Types of Managers
Similarities and Differences in What
Managers Do
Do You Have the Traits to Be a
Manager?
● The Managerial Skills
Technical Skills
Interpersonal Skills
Conceptual Skills
● The Evolution of Modern
Management
The Classical and Scientific
Management School
The Behavioral School
The Administrative School
The Management Science School
The Situational/Contingency School
Modern Management Schools of
Thought
● Managing Now
The Company of the Future Is
Here Now
Some Important Management
Information Systems
PRACTICE IT: J. Crew
Virtual Integration at Dell Computer
● What’s to Come
MANAGING AND THE EVOLUTION
OF MANAGEMENT
J. Crew
t first, J. Crew was a real success story. Starting as a direct-mail
retail business, its distinctive, collegiate lifestyle catalogs were a hit.
A
As catalog sales grew, J. Crew began opening stores with jeans, shirts,
and chinos priced a bit above stores like The Gap. Sales grew fast. But
soon, J. Crew was struggling. Competitors were siphoning off its cus-tomers.
J. Crew struggled with an identity crisis, made worse by a
revolving door of top managers. Perhaps more unnerving, a new
generation of retail managers at Zara, Benneton, and H&M was using
high-tech computerized systems to track daily store sales and to
produce and deliver almost overnight the fashions that were selling
best—tasks that often took
J. Crew weeks or months to
complete. With its sales, profits,
and prospects diminishing,Texas
Pacific Group, a private
investment company, bought
control of J. Crew. They tried
for several years to revive the
J. Crew brand. Then, a few years
ago, they hired Millard Drexler,
The Gap Inc.’s former CEO and
a famously successful retail man-ager.
The question was, What
steps should he take to turn
J. Crew around? ■
J. Crew’s new CEO had to turn the company
around.
BEHAVIORAL OBJECTIVES
After studying this chapter, you should be able to:
Show that you’ve learned the chapter’s essential information by
➤ Defining manager and organization.
➤ Listing and describing five things a manager can learn from the evolution of
management thought.
➤ Defining information technology and information system.

2 PART ONE CHAPTER 1 Managing and the Evolution of Management
Show that you can practice what you’ve learned here by
➤ Reading the opening vignette and giving three examples of what the new manager may do.
➤ Reading the exercises and answering the question,“Do I have what it takes to be a
What Managers Do
anagers can have the most remarkable effects on organizations. A few years
ago, Avon Products was struggling.1 Its whole back-end operation—buying
from suppliers, taking orders, and distributing products to sales reps—lacked au-tomation.
Sales reps took orders by hand. One-third of the orders went out wrong.
M
WINDOW ON MANAGING NOW
Andrea Jung Turns Avon Around
Within two years of becoming CEO, Andrea Jung had
turned Avon around. She did it by overhauling “everything
about the way Avon does business:how it advertises,man-ufactures,
packages, and even sells its products.”2 She
started with a turnaround plan. It included launching a
new line of businesses, developing new products, building
the sales force, and selling Avon products at retail stores.
Next, she told R&D,“You’ve got two years. I need a break-through
. . . . ”3 By the end of the year, Avon’s new Retroac-tive,
an anti-aging cream, sold $100 million. Jung also
reorganized Avon. She created an “office of the chairman.”
Now, many of the divisions that had their own managers
report instead directly to her office.The effect was to flat-ten
Avon’s chain of command (by cutting out a layer of
managers). This, Jung said, “. . . will significantly increase
speed and flexibility in decision making . . . .”4
Next, Jung appointed a new chief operating officer to
get Avon’s global operations under control. The company
sells worldwide,and eachAvon facility around the world had
its own unique computer system. In Poland, Germany, and
the United Kingdom, for instance, the shipping was manual.
In other countries, it was computerized. The computer
systems in one country couldn’t communicate with an-other’s.
At Avon’s headquarters,managers didn’t know what
each country’s factories had in stock or were shipping. No
one could plan the next day’s production levels.Things were
slipping out of control. Avon sends out about 50,000 orders
each day, and one-third of them went out wrong.
To solve this,Avon installed a single“supply chain man-agement
system” in all its countries’ facilities.This system
combines special software with new hardware and
telecommunications devices such as handheld PDAs.Now,
every night, this new system “. . . collects supply chain in-formation
fromAvon’s 29 markets; information such as in-ventory,
future sales demands, transport schedules, and
sales history.”5 This information, along with the system’s
built-in planning software, automatically creates daily pro-duction
and distribution plans for all of Avon’s facilities. It
also enables Avon sales reps to work collaboratively across
borders. For example, if a customer in Germany needs a
product that is out of stock there, the rep might see that
it’s available in Paris and have it shipped from France.The
new high-tech system helped cut $400 million in costs.6
Andrea Jung’s effective management turnedAvon around.
manager?”
➤ Reading the chapter case study and listing the manager’s specific management tasks.
➤ Reading the chapter case study and explaining what environmental forces are
influencing the situation.
Show that you can apply what you’ve learned here by
➤ Watching the simulation video and identifying the various functions the manager performs.
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What Managers Do ■ 3
Customers no longer just wanted products like Avon’s that made them look good;
they also wanted healthier skin. Yet Avon spent a fraction of what competitors
L’Oréal and Estée Lauder spent on research and development. The company had
to take action. It appointed Andrea Jung as CEO. Within two years, she added new
products, raised Avon’s sales by tens of millions of dollars, and boosted profitabil-ity
by automating operations and cutting costs. The Window on Managing Now
feature shows how she did this.
The effect of good management is amazing. Take an underperforming—
even chaotic—situation and install a skilled manager, and he or she can soon get
the enterprise humming. In the New Orleans turmoil after Hurricane Katrina hit
several years ago, no one in government seemed to know what to do. People were
starving on rooftops, begging passing planes for help. The U.S. Army sent in
Lieutenant General Russell Honore. He swiftly established a chain of command,
decided what had to be done, prioritized those tasks, assigned officers to do
them, and created a communications structure through which he maintained
control.
● FEMA vs. Wal-Mart That storm brought out the best and the worst in several
management teams.7 Most people still remember that even days after Katrina hit
New Orleans, the U.S. government’s Federal Emergency Management Agency
(FEMA) was still trying to organize its rescue efforts. Compare that to Wal-Mart’s
response. Many people are understandably upset today with Wal-Mart manage-ment’s
labor relations actions in the past few years, for instance, with respect to
low wages. However, in the case of Katrina, Wal-Mart’s other management actions
were quite effective. Six days before Katrina hit, Wal-Mart’s emergency operations
center managers made plans to shut and guard potentially endangered stores, and
they worked out how they would reopen and restock them. Emergency merchan-dise
began moving to distribution sites close to New Orleans but outside Katrina’s
likely path. Twelve hours before the National Weather Service issued its hurricane
warning, Wal-Mart’s own meteorologists told Wal-Mart’s emergency operations
managers that Katrina would hit. Its stores hunkered down. Then, once Katrina
passed, hundreds of Wal-Mart trucks rolled out to restock stores, with desperately
needed food, water, and supplies. Wal-Mart’s labor relations policies are a serious
issue. But after Katrina, one police officer surveying the devastation said that the
city’s only lifeline was the Wal-Mart.
Manager effects like these don’t occur just in big companies. Right now, man-agers
at thousands of small businesses—diners, dry cleaners, motels—are running
their businesses well, with courteous, prompt, first-class service; high-morale
employees; and a minimum of problems like cold dinners, or pants not pressed
on time.
● The Ineffective Manager Yet the opposite can be true. Take an enterprise
that’s been managed well for years—say, a neighborhood stationery store—and
watch as a new, less-competent owner takes over. Shelves are suddenly in disarray,
products are out of stock, bills are unpaid. One study of forty manufacturing firms
concluded that effective management was more important than factors like mar-ket
share, firm size, industry average rate of return, or degree of automation.8
Another study concluded that organizations with better managers had lower
turnover rates and higher profits and sales per employees.9 About 90 percent of
the new businesses started this year will fail within five years; Dun & Bradstreet
says that the reason is usually poor management. The aim in this book is for you to
be a better manager. Let’s start with some definitions.

Organization Defined
All these enterprises—Avon, the diner, the dry cleaner, even the New Orleans res-cue
effort—are organizations. An organization consists of people with formally
assigned roles who work together to achieve stated goals. Organizations need not
be just business firms. The word applies equally well to colleges, local govern-ments,
and nonprofits like the Red Cross. The U.S. government is an organization—
certainly a not-for-profit one—and its head manager, or chief executive officer, is
the president. All organizations have several things in common.
First, organizations are (or should be) goal-directed. Thirty strangers on a bus
from New York to Maine are not an organization, because they’re not working
together to accomplish some singular aim.
Organizations are also (one hopes) organized because everyone has a job to
do, and people know who does what. Even a local dry-cleaning business has an
organizational structure. Employees know who does what (pressers press, for
instance, and cleaners clean) and how the work (the incoming clothes) should
flow through the store and get cleaned and pressed.
But as we just saw, whether organizations achieve their goals or not depends
on how the organizations are managed. This is because organizations, by their na-ture,
cannot simply run themselves. Who would ensure that each employee knew
what to do? Who would ensure that all employees work together, more or less
harmoniously? Who would decide the goals? The answer is, the manager.
Management Defined
Management expert Peter Drucker said that management “. . . is the responsibility
for contribution.”10 In other words, managers are responsible for making sure that
the company achieves its goals. Specifically, a manager is someone who is re-sponsible
for accomplishing an organization’s goals, and who does so by planning,
organizing, leading, and controlling the efforts of the organization’s people.
Management most often refers to the group of people—the managers—who are
responsible for accomplishing an organization’s goals through planning, organiz-ing,
leading, and controlling the efforts of the organization’s people. However,
management also refers to the totality of managerial actions, people, systems,
procedures, and processes in place in an organization (such as when someone
says, “the management of that crisis was totally inept”).
● Three Aspects of Managerial Work Our definitions of management high-light
three key aspects of managerial work. First, a manager is always
responsible for contribution—on his or her shoulders lies the responsibility for
accomplishing the organization’s goals. Therefore, while managers may apply
management theories, managing is never just theoretical. The manager is respon-sible
for getting things done. That is why former Honeywell CEO and successful
manager Lawrence Bossidy named his book Execution: The Discipline of Getting
Things Done.
Second, managers always get things done through other people. The
owner/entrepreneur running a small florist shop without the aid of employees is
not managing. Only when she starts hiring people and trying to get things done
through them can she call herself a manager. She’ll have to train and motivate her
new employees and put controls in place so that the person who closes the store
won’t borrow part of the day’s receipts.
organization: a group of
people with formally assigned
roles who work together to
achieve the group’s stated goals
manager: a person who plans,
organizes, leads, and controls
the work of others so that the
organization achieves its goals
management: the group of
people—the managers—who are
responsible for accomplishing
an organization’s goals through
planning, organizing, leading,
and controlling the efforts of the
organization’s people; also the
totality of managerial actions,
people, systems, procedures,
and processes in place in an
organization

The third aspect of managerial work refers to what managers actually do (and
why some people turn out to be better at managing than others). That third aspect
is that managers must be skilled at planning, organizing, leading, and controlling if
they are to accomplish the organization’s goals through other people. Manage-ment
writers traditionally refer to the manager’s four basic functions—planning,
organizing, leading, and controlling—as the management process. They include:
◗ Planning. Planning is setting goals and deciding on courses of action, develop-ing
rules and procedures, developing plans (for both the organization and those
who work in it), and forecasting (predicting or projecting what the future holds
for the firm).
◗ Organizing. Organizing is identifying jobs to be done, hiring people to do them,
establishing departments, delegating or pushing authority down to subordi-nates,
establishing a chain of command (in other words, channels of authority
and communication), and coordinating the work of subordinates.
◗ Leading. Leading is influencing other people to get the job done, maintaining
morale, molding company culture, and managing conflicts and communication.
◗ Controlling. Controlling is setting standards (such as sales quotas or quality
standards), comparing actual performance with these standards, and then
taking corrective action as required.
Some people think that managing is easy and that anyone with half a brain
can do it. But if it is so easy, why do 90 percent of new businesses fail within five
years due to poor management? Why did FEMA drop the ball when Katrina hit?
The words about management and managing in this book are easy to read. How-ever,
don’t let that lull you into thinking that managing is easy.
● Application Example: You Too Are a Manager Managing is something
we’re often called upon to do every day. In business, for instance, even a nonman-agerial
employee may have to manage once in a while. The marketing manager
might ask a marketing analyst to head a team analyzing a product’s potential.
Everyone who works should know the basics of managing.
Furthermore, life sometimes requires management skills. For example, sup-pose
that you and some friends want to spend the summer in France. They’ve
asked you to manage the trip. Where would you start? (Resist the urge to delegate
the job to a travel agent, please.) Start with planning. You will need to plan the
dates the group is leaving and returning, the cities and towns in France to visit,
the airline to take you there and back, how the group will get around in France, and
where to stay while you are there.
You might divide the work and create an organization. For example, put Rosa
in charge of checking airline schedules and prices, Ned in charge of checking
hotels, and Ruth in charge of checking the sites to see in various cities as well as the
transportation between them. However, the job won’t get done without supervi-sion.
For example, Ned can’t schedule hotels unless he knows from Ruth what sites
to see and when. You will either have to schedule weekly manager’s meetings or
coordinate the work of these people yourself.
Leadership can also be a challenge. Rosa is a genius with numbers, but she
tends to get discouraged. You’ll have to make sure she stays focused.
Finally, you will have to ensure that the whole project stays in control. At
a minimum, make sure that all those airline tickets, hotel reservations, and
management process: the
manager’s four basic functions
of planning, organizing, leading,
and controlling

itineraries are checked so there are no mistakes. Now let us consider another
real-life managing example.
● Application Example: Meg Whitman Builds eBay It took Meg Whitman
barely five years from the time eBay’s founders hired her to take eBay from almost
nothing to billions in sales. She did it by effectively applying the management
process. In terms of planning, in 2000, she said that eBay would achieve $3 billion
a year in revenue by 2005, and it did.
She organized the company. She split eBay into twenty-three main business
categories (such as sports, and jewelry and watches). Then Whitman assigned ex-ecutives
to manage each category (and many of their 35,000 subcategories). She
also organized a customer-support group that employs close to half of eBay’s
employees.
As a leader, she’s reportedly soft-spoken, participative, humble but firm. Be-hind
that quiet exterior is someone who keeps tight control. eBay reportedly meas-ures
almost everything, from how much time each user remains on the site to
eBay’s take rate (the ratio of revenues to the values of goods buyers and sellers
traded on eBay). Whitman even monitors eBay’s discussion boards to see what
users are saying.
By 2006, faced with intense competition, eBay’s growth rate was slowing.
Many of eBay’s most successful online sellers were exploring other ways to market
their products. One that sold 1,000 pairs of shoes a day on eBay was promoting its
own website and partnering with new websites that provide comparison prices.
Newer companies like Google were introducing competing services, such as
Froogle. As one analyst put it, “they’ve reached a point in their growth where
things are beginning to shift against [eBay].”11 Even a top CEO like Meg Whitman
can’t afford to relax for a moment. She knows that only the most agile and best-run
companies survive.12
Table 1.1 summarizes some differences between traditional CEOs and the
sorts of talents it takes to run today’s e-businesses such as eBay. With technology
and competition changing so fast, it takes someone who thrives on ambiguity and
change and who can make good decisions very fast.
T ABLE 1.1
CEOs of e-Businesses Need Some Special Skills
Traditional Company’s CEO eBay, Google-Type Company E-CEO
Encouraging employees Evangelizing to employees
Alert to change Obsessed with change
Cordial Brutally frank
Infotech literate Infotech superliterate
Fast decisions Superfast decisions
Can handle ambiguity Thrives on ambiguity
A paragon of good judgment Also a paragon of good judgment
Average age: fifty-seven Average age: thirty-five
Rich Really rich
Source: Adapted from Fortune, 24 May 1999, p. 107. © 1999 Time Inc. All rights reserved.

What Else Do Managers Do?
Planning, organizing, leading, and controlling are the heart of what managers do,
but there is more to the manager’s job. For example, when Apple CEO Steve Jobs
presented the new video iPod a while ago, he was acting as Apple’s spokesperson.
● Mintzberg’s Managerial Roles Professor Henry Mintzberg studied what
managers actually do. Mintzberg found that in a typical day, managers didn’t just
plan, organize, lead, and control. Instead, they also filled these various roles:
◗ The figurehead role. Every manager spends some time performing ceremonial
duties.
◗ The leader role. Every manager must function as a leader, motivating and
encouraging employees.13
◗ The liaison role. Managers spend a lot of time in contact with people outside
their own departments, essentially acting as the liaison between their depart-ments
and other people within and outside the organization.
◗ The spokesperson role. The manager is often the spokesperson for his or her
organization.
◗ The negotiator role. Managers spend a lot of time negotiating; the head of an air-line,
for instance, might try to negotiate a new contract with the pilots’ union.
● The Manager as Innovator In today’s fast-changing world, managers also
have to make sure their companies can innovate new products and react quickly
to change. Therefore, management experts Sumantra Ghoshal and Christopher
Bartlett say that successful managers must also improve their companies’ abilities
to be more innovative.14 Effective managers do this in three ways:
◗ They encourage entrepreneurship.15 In their study of successful companies,
Ghoshal and Bartlett found that successful managers got employees to think of
themselves as entrepreneurs. For example, the managers made sure employees
had the support and rewards they needed to create and run their own projects.
(We discuss entrepreneurship in Chapter 4.)
◗ They build competence. Bartlett and Ghoshal also found that successful man-agers
make sure employees had the skills and competencies to be innovative and
to run their own operations.16 They encourage them to take on more responsi-bility,
provide the education and training they need, allow them to make mis-takes
without fear of punishment, and coach them.17
◗ They promote a sense of renewal. Successful managers also foster what Bartlett and
Ghoshal call renewal.18 Effective managers take steps to guard against compla-cency.
They encourage employees to question if they might do things differently.
Effective managers want all their employees to be innovative. For example,
one South Carolina manufacturer uses a machine that now runs five times faster
than anticipated when the firm ordered it. The employees made over 200 small
improvements to boost its efficiency.19
Types of Managers
There are different types of managers. We may classify managers based on their
organization level (top, middle, first-line), their position (manager, director, or vice

president, for instance), and their functional title (such as sales manager or vice
president for finance). (Function refers in this instance to business function, such
as sales, accounting, production, and human resources.)
In Figure 1.1, the managers at the top level, of course, are the firm’s top man-agement.
These are the company’s executives. Typical positions here are presi-dent,
senior vice president, and executive vice president. Functional titles here
include senior vice president for sales and chief financial officer (CFO).
Beneath the top management level (and reporting to it) may be one or more
levels of middle managers. The positions here usually include the words man-ager
or director in the titles. (In larger companies like IBM, managers report to
executives: the managers at
the top of an organization
BY LEVEL BY POSITION BY FUNCTIONAL TITLE
TOP
MANAGEMENT
MIDDLE
MANAGEMENT
FIRST-LINE
MANAGEMENT
CEO
Director Director Manager
Non-supervisory Employees
Manager
Supervisor Supervisor
Chief Executive Officer
President
Supervisor
Vice
President
Vice
President
Vice
President
Vice President for Sales
Advertising Director
Sales Director
Production Director
Personnel (HR) Manager
Production Supervisor
Sales Manager
Assistant HR
Manager
F IGURE 1.1
Types of Managers

directors, who in turn report to top managers like vice presidents.) Examples of
functional titles here include production manager, sales director, human re-sources
(HR) manager, and finance manager. Finally, first-line managers are at
the lowest rung of the management ladder. Positions here include supervisor or
assistant manager. Functional titles include production supervisor and assistant
marketing manager.
Similarities and Differences in What Managers Do
All managers have much in common. They all plan, organize, lead, and control.
And all managers at all levels and with every functional title also spend most of
their time with people—talking, listening, influencing, motivating, and attending
meetings.20 In fact, even chief executives (whom you might expect to be somewhat
insulated from other people, up there in their executive suites) spend about three-fourths
of their time dealing directly with other people.21
However, there are two main differences among the management levels. First,
top and middle managers both have managers for subordinates. In other words,
they are in charge of other managers. First-line supervisors have workers—
nonmanagers—as subordinates. Second, top, middle, and first-line managers use
their time differently. Top managers tend to spend more time planning and setting
goals (like “double sales in the next two years”). Middle managers then translate
these goals into specific projects (like “hire two new salespeople and introduce
three new products”) for their subordinates to execute. First-line supervisors then
concentrate on directing and controlling the employees who actually do the work
on these projects day to day.
Do You Have the Traits to Be a Manager?
Research evidence can help someone decide whether management might be a
plausible occupation to pursue.22 It suggests that managers have certain traits.
● Personality and Interests Career counseling expert John Holland says that
personality (including values, motives, and needs) is an important determinant
of career choice. Specifically, he says that six basic personal orientations
determine the sorts of careers to which people are drawn. Research with his Voca-tional
Preference Test (VPT) suggests that almost all successful managers fit into at
least one of two (or both) personality types or orientations:
◗ Social orientation. Social people are attracted to careers that involve working
with others in a helpful or facilitative way. (So managers as well as others, like
clinical psychologists and social workers, would exhibit this orientation.) So-cially
oriented people usually find it easy to talk with all kinds of people; are good
at helping people who are upset or troubled; are skilled at explaining things to
others; and enjoy doing social things like helping others with their personal
problems, teaching, and meeting new people.23 It’s hard to be a manager if you’re
not comfortable dealing with people.
◗ Enterprising orientation. Enterprising people tend to like working with people in
a supervisory or persuasive way. They like influencing others. Enterprising peo-ple
often characterize themselves as being good public speakers, as having repu-tations
for being able to deal with difficult people, as successfully organizing the
first-line managers:
managers at the lowest rung of
the management ladder

work of others, and as being ambitious and assertive. They enjoy influencing
others, selling things, serving as officers of groups, and supervising the work of
others. Managers need to be comfortable influencing others.
● Comptencies Edgar Schein says that career planning is a process of discov-ery.
He says that each person slowly develops an occupational self-concept, in
terms of what his or her talents, abilities, motives, and values are.
People in different occupations have different competencies. Based on his
study of MIT graduates, Schein says that managers have a strong managerial
competence career anchor.24 These people show a strong motivation to become
managers, “and their career experience enables them to believe that they have the
skills and values necessary to rise to such general management positions.” A man-agement
position with high responsibility is their ultimate goal. Every career deci-sion
they make pivots around the fact that they know they have this managerial
competence career anchor. A career anchor, says Schein, is a dominant concern or
value that directs an individual’s career choices and that the person will not give
up if a choice must be made.
These managerially oriented people see themselves as competent in three
specific areas. One is analytical competence. They have the ability to identify,
analyze, and solve problems under conditions of incomplete information and
uncertainty. A second is interpersonal competence: the ability to influence, su-pervise,
lead, manipulate, and control people at all levels. Third is emotional
competence. They were stimulated, not exhausted, by emotional and interper-sonal
crises.
● Achievements Psychologists at AT&T conducted two long-term studies of
managers. The aim was to determine how their premanagement achievements
related to their subsequent success (or lack thereof) as managers at AT&T.25 Those
managers who went to college rose (on average) much faster and higher in man-agement
than did those who did not attend college. People with higher college
grades showed greater potential for promotion early in their careers, and they rose
higher in management than did those with lower grades. Those who had attended
better-quality colleges at first ranked higher as potential managers. However,
within several years, college quality had little effect on who was promoted.
Managers who majored in humanities and social
sciences moved faster up the corporate ladder.26 Busi-ness
majors ranked second. Math, science, and engi-neering
majors ranked third. Why? At least in this study,
the humanities majors scored the highest in decision
making, intellectual ability, written communication
skills, creativity in solving business problems, and
motivation for advancement. Both the humanities/
social science majors and the business majors ranked
higher in leadership ability, oral communication skills,
interpersonal skills, and flexibility than did the math,
science, and engineering majors.27
Findings like these may just be unique to this
specific group of managers—or to AT&T. However, the
findings do suggest that, whatever the major, it’s
important for managers and future managers to work
on improving decision making, creativity, and written
communication skills.
managerial competence:
the motivation and skills required
to gain a management position,
including intellectual, emotional,
and interpersonal skills
career anchor: a dominant
concern or value that directs an
individual’s career choices and
that the person will not give up if
a choice must be made
AT&T’s managers are dealing with rapid technological
change in their industry.

The Managerial Skills
The Managerial Skills ■ 11
uccessful managers like Andrea Jung and Lieutenant General Russell Honore
don’t just have the right personality traits and competencies. They also have
S
the right skills. For example, Jung’s planning skills helped her set Avon on the right
path. Honore’s organizational skills helped him turn New Orleans’s disastrous
situation around. Managers need three sets of skills: technical, interpersonal, and
conceptual.28
Technical Skills
First, managers have to be technically competent with respect to planning, organ-izing,
leading, and controlling. For example, they should know how to develop
a plan, write a job description, and design an incentive plan. Chapters 2 to 17
focus on these management skills. In today’s high-tech environment, managers
also must know when and how to use the manager’s new technological tools.
Chapters 5, 6, and 8 focus on these skills, for example, on how managers use
decision-making software. Finally, managers should be competent in their areas
of expertise. For example, accounting managers need accounting skills. Your other
business courses will help develop these latter skills.
Interpersonal Skills
Researchers at The Center for Creative Leadership in Greensboro, North Carolina,
studied why managers fail, and they came to some useful conclusions. Some man-agers
simply didn’t do their jobs. These managers thought more about being pro-moted
than about excelling on their current jobs.29 However, most of the failures
were interpersonal. These managers had abusive or insensitive styles, disagreed
with upper management about how to run the business, left a trail of bruised feel-ings,
or didn’t resolve conflicts among subordinates.
Second, managers must therefore have good interpersonal skills. Interper-sonal
skills “include knowledge about human behavior and group processes,
ability to understand the feelings, attitudes, and motives of others, and ability to
communicate clearly and persuasively.”30 These skills include tact and diplomacy,
empathy, persuasiveness, and oral communications ability. Because managing in
today’s Internet environment requires getting employees and alliance partners to
work together, encouraging collaboration and trust is also crucial. Chapters 13 to
17 will help you learn these skills.
Conceptual Skills
Third, studies also show that effective leaders tend to have more cognitive ability.
In other words, their intelligence (and subordinates’ perception of that intelli-gence)
tend to be highly rated.31 Conceptual (or cognitive) skills “include analyti-cal
ability, logical thinking, concept formation, and inductive reasoning.”32
Conceptual skills manifest themselves in good judgment, creativity, and in the
ability to see the big picture in a situation.
Intelligence is one thing; good judgment is another. Many high-IQ people
have wobbly judgment. And many people of lower IQ have great judgment.
As Lawrence Bossidy puts it, “If you have to choose between someone with a
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staggering IQ and elite education who is gliding along, and someone with a lower
IQ but who is absolutely determined to succeed, you’ll always do better with the
second person.”33 Chapter 5 will help you hone conceptual skills.
The Evolution of Modern Management
o understand how to manage today, it is useful to know something about how
management evolved over time, since much of what managers do today is sur-prisingly
similar to what even ancient managers did. One ancient Egyptian father
told his child this about managerial planning: “The leader ought to have in mind
the days that are yet to come.”34 In terms of control, the pharaoh’s vizier (manager)
got this advice: “Furthermore, he shall go in to take counsel on the affairs of the
king, and there will be reported to him the affairs of the two lands in his house
every day.”35We can learn from what worked and did not work for the managers
who came before us. For example, the word bureaucracy originally referred to an
efficient way to get things done!
The Classical and Scientific Management School
Modern management concepts and techniques had their roots in the Industrial
Revolution hundreds of years ago. Before that, businesses tended to be small.
When machines replaced human labor, business boomed. However, success cre-ated
a problem—how to manage these new, large enterprises. At this time, there
were no management principles, no management gurus, and no management
textbooks (or business schools).
Businesspeople therefore turned for management techniques to military and
religious organizations, the only big organizations they knew. These organizations
had (and still tend to have) centralized, top-down decision making, rigid chains of
command, specialized divisions of work, and autocratic leadership. Entrepre-neurs
thus organized their new businesses along the same lines.36
As their companies grew, business owners sought principles they could
apply to solve their management problems by asking questions like, “How
should we organize our departments?” and “How many employees should a
manager supervise?” Out of this environment emerged what we call today the
classical school of management.
● Frederick Winslow Taylor and Scientific Management Frederick Winslow
Taylor was among the first of the classical management writers. Writing mostly in
the early 1900s, he developed a set of principles and practices that he called scien-tific
management. Taylor’s basic theme was that managers should scientifically
study how work was done to identify the one best way to get a job done. He based
his theory of scientific management on four principles:
1. The one best way. Management, through scientific observation, must find the
one best way to perform each job.
2. Scientific selection of personnel. Management must uncover each worker’s
limitation, find his or her “possibility for development,” and give each worker
the required training.
3. Financial incentives. Taylor knew that putting the right worker on the right
job would not ensure high productivity. He proposed financial incentives,
with each worker paid in direct proportion to how much he or she produced.
T
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The Evolution of Modern Management ■ 13
4. Functional foremanship. Taylor called for a division of work be-tween
manager and worker such that managers did all planning,
preparing, and inspecting, and the workers did the actual work. Spe-cialized
experts, or functional foremen, would be responsible for
specific aspects of a job, such as choosing the best machine speed
and inspecting the work.37
● Frank and Lillian Gilbreth and Motion Study The work of this
husband-and-wife team also illustrates the classical/scientific manage-ment
approach. Born in 1868, Frank Gilbreth began as an apprentice
bricklayer, and he soon became intrigued by the idea of improving effi-ciency.
38 In 1904, he married Lillian, who had a background in psychol-ogy.
Together, they invented motion-study principles to scientifically
analyze tasks. Two principles were “The two hands should begin and
complete their motions at the same time,” and “The two hands should
not be idle at the same time except during rest periods.”39
● Henri Fayol and the Principles of Management The work of
Henri Fayol also illustrates the classical approach. Fayol had been an ex-ecutive
with a French iron and steel firm for thirty years before writing
General and Industrial Management. In his book, Fayol said that man-agers
performed five basic functions: planning, organizing, command-ing,
The Gilbreths were scientific management
pioneers.
coordinating, and controlling (sound familiar?). He also outlined a list of
management principles he had found useful. Fayol’s fourteen principles include
his famous principle of unity of command: “For any action whatsoever, an
employee should receive orders from one superior only.”40
● Max Weber and the Bureaucracy Max Weber’s work was first published in
Germany in 1921. At the time, managers still had few principles they could apply
in managing organizations. Weber therefore created the concept of an ideal or
pure form of organization, which he called bureaucracy. Bureaucracy, for Weber,
was the most efficient form of organization. Managers, he said, would do well to
organize their companies along these lines:
1. A well-defined hierarchy of authority
2. A clear division of work
3. A system of rules covering the rights and duties of all employees
4. A system of procedures for dealing with the work situation
5. Impersonality of interpersonal relationships
6. Selection for employment and promotion based on technical competence.41
The Behavioral School
The classical management experts’ principles gave managers at the time rules
they could use to better run their companies. However, the principles themselves,
while valuable, tended to ignore the human element at work. “Design the most
highly specialized and efficient job you can,” assumed the classicist, and “plug in
the worker, who will then do your bidding if the pay is right.” The basic (if implicit)
assumption was that pay and working conditions alone determined workers’
productivity.
bureaucracy: to Max Weber,
the ideal way to organize and
manage an organization;
generally viewed today as a term
reflecting an unnecessarily rigid
and mechanical way of getting
things done

By the 1920s, things were changing. People moved from farms to cities and
became more dependent on each other for goods and services. Businesses mech-anized
their factories, and jobs became more specialized, monotonous, and inter-dependent.
42 The Great Depression began. These events made people wonder: Are
hard work, individualism, and maximizing profits—the building blocks of classical
management—really as beneficial as they were thought to be? Soon, government
became more involved in economic matters. Social reformers worked both at
establishing a minimum wage and at encouraging trade unions.
● The Hawthorne Studies In 1927, what we call today the Hawthorne studies
began at the Chicago Hawthorne plant of the Western Electric Company. Re-searchers
from Harvard University conducted several studies, one of which is
known as the relay assembly test room studies. The researchers isolated a group of
workers in a separate room.Then the researchers began changing the working con-ditions
(for instance, modifying the length of the workday and the morning and af-ternoon
rest breaks). Surprisingly, these changes did not greatly affect the workers’
performance.The researchers concluded that employee performance depended on
factors other than working conditions or pay—a stunning discovery at the time.
In short, the researchers found that it was the workers’ social situations, not
just their working conditions, that influenced how they behaved at work. Most no-tably,
the researchers discovered that their study had inadvertently made the
workers feel they were special. The research observer had changed the workers’
situation by “his personal interest in the girls and their problems.”43 Scientists call
this phenomenon the Hawthorne effect. It’s what happens when the scientist, in
the course of an experiment, inadvertently influences the participants.
The Hawthorne studies were a turning point in the study of management.
They proved that employee morale and showing an interest in employees had a
big effect on employee performance. The human relations movement, inspired by
this realization, was born. It emphasized that workers had social needs that the
organization had to accommodate.
● Changing Environment Hawthorne wasn’t the only reason for this new
point of view: the environment was also changing. Having grown large and then
made their companies more efficient, many managers were turning to research
and development (R&D) to develop new products. For example, after World War II,
companies such as U.S. Rubber and B.F. Goodrich (which had concentrated on tire
manufacturing) began developing and marketing new products such as latex,
plastics, and flooring.
The new R&D and product diversification influenced management theory in
several ways. For one thing, efficiency was no longer a manager’s only concern.
With more diversified product lines to keep track of, managers had to decentralize—
that is, set up separate divisions to manage each new product. That meant relying
on these new divisions’ managers and employees to make more decisions. And
with the need to encourage employees to innovate, managers had to let even
lower-level employees make more decisions. Thus, because of the Hawthorne
findings and the other changes taking place after World War II, managers started
taking a much more people-oriented approach to managing employees.
● Douglas McGregor: Theory X and Theory Y The work of Douglas McGregor
is a good example of this new approach. According to McGregor, the classical
organization was not just a relic of ancient times. Instead, it also reflected certain
basic assumptions about human nature.44 McGregor arbitrarily classified these

assumptions as Theory X. Theory X assumptions held that most people dislike
work and responsibility and prefer to be directed; that they are motivated not by
the desire to do a good job but simply by financial incentives; and that therefore
most people must be closely supervised, controlled, and coerced into achieving
organizational objectives.
McGregor questioned this view. He felt that management needed new prac-tices
and ways of organizing to deal with diversification, decentralization, and
participative decision making. These new management practices had to reflect a
new set of assumptions about human nature, assumptions McGregor called
Theory Y. Theory Y held that people wanted to work hard, could enjoy work, and
could exercise substantial self-control. You could trust your employees if you
treated them right.
● Rensis Likert and the Employee-Centered Organization What new man-agement
practices do these Theory Y assumptions call for? Writing at this time,
the researcher Rensis Likert concluded that effective organizations differ from
ineffective ones in several ways. The classical writers’ “job-centered organiza-tions”
focus on specialized jobs, efficiency, and close supervision of workers.
Post-Hawthorne “employee-centered organizations” should “focus their primary
attention on endeavoring to build effective work groups with high performance
goals.”45 Therefore, said Likert, “widespread use of participation is one of the
more important approaches employed by the high-producing managers.”46
He said that managers should let workers participate in making important work-related
decisions.
● Chris Argyris and the Mature Individual Chris Argyris reached similar
conclusions, but he approached the situation differently.47 Argyris argued that
healthy people go through a maturation process. Gaining employees’ compliance
by assigning them to highly specialized jobs with no decision-making power and
then closely supervising them encourages workers to be dependent, passive,
and subordinate. He said that it’s better and more natural to give workers more
responsibility and broader jobs.
The Administrative School
The administrative school experts include Chester Barnard and Herbert Simon.
Chester Barnard was president of what was then New Jersey Bell Telephone Com-pany
and, at various times, president of the Rockefeller Foundation and chair of
the National Science Foundation. In terms of devising a management theory, he
focused on what managers could do to make employees willing to contribute their
individual efforts to the organization.
How do you get the employees to “contribute their individual efforts”?48
Barnard proposed what he called a person’s zone of indifference. He said that each
person has a range of orders (a “zone of indifference”) he or she will willingly ac-cept
without consciously questioning their legitimacy.49 Barnard said the manager
had to provide sufficient inducements (and not just financial ones) to make each
employee’s zone of indifference wider.
Herbert Simon also viewed getting employees to do what the organization
needed them to do as a major issue facing managers. How can managers influence
employee behavior? According to Simon, managers can ensure that employees
carry out tasks in one of two ways. They can impose control by closely monitoring
subordinates and insisting that they do their jobs as ordered (using the classicists’
Chris Argyris established
many of the principles that
led managers to take a more
people-oriented view of how
to manage organizations.

approach, in other words). Or managers can foster employee self-control by
providing better training, encouraging participative leadership, and developing
commitment and loyalty (thus, take a more behavioral approach).50
The Management Science School
More recently, management theorists began to apply quantitative techniques to
solving management problems. Writers usually refer to this movement as man-agement
science (or operations research). It is “the application of scientific meth-ods,
techniques, and tools to problems involving the operations of systems so as to
provide those in control of the system with optimum solutions to the problems.”51
● The Management Science Approach Historian Daniel Wren says that op-erations
research/management science has “. . . roots in scientific management.”52
Like Taylor and the Gilbreths, today’s management scientists use research and
analysis to find optimal solutions to management problems. Modern-day manage-ment
scientists, of course, use much more sophisticated mathematical tools
and computers. And management science’s goal is not to try to find a “science
of management” but “to use scientific analysis and tools to solve management
problems.”
● The Systems Approach Management science evolved along with the sys-tems
approach. A system is an entity—a hospital, city, company, or person, for
instance—that has interdependent parts (or subsystems) and a purpose. Systems-approach
practitioners advocate viewing organizations as systems with interre-lated
subsystems. Focusing on the interrelatedness of the subsystems (and between
the subsystems and the firm’s environment) provides useful insights. For exam-ple,
it suggests that a manager can’t change one subsystem without affecting the
rest. Hiring a new production manager might have repercussions in the sales and
accounting departments.
Similarly, according to systems experts, managers can’t properly organize and
manage their companies without understanding the firms’ environments. For ex-ample,
when the tire companies diversified into new products, they abruptly faced
more diverse markets and competitors. That prompted these companies to split
themselves into separate divisions so each division could focus on its own market.
That got management experts thinking that the organization and how you
manage it must be contingent (rely) on the environment.
The Situational/Contingency School
Studies in England and the United States soon began to emphasize the need for
a situational or contingency approach to management. The essence of this
approach was that both the organization and how its managers should manage it
depended (were contingent) on the company’s environment and technology.
For example, two British researchers, Tom Burns and G. M. Stalker, studied
several industrial firms in England. They concluded that whether what they called
a mechanistic or an organic management approach was best depended on
the company’s environment. In a textile mill they studied, it was important to have
long, stable production runs. That way, management didn’t have to shut down the
huge textile machines. Management had to keep sales and demand stable. In
such a stable environment, Burns and Stalker found that within the company, a

mechanistic (or classical) management approach worked best. Managers empha-sized
efficiency, specialized jobs, and making everyone stick to the rules.
In contrast, Burns and Stalker found that the main focus in high-tech firms
was innovating new products. These companies therefore faced relatively innova-tive,
fast-changing environments (with more new products and more quickly
changing competitors, for instance). In these firms, the important thing was learn-ing
as fast as possible what competitors were doing and being able to respond
quickly by letting even lower-level employees make fast decisions. These firms
used the more flexible, people-oriented, organic management approach. They
emphasized innovation, did not confine employees to specialized jobs, and did
not stress sticking to the rules.
With business becoming increasingly high-tech, it would soon turn out that
this organic management approach would become more prevalent. With that in
mind, let us turn to managing today.
Modern Management Schools of Thought
Things change fast in business today. Just months after going public, Google faced
new competition. Yahoo! poured millions into building its search capabilities.
Microsoft was perfecting its own search engine. Amazon (fearing Google’s new
Froogle shopping site) introduced a new search engine. And, not to be outdone,
Google introduced Gmail to lure surfers from Yahoo! and Microsoft.53 After about
one year in business, Friendster.com, the social networking site, had about 1 mil-lion
unique visitors per month. Introduced a year later, myspace.com went from
nothing to 14 million visitors per month.
Rapid change like this is not limited to high-tech companies. For example, be-tween
1997 and 2006, Coca-Cola Co. had three CEOs—extraordinary turnover for
this firm. Why? Coke faces bigger global competitors, and huge customers like
Wal-Mart are now dictating stronger terms. (For example, Wal-Mart made Coca-
Cola introduce a new Splenda-based Diet Coke.) Carbonated drinks still account
for most of Coke’s business, but consumers are increasingly purchasing noncar-bonated
drinks.54
Managing under such fast-changing conditions is a challenge. Ford Motor
Company announced its new Way Forward plan in March 2006 to return to prof-itability;
in June, they had to revise that plan because of shrinking sales. Then, in
September 2006, William Ford, Ford’s CEO, stepped down in favor of bringing in a
new CEO, a president from Boeing named Al Mulally. Mr. Mulally had experience
managing under conditions of rapid change.
Several factors explain why the manager’s environment is changing so fast.
These factors include globalization, technological change, and the changing
nature of work.
● Competition Is Global Globalization refers to extending a company’s sales,
ownership, and/or manufacturing to new markets abroad.55 Toyota produces the
Camry in Kentucky, while Dell produces and sells personal computers in China.
In 2006, Google extended its reach into China by instituting its new Google China
instant messenger service. Free trade areas—agreements that reduce tariffs and
barriers among trading partners—further encourage international trade.
More globalization means more competition, and more competition means
more pressure to improve—to lower costs; to make employees more productive;
and to do things better, faster, and less expensively. When Carrefour opens stores
in Chile, the local retailers either improve or leave. Similarly, Ikea changed the
globalization: the extension
of a firm’s sales, ownership, or
manufacturing to new markets
abroad

ground rules for local U.S. furniture stores when it opened in New Jersey. As one
expert says, “The bottom line is that the growing integration of the world economy
into a single, huge marketplace is increasing the intensity of competition in a wide
range of manufacturing and service industries.”56
Managers react in various ways. Some, like Levi Strauss, outsource or transfer
operations abroad to seek cheaper labor and to tap what Fortune magazine calls
“a vast new supply of skilled labor around the world.”57 Others, as we’ll see, adapt
by applying world-class management practices. Many of these practices, such as
flexible manufacturing and computerized links between a company and its sup-pliers,
rely on technology.
● Technological Advances Force Managers to Change New high-tech prod-ucts
and services are changing the face of business. Thousands of new Web-enabled
businesses exist, including (to choose just three) file-sharing sites, blog
sites, and social networking sites like myspace.com.58 Managers rely on informa-tion
technology, for instance, in the form of personal digital assistants (PDAs) to
do their jobs.
Technology is triggering turmoil. In 2006, America’s second-largest newspaper
chain, Knight-Ridder, was sold. Part of its problem was new high-tech competi-tion.
Websites such as Monster and Hot Jobs had drawn off many employment ad
users, while sites like Craigslist siphoned classified ad users. Early in 2006, SBC
Communications bought AT&T, which then bought BellSouth. The purchases re-flect
technological change. For example, demand for Voice over Internet Protocol
(VoIP) phone calls is booming, which displaces demand for land-line and even
cell-phone calls. This accelerates a revolution among land-line and cell-phone
firms, many of which have gone out of business trying to compete on this fast-changing
playing field.59
● The Nature of Work In turn, using new technology to the fullest usually re-quires
changing how people work. For example, one bank installed special software
that made it easier for customer-service representatives to handle customers’
inquiries. Seeking to capitalize on the new software, the bank upgraded the
customer-service representatives’ responsibilities. The bank gave them new train-ing,
taught them how to sell more of the bank’s services,
gave them more authority to make decisions, and
raised their wages. Here, the new computer system
improved profitability.
A second bank installed a similar system but did
not change the workers’ jobs. Here, the system did help
each service representative handle a few more calls.
But this second bank saw few of the performance gains
that the first bank did by turning its reps into moti-vated,
highly trained salespeople.60
As Microsoft Corporation chair Bill Gates put it, “In
the new organization, the worker is no longer a cog in a
machine but is an intelligent part of the overall process.
Welders at some steel jobs now have to know algebra
and geometry to figure weld angles from computer-generated
designs.”61 This means managers must
be skilled at managing knowledge work and human
capital.62 Knowledge work is work that depends on
employees’ training, knowledge, and expertise. Human
Managers need a new approach when managing knowledge
workers like the person pictured here.

capital refers to the sum total of all the knowledge, education, training, skills, and
expertise of a firm’s workers.63Today, “the center of gravity in employment is mov-ing
fast from manual and clerical workers to knowledge workers, who resist the
command and control model that business took from the military 100 years
ago.”64 In other words, managers need new principles and tools for managing
knowledge workers.
● Modern Management Thought Trends like these prompted modern man-agement
writers to propose new theories of how to manage. The basic theme of
these experts is managing change and innovation. Two McKinsey & Co. consul-tants,
Thomas Peters and Robert Waterman Jr., were among the first. They studied
what they called eight excellent companies. They concluded that these firms were
excellent because managers here followed several simple principles: a bias toward
action, simple form and lean staff, continued contact with customers, productiv-ity
improvement via people, operational autonomy to encourage entrepreneur-ship,
one key business value, doing what they know best, and simultaneous loose
and tight controls (in other words, making sure that employees buy into the
company’s values so that they are able to control themselves).65
Rosabeth Moss Kantor studied companies like IBM. She concluded that more
successful companies generally had fewer management levels and a greater re-sponsiveness
to change, and they entered into more partnerships with other com-panies.
66 As mentioned earlier in this chapter, Sumantra Ghoshal and Christopher
Bartlett argue that successful managers foster innovation by encouraging
entrepreneurship.
Several modern management writers say that, with innovation so important,
the best companies are intelligent enterprises, or learning organizations. James
Brian Quinn studied what he calls intelligent enterprises. These companies (like
Google) depend on converting their employees’ intellectual resources (such as
engineering knowledge) into services and products. Companies like these, says
Quinn, must leverage—take maximum advantage of—their intellectual capital.
They do this by ensuring that ideas can flow quickly among employees, such as by
encouraging informal communications.67
Similarly, Peter Senge argues for creating learning organizations, “organiza-tions
where people continually expand their capacity to create the results they
truly desire . . . and where people are continually learning how to learn together.”68
Learning organizations’ managers do this by encouraging systems thinking,
personal mastery (empowering employees to make decisions), building a shared
vision, and team learning.69
The bottom line is that modern management theorists argue for a more agile,
responsive, lean, fast-acting approach to management. Figure 1.2 helps summa-rize
their thinking. A fast-changing global environment means more competition,
change, and unpredictability. Managers have responded by making their compa-nies
more streamlined and agile, leaner, and faster-acting. The following discus-sion
lists a few specific features of managing in today’s fast-changing environment,
according to their thinking.
● Smaller, More Entrepreneurial Organizational Units It is easier to stay
in touch with employees when the organization is not too big. Toyota therefore
keeps its plants down to several hundred employees. T. J. Rogers, president of
Cypress Semiconductor, believes that large companies stifle innovation. When
developing a new product, he creates a separate start-up company under the
Cypress umbrella.70

F IGURE 1.2
Why Companies Need to Be More Flexible and World Class
Factors including globalized competition, technology revolution, new competitors, and changing
tastes produce more uncertainty, more choices, and more complexity. The result is that
organizations must be responsive, smaller, flatter, and oriented toward motivating knowledge
workers.
CHANGES LEADS TO SO COMPANIES MUST BE
Fast, responsive, and adaptive
Flat organizations
Downsized
Quality conscious
Empowered
Smaller units
Decentralized
Human capital oriented
Boundaryless
Values and vision oriented
Team based
■
■
■
■
■
■
■
■
■
■
■
Increased competition
Uncertainty, turbulence,
and rapid change
More consumer choices
Mergers and divestitures
Joint ventures
More complexity
Short product life cycles
Market fragmentation
More uncertainty for
managers
Record number of business
failures
● Team-Based Organizations Managers extend this small-is-beautiful phi-losophy
to how they organize the work itself. Most companies today organize at
least some of their operations around small, self-managing teams. GM’s Saturn
Corporation subsidiary is an example. Work is organized around work teams of ten
to twelve employees. Each team is responsible for a complete task, such as
installing door units or maintaining automated ma-chines.
The teams don’t have traditional supervisors.
Instead, highly trained workers do their own hiring,
control their own budgets, monitor the quality of their
own work, and generally manage themselves.
● Empowered Decision Making For self-managing
teams to manage themselves, they need the authority
and training to do so. Empowering employees (giving
them the training and authority) is therefore central to
what managers do today.
● Flatter Organizational Structures, Knowledge-
Based Management It can take a long time for a
request from a front-line employee to get to the top of
the typical tall, multilayered organization like GM. By
empowering their employees (and letting them make
their own decisions), companies can eliminate layers of
management. Instead of seven or eight tall manage-ment
layers, there may be only three or four flat layers.71
■
■
■
■
■
■
■
■
■
■
Explosion of technological
innovation
Globalization of markets
and competition
Deregulation
Changing demographics
New political systems
Category killers
Service and knowledge jobs
■
■
■
■
■
■
■
Worker empowerment: Rooms Control Clerk at the front
desk, the New York Marriott, Brooklyn.

Managing Now ■ 21
● New Bases of Management Power In today’s team-based and empowered
organizations, managers can no longer rely on their formal authority to get em-ployees
to follow them.72 Peter Drucker put it this way: “You have to learn to man-age
in situations where you don’t have command authority, where you are neither
controlled nor controlling.”73 Yesterday’s manager thought of him- or herself as a
manager or boss. The new manager is a sponsor, a team leader, or an internal
consultant.74
● An Emphasis on Vision In companies with fewer bosses, formulating a
clear vision of where the firm is heading becomes more important. Peter Drucker
says today’s companies require “clear, simple, common objectives [a vision] that
translate into particular actions.”75 The vision is like a signpost. Even without a lot
of supervisors to guide them, employees can steer themselves by the company’s
vision.76 Technology is another feature of managing now.
Managing Now
I
nformation technology is now a familiar aspect of our lives. We use computers,
e-mail, software, cell phones, iPods, fax machines, flash drives, scanners, and
BlackBerries© to assist with our daily chores. We search for travel information on
Expedia, download airline tickets, and register for and take college courses online.
Computerized diagnostic tools analyze our autos’ problems, point-of-sale com-puters
at Zara process our credit-card purchases, and computerized traffic-flow
systems control our trips to work.
The Company of the Future Is Here Now
Perhaps not so obvious is the vast number of ways in which managers rely on
information technology to succeed in today’s fast-changing world. Modern man-agement
theorists’ prescriptions for streamlined, agile, lean, faster-acting compa-nies
would be hard to achieve without information technology.77 Information
technology (IT) refers to any processes, practices, or systems that facilitate proc-essing
and transporting information. It includes both the hardware (such as
computers, iPods, cell phones, and servers) and the software systems used to
make these devices work. Like the managers and professionals on this book’s cover,
managers today simply could not do their jobs—or do them as well—without the
aid of information technology. Here are some examples of the managerial applica-tions
of information technology we’ll discuss in this book, showing how managers
use information technology.
◗ The Spanish retailer Zara doesn’t need the expensive inventories that burden
competitors like The Gap. Zara operates its own Internet-based worldwide distri-bution
network linked to the checkout registers at its stores around the world.
This lets it continuously monitor store sales. When it sees a particular garment
flying off the shelves of one of its stores, its flexible manufacturing system swings
into action. It dyes the required fabric, manufactures the item, and speeds it to
that store.78
◗ Accountants PriceWaterhouseCooper maintains electronic bulletin boards on
more than 1,000 different company projects. About 18,000 of its employees in
Online Study Center
ACE the Test
Managing Now! LIVE
information technology
(IT): any processes, practices,
or systems that facilitate the
processing and transporting of
information

twenty-two countries use these bulletin boards to get updates on matters such as
how to handle specialized projects on which they are working.
◗ The team that developed the Boeing 787 made extensive use of videoconferenc-ing
for meeting with engine suppliers and airlines around the world to discuss
the new aircraft’s design.
◗ Managers make extensive use of mySpace.com-like virtual online communities.
For example, to win a $300 million navy ship deal, Lockheed-Martin established
a virtual design environment with two major shipbuilders via a private intranet.
Eventually, about 200 global suppliers also connected to the network via special,
secure Internet links. This allowed secure transfer of design, project manage-ment,
and even financial data back and forth via simple browser access.
◗ Procter & Gamble’s R&D executive, Larry Huston, knew his firm had to reach out
to get more and better new-product ideas. Procter & Gamble (P&G) now uses var-ious
information technology tools to connect itself to various sources of new-product
ideas. For example, InnovationNet is an intranet Web portal for 18,000
Procter & Gamble innovators in research and development, engineering, market
research, purchasing, and patents. One P&G senior vice president calls it a sort of
global lunchroom. It lets 18,000 P&G employees worldwide exchange ideas.
◗ With about 10,000 stores and 34 million transactions a week, Seattle-based Star-bucks
Coffee Company’s managers must make sure they stay in control of what’s
happening at each of their stores. That’s why Starbucks uses a global informa-tion
technology system to monitor transactions in each of its stores. Its system
(called XPR) remotely monitors an assortment of metrics at each store. XPR then
triggers reports when any of the metrics for a store seem to be moving in un-usual
ways. For example, the system monitors point-of-sale activities and then
triggers reports if a particular register seems to be recording too many free re-fills.
That helps Starbucks’s executives stay in control, even from thousands of
miles away.
◗ Aiming to improve its service, Safeway Supermarkets installed special point-of-
sale computerized registers. Their suppliers now get real-time information
regarding sales of their products, which they need in order to replenish Safeway’s
shelves using just-in-time inventory management. Some Safeway customers
receive handheld devices in order to communicate to Safeway, prior to leaving
home, the items they need to purchase.
◗ Wal-Mart recently had its top 100 suppliers start attaching radio frequency iden-tification
(RFID) tags to shipments. These help Wal-Mart and its supply chain
partners keep track of inventory as it moves from manufacturer to warehouse to
stores.79
◗ Information technology is critical to UPS’s success. Its drivers use handheld
computers to capture customers’ signatures along with pickup, delivery, and
time-card information and automatically transmit this information back to
headquarters via a wireless telephone network. UPS and its customers can
then monitor and control the progress of packages throughout the delivery
process.
◗ Caterpillar Corporation needed a better way for its employees to share their
knowledge. The company recently introduced its Knowledge Network, a Web-based
system that Caterpillar employees use to collaborate and share knowledge.

Managing Now ■ 23
Using the Knowledge Network, Caterpillar employees can more easily communi-cate
and participate in chatroom-type discussions, and post best ideas on
community bulletin boards.
◗ A “digital dashboard” presents the manager with computerized desktop graphs
and charts so he or she can get a picture of where the company has been and
where it’s going. For example, a top manager’s dashboard for Southwest Airlines
might display daily trends for activities such as airplane turnaround time,
attracting and keeping customers, and on-time flights. This keeps the manager
in control. For example, if ground crews are turning planes around slower today,
financial results tomorrow may decline unless the manager takes action.
Some Important Management Information Systems
● Information Systems All the examples listed above depend on information
systems. Information system refers to the interrelated components working to-gether
to collect, process, store, and disseminate information to support decision
making, coordination, analysis, and visualization in an organization. Managerial
information systems support managerial decision making and control. Caterpillar
uses a “knowledge management information system” to capture and compile the
information that it needs. Safeway uses a “supply chain management information
system” to automate its purchases from suppliers. The following discussion lists
some important information systems that managers use (we discuss these in more
detail in Chapter 5).
● Decision Support Systems A decision support system (DSS) is a set of
computerized tools that helps managers make decisions. The DSS helps the man-ager
make decisions in two ways. It helps that person access the data he or she
needs (for instance, on which products sold best last year). And it provides user-friendly
software to analyze that data.
● Enterprise Resource Planning Systems An enterprise resource plan-ning
(ERP) system is a companywide integrated computer system. It is com-prised
of compatible software modules for each of the company’s separate
departments (such as sales, accounting, finance, production, and human resources).
Often Internet-based, the ERP modules are designed to communicate with each
other and with the central system’s database. That way, information from all the
departments is readily shared by the ERP system and is available to employees in
all the other departments. ERP strips away the barriers that typically exist among
a company’s stand-alone departmental computer systems. The name notwith-standing,
enterprise resource planning systems are not primarily planning systems.
We’ll generally refer to them as enterprise systems in this book.
With an enterprise system, activities that formerly required human inter-vention
(such as production telling accounting that it should bill a customer
because an order just shipped) occur automatically. By integrating the separate
departmental modules, enterprise systems can do things for managers that the
separate departmental systems (sales, production, finance, and human re-sources)
could not do on their own. For example, when a customer buys a Dell
computer online, Dell’s ERP automatically records the sale, orders the necessary
parts, schedules production, orders UPS to deliver the finished product, and
has Dell’s accounting department send the customer a bill. The accompanying
information system: the
interrelated components
working together to collect,
process, store, and disseminate
information to support decision
making, coordination, analysis,
and visualization in an
organization
decision support system
(DSS): a set of computerized
tools that helps managers make
decisions
enterprise resource
planning (ERP) system:
a companywide integrated
computer system comprised of
compatible software modules
for each of the company’s
separate departments

PRACTICE IT
J. Crew
After hitting turbulence in the 1990s, J. Crew sold out to
Texas Pacific Group, which brought in The Gap Inc.’s for-mer
CEO Millard Drexler to turn the company around.
One of Drexler’s first steps was to articulate a new plan
for J. Crew, which had struggled with an identity crisis for
several years. Drexler took J. Crew back to its preppy
roots and also began offering more upscale merchandise,
including $550 tuxedo jackets for men.
However, Drexler knew that in the increasingly com-petitive
retail industry, having the right image was not
enough. J. Crew was now competing with huge multina-tional
companies like Zara, H&M, and, in some markets,
even with Target and Wal-Mart. Companies like these had
hugely efficient information technology-based systems. At
Target, for instance, every time an item moved through a
point-of-sale register, digital signals went out to its suppli-ers
and transportation companies, automatically signaling
them to replenish the items. Zara’s technology systems
were, in a way, even more impressive. Zara does almost all
its own designing and manufacturing in its plant in Spain.
When it receives the overnight digital signals about what
customers are buying each day, management springs into
action. Zara then quickly designs, produces, and delivers
to each store similar, complementary items.Drexler knew
J. Crew’s success depended in part on installing such man-agement
information systems.
J. Crew’s new chief intelligence officer (CIO) Paul
Fusco decided to install an enterprise system from one of
the largest suppliers of such systems, SAP. J. Crew began
by installing separate SAP enterprise modules for each of
supply chain management
systems: systems to help a
company manage its
relationship with its suppliers
and retailers by providing
information to help suppliers,
purchasing firms, distributors,
and logistics/transportation
companies coordinate, schedule,
and control a company’s
procurement, production,
inventory management, and
delivery services
its departments. They started with financial systems and
then moved on to human resources and inventory man-agement
and replenishment.
The new enterprise system made J. Crew a more
agile and efficient company. For example,by automating its
purchase order system, J.Crew reduced the time required
to fill an order and get it to the store by about three
weeks. More important, the new system gives J. Crew’s
headquarters merchandise managers and buyers a real-time
view of what’s selling and what’s not. This changed
the firm’s whole planning system. Previously, it took two
to three days for J. Crew’s buyers and merchandisers to
find out what was selling in each store.That made it im-possible
to accurately gauge exactly what to design and
produce. Now, sales and inventory data move digitally
from every store to headquarters every night. As Fusco
says, “[I]t’s so important when the buyers and merchan-disers
arrive each morning for them to have a complete
view of what’s sold the previous day . . . having a better
view of yesterday helps our merchants to make more
informed decisions.”80
Millard Drexler’s J. Crew turnaround has been a huge
success. For 2005, J. Crew had profits of $3.8 million, com-pared
with a loss of just over $100 million in the previous
year. And in July 2006, J. Crew’s new owners sold off some
of their stock in one of the largest initial public offerings in
the previous five years, raising about $350 million. In three
years, Drexler had turned the company around, using
effective management skills supported by information
technology.
Practice IT feature shows how Millard Drexler used an enterprise system to help
turn J. Crew around.
● Supply Chain Management Systems Supply chain management systems
help the company manage its relationship with its suppliers and retailers. They
provide information to help suppliers, purchasing firms, distributors, and
logistics/transportation companies coordinate, schedule, and control a company’s
procurement, production, inventory management, and delivery services. For
many firms today, much of their fame rests on their supply chain management
systems. Target keeps its costs famously low largely because its point-of-sale com-puters
automatically notify vendors like Levi’s and P&G when it’s time to replace
merchandise.

Managing Now ■ 25
Virtual Integration at Dell Computer
Michael Dell built Dell Computer by using supply chain
and customer relationship technology to “blur the tradi-tional
boundaries . . . among suppliers, manufacturers, and
For most computer companies, the manufacturing
process is like a relay race: components come in from sup-pliers,
these components are assembled into computers,
and the computers are then handed off for distribution
through wholesalers and retailers (such as CompUSA) to
the ultimate customers. Dell’s system changes all that. For
example, Dell interacts with and sells to customers directly,
so it eliminates the activities of the wholesalers and retailers
in the traditional distribution chain.
Virtual integration—linking Dell with its suppliers
and customers via the Internet—speeds things up even
● Customer Relationship Management Systems Customer relationship
management systems help companies manage all the processes involved with
interacting with customers, such as taking orders, answering technical questions,
and sending bills.83 For example, when a customer calls with a problem, Dell’s cus-tomer
relationship management system shows the technician what system the
customer owns. It then leads the technician through a sequence of diagnostic
questions to solve the problem.
● Knowledge Management Knowledge management refers to any efforts
aimed at enabling a company’s managers and employees to better access and uti-lize
information available anywhere in their companies.84 When an organization
has information and either doesn’t know it has that information or can’t access it,
it suffers a breakdown in knowledge management.
Knowledge management is enormously important today. Think of how waste-ful
it is for an engineer to spend three days writing a quote for a customer, only to
then discover that her predecessor filed a similar quote. One advisory firm esti-mates
that Fortune 500 companies lose at least $31.5 billion per year by not shar-ing
knowledge.85 In today’s competitive business environment, it’s usually the
company with the best information that is the most successful. As a result, many
managers today embrace knowledge management systems.
Knowledge management systems organize and make available important
knowledge, wherever and whenever the manager or employee needs it. We’ll see in
Chapter 5 that some knowledge management systems focus on accessing, compil-ing,
and organizing and reviewing knowledge that’s already written down and
stored away in some form in the company. For example, Merck has vast amounts of
knowledge stored away in its computers, like what combinations of drugs they’ve
tested in the past and what the results were. Others focus on helping the company
capture new knowledge. For instance, they make it easier for a repairperson to elec-tronically
record how he or she solved a customer’s computer problem.
the end users.”81
customer relationship
management systems:
systems to help companies
manage all the processes
involved with interacting with
customers, such as taking
orders, answering technical
questions, and sending bills
knowledge management:
any efforts aimed at enabling a
company’s managers and
employees to better access and
utilize information available
anywhere in their companies
knowledge management
systems: systems to organize
and make available important
knowledge, wherever and
whenever a manager or
employee needs it
more. Computerized information from Dell continually
updates suppliers regarding the number of components
they should deliver every morning.The outside suppliers
thus actually start to look and act more like an inside part
of Dell. Similarly, instead of stocking its own monitors,
“[w]e tell Airborne Express or UPS to come to Austin and
pick up 10,000 computers a day and go over to the Sony
factory in Mexico and pick up the corresponding number
of monitors. And while we’re all sleeping, they match up
the computers and the monitors, and deliver them to the
customers . . . [O]f course, this requires sophisticated data
exchange.”82
The result of this virtual integration is a lean, efficient,
and fast-moving operation. It can turn on a dime when the
products demanded by customers change.

What’s to Come
T
1. An organization consists of people who have for-mally
assigned roles and who must work together
to achieve the organization’s goals. Organizations
needn’t be just business firms.
2. Organizations are run by managers. A manager is
someone who plans, organizes, leads, and controls
the people and the work of the organization so that
the organization achieves its goals.
3. Management writers traditionally refer to the
manager’s four basic functions of planning, organ-izing,
leading, and controlling as the management
process.
4. We can classify managers based on organizational
level (top, middle, first-line), position (executives,
managers or directors, supervisors), and func-tional
title (vice president of production, sales
manager). All managers get their work done
through people and by planning, organizing, lead-ing,
and controlling. Top managers spend more
time planning and setting goals. Lower-level man-agers
concentrate on implementing goals and
getting employees to achieve them.
5. Managers play other roles too—for instance, fig-urehead,
leader, liaison, spokesperson, negotiator.
They also engage in entrepreneurial, competence-building,
and renewal processes.
6. Almost everything a manager does involves inter-acting
with and influencing people. The bottom
line is that the leading, or people, side of what
managers do is not just another step in the
management process; it is an integral part of the
manager’s job.
7. Managers and their organizations now confront
rapid change and intense competition. Trends
contributing to this include globalization, techno-logical
advances, and an emphasis on knowledge
work.
8. Modern management theorists’ prescriptions for
streamlined, agile, lean, faster-acting companies
would be hard to achieve without information
technology. Information technology (IT) refers to
any processes, practices, or systems that facilitate
processing and transporting information.
9. Information system refers to the interrelated com-ponents
working together to collect, process, store,
and disseminate information to support decision
making, coordination, analysis, and visualization
in an organization. Managerial information sys-tems
support managerial decision making and
control.
C H A P T E R S U M M A R Y
hroughout history, some things in management have not and will not quickly
change. Managers still plan, organize, lead, and control. And they still deal
with people—communicating, leading, appraising, and coaching them.
This is a book on management; therefore, we focus on what managers should
know about planning, organizing, leading, and controlling, and dealing with peo-ple.
However, we have seen that managers now manage in a fast-changing and
highly competitive global environment. To succeed here, managers simply have
no choice but to effectively use information technology (IT) devices and systems,
including software systems, cell phones, RFIDs, and PDAs. We therefore include in
this book many examples of the Internet and IT tools that managers use today to
plan, organize, lead, and control. We place some of these examples, like the ac-companying
one on Dell Computer (on page 25), in the Practice IT and Window on
Managing Now features.

Experiential Exercises ■ 27
1. Is your professor responsible for managing this
class? Why or why not?
2. Is your management class an organization? Why or
why not?
3. Give examples of each of the four functions of
management.
4. Give examples of top, middle, and first-level man-agers
at your college or university.
5. What are four things a manager today can learn
and apply from studying management history?
6. Briefly describe four differences between classical
and behavioral approaches to managing.
7. What accounts for the fact that companies must be
agile today?
8. List ten examples of information technology you
would typically expect to deal with on the job.
9. What information technology tools do you use?
List at least three ways in which managers
use these for planning, organizing, leading, or
controlling.
D I S C U S S I O N Q U E S T I O N S
1. Most people tend to think of organizations as
pyramid-shaped hierarchies, with authority and
decision making flowing from the top down. The
boss gives the orders, and the employee does the
work. As this chapter points out, today’s changing
environment demands new forms of organization.
In a team of four to five students, graphically de-pict
some of the newer organizational designs
mentioned in this chapter. First, draw the shapes
you think represent the organization charts of the
new team-focused organizations. Then write a
brief (one- to two-page) summary describing what
you have drawn and what you think the implica-tions
of these designs are for planning, organizing,
leading, and controlling organizations today.
2. While most organizations do tend to be hierarchies
with bosses telling employees what to do, colleges
and universities have long been somewhat differ-ent.
For example, many universities traditionally
have faculty senates that make decisions about
what new programs to approve, and on what bases
the university will evaluate and appraise profes-sors.
Similarly, many universities have students
evaluate the faculty—still an unusual arrangement
even in progressive companies. As a team, answer
the following questions: (a) In a university in which
students evaluate the faculty and the faculty is “the
boss” when it comes to deciding on new programs,
how can you determine who the “managers” and
“employees” are? (b) What five specific recent envi-ronmental
trends do you think have had the most
pronounced effect on the methods used to manage
your college or university today? (c) List several
ways in which you believe these trends have influ-enced
the way in which the college or university’s
managers plan, organize, lead, and control.
3. Write a short essay on this topic: the tasks I’ve per-formed
that I most enjoyed, was proudest of, and
was most successful at. (Perhaps, if you’re lucky,
one task fills the bill!) Now do the same for the task
or tasks you least enjoyed, were least proud of, and
were least successful at. Now answer this question:
based on what you know about what managers do
and what it takes to be a manager, do you think you
have what it takes to be a manager?
E X P E R I E N T I A L E X E R C I S E S

C A S E S T U D Y
No Rules, Just Right
Chris Sullivan and the founders of Outback Steak-house,
Inc., developed a unique vision for a restaurant
concept and the management system that would make
it work. Having worked for other chain restaurants in
the past, Sullivan and his team wanted to do things very
differently. They wanted a restaurant that was a fun
place for employees to work.
Sullivan and his cofounders had originally planned
to build just a few restaurants and then play a lot of
golf. Things didn’t work out that way. The company
they created captured the imagination and appetites
of the public. Within its first six years, Outback
Steakhouse had become the fastest-growing restaurant
chain in the casual-dining segment of the restaurant
industry. Outback’s management team took the com-pany
public. It has won numerous awards for business
growth, including Entrepreneur of the Year awards
from both Inc. magazine and the Kauffman (Entrepre-neurship)
Foundation.
Part of Outback’s success has come from its un-orthodox
management system. First, Sullivan and his
colleagues wanted restaurateurs to be able to make a
career as store managers. In many restaurant chains,
the best-paying positions are in the corporate office,
not directly serving customers. Top store managers in
those systems leave the restaurant to move to corpo-rate
to make a good salary.
To attract managers, Outback offered very strong
financial packages (in many cases offering the manager
equity in the local restaurant), assignment to a location
for a minimum of five years, and a work environment
serving dinner only. Outback’s unique employment
benefits aren’t just for management. Recently, the
company rolled out a benefits program for part-time
employees. In contrast to many other companies, the
less you make at Outback, the less you are required to
pay for health insurance.
Sullivan insists that one key for a successful restau-rant
is for the local team to have fun. Local Outback
managers have noted that one of the first questions
CEO Sullivan asks them when visiting their location is,
“Are you still having fun?” Management’s casual style
and its fiercely entrepreneurial culture echo the corpo-rate
motto: “No rules, just right.”
DISCUSSION QUESTIONS
1. Based on this case, what management roles does
Sullivan fulfill?
2. List at least ten specific management tasks Sullivan
will have to attend to in a typical week.
3. Is Sullivan using a classical or a behavioral man-agement
approach, and why do you think he is
doing so, given his environment and situation?
4. What environmental forces are acting to influence
Outback’s business and management style, for
good or for ill?

29
2
CHAPTER OUTLINE
Opening Vignette: Sarbanes-
Oxley Act of 2002
● Ethics in an Age of
Information Technology
Ethics and the Law
● What Influences Ethical
Behavior at Work?
Individual Factors
Organizational Factors
● Encouraging Ethical
Behavior at Work
Publish an Ethics Code
What Managers Do to Encourage
Ethical Behavior
IMPROVING YOUR ETHICS-BUILDING
SKILLS
Managing Now: Using Information
Technology to Encourage Ethical
Behavior
Complying with Sarbanes-Oxley
and Other Regulations
PRACTICE IT: DTE Energy’s
Web-Based Ethics Training System
● Social Responsibility Now
Social Responsibility Defined
To Whom Is the Company Responsible?
Why Are Companies Socially
Responsible?
How to Improve the Company’s Social
Responsiveness
● Managing Diversity
Bases for Diversity
Barriers in Dealing with Diversity
How to Manage Diversity
Recruiting a More Diverse Workforce
ETHICAL AND SOCIAL ISSUES
Sarbanes-Oxley Act of 2002
anagers today run big legal risks if they don’t manage their compa-nies
ethically.1 For example, the federal Sarbanes-Oxley Act now
M
requires that publicly traded companies’ CEOs and CFOs personally
certify the accuracy of their companies’ financial statements and that
their firms’ internal controls are adequate.2 This means the managers
must be able to show they’ve done their best to ensure that all their
employees are acting ethically.
To do this, managers must
provide employee ethics training
(among other things) and prove
that employees actually got
trained. However, offering and
following up on such training
programs can be expensive,
particularly when hundreds of
employees are involved. So when
DTE Energy needed ethics train-ing
for its 14,000 employees, its
managers wanted a cost-effective
program.What should they do?
You should have a good answer
after reading this chapter. ■
Franklin Raines, the CEO of the Business
Roundtable business association, leads a
group of managers in an ethics training
program.
➤ Explaining what is meant by ethical behavior.
➤ Describing the organizational factors that influence ethical behavior at work.
➤ Listing five ways in which a supervisor can personally improve the ethical behavior of
his or her subordinates.
➤ Answering the question,“To whom is the company responsible?”
➤ Listing the bases for diversity.

30 PART ONE CHAPTER 2 Ethical and Social Issues
➤ Reading the opening vignette about the Sarbanes-Oxley Act and DTE Energy and
recommending an ethics training system for the company.
➤ Reading the end-of-chapter exercises and explain how you would handle the ethical
challenge.
➤ Reading the chapter case study and explain what you would do if you were the man-ager,
and why.
➤ Watching the simulation video, identifying the ethical situations, and determining
appropriate actions.
➤ Studying the video scenario and explaining how the manager could use information
technology (IT) to encourage ethical behavior in the company.
Ethics in an Age of Information Technology
he U.S. Justice Department recently tried to force Google to hand over a week’s
worth of Internet searches.Google refused.Yet the day the story broke,Google’s
T
stock fell almost 10 percent. This drop seemed to reflect the fact that if Google ever
did have to agree to such a request, users felt it would invade their privacy.3
In fact, this case had little to do with privacy. The government said it didn’t
seek personally identifiable information. And Google said its main concern was
that supplying the information might give competitors some insight into Google’s
trade secrets. Still, just the idea that the government’s request might somehow
strip away Google users’ privacy was enough to trigger widespread concern. Users
were concerned about their privacy. And perhaps they were concerned about the
ethics of Google letting them think that all those searches they inputted were pri-vate,
when in fact they were all filed away, potentially available for all to see.
The idea that websites and even employers are tracking what people do has
focused new interest on ethics. Ethics are the principles of conduct that govern an
individual or a group.4 Someone can tell when a situation involves ethics from two
observations. First, ethical decisions always involve normative decisions. These are
decisions where the manager must decide if something is good or bad, right or
wrong. Second, ethics always involve moral decisions. These are decisions (like those
involving lying or stealing) that society views as having serious moral consequences.
● Ethical or Not? Sometimes it’s clear what the ethical thing to do is, but often
it is not. Sometimes it’s fairly clear. One guideline is that if the decision makes the
person feel ashamed or remorseful, or involves a matter of serious consequence
such as murder, then chances are it is unethical. For example, you are the pur-chasing
manager, and your biggest supplier offers you a $10,000 all-expenses-paid
trip to play golf in Scotland, but asks you not to tell your boss. Most people would
(rightly) assume that taking the trip is unethical.
On the other hand, many ethical decisions are judgment calls, and here it’s not
so clear what is ethical and what is not. Conflicts of interest often fall in this cate-gory.
Conflicts of interest arise when someone who represents Party A in dealings
with Party B has a hidden relationship with Party B. For example, a big supplier
(who you know your firm is thinking of dropping in favor of another) offers you
(the purchasing manager) some help in getting admitted to a graduate program by
Online Study Center
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Managing Now! LIVE
Online Study Center
ACE the Test
Managing Now! LIVE

Ethics in an Age of Information Technology ■ 31
calling his friend, the dean. What would you do? Similarly, some doctors accept
expensive free dinners and trips from drug companies, although they contend
(perhaps correctly) that accepting those gifts cannot affect whether and how
much they prescribe those companies’ drugs.
There are countless other ethical judgment calls. For example, at election
time, many newspapers size up the accuracy and honesty of political ads. How far
can a candidate (or company) go in embellishing the truth or stating facts out of
context in ads? It’s an ethical judgment call. As another example, most people
would say that lying is bad. But if a person who plans to cause harm asks you
where his victim is, would lying still be bad? Perhaps not.5 The fact that ethics may
be situational complicates things even more. For example, bribery in some coun-tries
is so widespread that people in those countries don’t view it as wrong.
Ethics and the Law
Why not just follow the law? It may seem odd, but the law is not a perfect guide
about what is ethical. Something may be legal but not ethical, and something may
be ethical but not legal. Charging a naïve customer an exorbitant price may be
legal but unethical. Insulting the government may be ethical by society’s broader
norms but still illegal in some countries. Patrick Gnazzo, vice president for busi-ness
practices at United Technologies Corp. (and a former trial lawyer), put it this
way: “Don’t lie, don’t cheat, don’t steal. We were all raised with essentially the same
values. Ethics means making decisions that represent what you stand for, not just
what the laws are.”6
If it’s not just legal constraints, why do people do the right thing? One ethicist
explains this by suggesting people fall along a continuum, from selfish egoists to
people of integrity. Some must be forced to be ethical, while some do so voluntar-ily.
At one end, the selfish egoist basically says, “I’ll do whatever I think I can get
away with.”7 To stop or slow them down, governments pass laws, and many man-agers
do follow these legal standards. Other managers and professionals voluntar-ily
comply with the professional standards of their professions or professional
associations. For example, the professional association of executive recruiters has
rules regarding how long a recruiter should wait before approaching a manager he
or she placed in a position about a second new position. Finally, some people do
not need laws or standards to get them to do the right thing. They are people of
integrity who do what they honestly believe is right.8
Compare your ethics answers to those of Americans in one survey by answer-ing
the quiz in Figure 2.1. You’ll find the answers on page 58.
● Managing Now: Ethics and Information Technology An Internet spam
gang recently sent misleading e-mails to businesses and consumers in the United
States. Most people saw this as unethical. Microsoft helped catch the spammers. It
used thousands of trap accounts with addresses on its e-mail service.9
For all its benefits, modern information technology does prompt new ethical
concerns. A short list of concerns includes intellectual property piracy, computer
crimes (including hacking, viruses, and cyberterrorism), security and reliability of
intellectual property and of records and forms, spamming, online marketing to
children, and privacy.10
Of these, one survey found that business managers ranked IT-related security
and privacy as the two main technology-related issues they face. “Security refers
to a company’s attempts to prevent inappropriate access to the company’s
resources. Privacy refers to an individual’s expectation that what he or she does will
remain secret.”11 IT issues raise serious ethical concerns.
security: a company’s attempts
to prevent inappropriate access
to the company’s resources
privacy: an individual’s
expectation that what he or she
does will remain secret

OFFICE TECHNOLOGY GIFTS AND ENTERTAINMENT
8. Is a $50 gift to a boss unacceptable?
Yes No
10. Of gifts from suppliers: Is it OK to
take a $200 pair of football tickets?
13. Is it OK to take a $25 gift certificate?
14. Can you accept a $75 prize won at a
raffle at a supplier’s conference?
15. Due to on-the-job pressure, have you
ever abused or lied about sick days?
16. Due to on-the-job pressure, have
you ever taken credit for someone
else’s work or idea?
● Privacy and IT As the Managing Now section notes, privacy is now more of a
concern than in the past because information technology facilitates collecting,
processing, and disseminating vast quantities of employee and consumer informa-tion.
12 For example, websites use cookies to track users’ online behavior. They do
this to see which targeted ads are most effective and to maintain passwords and
other personalization features at many websites.13
Most consumers don’t like cookies. For example, in a survey, 64 percent of 150
Internet users said cookies represented an invasion of their privacy. Fifty-two per-cent
disable cookies before using the Web. About 39 percent delete cookies on a
weekly basis, and 25 percent do so monthly.14 DoubleClick Inc. uses cookies to
1. Is it wrong to use company e-mail
for personal reasons?
Yes No
2. Is it wrong to use office equipment
to help your children or spouse do
schoolwork?
Yes No
3. Is it wrong to play computer games on
office equipment during the workday?
Yes No
4. Is it wrong to use office equipment
to do Internet shopping?
Yes No
5. Is it unethical to blame an error you
made on a technological glitch?
Yes No
6. Is it unethical to visit pornographic
Web sites using office equipment?
Yes No
TRUTH AND LIES
7. What’s the value at which a gift from a
supplier or client becomes troubling?
$25 $50 $100
9. Is a $50 gift FROM the boss
unacceptable?
Yes No
Yes No
11. Is it OK to take a $120 pair of
theater tickets?
Yes No
12. Is it OK to take a $100 holiday food
basket?
Yes No
Yes No
Yes No
Yes No
Yes No
F IGURE 2.1
The Wall Street Journal Workplace Ethics Quiz
The spread of technology into the workplace has raised a variety of new ethical questions, and
many old ones still linger.
SOURCE: Adapted from Wall Street Journal, 21 October 1999, pp. 81–84. Ethics Officer Association, Belmont, Mass.: Ethics Leadership Group,Wilmette, Ill. Surveys sampled a
cross-section of workers at large companies and nationwide.
cookies: small files deposited
on a visitor’s hard drive to track
the person’s visits

Ethics in an Age of Information Technology ■ 33
track users’ online habits. Several years ago, it created controversy by matching
identifiable personal information with previously anonymous user profiles.15
Cookie-related ethical issues can be tricky. For example, if a consumer willingly
sends a website personal information, then collecting that information is ethical.
On the other hand, a monitoring program that secretly gathers this information to
use for identity theft is unethical. But suppose the person willingly gives informa-tion
to one site. That site then sells it to another site, which in turn uses it to pro-mote
its ownWeb services to the individual. In this situation, it isn’t clear that what
the websites did was ethical or not.16
Two events brought the privacy/ethics issue into focus for many people. Pas-sage
of the post-9/11 Patriot Act basically entails a tradeoff of some privacy for
added security. However, some in Congress argued that the government’s moni-toring
of some domestic phone calls without judicial consent was both illegal and
unethical. Others questioned whether librarians should have to transfer user lists
to law enforcement officials.
Similarly, passage of the Health Insurance Portability and Accountability
Act (HIPAA) affected many people. This act established national standards for
maintaining and electronically transferring patients’ health-care information. It
stemmed in part from concerns that the health-care industry was not doing
enough to protect patients’ privacy.17
● Employee Monitoring and IT Electronically monitoring employees raises
similar privacy and ethics concerns. For example, electronic performance moni-toring
(EPM) means having supervisors electronically monitor the amount of
computerized data an employee is processing per day. It’s estimated that as many
as 26 million U.S. workers have their performance monitored electronically. This
fact has already triggered congressional legislation aimed at requiring that em-ployees
receive precise notification of when they will be monitored.
Electronic performance monitoring is also becom-ing
more sophisticated. Thanks to cell phones and
wireless communication, employers like United Parcel
Service (UPS) use GPS units to monitor the where-abouts
of their deliverypeople. A federal law now re-quires
all new cell phones to have GPS capabilities; this
should expand the number and range of employees
that employers keep tabs on.18 Many more employers,
like Bronx Lebanon Hospital in New York, use biometric
scanners, for instance, to ensure that the employee
who clocks in in the morning is really who he or she
claims to be.19
Monitoring is spreading. For example, one survey
by the Society of Human Resource Management found
that about two-thirds of companies monitor e-mail ac-tivity,
three-fourths monitor employee Internet use,
and about two-fifths monitor phone calls.20 Another
survey of 192 companies concluded that 92 percent
check their employees’ e-mail and Internet use at work.
Twenty-two percent monitor employees’ online activi-ties
all the time.21
Air-Trak employee using global positioning software to track
an employee’s movements.
There are two main legal restrictions on workplace monitoring: the Electronic
Communications Privacy Act (ECPA) and common-law protections against inva-sion
of privacy.Congress intended the ECPA to restrict interception and monitoring

of oral and wire communications. Common-law protections against invasion of
privacy are not written down in laws, but reflect many years’ worth of judges’
decisions.22
Employers do have legitimate reasons for electronically monitoring employ-ees.
As one example, employees who use their company computers to swap and
download music files can ensnare their employers in illegal activities.23 Monitor-ing
can also improve productivity, as when UPS tracks the whereabouts of their
drivers.
● Security and IT Information technology also raises serious computer secu-rity
concerns. The Australian Stock Exchange recently had to review its online
practices when a security breach allowed people using its website to view the de-tails
of other users’ stock-market activity.24 Several credit-card-processing compa-nies
recently had data on millions of clients stolen. Employees understandably
worry that nonauthorized persons may gain access to their private personnel
files. Similarly, most people know that what an attorney and his or her client dis-cuss
is supposed to be confidential. Yet when an e-mail message bounces from
computer to computer through the Internet, it’s more like a postcard than a
sealed letter.25
● Piracy Information technology has created whole new industries devoted to
pirating copyrighted music, books, andmovies. A walk through video stores in some
foreign countries would reveal thousands of pirated music andmovie performances.
And many people routinely download and trade copyrighted files with friends or use
pirated software at work. Does morality forbid downloading? Some say no, that the
Internet should make transfers free. Others argue that it’s immoral (and thus uneth-ical)
to violate copyrights by downloading and sharing music or movies.26
● Reducing IT’s Ethical Concerns Technical and legal safeguards can reduce
piracy, privacy, and security concerns up to a point. For example, techniques for
improving security include encrypting e-mail messages, installing firewalls and
antivirus software, instituting access control techniques for preventing unautho-rized
access, making the computer itself physically secure by using passwords,
attaching a privileged notice to each e-mail, and using digital signatures on
e-mails.
However, most ethical issues come back to the ethics of people. What about the
entrepreneur who’s thinking of saving some money by illegally duplicating a pro-gram
for his or her employees to use? Or, say, the employee whose company is
monitoring his or her e-mail messages, or the consumer who’s submitting personal
information to a website? In most cases, the ethics of those involved—the entre-preneur,
the people doing the monitoring, and those managing the website—are
the only real safeguards.
What Influences Ethical Behavior at Work?
everal years ago, MCI-WorldCom’s CFO pleaded guilty to helping hide the
company’s true financial condition. The government accused him of having
S
subordinates make fraudulent accounting entries and of filing false statements

What Influences Ethical Behavior at Work? ■ 35
with the SecuritiesandExchangeCommission(SEC).Whywoulda starCFOdothis?
Because, he said, he thought he was helping MCI: “I took these actions, knowing
they were wrong, in a misguided attempt to preserve the company to allow it to
withstand what I believed were temporary financial difficulties.”27
Managers can learn some lessons from MCI-WorldCom. Even gifted man-agers
fail if they make the wrong ethical choices. And even honest managers find it
easy to convince themselves that what they’re doing is not really wrong.
As the example from WorldCom shows, there is no simple answer to the ques-tion,
What influences ethical behavior at work? It is not just an issue of personal
honesty. Basically, to quote just one source, “[E]thical decisions are the result of
the interaction of the person and the situation.”28 Let us look more closely at what
this means.
Individual Factors
Certainly, people do bring to their jobs their own ideas of what is morally right and
wrong, and this influences what they do. Managers use a variety of devices, from
polygraph (lie detector) machines (now banned in most cases) to written honesty
tests to uncover such tendencies.
Personal ethical tendencies are important. For example, researchers surveyed
CEOs of manufacturing firms. The aim was to explain the CEOs’ intentions to
engage (or to not engage) in two questionable business practices: soliciting a
competitor’s technological secrets and making payments to foreign government
officials to secure business. The researchers concluded that the CEOs’ personal
tendencies more strongly affected their decisions than did environmental or orga-nizational
pressures.29
Several personal traits seem to predispose people to possibly making ethical
mistakes. Age is one factor. One study surveyed 421 employees to measure the
degree to which age, gender, marital status, education, dependent children,
region of the country, and years in business influenced responses to ethical
decisions. (Decisions included “doing personal business on company time” and
“calling in sick to take a day off for personal use.”) Older workers in general had
stricter interpretations of ethical standards and made more ethically sound
decisions than did younger employees. Other studies have found this ethical
generation gap.30
Researchers in another study asked graduate and undergraduate students to
complete a questionnaire containing eleven statements. Each statement de-scribed
a common but probably unethical behavior concerning intellectual prop-erty.
The good news was that the students did label as highly unethical those
behaviors that had to do with personal privacy or property theft. The bad news
was that those behaviors that had to do with theft of the company’s property or
privacy did not elicit the same negative reactions. Instead, the students tended to
be neutral about whether these behaviors were ethical or not.31
Another study focused on how different people react to protecting intellectual
property and privacy rights. Machiavellian personalities—those who took some
pleasure in manipulating others—were more likely to view ignoring the intellec-tual
property and privacy rights of others as acceptable.32
● Self-Deception Personal tendencies are also important because self-deception
has a bigger influence in ethical choice than most people realize. To

sum this up, “Corrupt individuals tend not to view themselves as corrupt.”33 They
rationalize their unethical acts as being somehow okay. As the president of the
Association of Certified Fraud Examiners puts it, people who have engaged in
corrupt acts “. . . excuse their actions to themselves, by viewing their crimes as
non-criminal, justified, or part of a situation which they do not control.”34
Table 2.135 summarizes six ways managers rationalize away the corruptness of
their corrupt acts. For example, consider the “appeal to higher loyalties” rational-ization.
Here the manager might say, “I’m doing this to protect the company.” In
one real example, three former executives pleaded guilty to federal charges in
what authorities then called the largest and longest accounting fraud in history;
the fraud had lasted for twelve years. The managers said they had done what they
did to keep their company’s stock price high.36
T ABLE 2.1
How Managers Rationalize Their Corrupt Behavior
Strategy Description Examples
Denial of responsibility The actors engaged in corrupt “What can I do? My arm is being twisted.”
behaviors perceive that they “It is none of my business what the
have no other choice than to corporation does in overseas bribery.”
participate in such activities.
Denial of injury The actors are convinced that “No one was really harmed.”
no one is harmed by their “It could have been worse.”
actions; hence, the actions
are not really corrupt.
Denial of victim The actors counter any blame for “They deserved it.”
their actions by arguing that “They chose to participate.”
the violated party deserved
whatever happened.
Social weighting The actors use two basic approaches “You have no right to criticize us.”
to reduce the perceived importance “Others are worse than we are.”
of corrupt behaviors: (1) condemn
the condemner and (2) selective
social comparison.
Appeal to higher loyalties The actors argue that their “We answered to a more important cause.”
violation of norms is due to “I would not report it because of my
their attempt to realize a loyalty to my boss.”
higher-order value.
Metaphor of the larger The actors rationalize that they “We’ve earned the right.”
are entitled to indulge in “It’s all right for me to use the Internet for
deviant behaviors because of personal reasons at work. After all, I
their accrued credits work overtime.”
(time and effort) in their jobs.
Source: Vikas Anand et al., “Business as Usual: The Acceptance and Perpetuation of Corruption in
Organizations,” Academy of Management Executive, 2004, vol. 18, no. 2, p. 41. Copyright 2004 by Academy of
Management (NY). Reproduced with permission of Academy of Management (NY) in the format Textbook via
Copyright Clearance Center.

What Influences Ethical Behavior at Work? ■ 37
Organizational Factors
In a famous study first conducted at Yale University some years ago, researcher
Stanley Milgram showed that, given the right situation, even ethical people do
unethical things.37 In this case, numerous undergraduate students were willing
to inflict what they erroneously thought was pain on fellow students in a mis-guided
effort to help the researcher conduct his study. One conclusion we can
draw is that misplaced loyalties distort peoples’ ethical choices. Most of the ap-parently
sadistic students felt they were, in effect, “just following orders.” A sec-ond
is that the organization and its leaders have a big influence on whether
people behave ethically. Pressure, the boss, and the firm’s culture are three such
factors.
● Pressure to Perform Putting employees under undue pressure fosters eth-ical
compromises. A study by the American Society of Chartered Life Underwriters
found that 56 percent of all workers felt some pressure to act unethically or ille-gally,
and that the problem seems to be getting worse.38
Table 2.2 shows the principal causes of ethical compromises as reported by six
levels of employees and managers. Dealing with scheduling pressures was the
T ABLE 2.2
Principal Causes of Ethical Compromises
Senior Middle Front-Line Professional Administrative, Hourly
Management Management Supervisor Nonmanagement Salaried Employees
Meeting schedule pressure 1 1 1 1 1 1
Meeting overly aggressive 3 2 2 2 2 2
financial or business
objectives
Helping the company 2 2 4 4 3 4
survive
Advancing the career 5 4 3 3 4 5
interests of my boss
Feeling peer pressure 7 7 5 6 5 3
Resisting competitive 4 5 6 5 6 7
threats
Saving jobs 9 6 7 7 7 6
Advancing my own career 8 9 9 8 9 8
or financial interests
Other 6 8 8 9 8 9
Note: 1 is high; 9 is low.
Source: O. C. Ferrell and John Fraedrich, Business Ethics, 3rd ed. (Boston: Houghton Mifflin, 1997), p. 28.
Adapted from Rebecca Goodell, Ethics in American Business: Policies, Programs, and Perceptions (Ethics
Resource Center, 1994), p. 54. Reprinted with permission of the Ethics Resource Center.

number 1 reported cause of ethical lapses. Meeting overly aggressive financial
or business objectives and helping the company survive were two other top
causes. Advancing my own career or financial interests ranked toward the bottom
of the list.
● The Boss’s Influence The leader’s actionsmaybe“the single most important
factor in fostering corporate behavior of a high ethical standard.”39 In other words,
employees tend to take their ethical signals from their bosses. Yet only about
27 percent of employees in one poll strongly agreed that their organizations’ lead-ership
is ethical.40 One writer gives these examples of how supervisors knowingly
(or unknowingly) lead subordinates astray ethically:
◗ Tell staffers to do whatever is necessary to achieve results.
◗ Overload top performers to ensure that work gets done.
◗ Look the other way when wrongdoing occurs.
◗ Take credit for others’ work or shift blame.41
When managers do set the wrong tone, it often starts at the top. The National
Commission on Fraudulent Financial Reporting concluded that “more than any
other key individual, the chief executive sets the tone at the top that affects
integrity and ethics and other factors of a positive, controlled environment.”42
Some top managers react to ethical crises in admirable ways. When he found
out that a rogue group of Procter & Gamble (P&G) investigators were going through
competitor Unilever’s garbage for information, former P&G CEO John Pepper was
reportedly shocked. He ordered the campaign to stop, and he fired the managers
responsible for hiring the spies. Then, he blew the whistle on his own company. He
had P&G inform Unilever of what his firm had done. Unilever demanded, among
other things, that Procter & Gamble retain a third-party auditor to make sure it does
not take advantage of the documents its spies stole from Unilever’s trash.43
● The Organizational Culture Employees also get signals about what is ac-ceptable
behavior from the culture of the organization in which they work. We may
define organizational culture as the characteristic traditions, norms, and values
employees share. Values are basic beliefs about what you should or shouldn’t do
and about what is and is not important. Google’s
founders famously wrote “Do no evil” in the firm’s
prospectus when they took their company public on
the stock market. They wanted “Do no evil” to be a
basic value or rule employees applied when making
decisions on behalf of Google.
Managers shape organizational cultures in many
ways. They do so consciously, for example, by using
symbols (such as incentives to reward ethical
behavior), offering stories about ethical employees,
and holding ceremonies to reward employees who did
the right thing.Writing the values up as rules or codes
(as Google did) also illustrates using symbols.
Managers sometimes shape culture unconsciously.
Thus, the manager who unthinkingly accepts expensive
dinners from a supplier in violation of company rules
may send the signal to subordinates that unethical be-havior
really isn’t that bad.
organizational culture: the
characteristic traditions, norms,
and values that employees share
Google’s organizational culture.

