MGMT4 4th Edition by Chuck Williams

WILLIAMS McWILLIAMS LAWRENCE WAHEDUZZAMAN

MG 4 MT 4TH ASIA–PACIFIC EDITION

MGMT4 4th Edition Chuck Williams Alan McWilliams Rob Lawrence Wahed Waheduzzaman

Head of content management: Dorothy Chiu Content manager: Rachael Pictor Content developer: Raphael Solarsh/Vicki Stegink Project editor: Sutha Surenddar Editor: Julie Wicks Proofreader: Melissa Faulkner Permissions/Photo researcher: Helen Mammides Text designer: Watershed Art (Leigh Ashforth) Project designer: Linda Davidson Cover designer: Linda Davidson (Original design by Ruth O’Connor) Cover: Icon made by smashicons from www.flaticon.com Cenveo Publisher Services Any URLs contained in this publication were checked for currency during the production process. Note, however, that the publisher cannot vouch for the ongoing currency of URLs.

Acknowledgements Authorised adaptation of MGMT, 11th edition by Chuck Williams published by Cengage Learning US, 2020 [9781337407465] Part opener images Part ONE: Shutterstock.com/Mallari Part TWO: Shutterstock.com/Allies Interactive Part THREE: Shutterstock.com/Artos Part FOUR: Shutterstock.com/Ilyafs Part FIVE: Shutterstock.com/TarikVision

© 2020 Cengage Learning Australia Pty Limited Copyright Notice This Work is copyright. No part of this Work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without prior written permission of the Publisher. Except as permitted under the Copyright Act 1968, for example any fair dealing for the purposes of private study, research, criticism or review, subject to certain limitations. These limitations include: Restricting the copying to a maximum of one chapter or 10% of this book, whichever is greater; providing an appropriate notice and warning with the copies of the Work disseminated; taking all reasonable steps to limit access to these copies to people authorised to receive these copies; ensuring you hold the appropriate Licences issued by the Copyright Agency Limited (“CAL”), supply a remuneration notice to CAL and pay any required fees. For details of CAL licences and remuneration notices please contact CAL at Level 11, 66 Goulburn Street, Sydney NSW 2000, Tel: (02) 9394 7600, Fax: (02) 9394 7601 Email: [emailprotected] Website: www.copyright.com.au For product information and technology assistance, in Australia call 1300 790 853; in New Zealand call 0800 449 725 For permission to use material from this text or product, please email [emailprotected] National Library of Australia Cataloguing-in-Publication Data Creator: Williams, Chuck, author. Title: MGMT4 / Chuck Williams, Alan McWilliams, Rob Lawrence, Wahed Waheduzzaman (author). Edition: 4th Asia-Pacific Edition ISBN: 9780170427371 (paperback) Notes: Includes index. Other Creators/Contributors: Alan McWilliams, Rob Lawrence, Wahed Waheduzzaman (author).

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PART ONE INTRODUCION TO MANAGEMENT

1 Management

BRIEF CONTENTS

2 History of management

3 Organisational environments and cultures

4 Ethics and social responsibility

PART TWO PLANNING

5 Planning and decision making

6 Organisational strategy

7 Innovation and change

111

8 Global management

128

PART THREE ORGANISING

9 Designing adaptive organisations

150 151

10 Managing teams

171

11 Managing people: human resource management

187

PART FOUR LEADING

221

12 Motivation

222

13 Leadership

240

14 Managing communication

258

PART FIVE CONTROLLING

277

15 Control

278

16 Managing information

294

17 Managing service and manufacturing operations

311

Endnotes

329

Index

352

Tear-out review cards

iii

CONTENTS

PART ONE: INTRODUCION TO MANAGEMENT

1 Management

Management is …

Management functions

Planning Organising Leading Controlling

4 4 5 5

Kinds of managers

Top managers Middle managers First-line managers Team leaders

6 7 7 8

Managerial roles Interpersonal roles Informational roles Decisional roles

9 9 10 11

What companies look for in managers

Mistakes managers make

The transition to management: the first year

Competitive advantage through people

2 History of management The origins of management Management ideas and practice throughout history Why we need managers today

Scientific management Father of scientific management: Frederick W. Taylor Motion studies: Frank and Lillian Gilbreth Charts: Henry Gantt

Bureaucratic and administrative management Bureaucratic management: Max Weber Administrative management: Henri Fayol

Human relations management

19 19 20 20

22 22 24 24

25 26 27

Constructive conflict: Mary Parker Follett 27 Hawthorne Studies: Elton Mayo 29 Cooperation and acceptance of authority: Chester Barnard 31

Operations, information, systems and contingency management Operations management Information management Systems management Contingency management

1 31 31 32 33 33

3 Organisational environments and cultures 35 Changing environments Environmental change Environmental complexity Resource scarcity Environmental uncertainty

General environment Economy Technological component Sociocultural component Political/legal component

Specific environment Customer component Competitor component Supplier component Industry regulation component Advocacy groups

Making sense of changing environments Environmental scanning Interpreting environmental factors Acting on threats and opportunities

Organisational cultures: creation, success and change Creation and maintenance of organisational cultures Successful organisational cultures Changing organisational cultures

4 Ethics and social responsibility

36 36 37 38 38

38 39 40 40 40

41 41 42 43 44 44

46 46 47 47

49 49 50 51

Workplace deviance

Regulators and regulations

Who, what and why? Determining the punishment

57 57

Influences on ethical decision making

Ethical intensity of the decision Moral development Principles of ethical decision making

59 60 61

Practical steps to ethical decision making Selecting and hiring ethical employees Codes of ethics

63 63 63

Ethics training Ethical climate

To whom are organisations socially responsible?

For what are organisations socially responsible?

Responses to demands for social responsibility

Social responsibility and economic performance

PART TWO: PLANNING

5 Planning and decision making Benefits and pitfalls of planning Benefits of planning Planning pitfalls

How to make a plan that works Setting goals Developing commitment to goals Developing effective action plans Tracking progress Maintaining flexibility

Planning from top to bottom Starting at the top Bending in the middle Finishing at the bottom

Steps and limits to rational decision making Define the problem Identify decision criteria Weight the criteria Generate alternative courses of action Evaluate each alternative Compute the optimal decision Limits to rational decision making

Using groups to improve decision making Advantages and pitfalls of group decision making Structured conflict Nominal group technique Delphi technique Electronic brainstorming

6 Organisational strategy

74 75 76 76 76

77 77 78 79 79 80

80 81 82 82

84 84 85 85 86 86 87 87

88 88 89 90 90 91

What is strategy?

Sustainable competitive advantage

Strategy-making process

Assessing the need for strategic change Situational analysis Choosing strategic alternatives

Corporate-level strategies Portfolio strategy Grand strategy

64 65

97 97 99

101

Firm-level strategies Direct competition Strategic moves of direct competition

7 Innovation and change

108 108 109

111

The difference between change and innovation

112

Why innovation matters

112

Technology cycles Innovation streams

Managing innovation Managing sources of innovation Experiential approach: managing innovation during discontinuous change Compression approach: managing innovation during incremental change

112 114

116 116 118 119

Organisational decline: the risk of not changing

120

Managing change

121

Managing resistance to change What not to do when leading change Change tools and techniques

8 Global management

122 123 125

128

Global business, trade rules and trade agreements

129

The impact of global business Trade agreements Consumers, trade barriers and trade agreements

129 132 135

Consistency or adaptation?

136

Forms of global business

137

Exporting Cooperative contracts Strategic alliances Wholly owned affiliates (build or buy) Global new ventures

Finding the best business climate Growing markets Choosing an office or manufacturing location Minimising political risk

137 138 139 140 140

140 141 142 142

101 104

Becoming aware of cultural differences

144

Industry-level strategies

105

Preparing for an international assignment

147

Positioning strategies Adaptive strategies Five industry forces

105 106 107

Language and cross-cultural training Spouse, family and dual-career issues

147 148

Contents

PART THREE: ORGANISING

9 Designing adaptive organisations Departmentalisation Functional departmentalisation Product departmentalisation Customer departmentalisation Geographic departmentalisation Matrix departmentalisation

Organisational authority Chain of command Line versus staff authority Delegation of authority Degree of centralisation

Job design

150 151 153 153 154 155 156 157

159 159 159 159 160

161

Job specialisation Job rotation, enlargement and enrichment Job characteristics model

Intra-organisational processes Reengineering Empowerment

Inter-organisational processes Modular organisations Virtual organisations

10 Managing teams The good and bad of using teams The advantages of teams The disadvantages of teams When to use teams

Kinds of teams

161 162 162

165 165 167

167 168 169

171 172 172 173 174

175

Autonomy – the key dimension Special kinds of teams

Work team characteristics Team norms Team cohesiveness Team size Team conflict Stages of team development

175 176

178 178 179 179 180 181

Enhancing work team effectiveness

182

Setting team goals and priorities Selecting people for teamwork Team training Team compensation and recognition

182 183 185 186

11 Managing people: human resource management Employment legislation Employment laws Employment discrimination

Recruiting Job analysis and recruiting Internal recruiting External recruiting

Selection Application forms and résumés References and background checks Selection tests Interviews

Training Determining training needs Training methods Evaluating training

Performance appraisal Accurately measuring job performance Sharing performance feedback

Compensation and remuneration Compensation decisions Terminating employees Downsizing Retirement Employee turnover

Anti-discrimination legislation and diversity Age discrimination Disability discrimination Racial discrimination Sex discrimination Sexual orientation discrimination Workplace bullying Diversity makes good business sense

Basics of motivation Effort and performance Need satisfaction Extrinsic and intrinsic rewards Motivating with the basics

Equity theory

Contents

188 189

189 189 191 191

192 193 193 194 196

198 198 199 200

200 201 202

204 204 206 207 207 208

209 209 209 211 211 214 214 215

216

Deep-level diversity

216

Managing diversity

217

Diversity paradigms Diversity principles

218 219

221 222 223 223 223 225 226

227

Components of equity theory How people react to perceived inequity Motivating with equity theory

188

Surface-level diversity

PART FOUR: LEADING

12 Motivation

187

228 229 230

Expectancy theory Components of expectancy theory Motivating with expectancy theory

Reinforcement theory Components of reinforcement theory Schedules for delivering reinforcement Motivating with reinforcement theory

Goal-setting theory

231 231 233

233 235 235 236

237

Components of goal-setting theory Motivating with goal-setting theory

237 238

Motivating with the integrated model

238

13 Leadership Leaders versus managers Who leaders are and what leaders do Leadership traits Leadership behaviour

Putting leaders in the right situation: Fiedler’s contingency theory Leadership style: least-preferred co-worker Situational favourableness Matching leadership styles to situations

Adapting leader behaviour: path–goal theory Leadership styles Subordinate and environmental contingencies Outcomes

240 241 242 242 243

246 246 247 247

248 249 250 250

Adapting leader behaviour: normative decision theory 251 Decision styles Decision quality and acceptance Problem: change to casual wear?

Visionary leadership Charismatic leadership Transformational leadership

251 252 252

254

14 Managing communication Perception and communication problems Basic perception process Perception problems Perceptions of others Self-perception

Kinds of communication

The control process Standards Comparison to standards Corrective action Dynamic, cybernetic process Feedback, concurrent and feed-forward control Control isn’t always worthwhile or possible

Control methods Bureaucratic control Objective control Normative control Concertive control Self-control

What to control The balanced scorecard The financial perspective: controlling budgets, cash flows and economic value added The customer perspective: controlling customer defections The internal perspective: controlling quality The innovation and learning perspective: controlling waste and pollution

259 259 260 260 262

262

The communication process Formal communication channels Informal communication channels Coaching and counselling: one-on-one communication Non-verbal communication

262 264 265

Managing one-on-one communication

268

266 267

Choosing the right communication medium Listening Giving feedback

268 269 271

Managing organisation-wide communication

272

Improving transmission: getting the message out Improving reception: hearing what others feel and think

272 272

254 256

PART FIVE: CONTROLLING

15 Control

258

277 278 279 279 280 280 281 281 281

283 283 283 284 285 285

286 286 287 289 290

16 Managing information Strategic importance of information First-mover advantage Sustaining a competitive advantage

Characteristics and costs of useful information Accurate information Complete information Relevant information Timely information Acquisition costs Processing costs Storage costs Retrieval costs Communication costs

Capturing, processing and protecting information Capturing information Processing information Protecting information

Accessing and sharing information and knowledge Internal access and sharing External access and sharing Sharing knowledge and expertise

294 296 296 296

297 297 298 298 298 298 298 298 299 299

300 300 301 303

307 307 308 309

292

Contents

vii

17 Managing service and manufacturing operations

Productivity

Quality

312 313

314

Quality-related characteristics for products and services ISO 9000 and 14000 Baldrige National Quality Award and the Australian Business Excellence Framework Total quality management

Contents

311 311

Why productivity matters Kinds of productivity

viii

Service operations

315 316 317 317

The service-profit chain Service recovery and empowerment

Manufacturing operations Amount of processing in manufacturing operations Flexibility of manufacturing operations

Inventory Types of inventory Measuring inventory Costs of maintaining an inventory Managing inventory Endnotes Index Tear-Out Cards

319 319 320

320 320 321

322 323 323 325 326 329 352

Guide to the text As you read this text you will find features in every chapter to enhance your study of Management and help you understand how the theory is applied in the real world. PART OPENING FEATURES The Part openers outline the chapters contained in each part for easy reference.

CHAPTER OPENING FEATURES Identify the key concepts that the chapter will cover with the Learning outcomes at the start of each chapter. The Learning outcome icons throughout the chapters indicate where this content is covered.

Management

PART

ONE

INTRODUCTION TO MANAGEMENT

LEARNING OUTCOMES

1 Describe what management is. 1

Management

2 Explain the four functions of management.

History of management

Organisational environments and cultures

5 Explain what companies look for in

Ethics and social responsibility

6 Discuss the top mistakes that managers

WHAT IS MANAGEMENT?

3 Describe the different kinds of managers. 4 Explain the major roles and sub-roles that managers perform in their jobs. managers. make in their jobs.

7 Describe the transition that employees go through when they are promoted to management positions.

8 Explain how and why companies can create

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competitive advantage through people.

Management issues are fundamental to any organisation: how do we plan to get things done, organise the company to be efficient and effective, lead and motivate employees and put in place controls to make sure our plans are followed and our goals are met? Good management is basic to starting a business, growing a business and maintaining a business once it has achieved some measure of success. Determining what constitutes good management for individual businesses is not always straightforward. Companies in Australia pay management consultants nearly $6.5 billion1 a year for advice on basic management issues, such as how to lead people effectively, organise the company efficiently and manage large-scale projects and processes.2 This textbook will help you understand some of the basic issues that management consultants help companies resolve (and it won’t cost you billions ofdollars). PPLY E A After reading the Get started with the media quiz: Camp Bow Wow: Innovative next two sections, Management for a Changing World you should be able

FEATURES WITHIN CHAPTERS MGMT in Practice boxes present practical applications of key management concepts and tips. MGMT IN PRACTICE

FACTORS THAT ENCOURAGE PEOPLE TO WITHHOLD EFFORT IN TEAMS •

•

The presence of someone with expertise: team members will withhold effort when another team member is highly qualified to make a decision or comment on an issue. The presentation of a compelling argument: team members will withhold effort if the arguments for a course of action are very persuasive or similar to their own thinking. A lack of confidence in one’s ability to contribute: team members will withhold effort if they are unsure about their ability to contribute to discussions, activities or decisions. This is especially so for high-profile decisions. An unimportant or meaningless decision: team members will withhold effort by mentally withdrawing or adopting a ‘who cares’ attitude if decisions don’t affect them or their units, or if they don’t see a connection between their efforts and their team’s successes or failures. A dysfunctional decision-making climate: team members will withhold effort if other team members are frustrated or indifferent, or if a team is floundering or disorganised.20

Smart MGMT boxes showcase examples of innovative management. SMART MGMT

MISSIONS AND VISIONS – FROM THE RIDICULOUS TO THE SUBLIME Alcoa’s vision, ‘to be the best company in the world’, is as succinct as the Australian National University’s (ANU) vision is detailed. ANU aims to be recognised worldwide for excellence. ANU’s vision statement is: Contemporary ANU will sit among the great universities of the world, and be defined by a culture of excellence in everything that we do. We will be renowned for the excellence of our research, which will be international in scope and quality, always measured against the best in the world. Our research investment will be strategic, taking a long-term view and focus on high-quality activities, high-impact infrastructure and areas of high national importance. We will be renowned for the excellence of our undergraduate and graduate education: excellence in student cohort, excellence in teaching, excellence in student experience and excellence in outcomes. We will be renowned for the quality of the contribution our research and education make to societal transformation. We will identify emerging areas of need for the nation and provide research and education that will equip Australia to cope with challenges not yet imagined.

Guide to the text

FEATURES WITHIN CHAPTERS

MGMT FACT

WORKPLACE AND COMMUNITY

MGMT TREND

CASH MANAGEMENT

WANT FRIES WITH THAT?

TAYLOR’S REST BREAK NOW INCLUDES NAPPING

Don’t think scientific management has much to do with today’s work life? Think again about the last time you were in a shop and the salesperson said, ‘Have a nice day’. Service providers – particularly at restaurants – use scripts to ensure that employees are following the ‘one best way’ of interacting with customers. McDonald’s uses a speech-only script (employees must say, ‘May I help you?’ instead of ‘Can I help someone?’). At one popular chain of restaurants, employees must greet the table within 30 seconds of arrival, take the drink order within three minutes, suggest five items while taking the order and check back with the table three minutes after the food arrives.12 iStock.com

While rest breaks traditionally involve sitting or taking a brief walk, some employers now see a rest break as an opportunity for a quick snooze. Lampooned in movies, television and even the business press, napping at work is nonetheless a proven way to increase focus, memory and alertness on the job. A recent study from the University of Michigan found that a one-hour nap during the workday produced all those benefits—and more. As numerous as the benefits of napping are said to be, the challenges of napping at work are even more so. Not only is it difficult to break pace during the workday long enough to actually fall asleep, but finding a place to sleep can be challenging as well. Only 6 per cent of companies have dedicated spaces for napping, and many employees work in loud, crowded spaces with stiff, uncomfortable chairs. Sleep experts do have some advice for people working at companies that embrace workday naps. First, when deciding what time to close your eyes, figure out the midpoint of your previous night’s rest and add 12 hours. (For example, if you slept from 11 p.m. to 7 a.m., then your ideal nap time the next day is 3 p.m.) Once you know when to nap, sleep either for 20 or 90 minutes—ideal times for a re-energizing nap. Anything in between or beyond those two durations will leave the napper feeling groggy and ineffective,

MGMT Fact boxes present interesting facts about contemporary and historical management.

Workplace and Community boxes present a behind the scenes look at real world management practices and their outcomes.

MGMT Trend boxes reveal the current and future directions of management.

REVIEW FEATURES Review your understanding of the key chapter topics with the Concept summary at the end of each Part.

Chapter tear-out cards found at the back of the book provide a portable study tool, summarising each chapter for class preparation and revision.

REVIEW KEY TERMS

PART 1, CHAPTERS 1– 4

Management

What can you take from your progress through this part of MGMT4 1

Getting work done through others.

Management

Efficiency

☑ You have developed your understanding of the four functions of management

Getting work done with a minimum of effort, expense or waste.

and covered the different kinds of managers – including the major roles and sub-roles that managers perform in their jobs. describe the transition that employees go through when they are promoted to management positions.

make mistakes, and you can now identify and discuss the top mistakes that managers make in their jobs.

Listen to an audio summary of each chapter in the End of Part summary

☑ You understand that companies can create competitive advantage through people. ☑ You have learned that sometimes managers HAPTER 1

OVERALL AIM OF PART1

Planning

Monitor role

Determining organisational goals and a means for achieving them.

Organising

Leading

To introduce management, its history and its applications in contemporary workplaces

☑ You have developed your understanding of the history of management and you

Inspiring and motivating workers to work hard to achieve organisational goals.

have covered conceptual, theoretical and analytical aspects of management.

☑ You are able to discuss the origins of management, comparing them with the

Controlling

ideas and practices of managers today.

☑ You understand the history of scientific management, bureaucratic and administrative management, and you have learnt about the contributions to management theory and practice by key thinkers in the field. PTER relations management and can apply the lessons learnt from 3

Listen to an audio summary of each chapter in the End of Part summary

☑ You have covered the history of human

Executives responsible for the overall direction of the organisation.

Middle managers Managers responsible for setting objectives consistent with top management’s goals and for planning and implementing subunit strategies for achieving these objectives.

Organisational environments and cultures

☑ You have learnt how changing environments affect organisations. You can explain and provide examples of the four components of the general environment and explain the five components of the specific environment.

First-line managers

☑ You will be able to articulate and adopt certain processes that companies Listen to an audio summary of each chapter in the End of Part summary

HAPTER 23

use to make sense of their changing environments, and expand upon how organisational cultures are created and how they can help companies be successful.

Monitoring progress towards goal achievement and taking corrective action when needed.

Top managers 2

Liaison role The interpersonal role managers play when they deal with people outside their units.

Deciding where decisions will be made, who will do what jobs and tasks and who will work for whom.

History of management

The interpersonal role managers play when they motivate and encourage workers to accomplish organisational objectives.

Accomplishing tasks that help fulfil organisational objectives.

Effectiveness

☑ You can articulate what companies look for in managers and you will be able to

Managers who train and supervise the performance of non-managerial employees who are directly responsible for producing the company’s

LEARNING OUTCOMES

Leader role

The informational role managers play when they scan their environment for information.

Disseminator role The informational role managers play when they share information with others in their departments or companies.

Spokesperson role The informational role managers play when they share information with people outside their departments or companies.

Entrepreneur role The decisional role managers play when they adapt themselves, their subordinates and their units to change.

Disturbance handler role The decisional role managers play when they respond to severe problems that demand immediate action.

LO1

Management is …

Good management is working through others to accomplish tasks that help fulfil organisational objectives as efficiently as possible. LO2

Management functions

Henri Fayol’s classic management functions are known today as planning, organising, leading and controlling. Planning is determining organisational goals and a means for achieving them. Organising is deciding where decisions will be made, who will do what jobs and tasks and who will work for whom. Leading is inspiring and motivating employees to work hard to achieve organisational goals. Controlling is monitoring progress toward goal achievement and taking corrective action when needed. Studies show that performing management functions well leads to better managerial performance. LO3

Kinds of managers

There are four different kinds of managers. Top managers are responsible for creating a context for change, developing attitudes of commitment and ownership, creating a positive organisational culture through words and actions and monitoring their company’s business environments. Middle managers are responsible for planning and allocating resources, coordinating and linking groups and departments, monitoring and managing the performance of subunits and implementing the changes or strategies generated by top managers. First-line managers are responsible for managing the performance of non-managerial employees, teaching their workers how to do their jobs and making detailed schedules and operating plans based on middle management’s intermediate-range plans. Team leaders are responsible for facilitating team performance, managing external relationships and facilitating internal team relationships.

Resource allocator role The decisional role managers play when they decide who gets what resources.

Negotiator role The decisional role managers play when they negotiate schedules, projects, goals, outcomes, resources and employee raises.

LO4

Managerial roles

ICONS

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Guide to the online resources FOR THE INSTRUCTOR Cengage is pleased to provide you with resources that will help you prepare your lectures and assessments. These teaching tools are accessible via cengage.com.au/instructors for Australia or cengage.co.nz/instructors for New Zealand. MINDTAP Premium online teaching and learning tools are available on the MindTap platform – the personalised eLearning solution.

MindTap is a flexible and easy-to-use platform that helps build student confidence and gives you a clear picture of their progress. We partner with you to ease the transition to digital – we’re with you every step of the way. The Cengage Mobile App puts your course directly into students’ hands with course materials available on their smartphone or tablet. Students can read on the go, complete practice quizzes or participate in interactive real-time activities.

MindTap for MGMT4 is full of innovative resources to support critical thinking, and help your students move from memorisation to mastery! Includes: •

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TEST BANK (COGNERO & WORD)

POWERPOINT™ PRESENTATIONS

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Use the chapter-by-chapter PowerPoint slides to enhance your lecture presentations and handouts by reinforcing the key principles of your subject.

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xii

PART

ONE 1

Management

History of management

Organisational environments and cultures

Ethics and social responsibility

INTRODUCTION TO MANAGEMENT

Management

LEARNING OUTCOMES

WHAT IS MANAGEMENT?

1 Describe what management is. 2 Explain the four functions of management. 3 Describe the different kinds of managers. 4 Explain the major roles and sub-roles that managers perform in their jobs.

5 Explain what companies look for in managers.

6 Discuss the top mistakes that managers make in their jobs.

7 Describe the transition that employees go through when they are promoted to management positions.

8 Explain how and why companies can create

ENGAG

EO VID

Throughout this PPLY E A chapter the MindTap icon indicates an opportunity to go online and access videos, audio, quizzes and more. The highlighted text above the icon identifies the chapter folder in which you can find it.

LO1

MANAGEMENT IS …

Many of today’s managers got their start working on the factory floor, clearing dishes from tables, helping customers choose the right dress to buy or working in a supermarket. Similarly, lots of you will start at the bottom and work your way up. There’s no better way to get to

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competitive advantage through people.

Shutterstock.com/Stuart Taylor

know your competition, your customers and your business. However, whether you begin your career at the entry level or as a supervisor, your job is not to do the work, but to help others do theirs. management Management is getting work done getting work done through others. Vineet Nayar, Founder of through others Sampark Foundation and former CEO of IT services company HCL Technologies, doesn’t see himself as the guy who has to do everything or have all the answers. Instead, he sees himself as ‘the guy who is obsessed with enabling employees to create value’. Rather than coming up with solutions himself, Nayar creates: opportunities for collaboration, peer review and employees to give feedback on ideas and work processes. Says Nayar, ‘My job is to make sure everybody is enabled to do what they do well’.3 Nayar’s description of managerial responsibilities suggests that managers also have to be concerned with efficiency and effectiveness in the work process. Efficiency is getting work done with a minimum of effort, expense or waste. For example, Australia Post has reduced freight costs and increased efficiency efficiency by developing a partnership with getting work done with a minimum of effort, the China Post and Sai Cheng Logistics. expense or waste This partnership has created an efficient supply chain between Australia and China, allowing for direct contact between suppliers in China and consumers in Australia, subsequently reducing freight and middle-man costs.4

By managing effective partnerships, Australia Post increases its business’ efficiency

By itself, efficiency is not enough to ensure success. Managers must also strive for effectiveness, which is accomplishing tasks that help fulfil organisational objectives, such as customer service effectiveness and satisfaction. The renowned writer accomplishing tasks that help on management, Peter Drucker, puts fulfil organisational objectives it like this: ‘efficiency is doing things right, effectiveness is doing the right things’.5

LO2

MANAGEMENT FUNCTIONS

Henri Fayol, who was a managing director (CEO) of a large steel company in the early 1900s, was one of the founders of the field of management. You’ll learn more about Fayol and management’s other key contributors when you read about the history of management in Chapter 2. Based on his 20 years of experience as a CEO, Fayol argued that ‘the success of an enterprise generally depends much more on the administrative ability of its leaders than on their technical ability’.6 A century later, Fayol’s arguments still hold true. During a two-year study code-named Project Oxygen, Google analysed performance reviews and feedback surveys to identify the traits of its best managers. According to Laszlo Bock, Google’s vice president for people operations, ‘We’d always believed that to be a manager, particularly on the engineering side, you need to be as deep or deeper a technical expert than the people who work for you. It turns out that that’s absolutely the least important thing.’7 What was most important? ‘Be a good coach.’ ‘Empower; Don’t micromanage.’ ‘Be product and results-oriented.’ ‘Be a good communicator and listen to your team.’ ‘Be interested in [your] direct reports’ success and wellbeing.’8 In short, Google found what Fayol observed: administrative ability, or management, is key to an organisation’s success. According to Fayol, to be successful managers need to perform five managerial functions: planning, organising, coordinating, commanding and controlling. 9 Today, though, most management textbooks have dropped the coordinating function and refer to Fayol’s commanding function as ‘leading’. Consequently, Fayol’s management functions are known today as planning, organising, leading and controlling (see Figure 1.1). Studies indicate that managers who perform these management functions well are more successful. For example, the more time that CEOs spend planning, the more profitable their companies are.10 Over a 25-year period, a large US telecommunications company, AT&T, found that

CHAPTER 1 Management

why this book is organised around the four functions of management.) Now let’s take a closer look at each of these management functions in more detail.

Planning

Organising

PLANNING Planning is determining organisational

The four functions of management

FIGURE 1.1

Controlling

The four functions of management

employees with better planning and decision-making skills were more likely to be promoted into management jobs, to be successful as managers and to be promoted into upper levels of management.11 The evidence is clear. Managers serve their companies well by planning, organising, leading and controlling. (That’s

SMART MGMT

HAMBURGER U As McDonald’s looks to grow in the booming market of China, the company knows that a key to its success there is the quality of its managers. That’s why it recently opened up a training centre, Hamburger University, in Shanghai, with the goal of recruiting and retaining top employees. With an investment of about $23 million, McDonald’s created a centre where it could train about 1000 people per year for junior and senior management positions. The centre also helps franchise owners learn how to operate their restaurants effectively and efficiently. With an acceptance rate of only 1 per cent of applicants, it is not easy to get in; McDonald’s Shanghai course sets a higher standard than Harvard (which has a 7 per cent acceptance rate).12 And all of this investment is intended to serve as a foundation for the company’s plans to expand aggressively in China by opening 1000 more stores. Hamburger University is great for employees, too, since it gives them an opportunity to move up in the McDonald’s hierarchy. An entry-level employee can rise to store manager, and with training from Hamburger University, rise to middle and senior management in the organisation, making McDonald’s an ideal place for people looking for steady career paths.13

planning determining organisational goals and a means for achieving them

goals and a means for achieving them. As you’ll learn in Chapter 5, planning is one of the best ways to improve performance. It encourages people to work harder, to work hard for extended periods, to engage in behaviour directly related to goal accomplishment and to think of better ways to do their jobs. More importantly, companies that plan have larger profits and faster growth than companies that don’t plan. For example, the question, ‘What business are we in?’ is at the heart of strategic planning, which you’ll learn about in Chapter 6. If you can answer the question, ‘What business are you in?’ in two sentences or less, chances are you have a very clear plan for your business. But getting a clear plan is not so easy. Sometimes even very successful companies stray from their core business. Cisco Systems, maker of the critical computer routers and switches that run the Internet and create high-speed networks in offices and homes, strayed from its core networking business by spending $34 billion acquiring or developing consumer products, such as Pure Digital, which made the once-popular Flip camera; Kiss Technology, which made networked DVD players; and Umi, a $600 videoconference service for homes that came with a $25 monthly charge for video access. Longtime CEO John Chambers has admitted that Cisco lost its focus and that going forward its priorities will be its core business: ‘leadership in core routing, switching, and services; collaboration; data centre virtualization and cloud; architectures; and video’.14 Accordingly, Cisco has now shut down its Flip, Kiss and Umi divisions. You’ll learn more about planning in Chapter 5 on planning and decision making, Chapter 6 on organisational strategy, Chapter 7 on innovation and change and Chapter 8 on global management.

ORGANISING Organising is deciding where decisions organising will be made, who will do what jobs and deciding where decisions will be made, who will do tasks and who will work for whom in the what jobs and tasks and company. In other words, organising is who will work for whom about determining how things get done. In the retail industry, that usually means matching staffing levels to customer traffic, increasing staffing when busy and then decreasing staffing when slow. Walmart recently implemented software to match the schedules of its

2.2 million associates with the flows of its 260 million weekly customers. While this dynamic, just-in-time approach sounds like a great idea, it resulted in highly fragmented schedules for thousands of store employees who could be sent home from work after just a few hours (due to unexpectedly slow customer traffic) or called back unexpectedly (when customer traffic increased). These unpredictable work schedules, which effectively put many associates perpetually on call, produced backlash from employees, advocacy groups and unions alike. In response, Walmart reconfigured its schedules using three types of shifts: open, fixed and flex. Managers schedule open shift employees during times that they previously indicated that they would be available for. Fixed shifts, which are offered first to long-time employees, guarantee the same weekly hours for up to a year. Finally, flex shifts let employees build their own schedules in two- to three-week blocks. Walmart is also developing an app that will allow employees to view, update and set their schedules using a smartphone. Walmart managers have high hopes for the new shift structures, which reduced absenteeism by 11 per cent and employee turnover by 14 per cent during a two-year test.15 You’ll learn more about organising in Chapter 9 on designing adaptive organisations, Chapter 10 on managing teams and Chapter 11 on human resource management.

CONTROLLING The last function of management, controlling, is monitoring progress towards goal achievement and taking corrective action when progress isn’t controlling being made. The basic control process monitoring progress involves setting standards to achieve towards goal achievement and takingcorrective goals, comparing actual performance action when needed to those standards and then making changes to return performance to the standards you set. To maintain low-priced airfares and cut costs, budget carrier Jetstar charges customers for what they call ‘extras’. Food and drink are optional extras that can be paid for online when booking or on board, along with entertainment and comfort packs containing pillows and blankets. For an additional fee, customers can also reserve a window or aisle seat, or a seat with extra legroom. A surcharge for checked-in luggage (starting at around $50 for a domestic flight in Australia) also controls expenditure.17 You’ll learn more about the control function in Chapter 15 on control, Chapter 16 on managing information and Chapter 17 on managing service and manufacturing operations.

LEADING Our third management function, leading, involves inspiring and motivating employees to work hard to achieve organisational goals. Gail Kelly, former CEO of leading Westpac, retired as leader of one of Australia’s inspiring and motivating employees to work hard largest banks in 2015. A former school teacher to achieve organisational and bank teller, Kelly has made it to the top of goals the management tree through hard work and good leadership. Reported to be a fierce and courageous head of her organisation, Gail Kelly is also an outspoken advocate for the role of women in business and society. After her career in banking with Westpac, Kelly has taken up an Adjunct Professorship in business with the University of New South Wales, is a director of Woolworths (South Africa), as well as Country Road Group and David Jones (Australia), has written a book on leadership and, as an Ambassador for Women’s Empowerment with CARE Australia, is a mentor for young business leaders. She is quoted as saying ‘My whole model is based around gathering the best people you can around you and creating an environment where people can do their best work’.16 Gail Kelly inspired people around her to work hard to achieve organisational goals by clearly outlining a vision for her bank, by being a role model and by setting an example of effective management. You’ll learn more about leading in Chapter 12 on motivation, Chapter 13 on leadership and Chapter 14 on managing communication.

WHAT DO MANAGERS DO?

Not all managerial jobs are the same. The demands and the requirements placed on the CEO of Facebook, for example, are significantly different from those placed on the manager of your local fast-food restaurant. After reading the next two sections, you should be able to: ● describe different kinds of managers ● explain the major roles and sub-roles that managers perform in their jobs.

LO3

KINDS OF MANAGERS

As shown in Table 1.1, there are four kinds of managers, each with different jobs and responsibilities: ● top managers ● middle managers ● first-line managers ● team leaders.

CHAPTER 1 Management

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TABLE 1.1

What the four kinds of managers do

Jobs

Top managers CEO CIO COO Vice-president CFO Corporate heads

Change Commitment Culture Environment

Middle managers General manager Plant manager Regional manager Divisional manager

Resources Objectives Coordination Subunit performance Strategy implementation

First-line managers Office manager Shift supervisor Department manager

Non-managerial worker supervision Teaching and training Scheduling Facilitation

Team leaders Team leader Team contact Group facilitator

Facilitation External relationships Internal relationships

TOP MANAGERS Top managers hold positions like chief executive officer (CEO), chief operations officer (COO), chief financial officer (CFO) and chief information top managers officer (CIO), and are responsible for the executives responsible for the overall direction of the overall direction of the organisation. Top organisation managers have the following responsibilities.18 First, they are responsible for creating a context for change. When Satya Nadella was appointed CEO of Microsoft, the company was perceived as a shortsighted, lumbering behemoth. Nadella reoriented the company with a series of acquisitions and innovations, including purchasing Mojang, maker of the Minecraft video game, and a 3D-hologram feature for controlling Windows. After following Microsoft for years, one analyst noted about Nadella’s new direction for the 6

Responsibilities

company, ‘Microsoft hasn’t really shown any sort of vision like this in a long, long time.’19 As one CEO said, ‘The CEO has to think about the future more than anyone.’20 Second, once that vision or mission is set, the next responsibility of top managers is to develop employees’ commitment to and ownership of the company’s performance. That is, top managers are responsible for getting employee commitment and agreement. Third, top managers are responsible for creating a positive organisational culture through language and action. Top managers have an impact on company values, strategies and lessons through what they do and say to others, both inside and outside the company. Above all, no matter what they communicate, it’s critical for CEOs to send and reinforce clear, consistent messages.21 When Mark Fields became Ford Motor Company’s CEO, the clear, consistent message from his predecessor,

Alan Mulally, was ‘One Ford’, which was meant to pull together a fractionalised company characterised by ‘infighting and fiefdom-building’.22 Said Mulally, ‘Our single most important strategy is to continue to integrate Ford around the world.’23 By contrast, Fields made clear that the message under his leadership is ‘Two Fords’: one Ford was ‘foundational’, but the company needed to ‘evolve’ to being an auto and mobility company. Fields explained that total revenue from ‘the traditional automotive industry is around $2.3 trillion today and growing’; Ford, he says, gets about 6 per cent of this. Fields notes that, ‘transportation products and services revenue is already around $5.4 trillion [per year]. We and the traditional auto industry get 0 per cent of this today. That’s why being an auto and a mobility company makes business sense [for Ford].’24 Finally, top managers are responsible for monitoring their business environments. This means that top managers must closely monitor customer needs, competitors’ moves, economic conditions and long-term business and social trends.

SMART MGMT

CULTURE IN THE GOOGLEPLEX In the increasingly fierce competition to hire and retain the best and brightest employees, companies are looking to their organisational culture to find an advantage. Research from consulting firm Deloitte shows that culture, engagement and employee retention are now the top talent challenges facing businesses today. A leader in building a high-performance culture that is attractive to work in is Google. Google actively encourages employees to put their ideas into action. The company advocates that everyone has access to senior decision makers, as can be seen from this online statement about Google culture: ‘We strive to maintain the open culture often associated with startups, in which everyone is a handson contributor and feels comfortable sharing ideas and opinions. In our weekly allhands (“TGIF”) meetings – not to mention over email or in the cafe – Googlers ask questions directly to Larry [Larry Page, CEO], Sergey [Sergey Brin, co-founder] and other execs about any number of company issues. Our offices and cafes are designed to encourage interactions between Googlers within and across teams, and to spark conversation about work as well as play’.28

Middle managers hold positions like factory manager, regional manager or divisional manager. They are responsible for setting objectives consistent middle managers with top management’s goals and for managers responsible planning and implementing subunit for setting objectives consistent with top strategies for achieving those objectives.25 management’s goals They are also responsible for monitoring and and for planning and implementing subunit managing the performance of the subunits strategies for achieving and individual managers who report to them. these objectives Another major responsibility of middle managers is to coordinate and link groups, departments and divisions within a company. Following the earthquake which devastated the New Zealand city of Christchurch in 2011, insurance companies were tasked with responding to a multitude of claims from local businesses. A recent study of the effectiveness of these insurers has shown that some insurance organisations managed their resources better than others when tasked with coordinating extensive inspection of damaged properties and the generation of accurate claim reports. While the earthquake is now in the past, reconstruction of the city is being slowed by ongoing seismic activity and there is still a lot to be done. It is anticipated that the task of full reconstruction may take another decade to complete.26 In addition to the seismic activity, the slowdown is in part attributed to bureaucratic ‘red tape’ and delays in processing insurance claims with some companies. The industry watchdog, InsuranceWatch, is tasked with monitoring all of New Zealand’s insurance agencies to ensure that their implementation teams meet required objectives.27

Alamy Stock Photo/SiliconValleyStock

MIDDLE MANAGERS

Finally, middle managers are also responsible for implementing changes or strategies implemented by top managers. When the Aldi supermarket chain entered the Australian market, they realised the opportunity to ‘simplify’ the task of grocery shopping compared to larger grocery chains. In order to lower their prices, they cut out expensive advertising and marketing departments, relying on middle managers to deal with suppliers and producers face-to-face.29

FIRST-LINE MANAGERS First-line managers, sometimes known as front-line managers, hold positions like office manager, shift supervisor or department manager. The primary responsibility of first-line

first-line managers managers who train and supervise the performance of non-managerial employees, who are directly responsible for producing the company’s products or services

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managers is to manage the performance of entry-level employees, who are directly responsible for producing a company’s goods and services. Therefore, first-line managers are the only managers who don’t supervise other managers. First-line managers encourage, monitor and reward the performance of their employees. They also make detailed schedules and operating plans based on middle management’s intermediate-range plans. In fact, in contrast to the long-term plans of top managers (three to five years out) and the intermediate plans of middle managers (six to 18 months out), first-line managers engage in plans and actions that typically produce results within two weeks.30 For example, a typical convenience store manager might start the day by driving past competitors’ stores to inspect their specials’ prices. Then they would check the outside of their own store for anything in need of maintenance, such as blown light globes or damaged signs, or that needs restocking, like windscreen washer fluid and paper towels. Then comes an inside check, where the manager determines what needs to be done for the day (Are there enough muffins and juices for breakfast or enough sandwiches for lunch?). Once the day is planned, the manager turns to weekend orders. After accounting for the weather (hot or cold) and the sales trends at the same time last year, the manager makes sure the store will have enough bread, milk, soft drinks and weekend newspapers on hand. Finally, the manager looks seven to 10 days ahead for staffing needs and preparing staff rosters.

the leader should be able to show the others how to think about the work that they’re doing in the context of their lives. It’s a tall order, but the best teams have such leaders’.31 Relationships among team members and between different teams are crucial to good team performance, and must be well managed by team leaders, who are responsible for fostering good relationships and addressing problematic ones within their teams. Getting along with others is much more important in team structures because team members can’t get work done without the help of teammates. Tim Clem emerged as a team leader at a software company that provides collaborative tools and online work spaces for people who code software. The company also uses team structures and team leaders to decide which software projects its 170 employees will work on. After only a few months at the company, Clem, who had not previously led a team, convinced his colleagues to work on a new product he had designed for Microsoft Windows.32 Without their approval, he would not have been able to implement the change or secure the resources to hire people to do the project. By contrast, a manager, and not the team, would have likely made this decision in a traditional management structure. Second, team leaders are responsible for managing external relationships. Team leaders act as the bridge or liaison between their teams and other teams, departments and divisions in a company. For example, if a member of Team A complains about the quality of Team B’s work, Team A’s leader needs to initiate a meeting with Team B’s leader. Together, these team leaders are responsible for getting members of both teams to work together to solve the problem. If it’s done right, the problem is solved without involving company management or blaming members of the other team.33

The fourth kind of manager is a team leader. This relatively new kind of management job developed as many companies have moved to self-managing team leaders teams, which, by definition, have no managers responsible for facilitating team formal super visor. In traditional activities toward goal management hierarchies, first-line accomplishment managers are responsible for the performance of non-managerial employees, making job assignments and controlling resources, and may even have the authority to hire and fire employees. Team leaders have a different set of responsibilities than traditional first-line managers. Team leaders are primarily responsible for facilitating team activities toward accomplishing a goal. This doesn’t mean team leaders are responsible for team performance. They aren’t. The team is. Team leaders help their team members plan and schedule work, learn to solve problems and work effectively with each other. Management consultant Franklin Jonath says, ‘The idea is for the team leader to be at the service of the group. It should be clear that the team members own the outcome. The leader is there to bring intellectual, emotional and spiritual resources to the team. Through his or her actions,

Alamy Stock Photo/Erik Isakson

TEAM LEADERS

Even first-line managers perform the four functions of management

Third, team leaders are responsible for internal team relationships. Getting along with others is much more important in team structures because team members can’t get work done without the help of their teammates. You will learn more about teams in Chapter 10.

LO4

EO VID

So far, we have described managerial work by focusing on the functions of management and by examining the four kinds of managerial jobs. Although those are valid and accurate ways of categorising managerial work, if you followed managers around as they performed their jobs, you probably would not use the terms

PPLY E A

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MANAGERIAL ROLES

Complete the Develop your career potential worksheet for Chapter 1

Interpersonal roles

• Figurehead • Leader • Liaison

FIGURE 1.2

planning, organising, leading and controlling to describe what

they do. In fact, that’s exactly the conclusion that management researcher Henry Mintzberg came to when he observed five American CEOs. Mintzberg spent a week ‘shadowing’ each of the CEOs and analysing their mail, their conversations and their actions. Mintzberg concluded that managers fulfil three major roles while performing their jobs:34 ● interpersonal roles ● informational roles ● decisional roles. In other words, managers talk to people, gather and give information and make decisions. Furthermore, as shown in Figure 1.2, these three major roles can be subdivided into 10 sub-roles; we will examine these in the following sections.

Informational roles

• Monitor • Disseminator • Spokesperson

Decisional roles

• • • •

Entrepreneur Disturbance handler Resource allocator Negotiator

Mintzberg’s managerial roles

Source: Adapted from “The Manager’s Job: Folklore and Fact,” by Mintzberg, H. Harvard Business Review, July–August 1975.

INTERPERSONAL ROLES More than anything else, management jobs are peopleintensive. Estimates vary with the level of management, but most managers spend between two-thirds and fourfifths of their time in face-to-face communication with others.35 If you’re a loner or if you consider dealing with people to be a pain, then you may not be cut out for management work. In fulfilling the interpersonal roles of management, managers perform three sub-roles: figurehead, leader and liaison. In the figurehead role, managers perform ceremonial duties like greeting company visitors, speaking at the opening of a new facility or representing the figurehead role the interpersonal role company at a community luncheon to managers play when they support local charities. In January 2018, the perform ceremonial duties charity supporting children with cancer, RedKite, celebrated five years of corporate partnership with Coles. RedKite CEO Monique Keighery marked the occasion by saying, ‘… this partnership has ensured support for families 120 000 times …’.36 Among

other events, children’s cancer charity RedKite holds an annual Corporate Quiz in state capitals across Australia to raise money, and Keighery, other board members of RedKite and their corporate sponsors attend these events to represent the charity and their respective organisations.37 When managers are in the leader role, they motivate and encourage employees to accomplish organisational objectives. The QANTAS name is well leader role known for its enviable safety record of the interpersonal role never having lost a jet. That kind of managers play when they motivate and encourage focus on safety comes from the top. employees to accomplish For CEO Alan Joyce, the QANTAS organisational objectives reputation for safety is at the core of the business. Joyce is quoted as saying that safety is ‘… top of mind in everything that we do from the management down to the engineers, pilots and cabin crew’. When Joyce holds management meetings, the first item of business is to go over every single safety issue that has arisen since the last meeting.38

CHAPTER 1 Management

And finally, in the liaison role, managers deal with people outside their units. Studies consistently indicate that managers spend as much time with ‘outsiders’ as they do with their own subordinates and their own bosses.39

look at that for an explanation. We share other information, too – every time we have a meeting, we release meeting notes to the organisation. When we have a board meeting, we write a letter about it afterward and send it to the organisation’.40 Qualtrics also uses an internal database where each quarter employees enter their plans for meeting the company’s objectives. Those plans are then made visible to everyone else at Qualtrics.41 In contrast to the disseminator role, in which managers distribute information to employees inside the company, in the spokesperson role, spokesperson role managers share information with people the informational role managers play when they outside their departments and companies. share information with people One of the most common ways CEOs outside their departments or companies serve as spokespeople for their companies is at annual meetings with company shareholders or the board of directors. The news is not always good, and managers have to sometimes ‘face the music’ and admit when their company has got it wrong. For example, as problems with bad behaviour in the Australian banking industry became known during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, senior managers were faced with the job of apologising and explaining to the public how these things could happen. Matt Comyn’s first public task as CEO of the Commonwealth Bank of Australia was to say ‘sorry’. In a letter written to 51 000 bank staff Matt Comyn wrote: ‘We have made mistakes. That starts with me and our senior executives. We have let some of our customers down when they have needed us most … in doing so we have let you down. We have been too slow to fix mistakes and we have failed to meet some important regulatory and compliance obligations. This is unacceptable.’42

liaison role the interpersonal role managers play when they deal with people outside their units

Not only do managers spend more of their time in face-toface contact with others, but they also spend much of it obtaining and sharing information. Indeed, Mintzberg found that the managers in his study spent 40 per cent of their time giving and getting information from others. In this regard, management can be viewed as processing information, gathering information by scanning the business environment and listening to others, and then sharing that information with the people inside and outside the company. Mintzberg described three informational subroles: monitor, disseminator and spokesperson. In the monitor role, managers scan their environment for information, actively contact others for information and, because of their personal contacts, monitor role the informational role receive a great deal of unsolicited managers play when they information. Besides receiving first-hand scan their environment for information, managers monitor their information environment by reading online news and business sites, local newspapers and the business pages of The Age, Sydney Morning Herald or the Financial Review to keep track of customers, competitors and technological changes that may affect their businesses. Now, managers can also take advantage of electronic monitoring and distribution services that track news services (Associated Press, Reuters and so forth) for stories related to their businesses. Because of their numerous personal contacts and their access to subordinates, managers are often hubs for the distribution of critical information. In the disseminator role disseminator role, managers share the informational information they have collected with their role managers play subordinates and others in the company. when they share information with others Although there will never be a complete in their departments or substitute for face-to-face dissemination companies of information, the primary methods of communication in large companies are email and voicemail. At Qualtrics, a software company that provides sophisticated online survey research tools, CEO Ryan Smith makes sure that everyone in the company is clear on company goals and plans. Every Monday, employees are asked via email to respond to two questions: ‘What are you going to get done this week?’ and ‘What did you get done last week that you said you were going to do?’ Smith says: ‘Then that rolls up into one email that the entire organisation gets. So if someone’s got a question, they can

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INFORMATIONAL ROLES

CEOs often adopt the spokesperson role to communicate important information to stakeholders

MGMT FACT

CONNECT TO YOUR BUSINESS Making good decisions depends on having good information. Business leaders need to assess a broad range of information, from both inside and outside their organisation. Among the range of available information, many managers turn to online sources which deal with business matters specifically. Some of these services, such as the ones listed below, deliver customised electronic newspapers that include only stories on topics the reader specifies: • Crikey (http://www.crikey.com.au) – business commentary and analysis. • Boss Financial Review (http://www.afr.com/boss) – regular background information and reporting of current business issues. • The Business Times (Singapore)(http://www. businesstimes.com.sg) – business news and stock market information.

DECISIONAL ROLES Mintzberg found that obtaining and sharing information is not an end in itself. Obtaining and sharing information with people inside and outside the company is useful to managers because it helps them make good decisions. According to Mintzberg, managers engage in four decisional sub-roles: entrepreneur, disturbance handler, resource allocator and negotiator. In the entrepreneur role, managers adapt themselves, their subordinates and their units to change. Amid the ongoing speculation over the entrepreneur role future of traditional postal services around the decisional role managers play when they the world, Australia Post has tackled the adapt themselves, their challenge of digital disruption head on. Two subordinates and their units to change senior executives with the task of leading the group into the new territory are Andrew Walduck, the executive GM of trusted services, and Greg Sutherland, CMO and now the executive GM of consumer and SMB products. Australia Post sees digital transformation as an opportunity for innovation and sustainable change that is informed and shaped by customer feedback. The two executives are quick to point out, however, that they’re not just focusing on digital solutions alone. Australia Post sees digital as the impetus for adopting new ways of working that put the customer firmly at the centre. The two executives explain that Australia Post is changing from being a business that used its fleet of trucks and motorbikes to deliver mail and parcels to an address, to a customercentric business that delivers to a person.43

In the disturbance handler role, disturbance handler role managers respond to pressures and the decisional role managers play when they respond to problems so severe that they demand severe problems that demand immediate attention and action. immediate action Managers often play the role of disturbance handler when events which impact negatively on the company have to be addressed. How Optus responded to a technical crisis with its sports streaming services is a good example. In the middle of the 2018 FIFA World Cup, Australian telecommunications company Optus was forced to admit to an embarrassing ‘own goal’ when its much publicised online streaming coverage of the football competition collapsed and left customers without the promised service. After a few infuriating days for fans while Optus tried in vain to fix the technical issues, Optus finally chose to refund money to subscribers and hand over the very expensive and potentially lucrative broadcast rights to the coverage of the World Cup in Australia to TV station SBS. As a compensation to disgruntled fans who had paid a premium price to watch the World Cup games, Optus offered free sports streaming services to its customers for a month.44 Optus chief executive Allan Lew acted quickly by offering to refund subscription fees and allow SBS to broadcast the remaining group-stage matches. By resolving the problem and compensating customers, Allan Lew was acting in his disturbance handler role as CEO of Optus. In the resource allocator role, resource allocator role managers decide who will get what the decisional role managers play when they decide who resources and how much of each gets what resources resource they will get. Alphabet (formerly Google) is the second most profitable company in the world after Apple. For years, it grew so fast, with revenues greatly exceeding costs, that budgets, much less budget discipline, didn’t matter (if ever used at all). Founders Larry Page and Sergey Brin hired CFO Ruth Porat to get Alphabet’s businesses to make and stick to their budgets. Alphabet Chairman Eric Schmidt admits, ‘Before she was there, we had lost discipline.’45 Alphabet makes 95 per cent of its revenue from online ads, including Google search, YouTube and mobile ads (mostly on Android phones). But in the rest of Alphabet (Nest thermostats, Google Ventures, Google Fiber), expenses far exceed revenues. So Porat is instilling discipline by cutting budgets, by approving video conferences rather than business travel and by charging the business units for using Alphabet’s functions (legal, human resources and public relations). Chairman Schmidt says, ‘The cost cutting is real, and it’s the right thing to be done, and it’s driven by [Porat].’46

CHAPTER 1 Management

In the negotiator role, managers negotiate schedules, projects, goals, outcomes, resources and employee raises. Twenty of the US’s largest companies, including American Express, IBM, Marriott, Shell Oil and Verizon Communications, have formed the Health Transformation Alliance (HTA) to negotiate lower drug and medical costs. Kevin Cox, former chief human resource office at American Express, says, ‘Even the most successful companies won’t be able to afford the rising costs of health care in the not too distant future.’47 At a time when health care spending is increasing 6 to 8 per cent per year, the HTA expects to lower drug costs by 15 per cent for their 6 million employees. Kyu Rhee, IBM’s chief health officer says, ‘This is the group that’s paying the bill. We’re not waiting for the public sector to come up with the solution − we have the skills and expertise to do this ourselves.’48

negotiator role the decisional role managers play when they negotiate schedules, projects, goals, outcomes, resources and employee raises

manager. As their communications indicate, at first they did not feel confident about their ability to do their jobs as managers. Like most new managers, these sales managers suddenly realised that the knowledge, skills and abilities that led to success early in their careers (and were probably responsible for their promotion into the ranks of management) would not necessarily help them succeed as managers. As sales representatives, they were responsible only for managing their own performance. But as sales managers, they were now directly responsible for supervising all of the sales representatives in their territories. Furthermore, they were now directly accountable for whether those sales representatives achieved their sales goals or not. If performance in non-managerial jobs doesn’t necessarily prepare you for a managerial job, then what does it take to be a manager? After reading the next three sections, you should be able to: ● explain what companies look for in managers ● discuss the top mistakes that managers make in their jobs ● describe the transition that employees go through when they are promoted to management.

WHAT DOES IT TAKE TO BE A MANAGER? LO5

SALES REPRESENTATIVE #1

Suddenly, I found myself saying, ‘Boy, I can’t be responsible for getting all the revenue. I don’t have the time’. Suddenly you’ve got to go from [taking care of] yourself and say ‘Now I’m the manager and what does a manager do?’ It takes a while thinking about it for it to really hit you … a manager gets things done through other people. That’s a very, very hard transition to make. SALES REPRESENTATIVE #2 49

The statements above come from two star sales representatives, who, on the basis of their superior performance, were promoted to the position of sales

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When companies look for employees who would be good managers, they look for individuals who have technical skills, human skills, conceptual PPLY E A What do skills and the motivation to managers do and what manage.50 Figure 1.3 shows the makes a good manager? relative importance of these four skills to the jobs of team leaders, first-line managers, middle managers and top managers. Technical skills are the ability to apply the specialised procedures, techniques and knowledge required to get the job done. For sales managers, technical technical skills skills are the ability to find new sales the ability to apply the prospects, develop accurate sales pitches specialised procedures, techniques and knowledge based on customer needs and close the required to get the job done sale. For a nurse supervisor, technical skills might include being able to give an injection or know what to do if a patient goes into cardiac arrest. EO VID

I didn’t have the slightest idea what my job was. I walked in giggling and laughing because I had been promoted and had no idea what principles or style to be guided by. After the first day, I felt like I had run into a brick wall.

WHAT COMPANIES LOOK FOR IN MANAGERS

High Importance

Team leaders First-line managers Middle managers

Low Importance

Top managers

Technical skills

FIGURE 1.3

Human skills

Conceptual skills

Motivation to manage

Management skills

Technical skills are most important for team leaders and lower-level managers because they supervise the employees who make products or serve customers. Team leaders and first-line managers need technical knowledge and skills to train new employees and help employees solve problems. Technical knowledge and skills are also needed to troubleshoot problems that employees can’t handle. Technical skills become less important as managers rise through the managerial ranks, but they are still important.

WORKPLACE AND COMMUNITY

RESOURCE ALLOCATION: THE ABC RESPONDS TO BUDGET CUTS Faced with rapidly changing circ*mstances which included a funding cut in the 2014 national budget, the Australian Broadcasting Corporation (ABC) has had to make some tough decisions about where it allocates its scarce financial resources. In response to the budget cuts the ABC set about the task of looking for operational efficiencies and the seemingly inevitable reduction in staff numbers. The ABC announced a redundancy process at the end of 2014 as a result of the federal government’s decision to reintroduce an efficiency dividend for the national broadcaster, cutting the budget by $254 million over a five-year period. During a Senate estimates hearing in early 2015 the ABC’s chief operating officer David Pendleton confirmed that the Australian Broadcasting Corporation had recorded almost 250 redundancies since the beginning of the 2014/15 financial year.51 The funding cuts have continued for the national broadcaster and in 2018 the then Managing Director, Michelle Guthrie, was faced with the news that the

ABC was facing even deeper cuts to its budget. The Commonwealth Government announced that the amount of money allocated to the ABC would be ‘frozen’ from July 2019 for three years, effectively costing the organisation $84 million.

Human skills can be summarised as the ability to work well with others. Managers with people skills work effectively within groups, encourage human skills others to express their thoughts and the ability to work well with feelings, are sensitive to others’ others needs and viewpoints and are good listeners and communicators. Human skills are equally important at all levels of management, from first-line supervisors to CEOs. However, because lower-level managers spend much of their time solving technical problems, upper-level managers may actually spend more time dealing directly with people. On average, firstline managers spend 57 per cent of their time with people, but that percentage increases to 63 per cent for middle managers and 78 per cent for top managers.52 Conceptual skills are the ability to see the organisation as a whole, to understand how the different parts of the company affect each other and to recognise how the conceptual skills company fits into or is affected by its the ability to see the organisation as a whole, external environment, such as the understand how the different local community, social and economic parts affect each other and fo r c e s , c u s t o m e r s a n d t h e recognise how the company fits into or is affected by its competition. Good managers have to environment be able to recognise, understand and reconcile multiple complex problems and perspectives. In other words, managers have to be smart! In fact,

CHAPTER 1 Management

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intelligence makes so much difference for managerial performance that managers with above-average intelligence typically outperform managers with average intelligence by approximately 48 per cent.53 Clearly, companies need to be careful to promote smart employees into management. Conceptual skills increase in importance as managers rise through the management hierarchy. Good management involves much more than intelligence, however. For example, making the department genius a manager can be disastrous if that genius lacks technical skills, human skills or one other factor known as the ‘motivation to manage’. Motivation to manage is an assessment of how motivated employees are to interact with superiors, participate in competitive situations, motivation to behave assertively towards others, tell manage others what to do, reward good behaviour an assessment of how enthusiastic employees and punish poor behaviour, perform are about managing the actions that are highly visible to others work of others and handle and organise administrative tasks. Managers typically have a stronger motivation to manage than their subordinates and managers at higher levels usually have stronger motivation to manage than managers at lower levels. Furthermore, managers with a stronger motivation to manage are promoted faster, are rated as better managers by their employees and earn more money than managers with a weak motivation to manage.54

Technical skills are valuable to managers who need to train staff and help them overcome problems

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MISTAKES MANAGERS MAKE

Another way to understand what it takes to be a manager is to look at the mistakes managers make. In other words, we can learn just as much from what managers shouldn’t do as from what they should do.

Several studies of American and British managers have compared arrivers, or arrivers managers who made it all the way to the managers who have made it to the top of a company top of their companies, with derailers, derailers managers who were successful early in managers who were early in their their careers but were knocked off the fast successful careers, but stagnated in track by the time they reached the middle middle or upper management to upper levels of management.55 The researchers found that there were only a few differences between arrivers and derailers. For the most part, both groups were talented and both groups had weaknesses. But what distinguished derailers from arrivers was that derailers possessed two or more ‘fatal flaws’ with respect to the way that they managed people. Although arrivers were by no means perfect, they usually had no more than one fatal flaw or had found ways to minimise the effects of their flaws on the people with whom they worked. The number one mistake made by derailers was that they were insensitive to others by virtue of their abrasive, intimidating and bullying management style. The authors of one study described a manager who walked into his subordinate’s office and interrupted a meeting by saying, ‘I need to see you’. When the subordinate tried to explain that he was not available because he was in the middle of a meeting, the manager barked, ‘I don’t give a damn. I said I wanted to see you now’.56 Not surprisingly, only 25 per cent of derailers were rated by others as being good with people, compared with 75 per cent of arrivers. The second mistake was that derailers were often cold, aloof or arrogant. Although this sounds like insensitivity to others, it has more to do with derailer managers being so smart, so expert in their areas of knowledge, that they treated others with contempt because they weren’t experts too. For example, an American telecommunications company called in an industrial psychologist to counsel its head of human resources because she had been blamed for ruffling too many feathers at the company. Interviews with her co-workers and subordinates revealed that they thought she was brilliant, was ‘smarter and faster than other people’, ‘generates a lot of ideas’ and ‘loves to deal with complex issues’. Unfortunately, these smarts were accompanied by a cold, aloof and arrogant management style. The people she worked with complained that she does ‘too much too fast’, treats co-workers with ‘disdain’, ‘impairs teamwork’, ‘doesn’t always show her warm side’ and has ‘burned too many bridges’.57 The third and fourth mistakes made by the derailers, betraying trust and being overly ambitious, reflect a lack of concern for co-workers and subordinates. Betraying a trust doesn’t mean being dishonest. Instead, it means making others look bad by not doing what you said you would do when you said you would do it. The mistake, in itself, is not

fatal because managers and their employees aren’t machines. Tasks go undone in every company every single business day. There’s always too much to do and not enough time, people, money or resources to do it. The fatal betrayal of trust is failing to inform others when things will not be done on time. This failure to admit mistakes, quickly inform others of the mistakes, take responsibility for the mistakes and then fix them without blaming others distinguishes the behaviour of derailers from arrivers. The fourth mistake is being overly political and ambitious. Managers who always have their eye on their next job rarely establish more than superficial relationships with peers and co-workers. In their haste to gain credit for successes that would be noticed by upper management, they make the fatal mistake of treating people as though they don’t matter. An employee with an overly ambitious boss described him this way: ‘He treats employees coldly, even cruelly. He assigns blame without regard to responsibility, and takes all the credit for himself. I once had such a boss, and he gave me a new definition of shared risk: if something I did was successful, he took the credit. If it wasn’t, I got the blame’.58 The final mistake made by derailer managers is being unable to delegate or build a team and staff effectively. Many derailer managers were unable to make the most basic transition to managerial work: to quit being hands-on doers and start getting work done through others. In fact, according to an article in Harvard Business Review, up to 50 per cent of new managers fail because they cannot make the transition from producing to managing.59 When managers meddle in decisions that their subordinates should be making – when they can’t stop being doers – they alienate people who work for them. According to Richard Kilburg of Johns Hopkins University, when managers interfere with employees’ decisions, ‘You … have a tendency to lose your most creative people. They’re able to say, “Screw this. I’m not staying here”’.60 In addition to trying to do their subordinates’ jobs as well as their own, managers who fail to delegate will not have enough time to do anything well.