Encouraging Ethical Behavior at Work ■ 39
Encouraging Ethical Behavior at Work
ust as there is no single cause of unethical behavior at work, there’s no one sil-ver
bullet to prevent it. Instead, managers must take several steps to ensure eth-ical
behavior by their employees.44
Publish an Ethics Code
J
The first step is usually to adopt an ethics code. An ethics code lays out the prin-ciples,
values, and guidelines the company wants its employees to adhere to.45
One study found that 56 percent of large firms and about 25 percent of small firms
had corporate ethics codes.46 As an example, IBM’s ethics code has this to say
about tips, gifts, and entertainment:
No IBM employee, or any member of his or her immediate family, can accept
gratuities or gifts of money from a supplier, customer, or anyone in a business
relationship. Nor can they accept a gift or consideration that could be per-ceived
as having been offered because of the business relationship.
“Perceived” simply means this: if you read about it in the local newspaper,
would you wonder whether the gift just might have had something to do with
a business relationship? No IBM employee can give money or a gift of signifi-cant
value to a customer, supplier, or anyone if it could reasonably be viewed
as being done to gain a business advantage.47
The ethics code is often part of (and, in most cases, the same as) a code of con-duct.
The latter addresses not just ethics but also closely related matters such as
respecting the environment.
Basically, all publicly traded companies doing business in the United States
must have ethics codes.48 The Sarbanes-Oxley Act (passed after a series of top cor-porate
management ethical lapses a few years ago) requires companies to declare
if they have a code of conduct. Federal sentencing guidelines reduce penalties for
companies convicted of ethics violations if they have codes of conduct. Both the
New York Stock Exchange and NASDAQ require listed companies to follow their
exchanges’ corporate governance rules.
Codes of conduct are also a global phenomenon (see Figure 2.2). Nations and
groups of nations (including Japan, South Africa, the European Union, and the
Online Study Center
ACE the Test
Managing Now! LIVE
ethics code: the principles,
values, and guidelines a
company wants its employees
to adhere to
Asian Pacific Economic Cooperation Forum Business Code of Conduct
(www.cauxroundtable.org)
Caux Round Table Principles for Business (www.cauxroundtable.org)
European Corporate Code of Conduct (European Union Parliament, www.europa.eu.int)
Fair Labor Association Workshop Code of Conduct (www.fairlabor.org)
Global Sullivan Principles (http://globalsullivanprinciples.org)
ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social
Policy (www.ilo.org)
OECD Guidelines for Multinational Enterprises—2000 (www.corporate-accountability.org)
OECD, Principles of Corporate Governance—2004 (www.oecd.org)
Rules of Conduct on Extortion and Bribery in International Business Transactions
(International Chamber of Commerce, www.iccwbo.org)
United Nations Universal Declaration of Human Rights (www.un.org)
■
■
■
■
■
■
■
■
■
■
F IGURE 2.2
Codes of Conduct
SOURCE: Adapted from Standards of
Corporate Social Responsibility by Social
Venture Network, 1999,www.svn.org/.

Asian Pacific Economic Cooperation Forum) have corporate codes they expect
companies to follow. These codes generally do not carry the weight of law. How-ever,
they do set out what these countries view as acceptable corporate behavior.
As such, “. . . They are slowly defining the terms and conditions of a company’s
license to operate—around the world.”49
Businesspeople also hope that an antibribery treaty signed by thirty-four
trading nations will reduce the incidence of corruption. Some executives also ad-vocate
a global corporate ethics standard under the auspices of the International
Standards Organization (ISO). The ISO now provides international quality (ISO
9000) and environmental (ISO 14,000) standards. “We want a simple, effective way
to operate [ethically] internationally—one that meets all the criteria of doing
business overseas, whether it’s proving assurance of quality or ethical business
practices,” says one executive.50 ISO ethical standards would provide a detailed list
of criteria companies must meet to prove that they do business ethically.
Codes of conduct tend to include several common principles. After reviewing
various international codes of conduct, researchers concluded that most codes
address the eight principles listed in Figure 2.3.
Fiduciary principle: act as a fiduciary for the company and its investors.
Carry out the company’s business in a diligent and loyal manner, with the degree of
candor expected of a trustee.51
I.
II.
III.
IV.
V.
VI.
VII.
Property principle: respect property and the rights of those who own it.
Refrain from theft and misappropriation, avoid waste, and safeguard the property
entrusted to you.
Reliability principle: honor commitments. Be faithful to your word and follow through
on promises, agreements, and other voluntary undertakings, whether or not
embodied in a legally enforceable contract.
Transparency principle: conduct business in a truthful and open manner. Refrain from
deceptive acts and practices, keep accurate records, and make timely disclosures of
material information while respecting the obligations of confidentiality and privacy.
Dignity principle: respect the dignity of all people. Protect the health, safety, privacy,
and human rights of others. Adopt practices that enhance human development of the
workplace, the marketplace, and the community.
Fairness principle: engage in free and fair competition, deal with all parties fairly and
equitably, and practice nondiscrimination in employment and contracting.
Citizenship principle: act as responsible citizens of the community. Respect the law,
protect public goods, cooperate with public authorities, avoid improper involvement in
politics and government, and contribute to community betterment.
VIII. Responsiveness principle: engage with parties who may have legitimate claims and
concerns relating to the company’s activities, and be responsive to public needs while
recognizing the government’s role and jurisdiction in protecting the public’s interest.
F IGURE 2.3
Eight Common Code of
Conduct Principles

T ABLE 2.3
Six Steps to Effectively Implementing an Ethics Code
1. Distribute the code of ethics to all employees, subsidiaries, and associated
companies.
2. Assist employees in interpreting and understanding the application and intent
of the code.
3. Specify management’s role in the implementation of the code.
4. Inform employees of their responsibility to understand the code, and provide
them with the overall objectives of the code.
5. Establish grievance procedures.
6. Provide a conclusion or closing statement, such as this one from Cadbury
Schweppes: The character of the company is collectively in our hands. Pride in
what we do is important, and let us earn that pride by the way we put the
beliefs set out here into action.
Source: O. C. Ferrell and John Fraedrich, Business Ethics, 3rd ed. (Boston: Houghton Mifflin, 1997), p. 176.
Adapted from Walter W. Manley II, The Handbook of Good Business Practice (London: Routledge, 1992), p. 16.
It is customary for the firm to set forth its ethics code in the form of written
documents.52 Table 2.3 summarizes six steps for effectively implementing an
ethics code.
● Are Ethics Codes Effective? Enron was a large gas and power trading
company that basically imploded in the face of allegations of top management
misconduct. Eventually, several of its managers plead guilty. Yet Enron’s ethics
code was readily available on the company’s website. It said, among other things,
“As a partner in the communities in which we operate, Enron believes it has a re-sponsibility
to conduct itself according to certain basic principles.” Those values
include “respect, integrity, communication and excellence.”53
However, in most cases, ethics codes do have a positive impact on employees’
ethical behavior. One study consisted of interviews with 766 subjects over a
two-year period.54 The researchers drew two main conclusions. First,
Respondents who worked for companies having a code of ethics judge subor-dinates,
co-workers, themselves and especially supervisors and top managers
to be more ethical than respondents employed in organizations not having a
formal code of ethics. . . .55
Second, it seemed to be the mere presence of the code (rather than its content)
that was important.
In fact, we found that although most respondents could not recall specific fea-tures
of their company’s ethics code, employees of companies having a code
had very different perceptions of ethical climate and behavior than employees
of companies lacking a code. . . .56
What Managers Do to Encourage Ethical Behavior
Having an ethics code doesn’t guarantee employees will act ethically, as Enron
discovered. Instead, managers need to implement and enforce the code’s ethical

IMPROVING YOUR ETHICS-BUILDING SKILLS
There is much that you, as a manager, can do to make it
more likely that your employees behave ethically.
Walk the Talk
First, we’ve seen in this chapter that the leader’s actions
are the biggest element in determining whether employ-ees’
ethical standards stay high. Supervisors therefore
need to walk the talk when it comes to behaving ethically
and enforcing ethics rules.
Unfortunately, supervisors sometimes send the
wrong cues. For example, telling subordinates they should
do “whatever it takes” to get the job done, overloading
subordinates, and ignoring incidents of wrongdoing help
set the stage for ethical misdeeds.
Even for experienced supervisors, knowing where to
draw the ethical line sometimes isn’t easy. Questions to
ask include, Is what you’re about to do legal? Is it right?
How do you think you’ll feel afterward? How would you
react if you saw your actions described in the newspaper?
Clarify Your Expectations
Make it clear what your expectations are with respect to
the ethical values you want subordinates to follow. If your
company has a corporate ethics code, emphasize, from
your subordinate’s first day, that you expect him or her to
follow that code.
Some managers use stories and examples to make
their ethical expectations come alive.The examples may be
local, as when they describe the lengths to which someone
in the company went to do the right thing. The news is
always a good source, as when that MCI-WorldCom exec-utive
said that he knew he was doing wrong, but he was
trying to save the company.
However, clarifying expectations doesn’t mean just
talking about them. Strong statements may reduce the
risk of legal and ethical violations. But those statements
are meaningless if subordinates see that you or your com-pany
does not back them up with enforcement.
Screen Out the Problem Employees
To some extent, the easiest way to avoid ethical lapses is
to screen out potential problem employees before you
hire them. Some companies use honesty tests to screen
out ethically undesirable applicants, but testing is not your
only option.
To the degree possible, make sure you’ve checked
out the person you’re thinking of hiring with careful back-ground
and reference checks. There’s generally nothing
wrong with asking all candidates some very direct ques-tions.
For example, Have you ever observed someone
stretching the rules at work? What did you do about it?
Have you ever had to go against company guidelines or
procedures to get something done? Have you ever stolen
anything at work?
Support Ethics Training
We’ve seen that, for all practical purposes, ethics training
is mandatory today. Federal sentencing guidelines from
principles. Here, three main things—top management commitment, training, and
enforcement—are important.
● Top Management Commitment We saw that employees tend to take their
ethical signals from their bosses. As two researchers put it, “To achieve results,
the chief executive officer and those around the CEO need to be openly and
strongly committed to ethical conduct, and give constant leadership in tending
and renewing the values of the organization.”57 Lockheed Martin Corporation
appointed a chief ethics officer, Nancy Higgins, as executive vice president of
ethics and business conduct to emphasize top management’s commitment to
ethics.58
● Train Employees Training plays an important role in publicizing a com-pany’s
ethics principles and in encouraging employees to adhere to them. For

1991 reduced penalties for employers accused of miscon-duct
who had implemented codes of conduct and ethics
training. An amendment to those guidelines, which be-came
effective in 2004, outlines stricter ethics training
example, based on one survey, 89 percent of surveyed ethics officials said that their
companies use the new-hire orientation to convey ethics codes, and 45 percent
use annual refresher training sessions. Figure 2.4 on page 44 shows other findings
from this survey.
● Measure and Enforce One study of effective ethics programs found that all
these firms used surveys or audits to monitor actual compliance with ethical
standards.59 Board members and employees should then discuss the results.60
Managers should address any ethical lapses by enforcing the firm’s ethics code.
As one study of ethics concludes, “Strong statements by managers may reduce
the risk of legal and ethical violations by their work forces, but enforcement of
standards has the greatest impact.”61 The accompanying feature, Improving Your
Ethics-Building Skills, focuses on what the individual manager/supervisor can do
to encourage ethical behavior.
requirements.
In most firms, the manager’s responsibility here is to
make sure his or her employees are participating in the
ethics training program and doing so seriously. Packaged
ethics training programs are also widely available online.
For example, skillsoft.com and netG.com offer such
programs.
Ensure Fair and Unbiased Performance Appraisals
How the supervisor handles the employees’ periodic
performance appraisals is important. Unfairness and bias
in the appraisal sends a strong signal that ethics is sec-ondary
in the company or to the supervisor.To send the
signal that fairness and ethics are paramount, the em-ployees’
standards should be clear, employees should
understand the basis upon which you’re appraising them,
and you should perform the appraisals objectively and
fairly.
Use Rewards and Discipline
Because behavior tends to be a function of its conse-quences,
it is the manager’s (and the company’s) responsi-bility
to ensure that the firm rewards ethical behavior and
penalizes unethical behavior. In fact, when the company
does not deal swiftly with unethical behavior, it’s often
the ethical employees (not the unethical ones) who feel
punished.
Strive to Build an Atmosphere of Fairness, Justice,
and Respect
Ethics always involve questions of right and wrong and of
society’s moral standards. Therefore, employees tend to
associate unfair, unjust, disreputable behavior with unethi-cal
companies and supervisors.They tend to associate fair,
just, respectful behavior with ethical companies and
supervisors.
Some workplace unfairness is blatant. For example,
some supervisors are workplace bullies, yelling at or ridi-culing
subordinates, humiliating them, and even making
threats. Behavior like this is not just unfair, but unethical
too. Many firms therefore have antiharassment policies.
For example,“It is the policy of this company that all em-ployees,
customers, and visitors are entitled to a respect-ful
and productive work environment, free from behavior
and language constituting workplace harassment.”
Yet in practice, it’s not gross behavior like workplace
bullying that’s the problem. Instead, it’s the many small day-to-
day opportunities where the manager should have been
fair but was not. To the extent that the manager carries
out his or her hiring, training, appraisal, reward, discipline,
and termination responsibilities with honesty, fairness, and
respect, he or she can foster a feeling among employees
that they’re working in a place that values ethical behavior
and where ethical behavior must be the norm.

Company ethics officials say they convey ethics codes and programs to employees
using these training programs:
New hire orientation
Annual refresher training
Annual training
Occasional but not scheduled training
New employee follow-up sessions
No formal training
Company ethics officials use these actual training tools to convey ethics training
to employees:
Copies of company policies
Ethics handbooks
Videotaped ethics programs
Online assistance
Ethics newsletters
89%
45%
32%
31%
20%
5%
78%
76%
59%
39%
30%
F IGURE 2.4
The Role of Training in Ethics
SOURCE: Susan Well,“Turn Employees
into Saints,” adapted from HRMagazine,
December 1999, p. 52.
Managing Now: Using Information Technology
to Encourage Ethical Behavior
Turner Broadcasting System Inc. noticed that employees at its CNN London busi-ness
bureau were piling up overtime claims. CNN installed new software to moni-tor
every webpage every worker used. Overtime expenses soon plunged. As the
firm’s network security specialist puts it, “If we see people were surfing the Web all
day, then they don’t have to be paid for that overtime.”62
As at CNN, information technology is a double-edged sword for employee
ethics. It enables employees to spend time at work on personal pursuits—
shopping online or sending messages to friends, for instance. (UPS caught one
employee using the company computer to run a personal business.) However, as
we saw earlier in this chapter, information technology also enables employers to
monitor their employees’ behavior as never before.
● The Wireless Revolution Internet monitoring is just one example of how
managers use technology to keep closer tabs on their employees. When cable

Complying with Sarbanes-Oxley and Other Regulations
Particularly for larger firms, complying with Sarbanes-
Oxley (SOX) would be prohibitively expensive without
IT support. For example, SOX requires that top man-agers
certify, through a series of sign-off procedures, that
the company has complied with its financial statement
accuracy and whistle-blower requirements. Enterprise-based
financial-software packages enable managers to
quickly analyze each department’s compliance proce-dures,
and to organize the financial data for documenta-tion
and sign-off.63
Sarbanes-Oxley is just one of the many national and in-ternational
laws and regulations with which companiesmust
comply. For example, Adaptec Corp. provides data storage
to many companies and government agencies, many
abroad.Particularly for high-technology companies such as
Adaptec, complying with global trade regulations is quite
complex.The software company SAP’s “Global Trade Ser-vices”
software package helps Adaptec to comply. For ex-ample,
this system automatically compares Adaptec’s busi-ness
partners around the world with the “restricted party”
lists various governments publish. The package’s Export
Control System checks for embargos and then automati-cally
performs the necessary export license activities. Says
one Adaptec manager, “Many of our orders, destinations,
and business partners have to be screened the day of the
shipments . . .We now have that data in a single, integrated
system for a more easily accessible electronic record.”64
Similarly, IT helps international employers comply
with local employment, payroll, safety, and recording
regulations in each country in which they operate.65 For
example, software packages combined with special data-input
devices help companies comply with federal money-laundering
regulations by automatically identifying and
classifying suspicious cash-flow activities. Others help fi-nancial
companies comply with banking regulations such
as the Home Mortgage Disclosure Act.66 The European
Union requires most publicly traded companies to issue
consolidated financial statements consistent with Interna-tional
Financial Reporting Standards. Compliance here
would be impossible without using financial-software
packages for planning, budgeting, financial reporting, and
cost and profitability management.
repairperson Johnny Cupid starts his service truck, his employer BellSouth
knows exactly where he is. Thanks to BellSouth’s new global positioning satellite
(GPS) units, BellSouth supervisors know every time Cupid stops at a stoplight
and where he is as he makes his daily rounds. “I feel like they got their eye on me
all the time,” he says. “I can’t slow down anywhere anymore.”67 A BellSouth
spokesperson says, “GPS was not installed as an employee monitoring system.
It’s an efficiency tool, just like the wireless laptops and cellphones our techni-cians
have.” However, union workers filed about fifty grievances about the system
in one recent year. Cupid says, “I love my job (but) I don’t need any more stress.”
As at BellSouth, managers generally don’t use IT just to check up on em-ployees
but to improve efficiency. The Window on Managing Now feature
shows how managers use information technology to comply with government
regulations.
Lockheed Martin relies on IT for managing its ethics compliance programs.
For example, Lockheed uses its intranet to help its 160,000 employees take ethics
and legal compliance training online. Each short course addresses topics ranging
from insider trading to sexual harassment. The system also keeps track of who is
(and is not) taking the required courses.
Lockheed’s special electronic ethics software also keeps track of how well the
company and its employees are doing in terms of maintaining high ethical stan-dards.
68 For example, the program helped top management see that in one year,
4.8 percent of the company’s ethics allegations involved conflicts of interest. It

PRACTICE IT
DTE Energy’s Web-Based Ethics Training System
Complying with Sarbanes-Oxley means that publicly traded
companies need a cost-effective way of training employees
and of certifying that they really were trained.So when DTE
Energy, with 14,000 employees, needed ethics training, it
turned to aWeb-based program from Integrity Interactive
Corp. ofWaltham, Massachusetts. Now, all the company’s
employees have easy access through their computers to a
standardized ethics training program. DTE can also easily
track who has taken the training and who has not.The em-ployees
can take the training when they want to, and the
company can monitor their progress.As one officer at In-tegrity
Interactive said, it would have been easy in the 1990s
for companies to resist ethics training by saying
[W]e have 30,000 employees and 40% turnover.There’s
no way to train all these people in our code of conduct
and ethical compliance . . .The Internet has taken that
excuse away. It is now physically possible to reach any-one,
anywhere on the globe—and what’s more, to
prove that you’re doing it.69
shows that it takes just over thirty days to complete an ethics violation internal in-vestigation.
70 It also shows that several years ago, 302 Lockheed employees were
sanctioned for ethical violations. The accompanying Practice IT feature shows
how DTE Energy uses information technology for ethics training.
Social Responsibility Now
or years, environmental activists linked General Electric (GE) with wasting en-ergy
and dumping toxic wastes inNewYork’sHudson River.Today,GEis actively
F
pursuing socially responsible energy and environmental policies. The company is
appraising its managers based on their environment-friendly performance. Every
GE business unit must cut its greenhouse gas, or carbon dioxide, emissions.Under
GE’s Ecomagination strategy, it aims to double its revenues fromrenewable energy
such as hydrogen fuel cells within several years.71
General Electric isn’t doing this just because social responsibility makes for
good public relations. GE found that most of its customers believe that rising fuel
costs and environmental regulations will soon make alternative fuels and a
cleaner environment a necessity. As one of the world’s premier corporations, GE’s
new stance says much about how managers view social responsibility now. As sev-eral
writers put it:
[M]ore and more companies are accepting corporate citizenship as a new
strategic and managerial purpose requiring their attention. Once seen as a
purely philanthropic activity—a source of general goodwill, with no bottom-line
consequence—citizenship is moving from the margins of concern to the
center at leading companies.72
Figure 2.573 summarizes the new attitude and approach.
Social Responsibility Defined
Corporate social responsibility refers to the extent to which companies should and
do direct resources toward improving segments of society other than the firm’s
owners. In essence, “Theories of corporate social responsibility suggest that there
needs to be a balance between what business takes from society and what it gives
back in return.”74 Socially responsible behavior might include creating jobs for
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Social Responsibility Now ■ 47
minorities, controlling pollution, improving working conditions for one’s employ-ees
abroad, or supporting educational facilities or cultural events, for example.75
To Whom Is the Company Responsible?
The topic of social responsibility continues to provoke lively debate. On one point
all or most agree: “The socially responsible corporation is a good corporation.”76 In
other words, acting in a socially responsible manner means being ethical, doing
the right thing with respect to issues such as pollution or charitable contributions.
The question is, Is a company that tries to do its best for only its owners any
less ethical than one that tries to help customers, vendors, and employees, too?
The answer depends on what you believe is the purpose of a business. Many per-fectly
ethical people believe that a company’s only social responsibility is to its
stockholders. Others disagree.
● Managerial Capitalism The classic view is that a corporation’s main pur-pose
is to maximize profits for stockholders. Today, this view is most notably asso-ciated
with economist and Nobel laureate Milton Friedman. He said:
The view has been gaining widespread acceptance that corporate officials and
labor leaders have a “social responsibility” that goes beyond the interest of
their stockholders or their members. This view shows a fundamental miscon-ception
of the character and nature of the free economy. In such an economy,
there is one and only one social responsibility of business—to use its re-sources
and engage in activities designed to increase its profits so long as it
stays within the rules of the game, which is to say, engages in open and free
competition, without deception and fraud. . . .77
Friedman said that the firm’s profits belong to the stockholders, the com-pany’s
owners, and to them alone.78 He also said that the stockholders deserve
their profits because these profits derive from a voluntary contract among the var-ious
corporate stakeholders. For example, the community receives taxes, suppliers
are paid, employees earn wages, and so on. Everyone gets his or her due, and
additional social responsibility is unnecessary.
● Stakeholder Theory An opposing view is that business has a social respon-sibility
to serve all the corporate stakeholders affected by its business decisions. A
corporate stakeholder is “any group which is vital to the survival and success of
the corporation.”79
As shown in Figure 2.6, experts in this area traditionally identify six stake-holder
groups: stockholders (owners), employees, customers, suppliers, managers,
corporate stakeholder: any
group that is vital to the survival
and success of the corporation
Do the minimum required by law
Keep a low profile
Downplay public concerns
Reply to shareholders’ inquiries when
necessary
Communicate on a need-to-know basis
Make decisions on the bottom line and
laws alone
■
■
■
■
■
■
OLD ETHIC NEW ETHIC
Do the right thing
Show you are doing the right thing
Seek to identify and address public
concerns
Be responsible to shareholders
Communicate openly
Integrate all of the above into decision
making
■
■
■
■
■
■
F IGURE 2.5
Old and New Company
Attitudes
SOURCE: Adapted from Dunphy,D., Griffiths,
A., & Benn, S., Organizational Change for
Corporate Sustainability (New York:
Routledge, 2003), p. 11.

Stockholders
THE BUSINESS
Customers
Managers
Suppliers
Employees
Community
and the local community.80 Stakeholder theory holds that the rights of these
groups must be ensured, and, further, the groups must participate, in some sense,
in decisions that substantially affect their welfare.81
● The Moral Minimum Between the extremes of Friedman’s capitalism and
stakeholder theory lies an intermediate position. Moral minimum advocates
agree that the purpose of the corporation is to maximize profits but say that in
doing so, it must conform with the moral minimum. This means that the firm
should be free to strive for profits so long as it commits no harm.82 A business
would certainly have a social responsibility not to produce exploding cigarette
lighters or operate chemical plants that poison the environment. However, it’s
unlikely that the firm’s social responsibilities would extend to donating to charity
or educating the poor, for instance. The bottom line is that when it comes to being
socially responsible, there are many points of view.
Why Are Companies Socially Responsible?
Employees of the DeCoro sofa plant in Shenzhen, China, recently got into a fist-fight
with the plant’s Italian managers, who had fired them the week before. The
workers were protesting their firing. Hundreds of plant
workers soon took to the streets to protest what they
said was unfair treatment by the managers.
The incident prompted management to retain
experts to administer the plants’ first social audit.
Prompted by accusations of sweatshop working condi-tions
at other plants in the 1990s, social audits aim to
verify that plants are meeting both local labor laws and
buyers’ codes regarding things like safety conditions.
Yet many buyers, including giants like Nike, reportedly
know that some plant managers falsify the information
they give the social auditers.83
In practice, the lengths to which a manager goes to
be socially responsible depends on four things. It de-pends,
first, on how ethical the person is. Ethical people
can surely adhere to Friedman’s stockholder-oriented
managerial capitalism theory, but even Friedman said
that the manager must play by the rules. No ethical
F IGURE 2.6
A Corporation’s Major
Stakeholders
One view of social responsibility is
that a firm must consider and serve
all the stakeholders that may be
affected by its business decisions.
moral minimum: the
position that states that the
purpose of the corporation is to
maximize profits without
committing any harm
Russian workers protest at a Coca-Cola plant in
St. Petersburg.

Social Responsibility Now ■ 49
managerial capitalist would knowingly commit unethical acts, say, by selling med-icines
that tests have shown to be deadly.
Second, how socially responsible the company is depends on top manage-ment’s
philosophy—whether they believe in managerial capitalism, stakeholder
theory, or the moral minimum, for instance. The original Ben and Jerry (of Ben &
Jerry’s Ice Cream) were famous for buying milk from local Vermont farmers,
although their prices were higher than those of other regions.
Third, as at the sofa plant, outside monitors and pressure groups help to nudge
the process along. As another example, when shoppers in several Home Depot
stores heard, “Attention shoppers, on aisle 7 you’ll find mahogany ripped from the
heart of the Amazon,” store managers scampered to find pranksters with mega-phones.
84 There were none. Rainforest Action Network activists had cracked Home
Depot’s intercom system’s security code.
Finally, as explained above, economic realities like rising fuel costs and envi-ronmental
regulations require that managers like those at GE pursue socially
responsible aims to support their companies’ strategic needs.
Companies usually don’t go from being socially irresponsible to socially
responsible overnight. Instead, they evolve. Figure 2.785 illustrates the typical
evolution. Firms move from defensive to grudging compliance, and then on to af-firmatively
making the changes a valued part of management’s strategic plans.
When it comes to developing a sense of corporate responsibility, organizations
typically go through five stages.
Stage What Organizations Do Why They Do It
DEFENSIVE
COMPLIANCE
MANAGERIAL
STRATEGIC
CIVIL
Deny practices, outcomes,
or responsibilities
Adopt a policy-based
compliance approach as a
cost of doing business
Embed the societal issue
in their core management
processes
Integrate the societal issue
into their core business
strategies
Promote broad industry
participation in corporate
responsibility
To defend against attacks to their
reputation that in the short term could
affect sales, recruitment, productivity,
and the brand
To mitigate the erosion of economic
value in the medium term because of
ongoing reputation and litigation risks
To mitigate the erosion of economic
value in the medium term and to
achieve longer-term gains by integrating
responsible business practices into their
daily operations
To enhance economic value in the long
term and to gain first-mover advantage
by aligning strategy and process
innovations with the societal issue
To enhance long-term economic value
by overcoming any first-mover
disadvantages and to realize gains
through collective action
F IGURE 2.7
The Five Stages in Social
Responsibility for an
Organization

How to Improve the Company’s
Social Responsiveness
Managers improve their companies’ social responsiveness by instituting policies
and practices that encourage socially responsible behavior. These include social
audits, whistle-blowing, joining responsibility advocacy groups, and staying in
touch with stakeholders.
● The Social Audit One important step is to ascertain just how socially re-sponsible
the firm really is. Some firms measure this by using a rating system
called a corporate social audit.86 This is a review and analysis of the firm’s social
responsibility, usually based on a checklist that addresses issues such as “How
many accidents have you had this year?” “What percent of your profits go to com-munity
services?” and “What portion of your managers are minority or women?”
The DeCoro plant’s social audit is typical of those used at facilities throughout
China’s Pearl River Delta, which contains many of China’s industrial cities.
Auditors come in for a few hours or days. They review payroll records, interview
employees, check fire escapes, and take similar actions.87
The Sullivan Principles for Corporate Labor and Community Relations in
South Africa is the classic audit example.88 The Reverend Leon Sullivan was an
African American minister and General Motors (GM) board of directors member.
For several years during the 1970s, he had tried to pressure the firm to withdraw
from South Africa, whose multiracial population was divided by government-sanctioned
racist policies known as apartheid.
As part of that effort, Sullivan codified a set of principles “to guide U.S. busi-ness
in its social and moral agenda in South Africa.”89 The code provided measur-able
standards by which one could audit U.S. companies operating in South
Africa. For example, there were standards for nonsegregation of the races in all eat-ing,
comfort, and work facilities.90
● Whistle-Blowing Sarbanes-Oxley strengthens the rights of whistle-blowers,
people who report their employers’ questionable activities to authorities.91 For
example, SOX gives whistle-blowers the right to sue in federal court if employers
retaliate against them.
Many firms have a reputation for actively discouraging whistle-blowing. Yet
doing that may be short-sighted. As one writer put it, whistle-blowers “represent
one of the least expensive and most efficient sources of feedback about mistakes
the firm may be making.”92 Other firms find that trying to silence whistle-blowers
backfires.93 Once the damage has been done—whether it is asbestos hurting work-ers
or a chemical plant making the community ill—the cost of making things right
can be enormous.94 When John Pepper, CEO of P&G, discovered that some rogue
P&G employees were spying on a competitor, he followed a laudable course: he
blew the whistle on his own company and told Unilever about P&G’s transgression.
● Social Responsibility Networks Other firms, such as Rhino Records, join
organizations like the Social Venture Network (www.svn.org) and Businesses for
Social Responsibility (www.bsr.org). These organizations promote socially respon-sible
business practices and help managers to establish socially responsible
programs.95
● Managing Now Managers use the Internet to support their social responsi-bility
efforts. For example, Shell Oil Company maintains an Internet-based
corporate social audit: a
review and analysis of a firm’s
social responsibility
CEO John Pepper took the
correct step of divulging his
company’s ethical lapse as
soon as he became aware of it.

Managing Diversity ■ 51
stakeholder Web forum. The website makes it easy for anyone with an interest in
Shell’s operations—consumers, people living near Shell refineries, and owners of
Shell-branded gas stations, for instance—to make their opinions known. This
helps Shell be more socially responsive, by making it easier for management to en-gage
with parties who have legitimate concerns.96
Managing Diversity
f all the firm’s nonowner stakeholders, perhaps none has so obvious a claim on
receiving socially responsible treatment as do its employees. To a great extent,
O
the company is its employees, since they largely determine if the firm will succeed.
So the care, courtesy, integrity, and humanity the firm applies in managing its
employee diversity is a measure of how socially responsible it is.
Managing diversity means “planning and implementing organizational sys-tems
and practices to manage people so that the potential advantages of diversity
are maximized while its potential disadvantages are minimized.”97 Managing
diversity refers to questions like, How much effort should a manager make to
employ minorities? How ethnically diverse should the company be? and, How
much effort should employers make to manage the resulting diversity?
Diversity management is increasingly important for several reasons. Treating
employees equitably is, first, an ethical and moral matter. There are also equal-employment
laws for those employers that require some added motivation. From
a practical point of view, the workforces of many industrialized countries, includ-ing
the United States, are increasingly diverse, and employers have little choice but
to recruit and then productively assimilate women and minorities. Furthermore,
in an increasingly diverse and globalized business environment, smart employers
capitalize on their diversity. For example, Longo Toyota in El Monte, California,
built a sixty-person salesforce that speaks more than twenty languages. This is a
powerful competitive advantage in demographically diverse Southern California.
Having a smoothly functioning diverse workforce is also advantageous for compa-nies
that routinely do business abroad. As the Wall Street Journal recently put it,
“As companies do more and more business around the world, diversity isn’t simply
a matter of doing what is fair or good public relations. It’s a business imperative.”98
Today, therefore, the aim of diversity management is not just to get diverse
employees to work together but to create “a workplace where differences can be
learned from and leveraged.”99 Leveraging—capitalizing on—diversity can pay big
dividends. For example, starting with low percentages, people of color recently
held 17 percent of PepsiCo’s mid- and top-level jobs, and women held 29 percent.
PepsiCo learned from and leveraged its newly diverse management pool. For ex-ample,
in one recent year, new diversity-driven products such as guacamole-flavored
Doritos (Hispanic) and wasabi-flavored snacks (Asian) accounted for
about one percentage point of PepsiCo’s 8 percent revenue growth.
Bases for Diversity
What is “diversity”? In one study, most respondents listed race, gender, culture, na-tional
origin, disability, age, and religion as the demographic building blocks that
represent diversity. They are what people often think of when they are asked what
diversity means.100
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managing diversity:
planning and implementing
organizational systems and
practices to manage people so
that the potential advantages of
diversity are maximized while
the potential disadvantages are
minimized

A workforce is diverse when it is composed of two or more groups, each of
whose members are identifiable and distinguishable based on the following de-mographic
or other characteristics:101
◗ Racial and ethnic groups. African Americans, Pacific Islanders, Asian Americans,
Native Americans, and other people of color comprise about 25 percent of the
U.S. population.
◗ Women. Women represent about 48 percent of the U.S. workforce.
◗ Older workers. By 2005, the average age of the U.S.
worker was forty, up from an average of thirty-six,
and reflecting the gradual aging of the workforce.
◗ People with disabilities. The Americans with Disabil-ities
Act makes it illegal to discriminate against peo-ple
with disabilities who are qualified to do the job.
This act has highlighted the large number of people
with disabilities in the U.S. workforce.
◗ Sexual/affectional orientation. Experts estimate that
5 to 20 percent of the population is gay. This may
make gays a larger percentage of the workforce than
some racial and ethnic minorities.102
◗ Religion. Domestic and world events are underscor-ing
differences, similarities, and tensions relating to
the diversity of religions among most employees in a
given firm.
Winning with diversity: the night crew at Home Depot.
Barriers in Dealing with Diversity
Demographic differences can create behavioral barriers that inhibit collegiality
and cooperation. Managers who want to manage diversity must address these
barriers if they want their employees to work together productively. The barriers
include stereotyping and prejudice, ethnocentrism, discrimination, tokenism,
and gender-role stereotypes. Managing diversity starts with understanding these
barriers.
● Stereotyping and Prejudice Stereotyping and prejudice are two sides of the
same coin. Stereotyping is a process in which someone ascribes specific behav-ioral
traits to individuals based on their apparent membership in a group.103
Prejudice is a bias that results from prejudging someone based on some trait.
Most people develop lists of behavioral traits that they associate with certain
groups. For example, stereotypical male traits might include strong, aggressive,
and loud; female traits might include cooperative, softhearted, and gentle.104
When someone allows traits like these to determine how he or she reacts to mem-bers
of one of these groups, then we say the person is prejudiced.
● Ethnocentrism Ethnocentrism is prejudice on a grand scale. It is a tendency
to view members of one’s own group as the center of the universe and other social
groups less favorably. For example, in one study, managers attributed the good
performance of some minorities less to their ability and more to help they received
from others. Conversely, they attributed the performance of nonminorities to
their abilities.105
diverse: composed of two or
more groups (when referring to
a workforce), each of whose
members are identifiable and
distinguishable based on
demographic or other
characteristics
stereotyping: a process in
which someone ascribes specific
behavioral traits to individuals
based on their apparent
membership in a group
prejudice: a bias that results
from prejudging someone based
on some trait

● Discrimination Discrimination is prejudice in action. Whereas prejudice
means a bias toward prejudging someone based on that person’s traits,
discrimination means taking specific actions toward or against the person based
on the person’s group.106
In many countries, including the United States, it is illegal to discriminate at
work based on a person’s age, race, gender, disability, or country of national origin
(with some very specific exceptions, such as when hiring men to play male roles in
a movie). But in practice, discrimination is still a barrier to managing diversity. For
one thing, discrimination is often subtle. For example, many argue that an invisi-ble
“glass ceiling,” enforced by an old-boy network and friendships built in places
like exclusive clubs, effectively prevents women from reaching the top ranks of
management.
● Tokenism Tokenism occurs when a company appoints one or a small group
of women or minority-group members to high-profile positions, rather than more
aggressively seeking full representation for that group. Tokenism is a diversity
barrier when it slows the process of hiring or promoting more members of the
minority group.
Token employees often fare poorly. Research suggests, for instance, that token
employees face obstacles to full participation, success, and acceptance in the
company. The extra attention their distinctiveness creates magnifies their good or
bad performance.107
● Gender-Role Stereotypes Discrimination againstwomengoes beyond glass
ceilings. Working women also confront gender-role stereotypes, the tendency to
associate women with certain (frequently nonmanagerial) jobs. In one study,
attractiveness was advantageous for female interviewees when the job was non-managerial.
When the job was managerial, there was a tendency for a woman’s
attractiveness to reduce her chances of being hired.108
How to Manage Diversity
Diversity can be a blessing or—if mismanaged—a problem. Bringing together
people with different values and views can ensure they attack problems in a richer,
more multifaceted way. On the other hand, if barriers such as stereotypes and
tokenism flourish, diversity can make it harder to create smoothly functioning
teams.109 To repeat, managing diversity means taking steps to maximize diversity’s
potential advantages while minimizing the potential barriers—such as prejudice
and bias—that can undermine the functioning of a diverse workforce. The man-ager
can take several steps.
● Legal Actions Managing diversity usually involves both legally mandated
and voluntary actions. There are, of course, many legally mandated actions. For
example, employers should avoid discriminatory employment advertising (such
as “young man wanted for sales position”) and prohibit sexual harassment.
However, legally required steps are rarely enough to blend diverse employees
into a productive team. Other voluntary steps and programs are required. As sum-marized
in Figure 2.8, these include providing strong leadership, assessing the
situation, providing diversity training and education, changing the culture and
management systems, and evaluating the diversity program.
● Provide Strong Leadership Top executives of firms with exemplary diver-sity
management reputations champion diversity. For example, they take strong
discrimination: taking
specific actions toward or
against a person based on the
person’s group
tokenism: appointing one or
a small group of women or
minority-group members to
high-profile positions, rather
than more aggressively seeking
full representation for that group
gender-role stereotypes:
the tendency to associate
women with certain (frequently
nonmanagerial) jobs

ACTIVITIES AT THE HEART OF A DIVERSITY MANAGEMENT PROGRAM
Assess Your
Leadership Situation Evaluate
Comprehensive
organizational
assessment
Baseline data
Benchmarking
personal stands on the need for change, become role models for the behaviors
required for the change, issue a statement that defines what they mean by diver-sity,
and provide financial and other support to implement the changes.110
After settling a class-action suit by black employees, Coca-Cola took steps to im-prove
its diversity management record. For example, it established a formal men-toring
program. It also is spending $500 million to support minority suppliers.111
● Assess Your Situation For example, use surveys to measure current em-ployee
attitudes and perceptions toward different cultural groups in the company.
Conduct audits of your minority and female hiring and staffing practices.
● Provide Diversity Training and Education “The most commonly utilized
starting point for . . . managing diversity is some type of employee education pro-gram.”
112 A one- to two-day seminar involving a diverse group of employees is
typical. Topics include, What does diversity mean to you? What does it mean to
our organization?113
● Change the Culture and Management Systems Managers have to walk
the talk if they want employees to take diversity management seriously. For exam-ple,
change the performance appraisal procedure to appraise supervisors based
partly on their success in minimizing intergroup conflicts. Institute mentoring
programs. Mentoring is “a relationship between a younger adult and an older,
more experienced adult in which the mentor provides support, guidance, and
counseling to enhance the protégé’s success at work and in other arenas of life.”114
Mentoring can contribute to the success of diversity management. Why attract a
diverse workforce and then leave the new people to sink or swim?115
Sending signals about how management feels about diversity can cut both
ways. For example, six women filed a sexual discrimination class-action suit in
federal court against Wal-Mart.116 Among other things, they asserted that they did
not get the raises or promotions their male colleagues received. They also said they
were exposed to hostile comments and actions by male employees (including,
allegedly, offers to “get one of them pregnant”).
■
■
■
Top management
commitment and
support
Steering and advisory
groups
Communications
strategy
■
■
■
Education
Awareness training
Development of
in-house expertise
Orientation programs
Advanced training
■
■
■
■
Changes in Culture
and Management
Systems
■
Recruitment
■
Orientation
■
Performance appraisal
■
Compensation and
benefits
■
Promotion
■
Training and develop-ment
Evaluation
Accountability
Continuous
improvement
■
■
■
F IGURE 2.8
Activities Required to Better Manage Diversity
mentoring: a relationship
between a younger adult and an
older, more experienced adult in
which the older adult provides
support, guidance, and
counseling to enhance the
protégé’s success at work and in
other arenas of life

Wal-Mart denies any systematic discrimination and has policies forbidding sex-ual
harassment of any kind.However, some lawyers argue that it’s not whatWal-Mart
says, it’s what it does. They argue thatWal-Mart has long had a policy of vigorously
defending itself in such lawsuits. They say such actions could prompt some employ-ees
to believe thatWal-Mart may not actually take sexual harassment seriously.
● Evaluate the Diversity Program For example, do your surveys suggest
an improvement in employee attitudes toward diversity? How many employees
have entered into mentoring relationships? Do these relationships appear to be
successful?
● Managing Now The manager assessing the effectiveness of his or her com-pany’s
equal-employment and diversity efforts has numerous measures to use.
These include, for example, the number of diversity-related (sexual harassment,
age discrimination, and so forth) legal claims per year, the percentage of minority/
women promotions, and measures for analyzing the survival and loss rate among
diverse employee groups.
Even for a company with just several hundred employees, keeping track of
metrics like these is expensive. Managers therefore tend to rely on technology. For
example, the typical diversity management software package provides manage-ment
with several diversity-related software options. These provide information
relatively efficiently. The typical package calculates for the manager things like the
cost per diversity hire, a workforce profile index, the amount of voluntary turnover
among diverse employee groups, and the effectiveness of the firm’s employment
agencies’ diversity initiatives.
Recruiting a More Diverse Workforce
It is useless to talk about diversity management if the company does not effec-tively
recruit and retain a diverse team of employees. Without a diverse workforce,
there is no diversity to manage.
Managers do not just recruit diverse employees out of altruism or because it is
the socially responsible thing to do. The U.S. population is becoming more di-verse,
and thus more applicants are minorities or women. Federal, state, and local
laws also generally require equality in employment. This means hiring people
based on their abilities to do the job, not based on their ethnicity, age, gender, or
other trait such as disability. Furthermore, as we noted earlier, having a diverse
workforce is becoming a practical necessity as companies do more and more busi-ness
around the world.
● Fine-Tuning Recruitment Efforts Recruiting a diverse workforce usually
requires fine-tuning recruitment and retention efforts to the diverse employees’
needs. For example, older workers sometimes particularly value having more free
time and flexible work hours. Firms such as Wrigley Company let workers over age
sixty-five shorten their workweeks and use minishifts to let these workers work
less than full-time. Recruiting single parents similarly requires understanding that
they often need to have flexible work arrangements. They also need supervisors
who are supportive of their dual roles as employees and single parents. To the ex-tent
that some minorities or recent immigrants may need special training, many
firms institute special remedial training. For example, Aetna Life and Casualty
provides remedial training in basic arithmetic and writing.
Women workers, married or not, often carry the heavier burden of caring for
the children and obviously have childbearing responsibilities that men do not.

Many progressive firms, such as the accounting firm KPMG, therefore make it
easier for females to, say, restart their careers after returning from even lengthy
maternity leaves, or to remain employed (if they so choose) in positions that don’t
involve the time commitments of being full-time partners in the firm. In any case,
recruiting (and retaining) a diverse workforce calls for having a comprehensive
plan in place for providing the employment support these employees need.
1. Managers face ethical choices every day. Ethics
refer to the principles of conduct governing an
individual or a group. Ethical decisions always in-clude
judgments of good and bad and of serious
moral issues.
2. Being legal and being ethical are not necessarily
the same thing. A decision can be legal but still
unethical, or ethical but still illegal.
3. Organizational factors influencing ethical behav-ior
include pressure, the boss, and the organiza-tion’s
culture.
4. To improve your ethics-building skills, walk the
talk; clarify your expectations; screen out the prob-lem
employees; support ethics training; ensure fair
and unbiased performance appraisals; use rewards
and discipline; and strive to build an atmosphere
of fairness, justice, and respect.
5. Information technology has prompted new ethical
concerns, particularly related to security (control-ling
access to company resources) and privacy. In
terms of privacy, electronic performance monitor-ing
and wireless-based monitoring of employee
location and performance allow employers to keep
close tabs on what their employees are doing. Sim-ilarly,
the majority of companies monitor e-mail
activity and employee Internet use.
6. Information technology also raises serious security
concerns. For example, nonauthorized employees
or outsiders could gain access to employees’ per-sonal
data.
7. Technical and legal safeguards can reduce privacy
and security concerns, up to a point. However, the
ethics of those managing the company may be the
only real safeguards.
8. Ethics policies and codes send a strong signal that
top management is serious about ethics and are
signs that it wants to foster a culture that takes
ethics seriously.
9. Organizational culture is the characteristic tradi-tions,
norms, and values employees share. Values
are basic beliefs about what you should or should
not do and what is and is not important. Managers
need to “walk the talk” to set the right culture.
10. Employers’ use of information technology to
maintain high ethical standards goes well beyond
employee monitoring and employee training. For
example, it would be prohibitively expensive with-out
IT support for most companies to comply with
the standards in the Sarbanes-Oxley Act regarding
financial statement accuracy and whistle-blower
requirements. Similarly, IT enables companies en-gaged
in foreign trade to automatically perform
the necessary export license activities and to com-ply
with local employment, payroll, safety, and
recording regulations in each country in which
they operate.
11. People differ in answering the question, To whom
should the corporation be responsible? Some say
solely to stockholders, and some say to all stake-holders.
Some take an intermediate position: they
agree that the purpose of the corporation is to
maximize profits, but that it is subject to the re-quirement
that it must do so in conformity with
the moral minimum.
12. As business becomes more global and the work-force
becomes more diverse, it becomes more im-portant
to manage diversity so that its benefits
can be leveraged while minimizing potential bar-riers.
Potential barriers to managing diversity in-clude
stereotyping, prejudice, and tokenism.
Managing diversity involves taking steps such as
providing strong leadership, assessing the situa-tion,
providing training and education, changing
the culture and systems, and evaluating the diver-sity
program.

1. What is ethical behavior?
2. Explain why information technology is a double-edged
sword with respect to ethical behavior in
organizations.
3. What are two technology-related ethical issues busi-ness
managers face? Give examples of each.
4. What individual factors contribute to one’s ethical
or unethical behavior?
5. What are the organizational factors that influence
ethical behavior at work?
6. What are eight common code of conduct principles?
1. Obtain the ethics code for your college. Then de-termine
to what extent it covers the eight common
code of conduct principles discussed in this chap-ter.
Do you think the college’s code is effective?
Why or why not?
2. Most students (and faculty members, for that mat-ter)
would not want unauthorized individuals
gaining access to the personal information the col-lege
has on file for them. In teams of three or four
students, compile a list of the information technol-ogy
tools the college uses to ensure that its stu-dents’
records are secure.Particularly for professors
teaching online courses, employee performance
monitoring (or, more accurately in this case, stu-dent
performance monitoring) is very important.
After all, the professor wants to make sure that
students log on to do the online activities. And
professors want to make sure that exams are also
properly monitored. In your teams of three or four
students, compile a list of ways in which the online
teaching system your college uses monitors
student performance online.
3. You work for a medical genetics research firm as a
marketing person. You love the job. The location is
great, the hours are good, and the work is challeng-ing
and flexible. You receive a much higher salary
than you ever anticipated. However, you’ve just
heard via the rumor mill that the company’s elite
medical team has cloned the first human, the firm’s
CEO. It was such a total success that you have
7. What are important managerial methods for en-couraging
ethical behavior?
8. What are three ways in which managers use infor-mation
technology to improve ethical behavior in
organizations?
9. To whom is the company responsible? Include
the three main points of view addressed in the
chapter.
10. Why are companies socially responsible?
11. How is the subject of managing diversity changing
today?
heard that they may want to clone every employee
so that they can use the clones to harvest body
parts as the original people age or become ill. You
are not sure you endorse the cloning of humans.
You joined the firm for its moral and ethical repu-tation.
You feel that the image presented to you was
one of research and development of life-saving
drugs and innovative medical procedures. The
thought of cloning was never on your mind, but
now it must be. In teams of four or five students,
answer the following questions: What, if any, is the
ethical decision to be made? What would you do?
Why?
4. You are taking a month’s holiday in Europe. During
your first week there, you became very ill with a re-curring
ailment for which you have been previ-ously
treated with limited success in the United
States. It is a chronic condition that is inhibiting
your ability to advance your career. The doctors
who treated you in Europe have given you some
medication that is legal there but has not been ap-proved
for use in the United States by the U.S. Food
and Drug Administration. You feel better than you
have in years. Because the European drug laws
allow this drug to be purchased across the counter
without a prescription, you are able to buy a year’s
supply. However, you know that it is listed as an il-legal
drug in the United States and you must pass
through customs. If your decision is to smuggle the
drug in and you are successful, what will you do in
a year?

C A S E S T U D Y
Allstate’s Disappearing Agents
Like many companies, Allstate faces pressure to be
cost-competitive and to provide new services to its
customers. It also faces pressure for continuous
improvement in its financial performance from its
shareholders. Assume that for Allstate to survive and
prosper, it needs to respond to both customers and
shareholders. What responsibilities does it have toward
another important group of stakeholders, its employ-ees?
Several years ago, the Allstate Corporation an-nounced
a series of strategic initiatives to expand its
selling and service capabilities, buy back company
shares to raise its stock price, and cut expenses by re-ducing
the workforce. As part of its restructuring,
Allstate would transfer its existing agents to an exclu-sive
independent contractor program, whereby Allstate
agents would become basically self-employed inde-pendent
contractors. This would markedly reduce the
need for Allstate to provide agency support staff. In its
press release on this initiative, Allstate management
also announced it would eliminate 4,000 current non-agent
positions by the end of 2000, or approximately 10
percent of the company’s nonagent workforce.
Said Allstate’s CEO, “Now, many of our customers
and potential customers are telling us they want our
products to be easier to buy, easier to service and more
competitively priced. We will combine the power of our
agency distribution system with the growth potential of
direct selling and electronic commerce. . . . This unique
combination is without parallel in the industry and will
make Allstate the most customer-focused company in
the marketplace.”
Proponents of this type of restructuring might
argue that Allstate is simply taking the steps needed to
be competitive. They might even say that if Allstate did
not cut jobs to create the cash flow needed to fund new
competitive initiatives, it might ultimately fail as a
business, putting all 54,000 of its employees at risk.
Yet Allstate’s program raises concerns. One analyst
noted that by encouraging customers to purchase in-surance
products directly via the Internet, Allstate
could threaten the commissions of its more than
15,000 agents. The announcement of cost cutting came
one day after Allstate announced it would meet its reg-ular
quarterly dividend of $0.15 per share. The com-pany
has raised its dividend annually since 1993.
1. Is reducing the number of employees in a com-pany
in and of itself unethical? Why or why not? Is
it socially responsible (or irresponsible)?
2. If you decided it was generally ethical, what would
the company have to do to make the employee dis-missals
unethical?
3. What responsibilities does a company like Allstate
have toward its employees?
4. Is there a moral dimension to the question of mar-keting
Allstate insurance via the Internet? If so,
what is it?
Answers to Wall Street Journal Ethics Quiz
The quiz is on page 32.
1. 34% said personal e-mail on company computers is wrong.
2. 37% said using office equipment for schoolwork is wrong.
3. 49% said playing computer games at work is wrong.
4. 54% said Internet shopping at work is wrong.
5. 61% said it’s unethical to blame your error on technology.
6. 87% said it’s unethical to visit pornographic sites at work.
7. 33% said $25 is the amount at which a gift from a supplier
or client becomes troubling, while 33% said $50, and 33%
said $100.
8. 35% said a $50 gift to the boss is unacceptable.
9. 12% said a $50 gift from the boss is unacceptable.
10. 70% said it’s unacceptable to take the $200 football tickets.
11. 70% said it’s unacceptable to take the $120 theater tickets.
12. 35% said it’s unacceptable to take the $100 food basket.
13. 45% said it’s unacceptable to take the $25 gift certificate.
14. 40% said it’s unacceptable to take the $75 raffle prize.
15. 11% reported they lie about sick days.
16. 4% reported they take credit for the work or ideas of others.

59
MANAGING IN A GLOBAL 3
ENVIRONMENT
Tramco, Inc.
ramco, Inc. is a small company with big ideas. With only about
100 employees,Wichita, Kansas–basedTramco designs and manufac-tures
the big conveyors that food-processing firms like General Mills
T
use to move ingredients around their factories.1 But like almost all
small-business managers today,
Tramco’s managers knew that
to continue to grow, they had
to take their company abroad.
After all, many of their huge
U.S. customers already had
factories abroad, and Tramco
wanted to serve them there.
And there were also thousands
of local food companies abroad
that Tramco’s managers knew
would buy Tramco’s products,
if Tramco could provide local
service.The problem was that
Tramco’s conveyors are so big
and heavy that it costs as much
to pack and ship one as it does
to manufacture it. So Tramco had a dilemma. It could not just hire sales-people
abroad, get orders, and then ship the huge conveyors. But with
only about 100 employees, Tramco wasn’t big enough to build its own
factories abroad. What should they do? ■
➤ Explaining the economic, legal/political, sociocultural, and technological issues managers
should consider when expanding abroad.
➤ Listing the special challenges a manager faces in leading and motivating employees abroad.
CHAPTER OUTLINE
Opening Vignette: Tramco, Inc.
● Globalization
Globalization Defined
The Pros and Cons of Globalization
● How and Why Do Companies
Conduct Business Abroad?
Exporting
Licensing
Franchising
Foreign Direct Investment and the
Multinational Enterprise
Joint Ventures and Strategic Alliances
Shanghai GM
Wholly-Owned Subsidiaries
The Language of International Business
● The Manager’s International
Environment
The Economic Environment
The Legal and Political Environment
The Sociocultural Environment
The Technological Environment
Distance and Global Management
Managing Now: Global Communications
● Planning, Organizing, and
Controlling in a Global
Environment
The Global Manager
Planning in a Global Environment
Organizing in a Global Environment
Global Clustering
PRACTICE IT: Tramco, Inc.
Controlling in a Global Environment
● Leading and Motivating in a
Multicultural Environment
Dräger Safety
Values
Leadership in a Multicultural Environment
Motivation in a Multicultural Environment
Interpersonal Communications in a
IMPROVING YOUR CULTURAL
INTELLIGENCE SKILLS
Leon Trammell (center), Chairman of
Tramco, had to decide how he and his firm’s
managers should take Tramco’s business
abroad.

60 PART ONE CHAPTER 3 Managing in a Global Environment
➤ Listing the reasons why you would (or would not) be a good global manager.
➤ Giving examples of how to use information technology (IT) to improve global
➤ Reading the opening vignette about Tramco, Inc. and suggesting what IT tools they
➤ Reading the end-of-chapter exercises and explaining what global strategy the company
➤ Watching the simulation video and identifying the key implementation issues facing the
➤ Watching the simulation video and identifying what cultural adaptations need to be
Globalization
communications.
should use, and why.
should pursue, and why.
global business.
made when expanding globally.
utside Anchorage, Alaska, just off Northern Lights Boulevard, is FedEx’s new
Anchorage hub. This enormous facility handles FedEx air shipments between
O
North America and China. With package delivery growing relatively slowly in North
America, China presents FedEx with enormous growth possibilities. In one recent
year, the revenue FedEx generated from its package-delivery business to and from
China increased by about 50 percent.2 Like many companies today, most of FedEx’s
growth comes from international operations. Most businesses today are therefore
involved in international business. The main purpose of this chapter is to enable
you to better understand what it’s like managing in a global environment.
Globalization Defined
Globalization (as noted in Chapter 1) is the tendency of firms to extend their sales,
ownership, and/or manufacturing to new markets abroad. As with Tramco and
FedEx, managers expand their services abroad to take advantage of new opportu-nities.
Sony, Apple, and Nike are some firms that market and manufacture all over
the world. For these firms and most others, managing is increasingly global.
Globalization is a two-way street. General Motors (GM) manufactures and
sells cars in China, and China’s Shanghai Auto is planning to manufacture and
sell cars in the United States. In South Africa, numerous small wood furniture
producers use the Internet to work with trading partners around the world. In
South Korea, a special government program subsidizes small companies that want
to use information technology to boost their share of global commerce. Raju
Mirchandani, born in Dubai, recently expanded abroad by opening a branch of
his New York–based “Bar and Books” in the Czech Republic.3
The Pros and Cons of Globalization
Globalization is thus not just for manufacturing firms.4 For example, soon after
it bought MySpace.com, News Corp. began laying plans to take the site abroad,
to Britain and Europe, and soon to Asia. Going abroad will obviously hold some
challenges for MySpace. For example, political and legal constraints against
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How and Why Do Companies Conduct Business Abroad? ■ 61
unrestricted blogging may be an issue in China, and
each country must have its site in its own language.5
It’s hard to overemphasize how important global-ization
is today to just about every business and man-ager
in America (and around the world), and to every
employee and consumer. In his recent book The World
Is Flat, columnist Thomas Friedman explains how com-munications
technology now makes it easy for compa-nies
everywhere (like Tramco) to compete just about
anywhere. This has had a startling effect on businesses.
As we noted in Chapter 1, more globalization means
more competition, and more competition means more
pressures to improve—to lower costs, to make employ-ees
more productive, and to do things better and less
expensively. Globalization is great for firms like Tramco
and FedEx, whose managers had the foresight and skills
to capitalize on global opportunities. It’s also great for
Many U.S. companies are outsourcing call center services to
centers like this one in India.
consumers, who can now buy almost everything—from conveyors to cars to com-puters—
less expensively thanks to globalization-driven competition.
But there’s also another side to globalization.6 All that improved productivity
is coming from somewhere, and in many cases, it’s coming from reductions in
the numbers of managers and employees that companies need to compete. In
2006, Ford Motor Company instituted a plan, called Way Forward, that lays out
how Ford would return to profitability, in part by reducing its workforce by over
25,000 employees, selling assets, and boosting productivity. GM has a similar
plan. Meanwhile, Toyota’s North American sales continue to expand, putting it
on track to soon become the largest seller of cars in America. Globalization also
triggered outsourcing. Outsourcing refers to the business practice of having
workers abroad do jobs (such as handling customer-service questions) that em-ployees
in a company’s home office previously did. American companies had
outsourced about 830,000 service-sector jobs as of 2005.7 No company or man-ager
or employee today—even one safely situated in America’s heartland, like
Tramco—is not affected in a big way by globalization. Globalization shows up in
the prices of the products we buy, the companies we choose to buy from,
whether our employers stagnate or grow, and indeed how hard we work and
whether we keep our jobs. Everyone should understand the global environment
in which we live.
How and Why Do Companies Conduct Business Abroad?
ompanies like Tramco expand abroad for several reasons: to expand sales, ob-tain
new foreign products, cut labor costs, and perhaps seek foreign partner-ships
for broader strategic reasons. Tramco expanded to follow its customers
C
abroad. In 2006, Google expanded its China presence by initiating its Google
China instant-messaging service. In 2005, IBM sold its personal computer (PC)
division to the Chinese firm Lenova, in part to cement firmer ties with the
booming China market.
Once they decide to expand abroad, managers like those at Tramco must
decide how to expand. (Remember that Tramco, faced with the difficulty of
shipping its products overseas, had to decide what its options were.) Options
outsourcing: the business
practice of having workers
abroad do jobs (such as
handling customer-service
questions) that employees in
a company’s home office
previously did
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include exporting, licensing, franchising, foreign direct investment, joint ventures/
strategic alliances, and wholly-owned subsidiaries.
Exporting
Exporting is often a manager’s first choice when expanding abroad, because it is a
relatively simple and easy approach. Exporting means selling abroad, either
directly to customers or indirectly through agents and distributors. Agents,
distributors, or other intermediaries handle more than half of all exports. They are
generally local people familiar with the market’s customs and customers.
The manager can check business reputations of potential local representatives
via local agencies of the U.S. State Department. A U.S. Commerce Department trade
specialist will provide advice regarding generating overseas business. For example,
advertising in Commercial News USA, a government publication, will inform about
100,000 foreign agents, distributors, buyers, and government officials about U.S.
products. The Small Business Exporters Association (www.sbea.org) is another good
source.8
Exporting has pros and cons. It avoids the need to build factories abroad, and
it is a relatively quick and inexpensive way of going international.9 It’s also a good
way to test the waters in the host country and to learn more about its customers’
needs. Transportation and tariff costs and poorly selected representatives are
potential problems.
More and more companies rely on e-commerce to directly sell their products
abroad, but even this can produce surprises. One European country wanted the
Internet “closed” on Sundays to avoid competing unfairly with local merchants
who closed that day.10 Another country asked Lands’ End to revise its guarantee,
which it said was too good for local shops to compete with. And while getting an
online order from, say, Japan may be exciting, the Better Business Bureau says that
nondelivery is a chronic complaint, usually because the e-exporter is not familiar
with foreign shipping requirements.
Licensing
If someone with a great idea wants to let someone else use the same idea, he or she
might want to grant that person a license. Music companies grant licenses all the
time. For instance, if Universal wants to let MGM use one of its songs in a movie, it
will grant a license for that use. Licensing is an arrangement whereby the licensor
(let’s say, Universal) grants another firm (let’s say, MGM) the right to exploit
intangible (intellectual) property, such as patents, copyrights, manufacturing
processes, or trade names, for a specific period.The licensor usually gets royalties—
a percentage of the earnings—in return.11
Licensing is particularly useful when doing business abroad because it
enables a firm to generate income abroad from its intellectual property without
actually producing or marketing the product or service there. If a company in
Kansas has a patent on a new device, one way for it to make money on that patent
abroad is to license the patent’s foreign rights to a company abroad.
Franchising
If you’ve eaten in McDonald’s by the Spanish Steps in Rome, you’ve experi-enced
franchising as another way to do business abroad. Franchising is the
exporting: selling abroad,
either directly to target
customers or indirectly by
retaining foreign sales agents
and distributors
licensing: an arrangement
whereby a firm (the licensor)
grants a foreign firm the right to
use intangible property
franchising: the granting of a
right by a company to another
firm to do business in a
prescribed manner

granting of a right by a company to another firm to do business in a prescribed
manner.12
Franchising and licensing both involve granting rights to intellectual property.
Both are also quick and lower-cost ways to expand abroad. However, franchising
tends to be much more restrictive. The franchisee must generally follow strict
guidelines in running the business. McDonald’s, for instance, is very fussy about
franchisees following all its rules. The franchisee must also make substantial
investments in a physical plant (such as a fast-food restaurant). Licensing tends to
be limited to publishers and manufacturers—to letting others use a copyrighted
or patented idea. Franchising is more common among service firms, such as
restaurants, hotels, and rental services, that want to let investors (called fran-chisees)
open businesses under the franchiser’s name.
Foreign Direct Investment and
the Multinational Enterprise
At some point, managers find that capitalizing on international opportunities
requires direct investment. Foreign direct investment refers to having opera-tions
in one country owned and controlled by entities in a different country.
Companies make foreign direct investments in several ways. A foreign firm
might build facilities in another country, as Toyota did when it built its Camry
plant in Georgetown, Kentucky. Or a firm might buy property or operations, as
when Wal-Mart bought control of the Wertkauf stores in Germany (it sold them
and left Germany several years later, when the investment did not pan out).
Foreign portfolio investments are investments by a company (or government) in
a foreign firm’s financial instruments (such as bonds or common stock). Strictly
speaking, foreign direct investment means owning more than 50 percent of the
operation. But in practice, a firm can gain effective control by owning less than
half.
Foreign purchases of businesses trigger large and small changes. For example,
when the Italian bank UniCredito Italiano Group purchased Boston’s Pioneer
Group, one of its first changes was installing an Italian espresso machine in
Pioneer’s offices. The Milan bank also installed videoconferencing equipment so
managers on both sides of the Atlantic can interact live. Pioneer group managers
have begun learning Italian. And the companies integrated their Italian and U.S.
investment teams, which then went on to launch several global funds.13
Joint Ventures and Strategic Alliances
Managers often form strategic alliances or joint ventures when making forays into
foreign markets (usually as a way to expand abroad without making a huge invest-ment).
Strategic alliances are formal cooperative agreements between potential
or actual competitors, agreements that are of strategic importance to the alliance
members.14 Airline alliances, such as American Airlines’ One World alliance with
Japan Airlines and others, are examples. The airlines don’t share investments, but
they do share seating on some flights, and they let passengers use alliance members’
airport lounges.15 Each airline gets the advantage of being able to offer its own
passengers an expanded overseas network without having to develop its own fleet
of planes and flights abroad.16 Perhaps a strategic alliance with a manufacturer
abroad is an option for Tramco, Inc.
foreign direct investment:
operations in one country
owned and controlled by entities
in a different country
strategic alliance: a formal
agreement between potential or
actual competitors to achieve
common strategic objectives

Shanghai GM
Global joint ventures would be impractical without infor-mation
technology such as computers, cell phones, fax, and
software. As we mentioned, Shanghai Auto has a joint
venture with General Motors, called Shanghai GM. The
company’s manufacturing process involves assembling vehi-cles
from parts and partially assembled components it im-ports
from around the world. Before Shanghai GM installed
its new supply chain management software system,Shanghai
GM’s parts suppliers could not get real-time knowledge of
what cars Shanghai GM had scheduled to assemble. And
Shanghai GM did not know what parts its vendors already
had in stock.This meant Shanghai GM had to order parts
far in advance and then stock these parts, sometimes for
several weeks.
With a joint venture, two or more companies jointly form a separate
company in which each party contributes assets, and each shares both ownership
and risk.18 Companies execute joint ventures every day. For example, the big
Indian media company, Zee Telefilms, formed several partnerships with Time
Warner. The firms call their joint venture Zee Turner. It will distribute both partners’
television programs in India and neighboring countries.19
Partners usually form joint ventures to quickly gain advantages that would
otherwise take time to acquire. Shanghai Auto and GM formed Shanghai General
Motors. GM wanted to quickly produce Buicks for sale in China. Shanghai Auto
wanted to learn how to build world-class cars.20 The Window on Managing Now
feature shows how technology helped make their venture a success.
A joint venture lets a firm gain useful experience in a foreign country by using
the expertise and resources of a locally knowledgeable firm. As already mentioned,
GM and Shanghai Auto formed a joint venture near Shanghai to build GM cars for
China. Joint ventures also help both companies share the cost of starting a new
operation. One downside is that the joint-venture partners each risk giving away
their proprietary secrets. And sharing control and decision making can lead to
conflicts, and thus requires careful planning regarding who does what.
Joint ventures can be a necessity. In China, foreign companies that want to
enter regulated industries (like telecommunications) must use joint ventures with
Chinese partners. The partnership of Britain’s Alcatel and Shanghai Bell to make
telephone-switching equipment is an example.21
● Successful Joint Ventures Experts from consultantsMcKinsey & Co. estimate
that companies have launched over 5,000 joint ventures worldwide in the past few
years, but that these ventures’ success rate is barely 50 percent.22 Their study shows
that in organizing a joint venture, managers need to follow several guidelines:
◗ Achieve strategic alignment. Organize the joint venture so that each corporate
partner derives from the venture the strategic benefits it desires. For example,
when Starbucks formed a coffee venture with PepsiCo, Starbucks sought to
joint venture: the joining of
two or more companies to form
a separate company so that each
party contributes assets, owns
the entity to some degree, and
shares risk
Shanghai GM’s managers found a better way. They used
information technology (including new software systems
and the Internet) to link together all the partners of the
joint venture’s worldwide supply chain (this includes its
parts suppliers, shippers, and warehouses, for instance).
Shanghai GM and its vendors and carriers now use an
Internet portal to get continuous real-time production
schedules showing what vehicles are to be produced, as
well as updates on the availability of various parts. This
dramatically reduced the amount of time managers had to
leave for ordering vehicle components and reduced how
much inventory Shanghai GM had to keep in stock.17
This helped ensure that Shanghai GM is an efficient,
world-class joint venture.

expand its brand into carbonated coffee, and PepsiCo
wanted to expand from sodas to coffee. In assessing
results, the partners therefore had to pay careful
attention to improvements in Starbucks’ share of the
carbonated beverage market and in PepsiCo’s share
of the coffee market.
◗ Create a governance system. Give the joint venture’s
managers enough autonomy so they can make deci-sions
quickly enough to be competitive, but not so
much autonomy that they can trap either corporate
partner in large, unwelcome commitments.
◗ Manage economic interdependencies. Outline clearly
each partner’s contributions in terms of capital,
people, and material and other resources.
◗ Build the organization. Decide cooperatively which
managers will actually staff the joint venture and
what roles they may continue to play in their previ-ous
joint-venture parent firms.
Shanghai Auto and GM formed Shanghai General Motors
to quickly gain manufacturing and sales advantages that
would otherwise take time to acquire.
Wholly-Owned Subsidiaries
Sometimes, the best way to go abroad is to open or own one’s own facility. A
wholly-owned subsidiary is one owned 100 percent by the foreign firm. In the
United States, Toyota Motor Manufacturing, Inc., and its Georgetown, Kentucky,
Camry facility is a wholly-owned subsidiary of Japan’s Toyota Motor Corporation.
Wholly-owned subsidiaries let the company do things exactly as it wants (subject
to local laws and regulations, of course).
The Language of International Business
To do business abroad, the manager should also know the vocabulary of interna-tional
business. An international business is any firm that engages in international
trade or investment. International business also refers to those activities, such as
exporting goods or transferring employees, that require moving resources, goods,
services, and skills across national boundaries.23 International trade is the export
or import of goods or services to consumers in another country. International
management is the performance of the management functions of planning,
organizing, leading, and controlling across national borders. As myspace.com’s
managers expand abroad, for instance, they necessarily engage in international
management.
A multinational corporation is a special type of international business. A
multinational corporation (MNC) is one that operates manufacturing and
marketing facilities in two or more countries. Managers of the parent firm, whose
owners are mostly in the firm’s home country, coordinate the MNC’s operations.
Firms like GE and GM have long been multinational corporations. However,
thousands of small firms are MNCs, too. An MNC operates in two or more
countries and often adapts its products and practices to each one. Often, however,
the MNC’s behavior may still reflect its national roots. When Germany’s
DeutscheBank bought a British bank, the British managers’ high-incentive pay
prompted tension between them and their new German bosses.
wholly-owned subsidiary:
a firm that is owned 100 percent
by a foreign firm
international business: any
firm that engages in international
trade or investment; also
business activities that involve
the movement of resources,
goods, services, and skills across
national boundaries
international trade: the
export or import of goods or
services to consumers in another
country
international management:
the performance of the
management process across
national boundaries
multinational corporation
(MNC): a company that
operates manufacturing and
marketing facilities in two or
more countries, and whose
managers, located mostly in the
firm’s home country, coordinate
the MNC’s operation

The Manager’s International Environment
ensions like those between the British managers and their new German bosses
illustrate a fact of life when doing business abroad. Countries differ in terms of
T
economic, legal, and political systems and also in their cultures. Differences like
these translate into different ways of doing business. Managers at firms like Tramco
and myspace.com ignore such differences at their peril because the differences
shape the manager’s plans, organization, leadership style, and controls. We’ll
address countries’ economic, legal/political, sociocultural, and technological
environments.
The Economic Environment
First, managers should understand the economic environments of the countries
they are considering entering. This includes each country’s economic system,
economic development, exchange rates, trade barriers, and economic integration
and free trade.
● The Economic System Countries differ in the extent to which they adhere
to capitalistic economic ideals and policies like America’s. For example, America’s
is a market economy. In a pure market economy, supply and demand determine
what is produced, in what quantities, and at what prices. Managers here have
freedom of choice to compete and set prices without government intervention.
At the other extreme,North Korea is a pure command economy. Countries like
these base their yearly production and price targets on five-year plans set by the
government. Then the government establishes specific production goals and
prices for each sector of the economy (for each product or group of products), as
well as for each manufacturing plant.Managers from abroad usually need govern-ment
approval before entering these markets and forming partnerships with local
firms.
In a mixed economy, some sectors have private ownership, while the
government owns and manages others.24 For example, France is a capitalist country.
However, it has a mixed economy. The government owns shares of industries like
telecommunications (France Telecom) and air travel (Air France).
Economic systems in transition can trigger social instability. Free-market
economies depend on commercial laws, banking regulations, protection of
private property, and an effective independent judiciary and law enforcement.
When Russia moved to capitalism a number of years ago, it lacked much of this
political and legal infrastructure. Early business owners there had to cope not just
with competitors but also with criminals and lax law enforcement.
● Economic Development Countries also differ in degree of economic devel-opment.
For example, some countries, such as the United States, Japan, Germany,
France, Italy, and Canada, have large, mature economies and extensive industrial
infrastructures. The latter includes telecommunications, transportation, and
regulatory and judicial systems. These countries’ gross domestic products range
from about $700 billion for Canada to $8.5 trillion for the United States. Other
countries, such as Mexico, are less developed. Economists often measure an
economy’s size by gross domestic product. Gross domestic product (GDP), a
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mixed economy: an
economy in which some sectors
are left to private ownership and
free-market mechanisms, while
others are largely owned and
managed by the government
gross domestic product
(GDP): the market value of all
goods and services that have
been bought for final use during
a period of time, and, therefore,
the basic measure of a nation’s
economic activity

The Manager’s International Environment ■ 67
measure of economic activity, is the market value of all goods and services bought
for final domestic use during a period.
Some countries (like China) are growing much faster than others (like the
United States). The growth rate of mature economies averages around 3 to 4 percent
per year. On the other hand, China is growing at about 9.5 percent per year
(10.5 percent in 2005–2006). Many managers at firms like General Electric (GE) are
therefore boosting their investments in high-growth, high-potential countries.25
Being relatively less-developed may suggest the potential for rapid development
and growth. However, it can also mean inadequate roadways, communications,
and regulatory and judicial infrastructures.
● Exchange Rates Like anyone traveling or doing business abroad, managers
engaged in international business must also juggle exchange rates. The exchange
rate for one country’s currency is the rate at which someone can exchange it for
another country’s currency. As the value of the dollar dropped against Europe’s
euro in 2003–2006, Europeans found it easier to purchase American products
and properties. European manufacturers found it harder to compete against the
cheaper American goods. British travelers flocked to the United States to buy
clothes and even vacation homes (because the strong British pound could buy
so many weak American dollars). On the other hand, some Americans were
shocked to find it could cost $40 to buy a pasta meal in London’s Piccadilly
Circus (because it took so many American dollars to buy one British pound’s
worth of food).
● Trade Barriers The Gap store in Paris’s Passy area (across the Seine from the
Eiffel Tower) sells jeans that someone could buy for two-thirds the price in mid-town
Manhattan. Why? In part because trade barriers distort the prices companies
must charge for their products. Trade barriers (such as tariffs and quotas) are
governmental influences aimed at reducing the competitiveness of imported
products or services. Countries often use such barriers to make their domestic
products look more attractive. Tariffs, the most common trade barrier, are
governmental taxes levied on goods shipped internationally.26 The exporting
country collects export tariffs. Importing countries collect import tariffs. For
instance, a China textile manufacturer might have to pay an import tax, or duty, to
the United States in order to bring its textiles into the United States. Even people
flying internationally—say, to the United States—must pay a duty to bring in many
items, such as watches. Countries through which the goods pass collect transit
tariffs. Other countries impose quotas—legal restrictions on the import of specific
goods.27 Managers thinking of doing business abroad ignore taxes like these at
their peril.
Nontariff trade barriers exist, too. For example, cars imported to Japan must
meet a complex set of regulations and equipment modifications. Side mirrors
must snap off easily if they contact a pedestrian. Some countries make payments
called subsidies to domestic producers. These are government payments that can
make inefficient domestic producers more competitive.
● Economic Integration and Free Trade Economic integration and free trade
are two big determinants of the economic situation international managers
face. Free trade means all trade barriers among participating countries are
removed.28 Free trade occurs when two or more countries agree to allow the free
flow of goods and services. Trade is unimpeded by trade barriers such as tariffs.
exchange rate: the rate at
which one country’s currency
can be exchanged for another
country’s currency
trade barrier: a governmental
influence that is usually aimed
at reducing the competitiveness
of imported products or services
tariff: a government tax on
imports
quota: a legal restriction on the
import of particular goods
subsidies: direct payments a
country makes to support a
domestic producer
free trade: the situation in
which all trade barriers among
participating countries are
removed so that there is an
unrestricted exchange of goods
among these countries

Economic integration means that two or more nations obtained the advantages
of free trade by minimizing trade restrictions.
There are several levels or degrees of economic integration: free trade areas,
custom unions, and common markets. In a free trade area, member countries
remove all barriers to trade among them so that they can freely trade goods and
services among member countries. A customs union is the next higher level of
economic integration. Here, members dismantle trade barriers among themselves
while establishing a common trade policy with respect to nonmembers. In a
common market, no barriers to trade exist among members, and a common
external trade policy is in force. In addition, factors of production, such as labor,
capital, and technology, move freely between member countries, as shown in
Figure 3.1. We’ll look at some examples next.
More regions are pursuing economic integration. Back in 1957, founding
members France, West Germany, Italy, Belgium, the Netherlands, and Luxem-bourg
established the European Economic Community (EEC), now called the
European Union (EU). Their Treaty of Rome called for the formation of a free trade
area, the gradual elimination of tariffs and other barriers to trade, and the forma-tion
of a customs union and (eventually) a common market. Soon, the EEC further
reduced its trade barriers.29 By 1995, Austria, Finland, and Sweden became the
thirteenth, fourteenth, and fifteenth members, respectively, of the EU. In 2002, the
EU admitted ten more members, including some formerly Soviet Union countries,
such as Poland. On January 1, 2002, the EU’s new currency, the euro, went into
circulation. It entirely replaced twelve EU countries’ local currencies.
Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and
Vietnam comprise the Association of Southeast Asian Nations (ASEAN).30 There is
Goods and services move freely in free trade area, customs
union, common market.
Factors of production move freely in common market only.
Common trade policy toward nonmembers: customs
union, common market.
Member
Country
Member country
Nonmember country
Member
Country
Member
Country
Nonmember
Country
economic integration: the
result of two or more nations
minimizing trade restrictions in
order to obtain the advantages
of free trade
free trade area: a type of
economic integration in which
all barriers to trade among
members are removed
customs union: a situation in
which trade barriers among
members are removed and a
common trade policy exists with
respect to nonmembers
common market: a system
in which no barriers to trade
exist among member countries,
a common external trade policy
that governs trade with
nonmembers is in force, and
factors of production, such as
labor, capital, and technology,
move freely among members
F IGURE 3.1
Levels of Economic
Integration

also the Asia Pacific Economic Cooperation (APEC) forum. Members include
Australia, Chile, China, Japan,Malaysia,Mexico, Singapore, and theUnited States.31
Africa also has several regional trading groups, including the Southern African
Development Community, the Common Market for Eastern and Southern Africa,
and the Economic Community ofWest African States.
Canada, the United States, and Mexico established the North American Free
Trade Agreement (NAFTA). NAFTA creates the world’s largest free trade market,
with a total output of about $11 trillion.
● The World Trade Organization (WTO) Governments work together to en-courage
free trade in other ways (not just by fostering free trade areas, in other
words).32 The General Agreement on Tariffs and Trade (GATT) was one example.
Formed in 1947 by twenty-three countries, by the mid-1990s, 117 countries were
participating. The World Trade Organization (WTO) replaced GATT in 1995, and it
now has over 130 members. One of the WTO’s important functions is granting
most favored nation (or normal trade relations) status for countries. This means
that the WTO countries’ “most favorable trade concessions must apply to all trad-ing
partners.”33
When China received most favored nation status, it got the benefits of normal
trade relations with WTO partners, but it also had to reduce its own trade barriers.
Several U.S. companies, including New York Life Insurance Company and Metro-politan
Life Insurance Co., quickly got the green light to set up 50-50 joint ventures
with Chinese partners once China joined the WTO.34 More recently, the New York
Stock Exchange got China’s permission to open a business office there.
Even for WTO members, some trade barriers fall faster than others. With
WTO membership, China will see its import duties on cars fall drastically (to
about 25 percent).35 However, within China, Shanghai still has big license fees
on cars from neighboring provinces so that Shanghai can protect its locally built
Volkswagen.
● The Impact of Economic Integration Economicintegration (such asNAFTA
and the EU) has a big effect on managers. By removing trade barriers such as
tariffs, it promotes regional trade because it becomes easier for companies from
one country to do business in another. It thus boosts competition. So, in Europe,
airlines (like British Airways) and telecommunications firms (like France Telecom)
now face competition from Air France and DeutscheTelecom. Establishing free
trade zones also puts firms from nonmember countries at a disadvantage. Many
U.S. managers formed joint ventures with European partners to make it easier for
them to sell in the EU.
In general, economists believe that free trade improves the standard of living
of a country’s citizens by encouraging competition and therefore providing better
products at lower prices. The other side of the coin is that business managers now
must be much more skillful at managing their companies to compete.
The Legal and Political Environment
Global political and legal differences can blindside even the most sophisticated
managers and companies. After spending billions of dollars expanding into
Germany, for instance, Wal-Mart managers were surprised to learn that Germany’s
commercial laws discourage advertising or promotions that involve competitive
price comparisons. They soon had to leave Germany. In 2006, the European Union

was locked in a dispute with Microsoft, which the EU accused of not making it easy
enough for other firms to design compatible software products.
● Legal Systems Countries differ fundamentally in their approaches to the
law. For example, companies like MGM and Warner Music find it difficult to pro-tect
their intellectual property in some Asian countries where copyright laws
(if they exist) are not enforced with the same zeal as they are in Europe and the
United States. Similarly, a U.S. manager, if arrested in France, may be surprised to
find that French law holds him guilty until proven innocent—the opposite of the
United States.
Global managers should familiarize themselves with such differences. In
France, labor laws can make it difficult to fire and lay off employees, and employers
in France, Germany, and the Netherlands usually must consult with powerful work
councils before reorganizing or relocating employees.36 Similarly, legal terms such
as trade secrets and confidential information aren’t necessarily enforceable in
some countries around the world, even if the manager puts the words into his or
her international contracts.37
Legal considerations influence how managers expand abroad.38 In India, for
instance, a foreign investor may own only up to 40 percent of an Indian indus-trial
company, whereas in Japan, up to 100 percent of foreign ownership is al-lowed.
39 Some managers go global by appointing sales agents or representatives
in other countries. But in Algeria, agents can’t represent foreign sellers. Other
countries view agents as employees subject to those countries’ employment
laws.40
International law consists mostly of agreements embodied in treaties and
other types of agreements. International law governs things like intellectual property
rights. Intellectual property piracy (fake brands) can be a big problem where the
legal system is inadequate or inadequately enforced. For example, Procter &
Gamble (P&G) estimates that about 20 percent of all its products sold in some
countries are fake.41
● Political Systems Going abroad also means sizing up the political systems
and risks with which the manager must cope. Thus, democratic countries usually
provide a more open environment in which to run businesses than do
dictatorships. Sometimes, the company’s fate can change unexpectedly as the
political winds shift. For example, some time ago, the Coca-Cola Company was
very successful inUzbekistan. One reason, perhaps, was that it opened the plant in
partnership with the Uzbekistan president’s son-in-law. When the president’s
daughter separated from her husband, the bottling company’s Uzbek fortunes
diminished.42
The manager also must take many practical risks into account. Examples
include the problems a firm’s employees might run into being robbed or arrested
while traveling abroad. A new website (www.assessyourinternationalrisk.org)
helps managers size up their international risks.43
The Sociocultural Environment
Global managers also quickly discover that people around the world react to
events in varied but characteristic ways. For example, one study found that
Japanese, German, and U.S. managers tended to take different approaches

when resolving workplace conflict.44 The Japanese prefer the power approach,
which meant tending to defer to the party with the most power. Germans used
a more legalistic, stick-to-the-rules approach. U.S. managers tend to try to take
into account all parties’ interests and to work out a solution that maximizes
everyone’s benefits.
Cultural differences like these should influence how managers conduct busi-ness
abroad. When it opened its new production plant in Valenciennes, France,
Toyota had to explain to the French Labor Ministry why management banned the
traditional red wine at lunchtime in the company cafeteria. The reasons given
were health and working conditions.45
On the other hand, Starbucks broke some traditions when it opened its first
Tokyo store. Starbucks (pronounced STAH-buks-zu in Japanese) redefined the
way the Japanese drink coffee. Its nonsmoking, bright, sofa-filled stores are in
marked contrast to the dimly lit, smoke-filled stores where many Japanese tradi-tionally
drink their coffee from tiny cups.46
The Technological Environment
Doing business abroad often requires technology transfer, which basically
means transferring knowledge, such as how to design or manufacture some
product, or how to apply some process or render some service.47 Let’s say that
Dell builds a computer factory in China staffed with local Chinese managers and
workers. The plant’s success depends on more than the bricks and mortar and
machines. For example, Dell must also carefully train all the workers to
use Dell’s technology—such as its methods for ordering computer
parts and for reporting problems. Similarly, Tramco (from this chap-ter’s
opening vignette) must have some way to transfer its knowledge
of how to produce its conveyors if it decides to have a company abroad
manufacture them.
● Successful Technology Transfer Successful technology transfer
depends on several factors. First, one needs a desirable and suitable
technology. For instance, one Miami company transferred to another
country the machines from a plant that was a bit out-of-date in
America but still usable in the lower-cost labor country abroad. Social
and economic conditions must then favor the transfer. Pollution-reducing
technology might be economically useless in a country where
pollution reduction is low priority. Finally, technology transfer de-pends
on the willingness and ability of the receiving party to use and
adapt the technology.48 In China, for instance, many multinational
hotel chains are spending millions of dollars to train their local em-ployees
to apply the hotel chains’ philosophy, for instance, for giving
excellent service.
Sometimes technology transfers more quickly than the manager
originally planned. For example, thanks to joint ventures with Volks-wagen
(VW) and GM, Shanghai Auto now produces over 650,000
cars per year in ultramodern factories in and around Shanghai.
The company is already one of Fortune’s 500 largest companies in
the world, with total revenues well over $12 billion. However, for
top management at Shanghai Auto, that is only the beginning. The
technology transfer: the
transfer, often to another country,
of the knowledge required to
manufacture a product, apply a
process, or render a service; does
not extend to the mere sales or
lease of goods
“STAH-buks-zu” broke some traditions
when it opened its first Tokyo store.

company’s CEO says that Shanghai Auto will be producing 2 million vehicles
by 2010.
Technology transferred from GM and VW helped Shanghai Auto achieve this.
For example, when Shanghai Auto’s joint venture with GM (Shanghai General
Motors) started business, the joint venture received licenses to use GM’s technical
know-how. GM’s technical computer systems, blueprints, and other supporting
information helped Shanghai Auto create the manufacturing machines and
systems for its new high-tech factory.49 That helped Shanghai Auto to eventually
grow out of its dependence on joint ventures and to someday compete with its
joint-venture partners on their own turf.
Distance and Global Management
As you can see, it’s not just vast distances that global managers must deal with.
They also face economic, legal/political, sociocultural, and technological barriers.
In fact, such factors are often as or more important than geographic distance in
determining a foreign venture’s success. One researcher says that managers
should take into account four factors before expanding abroad: (1) cultural
distance (such as languages and religions), (2) administrative distance (such as ab-sence
of shared monetary or political associations), (3) geographic distance (such
as physical remoteness), and (4) economic distance (such as differences in con-sumer
incomes). All of these—not just physical distance—influence the difficulty
the company can expect to encounter (see Figure 3.2). The more distant the new
country is on each of the four measures, the more difficult it may be to expand into
it. MySpace will probably find it more challenging to expand into China than
into England.
ATTRIBUTES CREATING DISTANCE
Administrative Distance
Absence of shared
monetary or political
association
Political hostility
Government policies
Institutional weakness
■
■
■
■
Cultural Distance
Different languages
Different ethnicities;
lack of connective ethnic
or social networks
Different religions
Different social norms
■
■
■
■
Geographic Distance
Physical remoteness
Lack of a common border
Lack of sea or river access
Size of country
Weak transportation or
communication links
Differences in climates
■
■
■
■
■
■
Economic Distance
Differences in consumer
incomes
Differences in costs and
quality of:
• natural resources
• financial resources
• human resources
• infrastructure
• intermediate inputs
• information or
knowledge
■
■
F IGURE 3.2
Determinants of Global Distance
SOURCE: Adapted from Pankaj Ghemawat,“Distance Still Matters,” Harvard Business Review, September 2001, p. 140.

Managing Now: Global Communications
Distance—be it physical distance, cultural distance, or another type of distance—
has always been a major stumbling block to doing business abroad. This is be-cause
distance complicates everything the manager does, from controlling local
operations to coaching employees.
Telecommunications tools like the telephone and e-mail reduce these prob-lems.
Instant messaging enables geographically dispersed employees to com-municate
inexpensively in real time. With Voice over Internet Protocol (VoIP)
technology, calls that would usually go over phone lines are redirected through
the Internet, which makes it easier and less expensive for companies to add or
delete phones, and to combine voice and e-mail systems. Telecommunications—
the electronic transmission of data, text, graphics, voice (audio), or image
(video) over any distance—also facilitates transferring technical information.
Ford designers at the company’s Dearborn, Michigan, headquarters use
computers to design new cars. Digitized designs then go electronically to Ford’s
Turin, Italy, design facility. There, the system automatically reproduces the designs
and creates mockups of them. As another example, PricewaterhouseCoopers
maintains electronic bulletin boards on more than 1,000 different company pro-jects.
About 18,000 of its employees in twenty-two countries use these electronic
bulletin boards to get updates on matters such as how to handle specialized
projects.50
● Face-to-Face Global Communications However, dealing with sensitive top-ics
or trying to be persuasive usually requires more personal, “rich” media, and this
is where modern IT-based systems are invaluable to global managers.51 Being able
to see the other person usually makes it easier to communicate in any situation. And
in some societies—including many in Asia—people are much more comfortable
with rich media. This means communicating with people whose expressions and
gestures they can actually see. Examples of useful IT tools here include videoconfer-encing,
group decision support systems, and virtual communities. These all support
global communications and make it possible for virtual teams—geographically dis-persed
teams who communicate primarily online and via telecommunications—
to do their jobs. We’ll look at each.
● Videoconferencing Companies use videoconferencing to facilitate commu-nications
of geographically dispersed members of work teams. For example, the
team that developed the Boeing 787 made extensive use of videoconferencing for
meetings with engine suppliers and airlines around the world to discuss the new
aircraft’s design.52 The links may be by phone or they may be satellite-based;
or they may use one of the popular PC-based video technologies.53 Videoconfer-encing
has become very sophisticated. For example, Hewlett-Packard’s new life-size
Halo Collaboration Studio makes videoconferencing so clear that it makes
people look as if they’re on the other side of the table, although they may be half a
world away.
● Workgroup Support Systems Workgroup support systems are technology-based
systems that make it easier for workgroup members to work together.
Team members might meet at a single site, or they may be dispersed around the
world. A group decision support system (DSS) is an interactive, computer-based
communications system that facilitates the solution of problems by a
decision support system
(DSS): an interactive,
computer-based
communications system that
facilitates the solution of
problems by a virtual decision-making
team

virtual decision-making team.54 The group DSS lets team members interact via
their PCs and use several software tools to assist in decision making and project
completion. These software tools include electronic questionnaires, electronic
brainstorming tools, idea organizers (to help team members compile ideas gen-erated
during brainstorming), and tools for voting or setting priorities (so that
recommended solutions can be weighted and prioritized). A group scheduling
system provides a shared scheduling database for geographically disbursed
group members. Each group member puts his or her daily schedule into the
shared database, which then helps to identify and set the most suitable times for
meetings. A workflow automation system uses an e-mail type of system to au-tomate
the flow of paperwork.55 For example, if a proposal requires four signa-tures,
the workflow automation system can send it electronically from mailbox to
mailbox for the required signatures.
● Collaborative Writing Systems Collaborative writing systems let group
members create long written documents (such as proposals) while working at a
network of interconnected computers. As team members work on different sec-tions
of the proposal, each member has automatic access to the rest of the sections
and can modify his or her section to be compatible with the rest. For example,
each member of a global team with access to Oracle Project Collaboration software
can easily keep track of such things as assigned tasks, issues, and deliverables. It
enables global team members (both within and outside the company) to work
together more efficiently and to make better and more effective project-related
decisions.56
● Virtual Communities One Friday night, about eighty young people met in a
Tokyo club to exchange business cards and to learn more about some of the other
people in their Japan-based myspace.com-like virtual online community.57 Back
online, they spend hours discussing matters of mutual interest.58
Global companies also use virtual communities. For example, as the prime
contractor in an effort to win a $300 million navy ship deal, Lockheed-Martin
“established a virtual design environment with two major shipbuilders, via a pri-vate
internet existing entirely outside the firewalls of the three individual compa-nies.”
59 Eventually, about 200 global suppliers also connected to the network via
special, secure Internet links. This Internet-based network “allows secure transfer
of design, project management, and even financial data back and forth among the
extended design team via simple browser access, with one homepage as its focal
point.” Lockheed got the contract.
● Internet-Based Communications Schlumberger, which manufactures oil-drilling
equipment and electronics, has headquarters in New York and Paris. The
company operates in eighty-five countries, and in most of them, employees are in
remote locations.60 How does the company keep communications costs low for
such a global operation? Here’s how experts describe the company’s system:
Using the Internet, Schlumberger engineers in Dubai (on the Persian Gulf)
can check e-mail and effectively stay in close contact with management at a
very low cost. In addition, the field staff is able to follow research projects as
easily as can personnel within the United States. Schlumberger has found that
since it converted to the Internet from its own network, its overall communi-cations
costs are down. . . . The main reason for the savings is the dramatic
drop in voice traffic and in overnight delivery service charges. . . .61
group scheduling system:
a system that provides a shared
scheduling database for
geographically disbursed group
members
workflow automation
system: an e-mail type of
system to automate the flow of
paperwork

Planning, Organizing, and Controlling in a Global Environment ■ 75
Planning, Organizing, and Controlling
in a Global Environment
nternational management means carrying out the four management functions
we discuss in this book—planning, organizing, leading, and controlling—
I
to achieve the company’s international aims. As we’ve seen, managing in a global
environment can present managers with some special challenges. We’ll look at
some of these challenges in the following discussion, starting with the global man-ager’s
traits, and then focusing on planning, organizing, and controlling in a global
environment. This should also provide you with a better feel for what planning,
organizing, leading, and controlling involve on a day-to-day basis.
The Global Manager
Not everyone is competent to manage in a global arena. Saying you appreciate
cultural differences is one thing; being able to act on it is another. Global managers
therefore tend to be, first, cosmopolitan in how they view people and the world.
Some define cosmopolitan as “belonging to the world; not limited to just one part
of the political, social, commercial or intellectual spheres; free from local, provin-cial,
or national ideas, prejudices or attachments.”62 Global managers must be
comfortable living and working anywhere in the world, and being cosmopolitan
helps them to do so.
Sir Howard Stringer, chief executive officer of Sony
Corp., is probably as “global” as a manager can be. Born
in Wales, Sir Howard manages Tokyo-based Sony Corp.
by telecommuting from his offices in New York while
still often visiting his family in Oxfordshire, England.63
Sir Howard got the Sony CEO job partly based on
his success turning around Sony USA. Under his watch,
Sony USA eliminated 9,000 jobs and $700 million in
costs. He also made other numerous changes, includ-ing
merging Sony’s music business with Bertelsmann’s
BMG label.
Now that he is CEO of Sony Corp., Sir Howard’s
strategies will probably include centralizing some
Sony activities such as research and development to
cut costs, and focusing more on high-value products
such as video games. He also wants Sony’s employees
and professionals from divisions such as engineering
and media to work more closely together. But as a true
global manager, Sir Howard knows that in a Japanese
culture that favors harmony, he can’t push the idea of
Sir Howard Stringer is a global executive endeavoring to
manage Sony Corporation while dividing his time between
the United States, Europe, and Japan.
maximizing shareholder value too hard. As a true global manager, he will adapt his
leadership style to the culture of the Japanese.
Like Sir Howard, cosmopolitan people are sensitive to what is expected of
them in any context, and they have the flexibility to deal intelligently and in an
unbiased way with people and situations from other cultures. One needn’t have
traveled extensively or be multilingual like Sir Howard to be cosmopolitan,
although such experiences help. The important thing is to be sensitive to other
people’s perspectives and to consider them in your own behavior.64
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In addition to being cosmopolitan, global managers also have what some
experts call a global brain. They are flexible enough to accept that, at times, their
own ways of doing business are not the best. For example, Volkswagen formed a
partnership with Skoda, a Czech carmaker. VW trained Skoda’s managers in West-ern
management techniques. However, it followed Skoda’s suggestions about how
to conduct business in the Czech Republic.65 Being willing to apply the best solutions
from different systems is what experts mean by having a global brain.
This global point of view (or its absence) tends to reflect itself in a man-ager’s
global philosophy. For example, an ethnocentric (home-base-oriented)
management philosophy may manifest itself in an ethnocentric or “stay at home”
home-market-oriented firm. A polycentric philosophy may translate into a com-pany
that is limited to several individual foreign markets. A regiocentric (or geo-centric)
philosophy may lead managers to create more of a global production and
marketing presence.
● Would Your Company Choose You as an International Executive?
What do companies look for in their international executives? One study focused
on 838 lower-, middle-, and senior-level managers from six international firms in
twenty-one countries. The researchers studied the extent to which employers
could use personal characteristics such as sensitivity to cultural differences to
distinguish between managers who had high potential as international executives
and those whose potential was not so high. Fourteen personal characteristics
successfully distinguished those identified as having high potential from those
identified as lower performing.
Table 3.1 lists the fourteen characteristics with sample items. For each, indicate
(by placing a number in the space provided) whether you strongly agree (7),
strongly disagree (1), or fall somewhere in between. The higher you score, the more
likely you would have scored high as a potential global executive in this study.66
Planning in a Global Environment
Planning means setting goals and identifying the courses of action for achiev-ing
those goals. The company’s strategic plan lays out how the company will
move from the business it is in now to the type of business it wants to be. GM
wanted to expand into China. Its strategy was to do so by forming a joint ven-ture
with Shanghai Auto.
Going global helps to illustrate the sorts of strategic decisions managers
need to make. For example, one big global strategy question is whether to
offer standardized or localized products abroad. In deciding this, common
sense does not always suffice. Instead, the manager needs to study the matter
carefully. For years, Mattel Inc. adapted its Japan Barbie doll to what it as-sumed
were local tastes, with black hair, Asian features, and Japanese-type
clothes.67 Several years ago, Mattel’s consumer research group discovered
a surprising fact. Most kids around the world actually wanted the original
Barbie, with her blond hair and blue eyes. So recently, when Mattel intro-duced
its Rapunzel Barbie with long blond hair, it also introduced the same
doll on the same day in fifty-nine countries. The Window on Managing Now
feature (page 78) shows how managers use software and other IT components
to improve their localization decisions.
As another planning example, expanding abroad also takes careful feasi-bility
planning. French retailerCarrefour conducts feasibility studies before en-tering
new markets. For example, it avoids entering developing markets—such
ethnocentric: a management
philosophy that leads to the
creation of home-market-oriented
firms
polycentric: a management
philosophy oriented toward
pursuing a limited number of
individual foreign markets
regiocentric: a management
philosophy oriented toward
larger areas, including the global
marketplace; also called
geocentric
planning: the process of setting
goals and courses of action,
developing rules and
procedures, and forecasting
future outcomes
Mattel discovered that children
everywhere wanted the same blond
Rapunzel Barbie.