• • • •

FEB

Be the boss Formal authority Manage tasks Job is not managing people

FIGURE 1.4

THE TRANSITION TO MANAGEMENT: THE FIRST YEAR

In her book Becoming a Manager: Mastery of a new identity,61 Harvard Business School professor Linda Hill followed the development of 19 people in their first year as managers. Her study found that becoming a manager produced a profound psychological transition that changed the way these managers viewed themselves and others. As shown in Figure 1.4, the evolution of the managers’ thoughts, expectations and realities over the course of their first year in management reveals the magnitude of the changes they experienced. Initially, the managers in Hill’s study believed that their job was to exercise formal authority and to manage tasks – basically being the boss, telling others what to do, making decisions and getting things done. One of the managers Hill interviewed said, ‘Being the manager means running my own office, using my ideas and thoughts.’ Another said, ‘[The office is] my baby. It’s my job to make sure it works.’62 In fact, most of the new managers were attracted to management positions because they wanted to be ‘in charge’. Surprisingly, the new managers did not believe that their job was to manage people. The only aspects of people management mentioned by the new managers were hiring and firing. After six months, most of the new managers had concluded that their initial expectations about managerial work were wrong. Management wasn’t being ‘the boss’. It wasn’t just about making decisions and telling others what to do. The first surprise was the fast pace and heavy workload involved in being a manager. Said one manager, ‘This job is much harder than you think. It is 40 to 50 per cent more work than being a producer! Who would have ever guessed?’ The pace of managerial

After six months as a manager

Managers’ initial expectations JAN

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MAR

• • • •

MAY

After a year as a manager

JUN

Initial expectations were wrong Fast pace Heavy workload Job is to be problem solver and troubleshooter for subordinates

JUL

• • • •

AUG

SEP

OCT

NOV

DEC

No longer ‘doer’ Communication, listening and positive reinforcement Learning to adapt to and control stress Job is people development

Stages in the transition to management

Source: L.A. Hill, Becoming a manager: mastery of a new identity (Boston: Harvard Business School Press, 1992).

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inflexible, just a lot of how-to’s.’65 By the end of the year, most of the managers had abandoned their authoritarian approach for one based on communication, listening and positive reinforcement. Finally, after beginning their year as managers in frustration, the managers came to feel comfortable with their subordinates, with the demands of their jobs and with their emerging managerial styles. While being managers had made them acutely aware of their limitations and their need to develop as people, it also provided them with an unexpected regard for coaching and developing the people who worked for them. One manager said, ‘I realise now that when I accepted the position of branch manager that it is truly an exciting vocation. It is truly awesome, even at this level; it can be terribly challenging and terribly exciting’.66

Top managers spend an average of nine minutes on a given task before having to switch to another

COMPETITIVE ADVANTAGE THROUGH PEOPLE

In his books Competitive Advantage Through People and

An overview of competitive advantage

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The Human Equation: Building profits by putting people first,

Stanford University business professor Jeffrey Pfeffer contends that what separates top-performing companies from their competitors is the way they treat their workforces – in other words, their management.68

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work was startling, too. Another manager said, ‘You have eight or nine people looking for your time … coming into and out of your office all day long’. A somewhat frustrated manager declared that management was ‘a job that never ended … a job you couldn’t get your hands around’.63 Informal descriptions like this are consistent with studies indicating that the average first-line manager spends no more than two minutes on a task before being interrupted by a request from a subordinate, a phone call or an email. The pace is somewhat less hurried for top managers, who spend an average of approximately nine minutes on a task before having to switch to another. In practice, this means that supervisors may perform 30 different tasks per hour, while top managers perform seven different tasks per hour, with each task typically different from the other that preceded it. A manager described this frenetic level of activity by saying, ‘The only time you are in control is when you shut your door and then I feel I am not doing the job I’m supposed to be doing, which is being with the people’.64 The other major surprise after six months on the job was that the managers’ expectations about what they should do as managers were very different from their subordinates’ expectations. Initially, the managers defined their jobs as helping their subordinates perform their jobs well. For the managers, who still defined themselves as doers rather than managers, assisting their subordinates means going out on sales calls or handling customer complaints. But when managers ‘assisted’ in this way, their subordinates were resentful and viewed their help as interference. The subordinates wanted their managers to help them by solving problems that they couldn’t solve. Once the managers realised this distinction, they embraced their role as problem solver and troubleshooter. Therefore, they could help without interfering with their subordinates’ jobs. After a year on the job, most of the managers thought of themselves as managers and no longer as doers. In making the transition, they finally realised that people management was the most important part of their jobs. One manager summarised the lesson that had taken him a year to learn by saying, ‘As many demands as managers have on their time, I think their primary responsibility is people development. Not production, but people development’. Another indication of how much their views had changed was that most of the managers now regretted the rather heavy-handed approach they had used in their early attempts to manage their subordinates. ‘I wasn’t good at managing … so I was bossy like a first-grade teacher.’ ‘Now I see that I started out as a drill sergeant. I was

WHY MANAGEMENT MATTERS

If you look on the shelves of the business section in your campus bookstore, you’ll find hundreds of books that explain precisely what companies need to do to be successful. Unfortunately, the best-selling business books tend to be faddish, changing dramatically every few years. One thing that has not changed, though, is the importance of good people and good management – companies can’t succeed for long without them. Apple CEO Tim Cook agrees, saying, ‘I think about my day and weeks and months and years – I put them in three buckets: people, strategy and execution. I sort of move between those on a daily basis as to where I put my time. I always think the most important one of those is people. If you don’t get that one right, it doesn’t matter what kind of energy you have in the other two – it’s not enough.’67 After reading this section, you should be able to explain how and why companies can create competitive advantage through people.

Pfeffer found that managers in top-performing companies used ideas like employment security, selective hiring, selfmanaged teams and decentralisation, high pay contingent on company performance, extensive training, reduced status distinctions (between managers and employees) and extensive sharing of financial information to achieve financial performance that, on average, was 40 per cent higher than that of other companies. These ideas, which are explained in detail in Table 1.2, help organisations develop workforces that are smarter, better trained, more motivated and more committed than their competitors’ workforces. Also, as indicated by the phenomenal growth and return on investment earned by these companies, smarter, better trained and more committed workforces provide superior products and service to customers, who keep buying and, by telling others about their positive experiences, bring in new customers. Pfeffer also argues that companies that invest in their people will create long-lasting competitive advantages that are difficult for other companies to duplicate. Indeed, other studies clearly demonstrate that sound management practices can produce substantial advantages in four critical areas of organisational performance: sales revenues, profits, stock market returns and customer satisfaction. A study of nearly 1000 organisations found that those that use just some of the ideas shown in Table 1.2 had over

$27 000 more in sales per employee and over $3800 more in product per employee than companies that didn’t.69 For a company with 100 people, these differences amount to $2.7 million more in sales and nearly $400 000 more in annual profit! Another study investigating the effect of investing in people on company sales found that poorly performing companies that adopted simple management techniques such as setting performance expectations and coaching, as well as reviewing and rewarding employee performance, were able to improve their average return on investment from 5.1 per cent to 19.7 per cent, and increase sales by approximately $130 000 per employee!70 They did this by adopting management techniques as simple as setting performance expectations (establishing goals, results and schedules), coaching (informal ongoing discussions between managers and subordinates about what is being done well and what could be done better), reviewing employee performance (annual formal discussion about results) and rewarding employee performance (adjusting salaries and bonuses based on employee performance and results).71 Two decades of research across 92 companies indicates that the average increase in company performance from using these management practices is typically around 20 per cent.72 That fits with another study of 2000 firms showing that an average improvement in management practices can produce a 10 to 20 per cent increase in the total value of a company.73 So, in addition to significantly improving the profitability of healthy companies, sound management practices can turn around failing companies. To determine the effect of investing in people on stock market performance, researchers matched companies on Fortune magazine’s list of ‘100 Best Companies to Work for in America’ with companies that were similar in industry, size and – this is the key– operating performance. In other words, both sets of companies were equally good performers; the key difference was how well they treated their employees. For both sets of companies, the researchers found that employee attitudes such as job satisfaction changed little from year to year. The people who worked for the ‘100 best’ companies were consistently more satisfied with their jobs and employers year after year than were employees in the matched companies. More importantly, those stable differences in employee attitudes were strongly related to differences in stock market performance. Over a three-year period, an investment in the ‘100 Best Companies to Work for’ would have resulted in an 82 per cent cumulative stock return compared to just 37 per cent for the matched companies.74 This difference is remarkable given that both sets of companies were equally good performers at the beginning of the period.

CHAPTER 1 Management

TABLE 1.2

Competitive advantage through people: management practices

1 Employment security

Employment security is the ultimate form of commitment that companies can make to their employees. Employees can innovate and increase company productivity without fearing the loss of their jobs.

2 Selective hiring

If employees are the basis for a company’s competitive advantage, and those employees have employment security, then the company needs to aggressively recruit and selectively screen applicants in order to hire the most talented employees available.

3 Self-managed teams and decentralisation

Self-managed teams are responsible for their own hiring, purchasing, job assignments and production. Selfmanaged teams can often produce enormous increases in productivity through increased employee commitment and creativity. Decentralisation allows employees who are closest to (and most knowledgeable about) problems, production and customers to make timely decisions. Decentralisation increases employee satisfaction and commitment.

4 High wages contingent on organisational performance

High wages are needed to attract and retain talented employees and to indicate that the organisation values its employees. Employees, like company founders, shareholders and managers, need to share in the financial rewards when the company is successful. Why? Because employees who have a financial stake in their companies are more likely to take a long-run view of the business and think like business owners.

5 Training and skill development

Like a high-tech company that spends millions of dollars to upgrade computers or research and development labs, a company whose competitive advantage is based on its people must invest in the training and skill development of its people.

6 Reduction of status differences

These are fancy words that indicate that the company treats everyone, no matter what the job, as equal. There are no reserved parking spaces. Everyone eats in the same cafeteria and has similar benefits. The result: much improved communication as employees focus on problems and solutions rather than on how they are less valued than managers.

7 Sharing information

If employees are to make decisions that are good for the long-run health and success of the company, they need to be given information about costs, finances, productivity, development times and strategies that was previously known only by company managers.

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Finally, research also indicated that managers have an important effect on customer satisfaction. Many people find this surprising. They don’t understand how managers, who are largely responsible for what goes on inside the company, can affect what goes on outside the company. They wonder how managers, who often interact with customers in negative situations (when customers are angry or dissatisfied), can actually improve customer satisfaction. It turns out that managers influence customer satisfaction through employee satisfaction. When employees are satisfied with their jobs, their bosses and the companies they work for, they provide much better service to customers.75 You will learn more about the service-profit chain in Chapter 17 on APPLY managing ser vice Find out more about your management strengths and growth and manufacturing areas with this self assessment operations.

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Source: J. Pfeffer, The human equation: building profits by putting people first (Boston: Harvard Business School Press, 1996). Reprinted with permission of Harvard Business Publishing. All rights reserved.

People provide companies with significant competitive advantages

1 2

History of management

LEARNING OUTCOMES

IN THE BEGINNING

1 Explain the origins of management. 2 Explain the history of scientific management.

3 Discuss the history of bureaucratic and administrative management.

4 Explain the history of human relations management.

5 Discuss the history of operations,

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information, systems and contingency management.

Each day, managers are asked to solve challenging problems and are given only a limited amount of time, people or resources. Yet it’s still their responsibility to get things done on time and within budget. Tell today’s managers to ‘reward employees for improved production or performance’, ‘set specific goals to increase motivation’ or ‘innovate to create and sustain a competitive advantage’, and they’ll respond, ‘Of course! Who doesn’t know that?’ Only 130 years ago, however, business ideas and practices were so different that today’s widely accepted management ideas would have been as ‘self-evident’ as space travel, mobile phones and the Internet. In fact, 130 years ago, management wasn’t yet a field of study and there were no management jobs and no management careers. So, if there were no managers 130 years ago, but you can’t walk down the hall today without bumping into one, where did management come from? After reading the PPLY E A Get started with the media next section, you quiz: Barcelona Restaurant Group: The should be able to Evolution of Management Thinking explain the origins of management.

THE ORIGINS OF MANAGEMENT

Although we can find the seeds of many of today’s management ideas throughout history, it wasn’t until the last two centuries that systematic changes in the nature of work and organisations created a compelling need for managers.

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sun), transported by boat for two to three days, moved onto the construction site, numbered to identify where it would be placed and then shaped and smoothed so that it would fit perfectly into place. It took 20 000 workers 23 years to complete this pyramid; more than 8000 people were needed just to quarry the stones and transport them. A typical ‘quarry expedition’ might include 100 army officers, 50 government and religious officials, 200 members of the king’s court to lead the expedition, 130 stone masons to cut the stones, 5000 soldiers, 800 barbarians and 2000 bond servants to transport the stones on and off the ships.2 Table 2.1 shows how other management ideas and practices throughout history relate to management functions.

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Let’s begin our discussion of the origins of management by learning about: ● management ideas and APPLY Get a quick practice throughout history overview of the origins and ● why we need managers evolution of management today.

MANAGEMENT IDEAS AND PRACTICE THROUGHOUT HISTORY Examples of management thought and practice can be found throughout history.1 For example, the Egyptians recognised the need for planning, organising and controlling; for submitting written requests; and for consulting staff for advice before making decisions. The practical problems they encountered while building the great pyramids no doubt led to the development of these management ideas. The enormity of the task they faced is evident in the great pyramid of Khufu, which contains 2.3 million blocks of stone. Each block had to be quarried, cut to the precise size and shape, cured (hardened in the

WHY WE NEED MANAGERS TODAY Working from 8 a.m. to 5 p.m., coffee breaks, lunch hours, crushing peak-hour traffic and punching a time clock are associated with today’s working world. But for most of

Controlling

Leading

Organising

Planning

Time

Individual or group

Management ideas and practice throughout history

TABLE 2.1

Contributions to management thought and practice

5000 BCE

Sumerians

Record keeping.

4000 BCE to 2000 BCE

Egyptians

Recognised the need for planning, organising and controlling when building the pyramids; submitted requests in writing; made decisions after consulting staff for advice.

1800 BCE

Hammurabi

Established controls by using witnesses (to vouch for what was said or done) and writing to document transactions.

600 BCE

Nebuchadnezzar

Wage incentives and production control.

500 BCE

Sun Tzu

Strategy; identifying and attacking opponent’s weaknesses.

400 BCE

Xenophon

Recognised management as a separate art.

400 BCE

Cyrus

Human relations and motion study.

175

Cato

Job descriptions.

284

Diocletian

Delegation of authority.

900

Alfarabi

Listed leadership traits.

1100

Ghazali

Listed managerial traits.

1418

Barbarigo

Different organisational forms/structures.

1436

Venetians

Numbering, standardisation, and interchangeability of parts.

1500

Sir Thomas More

Critical of poor management and leadership.

1525

Machiavelli

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humankind’s history, people didn’t commute to work; work usually occurred in homes or on farms. As recently as 1900, the majority of Australians earned their living from agriculture. Even most of those who didn’t earn their living from agriculture didn’t commute to work. Blacksmiths, furniture makers, leather-goods makers and other skilled tradesmen or craftsmen, who formed trade guilds (the historical predecessors of labour unions) in England as early as 1093, typically worked out of shops in or next to their homes.3 Likewise, until the late 1800s, cottage workers worked with each other out of small homes that were often built in a semicircle. A family in each cottage would complete a different production step, with work passed from one cottage to the next until production was complete. With small, selforganised work groups, no commuting, no bosses and no common building, there wasn’t a strong need for management.

It took 20 000 workers 23 years to complete this pyramid; more than 8000 were needed just to quarry the stones and transport them

During the Industrial Revolution (late eighteenth century into the nineteenth century), however, jobs and organisations changed dramatically.4 First, thanks to the availability of power (steam engines and later electricity), low-paid, unskilled labourers running machines began to replace high-paid, skilled artisans who made entire products by themselves, by hand. This new massproduction system was based on a division of labour: each worker, interacting with machines, performed separate, highly specialised tasks that were but a small part of all the steps required to make manufactured goods. While workers focused on their singular tasks, managers were needed to effectively coordinate the different parts of the production system and optimise its overall performance. Productivity skyrocketed at companies that understood this. For example, at the Ford Motor Company, the time required to assemble a car dropped from 12.5 work hours to just 93 minutes.5 Second, jobs existed in large, formal organisations where hundreds, if not thousands, of people worked under one roof, instead of in fields, homes or small

shops.6 In 1884, Australian industrialist H.V. McKay, who first started out working in a blacksmiths in Ballarat, established the Sunshine Harvester Works in what are now the western suburbs of Melbourne. Sunshine Har vester Works was at one time the largest manufacturer in Australia, with over 3000 employees around 1906.7 By 1913, Henry Ford employed 12 000 employees in just his Highland Park, Michigan factory in the US. With individual factories employing so many workers under one roof, companies now had a strong need for disciplinary rules (to impose order and structure). For the first time, they needed managers who knew how to organise large groups, work with employees and make good decisions.

MGMT FACT

ANCIENT MANAGERS Sumerian priests developed a formal system of writing (scripts) that allowed them to record and keep track of the goods, flocks and herds of animals, coins, land and buildings that were contributed to their temples. Furthermore, to encourage honesty in such dealings, the Sumerians instituted managerial controls that required all priests to submit written accounts of the transactions, donations and payments they handled to the chief priest. Just like clay or stone tablets and animal-skin documents, these scripts were first used to manage the business of Sumerian temples.8

THE EVOLUTION OF MANAGEMENT

Before 1880, business educators taught only basic bookkeeping and secretarial skills, and no one published books or articles about management.9 Today, if you have a question about management, you can turn to dozens of academic journals, hundreds of business school and practitioner journals (such as Harvard Business Review, Sloan Management Review, Journal of Management and Organisation and Academy of Management Executive) and thousands of books and articles. In the following sections, you will learn about other important contributors to the field of management, and how their ideas shaped our current understanding of management theory and practice.

CHAPTER 2 History of management

After reading the next four sections, which review the different schools of management thought, you should be able to: ● explain the history of scientific management ● discuss the history of bureaucratic and administrative management ● explain the history of human relations management ● discuss the history of operations, information, systems and contingency management.

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SCIENTIFIC MANAGEMENT

Before scientific management, organisational decision making could best be described as ‘seat-of-the-pants’. Decisions were made haphazardly without any systematic study, thought or collection of information. If the ‘managers’ hired by the company founder or owner decided that workers should work twice as fast, little or no thought was given to worker motivation. If workers resisted, ‘managers’ often resorted to physical beatings to get workers to work faster, harder or longer. With no incentives for ‘managers’ to cooperate with workers and vice versa, managers and workers played games within the system, trying to take advantage of each other. Likewise, each worker did the same job in his or her own way with different methods and different tools. In short, there were no procedures to standardise operations, no objective standards by which to judge whether performance was good or bad, and no follow-up to determine if productivity or quality actually improved when changes were made.10 This all changed with the advent of scientific scientific management , which management thoroughly studied and tested different thoroughly studying and testing different work work methods to identify the best, most methods to identify the efficient ways to complete a job. best, most efficient way to complete a job Let’s find out more about scientific management by learning about: ● Frederick W. Taylor, the father of scientific management ● Frank and Lillian Gilbreth and motion studies ● Henry Gantt and his Gantt charts.

FATHER OF SCIENTIFIC MANAGEMENT: FREDERICK W. TAYLOR Frederick W. Taylor (1856–1915), the ‘father of scientific management’, began his career as a worker at Midvale Steel Company. He was later promoted to patternmaker, supervisor and then chief engineer. At Midvale, Taylor was deeply affected by his three-year struggle to get the men who worked for him to do, as he called it, ‘a fair day’s work’. Taylor explained that as soon as he became the boss, ‘the men who were working under me 22

… knew that I was onto the whole game of soldiering soldiering, or deliberately restricting output when workers deliberately slow their pace or restrict [to one-third of what they were capable of their work outputs producing]’. When Taylor told his workers, ‘I am rate buster going to try to get a bigger output’, the workers a group member whose responded, ‘We warn you, Fred, if you try to work pace is significantly faster than the normal bust any of these rates we will have you over pace in his or her group the fence in six weeks’.11 (A rate buster was someone who worked faster than the group.) Over the next three years, Taylor tried everything he could think of to improve output. By doing the job himself, he showed workers that it was possible to produce more output. He hired new ‘intelligent’ workers and trained them himself, hoping they would produce more. But they would not because of ‘very heavy social pressure’ from the other workers. Pushed by Taylor, the workers began breaking their machines so that they couldn’t produce. Taylor responded by fining them every time they broke a machine and for any violation of the rules, no matter how small, such as being late to work. Tensions became so severe that some of the workers threatened to shoot him. The remedy that Taylor eventually developed was ‘scientific management’. The goal of scientific management is to use systematic study to find the ‘one best way’ of doing each task. To do that, managers must follow the four principles shown in Table 2.2. First, ‘develop a science’ for each element of work. Study it. Analyse it. Determine the ‘one best way’ to do the work. For example, one of Taylor’s controversial proposals at the time was to give rest breaks to factory workers doing physical labour. Today, we take breaks for granted, but in Taylor’s day, factory workers were expected to work without stopping. Using systematic experiments, Taylor showed that frequent rest breaks greatly increased daily output. Second, scientifically select, train, teach and develop workers to help them reach their full potential. Before Taylor, supervisors often hired on the basis of favouritism and nepotism. Who you knew was often more important than what you could do. By contrast, Taylor instructed supervisors to hire ‘first class’ workers on the basis of their aptitude to do a job well. For similar reasons, Taylor also recommended that companies train and develop their workers – a rare practice at the time. Third, cooperate with employees to ensure implementation of the scientific principles. As Taylor knew from personal experience, more often than not workers and management viewed each other as enemies. Taylor said: ‘The majority of these men believe that the fundamental interests of employees and employers are necessarily antagonistic. Scientific management, on the contrary, has at its very foundation the firm conviction that the true interests of the two are one and the same; that prosperity for the employer cannot exist for many years unless it is accompanied by prosperity for the employee and vice versa;

TABLE 2.2

Taylor’s four principles of scientific management

1st

Develop a science for each element of a man’s work, which replaces the old rule-of-thumb method.

2nd

Scientifically select and then train, teach and develop the workman, whereas in the past he chose his own work and trained himself as best he could.

3rd

Heartily cooperate with the men so as to ensure all of the work being done is in accordance with the principles of the science that has been developed.

4th

There is an almost equal division of the work and the responsibility between the management and the workmen. The management take over all the work for which they are better fitted than the workmen, while in the past almost all of the work and the greater part of the responsibility were thrown upon the men. Source: F. W. Taylor, The principles of scientific management (New York: Harper, 1911).

WORKPLACE AND COMMUNITY

WANT FRIES WITH THAT?

iStock.com/PIKSEL

MGMT TREND

TAYLOR’S REST BREAK NOW INCLUDES NAPPING While rest breaks traditionally involve sitting or taking a brief walk, some employers now see a rest break as an opportunity for a quick snooze. Lampooned in movies, television and even the business press, napping at work is nonetheless a proven way to increase focus, memory and alertness on the job. A recent study from the University of Michigan found that a one-hour nap during the workday produced all those benefits—and more. As numerous as the benefits of napping are said to be, the challenges of napping at work are even more so. Not only is it difficult to break pace during the workday long enough to actually fall asleep, but finding a place to sleep can be challenging as well. Only 6 per cent of companies have dedicated spaces for napping, and many employees work in loud, crowded spaces with stiff, uncomfortable chairs. Sleep experts do have some advice for people working at companies that embrace workday naps. First, when deciding what time to close your eyes, figure out the midpoint of your previous night’s rest and add 12 hours. (For example, if you slept from 11 p.m. to 7 a.m., then your ideal nap time the next day is 3 p.m.) Once you know when to nap, sleep either for 20 or 90 minutes—ideal times for a re-energizing nap. Anything in between or beyond those two durations will leave the napper feeling groggy and ineffective, counteracting the point of the nap in the first place. SOURCE: R. GREENFIELD, “NAPPING AT WORK CAN BE SO EXHAUSTING,” BLOOMBERG BUSINESSWEEK, 20 AUGUST 2015, HTTP://WWW.BLOOMBERG.COM/NEWS/ARTICLES/2015-08-20/ NAPPING-AT-WORK-CAN-BE-SO-EXHAUSTING, ACCESSED 26 MARCH 2016.

and that it is possible to give the worker what is most wanted – high wages – and the employer what he wants – a low labour cost – for the product’.13 The fourth principle of scientific management was to divide the work and the responsibility equally between management and employees. Prior to Taylor, workers alone were held responsible for productivity and performance. But, said Taylor, Almost every act of the workman should

be preceded by one or more preparatory acts of the management which enable him to do his work better and quicker than he otherwise could’.14 Above all, Taylor felt these principles could be used to determine a ‘fair day’s work’; that is, what an average worker could produce at a reasonable pace, day in and day out. Once that was determined, it was management’s responsibility to pay workers fairly for that ‘fair day’s work’. In essence, Taylor

CHAPTER 2 History of management

MOTION STUDIES: FRANK AND LILLIAN GILBRETH The husband and wife team Frank and Lillian Gilbreth are best known for their use of motion studies to simplify work, but they also made significant contributions to industrial psychology. Like Frederick Taylor, their early experiences significantly shaped their interests and contributions to management. Though admitted to MIT, Frank Gilbreth (1868–1924) began his career as an apprentice bricklayer. While learning the trade, he noticed the bricklayers using three different sets of motions – one to teach others how to lay bricks, a second to work at a slow pace and a third to work at a fast pace. Wondering which was best, he studied the various approaches and began eliminating unnecessary motions. For example, by designing a stand that could be raised to waist height, he eliminated the need to bend over to pick up each brick. By having lower-paid workers place all the bricks with their most attractive side up, bricklayers didn’t waste time turning a brick over to find it. By mixing a more consistent mortar, bricklayers no longer had to tap each brick numerous times to put it in the right position. Together, Gilbreth’s improvements raised productivity from 120 to 350 bricks per hour and from 1000 bricks to 2700 bricks per day.17 As a result of his experience with bricklaying, Gilbreth and his wife Lillian developed a long-term interest in using motion study to simplify work, improve productivity and reduce the level of effort required to safely perform a job. Indeed, Frank Gilbreth said, ‘The greatest waste in the world comes from needless, ill-directed and ineffective motions’.18 The Gilbreths’ motion study, however, is different from Frederick W. Taylor’s time study. Taylor developed time study to put an end to soldiering and to determine what could be considered a fair day’s work. Time study worked by timing time study how long it took a ‘first-class man’ to timing how long it takes good workers to complete complete each part of his job. After allowing each part of their jobs for rest periods, a standard time was 24

established and a worker’s pay would increase or decrease depending on whether the worker exceeded or fell below that standard. By contrast, motion study, as we motion study breaking each task or job saw in Frank Gilbreth’s analysis of bricklaying, into its separate motions broke each task or job into separate motions and and then eliminating those that are unnecessary or then eliminated those that were unnecessary or repetitive. Because many motions were repetitive completed very quickly, the Gilbreths used motion-picture films, a relatively new technology at the time, to analyse jobs. Most film cameras, however, were hand-cranked and thus variable in their film speed, so Frank Gilbreth invented the micro chronometer, a large clock that could record time to 1/2000th of a second. By placing the micro chronometer next to the worker in the camera’s field of vision and attaching a flashing strobe light to the worker’s hands to better identify the direction and sequence of key movements, the Gilbreths could use film to detect and precisely time even the slightest, fastest movements. Motion study typically yielded production increases of 25 to 300 per cent.19 Lillian Gilbreth (1878–1972) was an important contributor to management as well. She was the first woman to receive a PhD in management, as well as the first woman to become a member of the Society of Industrial Engineers and the American Society of Mechanical Engineers. When Frank died in 1924, she continued the work of their management consulting company (which they had shared for over a dozen years) on her own. Lillian, who was concerned with the human side of work, was one of the first contributors to industrial psychology, originating ways to improve office communication, incentive programs, job satisfaction and management training. Her work also convinced the government to enact laws regarding workplace safety, ergonomics and child labour.20 Shutterstock.com/GLYPHstock

was trying to align management and employees so that what was good for employees was also good for management. In this way, he felt, workers and managers could avoid the conflicts that he had experienced at Midvale Steel. One of the best ways, according to Taylor, to align management and employees was to use incentives to motivate workers. In particular, Taylor believed in piece-rate incentives for which pay was directly tied to how much workers produced. Although Taylor remains a controversial figure among some academics, nearly a century later it is inarguable that his key ideas have stood the test of time.15 In fact, his ideas are so well accepted and widely used that we take most of them for granted. As eminent management scholar Edwin Locke says, ‘The point is not, as is often claimed, that he was “right in the context of his time”, but is now outdated, but that most of his insights are still valid today’.16

The Gilbreths used early motion picture cameras to analyse workers and improve productivity

CHARTS: HENRY GANTT Henry Gantt (1861–1919) was first a protégé and then an associate of Frederick Taylor. Gantt is best known for the Gantt chart, but he also made significant contributions to management with respect to the training and development

workers, were reluctant to teach workers what they knew. Gantt overcame the supervisors’ resistance by rewarding them with bonuses for properly training all of their workers. Thus, Gantt’s approach to training was straightforward: ‘(1) a scientific investigation in detail of each piece of work, and the determination of the best method and the shortest time in which the work can be done. (2) A teacher capable of teaching the best method and the shortest time. (3) Reward for both teacher and pupil when the latter is successful’.22

LO3

BUREAUCRATIC AND ADMINISTRATIVE MANAGEMENT ENGAG

PPLY The field of scientific E A Get an management focused on introduction to the concept of bureaucracy improving the efficiency of manufacturing facilities and their workers. At about the same time, equally important ideas were developing in Europe. German sociologist Max Weber’s ideas about bureaucratic management, which presented a new way to run entire organisations, were published in The Theory of Economic and Social Organisation in 1922. Henri Fayol, an experienced French CEO, published his ideas about administrative management, including how and what managers should do in their jobs, in General and Industrial Management in 1916.