T ABLE 3.1
Characteristics of More Successful International Managers
Scale Your Score Sample Item
Sensitive to cultural differences. When working with people from other cultures, works
hard to understand their perspectives.
Business knowledge. Has a solid understanding of our products and
services.
Courage to take a stand. Is willing to take a stand on issues.
Brings out the best in people. Has a special talent for dealing with people.
Acts with integrity. Can be depended on to tell the truth, regardless of
circumstances.
Is insightful. Is good at identifying the most important part of a
complex problem or issue.
Is committed to success. Clearly demonstrates commitment to seeing the
organization succeed.
Takes risks. Takes personal as well as business risks.
Uses feedback. Has changed as a result of feedback.
Is culturally adventurous. Enjoys the challenge of working in countries other than
his or her own.
Seeks opportunities to learn. Takes advantage of opportunities to do new things.
Is more open to (less sensitive Appears brittle—as if criticism might cause him or her
about) criticism. to break. (Reverse scored, so 1 is “strongly agree” for
this item.)
Seeks feedback. Pursues feedback even when others are reluctant to
give it.
Is flexible. Doesn’t get so invested in things that he or she cannot
change when something doesn’t work.
TOTAL SCORE
as Russia—that don’t have reliable legal systems.68 Even in more traditional mar-kets,
Carrefour won’t proceed without at least a year’s worth of on-site research. In
China, “Carrefour takes care to chop vegetables vertically—not laterally—so as not
to bring bad luck to superstitious shoppers.”69
Organizing in a Global Environment
Organizing means identifying the jobs to be done, establishing departments,
delegating or pushing authority down to subordinates, and creating a chain of
command and mechanisms for coordinating employees’ efforts. In general, the
firm’s stage of internationalization determines how it organizes its international

Global Clustering
Managers today increasingly use “clustering” to make bet-ter
decisions about whether to offer standardized or local-ized
products. Clustering means identifying commonalities
among customers based on their local tastes, and then
combining (or clustering) common customers together.
The clustered customers still get their locally preferred
products or services. The company gets improved
economies by clustering together several customers with
similar tastes and preferences.
For example, Best Buy clusters stores in terms of
several typical types of customers. For example, “Jill” is a
busy mother who is the chief buyer for her household
and wants quick, personalized help navigating the world
of technology. Stores aimed at appealing to “Jill” have
uncluttered, wider aisles, warmer lighting, and more
technology-related toys for children.
Clustering relies on information technology.70
Clustering requires being able to quickly access and
analyze huge amounts of sales information across the
company’s global operations. The company needs to
analyze who buys what and how buyers are similar to or
different from each other. Information technology makes
this possible. For example, with information on details
like style and size constantly streaming back to the
retailer Zara’s global headquarters from point-of-sale
computers, personal digital assistants (PDAs), and special
software in stores, companies like Zara have developed
methods for analyzing data on local buying patterns.This
enables them to group these buying patterns into
clusters—groups of stores that get similar merchandise
and store layouts.
efforts. Thus, a company at the earliest stages of internationalization (or with few
globally qualified managers) will more likely opt for managing its international
operations out of a headquarters import-export or international department.
There is a typical evolution as the company becomes more international. In a
domestic organization, each company division handles its own foreign sales. In
response to increasing orders from abroad, the firm may move to an export-oriented
structure. Here, one department (often called an import-export depart-ment)
coordinates all international activities such as licensing, contracting, and
managing foreign sales.
In an international organization, management splits the company into
domestic and international divisions. The international division focuses on
production and sales overseas, while the domestic division focuses on domestic
markets. Reynolds Metals, for instance, set up six worldwide businesses, each with
a U.S.-focused group and a separate international group. In a multinational
organization, each country where the firm does business has its own subsidiary.
Royal Dutch Shell has separate subsidiaries for Shell Switzerland and Shell U.S.A.
(as well as many other countries).71
Other things affect how the manager organizes his or her international opera-tions.
Top management’s philosophy is another consideration. For example, some
CEOs are more globally oriented, while some are more local (ethnocentric) in their
philosophical outlooks. The manager who believes that his or her country’s ways
are best is less likely to delegate much authority to remote local managers.
Geographic distance is also important. Practical experience shows that it’s harder
to keep track of things that are happening far away. The following Managing Now
section shows how Porsche uses information technology to help headquarters
managers make better local decisions.

● Managing Now: Porsche Centralizes Information technology also makes
it easier to centralize decision making in one headquarters location (as opposed
to letting managers at remote sites make these decisions). For example, Porsche’s
local warehouses used to supply parts to local dealers. If a warehouse was out of
stock, there could be a delay. Now, Porsche uses information technology to link all
its worldwide parts distribution and warehouse facilities. Therefore, its new cen-tral
global logistics-planning center always knows who has what parts where. Now,
when an order for a part comes in from a dealer, that order goes to the global lo-gistics-
planning center. This center handles the scheduling based on its informa-tion
regarding global availability of those parts.72 The Practice IT feature shows
how Tramco expanded abroad.
Controlling in a Global Environment
Coca-Cola once had a rude surprise when several European countries made it take
its beverages off store shelves. Coke has high standards for product quality and in-tegrity,
but controlling what’s happening at every plant worldwide is a challenge.
Chemicals had possibly seeped into the beverages at one of Coke’s European
plants.
Controlling means monitoring actual performance to ensure it is consistent
with the standards the manager set. This is difficult enough when the employees
are next door. Geographic distance complicates the problem, and the other
distances (cultural and legal, for instance) complicate it even more. Among other
things, the global manager should carefully address two factors: what to control
and how to control it. The following presents some examples.
● Deciding What to Control Particularly given the geographic distances in-volved,
the global manager has to choose the activities he or she will control
with great care. The manager could, of course, try to micromanage everything
abroad—from hiring and firing to product design, sales campaigns, and cash
PRACTICE IT
Tramco, Inc.
Wichita, Kansas–based Tramco wants to supply its con-veyors
abroad, but the conveyors are so big and heavy
that it costs as much to pack and ship one as it does to
manufacture it. So they can’t economically ship them.And
with only about 100 employees,Tramco can’t start build-ing
its own factories in countries around the world.
Tramco was able to use technology to solve its prob-lem.
First, it entered into strategic partnership agree-ments
with manufacturers in several countries, who
agreed to build the conveyors according to Tramco’s spec-ifications.
The engineering design work on these huge
conveyors is highly specialized and proprietary, so Tramco
wanted to do that design work in its own Wichita offices.
By installing special three-dimensional computerized
design equipment at its own offices and at each partner
abroad, Tramco’s engineers in Kansas can design the
conveyor and electronically transmit the design to the
partner, which then manufactures it. It’s easy for Tramco’s
engineers and the local manufacturer-partners’ produc-tion
teams to discuss and fine-tune designs electronically.
Thanks to its new technology, Tramco is now truly a
global company, with customers and manufacturing part-ners
around the world. It’s hard to see how Tramco could
have accomplished this without information technology.

management. However, micromanaging at long distances is not practical—even
with the Internet, keeping track of people far away is not easy.
In practice, the amount of autonomy the local manager gets is usually least for
financial and capital decisions and most for personnel decisions.73 Production and
marketing decisions tend to fall in the middle. In one study of 109 U.S., Canadian,
and European multinational corporations, “these firms exercised stricter financial
control, and allowed greater local freedom for labor, political, and business
decisions. The home offices also usually made the decisions to introduce new
products and to establish R&D facilities.”74
● Deciding How to Maintain Control The global manager also must decide
how to control his or her global operations. Most managers today use computer-ized
information systems. For many years, Kelly Services, Inc., let its offices in each
country operate with their own individual billing and accounts receivable sys-tems.
However, according to Kelly’s chief technology officer, “we are consolidating
our operations in all countries and subsidiaries under a standard [information
system]. . . . All our customers expect us to deliver consistent practices, metrics,
and measurement. Establishing global standards is an important part of meeting
and exceeding that expectation.”75
Global managers also endeavor to foster their employees’ self-control and
employee commitment. Global managers do use computerized systems, financial
and operating reports, and personal visits to help control their international
operations.76 However, methods like these are limited when thousands of miles
separate boss and subordinate. Particularly in global companies, there’s wisdom
in making sure employees want to do what is right—and that they know what’s
expected of them in terms of the company’s values and goals.
In other words, global companies have to make sure their managers and em-ployees
buy into and are really committed to “the way we do things around here.”77
Many firms, like Shell Oil and GE, therefore spend millions of dollars each year
bringing managers together for special training sessions where the firm’s core val-ues
(such as “ethics is all-important”) are stressed. The Window on Managing Now
feature illustrates how Dräger Safety uses information technology to support its
control efforts.
Leading and Motivating in a Multicultural Environment
any people are probably less skilled at dealing with cultural differences than
they think they are. Most people might say, “of course, there are cultural differ-ences
among people from different cultures.” Yet many, once abroad, would blun-der
into simply treating the people there the same as the people at home.78 The
M Online Study Center
problem stems from what international management writers call the universality
assumption of motivation: “These [motivation] theories erroneously assume that
human needs are universal.”79 For example, an American manager in Chile might
assume that employees there are as enthusiastic about participative leadership—
having the boss ask what the workers think is best—as are those in the United
States, although they might not be.
Such assumptions are not uniquely American. Everyone everywhere tends to
assume that everyone thinks and feels more or less like they do. But, in fact, people
and cultures are different in many ways. We’ll briefly look at how cultural differences
influence how managers in international arenas motivate and lead employees.
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Leading and Motivating in a Multicultural Environment ■ 81
Dräger Safety
Dräger Safety, based in Lubec, Germany, is the world’s
largest supplier of personal-protection, gas-testing, and
diving equipment, with operations in thirty-three coun-tries.
80 Several years ago, Dräger faced a problem control-ling
its worldwide sales and inventory operations. Each of
its facilities around the world basically had its own soft-ware
system. For instance, if managers at headquarters
wanted to know what the company’s total inventory was,
headquarters employees had to collect the separate,
incompatible reports from each of the company’s facilities
and summarize them for management.
This lack of comparable information was hurting
Dräger’s competitiveness. As Dräger’s chief financial offi-cer
put it, “it got to the point where sales reps dreaded
going to customer sites . . . the customer would spend a
whole hour berating them about late deliveries and missed
appointments.” For instance, warehouses found it difficult
to monitor the status of a product after it shipped, and the
trucking company found it difficult to forecast when
Dräger would have a particular order ready to ship.
Dräger installed a new software system that enables
its managers to better control its global production. For
example, it installed a special enterprise software system
that integrated and made compatible the systems each of
its facilities had been using. Now, all Dräger’s suppliers,
facilities, and customers are linked together to Dräger’s
global database.
Figure 3.3 summarizes the new system. Dräger’s
suppliers, locations, and customers can all connect to the
common global database and thereby monitor product
and shipping status. Dräger salespeople can now give
customers accurate shipping estimates. Customers now
get accurate shipping information. Furthermore, Dräger
headquarters management can now access the global data-base
for producing sales forecasts, production plans, and
purchasing plans and for compiling budgets and financial re-ports.
At Dräger, IT—a combination of computers, special
software, cell phones, PDAs, and fax, for instance—made
successful globalization possible.
Dräger Supplier Dräger Locations Dräger Customer
Common Supply Chain
Management Applications
Common
Database
Common Data
Integration
Budget, Controlling, Analysis, Reports
Sales
Forecast
Demand
Planning Production Purchasing Drop ship
Intranet / Internet
GLOBAL DATABASE
F IGURE 3.3
An Oracle-Based Supply
Chain
SOURCE: Adapted from Business
Benefits Series,“Dräger Safety
Re-Engineers Global Supply Chain,
Builds Centralized Logistics and IT
Infrastructure Yielding Three-Year ROI
of 193%,” www.oracle.com, accessed
March 2006. Reprinted by permission of
Oracle Corporation.

Values
One way people around the world differ is in terms of their values. Values are
basic beliefs we hold about what is good or bad, important or unimportant.
Values (such as West Point’s famous “Duty, honor, country”) are important to
managers because our values shape how we behave. When Professor Geert
Hofstede studied managers around the world, he found that societies’ values
differ in several ways:
◗ Power distance.81 Power distance is the extent to which the country’s less power-ful
members accept and expect that power will be distributed unequally.82At the
time, Hofstede concluded that acceptance of such inequality was higher in some
countries (such as Mexico) than it was in others (such as Sweden).
◗ Individualism versus collectivism. In individualistic countries like Australia and
the United States, “all members are expected to look after themselves and their
immediate families.”83 In collectivist countries like Indonesia and Pakistan, society
expects people to care for each other more.
◗ Masculinity versus femininity. According to Hofstede, societies differ also in the
extent to which they value assertiveness (which he called “masculinity”) or caring
(“femininity”). For example, Austria ranked high in masculinity; Denmark
ranked lower.
◗ Uncertainty avoidance. Uncertainty avoidance refers to whether people in the
society are uncomfortable with unstructured situations in which unknown,
surprising, novel incidents occur. People in some countries (such as Sweden,
Israel, and Great Britain) are relatively comfortable dealing with uncertainty and
surprises. People living in other countries (including Greece and Portugal) tend
to be uncertainty avoiders, said Hofstede.84
Leadership in a Multicultural Environment
Leadership means influencing someone to willingly work toward achieving the
firm’s objectives. The manager dealing with people from other cultures needs to
keep in mind that cultural differences affect how managers exercise their leadership
authority. For example, Hofstede found large differences in the “power distance” (in-equality)
people in different cultures will tolerate.85 Figure 3.4 lists countries with
large (or high) and small (or low) power-distance rankings. For example, Argentines
appear more tolerant of large power differences, Swedes less so.
Findings like these have practical managerial implications. For one thing, they
help to explain why managers from different countries seem to have different
mindsets when it comes to doing business. For example, if a manager in a “large
power distance society” attempts to reduce the distance by acting more accessible
and friendly, his or her subordinates may not react well to such friendliness from
their boss.86 In that context, it’s not surprising that leaders in some countries (for
instance, Spain, Portugal, and Greece) tend to delegate less authority than do lead-ers
in others such as Sweden, Japan, Norway, and the United States.87
Motivation in a Multicultural Environment
Similarly, the motivation techniques managers use in one country may not work
well in another. For example, in his famous“needs hierarchy theory,” American psy-chologist
AbrahamMaslow said that people are motivated first to satisfy their basic
physiological needs (food and water) and only then will they be motivated to satisfy
(in ascending order) their security, social, self-esteem, and self-actualization
values: basic beliefs about what
is important and unimportant,
and what one should and should
not do

POWER DISTANCE
(becoming the person you believe you are capable of becoming) needs.However, he
based his theory on Americans. In other societies, people’s needs don’t necessarily
revolve aroundthe self asmuchas aroundsocial relationships.Thus, in China, social
needs might come first, then physiological, security, and finally self-actualization
needs. Not surprisingly, in Asia, paying an incentive to a work team for how well it
performs is very popular. In America, individual incentives are more popular.88
Interpersonal Communications in a
Communication refers to exchanging information so that the manager creates a
common basis of understanding. Cultural differences influence communication in
F IGURE 3.4
Countries Ranked Based on
How Much Power Distance
People Tolerate
SOURCE: Adapted from G. Hofstede, Culture’s
Consequences (Beverly Hills, Calif.: Sage
Publications, 1984).
Argentina
Brazil
Belgium
Chile
Colombia
France
Greece
Hong Kong
India
Iran
Italy
Japan
Mexico
Pakistan
Peru
Philippines
Portugal
Singapore
Spain
Taiwan
Thailand
Turkey
Venezuela
Yugoslavia
Australia
Austria
Canada
Denmark
Finland
Germany
Great Britain
Ireland
Israel
Netherlands
New Zealand
Norway
Sweden
Switzerland
U.S.A.
HIGH POWER DISTANCE
(Inequality more
acceptable)
LOW POWER DISTANCE
(Inequality less
acceptable)

obvious and subtle ways. Language barriers are one obvious problem. An American
manager negotiating a deal in England can generally make him- or herself under-stood
using English, but he or she might need an interpreter in France. Even when
the other party speaks some English, problems can arise. For example, using an
idiom (such as “you bet it is”) may be incomprehensible to the Swiss person with
whom you’re speaking. Furthermore, as General Motors once discovered, words that
sound or look the same (such as Nova, which means “won’t go” in Spanish) may have
different meanings in different countries.
The problem is not just the words. As much as 90 percent of what people “say”
is nonverbal, conveyed via facial expressions and signs and motions of one sort or
another. Here is where the novice international manager can really get into
trouble. Table 3.2 shows what some typical nonverbal behaviors mean in various
countries. Subtle differences like these can make international management an
adventure! The Improving Your Cultural Intelligence Skills feature presents other
examples of global cultural differences.
T ABLE 3.2
Implications of Various Nonverbal Behaviors in Different Cultures
Nonverbal Behavior Country Meaning
Thumbs up United States An approval gesture/okay/“Good job!”
Middle East A gesture of insult
Japan A sign indicating “male”
Germany A sign for the count of 1
A finger circulating next to the ear Argentina A telephone
United States “Crazy!”
A raised arm and waggling hand United States Goodbye
India, South America Beckoning
Much of Europe A signal for no
Showing the back of the hand England A rude sign
in a V-sign Greece, Middle East A sign for the count of 2
Showing a circle formed with United States “Very good!”
index finger and thumb Turkey Insult gesture/accusation of homosexuality
Eye contact, gazing United States A sign of attentiveness
Japan A rude behavior/an invasion of privacy
Most Asian countries Sign of disrespect to senior people
Widening eye United States An indication of surprise
Chinese An indication of anger
Hispanic Request for help
French Issuance of challenge
Nodding the head up and down Western countries A sign for agreement/yes
Greece, Bulgaria A sign for disagreement/no
Source: Adapted from Kamal Fatehi, International Management (Upper Saddle River, N.J.: Prentice Hall, 1996), Table 6.1, p. 194.

IMPROVING YOUR CULTURAL INTELLIGENCE SKILLS
In practice, there is more to being multicultural than just
using the right mannerisms and idioms.Two researchers say
that being truly multicultural (having “cultural intelligence”)
F IGURE 3.5
Diagnosing Cultural Intelligence
requires that the person also have what they call the right
cognitive, physical, and emotional/motivational cultural
skills. Figure 3.5 presents a short cultural intelligence test.
These statements reflect different facets of cultural intelligence. For each set, add up your scores and divide by four to produce an
average. Work with large groups of managers shows that for purposes of your own development, it is most useful to think about
your three scores in comparison to one another. Generally, an average of less than 3 would indicate an area calling for improvement,
while an average of greater than 4.5 reflects a true “Cultural Quotient” (CQ) strength.
Rate the extent to which you agree with each statement, using the scale:
1 = strongly disagree, 2 = disagree, 3 = neutral, 4 = agree, 5 = strongly agree.
Before I interact with people from a new culture, I ask myself what I hope to achieve.
If I encounter something unexpected while working in a new culture, I use this experience to figure out new
ways to approach other cultures in the future.
I plan how I’m going to relate to people from a different culture before I meet them.
When I come into a new cultural situation, I can immediately sense whether something is going well or
something is wrong.
Total
÷ 4 = COGNITIVE CQ
+
It’s easy for me to change my body language (for example, eye contact or posture) to suit people from a
different culture.
I can alter my expression when a cultural encounter requires it.
I modify my speech style (for example, accent or tone) to suit people from a different culture.
I easily change the way I act when a cross-cultural encounter seems to require it.
+
Total ÷ 4 = PHYSICAL CQ
Total
I have confidence that I can deal well with people from a different culture.
I am certain that I can befriend people whose cultural backgrounds are different from mine.
I can adapt to the lifestyle of a different culture with relative ease.
I am confident that I can deal with a cultural situation that’s unfamiliar.
÷ 4 = EMOTIONAL/MOTIVATIONAL CQ
+
SOURCE: Christopher Earley and Elaine Mosakowski,“Cultural Intelligence,” Harvard Business Review, October 2004, p. 143.
Reprinted by permission of the Harvard Business Review.

For example, the Cognitive Skills component of some-one’s
cultural intelligence in the figure is reflected in
statements like the following: “When I come into a new
cultural situation, I can immediately sense whether some-thing
is going well or something is wrong.” One point
these experts emphasize is that succeeding with people of
other cultures really takes being sensitive to who they are
and to how they do things. As they say,
1. Companies can pursue several approaches when it
comes to extending operations to foreign markets:
exporting, licensing, and franchising are popular
alternatives. At some point, a firm may decide to
invest funds in another country. Joint ventures and
wholly-owned subsidiaries are two examples of
foreign direct investment.
2. An international business is any firm that engages
in international trade or investment. Firms are
globalizing for many reasons, the three most com-mon
being to expand sales, acquire resources, and
diversify sources of sales and supplies. Other rea-sons
for pursuing international business include
reducing costs or improving quality by seeking
products and services produced in foreign coun-tries
and smoothing out sales and profit swings.
3. Free trade means removing all barriers to trade
among countries participating in the trade agree-ment.
Its potential benefits have prompted many
nations to enter into various levels of economic in-tegration,
ranging from a free trade area to a com-mon
market.
4. Globalizing production means placing parts of a
firm’s production process in various locations
around the globe. The aim is to take advantage of na-tional
differences in the cost and quality of produc-tion
and then integrate these operations in a unified
system of manufacturing facilities around the world.
Companies are also tapping new supplies of skilled
labor in various countries. The globalization of mar-kets,
production, and labor coincides with the rise of
a new type of global manager, someone who can
function effectively anywhere in the world.
5. International managers must be skilled at weigh-ing
an array of environmental factors. Before doing
business abroad, managers should be familiar with
the economic systems, exchange rates, and level of
economic development of the countries in which
they plan to do business. They must be aware of
import restrictions, political risks, and legal differ-ences
and restraints. Important sociocultural dif-ferences
also affect the way people in various
countries act and expect to be treated. Values,
languages, and customs are examples of elements
that distinguish people of one culture from those
of another. Finally, the relative ease with which the
manager can transfer technology from one coun-try
to another is an important consideration in
conducting international business.
6. With respect to planning the products it sells, the
company can offer standardized products world-wide,
or products more specifically designed for
local preferences. Many companies group cus-tomers
into clusters to gain some of the advantages
of both standardization and localization. Feasibil-ity
planning is also important to global managers.
7. Particularly given the geographic distances
involved, the global manager has to choose the
activities he or she will control with great care.
Micromanaging at long distances is not practical—
even with the Internet, keeping track of people far
away is not easy. In practice, the amount of auton-omy
the local manager gets is usually least for
financial and capital decisions and most for
personnel decisions.
8. The company’s international organization reflects
the firm’s degree of globalization. In a domestic
organization, each division handles its own foreign
sales. In response to increasing orders from abroad,
the firm may move to an export-oriented structure.
. . . Your actions and demeanor must prove that you
have already to some extent entered their world.
Whether it’s the way you shake hands or order a coffee,
evidence of an ability to mirror the customs and gestures
of the people around you will prove that you esteem them
enough to want to be like them. By adopting people’s
habits and mannerisms,you eventually come to understand
in the most elemental way what it is like to be them.89

Case Study ■ 87
1. If you owned a small U.S. business and wanted to
expand sales to Europe, explain briefly how you
would go about doing so.
2. Why does globalization affect businesses and
employees in the United States?
3. What do we mean by economic integration?
4. What is the European Union?
5. How do managers generally organize for interna-tional
business? What do their organizining deci-sions
depend on?
1. You have just taken an assignment to assess the
feasibility of opening a branch of your company’s
business in Russia. Your company manufactures
and sells farming equipment. Working in teams of
four or five, prepare a detailed outline showing the
main topic headings you will have in your report,
including a note on the management tools you will
use to get the information you need for each topic.
2. While Google’s strategy of exporting its e-mail and
other tools from the United States to various coun-tries
seems to be working well, management is now
concerned that local competitors may start eating
into its business. Working in teams of four or five,
use the discussions in this chapter to specify the
global strategy (localize or not?) you believe Google
should pursue now. What global organization
structure would that imply?
3. Spend several minutes using the tools and what
you learned so far in this book to list ten reasons
why you would (or would not) be a good global
manager.
4. Many rightfully believe that it is the business
school’s responsibility to familiarize business stu-dents
with what it takes to be an effective global
manager. In teams of four or five, compile a list,
based on this course and any others you’ve taken,
of what your business school is doing to cultivate a
better appreciation of the challenges of doing busi-ness
internationally.
C A S E S T U D Y
U.S. Bookseller Finds a Strong Partner in German Media Giant
When Barnes & Noble was exploring ways to become
more competitive in its battle with Amazon.com,
there were hundreds of U.S. companies to which it
could turn. Research demonstrated that the cultural
differences that characterize cross-border ventures
made them far more complicated than domestic ones.
So Barnes & Noble surprised competitors when it
chose to form an Internet joint venture with the
German media giant Bertelsmann.
Bertelsmann was best known among college stu-dents
for its record label and music club, BMG (now
both owned by Sony). At the time, BMG Entertainment
was second in the market with $1.9 billion in sales.
Bertelsmann’s holdings include Random House, the
In an international organization, management
splits the company into domestic and international
divisions. In a multinational organization, each
country where the firm does business has its own
subsidiary.
9. Leading, motivating, and communicating abroad
are susceptible to what international management
writers call the universality assumption—the
tendency to assume that everyone everywhere
thinks and feels more or less like we do. People
around the world actually hold different values in
areas such as power distance, individualism versus
collectivism, masculinity versus femininity, and
uncertainty avoidance, and they often have differ-ent
needs and ways of communicating.

world’s largest English-language book publisher, and
Offset Paperback, a firm that manufactures nearly
40 percent of all the paperback books sold in the
United States. Bertelsmann had also actively pursued
e-commerce on its own.
To fund the original barnesandnoble.com, the two
created a separate company and conducted an initial
public offering (IPO) to raise capital. The offering
raised $421 million for the new venture after commis-sions
and expenses, making it the largest e-commerce
offering in history. Since launching its online business
in May 1997, barnesandnoble.com has quickly become
one of the world’s largest e-commerce retailers. The
company has successfully capitalized on the recog-nized
brand value of the Barnes & Noble name to
become the second largest online retailer of books.
1. What may have motivated Barnes & Noble to part-ner
with the German firm Bertelsmann? In general
terms, what advantages would Barnes & Noble
gain by having an international partner in such an
endeavor? Suggest the pros and cons of this part-nership.
2. Specify the basic global strategy you believe
barnesandnoble.com should pursue, and explain
why. How, in very general terms, would you orga-nize
this venture?
3. With all its experience in e-commerce, why wouldn’t
BMG just set up its own competitor to Amazon
.com?
4. List three specific planning, organizing, leading,
and controlling issues Barnes & Noble’s managers
probably faced in establishing this new joint
venture.
5. Write a one-page essay on the following topic:
cultural factors our Barnes & Noble managers
should keep in mind when dealing with our
colleagues at Bertelsmann.

89
4
CHAPTER OUTLINE
Opening Vignette: Procter &
Gamble
● Introduction:
Entrepreneurship and
Innovation
● Entrepreneurship Today
Entrepreneurs and Small-Business
Management
The Environment of Entrepreneurship
Why Entrepreneurship Is Important
● What It Takes to Be an
Entrepreneur
Research Findings
Anecdotal Evidence
Should You Be an Entrepreneur?
● Getting Started in Business
Coming Up with the Idea for the
Business
Methods for Getting into Business
Forms of Business Ownership
Getting Funded
Writing the Business Plan
Choosing a Web-Based Business
● Managing Innovation and
New-Product Development
Using Computerized Business-
Planning Software
The Eight-Stage New-Product
Development Process
Fostering Innovation
● Innovation Now
Innovation and Collaboration
Innovation and Learning
Managing Now: Using Information
Technology for Innovation
PRACTICE IT: Collaborative
Innovation at P&G
Product Life-Cycle Management
Managing Now: Product Life-Cycle
Management Software
MANAGING ENTREPRENEURSHIP
AND INNOVATION
Procter & Gamble
ust about everyone uses products from Procter & Gamble (P&G)
every day. Some of its hundreds of famous brands include, just for a
J
start, Bounty, Crest, Clairol, Duracell, Gillette, Head & Shoulders, Ivory,
Old Spice, Pampers, and Swiffer. Like almost every company, the only
way P&G can stay ahead of the
competition is to keep coming
up with new and improved
products. Whether it’s a
new multiblade razor, a
superwhitening toothpaste, or
a Swiffer mop (which did not
even exist a few years ago),
innovation is the name of the
game at P&G. The problem is
that companies like P&G can’t
rely on just their own research
labs to come up with the
necessary new products.
“The R&D model that most
companies are following is broken,” says Larry Huston, the firm’s head of
research and development.1 Instead, P&G also wants to tap the ideas of
its millions of consumers, distributors, and retailers, as well as any scien-tists
who might want to contribute.The question for Larry Huston is,
How should P&G do this? ■
➤ Explaining why you do (or do not) have the traits to be an entrepreneur.
➤ Listing the pros and cons of four forms of business ownership.
➤ Listing what a person should keep in mind with respect to buying a business or
franchise.
Just about everyone uses a P&G product
every day.

90 PART ONE CHAPTER 4 Managing Entrepreneurship and Innovation
➤ Explaining managing innovation, new product development, and life-cycle management,
using examples.
➤ Reading the opening vignette and explaining how to answer Larry Huston’s question.
➤ Reading the chapter case study and listing what an entrepreneur is doing right and
doing wrong with respect to starting a business.
➤ Reading Experiential Exercise 2 and explaining why you would or would not buy that
franchise.
➤ Watching the simulation video and identifying how the manager recognizes, manages,
and creates innovation for a sustained competitive advantage.
Introduction: Entrepreneurship and Innovation
&G is a great company, but chances are most people reading this book won’t
work for P&G, or for other giant companies like GM either. Most people work
P
for small, entrepreneurial firms, firms with no more than perhaps 100 or so em-ployees.
And many business school graduates also go out and start their own busi-nesses,
or buy small businesses, or start franchises. Therefore, business students
definitely should be familiar with small-business management.
Small entrepreneurial companies are important for another reason. Small
firms are engines of inventiveness and innovation, the sort of inventiveness and
innovation that produces the floods of new products that any society needs to grow
and to thrive. After all, all those Google, MySpace, and Youtube dotcoms didn’t
come out of some giant company’s lab. (Twenty-somethings Chad Hurley and
Steven Chen created Youtube in about one year.) And even most of the great and
most innovative products around today (like the Apple computer, or even Gillette
razors) originally came out of the work of a small band of people working together,
often in the proverbial garage. The bottom line is that business students and man-agement
majors should know something about managing small entrepreneurial
companies and about innovation.
In fact, innovation is a much more important topic for business success than
most people realize. Xerox Corporation revolutionized the document-duplicating
market with its first Xerox machine. It then watched feebly as Canon captured
market share with innovative new-product improvements. Kodak owned the pho-tographic
film market for almost 100 years. It then watched helplessly for years as
first Polaroid and then digital photography revolutionized the photography mar-ket.
Americans once shopped for bargains in stores owned by companies named
W. T. Grant and Woolworth’s. Then Sam Walton entered the scene with a new
approach that basically put these giants and many small mom-and-pop retail
businesses out of business.
● Creative Destruction The economist Joseph Schumpeter used the term
creative destruction to describe the process through which entrepreneurs and
companies introduce radical innovations like these that transform industries.2
Basically, to paraphrase Schumpeter, no industry and no products are immune to
being put out of business by some revolutionary new product; or new equipment;
or new methods of organization, management, or communication. For example,
think about the thousands of bookstores that Amazon put out of business with
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Entrepreneurship Today ■ 91
its first Internet website. Note how Monster is killing the market for newspaper
help-wanted ads. And consider how even Microsoft, long the king of the hill of
personal computers, is fighting to stay dominant now that people increasingly
find and use the software they need online. For example, in June 2006, Google
announced a new service that lets users access (online and for free) a spreadsheet
package that rivals Microsoft’s Excel program.
Schumpeter’s creative destruction theory neatly sums up a fact of manage-ment
life, and one we’ll discuss at more length later in this chapter. The develop-ment
and life of every product, no matter how innovative it is when first intro-duced,
follows what businesspeople call a product life cycle. An inventor or
entrepreneur gets a new-product idea, develops it, introduces it to the market (to
those buying the product), and then hopefully watches sales take off. Next, he or
she turns (again, hopefully) to innovating improvements to the product as the
market matures, for instance, as competitors like Canon and Wal-Mart clamber in.
Finally, as changing tastes and even more innovative new products cause the mar-ket
for the original product to decline, our inventor/entrepreneur needs to decide
what to do. What does P&G do as things get more and more competitive in the
toothpaste market? Keep adding new innovations (whiteners, and so on)? Get out
of producing toothpaste altogether?
In this chapter, we’ll focus on two inseparable topics, entrepreneurship and
innovation. No company that fails to innovate can survive, no matter how skilled
its managers are in their other endeavors. And it is most often through the efforts
of entrepreneurs that truly innovative new products and services arise to chal-lenge
the status of the former kings of the hill. We’ll begin with entrepreneurship.
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Entrepreneurship Today
arly in their careers, Steve Jobs, Michael Dell, and Donna Karan were all entre-preneurs.
Entrepreneurship is the creation of a business for the purpose of
E
gain or growth under conditions of risk and uncertainty.3 An entrepreneur is thus
someone who creates new businesses under risky conditions.4 Entrepreneurship
“requires a vision and the passion and commitment to lead others in the pursuit of
that vision [and] a willingness to take calculated risks.”5 Figure 4.1 neatly sums up
what entrepreneurship is all about. In the pantheon of management, entrepre-neurs
are unique. Entrepreneurs “build something of value from practically noth-ing.”
6 Innovation, the creating of value, growth, and uniqueness, characterizes the
entrepreneur’s efforts. Many business students plan to and will start new busi-nesses
(and have to manage them) once they leave school.
Entrepreneurs and Small-Business Management
Because entrepreneurs create something out of nothing, it stands to reason that the
firms they create usually start small.Most people therefore tend to associate entre-preneurs
with small businesses, although that link is, in reality, a bit tenuous.David
Neeleman, JetBlue’s founder and CEO, is certainly an entrepreneur. However, the
business he’s running is not and never really was very small. On the other hand,
someone who buys and runs a successful dry-cleaning business probably is not
an entrepreneur in the strictest sense. That person is a small-business owner/
manager. It’s creating a business fromnothing that distinguishes the entrepreneur.
Small-business management refers to planning, organizing, leading, and
controlling a small business. The U.S. Small Business Administration (SBA) sets
entrepreneurship: the
creation of a business for the
purpose of gain or growth under
conditions of risk and uncertainty
entrepreneur: someone who
creates new businesses for the
purpose of gain or growth under
conditions of risk and uncertainty
small-business
management: planning,
organizing, leading, and
controlling a small business

Process
DEFINING
Entrepreneur
ENTREPRENEURSHIP
Uniqueness
Growth
The
Profit or
Not-for-Profit
Creating
Value
Innovation
Organization
Creation
size limits by industry when it defines which businesses are small enough to be
eligible for SBA-guaranteed loans. Generally, manufacturing or wholesaling firms
with fewer than 100 employees are small businesses. Retailing or service firms
with annual sales under $5 million are small businesses.
Successful entrepreneurs like Neeleman tend to be good small-business man-agers
because the firms they start either growsuccessfully or die.However, success-ful
small-business managers needn’t necessarily exhibit the flair for innovation—for
creating new businesses under risky conditions—which is the hallmark of the en-trepreneur.
Small-business owners who inherit or buy small businesses and run
them successfully need to be good managers. Entrepreneurs, on the other hand,
don’t just have to run their businesses; they must also have the flair for starting a
business from scratch.
The Environment of Entrepreneurship
Entrepreneurs like taking risks, but that doesn’t mean they are foolish. Good
entrepreneurs continuously size up their opportunities and constraints—their
environments.
Some countries are more conducive to entrepreneurship than others. The
country’s level of economic freedom is one important factor.7 Some countries make
it easier to be entrepreneurial than do others. Table 4.1 shows a portion of the
Heritage Foundation’s index of economic freedom. For instance, in Hong Kong,
Singapore, Ireland, and the United States, entrepreneurs encounter relatively few
barriers in starting and growing their businesses. At the other extreme, pity the en-trepreneur
who wants to start a business in Cuba or North Korea. Here, the com-bination
of governmental and bureaucratic impediments and high taxes are
enough to stifle almost any new business idea.
Periods of increased economic activity (boom times) tend to be associated
with increased business creation (“timing is everything” is how one entrepreneur
put this). As the U.S. economy boomed in the late 1990s, the number of businesses
created jumped (see Figure 4.2). Business creation also outpaced the number of
firms that closed down. However, the number of businesses that closed down rose,
too (perhaps because boom times also mean that struggling entrepreneurs have
other employment opportunities to pursue).
F IGURE 4.1
Common Themes in
Definitions of
Entrepreneurship
SOURCES: Adapted from Mary Coulter,
Entrepreneurship in Action (Upper Saddle
River, N.J.: Prentice Hall, 2001), p. 4; based on
W. B. Gartner,“What Are We Talking About
When We Talk About Entrepreneurship?”
Journal of Business Venturing, 5, 1990,
pp. 15–28.

Entrepreneurship Today ■ 93
Technological advances (whether steam engine, railroad, telephone, com-puter,
or the Web) also trigger bursts of business creation. For example, the growth
in percentage of patents issued by the U.S. Patent and Trademark Office rose from
the single digits in the early 1990s to over 32 percent in 2000 as Web businesses
took off.8Many of these patents translated into new-business ideas.
In practice, dozens of other environmental (outside) opportunities and con-straints
influence the budding entrepreneur’s willingness and ability to create a
new business. A short list of other environmental factors includes venture capital
F Business Turnover, 1990 – 2003 IGURE 4.2
Business Turnover,
650
1990–2003
500
350
T H O U S A N D S
1990 1992 1994 1996 1998 2000 2002 2003
Employer firm births Employer firm terminations
SOURCES: U. S. Small Business Administration,
Office of Advocacy, from data provided by
the U.S. Bureau of the Census and the U.S.
Department of Labor, ETA.
T ABLE 4.1
The Index of Economic Freedom: Selected Locales
Overall Rank Country Overall Score*
1 Hong Kong 1.35
2 Singapore 1.55
4 Ireland 1.80
4 United States 1.80
9 United Kingdom 1.85
45 France 2.70
60 Mexico 2.90
72 Saudi Arabia 3.00
153 Cuba 4.75
155 North Korea 5.00
*Low overall score means higher economic freedom.
Source: Adapted from “The Index of Economic Freedom: Selected Locales,” © 2001, The Heritage Foundation,
214 Massachusetts Ave NE, Washington, D.C., 20002–4999, at www.heritage.org.

availability, a technically skilled labor force, accessibility of suppliers, accessibility
of customers, the availability of lenders, accessibility of transportation, the
attitude of the area’s population, and the availability of supporting services (such
as roads, electric power, and accounting firms).9
Why Entrepreneurship Is Important
When it comes to its impact on the U.S. economy, the phrase small business is a
little misleading.10 For example, small businesses as a group account for most of
the 600,000 or so new businesses created every year, as well as for most of the
growth of companies (small firms grow much faster than big ones). Small firms
also account for about three-quarters of the employment growth in the U.S.
economy—in other words, small businesses create most of the new jobs in the
United States.
More than half of the people working in the United States—68 million out of
118 million—work for small firms. That’s why one recent U.S. president’s report
noted, “a great strength of small businesses is [their] role in renewing the Ameri-can
economy.”11 Small businesses are “an integral part of the renewal process”
through which businesses arise to replace those that fail. In doing so, they provide
employment opportunities for tens of millions of people. Indeed, as we said, the
vast majority of students graduating today will start or work for smaller firms.
Small businesses also account for much of the product and technological
innovation in America today. For example, “new small organizations generate
24 times more innovations per research and development dollar spent than do
Fortune 500 organizations, and they account for over 95 percent of new and
‘radical product development.’”12
What It Takes to Be an Entrepreneur
everal years ago, someone asked H. Ross Perot, who had made hundreds of
millions of dollars starting Electronic Data Systems Inc. and then Perot Sys-tems
Inc., what his advice would be for people who hoped to be entrepreneurs.
S
Perot said, “Never give up, never give up, never give up.” His advice highlights an
entrepreneurial dilemma. On the one hand, there’s no doubt that tenacity is a
crucial trait for entrepreneurs, because creating something out of nothing is so
difficult. On the other hand, tenacity gets the entrepreneur only so far. It is only
one entrepreneurial trait among many.
Research Findings
What does it take to be a successful entrepreneur? Psychologists have studied
this question with mixed results. Based on some studies, researchers say that the
entrepreneur’s personality characteristics include self-confidence, a high level of
motivation, a high energy level, persistence, initiative, resourcefulness, the desire
and ability to be self-directed, and a relatively high need for autonomy.13 This
certainly makes sense. Others argue that people high in the need to achieve are
more prone to be entrepreneurs because they like to set goals and achieve them.
Yet high-need-for-achievement people are no more likely to start businesses
than those with a lower need.14 One expert concludes that the trait approach
to identifying entrepreneurs is “inadequate to explain the phenomenon of
entrepreneurship.”15

Recent studies are more positive. Some studies focus on the proactive person-ality.
Proactive behavior reflects the extent to which people “. . . take action to
influence their environments.”16 One study of 107 small-business owners found
some support for the notion that proactive personality contributes to innovation
in some circumstances.17
Still others study what they call the dark side of the entrepreneur. They say less
positive traits drive entrepreneurs, traits like the need for control, a sense of dis-trust,
the need for applause, and a tendency to defend one’s operations.18 This
approach doesn’t paint a pretty picture of how some entrepreneurs behave. With
respect to the need for control, for instance, “a major theme in the life and person-ality
of many entrepreneurs is the need for control. Their preoccupation with con-trol
inevitably affects the way entrepreneurs deal with power relationships and the
consequences for interpersonal action. . . . An entrepreneur has a great inner
struggle with issues of authority and control.”19
Anecdotal Evidence
A few behaviors do seem to arise consistently in anecdotal and case studies of suc-cessful
entrepreneurs. As we mentioned earlier, tenacity is one. Entrepreneurs
face so many barriers when creating a business that if they’re not tenacious,
they’re bound to fail.
Intensity—the drive to pursue a goal with passion and focus—is another trait
that often pops up. For example, Sky Dayton started EarthLink in the mid-1990s,
and the firm is now one of the largest Internet service providers.20 One friend, who
watched him surfing, says Dayton “took the sport up with a vengeance. He’s as
intense and fearless in surfing as he is in business.”
Should You Be an Entrepreneur?
Is entrepreneurship for you? To gauge your potential, try taking the short proactive
personality survey in Figure 4.3. You might also answer the following questions,
compliments of the U.S. Small Business Administration:
◗ Are you a self-starter? No one will be there prompting the entrepreneur to de-velop
and follow through on projects.
◗ How well do you get along with different personalities? Business owners need to
develop good working relationships with a variety of people, including cus-tomers,
vendors, employees, bankers, and accountants. Will you be able to deal
with a demanding client, an unreliable vendor, or a cranky employee?
◗ How good are you at making decisions? Small-business owners make decisions
constantly and often quickly, under pressure, and independently.
◗ Do you have the physical and emotional stamina to run a business? Can you han-dle
twelve-hour workdays, six or seven days a week?
◗ How well do you plan and organize? Research shows that good plans could have
prevented many business failures. Furthermore, good organization—not just of
employees but also of finances, inventory, schedules, production, and all the
other details of running a business—can help prevent problems.
◗ Is your drive strong enough to maintain your motivation? Running a business
can wear you down. You’ll need strong motivation to help you survive slow-downs,
reversals, and burnout.
What It Takes to Be an Entrepreneur ■ 95

Instrument
Respond to each of the 17 statements using the following rating scale:
1 = Strongly disagree
2 = Moderately disagree
3 = Slightly disagree
4 = Neither agree nor disagree
5 = Slightly agree
6 = Moderately agree
7 = Strongly agree
1. I am constantly on the lookout for new ways to improve my life. 1 2 3 4 5 6 7
2. I feel driven to make a difference in my community—
and maybe the world. 1 2 3 4 5 6 7
3. I tend to let others take the initiative to start new projects. 1 2 3 4 5 6 7
4. Wherever I have been, I have been a powerful force for
constructive change. 1 2 3 4 5 6 7
5. I enjoy facing and overcoming obstacles to my ideas. 1 2 3 4 5 6 7
6. Nothing is more exciting than seeing my ideas turn into reality. 1 2 3 4 5 6 7
7. If I see something I don’t like, I fix it. 1 2 3 4 5 6 7
8. No matter what the odds, if I believe in something, I will make
it happen. 1 2 3 4 5 6 7
9. I love being a champion for my ideas, even against others’
opposition. 1 2 3 4 5 6 7
10. I excel at identifying opportunities. 1 2 3 4 5 6 7
11. I am always looking for better ways to do things. 1 2 3 4 5 6 7
12. If I believe in an idea, no obstacle will prevent me from making
it happen. 1 2 3 4 5 6 7
13. I love to challenge the status quo. 1 2 3 4 5 6 7
14. When I have a problem, I tackle it head-on. 1 2 3 4 5 6 7
15. I am great at turning problems into opportunities. 1 2 3 4 5 6 7
16. I can spot a good opportunity long before others can. 1 2 3 4 5 6 7
17. If I see someone in trouble, I help out in any way I can. 1 2 3 4 5 6 7
Scoring Key
To calculate your proactive personality score, add up your responses to all statements,
except item 3. For item 3, reverse your score.
Analysis and Interpretation
This instrument assesses proactive personality. That is, it identifies differences among
people in the extent to which they take action to influence their environments.
Proactive personalities identify opportunities and act on them; they show initiative,
take action, and persevere until they bring about change. Research finds that the
proactive personality is positively associated with entrepreneurial intentions. Your total
score will be between 17 and 119. The higher your score, the stronger your
proactive personality. For instance, scores above 85 indicated fairly high proactivity.
F IGURE 4.3
Is Entrepreneurship for Me?
SOURCES: Adapted from T. S. Bateman and
J. M. Crant,“The Proactive Component of
Organizational Behavior: A Measure and
Correlates,” Journal of Organizational
Behavior, March 1993, pp. 103–118; J. M.
Crant,“The Proactive Personality Scale as
a Predictor of Entrepreneurial Intentions,”
Journal of Small Business Management, July
1996, pp. 42–49.
◗ How will the business affect your family? The first few years of a business start-up
can be hard on family life. The strain of an unsupportive spouse may be
hard to balance against the demands of starting a business. There also may
be financial difficulties until the business becomes profitable, which could
take years.21

Getting Started in Business
Getting Started in Business ■ 97
vercoming all the challenges that stand in the way of going from nothing to
something requires tackling at least four main tasks along the way: (1) coming
O
up with the idea for the business, (2) deciding how to get into that business,
(3) deciding on a form of business ownership, and (4) getting funded.
Coming Up with the Idea for the Business
Most entrepreneurs don’t come up with the ideas for their businesses by doing an
elaborate analysis of what customers want.22 Between 43 percent and 71 percent
of those responding to one survey said that they got the ideas for their businesses
through their previous employment. Ralph Lauren supposedly got his idea for the
Polo line of clothes while working at Brooks Brothers.23 After work experience,
serendipity was the source that 15 to 20 percent of respondents mentioned. They
just stumbled across the business idea. A handful of respondents got their ideas
from hobbies or from a “systematic search for business opportunities.”24
Speaking of serendipity, consider Lance Fried. He got the idea for his busi-ness
pretty much by accident. His friend dropped an iPod into a cooler of water
and ice, ruining it. Fried, who’s in the habit of watching the surfers near his home
in Del Mar, California, got his brainstorm. The prototype for a waterproof MP3
player was soon ready. His target customers were people who would use them
while surfing, swimming, or snowboarding. He invested his savings to get his
business started. Fried’s business plan called for starting small and for selling
through small specialty shops, thus building his product’s reputation. He intro-duced
his product at a big trade show, and hundreds of people came by to try it.
He cleverly left the players at the bottom of a fish tank with the earphones hung
over the top, so anyone stopping by could listen. Dozens of shops ordered his
product. Surfer magazine put it at the top of its holiday wish list. Lance Fried’s
business took off.
Methods for Getting into Business
Entrepreneurs get into business in several ways: through a family-owned business,
by starting a business from scratch, by buying a business, or by buying a franchise.
● Taking Over the Family-Owned Business Perhaps the easiest way to get
into business is to take over the family business. A family-owned business “is one
that includes two or more members of a family with financial control of the com-pany.”
25 About 90 percent of all businesses in the United States are family-owned
and -managed. They employ more than 50 million people and account for over
half of the country’s economic output.26
Balancing family and business pressures is not easy. As Dan Bishop, president
of the National Family Business Association, has said, “A family is based on emo-tion,
nurturing, and security, but a business revolves around productivity, accom-plishment,
and profit.”27 The owner may be torn between doing what’s best for the
business and a desire to help a child who may not have what it takes to succeed.
Many owners do little planning to help ease the burden for heirs. One survey
showed that only 45 percent of the owners of family firms had selected successors.28
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Lance Fried is a successful
entrepreneur whose insight
created an all-new product,
and whose management
skills then built a successful
company around that
product.

At a minimum, the owner of the family business should make his or her succession
plans clear. “The children should know if they will take over management or if the
business will be sold to an outsider. If they spend years working in the business
only to find it sold to an outsider, they may have trouble finding positions in other
companies.”29
● Starting a New Business When most people think of entrepreneurs, it’s their
role as the starter of a new business that comes to mind. (That was the route Lance
Fried chose.) It is in starting a new business that the entrepreneur supplies the
spark that makes something out of nothing. This spark brings a new business to
life, complete with customers, suppliers, permits, accountants, and lawyers.
Because the endeavor will require so much of the entrepreneur’s money and
time, starting a small business is not something to take lightly. To prepare, the en-trepreneur
should:
1. List the reasons for wanting to go into business. Some of the most common
reasons are that you want financial independence and creative freedom, and
you want to use your skills and knowledge more fully.
2. Determine what business is right for you. Ask yourself, What do I like to do
with my time? What technical skills have I learned? What do others say I am
good at? Will I make enough to support my family?
3. Identify the niche your business will fill. Research and answer questions such
as: What business am I interested in starting? What services or products will I
sell? Is my idea practical, and will it really work? What is my competition? What
is my business’s advantage over existing firms?
4. Conduct a prebusiness review. Now answer questions like these: What insur-ance
coverage will I need? What equipment or supplies will I need? What are
my resources? What financing will I need? Where will my business be located?
Answers to these questions will help you create a business plan. The business
plan should serve as a blueprint for the business. According to the Small Business
Administration, “[The plan] should detail how the business will be operated, man-aged
and capitalized.”30We’ll discuss business planning in a moment.
● Buying an Existing Business Buying an existing business is a double-edged
sword. At least in theory, buying an existing business means the buyer will
know what the existing market is, as well as what the company’s revenues, ex-penses,
and profits (or losses) are. Buying a business can also mean getting into
business faster and with less effort than starting a business from scratch.
On the other hand, as one cynical management consultant once put it,
“There’s always a reason why the business owner wants to sell, and the reason is
never good.” One risk is that the figures the owner reports may be inflated. An-other
is that the owner may know or sense that things are about to go wrong.
● Buying a Franchise To some extent, buying a franchise gives the entrepre-neur
the best of both worlds. A franchiser is a firm that licenses other firms to use
its business idea and procedures and to sell its goods or services in return for roy-alty
and other types of payments. A franchisee is a firm that obtains a license to
use a franchiser’s business ideas and procedures and that may get an exclusive
right to sell the franchiser’s goods or services in a specific territory. Each franchisee
franchise: a license to use a
company’s business ideas and
procedures and to sell its goods
or services
franchiser: a firm that licenses
other firms to use its business
idea and procedures and to sell
its goods or services in return for
royalty and other types of
payments
franchisee: a firm that obtains
a license to use a franchiser’s
business ideas and procedures
and that may get an exclusive
right to sell the franchiser’s
goods or services in a specific
territory

owns his or her franchise unit. The franchising agreement is a document that
lays out the relationship between the franchiser and franchisee. The agreement
creates a franchise, a franchiser, and a franchisee.31
Franchising can be a good way to get into business. The franchisee usually
gets the right to start his or her business from scratch without the excess baggage
of the problems associated with an existing business. Yet the franchisee gets much
of the preparatory work done by the franchiser and (hopefully) gets a business that
is based on a proven business model. Other benefits include name recognition,
management training and assistance, economies in buying, financial assistance,
and promotional assistance. On the other hand, some franchisers don’t put the
thought and care into developing the franchise idea that familiar ones like
McDonald’s do. In such cases, the unsuspecting buyer can end up investing his or
her life savings in a dud. One expert suggests looking for the following details
when evaluating a franchise opportunity:
1. Select a franchising company with a reputation for distributing quality prod-ucts
and services to ultimate customers. Franchisers like Dunkin’ Donuts and
McDonald’s are famous for their emphasis on providing high-quality products
and services—they’re not there just to sell franchises.
2. Pick a franchiser that is dedicated to franchising. Avoid franchisers with large
numbers of company-owned stores—or that distribute the product or ser-vices
through other channels, such as supermarkets.
3. Pick a franchiser that provides products or services for which there is an es-tablished
market demand.
4. Pick a franchiser that has a well-accepted trademark.
5. Evaluate your franchiser’s business plan and marketing methods.
6. Make sure your franchiser has good relationships with its franchisees.
7. Deal with franchising companies that provide sales and earnings projections
that demonstrate an attractive return on your investment.
8. Meet with your accountant and lawyer, and carefully review the franchiser’s
Uniform Franchise Offering Circular, a document required by the U.S. Federal
Trade Commission (FTC). The FTC oversees the interstate activities of the
franchise industry. Its Uniform Franchise Offering Circular rules require fran-chisers
to disclose all essential information about the business.32
The checklist in Figure 4.4 provides additional guidance for evaluating the fran-chise
and the franchiser.
Forms of Business Ownership
In creating the business entity, the entrepreneur needs to decide what the entity’s
form of ownership will be. The four main forms of business ownership are the sole
proprietorship, the partnership, the corporation, and the limited liability company.
● The Sole Proprietorship The sole proprietorship is a business owned
by one person. About 70 percent of businesses in the United States are sole
proprietorships.
franchising agreement:
a document that lays out the
relationship between the
franchiser and franchisee
sole proprietorship: a
business owned by one person

F IGURE 4.4
Checklist for Evaluating a Franchise Opportunity
The Franchise
1. Did your lawyer approve the franchise contract you are considering after he studied it paragraph by paragraph?
2. Does the franchise call on you to take any steps that are, according to your lawyer, unwise or illegal in your state, county,
or city?
3. Does the franchise give you an exclusive territory for the length of the franchise agreement or can the franchisor sell a
second or third franchise in your territory?
4. Is the franchisor connected in any way with any other franchise company handling similar merchandise or service?
5. If the answer to the last question is yes, what is your protection against this second franchisor organization?
6. Under what circumstances can you terminate the franchise contract and at what cost to you, if you decide for any reason
at all that you wish to cancel it?
7. If you sell your franchise, will you be compensated for your goodwill, or will the goodwill you have built into the business
be lost by you?
The Franchisor
8. How many years has the firm offering you a franchise been in operation?
9. Has it a reputation for honesty and fair dealing among the local firms holding its franchise?
10. Has the franchisor shown you any certified figures indicating exact net profits of one or more going firms that you
personally checked yourself with the franchisee?
11. Will the firm assist you with
a. A management training program?
b. An employee training program?
c. A public relations program?
d. Capital?
e. Credit?
f. Merchandising ideas?
12. Will the firm help you find a good location for your new business?
13. Is the franchising firm adequately financed so that it can carry out its stated plan of financial assistance and expansion?
14. Is the franchisor a one-person company or a corporation with an experienced management trained in depth (so that
there would always be an experienced person at its head)?
15. Exactly what can the franchisor do for you that you cannot do for yourself?
16. Has the franchisor investigated you carefully enough to assure itself that you can successfully operate one of its
franchises at a profit both to it and to you?
17. Does your state have a law regulating the sale of franchises, and has the franchisor complied with that law?
You—the Franchisee
18. How much equity capital will you have to have to purchase the franchise and operate it until your income equals your
expenses? Where are you going to get it?
19. Are you prepared to give up some independence of action to secure the advantages offered by the franchise?
20. Do you really believe you have the innate ability, training, and experience to work smoothly and profitably with the
franchisor, your employees, and your customers?
21. Are you ready to spend much or all of the remainder of your business life with this franchisor, offering its product or
service to your public?
Your Market
22. Have you made any study to determine whether the product or service that you propose to sell under the franchise has
a market in your territory at the prices you will have to charge?
23. Will the population in the territory given to you increase, remain static, or decrease over the next five years?
24. Will the product or service you are considering be in greater demand, about the same, or less demand five years from
now than today?
25. What competition exists in your territory already for the product or service you contemplate selling?
a. Nonfranchise firms?
b. Franchise firms?
SOURCE: Franchise Opportunities Handbook (Washington,D.C.: U.S. Government Printing Office, 1988).

The sole proprietorship is simple to start. The owner usually just has to regis-ter
the firm’s name at the county courthouse and perhaps get the necessary mu-nicipal
business license.33 As sole owner, there are no other owners with whom to
share the rewards or setbacks. Sole proprietors are their own bosses. Because the
sole proprietor is the firm, he or she pays only personal income taxes on its profits.
There is no income tax on the firm as a separate entity.
On the other hand, the sole proprietor has unlimited financial liability. Un-limited
liability means that the business owner is responsible for any claims
against the firmthat go beyond what the owner has invested in the business. Sole
proprietors, therefore, risk losing everything they own if their businesses go
bust. Furthermore, there is no other owner with whom to share the management
burden.
● The Partnership Some entrepreneurs therefore opt to form a partnership.
Under the Uniform Partnership Act, a partnership is “an association of two or
more persons to carry on as co-owners of a business for profit.” People form a
partnership by entering into a partnership agreement. A partnership agreement
is an oral or written contract between the owners of a partnership. It states the
name, location, and business of the firm. It also specifies the mutual understand-ing
of each owner’s duties and rights in running the business, the method for shar-ing
the profits or losses, and the policies for withdrawing from the business and
dissolving the partnership.
In a general partnership, all partners share in the ownership, management,
and liabilities of the firm. A limited partnership is a business in which one or
more, but not all, partners (the limited partners) are liable for the firm’s debts only
to the extent of their financial investment in the firm. This helps the firm’s general
partners (who actually run the business) attract investment dollars from people
who do not want unlimited liability—or who do not want to get involved in man-aging
the firm.
The partnership has four main advantages. There are few restrictions on start-ing
one. There are several partners, so a partnership permits the pooling of funds
and talents. The partnership also provides more chance to specialize. For example,
the outside person can specialize in sales, while the inside person can specialize in
running the business. Finally, like a sole proprietorship, the owners, not the firm,
are taxed only individually.
Unlimited liability is a main disadvantage. In general partnerships, all part-ners
have unlimited liability for the partnership’s debts. In a limited liability part-nership,
the limited partners are personally liable only up to the amount they
invest in the business.
● The Corporation A corporation is a legally chartered organization that is a
separate legal entity, apart from its owners. A corporation comes into being when
the incorporators (founders) apply for and receive a charter (license) from the
state in which the firm is to reside. The shareholders (or stockholders) own the cor-poration.
Each owns a part interest in the entire corporation.
Limited financial liability is the corporation’s main advantage over sole pro-prietorships
and partnerships. Usually, the most an owner/shareholder can lose is
what he or she paid for the shares. This makes it much easier for the company to
raise money. Furthermore, because the corporation is a separate legal entity, it has
permanence. The death or imprisonment of a shareholder does not mean the end
of the corporation.
partnership: an association of
two or more persons to carry on
as co-owners of a business for
profit
partnership agreement: an
oral or written contract between
the owners of a partnership. It
identifies the business, and it
lays out the partners’ respective
rights and duties.
general partnership: a
partnership in which all partners
share in the ownership,
management, and liabilities of
the firm
limited partnership: a
partnership in which one or
more, but not all, partners (the
limited partners) are liable for
the firm’s debts only to the extent
of their financial investment in
the firm
corporation: a legally
chartered organization that is a
separate legal entity, apart from
its owners. A corporation
comes into being when the
incorporators (founders) apply
for and receive a charter from
the state in which the firm is to
reside.

Taxation is a big disadvantage. In sole proprietorships and partnerships, the
owners pay the company’s income taxes individually—the government does not
also separately tax the companies themselves. Corporations are entities separate
from their owners. Therefore, the corporation generally pays federal and state taxes
on its profits. If the corporation then pays cash dividends to shareholders from its
after-tax profits, the shareholders pay personal income taxes on the dividends. Cor-porations
can avoid double taxation by forming an S corporation. An S corporation
has the option of being taxed like a partnership. It pays no income taxes as a firm.
● The Limited Liability Company The limited liability company (LLC) is
a cross between a partnership and a corporation. Like a corporation, the LLC
limits the liability of its owners (called members) from personal liability for the
company’s debts and liabilities. At the same time, the limited liability company’s
earnings are not subject to separate corporate taxes. The government taxes it as if
it is an individual proprietorship or partnership.34
Getting Funded
Generating ideas for the business and deciding on a legal form are all theoretical if
the entrepreneur can’t find the money to actually start the business. How will I
fund my business? is, therefore, a question the entre-preneur
should be thinking about. Even experienced
businesspeople make mistakes. The developers of the
Royal Palm Crowne Plaza Resort in South Florida
completed their new hotel—but two years late and
with cost overruns of $16 million. To reduce that debt,
they had to sell about 150 of the 422 hotel rooms as
condominiums.35
The two basic sources of business finance are debt
and equity. Equity finance represents an ownership in
the venture. Debt, of course, is borrowed capital.
● Equity For the typical new small business, much
of the initial capital traditionally comes from the
founder. Family and friends are usually the second
biggest source. No one knows the entrepreneur like his
or her family and friends. One hopes that this familiar-ity
translates into the faith required to help that person
start a business.
S corporation: a corporation
that has the option of being
taxed like a partnership and that
pays no income taxes as a firm
limited liability company
(LLC): a cross between a
partnership and a corporation
angels: wealthy individuals
interested in the high-risk/high-reward
potentials to be derived
from the creation of a new
venture
One of the swimming pools at the Royal Palm Crowne Plaza
Resort in Miami Beach.
Outside equity—either from wealthy private investors (so-called angels) or
from venture capital firms—are two other possibilities. Angels are wealthy indi-viduals
interested in the high-risk/high-reward potentials to be derived from the
creation of a new venture. Venture capitalists professionally manage pools of
investor money. They specialize in evaluating new venture opportunities and
taking equity stakes in worthy businesses. A public offering—selling stock to the
public—is usually an option open to relatively few new ventures. When the com-pany
first sells stock to outside owners, the firm has gone public. The process is
called the initial public offering (IPO). Investment bankers are professionals
that walk the entrepreneur through the various registration requirements, thus
enabling the company to publicly offer stock.36
● Debt Debt, or borrowed capital, is the second main source of business
finance. An entrepreneur with good personal credit and a sound business plan
venture capitalists:
professionals who manage pools
of investor money, and who
specialize in evaluating new
venture opportunities and
taking equity stakes in worthy
businesses
initial public offering
(IPO): the process that occurs
the first time a company sells
stock to outside owners

may be able to obtain a business loan from a commercial bank. However, banks
are not in the venture capital business. The entrepreneur usually guarantees loans
like these with his or her personal assets and promise to repay.
Many entrepreneurs dip deeply into their personal debt-paying capacity to
support the business. By one estimate, the debts of smaller businesses are divided
roughly equally among (1) business credit lines (loans from banks, or from ven-dors
who are willing to wait a while to get paid) and loans, (2) business credit-card
debt, and (3) personal credit-card debt.37 Asset-based debt is a popular type of
business loan. It is debt collateralized (guaranteed) by one or more specific assets
of the business. If the business doesn’t pay, the lender takes the asset.
● The Small Business Administration (SBA) Many entrepreneurs turn to
the Small Business Administration (SBA) for assistance in obtaining bank financ-ing.
Most of these SBA loans are in the form of so-called 7-A loans. The SBA basi-cally
guarantees up to 90 percent of the outstanding loan; the loan itself comes
from a commercial bank. However, the businessperson typically must personally
guarantee the entire loan, too.
Writing the Business Plan
Whether raising capital from friends or the SBA, the entrepreneur will have to pro-vide
a business plan. Planning means “setting goals and choosing courses of ac-tion
for achieving those goals.” The entrepreneur should have a good idea of what
financial and other business goals he or she wants to achieve and how he or she
plans to reach those goals. Those investing in the business will certainly want to
see what the entrepreneur’s plans are for the business.
Business planning usually starts with the manager asking, What business are
we in? The company needs a clear idea of what specific products it’s going to
sell and how the business will differ from the competition. The owners can’t intel-ligently
choose suppliers, employees, advertising campaigns, or business
partners if they don’t know what business they are in. They also cannot make fi-nancial
projections for sales, costs, and profits if they don’t see quite clearly what
business they are in. Compass Records illustrates why such clarity of vision is
important.
● Compass Records Alison Brown and Garry West,
both musicians, got their idea for starting Compass
Records while talking before a show they were attend-ing
in Stockholm.38 Today, Compass Records is boom-ing.
Over the last ten or so years, the company has
released more than 100 albums, ranging from “collec-tions
of centuries old ballads by the British folksinger
Kate Rusby to an album of soukous by the Congolese
singer guitarist Samba Ngo.”39
What business is Compass Records in? Compass has
built up an audience of listeners by focusing like a laser
on roots music/folk music—from whatever country.
As Alison Brown says, “Whether we’re doing Celtic or
Bluegrass or singer-songwriter, it all has that common
thread running through it.”40
Alison Brown, co-owner of Compass Records.

Choosing a Web-Based Business
The Internet makes it easier to get into business. For ex-ample,
an entrepreneur can create a virtual bookstore or
other business for a fraction of the time and cost that it
would take to create a bricks-and-mortar version. In fact,
eBay grew so fast in part by becoming the online market-place
where entrepreneurs could sell their wares.
In terms of deciding what one’s business should be,
the secret of small-business Web success seems to be
choosing a niche. One expert calls this “the fragmenta-tion
of the Web.”41 For example, Harris Cyclery is a suc-cessful
New England business. Sheldon Brown, the vet-eran
mechanic who runs Harris Cyclery, avoids head-on
competition with bigger online bicycle retailers by focus-ing
on hard-to-find replacement parts. He also cultivates
a competitive advantage by offering free advice over the
Web.42 Ron Davis, who owns and manages a chain of ap-parel
stores called The Shoe Horn, also created a web-site,
but he kept it highly focused. He sells dyed wedding
shoes online.43 He knows what his business is and sticks
to it.
Highly focused online entrepreneurs can use giant
websites to help them get their businesses started. Thanks
to sites like eBay and Froogle, even tiny businesses can
offer their products to huge audiences online.
Sticking to that vision has taken Compass Records into some interesting mu-sical
niches. Its first release was an album of music played on a didgeridoo, a wood
instrument indigenous to Australia. Other titles “have included sets by the pro-gressive
jazz bassist Victor Wooten, the Czech Bluegrass band Druha Trava and the
neopop duo Swan Dive.”44 The partners know exactly what business they are in.
Their business is not “music” but “roots music/folk music.” Because they do know
what business they’re in, it is easy for them to make plans—regarding what musi-cians
to choose; how and where to record, market, and publicize their records; and
roughly speaking, what they can expect in terms of revenues, expenses, and sales
when they sign an artist. See the Window on Managing Now feature for another
example of the need for business planning.45
The business plan lays out in detail what the business is, where it is heading,
and how it plans to get there. Figure 4.5 summarizes the contents of a typical
business plan.
● Creating the Business Plan Developing the business plan helps the entre-preneur
understand his or her options and anticipate problems. The entrepreneur
does not want to find out six months after opening that labor costs are twice as
high as anticipated and that the store’s economics, therefore, make it unlikely that
the business can survive. Furthermore, no banker, angel, or financier will make
cash infusions without a business plan.
Experts in writing business plans emphasize the importance of doing this
job right. You need to pay particular attention to four tasks: (1) clearly define the
business, (2) provide evidence of management capabilities, (3) provide evi-dence
of marketing capabilities, and (4) offer an attractive financial arrange-ment.
46 As one expert says, “Most entrepreneurs and small-business owners can
prepare a B or B business plan without too much trouble. That would be fine
if investors would fund B or B plans. Investors, however, fund only A or
A plans. . . .”47 TheWindow on Managing Now feature on page 106 shows one
way to accomplish this.
business plan: a plan that lays
out what the business is, where
it is heading, and how it plans to
get there

Managing Innovation and New-Product Development ■ 105
F IGURE 4.5
Contents of a Good Business Plan
Introduction
A basic description of the firm—name, address, business activity, current stage of development of the firm, and plans
for the future.
Executive Summary
An overview of the entire business plan, summarizing the content of each section and inviting the reader to continue.
Industry Analysis
A description of the industry the firm is competing in, focusing on industry trends and profit potential.
Management Section
A description of the management team and whether it is complete—and, if not, when and how it will be completed.
Manufacturing Section
A description of the complexity and logistics of the manufacturing process and of the firm’s production capacity and current
percentage of capacity use.
Product Section
A description of the good or service, including where it is in its life cycle (for example, a new product or a mature product);
of future product research and development efforts; and of the status of patent or copyright applications.
Marketing Section
A marketing plan, including a customer profile, an analysis of market needs, and a geographic analysis of markets; a description of
pricing, distribution, and promotion; and an analysis of how the firm’s marketing efforts are different from competitors’ efforts.
Financial Section
Financial statements for the current year and the three previous years, if applicable; financial projections for the next three to
five years; and assumptions for sales, cost of sales, cash flow, pro forma balance sheets, and key statistics, such as the current
ratio, the debt/equity ratio, and inventory turnovers.
Legal Section
Form of ownership (proprietorship, partnership, or corporation) and a listing of any pending lawsuits filed by or against the firm.
SOURCE: Adapted from Business Plan Pro (Palo Alto, Calif.: Palo Alto Software).
Managing Innovation and New-Product Development
ntrepreneurs and small entrepreneurial companies don’t have monopolies on
new ideas and innovation. Innovation plays a crucial role in helping all firms,
E
not just small ones, to survive and expand. We’ll look at how managers manage
the innovation process in this and the following sections. We begin by defining
what innovation is and what it is not. Innovation does not just mean inventing
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Using Computerized Business-Planning Software
There are several business-planning software packages to
assist the entrepreneur in writing A plans. For example,
Business Plan Pro, from Palo Alto Software, contains all
the information and planning aids you need to create a
business plan. It contains, for example, thirty sample plans,
step-by-step instructions (with examples) for creating
each part of a plan (executive summary, market analysis,
and so on), financial planning spreadsheets, easy-to-use
tables (for instance, for making sales forecasts), and auto-matic
programs for creating color three-dimensional
charts for showing things like monthly sales and yearly
profits.
Business Plan Pro’s Planning Wizard takes the entre-preneur
“by the hand” and helps him or her develop a
business plan step by step. The result is an integrated
plan, complete with charts, tables, and professional for-matting.
For example, click “start a plan,” and the Planning
Wizard presents a series of questions, including, “Does
your company sell products, services or both?” “Would
you like a detailed or basic business plan?” “Does your
company sell on credit?” Then as you go to each
subsequent part of the plan—such as the executive
summary—the Planning Wizard shows instructions with
examples, making it easy to create your own executive
summary (or other plan section). The Planning Wizard
even helps the entrepreneur translate his or her financial
and other projections (such as for numbers of items
sold) into easy-to-understand tables and charts.48
something new. Many new inventions end up withering on some research and de-velopment
department’s shelf. Innovation means something more. Innovation
means uncovering a valuable need, inventing a new or improved product or ser-vice
to fill that need, and then developing and introducing the new product or ser-vice
so that it succeeds in the marketplace.49
● Innovation in Practice For example, IBM’s employees produced more U.S.
patents than any other company between 1993 and 2005, at a cost of about $6 bil-lion
per year in research and development expenditures alone. Even a company as
large as IBM could not afford this unless it led to saleable products. Innovation at
IBM therefore “requires applying those technologies to critical customer problems
and then bringing them to market in a form that customers can easily use.”50 In-novation
is therefore not just a job for engineers, inventors, and entrepreneurs. It
also requires effective management, for instance, in identifying the need, develop-ing
and testing the new idea, and making sure that the structure and people are in
place to get the product to market.
The process of innovation is more complicated than it might appear at first.
For example, ideally, companies can’t just wait to react to what customers say they
want. Suppose customers don’t yet realize what they need? And waiting till the
need is obvious may give competitors the time to innovate the same (or better)
new-product ideas. The preferred approach is to anticipate the customers’ needs,
often before the customers realize that they have such needs. For example, when
Procter Gamble engineers invented the Swiffer mop, they identified the need
and invented a whole new way to mop floors by anticipating rather than reacting
to its customers’ needs.51
As small entrepreneurial companies evolve into large multinational ones, they
must guard against losing their entrepreneurial flair. Growth can bring bureauc-racy,
for instance, in terms of stratified, compartmentalized, slow-moving deci-sions.
Many once-successful entrepreneurial companies, including Polaroid,
Kodak, and Xerox, basically became, for a time, victims of their own success.
Growth led to misplaced self-confidence and a dramatic reduction in these firms’

Managing Innovation and New-Product Development ■ 107
Commerciali-zation
Idea
creative output. Google’s small entrepreneurial teams seem, at least for now, to be
coming up with more innovative new products and services than does Microsoft’s
more plodding, hierarchical approach.
The Eight-Stage New-Product Development Process
To help ensure they have a steady stream of new and innovative products, man-agers
often establish a formal new-product development process for their compa-nies,
often under the guidance of a new-product development (RD) officer and
department. This new-product development process typically consists of eight
main stages.52 Figure 4.6 summarizes these eight stages.
1. In the first stage, idea generation, the company uses consumer research
and creativity to produce the ideas that become the raw material of the new-product
development process.
2. It may take thousands of new-product ideas to produce just one saleable new
product. Most companies do not have the resources to put thousands of new-product
development ideas into development. The purpose of the second
stage, idea screening, is to reduce the many possible new-product ideas down
to a more manageable few. Managers here might ask questions such as, Does
this product really makes sense for our customers?
3. In the third stage, concept development and testing, the new-product develop-ment
department translates each surviving new-product idea into a more
tangible concept and then tests it. For example, Gillette researchers may have
an idea for a new razor that combines the simplicity of a manual razor with
some of the advantages of an electric one. In this concept development and
testing stage, Gillette’s development experts translate this raw idea into a more
workable product concept—say, a cross between a five-blade manual razor
and a simple battery-driven device, one that vibrates the razor’s head. Gillette
then tests this product concept. For instance, it asks consumers questions
such as, How do you like this battery-driven razor compared with the manual
razor you’re using now?
4. Having an idea—even one that seems to appeal to the markets—is only the
beginning of the process of innovating a successful new product. The best
idea will fail if the company isn’t successful in introducing it to the market.
Therefore, marketing strategy development is the fourth step in the process.
Marketing strategy development means laying out a marketing plan for the
potential new product. This plan includes the target customers (for instance,
Generation
Idea
Screening
Concept
Development
and Testing
Marketing
Strategy
Development
Business
Analysis
Product
Development
Test
Marketing
F IGURE 4.6
The Eight Stages in New-Product Development

in terms of age, income, and education) and the probable target price, sales,
and market share and profit goals.
5. In the fifth stage, business analysis, the manager examines the target market
and the potential new product’s pricing, sales, market share, and pricing goals
to determine how likely it is that this new product will succeed.
6. Assuming the answer is yes, the new-product process moves into its sixth
stage, product development. In creating the very successful RAZR cell phone,
Motorola scientists and engineers worked with production engineers and
marketing specialists to create the actual prototypes for the product. The
product development stage should answer the question, Can we turn this
product idea into a workable, saleable new product?
7. For most companies, the vast expense involved in gearing up to produce and
sell the new product means it is prudent to test-market it first. Test marketing
is the seventh new-product development stage. For example, Kraft Foods
might test-market a new cheese in one or two small U.S. cities before rolling
out full production and marketing nationwide. This gives Kraft managers an
opportunity to test and improve physical characteristics of the product. It also
lets the manager test aspects of the marketing plan for the product, such as
whether the price is too high, too low, or just right.
8. Now the manager is just about set to introduce the new product. In this eighth
stage,commercialization, the manager actually implements themarketing plan
by introducing the new product into the market. If the manager has done his or
her homework, the commercialization will be successful. The company will
have successfully innovated, fromidea, to development, to commercialization.
Fostering Innovation
Managers traditionally use three methods—intrapreneurship, business incuba-tors,
and new-product development teams—to foster increased innovation. We
look at these next.
● Corporate Intrapreneurship Entrepreneurship is not just for entrepreneurs.
Large companies also work hard at being entrepreneurial. Managers of giant com-panies
understand that entrepreneurial activities drive innovation and that big-company
bureaucracy can stifle such activities. Thus, they work hard to institute
policies and practices that encourage what they call intrapreneurship within
their big firms. For example, intrapreneurial activities within Cisco Systems led
to the creation of several spinoff companies (including Cordis Corp. and Equinox)
that together produced almost $700 million for Cisco.53 Similarly, QUALCOMM
Corporation’s intrapreneurial activities led to the wireless Web company Hand-spring.
Sun Microsystems’ intrapreneurial activities helped it create and spin off
several successful companies, including Caldera Systems.
Intrapreneurship means producing innovative ideas and products in big cor-porations
by organizing innovation around small, usually autonomous business
units, and by taking steps to empower employees to be more entrepreneurial and
innovative.54 Intel provides an example of what is involved.
● Intel’s and Sunlight’s New-Business Initiatives The idea for Intel’s new,
in-house new-business initiative “. . . came from our employees, who kept telling
us they wanted to do entrepreneurial things. . . .55 Intel is in the microprocessor
business. However, its new-business intrapreneurship initiative is earmarked
intrapreneurship: the
development, within a large
corporation, of internal markets
and relatively small autonomous
or semiautonomous business
units that produce products,
services, or technologies that
employ the firm’s resources in a
unique way

Innovation Now ■ 109
specifically for encouraging nonmicroprocessor busi-nesses.
Part of Intel’s intrapreneurship effort involves pro-viding
budding Intel employee-inventors with the spare
time and some financial support to pursue their ideas. For
example, Intel engineer Paul Scagnetti came up with the
idea for a handheld computer that helps people record and
plan their fitness regimens. Intel gave him the funding to
launch his product, the Vivonic fitness planner.
Intrapreneurship applies equally well to introducing
new services as it does to introducing new products. For ex-ample,
the group benefits department of Canada’s Sunlight
Financial Insurance Company has over 3,100 employees in
eleven locations in Canada. To help innovate new services, it
also has a small, intrapreneurial sixty-person group that
works independently. Its job is to come up with and create
new insurance services, for instance, for university profes-sors.
56 As the vice president of group benefits says, this small
unit “. . . and the others we have like it operate with great in-dependence
and often act as a sort of laboratory creating, re-fining
and launching new products.”57
QUALCOMM Corporation’s intrapreneurial activities
led to the wireless Web company Handspring.
● Business Incubators Some entrepreneurs and managers turn to business
incubators to help develop their new-product ideas. As its name implies, employ-ees
in a business incubator center provide the advice, support, and resources that
the manager needs to nurture the new idea. Some companies establish their own
business incubators; other incubators are university-based. IBM established
dozens of business innovation centers around the world. In these centers, spe-cially
trained IBM engineering, financial, and other employees work with IBM cus-tomers.
They help the latter capitalize on IBM products and services in commer-cializing
their own companies’ new-product ideas.58
● New-Product Development Teams The usual new-product development
process resembles a relay race. Each department, such as research and devel-opment
(RD), does its part of the job. It then hands off the project to the next
department, for instance, from RD to marketing, to finance, and then to
production. The problem with this sequential process is that it tends to be slow
at identifying potential problems and at making the required changes. For ex-ample,
if production wants to make a change, that change needs to be backed
up to and approved by each preceding department.
More companies are therefore reorganizing their new-product development
processes around small, multifunction teams.59 Teams comprised of employees
from RD, finance, sales, production, and engineering work together on develop-ing
and commercializing a new-product idea. Then, new-product development is
no longer a relay race. Instead, the team members work interactively and collabo-ratively
to fine-tune and finalize their new-product idea.60
Innovation Now
nnovation today is becoming more collaborative and technology-based. We
discuss how in this final section. I
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Innovation and Collaboration
Traditional new-product development tends to be inward-looking. Employees in
RD or new-product development think up and evaluate ideas for new products.
They may not check with customers and suppliers until it’s time to test-market the
product.
Managers are now moving away from that inward-looking model. Instead of
just asking their customers, suppliers, and dealers for help in test-marketing new-product
ideas, they are tapping them as sources for new-product ideas. Kraft
Foods Inc. recently launched a program to encourage unsolicited new-product-idea
submissions from customers and others.61
Kraft’s CEO calls this “open innovation.” Other experts call it “collaborative
new-product and process development” (NPPD) and “open market innovation.”
IBM speaks of creating “innovation ecosystems” comprised of solution providers,
independent software developers, consultants, venture capitalists, academics,
and industry thought leaders.62 In any case, the main aim of collaboration is to
tap the ideas of a wider community and thus to solicit more and better new-product
ideas.
● Why Collaboration? At Kraft and other firms, diminishing innovation
prompted CEOs to look outside their companies for new ideas. For example, Kraft
has its own research and development units for developing new products. How-ever,
the only big new product they’ve had in years was DiGiorno pizza. A study by
consultants Booz Allen Hamilton Inc. concluded that there was no relationship
between a company’s growth rate and the amount it spent on research and devel-opment.
Firms like Merck felt that their own RD was becoming too insular, too
Merck-oriented. The solution: Dr. Peter Kim, Merck’s new RD head, hired many
SOURCE: © 2006 Kraft Foods Inc. All rights reserved.

new outside scientists. He also instituted procedures that enable hundreds of
independent, outside scientists to help Merck identify and develop new potential
drugs.63
We’ll see that companies like Kraft and Merck use a variety of tools, often
Internet-based, to make it easier to tap the ideas of outsiders, be they freelance
scientists and inventors, customers, suppliers, universities, or others.64 As one
example, links on Kraft’s corporate website now make it easier for outsiders to
submit ideas online or via a toll-free telephone number.
Innovation and Learning
Tapping the ideas of people both inside and outside the firm requires that firms
such as Kraft be good at learning—for instance, at learning what customers want,
what competitors are doing, and which ideas one’s suppliers and employees
believe might work and which to discard.65 As one expert said,
[A]n organization’s innovative potential is strongly influenced by its access to
customer and competitor intelligence, by its awareness of its internal organi-zational
and technological capabilities, and by its understanding of external
demands posed by governmental policies, environmental regulations, laws,
and socioeconomic trends. . . . Progressive firms have recognized this and are
implementing new organizational structures, communication technologies,
and incentives systems in order to grow their collaborative potential in im-portant
areas.66
We will see in Chapter 10 that managers can take many steps to improve their
companies’ abilities to learn.Many reduce the number of management layers in the
chain of command. This way, the managers at the top are closer to the customers
rather than isolated in their executive suites by layers of subordinates. Most also
help their employees do a better job of gathering, analyzing, and communicating
information about new-product ideas. For example, the firm might give repair-people
laptop computers and encourage them to share ideas for learning about
and solving particular customer problems.
Managing Now: Using Information Technology
for Innovation
When a company embraces collaborative new-product development, it needs a
way to link together and tap the input of many people. It wants input from inde-pendent
experts like scientists who might be able to contribute. And it wants
input from its own supply chain members such as its dealers, customers, and
suppliers.
Companies use information technology–based systems to enable this kind of
collaboration. The basic idea is to allow ideas to flow freely among all the parties.
Companies are using a variety of information technology–based systems for
enabling this kind of collaboration. A short list would include virtual PC-based
video brainstorming sessions (among people in different locations), e-mail, re-quest
for assistance notices on bulletin boards, videoconferencing, and computer-aided
design tools. The latter enable geographically dispersed employees to work
in a virtual environment to collaboratively create and fine-tune new-product de-signs.
Many companies use even more powerful tools. The Practice IT feature
shows how Procter Gamble uses information technology to facilitate collabora-tive
innovation.

PRACTICE IT
Collaborative Innovation at PG
Procter Gamble’s RD head, Larry Huston, knew his
firm had to reach out to get more and better new-product
ideas.PG now uses several information technology tools
to connect itself to various sources of new-product
ideas.67
InnovationNet
This is an intranet Web portal for 18,000 Procter
Gamble innovators in research and development, engineer-ing,
market research, purchasing, and patents. One PG se-nior
vice president calls it a sort of global lunchroom.It lets
those 18,000 PG employees worldwide exchange ideas.
InnoCentive
This virtual laboratory posts scientific problems from its
thirty idea-seeking corporate members (including PG) to
a proprietary network of about 30,000 registered solvers
around the world. Each posting at www.Intelincentive.com
includes a promised cash incentive for coming up with the
solution.
NineSigma Inc.
This company helps its fifty or so clients (including PG)
prepare technical briefs describing projects or problems
they want solved. NineSigma then sends these briefs
(without identifying the corporate customer) to re-searchers
around the world for possible solutions.
YourEncore Inc.
This is a network of about 400 retired scientists and engi-neers.
PG and other YourEncore corporate sponsors
pay them for specific, short-term job assignments aimed
at helping the YourEncore Inc. sponsors develop new
products.68
● Self-Organizing Intranet portals like PG’s InnovationNet (which links its
18,000 innovators) can make it easy for subsets of these experts to self-organize.
The portal enables them to identify like-minded colleagues and to share informa-tion
about projects of mutual interest without centralized, detailed managerial
guidance.69
Product Life-Cycle Management
No new product sells forever. Instead, all products move through a product life
cycle from development to expansion, maturity, and decline.70 In stage 1, the com-pany
develops and test-markets the new product and then introduces it to the
market. Stage 2 is a period of rapid expansion as the new product, with little com-petition,
quickly expands its sales. Competition picks up in stage 3 (maturity), and
the growth rate of both sales and profitability flatten. Finally, the product enters its
fourth stage, the decline stage, as both sales and profitability start to trend down.
Managers face different challenges at each stage of a product’s life cycle. For
example, in stage 1 (development), the main challenges are creating, developing,
and testing the new-product idea, and introducing the product to the market. In
the second stage, the expansion stage, the manager, facing little competition, can
focus on marketing the new product to as many new customers as possible. In the
third stage, the maturity stage, competition becomes intense, and the manager
turns to making incremental, innovative improvements to keep the product sell-ing.
In the fourth stage, the decline stage, the total market for the product begins
to shrink, and the manager must decide whether to stay in the business or to
introduce a dramatically new stage 1 product to meet the market’s new needs.

Managing Now: Product Life-Cycle
Management Software
For companies like Sony or Dell that produce hundreds or thousands of differ-ent
products and models, each in different life-cycle stages, keeping track of
all the different components that comprise each product and model is a
daunting task.71 For example, Sony has over 3,000 main product groups and
over 54,000 identifiable products. That can translate into millions of separate
components.
The huge number of components complicates the new-product development
process for a firm like Sony or Dell.72 Ideally, companies like these don’t want
to start from scratch every time they design a new product. Instead, they want to
keep costs down by reusing, if possible, proven components from their existing
products. However, doing so presents three challenges.
◗ One challenge is keeping track of all those current products’ components.
◗ Another is enabling the companies’ designers to see how, for instance, they
might recycle a component from an existing Sony laptop to serve some purpose
in Sony’s new video game.
◗ A third is to show suppliers how the components they previously supplied for
product A are now going to be used (in a slightly modified fashion) in the com-pany’s
new product B.
Challenges like these don’t concern only companies that are trying to innovate
brand-new products. They also concern managers who are trying to update exist-ing
products. To address every product’s inevitable life-cycle maturity and decline,
every company continually fine-tunes its existing products, for instance, by
upgrading memory capacity. So Dell’s designers, for example, face the three
component-recycling challenges, not just for the new products they’re developing
but also for innovating and improving their existing products. How can managers
at Dell or Sony make sure they’re doing the best job of recycling existing products’
components?
● Product Life-Cycle Software Keeping track of all these components is a
mammoth task if done manually. The preferred alternative is to use product life-cycle
management software. Product life-cycle management software is a suite of
software applications that helps managers design, manufacture, and manage the
evolution of their products.73
Product life-cycle management (PLM) software applications support innova-tion
in many ways. For example, if Dell’s engineers want to design a new computer,
the company’s product life-cycle management software helps them keep track of
and reuse the parts of previous designs. This in turn helps Dell minimize new-product
and component development costs. It also helps Dell keep operational
surprises and problems to a minimum. By enabling designers to reuse existing
components, PLM software also reduces the amount of time it takes to get the new
product to the market and improves the efficiency of the whole new-product in-novation
process. It does this in part by enabling the company’s suppliers to track
product changes via the firm’s new-product development intranet, and thereby in-form
them automatically when a component is to be improved and/or reused in a
new product.

1. Entrepreneurship is the creation of a business for
the purpose of gain or growth under conditions
of risk and uncertainty, and an entrepreneur is
someone who creates new businesses under risky
conditions.
2. Some environments are more conducive to entre-preneurship
than others. The level of economic
freedom is one consideration. Others include
the ability to streamline, downsize, and fire em-ployees
at will; technological advances; the level
of economic activity; globalization, and other
environmental factors, such as venture capital
availability; a technically skilled labor force; the
accessibility of suppliers; the accessibility of cus-tomers;
the availability of lenders; the accessibility
of transportation; the attitude of the area’s popu-lation;
and the availability of supporting services
(such as roads, electric power, and accounting
firms).
3. Small businesses as a group account for most of
the new businesses created every year as well as for
most of the growth of companies (small firms grow
much faster than do big ones). Small firms also ac-count
for about three-quarters of the employment
growth in the U.S. economy—in other words, small
businesses create most of the new jobs in the
United States.
4. A few behaviors seem to arise consistently in anec-dotal/
case descriptions of successful entrepreneurs,
1. Why is entrepreneurship important?
2. Do you know of anyone involved in a family busi-ness,
and if so, do they experience any of the family
business issues we discussed in this chapter?
Which ones?
3. If you were interested in buying a franchise, how
would you get started?
4. According to your state and county officials, what
is involved in incorporating where you live?
5. Why do you think you would (or would not) make a
good entrepreneur?
6. List ten innovative products introduced by PG
over the past five years.
1. Using the information in this chapter, write a one-page
paper on the topic “Why I would (or would
not) make a good entrepreneur.”
2. At the library or on the Internet, review sales infor-mation
on two popular franchises of your choice.
Then, in teams of three or four people, evaluate
including tenacity and intensity—the drive to pur-sue
a goal with passion and focus.
5. Most entrepreneurs seem to stumble upon their
ideas for a business. Most of those responding to
one survey said that they got their ideas for their
businesses through their previous employment.
Serendipity was the next source that most respon-dents
mentioned. A relative handful got their ideas
from hobbies or from a systematic search for busi-ness
opportunities.
6. In creating the business entity, the entrepreneur
needs to decide what the ownership structure will
be. The four main forms of business ownership are
the sole proprietorship, the partnership, the corpo-ration,
and the LLC. Taxation and limiting the
owner’s liability are always big considerations in
choosing an ownership form.
7. Innovation means uncovering a valuable need, in-venting
a new or improved product or service to fill
that need, and then developing and introducing
the new product or service so that it succeeds in
the marketplace. Today, most big companies rely
more on collaborative innovation, which involves
reaching out with IT tools to those inside and out-side
the company for good ideas.
8. Product life-cycle management software is a suite
of software applications that helps managers de-sign,
manufacture, and manage the evolution of
their products.