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of workers. As shown in Figure 2.1, a Gantt chart, which shows time in various units on the x-axis and tasks on the y-axis, visually indicates what tasks must be completed at which times in order to complete a project. For example, Figure 2.1 shows that to start construction on a new company headquarters by the week of 18 November, the following tasks must be completed by the following dates: architectural company selected by 7 October, architectural planning done by 4 November, permits obtained from the city by 11 November, site preparation finished by 18 November and loans and financing finalised by 18 November. Though simple and straightforward, Gantt charts were revolutionary in the era of ‘seat-of-the-pants’ management because of the detailed planning information they provided to managers. Gantt said, ‘Such sheets show at a glance where the delays occur, and indicate what must have our attention in order to keep up the proper output’. Today, the use of Gantt charts is so widespread that nearly all project management software and computer spreadsheets have the capability to create charts that track and visually display the progress being made on a project. Finally, Gantt, along with Taylor, was one of the first to strongly recommend that companies train and develop their workers.21 In his work with companies, he found that workers achieved their best performance levels if they were trained first. At the time, however, supervisors, fearing that they could lose their jobs to more knowledgeable

Gantt chart a graphical chart that shows which tasks must be completed at which times in order to complete a project or task

Current week Weeks

23 Sep to 30 Sep

30 Sep to 7 Oct

7 Oct to 14 Oct

14 Oct to 21 Oct

21 Oct to 28 Oct

28 Oct to 4 Nov

4 Nov to 11 Nov

11 Nov to 18 Nov

18 Nov to 25 Nov

Tasks Interview and select architectural firm

Architect by 7 October Weekly planning with architects by 4 November

Hold weekly planning meetings with architects

Permits and approval by oval by 11 November

Obtain permits and approval from city

Site construction done by 18 November

Begin preparing site for construction

Financing finalised by 18 November

Finalise loans and financing

Start building

Begin construction

Tasks Weeks

23 Sep to 30 Sep

30 Sep to 7 Oct

7 Oct to 14 Oct

14 Oct to 21 Oct

21 Oct to 28 Oct

28 Oct to 4 Nov

4 Nov to 11 Nov

11 Nov to 18 Nov

18 Nov to 25 Nov

Current week FIGURE 2.1

Gantt chart for starting construction on a new headquarters

CHAPTER 2 History of management

Let’s find out more about Weber’s and Fayol’s contributions to management by learning about: ● bureaucratic management ● administrative management.

BUREAUCRATIC MANAGEMENT: MAX WEBER Today, when we hear the term ‘bureaucracy’, we think of inefficiency and red tape, incompetence and ineffectiveness, and rigid administrators blindly enforcing nonsensical rules. When German sociologist Max Weber (1864–1920) first proposed the idea of bureaucratic organisations, however, monarchies and patriarchies, not bureaucracies, were associated with these problems. In monarchies, where kings, queens, sultans and emperors ruled, and patriarchies, where a council of elders, wise men or male heads of extended families ruled, the top leaders typically achieved their positions by virtue of birthright. Likewise, promotion to prominent positions of authority was bureaucracy based on who you knew (politics), who the exercise of control on the basis of knowledge, you were (heredity) or traditions. expertise or experience It was against this historical background that Weber proposed the then new idea of bureaucracy. According to Weber, bureaucracy is ‘the exercise of control on the basis of knowledge’.23 So, in a bureaucracy, rather than ruling by virtue of favouritism or personal or family connections, people would lead by virtue of their rational–legal authority – in other words, their TABLE 2.3

Elements of bureaucratic organisations

Qualification-based hiring

Employees are hired on the basis of their technical training or educational background.

Merit-based promotion

Promotion is based on experience or achievement. Managers, not organisational owners, decide who ispromoted.

Chain of command

Each job occurs within a hierarchy, the chain of command, in which each position reports and is accountable to a higher position. A grievance procedure and a right to appeal protect people in lower positions.

Division of labour

Tasks, responsibilities and authority are clearly divided and defined.

Impartial application of rules and procedures

Rules and procedures apply to all members of the organisation and will be applied in an impartial manner, regardless of one’s position or status.

Recorded in writing All administrative decisions, acts, rules or

procedure will be recorded in writing. Managers separate fromowners

The owners of an organisation should not manage or supervise the organisation. Source: M. Weber, The Theory of Economic and Social Organization, trans. A. Henderson & T. Parsons (New York: The Free Press, 1947): 329–34.

knowledge, expertise or experience. Furthermore, the aim of bureaucracy is to achieve an organisation’s goals in the most efficient way possible. Table 2.3 shows the seven elements that, according to Weber, characterise bureaucracies. First, instead of hiring people because of their family or political connections or personal loyalty, they should be hired because their technical training or education qualifies them to do their jobs well. Second, along the same lines, promotion within the company would no longer be based on who you knew or who you were (heredity), but on your experience or achievements. Furthermore, to limit the influence of personal connections in the promotion process, managers, rather than organisational owners, should decide who gets promoted. Third, each position or job is part of a chain of command that clarifies who reports to whom throughout the organisation. Those higher in the chain of command have the right, if they so choose, to give commands, take action and make decisions concerning activities occurring anywhere below them in the chain. Fourth, to increase efficiency and effectiveness, tasks and responsibilities are separated and assigned to those best qualified to complete them. Fifth, an organisation’s rules and procedures should

MGMT FACT

PRISONERS OF BUREAUCRACY Despite its advantages over monarchical and patriarchal organisational forms, even Weber recognised bureaucracy’s limitations. He called it the ‘iron cage’ and said, ‘Once fully established, bureaucracy is among those social structures which are the hardest to destroy’.24 According to management professors Gary Hamel and Michele Zanini, in the US alone its cost is $3 trillion a year, or 17 per cent of GDP! How is this so? Too many managers! Twenty-four million US managers results in one manager for every 4.7 workers. Hamel and Zanini estimate that companies could easily double that to one manager for every 10 workers. SOURCES: G. HAMEL & M. ZANINI, ‘EXCESS MANAGEMENT IS COSTING THE U.S. $3 TRILLION PER YEAR’, HARVARD BUSINESS REVIEW DIGITAL ARTICLES, 5 SEPTEMBER 2016, ACCESSED 4 MARCH 2017, HTTPS://HBR.ORG/2016/09/EXCESS-MANAGEMENT-IS-COSTINGTHE-US-3-TRILLION-PER-YEAR; M. WEBER, THE PROTESTANT ETHIC AND THE SPIRIT OF CAPITALISM (NEW YORK: SCRIBNER’S, 1958).

apply to all members, regardless of their position or status. Sixth, to ensure consistency and fairness over time and across different leaders, all rules, procedures and decisions should be recorded in writing. Finally, to reduce favouritism, ‘professional’ managers rather than company owners should manage or supervise the organisation. When viewed in historical context, Weber’s ideas about bureaucracy represent a tremendous improvement. Fairness supplanted favouritism, the goal of efficiency

replaced the goal of personal gain, and logical rules and procedures took the place of traditions or arbitrary decision making. Today, however, after more than a century of experience we recognise that bureaucracy has limitations as well. In bureaucracies, managers are supposed to influence employee behaviour by fairly rewarding or punishing employees for compliance or non-compliance with organisational policies, rules and procedures. In reality, however, most employees would argue that bureaucratic managers emphasise punishment for non-compliance much more than rewards for compliance. Ironically, bureaucratic management was created to prevent just this type of managerial behaviour.

ADMINISTRATIVE MANAGEMENT: HENRI FAYOL Though his work was not translated and widely recognised in the US until 1949, Frenchman Henri Fayol (1841–1925) was as important a contributor to the field of management as Frederick Taylor. But, whereas Taylor’s ideas changed companies from the shop floor up, Fayol’s ideas, which were shaped by his experience as a managing director (CEO), generally changed companies from the board of directors down.25 Fayol is best known for developing five functions of managers and 14 principles of management. The most formative events in Fayol’s business career came during his 20-plus years as the managing director of Compagnie de Commentry-Fourchambault-Decazeville, commonly known as Comambault, a vertically integrated steel company that owned several coal and iron ore mines and employed 10 000 to 13 000 workers. Fayol was initially hired by the board of directors to shut the ‘hopeless’ steel company down. But, after ‘four months of reflection and study’, he presented the board with a plan, backed by detailed facts and figures, to save the company. With little to lose, the board agreed. Fayol then began the process of turning the company around by obtaining supplies of key resources, such as coal and iron ore; using research to develop new steel alloy products; carefully selecting key subordinates in research, purchasing, manufacturing and sales and then delegating responsibility to them; and cutting costs by moving the company to a better location closer to key markets. Looking back 10 years later, Fayol attributed his and the company’s success to changes in management practices. He wrote, ‘When I assumed the responsibility for the restoration of Decazeville, I did not rely on my technical superiority … I relied on my ability as an organizer [and my] skill in handling men’.26 Based on his experience as a CEO, Fayol argued that ‘the success of an enterprise generally depends much more on the administrative ability of its leaders than on

their technical ability’.27 Remember, as you learned in Chapter 1, Fayol argued that this means that if managers are to be successful, they need to perform five managerial functions or elements: planning, organising, coordinating, commanding and controlling. 28 Today though, most management textbooks have dropped the coordinating function and now refer to Fayol’s commanding function as ‘leading’. Consequently, Fayol’s management functions are widely known as planning (determining organisational goals and a means for achieving them), organising (deciding where decisions will be made, who will do what jobs and tasks, and who will work for whom), leading (inspiring and motivating employees to work hard to achieve organisational goals) and controlling (monitoring progress towards goal achievement and taking corrective action when needed). In addition, according to Fayol, effective management is based on the 14 principles shown in Table 2.4.

LO4

HUMAN RELATIONS MANAGEMENT

As we have seen, scientific management focused on improving efficiency; bureaucratic management focused on using knowledge, fairness and logical rules and procedures; and administrative management focused on how and what managers should do in their jobs. In contrast, in the human relations approach to management, people were more than just extensions of machines; they were valuable organisational resources whose needs were important and whose efforts, motivation and performance were affected by the work they did and their relationships with their bosses, co-workers and work groups. In other words, efficiency alone is not enough. Organisational success also depends on treating employees well. Let’s find out more about human relations management by learning about: ● Mary Parker Follett’s theories of constructive conflict ● Elton Mayo’s Hawthorne Studies ● Chester Barnard’s theories of cooperation and acceptance of authority.

CONSTRUCTIVE CONFLICT: MARY PARKER FOLLETT Mary Parker Follett (1868–1933) was a social worker who, after 25 years of working with schools and non-profit organisations, began lecturing and writing about management and working extensively as a consultant for business and government. Many of today’s ‘new’ management ideas can clearly be traced to her work. Follett is known for developing ideas regarding constructive conflict, also called cognitive conflict, which is discussed in Chapter 5 on decision making and Chapter 10

CHAPTER 2 History of management

TABLE 2.4

Division of work Increase production by dividing work so that each worker completes smaller tasks or job elements.

Authority and responsibility A manager’s authority, which is the ‘right to give orders’, should be commensurate with the manager’s responsibility. However, organisations should enact controls to prevent managers from abusing their authority.

Discipline Clearly defined rules and procedures are needed at all organisational levels to ensure order and proper behaviour.

Unity of command To avoid confusion and conflict, each employee should report to and receive orders from just one boss.

Unity of direction One person and one plan should be used in deciding the activities to be used to accomplish each organisational objective.

Subordination of individual interests to the general interest Employees must put the organisation’s interests and goals before their own.

Remuneration Compensation should be fair and satisfactory to both the employees and the organisation; that is, don’t overpay or underpay employees.

Centralisation Avoid too much centralisation or decentralisation. Strike a balance depending on the circ*mstances and employees involved.

Scalar chain From the top to the bottom of an organisation, each position is part of a vertical chain of authority in which each worker reports to just one boss. For the sake of simplicity, communication outside normal work groups or departments should follow the vertical chain of authority.

Order To avoid conflicts and confusion, order can be obtained by having a place for everyone and having everyone in their place; in other words, there should be no overlapping responsibilities.

Equity Kind, fair and just treatment for all will develop devotion and loyalty. This does not exclude discipline, if warranted, and consideration of the broader general interest of the organisation.

Stability of tenure of personnel Low turnover, meaning a stable workforce with high tenure, benefits an organisation by improving performance, lowering costs and giving employees, especially managers, time to learn their jobs.

Initiative Because it is a ‘great source of strength for business’, managers should encourage the development of initiative – the ability to develop and implement a plan – in others.

Esprit de corps Develop a strong sense of morale and unity among workers that encourages coordination of efforts.

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on teams. Unlike most people, then and now, who view conflict as bad, Follett believed that conflict could be beneficial. She said that conflict is ‘the appearance of difference, difference of opinions, of interests. For that is what conflict means – difference’. She went on to say, ‘As conflict – difference – is here in this world, as we cannot avoid it, we should, I think, use it to work for us. Instead of condemning it, we should set it to work for us. Thus we shall not be afraid of conflict, but shall recognise

PPLY E A

Fayol’s 14 principles of management

Find out more about your conflict management style with this self-assessment

that there is a destructive way of dealing with integrative conflict resolution such moments and a constructive way’.29 an approach to dealing Follett believed that the best way to deal with conflict in which with conflict was not ‘domination’, where one both parties deal with the conflict by indicating side won and the other lost, nor compromise, their preferences and then where each side gave up some of what they working together to find alternative that meets wanted, but integration. Said Follett, ‘There is an the needs of both a way beginning now to be recognized at least, and even occasionally followed: when two desires are integrated, that means that a solution has been found in which both desires have found a place that

neither side has had to sacrifice anything’. So, rather than one side dominating the other or both sides compromising, the point of integrative conflict resolution is to have both parties indicate their preferences and then work together to find an alternative that meets the needs of both. According to Follett, ‘Integration involves invention, and the clever thing is to recognize this, and not to let one’s thinking stay within the boundaries of two alternatives which are mutually exclusive’.30 Indeed, Follett’s ideas about the positive use of conflict and an integrative approach to conflict resolution predate accepted thinking in the negotiation and conflict resolution literature by six decades (see the best-selling book Getting to Yes: Negotiating agreement without giving in by Roger Fisher, William Ury and Bruce Patton, 1983). Table 2.5 summarises, in Follett’s own words, her contributions to management regarding power (‘with’ not ‘over’ others), the giving of orders (discussing instructions and resentment), authority (flowing from job knowledge and experience, not position), leadership (that leaders make the team and that aggressive, dominating leaders may be harmful), coordination and control (should be based on facts, information and coordination). In the end, Follett’s

TABLE 2.5

contributions added significantly to our understanding of the human, social and psychological sides of management. Peter Parker, the former chairman of the London School of Economics, said about Follett: ‘People often puzzle about who is the father of management. I don’t know who the father was, but I have no doubt about who was the mother’.31

HAWTHORNE STUDIES: ELTON MAYO Australian-born Elton Mayo (1880–1948) is best known for his role in the famous Hawthorne Studies at the Western Electric Company. The Hawthorne Studies were conducted in several stages between 1924 and 1932 at a Western Electric plant in Chicago. Although Mayo didn’t join the studies until 1928, he played a significant role thereafter, writing about the results in his book, The Human Problems of an Industrial Civilization.32 The first stage of the Hawthorne Studies investigated the effects of lighting levels and incentives on employee productivity in the Relay Test Assembly Room, where workers took approximately a minute to put ‘together a coil, armature, contact springs, and insulators in a fixture and secure the parts by means of four machine screws’.33 Two groups of six experienced female workers,

Some of Mary Parker Follett’s key contributions to management

Constructive conflict

• ‘As conflict — difference — is here in this world, as we cannot avoid it, we should, I think, use it to work for us. Instead of condemning it, we should set it to work for us.’

Power

• ‘Power might be defined as simply the ability to make things happen, to be a causal agent, to initiate change.’ • ‘It seems to me that whereas power usually means power-over, the power of some person or group over some other person or group, it is possible to develop the conception of power-with, a jointly developed power, a co-active, not a coercive power.’

The giving oforders

• ‘Probably more industrial trouble has been caused by the manner in which orders have been given than in any other way.’ • ‘But even if instructions are properly framed, are not given in an over-bearing manner, there are many people who react violently against anything that they feel is a command. It is often the command that is resented, not the thing commanded.’ • ‘An advantage of not exacting blind obedience, of discussing your instructions with your subordinates, is that if there is any resentment, any come-back, you get it out into the open, and when it is in the open you can deal with it.’

Authority

• ‘Indeed there are many indications in the present reorganisation of industry that we are beginning to rid ourselves of the over and under idea, that we are coming to a different conception of authority, many indications that there is an increasing tendency to let the job itself, rather than the position occupied in a hierarchy, dictate the kind and amount of authority.’ • ‘Authority should go with knowledge and experience, that is where obedience is due, no matter whether it is up the line or down.’

Leadership

• ‘Of the greatest importance is the ability to grasp a total situation … Out of a welter of facts, experience, desires, aims, the leader must find the unifying thread. He must see a whole, not a mere kaleidoscope of pieces … The higher up you go, the more ability you have to have of this kind.’ • ‘The leader makes the team. This is pre-eminently the leadership quality — the ability to organise all the forces there are in an enterprise and make them serve a common purpose.’ • ‘[It is wrong to assume] that you cannot be a good leader unless you are aggressive, masterful, dominating. But I think not only that these characteristics are not the qualities essential to leadership but, on the contrary, that they often militate directly against leadership.’

Coordination

• ‘One, which I consider a very important trend in business management is a system of cross-functioning between the different departments … Each department is expected to get in touch with certain others.’ • ‘Many businesses are now organised in such a way that you do not have an ascending and descending ladder of authority. You have a degree of cross-functioning, of inter-relation of departments, which means a horizontal rather than a vertical authority.’ • ‘The most important thing to remember about unity is — that there is no such thing. There is only unifying. You cannot get unity and expect it to last a day — or five minutes. Every man in a business should be taking part in a certain process and that process is unifying.’

Control

• ‘Control is coming more and more to mean fact-control rather than man-control.’ • ‘Central control is coming more and more to mean the co-relation of many controls rather than a superimposed control.’ Source: Mary Parker Follett, Mary Parker Follett – prophet of management: a celebration of writings from the 1920s, ed. P. Graham (Boston: Harvard Business School Press, 1995). Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202

CHAPTER 2 History of management

five to do the work and one to supply needed parts, were separated from the main part of the factory by a threemetre partition and placed at a standard work bench with the necessary parts and tools. Over the next five years, the experimenters introduced various levels and combinations of lighting, financial incentives and rest pauses (work breaks) to study the effect on productivity. Curiously, however, whether they increased or decreased the lighting, paid workers based on individual production or group production, or increased or decreased the number and length of rest pauses, production levels increased. The question, however, was why? Mayo and his colleagues eventually concluded that two things accounted for the results. First, substantially more attention was paid to these workers than to workers in the rest of the plant. Mayo wrote, ‘Before every change of program [in the study], the group is consulted. Their comments are listened to and discussed; sometimes their objections are allowed to negate a suggestion. The group unquestionably develops a sense of participation in the critical determinations and becomes something of a social unit’.34 The ‘Hawthorne Effect’ cannot be understood, however, without giving equal importance to the ‘social units’, which became intensely cohesive groups. (For years, the ‘Hawthorne Effect’ has been incorrectly defined as increasing productivity by paying more attention to workers.)35 Mayo said: ‘What actually happened was that six individuals became a team and the team gave itself wholeheartedly and spontaneously to cooperation in the experiment. The consequence was that they felt themselves to be participating freely and without afterthought, and were happy in the knowledge that they were working without coercion from above or limits from below’.36 Together, the increased attention from management and the development of a cohesive work group led to significantly higher levels of job satisfaction and productivity. For the first time, human factors related to work were found to be more important than the physical conditions or design of the work. In short, workers’ feelings and attitudes affected their work.

The next stage of the Hawthorne Studies was conducted in the Bank Wiring Room, where ‘the group consisted of nine wiremen, three solderers and two inspectors. Each of these groups performed a specific task and collaborated with the other two in completion of each unit of equipment. The task consisted of setting up the banks of terminals side-by-side on frames, wiring the corresponding terminals from bank to bank, soldering the connections and inspecting with a test set for short circuits or breaks in the wire. One solderman serviced the work of the three wiremen’.37 In contrast to the results from the Relay Test Assembly Room, where productivity increased no matter what the researchers did, productivity dropped in the Bank Wiring Room. Again, the question was why? Interestingly, Mayo and his colleagues found that group effects were responsible. The difference was that the workers in the Bank Wiring Room had been an existing work group for some time and had already developed strong negative norms that governed their behaviour. For instance, despite a group financial incentive for production, the group members decided that they would wire only 6000 to 6600 connections a day (depending on the kind of equipment they were wiring), well below the production goal of 7300 connections that management had set for them. Individual workers who worked at a faster pace were

WORKPLACE AND COMMUNITY

TOUGH JOBS

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During the early twentieth century, labour unrest, dissatisfaction and protests (some of them violent) were widespread in the United States, Europe and Asia. In 1919 alone, for example, more than four million American workers went on strike.39 Working conditions contributed to the unrest. Millions of workers in large factories toiled at boring, repetitive, unsafe jobs for low pay. Employee turnover was high and absenteeism was rampant. With employee turnover approaching 380 per cent in his automobile factories, Henry Ford had to double the daily wage of his manufacturing workers from $2.50, the going wage at the time, to $5 to keep enough workers at their jobs. It’s not surprising that Mayo’s ideas became popular during this period.

During the first stage of the Hawthorne Studies, Mayo and his colleagues tested the effects of lighting levels and incentives on employee productivity in the Relay Test Assembly Room ‘Women in the Relay Assembly Test Room’, ca. 1930. Western Electric Company Hawthorne Studies Collection, Baker Library, Harvard Business School.

socially ostracised from the group, or ‘binged’ – hit on the arm – until they slowed their work pace. Thus, the group’s behaviour was reminiscent of the soldiering that Frederick Taylor had observed.38 In the end, the Hawthorne Studies demonstrated that the workplace was more complex than previously thought, that workers were not just extensions of machines and that financial incentives weren’t necessarily the most important motivator for workers. Thanks to Mayo and the Hawthorne Studies, managers better understood the effect that group social interactions and employee satisfaction and attitudes had on individual and group performance.

COOPERATION AND ACCEPTANCE OF AUTHORITY: CHESTER BARNARD Like Henri Fayol, Chester Barnard (1886–1961) had experiences as a top executive that shaped his views of management. Barnard began his career in 1909 as an engineer and translator for AT&T, becoming a general manager at Pennsylvania Bell Telephone in 1922 and then president of New Jersey Bell in 1927.40 Barnard’s ideas, published in his classic book The Functions of the Executive, influenced companies from the board of directors down. Barnard is best known for his ideas about cooperation and the acceptance of authority. In The Functions of the Executive, Barnard proposed a comprehensive theory of cooperation in formal organisations. In fact, he defines organisation organisation as a ‘system of consciously a system of consciously coordinated activities or forces of two or coordinated activities or forces created by two or more persons’.41 In other words, ‘organisation’ more people occurs whenever two people work together for some purpose. Thus, organisation occurs when classmates work together to complete a class project, when Red Cross volunteers donate their time to fundraise and when managers work with subordinates to reduce costs, improve quality or increase sales. Why did Barnard place so much emphasis on cooperation? Because, he said, it is the ‘abnormal, not the normal, condition’. ‘Failure to cooperate, failure of cooperation, failure of organisation, disorganisation, disintegration, destruction of organisation – and reorganisation – are characteristic facts of human history.’42 According to Barnard, the extent to which people willingly cooperate in an organisation depends on how workers perceive executive authority and whether they’re willing to accept it. According to Barnard, for many managerial requests or directives, there is a ‘zone of indifference’, in which acceptance of managerial authority is automatic. For example, if your boss asks you for a copy of the monthly inventory report, and compiling and writing that report is part of your job, you think nothing of the request and automatically send it. In general, people will not be indifferent to managerial directives or orders if they (1) are

understood, (2) are consistent with the purpose of the organisation, (3) are compatible with the people’s personal interests and (4) can actually be carried out by those people. Acceptance of managerial authority (i.e. cooperation) is not automatic, however. Ask people to do things contrary to the organisation’s purpose or to their own benefit and they’ll put up a fight. So, while many people assume that managers have the authority to do whatever they want, Barnard, referring to the ‘fiction of superior authority’, believed that workers ultimately grant managers their authority.43

LO5

OPERATIONS, INFORMATION, SYSTEMS AND CONTINGENCY MANAGEMENT

In this last section, we review four other significant historical approaches to management that have influenced how today’s managers produce goods and services on a daily basis, gather and manage the information they need to understand their businesses and make good decisions, understand how the different parts of the company work together as a whole, and recognise when and where particular management practices are likely to work. To better understand these ideas, we look at the following: ● operations management ● information management ● systems management ● contingency management.

OPERATIONS MANAGEMENT Have you upgraded your mobile phone lately? Maybe you have a pair of Bluetooth headphones that you have to recharge the batteries in? Chances are you have a few old phone chargers around your house that will still fit into your new phone or even charge your headphones. This is possible because of standardisation in manufacturing. You may be surprised to know that there is even an international electrical engineering standard for things like USB plugs and ports as well as what frequency Bluetooth signals are transmitted at (search IEEE on the Internet to see what these are). Even the processor in your phone is manufactured to an IEEE standard, which means that the processors in all phones are manufactured by a relatively small number of companies. Modern manufacturing depends completely on these basic ideas of standards, and what we call interchangeability. In Chapter 17, you will learn about operations management, which involves managing the daily production of goods and services. In general, operations management uses a quantitative or mathematical approach to find ways to increase productivity, improve quality and manage or reduce costly inventories.

CHAPTER 2 History of management

Today, we take it for granted that manufactured goods will be made with standardised, interchangeable parts; that the design of those parts will be based on detailed plans; and that manufacturing companies will manage inventories to keep costs low and increase productivity. Surprisingly, these key elements of operations management have some rather strange origins: guns, geometry and fire. Since the 1500s, skilled craftsmen made the parts of a gun by hand. After each part was made, a skilled worker assembled the parts into a complete gun. The gun finisher did not simply screw the different parts of a gun together; each handmade part required extensive adjusting so that it would fit together with the other parts. This was necessary because, even when made by the same skilled craftsman, no two parts were alike. All this changed in 1791, however, when the US government ordered 40 000 muskets from private gun contractors. Because each handmade musket was unique, if a part broke, a replacement part had to be handcrafted. But one contractor, Eli Whitney, determined that if gun parts were made accurately enough, guns could be made with standardised, interchangeable parts. So he designed machine tools that allowed unskilled workers to make each gun part the same as the next. In 1801, he demonstrated the superiority of interchangeable parts to President-elect Thomas Jefferson by quickly and easily assembling complete muskets from randomly picked piles of musket parts.44 Today, because of Whitney’s ideas, most products are manufactured using standardised, interchangeable parts. But even with this advance, manufacturers still faced the significant limitation that they could not produce a part unless they had seen or examined it firsthand. Thanks to Gaspard Monge, a Frenchman of modest beginnings, this soon changed. Monge’s greatest achievement was his book Descriptive Geometry. In it, he explained techniques for drawing threedimensional objects on paper. For the first time, precise drawings permitted manufacturers to make standardised, interchangeable parts without first examining a prototype. Today, manufacturers rely on CAD (computer-aided design) and CAM (computer-aided manufacturing) to take designs straight from the computer to the factory floor. Once standardised, interchangeable parts became the norm, and parts could be made from design drawings alone, manufacturers ran into a costly problem that they had never faced before: too much inventory. Inventory is the amount and number of raw materials, parts and finished products that a company has in its possession. A solution to this problem was found in 1905 when the Oldsmobile Motor Works in Detroit burned down. After the fire, management rented a new production facility to get production up and running as quickly as possible. But because the new facility was much smaller, there was no room to store large 32

stockpiles of inventory. Therefore, the company made do with what it called ‘hand-to-mouth inventories’, in which each production station had only enough parts on hand to do a short production run. Since all of its parts suppliers were close by, Oldsmobile could place orders in the morning and receive them in the afternoon, just like today’s computerised, just-in-time inventory systems. So, contrary to common belief, just-in-time inventory systems were not invented by Japanese manufacturers. Instead, they were invented out of necessity a century ago because of a fire.

INFORMATION MANAGEMENT For most of recorded history, information has been costly, difficult to obtain and slow to spread. It took immense efforts of labour and time to hand-copy information, and therefore books, manuscripts and written documents of any kind were rare and extremely expensive. Word of Joan of Arc’s death in 1431 took 18 months to travel from France across Europe to Constantinople (now Istanbul, Turkey). Consequently, throughout history, organisations have pushed for and quickly adopted new information technologies that reduce the cost or increase the speed with which they can acquire, retrieve or communicate information. The first ‘technologies’ to truly revolutionise the business use of information were paper and the printing press. In the fourteenth century, water-powered machines were created to pulverise rags into pulp to make paper. Paper prices quickly dropped by 400 per cent. Less than a half-century later, Johannes Gutenberg invented the printing press, which reduced the cost and time needed to copy written information by 99.8 per cent. For instance, in 1483 in Florence, Italy, a scribe would charge one florin (an Italian unit of money) to hand-copy one document page. By contrast, a printer would set up and print 1025 copies of the same document for just three florins. What Gutenberg’s printing press did for publishing, the manual typewriter did for daily communication. Before 1850, most business correspondence was written by hand and copied using the ‘letter press’. With the ink still wet, the letter would be placed into a tissue paper ‘book’. A hand press would then be used to squeeze the ‘book’ and copy the still-wet ink onto the tissue paper. By the 1870s, manual typewriters made it cheaper, easier and faster to produce and copy business correspondence. Of course, in the 1980s, slightly more than a century later, typewriters were replaced by personal computers and word processing software for identical reasons. Finally, businesses have always looked for information technologies that would speed access to timely information. For instance, the Medici family, who opened banks throughout Europe in the early 1400s, used post messengers to keep in contact with their more than 40 ‘branch’ managers. The post messengers, who predated modern postal services by 400 years, could travel 90 miles

per day, twice what average riders could cover at the time, because the Medici were willing to pay for the expense of providing them with fresh horses. This need for timely information also led companies to quickly adopt the telegraph in the 1860s, the telephone in the 1880s and, of course, Internet technologies in the last two decades.

SYSTEMS MANAGEMENT Today’s companies are much larger and more complex. They most likely manufacture, service and finance what they sell. They also operate in complex, fast-changing, competitive, global environments that can quickly turn competitive advantages into competitive disadvantages. How, then, can managers make sense of this complexity, both within and outside their organisations?

MGMT FACT

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CASH MANAGEMENT

The cash register, invented in 1879, kept sales clerks honest by recording all sales transactions on a roll of paper securely locked inside the machine. But managers soon realised that its most important contribution was better management and control of their business. For example, department stores could track performance and sales by installing separate cash registers in the food, clothing and hardware departments. Modern retail point-of-sales systems have evolved to the point where every sale not only records who handled the transaction (if it’s not being completed on a self-serve terminal) but also updates the store’s stock information and links to the inventory management system for reordering from the warehouse. If the customer includes their store loyalty card information as part of the transaction, each item they buy is recorded as part of their personal profile. The biggest challenge for stores today is not how to get customer data, but how to use the mountains of data they have.46

One way to deal with organisational and environmental complexity is to take a systems view of organisations.45 A system is a set of interrelated system elements or parts that functions as a a set of interrelated whole. So, rather than viewing one part elements or parts that functions as a whole of an organisation as separate from the other parts, a systems approach encourages managers to complicate their thinking by looking for connections between the different parts of the organisation. Indeed, one of the more important ideas in the systems approach to management is that organisational systems are composed of parts or subsystems, subsystems which are simply smaller systems within smaller systems that operate within the context larger systems. Subsystems and their of a larger system connections matter in systems theory synergy because of the possibility for managers when two or more subsystems working to create synergy. Synergy occurs when together produce more two or more subsystems working than they can working together produce more than they can apart working apart. In other words, synergy occurs when 1 + 1 = 3. Figure 2.2 illustrates how the closed systems elements of systems management work systems that can sustain together. Whereas closed systems can themselves without interacting with their function without interacting with their environments environments, nearly all organisations open systems should be viewed as open systems that systems that can sustain themselves only by interact with their environments and interacting with their environments, on which depend on them for survival. Therefore, they depend for their rather than viewing what goes on within survival the organisation as separate from what goes on outside it, the systems approach also encourages managers to look for connections between the different parts of the organisation and the different parts of its environment. A systems view of organisations offers several advantages. First, it forces managers to view their organisations as part of and subject to the competitive, economic, social, technological and legal/regulatory forces in their environments.47 Second, it also forces managers to be aware of how the environment affects specific parts of the organisation. Third, because of the complexity and difficulty of trying to achieve synergies between different parts of the organisation, the systems view encourages managers to focus on better communication and cooperation within the organisation. Finally, survival also depends on making sure that the organisation continues to satisfy critical environmental stakeholders, such as shareholders, employees, customers, suppliers, governments and local communities.