C A S E S T U D Y
Getting By with a Little Help from His Mother’s Friends
Andrew Morris had almost everything he needed to
start his Caribbean grocery store in a New York City
suburb. He had an MBA from Columbia University, a
business plan, and a $50,000 loan from the European
American Bank. However, after he negotiated the rent
on a 1,600-square-foot retail space in Hempstead, New
York, he found he did not have enough cash left for in-ventory,
payroll, marketing, and licenses. Thanks to his
mother and her friends, he was able to secure an addi-tional
$15,000 in resources, which enabled him to stock
the shelves with dozens of kinds of hot sauce, curry,
and reggae music that the growing Caribbean commu-nity
craves.
Morris got the money from his mother’s susu, a kind
of club or fund developed byWest Indian housewives to
provide rotating credit for big-ticket household pur-chases.
A susu, which means “partner,” typically has
about twenty members, most of them either relatives or
close friends. Each week, every member contributes a
fixed sum, or hand, into the fund for a twenty-week pe-riod.
Any time during those twentyweeks, each member
is entitled to borrowan amount, or draw, to use interest-free
during that time. For example, if a twenty-member
susu has a setweekly contribution of $100, each member
pays $100 into the fund every week—or pays a total of
$2,000 over twentyweeks. Eachmemberis then also able
to draw $2,000 at any point during that period. Essen-tially,
the susu is a kind of planned savings program that
pools money to help members of the group who need
help with cash flow. The Caribbean susu is not really a
unique concept in the United States. Asian Americans
and other ethnic groups have also developed informal
lending networks for their members.
Case Study ■ 115
Andrew Morris has dipped into his mother’s susu a
number of times to help his business grow. He used the
money to pay a sales tax obligation; purchase a com-mercial
oven to cook Jamaican meat patties; produce a
special Easter promotion with traditional cheese and
sweetbread sandwiches; and expand his inventory to in-clude
unusual but popular items, such as Jamaican Chi-nese
soy sauce. “It’s a cash-flow boon,” Morris says. After
seven years of ongoing susu support, Morris’s store now
has annual revenues of over $1 million. Morris is now
counting on susu support to help it expand into distrib-uting
coffee and developing a website. “[The susu is] no
longer just a Christmas club,” he says. “It’s a way of life.”74
1. Andrew Morris has approached you for help. List
what you believe he is doing right and doing wrong
with respect to starting his business. What do you
think accounts for the fact that he ran out of money
before he opened, even though he had a business
plan? What remedy or remedies would you suggest
at this point?
2. Develop a one-page outline showing Andrew
Morris how you would suggest he conduct an in-formal
business feasibility study.
3. List the activity areas for which Andrew Morris
should establish controls.
4. What other alternative means for obtaining financ-ing
would you recommend for Andrew Morris, and
what are their pros and cons when compared to
continuing to use his mother’s susu?
the pros and cons of these franchise businesses,
and answer the question, Should I invest in this
franchise?
3. The dean of your business school is eager to ex-pand
her college’s programs to new markets. She
has decided to try to establish a new online MBA
program. She has asked you to conduct an infor-mal,
quick feasibility study. In teams of four or five,
outline what you would cover in such a study, and
then explain why you believe her new program is
or is not a good idea.
4. In teams of four or five people, choose a consumer
products company such as PG and list the innov-ative
products they’ve introduced in the past three
years. What was it about these products that you
consider innovative?

CHAPTER OUTLINE
Opening Vignette:
Caterpillar Inc.
● Data, Information, and
Knowledge
The Nature of Information
What Is Information Quality?
Managing Now: Data Mining
● Information Systems for
Managing Organizations
Management’s Requirement for
Information
Transaction-Processing Systems
Management Information Systems
Decision Support Systems
Executive Support Systems
Computers Add Value at Bissett
Nursery
● Enterprise Systems and
Knowledge Management
What Are Enterprise Systems?
Three Special Enterprise Systems
Types of Knowledge Management Systems
● Telecommunications and
Computerized Networks
Ryder System’s Knowledge
Management Center
PRACTICE IT: Caterpillar
Telecommunications Basics
How Managers Use Telecommunications
Telecommunications-Based Workgroup
Support Systems
Networks
The Internet
● Managing Now: Managerial
Applications of Information
Technology
Planning: Using Information Technology
for Strategic Advantage
Organizing: Networking the
Organization Structure
Staffing: Telecommuting
Leading: Reengineering the Company
Controlling
116
5 INFORMATION AND KNOWLEDGE
MANAGEMENT
Caterpillar Inc.
“ nowledge management” at Caterpillar Inc. used to mean buying a
colleague a cup of coffee. This “would enable employees to learn
K
anything they needed to know.” And for many years, that was
adequate.1 Caterpillar manufactures construction and mining equip-ment.
Most of the company’s investment was in the sorts of machines
and factories you would associate with a big industrial manufacturing
company. Acquiring and sharing knowledge about things like best prac-tices
and new ideas was not management’s major focus.
Now things are different.
Caterpillar’s managers saw that all
competitors had access to the
same manufacturing facilities and
machinery. To compete in today’s
business environment, Caterpillar
had to put more emphasis on its
intangible, intellectual assets—on
things like patents; new, creative
ideas; and on world-class best
practices in all areas. These best
practices include finding out what
customers want, delivering better
service, producing equipment
more efficiently, and better man-aging
its huge workforce. As at
The giant Caterpillar Inc. needed a better
way to manage its accumulated corporate
knowledge.
most firms, best practices had become the key to Caterpillar’s success.
In today’s business environment, best practices like these now make
the difference between success and failure. For Caterpillar, the chal-lenge
was that much of the knowledge about best practices was filed
away in procedures manuals or hidden away in their employees’ minds.
How could Caterpillar retrieve and store these millions and millions of
ideas and best practices and encourage employees to share what
they know? ■

Data, Information, and Knowledge ■ 117
➤ Defining and giving examples of data, information, and knowledge.
➤ Defining information technology.
➤ Giving examples of why managers at different levels require different types of information.
➤ Comparing and contrasting at least four types of information systems.
➤ Reading the chapter case study and identifying the information system the manager
needs.
➤ Showing how managers in the opening vignette rely on information technology.
➤ Viewing the simulation video and identifying if the information is of high quality.
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Data, Information, and Knowledge
he challenge that Caterpillar faced is a challenge that all businesses face today.
And it is a challenge that highlights how important managing information has
T
become to companies’ success and why information technology is so important.
Information technology is a familiar and inescapable aspect of our lives. We
use computers, e-mail, software, cell phones, iPods, fax machines, flash drives,
scanners, and BlackBerry© devices to communicate and to assist with our daily
chores. We search for travel information on Expedia, download airline tickets prior
to trips, wait patiently as voice-mail systems direct our calls, and register for and
take college courses online. Computerized diagnostic tools analyze our autos’
problems, point-of-sale computers at Target process our credit-card purchases,
and computerized traffic-flow systems control our progress to work.
What may not be quite so obvious is the vast number of ways in which man-agers
rely on information and information technology. Information technology
(IT) refers to any processes, practices, or systems that facilitate processing and
transporting information. It includes both the hardware (such as computers, iPods,
cell phones, and servers) as well as the software systems used to make these devices
work. Information systems are more specialized. Information system refers to
“the interrelated components working together to collect, process, store, and dis-seminate
information to support decision making, coordination, analysis, and vi-sualization
in an organization.”2Managers depend on information technology and
systems to manage the vast quantities of ideas, knowledge, and other information
that their firms rely on for their success. Like their colleagues at Caterpillar, man-agers
can’t manage today without knowing how to manage information.
The Nature of Information
Most information systems transform data into information and knowledge that
managers can actually use. Data comprise facts, figures, or observations. For
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information technology
(IT): any processes, practices,
or systems that facilitate the
processing and transporting
of information
information system: the
interrelated components
working together to collect,
process, store, and disseminate
information to support decision
making, coordination, analysis,
and visualization in an
organization

118 PART TWO CHAPTER 5 Information and Knowledge Management
example, daily laptop sales figures for Dell computer comprise data. But data—
these numbers—are of little use for management decisions—they’re just raw data.
Information is data in context. For example, Dell’s CEO can review a graph of
laptop sales data for a week, and from that glean useful information about
whether Dell’s sales are trending up or down. Information is data presented in a
form that is meaningful to the recipient.3 “Information,” as Peter Drucker said, “is
data endowed with relevance and purpose.”4
All information systems deal with data. Some systems transform data into in-formation,
for example, by expressing them in the form of graphs or charts. Thus,
Dell’s CEO may start each day by viewing on his laptop computerized graphs and
charts summarizing the trends for Dell activities such as laptop sales, profit mar-gins,
and unit costs.
Managers combine information like that onDell’s sales graph with what they al-ready
know, and with other information (such as competitors’ sales for the same
period), to create knowledge. Knowledge is “information . . . distilled via study or
research and augmentedby judgment and experience.”5Managers use knowledge to
understand what is happening and to make predictions. The sales graph (informa-tion)
shows that Dell sales are trending down. Dell’s CEO knows that a newly
rejuvenated Hewlett-Packard (HP) is selling comparable laptops for 5 percent less
cost. This knowledge (Dell sales trending down plus HP selling theirs for 5 percent
less) leadsDell’sCEOto conclude, based on his previous experience, that HP’s laptop
sales are underminingDell’s, and that a lowerDell price and more ads are in order.
Consider another example. PepsiCo wants to determine why consumers are
not buying its Pepsi Light clear drink. The company’s market researchers conduct
a survey containing thirty multiple-choice questions, each with five possible
choices. They place all these data (all the answers to the thirty questions from the
hundreds of people who took the survey) on a DVD. If printed, all these data would
appear as streams of unrelated numbers. But then, PepsiCo’s market researchers
summarize these data using graphs showing average responses by age level and
other demographic traits. The result is information. For example, they may find
that older people, by and large, don’t seem to be purchasing this product. PepsiCo’s
marketing department can then apply its knowledge to draw meaningful conclu-sions,
such as, in this case, a hypothesis about why older consumers seem less
inclined to purchase Pepsi Light than are younger ones.
What Is Information Quality?
Of course, managers don’t just want information; they want high-quality informa-tion
they can use to make good decisions. High-quality information has several
characteristics (see Figure 5.1).6 As in the PepsiCo example, good information
must be pertinent and related to the problem at hand. It must also be timely. For
example, the Pepsi Light survey information would be useless if it came rolling in
two years after the product was pulled off the shelf. Good information must also
be accurate, and finally, good information reduces uncertainty, which we can
define as the absence of information about a particular area of concern.7 In the
PepsiCo example, to meet these last two criteria, the survey information should
help the marketing manager answer the question, Why aren’t people buying Pepsi
Light the way we thought they would?
Yet managers today are, if anything, deluged by information. Having high-quality
information is therefore just a start. It’s not enough for the company’s
information systems and technology (all its computer systems, software packages,
communication devices, and so on) to generate and transfer more (even high-quality)
information. That’s often the last thing the manager needs! Those systems
knowledge: information
distilled via study or research
and augmented by judgment
and experience

Data, Information, and Knowledge ■ 119
Pertinent
(related to
the problem)
HIGH-QUALITY
INFORMATION
Reduces uncertainty
(it tells us something
we needed to know
but did not know)
Accurate
(the information is
correct and truthful)
Timely
(in time to make
a good decision)
must also contribute to the manager’s knowledge of what is happening, through
analysis, interpretation, and explanation. We’ll look at several examples in this
chapter, including the following one on data mining.
Managing Now: Data Mining
Data mining is “the set of activities used to find new, hidden, or unexpected
patterns in data.”8 Data-mining systems use tools like statistical analysis and so-called
intelligent agents to sift through computerized data looking for relation-ships.
Thanks to data mining, the manager can discover patterns that he or she
can then use to make predictions. He or she can answer questions such as, Which
of our products would this customer be most likely to buy? Which of our cus-tomers
are making too many returns? What is the likelihood that these customers
will respond to our promotional coupons?9
Department stores use data mining all the time. For example, Macy’s neces-sarily
captures huge amounts of data on its customers—what they buy, when they
buy it, how they pay for it, and what day of the week they tend to shop, for in-stance.
Left unanalyzed, all these data are of little use. However, stores like Macy’s
use data mining to make sense of it. For example, data mining reveals that some
customers often come in to redeem 20-percent-off coupons they get in the mail.
Furthermore, some customers are much more apt to buy new electronic gadgets
with coupons than are other customers. Data mining therefore gives Macy’s mar-keting
managers valuable knowledge about which customers should receive
which coupons and brochures.
The data Macy’s mines come from the firm’s data warehouse. The data ware-house
is a sort of computerized holding station for Macy’s data. The company’s
operational systems—for instance, its computerized point-of-sale registers and
billing systems—are continuously collecting data about customers’ purchases.
The data warehouse is the location in which the company stores these data.
Then Macy’s managers can use the sorts of decision support systems we discuss
next to mine these data and perform other procedures that help them make
better decisions.
F IGURE 5.1
What Makes High-Quality
Information?

Information Systems for Managing Organizations
s we said, an information system refers to “the interrelated components work-ing
together to collect, process, store, and disseminate information to support
decision making, coordination, analysis, and visualization in an organization.”10
An information system includes all the people, data, technology, and organiza-tional
procedures that work together to retrieve, process, store, and disseminate
information to support management. In this book, we’ll focus on managerial
information systems, which are systems that support managerial decision making
and control.
Information systems are more than computers. An information system also
usually includes the employees who input data into the system and retrieve its
output. Managers are (or should be) part of the information system, since it is de-signed
to serve their specific needs for information, like the PepsiCo managers’
need for information about customers’ buying patterns. Building an information
system usually starts with understanding what information management needs.
Management’s Requirement for Information
The information a manager needs generally depends on two basic things—the
business department the manager is attached to and the manager’s level in the
chain of command. Figure 5.2 summarizes this idea.
● Business Function Information Needs First, managers in different depart-ments
need information that is relevant to their business functions. For example,
A
F IGURE 5.2
Types of Information Systems
SOURCE: Kenneth C. Laudon and
Jane P. Laudon, Management Information
Systems 9e, © 2006, Prentice Hall,
Upper Saddle River, N.J., p. 41.
Sales and
Marketing
Manufacturing
and Production
Finance and
Accounting
Human
Resources
KIND OF
INFORMATION
SYSTEM
FUNCTIONAL AREAS
GROUPS
SERVED
Executive
Support
Systems
Decision
Support
Systems
Strategic Level:
Senior Managers
Management
Information
Systems Management Level:
Middle Managers
Transaction
Processing
Systems
Operational
Level:
Operational
Managers
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Information Systems for Managing Organizations ■ 121
PepsiCo’s marketing managers need marketing information, its production man-agers
need production information, and its human resource (HR) managers need
HR-related information on things like turnover and grievances. Therefore, busi-nesses
generally have functional information systems, such as sales systems, pro-duction
systems, finance systems, and HR systems.
● Business-Level Information Needs Similarly, managers at different lev-els
in the organization tend to require different types of information.11 For ex-ample,
first-line managers (like production supervisors) need a short-term
focus. They need to schedule front-desk personnel, supervise accounting de-partments,
and oversee production departments. At this level, the information
they need should emphasize operational activities such as production schedules
and cash-management information.
Middle managers—who supervise several front-line managers—tend to focus
more on broader, intermediate-range issues, like those events that might affect the
company in the coming year or so. Therefore, they require information for use in
budget analysis (are we meeting our budgets for the year or not?) and in overall
factory efficiency.
Top managers, including the CEO and the firm’s top vice presidents, focus
more on long-range, strategic decisions. They need information that will enable
them to make, for example, merger and acquisitions decisions and new-product
decisions.
These different information requirements translate into requirements for dif-ferent
types of information systems at each level of the organization.
● Levels of Information Systems Thus, different information systems are ap-propriate
to each organizational level.12 As in Figure 5.2, executive support sys-tems
provide information for strategic-level decisions on matters such as five-year
operating plans.Management information systems (MISs) provide middleman-agers
with reports regarding matters such as current versus historical sales levels.
Decision support systems (DSSs) are information systems that provide middle
managers with tools for analyzinganddecidingonmatters such as which customers
would be the best candidates for mailings. Transaction-processing systems pro-vide
detailed information about the most short-termactivities, daily activities such
as accounts payables and order status.Within each category, there are information
systems serving specific purposes.We’ll look more closely at each information sys-tem,
starting with the most day-to-day systems, transaction-processing systems.
Transaction-Processing Systems
A transaction is an event that affects the business. Hiring an employee, selling
merchandise, paying an employee, and ordering supplies are transactions. In
essence, transaction-processing systems collect and maintain detailed records
regarding the organization’s transactions. For example, a university must know
which students have registered, which have paid fees, which members of the fac-ulty
are teaching, and the secretaries that are employed to conduct its business.
The collection and maintenance of such day-to-day transactions were two
of the first procedures managers computerized. As is still the case today, early
transaction-processing systems automated the collection, maintenance, and
processing of mostly repetitive transactions. These include computing withhold-ing
taxes and net pay.
executive support systems:
information systems that
provide information for
strategic-level decisions on
matters such as five-year
operating plans
management information
systems (MISs): information
systems that provide middle
managers with reports regarding
matters such as current versus
historical sales levels
decision support systems
(DSSs): information systems
that provide middle managers
with tools for analyzing and
deciding on matters such as
which customers would be the
best candidates for mailings
transaction-processing
systems: information systems
that provide detailed
information about the most
short-term activities, daily
activities such as accounts
payable and order status

Today, transaction-processing systems perform the company’s daily opera-tional
activities, such as collecting point-of-sale data, maintaining employee
records, paying bills, processing orders, and maintaining inventories. They sup-port
business activities like tracking responses from the firm’s promotional efforts,
scheduling orders for production, and billing customers.13
Businesses generally have transaction systems for each major business func-tion.
Sales and marketing transaction-processing systems do things like enter and
process orders. Manufacturing and production systems handle activities like
maintaining inventory and scheduling production machines. Finance and ac-counting
systems handle activities such as paying bills, billing customers, and
maintaining the company’s financial records. Human resource systems help
maintain personnel or human resource (HR) records on details such as age,
address, and benefits, and track employees’ training, skills, and appraisals.
Management Information Systems
Management information systems (MISs) provide decision support for managers
by producing standardized, summarized reports on a regular basis.14 The MIS
generally produces reports for longer-term purposes than typical transaction-processing
systems.
Management information systems (MISs) aid managers by producing the
charts, graphs, and reports they need to understand their departments’ or compa-nies’
current and past performance.15 They take data and transform them into in-formation.
For example, an MIS may take raw data and show the sales manager
the trend of sales for the past two weeks; the production manager a graph of
weekly inventory levels; and the CEO a report summarizing the company’s rev-enues,
expenses, and profits for the quarter. The MIS thereby helps managers
plan, organize, lead, and control.
Decision Support Systems
A decision support system (DSS) is a set of computerized tools that helps man-agers
analyze information and make decisions. The DSS “assist[s] management
decision making by combining data, sophisticated analytical models, and user-friendly
software into a single powerful system that can support semi-structured
or unstructured decision making.”16 (The latter are decisions such as, What are the
chances that this new product will succeed?) Decision support systems have five
main components: a data management system, a model management system, a
knowledge engine, a user interface, and the user (see Figure 5.3):17
◗ The data management component retrieves, stores, and organizes the data, for
instance, from point-of-sale cash registers.
◗ The model management system retrieves, stores, and organizes the quantitative
and statistical models that the decision support system uses to analyze the data.
F IGURE 5.3
Five Components of DSS Data
THE DECISION SUPPORT SYSTEM
Model
Management User
Management
Knowledge
Engine
User
Interface

For example, Macy’s may use a formula to identify customers who make too
many returns.
◗ The knowledge engine does the actual reasoning for the system. For example, the
knowledge engine for a commercial bank might use its built-in rules to analyze a
loan applicant’s credit history, employment history, income level, and debt to ar-rive
at a decision regarding whether that person’s credit risk is high or low.
◗ The user interface consists of the tools (such as the keyboard and screen) the
manager uses to interact with the decision support system.
◗ Finally, the user is the decision maker who is actually using and controlling the
decision support system.
When it comes to helping managers make decisions, decision support sys-tems
are more powerful than are MISs because of the analytical tools and knowl-edge
engine the DSS contains. Whereas the MIS will dutifully print out prepro-grammed
sales graphs and reports, the DSS can actually analyze various
alternatives. For example, the dean of your school most likely receives weekly MIS-produced
reports on enrollments by class. Suppose, however, that your school is
facing a faculty strike. Now the dean would turn to a DSS. The dean may want to
include in her analysis her estimate of the likelihood that a number of the univer-sity’s
students would move across town to a competing university given the com-peting
university’s ability (or inability) to expand its class offerings. Among other
things, the dean’s DSS could then help the dean estimate the impact on school
revenues of having to drop various combinations of classes. Table 5.1 gives some
examples of how companies use their DSS systems. The Window on Managing
Now feature shows how one small business improved its revenues by installing
computerized transactions, MIS, and decision support information systems.
Executive Support Systems
Executive support systems (ESSs) help top-level executives acquire, manipu-late,
and use the information they need to maintain the overall effectiveness of the
company. Transaction-processing systems, management information systems,
and decision support systems rely on internal data, data such as daily sales, weekly
profits, and purchases per consumer that the company gathers from its customers
and operations.
T ABLE 5.1
Examples of Uses for DSS Systems
American Airlines Price and route selection—how much will we earn if
we add or drop this route?
Cornell University Program selection—should we add a new school of
business in China or not?
Donald Trump Realty Investment evaluation—should we open a new casino
in Mississippi or not?
Burger King Price and promotion selection—if we add this new
giant burger, what’s the likely impact on our revenues
and costs?
executive support systems
(ESSs): information systems
that help managers acquire,
manipulate, and use the
information they need to
maintain the overall
effectiveness of the company

Computers Add Value at Bissett Nursery
Before it installed its new computer systems, Long Island,
New York–based Bissett Nursery could not have handled
any more business. Bissett’s son Jimmy spent his days
sprinting around the shop trying to serve customers,
many of whom waited twenty-five minutes for a hand-written
invoice. Bookkeeping was a month behind, and in-ventory
control didn’t exist.18
Both Bissetts knew their company, a wholesaler of
nursery materials and lumber, would have to change. The
younger Bissett had ideas about expanding the business.
He thought the best way to do so would be with the help
of brother-in-law Bob Pospischil, an ex–fighter pilot
knowledgeable about computer systems and the financial
data they could produce.“My goal was not to change the
business,” says Pospischil,“but to use technology to meet
the business needs.” The elder Bissett was skeptical. He’d
seen competitors go the same route only to find it an ex-pensive
mistake, but he relented.
Pospischil spent sixty days getting a handle on buying,
sales, shipping, and accounting and then spent $135,000
on the company’s first big computer. Order-entry em-ployees
took turns visiting the software vendor to learn
the new system. After the first thirty minutes of opera-tions,
the network crashed. A frantic Jim Bissett insisted
everyone return to the old manual system. They ironed
out the problem in fifteen minutes, and the elder Bissett
gradually became accustomed to the new technology.
One big thing Jim Bissett soon gained from the new
system was a better perspective on each phase of his
operations. He could now order with precision based on
his customers’ historical needs. He could easily show
small contractors their annual needs for nonperishable
goods, enabling them to purchase in bulk and save money.
Bissett Nursery’s customer base shot from 600 to 7,500.
Bob Pospischil was just getting started.
Marketing was costing Bissett $130,000 annually, and
better than 60 percent of that budget went to producing
ads and catalogs. Pospischil had an easier time selling the
elder Bissett on the idea that he needed a desktop pub-lishing
system. The price tag was $40,000, but “with the
first catalog,we saved enough to pay for the system,” says
Pospischil.
Landscapers face big barriers with homeowners be-cause
they have to sell the aesthetics of their products.
It’s not easy to get a customer to visualize how a tree
would look in the customer’s own front yard. That
changed when a software company sold Bissett on an
imaging system that could produce a rendering of how
the planned trees and plants would look in front of the
customer’s house.
The new technology gave Bissett Nursery a huge
competitive edge.More than 95 percent of landscape con-tractors
who bought from Bissett and used Bissett’s
computer-generated images sold the job and came back
to fill orders at the nursery. By 2006, Bissett Nursery had
grown to become the largest horticultural distribution
center in New York State. Its new computerized informa-tion
systems helped make Bissett Nursery a huge success.
The information systems that fall under the executive support systems um-brella
are different. They use internal as well as external data (such as industry
sales trends). This is important. For the new CEO of Ford Motor Company, it does
little good to know just that Ford sales are up 5 percent. He also needs a compari-son
with auto industry sales to see that Ford’s market share is actually down 2 per-cent
last month. Executive support systems provide that sort of comparison.19
● How Executives Use ESSs Executives use executive support systems in many
ways. Executives such as Dell’s Michael Dell use their ESSs to monitor the pulse of
their companies. For example, Dell and his top managers have ESS-supported
“digital dashboards” on their PCs. These computerized graphs and charts help
them to monitor weekly performance, for instance, their progress relative to com-petitors’.
The Window on Managing Now feature presents another example.

Executives also use ESSs to quickly identify and understand evolving situa-tions.
A university president could use an ESS to keep tabs on and analyze the
following questions:
Is the average student taking fewer courses?
Are costs for maintenance labor substantially higher than they have been in
the past?
Is there a significant shift in the Zip Codes from which most of our students
come?
An ESS also makes it easy for executives to browse through the data. Says one:
I like to take a few minutes to review details about our customers, our manu-facturers
or our financial activities first hand. Having the details flow across
the screen gives me a feel for how things are going. I don’t look at each record,
but will glance at certain elements as they scroll by. If something looks un-usual,
it will just jump out at me and I can find out more about it. But if noth-ing
is unusual, I will know that, too.20
The CEO can also use an ESS to monitor a situation. Thus, a university presi-dent
can use an ESS to monitor the new dining facilities management firm running
the student cafeteria, by reviewing ESS information
such as student usage, student complaints, and rev-enues.
Executives also use ESSs to keep track of their
competitors. For example, a wealth of information is
available in commercial computerized databases, in-cluding
financial information on tens of thousands of
U.S. companies. Executives can use an ESS to tap into
such databases and glean competitive data (for in-stance,
regarding last year’s sales) regarding other firms
in their industry. An ESS can also support analyses. For
example, it could enable our university president to
create “what if” scenarios that show the likely effects on
university revenues of increasing faculty salaries or
adding new programs. Finally, an ESS may enable the
executive to get at data directly. Using their terminals
and personal digital assistants (PDAs), executives can
use an executive support system to tap directly into the
company’s data files and get specific information that
may be of interest (such as, What is that manager
spending on labor?), without waiting for his or her as-sistants
to assemble it.21
CEO Michael Dell, shown here with the president of the
Philippines, uses a desktop balanced scorecard with
computerized graphs and charts to monitor his company’s
performance.
● Expert Systems and Artificial Intelligence An expert system is an in-formation
system in which computer programs store facts and rules (often called
a knowledge base) to replicate the abilities and decisions of true human experts.
One early application identified an investment adviser’s criteria for recommend-ing
investments to clients who were in various demographic and risk-propensity
categories. Those criteria were then used to develop a computer program that
replicated most of the investment decisions the investment officer (the expert)
would have made. Similarly, if you go to a site such as www.vanguard.com, it will
compute an ideal investment portfolio for you (in general terms), based on factors
such as your risk preferences, current income and savings, and expected future
financial needs.
expert system: an
information system in which
computer programs store facts
and rules (often called a
knowledge base) to replicate the
abilities and decisions of true
human experts

The term artificial intelligence is often used in association with expert systems
because they both are related to replicating human thought processes. However,
expert systems are relatively straightforward information systems made up of pro-grams
that use decision rules. These decision rules, when combined with the facts
of the situation (like the person’s age and income level), allow the expert system to
mimic the expert’s decision-making style.
Artificial intelligence leaps beyond this sort of logical problem solving. Artifi-cial
intelligence (AI) can be defined as a computer’s ability “to accomplish tasks
in a manner that is considered ‘intelligent’ and is characterized by learning and
making decisions.”22
● Information System Security Regardless of the type of information system
(executive, MIS, or other), managers need to anticipate and prepare for security
breaches. Most readers are already somewhat familiar with the sorts of problems
that can arise. For example, computer viruses are programs that can perform de-structive
actions like erasing data while attached to one of a computer’s existing
programs. They’re called viruses because they’re capable of duplicating and trans-ferring
themselves to other linked computers. Trojan horses (named after the
huge wooden horse of Trojan War fame) seem innocent, like e-mails from a friend,
but once embedded, they can enable outsiders to track or manipulate the com-puter’s
files. Unlike viruses, Trojan horses can’t duplicate themselves. Worms ba-sically
act like viruses but can operate independently, without attaching to other
programs. Spyware programs (as the name implies) hide themselves in a com-puter
and enable outsiders to keep track of keystrokes.
Computer security specialists take numerous steps to defend against security
breaches. Commercial information systems and those connected to broadband
services particularly require firewalls, hardware/software packages that stand
between the company’s network and the outside network in order to inhibit unau-thorized
access. Systems also use authentication, for instance, via passwords, to
help protect systems. Various types of software, including antivirus and antispy-ware
programs, help identify and inhibit virus or spyware attacks. Companies
also use encryption, or coding of messages, to inhibit unauthorized people from
reading messages. Companies use several protocols or coding methods to encode
data, including Secure Sockets Layer (SSL) and the newer Transport Layer Security
(TLS). Managers also take other steps to improve computer system security.
Indeed, the International Standards Organization has special standards covering
security issues.
Enterprise Systems and Knowledge Management
o far, we have viewed information systems from two perspectives (refer again
to Figure 5.2).We looked at systems that cut horizontally across the company’s
S
functional departments, systems such as sales, production, finance, and human
resource management transaction systems. These serve managers in different
departments.We also looked at systems that serve managers depending on their
level in the company. These included transaction-processing, management infor-mation,
decision support, and executive-level systems. A third set of information
systems, called enterprise or enterprise resource planning systems, integrates
the information from all these horizontal and vertical systems.We discuss these
systems next.
artificial intelligence (AI):
a computer’s ability to
accomplish tasks in a manner
that is considered “intelligent”
and is characterized by learning
and making decisions
computer viruses: programs
that can perform destructive
actions like erasing data while
attached to one of a computer’s
existing programs
Trojan horses: items that
seem innocent, like e-mails
from a friend, but that once
embedded can contain
instructions that enable
outsiders to track or manipulate
the computer’s files
worms: programs that act
basically like viruses but can
operate independently, without
attaching to other programs
spyware: programs that hide
themselves in a computer and
enable outsiders to keep track
of keystrokes
firewalls: hardware/software
packages that stand between the
company’s network and the
outside network in order to
inhibit unauthorized access
authentication: passwords
and similar devices used to
verify a user’s identity
encryption: coding of
messages
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Enterprise Systems and Knowledge Management ■ 127
What Are Enterprise Systems?
An enterprise resource planning (ERP) system is a companywide integrated
computer system comprised of compatible software modules for each of the com-pany’s
separate departments (such as sales, accounting, finance, production, and
HR). Often Internet-based, the ERP modules are designed to communicate with
each other and with the central system’s database. That way, information from all
the departments is readily shared by the ERP system and is available to employees
in all the other departments. Activities that formerly required human intervention,
such as production telling accounting that it should bill a customer because an
order just shipped, now occur automatically. ERP strips away the barriers that typ-ically
exist among a company’s stand-alone departmental computer systems. The
name notwithstanding, enterprise resource planning systems are not primarily
planning systems. We’ll generally refer to them as enterprise systems in this book.
Enterprise systems help managers coordinate and integrate all the company’s
functions and processes. By integrating the separate departmental computer
modules, enterprise systems can do things for managers that the separate depart-mental
systems (sales, production, finance, and HR) could not do on their own.
Here’s an example:
With [ERP], a customer places an order, and the sales order was recorded. The
system schedules shipping and works backwards from the shipping date to
reserve the materials, to order parts from suppliers, and to schedule manufac-turing.
The [ERP] [accounting] module checks the customer’s credit limit,
updates the sales forecast, and creates a bill of materials. The salesperson’s
commission is updated. Product costs and profitability are calculated. Finally,
accounting data is updated, including balance sheets, accounts payable,
ledgers, and other financial information.23
Software companies like SAS, SAP, and Oracle supply enterprise systems. Some-times
managers start small, by installing one functional module at a time—for
instance, first accounting. Then they install sales, production, and human re-source
management modules at later times. As we’ll see in this book, it’s hard to be
world-class (in controlling operations or costs, for instance) without the benefits
that derive from enterprise systems.
● Managing Now: Millipore Corp. For example, Millipore Corp. develops
and manufactures technologies for drug companies. Wanting to better integrate
its worldwide operations, Millipore installed a Web-based suite of enterprise soft-ware
products from Oracle Corporation. Now, for example, instead of using differ-ent
financial packages in thirty countries, the compatible financial modules can
communicate with each other and with the systems at Millipore’s headquarters.
This means top management can get fast feedback on the firm’s financial perfor-mance
around the world. Similarly, Millipore turned to Oracle Corporation to in-stall
other compatible modules, including Oracle Order Management and Oracle’s
financial, warehouse, and distribution systems. Now all these modules can com-municate
with each other. Orders are processed automatically, production sched-ules
are set, orders are processed, and bills are sent out faster, all automatically,
and management can now track orders from entry through delivery.
Three Special Enterprise Systems
In addition to the ERP systems that integrate a company’s functional department
modules, managers use three other specialized types of integrative enterprise
enterprise resource
planning (ERP) system:
companywide integrated
computer systems comprised
of compatible software modules
for each of the company’s
separate departments (such as
sales, accounting, finance,
production, and HR) and
designed to communicate with
each other and with the central
system’s database

systems: supply chain management, customer relationship management, and
knowledge management systems.24
● Supply Chain Management Systems Supply chain management systems
help the company manage its relationship with its suppliers and retailers. They
“provide information to help suppliers, purchasing firms, distributors, and logistics
companies coordinate, schedule, and control business processes for procurement,
production, inventory management, and delivery of products and
services.”25 For example, when Dell receives an order for a new per-sonal
computer (PC), its supply chain management system auto-matically
notifies Dell’s assembly plant to schedule the work; the
vendors to send the parts; UPS to pick up the screen, printer, and
processor; and Dell’s billing department to mail an invoice. Dell’s
customers follow their orders’ progress by logging on to the same
system. For many firms today, much of their fame rests on their
supply chain management systems. French retailer (and Wal-Mart
rival) Carrefour keeps its costs down in part because its point-of-sale
computers automatically notify vendors like Levi’s and Procter
Gamble (PG) when it’s time to replace merchandise.
● Customer Relationship Management Systems Customer
relationship management systems help the company manage all
the processes involved with interacting with customers, such as
taking orders, answering technical questions, and sending bills.
For example, when a customer calls with a problem, Dell’s cus-tomer
relationship management system shows the technician
what system the customer owns and takes the technician through
a sequence of diagnostic questions aimed at identifying and solv-ing
the problem. Several years ago, to cut costs, Dell started having
technicians abroad take and answer customers’ calls. When cus-tomers
complained, Dell largely returned to its domestic system.
Its newest technical service system, introduced in 2006, allows the
Dell technician (with the customer’s okay) to tap into the cus-tomer’s
computer, diagnose it online, and correct the problem.
Point-of-sale computers like this one enable
retailers to keep their suppliers updated in real
time about sales and inventory levels of their
products.
● Knowledge Management Systems In today’s competitive business environ-ment,
it’s usually the company with the best information that’s the most success-ful.
As one expert put it, “It is a competitive advantage if your company is learning
faster than the competition.”26 As a result, many managers today are embracing
knowledge management. Knowledge management refers to any efforts aimed at
enabling the company’s managers and employees to better utilize the information
available anywhere in their companies.
Knowledge management is enormously important today. Think of how waste-ful
it is for an engineer to spend three days writing a quote for a customer, only to
discover that her predecessor filed a similar quote last year. One study estimates
that Fortune 500 companies lose at least $31.5 billion a year by not sharing knowl-edge
internally.27
Knowledge management systems focus on organizing and making available
important knowledge, wherever and whenever it is needed.28 Some knowledge
management systems focus on accessing, compiling, organizing, and reviewing
knowledge that’s already written down and stored away in some form in the com-pany.
For example, Merck has vast amounts of knowledge stored away in its
computers on things like what combinations of drugs they’ve tested in the past
knowledge management:
any efforts aimed at enabling a
company’s managers and
employees to better utilize the
information available anywhere
in their companies

Enterprise Systems and Knowledge Management ■ 129
and what the results were. Microsoft’s frequently asked questions (FAQ) sections at
microsoft.com contain the firm’s accumulated knowledge on how to handle vari-ous
problem issues.
But much of a company’s most important knowledge is not written down; it
resides in the minds of its employees.29 For example, think of all the knowledge
that must reside in the mind of a company’s sales manager as he or she prepares
to retire after twenty years on the job. This sales manager knows about each
customer’s preferences and needs, who to call, the names of those people’s
spouses, how often they should be contacted, and thousands of similar items of
knowledge. The company must have some way to harvest this treasure trove of
knowledge before the manager retires.
Experts distinguish among four basic types of knowledge management systems:
knowledge discovery systems, knowledge capture systems, knowledge sharing
systems, and knowledge application systems (see Figure 5.4).30 Knowledge discov-ery
systems help employees create or develop new knowledge. Nontechnical
knowledge discovery systems include joint decision-making meetings. Technical
Knowledge Discovery Systems
(collaborative group
decision-making tools)
Knowledge Application Systems
(help employees utilize
knowledge; Dell
tech support)
Knowledge Sharing Systems
(Web-based access to
a database)
FOUR KNOWLEDGE
MANAGEMENT SYSTEMS
Knowledge Capture Systems
(on-the-job training; repair-person
inputting repair
tip into wireless laptop)
F IGURE 5.4

systems include computerized collaborative PC-based group problem-solving
systems like those we discuss later in this chapter.
Knowledge capture systems help employees retrieve the knowledge that re-sides
in employees’ minds or in some documented form. Organizations have al-ways
used at least rudimentary knowledge capture systems, although usually not
by that name. When early humans sat telling stories of how to hunt, they were cap-turing
their experience and knowledge for the next generation. Today, on-the-job
training and face-to-face meetings are similar ways to let new employees capture
their predecessors’ knowledge. Companies also use technologies to support
knowledge capture.
● Managing Now: Knowledge Management at Xerox For example, Xerox
has about 23,000 repair technicians around the world fixing copiers at clients’
sites. In many cases, the repair solutions exist “only in the heads of experienced
technicians, who can solve complex problems faster and more efficiently than less
experienced ones.”31 The challenge for Xerox was to find a way to access all that
brain-based knowledge and translate it into a usable form. What could Xerox do to
give the company’s entire 23,000-person worldwide repair force access to this
knowledge?
Xerox’s solution was to create an intranet-based knowledge-capture communi-cations
system named Eureka that was linked to a corporate database. The company
encouraged repair technicians around the world to share repair tips by inputting
them into the database via Eureka. Xerox gave all technicians laptop computers to
facilitate this sharing of knowledge. Soon, more than 5,000 tips were in the database,
easily accessible by other service reps around the world.
Knowledge sharing systems help employees share knowledge. For example,
Web-based chat groups let people with common interests share knowledge with
the rest of the group. Knowledge sharing technologies include giving selected em-ployees
Web-based access to databases, where they can find the knowledge they
need. Thus, a manager at Dell can log on to the firm’s intranet and access the forms
he or she needs to appraise an employee. Accenture Consulting uses computer-ized
expertise locator systems. For example, a consultant in the United States with
a new client in the dairy-farming business might access information captured in
Accenture’s experience locator system from an Accenture consultant with a dairy
client in Ireland. The Window on Managing Now feature illustrates an IT-based
knowledge sharing system. The Practice IT feature (page 132) presents another.
Finally, knowledge application systems help employees utilize knowledge
without actually learning it themselves. Dell’s customer relationship management
systems have knowledge application systems built in. For example, a customer
with a problem calls Dell tech support, where a technician uses Dell’s knowledge
application system to follow a series of diagnostic questions.
Telecommunications and Computerized Networks
he people depicted in the photo on the cover of this book are just a few of the
tens of millions of people who rely on wireless telecommunications informa-tion
technology today. Companies use microwave transmission to get data from
Online Study Center T
one point to another. Employees use wireless transmission devices, including
BlackBerry©-type e-mail handheld devices, cellular phones, and personal digital
ACE the Test
Managing Now! LIVE

Telecommunications and Computerized Networks ■ 131
Ryder System’s Knowledge Management Center
Ryder Systems Inc. provides logistics and transportation
services worldwide. When companies in one country
need to coordinate shipments among dozens of suppliers
and customers worldwide, they turn to Ryder. Because so
much of what Ryder does involves fast-changing, state-of-the-
art methods, Ryder’s managers recognized how im-portant
knowledge management can be. As Gene Tyndall,
Ryder’s executive vice president of global solutions and
e-commerce, put it, “[P]eople, the knowledge they have
and the new knowledge they create are the corporate as-sets
that impact Ryder’s performance more than any
other form of capital.”
Ryder’s managers therefore also knew that Ryder
needed a way for all its employees to share new ideas and
to share what they knew about best practices. For Ryder,
an online knowledge management solution made the
most sense, because its employees needed a simple way
to access and share knowledge worldwide.32
To build its knowledge management system, Ryder
turned to the consulting company Accenture. Ryder
wanted its new knowledge management system to serve
several purposes: “exchanging best practices, facilitating
quick access to experts within Ryder; supplying customized
news feeds on key market information; and providing col-laborative
work areas for project teams.”33
To meet these goals, Accenture created an online
Knowledge Management Center for Ryder.The new sys-tem
is based in part on Lotus Notes. Lotus Notes is a
suite of special collaborative software.34 For example, fea-tures
from Lotus Notes that Accenture embedded in the
Knowledge Management Center include group calendar-ing
and scheduling, instant messaging (which allows Ryder
employees to see each other online and conduct chat ses-sions),
and online instant meetings in which multiple em-ployees
can meet to discuss particular issues. The new
Knowledge Management Center therefore makes it easy
for Ryder employees worldwide to collaborate and to
share knowledge.
In creating its new Knowledge Management Center,
Ryder recognized that getting employees to use it was
crucial. The implementation therefore included special
communications from the Knowledge Management Cen-ter
team to all employees describing the center’s purpose
and tools, special training, and incentives to encourage
employees to use the new system.
assistants to access their firms’ computer systems and to communicate. Personal
area networks including Bluetooth enable managers to wirelessly link their com-puters,
printers, keyboards, and computers within their homes and offices. When
traveling, they seek out Wi-Fi hotspots at airport clubs or Starbucks so they can
wirelessly access the Internet with their laptop computers.
Wireless telecommunications and computing have revolutionized customer
relationship and supply chain management. UPS has long equipped its delivery
personnel with handheld computers to instantaneously communicate pickups
and deliveries to the company’s central computer systems. Retail firms like Zara
use wireless telecommuting to send store sales data to its supply chain manage-ment
system. Wal-Mart requires that its largest vendors embed small radio fre-quency
identification tags (RFIDs). Wal-Mart and its supply chain partners use
these small transponders to keep track of each shipment wirelessly.
Digitizing data—taking data and transforming it into computer-readable
forms—enables managers to use information technology. For example, digital
imaging makes it easier to retrieve and manage knowledge. Thus, when Select
Medical Corp. instituted its new enterprise system, the firm needed a way to
process the hard-copy invoices and expense receipts that came in from the firm’s
hundreds of rehabilitation centers. Employees now fax most of the invoices and

As a huge manufacturer of construction and mining equip-ment,
Caterpillar’s managers knew they needed a way to
encourage employees to share their best ideas and to
capture what the company already had squirreled away
about best practices. Caterpillar engineers began thinking
that they wanted to capture what they called lessons
learned and thus avoid duplicated efforts. For example,
one engineer said, “[W]e found we were repeating the
same mistakes and doing the same research multiple
times from different business units.”35
Therefore, about seven years ago, Caterpillar intro-duced
its Knowledge Network, a Web-based system that
Caterpillar employees use to collaborate and share knowl-edge.
Caterpillar divided its Knowledge Network into
twelve communities. Each community focused on the
sorts of issues and challenges that might be of special in-terest
to particular subgroups of Caterpillar employees.
One community focused on the best way to bolt together
joints, thus enabling the Caterpillar employees who faced
this issue to share their best practices and making it easier
for them to institute these best practices—in this case, to
bolt together and fasten joints on heavy equipment.
expense receipts to a central computer server. There, the system automatically
transforms these hard-copy receipts into digital images and launches an e-mail-driven
invoice and expense approval process. Managers in Select’s finance depart-ment
receive these images, view them, and approve payments (or, if necessary,
return the bills unapproved with questions requesting clarification).36 In the rest of
this final section, we’ll look more closely at telecommunications and how man-agers
use it.
Telecommunications Basics
Telecommunications is the electronic transmission of data, text, graphics, voice
(audio), or image (video) over any distance.37 A telecommunications system is a
set of compatible communications devices that link geographically separated
information-processing devices38 (such as personal computers, telephones, and
video displays) for the purpose of exchanging data and information.39
As you can see in the simple system shown in Figure 5.5, several common ele-ments
exist in any telecommunications system.40 The telecommunications lines
or links are the medium through which signals are transmitted. They might be cop-per
wires, coaxial cables, optical fibers, or microwave transmission, for instance.
Terminals are input-output devices that send or receive data. Line adapters mod-ify
the signal from the terminal and computer so that it is suitable to be carried on
PRACTICE IT
Caterpillar
telecommunications: the
electronic transmission of data,
text, graphics, voice (audio), or
image (video) over any distance
telecommunications
system: a set of compatible
communications devices that
link geographically separated
information-processing devices
telecommunications lines:
links that provide the medium
through which signals are
transmitted
terminals: input-output
devices that send or receive data
line adapters: devices that
modify the signal from the
terminal and computer so that
it is suitable to be carried on a
telecommunications line
The aim of the Knowledge Network is basically to
make it easier for Caterpillar employees to share knowl-edge
and record the best way to do things. Using the
Knowledge Network, Caterpillar employees can more eas-ily
communicate and participate in chatroom-type discus-sions
and post best ideas on community bulletin boards.
Over the past few years, Caterpillar has expanded its
Knowledge Network. In August 2002, Caterpillar invited
its 7,000 independent dealers to start using the Knowl-edge
Network. Now, dealers can share best practices
with each other and with Caterpillar employees. For ex-ample,
over the years, dealers had lost access to a simple,
hands-on aptitude test that some dealers used to hire
quality repair technicians. Thanks to the new access to
Caterpillar’s Knowledge Network, a dealer posted a ques-tion
about this in the dealer service training community.
Another dealer posted a response about a quick and ef-fective
selection tool dealers could use. Caterpillar’s
Knowledge Network means employees and dealers can
now share ideas and do things much more productively
than they did before.

F IGURE 5.5
A Telecommunications System
A telecommunications system like this one is a set of compatible telecommunications devices
like lines, adapters, and computers that link geographically separated devices.
TRANSMITTER RECEIVER
Analog-to-digital conversion
0 1 1 0 1 0 1 1 0 1
modem: the most familiar
type of line adapter
telecommunications
software: the computer
program that controls input
and output activities and other
communications network
functions
Information
source
Information
user
a telecommunications line. The most familiar line adapter is called a modem.41
Finally, telecommunications software is the computer program that controls
input and output activities and other communications network functions.
How Managers Use Telecommunications
Few of a company’s information systems could function without telecommunica-tions
support. For example, apparel manufacturer and retailer Zara uses a sophis-ticated
telecommunications system. The system includes handheld PDAs, which
its store staff use to link Zara’s own inventory and manufacturing facilities with
point-of-sale processing devices at its retail stores. Detailed sales information is
transmitted directly to headquarters, where computerized decision-support sys-tems
analyze it for trends and buying patterns. Management can then make deci-sions
regarding inventories and production plans. Similarly, retailers such as
JCPenney use telecommunications to manage in-store inventories. Its buyers get
Encoding
Modulation
Multiplexing
Multiple access
Channel
(transmission
medium)
Digital-to-analog conversion
Decoding
Demodulation
Demultiplexing
Multiple access
SOURCE: Reprinted with permission from Encyclopedia Britannica, © 1999 by Encyclopedia Britannica, Inc.

instant access to sales information from the stores and can modify their purchas-ing
actions accordingly.
The list of ways in which businesses rely on telecommunications to support
information transfer and management is endless: Delta Airline’s computers auto-matically
e-mail or fax your new reservation to your home or office; radiologists
rely on telecommunications to receive digital x-rays, which they can then read
from remote locations; your college uses telecommunications to allow you to
access library information from your office or home; computer-assisted manufac-turing
systems use telecommunications to transmit information from one loca-tion
in the plant to another; and banks depend on telecommunications to make
their remote automatic teller machines operational. We will look at managerial
applications of telecommunications in this final section.
Telecommunications-Based Workgroup
Support Systems
Workgroups and work teams play important roles in just about every company.
The team might be a door-assembly team at Saturn, the sales department at a Levi
Strauss subsidiary, or a project team set up in a manufacturing plant to solve a
quality-control problem. The team’s members might all be dispersed around the
city or even around the world.
Companies use a variety of telecommunications-supported devices to facilitate
group communications and decision making. These devices range from very famil-iar
tools such as e-mail to more specialized tools like collaborative writing systems.
● Videoconferencing Videoconferencing uses telecommunications devices to
transmit video and audio among locations. Businesses without their own video-conference
equipment can use a local FedEx Kinko’s, many of which rent time on
their videoconference facilities. Big-screen videoconferencing is not always re-quired.
For example, Lotus Notes enables teams of users to videoconference using
their PCs, and the introduction of inexpensive PC-based video cameras quickly
brought videoconferencing within easy reach of just about everyone.
Videoconferencing can significantly improve communications and coordina-tion
among group members. It thereby helps a workgroup achieve its aims more
quickly than the group could otherwise. For example, we saw that the team devel-oping
the Boeing 787 made extensive use of videocon-ferencing
for meetings with engine suppliers and key
airlines regarding the new aircraft’s design.42
● Group Decision Support Systems A group
decision support system (GDSS) is an interactive
computer-based system used to facilitate the solution
of unstructured problems (such as, Should we intro-duce
this new product?) by a team of decision makers.43
The general aim of a GDSS (see Figure 5.6) is to allow a
team of decision makers to get together (sometimes in
the same room) and facilitate making a decision or
completing a task. The GDSS allows team members to
interact via their computers and to use a number of
software tools aimed at assisting them in their decision
making or project completion. Typical GDSS software
tools include electronic questionnaires, electronic
group decision support
system (GDSS): an
interactive computer-based
system used to facilitate the
solution of unstructured
problems
Videoconferencing is one IT tool that enables even
geographically disbursed teams to work together.

brainstorming tools, idea organizers (to help team members synthesize ideas gen-erated
during brainstorming), and tools for voting or setting priorities (so recom-mended
solutions can be weighted and prioritized).
Using GDSS helps a workgroup avoid a lot of the group decision-making bar-riers
that often occur in face-to-face groups. For example, there’s less likelihood
that one assertive person will control the whole meeting, since the computerized
GDSS programs govern all the brainstorming and listing of ideas—and the voting.
● Other Workgroup Support Systems Other workgroup support systems are
also available. For example, a collaborative writing system lets a workgroup’s
members create long written documents (such as proposals) while working si-multaneously
at one of a number of interconnected or networked computers. As
team members work on different sections of the proposal, each member has au-tomatic
access to the rest of the sections and can modify his or her section to be
compatible with the rest. A group scheduling system lets each group member
put his or her daily schedule into a shared database, which enables group mem-bers
to identify the most suitable times for meetings to be scheduled or to attend
currently scheduled meetings. A workflow automation system uses an e-mail-type
system to automate paperwork flow.44 For example, if a proposal requires
four signatures, it can be sent electronically from mailbox to mailbox for the
required signatures.
Figure 5.7 summarizes howa PriceWaterhouse (nowPricewaterhouseCoopers)
team won a consulting job by using groupware.45 The four Price Waterhouse exec-utives
who needed to write the proposal (which was due in three days) were in
three different states. But they were able to use their Lotus Notes Groupware to
conduct a four-way dialogue on their screens and extract key proposal compo-nents
from various Price Waterhouse databases. They could pull up résumés of the
key Price Waterhouse experts to include in the proposal and borrow passages from
similar proposals. The team met the deadline and won the contract.
Networks
For many of these applications, managers rely on telecommunications networks.
A network “is a group of interconnected computers, work stations, or computer
devices (such as printers and data storage systems).”46 Local area networks (LANs)
F IGURE 5.6
Group Decision Support
System
The Ventana Corporation’s system
demonstrates the features of
its GroupSystems for Windows
electronic meeting software,
which helps people create, share,
record, organize, and evaluate
ideas in meetings, between offices,
or around the world.
collaborative writing
system: a computerized
system that lets a workgroup’s
members create long written
documents (such as proposals)
while working simultaneously
at one of a number of
interconnected or networked
computers
group scheduling system: a
computerized system that lets
each group member put his or
her daily schedule into a shared
database, which enables group
members to identify the most
suitable times for meetings to be
scheduled or to attend currently
scheduled meetings
workflow automation
system: a computerized
system that uses an e-mail-type
process to automate paperwork
flow
network: a group of
interconnected computers, work
stations, or computer devices
(such as printers and data
storage systems)

F IGURE 5.7
Winning the Job with Groupware
Here’s how Price Waterhouse put together a proposal in four days and won a
multimillion-dollar consulting contract by using Lotus Notes software for groups.
On Thursday a Price Waterhouse executive learned that a major securities firm was out
to award a big consulting contract to help develop a complex new trading operation.
Price Waterhouse was invited to bid, but there was a hitch: The proposals were due
Monday. A Price Waterhouse competitor had been working on its own bid for weeks.
The four Price Waterhouse
executives who were needed to
write the proposal were in three
different states. But they were
able to work together using Notes,
which allowed them to conduct a
four-way dialogue on-screen. They
also extracted key components of
the proposal from various databases
on Notes. From one, they pulled
résumés of the Price Waterhouse
experts from around the world
who could be assigned to the job.
From another, they borrowed
passages from similar successful
proposals. As the draft evolved,
each of the four modified it or
made comments. Notes kept
track of the changes. Other
executives looked at the proposal
via Notes over the weekend.
Server with Databases
The proposal was ready Monday, and Price Waterhouse
won the deal. Its competitor didn’t even meet the deadline.
A year later, the client hired Price Waterhouse to audit the
new operation. That contract will probably last for years.
SOURCE: Adapted from David Kirkpatrick,“Groupware Goes Boom,” Fortune, December 27, 1993, pp. 100–101.

wide area networks (WANs), and distributed networks are three examples of man-agerial
networks.
A local area network (LAN) spans a limited distance, such as a building or
several adjacent buildings, often using the company’s own telecommunications
links, rather than common-carrier links like those provided by the local phone
company’s phone lines. At home, many people use LANs such as Bluetooth to link
together their telecommunications and computer devices.
Managers generally use LANs for one or more of the following reasons:
to distribute information and messages (including e-mail); to drive computer-controlled
manufacturing equipment; to distribute documents (such as engi-neering
drawings) from one department to another; to interconnect the LAN’s
computers with those of a public network such as the Internet; and to make
equipment sharing possible (including not just printers but disk storage file
servers, for instance).
Wide area networks (WANs) are networks that serve microcomputers over
larger geographic areas, from a few miles to around the globe. Early WANs utilized
common-carrier networks, such as the phone lines of phone companies. However,
many firms today own their own wide area networks, which are essentially private,
computerized telecommunications systems. For example, Benetton retail stores
accumulate sales data during the day and keep them on computer disks. At night,
another larger computer at corporate headquarters polls the individual retail
stores’ computers, accessing data that are then transmitted over telephone lines
back to headquarters. Here, the information is processed and a summary of sales
trends is forwarded to headquarters and individual store managers.47
Benetton’s system also relies on distributed processing. Distributed process-ing
generally uses small local computers (such as point-of-sale systems) to collect,
store, and process information, with summary reports and information sent to
headquarters as needed.48
The Internet
Of course, the most familiar telecommunications-based network for most people
is the Internet. The value of the Internet lies in its ability to connect easily and
inexpensively so many people from so many places and to instantaneously supply
information and access to business firms’ products and data.
● How Managers Use the Internet We’ll see in this book that the Internet
supports a vast array of managerial activities. Whirlpool Corporation installed a
Web-based supply chain management system. This new system can “talk” directly
to a dealer’s system for things like transmitting orders, exchanging sales data, and
submitting and paying invoices. This cuts the time and cost associated with these
transactions and greatly facilitates managing these operations. Just about every
company uses the Internet to support the transfer of the encrypted data for their
transaction-processing, MIS, decision support, and enterprise information sys-tems,
and therefore to better control their operations. Companies can, in a sense,
get a free ride on the Internet and thus use it to reduce the cost of their communi-cations.
For instance, many use Voice over Internet Protocol (VoIP) in lieu of con-ventional
telephone communications. Using groupware, the Internet makes it
easier and less expensive for companies to coordinate and supervise the work of
small teams that may, for instance, be opening new markets in isolated places. We
will discuss more examples in the following sections.
local area network (LAN):
a group of interconnected
computers, work stations, or
computer devices (such as
printers and data storage
systems) that spans a limited
distance, such as a building or
several adjacent buildings
wide area networks
(WANs): networks that serve
microcomputers over larger
geographic areas, from a few
miles to around the globe
distributed processing:
a method for handling
computerized information
that generally uses small local
computers (such as point-of-sale
systems) to collect, store,
and process information, with
summary reports and
information sent to
headquarters as needed
Managers use information
technology in the form of
computer information systems,
cell phones, PDAs, fax
machines, and networks to
support their activities.

Managing Now: Managerial Applications
of Information Technology
anagers use information technology in the form of computer information sys-tems,
cell phones, PDAs, fax machines, and networks to support a vast array of
M
their activities. Indeed, just about all the manager’s planning, organizing, leading,
and controlling activities rely on information technology today. We’ll look at hun-dreds
of specific examples in the following chapters. The following subsections
provide an illustrative overview.
Planning: Using Information Technology
for Strategic Advantage
From the day that amazon.com first went online and began pushing hundreds of
bookstores out of business, managers have known that they need to make infor-mation
technology part of their strategic, long-term plans. In fact, the most suc-cessful
companies in their industries owe their success to building their strategic
plans around information technology.
UPS is the world’s largest air and ground package distribution company, de-livering
over 3 billion parcels and documents each year in the United States and
abroad. Information technology is critical to UPS’s success. Its drivers use hand-held
computers to capture customers’ signatures along with pickup, delivery, and
time-card information and automatically transmit this information back to head-quarters
via a wireless telephone network. UPS and its customers can then moni-tor
and control the progress of its packages throughout the delivery process.
Other companies use information technology as part of their strategy to lock
in customers so they won’t switch to competitors. For example, Baxter Health Care
International, Inc., which supplies almost two-thirds of all products used by U.S.
hospitals, uses a stockless inventory and ordering system to lock in its hospital
customers. Terminals tied to Baxter’s own computers are installed in hospitals,
which can then easily place an order via direct telecommunications links. The
system generates shipping, billing, and inventory information and informs cus-tomers
via their hospital terminals what their estimated delivery dates will be.49
Baxter’s clever plan makes it much easier for hospitals to use Baxter’s products
than competitors’.
Organizing: Networking the Organization Structure
Information technology also reorganizes how businesses do things. For example,
by linking together employees in different departments and at different levels,
group decision-making support tools help “network” the organization structure at
many firms. As one New York insurance manager put it, groupware networks the
corporate hierarchy “because even non-supervisory office workers plugged into
groupware networks have information and intelligence previously available only
to their bosses.” Similarly, “networks . . . can give the rank and file new access: the
ability to join in online discussions with senior executives.”50 This reorganizes
things by changing who has authority for what.
For example, whenMary Joe Dirkes, a young insurance firmemployee, posted
a well-done memo on the network about the firm’s worker’s compensation efforts,

Managing Now: Managerial Applications of Information Technology ■ 139
top managers inNewYork immediately noticed her good work, and her responsibil-ities
were soon broadened. Her message and the network also altered the chain of
command, helping make the whole company more responsive:
She now gets requests for help from around the firm via the network. When a
client in Ohio needed someone with experience in cutting workplace injuries
in plastics factories, Dirkes clicked into a groupware database to find an
expert that could help. “Before, people would have called or sent a memo to
my boss, and then he’d assign it to me. . . . Now I do it on my own.”51
Staffing: Telecommuting
Millions of people around the world do most of their work at home and “com-mute”
to their employers electronically. Telecommuting is using telecommuni-cations
and computers from home, rather than actually commuting to the office,
to get one’s job done.
The typical telecommuter falls into one of three categories. Some are not em-ployees
at all but are independent entrepreneurs who work out of their homes—
perhaps developing new computer applications for consulting clients, for instance.
The second (and largest) group of telecommuters includes professionals and
highly skilled people who work at jobs that involve a great deal of independent
thought and action. These employees—computer programmers, regional salesper-sons,
textbook editors, or research specialists, for instance—typically work at home
most of the time, coming into the office only occasionally, perhaps for monthly
meetings.52 The third telecommuter category involves workers who carry out rela-tively
routine and easily monitored jobs such as data entry or word processing.53
When you call American Express (Amex) for travel advice, chances are your
travel counselor will not be at Amex headquarters but back home keeping one eye
on the kids.54 For a company that spends over $1 billion annually on information
technology, it is probably not surprising that many of Amex’s travel counselors
have shifted to working at home.
American Express connects its home-workers to its phone lines and data lines
for a small one-time expense of about $1,300 each, including hardware. After that,
the travel counselors easily bounce information from their homes to the nearest
reservation center and check fares and book reservations on their home PCs.
Supervisors continue to monitor agents’ calls, thus ensuring good control. Home-worker
counselors handle 26 percent more calls at home than in the office, result-ing
in about $30,000 more in annual bookings each. Working at home often means
saving three hours a day on commuting and thus translates into having more time
with the family.55
Leading: Reengineering the Company
Every business performs various processes (sets of activities) to get its work done.
Some processes are entirely embedded within some major business function such
as sales, finance, manufacturing, or human resources. For example, within manu-facturing,
one process involves checking and maintaining inventory levels.
Many other business processes are cross-functional because they include ac-tivities
in two or more departments. For example, a bank’s mortgage-approval
process typically involves activities in several departments. A loan officer writes
up the loan application, the bank’s credit department checks the prospective
borrower’s credit, the real-estate department inspects the property, and the loan-closing
department prepares the paperwork and arranges to have its attorney
telecommuting: using
telecommunications and
computers from home, rather
than actually commuting to the
office, to get one’s job done

meet with the customer to close the loan. This relay-race approach is not always
optimal. Much time may be lost passing the loan from department to department.
Customers may be lost to faster-moving rivals.
● Reengineering in Practice Managers therefore increasingly reengineer their
business processes.56 In practice, reengineering usually means reorganizing the
business processes around small teams of multifunctional specialists, who work
together using information technology (such as wireless laptops and MISs) to ac-complish
the end result. Thus, the bank might have a loan officer receive a mort-gage
application and type it into her laptop computer, where the bank’s new sys-tem
automatically checks the customer’s credit and sends the application to one
of several mortgage-processing teams. The team, working together or virtually
with wireless devices and group decision support systems, meets to reassess the
person’s credit, check the property’s value, and approve the loan in a fraction of the
time the process formerly took. Table 5.257 summarizes how some companies ap-plied
other reengineering principles.
Most reengineering projects stem from the installation by the company of
new information systems. This is because it’s usually wasteful to simply superim-pose
a new information system on the existing way of doing things. For example,
why use a new computer system to simplify the bank’s old wasteful relay-race ap-proach
to approving loans? Instead, the bank’s new, reengineered loan improve-ment
system means abolishing the former departments and reorganizing instead
around the new mortgage-approval teams. It also means getting these employees
to both use the new technology and work together amicably.
T ABLE 5.2
Selected Principles of Reengineering Applied
Reengineering Principle Company Example
Organize around
outcomes, not tasks.
Have those who use the
output of the process
perform the process.
Link parallel activities
during rather than at the
end of the process.
Treat geographically
dispersed resources as
if they are centralized.
Capture information at
the source.
Mutual Benefit Life
Hewlett-Packard (HP)
Xerox
Hewlett-Packard
Mutual Benefit Life
A case manager performs
and coordinates all
underwriting tasks centrally.
Department managers make
a note of their own purchases
using a shared database of
approved vendors.
Concurrent engineering—
let production participate in
new-product design and
engineering.
Each HP division has access
to a shared purchasing
database.
Customer-service
representatives enter
application information in a
central database.
Source: Adapted from Mary Summer, Enterprise Resource Planning, Upper Saddle River, N.J.:
Prentice Hall, © 2004, p. 24. Reprinted by permission of Pearson Education, Inc., Upper Saddle River, N.J.

Chapter Summary ■ 141
● The Behavioral Side of Reengineering Reengineering processes, as at the
bank, often succeed, but many efforts fail. Sometimes employees resist the change,
deliberately undermining the revised procedures. Often they don’t see the advan-tage
to themselves of making the change. As John Champy, a longtime reengineer-ing
proponent, has said:
[Reengineering] . . . is a matter of rearranging the quality of people’s
attachments—to their work and to each other. These are cultural matters. . . .58
What Champy means is that the manager must exercise effective leadership to
successfully implement the new technology-based reengineering process. He or
she must overcome employees’ resistance, for instance. And the manager needs
to instill in the employees the values that are consistent with working in a reengi-neering
environment. These values include:
1. To perform up to the highest measure of competence.
2. To take initiatives and risks.
3. To adapt to change.
4. To make decisions.
5. To work cooperatively as a team.
6. To be open, especially with information, knowledge, and news of forthcoming
or actual problems.59
Controlling
Information technology’s impact is particularly notable with respect to manage-rial
control. For example, Hyundai uses wireless handheld scanners to monitor
and control the 43,000 cars per year that go through one of its European import
centers.The scanners read bar codes on each car. That way, all employees, fromac-counting
to sales to the dealer, can continuously monitor each car’s whereabouts.
As another example, with offices in 36 countries, Alltech Inc. (which provides
products to the food and feed industries) needed a faster way to get information
regarding its order status and finances worldwide. Previously, auditors at each of
the company’s offices around the world manually entered data onto spreadsheets.
Then they sent the spreadsheets to Alltech’s headquarters, where accountants
compiled all this information into a master spreadsheet. Today, a Web-based soft-ware
system automatically collects financial information from standardized
financial accounting modules in each of the company’s offices around the world
and feeds this information back to headquarters. As a result, management receives
consolidated financial statements in 15 days, instead of 45.
1. Information is data presented in a form that is
meaningful to the recipient. Knowledge, on the
other hand, is information distilled via study or re-search
and augmented by judgment and experi-ence.
Good-quality information must be pertinent,
timely, and accurate and reduce uncertainty.
2. Information technology refers to any processes,
practices, and systems that facilitate the process-ing
and transportation of data and information.
The increasingly rapid development of informa-tion
technology in organizations has sped the
transformation of many businesses today into

information-based organizations. The role of in-formation
technology at work is to contribute to
the manager’s knowledge of what is happening
through analysis, interpretation, and explanation.
3. Managers at different levels in the organization
require different types of information. First-line
managers tend to focus on short-term, operational
decisions and therefore need information that fo-cuses
on operational activities. Middle managers
tend to concentrate on the intermediate range and
so require information for use in tasks such as
budget analysis, short-term forecasting, and vari-ance
analysis. Top managers make long-range
plans and, therefore, require information that will
enable them to make better strategic decisions.
4. Information systems are people, data, hardware,
and procedures that work together to retrieve,
process, store, and disseminate information to
support decision making and control. The hierar-chy
of information systems used in management
includes executive support systems, management
information and decision support systems, and
transaction-processing systems. An expert system
uses computer programs to store facts and rules
and to replicate the abilities and decisions of
human experts. Artificial intelligence may allow
computers to accomplish tasks in a manner that is
considered intelligent and is characterized by
learning and making decisions.
5. Decision support systems have five components:
data management, knowledge management, knowl-edge
engine, user interface, and the user.
6. An enterprise resource planning system is a com-panywide
integrated computer system comprised
of compatible software modules for each of the
company’s separate departments. They help man-agers
coordinate and integrate all the functions
and processes of the company.
7. Supply chain management systems help the com-pany
manage its relationship with its suppliers
and retailers. They provide information to help
suppliers, purchasing firms, distributors, and lo-gistics
companies coordinate, schedule, and con-trol
business processes related to supply chain
management. Customer relationship management
systems help the company manage all the processes
involved with interacting with customers, such as
taking orders, answering technical questions, and
sending bills.
8. Knowledge management refers to any efforts
aimed at enabling the company’s managers and
employees to better utilize the information avail-able
anywhere in their companies. There are four
basic types of knowledge management systems:
knowledge discovery systems, knowledge sharing
systems, knowledge capture systems, and knowl-edge
application systems.
9. Telecommunications is the electronic transfer of
data, text, graphics, voice, or images over any dis-tance.
Telecommunications systems connect geo-graphically
separated devices through the use of
lines or links, terminals, computers, line adapters,
and software. They have fostered the development
of numerous new computer systems applications,
such as workgroup support systems.
10. Managers use IT in many ways. For example, many
firms, such as UPS, design their plans around using
information technology and the Internet to obtain
a competitive advantage. IT and the Internet also
influence how managers organize—for instance,
by enabling employees throughout the company
to “network” and communicate.
11. Implementing technologically advanced systems
requires effective management. For example, re-engineering
usually involves reorganizing business
processes around small teams of multifunctional
specialists, who work together using information
technology to accomplish the end result. Reorga-nizations
like these typically fail if, due to ineffec-tual
leadership, employees resist using the new
equipment or simply refuse to work together
cooperatively.
12. Managers at companies such as Hyundai and
Alltech use IT to better control their operations.
For example, IT facilitates tracking product
progress and whereabouts and enables managers
at headquarters to obtain, often in real time, infor-mation
regarding the company’s finances.
1. What are the differences among data, information,
and knowledge?
2. Is the content of this book information, or is it
knowledge? Why?

Case Study ■ 143
3. What are ten examples of information technology
you use every week?
4. What knowledge management system do you use
for this course?
5. What is an enterprise system, and why would a
manager use one?
6. What telecommunications networks do you typi-cally
use?
1. Every morning at 8:30 there is a sixty-minute daily
operations review at FedEx. Fifteen to thirty repre-sentatives
of key departments like Air Operations,
Computer Systems, and Meteorology attend in
person or participate via conference call. The pur-pose
of the meeting is to see what happened last
night and to figure out what needs to be done
today to make sure that things run as smoothly as
possible. This is so important because customer
service is all FedEx offers and is the heart of their
strategy. The meeting is designed to ensure that it’s
reliable. Every weekday at 5 A.M., a recorded recap
of the night’s performance is made available by
voice mail so that participants can check in before
the meeting and review any problems they will
need to discuss and solve.
a. What concepts discussed in this chapter is
FedEx using, and how do these affect the man-agement
of its operations?
b. How would you describe the way technology
has shaped FedEx’s strategy and its thinking?
c. What other examples can you give for how
FedEx uses information technology?
2. Form teams with several other students in this
class. Your assignment is to list the knowledge
management techniques you would use for this
class, using only the knowledge management and
information technology devices you have with you
in class.
3. Form teams with several students in this class.
Choose companies you have dealt with (such as
Dell Computer), and list the instances in which you
believe you came in contact with their customer
relationship management systems.
C A S E S T U D Y
Information Technology Wins the Day for KnitMedia
KnitMedia is a company that owns several jazz
clubs, including The Knitting Factory in New York.
The company went interactive about ten years ago. The
Knitting Factory presented what was billed as “the
biggest live event the Internet has ever experienced.”
This festival, called GIG (for Global Internet Gather-ing),
presented interactive virtual live music from Lon-don,
Tokyo, Cologne, Paris, Toronto, San Francisco,
Amsterdam, and Hong Kong. The company used a
website linking multiple live musical venues so that, for
instance, Steve Lacy in Paris played and interacted
visually with a rhythm section in New York. All the Knit-
Media clubs, as they go online in the future, will be-come
part of this Internet network. Outlets for these
Internet broadcasts already include the Electronic Café
in Tokyo, the Café @ Boat Quay in Singapore, and Ams-terdam’s
Paradiso. Michael Dorf, KnitMedia’s CEO,
knows this is only the start: What he needs are more
suggestions about how he and KnitMedia can use
information technology to manage its clubs and to
bring consumers the music they want to hear.
1. How are music-related companies using informa-tion
technology today? Compile a list of informa-tion
technology applications used by KnitMedia’s
competitors.
2. If you were advising Michael Dorf, how would you
suggest he use information technology for improv-ing
the performance of KnitMedia and its various
businesses?

144
DECISION MAKING NOW
Fortis Bank
ortis Bank is the biggest financial institution in Belgium, but that
doesn’t mean it can rest on its laurels.1 The bank’s managers know
F
that to stay ahead, it’s crucial to
sign up new customers and get
current ones to add new ser-vices.
Doing so requires a
massive marketing effort. Con-sumers
are deluged by offers of
credit cards and loans from
banks. Spending tens of millions
of euros each year reaching out
to customers requires a fo-cused
approach, or the money
will be wasted. Some of the
questions the bank’s managers
face are, for example,Which
customers are most likely to
purchase this new investment
product? How will the market
react to a drop in interest
rates? Which prospects are most likely to want this new credit card?
And which client profile shows the highest risk of not being able to pay
back a loan?2 The challenge facing Fortis managers is how to get an-swers
to these questions so they can make the decisions they must
make to properly focus their marketing efforts. ■
➤ Distinguishing between programmed and nonprogrammed decisions.
➤ Listing and describing each step in the decision-making process.
➤ Explaining what is meant by competing on analytics and business intelligence.
6
CHAPTER OUTLINE
Opening Vignette: Fortis Bank
● The Basics of Decision
Making
Why Make Decisions?
Types of Decisions
Decision-Making Models: How Do
People Make Decisions?
● How to Make Decisions
Step 1: Define the Problem
Step 2: Clarify Your Objectives
Step 3: Identify Alternatives
Step 4: Analyze the Consequences
Step 5: Make a Choice
● Managing Now: Technology-
Supported Decision Making
Competing on Analytics
Analytics Tools
Managing Now: Business Intelligence
Baylor University
● How to Make Even Better
Decisions
Increase Your Knowledge
PRACTICE IT: Fortis Bank
Use Your Intuition
Don’t Overstress the Finality of
the Decision
Make Sure the Timing Is Right
Encourage Creativity
● Avoiding Psychological
Traps
Decision-Making Shortcuts
Anchoring
The Status Quo Trap
Delusions of Success
Psychological Set
Perception
Other Psychological Traps
Managers at Belgium’s Fortis Bank needed
to know more about their customers’
preferences so they could make the decisions
to properly focus their marketing efforts.

The Basics of Decision Making
The Basics of Decision Making ■ 145
veryone constantly faces the need to choose—the route to school, the job to
accept, or the business strategy to pursue. A decision is a choice from among
E
the available alternatives. Decision making is the process of developing and ana-lyzing
alternatives and making a choice.
Why Make Decisions?
Problems prompt most decisions. A problem is a discrepancy between a desirable
and an actual situation. If you need $50 for a show but can only afford $10, you
have a problem. Should you borrow money from a friend? Wait for ticket prices to
fall? However, some decisions don’t involve problems. Having two job offers to
choose from is not a problem, but it still requires a decision. The problem-solving
process (the steps one goes through to solve a problem) is the same as the process
for making decisions. Problem solving, like decision making, is the process of de-veloping
and analyzing alternatives and making a choice. Most people, therefore,
use the terms decision making and problem solving interchangeably.
The quality of a decision usually depends more on judgment than on raw IQ.
Some smart people have poor judgment. Some less brilliant people have great
judgment. Judgment refers to the cognitive, or thinking, aspects of the decision-making
process.3We’ll see in this chapter that emotions and biases often influence
one’s judgment and decisions.
Managers are always making decisions. For example, planning, organizing,
leading, and controlling are the basic management functions. However, as we
illustrate in Table 6.1, each of these functions calls for decisions—which plan to
implement, what goals to choose, which people to hire. Furthermore, managers
don’t make just planning, organizing, leading, and controlling decisions. They also
must make technical, job-related decisions. Table 6.2 illustrates this aspect of
managerial decision making. The sales manager decides which sales representa-tives
to use in each region and which advertising agency to use. The production
manager decides between alternative suppliers and whether or not to recommend
building a new plant.
Types of Decisions
Some decisions are bigger and harder to change (more strategic) than others.
Buying a house is more strategic than leasing a car. Some decisions are also more
decision: a choice made
between available alternatives
decision making: the process
of developing and analyzing
alternatives and choosing from
among them
problem: a discrepancy
between a desirable and an
actual situation
problem solving: the process
of developing and analyzing
alternatives and making a choice
➤ Reading the exercises and explaining what decision support tools you would use.
➤ Reading the chapter case and identifying what triggered the problem.
➤ Reading the chapter case and developing a consequences matrix and a decision matrix.
➤ Watching the simulation video and determining the decisions made by the manager.
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146 PART TWO CHAPTER 6 Decision Making Now
T ABLE 6.1
Everything Managers Do Involves Making Decisions
Management Function Representative Decisions
Planning What do we want to achieve?
What are our goals?
What are the main opportunities and risks we face?
What competitive strategy should we pursue?
Organizing What are the main tasks we have to accomplish?
How should we divide the work that needs to
be done?
Should I make these decisions or let subordinates
make them?
How should we make sure the work is coordinated?
Leading What leadership style should I use in this situation?
Why is this employee doing what he or she is doing?
How should I motivate this employee?
How can I get this team to perform better?
Controlling How am I going to control this activity?
Are the goals on which these controls are based out
of date?
Does this performance deviation merit corrective
action?
T ABLE 6.2
Decisions Functional Managers Make
Manager Decisions
Accounting Manager What accounting firm should we use?
Who should process our payroll?
Should we give this customer credit?
Finance Manager What bank should we use?
Should we sell bonds or stocks?
Should we buy back some of our company’s stock?
Human Resource Manager Where should we recruit for employees?
Should we set up a testing program?
Should I advise settling the equal-employment
complaint?
Production Manager Which supplier should we use?
Should we build the new plant?
Should we buy the new machine?
Sales Manager Which sales rep should we use in this region?
Should we use this advertising agency?
Should we lower prices in response to our
competitor’s doing so?

The Basics of Decision Making ■ 147
obvious than others. If your car is out of gas, you must fill the tank. The bigger,
strategic decisions usually take more thought, as we will see.
Similarly, some decisions are more routine than others. In general, managers
try not to have to make the same decision twice. The manager of a Macy’s store
does not want clerks to check with her every time customers make returns. She
wants to focus on the big decisions—for instance, on what to buy for the fall line of
clothes. Thus, managers endeavor to premake (or program) as many decisions as
they can. Employees can make these decisions more or less automatically.
● Programmed and Nonprogrammed Decisions Many (or most) manage-ment
decisions are therefore programmed. Programmed decisions (really,
programmable decisions) are decisions the manager can set up to be made in
advance. Usually, the manager creates rules or policies to help employees make
these decisions.4 Managers want to be able to focus their attention on the big de-cisions,
like how to deal with competitors. Therefore, they write policy, procedure,
and rule manuals to help employees make the routine (programmed) decisions on
their own.
In contrast, managers usually cannot make nonprogrammed decisions in
advance. Nonprogrammed (really, nonprogrammable) decisions are unique and
novel, and they often involve issues of grave importance to the company. For
example, strategic decisions (Should we expand overseas?) usually can’t be pro-grammed
(made) in advance. When the issue arises, the manager needs to analyze
the decision carefully and weigh his or her various options and pros and cons.
Decisions like these also (given their unpredictability and broad effects) tend to be
high risk. Nonprogrammed decisions tend to require intuition, creativity, and
judgment and all the information that the manager can muster. Most of the
decision-making skills in this chapter aim to improve one’s ability to make these
nonprogrammed decisions.
Some experts estimate that 90 percent of all management decisions in compa-nies
are programmed and so get made more or less automatically.5 In many state
universities, the decision concerning which students to admit is made by mathe-matically
weighing each candidate’s test scores and grades. Most firms try to pro-gram
inventory decisions, such as “reorder ten units of item A when the number of
item A in the bin drops to two.” When you swipe your credit card at a point of pur-chase,
the computerized card-acceptance decision is a programmed one. The
cashier refers the decision to a credit manager only if there’s a problem.
Managers distinguish between programmed and nonprogrammed decisions
because the manager’s time is precious. The more decisions he or she can program
or make routine, the less time he or she must devote to them. The manager’s sub-ordinates
or systems can make these decisions routinely. The principle of excep-tion,
then, is: bring only exceptions to the (routine) way things should be to the
manager’s attention.
● Tools for Making Programmed and Nonprogrammed Decisions Table 6.3
compares programmed and nonprogrammed decisions. Making programmed
decisions usually involves applying rules, for example, “you may give that person
a refund if the jacket is not damaged.” Computers are efficient at the automated
application of rules. For example, they can compute take-home pay based on tax
deductions and other such rules.
Nonprogrammed decisions generally require a very different decision-making
methodology because it’s difficult to preplan (program) how to respond to
problems that are unexpected and unique. One writer says, “[T]hese are the kinds
of decisions managers get paid to make.”6 Deciding what career to pursue, which
programmed decision: a
decision that is repetitive and
routine and can be made by
using a definite, systematic
procedure
nonprogrammed decision:
a decision that is unique and
novel

T ABLE 6.3
Comparing Programmed and Nonprogrammed Decisions
job to take, whether to move across the country, and who to marry are personal
nonprogrammed decisions. Deciding whether to buy a $1 million machine or to
expand to Asia are nonprogrammed business decisions. These decisions rely
heavily on judgment and on access to information. We will spend much of this
chapter showing you how to do a better job of making nonprogrammed decisions.
Decision-Making Models: How Do People
Make Decisions?
You own a retail store and must decide which of several trucks to buy for deliver-ies.
If you are like most people, you probably assume that you would be quite ra-tional
in deciding. For example, wouldn’t you size up all your options and their
pros and cons? Perhaps. Decision theory refers (most broadly) to the body of
knowledge concerned with understanding and predicting how people make deci-sions.
We’ll see later in his chapter that decision theory also refers more narrowly to
using quantitative methods to analyze and make decisions. We’ll focus next on two
widely known and important schools of thought (or theories of decision making)
regarding how people make decisions: the classical approach and the administra-tive
approach.
● The Classical Approach The idea that managers are totally rational when
making decisions has a long and honorable tradition in economic and manage-ment
theory. Early classical economists needed a simplified way to explain eco-nomic
phenomena, such as how demand affects prices. To come up with a work-able
theory, they accepted a number of simplifying assumptions. Specifically, they
assumed that the rational manager:
1. Had complete or “perfect” information about the situation, including the full
range of goods and services available on the market and the exact price of
each good or service.
2. Could distinguish perfectly between the problem and its symptoms.
3. Could identify all criteria and accurately weigh all the criteria according to his
or her preferences.
decision theory: the body
of knowledge concerned with
understanding and predicting
how people make decisions
Programmed Nonprogrammed
Nature of decision Recurring and predictable; Unpredictable; ambiguous
well-defined information and information; shifting decision
decision criteria criteria
Decision-making strategy Reliance on rules and computation Reliance on principles, judgment,
creative problem-solving processes
Decision-making tools Policies and rules; capital budgeting; Judgment; intuition, creativity;
computerized solutions computerized decision support
systems and modeling

How to Make Decisions ■ 149
4. Could accurately calculate and choose the alternative with the highest per-ceived
value.7
5. Could, therefore, be expected to make an optimal choice without being con-fused
by irrational thought processes.
● The Administrative Approach The assumptions listed above leave some-thing
to be desired. For example, does anyone really (even with the Internet) ever
have perfect knowledge of all the options?
Herbert Simon and his associates proposed a decision-making model they
believe better reflects reality. They agree that decision makers try to be rational.
However, they point out that such rationality is, in practice, subject to many con-straints:
“The number of alternatives [the decision maker] must explore is so
great, the information he would need to evaluate them so vast that even an ap-proximation
to objective rationality is hard to conceive. . . .”8
For example, most people probably would not check out every possible local
store before buying a plasma t.v. Experiments support this commonsense notion.
In one classic series of studies, participants were required to make decisions
based on the amount of information transmitted on a screen. Most peo-ple
quickly reached a point of information overload and began adjust-ing
in several ways. Some omitted or ignored some of the information;
others gave only approximate responses (such as “about 25” instead of
“24.6”). Based on a review of other evidence, one expert concluded,
“Even the simplest decisions, expressed in the conventional form of a
decision tree, rapidly overwhelm human cognitive capabilities.”9
Based on realities like these, Simon argues that bounded rationality
more accurately represents how managers actually make decisions.10
Bounded rationality means that a manager’s decision making is only as
rational as his or her unique values, abilities, and limited capacity for
processing information permit him or her to be.
There are two main things managers can learn from Simon’s admin-istrative
approach. One is to always remember that most people can’t
and don’t keep searching until they find the perfect solution—they don’t
optimize. Optimize means search for the perfect solution. Most people,
Simon says, satisfice; that is, they search for solutions until they find a
satisfactory one. They look for the optimal solution only in exceptional
cases.11
The second thing managers can learn from Simon is that many cog-nitive
biases and traps lie in wait for unsuspecting managers. Wise
managers thus take their own values, biases, abilities, and various other
psychological traps into account before making decisions.
How to Make Decisions
ome assume that good judgment is like a good singing voice—you have it or
you don’t. However, that’s not true. As with singing, it certainly helps to have
S
the raw material. But a conscientious effort at improving decision-making skills
can turn anyone into a better decision maker. In this section, we look at the steps
bounded rationality: the
boundaries on rational decision
making imposed by one’s values,
abilities, and limited capacity for
processing information
satisfice: to stop the decision-making
process when a
satisfactory alternative is found
rather than reviewing solutions
until the optimal alternative is
discovered
Online Study Center
ACE the Test
Managing Now! LIVE

in the decision-making process: the steps that a decision maker uses to arrive at a
decision. These steps include:
◗ Define the problem.
◗ Clarify your objectives.
◗ Identify alternatives.
◗ Analyze the consequences.
◗ Make a choice.
Step 1: Define the Problem12
Identifying or defining a problem is trickier than it may appear. People commonly
emphasize the obvious and get misled by symptoms.13 Here is a classic example.
Office workers were upset because they had to wait so long for an elevator. Tenants
were threatening to move. The owners called in a consulting team and told them
the problem was that the elevators were running too slow.
If you agree with defining the problem as “slow-moving elevators,” then the
potential solutions are all expensive. You could ask the tenants to stagger their
work hours, but that request could cause more animosity. Adding more elevators
is too expensive.
The point is that the alternatives you identify and the decisions you make re-flect
how you define the problem. What the consultants did in this case was define
the problem as “The tenants are upset because they have to wait for an elevator.”
The solution they chose was to have full-length mirrors installed by each bank of
elevators so the tenants could admire themselves while waiting! The solution was
inexpensive and satisfactory: The complaints virtually disappeared. In decision
making, framing refers to the idea that how the decision maker defines (frames)
the problem determines what the solutions will be and thus the quality of the de-cision.
Never take the statement of the problem for granted.
● How to Define the Problem The consultants’ clever solution to the eleva-tor
problem described above illustrates the first and most important step in defin-ing
problems: always ask, What triggered this problem? Luckily for the owners, the
consultants did not jump to any conclusions. They asked themselves, What trig-gered
the problem?The answer, of course, was the tenants’ complaints, complaints
triggered by frustration at having to wait. The problem then became: How do we
reduce or eliminate frustration with having to wait?
There are some useful hints to keep in mind here.14 Start by writing down your
initial assessment of the problem. Then, dissect it. Ask, What triggered this prob-lem
(as I’ve assessed it)? Why am I even thinking about solving this problem? What
is the connection between the trigger and the problem? That’s how the consultants
approached defining the problem—and how you should, too.
● Application Example Harold has had his job as marketing manager for
Universal Widgets, Inc., for about five years, and he has been happy with his job.
However, the recent widget downturn wreaked havoc with the company’s busi-ness,
and it had to cut about 10 percent of the staff. Harold’s boss gave him the bad
news: “We like the work you’ve been doing here, but we’re closing the New York
office. We want you to stay with Universal, though, so we found you a similar posi-tion
with our plant in Pittsburgh.” Harold is thrilled. He tells his parents, “I have to
framing: the notion that how
the decision maker defines the
problem determines what
the solutions will be and what
the quality of the decision
will be

move to Pittsburgh, but at least I still have a job. The problem is, where should I
live?” He immediately starts investigating housing possibilities in Pittsburgh. His
father thinks Harold may be jumping the gun. What would you do?
Harold’s father is right. Harold jumped to the conclusion that his problem
now is finding a place to live in Pittsburgh. Is that really the main decision he has
to make? Why is Harold even thinking about solving this problem? What triggered
this problem? What is the connection between the trigger and the problem? The
trigger was his boss’s comment that Universal no longer needed his services in
New York and that it was, therefore, transferring him to Pittsburgh. What’s the real
problem Harold must face here? Let us assume that the issue—and the decision
Harold really must make—is this: Should I move to Pittsburgh with Universal
Widgets? Or should I try to get the best marketing manager job I can, and if so,
where?15
Step 2: Clarify Your Objectives
Most people are looking to achieve several aims when making a decision. For ex-ample,
in choosing a location for a new plant, the manager typically wants to
achieve several objectives, such as minimize distance from the company’s cus-tomers,
get close to raw materials, and have access to a good labor supply.
● Have More Than One Objective Therefore, few managers would make a de-cision
with just a single objective in mind. (There are exceptions. The great foot-ball
coach Vince Lombardi once said, “Winning isn’t everything. It’s the only
thing.”) However, for most decisions, most people do not have the luxury of focus-ing
like a laser on one single objective. When deciding on a new laptop computer,
you may want to get the most memory, portability, and reliability you can for the
price. You’d buy the one that, on balance, best satisfied all these objectives. You’d
avoid the trap of making your decision as if minimizing price was your only aim.
● How to Clarify Objectives Your objectives should provide an explicit ex-pression
of what you really want. If you don’t have clear objectives, you will not be
able to evaluate your alternatives. For example, if Harold isn’t clear about whether
or not he wants to stay close to New York, wants at least a 10 percent raise, or wants
to stay in the widget industry, how could he possibly decide whether to stay with
Universal Widgets or leave—or which of several job offers were best? The answer
is, he could not.
How do you decide what you want the decision to accomplish for you? Here is
a useful five-step procedure:16
1. Write down all the concerns you hope to address through your decision. The
idea here is to make a comprehensive list of everything you hope to accom-plish
with your decision. Harold’s concerns include the impact of his decision
on his long-term career, enjoying what he’s doing, living close to a large urban
center, and earning more money than he earns now.
2. Convert your concerns into specific, concrete objectives. Make your objectives
measurable. Harold’s concerns translate into these objectives: getting a job
that puts him in a position to be marketing director within two years; getting a
job with a consumer products company; being within a one-hour drive of a
city with a population of at least 1 million people; and earning at least $1,200
per week.

3. Separate ends from means to establish your fundamental objectives. This step
helps you zero in on what you really want. One way to do this is to ask “why.”
Harold asks himself, “Why do I want to live within a one-hour drive of a city
with a population of at least 1 million people?” Because he wants to make sure
he can meet many other people who are his own age and because he enjoys
what he sees as big-city benefits such as museums. This helps clarify what
Harold really wants. For example, a smaller town might do if the town has the
right demographics and cultural attractions.
4. Clarify what you mean by each objective. Banish fuzzy thinking. For example,
“getting a raise” is a fuzzy objective. Harold, to his credit, wants to earn at least
$1,200 per week.
5. Test your objectives to see if they capture your interests. This is your reality
check. Harold carefully reviews his full list of final objectives to make sure they
completely capture what he wants to accomplish with his decision.
Step 3: Identify Alternatives
You must have a choice (in other words, two or more options or alternatives) if you
are going to make an effective decision. Wise managers, therefore, usually ask,
What are my options? What are my alternatives? Decision-making experts call al-ternatives
the raw material of decision making. They say that alternatives repre-sent
“the range of potential choices you’ll have for pursuing your objectives.”17
● How to Identify Alternatives There are several techniques for generating
alternatives. Be creative; start by trying to generate alternatives yourself, and then
expand your search by checking with other people, including experts. (We’ll dis-cuss
creativity below.) Also, look at each objective and ask yourself how you could
achieve each of them. For example, Harold might ask, “How could I get a position
that would lead to a marketing director’s job within two years?” One obvious alter-native
is to take a senior marketing manager’s job, a job just a notch below direc-tor.
However, remember that most managers satisfice. It’s rarely productive to
spend the time required to find the optimal solution.
● Application Example Through this process, Harold generates several feasi-ble
alternatives. He can take the Pittsburgh Universal Widget job, or he can leave
the company. If he leaves, his search for alternatives turns up four other possible
alternatives: a job with a dot-com as senior manager in New York; a marketing di-rector’s
job with Ford in Detroit; and two other marketing manager jobs, one with
a pet-food company in Newark and one with Nokia in Washington, D.C.
Step 4: Analyze the Consequences
The danger in making decisions is that you make them today, but you feel them to-morrow.
Harold decides today to stay with Universal. Then he finds out next year
that his prospects of promotion are almost nil because the company already has
two Pittsburgh marketing directors. “If only I’d thought of that,” Harold says. The
manager never wants to have to say, “If only I’d thought of that.”
Therefore, the next decision-making step is to analyze (think through) the
consequences of choosing each alternative. One expert says, “This is often the
most difficult part of the decision-making process, because this is the stage that

typically requires forecasting future events.”18 Harold needs a practical way to de-termine
what the consequences of each of his alternatives are. Only then can he
decide which option is best.
● How to Analyze the Consequences The decision maker’s job is to think
through, for each alternative, what the consequences of choosing that alternative
will be for each of the objectives.Here is a basic three-step process to use:19
1. Mentally put yourself in the future. For example, Harold imagines to himself,
here I am one year later in Pittsburgh. Can I get the director’s job? No! They al-ready
have two directors. Looking into the future is a crucial analytical skill.
2. Eliminate any clearly inferior alternatives. For example, if Harold thinks
through the consequences of each of his alternatives, it should be obvious that
his prospects for promotion to marketing director are virtually nil if he stays
with Universal Widgets. Therefore, why should he even continue considering
this alternative? He crosses it off.
3. Organize your remaining alternatives into a consequences table. A consequences
matrix (or table) lists your objectives down the left side of the page and your
alternatives along the top. In each box of the matrix, put a brief description that
shows the consequences of that alternative for that objective. This provides a
concise, bird’s-eye view of the consequences of pursuing each alternative.
● Application Example Harold started with five alternatives and four basic
objectives. Here they are in a consequences matrix, along with what he sees as
the consequences for each one:
consequences matrix: in
decision making, a grid showing
possible alternatives on a
vertical axis and one’s objectives
on a horizontal axis
Marketing director Consumer products One-hour drive from Earn at least
in two years company major city $1,200 per week
Marketing manager, Little or no NA—eliminated this NA—eliminated this NA—eliminated this
Universal Widgets, possibility—eliminated option option option
Pittsburgh this option
Senior manager, High probability—if Consumer-oriented, Yes, excellent $1,250 plus stock
dot-com,New company survives but does not really options
York City that long sell products
Marketing manager, Moderate Yes, but not as Yes $1,100 plus great
Ford,Detroit possibility—bigger interesting as selling benefits (discount
company, longer widgets. I may on new T-bird)
climb get bored.
Marketing manager, High probability— Yes, but not quite as Yes $1,200
pet foods,Newark small, growing interesting as
company with little selling widgets
marketing expertise
now
Marketing manager, Fairly high Yes—exciting Yes—exceptional $1,200
Nokia,Washington, probability— industry cultural attractions
D.C. fast-growing and demographics
company
Objective
Alternative

Step 5: Make a Choice
Your analysis is useless unless you make the right choice. Under perfect condi-tions,
making the right choice is easy. Review the consequences of each alterna-tive,
and choose the alternative that achieves your objectives. But in practice,
making a decision—even a simple one like choosing a computer—sometimes
can’t be done so rationally. Psychology and emotions can drive decisions and
make the choice more difficult.20 And not having all the facts can produce choices
that are less than optimal. In today’s unforgiving business environment, man-agers
must have the facts so they can make informed decisions.21We turn to this
topic next.
Managing Now: Technology-Supported Decision Making
everal years ago, Vermont-based Ben Jerry’s Ice Cream had a problem.
Dozens of people were suddenly calling its hotline to complain that the com-pany’s
famous Cherry Garcia ice cream didn’t have enough cherries. Ben Jerry’s
managers had to make a decision. Should they tell the plant to add more cherries?
Ignore the callers? Get more information?
As at Ben Jerry’s, decisions are no better than the information on which
they’re based. For example, how can Ben Jerry’s possibly identify the problem
without getting information from their factory and from other sources? How can
they identify alternatives or analyze the consequences of those alternatives with-out
information? They cannot, not without the right information.
Competing on Analytics
When Alan Mulally recently took over as Ford’s new CEO, newsapers referred to
him as “an engineer’s engineer”—meaning that he doesn’t make decisions based
just on gut feel; he wants to see the data. Some managers still take a laid-back, in-formal
approach to sizing up situations. However, many others, like Al Mulally,
compete based on analytics: their decisions are heavily fact-based. They want to
make informed decisions.
Author Michael Lewis wrote a best-selling book called Moneyball. It describes
how the Oakland A’s baseball team uses statistical data analysis to improve their
performance. Some baseball managers go by their gut in deciding questions like,
Who should we put up at bat if we have two outs and runners on first and third,
and we are facing a left-handed pitcher? Not the A’s. Whether scouting players or
deciding how much to raise stadium prices, the A’s, and some other teams, rely on
data analysis.22
Marriott International has a hotel program called Total Hotel Optimization.
The team running this program uses knowledge management and decision sup-port
software, and statistical analysis. Marriott can now send just the right offer-ings
to frequent customers, for instance, and price the rooms at each hotel at the
right level, given the dates and weather conditions.23 Like the A’s, Marriott Inter-national
competes based on analytics.24 Figure 6.1 shows some more examples
S

Managing Now: Technology-Supported Decision Making ■ 155
Function How Use Analytics Exemplars
Dell, Wal-Mart, Amazon
Harrah’s, Capital One, Barclay’s
Progressive, Marriott
New England Patriots, Oakland A’s,
Boston Red Sox
Honda, Intel
MCI, Verizon
Novartis, Amazon, Yahoo
of how companies use this analytical approach to make better decisions. Analy-tical
companies like Marriott have several attributes, which we discuss next.
● They Use Quantitative Modeling A quantitative model is a mathematical
representation (like Einstein’s famous Emc2) of some activity. Summarizing the
activity in mathematical terms lets the manager study the activity and perform
“what if” analyses. Capital One Bank conducts more than 30,000 analyses each
year to maximize the likelihood of signing up potential customers who are also
good credit risks. To do this, it uses decision support systems and data mining to
sift through hundreds of customer variables such as age, address, savings, net
worth, and credit history. Then they use models such as, If we send mailings to
people with these age, address, savings, net worth, and credit history traits, how
likely is it that they’ll respond to our offer for a new credit card?” Capital One Bank
F IGURE 6.1
How Companies Use Analytics
Analytics competitors make expert use of statistics and modeling to improve a wide variety of functions.
Here are some common applications:
SUPPLY CHAIN
CUSTOMER SELECTION,
LOYALTY, AND SERVICE
PRICING
HUMAN CAPITAL
PRODUCT AND SERVICE
QUALITY
FINANCIAL PERFORMANCE
RESEARCH AND
DEVELOPMENT
Simulate and optimize supply chain flows;
reduce inventory and stock-outs.
Identify customers with the greatest profit
potential; increase likelihood that they will
want the product or service offering;
retain their loyalty.
Identify the price that will maximize
yield or profit.
Select the best employees for particular tasks
or jobs, at particular compensation levels.
Detect quality problems early and minimize
them.
Better understand the drivers of financial
performance and the effects of nonfinancial
factors.
Improve quality, efficacy, and, where applicable,
safety of products and services.
Copyright © 2006 Harvard Business School Publishing Corporation. Reprinted by permission of Harvard Business Review.

does not make multimillion-dollar promotional decisions based on intuition.
They compete based on analytics.
UPS uses a similar approach. For example, its customer intelligence group
uses data mining and modeling to predict customer defections. They track vari-ables
like usage patterns and complaints.25 They know, based on their models, that
when customers’ usage patterns and complaints change in particular ways, the
customers defect to FedEx. So if UPS sees that pattern for a big customer, a UPS
salesperson contacts that customer to resolve the problem.
● They Hire and Develop Analytical People Companies like Capital One
Bank and UPS don’t hire just mathematicians and engineers, although that is part
of it. They encourage all employees to back up and defend their decisions with
facts. And they provide all their employees with the necessary technological sup-port
for obtaining the data they need and analyzing it.
● They Make Extensive Use of Technological Decision-Making Support
Analytical companies rely heavily on information technology to get the informa-tion
they need. Most have “. . . invested many millions of dollars in systems that
snatch data from every conceivable source. Enterprise resource planning, cus-tomer
relationship management, point-of-sale, and other systems ensure that no
transaction or other significant exchange occurs without leaving a mark.”26
Dell Computer spends hundreds of millions of dollars each year sending spe-cial
promotions to businesses and consumers via mail, e-mail, and other means.
How do they decide who gets what offers? They spent seven years building a data-base
that contains millions of records on the sales results by region for all the com-pany’s
print, television, and other ads. Dell then uses its computerized decision
support systems to retrieve, analyze, and draw conclusions that help it maximize
the impact of its marketing dollars.27 The Window on Managing Now feature
shows some important information technology–based analytics support tools.
Analytics Tools
SAS© offers a decision support package called SAS© Ana-lytics,
which includes several software tools, listed below.
These are the IT-based decision tools managers can use.
◗ Statistics. The statistics tool enables the manager to use
statistical analysis to analyze relationships and to pro-duce
decisions based on facts.
◗ Data and text mining. This software enables the manager
to mine or retrieve and to sift through the data in the
company’s data warehouse (where it holds the data it
collects from its day-to-day sales, billing, and other
transactions). This helps the manager identify trends
and to make predictions and better decisions.
◗ Forecasting. This software takes the data and lets the
manager predict outcomes based on historical patterns.
◗ Econometrics. This software enables the manager to
apply statistical methods to the data and trends, thus
helping him or her to better understand the trends.
◗ Quality improvement. This software enables the manager
to identify, monitor, and measure quality processes and
trends over time.
◗ Operations research. This software enables the manager
to apply mathematical techniques to analyze the data
and thus to achieve the best result.28

Managing Now: Technology-Supported Decision Making ■ 157
Managing Now: Business Intelligence
Faced with complaints from people claiming that their Cherry Garcia ice cream
lacked enough cherries, Ben Jerry’s managers didn’t jump to conclusions, for
instance, by adding more cherries to the recipe. Instead, they analyzed the
information.
Ben Jerry’s decision support software mines all the data that the company
collects every day from all its operations, from production and sales to finance and
customer service. Then its decision support systems find and retrieve the data its
managers need to make their decisions, and then analyze it.29
By using their decision support software to review (on desktop computerized
charts) the information from all their operations, Ben Jerry’s managers method-ically
eliminated possible causes. The desktop charts enabled managers to click
on particular charts (such as purchase by region) and to drill down and find the
underlying data (such as on purchases of Cherry Garcia ice cream by region). It
was not a regional problem (complaints came from all over the country). And the
factory was adding enough cherries.
What was the problem? Someone had changed the photo on the ice cream
carton so that it showed Cherry Garcia frozen yogurt by mistake. Ben Jerry’s
Cherry Garcia frozen yogurt is pinker and has more cherries than Cherry Garcia
ice cream. So consumers thought they were being shortchanged! Management
changed the photo on the box, and complaints stopped.30 Good information—
what many experts call business intelligence—helped Ben Jerry’s define the
problem and take corrective action.
● Business Intelligence Managers use the phrase business intelligence (BI) in
two ways. First, they use it more or less synonymously with the phrase decision sup-port
system (DSS) (discussed in Chapter 5) to refer to a set of software applications
and tools that transform data into a form that managers can use to make better,
faster decisions.31 Second, they use the phrase business intelligence to refer to the
information (intelligence) itself on which the manager makes his or her decision.
Thus, the business intelligence Ben Jerry’s got from its analyses helped its man-agers
to decide what to do. It used its business intelligence systems to produce that
information.
Business intelligence thus helps managers make better decisions. As a conse-quence
of doing business, companies continuously collect enormous amounts of
data from their sales, finance, customer-service, and other systems. This informa-tion
is of little use if the manager cannot access, manipulate, and analyze it. As we
explained earlier in this book, a decision support system is a set of computerized
tools that helps managers access and use information to make decisions. Ben
Jerry’s managers used the firm’s decision support system (DSS) to compile, ana-lyze,
and present all these data (from the sales and production departments, for
instance) and thus produce the business intelligence its managers needed to
make the Cherry Garcia decision.
Recall that decision support systems have five basic components:32
◗ The data management component retrieves, stores, and organizes the data.
◗ The model management system retrieves, stores, and organizes the quantitative
and statistical models that the decision support system uses to analyze the data
and make predictions.
◗ The knowledge engine does the actual reasoning for the system.
business intelligence (BI):
synonymous with decision
support system (DSS), namely, a
set of software applications and
tools that transform data into a
form that managers can use to
make better, faster decisions;
also, the information
(intelligence) itself on which the
manager makes his or her
decision

Baylor University
High school seniors shop around like never before to find
a college that best fits their needs.33 As Tom Bohannon,
Baylor’s assistant vice president of information manage-ment
and testing services, puts it, “[O]ne of Baylor’s pri-mary
challenges is managing enrollment while dealing
with factors such as the economy, over which we have no
control. . . .”34
To enable Baylor to compete in such an environment,
it uses customer relationship management, data ware-housing,
and data-mining software packages from SAS.
This enables Baylor’s administrators to retrieve and ana-lyze
student data from all the sources that touch a stu-dent,
including admissions,academic affairs,and student af-fairs.
For example, they know when each student first
makes contact, what information he or she received in the
mail, whether that student visited campus, and what his or
her major interests are. Baylor’s administrators can then
follow the students through their application and enroll-ment
process and even see when a student applies for a
Baylor University relies on information
technology to attract, enroll, and provide a
top-notch educational experience for its
students.
◗ The user interface consists of the tools (such as the keyboard and screen) that the
manager uses to interact with the system. The user interface also often includes
a computerized video dashboard. For example, Ben Jerry’s manufacturing
management dashboard might include (among other things) a bar graph show-ing
fruit ingredients used per pound of ice cream.
◗ Finally, the user is the decision maker who is actually using and controlling the
decision support system.
At Ben Jerry’s, the business intelligence effort drew on data from dozens of
the company’s information systems. For example, it tapped into the company’s
customer relationship management system to get more information on the actual
job or a scholarship.
What all this gives Baylor is the ability to mine a rich
trove of data and to get the business intelligence Baylor
needs to compete for students. For example, suppose the
question is, How should we target our mailings to
prospective students? Baylor’s information systems use
about twenty variables for predicting how Baylor should
target its initiatives. The variables include the student
prospects’ test scores; extracurricular activities; the dis-tance
they live from Baylor; whether their parents are
alumni; whether they visited the school; and whether
Baylor contacted them, or vice versa. Based on such infor-mation,
Baylor’s decision support systems use quantitative
models (equations) that can predict, based on past experi-ence,
which prospective students are most likely to enroll.
So “if a student received a high [likely to enroll] score, he
or she would receive an expensive marketing brochure
about Baylor.”35 As Bohannon says, “SAS has helped us
become more efficient in targeting and streamlining our
materials and expenses.” Even educational institutions
today compete on analytics.

How to Make Even Better Decisions ■ 159
complaints (who they’re coming from, and what the consumers were saying, for
instance). It tapped the company’s enterprise systems to see if the plant was using
too few cherries. It tapped its knowledge management system to see if there had
been similar complaints before. And it tapped its supply chain system to see if the
plant was purchasing too few cherries. Its managers could access and view all this
information on their desktop dashboards and thereby analyze it and determine
what the real problem was. The Window on Managing Now feature illustrates
business intelligence in action.
How to Make Even Better Decisions
xperts recommend various techniques to help managers improve the quality
of their decisions. We’ll discuss several of these techniques in the following
E Online Study Center
sections.
Increase Your Knowledge
“Knowledge is power,” someone once said, and that’s particularly true in making
decisions. Even the simplest decisions—like mapping the route to work each
morning—become difficult without basic information, such as the traffic report.
To increase your knowledge, ask questions, get experience, use consultants, do re-search,
and use decision support systems.
● Ask Questions Use the six main question words—Who? What? Where? When?
Why? How? In buying a used car, for instance, ask the following questions using
these question words: Who is selling the car, and who previously owned it? What
do similar cars sell for? What is wrong with this car? Where did the owner service it?
When did the owner buy it? Why does the owner want to sell? How much do you
think you could buy it for? Most people could save themselves aggravation by arm-ing
themselves with good questions.
● Get Experience Formanyendeavors, there’s no substitute for experience. For
example, many students find that interning in a job similar to the occupation they
plan to pursue can help in clarifying whether that occupation is right for them. Sim-ilarly,
multinational corporations with experience in a particular country generally
opt for ownership of foreign affiliates. Less-experienced companies tend to estab-lish
joint ventures in foreign markets, in part to develop the required expertise.36
● Use Consultants Managers use consultants’ experience (such as in person-nel
testing or strategic planning) to supplement their own lack of experience in
particular areas. Sometimes, just talking the problem over with other people can
help, particularly if they’ve had experience solving similar problems.
● Do Research Whatever the decision, there’s usually a wealth of information
you can tap. For example, are you thinking of moving employees from New York
City to Washington, D.C.? How do salaries in Washington compare with those in
New York? Websites like salary.com can answer that question easily.
● Use Decision Support Systems We saw that using data mining and other
decision support system tools is an invaluable way to get the business intelligence
a manager needs. The Practice IT feature shows how Fortis Bank did this.
ACE the Test
Managing Now! LIVE

Use Your Intuition
Several years ago, Malcolm Gladwell published a popular book named Blink: The
Power of Thinking Without Thinking. His basic point was that people tend to make
quick, snap decisions, and to do so based on intuition. Psychiatrist Sigmund
Freud made the following similar observation:
When making a decision of minor importance, I have always found it advan-tageous
to consider all the pros and cons. In vital matters, however, such as
the choice of a mate or a profession, the decision should come from the un-conscious,
from somewhere within ourselves. In the important decisions of
our personal life, we should be governed, I think, by the deep inner needs of
our nature.39
Another expert says you can usually tell when a decision fits your needs because it
brings a sense of relief. Good decisions, he says, are the best tranquilizers ever in-vented;
bad ones often increase your anxiety.40
These experts are talking about intuition. Intuition is the cognitive process
whereby a person instinctively makes a decision based on his or her accumulated
knowledge and experience. Psychologist Gary Klein tells this story to illustrate in-tuitive
decision making. A fire commander and his crew encounter a fire. The
commander leads his team into the building. Standing in the living room, they
blast water onto the smoke and flames, which appear to be consuming the
kitchen, yet the fire roars back. The fire’s persistence baffles the commander. His
men douse the kitchen fire again, but it flares up again. Suddenly, an uneasy feel-ing
grips the commander. His intuition tells him to order everyone to leave. Just as
the crew reaches the street, the living room floor caves in. The fire was in the base-ment,
not the kitchen. Had they been in the house, the men would have plunged
into an inferno.41
PRACTICE IT
Fortis Bank
Fortis Bank managers had to decide how to target the
millions of dollars of marketing programs they offered
each year. But to do so, they needed information. The
bank already had a relatively untapped customer data-base.
It included an enormous amount of data that the
bank’s transaction-processing systems collected. These
data included facts and figures on each customer such as
age, income, savings, other investments, payment pat-terns,
and whether each person responded favorably to a
particular bank offering.37
Fortis Bank decided to install a new SAS Enterprise
Miner decision-support software package. It enables
Fortis’s marketing analysts to sift through all these data,
for instance by income level, age, and credit history. It also
enabled them to identify which customers (based on age,
address, income, and so on) were historically more likely
to respond to particular offerings. That way, Fortis Bank
could create models—mathematical equations—that pre-dicted
who would best respond to an offering.They could
determine, for example, that people with a certain income
level, Zip Code, savings level, spending level, credit rating,
and so on will more likely want a gold credit card.
SAS Enterprise Miner is Web-based, so the bank’s
managers can access it wherever they are. Says the bank’s
commercial analysis manager,“SAS Enterprise Miner gave
us a greater understanding of customer motivations.We
can now fully exploit the data regarding our customers’
buying patterns and behavior.”38 The business intelligence
that Fortis Bank thereby derives enables the bank to
make fact-based decisions, to compete on analytics.
intuition: the cognitive process
whereby a person instinctively
makes a decision based on his or
her accumulated knowledge and
experience

As this story shows, we often reach intuitive decisions by quickly and unthink-ingly
comparing our present situation to situations we’ve faced in the past. In his
study of firefighters, Klein found they accumulate experiences and “subcon-sciously
categorize fires according to how they should react to them.”42 The fire
commander did this: the fire, based on his experience, just didn’t make sense. The
floor muffled the sounds of the fire and retarded the transfer of heat. The com-mander,
standing with his men in the living room, felt that something was wrong:
what he originally thought was a kitchen fire seemed too quiet and too cool. His
intuition saved them.
● Intuition’s Limitations Yet in practice, intuition can also be misleading.43
For example, studies show that people tend to take higher-than-normal risks
when they want to recover a previous loss. (The trap is called escalation of com-mitment.)
Thus, in negotiating a deal after losing out on a previous deal, one might
thus foolishly “bet the ranch” with what (they think) is simply an intuitive coun-teroffer.
In fact, the person is overcompensating for losing the previous deal.44 In-tuition
without facts and analysis can be deadly.
● Intuitive People Some people seem to be more naturally inclined to take an
intuitive approach to making decisions. Research shows that systematic decision
makers (systematics) take a more logical, step-by-step approach.45 At the other ex-treme,
intuitive decision makers (intuitives) use a more trial-and-error approach.
They disregard much of the information available and bounce from one alterna-tive
to another to get a feel for which seems to work best.
One study compared systematics with intuitives. The former systematically
searched for information and thoroughly evaluated all alternatives. The latter
sought information nonsystematically, and then quickly evaluated just a few fa-vored
alternatives. The intuitive approach was usually best.46 The lesson seems to
be that plodding through all the options may be fine if time permits. However, it’s
sometimes best to follow your instincts.47We can measure intuitiveness. The short
test in Figure 6.2 provides an approximate reading on whether you are more sys-tematic
or more intuitive in your decision making.48
Don’t Overstress the Finality
of the Decision
In making a decision, remember that few decisions are
forever. Some strategic decisions are hard to reverse.
When Ford decided in 2006 to close several plants and
to mortgage several others, it was a decision it would
have to live with for many years. However, the man-ager
can modify most decisions, even bad ones, with
time. The manager should not become frozen with an
unrealistic fear that a decision can’t be changed or
modified.49
Make Sure the Timing Is Right
“Timing is everything,” someone once said, and the
same applies to making decisions. With most people,
their moods or the pressure they’re under affects their
Ford decided to close several plants and mortgage several
others.

WHAT IS MY ORIENTATION?
You can get a rough idea of your relative preferences for the rational and intuitive ways of
dealing with situations by rating yourself on four items. For each statement, rank yourself
on a six-point scale—from 1 (never), to 2 (once in a while), 3 (sometimes), 4 (quite often),
5 (frequently but not always), or 6 (always)—and place your response in the box to the
right of the item:
1. When I have a special job to do, I like to organize it carefully from the start.
2. I feel that a prescribed, step-by-step method is best for solving problems.
3. I prefer people who are imaginative to those who are not.
4. I look at a problem as a whole, approaching it from all sides.
Now add the values for the first two items for one total and for the last two items for
another total. Subtract the second total from the first. If your total has a positive value,
your preference is Rational by that amount, and if your total has a negative value, your
preference is Intuitive by that amount. Ten represents the maximum possible rational
or intuitive score from the equally preferred midpoint (0). Mark your position on the
range of possible scores:
Intuitive Rational
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
These items are taken from a 30-item Personal Style Inventory (PSI) assessment of
preferences for Rational and Intuitive behavior created by William Taggart.
decisions. Researchers know that when people feel down, their actions tend to be
aggressive and destructive. Similarly, people tend to be lenient when they’re in
good spirits and tough when they are grouchy.
The manager therefore has to do a quick reality check prior to making a deci-sion.
Avoid regrettable decisions when moods are extreme, or when you are under
duress.
● Application Exercise: Harold’s Choice So which alternative should Harold
choose? He started by doing some research. He learns that there are two marketing
directors at the Pittsburgh plant. Because the prospects of a promotion are virtu-ally
nil, he discards that option. That leaves four options—the dot-com in New
York, Ford in Detroit, the pet food producer in Newark, and Nokia in D.C.
He reviews his consequences matrix. For three of the jobs—the dot-com, Ford,
and the pet food producer—his research and intuition suggest that they may lack
the direct interaction with consumers and consumer products that he prefers.
Promotion to senior director would probably take him more than two years at
Ford, which is suffering some reversals. He asks himself where he’ll be six months
from now if he takes the dot-com job and is dissuaded by the high failure rate of
dot-coms. Six months from now, he might be out of a job!
He puts together a decision matrix (shown in Figure 6.3) to summarize all this
information. In it, he rates each job on how well it fulfills each of his objectives.
First, he weights the importance to him of each of his objectives: 0.50, 0.20, 0.15,
F IGURE 6.2
Are You More Rational or
More Intuitive?
SOURCE: Adapted and reproduced by
permission of the publisher, Psychological
Assessment Resources, Inc., Odessa, FL
33556, from The Personal Style Inventory by
William Taggart and Barbara Hausladen.
Copyright 1991, 1993 by PAR, Inc.

2
(2 x 0.50 = 1)*
2
(2 x 0.50 = 1)
5
(5 x 0.50 = 2.5)
and 0.15—they should add up to 1.0. Then he rates (from 5—high to 1—low) the
extent to which each job fulfills each of his objectives. Looking over this matrix,
Harold sees that the pet-food and Nokia jobs look like the best bets. The pet-food
job is a possibility. In terms of senior director, it’s a good career move. However,
he’s a little less enthusiastic about the pet-food business, although it scores close
to the Nokia position. Harold has a good feeling about the Nokia job. It satisfies his
objectives, and his research suggests that living costs are comparable to New York.
He’s excited about the cell-phone business. Looking down the road, he sees this in-dustry’s
fast growth opening many new options for him. He can see himself living
in Washington, D.C. He takes the job.
Encourage Creativity
To make good decisions, the manager needs to be creative—for instance, in how
he or she defines the problem and generates alternatives. Creativity is the process
of developing original, novel responses to a problem. It is an integral part of
Marketing
Director
in Two
Years
Consumer
Products
Company
One-Hour
Drive from
Major City
Earn at least
$1,200 per
Week
Sum
0.50
*Shows the job’s rating (in this case 2) multiplied by the objective’s importance weight (in this case 0.50).
4
(4 x 0.50 = 2)
0.20
2
(2 x 0.20 = .4)
3
(3 x 0.20 = .6)
3
(3 x 0.20 = .6)
5
(5 x 0.20 = 1)
0.15
5
(5 x 0.15 = .75)
5
(5 x 0.15 = .75)
5
(5 x 0.15 = .75)
5
(5 x 0.15 = .75)
0.15
4
(4 x 0.15 = .6)
3
(3 x 0.15 = .45)
4
(4 x 0.15 = .6)
4
(4 x 0.15 = .6)
1.00
2.75
(1 + .4 + .75 + .6)
2.80
(1 + .6 + .75 + .45)
4.45
(2.5 + .6 + .75 + .6)
4.35
(2 + 1 + .75 + .6)
Harold’s
Objectives
How Harold
Rates Relative
Importance of
Each Objective
How Harold Rates
Senior Manager
DOTCOM • NY
on Satisfying
This Objective
How Harold Rates
Marketing Manager
FORD • DETROIT
on Satisfying
This Objective
How Harold Rates
Marketing Manager
NOKIA • WASH., D.C.
on Satisfying
This Objective
How Harold Rates
Senior Marketing
Manager PET-FOOD
PRODUCER • NEWARK
on Satisfying This
Objective
F IGURE 6.3
Harold’s Decision Matrix
creativity: the process of
developing original, novel
responses to a problem

making good decisions. We discuss techniques for being more creative in the fol-lowing
sections.
● Create a Culture of Creativity A major airline reportedly spent hundreds
of thousands of dollars training its employees to be creative, but the money was
largely wasted. After spending several days learning how to be creative, the em-ployees
returned to their cubicles, where a bureaucratic environment discouraged
them from recommending risky, innovative solutions:
This was an organization dogged by rules and regulations. What the airline had
not realized was that while you can increase the level of creativity by training,
the more important element is making sure that the corporate environment
allows people to exercise what they’ve learned.50
Management has to be proactive about creating an environment in which
creativity can flourish. Recognize (and, if appropriate, reward) innovative ideas.
Tolerate failure. If you punish employees for mistakes, they’ll tend to avoid
creative decisions because creativity involves risk.
● Encourage Brainstorming Meetings called to discuss problems often turn
out to be useless. The participants come to the meeting willing and even enthusi-astic
to define a problem and to provide solutions to it. However, if a participant’s
suggestion is immediately met with comments like, “That’s ridiculous” or “That’s
impossible,” people are unlikely to make innovative suggestions.
Brainstorming is a technique aimed at banishing this problem. It means re-quiring
that all participants withhold any criticism and comments until all sug-gested
alternatives are on the table. One important point here is that people
should feel comfortable about making suggestions even if the suggestions seem
strange. We saw that group decision-making software can facilitate electronic
brainstorming. It enables decision makers to meet in a virtual environment and to
type in suggestions and take positions anonymously. The system’s computerized
decision-making procedure limits premature evaluations of suggestions.
● Suspend Judgment For example, people tend to approach situations by
comparing them to similar experiences they’ve faced in the past.That can constrain
their creativity. “Unfortunately, . . . [no] two situations
are identical.Many decision makers spot the similarities
between situations very quickly but . . . ignore critical
differences.”51 Particularly if time permits, some ex-perts
suggest suspending judgment. Think through the
similarities and differences of the present and former
situations before jumping to conclusions.
● Get More Points of View When it comes to cre-ativity,
more points of view are usually better than
fewer, and diverse points of view are better than homo-geneous
ones.
● Provide Physical Support for Creativity The
AOL facility in Dulles, Virginia, has a creativity room
with leopard-print walls, oversize cartoon murals, and
giant paint cans that appear to spill over. The room’s
creator felt a standard conference room was not casual
brainstorming: a creativity-stimulating
technique in which
prior judgments and criticisms
are specifically forbidden from
being expressed in order to
encourage the free flow of ideas
AOL headquarters in Dulles,Virginia.

Avoiding Psychological Traps ■ 165
enough. Similarly, provide plenty of bulletin boards and whiteboards to accom-modate
the decision-making and creativity process.
● Encourage Anonymous Input Even in the most supportive environment,
some employees may be too introverted to participate fully. Allowing for anony-mous
and/or written input can help encourage such people to participate more.52
Avoiding Psychological Traps
s one researcher puts it, “[W]hen we make decisions, we’re not always in
charge. We can be too impulsive or too deliberate for our own good; one
A
moment we let our emotions get the better of us, and the next we’re paralyzed by
uncertainty.”53 Let’s look at some of the psychological traps that can inhibit good
decision making.
Decision-Making Shortcuts
People making decisions tend to take shortcuts. They do this by using heuristics,
which are decision-making shortcuts or rules of thumb. For example, mortgage
lenders typically abide by the heuristic that “people shouldn’t spend more than
28% of their gross monthly income on mortgage payments and other house-related
expenses.”54
Based on 150 interviews with decision makers, one researcher concluded,
“Relatively few decisions are made using analytical processes such as generating a
variety of options and contrasting their strengths and weaknesses.”55 Instead,
most people tend to use cognitive shortcuts, such as rules governing what to do in
new situations that are similar to those addressed in the past. Doing so can trap
the unsuspecting decision maker when the situation is different.
Anchoring
Anchoring means unconsciously giving too much weight to the first information
you hear. It can cause you to define the problem incorrectly.
Assume that you’re selling your car, which you know is worth about $10,000.
Joe has responded to your classified ad; when he arrives, he offhandedly remarks
that the car is worth only about $5,000. What would you do? On the one hand, you
know that $5,000 is ridiculous. On the other hand, Joe is the only game in town
(one other person called but never showed up). So you start bargaining with Joe.
He says $5,000; you say $10,000. Before you know it, you’ve arrived at a price of
$8,000 (for your $10,000 car).
What happened? You just got anchored (to put it mildly). Without realizing it,
you gave disproportionate weight to Joe’s comment about $5,000, and your deci-sion
making (and bargaining) from then on revolved around his price, not yours.
What should you have done? One response might have been: “Five thousand dol-lars?
Are you kidding? That’s not even in the ballpark!” At least that might have
loosened that subliminal anchor so the bargaining could take place on your terms,
not his. When negotiating, “think through your position before any negotiation be-gins
in order to avoid being anchored by the other party’s initial proposal. At the
same time, look for opportunities to use anchors to your own advantage. . . .”56
Online Study Center
ACE the Test
Managing Now! LIVE
heuristics: rules of thumb or
approximations applied as
shortcuts to decision making
anchoring: unconsciously
giving disproportionate weight
to the first information you hear

The Status Quo Trap
Decision makers tend to be biased toward alternatives that perpetuate the status
quo.57Why? Because making a decision that requires a change is fraught with risks.
As three experts put it, “[B]reaking from the status quo means taking action, and
when we take action, we take responsibility, opening ourselves to criticism and to
regret.”58 Years ago, this tendency to stick with the status quo was immortalized in
the phrase, “Nobody ever got fired for buying IBM,” which came to stand for deci-sions
whose chief rationale was safety.59
Managers can take steps to avoid the status quo trap. Don’t think of the status
quo as the only alternative; instead, force yourself to consider the other options.
Don’t exaggerate the cost of switching from the status quo. Always keep your ob-jectives
in mind, and make sure that they’re really best served by the status quo.60
Delusions of Success
A rising executive with a Fortune 100 manufacturing company led his firm into a
disastrous expansion in Asia, in the face of negative evidence. He first discussed
the opportunity with his executive staff and consultants; this rational analysis in-dicated
that it was a very risky venture. The market data looked barely favorable,
and the political and cultural factors were huge unknowns; yet the executive blun-dered
ahead. His overconfidence led him to assume that his associates really
shared his view but that they were being overcautious.61 He went ahead with his
expansion, a decision that proved disastrous.
Overoptimism misleads many decision makers. They have “delusions of suc-cess.”
62 Overoptimism is something of a built-in trait. Studies show that most peo-ple
overestimate their own talents. For example, in performance appraisals, about
half of all appraisees tend to place themselves in the top 10 percent, and almost all
the rest place themselves above the median. Another study asked students to rate
themselves on leadership ability; 70 percent said that they were above average.
Similarly, people “tend to exaggerate the degree of control we have, discounting
the role of luck.”63
Optimism is laudable, but managers need to guard against uninformed over-confidence.
Successful managers compete on analytics. They use business intelli-gence
to make fact-based decisions.
Psychological Set
Failing to think out of the box is another decision-making trap. The technical term
for this is psychological set, which means the tendency to look at things with a
rigid point of view when solving a problem.64 Doing so can severely limit a
manager’s ability to create alternative solutions. Figure 6.4 presents a classic ex-ample.
Your assignment is to connect all nine dots with no more than four lines
running through them, and to do so without lifting your pen from the paper.
Hint: Don’t take a rigid point of view.
To avoid this trap, always question your assumptions. Look again at the prob-lem
of the nine dots in Figure 6.4. Your instructions were to connect all nine dots
with no more than four lines running through them, and to do so without lifting
your pen from the paper. How would you do it? Start by checking your assumptions.
Most people view the nine dots as a square—they’re victims of psychological
set. Viewing them as a square limits your solutions. There is no way to connect all the
dots as long as you assume the dots represent a square. Figure 6.5 shows one solu-tion.
The key was checking your assumptions. Now solve the problem in Figure 6.6.
psychological set: the
tendency to look at things with a
rigid point of view when solving
a problem
F IGURE 6.4
Looking at the Problem in
Just One Way
SOURCE: Problem originally appeared in Sam
Loyd’s 1914 Cyclopedia of Puzzles.

Avoiding Psychological Traps ■ 167
F IGURE 6.6
Using Creativity to Find
a Solution
How many squares are in the
box? Count again. Only sixteen?
Take away your preconception of
how many squares there are.
Now, how many do you find? You
should find thirty!
Loyd’s Cyclopedia of Puzzles.
The psychological-set trap helps explain why many decisions go bad. For ex-ample,
the owners of the building whose tenants complained about the slow ele-vators
were victims of psychological set. They could see the problem in only one
way, and they did not question their assumptions. Luckily, the consultants didn’t
fall into the same trap.
Perception
The fact that we don’t always see things as they really are is another psychological
trap. Perception is the selection and interpretation of information we receive
through our senses, and the meaning we give to the information. Many things, in-cluding
our individual needs, influence how we perceive stimuli. Selective per-ception
means choosing, often without thinking about it, the information we’re
going to see or focus on. Experiences involving selective perception happen every
day. You might be less happy with a B in a course after finding out that your friend,
who had about the same test grades, got an A.65 Similarly, in organizations, prior
experiences influence how a person perceives a problem and reacts to it.
A classic study illustrates this point. Researchers asked twenty-three execu-tives,
all employed by a large manufacturing firm, to read a business case.66 Re-searchers
found that a manager’s position influenced how he or she defined “the
most important problem facing the company.” Of six sales executives, five thought
the most important problem was a sales problem. Four out of five production ex-ecutives,
but only one sales executive and no accounting executives, mentioned
organization problems. The managers looked at the same case, but they drew very
different conclusions. Each would probably have taken action based on his or her
singular view of the problem.
Selective perception pops up when decision makers selectively ignore critical
information. In another study, the researchers told the participants to watch a
videotape of two teams passing basketballs and to count the number of times each
team passed the ball. The participants concentrated so hard on watching the bas-ketballs
that only 21 percent of them noticed a woman walking among the team
members with an open umbrella.67 This finding may seem incredible, but it is not.
F IGURE 6.5
The Advantage of Not
Looking at the Problem in
Just One Way
Loyd’s 1914 Cyclopedia of Puzzles.
perception: the unique way
in which each person defines
stimuli, depending on the
influence of past experiences
and the person’s present needs
and personality
selective perception:
choosing, often without thinking
about it, the information we’re
going to see or focus on

Most people, when concentrating on a particular issue, can be blind to even the
most obvious information. The solution is to work strenuously to step back and
view the bigger picture.
Other Psychological Traps
Numerous other traps lie in wait for unsuspecting decision makers. Psychologist
Irving Janis described the phenomenon of groupthink: here, people deeply en-gaged
in a problem let their desire to go along and reach consensus stifle open de-bate
and full consideration of all the issues. The classic example here is when
Attorney General Robert Kennedy told one detractor (of the group decision to attack
Cuba at the Bay of Pigs), “You may be right and you may be wrong, but President
Kennedy hasmadehis decision, so keep your opinions to yourself.”68The risky shift
trap further complicates such a situation. Basically, the risky shift phenomenon
refers to the fact that groups tend to make riskier decisions than would their indi-vidual
members. Escalation of commitment can then further aggravate an already
bad decision. Escalation of commitment occurs when a person or group in-creases
its investment in a decision in the face of negative feedback. In business,
for instance, there’s a tendency to throw more money at a losing project to make it
profitable, although it seems obvious that the original plan was flawed.
groupthink: the psychological
trap in which people deeply
engaged in a problem let their
desire to go along and reach
consensus stifle open debate
and full consideration of all
the issues
risky shift phenomenon:
the notion that groups tend to
make riskier decisions than
would their individual members
escalation of commitment:
an increase in the investment
that a person or group has in a
decision when faced with
negative feedback
1. A decision is a choice from among available alter-natives.
Decision making is the process of develop-ing
and analyzing alternatives and making a choice.
2. Decisions can be either programmed (repetitive
and routine) or nonprogrammed (unique and
novel). Nonprogrammed decisions require more
intuition and judgment of decision makers.
3. Rational decision making assumes ideal condi-tions,
such as an accurate definition of the prob-lem
and complete knowledge about all relevant al-ternatives
and their values. In contrast, decision
making in reality is bounded by differences in
managers’ ability to process information, man-agers’
reliance on heuristics or shortcuts, anchor-ing,
escalation, psychological set, and factors in
the organization itself.
4. Defining the problem is crucial. Start by writing
down your initial assessment of the problem. Then
dissect it. Ask yourself, What triggered this problem
(as I’ve assessed it)? Why am I even thinking about
solving this problem? What is the connection be-tween
the trigger and the problem?
5. The consequences matrix compares alternatives
with objectives. The objectives matrix ranks each
alternative’s chance of achieving each objective.
6. Although some managers still take an informal,
seat-of-the pants approach to getting the facts and
information they need, many others now compete
based on analytics. In other words, their decisions
are heavily fact- and information-based. They do
extensive analyses. They want to ensure their big
decisions are well informed.
7. Business intelligence (BI) refers to a set of
processes (specifically, usually, a set of software ap-plications
and technologies) that transform data
into a form that managers can use to make better,
faster decisions.69 The phrase business intelligence
also refers to the actual information these processes
produce and on which the manager then bases his
or her decision.
8. Suggestions for making better decisions include
increase your knowledge, use creativity, use intu-ition,
don’t overstress finality, and make sure the
timing is right.
9. Psychological traps include decision-making short-cuts,
anchoring, status quo traps, psychological
set, perception, and ignoring information.

1. List four programmed decisions and four nonpro-grammed
decisions you typically make.
2. For managers, what are some of the practical im-plications
of Simon’s administrative theory?
3. What are the five steps in the decision process?
4. Give one original example of why it is important to
define the problem correctly.
5. Explain how you would use a consequences matrix
to make a better decision.
6. Give an example of how you have used intuition to
make a decision.
7. Explain what you would do to increase the creativ-ity
in a workgroup.
8. Give an example of how you use a business-intelligence
approach when buying a computer,
car, or home.
1. Most colleges and universities have grievance pro-cedures
to address inappropriate behavior by both
students and faculty. Working as a team, obtain the
student and/or faculty grievance procedures for
your college or university, and answer the follow-ing
questions: What provision (if any) does the pro-cedure
have for allowing the parties to define the
student’s or faculty member’s problem? Assume
that a student has accused a faculty member of giv-ing
him or her a lower grade than deserved, based
on the grading policies laid out in the course
syllabus. Propose at least five objectives for the
committee that must decide who is right and who
is wrong.
2. Working in teams of three to four, choose an article
from a recent newspaper about some decision a
company or government executive recently made.
If the decision is working out well, why do you
think that is so, based on what we discussed about
decision making in this chapter? If it turned out to
be a bad decision, what errors do you think the ex-ecutive
made?
3. In November 2004, retailers were surprised to hear
that Kmart was buying Sears. In fact, that was only
the latest in a series of events that actually began
about three years earlier.
It began with one decision. Charles Conaway,
then Kmart’s new CEO, decided to save Kmart by
beating Wal-Mart at its own low-cost game. For
years, Kmart had attracted customers with circulars
in weekly magazines. Conaway’s research showed
that the circulars accounted for over 10 percent of
Kmart’s operating expenses (compared with about
2 percent at Target and 1 percent at Wal-Mart).70
He believed Kmart had to reduce that expense.
Conaway and his team thus decided to change
their marketing approach. They abolished the cir-culars,
slashed prices on about 40,000 products,
and started advertising that “Kmart’s prices are
lower than Wal-Mart’s.” Given Wal-Mart’s size,
those were gutsy decisions.
They were also disastrous. Wal-Mart’s day-to-day
operating costs were way below Kmart’s, so
Wal-Mart simply dropped its ownprices evenmore.
Conaway’s decisions left Kmart with higher prices
and no circulars. Customers stopped showing up.
“We made a mistake by cutting too much advertis-ing
too fast,” is how Conaway put it. In December
2001—typically a retailer’s busiest month—Kmart’s
sales fell 1 percent, whileWal-Mart’s rose 8 percent.
One month later, Kmart sought bankruptcy protec-tion.
Conaway’s last big decision was to close 284
stores and fire 22,000 Kmart employees. In March
2002, Conaway left the firm. Investment banker
Edward Lampert gained control of Kmart when it
emerged from bankruptcy in May 2003. In March
2004, Kmart posted its first profitable quarter in
three years. Lampert then went on to merge Sears
into Kmart. The whole chain of events started, in a
way, with Conaway’s circulars decision.
Working in teams of three or four students, an-swer
this question: Based on what we discussed in
this chapter, where did Conaway go wrong? What
would you have done differently?

C A S E S T U D Y
Which Routes to Fly?
As an experienced airline executive, JetBlue CEO
David Neeleman knows the most important deci-sions
he has to make concern the routes JetBlue will fly.
The right decision will maximize ridership and mini-mize
competitive retaliation by offering low-cost
flights that competitors aren’t now providing. The
wrong decision will force Neeleman’s fledgling airline
to confront fast and sure competitive retaliation, in
which case, JetBlue could be out of business before it
really takes off.
The first and biggest route decision probably re-volved
around whether to choose New York’s JFK Air-port
as JetBlue’s first major gateway.71 JFK Airport was
once the headquarters for several U.S. airlines, but
most moved on to other cities and airports where costs
were lower and space was easier to come by. From
JetBlue’s point of view, JFK had several advantages. It is
in the middle of one of the ten busiest air-passenger
markets in the United States. New York’s political lead-ers
badly wanted a low-cost airline for their state that
would help reduce the cost of flying from the New York
City area to upper New York State. And while JFK did
have heavy delays, it actually was less busy than New
York’s other major airport, LaGuardia, for the time slots
JetBlue was looking at.
Several years ago, Neeleman and his team were con-sidering
other airport alternatives. At Boston’s Logan Air-port,
for instance, Neeleman says, “No one would give us
gates.” In other words, there was so much competition
from American Airlines and US Airways that JetBlue
couldn’t get the gates it needed, even though, according
to Neeleman, the gates at Logan were underutilized.
In terms of what he looks for in choosing routes,
Neeleman says that one thing his company must watch
out for is spreading itself too thin. Spreading his flights
among too many destinations runs the risk of lowering
the utilization rate of each plane—there would be too
much downtime, without enough passengers on each
route. As he says, “I just want passengers on the
planes.” Thus, the basic idea is to go into a few major
gateways, like JFK, and to use the traffic and population
base around these gateways to fly into smaller cities
that are not adequately served by low-cost airlines. For
example, he wants to fly passengers from JFK to Buffalo,
New York, and Fort Lauderdale (instead of Miami). The
question is, Where should JetBlue fly next?
Getting the slots (the permissions to fly in and out at
specific times) at a busy airport like JFK is not easy.
Neeleman set up a lobbying operation in Washington,
D.C., to help convince NewYork’s congressional delega-tion
that New York cities like Buffalo, Syracuse, and
Rochester needed JetBlue’s low-cost alternative flights
from New York City. In turn, New York congressional
members will have to work on convincing the Depart-ment
of Transportation that the needs of New Yorkers
(and JetBlue) are important enough to put JetBlue’s in-terest
ahead of those of major airlines like American and
USAir.
Getting the slots doesn’t mean JetBlue is home
free. For example, it was able to obtain numerous ar-rival
and departure slots at California’s Long Beach air-port.
However, those slots came with the condition that
they must all be utilized within several years. American
Airlines is already battling to take over some of those
slots; it is lowering prices to Long Beach and increasing
incentives (such as adding more frequent-flier miles
for those who fly there from JFK).
In addition, Neeleman was considering taking
JetBlue abroad—for instance, to Canada and Mexico.
Assume you are a consultant to Mr. Neeleman, who is
depending on your management expertise to navigate
the launch and management of JetBlue. He wants you
to complete the following tasks:
1. Accurately spell out what triggered the route-decision
problems stated in the case.
2. List at least four ways that Neeleman can identify
where JetBlue should fly next and then choose the
best alternative.
3. Propose at least five objectives for Neeleman, who
must make the decision regarding routes and
gateways.
4. Propose at least four alternatives to solve the situa-tion.
Develop a consequences matrix for the
situation.
5. Develop a decision matrix for the situation.
Note: In May 2007, apparently facing intense pressure from
investors and his board stemming from JetBlue’s managing of
the February 2007 storms that grounded its planes, David
Neeleman relinquished the CEO position to his No. 2, Dave
Barger. Neeleman remains JetBlue’s chairman, however.

Chapter 6 Appendix ■ 171
CHAPTER 6 APPENDIX
Quantitative Decision-Making Aids
anagers use quantitative analysis to make better decisions. For example, we
saw that Fortis Bank’s managers use quantitative modeling to express, in an
M
equation, some situation, such as identifying the customers most likely to accept
a new gold credit card according to demographic traits like age, address, and so
forth. Managers also use quantitative analysis on a more frequent basis. This ap-pendix
describes several of the more popular quantitative decision-making aids.
Breakeven Analysis
In financial analysis, the breakeven point is that volume of sales at which revenues
just equals expenses, and you have neither a profit nor a loss. Breakeven analysis
is a decision-making aid that enables a manager to determine whether a particu-lar
volume of sales will result in losses or profits.72
● Breakeven Charts Breakeven analysis makes use of four basic concepts:
fixed costs, variable costs, revenues, and profits. Fixed costs (such as for the plant
and machinery) are costs that basically do not change with changes in production.
In other words, you might use the same machine to produce 10 units, 50 units, or
200 units of a product. Variable costs (such as for raw material) rise in proportion
to volume. Revenue is the total income received from sales of the product. For
example, if you sell fifty dolls at $8 each, then your revenue is $8 50, or $400.
Profit is the money you have left after subtracting fixed and variable costs from
revenue.
A breakeven chart, like the one shown in Figure A6.1, is a graph that shows
whether a particular volume of sales will result in profits or losses. The fixed costs
breakeven analysis: a
financial analysis decision-making
aid that enables a
manager to determine whether a
particular volume of sales will
result in losses or profits
0 1,000
$5,000
$4,000
$3,000
$2,000
$1,000
0
Profits
2,000 3,000 4,000 5,000 6,000 7,000
R E V E N U E S O R C O S T S , I N D O L L A R S
Number of Units Produced or Sold
Variable Costs
Breakeven Point
Total Revenues
Total Costs
Fixed Costs
Losses
F IGURE A6.1
A Breakeven Chart
The breakeven point is the
number of units sold at which
total revenues just equals total
costs.

line is horizontal. Variable costs, however, increase in proportion to output and are
shown as an upward sloping line. The total costs line is then equal to variable costs
plus fixed costs at each level of output. The breakeven point is the point at which
the total revenue line crosses the total costs line. Beyond this point (note the
shaded area in Figure A6.1), total revenue exceeds total costs. In this example, an
output of about 4,000 units is the breakeven point. Above this point, the company
can expect to earn a profit. If sales are fewer than 4,000 units, the company can
expect a loss.
● Breakeven Formula The breakeven chart provides a picture of the relation-ship
between sales volume and profits. However, a chart is not required for deter-mining
breakeven points. Instead, you can use the following formula:
P(X ) F V(X )
where
F fixed costs
V variable costs per unit
X volume of output (in units)
P price per unit
We can rearrange this formula and calculate the breakeven point with F(PV). In
other words, the breakeven point is the volume of sales where total costs just
equals total revenues. If, for example, you have a product in which
F fixed costs $1,000.00
V variable costs per unit $.75
P price per unit $1.00 per unit
then the breakeven point is $1,000($1.00 $.75) 4,000 units.
Linear Programming
Breakeven analysis is only one of many quantitative techniques. Decision sci-ence
or decision theory techniques are another category of programmed
decision-making aids. These tools all rely on mathematics. For example, linear
programming is a mathematical method used to solve resource allocation
problems that arise “whenever there are a number of activities to be performed,
[with] limitations on either the amount of resources or [on] the way they can be
spent.”73
You can use linear programming to determine the best way to:
◗ Distribute merchandise from a number of warehouses to a number of
customers.
◗ Assign personnel to various jobs.
◗ Design shipping schedules.
◗ Select the product mix in a factory to make the best use of machine and labor
hours available while maximizing the firm’s profit.
◗ Route production to optimize the use of machinery.
linear programming: a
mathematical method used
to solve resource allocation
problems

Chapter 6 Appendix ■ 173
To apply linear programming successfully, the problem must meet certain
basic requirements. There must be a stated, quantifiable goal, such as “minimize
total shipping costs”; the resources to be utilized must be known (a firm could pro-duce
200 of one item and 300 of another, for instance, or 400 of one or 100 of
another); all the necessary relationships must be expressed in the form of mathe-matical
equations or inequalities; and all these relationships must be linear in
nature. An example can help illustrate:
Apex Electronics has five manufacturing plants and twelve warehouses
scattered across the country. Each plant is manufacturing the same prod-uct
and operating at full capacity. Because plant capacity and location do
not permit the closest plant to fully support each warehouse, Apex would
like to identify the factory that should supply each warehouse and thus
minimize total shipping costs.
Applying linear programming techniques to Apex Electronics’ problem can
provide an optimum shipping schedule.
Waiting-Line/Queuing Techniques
Waiting-line/queuing techniques are mathematical decision-making techniques
for solving waiting-line problems. For example, bank managers need to know how
many tellers they should have. If they have too many, they are wasting money on
salaries; if they have too few, they may end up with many disgruntled customers.
Similar problems arise when selecting the optimal number of airline reservations
clerks, warehouse loading docks, highway tollbooths, supermarket checkout reg-isters,
and so forth.
Statistical Decision Theory Techniques
Managers use statistical decision theory techniques to solve problems for
which information is incomplete or uncertain. Suppose a shopkeeper can stock
either brand A or brand B, but not both. She knows how much it will cost to stock
her shelves with each brand, and she also knows how much money she would earn
(or lose) if each brand turned out to be a success (or failure) with her customers.
However, she can only estimate how much of each brand she might sell, so her in-formation
is incomplete. Using statistical decision theory, the shopkeeper would
assign probabilities (estimates of the likelihood that the brand will sell or not) to
each alternative. Then she could determine which alternative—stocking brand A
or stocking brand B—would most likely result in the greatest profits.
● Three Degrees of Uncertainty Statistical decision theory assumes that a
manager may face three degrees of uncertainty in making a decision. Managers
make some decisions under conditions of certainty. Here, the manager knows in
advance the outcome of the decision. From a practical point of view, for example,
you know that if you buy a $50 U.S. savings bond, the interest rate you will earn to
maturity on the bond is, say, 6 percent. Managers rarely make decisions under
such conditions.
At the opposite extreme, managers make some decisions under conditions of
uncertainty. Here, a manager cannot even assign probabilities to the likelihood of
waiting-line/queuing
techniques: mathematical
techniques used to solve
waiting-line problems so that
the optimal balance of
employees available relative to
waiting customers is attained
statistical decision theory
techniques: techniques used
to solve problems for which
information is incomplete or
uncertain
certainty: the condition of
knowing in advance the
outcome of a decision
uncertainty: the absence of
information about a particular
area of concern

Expected
value of
stocking
Brand A
the various outcomes. For example, a shopkeeper may have several new products
that could be stocked but not have any idea of the likelihood that one brand will be
successful or that another will fail. Conditions of complete uncertainty are also
relatively infrequent. Most management decisions are made under conditions of
risk. Under these conditions, a manager can at least assign probabilities to each
outcome. In other words, the manager knows (either from past experience or by
making an educated guess) the chance that each possible outcome (such as prod-uct
A being successful or product B being successful) will occur.
● Decision Tree A decision tree is one technique for making a decision under
conditions of risk. With a decision tree like the one shown in Figure A6.2, an ex-pected
value can be calculated for each alternative. Expected value equals (1) the
probability of the outcome multiplied by (2) the benefit or cost of that outcome.
For example, in Figure A6.2, it pays our shopkeeper to stock brand B rather
than brand A. Stocking brand A allows a 70 percent chance of success for an $800
profit, so the shopkeeper has to balance this possible expected $560 profit against
the possibility of the $90 loss (.30 possible loss of $300). The expected value of
stocking brand A is thus $470. By stocking brand B, though, the expected value is a
relatively high $588.
decision tree: a technique for
facilitating how decisions under
conditions of risk are made,
whereby an expected value and
gain or loss can be applied to
each alternative
expected value: a calculated
value that equals the probability
of the outcome multiplied by the
benefit or cost of that outcome
30% Chance of Failure
60% Chance of Success
.70 x $800 = $560
.30 x -$300 =
-90
$470
.60 x $1,000 = $600
.40 x -$30 =
-12
$588
Expected
value of
stocking
Brand B
Brand A 70% Chance of Success
Brand B 40% Chance of Failure
F IGURE A6.2
A Decision Tree
The expected value of each
alternative is equal to (1) the
chance of success or failure times
(2) the expected profit or loss.
risk: the chance that a
particular outcome will or
will not occur

175
7
CHAPTER OUTLINE
Opening Vignette: Oxford
University Press
● The Nature and Purpose
of Planning
What Planning Accomplishes
The Management Planning Process
The Planning Hierarchy
How to Set Objectives
Managing Now: The Management
Planning Process
● Forecasting
Sales Forecasting Techniques
Demand Forecasting at Wal-Mart
Marketing Research
Competitive Intelligence
PRACTICE IT: Demand Forecasting
and Planning at Oxford University
Press
IMPROVING YOUR FORECASTING
SKILLS
● Types of Plans
The Business Plan
Business Planning Packages
● Strategic Planning
The Strategic Management Process
Types of Corporate Strategies
Types of Competitive Strategies
Functional Strategies
Strategic Planning Tools
Pella’s New Competitive Advantage
● Strategy Execution and
Digital Dashboards
Traditional Methods for Improving
Strategy Execution
Managing Now: Strategy Maps
The Balanced Scorecard
Digital Dashboards and Performance-
Management Systems
PLANNING AND STRATEGIC
MANAGEMENT
Oxford University Press
he managers at Oxford University Press (OUP) knew they had to
improve their planning systems. The company publishes over 4,500
T
new books each year and employs about 4,800 people worldwide.1
Its education and children’s division markets textbooks, dictionaries,
children’s fiction, and picture books to schools and booksellers.
Oxford is one of the top educational publishers in the United
Kingdom. However, it competes worldwide with much larger
educational publishers.
Publishers need accurate
forecasts. It can take from two
days to twelve weeks to reprint
a title. So if the title’s inventory
is low and OUP gets a big
order, the adopting school may
turn to a different book and
publisher. On the other hand,
stocking too many books ties
up cash and space.
OUP’s education and chil-dren’s
division relies on tradi-tional
forecasting and planning
Facing global competition, managers at
Oxford University Press (OUP) knew they
had to improve their planning systems.
systems. Employees kept track
of each book’s inventory and
sales orders manually, on electronic spreadsheets.Warehouse stock
managers can’t easily track historical sales patterns for each school or
book. This makes it hard to forecast and anticipate future orders and
to plan accordingly. “[W]e often have to order rush reprints to fulfill
unexpected orders,” says one OUP manager. “As a result, we pay
higher prices.” OUP asks your team to recommend a new forecasting
and planning system. You should have a good answer after reading this
chapter. ■

176 PART THREE CHAPTER 7 Planning and Strategic Management
➤ Listing what planning accomplishes.
➤ Describing each of the steps in the management planning process.
➤ Briefly explaining what we mean by sales forecasting, marketing research, and competi-tive
intelligence.
➤ Listing and describing the steps in the strategic management process.
➤ Giving examples of the various types of strategies.
➤ Reading the opening vignette about Oxford University Press and suggesting a forecast-ing
and planning system for the company.
➤ Reading the end-of-chapter exercise and explaining how you would do an environmen-tal
scan for your college or university.
➤ Reading the chapter case study and drawing a strategic map for the company.
➤ Watching the simulation video and making recommendations to managers with regards
to their planning and strategic management processes.
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The Nature and Purpose of Planning
lanning is something we do every day, often without giving it much thought.
For example, most readers of this book are reading it as part of a management
P
course. This course is probably part of their program of studies. The program of
studies is a plan. It shows the goal (say, getting a business degree in two years). And
it shows how you will get that degree, by listing the courses needed to graduate, the
sequence in which to take them, and when.
Like the program of studies, plans are methods for achieving a desired result.
Plans answer the questions, What will we do? When will we do it? Who will do it?
and (usually) How much will it cost?2 Plans always specify (or imply) goals (such as
“boost sales by 10 percent”) and courses of action (such as “hire a new salesperson
and boost advertising by 20 percent”). Goals, or objectives, are specific results
you want to achieve. Planning is the process of establishing objectives and
courses of action for achieving them.3 Planning always involves deciding now
what to do in the future.
What Planning Accomplishes
The fact that planning “involves deciding now what to do in the future” highlights
one of the things that planning accomplishes. Planning lets you make your deci-sions
ahead of time, in the comfort of your home (or office), and with the luxury of
having the time to research and weigh your options. It also thereby helps you to
anticipate the consequences of various courses of action, and to think through the
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plans: methods for achieving
a desired result
goals: specific results you want
to achieve
objectives: specific results you
want to achieve
planning: the process of
establishing objectives and
courses of action

The Nature and Purpose of Planning ■ 177
practicality and feasibility of each without actually having to commit the re-sources
to carry out each course of action. For example, developing a budget for
the year may show the business owner that the move to new, more expensive
offices would be unwise.
Planning also provides direction and a sense of purpose. For example, some-one
once said, in reference to career plans, “The world parts and makes a path for
the person who knows where he or she is going.” Many people find that this sense
of purpose—this “knowing where I am going”—pulls them like a magnet through
challenges and adversity until they reach their goals.
Planning also helps avoid piecemeal decision making—making decisions that
are not consistent with the goal or with each other. For example, R. R. Donnelley
Sons Company prints books, magazines, and documents for customers such as
investment bankers.4 Donnelley’s planning led its managers to anticipate that, as
its customers conducted more business abroad, they would want Donnelley to
help service them globally. The company therefore invested in advanced technology
and a worldwide digital printing network. It didn’t waste money building conven-tional
printing plants in the United States. Now it prints documents simultane-ously
around the globe. It is also beginning to offer its customers a wider range
of services, such as digital content management.5 Management theorist Peter
Drucker says that planning also helps identify potential opportunities and threats
and reduce long-term risks.6 For example, R. R. Donnelley’s planning process
helped identify the opportunity for satellite-based global printing and for expan-ding
its product offerings.
Last but not least, planning facilitates control. Control means “ensuring that
activities conform to plan.” Thus, a company’s plan may specify that its profits will
double within five years. This goal becomes the standard against which to meas-ure,
compare, and control the manager’s performance. Planning and control are
the twins of the management process. You cannot control if you don’t know what
your standards are, and it’s futile to have a plan if you don’t control what you are
doing.
The Management Planning Process
The planning process involves five basic steps:
1. Set an objective. For example, managers at Ford recently decided to cut about
25 percent of its North American vehicle capacity over five years.
2. Develop forecasts and planning premises. Forecasting means making assump-tions
or premises about the future. Forecasting should help show Ford’s man-agers
which plants to cut. Forecasting should reveal, for instance, what oil
prices should be, which Ford products should be in highest demand for the
next few years, and which countries (like China) should grow the fastest. This
is valuable information for a company trying to decide which plants to close
and which products to phase out.
3. Determine what the alternatives are. Every plan consists of a goal and a course
of action for achieving that goal. There are usually several ways to achieve the
goal. Ford could cut production costs by closing selected plants or phasing out
specific products or product lines.
4. Evaluate alternatives. Remember that plans are decisions you make today for
what to do tomorrow. Therefore, apply all your decision-making skills (from
Chapter 6) to evaluating your alternatives. Think through the consequences of
each course of action.

5. Implement and then evaluate the plan. Finally, choose the course(s) of action,
decide who should do what, and implement the plan. Then periodically check
to make sure that actual progress is consistent with the plan.
It hardly matters if you’re planning your career or a trip to France, or how
you’re going to cut costs or market your firm’s new product. The basic process
always involves setting objectives, forecasting, determining alternative courses of
action, evaluating those options, and then choosing and implementing your plan.
The process is the same when managers develop plans for their companies, with
two small complications.
First, there is usually a hierarchical aspect to managerial planning.Top manage-ment
approves a long-termor strategic plan. Then each department creates its own
budgets and other plans to fit and to contribute to the company’s long-termplan.
Second, the process involves much give-and-take among departments. Top
management formulates goals and plans partly based on upward feedback from
the departments. The departments in turn draw up plans that support top man-agement’s
plan.
The Planning Hierarchy
As a result, Step 5 in the planning process (implement and then evaluate your
plan) is usually not the last step in the businesss planning process. It’s often just
the start for round 2, because top management’s plans and goals become the
targets for which lower-level departments then craft derivative plans. The vice
president produces a plan for her department. Then her own department heads
produce plans for their departments, and so on. In this way, the planning process
produces a hierarchy of plans and goals.
Figure 7.1 summarizes this idea. At the top of the hierarchy, the president and
his or her staff set strategic goals (such as “a minimum of 55 percent of sales
revenue will come from customized products by 2008”). Lower-level managers
(in this case, starting with the vice presidents) then set goals (such as “convert
Building C to customized manufacturing operations”) that make sense in terms
of the goals at the next level up. In this way, the company creates a hierarchy of
supporting departmental goals, down to tactical and functional goals and finally
short-term operational goals for each employee.
How to Set Objectives
Goals play a central role in what managers do. Managers should always expect to be
judged on the extent to which they achieved their units’ goals. As Peter Drucker put
it, “There has to be something to point to and say, we have not worked in vain.”7
Effective goals have several characteristics, as summarized by the acronym
SMART. They are specific, and clearly state the desired results. They are measur-able,
and answer the question “How much?” They are attainable. They are relevant
and derive from a crucial organizational need. And they are timely and specify
deadlines.8
Planning expert George Morrisey advises expressing the goal so it addresses
four details:
To (1) (action/verb)
(2) the (single measurable result)
by (3) (target date/time span)
(4) at (cost in time and/or energy)
hierarchy of plans and
goals: a set of plans and goals
that includes the companywide
plan and the derivative plans of
subsidiary units required to help
achieve the companywide plan

The Nature and Purpose of Planning ■ 179
For example, “(1) sell (2) $2 million of product X (3) next year, with (4) the same size
sales force.”
● Management by Objectives Management by objectives (MBO) is a technique
in which supervisor and subordinate jointly set goals for the latter and periodically
assess progress toward those goals. A manager may engage in a modest MBO
program by simply setting goals with his or her subordinates and periodically
providing feedback. However, the term management by objectives usually refers to
a comprehensive organizationwide program for setting goals down the chain of
command. The MBO process consists of five steps:
1. Set organization goals. Top management sets strategic goals for the company.
2. Set department goals. Department heads and their superiors jointly set sup-porting
goals for their departments.
3. Discuss department goals. Department heads present department goals and
ask all subordinates to develop their own individual goals.
4. Set individual goals. Goals are set for each subordinate, and a timetable is as-signed
for accomplishing those goals.
VP of Marketing’s
Goals
Complete market
study on sales
potential for
customized products
VP of Sales’
Goals
Increase sales of
customized products
to 25% in year one
VP of Manufacturing’s
Goals
Convert Building C
to customized
manufacturing
operations
VP of Human
Resources’ Goals
Change compensation
structure to create
incentives for
customized sales
Purchasing Director’s Goals
Purchase and install new equipment
Engineering Director’s Goals
Complete feasibility study of
conversion requirements
President’s Strategic Goals
Have a minimum of 55% of sales revenue
from customized products by 2008
Boost overall corporate profitability by 10%
Increase sales revenue by 20% in two years
■
■
■
F IGURE 7.1
Hierarchy of Goals

5. Give feedback. The supervisor and subordinate meet periodically to review the
subordinate’s performance and to monitor and analyze progress toward his or
her goals.9
Managing Now: The Management Planning Process
Without suitable technological support, planning can be unduly time-consuming.
For example, suppose the manager needs to translate revenue forecasts into pro-duction
and personnel estimates, convert the plan into financial budgets, and see
what effect different assumptions about the future might have on the manager’s
plans. Even with Excel-type spreadsheet support, such tasks take time. Many man-agers
therefore now use special planning software to facilitate these tasks. Alight
Planning software (www.alightplanning.com/Software) is one example. Alight Plan-ning
basically automates the most time-consuming management planning tasks.
For example, its Integrated Financial Statements feature quickly translates the man-ager’s
goals into financial statements such as income statements, balance sheets,
and cash-flow budgets.
Its Stage Based Planning feature lets the manager see what the results of
executing the plan will be over time, at each stage of its development. The Analysis
Tools feature lets the manager test and graph various assumptions. For example,
this feature lets the manager perform an “impact analysis,” to see how changing
various company activities (such as advertising expenses and sales-force size)
affects the company’s sales.
By automating much of the planning process and enabling the manager to
more easily test the impact of his or her assumptions, Alight Planning facilitates
managerial planning.
SOURCE: www.alightplanning.com (March 9, 2006). Copyright © 2005–2006 Alight LLC. All rights reserved.

Forecasting
Forecasting ■ 181
anagers build their plans on assumptions or premises about the future. Audi
expanded to China because it forecast a booming market for high-quality
M
cars in that country. Managers traditionally use several forecasting techniques
to produce the premises on which they build their plans. These include sales
forecasting, marketing research, and competitive intelligence.
Sales Forecasting Techniques
To forecast means to estimate or calculate in advance or to predict. A company’s
production, personnel, and finance levels usually depend on the company’s level
of sales. Therefore, business forecasting often starts with predicting the direction
and magnitude of sales.
Managers use various quantitative techniques to make sales forecasts. Time-series
forecasting is one approach. A time series is a set of observations taken at
specific times, usually at equal intervals. Examples of time series are a department
store’s total monthly or yearly sales receipts, and the daily closing prices of a share
of stock.10 The manager uses time-series forecasting to plot and identify basic
trends (such as rising sales in China) over time.
Sometimes, just tracking activity over time is not enough. Instead, managers
may want to understand the causal relationship between two variables. For exam-ple,
the sales department at General Motors needs to know the causal relationship
between car sales and an indicator of economic activity, like disposable income.
Causal forecasting estimates the company factor (such as sales) based on other
factors (such as disposable income, or level of unemployment). Managers use
statistical techniques such as correlation analysis (which shows how closely the
variables are related) to identify the necessary relationships.
● Qualitative Forecasting Methods It is true that in developing useful plans,
hard data and numbers are always important. However, planning also always in-volves
human judgment. Qualitative forecasting tools emphasize human judg-ment.
They gather, in as logical, unbiased, and systematic a way as possible, all
the information and human judgment that a manager can apply to a situation.
The jury of executive opinion is one example. It involves asking a group of
key executives to forecast sales for, say, the next year. Generally, each executive
receives data on forecasted economic levels and anticipated corporate changes.
Each executive then makes an independent forecast. They then reconcile their dif-ferences.
The sales force estimation method gathers the opinions of the sales
force regarding what they think sales will be in the forthcoming period. Each sales-person
estimates his or her next year’s sales, usually by product and customer.
Sales managers then review each estimate, compare it with the previous year’s
data, and discuss changes with each salesperson. The sales manager then com-bines
the separate estimates into a sales forecast for the firm.
Necessary though they may be, basing plans just on subjective forecasts can
be perilous. Several years ago, Nortel Networks Corp. planned to meet “explosive
customer demand” by adding 9,600 jobs.11 Nortel executives arrived at their
“explosive growth” forecast by asking their largest customers for sales estimates.
Nortel’s CEO later found that some of his largest customers told Nortel to gear up
to ship them more equipment, even as their own sales were falling off.
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forecast: estimate or calculate
in advance; predict
time series: a set of
observations taken at specific
times, usually at equal intervals
jury of executive opinion: a
forecasting method that involves
asking a group of key executives
to forecast sales for, say, the next
year
sales force estimation
method: the gathering of the
opinions of the sales force
regarding what they think sales
will be in the forthcoming
period

● Managing Now Managers today therefore often use software systems to im-prove
their sales forecasting processes. For example, MTN is South Africa’s main
cellular network. In the past, the company based its forecasts for handsets on
salespeople’s estimates. Then the company tried a more sophisticated system, but
it was still a manual one. Employees manually extracted data on details like inven-tories
of handsets in stores and warehouses and on orders and current sales. That
proved to be very time-consuming and still did not provide accurate forecasts.12
Management’s solution was to turn to several software packages from SAS.
Now, MTN’s new data warehouse continuously receives information from a
variety of sources, including daily sales and handset production lead times. With
consultants from SAS, MTN created analytical software tools so its managers
could better utilize this information.
The new system enabled management to analyze information from the com-pany’s
data warehouse. For example, it helps management validate the sales
force’s forecasts and avoid both loss of sales and overstocking. Combined with
two other SAS packages—an Internet application, and a wireless Internet gateway
service—the sales force can now use information technology (IT) to interact
directly with the data warehouse from anywhere. That gives them a better idea of
which handset models sell better, where, and why.
The following Window on Managing Now and Practice IT features present
more illustrations of IT’s use in planning.
Demand Forecasting at Wal-Mart
As most people know,Wal-Mart has many systems in
place whose purpose is to keep costs down. Some of
these systems—such as Wal-Mart’s policy of paying low
wages and of strenuously resisting unions—have under-standably
elicited the concern and even the anger of many
critics. However, not all Wal-Mart’s cost-reducing systems
directly involve personnel issues. For example, the tech-nology
the company uses to monitor and forecast cus-tomer
preferences helps to keep costs down.
Wal-Mart’s forecasting is largely automated thanks to
technology. Here,Wal-Mart relies on its data warehouse.
A data warehouse is that part of the computer system
that collects and stores information on details like sales,
inventory, products in transit, and product returns, infor-mation
it gathers from Wal-Mart’s computer terminals in
3,000 stores. Software programs then help Wal-Mart’s
managers to use these data to analyze trends, understand
customers, and more effectively manage inventory. As
one example, information in its data warehouse tracks the
sale by store of about 100,000 Wal-Mart products. Thus,
Wal-Mart managers can examine the sales of individual
items for individual stores and can also create seasonal
profiles for each item. Armed with this information, man-agers
can more accurately plan what items will be needed
for each store and when.
Wal-Mart took this a step further. It teamed with
suppliers like Warner-Lambert to create an Internet-based
collaborative forecasting and replenishment system
(Wal-Mart calls it CFAR).We saw that Wal-Mart collects
data (on things like sales by product and by store, and
seasonal trends) for its sales of Warner-Lambert’s (and
others’) products. Managers at Wal-Mart and Warner-
Lambert then collaborated to develop forecasts for sales
by store for Warner-Lambert products, such as Listerine.
Once Warner-Lambert and Wal-Mart planners decide on
mutually acceptable figures, a standard purchase plan is
finalized and sent to Warner-Lambert’s manufacturing
planning system. The supplier then automatically replen-ishes
items. So far, CFAR has helped cut the supply-cycle
time for Listerine from twelve weeks to six. That means
less inventory, lower costs, and lower prices.13
data warehouse: that part of
the computer system that
collects and stores information
on details like sales, inventory,
products in transit, and product
returns

Forecasting ■ 183
Marketing Research
Marketing research refers to the procedures managers use to develop and analyze
customer-related information that helps managers make decisions.14 Marketing
researchers depend on two main types of information. One source is secondary
data, or information collected or published already. Good sources of secondary
data include the Internet, libraries, trade associations, company files and sales
reports, and commercial data (for instance, from companies such as A. C. Nielsen,
which tracks television-viewing habits). Primary data refer to information specif-ically
collected to solve a current problem. Primary data sources include mail and
personal surveys, in-depth and focus-group interviews, and personal observation
(watching the reactions of customers who walk into a store).15
Competitive Intelligence
Developing useful plans requires knowing as much as possible about what com-petitors
are doing or are planning to do. Competitive intelligence (CI) is a system-atic
way to obtain and analyze public information about competitors.
PRACTICE IT
Demand Forecasting and Planning at Oxford University Press
Faced with increasing pressure from giant competitors
like Pearson and McGraw-Hill, OUP’s managers needed a
faster way to forecast and estimate textbook demand. Its
education and children’s division managers wanted to in-crease
market share.To do so, they had to make sure the
right quantities of books—not too many and not too
few—are in stock when customers need them.The man-ual
system involving sales force estimates and spread-sheets
was not working.What would you suggest?
They installed a software package called SAP De-mand
Planning.Working with the software supplier, OUP
employees input into this system details about each title,
including its international standard book number, the
most economical order quantities, reprint lead times, and
three years of historical sales. Each night, data (such as
daily sales of each title, current inventory levels, and
numbers of books returned) from the education and
children’s divisions’ back-office systems download auto-matically
into the new Demand Planning system. The
Demand Planning system then automatically provides
OUP’s managers with the planning information they
need, such as “how many copies of this book will likely be
ordered next month?” E-mail or cell-phone text messag-ing
triggers alerts if the system senses a wide discrepancy
between historical data for the book and the system’s
forecast. Stock managers then determine if there’s some
new factor—such as a huge new adoption—affecting the
forecast.
The result has been a dramatic improvement in
Oxford University Press’s forecasts and plans. Stock man-agers
now have up-to-date information for making reprint
decisions. Demand Planning’s internal analytical tools do
the sales-estimate computations. A graphical digital
dashboard user interface (similar to Figure 7.2) makes it
easy for managers to see at a glance things like fore-casted
demand for a book versus historical demand. It
also enables them to analyze the most profitable titles,
identify why sales forecasts are falling short of target, and
track the education and children’s divisions’ performance
against plan. The result is real-time, accurate sales fore-casts
and plans, and the ability to make corrections
quickly, if necessary.
marketing research: the
procedures managers use to
develop and analyze customer-related
information that helps
managers make decisions
secondary data: information
collected or published already
primary data: information
specifically collected to solve
a current problem

Marketing Perspective
Customer Perspective
Customer Satisfaction Survey
0 1.0 2.0 3.0 4.0 5.0
F IGURE 7.2
Balanced Scorecard Digital Dashboard Example
21% 16%
Companies increased their use of private intelligence services over the past
Financial Perspective
few years. Today, several competitive intelligence companies including Stratfor,
Marsh and McClellan’s Marsh Kroll subsidiary, and Jane’s Information Group also
help companies assess terrorism and related risks.16
Competitive intelligence practitioners use various tools to discover what their
clients’ competitors are doing. These tools include having specialists visit their
facilities, hiring their workers, and questioning their suppliers and customers. CI
firms also do extensive Internet searches to unearth information about competi-tors,
as well as searches like reading stock analysts’ reports on the competitors’
prospects. CI consulting firms use former prosecutors, business analysts, and
FBI and Drug Enforcement Agency (DEA) employees to uncover the sorts of
Budget Index
12%
3.18
Post-Sales Incentive Award Survey
11% – 20%
Sales History Perspective
Web Hits (Thousands) Programs Adopted by Others
Steps Eliminated
College Books Trade Books
0 1.0 2.0 3.0 4.0 5.0
4.1
30
25
20
15
10
5
0
2002 2003 2004 2005
5
4
3
2
1
0
SOURCE: Adapted from www.balancedscorecardsurvival.com/balancedscorecardsample.html (downloaded January 7, 2006).

Forecasting ■ 185
information you might want before entering into an alliance with another com-pany,
or before deciding to get into some business.17
Using the Internet is a gold mine for competitive intelligence investigations.
Amazon.com used this approach to analyze a competitor’s new business move.
Barnes Noble had just listed three new-product category tabs on its homepage.
Amazon.com hired a competitive intelligence firm to analyze Barnes Noble’s
Web activity. They found that only one of the new tabs was popular with shoppers.
Suggestions for unearthing competitors’ intelligence over the Web include:18
◗ Use a search engine to get a list of all the webpages your competitor has opened
on the Internet by typing in url://companyname.com
◗ Find all the websites linked to your competitor’s site by typing in link://www
.companyname.com
◗ Comb through your competitor’s website looking for information on things like
the firm’s business goals.
◗ If your competitor is publicly traded, carefully review its investor relations pages.
These pages contain public information like quarterly profits reports and
unusual expenses.
◗ On the website, review your competitor’s press releases; these may provide
insights into potential problems like those indicated by restructuring plans.
◗ Carefully review your competitor’s listed job openings. For example, is one of
its product lines listing many new job openings? That might signal a planned
expansion.
◗ Check out message boards and chatrooms dedicated to the company. These
often contain customer and/or employee complaints that provide insights into
the firm’s plans and or weaknesses. The Improving Your Forecasting Skills feature
presents additional recommendations.
Today, several competitive
intelligence companies
including Stratfor help
companies assess terrorism
and related risks.
(Courtesy, Stratfor)

IMPROVING YOUR FORECASTING SKILLS
Don’t Get Blind-Sided
Whichever forecasting methods they use, managers
should make sure they’re not so preoccupied with their fa-miliar
competitors that they get blind-sided from an unex-pected
direction. For example, between 2001 and 2004,
Mattel lost about 20 percent of its share of the fashion-doll
Barbie-type market to smaller rivals. Mattel was so sure it
knew what its customers wanted that it didn’t notice a big
change: Barbie’s target market, girls ages three to eleven,
had shrunk to girls ages three to five.19 Barbie’s customers
were outgrowing Barbie at younger ages and turning to
dolls that looked like pop stars. Competitors picked up on
that trend much more quickly. They introduced dolls that
better appealed to girls ages five to eleven.
The moral is that, in practice, the manager needs to
scan the periphery (in other words, watch what’s hap-pening
beyond your traditional competitors) when mak-ing
plans because the biggest threats often are the ones
Types of Plans
anagers express their plans in a variety of formats. For example, descriptive
plans, like a student’s program of studies, state in words what is to be
descriptive plans: plans that M
achieved, by whom, when, and at what cost. Budgets are plans stated in financial
terms. Graphic plans like those in Figure 7.3 show what is to be achieved, how,
and when, in charts or in graphs.
Plans also differ in the time span they cover. Top management usually engages
in long-term (three- to five-year) business or strategic planning. Middle managers
focus on developing midterm tactical plans (of up to two to three years’ duration).
Tactical plans (also sometimes called functional plans) pick up where strategic
plans leave off: these are your firm’s marketing, production, and personnel plans.
They show each department’s role in helping carry out the company’s overall
strategic plan. First-line managers focus on short-term operational plans. They
focus on detailed, day-to-day planning. The Gantt chart (Figure 7.3) is an opera-tional
plan.
Finally, some plans are made to be used once, and others, repeatedly. For
example, some plans are programs. Like a student’s program of studies, these
present in an orderly fashion all the steps in a major one-time project, used once.
● Standing Plans In contrast, managers use standing plans repeatedly.20 Policies,
procedures, and rules are examples of standing plans. Policies are broad guide-lines.
For example, it might be the policy at Saks Fifth Avenue that “we sell only
high-fashion apparel and top-of-the-line jewelry.” This is a plan because it shows
state in words what is to be
achieved, by whom, when, and
at what cost
budgets: plans stated in
financial terms
the manager doesn’t see coming.There are several ways
to do this:
◗ Tell a department such as market research that they are
also in charge of watching out for unexpected events,
not just the usual competitors.
◗ Create a high-level lookout. For example, IBM has a
unit it calls Crow’s Nest. This team is responsible for
watching for new and unexpected opportunities and
dangers.
◗ Start a new initiatives program. For example, Royal
Dutch Shell’s Game-Changer program encourages its
managers to envision and test possibilities for new
opportunities beyond the company’s core products and
services. The program quickly produced 400 ideas and
led to creating thirty new technologies and three new
businesses.
graphic plans: plans that show
what is to be achieved, how, and
when, in charts or in graphs
tactical plans: the
departmental plans for
supporting the business’s
companywide strategic plan;
also known as functional plans
functional plans: (see tactical
plans)
operational plans: plans that
focus on detailed, day-to-day
planning, such as how many
machines to use that day

Types of Plans ■ 187
PROJECT Day
1
Day
2
Day
3
Day
4
A
B
C
Day
5
Day
6
Day
7
Day
8
Day
9
Day
10
Day
11
Day
12
Day
13
Day
14
Day
15
Gantt Scheduling Chart Symbols
Start of Project Scheduled Time Allowed
End of Project Actual Work Progress
the firm’s apparel and jewelry buyers what general course of action they should
follow in choosing merchandise to buy for their stores. Procedures spell out what
to do if a specific situation arises; for example, “Before refunding the customer’s
purchase price, the salesperson should carefully inspect the garment and then ob-tain
approval for the refund from the floor manager.” Rules are specific guides to
action; for example, “Under no condition will we refund the purchase price after
thirty days.” In standing plans, the goal or purpose is usually implied but clear.
The Business Plan
The company’s business plan provides a comprehensive view of the firm’s situa-tion
today and of its companywide and departmental goals and plans for the next
three to five years. Managers most often use the term business plan in relation to
smaller businesses. It is the sort of plan that investors or lenders want to see before
providing money to the firm. However, small businesses don’t have monopolies on
business plans. Even Dell or Microsoft has a version of a comprehensive plan like
this. They often label it their long-term or perhaps strategic plan.
There are no rigid rules regarding what such plans must contain. However,
they usually include, at a minimum, (1) a description of the business (including
ownership and products or services), (2) the marketing plan, (3) the production
plan, (4) the financial plan, and (5) the personnel/human resource plan.
● The Marketing Plan To be successful, a business must have customers. And
to have customers, it should have a plan for marketing its products or services to
them. Acme Business Consulting may have the best consultants. But if the poten-tial
clients don’t know those consultants exist, Acme’s prospects are limited. The
marketing plan specifies the nature of your product or service (for instance, its
variety, quality, design, and features). It also shows the approaches the company
plans to take with respect to pricing and promoting the product or service and
getting it sold and delivered to the customers. (Marketing managers call these the
four P’s—product, price, promotion, and place.)
● The Production/Operations Plan Implementing the marketing plan neces-sitates
having productive assets. For example, it takes factories and machines
to assemble Dell’s PCs. Therefore, Dell must plan well in advance for meeting its
F IGURE 7.3
Gantt Scheduling Chart for
Acme Strategic Report
Projects, January 1–15, 2007
The Gantt chart helps Acme’s
managers plan their consultants’
time and keep track of each
project’s progress. Similar Gantt
charts help managers in factories
plan machine usage for building
different products.
programs: plans that present
in an orderly fashion all the steps
in a major one-time project
policies: broad guidelines
regarding the company’s
approach to certain major
decisions, such as what quality
merchandise to offer
procedures: plans that spell
out what to do if a specific
situation arises
rules: specific guides to day-to-
day action
business plan: a plan that
provides a comprehensive view
of the firm’s financial, sales, and
business situation today and of
its companywide and
departmental goals and plans
for the next three to five years
marketing plan: a plan that
specifies the nature of your
product or service (for instance,
its variety, quality, design, and
features) and the approaches the
company plans to take with
respect to pricing and
promoting the product or
service and getting it sold and
delivered to the customers

projected demand for the technology to take orders for, build, and distribute its
PCs. The production or operations plan shows how the company will produce the
products it plans to sell.
● Managing Now The consulting firm Accenture helped Dell install an im-proved
Internet-based production-planning system. This system integrates Dell’s
entire sales to manufacturing to delivery supply chain. With it, Dell and its suppli-ers
automatically receive real-time updates on sales and production schedules.
Suppliers see what components Dell needs where and when. Truckers see what
components to pick up from suppliers and where to deliver them and what Dell
products to deliver and to whom.21 The system virtually automates the production-planning
process for Dell and its suppliers and truckers.
● The Personnel/Human Resource Plan Anything the company does, or plans
to do, requires managers and other personnel, and therefore a personnel plan. For
example, a consulting company’s projected number of clients helps determine
how many consultants it needs at each stage of the plan. The personnel plan
shows how many of which type of employee the company will need.
● The Financial Plan What’s the bottom line? is the first question many man-agers
and bankers ask. The question underscores a truism about business and
management. At the end of the day, most of a manager’s plans and goals and
accomplishments end up expressed in financial terms.
The financial plan is the vehicle for doing so. The financial plan translates the
manager’s sales, production, and personnel plans into financial terms. For exam-ple,
a projected (or pro forma or planned) profit and loss (PL) statement shows
the revenue, cost, and profit (or loss) implications of a company’s marketing,
production, and personnel plans.
Business Planning Packages
Several good business planning software packages are available, such as Business
Plan Pro from Palo Alto Software. For example, Business Plan Pro contains all the
information and planning aids someone would need to create a business plan
from beginning to end. It contains thirty sample plans; detailed sample plan out-lines;
complete, step-by-step instructions (with examples) for creating each part
of a plan (executive summary, market analysis, and so on); and financial planning
spreadsheets. It also contains easy-to-use tables (for instance, for making sales
forecasts) and automatic programs for creating color, three-dimensional (3D)
charts for showing facts like monthly sales and yearly profits.
Strategic Planning
s explained earlier, the planning process usually starts with managers formu-lating
a special type of plan, a strategic plan. A strategic plan spells out (1) the
A
desired business or businesses the firm wants to be in, in terms of products,
geographic sales area, and competitive advantage, and (2) the major steps it will
take to get there, given (3) the company’s opportunities and threats and internal
strengths and weaknesses. A strategy is a course of action. It shows how the
enterprise will move from the business it is in now to the business it wants to be in.
Strategic planning is the process of identifying the firm’s business today, its
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Strategic Planning ■ 189
desired future business, and the courses of action it should pursue to get there
given its opportunities, threats, strengths, and weaknesses.
As an example, the Ford Motor Company in 2006 was struggling to compete
against stronger, more profitable competitors from abroad. In early 2006, it intro-duced
a new strategic plan, which its managers dubbed Way Forward. It envi-sioned
moving Ford from a loss-making, relatively ponderous company to a
leaner, more profitable one. Ford’s strategies for moving there include cutting
about 25 percent of its North American vehicle capacity and 10 percent of its
white-collar workforce and streamlining its purchasing process.22 (By mid-2006,
Ford, facing unexpectedly tough competition, revised its plan to strip even more
costs and to do so faster. It then replaced its CEO with a new one.)
The Strategic Management Process
As you can see in Figure 7.4, strategic planning represents the first steps of the
strategic management process. The seven-step strategic management process in-cludes
both strategic planning and strategy implementation and execution.
● Step 1: Define the Current Business and Mission Every company must
choose the terrain on which it will compete—in particular, what products it will
sell, where it will sell them, and how its products or services will differ from its
competitors’. Rolex and Seiko are both in the watch business. But Rolex sells a
limited product line of high-priced quality watches. Seiko sells a wide variety of
strategic plan: a plan that
spells out (1) the desired
business or businesses the firm
wants to be in, in terms of
products, geographic sales area,
and competitive advantage, and
(2) the major steps it will take
to get there, given (3) the
company’s opportunities and
threats and internal strengths
and weaknesses
strategy: a course of action
that shows how the enterprise
will move from the business it
is in now to the business it wants
to be in
strategic planning: the
process of identifying the firm’s
business today, its desired future
business, and the courses of
action it should pursue to get
there given its opportunities,
threats, strengths, and
weaknesses
Step 1:
Define
the
current
business
and
mission
Step 2:
Perform
external
and
internal
audits
Step 3:
Formulate
new
business
and
mission
statements
Step 4:
Translate
the
mission
into
goals
Step 6:
Implement
the
strategy
Step 5:
Formulate
strategies
to achieve
the
strategic
goals
Step 7:
Evaluate
perfor-mance
Feedback
Strategy
Formulation
Strategy
Implementation
Strategy
Execution
F IGURE 7.4
Strategic Management Process
SOURCE: Adapted from Fred David, Strategic Management (Upper Saddle River, N.J.: Prentice Hall, 2005), p. 77.

relatively inexpensive but innovative specialty watches with features like com-passes
and altimeters.
Sometimes, managers use the words vision and mission to help clarify the busi-nesses
in which the company should compete. The manager’s vision for the com-pany
usually provides a broad overview of where the manager wants the company
heading. For example, Rupert Murdoch, chair of News Corporation (which owns
the Fox network and many newspapers and satellite TV operations), has a vision of
an integrated, global, satellite-based news-gathering, entertainment, and Internet
and multimedia firm. WebMD CEO Jeffrey Arnold saw WebMD supplying every-thing
a consumer might want to know about medical-related issues.
The firm’s mission statement is usually more specific. Visions show in very
broad terms what the business should be tomorrow. The mission describes what
it needs to accomplish today. For example, the mission of the California Energy
Commission is to “assess, advocate and act through public/private partnerships
to improve energy systems that promote a strong economy and a healthy
environment.”23
● Step 2: Perform External and Internal Audits
Here the manager sizes up the situation. Ideally, the
new strategic plan and mission should make sense in
terms of the external opportunities and threats the firm
faces and in terms of its internal strengths and weak-nesses.
Managers base their strategic plans on careful
analyses of their external and internal situations. We’ll
discuss strategic analysis tools for doing this later in
this chapter.
● Step 3: Formulate New Business and Mission
Statements Based on the situation analysis, what
should our new business be, in terms of what products
it will sell, where it will sell them, and how its products
or services will differ from its competitors’? What is our
new mission and vision?
● Step 4: Translate the Mission into Goals Next, translate the new mission
into executable, measurable strategic goals. For example, what does the California
Energy Commission’s mission to “assess, advocate and act through public/private
partnerships to improve energy systems . . .” mean in terms of how many and what
specific types of partnerships to form, and when?
● Step 5: Formulate Strategies to Achieve the Strategic Goals The manager
formulates strategies (courses of action) to move the company from where it is
today as a business to where it wants to be tomorrow. At Ford, the strategies in-cluded
closing plants and streamlining purchasing.
● Step 6: Implement the Strategy Strategy implementation means trans-lating
the strategy into initiatives, actions, and results—by actually hiring (or fir-ing)
people, building (or closing) plants, and adding (or eliminating) products and
product lines. Therefore, success here requires applying all the management func-tions,
such as organizing, leading, and controlling.
Companies should ensure that all employees and managers understand the
strategy and their roles in executing it.24Thus, managers usually try to make it easy
to communicate the basic principles of their strategies.25 For example, Dell’s strat-egy
boils down to “sell direct.”