CONTINGENCY MANAGEMENT Earlier you learned that the goal of scientific management was to use systematic study to find the ‘one best way’ of

CHAPTER 2 History of management

Components of general environment

Economy Suppliers

Components of specific environment

Technical trends Competitors

Organisation Products Inputs from general and specific environments

• Management knowledge • Manufacturing, production, and service techniques

Inputs transformed into outputs Services

Feedback from environments

Industry regulation

Advocacy groups

Political/legal trends

FIGURE 2.2

Customers Sociocultural trends

Systems view of organisations

doing each task and then use that ‘one best way’ everywhere. The problem, as you may have gathered from reading about the various approaches to management, is that no one in management seems to agree on what that ‘one best way’ is. Furthermore, more than 100 years of management research has shown that there are clear boundaries or limitations to most management theories and practices. No management ideas or practices are universal. Though they may work much of the time, none works all the time. But, then, how is a manager to decide what theory to use? Well, it depends on the situation. The contingency approach to management contingency precisely states that there are no universal approach a theory which holds that management theories, and that the most there are no universal effective management theory or idea management theories, and that the most effective depends on the kinds of problems or management theory or s i tu a t i o n s t h a t m a n a g e r s o r idea depends on the kinds of problems or situations organisations are facing at a particular that managers are facing time.48 In short, the ‘best way’ depends at a particular time and on the situation. place

One of the practical implications of the contingency approach to management is that management is much harder than it looks. In fact, because of the clarity and obviousness of some management theories, students and employees often wrongly assume that if management would take just a few simple steps, then a company’s problems would be quickly and easily solved. If this were true, few companies would have problems. A second implication of the contingency approach is that managers need to look for key contingencies that differentiate today’s situation or problems from yesterday’s situation or problems. Moreover, it means that managers need to spend more time analysing problems, situations and employees before taking action to fix them. Finally, it means that as you read this text and learn about management ideas and practices, you need to pay particular attention to qualifying phrases such as ‘usually’, ‘in these situations’, ‘for this to work’ and ‘under these circ*mstances’. Doing so will help you identify the key contingencies that will help you become a better manager.

1 3

Organisational environments and cultures

LEARNING OUTCOMES

1 Discuss how changing environments affect organisations.

EXTERNAL ENVIRONMENTS

2 Describe the four components of the general environment.

3 Explain the five components of the specific environment.

4 Describe the process that companies use to make sense of their changing environments.

5 Explain how organisational cultures are created and how they can help companies be successful.

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EO VID

External environments are the forces external and events outside a company that have environments all events outside a the potential to influence or affect it. company that have the Education and related services are potential to influence or Australia’s fourth-largest export, beaten affect it only by commodities such as iron ore, coal and gold. The growth in the number of international students had been trending upwards, hitting a high of 270 000 in 2010. However, events in the external environment were about to change that. Unlike many of the economies of countries around the world, the Australian economy weathered the Global Financial Crisis (GFC) very well, and one impact was the rise in value of the Australian dollar against other currencies. While this was great for anyone going on a holiday overseas, it also meant that the cost of study in Australia went up. From 2010 to 2012 the numbers of students choosing to study in Australia went down sharply. From late 2013 and as other national economies recovered from the impact of the GFC, and as other changes had their influence on the Australian economy, the Australian dollar fell back to preGFC levels. With the fall of the Australian dollar from parity (and higher) with the US dollar back to around 75 US cents, international student numbers started to rise once again. In 2018, the number of international students in Australian Higher Education rose to over 381 000.1 As national economies recover from the effects of the GFC, more people can afford to study overseas. As the Australian dollar falls, tuition fees at Australian universities and schools get cheaper when paid for with yuan, rupees, ringgit or Thai baht and demand rises.2 This chapter examines the internal and external forces that affect business. We’ll examine the two types of external organisational environments: the general

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media quiz: Camp Bow Wow: The Environment and Corporate Culture

LO1

CHANGING ENVIRONMENTS

Let’s examine the four basic characteristics of changing external environments: ● environmental change ● environmental complexity ● resource scarcity ● environmental uncertainty for organisational managers created by environmental change, environmental complexity and resource scarcity.

ENVIRONMENTAL CHANGE environmental change the rate at which a company’s general and specific environments change stable environment an environment in which the rate of change is slow

Environmental change is the rate at

which a company’s general and specific environments change. In stable environments, the rate of environmental change is slow. A part from occasional shortages due to drought or frost, the wholesale food distribution business – where dairy items, fresh produce, baked goods, poultry, fish and meat are processed and delivered by trucks from warehouses to restaurants, grocery stores and other retailers – changes little from year to year. Distributors take shipments from farmers, food manufacturers and food importers, consolidate them at warehouses and then distribute them to retailers. While recent adoption of global positioning satellite (GPS) systems and radio frequency identification (RFID) devices might be seen as ‘change’, wholesale food distributors began using them because, like the trucks they bought to replace horse-drawn carriages in the early 1900s, GPS and

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RFID improve the core part of their business – getting the freshest food ingredients to customers as quickly and inexpensively as possible – which has not changed in over a century.3 In dynamic environments, the rate of dynamic environmental change is fast. While wholesale environment an environment in which food distribution companies have stable the rate of change is fast environments, Apple, which PPLY E A produces iPhone Complete the Management Decision smartphones, competes in worksheet for Chapter 3 an extremely dynamic external environment. Apple’s competitors, such as Samsung, Sony, Google Pixel, LG, Xiaomi and Oppo, frequently update models with innovative features and new technology. Over a 10-year span, Apple has released several different iPhone models, each having better features and functionality than the model it replaces. Let’s compare the original iPhone to the 2018 iPhone XS: the original had a 320 × 480 pixel resolution screen versus the iPhone XS 2436×1125 pixel Super Retina HD OLED display; the original’s processor was 32-bit 412 MHz, with 128 MB of RAM, and the iPhone XS has Apple’s A12 Bionic processor which has a speed of 2.49 Ghz with 4 GB of RAM. The iPhone XS is also water resistant with a rating of IP68 (which means it can be under water to a depth of up to 1.5 metres for about 30 minutes without letting water into the phone). With such great advances from the introduction of the original iPhone in 2007 to the iPhone XS release in 2018, it is apparent that pressure from Apple’s competitors in this very dynamic market forces them to continually update and upgrade their products at a rapid rate.4 Although you might think that a company’s external environment would be either stable or dynamic, research suggests that companies punctuated often experience both. According to equilibrium theory a theory that holds that punctuated equilibrium theory, companies companies go through go through long, simple periods of stability long, simple periods of stability (equilibrium), (equilibrium) during which incremental changes followed by short periods of dynamic, fundamental occur, followed by short, complex periods of change (revolution), dynamic, fundamental change (revolutionary finishing with a return to periods), finishing with a return to stability stability (new equilibrium) (new equilibrium).5 One example of punctuated equilibrium is the Australian airline industry. Twice in the last 20 years, the Australian airline industry has experienced revolutionary periods. The first, from the early 1990s to 1999, occurred immediately after airline deregulation in 1990. Prior to deregulation, the Australian federal government controlled where airlines could fly, how much could be charged, when they could fly and the number of flights they could have on a particular route. After deregulation, these choices were left to the airlines. The financial losses during this period and the two EO VID

EO VID

environment that affects all organisations and the specific environment unique to each company. Then we learn how managers make sense of their changing general and specific environments. The chapter finishes with a discussion of internal organisational environments by focusing on organisational culture. But first, let’s see how the changes in external organisational environments affect the decisions and performance of a company. After reading the next four sections, you should be able to: ● discuss how changing environments affect organisations ● describe the four components of the general environment ● explain the five components of the specific environment ● describe the process that companies use to make sense of their changing APPLY environments. Get started with the

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failed attempts to start a low-cost airline (Compass Mk 1 and Mk 2) clearly indicated that the airlines had trouble adjusting to the intense competition that occurred after deregulation. By the mid-1990s, however, profits returned to the industry and held steady until mid-2000. Then, after experiencing escalating costs and being bought by the smaller Air New Zealand, Ansett airlines lost millions of dollars at the same time as the industry went through dramatic changes. Key expenses, including jet fuel and employee salaries, which had held steady for years, increased. As more modern, fuel efficient aircraft were put into operation by its main rival, Ansett faced increasing operating costs associated with its older fleet. Furthermore, revenues, which had grown steadily year after year, dropped because of dramatic changes in the airlines’ customer base. Business travellers, who had typically paid full-priced fares, comprised more than half of all passengers during the1980s. However, by the late 1990s, the largest customer base had changed to leisure travellers, who wanted the cheapest flights they could get.6

Airlines like Scoot, Tiger Airways and Jetstar have maintained relative market equilibrium by offering services for customers on a limited budget

After the collapse of Ansett in 2003 and the successful start-up of Virgin Australia in 2000, the domestic aviation industry in Australia experienced a decade of stability, just as punctuated equilibrium theory predicts. The decade between 2003 and 2013 saw new entrants into the Australian market, with the Qantas offshoot Jetstar starting up in 2003 and Tiger Airways, at that time a subsidiary of Tiger Airways Singapore, commencing Australian domestic operations in 2007. Following poor financial performance, Tiger Airways Australia was effectively taken over when Virgin Australia bought a 60% share of the company, the other 40% being owned by Singapore Airlines. In 2014, Virgin Australia bought Singapore Airlines’ share and became the sole owner of what we know today as Tigerair Australia.7 Scoot, another low cost carrier, this time an offshoot from Singapore Airlines, commenced international flights into Australia in 2012 and was a competitor to Jetstar on routes between Perth and Singapore – although in the

first quarter of 2015 Scoot announced to the stock market a significant trading loss of Sg$20 million.8 Just to show how complicated the industry is, Singapore Airlines owns both the Scoot and Tigerair companies outside Australia, while Tigerair Australia remains a subsidiary of Virgin Australia!9 However, the industry in Australia remains relatively stable despite the arrival of the new entrants. The next section will explain the concept of environmental complexity in more detail.

ENVIRONMENTAL COMPLEXITY Environmental complexity is the

environmental

number and the intensity of external complexity the number of external factors in the environment that affect factors in the environment organisations. Simple environments that affect organisations have few environmental factors, whereas simple environment an environment with few complex environments have many environmental factors environmental factors. The dairy industry is complex an excellent example of a relatively simple environment an environment with many external environment. Australia is the environmental factors fourth largest dairy exporter in the world. Approximately 40 per cent of Australian milk production is exported, which was worth an estimated $2.7 billion in 2014−15. More than 125 Australian companies export milk and dairy products.10 Even accounting for decades-old advances in processing and automatic milking machines, milk is produced in much the same way today as it was 100 years ago. As food manufacturers have introduced dozens of new dairy-based products each year, the population has climbed, and exports to countries like China have increased, milk production in Australia has enjoyed steady growth in output between 2000 and 2018. Productivity growth (the measure of outcomes compared to inputs) in the Australian dairy industry has also risen in recent years, with a 1.4 per cent increase each year between 2015 and 2016 as dairy farmers have looked for more efficient ways of doing their job.11 At the other end of the spectrum, few industries find themselves in more complex environments today than the personal computer (PC) business. Since the early 1980s, PC sales have grown spectacularly. But with consumers now spending technology dollars on tablets, e-readers like the Amazon Kindle and smartphones like the iPhone, sales of Windows-based PCs dropped 6.2 per cent during 2016 and into 2017. With global sales of personal computers falling, Lenovo, HP and Dell still managed to maintain their position as the top three manufacturers, whereas Asus, Apple and Acer all lost sales to the tune of 2.6 per cent, 8.7 per cent and 9.9 per cent respectively. On a slightly brighter note, the introduction of Windows 10 in 2015 had a positive impact in the market for Microsoft; reports showed an increase in business deployment of the Windows 10 operating system during 2016 and into 2017.12

CHAPTER 3 Organisational environments and cultures

RESOURCE SCARCITY Thanks to the growing middle classes in India and China having a taste for sweet things, global demand for chocolate is up, but with global production down because of antiquated farming methods and ageing, less productive cocoa trees, cocoa prices have risen 40 per cent since 2012. The 10 largest chocolate producers have combined efforts to increase supply by dedicating $1 billion toward sharing ways to improve crop yields. Yea Amekudzi, who works for Mondelez International, which makes Cadbury Dairy Milk bars, says that producers in Ghana (which is the second largest cocoa exporter in the world), ‘… need to change the way they farm. We don’t have the forest cover we had, we don’t have the rain our grandfathers had, and the soil isn’t as fertile …’13. With the right methods, chocolate companies believe that Ghana’s farmers can triple yields.

resource scarcity the abundance or shortage of critical organisational resources in an organisation’s external environment

ENVIRONMENTAL UNCERTAINTY As Figure 3.1 shows, environmental change, environmental complexity and resource scarcity affect environmental uncertainty, which is how well managers can understand or predict the external changes and trends affecting their businesses. Starting at the left side of the figure, environmental uncertainty is lowest when environmental change and environmental complexity are at low levels and resource scarcity is small (i.e. resources are plentiful). In these environments,

environmental uncertainty the extent to which managers can understand or predict which environmental changes and trends will affect their businesses

Environmental uncertainty

High

Medium

managers feel confident that they can understand, predict and react to the external forces that affect their businesses. By contrast, the right side of the figure shows that environmental uncertainty is highest when environmental change and complexity are extensive and resource scarcity is a problem. In these environments, managers may not be confident that they can understand, predict and handle the external forces affecting their businesses.

LO2

GENERAL ENVIRONMENT

As Figure 3.2 shows, two kinds of external environments influence organisations: the general environment and the specific environment. The general general environment consists of the economy environment economic, and the technological, sociocultural and the technological, political/legal trends that indirectly affect sociocultural and political all organisations. Changes in any sector trends that indirectly affect all organisations of the general environment eventually affect most organisations. For example, when a country’s central bank (the Reserve Bank of Australia, Reserve Bank of New Zealand, Bank Negara in Malaysia or the Federal Reserve in the US) lowers its prime lending rate, most businesses benefit because banks and credit card companies often pass on the lower interest rates to their customers in the rates they charge for loans. Consumers can then borrow money more cheaply to buy homes, cars, refrigerators and large-screen TVs.

When environmental change and complexity are at high levels and resource scarcity is high (i.e. resources are scarce), uncertainty is high, and managers may not be at all confident that they can understand, predict and handle the external forces affecting their businesses.

When environmental change and complexity are at low levels and resource scarcity is small (i.e. resources are plentiful), uncertainty is low, and managers feel confident that they can understand, predict and react to the external forces that affect their businesses.

Resource scarcity Environmental complexity Environmental change

Low

Environmental characteristics

FIGURE 3.1

Environmental change, environmental complexity and resource scarcity

eral environmen t Gen

So cio tre cult nd ura s l

y log no h c Te $ $

Competition Customers

Organisation Suppliers

Advocacy groups

my no o Ec

FIGURE 3.2

Industry regulation

Spe nt cific environme

Po liti c tre al/le nd ga s l

General and specific environments

Each organisation also has a specific environment that is unique to that organisation’s industry and directly affects the way it conducts day-to-day business. After more than 20 million unsafe toys – many of them produced in Chinese factories – were recalled, the toy industry spent A$200 million to increase the safety of its products.14 But, because that change was a response to the specific environment (which only influences this industry) and not the general environment (which influences all businesses), only toy manufacturers and retailers were affected. The specific environment, which will be discussed in detail later in this chapter, includes customers, competitors, suppliers, industry regulation and advocacy groups. Let’s take a closer look at the four components of the general environment that affect all organisations: ● the economy ● technological trends ● sociocultural trends ● political/legal trends.

specific environment the customers, competitors, suppliers, industry regulations and advocacy groups that are unique to an industry and directly affect how a company does business

ECONOMY The current state of a country’s economy affects virtually every organisation doing business there. In general, in a growing economy, more people are working and wages are growing, and therefore consumers have relatively more money to spend. More products are bought and sold in a growing economy than in a static or shrinking economy.

Though an individual organisation’s sales will not necessarily increase, a growing economy does provide an environment favourable to business growth. By contrast, in a shrinking economy, consumers have less money to spend and relatively fewer products are bought and sold. Thus, a shrinking economy makes growth for individual businesses more difficult. Because the economy influences basic business decisions, such as whether to hire more employees, expand production or take out loans to purchase equipment, managers scan their economic environments for signs of significant change. Some managers try to predict future economic activity by keeping track of business confidence. business confidence Business confidence indices show indices how confident managers in organisations indices that show the level of confidence managers are about future business growth. For have about future example, an Australian index that is business growth widely cited is the National Australia Bank (NAB) business confidence index. Managers often prefer business confidence indices to economic statistics because they know that managers make business decisions that are in line with their expectations concerning the economy’s future. In Hong Kong, the Swedish Chamber of Commerce (Swedcham) collates a series of business confidence surveys to present an annual ‘summary of surveys’.15 So if the Swedchamsurvey or the NAB business confidence index in Australia are dropping, a manager might decide against hiring new employees, increasing production or taking out additional loans to expand the business.

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TECHNOLOGICAL COMPONENT technology the knowledge, tools and techniques used to transform input into output

Technology is the knowledge, tools and

techniques used to transform inputs (raw materials, information and so forth) into outputs (products and services). For example, the inputs of authors, editors and artists (knowledge) and the use of equipment like computers and printing presses (technology) transformed paper, ink and glue (raw materials) into this book (the finished product). In the case of a service company such as an airline, the technology consists of equipment, including aeroplanes, repair tools and computers, as well as the knowledge of mechanics, ticket clerks and flight crews. The output is the service of transporting people from one place to another. Changes in technology can help companies provide better products or produce their products more efficiently. For example, advances in surgical techniques and imaging equipment have made open-heart surgery much faster and safer in recent years. While technological changes can benefit a business, they can also threaten it. For example, the Australian insurance industry earns about $20 billion annually in premiums for auto insurance.16 When self-driving cars arrive, they could, much like technology in passenger jet co*ckpits, reduce accidents by 80 per cent. Furthermore, does the passenger who is not driving pay the insurance? As self-driving cars are already operating in San Francisco, Singapore and Paris, and testing of driverless vehicles is currently being conducted in parts of Australia, it seems inevitable that self-driving will become more commonplace.17 The law, regulation and insurance offerings will need to adapt to keep pace with this new technology. In the US, insurance company Allstate Corporation’s CEO Tom Wilson says, ‘Change is coming, and we need to get ahead of it.’18. Companies must embrace new technology and find effective ways to use it to improve their products and services or decrease costs. If they don’t, they will lose out to those companies that do.

SOCIOCULTURAL COMPONENT The sociocultural component of the general environment refers to the demographic characteristics, general behaviour, attitudes and beliefs of people in a particular society. Sociocultural changes and trends influence organisations in two important ways. First, changes in demographic characteristics – such as the number of people with particular skills or the growth/ decline in particular population segments (marital status, age, gender, ethnicity) – affect how companies staff their businesses. Married women with children are much more likely to work today than five decades ago. In 1960, less than 30 per cent of Australian women were in paid

employment. By 1996, the participation rate of Australian women in paid employment had risen to 59 per cent and to 66 per cent in 2017. In Australia, the female workplace participation rate in 2015 was 56.8 per cent compared to 78 per cent for men. Second, sociocultural changes in behaviour, attitudes and beliefs also affect the demand for a business’ products and services. Today, with traffic congestion creating longer commutes and both parents working longer hours, employees are much more likely to value products and services that allow them to recapture free time with their families. For example, urban dwellers in their 20s and early 30s who follow the latest styles, trends and fashions – often referred to as hipsters – spend more of their income on food than their parents did at the same age. But rather than buying from the commercial food and beverage companies that their parents made into household names, these young adults gravitate toward organic foods, exotic ingredients and craft beers, spirits, and mixers. Consequently, markets that used to be considered niche are booming. In Australia and New Zealand, companies like Marley Spoon, HelloFresh and My Food Bag provide a food (and recipe) delivery service, and companies like Uber Eats offer home delivery from the menus of good-quality restaurants.19 Despite the economic impact that hipsters have in these markets, large consumer product companies find it difficult to get and keep their purchasing loyalty. Economist Douglas McWilliams says that hipsters have ’identifiable spending patterns and hom*ogeneous tastes. But they don’t want others to copy them, so they keep up by changing their tastes, by moving on to the next things. You have to watch that if you’re a consumer products company.’20

POLITICAL/LEGAL COMPONENT The political/legal component of the general environment includes the legislation, regulations and court decisions that govern and regulate business behaviour. New laws and regulations continue to impose additional responsibilities on companies. Unfortunately, many managers are unaware of these new responsibilities. For example, under Australia’s Sex Discrimination Act 1984, if an employee is harassed by anyone at work, the company – not just the harasser – is potentially liable to face prosecution. An employer must take all adequate measures to prevent such an act or provide adequate facilities and management to avoid workplace harassment.21 Another example, under Australian workplace law, is that employees who have been on the job for one year or more are guaranteed 52 weeks unpaid parental leave after the birth or adoption of a child.22 The same job, pay and benefits will be standing when they return to work.

Employees are also eligible for 10 days paid carer’s leave each year.23 Many managers are also unaware of the potential legal risks associated with traditional managerial decisions like recruiting, hiring and firing employees. Increasingly, businesses and managers face stiff penalties for not exercising their duty of care towards employees regarding their safety and wellbeing. In 2018 a fast food restaurant chain and a recycling company found themselves in court following an accident that resulted in the death of one pedestrian and the severe injury to another. The fast food restaurant chain was fined $275 000 for an incident at one of their Victorian restaurants where an elderly couple passing by had a large recycling bin accidentally dropped on them.24 The elderly man died in hospital shortly after the accident and his wife was left severely injured. The fast food restaurant chain was found guilty by a County Court jury of failing to ensure persons other than employees are not exposed to risk. The restaurant had well-developed safety procedures in place for their own staff, but had failed to ensure that any potential risk to restaurant patrons, or people just passing by, had been considered and planned for. Some think that companies’ legal risks are too severe. But many believe that the government should do more to regulate and restrict business behaviour and that it should be easier for average people to sue dishonest or negligent corporations. From a managerial perspective, the best medicine against legal risk is prevention. As a manager, it is your responsibility to educate yourself about the laws, regulations and potential lawsuits that could affect your business. Failure to do so may put you and your company at risk of sizeable penalties, fines or legal charges.

SPECIFIC ENVIRONMENT

As you just learned, changes in any sector of the general environment (economic, technological, sociocultural and political/legal) eventually affect most organisations. By contrast, each organisation also has a specific environment that is unique to that organisation’s industry and directly affects the way it conducts day-to-day business. For instance, if your customers decide to use another product, your main competitor cuts prices by 10 per cent, your best supplier can’t deliver raw materials, government departments mandate reductions in pollutants in your industry or environmental groups accuse your company of selling unsafe products, the impact from the specific environment on your business is immediate.

CUSTOMER COMPONENT Customers purchase products and services. Companies cannot exist without customer support. Therefore, monitoring customers’ changing wants and needs is critical to business success. There are two basic strategies for monitoring customers: reactive and proactive.

MGMT TREND

E-READER INFLUENCES ON BOOK PUBLISHING

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LO3

Let’s examine how the following components of the specific environment affect businesses: ● customers ● competitors ● suppliers ● industry regulation ● advocacy groups.

Prime View International, based in Taipei, Taiwan, is responsible for one of the biggest threats to book publishers. It makes the E Ink screens used in the leading e-reader devices: Amazon’s Kindle, Barnes & Noble’s Nook and Sony’s Reader. Their popularity stems from the displays’ uncanny likenesses to newsprint (i.e. black and white), which makes the screens much easier to read for longer periods; lack of backlighting, which means devices using E Ink screens can be read in direct sunlight without reflection or washing out; and incredibly low power consumption that allows e-readers to go four weeks between charges. E Ink screens grew so rapidly in popularity that in 2010, a little less than three years after the screen’s introduction, Amazon.com was selling 143 Kindle books for every 100 hardcover books and 115 Kindle books for every 100 paperback books. Despite these figures, print-based books remain the dominant source of revenue for most publishers. E-readers and tablet devices have, however, started a trend away from print-based books.25

Reactive customer monitoring is identifying and addressing customer trends and problems after they occur. One reactive strategy is to identify customer concerns by listening closely to customer complaints. This strategy involves not only listening to complaints but also responding to customer concerns. For example, companies that respond quickly to customer letters of complaint are viewed

CHAPTER 3 Organisational environments and cultures

much more favourably than companies that are slow to respond or never respond. In particular, studies have shown that when a company’s follow-up letter thanks the customer for writing; offers a sincere, specific response to the complaint (not a form letter, but an explanation of how the problem will be handled); and contains a small gift, coupons or a refund to make up for the problem, customers are much more likely to purchase products or services again from that company.26 Proactive monitoring of customers means identifying and addressing customer needs, trends and issues before they occur. An example of proactive monitoring is the fastfood industry’s use of multibranding, in which two or more food chains share space under the same roof. Multibranding brings in more customers by giving them more choice. Customer research has suggested that people dining together might like to eat at different places at the same time. Spotify is the world’s most popular subscription music service, with 20 million paying subscribers and 55 million ad-supported users. Spotify Fan Insights, a data analytics tool, helps musical artists better understand their listeners and convert their fans’ enthusiasm into deeper engagement. Fan Insights lists listeners’ geographic locations, demographic information (such as gender and age), how they are listening (for example, to a Spotify-curated playlist or to their own collections), when they are listening (down to the time of day) and even which playlists contain the artists’ music. In addition, artists can now sell concert tickets and merchandise directly through Spotify. For Spotify Chief Revenue Officer Jeff Levick, supporting artists with metrics and selling tools helps them understand their own audiences. ’For artists, this can even give them the ability to better manage their tours. They can have the knowledge about where they should be playing certain songs, for example, rather than just doing the same set list everywhere.’27. This kind of information is particularly helpful for finding and catering to superfans. According to Spotify’s vice president of product, Charlie Hellman, these fans ’have a disproportionate impact on revenue: they’re the people who’ll buy tickets, VIP packages, merchandise, and will be the social evangelists for the band.’28

difference between business success and competitive failure comes down to whether your analysis for monitoring company is doing a better job of satisfying atheprocess competition that customer wants and needs than the involves identifying competition. Consequently, companies competition, anticipating their need to keep close track of what their moves and determining competitors are doing. To do this, their strengths and weaknesses managers perform a competitive analysis, which involves deciding who your competitors are, anticipating competitors’ moves and determining competitors’ strengths and weaknesses. Surprisingly, managers often do a poor job of identifying potential competitors because they tend to focus on only two or three well-known competitors with similar goals and resources.29 Electrolux, Hoover, Dirt Devil and, more recently, Oreck compete fiercely in the market for vacuum cleaners. Because these companies produced relatively similar vacuum cleaners, they paid attention to each other and competed mostly on price. When Dyson entered the market in the early 2000s with its radically different vacuum cleaner, which developed and maintained significantly more suction power, the company garnered 20 per cent market share within its first 12 months on the shelves.30 Only then did Electrolux, Hoover and Dirt Devil design their own bagless vacuums. Dyson has continued to grow and in 2015–16, sales of their vacuum cleaners exceeded $2.7 million (GBP 1.6 million), or three times that of 2004.31

COMPETITOR COMPONENT

Another mistake managers may make when analysing the competition is to underestimate potential competitors’ capabilities. When this happens, managers don’t take the steps they should to continue to improve their products or services. The result can be significant decreases in both market share and profits. For the latter part of the 1990s and the majority of the first decade of the 2000s, Nokia was the dominant company in the mobile phone business. Nokia developed their own phone operating system, Symbian, and developed top-end phones to use it. The top

Competitors are companies in the same industry that sell similar products or services to customers. Holden, Ford, Toyota, Honda, Mitsubishi, Nissan, Hyundai and Kia all compete for automobile customers. SBS, ABC, Channel 9, Channel 7 and Channel 10, along with cable channels and content streaming providers like Netflix, Stan and Amazon’s Prime Video, compete for the attention of TV viewers. Often the

competitors companies in the same industry that sell similar products or services to customers

SMART MGMT

REDUCING SUPPLIER DEPENDENCE One of the ways that companies are trying to reduce the bargaining power of rare-earth metal suppliers in China is by looking for alternative sources. Japanese electronics maker Hitachi announced plans to recycle two rare-earth metals, neodymium and dysprosium, by recycling their own products (such as hard drives and air conditioners) rather than ordering them from Chinese suppliers. This demand has driven new exploration and new refining techniques around the world, including Australia. Recent projections suggest that Australian producers are set to exceed China in the global supply of rare-earth metals.32

Buyer dependence is the degree to buyer dependence which a supplier relies on a buyer because the degree to which a supplier relies on a buyer of the importance of that buyer to the because of the importance supplier’s sales and the difficulty of finding of that buyer to the other buyers for its products. An example supplier and the difficulty of finding other buyers for of this can be seen in the food and grocery its products industry. According to Samantha Blake of the Australian Food and Grocery Council (AFGC), ‘Australia’s retail environment for food and grocery products is one of the most concentrated in the world with the top three retailers in Australia accounting for over 90 per cent of total supermarket sales’.38 In recent years it has been argued that it is difficult for supermarket suppliers to negotiate reasonable trading terms in Australia and New Zealand because these countries have the highest levels of supermarket concentration in the world, giving substantial market power to major supermarkets. Furthermore, it has been said that manufacturers are also finding it hard to compete with growing levels of private-label products, which are forecast to rise in Australia from 25 per cent to more than 40 per cent by 2020.39 Critics of the level of market concentration in Australia have said that suppliers and farmers simply can’t afford not to deal with the major two supermarkets and because of this power imbalance, farmers and manufacturers have now become ‘price-takers’.

SUPPLIER COMPONENT suppliers companies that provide material, human, financial and informational resources to other companies supplier dependence the degree to which a company relies on a supplier because of the importance of the supplier’s product to the company and the difficulty of finding other sources of that product

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of the line Nokia ‘smart’ phones did not use touch screen technology and were often noted for being ‘non-intuitive’ in their use. The arrival of the Apple iPhone and other smartphones like Samsung, LG and HTC using the Android operating system, with a touch screen and icon-based user interface, toppled Nokia from its top spot. The rapid fall from the top shook the Finnish company as they faced a future without their own operating system installed on their flagship smartphones. What followed was an ill-fated and relatively brief relationship which saw Microsoft buy Nokia for US$7.2 billion in 2014 and put the Windows operating system in Nokia smartphones. Despite initial high hopes, the Nokia/Microsoft phones never caught the sales levels that Apple’s iPhone enjoys and only gained 3 per cent of the smartphone market.33 Nokia has been coming back into the smartphone market over the course of 2017 and 2018, with their most recent range of phones using the Android operating system and containing lots of features. For the people old enough to have fond memories of the classic Nokia phones, the company has released retro-styled phones which replicate the look and feel of the ‘old school’ phone. The Nokia 3310 and 8810 4G ‘banana phone’ look and feel like products from 1996 when Nokia was king, and once again Nokia is using an operating system that is not Android, Windows or iOS. These retro phones are using KaiOS, which is a Linux-based operating system for phones.34

Suppliers are companies that provide

material, human, financial and informational resources to other companies. A key factor influencing the impact and quality of the relationship between companies and their suppliers is how dependent they are on each other.35 Supplier dependence is the degree to which a company relies on that supplier because of the importance of the supplier’s product to the company and the difficulty of finding other sources for that product. Chinese mining companies, for example, provide 97 per cent of rare-earth materials like samarium, scandium and yttrium, which are used to manufacture TV screens, mobile phones, fibre optics and electric motors.36 When China announced it was cutting exports of rare-earth materials, Sojitz, which imports rare-earth materials to Japan for companies like Hitachi, estimated that Japanese companies would face shortages of 10 000 tonnes a year. ‘The only real solution to the problem is to buy new mining rights overseas’, according to Toru Okabe, an engineering professor at the University of Tokyo.37 The emerging rare earth metal mines in Australia may just meet that demand.

In Australia 90 per cent of supermarket sales come from one of the three major retailers, granting these companies significant market power

The AFGC has stated that supermarkets have been unfairly expecting manufacturers to accept no or very small price increases to subsidise their own new low prices. However, in 2015, following intervention from the Australian Competition and Consumer Commission (ACCC) and an arbitration process chaired by former Victorian State Premier Jeff Kennett, the two major supermarket chains have agreed to refund suppliers money and allow them to quit unfair supply contracts if they choose to. Gary Dawson, CEO of AFGC, has welcomed the outcome and

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congratulated Coles and Woolworths for formally committing to sign up to an industry code of conduct for the treatment of suppliers. The code is intended to drive behavioural change and encourage fair and effective competition in the long-term interest of consumers.40 As the Australian supermarkets example shows, a high degree of buyer or seller dependence can lead to opportunistic behaviour, in which opportunistic behaviour one party benefits at the expense of a transaction in which one party in the relationship benefits at the other. Though opportunistic the expense of the other behaviour between buyers and relationship behaviour suppliers will never be completely mutually beneficial, long term exchanges between buyers and eliminated, many companies believe suppliers that both buyers and suppliers can benefit by improving the buyer– supplier relationship.41 In contrast to opportunistic behaviour, relationship behaviour focuses on establishing a mutually beneficial, long-term relationship between buyers and suppliers.42

INDUSTRY REGULATION COMPONENT Regulatory agencies affect businesses by creating and enforcing rules and regulations to protect consumers, employees or society as a whole. Government agencies and regulatory commissions can affect almost any kind of business. Surveys indicate that managers rank dealing with government regulations as one of the most demanding and frustrating parts of their jobs.43 Whereas the political/legal component of the general environment affects all businesses, the industry regulation component consists of regulations and rules that govern the practices and procedures of specific industries, businesses and professions. Airbnb, the home-sharing website that helps homeowners earn extra money through short-term rentals of rooms, apartments or homes, is facing regulatory push back from major cities. Regulators argue that Airbnb rentals reduce the supply of housing that could go to full-time renters or owners, thus driving expensive housing prices even higher. Accordingly, in Australia some state governments are regulating how Airbnb can operate. In 2018, the New South Wales state government passed legislation to allow strata owner corporations to pass by-laws to prevent short-term letting in their block if the owner does not live in the unit they are letting out. The intention is to prevent speculators buying up apartments to put on Airbnb, but still allowing owner/ occupiers to continue to let spare rooms if they are not in use. The new rules also state that there is a limit of 180 days per year for any short-term rental. NSW’s then Minister for Innovation and Better Regulation, Matt Kean stated that it had been a complex issue to resolve. ’We’ve been grappling with how to regulate this industry for a little over two years’, he said.44

Similarly, London makes Airbnb limit homeowners to no more than 90 rental days a year. Amsterdam does the same, but the limit is 60 rental days a year. Regulators believe that limiting rental days should discourage home owners from purchasing properties for the purpose of renting them out all year via Airbnb. Not surprisingly, Airbnb disagrees with these regulations and frequently takes regulators to court. In New York, Airbnb’s largest market, where it’s illegal to rent an entire apartment for less than 30 days, Airbnb has filed with a court appeal, arguing that the law, ’would impose significant immediate burdens and irreparable harm’ to its business.45

ADVOCACY GROUPS Advocacy groups are groups of concerned

advocacy groups

people who band together to try to influence (also known as lobby the business practices of specific industries, groups) groups of concerned people who businesses and professions. The members band together to try to of a group generally share the same point of influence the business practices of specific view on a particular issue. For example, industries, businesses and environmental advocacy groups might try to professions get manufacturers to reduce pollution emissions. Unlike the industry regulation component of the specific environment, advocacy groups cannot force organisations to change their practices. Nevertheless, they can use a number of techniques to try to influence companies, such as public communications, media advocacy, webpages, blogs and product boycotts. The public communications public approach relies on voluntary participation communications an advocacy group tactic by the news media and the advertising that relies on voluntary industry to send out an advocacy group’s participation by the message. For example, a public service news media and the advertising industry to campaign to encourage people to quit get the advocacy group’s smoking ran ads in newspapers and message out magazines and on television throughout Australia with the message that ‘Every cigarette is doing you damage’.46 Media advocacy is much more aggressive than the public communications approach. A media advocacy approach typically involves framing the media advocacy group’s concerns as public issues an advocacy group tactic ( a ffe c t i n g eve r yo n e ) ; ex p o s i n g that involves framing issues as public issues; exposing questionable, exploitative or unethical questionable, exploitative practices; and creating controversy that is or unethical practices; and forcing media coverage by likely to receive extensive news coverage. buying media time or creating PETA (People for the Ethical Treatment of controversy that is likely to receive extensive news Animals), which has offices in Australia, coverage the United States, England, Italy and Germany, uses controversial publicity stunts and advertisem*nts to try to change the behaviour of large organisations, fashion designers, medical researchers and

MGMT FACT

AUSTRALIAN GOVERNMENT REGULATORY AGENCIES AND COMMISSIONS Australian Competition and Consumer Commission http://www.accc.gov.au/

The ACCC promotes competition and fair trade in the market place to benefit consumers, businesses and the community. It also regulates national infrastructure services. Its primary responsibility is to ensure that individuals and businesses comply with the Commonwealth competition, fair trading and consumer protection laws.

Department of Sustainability, Environment, Water, Population and Communities http://www.environment.gov.au/

The Australian Government Department of Sustainability, Environment, Water, Population and Communities (formerly the Department of the Environment, Water, Heritage and the Arts) develops and implements national policy, programs and legislation to protect and conserve Australia’s environment.

Australian Human Rights Commission http://www.humanrights.gov.au/

The Australian Human Rights Commission (previously the Human Rights and Equal Opportunity Commission, HREOC) website provides information on human rights issues including: Aboriginal and Torres Strait Islander social justice, disability rights, human rights, racial discrimination and sex discrimination. They also provide information about the United Nations, how to make a complaint, information for employers and information for students.

Australian Communications and Media Authority http://www.acma.gov.au/

The Australian Communications and Media Authority (ACMA) is responsible for the regulation of broadcasting, radio communications, telecommunications and online content. They provide information on the Internet, radio and TV, phones and licences for consumers and industry.

The Reserve Bank of Australia http://www.rba.gov.au/

As the nation’s central bank, the RBA controls interest rates and money supply, and monitors the Australian banking system to produce a growing economy with stable prices.

Pharmaceutical Benefits Scheme http://www.pbs.gov.au/

The PBS Schedule lists all of the medicines available to be dispensed to patients at a government-subsidised price. The Schedule is part of the wider Pharmaceutical Benefits Scheme managed by the Department of Health and Ageing and administered by Medicare Australia.

Australian Securities and Investments Commission http://www.asic.gov.au

ASIC is Australia’s corporate, markets and financial services regulator and contributes to Australia’s economic wellbeing by ensuring that Australia’s financial markets are fair and transparent.

anyone else it believes is hurting or mistreating animals. In one protest, PETA mounted a vigorous campaign against the Australian wool industry practice of mulesing sheep to prevent fly strike (a deadly infestation of blowfly larvae in the skin and fleece of merino sheep). PETA recruited highprofile celebrities to advocate against mulesing and called for fashion designers around the world to stop using Australian wool. Sections of the Australian wool industry responded to public pressure by seeking alternative ways to protect sheep from flystrike.47 Research undertaken at the University of Adelaide’s Roseworthy campus is conducting animal trials with naturally occurring proteins that help to stop wool growing around the problematic area of the sheep’s backside, so the desired effect of mulesing occurs naturally.48 product boycott A product boycott is a tactic in an advocacy group tactic which an advocacy group actively tries to that involves protesting a company’s actions by persuade consumers not to purchase a convincing consumers not company’s product or service. to purchase its product or service

WORKPLACE AND COMMUNITY

OPERATORS ARE STANDING BY Ever wonder how so many people can vote on TV competitions such as Big Brother, The Voice or Dancing with the Stars at the same time? Or what would happen if millions of people all used the phone at once? In most countries around the world, telecommunications companies have dedicated systems to identify mass-calling events. Specialists keep on top of what’s going on in the world that could cause a spike in phone traffic. They patrol the Internet, TV networks and newspapers. They subscribe to the email newsletters and Twitter accounts of every major league sports team and regularly visit Ticketmaster.com and other ticket vendors. They know when concert tickets for popular bands go on sale, when major public appearances by dignitaries are scheduled and when TV shows are asking viewers to call in. The goal of all this monitoring is to ensure that they can manage call volumes without a disruption in service.

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your future. And we are very disappointed.’51 LEGO ultimately modified some of the LEGO Friends marketing materials, but the product remained unchanged – pink and purple bricks for building pop star houses, cupcake cafés and a supermarket. Overall, LEGO Friends has been a tremendous success. The boycott had no effect on sales, and independent research firm NPD Group credits LEGO Friends with increasing the market for girls’ building toys from $300 million to $900 million in just three years.52 According to LEGO Senior Design Manager Benedikte Schinkel Stamp, ’We just had to wait for the controversy to die out.’53

LO4

In Chapter 1, you learned that managers are responsible for making sense of their business environments. As our discussions of the general and specific environments have indicated, however, making sense of business environments is not an easy task. Because external environments can be dynamic, confusing and complex, managers use a threestep process to make sense of the changes in their external environments: ● environmental scanning ● interpreting environmental factors ● acting on threats and opportunities.

ENVIRONMENTAL SCANNING Environmental scanning is searching

environmental

the environment for important events or scanning issues that might affect an organisation. searching the environment for important events or Managers scan the environment to stay issues that might affect up to date on important factors in their an organisation industry. For example, with one PPLY E A out of every four new car buyers Complete the ‘What would you do?’ purchasing highly profitable worksheet for Chapter 3 4WD sports utility vehicles (SUVs), car executives hadn’t paid much attention to environmental groups’ complaints about SUVs’ extremely poor fuel consumption figures. However, and in line with recent global trends, new car buyers in Australia have been increasingly switching to smaller vehicles and to SUVs. These two categories now make up nearly two-thirds of the Australian new car market.54 Managers also scan their environments to reduce uncertainty. Recently, Gatorade created a ‘Mission Control Center’, a room filled with computer monitors and marketing experts, resembling a NASA control centre,

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This was the case with the LEGO Group, a familyowned Danish company that makes LEGO block and toys. While 90 per cent of LEGO players are boys, the company has launched four girl-focused toy lines since 1979 – mostly for building jewellery, beach houses and stables in pink and purple. Feminist groups criticised each line for being less challenging than the traditional LEGO bricks aimed at boys and for perpetuating gender stereotypes through ‘pinkification’. Before making another attempt at appealing to girls, LEGO spent five years conducting observation research to better understand how they assembled and played with LEGO products. LEGO also researched how girls and their parents make purchase decisions. (As it turns out, when given the choice, they still opted for pinks and purples over gender-neutral packaging.) The research led to the development and launch of LEGO Friends, which design director Rosario Costa described as, ‘a real construction toy – not dumbing it down’.50 But as with prior product lines aimed at girls, LEGO Friends was harshly criticised and boycotted. Advocacy group Spark Movement published an open letter to LEGO, beginning, ‘We represent the girls, the parents, the children, the fans, the hobbyists, the collectors, the friends, the big sisters and brothers, the grandparents, and

MAKING SENSE OF CHANGING ENVIRONMENTS

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The same pressure on telephone services can become a serious public safety issue. During natural disasters, telephone companies have contingency plans for such surges in demand should they happen during a flood, bushfire or earthquake. For example, immediately following the June 2012 earthquake in Melbourne, Telstra monitoring showed a dramatic spike in mobile phone usage.49

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that constantly monitors social media networks. The monitors display constantly updated visuals that provide real-time information on what people are saying about Gatorade, its competitors, and even sport nutrition in general, within social media networks. This allows Gatorade’s marketing team to track how consumers are reacting to its ads and to make quick adjustments based on those reactions. After releasing a campaign called ‘Gatorade Has Evolved’, Mission Control determined that the song featured in the ad, by David Banner, was so popular that within 24 hours, the company produced and released a full-length version of the song. With such a speedy response to consumers’ desires, Gatorade was able to increase engagement with its product education by 250 per cent.55 Organisational strategies also affect environmental scanning. In other words, managers pay close attention to trends and events that are directly related to their company’s ability to compete in the market place.56 Microsoft used to take software hackers to court to prosecute them for the damage caused by their efforts. However, since former chairman Bill Gates declared that security is Microsoft’s top priority, the company has been actively trying to engage the services of friendly hackers. Though companies like Microsoft long considered hackers to be the enemy, they are now a source of competitive advantage. From Microsoft’s perspective, teaming up with the hacker community to solve software problems prior to release simply makes good business sense. The security program manager for Microsoft stated that, with the assistance of the so-called researchers, ‘we have discovered things during the development of these products that we might not have discovered otherwise’.57

Gatorade’s ‘Mission Control Center’, a room filled with computer monitors and marketing experts, resembling a NASA control centre, constantly monitors social media networks

Finally, environmental scanning is important because it contributes to organisational performance. Environmental scanning helps managers detect environmental changes and problems before they become organisational crises.58 Furthermore, companies whose CEOs do more environmental scanning have higher profits.59 CEOs in better-performing organisations scan their organisation’s environments more frequently and scan more key factors in their environments, in more depth and detail than do CEOs in poorer-performing organisations.60

INTERPRETING ENVIRONMENTAL FACTORS After scanning, managers determine what environmental events and issues mean to the organisation. Typically, managers view environmental events and issues as either threats or opportunities. When managers interpret environmental events as threats, they take steps to protect the company from further harm. For example, when Internet phone services (Voice over Internet Protocol or VoIP) emerged as a threat, traditional phone companies around the world responded by announcing billion-dollar plans to expand their fibre-optic networks so that they could offer phone (using VoIP), Internet services and TV packages, just like those the cable and satellite companies offered.61 By contrast, when managers interpret environmental events as opportunities, they consider strategic alternatives for taking advantage of those events to improve company performance.

ACTING ON THREATS AND OPPORTUNITIES After scanning for information on environmental events and issues, and interpreting them as threats or opportunities, managers have to decide how to respond to these environmental factors. Deciding what to do under conditions of uncertainty is always difficult. Managers can never be completely confident that they have all the information they need or that they correctly understand the information they have. Because it is impossible to comprehend all the factors and changes, to assist decision making, managers often rely on simplified models of external environments called ‘cognitive maps’. Cognitive maps visually summarise the perceived relationships bet ween environment al factors and possible organisational a c t i o n s . cognitive maps graphic depictions of For example, the cognitive map how managers believe shown in Figure 3.3 represents a small environmental factors clothing store owner’s interpretation relate to possible organisational actions o f h e r b u s i n e s s e nv i r o n m e n t .

CHAPTER 3 Organisational environments and cultures

Target

– Low-cost

–

Kmart

Reasonable selection and prices

+ Low rent and taxes

Know customers well

+ Good value/ good service most likely to produce success and profits

Good location Large shopping centre 20 minutes away

Good value Good service

Low employee turnover

– Large selection of latest fashions

Environmental factors

–

Too small to get volume discounts

Potential strategies Company strengths and weaknesses

FIGURE 3.3

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The map shows three kinds of variables. The first variables, shown as rectangles, are environmental factors, such as a large shopping centre located 20 minutes away. The second variables, shown in ovals, are potential actions that the store owner might take, such as a low-cost strategy; good-value, good-service strategy; or a large selection of the latest fashions strategy. The third variables, shown as trapezoids, are company strengths, such as low employee turnover, and weaknesses, such as small size. The plus and minus signs on the map indicate whether the manager believes there is a positive or negative relationship between variables. For example, the manager believes that a low-cost strategy won’t work because Kmart and Target are nearby. Offering a large selection of the latest fashions would not work either – not with the small size of the store and its close proximity to a large shopping centre. However, the manager believes that a good-value, good-service strategy would lead to success and profits because of the store’s low employee turnover, good knowledge of customers, reasonable selection of P P A LY Get an overview of clothes at reasonable what environmental uncertainty is and how to manage it prices and good location.

INTERNAL ENVIRONMENTS

External environments are external trends and events that have the potential to affect companies. By contrast, the internal environment consists of the trends internal and events within an organisation that affect environment the events and trends the management, employees and inside an organisation organisational culture. Internal environments that affect management, are important because they affect what employees and organisational culture people think, feel and do at work. Creating, maintaining and changing organisational culture matters because research shows that positive, consistent cultures improve company performance. From a six-year study of 95 automobile dealerships, Professor Michael Gillespie says, ‘We found

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Cognitive maps

founders are gone, how are their values, attitudes and beliefs sustained in the organisational culture? The answer to this is ‘through stories and heroes’. Organisational members tell organisational organisational stories to make sense stories of organisational events and changes and stories told by organisational members to emphasise culturally consistent to make sense of assumptions, decisions and actions.67 At organisational events and changes and to Wal-Mart, the giant US retail chain that emphasise culturally also operates in China and other regions consistent assumptions, decisions and actions of the world, stories abound of founder Sam Walton’s thriftiness as he strove to make Wal- Mart the low-cost retailer that it is today. According to Gary Reinboth, one of Wal-Mart’s first store managers: ‘in those days, we would go on buying trips with Sam, and we’d all stay, as much as we could, in one room or two. I remember one time in Chicago when we stayed eight of us to a room. And the room wasn’t very big to begin with. You might say we were on a pretty restricted budget’.68 Today, Sam Walton’s thriftiness still permeates WalMart. Everyone, including top executives and the CEO, flies economy class rather than business or first class. When employees travel on business, it’s still the norm to share rooms (though two to a room, not eight!) at relatively inexpensive motels instead of business class hotels. Likewise, for business travel, Wal-Mart will reimburse only up to US$15 per meal, which is half to one-third the reimbursem*nt rate at similar-sized companies (remember, Wal-Mart is one of the largest companies in the world). organisational A second way in which organisational heroes people celebrated for culture is sustained is by recognising and their qualities and celebrating heroes. By definition, achievements within an organisational heroes are people within organisation

that culture causes performance, not vice versa.’ Culture clearly comes first. Dealerships whose cultures did not improve were less profitable over the course of the study.62 But dealerships with positive cultures in the study’s first few years usually had higher profits in the later years. It usually took, however, several years of change to an organisational culture to improve dealership performance as measured by customer satisfaction and dealer sales. ‘The culture of a sales department right now is to influence the customer satisfaction from that department two years from now, and that customer satisfaction is going to drive vehicle sales two years from that point’, says Gillespie.63 Gillespie and his co-authors concluded, ‘… that strong culture at the foundation can be a unique point of leverage for winning and retaining customers over time.’64 Leadership consultant David Grossman concludes, ‘Culture change today is at the heart of winning because it’s so difficult for [other] employers to copy.’ 65 The key component in internal environments is organisational culture, which is the organisational set of key values, beliefs and attitudes culture the values, beliefs and shared by organisational members. attitudes shared by After reading the next section, organisational members you should be able to explain how organisational cultures are created and how they can help companies be successful.

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Let’s take a closer look at: ● how organisational cultures are created and maintained ● the characteristics of successful organisational cultures ● how companies can APPLY accomplish the difficult Get an overview of what corporate culture is and t ask of changing how it develops organisational cultures. EO VID

ORGANISATIONAL CULTURES: CREATION, SUCCESS AND CHANGE iStock.com/GYI NSEA

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CREATION AND MAINTENANCE OF ORGANISATIONAL CULTURES A primary source of organisational culture is the company founder. Founders like Bill Gates (Microsoft) create organisations in their own image and imprint them with their beliefs, attitudes and values. Microsoft employees share founder Bill Gates’ determination to stay ahead of software competitors. Says a Microsoft vice-president, ‘No matter how good your product, you are only 18 months away from failure’.66 Though company founders are instrumental in the creation of organisational cultures, eventually founders retire, die or choose to leave their companies. When the

Bill Gates’ creation and maintenance of an organisational culture while with the company was crucial for Microsoft’s continued success

CHAPTER 3 Organisational environments and cultures

the organisation admired for their qualities and achievements. When it was renovating a large car dealership, a major building company found that its carpet subcontractor had mistakenly scheduled the new carpet to be delivered two weeks after it was to be installed. Rather than allow construction to be delayed, a company employee kept the project on schedule by immediately reordering the carpet, flying interstate to the carpet manufacturer’s factory, renting a truck and then driving the carpet back to the car dealership, all within 48 hours of learning about the problem. The building company CEO says this story is told and retold within their company as an example of heroic customer service. Moreover, the car dealership was so delighted with this extraordinary service that it went on to refer over $10 million in new business to the builder.69 Finally, the last way of sustaining organisational culture is through ceremonies. Organisational ceremonies are gatherings in which symbolic acts commemorate or celebrate notable achievements or changes. Patti Sanchez, senior vice president at Duarte, a communications consulting firm, explains that organisations, ’… rely on ceremonies to anticipate new beginnings, demarcate endings, and help everyone understand or navigate the changes at hand.’ 70 Sanchez describes a famous organisational ceremony at Apple in which co-founder and CEO Steve Jobs held a mock funeral for the Mac OS 9 operating system (which could only run one application at a time) nine months after Apple released the unix-based Mac OS X capable of running multiple applications simultaneously. ‘With sad music playing in the background, Jobs placed a large box labeled “Mac OS 9” into a coffin on stage and then delivered a eulogy for the operating system that had been “a friend to us all”.’71 Though done tongue-in-cheek, Jobs’ Mac OS 9 funeral was an important signal to Apple’s customer and software developers that it would never go back to OS 9’s outdated computing standards.

Preliminary research shows that organisational culture is related to organisational success. Cultures based on adaptability, involvement, a clear vision and consistency can help companies achieve higher sales growth, return on assets, profits, quality and employee satisfaction.72 Adaptability is the ability to notice and respond to changes in the organisation’s environment. Cultures need to reinforce important values and behaviours, but a culture becomes dysfunctional if it prevents change. In cultures that promote higher levels of employee involvement in decision making, employees feel a greater sense of ownership and responsibility. Unfortunately, that was the case at Mattel, the toy company, where Barbie sales were down 18 per cent after dropping 13 per cent the year before. Sales of Fisher-Price 50

Getty Images/Universal Images Group

SUCCESSFUL ORGANISATIONAL CULTURES

toys had declined three straight years. With revenues shrinking, Mattel cut $550 million in expenses just to maintain profits. CEO Bryan Stockton tried turning things around by changing the PowerPoint-presentation, meetingdriven, slow-to-make decisions culture. For example, it took eight meetings and 30 design iterations to approve the school crest for the Monster High toy line. As such, Mattel drifted from its creative roots focused on fun and play toward a conservative culture focused on the bottom line. To jump-start cultural change, CEO Stockton generated new rules for meetings: no more than 10 participants (except for training meetings), every meeting must have a specific purpose and ’There should be no more than a TOTAL of three meetings to make any decision’.73 Change was slow, but it took just one meeting to approve the new package designs for the 2016 Hot Wheels toys. Unfortunately, Mattel subsequently lost a $300 million-ayear Disney toy licensing agreement to Hasbro. CEO Stockton resigned in January 2015. Interim CEO Christopher Sinclair led a two-year turnaround that saw global Barbie doll sales rebound 20 per cent. Sinclair relinquished his interim CEO responsibilities in April 2017 when Google executive Margaret Georgiadis became Mattel’s new CEO.74 Company mission is the business’ company mission purpose or reason for existing. In organisational a business’ purpose or cultures with a clear company vision, the reason for existing organisation’s strategic purpose and direction are apparent to everyone in the company. When managers are uncertain about their business environments, the vision helps guide the discussions, decisions and behaviour of the people in the company. Finally, in consistent organisational consistent cultures, the company actively defines and organisational teaches organisational values, beliefs and cultures when a company actively attitudes. Consistent organisational cultures defines and teaches are also called ‘strong cultures’ because the organisational values, beliefs and attitudes core beliefs are widely shared and strongly

When employees enjoy the space they work in, it helps to foster a positive organisational culture

held. For example, everyone who has ever worked at McDonald’s has been taught its four core values: quality, service, cleanliness and value.75 Studies show that companies with consistent or strong corporate cultures will outperform those with inconsistent or weak cultures most of the time.76 Why? The reason is that when core beliefs are widely shared and strongly held, it is easy for everyone to figure out what to do or not do to achieve organisational goals. Having a consistent or strong organisational culture doesn’t guarantee good company performance. When core beliefs are widely shared and strongly held, it is very difficult to bring about needed change. Consequently, companies with strong cultures tend to perform poorly when they need to adapt to dramatic changes in their external environments. Their consistency sometimes prevents them from adapting to those changes.77 Indeed, McDonald’s saw its sales and profits decline over the last decade as customer eating patterns began changing. To turn around performance, McDonald’s developed hospitality and multilingual computer training programs and expanded its menu to include healthier and snack-oriented selections. Over 5000 McDonald’s restaurants were remodelled in a three-year period and now feature warmer lighting, upbeat music, flat-screen TVs and wi-fi networks; some of these changes can be found in McCafés around Australia (in fact, the first McCafé was in Melbourne), Malaysia, Singapore and Hong Kong. The company’s promotional message ‘I’m lovin’ it’ went from being derided by advertising executives to becoming one of the most recognisable jingles in any market. Only a few years into the plan, McDonald’s achieved 32 consecutive months of positive sales (its longest streak in 25 years), reached record annual revenues of more than US$20 billion (A$28 billion) and tripled the cash dividend paid to shareholders.78

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Weaver lived in an RV in the company’s parking lot for 54 weeks, eating at the Googleplex and showering in the company gym. His record stood until programmer Ben Discoe joined Google and lived out of a GMC van in the company parking lot for 56 weeks. Following Weaver’s strategy, Discoe ate at the Googleplex, charged his electronics at the office and ‘badged’ into the building in the middle of the night if he needed the restroom. According to Discoe, ‘Only a fool would pay rent in the Bay Area’. SOURCE: J. STEIN, ‘THE MAN WHO LIVED AT GOOGLE: THIRTEEN MONTHS OF WORKING, EATING, SLEEPING, AND BATHING AT THE GOOGLEPLEX. THE SAGA OF BEN DISCOE’, BLOOMBERG BUSINESSWEEK, 27 JULY–2 AUGUST 2015, 57–59.

CHANGING ORGANISATIONAL CULTURES As shown in Figure 3.4, organisational cultures exist on three levels.79 First, on the surface level are the reflections of an organisation’s culture that can be seen and observed, such as symbolic artefacts (e.g. dress codes and office layouts) and employees’ and managers’ behaviours. Next, just below the surface, are the values and beliefs expressed by people in the company. You can’t see these values and beliefs, but they become clear if you listen carefully to what people say and to how decisions are made or explained. Finally, unconsciously held assumptions and beliefs about the company are buried deep below the surface. These are the unwritten views and rules that are so strongly held and so widely shared that they are rarely discussed or even thought about, unless someone attempts to change them or unknowingly violates them. Changing such assumptions and beliefs can be very difficult. Instead, managers should focus on the parts of the organisational culture they can control; these include observable surface-level items, such as employees’ behaviours and symbolic artefacts, and expressed values and beliefs, which can be influenced through employee selection. Let’s see how these can be used to change organisational cultures.