Corporate Strategy:
Disney Corporation
Competitive Strategy:
Disney Films
Human
Resources
Theme Parks
Sales Manufacturing
ABC Network
● Step 7: Evaluate Performance Strategic control is the process of assessing
the company’s progress toward achieving its strategic goals and taking corrective
action as needed. Here, management monitors progress and asks why deviations
exist. Management simultaneously reviews the firm’s strategic situation (competi-tors,
technical advances, customer demographics, and so on) to see if it should
make any strategic adjustments.
Strategic plans don’t always work out. When General Motors sold the last of its
Hughes Electronics assets, it was the end of a plan put in place years earlier. GM
had bought both Electronic Data Systems and Hughes Electronics to automate and
reinvigorate their automobile production and sales. Many believe that the acquisi-tions
were actually a distraction that helped push GM’s market share down.26
There are three main types of strategies, corresponding to the level in the
company for which you are planning: corporate-level, business-level/competi-tive,
and functional-level strategies. We summarize these strategies in Figure 7.5.
Types of Corporate Strategies
Every company must decide the number of businesses in which it will compete and
the relationships that will exist among those businesses. A company’s corporate-level
strategy describes the variety of products or services the company will sell,
the number of businesses in which it will compete, and the relations among those
businesses. For example, with a concentration/single-business corporate strategy,
the company offers one product or product line, usually in one market. Firms with
single-business strategies include McDonald’s, KFC, and Gerber’s. The main ad-vantage
here is that the company can specialize, which should allow it to do that
one thing better than its competitors. The disadvantage is having all one’s eggs
in one basket. That’s one reason whyHarley-Davidson successfully diversified into
clothing, restaurants, and finance. There are several other standard or generic cor-porate
strategies managers use.
● Diversification Diversification is a strategy of expanding into related or un-related
products or market segments. Diversification helps the firm avoid the
F IGURE 7.5
Relationships Among
Strategies in Multiple-
Business Firms
Companies typically formulate
three types of strategies:
corporate-level strategies,
business-level/competitive
strategies, and functional-level
strategies.
strategic control: the process
of assessing the company’s
progress toward achieving its
strategic goals and taking
corrective action as needed

problem of having all its eggs in one basket by spreading risk among several prod-ucts
or markets. However, diversification also forces the company’s managers to
split their attention and resources among several products or markets. Thus,
diversification may undermine the firm’s ability to compete successfully in its
chosen markets.
Related diversification means diversifying into other industries so that a firm’s
lines of business still possess some kind of fit. For example, Ferrari could probably
sell more high-performance cars if it wanted to, but, preferring exclusivity, it limits
production. However, Ferrari capitalizes on its exclusive image by diversifying. For
example, the company licenses Ferrari designer logo apparel and sponsors week-end
trips for Ferrari owners to Napa Valley.27 In contrast, unrelated or conglomer-ate
diversification means diversifying into products or markets not related to the
firm’s present businesses or to one another. For example, Getty Oil diversified into
pay television.
Amazon.com pursued both related and unrelated diversification. It originally
specialized in selling books. It soon diversified into music and electronics. It then
formed partnerships with companies like Toys “R” Us to manage their Internet-based
sales.28
● Vertical Integration Vertical integration means owning or controlling the in-puts
to the firm’s processes and/or the channels through which it distributes its
products or services. Thus, Shell drills and refines its own oil and also sells it
through company-controlled outlets.
Today, firms like Cisco often do not produce the electronic devices (such
as cell phones) that bear their names. Instead, vertically integrated manufacturers
like Solectron and Flextronics assemble them. These manufacturers (such as
Solectron) are continuing to integrate vertically. They are buying up design firms
and even shipping firms, because “many are trying to provide cradle to grave ser-vices
from designing to final ship to customers.”29
Diversification and integration needn’t rely on only internal growth; some-times
the firm can gain similar benefits by partnering with other companies.
Strategic alliances or joint ventures are often the strategies of choice here. They are
formal agreements between two or more companies that enable the partners to
benefit from complementary strengths.
● Joint Ventures Joint ventures are companies that involve joint ownership and
operation by two or more companies of a business. For example, a small, Florida-based
company with a patented industrial pollution–control filter formed a joint
venture with a subsidiary of Shell Oil. Here, the joint venture was a separate cor-poration
based in Europe to which each partner contributed funds and other re-sources.
The oil firm got access to a product that could revolutionize its distilling
facilities. The filter company got access to the oil firm’s vast resources and Euro-pean
marketing network.
Joint ventures are one example of strategic alliances—agreements between ac-tual
or potential competitors to achieve some strategic aim. Managers should enter
such alliances with care. Several years ago, Bertelsmann’s BMG music subsidiary
decided to partner with the original Napster, the file-sharing service. Predictably,
the other major record labels were soon suing Napster for copyright infringement,
and Napster soon suspended its file-sharing service and went bankrupt. Its board
then ousted Bertelsmann’s CEO, who had masterminded the alliance.30
The virtual corporation is a modern version of the strategic alliance. It is “a tem-porary
network of independent companies—suppliers, customers, even erstwhile

rivals—linked by information technology to share skills, costs, and access to one an-other’s
markets.”31 Successful virtual corporations rely on trust and on a sense of
codestiny: everyone in these alliances needs to recognize that the fate of each part-ner
and of the alliance as a whole depends on each partner doing its share.
Virtual corporations usually aren’t corporations at all in the traditional sense
of common ownership or a chain of command. Instead, they are networks of
companies. Each lends the virtual corporation/network its special expertise. In-formation
technology enables the virtual corporation’s far-flung constituents to
communicate and make their contributions.
● Managing Now The website eLance (www.elance.com) provides a virtual envi-ronment
that enables freelance consultants and graphic designers to sell their ser-vices
to businesses. For example, it allows them to post information about their skills
and fees.32 Denver-based graphic designer Serena Rodriguez gets about 10 percent
of her business through that site. She works on projects electronically and long dis-tance,
without seeing or being a formal part of client firms like pharmaceuticals
manufacturer Merck. Getting a big project often means recruiting other free agents
to join your virtual team. For example, says website designer Andrew Keeler, “I work
with lots of people here in San Francisco whom I’ve never even met.”33
Types of Competitive Strategies
Whether a company concentrates on a single business or diversifies into a dozen
or more, each of those businesses needs a competitive strategy. Professor Michael
Porter defines competitive strategy as a plan to establish a profitable and sus-tainable
competitive position against the forces that determine industry competi-tion.
34 The competitive strategy specifies the basis on which the company will
compete. For instance, Volvo competes based on safety, and Lexus competes
based on high quality. Firms generally pursue one of three competitive strategies:
cost leadership, differentiation, or focus.
● Cost Leadership Most firms try to hold down costs. A cost leadership com-petitive
strategy goes beyond this. A business that pursues this strategy aims to be
the low-cost leader in an industry. It usually does this
by minimizing costs across the board.
● Managing Now Managers increasingly use infor-mation
technology (IT) to drive their cost leadership
strategies. Information technology helps Westdeutsche
Bank pursue its low-cost competitive strategy. The
German bank’s mortgage subsidiary’s strategic goal is to
become the lowest-cost provider of real-estate loans for
private customers through its branches in London and
Germany.35To accomplish this goal, management knew
it had to streamline its entire loan-approval process.
Management’s solution included installing records-management
software from SAP. The new system dra-matically
reduced the need for paper-based manual
tasks, improved the bank’s ability to respond quickly to
customer inquiries, and improved efficiency. Manage-ment
estimates their records-management unit is sav-ing
at least 21⁄2 hours per employee per week with the
competitive strategy: a plan
to establish a profitable and
sustainable competitive position
against the forces that determine
industry competition
Information technology helps Westdeutsche Bank pursue its
low-cost competitive strategy.

new system. That time savings helps the bank achieve its strategic goal of being
the low-cost leader in its markets.
● Differentiation With a differentiation strategy, a firm seeks to be unique in
its industry along some dimensions that are valued by buyers.36 The manager
picks one or more attributes of the product or service (such as quality, reliabilty,
or high fashion) that buyers (hopefully) perceive as important. The firm then
positions itself to meet those needs better than its competitors, for instance, by
how it produces, advertises, or sells the product or service.
Companies differentiate in many ways. These range from the product image
offered by cosmetics firms (Revlon) to concrete differences such as product dura-bility
(Caterpillar), safety (Volvo), usability (Apple Computer), and quality (Lexus).
● Focusers Differentiators (like Volvo) and low-cost leaders (like Dell) are gen-eralists
when it comes to the market. They aim to sell to all or most potential buy-ers.
Pursuing a focus competitive strategy means the company selects a narrow
market segment and then builds its business by serving the customers in that
niche better or more cheaply than do its generalist competitors. Here, the man-ager
must ask, “By focusing on a narrow niche market, can we provide our target
customers with a product or service better or more cheaply than could our gener-alist
competitors?” If the answer is yes (and if the market is big enough), it may pay
to focus. A Pea in the Pod, a chain of maternity stores, focuses on selling stylish
clothes to pregnant working women. By focusing, the company can provide a
wider range of such clothes to its target customers than can generalist competitors
like Macy’s or JCPenney.
Managers now often make IT-based systems the centerpiece of their compet-itive
strategies. The accompanying Window on Managing Now feature illustrates
this.
Finally, functional strategies flow from and depend on the business’s competitive
strategy. A functional strategy lays out a department’s basic operating policies.
For example, Dell competes as the industry’s low-cost leader. To execute this com-petitive
strategy, it formulated departmental functional strategies that support
Dell’s desired (low-cost leader) position. For example, the customer-service de-partment
created a new system that enables Dell advisers to link to customers’
computers (with the customers’ permission) to efficiently and quickly analyze
technical problems. We saw the production department uses special supply chain
systems to automatically coordinate production and shipping. The sales depart-ment
relies almost exclusively on direct telephone or Internet sales to eliminate
the costs of intermediaries such as retail stores.
Strategic Planning Tools
Strategic planning involves choosing strategies that will balance (1) the firm’s
strengths and weaknesses with (2) its external opportunities and threats. Ideally,
the manager wants to take advantage of opportunities (such as booming
demand in China), while capitalizing on the company’s strengths (such as a net-work
of friends and acquaintances in Asia). He or she also wants to anticipate and
functional strategy:
a strategy that lays out a
department’s basic operating
policies, such as where to build
plants and what sorts of
employees to hire

Pella’s New Competitive Advantage
Pella Corporation manufactures and sells standard and
custom windows and doors through a network of sales
branches and sales associates throughout the United
States and the world. The company’s basic supply chain
starts with the customer sale.The chain of events then in-cludes
creating the actual order, designing the product,
scheduling production, acquiring the raw materials and
components (such as locks and hinges), manufacturing it,
and delivering it to the customer.
Getting from the initial order to the final delivery is
actually quite complex. Doing so involves hundreds of
not-so-obvious supporting tasks. These tasks include, for
example, creating invoices, computing sales commissions,
sending delivery notices to contractors, and generating
accounts payable authorizations for paying suppliers. And
because Pella produces custom products, there are liter-ally
millions of possibilities when it comes to dimensions,
window color, and composition. It’s also a very expensive
process. It used to be filled with costs for manually com-pleting
things like orders, production schedules, inventory
make accommodations for threats and reduce (or avoid) strategies that might
depend on the firm’s weaknesses. Managers use SWOT analysis, environmental
scanning, portfolio analysis, and the BCG matrix as strategic analyis tools to
accomplish this balancing act.
● SWOT Analysis Managers use SWOT analysis to consolidate information
regarding their firm’s internal strengths and weaknesses and external opportuni-ties
and threats. The SWOT analysis matrix (shown in Figure 7.6) supplies illustra-tive
generic strengths, weaknesses, opportunities, and threats (SWOT) to guide
the manager’s analysis. It also provides a standardized four-quadrant format for
compiling the company’s strengths, weaknesses, opportunities, and threats.
lists, and delivery notices.
Strategically, Pella is a differentiator. It produces win-dow
and doors, with a strong brand image for quality and
reliability, at competitive costs. The company’s managers
believed it could strengthen its differentiation strategy by
automating and streamlining the steps in its supply chain
process.They did not want just lower costs, although that
was important. They wanted to deliver more value to
their customers by offering better-designed products
faster and with a minimum of hassle.
Working with consultants, Pella installed Oracle
E-Business Suite. This enterprise software system included
software packages such as Oracle Manufacturing and
Oracle Procurement, Sales Online, Order Management,
and Marketing. The new system dramatically improved
Pella’s operations and competitiveness. For example, the
Oracle Procurement package helped reduce the number
of calls between Pella’s purchasing department and suppli-ers
by as much as 95 percent because it processes most
of these purchase transactions online automatically. That
saved Pella about 20 percent in unplanned overtime labor
hours. Pella also now puts bar codes on all its products
and components, so it’s easier to track them by just scan-ning
the item into Pella’s new Oracle system. This change
led to about a 20 percent reduction in warehouse receiv-ing
labor costs, and means managers can keep closer tabs
on inventory.
This Oracle Web-based E-business Suite system pro-vides
Pella with a new competitive advantage—delivering
accurate orders more quickly and at lower cost. Cus-tomers
can now get the products they ordered faster and
at lower cost than they might otherwise. It thereby
helped management strengthen Pella’s differentiation
strategy. The company can now deliver even more quality
and reliability to its customers by offering better-designed
products faster, at lower costs.37

Potential Strengths
Market leadership
Strong research and development
High-quality products
Cost advantages
Patents
● Environmental Scanning Managers traditionally scan or monitor six key areas
of the company’s environment to identify opportunities and threats for their
SWOT analyses. Environmental scanning is the process of gathering and compil-ing
information about six environmental forces that might be relevant to the firm’s
strategic planners:
1. Economic trends. For example, the U.S. government now projects that the
country’s economic growth through 2014 will be below that of 1995–2005.
What opportunities and threats would such a trend imply for businesspeople
thinking of expanding in the United States and abroad? (GE recently reached
the point where just over half its sales come from abroad.)
2. Competition trends. These trends involve actions taken or to be taken by cur-rent
and potential competitors. For example, Google’s emergence as a search
powerhouse put Microsoft’s search technology at a disadvantage.
3. Political trends. For example, most cigarette firms have diversified into other
businesses as government regulations became more widespread.
4. Technological trends. For example, companies that own chains of movie the-aters
are irate that Disney wants to introduce new movies simulateously to the
theaters and on DVDs.38
5. Social and demographic trends. These trends reflect the way people live and
the nature of the people in a society, including what they value. In the United
States, for instance, the proportion of Hispanic people is rising. This prompted
GE’s NBC division to purchase the Spanish-language network Telemundo.
6. Geographic trends. These trends relate to climate, natural resources, and so
forth. In Florida, for instance, climate change has reduced the growing area for
oranges. Florida growers therefore formed alliances with South American
firms, who now supply much of the “Florida oranges.”
● Portfolio Analysis We saw that diversified firms end up with several busi-nesses
in their portfolios. For example, Rupert Murdoch’s News Corporation owns
■
■
■
■
■
Potential Opportunities
■
New overseas markets
■
Falling trade barriers
■
Competitors failing
■
Diversification
■
Economy rebounding
Potential Weaknesses
■
Large inventories
■
Excess capacity for market
■
Management turnover
■
Weak market image
■
Lack of management depth
Potential Threats
■
Market saturation
■
Threat of takeover
■
Low-cost foreign competition
■
Slower market growth
■
Growing government regulation
F IGURE 7.6
SWOT Matrix with Examples
of a Company’s Strengths,
Weaknesses, Opportunities,
and Threats

STARS
CASH COWS
QUESTION MARKS
DOGS
High
Low
High Low
Relative Market Share
Market Growth Rate
newspapers, television stations (Fox), and movie studios. How does the manager
decide which business to keep and which to sell? The BCG matrix is one tool.
● BCG Matrix The BCG matrix, developed by the Boston Consulting Group,
helps managers identify the relative attractiveness of each of a firm’s businesses.
It assumes that a particular business’s attractiveness depends on two things—the
growth rate of the business and the business’s market share. As you can see in
Figure 7.7, the manager plots each business on the matrix at the intersection of
the business’s estimated growth rate and relative competitive position (market
share).
This process identifies four types of businesses (see Figure 7.7). Stars are busi-nesses
in high-growth industries and in which the company has a high relative
market share. For example, Apple’s iPod business has a high growth rate and a very
high market share. Star businesses usually require large infusions of cash to sus-tain
growth. Their strong market positions help them generate the needed cash.
Question marks are businesses in high-growth industries, but the firm has low
market shares. The manager here faces a dilemma: the company must either di-vert
cash from its other businesses to boost the question mark’s market share or
get out of the business.
Cash cows are businesses in low-growth industries (such as cigarettes) that
enjoy high relative market shares. Being in a low-growth industry argues against
making large cash infusions into these businesses. However, their high market
share generally allows them to generate high sales and profits for years, even with-out
much new investment. Cash cows can therefore help drive a firm’s future suc-cess.
For example, Kodak’s consumer film unit is still a cash cow: the market is
shrinking fast, but Kodak has a big market share. In one recent year, Kodak was
able to generate over $1 billion in cash flow from its film business, which helped
nurture its digital photography growth business (a star business for Kodak).39
Finally, dogs are businesses with low market shares in low-growth industries.
The low market share puts the business in jeopardy relative to its larger competitors
(who can vastly outadvertise it, for instance). As a result, dogs can quickly become
F IGURE 7.7
BCG Matrix
After the position of each of the
company’s businessses is plotted, a
decision can be made regarding
which businesses will be cash
resources and which will be cash
users.
SOURCE: Adapted from “The Product
Portfolio,” Perspectives, no. 66, Boston
Consulting Group.

cash traps, absorbing cash to support a hopeless low-growth situation. Managers
usually sell them to raise cash to build their star and question-mark businesses.
Strategy Execution and Digital Dashboards
esigning the strategy is just the first part of the manager’s strategy manage-ment
job. The challenge isn’t just designing good strategies; it is getting em-ployees
to execute them. For example, researchers studied 1,800 large companies.
D
About 90 percent had detailed strategic plans with strategic goals. However, only
about one in eight achieved their strategic goals.40
Several factors help to explain why strategic goals go unmet. In one study,
consultants found that most of the 200 firms they surveyed didn’t even bother
tracking performance: “In our experience, less than 15 % of the companies make it
a regular practice to go back and compare the business’s results with the perfor-mance
forecast for each unit. . . .”41 Other reasons for not achieving the strategic
goals included allocating insufficient resources for executing the plan, poorly
communicating the strategy and goals to employees, and not clarifying what em-ployees
had to do to execute the strategy or who was in charge of what.
In other words, many managers spend a lot of time formulating strategic
plans, but then drop the ball, by not communicating their plans to employees, by
not assigning each employee clear goals and responsibilities, and by not monitor-ing
actual progress.
Traditional Methods for Improving
Strategy Execution
Therefore, if management expects employees to help execute its strategic plan, it
must ask, “Does every employee in the organization understand the business
strategy and how he or she can contribute to the success of the strategy?”42 Three
traditional ways for accomplishing this include face-to-face communicating,
management by objectives, and executive assignment tables.
● Face-to-Face Communications Managers traditionally use face-to-face com-munications
to encourage employees to help execute the managers’ plans. CEO
Lawrence Bossidy took this approach when he merged Honeywell Corp. and Al-liedSignal.
In his first two months, “I talked to probably 5,000 employees. I would
go to Los Angeles and speak to 500 people, then to Phoenix and talk to another
500. I would stand on a loading dock and speak to people and answer their ques-tions.
We talked about what was wrong and what we should do about it.”43
● Management by Objectives (MBO) As we explained earlier, many firms still
use management by objectives to communicate and set goals for employees and
to monitor their employees’ progress in meeting their goals. Department heads
meet with their own bosses, and then with their own employees, to work out and
assign objectives. The problem is that MBO is time-consuming. It requires numer-ous
meetings among employees and supervisors, and then documenting each
person’s goals. Then managers typically assess each employee’s performance no
more than once or twice a year.
● Executive Assignment Tables Many managers use an executive assignment
table similar to the one shown in Table 7.1 to clarify who is responsible for what
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Strategy Execution and Digital Dashboards ■ 199
T ABLE 7.1
Executive Assignment Action Plan for Achieving a Long-Term Objective*
Long-term goal: have a minimum of 55% of sales revenue from customized products by 2008.
Each Manager’s Which Manager How Will We
Executive Does This, and Who By When Does the Resources Manager Monitor
Assignment/Goals Helps Him or Her? Manager Do This? Will Require . . . Progress?
Primary Supporting Start Complete Capital Operating Human Labor
1. Complete market study Vice president, Vice president, Year 1 Year 1 $10,000 500 hrs. Written
on sales potential for marketing sales progress
customized products report
2. Revise sales Vice president, Vice president, Year 1 50 hrs. Revise
forecasts for sales marketing forecasts
years 1, 2, and 3
to reflect changes
3. Convert Building Vice president, Vice president, Year 1 Year 2 $500,000 $80,000 1,100 hrs. Written
C to customized manufacturing engineering; progress
manufacturing vice president, reports
operation by 2008 administration
4. Change compensation Vice president, Vice president, Year 1 Year 1 $50,000 100 hrs. Revised
structure to create human sales structure
better incentives resources report
for customized sales
5. Train sales staff in Director of Vice president, Year 2 Year 2 $50,000 1,000 hrs. Training plan
new technology training sales reports
6. Expand production of Vice president, Vice president, Budgeted Budgeted Production
customized products manufacturing engineering reports
—to 25% Year 1 Year 2
—to 30% Year 2
—to 40% Year 3
—to 50% to 55% Year 3
7. Increase sales Vice president, Vice president, Sales reports
of customized sales marketing
products
—to 25% Year 1 Year 2
—to 30% Year 2
—to 40% Year 3
—to 55% Year 3
8. Revise sales Vice president, Vice president, Year 3 Revised
forecasts sales marketing forecasts
*This executive assignment action plan shows the specific executive assignments required to achieve top management’s long-term objective:
“have a minimum of 55% of sales revenue from customized products by 2008.”
Source: Adapted from George Morrisey, A Guide to Long-Range Planning (San Francisco: Jossey-Bass, Inc., 1996), pp. 72–73.

A system that focuses employees on the goals and initiatives that they must execute for the
company to succeed, and that gives managers a timely way to monitor performance and
take corrective action.
DIGITAL
DASHBOARD
STRATEGY
MAP
PERFORMANCE MANAGEMENT PROCESS
Graphical tool that
summarizes the chain of
activities that contribute to
a company’s success, and so
shows employees the “big
picture” of how their
performance contributes to
achieving the company’s
overall strategic goals.
Presents the manager
with desktop graphs and
charts, so he or she gets a
picture of where the
company has been and
where it’s going, in terms
of each activity in the
strategy map.
BALANCED
SCORECARD
A process for managing
employees’ performance
and for aligning all employees
with key objectives, by
assigning financial and non-financial
goals, monitoring
and assessing performance,
and quickly taking corrective
action.
F IGURE 7.8
Summary of Performance-
Management Process
aspect of the plan. As you can see, the table lists each manager’s assignment in
executing the company’s strategic plan. In this case, one long-term top-management
strategic goal is to “have a minimum of 55% of sales revenue from customized
products by 2008.” The executive assignment table then lists each department’s
goals and roles. For example, the vice president of marketing (supported by the
sales vice president) should “complete a market study of sales potential for
customized products” by the end of year 1.
In summary, managers need tools for communicating strategic goals to sub-ordinates
and for monitoring actual progress. Assigment tables provide managers
with specific, measurable objectives against which they can measure their perfor-mance.
However, tables like these are time-consuming to produce. Furthermore,
the typical annual or semiannual milestones at best permit periodic, rather than
real-time, performance assessments. MBO has much the same delay problem.
Managers today need real-time feedback on how they are doing.
Managing Now: Strategy Maps
To get this real-time feedback, managersnowoften use a performance-management
process to communicate goals and responsibilities and to track performance. In
this context, performance management refers to any system that focuses employ-ees
on the goals and initiatives that they must execute for the company to succeed,
and that gives managers a timely way to monitor performance and take corrective
action. The basic idea of modern performance management is to use information
technology to give management a real-time bird’s-eye view of how the company is
doing in terms of (1) carrying out the tasks required to achieve its strategic goals
and (2) actually achieving those goals. This process relies on three information
technology–based tools: strategy maps, balanced scorecards, and digital dash-boards.
Figure 7.8 summarizes this process. It starts with the strategy map.

strategy map: a graphical tool
that summarizes the chain of
activities that contributes to a
company’s success
The strategy map is a graphical tool that summarizes the chain of activities
that contributes to a company’s success. Thus, it shows the big picture of how each
department’s or team’s performance contributes to achieving the company’s over-all
strategic goals.
Figure 7.9 presents a strategy map for Southwest Airlines. Southwest pursues
a low-cost leader competitive strategy. Therefore, it shapes all its activities to
F IGURE 7.9
Strategy Map for Southwest Airlines
Financial Aims
Customer Aims
Internal
Operations
Employee
Considerations
Shareholder
Value
Profits and Return
on
Assets
Attract
and Keep
Customers
Fewer
Planes
Committed
Ground and
Flight Crews
On-Time
Flights
Fast Plane
Turnarounds
Low
Prices
Grow
Revenues
SOURCE: Adapted from Ravi Tangri,“Creating a Strategy Map,” www.teamchrysalis.com.

balanced scorecard: a type
of performance-management
process that involves
(1) assigning financial and
nonfinancial goals to the
activities in the strategy map,
(2) informing all employees of
their goals, (3) continuously
monitoring and assessing
performance, and (4) taking
corrective action as required
delivering low-cost, convenient service. The strategy map for Southwest suc-cinctly
lays out the hierarchy of big activities required for Southwest Airlines to
succeed. At the top is achieving companywide, strategic financial goals. The strat-egy
map in Figure 7.9 shows the chain of activities that helps Southwest achieve
these goals. To boost revenues and profitability, Southwest needs to fly fewer
planes (to keep costs down), attract and keep customers, maintain low prices, and
maintain on-time flights. In turn (further down the strategy map), on-time flights
and low prices require fast turnaround. And fast turnaround requires motivated,
committed ground and flight crews.
The strategy map enables Southwest’s management to see in broad terms each
of the major activities that contribute to Southwest’s success. It also helps
employees understand their assignments and roles. For example, each ground-crew
employee can see that by working hard to turn planes around fast, he or she
is contributing to a chain of activities that helps make Southwest profitable.
The Balanced Scorecard
Once the manager outlines the activities with the strategy map, he or she must
attach measurable targets to each of these activities. For example, he or she must
answer questions like “What do we mean by faster turnaround time?” and “What
do we mean by on-time flights?” The balanced scorecard is one way to do this. The
balanced scorecard is a type of performance-management process. In particular,
it involves (1) assigning financial and nonfinancial goals to the activities in the
strategy map, (2) informing all employees of their goals, (3) continuously monitor-ing
and assessing performance, and (4) taking corrective action as required. The
word balanced in balanced scorecard refers to a balance of goals. It includes a
balance of financial and nonfinancial goals, of short-term and long-term goals,
and of external goals (for instance, what the customer thinks) and internal goals
(for instance, airplane turnaround time). Southwest might want to measure turn-around
time in the following terms: “Improve turnaround time from an average
of 30 minutes per plane to 26 minutes per plane this year.” It might measure
customer satisfaction with periodic surveys.
The great advantage of the balanced-scorecard approach is that it is predictive.
Financial goals such as budgets are better at telling managers how they’ve done
than how they’ll do tomorrow. On the other hand, monitoring a balanced set of
measures can signal problems ahead. Thus, doing so might prompt Southwest
Airlines’ CEO to say, “Our customer-service ratings dipped, and since customer
service leads to more customers and in turn to future revenues, we should take
corrective action now.”
As part of the balanced-scorecard process, management will probably pre-pare
performance measures, as well as management initiatives for achieving
these measures, for each of the main activities in the firm’s strategy map. For ex-ample,
“to attract and keep customers” is one strategy-map activity for Southwest.
The manager might therefore prepare measures and initiatives similar to those in
Figure 7.10 for this activity. Specifically, he or she would list several objectives, for
instance, in terms of customer satisfaction (as measured by customer surveys).
For each objective, the manager might also list several initiatives aimed at sup-porting
these customer-satisfaction objectives.
The balanced-scorecard process is one specific example of performance man-agement.
As noted, performance management refers to any system that focuses
employees on the goals and initiatives that they must execute for the company to
performance
management: any system
that focuses employees on the
goals and initiatives that they
must execute for the company
to succeed, and that gives
managers a timely way to
monitor performance and take
corrective action

F IGURE 7.10
Balanced Scorecard: Performance Measures, Performance Targets,
and Management Initiatives
ONE BALANCED SCORECARD PERFORMANCE MEASURE AND TARGET*
HOW TO
MEASURE
OBJECTIVE
Extent of customer
satisfaction with timeliness
of airline boardings,
takeoffs, arrivals
MANAGEMENT INITIATIVES TO
IMPROVE PERFORMANCE
Project Manager Due Date
OPERATIONAL
TARGET
succeed, and that gives managers a timely way to monitor performance and take
corrective action. Four features characterize performance management:
1. The aim of any performance-management process is to align the employees’
efforts with the company’s strategic goals.
2. It provides each employee, from the top to the bottom of the chain of com-mand,
with an easy way to visualize and understand his or her role in achiev-ing
the company’s strategy.
3. Employees receive individual goals that make sense in terms of supporting
the company’s overall strategic goals.
4. It includes a process for continuously monitoring employees’ performance
and for taking timely corrective action, usually information technology–based.
Digital Dashboards and Performance-Management
Systems
Even a simple strategy map like that for Southwest Airlines may produce dozens of
objectives, measures, and initiatives. How is the manager to monitor, integrate,
and analyze information on performance for all employees and activities on all
these measures—and do so in real time?
BALANCED
SCORECARD
OBJECTIVE
(Based on customer
surveys)
Analyze why January
2007 boardings
satisfaction ratings
dropped to 85%
Customer Satisfaction Timeliness 95% customer
satisfaction
ratings
Janis Smith,
customer
service
manager
March 31,
2007
*Note: Customer satisfaction is one measure of how Southwest Airlines is doing. A company like Southwest might have a table like this
addressing each activity in its strategy map, along with specific measurable targets, and (as required) management initiatives for
diagnosing and rectifying poor performance. The objectives and measures in this table become the basis for Southwest’s performance
management process. Specifically, it enables management to monitor how employees are doing with respect to the balanced set of
objectives in its strategy map, and thereby makes sure employees are doing what is necessary to achieve the objectives—like customer
satisfaction—that Southwest must achieve to be successful.
SOURCE: Adapted from Steve Logan,“Balanced Scorecard 101.”

Managers now use special performance-management software systems to do
this. These systems integrate and store information from hundreds or thousands
of sources (for instance, feedback from customer surveys, daily airplane turn-around
statistics, employee performance measures, and on-time flights). They
employ built-in analytical tools to review and analyze all this information and to
provide managers with continuous, real-time updates regarding the company’s
performance. The performance-management systems then generally present the
summarized information the managers need in computerized digital dashboards.
● The Digital Dashboard The saying “A picture is worth a thousand words”
explains the purpose of the digital dashboard. A digital dashboard (like that in Fig-ure
7.2 on page 184) presents the manager with desktop graphs and charts showing
where the company has been and where it’s going in terms of each activity in the
strategy map. The dashboard takes all the results of the number crunching by the
company’s performance-management software and presents it to the manager in an
intelligible form. For example, a top manager’s dashboard for Southwest Airlines
might display daily trends for strategy-map activities such as fast turnaround, at-tracting
and keeping customers, and on-time flights. This gives the manager time to
take corrective action. For example, if ground crews are turning planes around slower
today, financial results tomorrow may decline unless the manager takes action.
Like automobile dashboards, these digital dashboards also usually present in-formation
so it grabs the manager’s attention, such as by a graph blinking red if
turnaround time is trending down. For example, SAS software’s Strategic Perfor-mance
Management package is a Web-based system that produces alerts “that call
employees to action when performance is not meeting targets.”44
Software systems like Strategic Performance Management help managers
make better decisions. For example, Oracle’s Balanced Scorecard package lets
management compare their performance (for instance, with respect to airline turn-around
time) against industry peers as well as against internal budgets and histor-ical
data. From their desktops, managers can also click on any indicator to perform
more-detailed analyses. If there are problems, the system enables employees to
collaborate online and thus analyze the causes and take corrective action.
With a digital dashboard based on the strategy map, managers can also see
how their decisions at each level affect the company’s strategy. As the managing
director of a Danish mortgage credit organization says, “When I turn on my com-puter
in the morning, our scorecard is the first thing I see. . . . If I discover any devi-ations
of the key figures I contact the person responsible for the specific area. . . .”45
digital dashboard: a
computer dispay that presents
the manager with desktop
graphs and charts showing
where the company has been
and where it’s going in terms of
each activity in the strategy map
Airlines like Southwest
and JetBlue use strategy
maps to identify the
chain of activities that
determine their
performance.

Discussion Questions ■ 205
1. Plans are methods for achieving a desired result.
Goals or objectives are specific results you want to
achieve. Planning is the process of establishing
objectives and courses of action, prior to taking
action.
2. Planning lets you make your decisions ahead of
time, provides direction and a sense of purpose,
provides a unifying framework, avoids piecemeal
decision making, helps managers identify potential
opportunities and threats, and facilitates control.
3. The management process consists of five steps:
set the objective, develop forecast and planning
premises, determine what the alternatives are,
build alternatives, implement and then evaluate
the plan.
4. Goals are specific, measurable, attainable, rele-vant,
and timely (SMART).
5. Forecasting is estimating or calculating in advance
or predicting. Basic forecasting techniques include
time-series forecasting, causal forecasting, and
qualitative forecasting. Qualitative methods in-clude
jury of executive opinion and the sales force
estimation method. Managing now often involves
automating the forecasting process by using infor-mation
technology systems to continuously moni-tor
demand for the company’s product and to
communicate this information to management.
6. Competitive intelligence is a systematic way to
obtain and analyze public information about
competitors. The Web is useful for this task, for
instance, for finding all the websites linked to the
competitor’s site and for carefully reviewing its
investor relations pages.
7. The steps in the strategic-management process in-clude
define the business and its mission, perform
external and internal audits, translate the mission
into goals, formulate strategies to achieve the
strategic goals, implement the strategy, and evalu-ate
performance via strategic control.
8. Examples of strategies include corporate-level
strategies (such as concentration and diversifica-tion),
competitive strategies (such as low-cost, dif-ferentiator,
and focuser), and functional strategies.
9. A strategy map is a graphical tool that summarizes
the chain of activities that contributes to a com-pany’s
success and shows employees how their
performance contributes to achieving the com-pany’s
overall strategic goals.
10. Performance management refers to any systems
that focus employees on the goals and initiatives
that they must execute for the company to suc-ceed,
and that give managers a timely way to
monitor performance and take corrective action.
Today, information technology supports the per-formance-
management process, for instance, by
using the balanced-scorecard process to apply a
balanced set of financial and nonfinancial meas-ures
to the activities in the strategy map and then
reporting actual performance in real time to man-agement
via desktop digital dashboards.
1. What are the advantages of planning?
2. What are the basic steps in the planning process?
What are the “two small complications” that occur
when managers apply that process in planning for
their firms?
3. In what ways are SMART goals smart?
4. What are some advantages and disadvantages of
making sales force estimates based on forecasts
collected from the sales force?
5. What is competitive intelligence? Do you think that
it is an ethical process?
6. What are the basic components of a business plan?
7. What is a strategic plan? What purpose does it
serve?
8. What is performance management? What is its re-lationship
to strategy maps, balanced scorecards,
and digital dashboards?

1. It is probably safe to say that a person’s career plan
is one of the most important plans he or she cre-ates.
Unfortunately, most people never write out
such a plan, or they don’t realize they need one
until it’s too late. Using the concepts and tech-niques
in this chapter, develop an outline of a
career plan for yourself, one that is sufficiently de-tailed
to provide direction for your career decisions
over the next five years. Make sure to include
measurable goals and milestones.
2. With three to four other students in the class, form
a strategic-management group for your college or
university. Your assignment is to develop the out-line
of a strategic plan for your college or university,
including details such as mission and vision state-ments;
strategic goals; corporate, competitive, and
functional strategies; and a summary of what busi-ness
your college or university is in. In preparing
your plan, make sure to conduct an environmental
scan, collect competitive intelligence, and use a
SWOT chart. Draw a strategy map for the college or
university.
3. Meet in groups of three or four students and clas-sify
local businesses as to whether they appear to
be pursuing differentiator, low-cost, or focuser
strategies. Explain why you classified the busi-nesses
the way you did.
C A S E S T U D Y
The JetBlue Airways Strategy
In the hugely competitive airline industry, a company
needs the right strategy, or it may as well close its
doors. In the twenty or so years since the U.S. govern-ment
deregulated the airline industry, dozens of air-lines,
from Pan Am to Eastern, have gone out of busi-ness
because they had the wrong strategy or because
strategy execution was less than effective, or both.
Therefore, when David Neeleman said he was start-ing
a new airline, there was some skepticism. However,
JetBlue has been successful and profitable since its in-ception,
so most of that skepticism has evaporated.
In terms of its corporate-level strategy, JetBlue’s
plan wasn’t that different from the plan followed by
other industry start-ups. Its management started small,
with several flights from JFK to Fort Lauderdale and
from JFK to upper New York State. Gradually, it pursued
geographic expansion, starting with a JFK to Long
Beach route. For now, contractors at some airports,
such as JFK, handle JetBlue’s servicing.
JetBlue really distinguished itself with its competi-tive
strategy. Most airlines are differentiator, low-cost
leader, or focuser. For example, until recently, American
Airlines distinguished itself as a differentiator, providing
its passengers with perks like Internet support and a
strong frequent-flier program. Southwest Airlines is a
low-cost leader. Other airlines, like those specializing in
emergency medical evacuation from Europe to the
United States, focus on serving very specific niche
markets.
In terms of competitive strategy, JetBlue seems to
be following a hybrid approach. It seeks to combine the
advantages of being a low-cost leader with the kind of
quality service you’d expect to find only on major dif-ferentiator
airlines such as American. JetBlue keeps
cost down by flying new, low-maintenance planes;
eliminating meals; training teams of employees to turn
aircraft around quickly; and flying only one type of air-craft
so that all pilots and crew can easily switch from
plane to plane. At the same time, JetBlue aims to pro-vide
top-notch service. Passengers get leather seats,
each with its own TV monitor. JetBlue’s Airbus seats are
about an inch wider than those on most Boeing econ-omy-
class seats. Managers carefully select and train
employees to provide upbeat, courteous service. Pas-sengers
get reserved seats. And while it doesn’t provide
meals, JetBlue does provide unlimited snacks.
The competitive strategy has worked until now, but
the competition is becoming much more fierce. When
JetBlue was not on the radar screens of competitors like
American Airlines, it had the low-cost flights from
some airports, such as Fort Lauderdale, pretty much
to itself. However, its own success has increased the

attention it gets from competitors. Most of them, like
American, are using JetBlue’s playbook, for instance, by
cutting out meals to lower costs. Therefore, David
Neeleman knows he must monitor events very care-fully
to make sure that his quality-service/low-cost hy-brid
competitive strategy keeps JetBlue flying high. A
breakdown in JetBlue’s systems that left hundreds of
passengers stranded on JetBlue planes during a snow-storm
in early 2007 made it clear that costs may have
already been reduced too much.
You and your team are consultants to Neeleman,
who is depending on your management expertise to
help navigate the competitive pressures ahead. Here’s
what he wants to know from you now.
1. Develop a vision and mission statement for
JetBlue.
Case Study ■ 207
2. On a single sheet of paper, write the outline of a
workable strategic plan for JetBlue.
3. Based on newspaper reports and an Internet
search, identify JetBlue’s current corporate strate-gies,
and list its strategic options.
4. List the strategic planning tools you think JetBlue
should use, and why.
5. Draw a strategy map for JetBlue, and give its man-agement
team a brief, two-paragraph explanation
for why you think JetBlue should institute a digital
dashboard performance-management system.
Note: In May 2007, apparently facing intense pressure from
investors and his board stemming from JetBlue’s managing
of the February 2007 storms that grounded its planes, David
Neeleman relinquished the CEO position to his No. 2, Dave
Barger. Neeleman remains JetBlue’s chairman, however.

208
8 CONTROLLING
Controlling the Cappuccino Makers at Starbucks
ith 10,000 company-owned stores around the world doing 34 mil-lion
customer transactions per week, Starbucks knows that control-ling
W
what’s happening in those stores is very important.1 The question is,
How do you control a store
that’s 12,000 miles away?
Companies such as Subway
or McDonald’s don’t have Star-bucks’
problem. They franchise
most of their stores, so their
top managers can be reasonably
sure that the local franchisee
will control what’s happening in
his or her store. If there’s a
problem like stealing, the local
owner should be able to catch
it before it gets out of hand.
But Starbucks decided from
day one not to franchise. That
means Starbucks needs a con-trol
Starbucks’ top managers need a way to
control what’s happening in their stores,
even half a world away, as here in China.
system that lets its Seattle-based managers control what’s happen-ing
in each of those 10,000 stores, even if the store is far away. After
reading this chapter, you should be able to recommend a control
system for Starbucks. ■
➤ Describing each step in the basic control process.
➤ Giving examples of steering, concurrent, and feedback controls.
➤ Briefly explaining personal, traditional, and commitment-based controls.
➤ Listing the components of the basic financial management control system.
➤ Comparing activity-based and traditional accounting systems.
➤ Listing four unintended consequences of controls.
CHAPTER OUTLINE
Opening Vignette: Controlling
the Cappuccino Makers
at Starbucks
● The Fundamentals of
Effective Control
The Basic Control Process
Three Types of Control Systems
Personal, Traditional, and Commitment-
Based Control
Using Technology to Stay in Control
at UPS
● Traditional Controls
The Basic Financial Management
Control System
Ratio Analysis and Return on
Investment
Financial Responsibility Centers
● Managing Now: IT-Enabled
Control Systems
Enterprise Resource Planning–Based
Control
More Timely Accounting Reports
Activity-Based Costing (ABC)
Millipore Corp. Integrates Its Global
Operations with ERP
Wireless-Assisted Control
Electronic Performance Monitoring
(EPM)
Digital Dashboards and Control
● How Do People React
to Control?
Unintentional Tactics
● Commitment-Based Control
Systems
Creating Belief Systems and Values
to Encourage Self-Control
Using Commitment-Building Methods
to Foster Self-Control
PRACTICE IT: Controlling the
Cappuccino Makers at Starbucks

The Fundamentals of Effective Control ■ 209
➤ Reading the chapter-opening vignette about Starbucks and recommending a control
system for them.
➤ Reading the end-of-chapter exercise and recommending specific feedforward, concur-rent,
and feedback controls the manager could use.
➤ Reading the chapter case study and explaining the unintended behavioral consequences
Ritz-Carlton may experience.
➤ Watching the simulation video and identifying control tools and systems being used by
the company.
➤ Watching the simulation video and explaining what the managers should do to improve
employee commitment.
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The Fundamentals of Effective Control
s Hurricane Katrina swept through New Orleans several years ago, FEMA offi-cials’
control systems signalled that the levees had held and that all were safe.
A
They were soon to find out how mistaken those controls were. Control is the task
of ensuring that activities are providing the desired results. As one expert says,
“The goal [of the control system] is to have no unpleasant surprises in the future.”2
Controlling involves setting targets, measuring performance, and taking correc-tive
action. Most controls therefore aim to influence employee behavior, which is
why controlling someone often has negative overtones. Control also requires that
targets, standards, or goals be set. That is why managers often use the word
planning along with the word control. Control systems collect, store, and trans-mit
information on profits, sales, or other measures. Starbucks needs a control
system to keep track of what’s happening in its stores. In Washington, D.C., FEMA
needed a contol system to monitor what was happening with those levees in New
Orleans, Louisiana.
If you could be sure that every plan you made and every task you assigned
would be perfectly executed, you really wouldn’t need control. There would be no
surprises. Unfortunately, events rarely go this smoothly. People vary widely in
abilities, motivation, and ethics. Furthermore, plans themselves become out-dated,
often suddenly. (Think of the scrambling FEMA had to do when the levees
broke.)
Many people associate control with large, companywide accounting systems.
However, those systems are just part of what control is about. Control actually
refers to monitoring every task the manager delegates. Some tasks may be so
unimportant or your subordinates so capable that you needn’t bother with con-trols.
However, most managers know that abdication like this is risky. Someone
once said, “A poor manager delegates nothing, and a mediocre manager delegates
everything. An effective manager delegates all that he or she can to subordinates.
At the same time, the manager establishes sufficient checkpoints so that he or she
knows the work has been performed.”
For every task the managers delegates, he or she should ask, How will I keep
track of whether this job is done right? We’ll see how to do so in this chapter.
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control systems: devices
that collect, store, and transmit
information on profits, sales,
or other measures

210 PART THREE CHAPTER 8 Controlling
The Basic Control Process
As mentioned above, controlling involves setting targets, measuring performance,
and taking corrective action. These three steps comprise the basic control process.
● Step 1: Set a Standard, Target, or Goal This step shows what the results
ought to be. Managers express standards in terms of money, time, quantity, or
quality (or a combination of these). Thus, a salesperson might have a (money)
quota of $8,000 worth of products per month. The editor may give the reporter till
June 1 (time) to submit her column. Production supervisors are usually responsi-ble
for producing a specified number of units (quantity) of product per week.
Lexus speaks glowingly of its few defects per car (quality).
● Step 2: Measure Actual Performance Against Standards The next step
is to measure and compare actual performance with the standard. Here, the man-ager
can use many tools. These range from personally monitoring how employees
are doing to using budgets or information technology–based systems.
● Step 3: Take Corrective Action When the manager compares actual with
planned performance, he or she should check for any significant deviations. If
there are any, the manager takes corrective action.
Three Types of Control Systems
It would surely do Starbucks little good to discover in June that in March, a store
manager had run off with $40,000 of a store’s receipts. By June, the money might
well be lost. Starbucks needs a more responsive control system. Some systems are
more responsive than are others. Managers therefore distinguish among three
types of control systems. All the controls we’ll discuss in this chapter fall into one
of these categories.
Steering controls (also called feedforward or precontrol) are controls that let
the manager take corrective action before the operation or project is completed.3
Steering controls are always preventive in nature. For example, on a flight to Mars,
you would not want to find out after the fact that you missed your mark. Engineers
therefore track a spacecraft’s flight path continuously so they can adjust its trajec-tory
in time to reach the target.
Managers use steering controls all the time. For example, they set intermedi-ate
milestones and thus check progress long before the project is complete. They
set up procedures to reject defective raw materials and to test and screen out job
candidates who may become problem employees. They review budgets on a com-parative
basis to better identify trends. They monitor aircraft turnaround time on
a daily basis, so they can correct any problems before profits start to suffer.
● Managing Now Information technology (IT) and the Internet have improved
managers’ abilities to make timely midcourse corrections. Boeing’s use of the
Web is a good example. Boeing has an Internet-based network used by 1,000
other companies, including aluminum supplier Alcoa, Inc.4 To gain access to this
network, external users (including most of Boeing’s suppliers and customers)
receive digital certificates from Boeing, with passwords authorizing them to
access the network.
The network allows both Boeing and its suppliers to maintain better, more
timely control by, for example, reducing the number of misunderstandings with
steering controls: controls
that let the manager take
corrective action before the
operation or project is
completed; also called
feedforward or precontrol

suppliers and customers. Access to the e-network means
suppliers can continually get real-time updates regard-ing
required delivery dates and schedule changes and
can make course corrections if these are required. Boe-ing
also linked its e-commerce system to tracking tools
supplied by delivery services such as FedEx. Customers
can therefore view the status of their parts orders at any
time over theWeb, which minimizes delivery surprises.
Boeing’s Internet-based system has improved the
timeliness of the company’s control system in other
ways. For example, employees use the system to moni-tor
production lines: “We use the Web to keep track of
shortages on airplane production lines so that every-one
in the whole organization can know where the hot
spots are, not just management.”5 We’ll look more
closely at IT-based controls later in this chapter.
Concurrent (or yes/no) controls are controls
managers apply at the moment the activity to be con-trolled
takes place. They instantly make yes/no decisions
about whether the activity can take place. For example,
Concurrent control: A manager talks to customers at a
Cheesecake Factory in California.
the movie theater clerk makes on-the-spot decisions about whether someone is old
enough to see a particular movie. Yes/no controls often involve applying the com-pany’s
rules and procedures. Ideally, when a situation covered by the rules comes up,
the employee will be prepared to say yes or no.
Feedback (or postaction) controls are controls the manager uses to com-pare
results to the standard and to take action after the event he or she is control-ling
has occurred. The final inspection on a car assembly line is an example. Many
other familiar controls fall into this postaction category, including semiannual
budgets and the end-of-term grades students receive.
The problem with postaction controls (as with grades) is that you usually can’t
do much to remedy the situation once the results are in. That’s why managers (and
professors) try to inject timeliness into their postaction controls. Instead of just a
final exam, professors give a midterm, too. Instead of just a midyear budget, the
manager prepares monthly budgets, too. The Window on Managing Now feature
shows how UPS uses IT to inject an element of timeliness into their postaction
controls.
Periodic surveys are another example of postaction controls. For example,
twice a year, Siebel Systems (which makes computer systems) has consultants
collect data from about 20 percent of its customers. This provides detailed re-ports
on how satisfied the customers are with specific Siebel departments and
individuals.6
Personal, Traditional, and Commitment-Based
Control
Assume you just took over as editor in chief of your college’s student paper. What
are some of the details you would want to control? A (very) short list would include
article length and quality, advertising revenues, operating expenses, article dead-lines,
article topics, and the format for each issue. How will you make sure all these
details stay under control? Any manager has three basic options: you can (1) mon-itor
things personally; (2) rely on traditional control tools, such as budgets; or
concurrent (yes/no)
controls: controls managers
apply at the moment the activity
to be controlled takes place
feedback (or postaction)
controls: controls the manager
uses to compare results to the
standard and to take action after
the event he or she is controlling
has occurred

Using Technology to Stay in Control at UPS
UPS is the world’s largest air and ground package-distribution
company. It delivers close to 3 billion parcels
and documents each year in the United States and more
than 185 other countries. Critical to its success has been
the $1.8 billion UPS invested in information technology.
Each UPS driver uses a handheld computer called a deliv-ery
information acquisition device (pictured on page 223).
This device captures customers’ signatures along with
pickup, delivery, and time-card information. Then it auto-matically
transmits this information to headquarters via a
Through TotalTrack, its automated package-tracking
system, UPS can control packages throughout the delivery
process. And with its own global communications network
(3) rely on employees’ self-control by appealing to their sense of commitment. (Or,
of course, you can use a mixture of all three.)
● Personal (or Interactive) Control The editor in chief of a college paper
has one big control advantage over the managing editor of the New York Times.
The college paper is probably small enough so that the editor can continuously
talk face-to-face with all the staff. He or she can monitor in real time how every-thing
is going.
Personal control means maintaining control by personally monitoring how
everyone is doing. Personal control is the most basic way to stay in control. Even
large firms use this approach.7 For example, firms like Toyota limit their plants to
a few hundred employees. In this way, interactions and
control in each unit remain more instantaneous and
personal.
In fact, it would be highly unusual for any manager
not to rely to some extent on personal interactions as a
way to stay in control. Some managers formalize this
approach by adhering to the notion of “management
by walking around.” They stay in control, in part, by lit-erally
walking around their facilities to see how things
are going.
Others schedule weekly meetings where they dis-cuss
results. Senior managers at USA Today use this
approach.8 Friday morning they get three weekly re-ports.
This Friday Packet includes information ranging
from advertising sales figures to information about
particular advertisers. Weekly face-to-face meetings
among senior managers and key subordinates help
cellular telephone network.
personal control:
maintaining control by
personally monitoring how
everyone is doing
One simple but effective way to control what’s happening is to
have people meet and interactively discuss “how we’re doing.”
called UPSnet, UPS not only tracks its packages but elec-tronically
transmits documentation on each shipment di-rectly
to customs officials prior to arrival. Shipments are
therefore either cleared for shipment or flagged for in-spection
when they arrive.
UPS uses the Internet to help it and its customers
monitor and control the progress of all those billions of
packages. For example, the UPS Internet-based tracking
system lets a customer store up to twenty-five tracking
numbers and then monitor the progress of each package.
The system not only lets the customer (and UPS) keep
track of each package’s progress, it also serves as a value-added
feature for the customer. It can easily keep UPS
customers informed about the progress of every package.

apply this information. Regular topics include advertising volume compared to
plan and new business by type of client.
● Traditional Control Traditional control uses external devices such as budg-ets
and computerized information systems to monitor performance and to report
on results. These methods are what usually spring to mind when most people
think of control. Thus, Jeffrey Immelt controls GE in part through a system of
(computerized) financial controls and budgets.
● Self-Control and Commitment-Based Control Personal observation and
traditional controls like budgets get the manager only so far. No control system
can anticipate every possible crisis. Employees have many ingenious ways of get-ting
around the system. And in many situations (such as building high-quality
cars), you want the employees to want to build in quality; you can’t really force
them to do so. That is why many companies, including Starbucks, work hard to cre-ate
an environment in which employees want to exercise self-control and do what’s
best for the firm. Self-control refers to a set of methods managers use to encourage
employees to control their own performance.
We’ve summarized the three basic control approaches—personal, traditional,
and commitment—in Figure 8.1. We’ll devote the rest of this chapter to discussing
the traditional and the commitment-based systems in detail.
traditional control: controls
based on external devices such
as budgets and computerized
information systems to monitor
performance and to report on
results
self-control: a set of methods
managers use to encourage
employees to control their own
performance
Diagnostic
Control
Systems
(budgets, ROI,
financial ratios)
IT-Based Systems
(such as
enterprise
resource
planning )
Belief Systems
(establish
values)
Commitment-
Fostering
Systems
Traditional
Control
Systems
Commitment-
Based
Control
Systems
Systems for
Maintaining
Control
Personal-
Interactive
Systems
(monitor
face-to-face)
F IGURE 8.1
Three Basic Categories
of Control Systems

Traditional Controls
raditional controls are formal, preplanned, methodical systems that help
managers zero in on discrepancies. Also called diagnostic or budgetary con-trols,
they are the controls most people think of when they think of management
control. Budgets and production reports are two examples. These controls reduce
the need for managers to continually and personally monitor everything for which
they are responsible.9Having previously set targets or goals, the manager can (at
least in theory) then leave the employees to pursue the goals. Ideally, the manager
can be secure in the knowledge that if the goals aren’t met, the deviations will show
up as red flags in performance reports.
This last idea forms the heart of what managers call the principle of exception.
The principle of exception (or management by exception) holds that to conserve
managers’ time, only significant deviations or exceptions from the standard, “both
the especially good and bad exceptions,” should be brought to the manager’s
attention.10
The Basic Financial Management Control System
Managers—including a student paper’s editor in chief—have many nonfinancial
details to control. For our editor, these include article deadlines, article length and
quality, and the format for each issue. Yet in reality, it’s usually the financial
aspects—the bottom line—that’s first among equals when it comes to control.
Financial controls thus form the heart of a company’s basic management control
system.
Financial controls begin with the firm’s planning process. Management for-mulates
an overall strategy and mission for the firm. This provides a framework
within which the rest of the planning process can take place. Next, management
formulates subsidiary, lower-level plans and a hierarchy of goals. At the top, the
president sets strategic goals (such as “have 55% of sales revenue from customized
products by 2008”). As we discussed in Chapter 7, each functional vice president,
and in turn each of their subordinates, then receives goals.
The result is a chain or hierarchy of departmental goals and short-term oper-ational
goals and plans. At each step in this hierarchical process, management
invariably translates the goals and plans into financial targets and embodies them
in budgets. The president’s goal might translate as “$2 million in revenues from the
Custom Products Division in 2008.” Financial statements and budgets thus be-come
the heart of the firm’s basic management control system. Let’s look more
closely at these statements and budgets.
● Budgets Budgets are formal financial expressions of a manager’s plans.
They show targets for things like sales, cost of materials, production levels, and
profit, expressed in dollars. These planned targets are the standards against which
the manager compares and controls the unit’s actual performance. The first step
in budgeting is generally to develop a sales forecast and sales budget. The sales
budget shows the planned sales activity for each period (usually in units per
month) and the revenue expected from the sales.
The manager can then produce various operating budgets. Operating
budgets show the expected sales and/or expenses for each of the company’s de-partments
for the planning period in question. For example, the production and
T
traditional controls: formal,
preplanned, methodical systems
that help managers zero in on
discrepancies
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principle of exception:
(or management by exception)
holds that to conserve
managers’ time, only significant
deviations or exceptions from
the standard should be brought
to the manager’s attention
budgets: formal financial
expressions of a manager’s plans
sales budget: a budget that
shows the planned sales activity
for each period (usually in units
per month) and the revenue
expected from the sales
operating budgets: budgets
that show the expected sales
and/or expenses for each of the
company’s departments for the
planning period in question

F IGURE 8.2 OPERATING BUDGET FOR MACHINERY DEPARTMENT, JANUARY 2007
Example of a Budget
$2,107
$3,826
$ 402
$ 500
materials budget (or plan) shows what the company plans to spend for materials,
labor, administration, and so forth to fulfill the requirements of the sales budget.
● Profit Planning The next step is to combine all these departmental budgets
into a profit plan for the coming year. This profit plan is the budgeted income
statement or pro forma income statement. It shows expected sales, expected ex-penses,
and expected income or profit for the year. In practice, cash from sales
usually doesn’t flow into the firm so that it coincides precisely with cash disburse-ments.
(Some customers may take thirty-five days to pay their bills, for instance,
but employees expect paychecks every week.) The cash budget or plan shows, for
each month, the amount of cash the company can expect to receive and the
amount it can expect to disperse. The manager can use it to anticipate his or her
cash needs and to arrange for short-term loans, if need be.
The company also has a budgeted balance sheet. The budgeted balance
sheet shows managers, owners, and creditors what the company’s projected fi-nancial
picture should be at the end of the year. It shows assets (such as cash and
equipment), liabilities (such as long-term debt), and net worth (the excess of as-sets
over other liabilities).
Budgets are the most widely used control device. Each manager, from first-line
supervisor to company president, usually has an operating budget to use as
a standard of comparison. Remember, however, that creating the budget (as in
Figure 8.2) is just the standard-setting step in the three-step control process. You
must still compare the actual and the budgeted figures. And if necessary, you’ll
need to diagnose any problems and take corrective action.
The firm’s accountants compile the financial information and feed it back to
the appropriate managers. As in Figure 8.3, the performance report shows budg-eted
or planned targets. Next to these numbers, it shows the department’s actual
performance numbers. Variances are the differences between budgeted and ac-tual
amounts. The report may provide a space for the manager to explain any vari-ances.
After reviewing the performance report, management can take corrective
action.
Traditional Controls ■ 215
Budgeted Expenses Budget
Direct Labor
Supplies
Repairs
Overhead (electricity, etc.)
TOTAL EXPENSES $6,835
income statement: the profit
plan that shows expected sales,
expected expenses, and
expected income or profit for
the year
cash budget: a plan that
shows, for each month, the
amount of cash the company
can expect to receive and the
amount it can expect to disperse
balance sheet: a statement
that shows managers, owners,
and creditors what the
company’s projected financial
picture should be at the end of
the year, in terms of assets,
liabilities, and net worth
variances: the differences
between budgeted and actual
amounts (on performance
reports)

PERFORMANCE REPORT FOR MACHINERY DEPARTMENT, JANUARY 2007
Direct Labor
Supplies
Repairs
Overhead
(electricity, etc.)
TOTAL
Budget Actual Variance Explanation
$2,107
$3,826
$ 402
$ 500
$6,835
$2,480
$4,200
$ 150
$ 500
$7,330
$373 over
$374 over
$252 under
0
$495 over
Had to put workers on
overtime.
Wasted two crates of
material.
Fewer repairs than
planned.
The firm’s accountants also periodically audit the firm’s financial statements.
An audit is a systematic process that involves three steps: (1) objectively obtain
and evaluate evidence regarding important aspects of the firm’s performance;
(2) judge the accuracy and validity of the data; and (3) communicate the results to
interested users, such as the board of directors and the company’s banks.11 The
purpose of the audit is to certify that the firm’s financial statements accurately re-flect
its performance.
Ratio Analysis and Return on Investment
Managers also use financial ratio analysis to monitor performance and maintain
control. Financial ratios compare one financial measure on a financial statement
to another. The return on investment (ROI) is one such ratio. ROI equals net profit
after taxes divided by total investment. Managers use it as a gauge of overall com-pany
performance. Rather than measuring net profit as an absolute figure, it
shows profit in relation to the total investment in the business, which is often a
more informative figure. For example, a $1 million profit is more impressive with a
$10 million investment than it would be with a $100 million investment. Figure 8.4
lists some commonly used financial ratios.
Analyzing financial ratios helps managers analyze their firm’s performance. For
example (see Figure 8.5), suppose the firm didn’t meet its net income target. Ratio
analysis shows that low sales or high sales costs may account for this. Similarly,
earnings divided by sales (the profit margin) reflects management’s success or fail-ure
in maintaining satisfactory cost controls. As another example, too much invest-ment
may help account for a low ROI. In turn, too much investment might reflect
inadequate inventory control, too many accounts receivable, or too much cash.12
● Strategic Ratios In his book Good to Great, Jim Collins studied companies
that went from good but average to great. He says that one distinguishing charac-teristic
of companies that went from good to great was that they were able to
sum up in one simple ratio what their strategy was all about.13 A strategic ratio
F IGURE 8.3
Example of a Performance
Report
audit: a systematic process that
involves three steps: (1)
objectively obtain and evaluate
evidence regarding important
aspects of the firm’s
performance; (2) judge the
accuracy and validity of the
data; and (3) communicate the
results to interested users, such
as the board of directors and the
company’s banks
financial ratios: ratios that
compare one financial measure
on a financial statement to
another
strategic ratio: a succinct
summary of the crucial
measures that the firm must
focus on to achieve its strategic
aims

Traditional Controls ■ 217
NAME OF RATIO
INDUSTRY NORM
FORMULA (AS ILLUSTRATION)
Current assets
Current liabilities
Cash and equivalent
Current liability
Sales
Cash and equivalent
Inventory
Current assets – Current liabilities
Total debt
Net worth
Net profit before fixed charges
Fixed charges
Current liability
Net worth
Fixed assets
Net worth
Sales
Inventory
Sales
Net working capital
Sales
Fixed assets
Receivables
Average sales per day
Sales
Net worth
Sales
Total assets
2.6
1.0
12 times
85%
56%
6 times
32%
60%
7 times
1. Liquidity Ratios (measure the ability of the firm
to meet its short-term obligations)
Current ratio
Acid-test ratio
Cash velocity
Inventory to net working capital
2. Leverage Ratios (measure the contributions
of financing by owners compared with financing
provided by creditors)
Debt to equity
Coverage of fixed charges
Current liability to net worth
Fixed assets to net worth
3. Activities Ratios (measure the effectiveness
of the employment of resources)
Inventory turnover
Net working capital turnover
Fixed-assets turnover
Average collection period
Equity capital turnover
Total capital turnover
4. Profitability Ratios (indicate degree of
success in achieving desired profit levels)
Gross operating margin
Net operating margin
Sales (profit) margin
Productivity of assets
Return on investment
Net profit on working capital
Gross operating profit
Sales
Net operating profit
Sales
Net profit after taxes
Sales
Gross income – Taxes
Total assets
Net profit after taxes
Total investment
Net operating profit
Net working capital
5 times
6 times
20 days
3 times
2 times
30%
6.5%
3.2%
10%
7.5%
14.5%
F IGURE 8.4
Widely Used Financial Ratios

Return on
Total
Investments
Earnings as
Percentage
of Sales
Multiplied by
Turnover
Divided by
Total
Long-Term
Investment
Sales
Minus
Cost of
Sales
Plus
Selling
Expenses
Plus
Plus
Net Income
Sales
Divided by
Total
Investment
Sales
Total Cost
of Sales
Working
Capital
Administrative
and Other
Expenses
Accounts
Receivable
Plus
Inventories
Plus
Cash
Long-Term
Investments
Plus
Fixed,
Intangible, and
Other Assets
F IGURE 8.5
Ratio Analysis: Factors Affecting Return on Investment
The firm’s overall profitability—its return on total investments—can be better understood
by analyzing its components, including earnings as a percentage of sales and turnover.

Managing Now: IT-Enabled Control Systems ■ 219
succinctly summarizes the crucial measures that the firm must focus on to
achieve its strategic aims. For example, Gillette bases its strategy in part on selling
multiple products repeatedly to customers. It therefore focuses on profit per cus-tomer
rather than profit per division, as other consumer companies do. Walgreen’s
wants to be “the place to shop,” and so it sells a variety of items. It therefore focuses
on profit per customer visit rather than profit per store. The grocery firm Kroger
wants to dominate in each local market. It therefore focuses on profit per local
population instead of profit per store.
Financial Responsibility Centers
In most firms, certain managers are responsible for achieving specific sets of fi-nancial
targets. This makes it easier for top management to evaluate these man-agers’
performances. It also makes it easier for each manager to see how the firm
will evaluate his or her performance. When the manager has an operating budget
tied to specific financial performance targets, we say the manager is in charge of a
financial responsibility center. Financial responsibility centers are units that are
responsible for and are measured based on a specific set of financial activities.
There are several types of financial responsibility centers. Profit centers are
responsibility centers whose managers the company holds accountable for profit.
(Profit is a measure of the difference between the revenues generated and the cost
of generating those revenues.14) The Allfirst unit of the banking group AIB is a
profit center. AIB holds the division’s head responsible for the profitability of that
division. AIB controls that manager’s performance partly by monitoring whether
the division “makes its numbers”—in other words, meets its profit goals.
Revenue centers are responsibility centers whose managers are accountable
for generating revenues. Thus, firms generally measure sales managers in terms of
the sales produced by their revenue center/departments. Cost centers are respon-sibility
centers whose managers are accountable for managing their operations—
such as factories—within certain cost constraints.
Managing Now: IT-Enabled Control Systems
yundai uses wireless handheld scanners to monitor and control the 43,000
cars per year that go through one of its European import centers. The hand-held
scanners read bar codes on each car. They then automatically send the infor-mation
directly back to Hyundai’s computer systems. That way, all employees
H
along the supply chain, from sales to the dealer, to shipping, can continuously
monitor the whereabouts of each car.15
As at Hyundai, information technology revolutionized how managers main-tain
control. We’ll look at how this change was achieved in this section, with
particular attention to using enterprise resource planning systems, more timely
accounting reports, activity-based costing, wireless systems, electronic perfor-mance
monitoring, and digital dashboards.
Enterprise Resource Planning–Based Control
As we discussed in Chapter 5, enterprise resource planning systems are not
primarily planning systems. An enterprise resource planning (ERP) system is a
companywide integrated computer system comprised of compatible software
financial responsibility
centers: organizational units
that are responsible for and are
measured based on a specific set
of financial activities
profit centers: responsibility
centers whose managers the
company holds accountable for
profit
revenue centers:
responsibility centers whose
managers are responsible for
generating a certain level of
revenues
cost centers: responsibility
centers whose managers are
responsible for managing their
operations within certain cost
constraints

modules for each of the company’s separate departments, such as sales, account-ing,
finance, warehousing, production, and human resources (HR). Each depart-ment
gets its own module or system. Often Internet-based, the ERP modules are
designed to communicate with each other and with the central system’s database.
That way, information from all the departments is readily shared by the ERP
system and is available to employees in all the other departments. Activities that
formerly required human intervention, such as production telling accounting that
it should bill a customer because an order just shipped, now occur automatically.
ERP strips away the barriers that typically exist among a company’s stand-alone
departmental computer systems. With an ERP installed and running, the manager
has a platform on which he or she can install IT-based accounting and other con-trols
such as those we discuss in the next sections. This produces better, faster
control systems.
More Timely Accounting Reports
Most firms computerized their accounting departments many years ago. The
main difference today is that with ERP, all the company’s global accounting (and
other) departments use compatible accounting modules and share their financial
information via a common database.16 This arrangement gives faster, more timely
accounting reports and control. We’ll look at several examples.
● Managing Now For example, updating and maintaining financial statements
was a slow process at NovaCare, a network of over 500 rehabilitation clinics and
physical therapy centers. Each clinic and center had its own accounting system.
Clinic and center administrators inputted financial data into separate systems for
each of their clinics or centers. The process took two to three employees five hours
a day.17 By installing Oracle Financials, the company put all its centers on the same
software system. This setup eliminated much of the labor that the financial state-ment
postings previously required. It also made it easy for NovaCare’s headquar-ters
staff to run off standardized financial reports for the company. This enables
the company to close its books five days faster than it could previously.
With offices in thirty-six countries, Alltech Inc. (which provides products to
the food and feed industries) needed a faster way to get information regarding its
order status and finances worldwide. Previously, auditors at each of the company’s
offices around the world manually entered data onto spreadsheets. Then they sent
the spreadsheets to Alltech’s headquarters, where accountants compiled all this
information into a master spreadsheet. The process took about forty-five days to
complete.18
Today, a Web-based software system automatically collects financial informa-tion
from standardized financial accounting modules in each of the company’s
offices around the world. It also feeds this information back to headquarters. As a
result, management receives consolidated financial statements in fifteen days, in-stead
of forty-five. This faster feedback means tighter top-management control of
global operations. The Window on Managing Now feature provides an in-depth
example.
Activity-Based Costing (ABC)
Traditional accounting systems have a problem showing what it actually costs to
produce and sell a product or service. Suppose, for example, that an insurance
company has a contract to provide insurance to a big client. The insurance firm’s
president wants to know what the contract costs the company. The traditional

Millipore Corp. Integrates Its Global Operations with ERP
Millipore Corp. develops and produces the technologies,
tools, and services pharmaceuticals companies use to
produce new drugs.19 With about 4,500 employees in fa-cilities
in thirty countries, managing and controlling global
operations is key to the firm’s success. Managers need to
know the answers to questions such as, How many em-ployees
do we have in each facility? What is the status of
a particular order? and What are our sales this month in
the European Union?
Their previous systems did not let management an-swer
such questions in a timely manner. Most of Millipore’s
facilities around the world each used different financial
management tools. Compiling information from facilities
around the world was therefore a time-consuming
process. To better manage its global operations, the com-pany
decided to install several integrated software prod-ucts
from Oracle Corp., including the ERP software pack-age
components Oracle Financials, Oracle Human
Resources, Oracle Self-Service Human Resources, and
Oracle Order Management. The components are inte-grated;
for instance, inputting a new order into Order
Management automatically informs Oracle Financials that
the new order exists. Similarly, when an employee changes
his or her pension plan using Self-Service Human Re-sources,
the system automatically “tells” Oracle Financials
to deduct the new costs from the employee’s paycheck.
The Web-enabled ERP suite of products helped
Millipore to control its global operations more effectively.
For example, by not using separate financial packages in
thirty countries, the standardized financial package means
top management can get fast feedback on the firm’s
financial performance around the world. Similarly, as
noted above, Oracle Order Management integrates with
Millipore’s new Oracle financial, warehouse, and distribu-tion
systems. Orders get processed automatically, and
management can track and control orders from entry
through delivery.
With operations around the world, Millipore also
needed to “. . . get a handle on the number of staff we had
at different geographies, what jobs they performed, and
what we were paying them.”20 Previously, headquarters
managers manually compiled employee spreadsheets each
quarter based on data that facilities around the world
produced from their own systems.Today, Millipore’s facili-ties
all run the same Oracle Human Resource Manage-ment
system. Thus, executives can now get an accurate
picture of how many people the firm employs around the
world and an accurate idea of who reports to whom. It
also lets managers control an array of new factors. For ex-ample,
they can easily analyze details like comparative
staffing levels versus sales among global departments.
accounting system might show what the company pays out in claims, and perhaps
what it paid the salesperson as a commission for getting the client. It might even
show (as approximations) what share of the insurance firm’s overhead expenses,
for things like office lighting and heating, the accounting system is charging to this
particular contract.
What the insurance firm’s accounting system probably cannot show are all the
actual costs of serving this client that are scattered around the insurance com-pany.
For example, how much time do this client’s employees spend on the phone
with the insurance firm’s customer-service reps? How much time do the doctors
that serve this client’s employees spend getting approvals for medical procedures
from the insurance company’s gatekeepers?
The problem is that traditional accounting systems tend to isolate depart-ments
with separate, stand-alone accounting systems. The customer-service de-partment
knows what it’s spending overall for customer reps. The gatekeeper
department knows what it’s spending overall for gatekeepers. But the president
can’t access the insurance company’s various departments and determine what
each of them is spending on this particular client.

ERP changes that. All departments use compatible software modules. All de-partments’
systems communicate with the central database. By linking together
the information from compatible accounting modules in different departments,
ERP enables managers to use activity-based costing. Activity-based costing
(ABC) is a system for allocating costs to products or services that takes all the
product’s or service’s costs into account (including production, marketing, distri-bution,
and sales and follow-up activities) in calculating the actual cost of each
product or service.
Activity-based costing is a powerful control tool. With ABC, the manager can
access all departments and monitor the costs associated with any activity he or
she wants to control. For example, the manager can calculate costs by order,
client, project, contract, or business process, rather than by just department or
cost center. ERP makes doing so possible.
● Managing Now For example, Montana Blue Cross Blue Shield installed an
activity-based management system from SAS. Previously, the company’s finance
managers controlled costs the traditional way: by computing basic budget vari-ances
for the company as a whole and for each department. The new ABC system
enabled them to also break out costs by insurance product, and even by individual
lines of business and contracts.
For instance, Blue Cross Blue Shield knew it was losing money on one contract
with a large client. However, its managers had not been able to track and evaluate
all the costs associated with this particular program. With the new SAS ABC sys-tem,
“We’ve been able to re-examine the contract and get a good grip on the costs
that we’re incurring.” Then Blue Cross Blue Shield managers took the steps neces-sary
to address the problem costs and began making the contract profitable.21
As another example, the check-printing company Deluxe Paper Payment Sys-tems
used its ABC system to “get a clearer picture of which of its customers were
profitable and which were not.”22 For example, the system helped it discover that
orders for checks from banks were much more profitable when they arrived via
electronic ordering. Deluxe then launched a campaign to increase electronic
ordering—particularly by its 18,000 bank and small-business customers. The
number of checks ordered electronically quickly jumped from 48 percent to
62 percent, which dramatically improved profits.
Wireless-Assisted Control
The UPS deliveryperson (see the Window on Managing Now feature on page 212)
picks up a package and then uses a delivery information acquisition device to
wirelessly communicate the package’s whereabouts to UPS’s home-base ERP
system. The sender of the package, using her laptop to go online wirelessly via a
Wi-Fi–enabled hot spot at an airport club before her flight, checks the UPS system.
She then uses her cell phone to tell her client that the shipment is on its way.
Control is going wireless. Wireless-assisted control often involves the com-pany’s
supply chain activities (defined in Chapters 1 and 5). For example, UPS’s
handheld acquisition devices are part of the firm’s supply chain management
system. They help UPS control, in real time, the whereabouts of packages in its
system. UPS’s TotalTrack system (see the Window on Managing Now feature) then
enables customers—senders and recipients—to communicate directly with the
system to check delivery status. The UPS system, while wireless, depends on em-ployees
to use handheld wireless devices to input the data. We’ll see next that the
trend now is to make the tracking process automatic.
activity-based costing
(ABC): a system for allocating
costs to products or services that
takes all the product’s or
service’s costs into account
(including production,
marketing, distribution, and
sales and follow-up activities) in
calculating the actual cost of
each product or service

● Managing Now For example, managers now use
radio-frequency identification (RFID) to wirelessly
control their materials and products.23 Basically, each
RFID is a computer chip with a tiny antenna. All along
the company’s supply chain—at the warehouse loading
dock, in the inventory stacks, and even at the checkout
counter—digital readers scan the RFIDs from a dis-tance
and transmit identifying data from the tags to
computers. Unlike bar codes that employees must read
manually, RFIDs continually transmit an item’s loca-tion,
without human intervention.
A few years ago, Wal-Mart told its 100 top suppliers
to start attaching RFID tags to their case and palate
shipments. Wal-Mart can now keep better track of in-ventory
as it moves from the warehouse into its distri-bution
centers and, finally, to its stores. For example,
it can replenish out-of-stock items three times faster
with the RFID technology than it used to.
UPS relies on information technology to track and control
its package shipments.
As another example, remote monitoring devices enable medical equipment
manufacturer Beckman Coulture to automate and better control its ordering
process. Remote sensors enable Beckman Coulture to automatically monitor the
use of blood analyzers by its medical laboratory customers. Then, when the cus-tomer’s
supplies are running low, Beckman Coulture can automatically arrange
shipments before the customer runs out. Its Oracle ERP system signals the order
department to produce an order, the manufacturing department to get ready to
produce it, and the accounting department to produce an invoice.24
Electronic Performance Monitoring (EPM)
Managers increasingly use high-tech methods to monitor and control employee
performance. As two researchers put it, “As many as 26 million workers in the
United States are subject to electronic performance monitoring (EPM)—such as
having supervisors monitor through electronic means the amount of computer-ized
data an employee is processing per day—on the job.”25 The supervisors can
then take immediate action by speaking with or contacting the errant employee if
he or she is not processing enough data. EPM basically means monitoring and
controlling employee performance automatically, using electronic means.
● Managing Now EPM is not just for monitoring subordinates. It is used for
monitoring bosses, too. For example, the Japanese company that controls 7-Eleven
is imposing an EPM system on its store managers in Japan and in the United
States. Like all 7-Eleven stores, the ones belonging to store manager Michiharu
Endo use a point-of-sale computer to let headquarters know each time he makes
a sale. With 7-Eleven’s new system, headquarters monitors how much time Endo
spends using the analytical tools built into the computerized cash register to track
product sales and how effective he is at weaning out poor sellers. Headquarters
then ranks stores by how often their operators use the computer as a measure of
their efficiency. The system has run into particular resistance in the United States.
Many 7-Eleven managers thought they escaped the bureaucratic rat race by taking
over their own stores. Some are surprised at the degree of control this new EPM
system has exposed them to.26

Digital Dashboards and Control
All things considered, it is always preferable to find out before things are out of
control that a problem exists and must be addressed. That, in essence, is the ad-vantage
of using the balanced scorecard and digital dashboard planning and con-trol
tools we discussed in Chapter 7. For example, a top manager’s dashboard for
Southwest Airlines might display daily trends for strategy-map activities such as
fast turnaround, attracting and keeping customers, and on-time flights. The man-ager
knows from experience that when these activities start to deteriorate, it’s usu-ally
not long before profits start deteriorating too. The beauty of the scorecard
process is that it gives the manager time to take corrective action. For example,
if ground crews are turning planes around more slowly today, financial results
tomorrow may decline unless the manager takes action.
Managers monitor their digital dashboards. If there are problems, the display,
with its summary graphs and charts for various measures, enables managers to
analyze the causes and take corrective action. To quote that Danish mortgage
credit managing director again, “When I turn on my computer in the morning, our
scorecard is the first thing I see. . . . If I discover any deviations of the key figures
I contact the person responsible for the specific area. . . .”27
How Do People React to Control?
anagers can’t rely solely on external control tools like budgets, EPM, and digi-tal
dashboards to keep employees in line. For one thing, some managers work
under an “illusion of control.” They believe they can monitor and control every-thing
when in fact they cannot.28 Even with digital dashboards, it is impossible to
have a system that’s so comprehensive it can track everything employees say or do.
There’s no practical way, for instance, to control how a front-desk clerk is greeting
guests every minute of every day.
Second, employees often short-circuit the controls, sometimes with inge-nious
tactics. These tactics include behavioral displacement, gamesmanship, op-erating
delays, and negative attitudes.29
● Behavioral Displacement Behavioral displace-ment
occurs when the controls encourage behaviors
that are inconsistent with what the company wants to
accomplish. A famous management truism is “you get
what you measure.” This is a double-edged sword. Set-ting
performance targets does focus employees’ efforts
on those targets. The problem is that the employees may
then focus on only what you’re measuring and disregard
the company’s more important goals.
For example, Nordstrom’s had a policy of measuring
employees in terms of sales per hour of work.30 Unfortu-nately,
monitoring just “sales per hour ofwork” backfired.
For example, some employees claimed their supervisors
were pressuring them to underreport hours on the job.
That way they allegedly boosted reported sales per hour
and made the supervisors look good. (Nordstrom settled
an employee suit about this matter for $15 million.) The
moral is: do not focus on just one or two targets.
M
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behavioral displacement:
a way to evade controls in which
the controls encourage
behaviors that are inconsistent
with what the company wants
to accomplish
Monitoring just “sales per hour of work” backfired in one
store when employees claimed their supervisors were
pressuring them to underreport hours on the job.

Commitment-Based Control Systems ■ 225
● Gamesmanship Gamesmanship refers to management actions that im-prove
the manager’s short-term performance but that may harm the firm in the
longer run. For example, one manager overshipped products to distributors at
year-end. The aim was to ensure that management would meet its budgeted sales
targets. It did, but then it had to deal with excess returns the following year.31
● Operating Delays Some control processes trigger operating delays and thus
unnecessarily slow things down. For example, General Electric’s (GE’s) former
CEO Jack Welch found that it sometimes took a year or more for division managers
to get approval to introduce new products. The problem was the long list of yes/no
approvals required by GE’s control system. Streamlining the approval process
solved this problem.
● Negative Attitudes Most people react suspiciously, at best, to efforts to con-trol
them. Therefore, it’s not surprising that controls often trigger negative em-ployee
attitudes. One classic study focused on first-line supervisors’ reactions to
budgets. It found that they saw the budgets as pressure devices. In reaction to this
perceived pressure, they formed antimanagement groups. Their own supervisors
then reacted by increasing their compliance efforts.32
Unintentional Tactics
Sometimes, the behavioral problem is unconscious rather than intentional. For
example, as we saw in Chapter 2, corrupt people often have a knack for convincing
themselves that the stealing or misreporting that they’re engaged in is really okay.
This can happen even when the facts seem to be quite clear. For example, most
people assume that accounting rules are fairly rigid and that auditors therefore
don’t have too much leeway in interpreting results. In fact, there’s actually much
ambiguity. Even apparently obvious questions like What is an expense? and What
is an investment? are open to interpretation. For example, asked by Money maga-zine
to estimate what a fictitious family owed in income taxes, the accountants’
answers ranged from about $37,000 to $68,000!33
That range means that auditors’ biases can distort the results. Most auditors
who review companies’ financial statements are honest. However, they are as sus-ceptible
to unconscious bias as other people. For example, the clients themselves
hire and fire auditors. So there can be an unconscious bias toward not overturning
the client’s financial decision, even if that decision is questionable.
Commitment-Based Control Systems
e’ve examined several reasons why managers can’t rely exclusively on the
controls we’ve discussed in this chapter to keep their companies in line. Em-ployees
have many clever ways to evade them. And it’s an illusion to think any
W
control system can control everything.
Two other factors complicate employee control. First, companies are increas-ingly
global, and monitoring employees far away is more difficult than if they’re
next door. Even companies that most people think of as very “controlling” can
have problems controlling operations abroad.34 For example, Wal-Mart recently
had to close or sell its facilities in Germany and South Korea because the difficulty
of controlling and doing business abroad eroded its profits in those countries.
gamesmanship: management
actions that improve the
manager’s short-term
performance but that may harm
the firm in the longer run
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Second, controlling the self-managing teams that most companies now rely on
can be counterproductive if doing so undermines the employees’ sense of empow-erment.
And for some activities—such as building high-quality cars—you need the
employees to want to do an excellent job because you can’t force them to do it.
The bottom line is that managers have therefore always endeavored to sup-plement
controls like those in this chapter with efforts to encourage employees to
control themselves. Managers use three tools to accomplish this. First, motivated
employees are more likely to exercise self-control. We will discuss motivation in
Chapter 14. We devote the remainder of this chapter to discussing two other tools
for encouraging employee self-control: creating belief systems and encouraging
employee commitment.35
Creating Belief Systems and Values
to Encourage Self-Control
James Collins and Jerry Porras studied firms that had been successful over many
years. In their book, Built to Last, they explain that firms like Boeing, Disney, GE,
Merck, and Motorola are successful in part because they create powerful values for
employees to share. Values such as “the customer is always right” help show em-ployees
“[w]hat this company stands for.”36 Employees then (hopefully) control
themselves by adapting what they do to these values.
For example, at the Toyota plant in Lexington, Kentucky, quality and team-work
are key values. Managers therefore select new employees based on whether
they exhibit quality and teamwork during the one-week screening process. Then,
Toyota’s orientation, training, and appraisal and incentive programs all emphasize
quality and teamwork. When employees buy into quality and teamwork, these val-ues
guide what they do. Even when there’s no one around to supervise them, the
employees control themselves.
Johnson Johnson (JJ) is another company famous for its shared values. It
summarizes its corporate values in its famous credo, which is shown in Figure 8.6.
The credo contains the firm’s guiding values. The first is, “We believe our first
responsibility is to the doctors, nurses, and patients . . . who use our products.”
These guidelines provide the boundaries within which Johnson Johnson em-ployees
work. Selling a product that might be harmful would obviously be out of
bounds.
Johnson Johnson was therefore shocked when armed federal agents briefly
closed down its LifeScan unit’s headquarters. LifeScan makes a diabetes diagnostic
device. Some JJ employees had failed to report that a software glitch made some
units show the wrong diagnosis. How could that happen in a company where all
100,000 employees are supposed to adhere to a strong code of ethics? “Mistakes
were made in the LifeScan situation. . . . They were errors in judgment. We did too
little, too late” is how the firm’s CEO put it.37Ordinarily, the company’s efforts to es-tablish
strong values and get employees to stick to them are more successful.
Using Commitment-Building Methods
to Foster Self-Control
The U.S. National Weather Service employs highly trained scientists, many making
life-or-death forecasts about tornado warnings. Because they are highly trained
and their work is vital, one might assume that morale and commitment won’t have
much effect on the accuracy of their forecasts. However, both do. Tentative results

F IGURE 8.6
Johnson Johnson Credo Our Credo
We believe our first responsibility is to the doctors, nurses and patients,
to mothers and fathers and all others who use our products and services.
In meeting their needs, everything we do must be of high quality.
We must constantly strive to reduce our costs
in order to maintain reasonable prices.
Customers’ orders must be serviced promptly and accurately.
Our suppliers and distributors must have an opportunity
to make a fair profit.
We are responsible to our employees,
the men and women who work with us throughout the world.
Everyone must be considered as an individual.
We must respect their dignity and recognize their merit.
They must have a sense of security in their jobs.
Compensation must be fair and adequate
and working conditions clean, orderly and safe.
We must be mindful of ways to help our employees fulfill
their family responsibilities.
Employees must feel free to make suggestions and complaints.
There must be equal opportunity for employment, development
and advancement for those qualified.
We must provide competent management,
and their actions must be just and ethical.
We are responsible to the communities in which we live and work
and to the world community as well.
We must be good citizens—support good works and charities
and bear our fair share of taxes.
We must encourage civic improvements and better health and education.
We must maintain in good order
the property we are privileged to use,
protecting the environment and natural resources.
Our final responsibility is to our stockholders.
Business must make a sound profit.
We must experiment with new ideas.
Research must be carried on, innovative programs developed
and mistakes paid for.
New equipment must be purchased, new facilities provided
and new products launched.
Reserves must be created to provide for adverse times.
When we operate according to these principles,
the stockholders should realize a fair return.
JohnsonJohnson SOURCE: Courtesy of Johnson and Johnson.
Reprinted by permission.
from one survey showed that some National Weather Service offices were much
more successful than others at predicting potentially destructive storms. Morale
and commitment factors seemed to explain much of the difference.38
Several years ago, Viacom agreed to sell its publishing operations for about
$4.6 billion. In announcing the sale, the publisher’s president thanked its employ-ees
for their “past hard work and dedication.” And he reminded them that during
the transition, “[I]t’s more important than ever to focus on our individual respon-sibilities
to ensure that our company performs at the highest levels.”39

These anecdotes illustrate the irony of employee commitment. On the one
hand, there is little doubt that employee commitment—employees’ identification
withand agreementtopursuethecompany’smissionasif it’s theirown—contributes
to organizational success.40 On the other, the trend in many firms is to take actions
that actually undermine commitment. For example, “[T]he trend today is to buy
and sell portfolios of businesses, and to downsize and outsource in an attempt to
increase short-term profits through cost-cutting.”41
● How to Boost Employee Commitment Managers can take tangible steps
to boost employee commitment. After reviewing the research, one writer con-cludes
that the way to do this “. . . is to employ practices that communicate to
employees that the organization is supportive of their efforts, that the organiza-tion
treats its employees fairly, and that the organization is interested in building
employees’ self-worth and importance”; in other words, that the firm “puts people
first.”42 He says that specific practices include improving employment security,
selectively hiring employees whose values are consistent with the company’s, high
compensation tied to organizational performance, extensive training, reduction
of status differences among employees, sharing of information between the
company and its employees, and pushing authority for decision making down to
employees.43
In the final subsections below, we will present seven commitment-building
practices, summarized as follows: foster people-first values, guarantee organiza-tional
justice, build a sense of community, communicate your vision, use value-based
hiring, provide financial rewards, and encourage personal development
and self-actualization.
● Foster People-First Values Managers with “people-first values” character-ize
high-commitment companies.These managers trust their employees, believe in
respecting their employees as individuals and treating them fairly, and are commit-ted
to employees’ welfare. Here is how one United AutoWorkers officer at Saturn’s
Spring Hill, Tennessee, plant put it: “Our philosophy is, we care about people—and
it shows.We involve people in decisions that affect them. . . . Saturn’s commitment
really comes down to how you feel about people—your attitudes—more than any-thing,
because all the other Saturn programs—the work teams, the extensive train-ing,
the way people are paid—all stem from these people attitudes.”44
Saturn fosters such people-first values. For example, Saturn employees carry a
card that lists the firm’s values, one of which is:
Trust and respect for the individual: We have nothing of greater value than our
people. We believe that demonstrating respect for the uniqueness of every in-dividual
builds a team of confident, creative members possessing a high de-gree
of initiative, self-respect, and self-discipline.45
The idea is to apply values like these to every decision. As one JCPenney officer said:
Our people’s high commitment stems from our commitment to them, and
that commitment boils down to the fundamental respect for the individual
that we all share. That respect goes back to the Penney idea—“To test every act
in this wise: Does it square with what is right and just?” As a result, the value of
respect for the individual is brought into our management process on a regu-lar
basis and is a standard against which we measure each and every decision
that we make.46
● Guarantee Organizational Justice Employee commitment depends in
part on developing trust, and this requires treating employees fairly. Managers

in firms like Starbucks, Saturn, and FedEx institute programs that guarantee man-agers
treat employees fairly. For example, they have guaranteed-fair-treatment
grievance programs for filing grievances, speak-up programs for voicing concerns,
periodic surveys for expressing opinions, and top-down programs for keeping em-ployees
informed.47
● Build a Sense of Shared Fate and Community
Part of fostering commitment entails making employ-ees
feel that “we’re all in this together.” Professor Rosa-beth
Moss Kanter found that leaders do this in several
ways.48 They minimize status differences. At Toyota’s
Camry assembly plant, all employees—from the presi-dent
on down—shared the same open office space,
wore the same uniforms, and ate in the same cafeteria.
Others foster a sense of community by encouraging
joint effort and communal work. At Saturn, all employ-ees
are on teams, and all teams work on projects
together. Others bring individual employees into regu-lar
contact with the group as a whole.49 Ben Jerry’s
has monthly staff meetings in the receiving bay of its
Waterbury, Vermont, plant.
● Managing Now Thanks to the Internet, employ-ees
don’t have to be at the same location to feel that
they’re part of a close-knit community. Internet-based
Saturn Corp. instituted numerous behavioral methods
aimed at fostering Saturn employees’ commitment.
group communication systems allow companies to build virtual communities by
letting employees communicate easily and in real time, even if they are dispersed
around the globe.50 As one expert puts it, “The sales department could hold
forums and share information in an interactive community.” Said another, “When
people interact in a virtual community, there is an exchange of ideas and informa-tion,
which becomes powerful and generates excitement.”51
● Use Value-Based Hiring Kanter also found that commitment to a cause is
higher among employees who share the same basic values. High-commitment
firms therefore practice value-based hiring. They don’t look for just job-related
skills in the people they hire. They also look for common experiences and values
that may signal the applicant’s fit with the firm. Thus, even college grads may start
out by cleaning one airline’s planes. The idea is that if you don’t fit in, you probably
won’t become committed to the company.
● Communicate Your Vision Committed employees need missions to be
committed to, preferably missions that they feel are bigger than they are. Employ-ees
at organizations like the Salvation Army, Saturn, and Ben Jerry’s become, in
effect, soldiers in a crusade. Through their employment, they redefine themselves
and their goals in terms of the company’s mission. The employee, says Kanter,
“finds himself anew in something larger and greater.”52 Employee commitment
thus derives in part from the power of the firm’s mission and from the manager’s
ability to crystalize that mission in a few simple values.
● Use Financial Rewards and Profit Sharing Although there is more to build-ing
commitment than financial rewards, high-commitment firms generally offer
above-average pay and incentives. FedEx, for instance, provides a half-dozen
types of incentive awards, including a Bravo-Zulu award that a manager can give
on the spot.
value-based hiring: looking
for common experiences and
values that may signal the
applicant’s fit with the firm,
rather than hiring based solely
on job-related skills

● Encourage Employee Development and Self-Actualization Employees
understand that staying loyal to an employer can be risky in an era of continuing
mergers and mass layoffs. Earning their commitment therefore requires reciproc-ity.
It requires proof that their employers are committed to them.
One strong signal is to show employees that the company is committed to
their personal development. Being the best at what one can be provides the best
job security, whether or not the person stays with the firm. Psychologist Abraham
Maslow emphasized that people need to self-actualize, “to become . . . everything
that one is capable of becoming. [W]hat man can be, he must be. . . .”53
Firms can help employees to self-actualize in many ways. They can train em-ployees
to expand their skills and to solve problems. They can enrich their jobs
and empower them. They can provide career-oriented interviews and help them
to continue their education and to grow. The results can be dramatic. Here’s how
one Saturn assembler put it:
I’m committed to Saturn in part for what they did for me; for the 300 hours of
training in problem solving and leadership that help me expand my personal
horizons; for the firm’s Excel program that helps me push myself to the limit;
and because I know that at Saturn I can go as far as I can go—this company
wants its people to be all that they can be.54
At FedEx, one manager similarly described his experience:
At Federal Express, the best I can be is what I can be here. I have been allowed
to grow with Federal Express. For the people at Federal Express, it’s not the
money that draws us to the firm. The biggest benefit is that Federal Express
made me a man. It gave me the confidence and self-esteem to become the
person I had the potential to become.55
The Practice IT feature shows howStarbucks applies this chapter’s control concepts.
PRACTICE IT
Controlling the Cappuccino Makers at Starbucks
With about 10,000 stores and 34 million transactions a
week, Seattle-based Starbucks Coffee Company’s man-agers
must make sure they stay in control of what’s hap-pening
at each store. Starbucks’ solution combines IT
with fostering employee commitment. First (in addition to
standard traditional control devices such as budgets),
Starbucks relies on a global information technology sys-tem
to monitor transactions in each of its stores. Its XPR
system remotely monitors an assortment of metrics at
each store. XPR then uses the principle of exception to
trigger reports when any of the metrics for a store seems
to be moving in unusual ways.56 For example, the system
monitors point-of-sale activities and then triggers reports
if a particular register seems to be recording too many free
refills. Some employees confess after being confronted
with the information; some confessed to stealing as much
as $42,000.With much smaller exceptions, the employee
gets a letter asking them to explain what’s happening.The
behavior usually stops after that.
Starbucks does not rely on just external controls. It
also works hard to encourage self-control by winning the
commitment of its employees. For example, all employees
who work at least twenty hours a week receive a full
complement of health and other benefits, and they are
eligible for the company’s stock-option plan. Employees
also receive free drinks while on duty. And they get the
considerable benefit of working in an environment that
some liken to a collegial living room. As a result, commit-ted,
engaged Starbucks employees help make sure that
things stay under control.

1. Control is the task of ensuring that activities are
providing the desired results. The control process
consists of three steps: set goals, measure perfor-mance,
and take corrective action. Managers
distinguish among steering controls, yes/no con-trols,
and postaction controls.
2. Budgets and ratio analysis are among the most
widely used diagnostic control tools. Budgets are
formal financial expressions of a manager’s plan
and show targets for yardsticks such as revenues,
cost of materials, and profits, usually expressed as
dollar amounts. Most managers also achieve con-trol
by monitoring various financial ratios.
3. The chapter presented three classes of control
methods. Personal, interactive control systems are
real-time, usually face-to-face methods of monitor-ing
both a plan’s effectiveness and the underlying
assumptions on which the plan was built. Tradi-tional
control systems like budgets and perfor-mance
reports are intended to ensure that goals are
being achieved and that variances, if any, are ex-plained.
Commitment-based control includes using
motivation techniques, building value systems, and
obtaining employees’ commitment.
4. Managers now use IT-based controls, usually
based on ERP systems. These include more timely
accounting reports, ABC, wireless-based control,
electronic performance monitoring, and digital
dashboards.
5. A problem with relying on traditional controls is that
they can lead to unintended, undesirable, and often
harmful employee reactions, such as behavioral dis-placement,
gamesmanship, operating delays, nega-tive
attitudes, and reduced empowerment.
6. Steps for improving employee commitment in-clude
the following: foster people-first values,
guarantee fair treatment, create a shared fate, use
values-based hiring, communicate the vision, use
rewards, and encourage self-actualization.
1. What are the basic steps in the control process?
2. Give examples of steering, concurrent, and feed-back
controls that your professor uses in this class.
3. Give examples of personal, traditional, and com-mitment-
based controls that family members use
at home.
4. How is activity-based costing different from tradi-tional
cost accounting?
5. Discuss why IT-based controls such as ABC, wire-less
controls, and digital dashboards would be
impractical without enterprise resource planning
systems.
6. Give examples of the unintended behavioral con-sequences
of controls that the dean of your college
might encounter if he or she passed the rule that
professors’ raises would be based on student rat-ings
only.
7. What do we mean by belief systems and values that
encourage self-control?
8. Explain why having committed employees is espe-cially
important in today’s industrial environment.
1. You are one of the founding engineers in your six-month-
old firm, and you brought to the firm the
values of hard work, quality, teamwork, and excell-lence.
These values have united the original mem-bers,
but you are concerned that they might change
with the addition of fifty new people needed by
your fast-growing company. Form teams of four to
five students. Each team should answer the follow-ing
question: What type of control system would
you develop to ensure that your values are adhered
to, based on the concepts in this chapter?
2. College students deal with professors all the time,
but they may not realize how difficult it is for the

C A S E S T U D Y
Controlling Ritz-Carlton
Many consider business hotels as offering a generic
service—a safe, clean, comfortable room in a city
away from home. Ritz-Carlton Hotel Company viewed
its business differently. Targeting industry executives,
meeting and corporate travel planners, and affluent
travelers, the Atlanta-based company manages twenty-five
luxury hotels that pursue the goal of being the very
best in each market. Ritz-Carlton succeeded with more
than just its guests. For example, three times it received
the U.S. government’s Malcom Baldrige National Qual-ity
Award. Given its mission of true excellence in ser-vice,
what types of control systems did Ritz-Carlton
need to achieve its goals?
In the presentation of the Baldrige award, the com-mittee
commended Ritz-Carlton for a management
program that included participatory leadership, thor-ough
information gathering, coordinated planning and
execution, and a trained workforce empowered “to
move heaven and earth” to satisfy customers. Of all the
elements in its system, Ritz-Carlton felt the most im-portant
control mechanism was committed employees.
The firm trains all employees in the company’s
Gold Standards, which set out Ritz-Carlton’s service
credo and the basics of premium service. The company
has translated these basics into twenty Ritz-Carlton
Basics. Each employee is to understand and adhere to
these standards, which describe processes for solving
any problem guests may have.
The corporate motto is “ladies and gentlemen
serving ladies and gentlemen.” Like many companies,
Ritz-Carlton gives new employees an orientation
followed by on-the-job training. Unlike other hotel
firms, Ritz-Carlton then certifies employees. It reinforces
its corporate values continuously by daily lineups; fre-quent
recognition for extraordinary achievement; and a
performance appraisal based on expectations explained
during the orientation, training, and certification
processes.
All workers must act at the first sign of a problem,
regardless of the type of problem or customer com-plaint.
Employees are empowered to do whatever it
takes to provide what Ritz-Carlton calls instant pacifi-cation.
Other employees must assist if a coworker re-quests
aid in responding to a guest’s complaint or wish.
There is never an excuse for not solving a customer
problem.
Responsibility for ensuring high-quality guest
services and accommodations rests largely with em-ployees.
The company surveys all employees annually
to determine their understanding of quality stan-dards
and their personal satisfaction as a Ritz-Carlton
employee. In one case, 96 percent of all employees
surveyed named excellence in guest services as the
key priority.
1. What actions does Ritz-Carlton take to control the
quality of its service?
2. What does Ritz-Carlton do to foster its employees’
high level of commitment?
3. How does the company’s value system foster em-ployee
self-control?
college’s administrators to control what their fac-ulty
members are doing. The typical professor has
a number of responsibilities, including teaching
classes, writing research articles, and attending
curriculum-development committee meetings.
The dean also wants to make sure faculty members
are conducting themselves professionally, for
instance, in terms of how they interact with their
students. Knowing that you are a management stu-dent,
the dean has asked you to develop a control
package for the college’s business professors. The
package is to include, at a minimum, a list of the
details that you want to control and a correspond-ing
list showing how you plan to control each
detail. Form teams of four to five students. Each
team should develop a package for the dean.
3. There is nothing quite like eating in a restaurant
where details—from customer service to hygiene—
are out of control. Before coming to class, visit one
or two local restaurants, and list everything you see
that might suggest that (at least in specific areas)
details are a bit out of control. Then meet in teams
of four to five students, compare notes, and create
a checklist for assessing the adequacy of a restau-rant’s
control mechanisms. If time permits and
if there is an on-campus cafeteria, evaluate the
school cafeteria’s controls.

233
9
CHAPTER OUTLINE
Opening Vignette: Will
Whirlpool Deliver?
● The Basics of Operations
Management
Managing the Production System
The Facility Location Decision
Basic Types of Production Processes
Facility and Production Layout
● Operations and Inventory
Planning and Control
Scheduling and Gantt Charts
Network Planning and Control Methods
Purchasing
The Role of Inventory Management
Basic Inventory Management Systems
● Controlling for Quality and
Productivity
Total Quality Management Programs
Quality Control Methods
Design for Manufacturability
● World-Class Operations
Management Methods
The Basic Components of Just-in-Time
(JIT) Systems
Computer-Aided Design and
Manufacturing
Flexible Manufacturing Systems
Computer-Integrated Manufacturing
● Supply Chain Management
Managing Now: Supply Chain
Management Software
The Three A’s of Supply Chain
Management
PRACTICE IT: Whirlpool Delivers
Why Supply Chain Management Is
Important
Basic Building Blocks of Supply Chain
Management Systems
WINDOW ON MANAGING NOW: Zara
Managing Now: Supply Chain City
MANAGING OPERATIONS
AND SUPPLY CHAINS
Will Whirlpool Deliver?
everal years ago,Whirlpool’s deliveries were so unreliable that its
managers grimly joked that customers ranked Whirlpool “fifth
S
among America’s four biggest appliance manufacturers.”1 Whirlpool’s
salespeople referred to the
company’s supply chain (the
information system Whirlpool
used to link together its manu-facturing
plants, warehouses,
distribution partners, and
retailers) as “sales disablers.”2
In an industry where getting
appliances on time is the
consumer’s main concern,
Whirlpool often missed its
dates. Rueben Slone, Whirlpool’s
new head of supply chain man-agement
for America, knew
changes were in order. What
should he have Whirlpool do
now? ■
Several years ago,Whirlpool needed a
more effective “supply chain” for getting
deliveries of products like these into
retailers’ stores.
➤ Listing and explaining the basic types of production processes.
➤ Listing what the manager has to do to minimize the seven wastes.
➤ Listing the reasons why a company is (and is not) world class.
➤ Listing and explaining the three A’s of supply chain management.
➤ Reading the opening vignette about Whirlpool and suggesting a supply chain solution
for the company.
➤ Reading the end-of-chapter exercise and evaluating a facility’s layout.

234 PART THREE CHAPTER 9 Managing Operations and Supply Chains
The Basics of Operations Management
ake a brief walk through a Circuit City or Best Buy. Domestic brands from
General Electric (GE) and Whirlpool compete with Miele and Bosch from
abroad. In such an environment, only world-class competitors survive. That’s why
companies like Whirlpool must have operations management systems in place.
These systems produce high-quality products at competitive costs and get them to
customers on time.
Operations management is the process of managing the resources required
to produce the organization’s goods and services.3 Operations managers particu-larly
focus on managing the “five P’s” of the firm’s operations: people, plants, parts,
processes, and planning and control systems. The people include the direct and
indirect workforce, such as assembly workers, inventory clerks, and clerical staff.
Plants are the factories or service branches (like banks) where the firm creates its
product or service. Parts include the raw materials and other inputs that the firm’s
operations will transform into finished products or services. Processes represent
the technology, equipment, and steps required to accomplish production. The
planning and control systems are the procedures management uses to run the sys-tem,
such as the methods used to schedule the work and to control quality.4 Oper-ations
managers include, for instance, plant managers, manufacturing managers,
purchasing managers, and logistics (or transportation) managers.
Operations management is not important for just manufacturing firms. For
example, in the new McDonald’s kitchen, computers control production, and
sandwiches come off the line in forty-five seconds. American Airlines uses sophis-ticated
operations management planning and scheduling tools to schedule reser-vations
clerks and to adjust flight schedules in the face of rough weather. La
Quinta Motor Inns uses operations management tools to analyze variables (such
as traffic counts and local purchasing power) to identify preferred locations.
Cookie-store managers use special work-scheduling software to chart hourly and
daily sales and to tell the manager how many employees he or she will need to
staff the store that day.5
In this chapter, we’ll look at the basic aspects of managing operations, the first
of which is managing the production system itself.
Managing the Production System
The production system is the part of the operations system that actually produces
the company’s products. Any production system has three main components—
inputs, a conversion system, and outputs (see Figure 9.1). Inputs are all the re-sources
required to create the product or service. These include raw materials and
T
operations management:
the process of managing the
resources that are needed to
produce an organization’s goods
and services
inputs: resources required for
the manufacture of a product or
service
➤ Reading the end-of-chapter exercise and creating a Gantt chart for a project.
➤ Reading the end-of-chapter exercise and computing the economic order quantity
(EOQ) for an item.
➤ Watching the simulation video and identifying how operations management can
improve organizational efficiency.
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The Basics of Operations Management ■ 235
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CONVERSION OUTPUTS
Direct Outputs
Indirect Outputs
■
purchased parts, personnel, and capital. Other inputs include data on the compe-tition,
the product, and the customer.
Any production system takes inputs and converts them into products or ser-vices
(outputs). The conversion system (also called the production process or
technology) has several components, including the production machinery and its
physical layout, the transport services that bring in the inputs and deliver the final
products to customers, and warehousing services for goods awaiting shipment.
The production system’s outputs include direct outputs (the actual products or
services) and indirect outputs (such as wages and salaries).
The same production system sequence applies to a service business (see
Table 9.1).6 For example, a college’s inputs include students, books, professors,
and buildings. Its conversion system consists of the lectures, exams, computerized
instruction, and so forth. The outputs are educated persons.
Whether you are producing goods or services, designing a production system
requires four basic decisions: Where will we locate the facility? What type of pro-duction
process will we use? What will be the layout of the overall plant or facility?
And what will be the layout of the production system itself? We’ll look at each.
The Facility Location Decision
Deciding where to locate the facility (plant or store) is crucial. Dry-cleaning
businesses try to place their stores near supermarkets to make it convenient for
customers. Britain’s Marks Spencer had to close over thirty of its retail stores
■
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■
■
■
■
■
■
■
■
INPUTS
Raw Materials
Purchased Parts
Personnel
Competitive Information
Demographic Information
Product Information
Customer Needs
Stockholder Needs
Capital
Machinery
Utilities
conversion system: any
production system that converts
inputs (material and human
resources) into outputs
(products or services);
sometimes called the
production process or
technology
output: a direct outcome
(actual product or service) or
indirect outcome (taxes, wages,
salaries) of a production system
■
■
■
■
■
■
■
Transportation
Warehousing
Manufacturing System
and Machinery
Technology
Policies and Procedures
Logistics
Wholesaling/Retailing
System
Physical Layout
Production Process
Products
Services
■
■
Wages and Salaries
Environmental Impact
Community Impact
■
■
F IGURE 9.1
The Basic Production System
The heart of every production system is a conversion process or system, which takes various
inputs and converts them into outputs such as products or services.

T ABLE 9.1
Components of Typical Production Systems
Production System Main Inputs What Conversion System Does Main Outputs
1. Cereal factory Grain, water, sugar, personnel, Converts raw materials Breakfast cereals
because they were in poor locations. For manufactur-ers,
key factors like transportation costs and labor
availability determine plant location.
Managers typically ponder many factors when
deciding where to locate a facility. Subjective consid-erations
can include details like the owner’s personal
preferences, say, for warm weather. More objective
criteria include, for instance, government rules and
attitudes, cultural issues, availability of labor, taxes,
utilities, environmental regulations, government in-centives,
and proximity to supplies and customers.
Managers ignore location considerations at their
peril. In the 1990s, many believed Vietnam was the
next great Asian tiger in terms of projected economic
growth.7 But for ten years, the experts were wrong.
Until recently, few visitors came. The $64 million
Hilton Hanoi Opera Hotel sat nearly empty for
years.8
Location, location, location: A dry-cleaning business in a
shopping mall allows customers to drop off and pick up
clothes on their way to shop for food or other items.
Basic Types of Production Processes
Deciding on a production process is a second crucial decision. We can distinguish
between two broad types of systems: intermittent production systems and contin-uous
production systems.
● Intermittent Systems In an intermittent production system, employees
work on the product on a start-and-stop basis.9 Automobile-repair shops, custom-cabinet
shops, and construction contractors are examples. Firms like these usually
intermittent production
system: a system in which
production is performed on a
start-and-stop basis, such as for
the manufacture of made-to-order
products
tools, machines, paper for into finished goods
cartons, buildings, utilities
2. Law firm Legal supplies, personnel, Attracts clients, compiles and Legal advice, client
information, computers, researches legal data, advises defenses
buildings, office furniture, clients, manages billing, etc.
utilities
3. College Students, books, supplies, Teaching facts, skills, attitudes, Educated persons
personnel, buildings, values through various pedagog-utilities
ical devices, including lectures,
online learning, and exams,
and providing associated
counseling and related services

offer made-to-order products. They usually deal with relatively low product volumes
and frequent schedule changes and tend to use general-purpose equipment that
can make a variety of models or products.
Mass production is a special type of intermittent production process. Here,
standardized methods and single-use machines produce long runs of standard-ized
items. Most mass production processes use assembly lines. An assembly line
is a fixed sequence of specialized (single-use) machines. In a typical assembly line,
the product moves from station to station, where one or more employees and/or
specialized machines perform tasks such as inserting bumpers or screwing on
doors.
Mass customization is a popular hybrid production process, somewhere be-tween
the intermittent and continuous production (discussed below) processes.
Mass customization means designing, producing, and delivering products so
that customers get customized products for at or near the cost and convenience of
mass-produced items.10 Dell’s production process exemplifies this approach. Dell
customers get customized PCs (they advertise today, “Dell—Purely You”) at a price
at or below that of mass-produced, standardized machines. Mass customization
depends on three factors:11
1. Modular product design. Products like Dell’s consist of separate modules
(each consisting of one or more prewired components) such as modems, DVD
drives, and processing chips. Employees can easily assemble these into differ-ent
forms of the product. Hewlett-Packard (HP) designs its printers to have a
separate power supply inserted later. Customers around the globe can get the
power supply they need.
2. Modular process design. Similarly, the firm designs its production process so
that workers can perform different steps in different places. A Dell repairper-son
may come to your office, just pull out the defective modular component,
and replace it.
3. Agile supply networks. Mass customization firms design the whole supply
chain (from vendors to production to distribution) to be adept at providing a
variety of services. For example, IBM designs its products around modules.
Vendors supply components and may do some preliminary assembly. IBM
factories then assemble these components into modules. IBM distributors
then assemble the modules into complete products based on what their cus-tomers
want.
Mass customization is unique among production processes. Managers in typ-ical
intermittent production firms must choose between high-volume mass pro-duction
and product variety. Mass customization weds high production volume
with high product variety.
● Continuous Production A continuous production system runs uninter-rupted
for very long periods. Chemical plants, paper plants, and petroleum re-fineries
are examples. They may run for months or even years, producing basically
the same products (paper, or refined oil, for instance) night and day.
Mass customization is blurring the traditional dividing line between intermit-tent
and continuous production processes. For example, computer-assisted man-ufacturing
processes at Mead Corporation, which produces and sells paper, give
the factory the flexibility of intermittent production and the efficiency of continu-ous
production.
mass customization:
designing, producing, and
delivering products so that
customers get customized
products for at or near the cost
and convenience of mass-produced
items
continuous production
system: a production process,
such as those used by chemical
plants or refineries, that runs for
very long periods without the
start-and-stop behavior
associated with an intermittent
production system

F IGURE 9.2
Product Layout
A car wash is an example of an assembly-line product layout. Each special-purpose machine
performs its function as the product moves from station to station.
SOURCE: Adapted from Everett Adam, Jr. and Ronald Ebert, Production and Operations Management (Upper Saddle River, N.J.:
Prentice Hall, 1992), p. 254.
Facility and Production Layout
Once the manager decides on a production process, he or she can decide how to
lay out the plant or facility.
● Facility Layout Facility layout refers to the configuration of the total facility—
not just the machines, but also the employee workstations, storage areas, internal
walls, and so forth. Important objectives here usually include reducing materials-handling
costs, providing sufficient capacity, and allowing for safe equipment op-eration
and ease of maintenance.
Facility layout is also important for service firms. Thus, food stores typically
put products like meats toward the back; to get to them, customers must pass the
other aisles, hopefully prompting them to pick up and buy more products along
the way.
● Production System Layout Whether in a factory or a service business,
there are basically four ways to lay out the production (conversion) system itself. In
a product layout, every item produced follows the same sequence from beginning
to end. Each item moves from one specialized tool and operation to another. An as-sembly
line is one example. Product layouts are not restricted to manufacturing.
For example, automatic car washes use product layouts, as Figure 9.2 illustrates.12
In a process layout, the designers group similar machines or processes to-gether.
As Figure 9.3 illustrates,13 service businesses like hospitals are usually
organized this way. There are separate locations for departments like pediatrics and
for testing and x-ray. In a fixed-position layout, the product stays at one location.
The manufacturing machines and workers (or machines) come to that location, as
needed. Companies build heavy products like ships and planes this way.
In a cellular manufacturing layout, the company groups machines into cells
(small work areas), and each cell contains all the tools required to complete one
activity (see Figure 9.414). Thus, a cell may be dedicated to all the grinding and pol-ishing
steps required to produce the valves for car engines. The advantage is that
cellular layouts reduce the wastes normally associated with moving the items
around the plant floor to different workstations.
Enter
Clean
out
Exit
Hot water
spray
Top wash
and brush
Side wash
and brush
Final rinse
spray
Hot
blower
Hand wipe
and cleanup
facility layout: the
configuration of all the
machines, employee
workstations, storage areas,
internal walls, and so forth that
constitute the facility used to
create a firm’s product or service
product layout: a production
system design in which every
item to be produced follows the
same sequence of operations
from beginning to end, as in an
assembly line
process layout: a production
system design in which similar
machines or functions are
grouped together
fixed-position layout: a
production system design in
which the product being built or
produced stays at one location
and the machines, workers, and
tools required to build the product
are brought to that location, as
needed, as for the building of
ships or other bulky products
cellular manufacturing
layout: usually a combination of
process and product layouts in
which machines and personnel
are grouped into cells containing
all the tools and operations
required to produce a particular
product or family of products

Reception
Room
Patient
Waiting
Area
Orthopedics
Restrooms
Obstetrics/
Gynecology
Laboratory
Tests
Pharmacy
X-Ray
Ophthalmology
Patient
Enters
Clinic
Patient
Exits
Clinic
PROCESS LAYOUT FOR MEDICAL CLINIC
Pediatrics
F IGURE 9.3
Process Layout
In a process layout like this one,
each process has its own area.
The product (in this case, the
patient) is directed to the
appropriate processes (such as
x-ray and pediatrics).
SOURCE: Adapted from Everett Adam, Jr. and
Ronald Ebert, Production and Operations
Management (Upper Saddle River, N.J.:
Prentice Hall, 1992), p. 254.
F IGURE 9.4
Improving Layouts by Moving
to the Cellular Manufacturing
Concept
Note in both (A) and (B) that
U-shaped work cells can reduce
material and employee movement.
(A) (B)
Improved layout—workers can
assist each other. May be able to
add a third worker.
Improved layout—in a U shape,
workers have better access. Four
workers were reduced to three.
Current layout—workers in small
closed areas. Cannot increase
output without a third worker.
Current layout—straight
lines are hard to balance.
Material
SOURCE: Adapted from Barry Render and
Jay Heizer, Principles of Operations
Management, 2nd ed., © 1997. Reprinted
by permission of Prentice Hall, Inc., Upper
Saddle River, N.J.

Operations and Inventory Planning and Control
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network planning and
control methods: ways
of planning and controlling
projects by graphically
representing the projects’
steps and the timing and links
between those steps
W
ORDER
NUMBER
1 5 10 15 20 25 30
027
035
079
087
JANUARY
Time
Manufacture Assemble Paint Paint Second Coat
Assemble Test Paint
Manufacture
Manufacture Assemble
Assemble Paint
F IGURE 9.5
A Gantt Chart
This Gantt chart shows the steps
and timing of each step for each
order.
hether producing cars or Broadway shows, the manager needs a system for
planning and controlling production. Operations or production planning
is the process of deciding what products to produce and where, when, and how to
produce them. Operations or production control is the process of ensuring that
the operation is meeting its production plans and schedules. Operations depend
on having adequate inventory. Inventory management is the process of ensuring
that the firm has enough inventories of all required parts and supplies within the
constraint of minimizing total inventory costs. We’ll look at operations and inven-tory
planning and controlling tools in this section.
Scheduling and Gantt Charts
Scheduling charts are simple but effective production planning and control tools.
Managers summarize their production schedules on charts that show what oper-ations
will be carried out and when. The Gantt chart in Figure 9.5 is one example.
For each order, it shows the start and stop times for each activity. This type of chart
lets the manager quickly monitor each order’s progress. A second type of Gantt
chart lists each operation separately in the left column, one under the other, and
the time along the bottom. That Gantt chart helps the manager monitor each
operation’s progress.
In practice, production schedulers start with the required delivery date. Then
they calculate how long each assembly operation will take, how long it will take to
obtain raw materials, and so forth. The schedulers can then decide whether the
firm can meet its required delivery date and what bottlenecks to unclog.
Network Planning and Control Methods
Scheduling complex projects usually requires computerized network charting
tools. Network planning and control methods graphically represent the proj-ect’s
steps and the timing and linkages among those steps. A project is a series of
interrelated activities aimed at producing a major product (like a new Boeing 787)
or a service (like a wedding reception).
operations or production
planning: the process of
deciding what products to
produce and where, when, and
how to produce them
operations or production
control: the process of
ensuring that the specified
production plans and schedules
are being adhered to
inventory management: the
process of ensuring that the firm
has enough inventories of all
required parts and supplies
within the constraint of
minimizing total inventory costs
Gantt chart: a production
scheduling chart (named after
management pioneer Henry
Gantt) that plots time on a
horizontal scale and generally
shows, for each product or
project, the start-and-stop
times of each operation

Operations and Inventory Planning and Control ■ 241
Put in
Outside
Wiring
7
days
5
days
2
days
PERT and CPM charts are the two most popular network planning and control
methods. PERT (program evaluation review technique) and CPM (critical path
method) were invented at about the same time and are similar, although several
details (for instance, CPM shows the cost of each step) set PERT apart from CPM.
Events and activities are the two major components of PERT charts. As
Figure 9.6 shows, events, depicted by circles, represent specific accomplishments,
such as “lay foundation.” Arrows represent activities, which are the time-consuming
aspects of the project (like laying the foundation). By studying the PERT chart, the
scheduler can determine the critical path, the sequence of critical events that, in
total, requires the most time to complete.
● Managing Now In practice, managers generally use manual project planning
versions of tools like Gantt and PERT for simpler projects. They use computerized
versions for more complex projects. Figure 9.7 illustrates a few of such software’s
benefits. In addition to laying out the network’s events and relationships, this
software provides pop-up calendars, automatically produces status reports, and
makes it easy to link up and communicate project status via the Web. It also helps
the manager define project tasks, anticipate obstacles, and print reports.
Buy
Materials
Hire
Workers
Get
Building
Permits
events: the specific
accomplishments in a project,
represented by circles in a PERT
chart
activities: the time-consuming
aspects of a project, represented
by arrows in a PERT chart
critical path: the sequence of
events in a project that, in total,
requires the most time to
complete
Run
Utilities to
Your Lot
Start
Put in
Interior
Plumbing
Put in
Outside
Plumbing
8
days
8
days
Put in
Interior
Wiring
Install
Fixtures
Paint
House
House
Complete
Level
Ground
5
days
1
day
Lay
Founda-tion
Put Up
Outside
Walls
15
days
3
days
8
days
2
days
Put Up
Interior
Walls and
Doors
7
days
3
days
6
days
2
days
8
days
3
days
3
days
9
days
Put in
Rugs
1
day
F IGURE 9.6
PERT Chart for Building a House
In a PERT chart like this one, each event is shown in its proper relationship to the other events.
The tan circles show the critical—or most time-consuming—path.

Purchasing
Purchasing departments buy all the materials and parts the firm needs to conduct
its business, including the raw materials that go into the firm’s products as well as
machinery, tools, purchased components, and office supplies.
Purchasing is a more important function than many managers realize.
Sometimes 60 percent or more of a manufacturer’s sales dollars are paid to sup-pliers
for purchased materials.15 As a rough approximation, a manager might
have to boost sales by $3 to $4 to produce the same increase in profits that
cutting purchasing costs by $1 would produce. Furthermore, manufacturers
striving to maintain quality levels know that the quality of a finished product like
a PC can’t be any better than the quality of components such as hard drives.
Purchasing departments thus affect a firm’s cost-effectiveness as well as its rep-utation.
Many firms work closely with suppliers to create better-quality parts.
Many firms, such as Ford, send engineers to help suppliers boost their quality
management systems.
Purchasing managers traditionally engage in several activities.16 Of course,
they try to minimize the costs of materials and supplies. However, this is usually
not their only (or even their main) concern.17 For many firms, high-quality, reli-able,
on-time deliveries outweigh costs. Companies like Toyota spend years devel-oping
close relationships with favored suppliers, even helping them to improve
their own operations.
As we’ll see later in this chapter, firms are increasingly automating their pur-chasing.
Suppliers bid for and fulfill their business via the Internet.
F IGURE 9.7
Example of a Computerized
Project Planning Report
SOURCE: Copyright © Experience In
Software, Inc. 1997–2006. Reprinted with
permission.

Operations and Inventory Planning and Control ■ 243
The Role of Inventory Management
How much to purchase depends partly on the firm’s current inventories. Firms
keep inventories of five types of items: raw materials and purchased parts,
components, works in process, finished goods, and supplies.18 Firms obtain raw
materials and purchased parts from outside suppliers and hold them for the pro-duction
of finished products. Components are subassemblies that are awaiting
final assembly. Work in process refers to all materials or components on the pro-duction
floor in various stages of production. Finished goods are final products
waiting for purchase or to be sent to customers. Finally, supplies are all items the
firm needs that are not part of the finished product, such as paper clips, duplicat-ing
machine toner, and tools. Inventory management is the process of ensuring
that the firm has enough inventories of all required parts and supplies within the
constraint of minimizing total inventory costs.
● Inventory Costs In practice, inventory managers must address four types of
costs. First, ordering or setup costs are the costs of placing the order (or of set-ting
up machines for producing the parts, if the parts are being manufactured,
not bought). For purchased items, ordering costs might include order-processing
costs (such as clerical time for filling out the order) and the cost of inspecting
goods when they arrive. For items made in-house, setup costs include the labor
involved in setting up the machine and the cost of preparing the paperwork for
scheduling the production run. Ordering or setup costs are usually fixed. For ex-ample,
it costs a clerk about the same to process the paperwork for a big order as
for a small order.
Acquisition costs (the total cost of all the units themselves bought to fill an
order) vary with the size of the order. For example, ordering parts in larger quanti-ties
may reduce each unit’s cost thanks to quantity discounts. This, in turn, will
lower the total acquisition costs of the order. Ordering smaller quantities may raise
the unit cost.
Inventory managers focus on two other inventory costs. Inventory-holding
or carrying costs are all the costs associated with carrying parts or materials in in-ventory.
The biggest specific cost here is usually the firm’s cost of capital, which in
this case is the value of a unit of the inventory times the length of time it is held
times the interest rate at which the firm borrows money.19 Suppose an item costs
$10 and stays in inventory for a year, and the firm must pay its bank 5 percent in-terest
to borrow money. Then it costs the firm $0.50 in finance charges just to hold
the item in inventory for a year. Stockout costs are the costs associated with run-ning
out of raw materials or finished-goods inventory. For example, if a company
cannot fill a customer’s order, it might lose both the current order and any profits
on future sales to this customer.
Inventory managers want to avoid three basic problems. Overinvestment in
inventories ties up money and space. Underinvestment leaves the firm unable to
fill production orders and discourages customers. Unbalanced inventory means
there are some understocked items and some overstocked ones.
Basic Inventory Management Systems
Many quantitative and nonquantitative tools are available for managing inven-tory.
The ABC and EOQ systems are two popular methods.
● ABC Inventory Management Most firms find that a small proportion (25 per-cent
to 30 percent) of the parts in their inventory accounts for a large proportion
inventory management: the
process of ensuring that the firm
has adequate inventories of all
required parts and supplies
within the constraint of
minimizing total inventory costs
ordering or setup costs: the
costs, usually fixed, of placing an
order or setting up machines for
a production run
acquisition costs: the total
costs of all units bought to fill an
order, usually varying with the
size of the order
inventory-holding or
carrying costs: all the costs
associated with carrying parts or
materials in inventory
stockout costs: the costs
associated with running out of
raw materials, parts, or finished-goods
inventory

(70 percent or 80 percent) of their annual dollar volume of inventory use. (Com-pute
a part’s annual dollar volume by multiplying its cost per part by the number
of parts used in a year.)
When using the ABC system, the manager divides the inventory into three
dollar-volume categories—A, B, and C.The A category parts—maybe 5 percent of the
total—are the most active. They account for perhaps 40 percent of the annual dollar
value of all parts used. The manager concentrates most of his or her surveillance on
the A parts. For example, he or she orders them most often but in smaller quantities.
In that way, their total number in inventory at any one time is minimized.
At the other extreme, the inventory manager might find that perhaps 50 per-cent
of the parts (the C category parts) in inventory account for, say, 15 percent of
all the parts used each year. Why spend as much time closely monitoring all those
parts when, in total, they account for only 15 percent of the firm’s annual dollar
volume of inventory use? They don’t tie up that much capital. The idea of ABC is to
focus most on the high-annual-dollar-volume A inventory items, to a lesser extent
on the B items, and even less on the C items.
● The Economic Order Quantity Inventory Management System The
point of the economic order quantity (EOQ) system is to determine the most
economical quantity to order—in other words, the quantity that will minimize
total inventory and setup costs. EOQ is the best-known and probably the oldest in-ventory
system.
Figure 9.8 illustrates the EOQ system. Note that the two major costs, inventory
carrying costs and ordering/setup costs, vary inversely with each other. For exam-ple,
ordering in large quantities (less often) usually allows the firm to reduce aver-age
ordering or setup costs (remember, it usually costs about the same in clerical
costs to place a big order as a small one). However, it also means higher storage
costs. (Ordering less often means placing fewer, bigger orders, so the company
has, on average, more inventory in stock.)
In its simplest form the economic order quantity (the most economic quantity
to order) is:
Q —2U—S
H
Q = Economic (optimal) order
quantity to order-total
costs minimized
A N N U A L C O S T S I N D O L L A R S
Minimum
Total
Costs
H = Annual holding
costs (pilferage, finance
costs, cost of space, etc.).
The more you order
each time, the more
average inventory you
must hold, and the
longer you must hold it.
Total Costs
S = Restocking or ordering costs for each order
(clerical time for placing order, or cost of setting
up machine). The more you order each time, the
less you spend on annual ordering costs.
economic order quantity
(EOQ): an inventory
management system based on a
simple formula that is used to
determine the most economical
quantity to order so that the
total of inventory and setup
costs is minimized
F IGURE 9.8
The Economic Order Quantity
Model
When order size goes up,
ordering costs per order go down
but carrying costs go up because
more items are left longer in
inventory.

Controlling for Quality and Productivity ■ 245
where Qis the economic order quantity (the most economical quantity to order), U
is the annual use of the item, S is the restocking or ordering costs, and H is the an-nual
holding cost per unit per year. Suppose a car factory uses 10,000 door handles
per year to build its cars; then U for the handles is 10,000. S may refer to either
restocking or ordering costs, depending on whether the firm makes or buys the
handles. If the car factory orders the handles froma supplier and it costs the factory
$200 per order (for forms, clerical support, and so forth) to place the order, then
S is $200. Holding (or carrying) costs per unit (H) (in this case, $1.00 per unit) in-cludes
such things as pilferage, borrowing costs associated with holding the items
in stock, and the costs of the space in which the inventory is held. EOQ would thus
be 2000 units.
This EOQ makes some simplifications. For example, it assumes that the same
number of units is taken from inventory periodically, such as ten units per day.
More sophisticated EOQ versions handle these and other complications.20
Controlling for Quality and Productivity
uality refers to the totality of features and characteristics of a product or ser-vice
that bears on its ability to satisfy given needs. Put another way, “[q]uality
Q
measures how well a product or service meets customer needs.”21 This quote high-lights
several things about quality. First, the customer’s needs are the basic stan-dard
for measuring quality. Thus, many coach flyers understandably consider
traveling on JetBlue’s wider leather coach seats as high quality compared with the
typical coach experience. Second, high quality does not
have to mean high price. Again, the basic consideration
should be the extent to which the product or service
meets the customer’s expectations.
Quality standards today are international. Doing
business often means the firm must show it complies
with ISO 9000, the quality standards of the Interna-tional
Standards Organization, to which the United
States is a signatory. These standards specify practices
and procedures for things like how to train employees
and how to monitor quality. Complying with ISO 9000
shows potential customers that the products you pro-duce
meet international standards. For example, Dell
wants its computers to meet international quality stan-dards.
Therefore, it must make sure that the companies
that supply it with components like hard drives them-selves
comply with those international standards.
Total Quality Management Programs
Total quality management (TQM) programs are companywide programs that
integrate all the functions and related processes of a business so that they are all
aimed at maximizing customer satisfaction through ongoing improvements. They
aim to focus all the company’s activities, including design, planning, production,
distribution, and field service, on maximizing customer satisfaction. They empha-size
management commitment to quality, empowering employees to address
quality issues, analyzing quality issues based on data and facts, and continuously
quality: the extent to which a
product or service can meet
customer needs and expectations
ISO 9000: the quality
standards of the International
Standards Organization
It may not be first class, but most passengers rate JetBlue’s
wide leather coach seats as “high quality.”
total quality management
(TQM): a specific
organizationwide program that
integrates all the functions and
related processes of a business
so that they are all aimed at
maximizing customer
satisfaction through ongoing
improvements

improving all aspects of one’s operations.22 Companies like GE that pursue TQM
typically train selected employees to become experts in applying TQM principles
(GE calls its employee-experts black belts). One team at GE Appliances analyzed
the inspection process on one refrigerator line and devised a better system that
did not require pulling refrigerators off the line to inspect them. By continually
making changes like these in how the company designs, manufactures, and dis-tributes
its products, total quality rises, and the savings (for instance, of not having
to throw out defective items) boosts profits.
TQMprograms go by many names. Sometimes managers call them continuous
improvement, zero defects, six-sigma, or (in Japan) Kaizen programs.23 Six-sigma
programs are perhaps the best known. Statisticians use the Greek letter sigma to
represent standard deviation. Standard deviation is basically a measure of varia-tion.
Suppose we can plot the number of defects our company gets with a normal,
or bell-shaped, curve. Then there is a very high probability we will get an average
number of defects (say, 10,000 per day), as indicated by the midpoint of the curve.
There is less probability we will get more (11,000) or fewer (9,000) defects per day.
About two-thirds of all likely defects will be between one standard deviation
from the average (mean). In the six-sigma system, if a company achieves only one
sigma, it’s very likely they will get lots of defects. If a company achieves six-sigma, it
means it gets very few defects—about 3.5 defects per million items they produce.
Most regard W. Edwards Deming as the intellectual father of TQM. He based
his concept of total quality on a fourteen-point system, which he says must be im-plemented
at all organizational levels. To get an idea of his TQM philosophy, we
can summarize his points as follows:
1. Create consistency of purpose toward the improvement of product and service.
2. Adopt a philosophy of quality.
3. Cease depending on inspection; instead, build quality into the product from
the beginning.
4. Don’t choose suppliers based just on price; emphasize loyalty and trust.
5. Improve constantly and forever the production and service system—in other
words, aim for continuous improvement.
6. Institute extensive training on the job.
7. Shift your focus from production to quality.
8. Don’t do things that make employees fear for their jobs.
9. People in research, design, sales, and production must work as a team to fore-see
problems.
10. Don’t rely on slogans and targets that push for higher quality and productivity,
particularly where you don’t put in systems for achieving these aims.
11. Eliminate work standards (quotas) on the factory floor.
12. Abolish using tools like annual appraisals; these rob employees of the intrin-sic
desire to do a great job.
13. Institute a vigorous program of employee training and self-improvement.
14. Make sure all managers push every day for each of the preceding thirteen
points.24
Deming at first had success converting Japanese, not American, firms to his
principles, and Japanese firms still strive hard to win Japan’s Deming quality prize.
six-sigma: a total quality
management program, the aim
of which is to reduce errors to
about 3.5 defects per million
items produced

Controlling for Quality and Productivity ■ 247
In the United States, the Department of Commerce created the Malcolm Baldrige
Award to recognize firms that adhere to Deming-type quality principles. (Baldrige
was secretary of commerce around that time.) Most U.S. firms can apply for the
award.25
Quality Control Methods
Managers use various tools to control product or service quality. For example,
most firms have formal inspection procedures. Sometimes (such as when produc-ing
heart pacemakers), 100 percent inspection is typical. More common is accep-tance
sampling. Here, the firm inspects only a portion of the items, perhaps
2 percent or 5 percent.
Firms also use quality control charts like that in Figure 9.9. The manager uses
the upper and lower control limits to show the range within which some measur-able
characteristic should fall. Then employees (or machines) measure the chosen
characteristic (such as length or weight). Thus, Kellogg’s might want to make sure
each box of corn flakes contains no more than 20.2 ounces and no fewer than
19.8 ounces. If the measures begin to move toward the upper or lower control lim-its,
it’s time to see what’s causing the variation.
● Managing Now Modern information technology–based quality control sys-tems
enable manufacturers to do more than monitor obvious quality dimensions
like size and weight. Firms like Kraft also want to know if the products coming off
production lines are chewy, sweet, and/or crunchy.26 Kraft uses a sensory analysis
application from the software company SAS to ensure consistent flavor and ap-pearance
of its snack foods. The system includes special electronic sensors and a
database of information. These features enable the system to sense whether an
item is as chewy, sweet, crunchy, and/or creamy as it’s supposed to be.
Inspections and control charts are useful, but Deming pushed for getting the
employees themselves to want to produce high-quality products. Modern quality
control efforts therefore emphasize getting employee teams involved in moni-toring
quality and analyzing problems. Employee quality-assurance teams typi-cally
use several tools to monitor and analyze quality problems. Figure 9.10 sum-marizes
some of them.27 For example, a scatter diagram shows the magnitude of
one trait (such as the number of defects) versus a second trait (such as time). A
acceptance sampling: a
method of monitoring product
quality that requires the
inspection of only a small
portion of the produced items
8:00 9:00 10:00 11:00 12:00 1:00 2:00 3:00 4:00
W E I G H T I N P O U N D S
Time
16
15
14
13
12
11
10
987654321
Upper
Control
Limit
Lower
Control
Limit
F IGURE 9.9
Example of a Quality
Control Chart
The idea behind any control chart
is to track quality trends to
ensure that they don’t go out of
control.

Process Flowchart Pareto Analysis Run Chart
?
A chart that describes the main steps,
branches, and eventual outputs of
a process.
Frequency Percentage
A B C D E F G
5
4
3
2
1
0
100%
50%
0%
A plot of the frequencies of important
error sources. 80/20 rule: 80 percent
of problems are due to 20 percent of
causes (A, B, etc., are error sources).
Time
A chart showing plotted values of
a characteristic over time.
Histogram Scatter Diagram Causes-and-Effect Diagram
Frequency
Items
A distribution showing the frequency of
occurrences between the high and low
range of data.
Also known as a correlation chart.
A graph of the value of one characteristic
versus another characteristic.
Machine Human
Method Material
Environment
Effect
A tool that uses a graphical description
to list and analyze potential sources of
process variation, classified by machine,
human, method, and material.
F IGURE 9.10
Commonly Used Tools for Problem Solving and Continuous Improvement
SOURCE: Adapted from Richard Chase and Nicholas Aquilero, Production and Operations Management, 6th ed.
(Homewood, Ill.: Irwin, 1992), p. 197.
cause-and-effect, or fishbone, diagram (see Figure 9.11) outlines the four main
causes of problems—machines, labor/people, methods, and materials. This kind
of diagram gives employees a useful structure they can use to systematically ana-lyze
the cause of quality problems.
Design for Manufacturability
Designing for manufacturability means designing products with ease of high-quality
manufacturing in mind.28 Designing for manufacturability is important:
“By the time a product has been designed, only about 8 percent of the total
product budget has been spent. But by that point, the design has determined 80
percent of the [eventual] cost of the product!”29 Experts therefore say, “The
design determines the manufacturability.”30 For example, we can see evidence of
design for manufacturability in the cars we drive. A few years ago, designers
would design new cars just for aesthetics, and the company’s assemblers might
have to spend hours putting in all of a dashboard’s parts. Today, the dashboard
designing for
manufacturability:
designing products with ease
of manufacturing and quality
in mind

Clean
Understaffed
Crew
Understaffed
Ticket Counters
(and headlights, tail lights, and so on) are designed to come to the factory as
preassembled modules. This makes assembling the final, high-quality car much
simpler.
Designing for manufacturability often means designing products using multi-disciplinary
teams. Operations managers call this simultaneous design or concur-rent
engineering. It ensures that all departments involved in the product’s
success contribute to its design.31
World-Class Operations Management Methods
ompetition in almost every industry is global.32 Thus, firms such as Whirlpool
face not just local competitors but foreign ones, like Meile. When competition
is global, competition is more intense. Firms everywhere are striving to improve
quality, lead time, customer service, and costs in the hope of gaining a stronger
hold on their markets. World-class companies are those that can compete based
on quality and productivity in an intensely competitive global environment. Firms
such as UPS, GE, and Toyota set the performance standards for their industries.
World-class manufacturers are world class in part because they use modern
production techniques and management systems to boost productivity, quality,
and flexibility. These techniques and systems include TQM (already described),
just-in-time manufacturing, computer-aided design and manufacturing, flexible
manufacturing systems, computer-integrated manufacturing, supply chain man-agement,
and enterprise resource planning. We discuss them next.
C
World-Class Operations Management Methods ■ 249
Material Machinery
Inadequate
Supply of Magazines
Inadequate Special
Meals Onboard
Dissatisfied
Airline
Customer
Mechanical
Delay on Plane
Broken Luggage
Carousel
Insufficient
Pillows and
Blankets Onboard
Deicing Equipment
Not Available
Overbooking
Policies
Bumping
Policies
Poor Check-In Policies
Mistagged Bags
Poorly Trained
Attendants
Methods Labor/People
F IGURE 9.11
Cause-and-Effect, or
Fishbone, Diagram for
Problems with Airline
Customer Service
concurrent engineering:
designing products in
multidisciplinary teams so that
all departments involved in the
product’s success contribute to
its design
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The Basic Components of Just-in-Time
(JIT) Systems
The concept called just-in-time (JIT) has two related definitions. In the narrowest
sense, JIT refers to production control methods used to attain minimum inventory
levels by arranging delivery of materials and assemblies just in time—in other
words, just when they are to be used. But realistically, one cannot minimize inven-tory
without also having excellent forecasting, assembly, shipping, and employee-training
practices in place. Otherwise, companies that keep minimal inventories
of spare parts and get the ones they need at the last minute run out of parts when
they most need them! So JIT is really a philosophy of manufacturing that aims to
optimize production-process efficiency by continuously reducing waste.
● The Seven Wastes Reducing seven main wastes is at the heart of the JIT
philosophy.33 The seven wastes (and examples of how to reduce them) are over-production
(reduce by producing only what is needed, as it is needed), waiting
(synchronize the workflow), transportation (minimize transport with better lay-outs),
processing (ask, “Why do we need this process at all?”), stock (reduce inven-tories),
motion (reduce wasted employee motions), and defective products (im-prove
quality to reduce rework).
As an example, most firms waste enormous resources waiting—to inspect in-coming
items, for storing raw materials or work in process, or for moving work in
process from one step of the process to another. JIT aims to reduce wastes like
these. JIT is also sometimes called lean or value-added manufacturing (reflect-ing
the fact that any manufacturing activity that does not add value to the product
for the customer is wasteful).34
JIT has its weaknesses. Having minimal inventory and getting parts just in
time works great when all is normal. Plants near New Orleans found themselves
out of their parts inventory (and out of luck) when Hurricane Katrina shut down
UPS and FedEx shipments in 2005.
● JIT Characteristics In practice, JIT-based facili-ties
tend to have several characteristics. They tend to be
small (less than 100 employees) specialized plants
rather than large ones. It is easier to manage small
plants, and it is easier to design the workflow and to
staff specialized, single-function plants.35 They tend to
be organized around cells, so all the processes required
to complete a major part of the product are in one place.
One employee can then perform all the processes.
Workers tend to be more highly trained and flexible.
Each worker also tends to be personally responsible for
the quality of the item he or she produces. Thus, quality
goes in at the source, when the product is actually
made, in turn eliminating a big source of waste.
● JIT’s Human Consequences Manufacturers in-stalling
such lean production systems need to consider
their potential effects on employees.36 At firms like
Toyota, eliminating waste typically goes hand in hand
with increased employee teamwork, participation, and
problem solving, and so lean manufacturing seems to
just-in-time (JIT): a
production control method used
to attain minimum inventory
levels by ensuring delivery of
materials and assemblies just
when they are to be used; also
refers to a philosophy of
manufacturing that aims to
optimize production processes
by continuously reducing waste
lean or value-added
manufacturing: a
management philosophy that
assumes that any manufacturing
process that does not add value
to the product for the customer
is wasteful
JIT-based facilities: Toyota inspectors examine a finished car
coming off the assembly line in the company’s Miyazaki,
Japan, factory.

boost motivation. However, one recent study shows how one company may have
done things wrong. In this study, workers who used to control the pace of their
work suddenly found themselves working on an assembly line. Basically, the work-ers
felt that the quality of their jobs had declined and that they were working
harder and with less control over what they did than they had previously. The
researcher concluded that in this case, lean production “can be damaging to
employees.”37 Such a situation is probably the opposite of what Deming had in
mind. Deming’s principles call for a quality system in which employees take own-ership
for and pride in their work. Managers instituting quality programs ignore
that to their peril.
Computer-Aided Design and Manufacturing
Technology—not just employee behavior—plays a big role in world-class manu-facturing.
For example, computer-aided design (CAD) is a computerized
process for designing new products or modifying existing ones. Designers sketch
and modify designs on a computer screen. CAD makes it easier to modify existing
designs and lets designers expose their designs to simulated stresses such as wind
resistance.
Computer-aided manufacturing (CAM) uses computers to plan and
program the production process or equipment. For example, it makes possible
computerized control of tool movement and cutting speed. So a machine can
carry out several sequential operations on a part, all under the guidance of the
computer-assisted system.
Operations managers often use CAD and CAM together. For example, with the
design already in place within the CAD system, the computer knows a compo-nent’s
dimensions and specifications and can tell the automated CAM production
equipment how to cut and machine it.
Companies use the Internet to expand the usefulness of such computer-based
systems. Consider Motorola’s plant in Mansfield, Massachusetts. When the plant
got approval to produce new cable modems, the plant manager knew he needed a
faster and cheaper way to get the engineering documents to the assemblers on the
plant floor.38 The manager and his staff created an internal plant intranet. They
used a digital camera to take pictures of each component. They placed these pic-tures
online, along with step-by-step instructions for assembly and testing. This
setup eliminated expensive paper engineering drawings. It also helped the plant
update its drawings instantaneously.
● Managing Now Companies use software applications to create more com-petitive
manufacturing processes. For example, applications like SAP Manufactur-ing
allow production managers to monitor, detect, and resolve production and
performance deviations in real time and to improve employee productivity.39
Flexible Manufacturing Systems
In many firms today, flexible manufacturing systems are at the heart of their
world-class production. Systems like these enable companies to quickly shift
production from one product to another, even on the same production line. A flex-ible
manufacturing system (FMS) is “a system in which groups of production
machines are connected by automated materials-handling and transfer machines,
and integrated into a computer system.”40 Computers route parts and components
to the appropriate machines, select and load the proper machine tools, and then
computer-aided design
(CAD): a computerized
process for designing new
products, modifying existing
ones, or simulating conditions
that may affect the designs
computer-aided
manufacturing (CAM):
a computerized process for
planning and programming
production processes and
equipment
flexible manufacturing
system (FMS): the
organization of groups of
production machines that are
connected by automated
materials-handling and transfer
machines, and integrated into a
computer system for the
purpose of combining the
benefits of made-to-order
flexibility and mass-production
efficiency

direct the machines to perform the required operations. Computerized automated
guided vehicles (AGVs) then move the items from machine to machine. Often,
there is a computer-guided cart system. It picks up and delivers tools and parts to
and from multiple workstations. Systems like these depend on automation and ro-bots.
Automation is the automatic operation of a system, process, or machine. A
robot is a programmable machine capable of manipulating items and designed to
move materials, parts, or specialized devices through programmed motions.
Several things contribute to the manufacturing system’s flexibility. Comput-erized
manufacturing instructions (CAM) reduce machine setup times. Reduced
setup times cut required manufacturing lead times. Automated guided vehicles
move parts with relative speed and efficiency. And the firm can respond more
quickly to new competing products or changing consumer tastes by using CAD to
redesign products and CAM to reprogram its machines. Toshiba’s president said
the aim of flexible manufacturing “is to push Toshiba’s
two dozen factories to adapt faster to markets . . . cus-tomers
wanted choices. They wanted a washing ma-chine
or TV set that was precisely right for their needs.
We needed variety, not mass production.”41
Flexible manufacturing helps Toshiba combine the
advantages of customized, one-at-a-time production
with the efficiency of mass production. At the Toshiba
plant in Ome, Japan, workers efficiently assemble nine
word-processor models on one line and twenty laptop
computer models on another.42 Such flexibility helps
Toshiba be responsive to customer requirements. The
National Bicycle Industrial Company, a subsidiary of
electronics giant Matsushita, is another example.43
With only twenty employees, National Bicycle’s factory
can produce more than a million variations of eighteen
bicycle models, each custom-made to a customer’s
unique requirements.
automation: the automatic
operation of a system, process,
or machine
Plants like this one owned by Toshiba rely on flexible
manufacturing systems.
Computer-Integrated Manufacturing
Many firms integrate automation, JIT, flexible manufacturing, and CAD/CAM into
one self-regulating production system. Computer-integrated manufacturing
(CIM) is defined as the total integration of all production-related business activi-ties
through the use of computer systems.44 It gives the firm a competitive advan-tage
based on speed, flexibility, quality, and low cost. Figure 9.12 summarizes this
integrative process.
CIM’s advantages usually exceed those of its component parts. For example,
CAD reinforces CAM by feeding design changes directly to the machinery tools.
Computer-integrated automated guided vehicles facilitate JIT systems by reduc-ing
human variability and waiting time in the system.45We’ve also seen that many
companies are using the Web to streamline their operations. For example, Boeing’s
electronic commerce website eliminates the barriers that traditionally separated
the company from suppliers and customers. Customers can keep track of their or-ders.
Suppliers can see when Boeing needs their parts. Boeing can see where their
parts are. Manufacturing systems are increasingly integrated with customers’ and
suppliers’ systems.46
Integration is important. As one Japanese executive put it, “In the past, manu-facturing
was characterized by large [production run] quantities, with few varieties.
computer-integrated
manufacturing (CIM):
the total integration of all
production-related business
activities through the use of
computer systems

Computer-Aided Design (CAD)
designs the product.
Today’s customers are asking for small quantities in very many varieties. CIM adds
flexibility to help make those very short production runs economical.”47
● Cook Specialty Company Cook Specialty Company is a good example of
how CIM works. Cook Specialty Company is a small manufacturer of precision
metal parts.48 As its customers trimmed the number of suppliers from whom they
purchased parts, Cook needed a way to stay competitive. Somehow, Cook had to
combine low-volume production with high variety and low cost. It needed mass-production
prices and job-shop flexibility.
Robots assemble and
test the products.
Automated Guided Vehicles
move the parts and products from
storage to assembly and back.
F IGURE 9.12
The Elements of CIM
Computer-Aided Manufacturing
(CAM) takes the CAD design and
guides machines to automatically
fabricate product.
Automated Storage and Retrieval Systems
automatically move parts and materials
in and out of storage.
Computers and
Computer Systems
SOURCE: Adapted from Barry Render and Jay Heizer, Principles of Operations Management, 2nd ed., p. 179, © 1997. Reprinted
by permission of Pearson Education, Inc., Upper Saddle River, N.J.

supply chain management:
the integration of the activities
that procure materials, transform
them into intermediate goods
and final product, and deliver
them to customers
Its solution was to switch to being a custom manufacturer, one that not only
made the products but helped customers design them. A new CIM system enables
Cook to do this. By linking its own computerized manufacturing system with cus-tomers’
CAD systems, Cook and its customers can now swap drawings and send
instructions for final designs directly to Cook’s computer-automated machines for
manufacture. Cook has a highly integrated system that gives customers a value-added
benefit and gives Cook a competitive edge.
● CIM and Employees Some companies spend millions installing CIM sys-tems
but find that their plants are no more productive or flexible than before. A
study sheds some light on why. Harvard Professor David Upton found that:
The flexibility of the plants depended much more on people than on any tech-nical
factor. Although high levels of computer integration can provide criti-cally
needed advantages in quality and cost competitiveness, all the data in
my study point to one conclusion: operational flexibility is determined pri-marily
by a plant’s operators and the extent to which managers cultivate,
measure, and communicate with them. Equipment and computer integration
are secondary.49
The successful computerization of paper manufacturerMeadCorporation’s mill
in Escanaba,Michigan, is an example.50Because some of its machines were already
computer integrated,Mead managers knew computerization itself was no panacea.
They decided to make the workers part of the plant improvement process:
◗ They replaced their existing computer systems with a new system called Quality
and Information for Decisions.51 The system (nicknamed QUID) was custom-designed
to make things easier for the operators who actually ran the machines.
◗ From the outset, the plant’s managers insisted that operators be involved in the
system’s design and development.
◗ The plant managers saw to it that the computer system was designed mostly in-house.
The employees at each work function in the plant designed their own
computer interface to ensure that they got the information they needed to do
their jobs.
The new people-friendly program was quite successful. The plant’s responsive-ness
and customer satisfaction measures rose dramatically. Escanaba became the
most productive mill in Mead’s fine-paper group. Recently, thanks in part to Esca-naba’s
success,Mead sold its entire paper operations to a company called Cerberus.
Supply Chain Management
omputer-integrated and lean manufacturing aim to eliminate the wastes of
unnecessary activities and to help companies respond faster to customers’
C
needs. Supply chain management supports these aims. Indeed, world-class
firms like Dell and Toyota are so successful largely due to how they manage their
supply chains. A supply chain “includes all the interactions between suppliers,
manufacturers, distributors, and customers. The chain includes transportation,
scheduling information, cash and credit transfers, as well as ideas, designs, and
material transfers.”52 Supply chain management “is the integration of the ac-tivities
that procure materials, transform them into intermediate goods and final
products, and deliver them to customers.”53 The idea is to build an integrated
supply chain: includes all the
interactions between suppliers,
manufacturers, distributors, and
customers, including specifically
transportation, scheduling
information, cash and credit
transfers, as well as ideas,
designs, and material transfers
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Supply Chain Management ■ 255
F IGURE 9.13
The Supply Chain
The supply chain includes all interactions among suppliers, manufacturers, distributors, and
customers.The chain involves transportation, scheduling information, cash and credit transfers,
as well as ideas, designs, and material transfers.
Market Research Data
Scheduling Information
Engineering and Design Data
Order Flow and Cash Flow
Ideas and Design to Satisfy
the End Customer
Material Flow
Credit Flow
Customer
Distributor
Manufacturer
chain of suppliers who together focus both on reducing waste and on getting the
desired products to the customers as expeditiously as possible.54 Figure 9.13
summarizes this.
Managing Now: Supply Chain Management Software
Companies usually build their supply chains’ interconnectedness around spe-cial
supply chain management software applications from companies like SAS,
SAP, and Oracle.We can get some insights into what these packages do for com-panies
by listing some typical components. For example, Oracle Supply-Chain
Management includes components such as: daily business intelligence for pur-chasing;
payables; purchasing; demand planning; e-bill payment; inventory;
order promising; manufacturing scheduling; shop floor management; trans-portation
planning; warehouse management; order management; demand con-sensus;
and advanced forecasts modeling.55
Supply chain packages like these work together with a company’s enterprise re-source
planning (ERP) software. As we saw, ERP software includes compatible soft-ware
packages for each department or business function. These business functions
include production and materials management, shipping, finance/accounting,
and human resources. Add the supply chain software, and the company can also
Supplier
Inventory
Customer
Customer
Supplier
Supplier
Inventory Inventory
Inventory
SOURCE: Adapted from Jay Heizer and Barry Render, Operations Management (Upper Saddle River, N.J.: Prentice Hall, 2001),
p. 434.

bring in supply chain partners such as distributors, truckers, and suppliers. Now,
information fromoutside the company—say, fromand to suppliers and truckers—
can also flow from and to the company’s inside departments, like production and
finance.
Dell’s ERP software posts the order and signals manufacturing to plan to produce
the PC. It hands off information on the order to Dell’s supply chain management
system. This signals suppliers (such as the one producing the monitor you want) to
prepare to have one picked up. It also notifies UPS to pick up your PC from Dell
(and the monitor from the supplier) on a particular day and to deliver it all to you,
as ordered. At the same time, Dell’s ERP notifies the accounting department to send
you a bill, and it lists your PC’s specifications on the Dell customer-service system
in case you call or link in with a question. And, all this happens automatically.
Experts say that great supply chains exhibit three characteristics: agility, adaptabil-ity,
quickly to sudden changes in markets.56 For example, thanks to its supply chain sys-tem,
stores in fifteen days; so when trends change, it can respond quickly. Adaptability
means being willing to change parts of the supply chain when change is required.
For example, Lucent continued to manage its supply chain on the assumption that
it should produce its own phones, even after competitors had outsourced manu-facturing
also align all the supply chain’s partners’ interests. For example, the incentives are
such that each Dell supply chain partner does what’s best to support Dell’s cus-tomers’
PRACTICE IT
Whirlpool Delivers
For example, what happens when someone places an order for a new Dell PC?
The Three A’s of Supply Chain Management
and alignment. Agility means that the supply chain must be able to respond
the retailer Zara can design, manufacture, and ship a new jacket to one of its
to highly efficient electronics manufacturing firms like Flextronics. Lu-cent’s
failure to adapt helps to explain why it lost market share. Great supply chains
needs. UPS will do what it needs to get that PC to the customer on time.
With Whirlpool’s sales force referring to its supply chain
as a sales disabler, new supply chain head Reuben Slone
took action. Slone and his team began by instituting a new
forecasting system called CPFR, which stands for “collab-orative
planning, forecasting, and replenishment.” The
basic idea of CPFR is to let all the partners in Whirlpool’s
supply chain—retailers, truckers, and manufacturing
plants, for instance—share information, like how many ap-pliances
Whirlpool expects to sell to each retailer (such
as Sears).This information enables each supply chain part-ner
to develop its own forecasts and to better prepare for
fulfilling their roles in Whirlpool’s supply chain. UPS can
see when it will have to send trucks to pick up finished
appliances. Sears can keep track of when its Whirlpool
appliance order will arrive.
Whirlpool’s supply chain management team supple-mented
this system with new Web-based supply chain man-agement
tools.For example, they installed a new Web-based
tool that lets Whirlpool’s system communicate directly with
a customer’s system for details like transmitting orders, ex-changing
sales data, and submitting and paying invoices.57
This cuts the time and costs associated with these transac-tions.
Product availability rose from about 88 percent in
2003 to more than 95 percent today.The number of days
the company had to hold finished goods in inventory
dropped from about thirty-three days to about twenty-six.

Why Supply Chain Management Is Important
Supply chain management is important because no business today functions
alone. The performance of every business depends on the suppliers who supply its
parts and on the companies who distribute its products to the ultimate cus-tomers.
How much the company’s products cost, the products’ quality and relia-bility,
and the speed and dependability with which the products show up at the
customer’s door all depend on the company’s supply chain partners. For example,
when the hard drive on a new Dell PC stops working, the consumer gets upset with
Dell, not with the part’s manufacturer.Whenthe replacement doesn’t arrive on time,
he or she gets upset withDell, not with UPS.Toomanysupply chain partner slip-ups
can doom a company’s business. The Practice IT feature shows that Whirlpool,
which several years ago suffered from slowdeliveries, learned that lessonwell.
● Managing Now: Reducing Costs with Supply Chain Management Supply
chain management helps companies reduce costs. For example, at General Elec-tric’s
power systems division, the firm’s Web-based supply chain management sys-tem
lets its customers monitor the assembly of the huge turbines they ordered as
the turbines move through the production process. These power-generating tur-bines
cost $35 million each and contain thousands of parts. Having customers
catch errors early and being able to get suppliers to change designs more expedi-tiously
means big cost savings for GE and the customer.58
As another example, Wal-Mart used to order two to four weeks’ worth of prod-uct
for each store. Now, Wal-Mart orders only five days’ worth of product. Its supply
chain partners (including its suppliers and truckers) are responsible for ensuring
that those products show up on time and for consolidating shipments from several
suppliers so the delivery trucks are full. Wal-Mart’s information technology–based
supply chain management system helps make sure the process runs smoothly. It
uses radio-frequency sensors, supply chain software, satellites, and digital trans-mission
devices from check-out stations to help suppliers keep track of Wal-Mart’s
sales and inventory and thus anticipate Wal-Mart’s needs.59
Basic Building Blocks of Supply Chain
Management Systems
In addition to the supply chain management system software and the IT system
itself, the four building blocks of supply chain management systems are sup-plier
partnering, transparency, Internet-based purchasing, and channel assembly.
Supplier partnering means choosing to do business with a limited number of
suppliers, with the aim of building relationships that improve quality and relia-bility
rather than just improve costs. Rather than getting competitive bids, the
customer-company often decides to work with a few supplier-partners.
Supplier partnering brings many advantages. The customer-buyer company
can work with the partner-supplier to ensure a cost-effective design. Firms like
Wal-Mart let suppliers literally link into the company’s point-of-purchase and in-ventory
systems to learn what products Wal-Mart needs, when. This system
reduces inventory costs, improves just-in-time performance, and reduces admin-istrative
costs. Supplier partnering reduces the customer-company’s administra-tion
costs (for instance, fewer purchasing agents are required). It can also improve
product quality (for instance, by enabling the customer-company to insist that the
supplier be ISO 9000 certified), eliminate waste from the supply chain, and still let
the firm push for cost reductions (although, perhaps, not quite so hard).
supplier partnering:
choosing to do business with a
limited number of suppliers,
with the aim of building
relationships that improve
quality and reliability rather
than just improve costs

Most supply chain software applications from companies like SAP, SAS, and
Oracle facilitate transparency. Transparency basically means giving supply chain
partners easy access to information about details like demand, inventory levels,
and status of inbound and outbound shipments, usually through a Web-based
portal. This information lets supply chain partners (like suppliers and truckers)
accurately predict the customer’s needs. Transparency requires trust and collabo-ration.
Thus, Dell needs to trust their suppliers to keep proprietary information
about Dell’s daily sales private. (We address trust and collaboration in Chapter 17).
As we said earlier, radio frequency identification (RFID) sensor tags support trans-parency.
Big retailers use these tags to help keep track of inventory as it moves
from manufacturer to warehouse to stores.60
● Managing Now The Safeway supermarket chain in the United Kingdom im-plemented
a supply chain management system that illustrates supplier partnering
and transparency. Aiming to improve its service, Safeway did a market research
study to find out what customers most disliked about shopping in their stores.
“Waiting on line at the checkout counter” topped the list. Safeway responded by
installing special scanners; customers can now scan and bag their own items if
they choose to. Number 2 on their customers’ list was “not being able to buy out of
stock items.” Safeway therefore reorganized its supply chain. It had been reluctant
to share information with suppliers for fear of divulging competitive information.
With new point-of-sale computerized registers, Safeway started sharing its real-time
sales with its suppliers.61 In doing so, Safeway turned their suppliers into
partners. Their suppliers now get real-time information regarding sales of their
products. That gives them the real-time information they need to replenish
Safeway’s shelves just in time.
Internet-based purchasing is a third building block of supply chain manage-ment.
For example, companies are creating what amounts to their own eBay-type
purchasing websites. They use these sites to enable potential vendors to bid
for their business. America’s big three automakers—General Motors (GM), Ford,
and DaimlerChrysler—created a Web-based purchasing exchange. Every year,
these firms make about $250 billion worth of purchases via this exchange.62
However, Internet-based purchasing (also called e-procurement) usually
means more than just getting orders via the Web. In today’s supply chains, supplier
partnering and transparency usually mean that favored suppliers (like Levi’s) can
monitor the real-time sales of customers (like Wal-Mart) and automatically create
orders to fulfill the customer’s needs. Therefore, Internet-based purchasing also
usually means having the system automatically generate the necessary shipping
documents and bills.
● Managing Now The thousands of orders Dell fills each week translate into
millions of component requirements. Dell makes more than 90 percent of its com-ponent
purchases online.63 Here’s how the system works. Dell’s suppliers use the
company’s special supply chain Internet portal to view Dell’s estimated parts
requirements and Dell’s actual orders and to confirm that they can meet Dell’s
delivery requirements. Then, as Dell actually receives orders, the online system
sends a pull signal to each supplier. This signal triggers the shipment of the parts
Dell needs to build current orders. As the head of Dell’s supply chain management
system says, “[W]e now schedule every line in every factory around the world
every two hours, and we only bring into the factory two hours worth of materi-als.”
64 That keeps Dell’s inventory to a minimum and helps to explain why its costs
are lower than its competitors’.
transparency: giving supply
chain partners easy access to
information about details like
demand, inventory levels, and
status of inbound and outbound
shipments, usually through a
Web-based portal
Internet-based purchasing:
making purchasing needs
known via the Web, as well as
getting orders via the Web and
automatically generating and
sending the necessary shipping
documents and bills
electronically; also called
e-procurement

● Channel Assembly Finally, some companies also make their suppliers or
distributors part of their manufacturing processes. Channel assembly, a fourth
characteristic of supply chain management, means having a supplier or distrib-utor
perform some of the company’s manufacturing steps. For example, Hewlett-
Packard (HP) doesn’t send finished printers to its distributors; it sends components
and modules. The distributors thus become an extension of HP’s production
process. When a retail store asks the distributor for a particular HP printer, the
distributor simply plugs together the required components and ships the assem-bled
product.
Many cars are assembled this way. For example, Siemens supplies electronic
parts for the Land Rover’s dashboard. However, Siemens does more than supply
parts. Other Land Rover suppliers send parts to Siemens, which then assembles
all these parts into completed dashboards. Siemens then sends these assembled
dashboards to the Land Rover plant, ready for installation. Land Rover does not
have to put together these components because Siemens has already done it.
The Window on Managing Now feature shows how the retailer Zara used all of
these building blocks to create a world-class company.
Zara
Today, the Spanish retailer Zara has more than 650 stores
in fifty countries and sales of over $6.5 billion.65 But the
company’s founder,Amancio Ortega, still remembers the
day, many years ago, when his present company started. A
German wholesaler had just canceled a big order, and
Ortega thought his clothing company could go bankrupt.
He had tied up all his money in the order. How would he
get rid of all that merchandise? He opened a shop near his
factory in the northwest corner of Spain and sold the
goods himself. It was the first Zara shop.66
The cancellation of that order taught Ortega a big
lesson. As he puts it, to be successful, “You need to have
five fingers touching the factory and five touching the cus-tomer.”
67 In other words, control everything that happens
to your product until the customer buys it.That philoso-phy
has driven Ortega to create one of retailing’s most
efficient supply chains.
Zara runs a very close-knit, mostly company-owned
supply chain. Because Ortega still likes to “keep five fin-gers
on the factory and five on the customer,” Zara does
about half its production in-house. Its communication sys-tem
quickly transfers both hard data (such as sales from
stores’ point-of-purchase registers) and anecdotal infor-mation
from store managers back to designers and
Zara’s state-of-the-art factory in Spain helps ensure that
popular items reach Zara’s stores in just a few days.
production staff in Spain. Zara uses information technol-ogy
to support its communications. For example, store
managers use handheld personal digital assistants (PDAs)
to transfer data that augments regular phone conversa-tions
between them and Zara’s market specialists. In
Spain, Zara designers work closely with product and tex-tile
engineers to create about 40,000 new designs per
year, of which the company selects about 10,000 for pro-duction.
Keeping design and manufacturing in one place
channel assembly:
organizing the product assembly
process so that the company
doesn’t send finished products
to its distribution channel
partners (such as warehouses,
distributors, and retailers), but
instead sends the partners
components and modules. The
partners thus become an
extension of the firm’s product
assembly process

Managing Now: Supply Chain City
Until recently, a quota system in the United States basically required that
American clothing manufacturers spread their manufacturing orders around
the globe as a way to support fledgling apparel manufacturing industries in
countries like Bangladesh. Those quotas ended a few years ago. As a result,
apparel manufacturing is quickly consolidating in low-cost, high-efficiency supply
chain cities in countries such as China. The supply chain city consolidates in one
place product design, engineering, and manufacturing. For example, the supply
chain city in Dongguam, in southern China, includes a huge factory, a hotel,
dormitory rooms for 4,000 workers, and restaurants.68
Apparel maker Liz Claiborne is consolidating all its design, textile engineering,
and manufacturing in this supply chain city because it brings together many of the
components of Liz Claiborne’s supply chain (like design, textile engineering, and
manufacturing). The company’s designers sit down here with technicians and en-gineers
from textile manufacturers and from the manufacturing facility itself to
quickly design and produce new apparel lines.
Liz Claiborne hopes that concentrating all this work in one place will simplify
and speed up its whole supply chain process. It used to have 250 suppliers in
thirty-five countries. Now, all this work will be done in the supply chain city. With
its old system, designs for new items would bounce back and forth from designers
in New York to various manufacturing facilities around the world, until the facili-ties
got the designs right. Now, all the design and manufacturing is done in one
place. Liz Claiborne hopes to get fast turnaround for new designs. In effect, it has
put much of its supply chain partners in one place—in a supply chain city.
1. Operations management is the process of managing
the resources required to produce an organization’s
goods and services. The direct production resources
of a firm are often called the five P’s of operations
and production management: people, plants, parts,
processes, and planning and control systems.
2. Any production system consists of inputs, a con-version
system, and outputs. Inputs are the pri-mary
resources used in the direct manufacture of
the product or service. The conversion system con-verts
those inputs into useful products or services
called outputs.
like this makes the whole process run more smoothly and
quickly. Once Zara’s designers choose a design, its com-puterized
design system translates that design to a final
product via computer-aided manufacturing.
Zara store managers throughout most of the world
place their orders by 3 P.M. Tuesday and 6 P.M. Friday.The
orders then generally ship from Zara’s factory within
forty-eight hours. Zara tags the items before they reach
the stores and ships them hung on special racks. When
they arrive, they are ready for display.
Zara’s superresponsive supply chain helps to explain
the company’s success. For example, Zara recently intro-duced
a version of a short, classic women’s jacket.When
the design proved quite popular, Zara designed, produced,
and delivered new variations of that jacket and put them
on display in stores worldwide in just fifteen days. Other
companies might take months to perfect designs and get
them to the stores. By then, the trend may be long gone.
As another example, Zara’s sends new products to its
stores every week, but always in short supply. If a cus-tomer
finds something that strikes his or her fancy, that
customer is inclined to think, “I should buy this now be-cause
it’s the last one left.” Executing that kind of limited
supply system means Zara’s supply chain must be able to
create and quickly replenish small batches of new goods,
and fast.

1. Describe the production system in a dry-cleaning
store.
2. What are the basic types of production processes?
Which category would a college fit into?
3. What is a PERT chart? What (in outline form) would
one look like for buying a car?
4. How could you use ABC inventory control in your
pantry?
5. What does world-class manufacturing mean to
you?
6. What makes a flexible manufacturing system
flexible?
7. What is a supply chain?
8. List four types of supply chain partners for your
school cafeteria.
3. The production system is at the heart of the opera-tion.
Four production design system decisions in-clude
the facility or plant location, the type of pro-duction
processes that will be used, the layout of
the plant or facility, and the layout of the produc-tion
system itself.
4. Production planning is the process of deciding
what products to produce, and where, when, and
how to produce them. Production control is the
process of ensuring that the specified production
plans or schedules are being met.
5. The production schedule is often presented on a
chart that shows what operations are to be carried
out and when. Network planning and control
methods are used to plan and control complex
projects. Purchasing departments buy the materials
and parts the firm needs to conduct its business.
6. Inventory management ensures that the firm has
adequate inventories of all needed parts and sup-plies
within the constraint of minimizing total
inventory costs. Many quantitative and nonquanti-tative
systems are available for managing inventory;
ABC and EOQ systems are two of the most popular.
7. Quality reflects how well a product or service meets
customer needs.Many firmsuse a process called de-signing
for manufacturability to improve quality.
Quality control involves a total,companywideeffort.
A number of quality control techniques are used to
monitor and control product quality, including in-spection
procedures and acceptance sampling.
8. World-class companies compete based on quality,
productivity, and responsiveness in an intensely
competitive global environment. World-class
manufacturers use modern production techniques
and progressive management systems to boost
manufacturing productivity, quality, and flexibility.
These production techniques and management
systems include TQM, JIT, CAD and CAM, FMS,
CIM, and mass customization.
9. Supply chain management helps the firm achieve
more efficient, integrated operations. Supplier
partnering involves choosing a limited number of
partners with whom the firm develops closer rela-tionships.
Channel assembly means having part-ners
in the supply chain assemble modules to suit
their customers’ needs.
1. The people managing your school cafeteria (or
franchised fast-food restaurant, etc.) have discov-ered
that you know all about laying out a facility to
make it more efficient, and they want to use your
services. In teams of four or five students, visit your
school cafeteria or other restaurant. What type of
layout does it use now? Explain how you would
change it, and why. Then briefly present your find-ings
to the class.
2. You probably will not want to attempt Experiential
Exercise 1 (evaluating your school cafeteria) until
you’ve laid out the schedule for your project. In
teams of four or five students, create a Gantt chart
for the cafeteria-evaluation project.
3. After you have evaluated the school cafeteria in
Experiential Exercise 1, you’ll probably identify
problems that you want management to address.

Use a fishbone/cause-and-effect diagram to ana-lyze
the problems.
4. Your college cafeteria wants to reduce what it
spends on its inventory of paper goods by deter-mining
the optimal number of paper plates to
obtain per order. Its annual demand for paper
plates is 50,000. The ordering cost is $10 per order.
The holding cost per plate per year is $0.05. Using
the EOQ model, how many plates should the cafe-teria
manager order each time?
C A S E S T U D Y
The Production Process at Wheeled Coach
Wheeled Coach, based in Winter Park, Florida, is the
world’s largest manufacturer of ambulances; they
make about one of every three ambulances you see on
the road.69Working four ten-hour days, 350 employees
make only custom-made ambulances for hospitals,
emergency medical teams (EMT), and fire depart-ments.
Although they make a full line of vehicles, from
small to large, nearly every one is different—one, for in-stance
has a special set of devices to make children
more comfortable in it, and most need special com-partments
in various places for the emergency medical
team’s equipment. Continuing growth requires large
capacity. The LA fire department alone orders about
150 ambulances per year. The firm has two identical
factories, one in Kansas, the other in Florida.
Wheeled Coach builds only ambulances and does
much of its own fabricating in-house. For example, it
builds its own electrical assemblies and seat cushions.
Within the factory, computer-assisted machines cut the
aluminum for the vehicle’s body, and special robotic
welders assemble the custom-made doors and weld
them to the body. As a focused factory, Wheeled Coach
established workcells for every major module (body,
doors, and so on). These workcells feed an assembly
line, where workers assemble the bodies, electrical-wiring
harnesses, interior cabinets, windows, painting,
and upholstery into finished vehicles.
Every workcell feeds the assembly line on schedule,
just in time for installation. The chassis, usually that of a
Ford truck, moves to a station where the aluminum
body is mounted. Then the vehicle is moved to paint-ing.
Following a custom paint job (usually involving
three applications), it is moved to the assembly line,
where it will spend seven days. During each of the
seven workdays, each workcell delivers its respective
module to the appropriate position on the assembly
line. During the first day, electrical wiring is installed.
On the second day, the unit moves forward to the sta-tion
where cabinetry is delivered and installed. From
there, the unit goes to a window and lighting station, on
to upholstery, to fit and finish, to further customizing,
and finally to inspection and road testing.
1. Why do you think major auto manufacturers do
not build ambulances?
2. What is a possible alternative production process
to the assembly line that Wheeled Coach currently
uses? Why?
3. Why is it more efficient for the workcells to prepare
modules and deliver them to the assembly line
than it would be to produce the components (such
as the dashboard) as part of the line or have them
delivered complete by outside suppliers?
4. What arguments would you make for why Wheeled
Coach is a world-class manufacturer?

263
10
CHAPTER OUTLINE
Opening Vignette: Staying in
Touch at Millipore
● Departmentalization:
Creating Departments
Three Basic Ways to Departmentalize
Creating Departments Around Functions
Creating Departments Around Self-
Contained Product Units
Contained Customer Units
Contained Marketing Channel Units
Contained Geographic Area Units
Creating Matrix Organizations
Departmentalization in Practice
● Achieving Coordination
Use Mutual Adjustment
Use Rules and Procedures
Standardize Goals, Skills, and Values
Managing Now: Standardizing Processes
with Enterprise and Supply Chain
Systems
LG Electronics
Exercise Direct Supervision: Use the
Chain of Command
Divisionalize
Appoint Staff Assistants
Appoint Liaisons
Appoint Committees
Use Coordination-Supporting Software
Packages
Organize Independent Integrators
● Authority and the Chain
of Command
Line and Staff Authority
An IT-Based Independent Integrator
at Thales
Sources of Authority
Delegating Authority
How to Decentralize
IMPROVING YOUR DELEGATING SKILLS
The Span of Control
Tall Versus Flat Organizations
ORGANIZING
Staying in Touch at Millipore
assachusetts-based Millipore Corp. supplies the technologies, tools,
and services that its customers use to produce new drugs.1
M
Coordinating the work of all its far-flung units was increasingly challenging
for Millipore Corp., with operations and 4,500 employees in more than
thirty countries. For example,
how could Millipore make sure
that what the unit in France
was doing for a client made
sense in terms of what its Asia
unit was doing for that same
client? To coordinate their
efforts,Millipore’s top managers
needed information on what
each country’s subsidiary was
doing. The problem was that
just about every subsidiary was
using a different, incompatible
information system. The only
Coordinating the work of all its far-flung
way top management could get
units was increasingly challenging for
an overall view of things like
Millipore Corp., with operations and 4,500
employees in more than thirty countries.
sales, inventories, and finances
was for employees in the home office to compile and summarize the
incoming information from each subsidiary. Doing so took weeks.
Bridget Reiss, the firm’s chief information officer, knew that to
coordinate Millipore’s worldwide efforts, it had to make a change.The
question was,What should they do? ■
➤ Listing and briefly describing five ways to organize departments.
➤ Listing seven principles of delegating authority.
➤ Listing and briefly describing three modern organization structures.

➤ Reading the chapter-opening vignette and explaining how this company can improve its
interdepartmental coordination.
➤ Reading the chapter case study and developing an organization chart for a company.
➤ Watching the simulation video scenario and determining
ways the company organized its activities to support
its overall goals.
CHAPTER OUTLINE (Continued)
● Organizing to Manage
Change
Organization and Environment:
The Burns and Stalker Studies
Organization and Technology: The
Woodward Studies
A Contingency Approach to Organizing
How Managers Streamline Their
Companies
● Modern Organizations
Building Team-Based Organizations
IMPROVING YOUR BOUNDARY-MANAGING
SKILLS
Network-Based Organizations
The Horizontal Organization
Brady Corp.
Federal Organizations
Managing Now: Virtual Organizations
Learning Organizations
PRACTICE IT: Millipore
A few years ago, General Motors ran ads in Miami showing people driving Cadil-lacs
through snow. GM’s marketing department in Detroit thought the ads would
help sell cars, but with temperatures around 80 degrees, the ads were just incon-gruous.
Why run snow ads in Miami? Because, to paraphrase the Wall Street
Journal, “GM’s cumbersome bureaucracy” was so many layers removed from the
buyers in Miami that it just lost touch with the market.2 GM already has many
problems (including huge pension obligations). Many people thought that it was
bizarre to add a bureaucratic organization structure to its list of ills.
The plans the manager sets need to be transformed into action. The first step
in doing so is usually to decide who is responsible for what and for organizing the
work—to arrange the activities of the enterprise so that they systematically con-tribute
to achieving the enterprise’s goals. Organizing may seem to be just com-mon
sense, but even some giant companies like GM find it’s not so simple.
We saw in Chapter 1 that all enterprises—GM, Avon, and dry-cleaning stores,
for instance—are organizations. An organization consists of people with formally
assigned roles who work together to achieve stated goals. Organizations need not
be just business firms. The word applies equally well to colleges, local govern-ments,
and nonprofits like the Red Cross. In any case, they all must come up
with an organization structure such that its people work in unison to achieve the
organization’s goals.
● Organization Charts The usual way of depicting an organization’s structure
is with an organization chart. This shows the title of each manager’s position
and, by means of connecting lines, who is accountable to whom, who has author-ity
for each area, and which people are expected to routinely communicate with
each other (see Figure 10.1, page 266). The organization chart also shows the chain
of command (sometimes called the scalar chain or the line of authority) between
the top of the organization and the lowest positions in the chart. The chain of
command represents the organization’s hierarchy of authority. It shows the path
an order should take from the president to employees at the bottom of the organi-zation
chart, and the path a comment should take in traveling from employees at
the bottom to the top.
One thing the organization chart does not show is the informal organiza-tion.
This is the informal, habitual contacts, communications, and ways of doing
things that employees develop. When the Avon salesperson, anxious to check on
one of her pending orders, calls a friend at Avon’s shipping depot instead of asking
her own district manager to check, she’s illustrating the use of a firm’s informal or-ganization.
We’ll look in this chapter at the basic elements in organizing compa-nies,
starting with departmentalization.
organizing: arranging the
activities of the enterprise so that
they systematically contribute to
the enterprise’s goals
organization: an entity that
consists of people with formally
assigned roles who work
together to achieve stated goals
organization chart: a chart
that shows the structure of the
organization including the title
of each manager’s position and,
by means of connecting lines,
who is accountable towhomand
who has authority for each area
chain of command: the path
that a directive and/or answer or
request should take through
each level of an organization;
also called a scalar chain or the
line of authority
informal organization:
the informal contacts,
communications, and habitual
ways of doing things that
employees develop
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Departmentalization: Creating Departments
very enterprise must engage in various activities such as manufacturing, sales,
or (in a hospital) radiology in order to accomplish its goals. Departmentaliza-tion
is the process through which the manager groups the enterprise’s activities
together and assigns them to subordinates; it is the organizationwide division of
work. (The groupings of activities go by the names department, division, unit, sec-tion,
or some other similar term.)
The basic question in departmentalization is, Around what activities should
we organize departments? For example, in a company, should we organize depart-ments
for sales and manufacturing? Or should there be separate departments for
industrial and retail customers, each of which then has its own sales and manu-facturing
units? There are three basic choices.
Three Basic Ways to Departmentalize
In the movie Gladiator, each Roman legion, consisting of about 6,000 soldiers, was
managed by about sixty centurions, each of whom managed about 100 soldiers.
Armies and some other enterprises still organize by simple numbers. In general,
however, managers use this approach sparingly. Most business activities (such as
sales or human resources) require specialized efforts, so dividing people just by
numbers wouldn’t make much sense.
Managers therefore traditionally have two realistic choices when it comes to
dividing the company’s work into departments. They can organize departments
around functions, or they can organize departments around self-contained units
(often called divisions). For example, the editor in chief of a student newspaper
can appoint functional department heads (editors) for editing, production, and
sales. Working under the editor in chief, this team publishes all the paper’s issues.
Or the editor in chief can appoint editors for each of the journal’s fall, winter,
spring, and summer editions. Each edition here would be self-contained. Each
edition’s editor gets his or her own editorial, production, and sales editors. Each
edition’s editor would then control most of the activities required to publish his or
her edition.
Creating Departments Around Functions
Functional departmentalization is grouping activities around functions such as
manufacturing, sales, and finance. The manager puts subordinates in charge of
each of these functions. The local dry-cleaning business organizes like this. It has
separate functional departments for things like counter work, spotting, cleaning,
and pressing. Figure 10.1 shows the organizational structure for the ABC Car
Company. At ABC, management organized each department around a different
business function, in this case, sales, finance, and production. Here, the produc-tion
director reports to the president and manages ABC’s production plants. Other
directors carry out the sales and finance functions.
This is a simple and obvious way to organize because regardless of how the
manager organizes (by functions or by self-contained units), someone must per-form
these functions if the firm is to survive.
E
Departmentalization: Creating Departments ■ 265
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departmentalization: the
process through which an
organization’s activities are
grouped together and
assigned to managers; the
organizationwide division of
work
functional
departmentalization:
a form of organization that
groups a company’s activities
around functions such as
manufacturing, sales,
or finance

266 PART FOUR CHAPTER 10 Organizing
FUNCTIONAL ORGANIZATIONS
ABC Car Company
Managers organize departments around three types of functions: business,
managerial, and technological. The business functions are those the enterprise
must engage in to survive. A manufacturing company’s business functions include
production, sales, and finance. A university’s business functions include academic
affairs, business affairs, and student affairs. Banks like Chase have business func-tion
departments for operations, accounting, and loans. Starbucks needs business
function managers for purchasing and sales.
Some managers organize by managerial functions, which means putting su-pervisors
in charge of managerial functions like planning, control, and adminis-tration.
Within production, technological functions may include plating, welding,
or assembling.
● Advantages Organizing by functions has several advantages:
1. It is simple, obvious, and logical. The enterprise must perform these functions
to survive.
2. It can promote efficiency for three reasons. First, functional departments are
specialized departments—they focus on doing one thing (such as sales)—and
everyone tends to get better with practice. Second, organizing by function
means that departments (like sales or production) serve all the firm’s products
or services. This can mean increased economies of scale (for instance, one
large plant and more efficient equipment for manufacturing all the company’s
products). Third, organizing by function minimizes duplication of effort. For
example, there is one production department for all the company’s products
rather than separate ones for each product.
3. It can simplify executive hiring and training. The managers running these de-partments
have specialized jobs (sales manager, for instance). It can be easier
to find good specialist managers than general managers, those with the
breadth of experience to administer several functions at once.
4. It can facilitate the top manager’s control. Functional department managers
tend to receive information on, and focus on, just the activities that concern
their own specialized activities. They usually have to rely on their boss (the
top manager) to coordinate their efforts. A functional organization can there-fore
make it easier for the top manager to control what’s happening in the
organization.
President
Finance
Director
Production
Director
Sales
Director
F IGURE 10.1
Functional
Departmentalization
This chart shows a functional
organization,with departments
for basic functions like finance,
sales, and production.

● Disadvantages Organizing by function also has disadvantages:
1. It increases the coordination workload for the executive to whom the functional
department heads report. Functional departmentalization can increase the
top manager’s control, but the other side of the coin is that responsibility for
coordinating all products and services rests on that person’s shoulders. For
example, the CEO may be the only one who can coordinate the work of the
functional departments. As size and diversity of products increase, the job of
coordinating production, sales, and finance for many different products or
markets may prove too much for one person.
2. It may reduce the firm’s sensitivity to and service to the customer. For example,
if JCPenney’s management decided to organize nationally around the func-tions
of merchandising, purchasing, and personnel, all of its U.S. stores might
tend to get the same products to sell, even if customers’ tastes in Chicago are
different from those in El Paso.
3. It produces fewer general managers. A functional organization fosters an em-phasis
on specialized managers (finance experts, production experts, and so
forth). This can make it more difficult to cultivate managers with the breadth
of experience required for jobs like CEO.
Often the functional form’s disadvantages outweigh its advantages. If so, man-agers
may opt to organize around self-contained units. The four options here are
to create departments to focus on different products, customers, marketing chan-nels,
or territories.
Creating Departments Around Self-Contained
Product Units
With product departmentalization, the manager organizes his or her depart-ments
around the company’s products or services (or around each family of
products or services). For example, GM has product divisions for Cadillac, Buick,
Pontiac, and Chevrolet. The editor in chief might organize her paper around sep-arate
fall, winter, spring, and summer issues.
The CEO for a pharmaceuticals company (see Figure 10.2) organized the firm’s
top-level departments so that each contains all the activities required to develop,
manufacture, and sell a particular product (skin care, vitamins, drugs). The gen-eral
manager of each division has functional departments—for production, sales,
and personnel—reporting to him or her. Each controls all or most of the resources
required to create, produce, and supply its product or products. For example, at
Kodak, each division focuses on a product line such as cameras.
Managers often refer to these product departments as business units or
divisions, and to this type of departmentalization as a divisional organization.
Divisionalization means the firm’s major departments are organized so that each
can manage all (or most of) the activities needed to develop, manufacture, and sell
a particular product or product line. To the extent that each division head has
control of all or most of the resources needed to create, produce, sell, and supply
its product or products, each of these product divisions is self-contained. Axa, a
large insurance and finance company, recently split its company into divisions
with specific product lines such as wealth management, corporate business, and
protection.3
product
departmentalization: a form
of departmentalization in which
the manager organizes multi-functional
departments around
the company’s products or
services (or around each family
of products or services)
division: a department that
manages all or most of the
activities needed to develop,
manufacture, and sell a
particular product or product
line
divisional organization:
a form of organization in which
the firm’s major departments are
organized so that each one can
manage all or most of the
activities needed to develop,
manufacture, and sell a
particular product or product
line

CEO
Chief Legal
Officer
Vitamin Products
Division General
Manager
● Advantages Organizing by self-contained units such as products has these
advantages:
1. The product or service gets the single-minded attention of its own general man-ager
and unit,and so its customers may get better,more responsive service.A gen-eral
manager oversees all the functions required to produce and market each
particular product or service. The effect should be that the product or service
(and its customers) get focused, more responsive attention with this type of or-ganization
than they would in a functional organization (in which, for instance,
the same sales manager must address the needs of multiple products).
2. It’s easier to judge performance. If a division is (or is not) doing well, it is clear
who is responsible because one general manager is managing the whole divi-sion.
This may better motivate the general manager.
3. It develops general managers. Divisions can be good training grounds for an
enterprise’s executives because they are miniature companies that expose
managers to a wider range of functional issues.
4. It reduces the coordination burden for the company’s CEO. In Figure 10.3, the
North American division is departmentalized by function, so that the presi-dent
has to coordinate the tasks of selling, producing, and staffing for each of
the company’s many products. He or she may thus have to deal with many
varied problems. Ideally, the effect of organizing around product divisions is
to push the job of coordinating the business units’ functional areas down to
the business unit heads. The CEO can then focus more on things like strategic
planning.
Skin Care Products
Division General
Manager
Drug Products
Division General
Manager
Chief Financial
Officer
Sales
Dept.
Manager
Prod.
Dept.
Manager
HR
Dept.
Manager
Sales
Dept.
Manager
Prod.
Dept.
Manager
HR
Dept.
Manager
Sales
Dept.
Manager
Prod.
Dept.
Manager
HR
Dept.
Manager
F IGURE 10.2
Divisional Organization for a Pharmaceuticals Company

CEO
● Disadvantages Organizing by self-contained units such as products has
these disadvantages:
1. It creates duplication of effort. The very fact that each product-oriented unit is
self-contained implies that each unit for each product has its own production
plants, sales force, and so on.
2. It reduces opportunities for top management control. An autonomous division
might, for instance, run up excessive expenses before top management dis-covers
there’s a problem. Striking a balance between providing each division
with enough autonomy while maintaining top-management control is the
central issue in organizing in this way.
3. It requiresmore managers with generalmanagementabilities. Each product divi-sion
is, in a sense, a miniature company. This means these firms must work dili-gently
to identify and develop managers with generalmanagementpotential.
4. It can encourage compartmentalization. The managers of the semiau-tonomous
units may be reluctant to pay much attention to the needs of the
other divisions. Thus, at toiletries maker Caswell-Massey, CEO Ann Robinson
says that her separate divisions were each oblivious to what the others were
doing: “The items featured on the catalog’s cover were not necessarily in the
store window. There was little synergy between brands.”4
President, North
America
VP
Sales
VP
Production
VP
Personnel
VP
Sales
VP
Production
VP
Personnel
Chief Financial
Officer
President, International
Operations
Skin Care
Vitamins
Drugs Skin Care
Vitamins
Drugs Skin Care
Vitamins
Drugs Skin Care
Vitamins
Drugs Skin Care
Vitamins
Drugs Skin Care
Vitamins
Drugs
F IGURE 10.3
Divisional Organizations Facilitate Coordination
The top level shows geographic departmentalization. Unless the presidents of the International
and North America divisions reorganize by setting up separate divisions for skin care, vitamins,
and drugs, they will have to personally coordinate sales, production, and personnel for all three
sets of products.

President
and Chief
Operating
Officer
Customer Units
Customer departmentalization is similar to product departmentalization, but
the manager organizes departments around the company’s customers. Figure 10.4,
for instance, shows the organization chart for the Grayson Steel Company. The
company’s main divisions are organized to serve particular customers, such as
metals and chemicals customers, packaging systems customers, aerospace and
industrial customers, and the international group.
● Advantages and Disadvantages With one management team and unit fo-cused
on each customer, customers can expect faster, better service than with
functional arrangements, particularly when customers’ needs are very different.
However, the company may have several production plants instead of one and
several sales managers, each serving the needs of his or her own customers, in-stead
of one.
Marketing Channel Units
Many companies, such as Caswell-Massey, sell their products through several mar-keting
channels. A marketing channel is the conduit or intermediary (wholesaler,
drugstore) through which a manufacturer distributes its products to its ultimate
customers. With marketing-channel departmentalization (see Figure 10.5),
management organizes the departments around each of the firm’s marketing
channels (instead of products or customers).
Companies departmentalized into marketing-channel departments (like
those now used by Caswell-Massey) typically market the same product (such as
soap) through two or more channels (such as drugstores and grocery stores). Man-agement
here typically chooses one department to manufacture the product for
all the marketing-channel departments.
● Advantages and Disadvantages Managers use marketing-channel depart-mentalization
when it’s important to cater to each marketing channel’s unique
needs. A department store may want Revlon to supply specially trained salespeo-ple
to run concessions in its stores. A discount druggist wants quick delivery.
customer
similar to product organization
except that generally self-contained
departments are
organized to serve the needs of
specific groups of customers
marketing channel: the
conduit through which a
manufacturer distributes its
products to its ultimate
customers
marketing-channel
an arrangement in which
departments of an organization
focus on particular marketing
channels, such as drugstores or
grocery stores
Aerospace
and Industrial
Products
Group
Metals and
Chemicals
Group
Packaging
Systems
Group
Materials
Science
Group
International
Group
F IGURE 10.4
Customer
Departmentalization,
Grayson Steel Company
With customer
departmentalization, separate
departments are organized
around customers, such as
aerospace as well as metals and
chemicals customers.

Vice President
Drugstore
Channel
Vice President
Grocery Store
Channel
Vice President
Department Store
Channel
President
Production
Manager
Apex
Face Soap
Sales
Department
Stores
Advertising
Manager
Department
Stores
Advertising
Grocery
Stores
Sales
Drugstores
Advertising
Drugstores
Sales
Grocery
Stores
F IGURE 10.5
Marketing Channel
Departmentalization
With marketing channels, the main
departments are organized to
focus on particular marketing
channels, such as drugstores and
grocery stores. Here, the
department store channel
produces the soap, and each
channel may sell to the same
ultimate consumers.
Putting a manager and department in charge of each channel helps ensure that
Revlon meets these diverse needs quickly and effectively. As in product and
customer departmentalization, the resulting duplication—in this case, of sales
forces—is the main disadvantage.
Geographic Area Units
With geographic or territorial departmentalization, the manager organizes
separate departments for each of the territories in which the enterprise does busi-ness.
Each territorial division gets its own management team. Each is often self-contained
(with its own production, sales, and personnel activities). We illustrated
territorial departmentalization in Figure 10.3 (page 269). At the top level, there are
separate presidents for North American and for international operations.
● Advantages and Disadvantages As is the case with other divisional-type
organizations, the main advantage of territorial departmentalization is that there
is one self-contained department dedicated to the needs of each geographic area.
Duplication is the main disadvantage. There might be four regional offices to
maintain, for instance.
Organizing geographically grew in popularity as firms expanded across na-tional
borders. Years ago, when poor communications made it difficult to monitor
operations abroad, it made sense to let local managers run regional or country
businesses as autonomous companies.
Territorial departmentalization is somewhat less necessary today, for two
reasons. First, information technology such as Internet-based videoconferencing,
geographic or territorial
departmentalization in which
the manager organizes separate
multifunction departments for
each of the territories in which
the enterprise does business

e-mail, fax, and enterprise systems makes it easier for an executive in one region to
monitor operations around the world.
Second, global competition is so intense that managers can’t risk slowing the
spread of innovations from one region to another. For example, Heinz’s CEO said
that he was ending the company’s system of managing by country or region.5 In-stead,
Heinz will organize globally by products or categories. Managers in the
United States will then work with those in Europe, Asia, and other regions to apply
the best ideas from one region to another. Similarly, Procter Gamble’s new or-ganization
eliminates its four regional business units. Now seven new executives
each manage product groups like baby care, beauty, and fabric and home care for
all regions. The company believes the reorganization will speed decision making
and send products to market faster.6
Creating Matrix Organizations
Sometimes, managers want to leave employees in their specialized functional
departments, but they also want to have those employees focus on particular
projects, products, or customers. A matrix organization, also known as matrix
management, is an organization structure in which employees are permanently
attached to one department (usually a functional department) but also simultane-ously
have ongoing assignments in which they report to project, customer, prod-uct,
or geographic unit heads.
We illustrate this in Figure 10.6. Universal Products Company organized the
firm’s automotive products division functionally, with departments for produc-tion,
engineering, materials procurement, personnel, and accounting. However,
because each of Universal’s big customers had special new-product development
needs, Universal management also created three project groups. There is one for
the Ford project, the Chrysler project, and the GM project. One or more employees
from each functional department (like production and engineering) is temporar-ily
assigned to each project. This is thus a matrix organization, with employees
each simultaneously housed in functional departments while also (at least tem-porarily)
devoted to particular products. Employees report to both their functional
and new-product heads.
J. P. Morgan investment banking uses a matrix structure. Managers around the
world answer to two bosses: a J. P. Morgan investment banking manager in Mexico
City reports both to her investment banking head back in New York and to the
head of J. P. Morgan’s Mexico City office. The managing director of advertising
agency DBB’s Far East subsidiary recently organized using matrix management, to
encourage better communications across DBB’s diciplines and clients.7
● Advantages and Disadvantages Ideally, matrix management provides the
best of both worlds. It gives the employees the stability and benefits of belonging
to permanent specialized departments. And it gives the firm most of the advan-tages
of having units and employees focused on specific projects, products, areas,
or customers.
However, the matrix organization also has special drawbacks. Ambiguity is
one. Even after years with a matrix structure, GM’s chair, when asked who reports
to whom, could only reply, “[I]ncreasingly, it depends.”8 Other disadvantages in-clude
confusion(from having two bosses),9power struggles and conflicts (because
authority tends to be more ambiguous), and excessive overhead (due to hiring
dual sets of managers, for instance).
Susan Arnold, PG’s vice
chairman.
matrix organization: an
organization structure in which
employees are permanently
attached to one department but
also simultaneously have
ongoing assignments in which
they report to project, customer,
product, or geographic unit
heads. Also known as matrix
management

Departmentalization in Practice
All but the smallest firms contain both functional and self-contained depart-ments.
Figure 10.7 illustrates this. Within the United States, there are separate
product departments for business systems, programming systems, and so forth.
Globally, this firm uses territorial departmentalization, with separate officers for
the United States, the Americas, Asia/Pacific, and Europe/Middle East/Africa.
General Manager
Automotive
Products
Division
Vice President
Project
Management
Vice President
Engineering
and Research
Department
Vice President
Materials and
Procurement
Department
Vice President
Accounts and
Control
Department
Vice President
Production and
Facilities
Department
General Manager
Electrical
Products
Division
General Manager
Aerospace
Products
Division
General Manager
Chemical
Products
Division
President
Universal Products
Company
Projects
Production
Representative
Production
Representative
Production
Representative
Engineering
Representative
Engineering
Representative
Engineering
Representative
Accounting
Representative
Accounting
Representative
Accounting
Representative
Personnel
Representative
Personnel
Representative
Personnel
Representative
Materials
Representative
Materials
Representative
Materials
Representative
Director
Ford
Project
Director
Chrysler
Project
Director
GM
Project
Vice President
Personnel and
Safety
Department
F IGURE 10.6
Matrix Organization Departmentalization
With a matrix organization, a self-contained project structure is often superimposed over a
functional organization.