HARDCORE TECH CULTURE Crunchtime at a software development firm can be so intense that employees spend several days at the office without even going home. As journalist Joel Stein puts it, ‘Sleeping in the office is as Silicon Valley as startups in garages.’ Spending the night at work can be seen as a badge of commitment and dedication; not so much to a company, but to the occupation of computer coding itself. It’s said that even after he was a billionaire, Yahoo! co-founder David Filo would doze in a sleeping bag under his desk. Elon Musk of PayPal (and now Tesla and SpaceX) would do the same on a beanbag alongside Filo’s sleeping bag. Aaron Levie, founder of Box.com, even moved his bed to his new office when his company (and his staff) outgrew his home. But workers who actually live on site are in another category altogether. Google programmer Matthew

SEEN (Surface level) • Symbolic artefacts such as dress codes • Workers’ and managers’ behaviours

HEARD (Expressed values and beliefs) • What people say • How decisions are made and explained BELIEVED (Unconscious asumptions and beliefs) • Widely shared assumptions and beliefs • Buried deep below surface • Rarely discussed or thought about FIGURE 3.4

Three levels of organisational culture

CHAPTER 3 Organisational environments and cultures

One way of changing a corporate culture is to use behavioural addition or behavioural substitution to establish new patterns of behaviour among managers and employees. Behavioural addition is behavioural the process of having managers and addition the process of having employees perform a new behaviour, managers and employees while behavioural substitution is perform new behaviours that are central to and having managers and employees perform symbolic of the new a new behaviour in place of another organisational culture that a company wants to behaviour. The key in both instances is to create choose behaviours that are central to and behavioural symbolic of the ‘old’ culture you’re substitution the process of having changing and the ‘new’ culture that you managers and employees want to create. perform new behaviours central to the ‘new’ Qantas, the Australian national airline, organisational culture in has embarked on a restructuring of the place of behaviours that business which started with the were central to the ‘old’ organisational culture establishment of its subsidiary, Jetstar. With the Global Financial Crisis dampening demand for international travel and intense competition coming from old and new foes (Qatar Airlines, Emirates and Singapore Airlines, to name just a few), Qantas is looking to be more efficient. The current Qantas plan includes separating the domestic operations arm of the business from the international operations. Over 90 years of tradition and experience is being confronted with change. The management culture of Qantas is being reshaped to cope with this change through the initiatives of CEO Alan Joyce. Joyce, who came to his current role from a background in low-cost airlines in Europe and Jetstar in Australia, is bringing to Qantas that same sharp eye for cutting through layers of entrenched behaviours. Joyce is, however, insisting on preserving the record of safety and engineering excellence that are hallmarks of the company. By articulating a clear vision of the future and by setting a personal example of the new ways of doing business, Alan Joyce is changing behaviours and culture at Qantas. The changes are paying off; in 2018 Qantas was able to report half year profit before tax of $975 million, a 14.6 per cent improvement on the same time period in 2017. The after tax profit for Qantas was $607 million, up by 17.8 per cent.80 Similar changes can be also be seen in other industries. Another way in which managers can begin to change corporate culture is to change the visible visible artefacts artefacts of their old culture, such as the visible signs of an office design and layout, company dress organisation’s culture, such as the office design code, and recipients (or non-recipients) of and layout, company company benefits and perks like stock dress code and company benefits and perks like options, personal parking spaces or the stock options, personal private company dining room. parking spaces or the private company dining Ryanair is a Dublin based airline that room offers incredibly low rates. Ryanair led the way in charging passengers for every part of the flight experience, including $50 to print a boarding 52

pass at the airport and a ‘no refunds’ policy for cancelled flights. Ryanair’s brazen policies originate from its brash CEO, Michael O’Leary. Regarding passengers who forget to print boarding passes at home, O’Leary says, ’We think they should pay 60 euros for being so stupid.’ Regarding cancelled flights, he says, ‘You’re not getting a refund, so **** off. We don’t want to hear your sob stories. What part of “no refund” don’t you understand?’81 Unfortunately, O’Leary’s unabashed statements have rubbed off on the company’s staffers, whose similarly negative attitudes discourage customers from choosing the airline. To address the problem, Ryanair recently introduced the ‘Always Getting Better’ campaign (also called the ‘Being Nicer’ campaign) to change the company’s focus from being cheap to providing a superior customer experience. The company reduced or eliminated some (but not all) of its fees; simplified online booking to require only 5 mouse clicks instead of 17; and introduced fully allocated seating to minimise congestion at the boarding gate. Previously, its ‘first come, first served’ boarding strategy encouraged travellers to rush the gates to get better seats.82 Crews were issued new, brightly colored uniforms and the company moved its headquarters from a tired, dull facility to a cheerful building with colourful art on the walls. The changes dramatically improved company performance. In just one year, the number of Ryanair passengers increased 10 per cent, and the load factor (the measurement of how full a jet is) reached 95 per cent. O’Leary said, ’If I’d known being nicer to customers was going to work so well, I’d have done it ages ago.’83 Cultures can also be changed by hiring and selecting people with values and beliefs consistent with the company’s desired culture. Selection is the process of gathering information about job applicants to decide who should be offered a job. In the human resources management role for most organisations, selection instruments measure whether job applicants have the knowledge, skills and abilities needed to succeed in their jobs. But companies are increasingly testing job applicants to determine how they fit with the company’s desired culture (i.e. values and beliefs). During the hiring process, Amazon uses a group of employees called ‘Bar Raisers’, who interview job candidates from other areas of the company, asking difficult and unexpected questions. Bar Raisers, who spend two to three hours on each job candidate, conducting phone and face-to-face interviews and participating in evaluation meetings, have the power to veto any applicant they’ve assessed. Founder Jeff Bezos started the Bar Raiser program to create a consistent corporate culture by ‘raising the bar’ when it came to hiring talent. Rather than hiring people for particular jobs, Bezos asks Bar Raisers to focus on hiring people who can succeed in Amazon’s culture. John Vlastelica, an HR consultant who worked at Amazon

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changing visible cultural artefacts, using behavioural substitution or hiring people with values consistent with a company’s desired culture, will change a company’s organisational culture. The best results are obtained by combining these methods. Together, these are some of the best tools managers have for changing culture because they send the clear message to managers and employees that ‘the accepted PPLY E A way of doing things’ Find out more about how you deal with the unknown, or your tolerance has changed. for ambiguity, with this self assessment

CHAPTER 3 Organisational environments and cultures

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in its early days, says, ’You want someone who can adapt to new roles in the company, not just someone who can fill the role that’s vacant’. Susan Harker, Amazon’s vice president of global talent acquisition, says, ‘We want to be as objective and scientific in our hiring as possible. The point is to optimize our chances of having long-term employees.’ And, unlike many companies, that means hiring talented people who fit Amazon’s culture. Human resource consultant Valerie Frederickson says, ‘There is no company that sticks to its process like Amazon does. They don’t just hire the best of what they see; they’re willing to keep looking and looking for the right talent.’84 Corporate cultures are very difficult to change. Consequently, there is no guarantee that any one approach

Ethics and social responsibility

LEARNING OUTCOMES

1 Identify common kinds of workplace deviance.

2 Describe the role of the Australian Competition and Consumer Commission (ACCC) in the Australian business environment.

3 Describe what influences ethical decision making.

4 Explain what practical steps managers can take to improve ethical decision making.

5 Explain to whom organisations are socially responsible.

6 Explain why organisations are socially responsible.

7 Explain how organisations can choose to respond to societal demands for social responsibility.

8 Explain whether social responsibility hurts or helps an organisation’s economic performance.

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WHAT IS ETHICAL AND UNETHICAL WORKPLACE BEHAVIOUR?

Today, it’s not enough for companies to make a profit. We also expect managers to make a profit by doing the right things. Managers don’t have the luxury of choosing theoretically optimal, win–win solutions that are obviously desirable to everyone involved. In practice, solutions to ethical and social responsibility problems aren’t optimal. Often, managers must be satisfied with a solution that just makes do or does the least harm. Rights and wrongs are rarely crystal clear to managers charged with doing the right thing. The business world is much messier than that. ethics Ethics is the set of moral principles or the set of moral principles values that defines right and wrong for a or values that defines right person or group. and wrong for a person Unfortunately, numerous studies have or group consistently produced distressing results about the state of ethics in today’s business world. One global ethics study found that even though business is substantially more trusted than government and that 65 per cent of employees trust the company where they work, just 40 per cent believe the companies they work for are ethical, and only 37 per cent believe that CEOs can be believed.1 Another study found that just 25 per cent trust business leaders to honestly correct mistakes and that less than 20 per cent believed that business leaders would be truthful and make ethical decisions.2 The Ethics & Compliance Initiative’s Global Business Ethics Survey across 13 countries found that: ● 22 per cent of employees were pressured to commit unethical acts ● 33 per cent of employees observed unethical behaviour ● 59 per cent of employees observing unethical behaviour reported it to company officials

Shutterstock.com/Elnur

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findings of previous studies and high by international standards ● The average loss reported is around $3.1 million. It seems that we all want to work for organisations, and people, we can trust. In short, much needs to be done to make workplaces more ethical, but – and this is very important – most managers and employees want this to happen. After reading the next two sections, you should be able to: ● identify common kinds of workplace deviance ● describe the role of the Australian Competition and Consumer Commission (ACCC) in the Australian business environment and explain how companies are encouraged to PPLY E A behave ethically Get started with the media quiz: Theo Chocolate: Managing Ethics and are punished and Social Responsibility for unethical behaviour.

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● 36 per cent of those reporting unethical behaviour experienced retaliation for doing so (see the discussion of whistle-blowing in section 4-4d).3 Fortunately, some studies contain good news about workplace ethics. When people believe their work environment is ethical, they are six times more likely to stay with that company than if they believe they work in an unethical environment.4 In fact, a survey by Deloitte reported that employees who were considering leaving their jobs cited ‘loss of trust’ as the greatest factor.5 One study asked 444 whitecollar workers which qualities they considered to be important in company leaders. The results? Honesty (30%) and communication (22%) ranked by far the highest. Interestingly, these two qualities also ranked highest as areas in which business leaders needed to improve – 16 per cent of respondents said that leaders need to improve their honesty, and 11 per cent cited communication.6 Michael Gould, Bloomingdale’s CEO of 22 years, agrees, saying, ‘To me, the fundamental basis of leadership is trust. If you don’t have trust, you have no leadership.’7 In short, much needs to be done to make workplaces more ethical, but – and this is very important – most managers and employees want this to happen. Every two years KPMG Australia undertakes a survey of fraud, bribery and corruption in Australian and New Zealand businesses. KPMG’s 2017 fraud and misconduct survey found, among other things, that:8 ● The most common perpetrators of fraud are inside the business, with 36 per cent of fraud being attributed to company management. ● Sixty-two per cent of fraud is motivated by personal greed. ● Twenty-two per cent of frauds used some form of technology, such as credit card fraud, hacking into financial systems, setting up false regular electronic transfers and using fake adverts. ● Forty per cent of frauds in Australia are in place over a five-year period before being discovered – detection is taking too long. ● Frauds are evenly spread across the age range – 46–54 year olds top the list with 28 per cent, but 25 per cent are committed by people below 36 – up from the

WORKPLACE DEVIANCE

Ethical behaviour follows accepted ethical behavior principles of right and wrong. Depending behaviour that conforms to a society’s accepted on which study you look at, one-third to principles of right and three-quarters of all employees admit that wrong they have stolen from their employers, committed computer fraud, embezzled funds, vandalised company property, sabotaged company projects, faked injuries to receive workers’ compensation benefits or insurance, or been ‘sick’ from work when they weren’t really sick. Some experts suggest that unethical behaviours like these, which researchers call workplace deviance, may cost companies as much as $3.7 trillion a year, or roughly 5 per cent of their revenues.9 More specifically, workplace workplace deviance deviance is unethical behaviour that unethical behaviour that violates organisational violates organisational norms about right norms about right and and wrong. As Figure 4.1 shows, wrong workplace deviance can be categorised by how deviant the behaviour is, ranging from minor to serious; and by the target of the deviant behaviour, either the organisation or particular people in the workplace.10 One kind of workplace deviance, called production production deviance deviance, hurts the quality and quantity unethical behaviour that hurts the quality and of work produced. Examples include quantity of work produced leaving early, taking excessively long work breaks, intentionally working more slowly or wasting resources.

CHAPTER 4 Ethics and social responsibility

MGMT TREND

LOST TIME IS LOST MONEY A Salary.com study found that 89 per cent of employees admit to wasting time at work, with 62 per cent wasting 30 minutes to an hour, 22 per cent wasting 2 to 3 hours and 4 per cent wasting 4 to 5 hours per day.11 The most accomplished time wasters secretly brought their pet birds to the office, hid under boxes to scare coworkers and held wrestling matches with other employees. A female employee wasted time by shaving her legs in the women’s restroom.12 The biggest source of workplace deviance, however, is probably cyberloafing: wasting time on the job with non-work-related social-media sites and apps like Facebook, Twitter, Instagram or SnapChat, as well as surfing non-work-related retail sites like Amazon .com. Amazingly, participants in a Kansas State University study admitted to wasting 60 per cent to 80 per cent of their work time online! Cyberloafing is estimated to cost US businesses $85 billion a year in loss productivity.13

Organisational

Production deviance • • • •

Property deviance

Leaving early Taking excessive breaks Intentionally working slowly Wasting resources

• • • •

Sabotaging equipment Accepting kickbacks Lying about hours worked Stealing from company

Serious

Minor

Political deviance • • • •

Personal aggression

Showing favouritism Gossiping about co-workers Blaming co-workers Competing non-beneficially

• • • •

Sexual harassment Verbal abuse Stealing from co-workers Endangering co-workers

Interpersonal

FIGURE 4.1

Types of workplace deviance

Source: Adapted from “A Typology of Deviant Workplace Behaviors” (Figure), S. L. Robinson and R. J. Bennett. Academy of Management Journal 38 (1995).

property deviance unethical behaviour aimed at the organisation’s property or products

Property deviance is unethical

behaviour aimed at company property or products. Examples include sabotaging, stealing or damaging equipment or products, and overcharging for services and then pocketing the difference. A survey of 2200 Australian shoppers by research firm Canstar Blue has found that when using self-service checkouts 7 per cent admitted to bagging (stealing) an item without scanning it, while

9 per cent admitted to not paying the full price by scanning the item as a cheaper alternative – ‘swipe everything as carrots’. The items most commonly stolen were fruits and vegetables (24%), packaged foods (16%), snacks and drinks (12%), baby products (12%) and fresh packaged meats (10%). Just 5 per cent of the survey respondents who admitted to stealing an item said they had been caught. Of those who tried to incorrectly scan an item (calling avocados carrots, for example), just 10 per cent said they had been caught. Shoppers aged 18–29 years old were the worst offenders, with 12 per cent admitting to deliberately stealing and 14 per cent scanning an item as something cheaper. In general terms, the older the shopper, the less likely they were to steal. The numbers are not much different from those of two years ago, suggesting that efforts by Coles and Woolworths to crack down on the ‘swipe everything as carrots’ mentality and rein in their massive theft bills have been largely unsuccessful.14 An American study found that organisational employees are involved in a significant amount of property deviance. A survey of 24 large retailers employing 2.3 million employees found that one out of 28 employees was caught stealing each year.15 Likewise, 58 per cent of office employees acknowledge taking company property for personal use, according to a survey conducted for Lawyers.com.16 The theft of company merchandise by employees, called employee shrinkage, employee shrinkage is another common form of property employee theft of company merchandise deviance. Employee shrinkage costs retailers around $3 billion in Australia, with around $750 million directly attributable to employees.17 Around a quarter (24.37%) of theft from retail stores is committed by staff. The causes of shrinkage are such things as internal error (including mispricing), invoicing errors and administrative failure, shoplifting, employee theft and theft/ errors by suppliers and vendors. ‘Sweethearting’ occurs when employees discount or don’t ring up merchandise their family or friends bring to the cash register. In ‘dumpster diving’, employees unload trucks, stash merchandise in a dumpster and then retrieve it after work.18 In the US, ‘sweethearting’ costs the retail service industry (that is, restaurants, hotels, hair salons, car washes and so on) $80 billion annually. Sixty-seven per cent of employees admit to sweethearting, primarily in the hope of receiving similar deals and discounts from the customers to whom they had extended a sweetheart deal.19 Whereas production and property deviance harm companies, political deviance and personal aggression are unethical behaviours that hurt particular people within companies. Political deviance is using deviance one’s influence to harm others in the political using one’s influence company. Examples include making to harm others in the decisions based on favouritism rather than company

performance, spreading rumours about co-workers or blaming others for mistakes they didn’t make. Personal aggression is hostile or aggressive behaviour towards others. Examples include sexual harassment, verbal abuse, stealing from co-workers or personally threatening co-workers. Thankfully, more extreme examples of personal aggression such as workplace deaths due to violence are low in Australia. In fact, the overall incidence of workplace deaths is seemingly trending downwards. Safe Work Australia statistics show that in Australia, as of October 2018, there were 100 work-related deaths – down from 134 in 2017. In 2016–2017, there were 106 260 claims due to serious injury; of these claimants 68 105 were male and 38 155 were female. The highest number of claims by age group was the 50–54 year old cohort (13 735) and the lowest was the 65+ year old cohort (2845). The 20–24 year old cohort recorded 10 085 serious claims. The trend is downward, not just in number but also in frequency. In 2012 there were 223 workplace fatalities in Australia and as of October 2018 there were 100: this is a frequency of 1.5 deaths per 100 000 workers in 2018 and a frequency of 1.93 per 100 000 workers in 2012.20 Safe Work Australia statistics do not disaggregate the cause of traumatic death to the extent that deaths due to violence can be separated from accidents and other causes. In the US, the fatality rate was 3.4 per 100 000 employees in 2015; this is 4836 workplace deaths. In the same year, 703 workplace deaths were due to violence.21

personal aggression hostile or aggressive behaviour toward others

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REGULATORS AND REGULATIONS

Regulating the corporate sector in Australia is mainly undertaken by three government agencies: the Australian Competition and Consumer Commission (ACCC), the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). The ACCC deals with competition matters generally at a national level. The ACCC was established in 1995 following the amalgamation of the Trade Practices Commission (1974) and the Prices Surveillance Authority (1983). The ACCC acts as the consumer and competition ‘watch dog’ and has general consumer protection responsibilities and powers to prohibit companies from substantially lessening competition. Its authority to do this comes from the Trade Practices Act 1974. ASIC is the national regulator of corporate entities, originally established as the Australian Securities Commission in 1991. When it became the Australian

Securities and Investments Commission in 1998, it took up investor and consumer protection responsibilities for all financial entities. ASIC has its own Act – the Australian Securities and Investments Commission Act 2001 – and is supported by several other statutes, including the Corporations Act 2001. ASIC is the authority that grants licences to financial entities that enable them to offer financial products and services so long as they adequately disclose their financial position to consumers. APRA is the national regulator of prudential institutions – deposit takers (e.g. banks), insurance companies and superannuation funds. Established to regulate financial entities and to ensure that they maintain a minimum level of financial soundness, APRA was formed by the Australian Prudential Regulation Authority Act 1998. Collectively, the role of the ACCC, ASIC and APRA is to protect consumers, investors and creditors by ensuring that companies and financial institutions abide by company and competition law. In the following we will examine: ● to whom regulations apply and what they cover ● how an organisation can be punished for the unethical behaviour of its managers and employees.

WHO, WHAT AND WHY? Nearly all businesses, non-profits, partnerships, labour unions, unincorporated organisations and associations, incorporated organisations and even pension funds, trusts and joint stock companies are covered by some kind of formal regulation or industry code of conduct. If your organisation can be characterised as a business (remember, non-profits count, too), then it is subject to some form of regulation or industry code of conduct. Regulations cover offences defined by laws, such as invasion of privacy, price fixing, fraud, customs violations, antitrust violations, civil rights violations, theft, money laundering, conflicts of interest, embezzlement, dealing in stolen goods, copyright infringements, extortion and more. It’s not enough merely to stay ‘within the law’, however. The purpose of formal regulation is not just to punish companies after they or their employees break the law, but rather to encourage companies to take proactive steps, such as ethics training, that will discourage or prevent white-collar crime before it happens. Regulations and industry codes of conduct also provide an incentive for businesses to cooperate with and disclose illegal activities to the relevant authorities.

DETERMINING THE PUNISHMENT In general, regulators tend to impose smaller fines on companies that take proactive steps to encourage ethical behaviour or voluntarily disclose illegal activities to the relevant authorities. Essentially, regulators use a carrot-andstick approach. The stick is the threat of heavy fines,

CHAPTER 4 Ethics and social responsibility

Getty Images/WILLIAM WEST/AFP

sometimes in the millions of dollars.22 The carrot is a lesser fine, but only if the company has started an effective compliance program (discussed below) to encourage ethical behaviour before the illegal activity occurs.23 The method used to determine a company’s punishment illustrates the importance of establishing a compliance program. The approach of the ACCC in policing business in Australia is to initially bring the matter to the attention of the business and to work with the business to find a remedy. Should this prove difficult, or if criminal action is uncovered, the ACCC will act to have the issue brought before the courts. Once a matter has been handed to the justice system and the Commonwealth Director of Public Prosecutions, the role of the ACCC changes. Only a court can determine whether a contravention of the Act has occurred and make orders against offenders. The ACCC’s role is to bring matters before the courts, so the courts can rule on whether contraventions have occurred and order suitable remedies and deterrents. The courts can make a wide range of findings and orders; for example: ● declarations that a company or individual has contravened the Act require respondents to publish public notices about their conduct and corrective advertising, and to disclose relevant information to others such as customers’ injunctions, restraining current or future conduct or requiring respondents to take certain action ● findings of fact which show contraventions of the Act, so that damages may be recovered by consumers and business affected by the conduct ● performance of community service ● placing respondents on probation.

WORKPLACE AND COMMUNITY

ACCC COOPERATION POLICY FOR ENFORCEMENT MATTERS The ACCC has a general policy of encouraging people and companies who might have contravened the Act to come forward and cooperate with the ACCC in addressing their possible contraventions of the Act. Such cooperation can be recognised by the ACCC through, for example: complete or partial immunity from action by the ACCC, ACCC submissions to the court for a reduction in penalty or administrative settlement instead of litigation. This policy is flexible and evolving, and the ACCC determines each case on its merits. Immunity will not be granted where the person or company concerned has compelled or induced someone else to take part in the conduct or where they were the ringleader or originator of the contravention. The policy applies only to potential civil contraventions of the Act (under the competition, fair trading and consumer protection provisions). Discretion regarding immunity for criminal conduct (under some fair trading and consumer protection provisions) lies with the Commonwealth Director of Public Prosecutions, not the ACCC. For details of the cooperation policy and how to approach the ACCC under it, see ACCC cooperation policy for enforcement matters, July 2002, and ACCC immunity policy for cartel conduct, August 2005. If you are unsure whether you have contravened the Act, or otherwise want to ‘blow the whistle’ on a possible contravention, approach the ACCC.24

A civil penalty of up to $500 000 can be imposed on an individual for breaches of any of the anti-competitive conduct sections. Breaches of the boycott provisions may attract penalties of up to $750 000.

If the ACCC brings a business’ or an individual’s breaches of the Trade Practices Act 1974 before the courts, significant penalties can apply

Breaches of the restrictive trade practices provisions (aside from the boycott provisions) by companies may result in whichever is greatest of the following penalties: ● $10 million ● three times the value of the illegal benefit, when the value of illegal benefit can be ascertained 58

● 10 per cent of the turnover in the preceding 12 months, when the value of the illegal benefit cannot be ascertained.

HOW DO YOU MAKE ETHICAL DECISIONS?

Let’s look at a hypothetical example (although it is based on a real situation) of a decision made by a large corporation. On a sultry, cyclone season morning in the build-up to a storm, schools were closed and most people

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had decided to stay home from work. Nevertheless, John Smith had already showered, shaved and dressed for the office. He kissed his wife Joan goodbye, but before he could get to his car, he fell dead on the garage floor from a sudden heart attack. Smith was four months short of his 30-year anniversary with the company. Having begun work at the age of 18, he was just 48 years old.25 Imagine you’re the manager in charge of benefits at Smith’s employer. Given that he was only four months short of full retirement, do you award full retirement benefits to John Smith’s wife and daughters? If the answer is yes, they will receive his full retirement benefits of 70 per cent of his salary, averaged over the last three years he worked there, for the rest of Joan Smith’s life. If you say no, his widow and two daughters will receive only 30 per cent of John’s salary. As the manager in charge of employee benefits, what would be the ethical thing for you to do? After reading the next two sections, you should be able to: ● describe what influences ethical decision making ● explain what practical steps managers can take to improve ethical decision making.

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Although some ethical issues are easily solved, many do not have clearly right or wrong answers. The ethical answers that managers choose depend on: ● the ethical intensity of the decision ● the moral development of APPLY the manager Get an overview of what ethical decision making ● the ethical principles used involves and aims to achieve to solve the problem. EO VID

INFLUENCES ON ETHICAL DECISION MAKING

ETHICAL INTENSITY OF THE DECISION Managers don’t treat all ethical decisions the same. The manager who has to decide whether to deny or extend full benefits to Joan Smith and her family is going to treat that

decision much more seriously than the decision of how to deal with an assistant who has been taking computer paper home for personal use. These decisions differ in their ethical intensity, or the degree of ethical intensity the degree of concern concern people have about an ethical people have about an issue. When addressing an issue of high ethical issue ethical intensity, managers are more aware of the impact their decision will have on others. They are more likely to view the decision as an ethical or moral decision rather than as an economic decision. They are also more likely to worry about doing the ‘right thing’. Ethical intensity depends on six factors:26 ● magnitude of consequences ● social consensus ● probability of effect ● temporal immediacy ● proximity of effect ● concentration of effect. Magnitude of consequences is the magnitude of total harm or benefit derived from an consequences the total harm or benefit ethical decision. The more people who are derived from an ethical harmed or the greater the harm to those decision social consensus people, the larger the consequences. agreement on whether Social consensus is agreement on behaviour is bad or good whether behaviour is bad or good. probability of effect Probability of effect is the chance that the chance that something will happen and then harm something will happen and then result in others harm to others. If we combine these factors, we can see the effect they can have on ethical intensity. For example, if there is clear agreement (social consensus) that a managerial decision or action is certain (probability of effect) to have large negative consequences (magnitude of consequences) in some way, then people will be highly concerned about that managerial decision or action, and ethical intensity will be high. Temporal immediacy is the time temporal between an act and the consequences immediacy the time between an act the act produces. Temporal immediacy is and the consequences the stronger if a manager has to lay off act produces proximity of effect employees next week as opposed to the social, psychological, three months from now. Proximity of cultural or physical effect is the social, psychological, cultural distance between a decision maker and those or physical distance of a decision maker affected by his or her from those affected by his or her decisions. decisions Thus, proximity of effect is greater for the concentration of effect manager who works with employees who the total harm or benefit are to be laid off than it is for a manager that an act produces on the average person who works where no layoffs will occur. Finally, whereas the magnitude of consequences is the total effect across all people, concentration of effect is how much an act affects the average person. Temporarily laying off 100 employees for 10 months without pay is a greater concentration of effect than temporarily laying off 1000 employees for one month.

CHAPTER 4 Ethics and social responsibility

Which of these six factors has the most impact? Studies indicate that managers are much more likely to view decisions as ethical decisions when the magnitude of consequences (total harm) is high and there is a social consensus (agreement) that a behaviour or action is bad.27

MORAL DEVELOPMENT It’s Friday. Another long week of classes and studying is over, and all you want to do is sit down and relax. ‘A movie sounds good’, you think to yourself, but you don’t want to trek down to the local cinema to spend upwards of $20, and while it would cost you less to rent a movie on iTunes or YouTube, you can’t quite bring yourself to pay the few dollars that they charge.28 Your roommate says he’s got the perfect solution and gives you the URL of a website that streams all the latest blockbuster movies and TV shows for free. The writers, actors and producers won’t earn a cent if you watch the pirated copy of the movie. Furthermore, it’s illegal to download or watch streamed copies of pirated shows. But how will the movie studios ever find out? Are

Stage 1 Heteronomous morality Level I: Preconventional morality

Level II: Conventional morality

the cops going to come through your door because you watched a pirated copy of Crazy Rich Asians? Will you watch the movie? What are you going to do? In part, according to psychologist Lawrence Kohlberg, your decision will be based on your level of moral development. Kohlberg identified three phases of moral development, with two stages in each phase (see Figure 4.2).29 At the preconventional preconventional level of moral development, people level of moral make decisions based on selfish reasons. development the first level of moral For example, if you are in Stage 1, the development in which punishment and obedience stage, your people make decisions based on selfish reasons primary concern will be to avoid trouble for yourself. So, you won’t download the movie because you are afraid of being caught and punished. Yet, in Stage 2, the instrumental exchange stage, you worry less about punishment and more about doing things that directly advance your wants and needs. So, you download the movie.

Avoidance of breaking rules for fear of punishment Obedience for obedience’s sake

Stage 2 Individualism, instrumental purpose and exchange

Acting in accordance with individual interests – fairness is an equal exchange based upon motivations of self-interest

Stage 3 Mutual interpersonal expectations, relationships and interpersonal conformity

Living up to what is expected of you Mutual relations of trust and respect should be maintained provided they conform to your expected social role

Stage 4 Social system and conscience

Rules are to be upheld except when they conflict with other social duties Right is contributing to society and fulfilling social duties

Stage 5 Social contract or utility and individual rights

Awareness of the social contract between individuals, but also of the different moral perspectives of others Some individual rights transcend the different perspectives of others and therefore should be upheld

Stage 6 Universal ethical principles

Following self-chosen ethical principles When such principles conflict with existing moral standards, these principles should be upheld regardless of majority opinion

Level III: Postconventional morality

FIGURE 4.2

Kohlberg’s stages of moral development

Source: Adapted from Weiten, W. (2001: 455, Figure 11.16). Reprinted with permission of Wadsworth, a division of Cengage Learning.

WORKPLACE AND COMMUNITY

FILE SHARING

Shutterstock.com/Matthias Pahl

Downloading movies via BitTorrent or just letting your friends have copies of your music or movie files is a common practice among people with a conventional level of morality. Despite widespread comments in the media about the illegality of file sharing, and highprofile cases like Dallas Buyers Club, people still share their movies, TV shows and music – illegally. Some of the ‘reasons’ given for this behaviour are that ‘Hollywood is doing well financially and they won’t miss the income’, or ‘file sharing has no measurable effect on the movie and TV industry’. Worldwide statistics would suggest otherwise. Illegal downloads do hurt the movie industry, and the number of people going to see movies in cinemas has shown very little growth since 2000 (when Internet access really became popular). While a lot of this lack of growth is being attributed to streaming services (Netflix, Stan, Amazon), it is also argued that piracy is still a major problem in Australia. Research shows that 21 per cent of Australians aged 12–64 still download movie and TV content from pirate websites even though the same or similar content is available legally from streaming services for relatively low cost.30

People at the conventional level of moral development make decisions that conform to societal expectations. In other words, they look to others for guidance on ethical issues. In Stage 3, the good boy, nice girl stage, you normally do what the other ‘good boys’ and ‘nice girls’ are doing. If everyone else is illegally downloading movies, music and TV shows, you will, too. But if they aren’t, you won’t either. In the law and order stage, Stage 4, you again look for external guidance and do whatever the law permits, so you won’t get the movie. People at the postconventional level of moral development always use internalised ethical principles to solve ethical dilemmas. In Stage 5, the social contract stage, you will refuse to download the movie because, as

conventional level of moral development the second level of moral development in which people make decisions that conform to societal expectations postconventional level of moral development the third level of moral development in which people make decisions based on internalised principles

a whole, society is better off when the rights of others – in this case, the rights of actors, directors, movie makers and distributors – are not violated. In Stage 6, the universal principle stage, you might or might not download a movie, depending on your principles of right and wrong. Moreover, you will stick to your principles even if your decision conflicts with the law (Stage 4) or what others believe is best for society (Stage 5). For example, those with strongly held socialist or communist beliefs would probably choose to download the movie because they believe goods and services should be owned by society rather than by individuals and corporations. Kohlberg believed that as people became more educated and mature, they would progress sequentially from earlier stages to later stages. But only 20 per cent of adults ever reach the postconventional stage of moral development where internal principles guide their decisions. By contrast, most adults are in the conventional stage of moral development in which they look outside themselves to others for guidance on ethical issues. This means that most people in the workplace look to and need leadership when it comes to ethical decision making.31

PRINCIPLES OF ETHICAL DECISION MAKING Besides an issue’s ethical intensity and a manager’s level of moral maturity, the particular ethical principles that managers use will also affect how they solve ethical dilemmas. Unfortunately, there is no one ‘ideal principle’ to use in making ethical business decisions. According to professor LaRue Hosmer, a number of different ethical principles can be used to make business decisions: long-term self-interest, personal virtue, religious injunctions, government requirements, utilitarian benefits, individual rights and distributive justice.32 All of these ethical principles encourage managers and employees to take others’ interests into account when making ethical decisions. At the same time, however, these principles can lead to very different ethical actions, as we can see by using these principles to decide whether to award full benefits to Joan Smith and her children. According to the principle of long- principle of longterm self-interest, you should never term self-interest take any action that is not in your or your an ethical principle that holds that you should organisation’s long-term self-interest. never take any action Although this sounds as if the principle that is not in your or your organisation’s long-term promotes selfishness, it doesn’t. What self-interest we do to maximise our long-term interests (save more, spend less, exercise every day, watch what we eat) is often very different from what we do to maximise short-term interests (max out our credit cards, be couch potatoes, eat whatever we want). At

CHAPTER 4 Ethics and social responsibility

The principle of individual rights principle of holds that you should never take an action individual rights an ethical principle that that infringes on others’ agreed-upon holds that you should rights. Using this principle, the corporation never take any action would deny Joan Smith full benefits. If it that infringes on others’ agreed-upon rights carefully followed the rules specified in its pension plan and granted Mrs Smith due process – meaning the right to appeal the decision – then the corporation would not be violating her rights. In fact, it could be argued that providing full benefits to Mrs Smith would violate the rights of employees who had to wait 30 years to receive full benefits. iStock.com/svetikd

any given time, John Smith’s employer has nearly 1000 employees who are just months away from retirement. Thus, because of the costs involved, it serves the company’s long-term interest to pay full benefits only after employees have put in their 30 years. The principle of personal virtue principle of personal holds that you should never do virtue an ethical principle that anything that is not honest, open and holds that you should never truthful and is not something that you do anything that is not honest, open and truthful, would be glad to see reported in the and is not something that newspapers or on TV. Using the you would be glad to see reported in the newspapers principle of personal virtue, John or on TV Smith’s employer should have quietly awarded Joan Smith her husband’s full benefits. Had it done so, it could have avoided the publication of an embarrassing Wall Street Journal article on this topic.33 principle of religious The principle of religious injunctions injunctions holds that you should an ethical principle that never take an action that is unkind or holds that you should never take any action that is not that harms a sense of community, kind and that does not build such as the positive feelings that come a sense of community from working together to accomplish a commonly accepted goal. Using this principle, John Smith’s employer would have been concerned foremost with compassion and kindness. Thus, it would have awarded full benefits to Joan Smith. According to the principle of principle of government government requirements, the requirements law represents the minimal moral an ethical principle that standards of society, so you should holds that you should never take any action that never take any action that violates the violates the law, for the law. Using this principle, Joan’s law represents the minimal moral standard husband’s former employer would deny full benefits to Joan Smith because her husband did not work for the company for 30 years. Indeed, a spokesperson for the corporation stated that making exceptions would violate relevant legislation relating to the payment of retirement benefits.34 The principle of utilitarian principle of utilitarian benefits benefits states that you should never an ethical principle that take an action that does not result in holds that you should never the greater good for society. In short, take any action that does not result in the greater you should do whatever creates the good for society greatest good for the greatest number. At first, this principle seems to suggest that the corporation should award full benefits to Joan Smith. If the corporation did this with any regularity, however, the costs would be enormous; profits would shrink and the corporation would have to cut its stock dividend, harming countless shareholders, many of whom rely on their dividends for retirement income. In this case, the principle does not lead to a clear choice.