F IGURE 10.7
A Hybrid Organization
Particularly in large organizations, several types of departmentalization are typically combined,
in this case, fucntional, product, and geographic.
Board of
Directors
Research
Division
Real Estate
and
Construction
Staff
Vice
President
and
General
Counsel
President
Vice
President,
Personnel
Senior
Vice President,
Corporate
Operations Staffs
Communications
Development
Manufacturing
Marketing and
Service
Organization
Programming
Quality
Information and
Telecom-munications
Systems
■
■
■
■
■
■
■
■
Senior
Vice
President,
Science and
Technology
Senior Vice
President,
Corporate Finance
and Planning Staffs
Controller
Economics
Secretary
Strategy and
Business
Development
Treasurer
■
■
■
■
■
Vice President,
Law and
External
Relations
Commercial
and Industry
Relations
Education
Export
Regulation
Governmental
Programs
■
■
■
■
France
Germany
Italy
United
Kingdom
Central Unit
Northern Unit
Southern Unit
■
■
■
■
■
■
■
Senior
Vice President
and Chairperson
World Trade
Europe/Middle
East/Africa
Corporation
Japan
Line Operations
■
■
Vice
President
and Group
Executive,
World Trade
Asia/Pacific
Group
Vice
President
and Group
Executive,
World Trade
Americas
Latin America
Division
■
Group
Senior
Vice President
and General
Manager
United States
(Figure 10.7 continues
on the next page.)
Credit
Corporation

Data
Systems
Division
General
Products
Division
System
Products
Division
■
■
■
Management organized the headquarters staff around managerial functions (gen-eral
counsel, finance and planning, and law).
Managers mix the types of departmentalization for three reasons. One is hier-archical
considerations: if the top-level departments are based on, say, products,
then each product division will probably need subsidiary departments for func-tions
like sales and manufacturing.
F IGURE 10.7 (Continued )
Senior
Vice President
and General
Manager,
Personal Systems
Entry
Systems
Division
Information
Products
Division
■
■
Vice President
and General
Manager,
Application
Business Systems
Vice President
and General
Manager,
Programming
Systems
Vice President
and General
Manager,
Enterprise
Systems
Vice President
and General
Manager,
Technology
Products
Vice President
and General
Manager,
Communication
Systems
Vice President
and Group
Executive,
U.S. Marketing
and Service
General
Technology
Division
Systems
Technology
Division
■
■
Vice President
and
General
Manager
Applications
Solutions
Application
Systems
Division
Systems
Integration
Division
■
■
National
Distribution
Division
National
Service
Division
North-Central
Marketing
Division
South-West
Marketing
Division
■
■
■
■
Communication
Products
Division
■
Report to Senior Vice President and General Manager, United States

The second is efficiency: product, customer, and territorial departments tend
to result in duplicate sales, manufacturing, and other functional departments.
One way to minimize this source of inefficiency is to have, say, a single production
department serving multiple customer departments. For example, after many
years of letting each GM brand (like Chevy) design its own cars, GM reorganized its
vehicle-design structure in 2005. It now designs vehicles globally rather than by
brand. Thus, Germany’s Opel leads in designing and developing GM’s midsize
cars, while other GM subsidiaries design other GM vehicles.10 GM feels it’s more
efficient to eliminate duplicate design centers.
● Hewlett-Packard’s Reorganization However, sometimes, letting business
unit heads control all the functions required to produce and sell their products
outweighs the inefficiencies of duplication. For example, when he became CEO of
Hewlett-Packard (HP), one of the first issues Mark Hurd addressed was the unsat-isfactory
performance of HP’s sales organization. Numerous HP executives and
customers described HP’s sales effort as underperforming and confused.
At that point (2005), HP consisted of product divisions that focused on busi-nesses
such as PCs, servers, and printers, as well as one centralized functional
sales department, which served all the business units. The sales force reported
through the chain of command to an executive who was separate from and not re-sponsible
to the HP product divisions. The heads of the product divisions had to
compete within the HP bureaucracy for sales assistance. As a result, customers
often had no idea who to call if they wanted to make a purchase. And the division
heads lacked the authority to direct a sales effort for their products because the
salespeople reported to their own, separate executive.
Hurd decided to abolish the central sales department and redeploy many of
the salespeople to the product divisions. This change also enabled Hurd to an-nounce
the layoffs of about 10 percent of HP’s workforce, many of whom were in
administrative or supervisory positions in the old sales division.11
● Common Sense As these examples illustrate, the third reason to mix depart-ments
is common sense. Numerous hard-to-measure factors—including what
management plans to achieve and the unique needs of the firm’s customers, terri-tories,
and products—all influence the departmentalization decision.
Rosenbluth International, a 1,000-office global travel agency, provides an ex-ample.
CEO Hal Rosenbluth organized it like a farm. “The family farm is the most
efficient type of unit I’ve ever run across, because everybody on the farm has to be
fully functional and multifaceted.” SoRosenbluth broke hiscompanyintomore than
100 geographic units, each functioning like a farm. Multitalented agents serve spe-cific
regions and clients. Corporate headquarters became what Rosenbluth calls
“farm towns.” Here, central “stores” like human resources (HR) are available for all
the “farms” to use. The firm’s computerized Global Distribution Network links
each of its travel agents to the company’s PCs in Philadelphia. There, centralized
data on clients help ensure that the work of all offices is coordinated to serve the
clients’ needs. The organization seems to have worked. He recently sold Rosen-bluth
Travel to giant Amex, creating the world’s largest travel company.12
Achieving Coordination
t is pointless for a manager to divide work among, say, production, sales, and
finance departments and then not provide the means to coordinate these de-partments’
efforts. Coordination is the process of achieving unity of action among
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Achieving Coordination ■ 277
interdependent activities. It is required whenever two or more interdependent indi-viduals,
groups, or departments must work together to achieve a common goal.
The more interdependent are the departments, the more coordination they
require. Someone must coordinate the work of functional departments, or how
can one be sure that the products sold by sales will be produced and financed in
sufficient quantities? At the other extreme, the work of semiautonomous product
divisions such as GM’s Chevrolet, Buick, and Cadillac product divisions require
less coordination by the CEO.
Professors Jay Galbraith and Henry Mintzberg, working independently, de-scribed
the techniques managers use to achieve coordination.13 We summarize
these and other techniques next.
Use Mutual Adjustment
Mutual adjustment means achieving coordination by relying on face-to-face inter-personal
interaction. For example, two people lifting a heavy log might coordinate
by counting “one, two, three, lift,” at which point, both people lift the log in unison.
Use Rules and Procedures
Managers use rules and procedures for coordinating routine, recurring activities.
Thus, a restaurant manager would have a rule that bussers will clear tables before
the waiter returns.
Standardize Goals, Skills, and Values
Firms also achieve coordination by standardizing their employees’ goals, skills,
values, and operating processes. For example, as long as the sales, finance, and
production managers attain their assigned goals, the president can be reasonably
sure that there will be enough financing and production capacity to meet the sales
target. Managers also standardize skills. Imagine the chaos if waiters don’t know
how to take customers’ orders and chefs can’t cook.
Many companies endeavor to standardize values among employees. For ex-ample,
every year, Unilever gives about 150 of its worldwide managers temporary
assignments at corporate headquarters.14 This gives the visiting managers a
strong sense of Unilever’s values (such as keeping an open mind and innovating
new products; see http://www.unilever.com/ourvalues/).15 This helps to ensure
that wherever they are around the world, Unilever managers’ efforts are consistent
with Unilever’s ethical values and other values.
Managing Now: Standardizing Processes
with Enterprise and Supply Chain Systems
Managers also boost coordination by standardizing processes. For example, sev-eral
years ago, the head of Nestlé Corporation’s Nordic operations (for Denmark,
Finland, Norway, and Sweden) was managing what amounted to four separate
companies. The Nestlé subsidiary in each country used its own information sys-tem.
The top executives responsible for Nestlé Nordic found it relatively difficult to
coordinate the four units’ operations due to the lack of standardized information
on matters such as sales, purchasing, inventory, and billing.
After installing an enterprise system that provided standardized information,
two things happened. First, the managers at Nestlé Nordic headquarters had the
coordination: the process of
achieving unity of action among
interdependent activities
mutual adjustment:
achieving coordination through
face-to-face interpersonal
interaction

LG Electronics
LG Electronics is one of the world’s largest consumer-electronics
companies, with 66,000 employees in thirty-nine
countries. LG produces products ranging from air
conditioners to laptops and mobile phones. Several years
ago, its sixty-five worldwide offices all used different soft-ware
systems. Therefore, management had to deal with
data and documents on matters such as sales, purchasing,
inventory, and finance that were in different formats.The
only way top managers could get a unified, coordinated
view of what was happening throughout the company was
to have employees in the head office merge the informa-tion
from subsidiaries, often by hand.
Moving to an enterprise system, in this case, from
Oracle Corporation, enabled LG to institute standardized
information systems across all its global offices. Now they
all use compatible software systems.As a result,“commu-nication
and cooperation between subsidiaries is ex-pected
to improve significantly, enabling different offices
to exchange information and resources more easily.
Directives from [the] head office can be disseminated via
the central system, ensuring all subsidiaries work to-gether
to achieve company-wide business goals.”16
Moving to an enterprise system enabled LG to institute
standardized information systems across all its
global offices.
information they needed to coordinate the subsidiaries’ efforts.17 Second, stan-dardizing
the information systems each subsidiary used for each of its business
functions also had the effect of encouraging the units to move more toward stan-dardizing
the sales and other processes they used. As at Nestlé, standardizing
processes often starts with standardizing a company’s software systems. Then,
having the way things are done in each subsidiary more standardized makes it eas-ier
to coordinate the subsidiaries’ efforts.
Supply chain management software systems also help a company’s supply
chain partners coordinate their efforts. For example, all of a firm’s supply chain
partners may use a common Internet portal to share information on activities like
sales, inventory, and delivery status. This helps to ensure coordinated decision
making.18 TheWindow onManaging Now feature presents another example.
Exercise Direct Supervision: Use the Chain
of Command
Direct supervision achieves coordination by having one person coordinate the
work of others, issuing instructions and monitoring results.19 When problems
arise that the rules or procedures don’t cover, subordinates bring the problem to
the manager. In addition to using rules and mutual adjustment, all managers use
the chain of command in this way to achieve coordination.

Divisionalize
Achieving Coordination ■ 279
As a rule, functional departmentalization creates heavy coordination demands on
the CEO because the work of the functional departments (like sales and produc-tion)
is both specialized and interdependent. (Thus, someone must coordinate the
sales, production, and finance departments.) Organizing by product, customer, or
geographic divisions reduces interdependence and reduces the coordination bur-den.
The CEO puts each lieutenant in charge of a self-contained operation. The
lieutenants coordinate their own operations. The divisions are relatively indepen-dent.
As noted, the CEO can then coordinate less and strategize more.
Appoint Staff Assistants
The coordinating manager must monitor the activities of the subordinate depart-ments
as well as analyze and address questions from lieutenants. Some managers
hire staff assistants to help with these tasks. When subordinates bring a problem to
the manager, the assistant can compile information about the problem, research
it, and offer advice.
Appoint Liaisons
When the volume of contacts between two departments grows, some managers
use special liaisons to facilitate coordination. For example, the sales department
manager might appoint a salesperson to be his or her liaison with the production
department. This liaison stays in the sales department but travels frequently to the
factory. When a new order arrives in sales, the sales manager can quickly deter-mine
from this liaison what the production schedules are and if the company can
deliver the order as promised.
Appoint Committees
Many firms achieve coordination by appointing interdepartmental committees,
task forces, or teams composed of representatives of the interdependent depart-ments.
They meet periodically to discuss common problems and ensure interde-partmental
coordination.
Use Coordination-Supporting Software Packages
Managers use various types of software packages to improve coordination. For
example, we saw that Rosenbluth Travel’s computerized Global Distribution Net-work
links each of its travel agents to the company’s centralized client database, to
help ensure that the work of all offices is coordinated to serve that client’s needs. San
Francisco–based Citadon provides Web-based construction coordination software.
By using the Internet and a laptop, everyone involved in a project—from owners and
architects to contractors and subcontractors—receives instantaneous updates re-garding
design changes and construction status. Group decision support systems
like Lotus Notes, with tools such as group scheduling and PC-based videoconfer-encing,
make it easier for even remote employees to coordinate their efforts.20
Organize Independent Integrators
An independent integrator is a separate individual or group that coordinates the
activities of several interdependent departments.21 Integrators are independent of
independent integrator:
an individual or a group that
coordinates the activities of
several interdependent
departments but is independent
of them

the departments they coordinate. They report to the manager who oversees both
those departments.
Professors Paul Lawrence and Jay Lorsch studied such departments.22 In the
plastics industry, for instance, developing a new product requires close coordination
among the research, engineering, sales, and production departments in a situation
where competitors are always introducing new and innovative products. Somefirms
in the plastics industry thus established new-product development departments.
Their role is to coordinate (or integrate) the research, marketing analysis, sales, and
production activities needed for developing and introducing a new product. The
Window on Managing Now feature shows how managers use information technol-ogy
(IT) to create such departments.
Authority and the Chain of Command
o one will generally take orders from someone unless they accept that person’s
authority to issue those orders. Organizations therefore run on authority.
Authority refers to a person’s legal right or power to take action, make decisions,
and direct the work of others. In a corporation, authority stems from the
owner/stockholders of the company. They elect a board of directors and authorize
the board to represent the owners’ interests. The board’s main functions are to
choose the top executives, approve strategies and long-term plans, and monitor
performance to make sure management is protecting the owners’ interests. The
board and its chairperson then delegate or pass down to the CEO the authority to
actually run the company—to develop plans, hire subordinate managers, and
enter into agreements. The CEO and each lower manager in turn delegates to or
authorizes his or her subordinates to do their jobs.
Line and Staff Authority
Managers need to decide which subordinates will have line authority or staff au-thority
because the company’s proper functioning depends on everyone knowing
who is in charge of what. Line versus staff authority is basically a question of rela-tionships.
Line authority gives the manager the right (or authority) to issue orders
N
An IT-Based Independent Integrator at Thales
France-based Thales, an electronics and defense supplier,
has three business units: defense, aerospace, and informa-tion
technology. Each business unit is fairly autonomous.23
Top management wanted to make sure that the research
scientists,engineers,and project managers in each of these
three divisions were familiar with each other’s projects
and that they did not duplicate each other’s efforts.Work-ing
with consultants from Accenture, Thales created a
new,IT-supported independent-integrator-type department
called Thales Research Technology.24 To support this de-partment’s
efforts, Thales and its consultants created what
they called a knowledge management portal.Thales’s busi-ness
unit engineers and scientists use laptops,PCs,personal
digital assistants (PDAs), and the portal to post papers, ask
questions, and make suggestions. In this way, each business
unit continues to benefit from its own research and engi-neering
teams, but they can also capitalize on each other’s
knowledge and minimize duplication of effort.
authority: the right to take
action, make decisions, and
direct the work of others
line authority: the right (or
authority) of a manager to issue
orders to other managers or
employees, creating a superior-subordinate
relationship

Authority and the Chain of Command ■ 281
to other managers or employees. It creates a superior-subordinate relationship.
Staff authority gives the manager the right (authority) to advise other managers
or employees. It creates an advisory relationship. Line managers have line au-thority.
The production vice president is the production manager’s boss and can
give that person orders. Staff managers have staff authority. They generally can-not
issue orders down the chain of command (except in their own departments).
The HR manager can advise the production manager about who to hire but can-not
insist or make the final decision, for instance.
In popular usage, managers associate line managers with managing functions
like sales or production that are essential for the company to exist. Staff managers
run functions that are generally advisory or supportive, such as purchasing, legal,
human resource management, and quality control. This distinction makes sense
as long as the staff department is in fact advisory. Strictly speaking, however, it is
not the type of department the person is in charge of or its name that determines
if the manager in charge is line or staff; it is the nature of the relationship. The line
manager can issues orders. The staff manager can advise.
There is one exception. A staff manager may also have functional authority.
Functional authority means that the staff manager can issue orders down the
chain of command within the very narrow limits of his or her functional authority.
For example, to protect the company from discrimination claims, the president
might give the HR manager functional authority over personnel testing. The latter
could order the production manager to use (or not use) a particular test. However,
the HR manager would probably want to be diplomatic lest line-staff conflict
emerge. Line-staff conflict is conflict between line and staff managers and
typically arises when line managers feel staff managers are encroaching on their
prerogatives.
Some small organizations use only line managers (they are line organiza-tions),
but most large ones have staff managers too—they are, therefore, line and
staff organizations. Typical line positions include the CEO and the managers for
sales and production. Typical staff positions include the managers for marketing
research, accounting, security, quality control, legal affairs, and human resource
management (HR).
Sources of Authority
One’s authority—and the willingness of employees to follow the manager’s
orders—derives from several sources. First, authority derives in part from a per-son’s
rank or position. We saw that in corporations, the owner-stockholders dele-gate
authority first to the board of directors, who then delegate to the CEO. The
CEO of software manufacturer Intuit has more authority based on rank than does
one of his senior vice presidents.
However, position authority is rarely enough to explain why people follow or-ders.
Some managers have authority because of personal traits, such as intelli-gence
or charisma. People follow their instructions because of the power of their
personalities. Others have authority because they are experts in an area or have
knowledge that requires others to depend on them.
Some astute management writers argue that, regardless of source, authority
always depends on subordinates’ acceptance of supervisors’ orders. Management
guru Chester Barnard was an early proponent of this view. He argued that for or-ders
to be carried out, they must lie within a subordinate’s “zone of acceptance”—
in other words, they must be viewed as acceptable. Experts often argue that getting
employees’ acceptance is increasingly important today, given the emphasis on
empowered workers and team-based organizations.
staff authority: the right (or
authority) of a manager to
advise other managers or
employees
line managers: managers who
are authorized to issue orders to
subordinates down the chain of
command
staff managers: managers
with authority to assist and
advise line managers
functional authority:
narrowly limited power to issue
orders down the chain of
command in a specific
functional area such as
personnel testing
line-staff conflict: a
disagreement between a line
manager and the staff manager
who is giving him or her advice

Delegating Authority
Organizing would be impossible without delegation, which is the passing down
of authority from supervisor to subordinate. The assignment of responsibility for
some department or job traditionally goes hand in hand with the delegation of
authority to get the job done.
A well-known management saying is, “You can delegate authority, but you
cannot delegate responsibility.” The CEO (or other manager) is ultimately respon-sible
for whatever occurs on his or her watch. Because the person doing the dele-gating
always retains the ultimate responsibility, delegation always entails the
creation of accountability. Subordinates become accountable—or answerable—to
the supervisor for the performance of the tasks assigned to them. The boss may
fire or discipline the subordinate who fails to do the job. However, the boss is still
responsible for all that goes wrong (or right).
Managers are people who get things done through others, and so knowing
how to delegate is a crucial management skill. The Improving Your Delegating
Skills feature illustrates how to do this.25
How to Decentralize
A decentralized organization is one in which (1) authority for most departmen-tal
decisions is delegated to the department heads, while (2) control for major
companywide decisions is maintained at headquarters. Decentralizing should
always represent a shrewd balance between delegated authority and top manage-ment’s
centralized control of essential functions. On the one hand, division man-agers
get the autonomy and resources they need to service their customers. On the
other hand, headquarters maintains essential control by centralizing major deci-sions
regarding things like capital appropriations. Achieving this balance is an art.
Here is how two famous management writers put this a number of years ago:
[D]ecentralization cannot mean autonomy; in that it implies establishment of
policies to guide decision-making along the desired courses, and in that . . . not
being all abdication of responsibility, it must be accompanied by controls de-signed
to ensure that delegated authority is used to further goals and plans.
Although the art of authority delegation lies at the base of proper decentral-ization
. . . it is apparent that the mere act of delegation is not enough to
ensure decentralization.26
● Departmentalization and Decentralization Managers most often use
the term decentralized in conjunction with companies organized around product
divisions. Managers of product divisions often run what amount to their own
miniature companies (or business units). They have the authority to make most
decisions having anything to do with their products, with little or no communica-tion
with the firm’s CEO. However, the CEO retains authority over major decisions
such as building a new plant. Remember, you can’t have a properly decentralized
company without effective, centralized controls.
Several years ago, accounting firm Arthur Andersen confronted just this sort
of problem. Its Houston office wanted to take an aggressive approach to letting the
energy trading company Enron account for some transactions. Andersen World-wide
had a special, centralized Professional Standards Group (PSG) at its Chicago
headquarters that apparently told local Houston Andersen managers not to use
the approach. It appears that someone at Andersen Houston may have approved
delegation: the act of passing
down authority from supervisor
to subordinate
decentralized
organization: an organization
in which (1) authority for most
departmental decisions is
delegated to the department
heads, while (2) control for
major companywide decisions is
maintained at headquarters

IMPROVING YOUR DELEGATING SKILLS
Suggestions for improving your delegating skills include:
Clarify the Assignment
Make it clear what you want the subordinate to accom-plish,
what results are expected, and when you want those
results.
Delegate, Don’t Abdicate
Shortly after assuming the CEO position at Motorola,
(former) CEO Chris Galvin sat in on several meetings
with the company’s Europe mobile phone group. Galvin
knew that Europeans preferred light, inexpensive phones,
so he asked if the market data supported the idea that the
relatively heavy phone they were working on would ap-peal
to customers. The manager said yes, and that’s re-portedly
where Galvin left it. The product subsequently
failed.27 The moral is this: Giving a person a job to do and
not following up is abdication, not delegation.
Know What to Delegate
Larry Bossidy, the executive who turned AlliedSignal
around and helped it merge with Honeywell, says there is
“one job no CEO should delegate—finding and developing
great leaders.”28 In Bossidy’s case, finding and developing
great leaders was the “one job no CEO should delegate.”
For a manager in a different company and at a different
level, there will be other tasks that he or she cannot (or
should not) delegate to a subordinate.
Specify the Subordinate’s Range of Discretion
The manager can use two guidelines here. First, the man-ager
should give the subordinate enough authority to do
the task successfully, but not so much that the person’s
actions can have adverse effects outside the areas for
which the manager has made the person responsible
(such as bankrupting the company). Second, the subordi-nate
should know when to check with the manager. One
typical set of options the manager can apply is: (1) wait to
be told what to do;(2) ask what to do;(3) act,then report
results immediately; and (4) take action, and report
periodically.
Authority Should Equal Responsibility
A basic principle of management is that authority should
equal responsibility. The person should have enough au-thority
to accomplish the task.
Make the Person Accountable for Results
There must be predictable and acceptable measures of
results.
Beware of Backward Delegation
A famous Harvard Business Review article entitled “Who’s
Got the Monkey?” explains what happens to an unsuspect-ing
manager whose subordinate comes into his office to
discuss a problem.The subordinate says,“I have a problem
with the job you gave me to do.”After a few minutes of dis-cussion,
the manager, pressed for time, says,“I’ll handle it.”
Like a monkey, the job has jumped from the subordinate’s
to the unsuspecting manager’s shoulders.The point is, be-ware
of backward delegation.When your subordinate says
the task isn’t working out as planned, suggest some solu-tions
or insist that your subordinate take the initiative in
solving the problem.
the transaction anyway, with disastrous results for Andersen Worldwide. Managers
at Andersen Worldwide had delegated most decisions to its branches, with the un-derstanding
that the branches would abide by the PSG’s centralized oversight and
control. In this case, those controls broke down. Local managers overrode the
PSG’s decision. Andersen was out of business within two years.
● Why Decentralize? Inafamousstudy ofhowcompaniesgrow, historian Alfred
Chandler coined the phrase, “Structure follows strategy.”He found, for example, that
a diversification strategy at firms like General Electric (GE) led to multiple product

lines for these firms. This meant that GE’s top managers had to manage an in-creasingly
diverse range of products and an increasingly diverse range of cus-tomers.
Having to deal with so many products and customers made the firm’s
original functional structures obsolete. At Westinghouse:
All of the activities of the company were [originally] divided into production,
engineering, and sales, each of which was the responsibility of a vice presi-dent.
The domain of each vice president covered the whole diversified and far-flung
operations of the corporation. Such an organization of the corporation’s
management lacks responsiveness. There was too much delay in the recogni-tion
of problems and in the solution of problems after they were recognized.29
Chandler found that these companies therefore decentralized. After diversify-ing,
they established product divisions for different product lines like light bulbs,
engines, and power plants. The managers of these units then got the authority to
run them as self-contained, relatively autonomous units. In practice, most man-agers
decentralize because they want faster decisions.30
● What to Decentralize The knack is in knowing which decisions to centralize—
and which to decentralize. One rule is this: decentralize decisions that will affect
just that one division or area and that would take a great deal of time for you to
make. Centralize decisions that could adversely affect the entire firm and that you
can make yourself fairly quickly and easily.
Cirque du Soleil, producer of international traveling circuses, is a good exam-ple
of decentralization. Cirque du Soleil’s headquarters are in Montreal, with of-fices
in Amsterdam, Las Vegas, and Singapore. Its 2,100 employees worldwide
come from forty different countries. Two-thirds of the employees work outside
Montreal, in simultaneous, multiple tours.
Each tour is like a separate, small-town circus. Everyone works
for Cirque du Soleil, but most of the employees travel with the
local, geographic-division tours. Management delegates decisions
for matters like human resources to the separate tour managers
because employment law, for example, can vary drastically from
country to country. It would take days for headquarters managers
to make decisions like that. Management centralizes other decisions,
for instance, regarding major investments. The company main-tains
a sense of unity and coordination through its strong culture
of shared values. It posts jobs on the Internet, and employees write
the company newspaper.
● Recentralizing Because information technology in the form
of PDAs, cell phones, and enterprise and other software makes
it easier for managers to monitor remote operations, there has
recently been some movement from decentralizing back to central-izing
organizations. Saks Inc. recently centralized its cosmetics-buying
functions, which had previously been conducted in three
locations.31 Recently, Home Depot announced it would centralize
its three U.S. divisional offices into the firm’s Atlanta headquarters.
Home Depot’s vice presidents and support staff would stay in the
firm’s Southern, Northern, and Western division locations, but the
division presidents relocated to Atlanta.32Home Depot’s centraliza-tion
follows a gradual consolidation over the past few years, with
Home Depot reducing geographic store division offices from nine
Cirque du Soleil’s 2,100 employees worldwide
come from forty different countries.

to three.33 China Unicom, the second largest mobile operator in China, recently
centralized the management of its international businesses.34
By the way, don’t let the Home Depot example fool you into thinking that the
only way to centralize is to bring far-flung units back to headquarters. Decentral-ization
and centralization are mainly about authority—about where decsions get
made. Lots of geographically disbursed companies, like BP and some other giant
oil firms, are actually quite centralized. Although they have geographic units
spread around the world, their big decisions are made back at headquarters.
Managers often call the centralized departments they create shared-services
departments. For example, Warner Music might establish several freestanding
music labels, but a single, centralized, shared-services legal affairs department
will do all the labels’ contracts.
● Managing Now: Recentralizing New information systems make it easier for
companies to recentralize. For example, for many years, 7-Eleven decentralized its
purchasing. Each regional area used its own software package and made its own
purchases. As one 7-Eleven manager said, “[T]here was no consistent process, so
different departments used separate access databases and had separate vendor
files for each system.”35 Upgrading all the regions to a common Oracle Procure-ment
and Sourcing software package enabled 7-Eleven to centralize its purchasing
by giving the central purchasing department real-time information on each store’s
product needs. The software package even automates the bidding process, thus
ensuring that 7-Eleven receives the best bids possible from qualified suppliers.
Delegating authority results in a chain of command. The manager needs to
decide whether that chain or hierarchy should be flat or tall. We look at this deci-sion
next.
The Span of Control
The span of control is the number of subordinates reporting directly to a supervi-sor.
In the country-based geographic organization shown in Figure 10.8, the span of
control of the country general manager is thirteen: there are six business managers,
five directors, one innovation manager, and one manufacturing manager.
The average number of people reporting to a manager determines how many
management levels the company will have. For example, if a company with sixty-four
workers to supervise has an average span of control of eight, then there will be
eight supervisors directing the workers and (because the eight supervisors need
their own supervisor) one manager directing the eight supervisors (a flat organi-zation).
However, if the span of control were only four, then supervising the same
number of workers would require sixteen supervisors. And because every four su-pervisors
needs their own supervisor, the sixteen supervisors would, in turn, be di-rected
by four managers. These four managers would, in turn, be directed by one
manager (a tall organization).
Tall Versus Flat Organizations
Classic management theorists said that tall organizational structures (with narrow
spans of control) improved performance by guaranteeing close supervision. The
thinking was that having six to eight subordinates was ideal. Beyond that it be-came
difficult to closely monitor and control what subordinates do. The counter-argument
is that flat is better: flat means wide spans, which means less meddling
with (and a more motivational experience for) subordinates.
span of control: the number
of subordinates reporting
directly to a supervisor

F IGURE 10.8
Spans of Control in Country-Based Organization
In this chart, the span of control of the general manager is thirteen—six business managers, five
directors, one innovation manager, and one manufacturing manager.
There are other arguments, pro and con. A tall chain of command may also
slow decisions by forcing each decision to pass through more people at more
levels. Several weeks after the United States began bombing Afghanistan in 2001,
reporters asked then-Secretary of Defense Rumsfeld if having several layers of
officers making tactical decisions about the ground attacks was slowing the
ground forces’ responsiveness. (His answer was no.)
The consensus today seems to be that flat is better.36 For one thing, flattening
cuts out levels and managers, and to that extent, it may save the company money
and reduce the number of approvals required to make a decision. There is also the
belief that eliminating layers pushes the point at which decisions are made closer
to the customer because there’s less reason to check first with the boss. Having
wider spans also implies that the supervisor monitors his or her subordinates less,
which makes particular sense today, with the trend toward highly trained and em-powered
employees.
The classic flattening example occurred some years ago. GE’s CEO at the time,
Jack Welch, had climbed the ranks and believed GE’s chain of command was
draining the firm of creativity and responsiveness. Business heads needed ap-proval
from the headquarters staff for almost every big decision they made. In one
case, the light bulb business managers spent $30,000 producing a video to demon-strate
the need for some production equipment they wanted to buy.
First, Welch eliminated redundant organizational levels. Before he took over,
“GE’s business heads reported to a group head, who reported to a sector head, who
Director
Finance, Customer
and Marketing
Support Operations
Country
General Manager
Office of
Innovation Manager
Director
Quality Program
Director
Industrial
Relations and
General Services
Manager
Manufacturing
Director
Marketing
Information
and Planning
Director
Legal and
Public
Relations
Business
Manager
Division A
Business
Manager
Division F
Business
Manager
Division E
Business
Manager
Division D
Business
Manager
Division C
Business
Manager
Division B

Organizing to Manage Change ■ 287
reported to the CEO. Each level had its own staff in finance, marketing, and plan-ning,
checking and double-checking each business.”37Welch disbanded the group
and the sector levels, thus dramatically flattening the organizational chain of com-mand.
When Welch was done, no one stood between the business heads and the
CEO’s office. He created a leaner, more responsive organization.
Organizing to Manage Change
recent BusinessWeek article said, “[I]f [businesses] are to thrive in this hyper-competitive
environment, they must innovate more and faster.”38 And to inno-vate
faster and faster, they need organization structures that enable managers
A
to make decisions faster. So, for example, Microsoft recently reorganized around
three core divisions—PlatformProducts Services, Business, and Entertainment
Devices—and eliminated several management levels. Microsoft’s stated purpose
was to “speed decision-making.”39 Also to speed decision making, Home Depot, as
we saw, consolidated its divisions, thus reducing store division offices from nine to
three, and then centralized its three remaining U.S. divisional offices in Atlanta.40 If
HMsees a new clothing design is doing well, it can get variations of that style into
its stores in threeweeks, while traditional retailers typically take ten months. HM’s
chief executive says, “Speed is important. You need to have the systems where you
can react in a short lead time to [provide] the right products.”41
To appreciate why rapid change is causing managers to replace traditional
structures with more responsive ones, it is useful to understand the factors that in-fluence
how companies organize. Two studies help to explain this phenomenon.
We briefly look at these, and then turn to modern organizations.
Organization and Environment:
The Burns and Stalker Studies
Researchers Tom Burns and G. M. Stalker studied about twenty industrial firms in
the United Kingdom a number of years ago. Their purpose was to determine how
the nature of the firm’s environment affected the way the firm was organized and
managed.42 Their findings continue to provide insight into howmanagers organize.
Burns and Stalker concluded that to be successful, a rayon manufacturer they
studied had to be highly efficient. Its existence therefore depended on keeping
unexpected occurrences to a minimum and maintaining steady, high-volume
production runs. Burns and Stalker found that the rayon mill’s organizational
structure reflected this stable, unchanging environment and emphasis on effi-ciency.
The organization was a “pyramid of knowledge”: top management made
most decisions and communicated them downward. Decision making in the plant
was highly centralized. Everyone from the top of the organization to the bottom
had a very specialized job to do.43 Coordination was achieved via the chain of
command.
In contrast, Burns and Stalker found that innovation was the big challenge the
electronics firms they studied faced. Their survival depended on continually intro-ducing
innovative electronic components. They had to be alert and watch for inno-vations
by their competitors. Responsiveness, creativity, and quick learning (rather
than efficiency) were paramount here. Here, Burns and Stalker found very different
organizational structures. There was a “deliberate attempt to avoid specifying

individual tasks.”44 Each worker’s job might change daily as employees rushed to
respond to the problem of the day. Most important, all employees shared common
beliefs and goals, and these common goals (such as “let’s make sure we produce
only first-rate products”) helped ensure they all could work together with little or
no guidance. When a problem arose, employees took the initiative to solve it. This
often meant bypassing the formal chain of command.
● Mechanistic and Organic Organizations Their findings led Burns and
Stalker to distinguish between two types of organizations, which they called
mechanistic and organic. The rayon firm was typical of mechanistic, classical or-ganizations.
The electronics firms were typical of the organic, behavioral ones. In
terms of organizational structure, we can summarize the Burns and Stalker find-ings
as follows:
◗ Lines of authority. In mechanistic organizations, the lines of authority are clear,
and everyone adheres to the chain of command. In organic organizations, em-ployees’
jobs are always changing, and the lines of authority are not so clear.
There is less emphasis on sticking to the chain of command in organic organiza-tions.
Employees simply speak directly with the person who can answer the
problem.
◗ Departmentalization. In mechanistic organizations (with their emphasis on effi-ciency),
functional departmentalization prevails. In organic organizations
(where flexibility is the rule), product/divisional departmentalization prevails.
◗ Degree of specialization. In mechanistic organizations, each employee has a
highly specialized job. In organic organizations, job enlargement is the rule.
◗ Degree of decentralization.Mechanistic organizations centralize most important
decisions. Lower-level employees in organic organizations tend to make more
important decisions; these firms are more decentralized.
◗ Span of control. The span of control is narrow in mechanistic organizations, and
there is close supervision. Spans are wider in organic organizations, and supervi-sion
is more general.
◗ Type of coordination. Managers tend to achieve coordination by sticking to the
chain of command in mechanistic organizations. In fast-changing organic organ-izations,
there is more emphasis on committees and cross-functional liaisons.
Table 10.1 summarizes the features of mechanistic and organic organizations.
Organization and Technology:
The Woodward Studies
British researcher Joan Woodward’s contribution lies in her discovery that a firm’s
production technology (the processes it uses to produce its products or services)
affects the way management should organize the firm. Woodward’s team analyzed
each company’s history, size, and policies and procedures.45None of these factors
explained why some successful firms had classic, mechanistic structures while
others had behavioral, organic ones. Finally, Woodward’s team decided to classify
the companies according to their production technologies, as follows:
1. Unit and small-batch production companies produced one-at-a-time proto-types
and specialized custom units made to customers’ requirements (like
fine pianos). They had to be very responsive to customer needs.

Organizing to Manage Change ■ 289
T ABLE 10.1
Burns and Stalker’s Approach to Organizing
Mechanistic Type Organic Type of
Characteristic of Organization Organization
Type of environment Stable Rapid change
Comparable to . . . Classical Behavioral organization:
organization emphasis on self-control
Adherence to chain of Firm Flexible—chain of command
command often bypassed
Type of Functional Divisional
departmentalization
How specialized Specialized Jobs change daily, with
are jobs? situation
Degree of Decision making Decision making
decentralization centralized decentralized
Span of control Narrow Wide
Type of coordination Rules; chain of Committees, liaisons, and
and communication command special integrators;
networking
2. Large-batch and mass production companies produced large batches of
products on assembly lines (like cars). Here, efficiency was crucial.
3. Process production companies produced products such as paper and petro-leum
products through continuously running facilities. Here, highly trained
technicians had to be ready to respond at a moment’s notice to production
emergencies, because shutdowns were enormously costly.
Once Woodward classified the firms, it became clear that a different type of
organizational structure was appropriate for each type of technology (see Table 10.2).
Note that both unit and process production firms tended to have organic struc-tures.
Mass production firms usually had mechanistic structures.
In terms of organizational structure, we can summarize the Woodward find-ings
as follows:
◗ Lines of authority. The lines of authority and adherence to the chain of command
are rigid in mass production firms, but they are more informal and flexible in
unit and process production firms.
◗ Departmentalization. There is a functional departmentalization in mass produc-tion
firms and a product type of departmentalization in unit and process pro-duction
firms.
◗ Degree of specialization. Jobs are highly specialized in mass production firms and
less so in unit and process production firms.
◗ Delegation and decentralization. Organizations tend to be centralized in mass
production firms and decentralized in unit and process production firms.
◗ Span of control. Unit and process production firms have smaller supervisory-level
spans of control than do mass production firms.

T ABLE 10.2
Summary of Woodward’s Research Findings*
downsizing: dramatically
reducing a company’s workforce
Unit and Small-Batch Large-Batch and Mass
Firms (Example: Production (Example: Process Production
Organizational Feature Custom-Built Cars) Mass-Produced Cars) (Example: Oil Refinery)
Chain of command Not clear Clear Not clear
Span of control Narrow Wide Narrow
Departmentalization Product Function Product
Overall organization Organic Mechanistic Organic
Specialization of jobs Low High Low
*Summary of findings showing how production technology and organizational structure
are related.
A Contingency Approach to Organizing
The studies discussed above demonstrate that different organizational structures
are appropriate for, or contingent on, different tasks. At one extreme are organiza-tions
where efficiency is supreme. Successful organizations here tend to be mech-anistic.
They stress adherence to rules and to the chain of command; are highly
centralized; and have a more specialized, functional departmentalization.
At the other extreme are companies where innovation is supreme. Here, man-agement
must emphasize creativity and entrepreneurial activities. To encourage
these activities, such organizations tend to be organic. Managers don’t encour-age
employees to stick to the chain of command. Decision making is pushed down
closer to the customers (it is more decentralized), and jobs and departments are
less specialized.
How Managers Streamline Their Companies
As globalized competition became more pronounced in the 1990s, CEOs began
taking steps to streamline their organizations. Their dual aims were to eliminate
waste and to boost responsiveness. The effects were twofold: streamlining reduced
costs and made the firms more efficient (for instance, by reducing the workforce).
And the streamlining made the companies more responsive (for instance, by
cutting out management layers). Downsizing was often the method they chose.
Downsizing means dramatically reducing a company’s workforce. This method
probably did reduce costs. However, downsizing can and often does have negative
consequences, particularly among those employees and their families who end up
without a job.
Other techniques the CEOs used included the following.
● Reduce Layers of Management Reducing management layers is one method
managers use to streamline and prepare their companies to better respond to
change. The assumption, often correct, is that cutting out management layers puts
the decision-making employee closer to the customer, where he or she can make
a fast decision without having to “check with the boss.” The railroad company CSX

recently reduced its layers of management from eleven to “no more than eight,” in
order to create what its CEO called a more responsive, streamlined company.46
● Establish Mini-Units Many managers split their companies into smaller
minicompanies. Intuit broke the company into separate businesses, each with its
own general manager and mission. Hal Rosenbluth broke his company into more
than 100 farmlike business units, each focused on special regions and clients. In
this way, everyone knew everyone else. Layers of management weren’t required for
approving decisions. Interactions and communications were more frequent.
● Reassign Support Staff Many firms also moved headquarters staff (such as
industrial engineers) out of headquarters and reassigned them to their business
units. For example, candy maker Mars Inc. is a $7 billion company with only a
three-person headquarters staff. Mars does have staff employees, but the staff em-ployees
are assigned directly to the individual business units. Here, they can help
their business units address customer needs rather than act as gatekeepers to
check and reject divisional managers’ plans.
● Widen Spans of Control and Empower Employees Squeezing out man-agement
layers results in wider spans of control, as we saw. If the supervisors are
not there to supervise, who makes the decisions? The answer is the employees
themselves: they are empowered. For example, when a new CEO took over at Pratt
Whitney’s engine division, airlines were threatening to stop buying Pratt engines
unless they got faster responses to their complaints. The new CEO boosted the
number of service representatives in the field and then gave them authority to ap-prove
multimillion-dollar warranty replacements on the spot. Customers were
impressed. Pratt Whitney quickly turned around.47
Modern Organizations
s we saw in Chapter 1, things change fast in business today. After about one
year in business, Friendster.com, the social networking site, had about one
million unique visitors per month. Introduced a year later, myspace.com went
from nothing to fourteen million visitors per month. Amazon (fearing Google’s
new Froogle shopping site) introduced a new search engine. Then Google intro-duced
Gmail to lure surfers from Yahoo and Microsoft and bought YouTube.
Increasingly today, steps such as downsizing, widening spans of control, or
establishing mini-units are not enough. Things are changing too fast, and compa-nies
have to be too entrepreneurial. Managers are therefore organizing around
teams, networks, and horizontal and federal-type structures to better respond to
and manage change. We’ll discuss each of these four new structures in this final
section. The Improving Your Boundary-Managing Skills feature explains one skill
managers need when managing these new kinds of organizations.
Building Team-Based Organizations
Most firms today organize some or all of their activities around self-managing
teams.Ateamisagroupofpeoplewhoworktogetherandshareacommonobjective.
For example, at Johnsonville Sausage Company in Wisconsin, the CEO or-ganized
most of the plant’s activities around self-managing, twelve-person work
A
Modern Organizations ■ 291
team: a group of people who
work together and share a
common objective

IMPROVING YOUR BOUNDARY-MANAGING SKILLS
teams. Its organization chart would show primarily teams, rather than depart-ments.
Some of the teams are responsible for maintaining the firm’s packaging
equipment, for instance. These self-managing teams are empowered. The em-ployees
manage themselves and make fast, on-the-spot decisions. For example,
duties of a typical Johnsonville team include:
◗ Recruit, hire, evaluate, and fire (as necessary)
◗ Formulate, then track and amend, its own budget
◗ Handle quality-control inspections, subsequent
troubleshooting, and problem solving
◗ Develop and monitor quantitative standards for pro-ductivity
and quality
◗ Suggest and develop prototypes of possible new
products and packaging51
Teams like these bring a double-barreled benefit to
the company. Having one team of multitalented work-ers
do all the work required to complete a task elimi-nates
the sorts of error-laden interdepartmental hand-offs
that normally waste time and cause defects. And
empowering team members to supervise themselves
can boost efficiency and motivation.
Finding ways to cut across traditional departmental
boundaries is at the heart of the team, network, and fed-eral
organizations we discuss in this section. For example,
if employees are unwilling or afraid to speak their minds,
the open communication that teamwork requires is im-possible
to obtain.
Traditional departmentalized organizations have four
main “boundaries.” First, vertically, the chain of command
creates authority boundaries. The president supervises the
vice president, who supervises the managers, and so on.
Subordinates are often reluctant to pass bad news on to
their bosses. Second are departmental boundaries. Each
department has its own specialized responsibilities. There
is often minimal interdepartmental communication, as if
employees work in what amount to separate “silos.”48
Third, each employee tends to focus on doing his or her
own narrow job, which creates what some experts call a
task boundary. An employee might say, “No, that’s not my
job,” for instance.49 Finally, each department also typically
has its own political agenda. For example, manufacturing,
wanting to boost efficiency, resists last-minute orders,
while sales wants to accept them.
These boundaries inhibit communication and deci-sions
and make modern, team-based, networked organi-zations
impossible. A boundaryless organization is
one in which the widespread use of teams, networks, and
similar structures requires that the boundaries that typi-cally
separate organizational functions and hierarchical
levels be reduced.50
Other than being aware of the boundaries, there are
no magic bullets for solving them. Reducing authority
boundaries requires that managers encourage and wel-come
honest advice and feedback from subordinates. Re-ducing
departmental and political boundaries requires
training and then rewarding employees for putting the
company’s needs first. Reducing the task (“It’s not my job”)
mentality requires clamping down at the first signs of such
behavior and rewarding publicly those who willingly as-sume
additional responsibilities.
Part of a twelve-personteamat the Johnsonville Sausage plant.

● Nature of Team-Based Organizations52 Managers traditionally organized
their companies with departments as their basic work units. This is evident in a
typical organization chart. Such a chart might show, for example, separate boxes
for each functional department, down to separate tasks for individual workers at
the bottom of the chart.
In team-based organizations, the team is the basic work unit. A typical Toyota
plant may have 300 employees and only two or three managers. Each work team is
responsible for a body of work such as installing dashboards or maintaining ro-bots.
The teams generally supervise themselves.
● Designing Organizations to Support Teams53 Creating a team-based or-ganization
requires first instituting the supporting mechanisms that will help the
team approach flourish. Experience suggests that these supporting mechanisms
include the right philosophy, structure, systems, skills, and policies (see Figure 10.9).
● Organizational Philosophy Team-based companies like Saturn and Toyota
emphasize values such as “people can be trusted to make important decisions
about their work activities.” They are characterized by high employee involvement
and trust.
● Organizational Structure In team-based companies, teams, not depart-ments,
are the basic work units. The teams supervise themselves, for instance,
scheduling overtime and hiring employees. The organization chart would show
primarily teams, rather than departments. These firms have relatively few supervi-sors
and delegate much decision making to the teams.
● Organizational Systems Every company depends on standard operating
systems or ways of doing things to make things go smoothly. These range from per-formanceappraisalandincentive
plans to systems for hiringemployees.Organizing
around teams requires making the firm’s systems and practices compatible with the
Effective Teams
Organizational
Philosophy
Basis for Teamwork to Flourish
Organizational
Structure
Organizational
Systems
Employee
Skills
Organizational
Policies
Flat structure
All or most
work organized
around teams
High-involvement,
high-delegation
jobs
■
■
■
Gainsharing
Procedures
Information
systems
■
■
■
Employment
stability
Equal treatment
■
■
Job-related
Interpersonal
Team-based
Managerial
■
■
■
■
High involvement
boundaryless organization:
an organization in which the
widespread use of teams,
networks, and similar structures
requires that the boundaries
that typically separate
organizational functions and
hierarchical levels be reduced
F IGURE 10.9
Designing Organizations
to Manage Teams
SOURCE: Adapted from James H. Shonk,
Team-Based Organizations (Homewood, Ill.:
Irwin, 1997), p. 36.

team approach. For example, managers often pay financial incentives to the team as
a whole rather than to individual employees, to encourage team solidarity.
● Organizational Policies Similarly, the company’s policies should support
the philosophy of empowerment, involvement, and trust that teamwork depends
on. For example, in plants like those run by Toyota, equal-treatment policies (such
as no reserved parking spaces and minimal status differences in offices and dress)
foster a sense of teamwork.
● Employee Skills To manage themselves, team members need various
decision-making and communications skills.
Network-Based Organizations
Many firms today superimpose organizational networks over their existing struc-tures.
An organizational network is a system of interconnected or cooperating
individuals. Networks enhance the likelihood that the work of even remote units
will be carried out promptly and in a coordinated way if quick decisions on some
matters must be made.
To put networking’s benefits into perspective, consider downloading a song.
One option is to methodically check one’s friends. Going one by one, we might find
our song after seventeen calls. Our other option is to enter one of the new legal
variants of the Napster-type online networks. Here, with everyone’s record files
shared, we instantly find our song. Putting everyone in contact with everyone else
expedites solutions.
Whetherformalor informal, organizational networks share thesamebasic idea:
to link selected employees from various departments, levels, and geographic areas
so that they can communicate quickly and without barriers across normal organiza-tional
boundaries.We describe three types of networks: formal organizational net-works,
informal organizational networks, and electronic information networks.
● Formal Organizational Networks A formal organizational network is “a
recognized group of managers assembled by the CEO and the senior management
team. The members are drawn from across the company’s functions, business
units, and geography, and from different levels of the hierarchy.”54 Figure 10.10
illustrates the cross-functional, cross-level nature of formal networks. Note the
number of organizational levels and the departments represented by the yellow
boxes. (The yellow boxes represent the formal network’s members.)
Formal networks have several characteristics.55 First, network membership
is a permanent assignment. In fact, each manager’s continuing experience and
relationships in the network help make the network effective. Second, formal net-works
generally take the initiative in finding and solving problems. Third, having a
formal network should change how the top manager does things.56 For example,
the network handles more of the interunit coordinating that the CEO might other-wise
have to do.
At the railroad firm Conrail, nineteen middle managers from various depart-ments
and levels constitute the firm’s operating committee, which is actually a for-mal
network. They meet for several hours per week, on an as-needed basis. They
review and decide tactical issues (delivery schedules and prices, for instance).
They also work on longer-term issues such as five-year business plans.57 If a cus-tomer
needs a fast decision on, say, pricing, this team can quickly draw on its
members’ varied knowledge to arrive at a decision.
organizational network:
a system of interconnected
or cooperating individuals

● Informal Organizational Networks Many companies cultivate informal or-ganizational
networks. Informal organizational networks consist of cooperating
individuals who are interconnected only informally. They share information and
help solve each other’s problems based on their personal knowledge of each
other’s expertise. The idea is that if a problem arises in one location, the manager
can informally network with colleagues at other locations to solve it.
In encouraging informal networks to form, the CEO’s main job is to create the
conditions that enable managers around the world to meet and to build mutual
trust.58 Executive development programs are one way to do this. For example,
both Philips and Shell bring managers from around the world to work together in
training centers in New York and London. Moving managers from office to office
around the world is another tactic. The transferees can build lasting relationships
around the globe. In one firm, for instance:
[International mobility] has created what one might call a “nervous system”
that facilitates both corporate strategic control and the flow of information
throughout the firm. Widespread transfers have created an informal infor-mation
network, a superior degree of communication and mutual under-standing
between headquarters and subsidiaries and between subsidiaries
themselves. . . .”59
● Managing Now: Electronic Networking Information technology, including
the Internet, e-mail, videoconferencing, PDAs, and collaborative computing soft-ware,
lets companies better utilize formal and informal networks. For example, a
new service from Airena, a Web service and mobile phone company, lets users in
small companies do group scheduling and organizing via their mobile phones.60
For larger firms, group decision support systems packages (like Lotus Notes) pro-vide
another tool.61 For example, IBM’s Lotus Sametime IM provides instant mes-saging
capabilities to remote network members.62 The OneSpace system is another
example. It allows product design teams “to collaborate over the Internet and
across firewalls in real-time by working directly on the 3D solid model. . . .”63
Hewlett-Packard’s new life-size Halo Collaboration Studio makes the people “on
the other side of the table” at a videoconference look as if they’re actually there.
F IGURE 10.10
How Networks Reshape
Organizations
The members of a formal
network may be selected from
various departments and
organizational levels.
SOURCE: From “How Networks Reshape
Organziations—For Results,” by Ram Charan,
Harvard Business Review, September–October
1991. Copyright ©1991 by the President and
Fellows of Harvard College; all rights reserved.
Reprinted by permission of Harvard Business
School Publishing.
informal organizational
networks: networks that
consist of cooperating
individuals who are
interconnected only informally

New-Product Development Sales Fulfillment Customer Support
The Horizontal Organization
The horizontal organization is an organization built around multidisciplinary
teams, each of which performs a process such as loan approval, sales fulfillment,
or customer support. Instead of being designed around departments, the
processes and the teams performing each process become the basic units of work.
Each team is comprised of several functional specialists. They work together
on those teams to carry out the process team’s activities (as illustrated in
Figure 10.11).64 Once these process teams are in place and performing, the firm
eliminates the departments, levels, and staff that do not directly contribute to the
work of the process-oriented teams.
● Why Horizontal Organizations? Many firms found that downsizing did not
change the way their departments did their work. The firms had fewer employees.
However, the work itself was still handled like a relay race. For example, at Ryder
Corporation, doing the paperwork for leasing a truck required as many as seven-teen
handoffs, as the documents made their way from one department to another,
such as credit checking, truck valuation, and loan approval. The time and effort
wasted were enormous. Errors invariably occurred. So, instead of having the
truck-leasing process weave its way through several departments, Ryder created
a vehicle-leasing process team. This team combined in one place employees with
all the functional specialties needed to approve a lease. That way, this new
process-oriented team could quickly approve or reject a lease application.
Creating horizontal organizations requires business process reengineering.
Business process reengineering means redesigning business processes, usually
by combining steps so that small multifunction process teams use information
technology to do the jobs formerly done by a sequence of departments. We’ll
discuss how to do this in Chapter 11, but the Window on Managing Now feature
provides one example.
VP of
Strategy
and
Planning
VP of
Support
Services
Chairperson
Chief
Operating
Officer
Process
Owner
Pricing
Sales
Shipping Production
Analysis
Process Strategy
Owner
Design and
Engineering
Research
Advertising
Service
Process
Owner
F IGURE 10.11
The Horizontal Corporation
In the horizontal organization, the work is organized around the cross-functional processes,
with multifunction teams carrying out the tasks needed to service the customer. Thus, the
sales fulfillment team carries out all the tasks required for billing an order.
SOURCE: Adapted from John A. Byrne,“The Horizontal Corporation,” BusinessWeek, 20 December 1993, p. 80.
horizontal organization:
an organization built around
multidisciplinary teams, each
of which performs a process
such as loan approval, sales
fulfillment, or customer support;
instead of being designed
around departments, the
processes and the teams
performing each process
become the basic units of work
business process
reengineering: redesigning
business processes, usually by
combining steps so that small
multifunction process teams use
information technology to do
the jobs formerly done by a
sequence of departments

Brady Corp.
Brady Corp., which manufactures identification and safety
products, allocated about $50 million to install a new sys-tem
that will link Brady’s suppliers, customers, and distrib-utors
over the Internet.However, only about one-third of
that money was for the technology. Top management
spent the rest on reengineering the firm’s organization and
processes around team-based horizontal processes.
For example, Brady customer-service employees
used to get the orders and pass them on to the firm’s pro-duction
department. The physical orders would then
move on to shipping. It was like a relay race.With Brady’s
new organization, customers with simple orders will send
them online directly to manufacturing. In manufacturing,
Brady will have a horizontal process. One factory-floor
person will oversee the entire production and shipping
process for each order. Management expects the new
horizontal organization to cut about five steps out of the
current fifteen-step sale-manufacturing-shipping process.
Brady’s new horizontal organization will help it capitalize
on its new online, direct customer-to-company informa-tion
technology system. Without reengineering, Brady
would have had its new online ordering system, but the
orders would still have been done the old, time-consuming
way, from department to department.
Federal Organizations
In a federal organization, highly autonomous but still company-owned units de-velop
their own products and have the option of collaborating with sister companies
under the very loose direction and control of the parent firm’s central manage-ment.
65 The federal approach lets the parent company tap and hopefully capital-ize
on the creativity and entrepreneurial spirit of its small, self-managed units.
Some big record labels are run as federal organizations. The parent label, like
Sony-EMI, finances people who have successful track records in music to set up
their own music labels, and these entrepreneurs then run their firms under the
parent firm’s umbrella. The parent firm then provides services (such as HR and
legal support). The labels are free to work with other labels within Sony-EMI, while
the parent firm provides minimal oversight. Virtual organizations, as we describe
next, are one modern federal-type example.
Managing Now: Virtual Organizations
Sometimes, a company has to marshal resources to accomplish some big project
but can’t afford the time or expense of acquiring and owning those resources itself.
A virtual organization is “a temporary network of independent companies—
suppliers, customers, perhaps even rivals—linked by information technology to
share skills, costs, and access to one another’s markets.”66
Virtual organizations (or virtual corporations) are networks comprised of
partner companies. Each company or entity brings to the virtual corporation its
special expertise. Information technology—the Internet, cell phones, group decision-making
software, and fax, for instance—makes the virtual organization possible
by linking each independent entity with the rest.
Some virtual companies are among the biggest in their industries. For exam-ple,
CorpHQ utilizes a network of professional service providers rather than em-ployees
to provide business-consulting services to industry. Its CEO says, “[O]ur
virtual organization allows us to utilize the skills and experience of a wide range of
business consultants. . . .”67
Virtual organizations enable some small businesses to undertake projects they
would not otherwise be able to. For example, Indigo Partners(www.indigohq.com),
federal organization: an
organization in which power is
distributed between a central
unit and a number of
constituents, but the central
unit’s authority is intentionally
limited
virtual organization:
a temporary network of
independent companies—
suppliers, customers, perhaps
even rivals—linked by
information technology in order
to share skills, costs, and access
to one another’s markets

begun about ten years ago by Jennifer Overholt, AnneMurguia, and A. C. Ross, is an
informal support group for marketing consultants. Indigo’s projects range frommar-ket
analyses for Fortune 500 companies to revising business plans for start-ups.68
Indigo Partners is a virtual company. It has no headquarters office.The firm’s six
partners work on projects individually or in small teams. For large projects, they tap
online into a pool of specialized freelancers. Thanks to Indigo, these freelancers bid
on big jobs, knowing they can tap the sum total of all the other Indigo freelancers’
knowledge and expertise. At the same time, the virtual-organization arrangement
frees them from having to manage bricks-and-mortar assets like an office.
Learning Organizations
One reason companies downsize, network, and reengineer is so that they can be-come
better at learning what new products competitors are introducing, what
new services customers want, and what new technologies may render their own
services obsolete.69 Learning organizations are any organizations that have “the
capacity to adapt to unforeseen situations, to learn from their own experiences, to
shift their shared mindsets, and to change more quickly, broadly, and deeply than
ever before.”70 When Microsoft reorganized into three core divisions and elimi-nated
management levels, it did so in part to make sure it remained a learning
organization.
If you looked at their organization charts and how they did things, learning or-ganizations
generally share the characteristics that we described in the last few
pages. To speed up decision making, management starts by downsizing, reducing
management layers, and empowering employees. It then creates networks and
encourages employees to think outside the boundaries of their own jobs.
However, organizing is not enough to make a company a learning organiza-tion.
Two more things are required. First, the company provides special knowledge-learning
organizations:
organizations that have the
capacity to adapt to unforeseen
situations, to learn from their
own experiences, to shift their
shared mindsets, and to change
more quickly
SOURCE: http://www.indigohq.com

management tools. For example, Xerox gives its repair personnel laptop comput-ers
and encourages them to digitize and share knowledge and ideas for solving
repair problems.
Second, management cultivates its employees’ “personal mastery.” This
means management ensures that employees have both the capacity and willing-ness
to learn and to share ideas. Steps here include:
◗ Provide continuous learning opportunities. Learning organizations offer exten-sive
opportunities for on- and off-the-job training to increase personal mastery.
◗ Foster inquiry and dialogue. Learning organizations make sure that all of the
company’s systems and procedures, as well as all the signals that managers send,
encourage open inquiry and dialogue.
◗ Establish mechanisms to ensure that the organization is continuously aware of
and can interact with its environment. For example, learning organizations en-courage
formal and informal environmental scanning activities by employees, to
quickly identify opportunities and threats.
● Managing Now Companies rely on special software to ensure that their learn-ing
management programs stay on track. For example, Aventis Pharmaceuticals
recently installed a special learning management system from Saba Software.71
Programs like these do several things. Most important, they enable Aventis’s re-search
scientists to easily access and participate in online training and develop-ment
courses. In addition, it enables them to register for instructor-led training
and lets the company automate the course registration process, deliver tests, track
and report student participation, and generate certificates.
PRACTICE IT
Millipore
With subsidiaries in over thirty countries, all operating
with different software packages, managers at Millipore’s
headquarters couldn’t effectively coordinate worldwide
operations. They had to wait for employees at headquar-ters
to compile and consolidate the information coming
in from subsidiaries. The lack of timely information made
it difficult for Millipore’s top managers to coordinate the
subsidiaries’ activities.
The company’s solution was to install,in phases,a suite
of separate but compatible enterprise software packages
from Oracle Corporation.Each subsidiary and department
got new software such as Oracle Financials, Oracle Self
Service Human Resources, and Oracle Purchasing. So, for
example,once all the subsidiaries were using the same ver-sion
of Oracle Financials, coordinating the company’s
financial operations became relatively simple. It cut in half
the time it took to finalize the company’s monthly
accounting statements. It also reduced the number of em-ployees
required for this task and “gave executives better
visibility into financial performance across the globe.”72
Installing this suite of software produced several
organizational benefits for Millipore. It improved interde-partmental
coordination by providing Millipore man-agers
with standardized information, which they used to
compare operations and monitor results. It also elimi-nated
numerous compilation and consolidation activities,
thus allowing Millipore to reduce its employee head count.
Third, it enabled Millipore to centralize certain shared-services
functions, such as human resource management.
For example, Oracle HR Self Service reduced the need
for local HR staff by enabling employees and supervisors
to self-service, via the Web, various activities such as
updating personnel forms and completing perfor-mance
appraisals.

1. Organizing means arranging an enterprise’s activi-ties
so that they systematically contribute to the
enterprise’s goals. An organization consists of peo-ple
whose specialized tasks are coordinated to
contribute to the organization’s goals.
2. Departmentalization is the process through which
management groups an enterprise’s activities to-gether
and assigns them to managers. Managers
generally group activities by functions, products,
customer groups, marketing channels, or geo-graphic
areas.
3. Coordination is the process of achieving unity of
action among interdependent activities. Tech-niques
for achieving coordination include mutual
adjustment; the use of rules; the standardization of
targets, skills, values, or processes; direct supervi-sion;
coordination software; divisionalizing; and
the use of a staff assistant, liaison, committee,
and/or independent integrators.
4. Many companies are adopting flatter structures in
an effort to eliminate duplication of effort, inspire
creativity, and increase responsiveness. The span
of control in a company is the number of subordi-nates
reporting directly to a supervisor.
5. Authority is the right to take action, make deci-sions,
and direct the work of others. Managers usu-ally
distinguish between line and staff authority.
6. Principles of delegation include delegating author-ity,
not responsibility; clarifying the assignment;
delegating, not abdicating; knowing what to dele-gate;
specifying the range of discretion; having
1. Why do we refer to departmentalization as the
organizational division of work?
2. What is the connection among decentralized, divi-sionalized,
and product departmentalization?
3. How does interdependence influence how a com-pany
coordinates its operations?
4. Why is decentralization not the same as delegation?
5. What are the pros and cons of matrix management?
6. Do you think a company can flatten its hierarchy
without taking steps to prepare its employees for
their new roles? Why or why not? What steps would
you recommend?
7. How would you use IT to improve coordination?
authority equal responsibility; making the person
accountable for results; and avoiding backward
delegation.
7. In practice, a decentralized organization is one in
which (1) authority for most departmental deci-sions
is delegated to the department heads, while
(2) control for major companywide decisions is
maintained at the headquarters office. Managers
usually use the term decentralized in conjunction
with product divisions.
8. Burns and Stalker’s findings, as well as Wood-ward’s,
show that different organizational struc-tures
are appropriate for—and contingent on—
different tasks. At one extreme are mechanistic
organizations for dealing with predictable, routine
tasks. At the other extreme, organic organizations
enable companies to respond faster.
9. Managers can institute a number of basic struc-tural
changes to make their organizations operate
more responsively. Examples of simplifying or re-ducing
structure are reducing layers of manage-ment,
creating mini-units, reassigning support
staff, and widening spans of control.
10. Many firms superimpose organizational networks
over existing structures. A network is a system of
interconnected or cooperating individuals. It can
be formal or informal, or IT-based. Team-based or-ganizations,
federal organizations, virtual organi-zations,
and horizontal organizations are other
modern organizations.

Case Study ■ 301
1. Colleges are interesting from an organizational
viewpoint because the employees (the faculty)
tend to make so many of a college’s decisions and
run so many of its projects. It’s not unusual, for in-stance,
to have the faculty elect a faculty senate,
which in turn appoints committees for things like
faculty promotions and curricula; the committees
then often have a major say in who gets promoted,
what programs the college offers, and so on. Simi-larly,
the students elect their own student govern-ments,
which in turn decide how the students’ fees
are spent.
Some critics say that all of this is a little like
“letting the inmates run the asylum.” And the pace
of criticism has picked up in the past few years.
With more colleges and universities going online,
students have more educational choices. As a
result, tuition fees are under pressure, and univer-sities
are scrambling to cut costs and be more effi-cient.
Boards of trustees are reviewing everything
about how their colleges do things—from how
many courses faculty members teach to how pro-fessors
are appraised to how to decide which
programs to offer or drop. Form teams of four to
five students, and answer the following questions:
a. Draw an organization chart for your college or
university. What type(s) of departmentalization
does it use? How would you show, on the chart,
the authority exercised by the faculty and fac-ulty
committees (teams)?
b. Decentralized structures tend to speed decisions.
However, some people think that even though
colleges tend to be decentralized, they are still the
most bureaucratic organizations they’ve ever
dealt with. To what extent and in what way is your
college decentralized? Do you consider it bureau-cratic,
and, if so, what explains why a decentral-ized
organization produces such bureaucracy?
c. How would you reorganize the college if stream-lining
and more efficiency were your goals?
2. In teams of four to five students, spend some time
on the Internet or in the library obtaining the
organization charts for two companies. Then to-gether
answer these questions: What forms of de-partmentalization
can you identify in each chart?
Which company would you say is more decentral-ized?
Why do you believe each company organized
the way that it did?
3. Because you are in college to learn, it is reasonable
to assume that your college (in general) and this
management class (in particular) are learning or-ganizations.
(After all, your class does have an or-ganizational
structure in terms of who does what,
whether authority is centralized or dispersed, and
so on.) In teams of four to five students, answer
these questions: If you were the “manager” taking
over this class, what would you say are the main
goals you want this class to achieve? Based on
these goals, what are the main tasks the class’s or-ganization
must perform? Draw the organization
chart of this class as it is now. Then list five specific
things you would do to reorganize this class as a
learning organization.
C A S E S T U D Y
Organizing Greenley Communications
Louis Greenley has to make a difficult decision.
Greenley Communications was a diversified com-munications
company that operated primarily in the
western United States. The firm owned and operated
newspapers and radio and television stations. For
years, there had been an “invisible wall” between the
print operations and radio and television.
Greenley’s existing structure was organized by in-dustry:
a newspaper division, a radio division, and a
television production division. Each division had its
own bookkeeping, sales, marketing, operations, and
service divisions. Accounting and financial manage-ment
were handled at the corporate level.
In the newspaper division, a clear distinction ex-isted
between the news and the sales/financial sides
of the business. Coming from a family of journalists,
Greenley was always concerned that the sale of advertis-ing
to local clients would influence the paper’s coverage

of the news—editors might ignore potential stories that
reflect negatively on an advertiser.
Thevice president of broadcast operations in Green-ley’s
television division proposed a major structural
change. The proposal called for organizing Greenley
Communications geographically. This reorganization
would allow regional managers to have a single sales
force that could sell advertising in any form: print,
radio, or television. The approach had some appeal.
There was significant overlap at Greenley—the com-pany
tended to employ multiple sales forces in the
same region, for instance, with different salespeople
often calling on the same customer. Certainly, there
would be savings in personnel because the company
would need a far smaller sales staff.
Greenley is not yet persuaded, however. He is try-ing
to decide what to do.
1. Draw Greenley’s current organization chart as best
you can.
2. What factors should influence Greenley’s decision
to restructure?
3. What risks does the proposed restructuring create?
4. What are the pros and cons of the vice president’s
new proposed structure?
5. If you were Greenley, how exactly would you reor-ganize
(if at all), and why?

CHAPTER OUTLINE
Opening Vignette: Yellow
Transportation
● Types of Organizational
Change
The Challenge of Organizational Change
An Example: Becoming an E-Business
Strategic Change
Technological Change
Baker McKenzie
Changing the People and/or the Culture
● Managing Now: Reorganizing,
Reengineering, and
Business Process
Management
Reorganizing
Business Process Reengineering
Reengineering the Loan Process
Business Process Management
● Dealing with Resistance
to Change
Why Do People Resist Change?
Overcoming Resistance to Change
Choosing the Right Method for
Overcoming Resistance
PRACTICE IT: Bill Zollars
● A Process for Leading
Organizational Change
Create a Sense of Urgency
Decide What to Change
Create a Guiding Coalition and
Mobilize Commitment
Develop and Communicate a
Shared Vision
Empower Employees to Make the Change
Implement the Change
Generate “Short-Term Wins”
Consolidate Gains and Produce
More Change
Anchor the New Ways of Doing Things
in the Company Culture
Monitor Progress and Adjust the Vision
as Required
Carlos Ghosn Leads a Change at Nissan
303
DESIGNING AND CHANGING 11
ORGANIZATIONS
Yellow Transportation
hen Bill Zollars became
CEO at Yellow Transporta-tion
Inc., it had just lost about
W
$30 million, laid off workers,
and had a strike. Previously se-nior
vice president at Ryder
Corp., Zollars had built Ryder’s
high-tech logistics unit into a
$1.5 billion business. He be-lieved
that saving Yellow Trans-portation
would require up-grading
the firm’s technology.
He knew he’d have to get his
firm’s thousands of truckers,
warehouse specialists, and oth-ers
to change the way they did
Bill Zollars,Yellow’s new CEO, knew he’d have
to get his firm’s thousands of employees to
change the way they did things and to accept
the new technologies the firm required.
things and to accept the new technologies.The question was,
How should he do this?1 ■
➤ Listing and discussing four ways to change an organization.
➤ Comparing and contrasting reengineering and business process management.
➤ Explaining how to change an organization’s culture.
➤ Listing and describing at least five ways to resolve a conflict.

CHAPTER OUTLINE (Continued)
Types of Organizational Change
ou are in management class, and the dean walks in and says that you and
some others need to move to a different class because of a fire safety code.
Y
How would you feel about that announcement? For a manager, implementing a
change almost invariably triggers worry, concern, and resistance.
Several years ago, Nissan was selling 80 percent of its cars at a loss and had lost
almost $6 billion in one year alone. The situation facing Carlos Ghosn, the person
sent to Japan to fix Nissan, was urgent. He knew the only way to save Nissan was to
take some steps that would not normally be considered within Japanese business
culture, such as cutting 21,000 jobs.2 As a French citizen coming to save a Japanese
company, how could he lead the required change without prompting vast resis-tance
by Nissan’s workers?
The Challenge of Organizational Change
Faced with the need to respond to competitive pressures, managers like Bill
Zollars, Carlos Ghosn, or Avon’s Andrea Jung invariably find themselves having to
formulate and implement an organizational change. Organizational change
refers to a planned, systematic alteration of the company’s strategy, structure,
technology, and/or people and culture. However, no change is ever made in isola-tion.
Thus, a recent decision by Aetna Insurance to change its strategy and down-size
also prompted changes in the firm’s organization structure and in how Aetna
trains its sales force.
Leading an organizational change can be treacherous. The change may re-quire
the cooperation of hundreds of managers and employees. Resistance may be
extensive, and the company must execute all these changes while still serving its
customers. The manager needs to know what to change and how to execute the
change. We’ll look at what the manager can change in this and the following sec-tion,
and then turn to how managers actually lead an organizational change.
An Example: Becoming an E-Business
As an example of how one change tends to trigger another, consider becoming an
e-business. General Electric (GE) now does most of its purchasing and much of
its marketing over the Web. A local jeweler can now attract orders from thousands
of miles away with its new associate relationship with Amazon.com. Fortune put
● Organizational
Development and Conflict
Management
Human Process Applications
Technostructural Applications
Human Resource Management
Applications
Strategic Applications
Managing Interpersonal Conflict
➤ Reading the experiential exercises and explaining how you would reengineer the
process.
➤ Reading the chapter case study and deciding if the company should reorganize and, if
so, what the new structure should look like.
➤ Watching the simulation video and identifying practices
used by the company to successfully accomplish change.
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organizational change:
a planned, systematic alteration
of the company’s strategy,
structure, technology, and/or
people and culture
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Types of Organizational Change ■ 305
it this way: “e or be eaten”: either get your business on the Web or watch your
competitors take your customers.3
The problem is that blending old business and e-business is not just about
installing new technology.4 For example, one of the things that torpedoed the
AOL-Time Warner merger a few years ago was the fact that their cultures and ways
of doing things were so different. Time Warner’s more conservative culture clashed
with AOL’s laid-back entrepreneurial way of doing things.5
The chief strategist for one e-business says, “Entering the e-commerce realm is
like managing at 90 mph. e-business affects finance, human resources, training,
supply-chain management, customer-resource management, and just about every
other corporate function.”6 For example, suppose a chain of florist shops decides
to expand its sales online. Should they organize the online operation as a separate
business unit? Or should they keep the current functional organization (sales, pur-chasing,
marketing, accounting, and human resources) and let each of those
department heads also run their parts of the new e-business? It’s a dilemma.7
Greg Rogers, head of Whirlpool Corporation’s e-commerce business, says a
new e-business’s strategy will have to change too.8 The company’s new strategy
will have to reflect the fact that e-commerce is now a big part of the company’s
plans. Becoming an e-business illustrates a change that requires altering just about
everything the company does—its strategy, technology, structure, and people and
culture.
● What’s to Come In the remainder of this first section, we’ll look briefly at
three types of organizational change (strategy, technology, and culture/people).
We’ll then look at the fourth type of change, structural change, in the next section
of this chapter. Then, in the final two sections of this chapter, we’ll turn to the
methods that managers use to make their change efforts more successful.
Strategic Change
Many managers face the need to change their companies’ strategies. For example,
faced with declining profits, Aetna Insurance pulled back from its high-growth
strategy. The firm had emphasized adding more policyholders. Its new strategy is
to emphasize fewer but more profitable ones. Management reduced policyholders
from 22 million to 14.4 million. By focusing on more profitable policyholders,
Aetna boosted profits by ten times, to $108 million in one quarter. Andrea Jung de-cided
to change Avon’s strategy so that retail stores could also sell Avon products.
Managers often try to avoid making big strategic changes because strategic
changes are fraught with peril; it’s hard to predict exactly what will happen.
This is especially true when the firm faces “discontinuous change”: an unex-pected
change that triggers a crisis, as when digital photography began crowding
Kodak’s film off the shelves. Changes like these are usually prompted by things out-side
of the manager’s control.9 The manager will also probably have to make his or
her changes under short time constraints. Strategic changes also tend to have com-panywide
impact. As at Aetna, it’s rarely possible to change the firm’s strategy with-out
also changing in some way the firm’s structure, technology, and people.
Research findings suggest that managers facing strategic changes should
keep the following three things in mind:
1. Strategic changes are usually triggered by factors outside the company. External
threats or challenges, such as deregulation, global competition, and dramatic
technological innovations, are usually what prompt managers to embark on
companywide, strategic changes.10
strategic change: a change
in a firm’s corporate and/or
competitive strategies

306 PART FOUR CHAPTER 11 Designing and Changing Organizations
2. Strategic changes are often required for survival. Researchers found that while
making a strategic change did not guarantee success, firms that did not
change when they should have did not survive. This was especially true when
some major change required quick and effective strategic change, but the
manager failed to respond. Many neighborhood businesses close if they can’t
change to compete with a new Wal-Mart.
3. Strategic changes implemented under crisis conditions are highly risky. Strate-gic
changes made under crisis conditions and with short time constraints
were the riskiest and most prone to fail. Changes like these eventually trigger
changes companywide—changes to the firm’s structure, technologies, people,
and culture and core values. Core values (such as “don’t make any risky
moves”) are especially hard to change.
Technological Change
We’ve seen in this book that many managers increasingly have to implement tech-nological
changes. Technological change means changing the way the company
creates or markets its products or services, or the way it uses technology to man-age
its systems and operations. For example, the manager might want to improve
operations by installing a new supply chain management system or by changing
the interface through which the employees (such as UPS delivery people) commu-nicate
with their home base. (The Window on Managing Now feature presents one
such example.)
Whatever the technological change, managers like Bill Zollars know they must
get their employees to accept the change if the change is to be successful. Many of
the examples you’ve read in this book—such as Brady Company installing its new
supply chain system—illustrate this. It would make no sense for Brady to have the
customers send their orders directly online to the plant floor if the employees
there resented having to do the extra work.
Baker McKenzie
The law firm Baker McKenzie has seventy offices in
thirty-eight countries. Many of its clients do business
globally. Before accepting a new client, it must ensure
that it is not inadvertently creating a conflict, for in-stance,
by agreeing to represent a client that another of
its clients is suing. It also needs a process for ensuring
that the advice it gives a multinational client complies
with laws and regulations (like the U.S.A. Patriot Act) in
all the countries in which it does business.11 Processes
like these can be time-consuming if done manually. Baker
McKenzie installed new business intake, conflicts
management, and regulatory software systems. These
technologies streamlined the firm’s former intake and
regulatory processes. They enable the firm’s lawyers to
avoid inadvertently accepting clients that might pose a
conflict, and they ensure that all relevant local laws and
regulations are being met.
technological change:
a change in the way the company
creates and markets its products
or services or in the way it uses
technology to manage its
systems and operations

Types of Organizational Change ■ 307
Changing the People and/or the Culture
As at Brady, strategic, technical, and structural changes (which we discuss next) in-variably
require changes to the behavioral, “people” side of the firm. This includes
changing the employees’ attitudes, values, or skills, or the firm’s culture.
Here, there are several options. If employees don’t have the knowledge or skills
to do the job, the manager may prescribe training. (We discuss training and devel-opment
in Chapter 12.) At other times, people problems stem from misunder-standing
or conflict. Here, conflict-resolution efforts (like those discussed at the
end of this chapter) may be in order. Sometimes, the manager just needs to over-come
resistance to the change by explaining the change’s true nature. Bill Zollars
at Yellow Transportation knew that his new technology would fail if he didn’t
explain the need for it convincingly.
Sometimes, the manager has to change the company’s culture to make his or
her broader desired changes work. Culture refers to the basic values the employees
share and the ways in which these values manifest themselves in behavior. For ex-ample,
some attribute Motorola’s lackluster performance in the early 2000s to the
company’s culture, which one writer described as “stifling bureaucracy, snail-paced
decision making, . . . and internal competition so fierce that [former CEO]
Galvin himself has referred to it as a ‘culture of warring tribes.’”12 There were few
things Galvin could do to make Motorola succeed in the face of such a culture.
● How to Create and Sustain the Right Corporate Culture Alan Mulally,
Ford’s new CEO, took over late in 2006. Many believe Ford suffered to some extent
from a culture of backbiting, bureaucratic behavior, and disdain (while Ford was
cutting 30,000 employees, the top executives suppos-edly
still used a fancy executive restaurant at Detroit
headquarters). Mulally knew he had to make many
changes at Ford to make that company succeed. He
could not do that in the face of such a culture.
What steps can a manager like Mulally take to
change the company’s culture? If, like Mr. Mulally, you
wanted to encourage Ford managers to work more like
a team, and employees to be more flexible about their
pay demands, what would you do? Perhaps close the
executive restaurant? Tell managers that from this
point on, you will appraise each one on the extent to
which he or she was a team player that year?
The essential thing to keep in mind is that it is the
manager’s behavior, not just what he or she says, that
molds what employees come to see as the firm’s real
culture and values. Experts suggest doing the following
to change organizational culture:13
Alan Mulally, Ford’s new CEO, had to change the company’s
culture.
1. Make it clear to your employees what you pay attention to, measure, and con-trol.
For example, at Toyota, quality and teamwork are desirable values.
Toyota’s selection and training processes therefore focus on the candidate’s
orientation toward quality and teamwork.
2. React appropriately to critical incidents and organizational crises. For exam-ple,
if you want to emphasize the value that “we’re all in this together,” don’t
react to declining profits by saying, “You’re all fired.”

3. Use signs, symbols, stories, rites, and ceremonies to signal your values. JCPenney
prides itself on loyalty and tradition. To support this, the firm inducts new
management employees into the Penney Partnership. At special conferences
they commit to Penney’s values of honor, confidence, service, and cooperation.
4. Deliberately role-model, teach, and coach the values you want to emphasize.
For example, Wal-Mart founder Sam Walton lived the values of hard work,
honesty, neighborliness, and thrift. He explained driving a pickup truck by
saying, “If I drove a Rolls-Royce, what would I do with my dog?”
5. Communicate your priorities by how you appraise employees and allocate re-wards.
For example, General Foods reoriented its strategy from cost control to
diversification and sales growth. It supported these new priorities by linking
bonuses to sales volume and new-product development, rather than to just
increased earnings.
Lawrence Weinbach, chair and CEO of Unisys, took many steps to change his
firm’s culture. His basic aim was to focus employees on performance and execu-tion.
To do this, he instituted systems that sent the right signals. As he said, “We’ve
moved to a pay-for-performance approach, to make sure that we’re properly rec-ognizing
the people who are doing things right. . . . [I]n some cases, we’ve needed
to tell people to seek opportunities elsewhere . . . we’ve invested in training and
education and created Unisys University, where employees can find courses and
programs on a range of . . . business related topics. We’ve also spent a lot of time
communicating and educating people about the importance of execution.”14
Managing Now: Reorganizing, Reengineering, and Business
Process Management
e hear on the news that the government had to reorganize the CIA, or that
Ford Motor Company laid off 30,000 employees and changed how it organ-ized
its car divisions. Often, when we think about “organizational change,” it’s
W
not strategic, technical, or behavioral change that comes to mind, but reorganiz-ing.
In this section, we look at reorganizing and at the closely related topics of
reengineering and process management. These are all examples of structural
organizational change.
Reorganizing
Reorganizing or structural change means changing the company’s organiza-tional
structure.
Managers reorganize all the time. GE’s CEO Jeffrey Immelt reorganized his
firm’s huge GE Capital division. He broke it into four divisions, with their four
managers now reporting directly to him rather than to the former GE Capital
head. DaimlerChrysler’s U.S. truck maker used to be one part of DaimlerChrysler’s
commercial vehicles division. DaimlerChrysler recently reorganized its commer-cial
vehicles division. Daimler split it into a new, separate truck group, and into
divisions for vans and buses.15 According to a Daimler spokesperson, having all
commercial vehicles in one division created “an artificial layer of administration
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reorganizing or structural
change: changing one or more
aspects of the company’s
organizational structure

Managing Now: Reorganizing, Reengineering, and Business Process Management ■ 309
over trucking which will no longer be present” after the
reorganization.16 The reorganization created a “pure
truck group.” The new organization means that “. . .
management can concentrate on the relevant func-tions
[necessary to run the truck business] and further
integrate the truck divisions, and to make the truck
group comparable for benchmark purposes to other
competing truck groups.”17 The other products (vans
and buses) that used to be part of Daimler’s commer-cial
vehicle division (along with trucks) now constitute
one separate division.
Structural changes like these tend to trigger em-ployee
resistance. New structures mean new report-ing
relationships, and some will view the change as
demotions. New structures may also mean new tasks
and job descriptions (task redesign) for employees.
People often have an affinity for predictability and the
status quo.
Still, reorganizing is a familiar organizational
change technique. For example, after dismissing
thousands of employees, Lucent needed a new orga-nizational
DaimlerChrysler recently reorganized its commercial
vehicles division by splitting it into a new, separate truck
group, and into divisions for vans and buses.
structure. The former CEO had organized the company around eleven
different businesses.18His successor argued that the eleven-division structure was
too unwieldy and downsized to five and then to two units. One unit, Integrated
Network Solutions, handles landline-based businesses, such as optical networks
and phone-call switching. Another, Mobility Solutions, focuses on Lucent’s wire-less
products. Today, a revitalized Lucent has merged with France’s Alcatel.
● Two Basic Questions When contemplating a reorganization, the manager
needs to address two basic questions: (1) howeffective is our current organizational
structure? and (2) if we do restructure, how big a reorganization do we require?
● Reorganizing Question 1: How Effective Is Our Current Organizational
Structure? The manager begins by determining how effective the current or-ganizational
structure is in helping the company achieve its goals. After all, if the
current organizational structure works, why change? The manager can apply nine
tests here, as follows:19
1. The market advantage test. Does the organizational design make sense in
terms of your company’s strategy?20 For example, if the strategy involves
expanding overseas, an organizational structure that had no provision for
addressing the markets abroad should raise a red flag. The rule of thumb here
is this: If a single unit is dedicated to a single segment (to a single market,
product, geographic area), the segment is receiving sufficient attention. If no
unit has responsibility for the segment, the design is flawed and should be
revamped. The DaimlerChrysler reorganization we mentioned earlier, which
created the pure truck group, illustrates dedication.
Similarly, Volkswagen (VW) considered reorganizing its nine brand divisions
into three operational divisions—one for premium cars, one for mass-market
cars, and one for commercial vehicles.21 One intent of this reorganization is to
enable the firm to better focus on what it sees as VW’s three separate market
segments: premium brands (Audi, Bugatti, Bentley, and Lamborghini), mass
brands (Volkswagen), and commercial vehicles.

2. The parenting advantage test. Does your current structure help the corporate
parent add value to the departments and subsidiaries? For example, investors
periodically ask, Would it not be more efficient for each of GE’s separate divi-sions
to spin off and run themselves rather than to remain part of GE’s overall
structure? GE says no. For example, the current GE structure helps ensure that
modern management techniques devised in one unit quickly spread to the
others.
3. The people test. Does your design reflect the strengths, weaknesses, and moti-vations
of your people?22 For example, after PepsiCo purchased Quaker Oats
Co., PepsiCo reorganized its business units partly because of the strengths of
some executives it inherited with the Quaker purchase. Robert Morrison,
Quaker’s CEO, quickly assumed responsibility for PepsiCo’s Tropicana juice
unit, while continuing to oversee Quaker.
4. The feasibility test. The basic question here is, What could stand in the way of
successfully implementing a new organizational structure? For example, 3M
Company’s new CEO considered not changing that company’s structure. He
was afraid that 3M was so collegial that making the tough choices required by
a reorganization would trigger too much resistance.23 He decided that the
risks of staying with the old structure were too great. He anticipated the
potential constraints and dealt with them.
5. The specialist culture test. Does your design protect departments that need
distinct cultures? For example, 3M is known for the number of new products
its engineers produce (including Post-it Notes). Its organizational structure
needs to support that innovative engineering spirit.24
6. The difficult-links test. Does your structure address the hard-to-coordinate
relationships? For example, in Chapter 10, we saw that the product develop-ment
process in some high-tech firms requires coordination by special
new-product development departments. These departments coordinate the
research and development (RD), sales, and manufacturing departments.
7. The redundant-hierarchy test. Does your organizational structure have too
many levels and units? For example, Microsoft recently eliminated several
management layers to make sure customers get quicker answers to their
inquiries.
8. The accountability test. Is it clear who is responsible for what? For example, if
a problem arose (such as a dramatic sales decline) for a particular product
line, could you quickly identify the manager who is responsible? Daimler re-organized
its truck division in part to ensure that managers were solely and
clearly responsible for truck performance.
9. The flexibility test. Does your organizational structure foster innovation and
responsiveness, or does it stifle it?25 This is one reason Intuit’s CEO breaks his
new ventures off into small, self-contained units. Such an approach ensures
that their managers can develop their businesses without being stifled waiting
for answers from the parent company.
● Reorganizing Question 2: How Big a Reorganization Do We Require?
If the current organization is not adequate, the manager may have to reorganize.
How big a reorganization is required? Sometimes, the manager can just fine-tune

When you identify a problem with your design, first look for ways to fix it without
substantially altering it. If that doesn’t work, you’ll have to make fundamental
changes. Here’s a step-by-step process for resolving problems:
Steps Not Involving Major Design Change
MODIFY WITHOUT CHANGING THE UNITS.
■
Refine the allocation of responsibilities (for example, clarify powers and responsibilities).
■
Refine reporting relationships and processes.
■
Refine lateral relationships and processes (for example, define coordination mechanisms).
■
Refine accountabilities (for example, define more appropriate performance measures).
REDEFINE SKILL REQUIREMENTS AND INCENTIVES.
■
Modify criteria for selecting people.
■
Redefine skill development needs.
■
Develop incentives.
SHAPE INFORMAL CONTEXT.
■
Clarify the leadership style needed.
■
Define norms of behavior, values, or social context.
Steps Involving Major Design Change
MAKE SUBSTANTIAL CHANGES IN THE UNITS.
■
Make major adjustments to unit boundaries.
■
Change unit roles (for example, turn functional units into business units or shared services).
■
Introduce new units or merge units.
CHANGE THE STRUCTURE.
■
Change reporting lines.
■
Create new divisions.
NOTE : It may be possible to fix the organizational design without major changes. The first (top) section of this figure shows
how the manager can fine-tune the organization and accomplish what needs to be done without making big changes. If these
won’t work, the manager may have to make the sorts of major changes listed in the figure’s second (bottom) section.
If the company does require a major reorganization, the guidelines in Chapter 10 apply, for example, regarding the pros and
cons of product versus functional structures and delegating authority. After designing a possible new structure, the manager can
then again apply the nine tests described on pages 309–310 to test it and to ensure the new design passes muster.
the current structure. For example, it might be sufficient to just clarify employees’
responsibilities or reporting relationships rather than reorganize the whole com-pany.
On the other hand, the situation may require a more dramatic change. At
Microsoft, the CEO decided he had to reorganize the entire structure around three
core divisions. The checklist in Figure 11.1 helps the manager decide if fine-tuning
or a major change is required.
F IGURE 11.1
Is a New Structure Really
Required?
SOURCE: Adapted from Michael Goold and
Andrew Campbell,“Do You Have a Well-
Designed Organization?” Harvard Business
Review, March 2002, p. 124.

Business Process Reengineering
Today, reorganizing doesn’t mean just changing departments from functional to
divisional, or delegating more authority. Instead, it can mean reorganizing or
reengineering the company’s basic business processes. As we saw in Chapter 10,
every business uses business processes to get its work done. For example, banks
have a loan-approval process. This process consists of activities such as getting
loan applications, reviewing creditworthiness, and inspecting the property. One
department usually does its part of the task, and then hands the task to the next
department, like a relay race. We saw that business process reengineering means re-designing
business processes, usually by combining steps so that small multifunc-tion
process teams use information technology to do the jobs formerly done by a
sequence of departments. The basic approach is to:
1. Identify a business process to be redesigned (such as approving a mortgage
application).
2. Measure the performance of the existing processes.
3. Identify opportunities to improve these processes.
4. Redesign and implement a new way of doing the work, usually by assigning
ownership of formerly separate tasks to an individual or team that uses new
computerized systems to support the new arrangement.
We illustrate reengineering in the Window on Managing Now feature.
Reengineering the Loan Process
Here is how one bank reengineered its mortgage-approval
process.26 Previously, a mortgage applicant com-pleted
a paper loan application that a bank employee then
entered into the bank’s computer system. The application
then moved through six different departments, where
employees such as credit analysts and underwriters per-formed
their tasks.This was too time-consuming for the
bank to be competitive. Borrowers wanted quick an-swers.
Squeezing several steps out of a loan-approval
process may also save a bank $1,000 or more per loan.
The bank reengineered its mortgage-application process
so that it required fewer steps and reduced processing
time from seventeen days to two.We illustrate the change
in Figure 11.2.
As in this example, reengineering often entails having
a small team of specially trained employees work together
(either in the same physical cell or space, or connected via
information technology) to complete a task that the firm
formerly did sequentially. This bank reengineered the
mortgage-application process by replacing the sequential
operation with a cell or multifunction mortgage-approval
team. Loan originators in the field now enter the mortgage
application directly into wireless laptop computers, where
software checks it for completeness. The information then
goes electronically to regional production centers. Here,
specialists (like credit analysts and loan underwriters)
convene electronically, working as a team to review the
mortgage together—at once. After they formally close
the loan, another team of specialists takes on the task of
servicing the loan.
As at this bank, reengineering usually triggers many
organizational changes. For example, after creating several

loan-approval teams, the bank could eliminate the sepa-rate
credit-checking, loan-approval, and home-inspecting
departments from its organization chart. Reengineering
here also required reorganizing some departments and
delegating more authority to the loan-approval teams,
who now did their jobs with less supervisory oversight.
The employees also needed additional training to use the
new system. This all could have, but did not, trigger em-ployee
dealing with employees’ concerns before implementing
the change.
Bank President
BEFORE
Prior to reengineering, the paper loan
application went from department
to department like a relay race.
Field Loan
Originators
AFTER
Credit
Analysis
Property
Inspection
resistance.The bank headed that resistance off by
After reengineering, the field loan originators took the applications on their laptops, and then
electronically transmitted the loans to the loan-processing teams, which met electronically.
Loan
Closing
Billing and
Accounting
Loan-Approval
Communications
Multifunction
Loan-Processing
Property
Inspector
Loan-Approval
Communications
Teams
Credit
Analyst
Loan-Closing
Department
Billing and
Accounting
Department
F IGURE 11.2
Redesigning the Mortgage-Application Process
By reengineering the mortgage-application process, the bank will be able to handle increased
paperwork much more quickly.

Companies’ experiences with reengineering illustrate the importance of over-coming
employee resistance. Reengineering failure rates run as high as 70 per-cent.
27 When reengineering does fail, it is often due to behavioral factors. For
example, it would do the bank little good to reengineer its loan process if the field
loan originators refuse to take the time to complete the online applications com-pletely.
Similarly, reengineering without considering the new loan-approval
teams’ skill requirements, training, and reporting relationships would have been
futile. John Champy, a reengineering expert, says that reengineering is not just
about changing processes, but also “. . . a matter of rearranging the quality of peo-ple’s
attachments—to their work and to each other.”28 The manager must prepare
employees for the change, to reduce resistance and also to make sure they have
the knowledge, skills, and attitudes they need to do their new jobs.
● Managing Now Reengineering also illustrates how managers use informa-tion
technology (laptops, fax, cell phones, PDAs, software, the Web, and so on) to
change management processes. In this case, information technology (IT) makes
the bank’s new loan-approval process possible. Laptops and special software en-able
the loan originators in the field to create a complete loan application. The
bank’s Web portal enables them to send it to the internal loan-processing team.
Decision support software and the Web enable even geographically dispersed
loan-processing team members to work together virtually to process the loan. And
the bank’s enterprise systems automatically provide other bank units such as
billing, accounting, and top management with the loan-related information they
need to do their jobs.
Business Process Management
Business process management (BPM) is the automation, coordination, and
continuous improvement of the many assets and tasks that make up a company’s
existing business processes.29 The assets include, for instance, the employees who
make the process work, as well as information technology and physical assets
such as trucks and computer equipment.
Business process reengineering and BPM both involve changing business
processes. However, business process reengineering projects tend to be one-time
efforts that aim to produce dramatic reorganizations of the handful of major
business processes that management believes are keeping the company from be-coming
world-class.30 Business process management is an ongoing process
aimed at making incremental improvements in existing processes, continuously,
over time.31
● BPM in Practice In practice, managers use special business process man-agement
software to analyze, adapt, and continuously manage and improve their
business processes.32 These software suites help the company improve the effi-ciency
and timeliness of its business processes. For example, TIBCO Company’s
TIBCO Staffware Process Suite includes several software packages that help man-agers
continuously manage and improve their business processes. The Integrated
Modeling package enables managers to create a flowchart of the business process
in question, as it is now and as it might be (see Figure 11.3). The Analysis package
enables the manager to measure and analyze the efficiency of the business
process. For example, the manager might use it to formulate key performance in-dicators
(such as “hours required to fulfill an order” and then to continuously
business process
management (BPM): the
automation, coordination, and
continuous improvement of the
many assets and tasks t

Managing now

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