Managers should consider the principles of ethical decision making when making decisions that affect their employees

Finally, under the principle of principle of distributive justice, you should never distributive justice an ethical principle that take any action that harms the least holds that you should fortunate among us in some way. This never take any action that harms the least fortunate principle is designed to protect the poor, among us: the poor, the the uneducated and the unemployed. uneducated and the unemployed Although Joan Smith could probably find a job, after 20 years as a stay-at-home mum, it’s unlikely that she could easily find one that would support her and her daughters in the manner to which they are accustomed. Using the principle of distributive justice, her husband’s former employer would award her full benefits. So, what did the employer decide to do? Since John Smith had not completed 30 full years with the company, his employer’s officials felt they had no choice but to give Joan Smith and her two daughters the smaller, partial retirement benefits.35 Do you think the employer’s decision was ethical? It’s likely many of you don’t. You may wonder how the company could be so heartless as to deny John Smith’s family the full benefits to which you believe they were entitled. Yet others might argue that the employer did the ethical thing by strictly following the rules laid out in its pension benefit plan. After all, being fair means applying the rules to everyone. As mentioned at the beginning of this chapter, one of the ‘real-world’ aspects of ethical decisions is that no matter what you decide, someone or some group will be

unhappy. This corollary is also true: no matter how you decide, someone or some group will be unhappy. Consequently, although all of these ethical principles encourage managers to balance others’ needs against their own, they can also lead to very different ethical actions. So even when managers strive to be ethical, there are often no clear answers when it comes to doing ‘the’ right thing.

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UNETHICAL AMNESIA: WHY UNETHICAL WORKERS CAN LIVE WITH THEMSELVES ‘I hope you can sleep at night!’ is what we might (or would like) to say to someone acting unethically or making unethical decisions. But, thanks to unethical amnesia, people who are repeatedly unethical generally forget that they were, which makes it easier to continue being unethical. When recalled, memories of unethical behaviour are remembered less clearly than ethical behaviour, which is easily and accurately remembered. So why do unethical workers have a ‘clear conscious’? Because they can’t remember. SOURCE: F. GINA & M. KOUCHAKI, “WE’RE UNETHICAL AT WORK BECAUSE WE FORGET OUR MISDEEDS,” HARVARD BUSINESS REVIEW, MAY 18, 2016, ACCESSED 21 MARCH, 2017, HTTPS://HBR.ORG/2016/05/WERE -UNETHICAL-AT-WORKBECAUSE-WE-FORGET-OUR-MISDEEDS.

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PRACTICAL STEPS TO ETHICAL DECISION MAKING

Managers can encourage more ethical decision making in their organisations by: ● carefully selecting and hiring ethical employees ● establishing a specific code of ethics ● training employees to make ethical decisions ● creating an ethical climate.

SELECTING AND HIRING ETHICAL EMPLOYEES As an employer, you can gain an understanding of how closely a job applicant’s view of honesty matches your own or your organisation’s standards by giving overt integrity test them integrity tests. Overt integrity a written test that tests estimate job applicants’ honesty by estimates job applicants’ directly asking them what they think or honesty by directly asking them what they think or feel about theft or about punishment of feel about theft or about unethical behaviour.36 For example, an punishment of unethical behaviours employer might ask an applicant, ‘Don’t most people steal from their companies?’ Surprisingly, unethical people will usually answer ‘yes’ to such questions, because they believe that the world is basically dishonest and that dishonest behaviour is normal.37

Personality-based integrity tests

personality-based

indirectly estimate job applicants’ honesty integrity test a written test that by measuring psychological traits such as indirectly estimates dependability and conscientiousness. For job applicants’ example, prison inmates serving time for honesty by measuring psychological traits, such white-collar crimes (counterfeiting, as dependability and embezzlement and fraud) scored much conscientiousness lower than a comparison group of middlelevel managers on scales measuring reliability, dependability, honesty, conscientiousness and abiding by rules.38 These results show that companies can selectively hire and promote people who will be more ethical.39

CODES OF ETHICS Today, almost all large corporations have similar ethics codes in place. Still, two things must happen if those codes are to encourage ethical decision making and behaviour. First, a company must communicate its code inside and outside the company. An example of a well-communicated code of ethics can be found at the financial services company PWC (Price Waterhouse Coopers) website (see https://www.pwc.com.au/about-us/code-of-conduct.html). With the click of a computer mouse, anyone inside or outside the company can obtain detailed information about the company’s specific ethical business practices.40

WORKPLACE AND COMMUNITY

WHAT’S IN THE BOX? VW DIESELGATE Regulators in Europe and the US have imposed strict standards on automobile engine emissions, and for many car makers it means that engine performance will have to be sacrificed if the standards are going to be met. Diesel engines have been used for decades for trucks and other heavy vehicles because of their strength and durability, as well as their fuel economy. In Europe diesel passenger cars have been popular for similar reasons, especially the fuel economy of diesel engines. However, diesel passenger cars have a reputation of being noisy, smelly and slow compared to cars with similar-sized petrol engines. Diesel passenger cars have not enjoyed the same popularity in the US that they have in Europe. The biggest car maker in the world by volume, Volkswagen (VW) Group, has been relatively successful selling diesel cars in the US in recent years. Modern diesel engines are quieter, don’t smell like a farm tractor and perform nearly as well as a similarsized petrol engine. Too good to be true? Well, maybe. A university research group in the US, at West Virginia University, were testing diesel powered cars, including VW diesels, to demonstrate how clean and efficient they are when they found that their ‘real

CHAPTER 4 Ethics and social responsibility

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Second, in addition to having an ethics code with general guidelines like ‘do unto others as you would have others do unto you’, management must also develop practical ethical standards and procedures specific to the company’s line of business. The ANZ Bank’s website also 64

contains references to very specific ethical standards on topics ranging from bribes and kickbacks to expense claims. For example, one of ANZ’s ethical guidelines is: ‘ANZ’s Anti-Bribery and Anti-Corruption Policy prohibits employees and contractors of ANZ from offering, promising, providing, requesting or receiving bribes directly, indirectly or through third parties, in any form, including kickbacks and facilitation payments. The Policy is based on Australian and international legislation and best practice, including guidance issued by Transparency International and Social Accountability International.’43 Specific codes of ethics such as this make it much easier for employees to decide what to do when they want to do the ‘right thing’. iStock.com/Squaredpixels

world’ on-the-road testing showed the emissions were significantly higher than the figures the car maker claimed. The emissions were also up to 35 times higher than results gained by US government authorities. Once the university tests were made public the US Environmental Protection Agency and the California Clean Air board started asking questions. Not long after that the European Union agencies did the same. Shortly after the scandal broke, Martin Winterkorn, CEO of VW Group, resigned. It seems that VW were able to write computer code for the on-board engine management computer that was able to determine if the car was being tested. If so, the computer code changed the engine management parameters to give the best fuel economy and lowest emission output possible, at the cost of performance and ‘driveability’. How were they caught? The usual tests for emissions and fuel economy are done under laboratory conditions, not on the road. The laboratory conditions run the car being evaluated through a series of tests on a stationary ‘rolling road’, inside a building. The West Virginia University researchers actually took the cars out on the road to test them. VW has lost its good reputation, customer confidence and sales around the world.41 In the US, a middle-level manager has been sentenced to seven years in prison, whereas no such convictions have been recorded in Europe yet. VW share value dipped by 55.6 billion euros, and worldwide sales went into reverse. However, in 2018 the tide seems to have turned and VW profits rose from 5.1 billion euros in 2016, returning to a very healthy 11.4 billion euros in 2017.42 VW last posted an 11 billion euro profit in the year before the Dieselgate scandal broke.

Ethics training will often reinforce a business’ code of conduct or mission statement

ETHICS TRAINING The first objective of ethics training is to develop employees’ awareness of ethics.44 This means helping employees recognise which issues are ethical issues and then avoid rationalising unethical behaviour by thinking, ‘This isn’t really illegal or immoral’ or ‘No one will ever find out’. Many organisations around the world take ethics training very seriously. The comprehensive code of ethical behaviour developed by the Australian Banking Association (ABA) and proposed to be adopted by all association members by July 2019 outlines their approach to ethics training for frontline staff and management.45 The ABA code states that ‘Our staff and representatives will be trained and competent — including about the Code. We will make sure that our staff and our representatives are trained so that they: a) can competently do their work; and b) understand the Code and how to comply with it when they are providing banking services.’46 Ethics training can be conducted in any organisation, in small group seminars or, increasingly more often, as an online self-paced training module. Ethical training is something that can be structured and undertaken in the workplace (or university), and it can also

be a process of personal reading and reflection on everyday experiences and events. In Australia The Ethics Centre (http://www.ethics.org.au/) provides a helpful webpage with online articles to help people reflect on everyday ethical issues (http://www.ethics.org.au/ > articles > Filter by topic: Everyday ethics) as well as being able to provide ethical training for businesses.47 Several companies have created board games to improve awareness of ethical issues.48 And other ethics training tools, like the Kew Gardens Principles, examine how ethical decisions can be made in specific scenarios. The Kew Gardens Principles were based on the study of a murder in Kew Gardens, New York, in which witnesses to the attack failed to intervene or seek help. Researchers developed a series of four decision-making factors that are used to help employees determine how they should respond to problems and ethical situations, even when the problems are not of their own doing.49 These decisionmaking factors can be applied to other scenarios as well. Specific company-related questions and scenarios make it easier for managers and employees to recognise and be aware of ethical issues and situations. The second objective for ethics training programs is to achieve credibility with employees. Not surprisingly, employees can be highly suspicious of management’s reasons for offering ethics training. Some companies have hurt the credibility of their ethics programs by having outside instructors and consultants conduct the classes.50 Employees often complain that outside instructors and consultants are teaching theory that has nothing to do with their jobs and the practical dilemmas they actually face on a daily basis. One company, CA Technologies, made its ethics training practical and relevant by creating a series of comical training videos with a fictional manager, Griffin Peabody, who is shown facing a series of ethics issues, such as conflicts of interest, competitive intelligence, workplace harassment, client expenses and conduct outside the workplace (search ‘Griffin Peabody’ at YouTube.com). Chief ethics officer Joel Katz says, ‘It’s easy for it [ethics training] to become a check-the-box exercise. We use Griffin’s escapades to teach compliance lessons in a funny way’. For instance, since CA Technologies acquires lots of companies – a common practice in technology industries – it’s critical, and required by law, that its employees keep potential acquisitions confidential to prevent insider trading. Chief compliance officer Gary Brown says, ‘They think they can tell a friend, “Guess what I was working on today”. They have to realize it is a much bigger problem’. To reinforce this point, Griffin Peabody is visited by Securities and Exchange Commission investigators after publicly disclosing information about a company that is being acquired.51 Ethics training becomes even more credible when top managers teach the initial ethics classes to their

subordinates who in turn teach their subordinates.52 Michael Hoffman, executive director for the Center for Business Ethics at Bentley University, says that having managers teach ethics courses greatly reinforces the seriousness with which employees treat ethics in the workplace.53 Unfortunately, though, 25 per cent of large companies don’t require top managers to attend, much less teach, ethics training.54 An example of good practice can be seen in Australian government. If you go to https://vpsc.vic.gov.au/ethicsbehaviours-culture/, you’ll see that the Victorian State government has put in place a number of resources to help employees develop an understanding of ethical issues. The Australian Commonwealth Public Service has similar resources at https://www.apsc.gov.au/aps-values-andcode-conduct-practice. The third objective of ethics training is to teach employees a practical model of ethical decision making. A basic model of ethical decision making, as seen in Table 4.1, helps employees think about the consequences their choices will have on others and consider how they will choose between different solutions.

ETHICAL CLIMATE Organisational culture is the key to fostering ethical decision making. The 2018 Global Business Ethics Survey reported that where companies have a program of minimum ethical standards in place and had a strong ethical culture (where core beliefs are widely shared and strongly held), 79 per cent of employees stated that they had reported unethical conduct and 74 per cent stated that they were satisfied with the process and outcomes. However, in companies without a program of minimum ethical standards and with weak ethical cultures (where core beliefs are not widely shared or strongly held), only 34 per cent of employees stated that they had reported unethical conduct and only 20 per cent stated that they were satisfied with the process and outcomes.55 Arguably, employees in strong ethical cultures are also more likely to report violations, because they expect that management wants them reported and won’t retaliate against them for doing so.56 The first step in establishing an ethical climate is for managers, especially top managers, to act ethically themselves. It’s no surprise that in study after study, when researchers ask, ‘What is the most important influence on your ethical behaviour at work?’, the answer comes back, ‘My manager’. A second step in establishing an ethical climate is for top management to be active in and committed to the company ethics program.57 Top managers who consistently talk about the importance of ethics and back up that talk by participating in their companies’ ethics programs send the clear message that ethics matter. Business writer Dayton Fandray says, ‘You can have ethics offices ... and training programs and reporting systems, but if the CEO doesn’t seem to care, it’s all just a sham. It’s not surprising to find

CHAPTER 4 Ethics and social responsibility

TABLE 4.1

Descriptions of the LPC and their corresponding leadership style

Identify the problem What makes it an ethical problem? Think in terms of rights, obligations, fairness, relationships and integrity. How would you define the problem if you stood on the other side of the fence?

Identify the constituents Who has been hurt? Who could be hurt? Who could be helped? Are they willing players or are they victims? Can you negotiate with them?

Diagnose the situation How did it happen in the first place? What could have prevented it? Is it going to get worse or better? Can the damage now be undone?

Analyse your options Imagine the range of possibilities. Limit yourself to the two or three most manageable. What are the likely outcomes of each? What are the likely costs? Look to the company mission statement or code of ethics for guidance.

Make your choice What is your intention in making this decision? How does it compare with the probable results? Can you discuss the problem with the affected parties before you act? Could you disclose without qualms your decision to your boss, the CEO, the board of directors, your family or society as a whole?

Act Do what you have to do. Don’t be afraid to admit errors. Be as bold in confronting a problem as you were in causing it. Source: L. A. Berger, ‘Train all employees to solve ethical dilemmas’, Best’s Review – Life-Health Insurance Edition, 95, 1995: 70–80.

that the companies that really do care about ethics make a point of including senior management in all of their ethics and compliance programs’.58 A third step is to put in place a reporting system that encourages managers and employees to report potential ethics violations. Whistleblowing, that is, reporting others’ ethics violations, is a difficult step for most people to take.59 Protection for whistleblowers in whistleblowing Australia who provide information to reporting others’ ethics violations to management or the ACCC is found in the Competition legal authorities and Consumer Act 2010 (CCA). If an individual person is found to have disadvantaged a whistleblower, they can be subject to a fine not exceeding $2000 or imprisonment for 12 months and a business may be subject to a fine not exceeding $10 000. Potential whistleblowers often fear that they, and not the ethics violators, will be punished.60 Professor Elizabeth Morrison says, ‘You have to confront the two fundamental challenges preventing employees from speaking up. The first is the natural feeling of futility—feeling like speaking up isn’t worth the effort or that no one wants to hear it. The second is the natural fear that speaking up will lead to retribution or harsh reactions’.61 Indeed, in large companies without an effective compliance program, 62 per cent of workers have observed unethical behaviour, 32 per cent of those have reported the misconduct and 59 per cent of those who reported the unethical behaviour experienced some kind of retaliation.62 The factor that does the most to discourage whistleblowers from reporting problems is lack of company action on their complaints.63 Thus, the final step in developing an ethical climate is for management to fairly 66

and consistently punish those who violate the company’s code of ethics. Netflix immediately fired an employee at a Netflix call centre who was caught stealing credit card information from the customers she was supposed to be helping. Netflix spokesperson Steve Swasey said, ‘We do everything we can to safeguard our members’ personal data and privacy, and when there’s an issue like this we deal with it swiftly and decisively’.64 Amazingly, though, not all companies fire ethics violators. In fact, 8 per cent of surveyed companies admit that they would promote top performers even if they violated ethical standards.65 However, as was the case with Volkswagen and Dieselgate, whistleblowers are often the people who provide the key information for regulatory authorities to act on.

WHAT IS SOCIAL RESPONSIBILITY?

Social responsibility is a business’ social responsibility a business’ obligation obligation to pursue policies, make to pursue policies, make decisions and take actions that benefit decisions and take actions 66 society. Unfortunately, because there are that benefit society strong disagreements over to whom and for what in society organisations are responsible, it can be difficult for managers to know what is or will be perceived as socially responsible corporate behaviour.

After a terrorist attack that killed 14 people, the US government asked Apple to break into the attacker’s encrypted iPhone. In a public letter to its customers, CEO Tim Cook stated, ‘While we believe the FBI’s intentions are good, it would be wrong for the government to force us to build a backdoor into our products. And ultimately, we fear that this demand would undermine the very freedoms and liberty our government is meant to protect’. 67 District Attorney Cyrus Vance Jr. criticised Apple, saying, ‘Apple and Google are their own sheriffs. There are no rules’. Was Apple’s refusal principled and to society’s benefit, or will its lack of cooperation harm, if not eventually endanger, others?68 After reading the next four sections, you should be able to explain: ● to whom organisations are socially responsible ● for what are organisations socially responsible ● how organisations can choose to respond to societal demands for social responsibility ● whether social responsibility hurts or helps an organisation’s economic performance.

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TO WHOM ARE ORGANISATIONS SOCIALLY RESPONSIBLE?

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There are two perspectives regarding to whom organisations are socially responsible: the shareholder model and the stakeholder model. According to the late Nobel Prize-winning economist Milton Friedman, the only social responsibility that organisations have is to satisfy their owners; that is, company shareholders. This view – called the shareholder shareholder model model – holds that the only social a view of social responsibility that holds responsibility that businesses have is that an organisation’s to maximise profits. By maximising overriding goal should be profit maximisation for the profit, the organisation maximises benefit of shareholders shareholder wealth and satisfaction. More specifically, as profits PPLY E A Complete the rise, the company stock ‘Develop your career potential’ owned by shareholders worksheet for Chapter 4 generally increases in value. Friedman argued that it is socially irresponsible for companies to divert time, money and attention from maximising profits to social causes and charitable organisations. The first problem, he believed, is that organisations cannot act effectively as moral agents for all company shareholders. Although shareholders are likely to agree on investment issues concerning a company, it’s highly unlikely that they have common views on what social causes a company should or should not support. Rather than act as moral agents, Friedman argued, companies should maximise profits for shareholders.

Shareholders can then use their time and increased wealth to contribute to the social causes, charities or institutions they want, rather than those that companies want. The second major problem, Friedman said, is that the time, money and attention diverted to social causes undermine market efficiency.69 In competitive markets, companies compete for raw materials, talented employees, customers and investment funds. A company that spends money on social causes will have less money to purchase quality materials or to hire talented employees who can produce a valuable product at a good price. If customers find the company’s product less desirable, its sales and profits will fall. If profits fall, the company’s stock price will decline and the company will have difficulty attracting investment funds that could be used to fund long-term growth. In the end, Friedman argues, diverting the organisation’s money, time and resources to social causes hurts customers, suppliers, employees and shareholders.70 Russell Roberts, an economist and research fellow at Stanford University’s Hoover Institution, agrees, saying, ‘Doesn’t it make more sense to have companies do what they do best, make good products at fair prices, and then let consumers use the savings for the charity of their choice?’71 By contrast, under the stakeholder model , management’s most important responsibility is the organisation’s long-term survival (not just maximising profits), which is achieved by satisfying the interests of multiple corporate stakeholders (not just stakeholder model shareholders). 72 Stakeholders are a theory of corporate persons or groups with a legitimate responsibility that holds that management’s most interest in a company.73 Since stakeholders important responsibility, are interested in and affected by the long-term survival, is achieved by satisfying organisation’s actions, they have a ‘stake’ the interests of multiple in what those actions are. PepsiCo CEO corporate stakeholders Indra Nooyi says that because stakeholders stakeholders persons or groups with a are multifaceted, with different interests, ‘stake’ or legitimate interest a company operating under the in a company’s actions stakeholder model has to redefine ‘profit’. She says, ‘[we] have to make sure our new P & L (profit & loss statement) actually says revenue, less costs of goods sold, less costs to society – and that’s your real profit’.74 Consequently, stakeholder groups may try to influence the organisation to act in their own interests. Figure 4.3 shows the various stakeholder groups that the organisation must satisfy to ensure its long-term survival. Being responsible to multiple stakeholders raises two basic questions. First, how does a company identify organisational stakeholders? Second, how does a company balance the needs of different stakeholders? Distinguishing between primary and secondary stakeholders can help answer these questions.75 primary stakeholder Some stakeholders are more any group on which an important to the organisation’s survival organisation relies for its than others. Primary stakeholders are long-term survival

CHAPTER 4 Ethics and social responsibility

Sp ec ia gro l int up ere s st

dary stakeholde con rs Se

dia Me $ $

Shareholders Customers

Company Employees

de ns Tra iatio c so as

FIGURE 4.3

Suppliers Governments

P ri m

ar y st a k

co Lo mm ca un l itie s

Stakeholder model of corporate social responsibility

groups on which the organisation depends for its long-term survival; they include shareholders, employees, customers, suppliers, governments and local communities. When managers are struggling to balance the needs of different stakeholders, the stakeholder model suggests that the needs of primary stakeholders take precedence over the needs of secondary stakeholders. But, among primary stakeholders, are some more important than others? In practice, yes, as CEOs typically give somewhat higher priority to shareholders, employees and customers than to suppliers, governments and local communities. 76 Addressing the concerns of primary stakeholders is important because, if a stakeholder group becomes dissatisfied and terminates its relationship with the company, the company could be seriously harmed or go out of business. Secondary stakeholders, such as the media and special interest groups, can influence or be influenced by the company. Unlike the primary secondary stakeholder stakeholders, however, they do not any group that can influence engage in regular transactions with or be influenced by a company and can affect the company and are not critical to its public perceptions about long-term survival. Consequently, its socially responsible behaviour meeting the needs of primary stakeholders is usually more important than meeting the needs of secondary stakeholders. Nevertheless, secondary stakeholders are still important because they can affect public perceptions and opinions about socially responsible behaviour. For instance, as mentioned in Chapter 3, People for the Ethical Treatment of Animals (PETA) have called for a total

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boycott of Australia’s $2.2 billion wool industry. With an aggressive ad campaign entitled, ‘Did your sweater cause a bloody butt?’, PETA wants Australia’s 55 000 sheep farmers to stop the practice of ‘mulesing’, which it considers cruel. Mulesing removes skin folds from a sheep’s rear end, usually without anaesthesia, to prevent the animal from becoming infested with blowfly eggs, which turn into flesheating maggots. PETA has convinced 30 leading fashion retailers, such as Benetton, Abercrombie & Fitch, Timberland, H&M and Hugo Boss, to stop using Australian wool. PETA spokesperson Matt Prescott says, ‘Approaching companies with big names and deep pockets is the best way to drive change’. Craig Johnston, an Australian farmer with 6000 merino sheep, says, ‘We don’t mules to be cruel, we do it because it’s the best husbandry practice available. Once a sheep suffers flystrike you are at a loss to do anything’. Still, as a result of PETA’s pressure, Australian Wool Innovation, the industry’s trade group, is sponsoring research to develop alternatives to mulesing.77 So, to who are organisations socially responsible? Many commentators, especially economists and financial analysts, continue to argue that organisations are responsible only to shareholders. Increasingly, however, top managers have come to believe that they and their companies must be socially responsible to their stakeholders. Today, surveys show that a significant number of managers in the Asia– Pacific region believe that it is unethical to focus just on shareholders. In the US, 29 states have changed their laws to allow company boards of directors to consider the needs of employees, creditors, suppliers, customers and local communities, as well as those of shareholders.78 So,

although there is not complete agreement, a majority of opinion makers would argue that companies must be socially responsible to their stakeholders.

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FOR WHAT ARE ORGANISATIONS SOCIALLY RESPONSIBLE?

Get an overview of why and how organisations act responsibly

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If organisations are to be socially responsible to stakeholders, what are they to be socially responsible for? Well, companies can best benefit their stakeholders by fulfilling their economic, legal, ethical and discretionary responsibilities.79 Economic and legal responsibilities play a larger part in a company’s social responsibility than do ethical and discretionary responsibilities. However, the relative importance of these various responsibilities depends on society’s expectations of corporate social responsibility at a particular point in time.80 A century ago, society expected businesses to meet their economic and legal responsibilities and little else. Today, when society judges whether businesses are socially responsible, ethical and discretionary responsibilities are considerably more important than they used to be. Historically, economic responsibility, making a profit by producing a product or service valued by society, has been a business’ most basic social responsibility. economic Organisations that don’t meet their responsibility the expectation that a financial and economic expectations company will make a profit come under tremendous pressure. For by producing a valued product or service example, company boards are very, very quick these days to fire CEOs. Spirit Airlines is known for its extremely low cost ‘Bare Fare’ pricing. Spirit customers get cheap prices, but they don’t get snacks (not even water), are charged for carry-on luggage (which is free on most other airlines) and sit in crowded, nonreclining seats (more people equals lower prices). Spirit grew steadily, went public, and by September 2015 had revenues of $1.6 billion, up 11 per cent over 2014. More impressively, profits rose 43 per cent to nearly $243 million during that same period. Competing airlines noticed. Helped by low oil prices, they aggressively slashed fares. In turn, Spirit cut fares 17 per cent to stay competitive. Its revenues, profits and stock price all declined. Three months later, CEO Ben Baldanza was abruptly replaced.81 William Rollnick, who became acting chairman of Mattel (toys) after the company fired its previous CEO, says, ‘There’s zero forgiveness. You screw up and you’re dead’.82 Indeed, in both Europe and the United States, nearly one-third of all CEOs are fired because of their inability to successfully change their companies. 83 PPLY E A

In fact, CEOs are three times more likely legal responsibility to be fired today than two decades ago. a company’s social to obey Legal responsibility is a company’s responsibility society’s laws and social responsibility to obey society’s laws regulations as it tries and regulations as it tries to meet its to meet its economic responsibilities economic responsibilities. Volkswagen clearly violated its legal responsibilities after admitting to using software to falsify emissions tests (turning emissions controls on during testing to meet standards and then turning them off during driving for better mileage). It agreed to pay $22 billion in settlements and fines in the US, including payments of $5000 to $10 000 to each owner of a VW diesel car and $4.3 billion in civil and criminal penalties. ‘Volkswagen deeply regrets the behaviour that gave rise to the diesel crisis’, the company said in a statement. ‘The agreements that we have reached with the US government reflect our determination to address misconduct that went against all of the values Volkswagen holds so dear.’84 Ethical responsibility is a company’s ethical social responsibility not to violate accepted responsibility principles of right and wrong when a company’s social responsibility not to conducting its business. News violate accepted principles Corporation, owned by billionaire Rupert of right and wrong when Murdoch, which owns the Wall Street conducting its business Journal and Fox News, is a global media company offering network programming, films, TV shows, direct broadcast satellite TV and publishing, primarily in the US, the UK and Australia. News Corporation shut down News of the World, the best-selling Sunday newspaper in the UK, after it was discovered that its reporters tapped into voicemails in pursuit of stories, including those of murdered children, family members of deceased soldiers and relatives of people killed in the 2005 London terrorist attacks. James Murdoch, News Corporation’s then deputy chief operating officer who eventually resigned his position because of the scandal, said that the newspaper’s reputation had been ‘sullied by behaviour that was wrong’. On the shutting down of the newspaper, he went on to say, ‘The News of the World is in the business of holding others to account. But it failed when it came to itself’.85

Many companies stepped in to help Americans rebuild in the wake of Hurricane Sandy

CHAPTER 4 Ethics and social responsibility

discretionary responsibility the expectation that a company will voluntarily serve a social role beyond its economic, legal and ethical responsibilities

Discretionary responsibilities

pertain to the social roles that businesses play in society beyond their economic, legal and ethical responsibilities. The protracted drought affecting Australian farmers has had a punishing impact on farm income and the wellbeing of farming families. Governments, both state and Commonwealth, have put in place measures to support farmers through the crisis. The Australian Banking Association has announced that their members would offer help, depending on the needs and circ*mstances of farm borrowers, in the form of a deferral of scheduled loan repayments, waiving fees and charges, including break costs on early redemption of farm management deposits, interest free periods or no interest rate increases, and debt consolidation to help make repayments more manageable.86 The Bank of Queensland (BOQ) has made a $50 000 donation to Rural Aid Australia, ANZ has donated $1 million and the Commonwealth Bank has promised $2 million to charities established to support drought-affected farms.87 Among other moves to support farms experiencing hardship, NAB has donated $100 000 to the Country Women’s Association.88 Several transport companies, mostly those who base their businesses on carting hay and other agricultural produce, have donated their time and used their vehicles to transport hay free of charge to drought-stricken farmers.89 Westpac has also announced a $100 million commitment to its agribusiness activities aimed at supporting farms affected by the drought.90 Carrying out discretionary responsibilities such as these is voluntary. Companies are not considered unethical if they don’t perform them. Today, however, corporate stakeholders expect companies to do much more than in the past to meet their discretionary responsibilities.

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RESPONSES TO DEMANDS FOR SOCIAL RESPONSIBILITY

social responsiveness a company’s strategy to respond to stakeholders’ economic, legal, ethical or discretionary expectations concerning social responsibility

Social responsiveness refers to a

company’s strategy to respond to stakeholders’ economic, legal, ethical or discretionar y expectations concerning social responsibility. A social responsibility problem exists whenever company actions do not meet stakeholder expectations. One model of social responsiveness identifies four strategies for responding to social responsibilit y problems: reactive, defensive, accommodative and proactive. These strategies differ in the extent to which the company is willing to act to meet or exceed society’s expectations.

A company using a reactive strategy reactive strategy will do less than society expects. It may a social responsiveness strategy in which a deny responsibility for a problem or fight company does less than any suggestions that the company should society expects defensive strategy solve a problem. a social responsiveness By contrast, a company using a strategy in which defensive strategy would admit a company admits responsibility for a problem but would do responsibility for a problem but does the least the least required to meet societal required to meet societal expectations. Foxconn is a Taiwanese expectations electronics manufacturing company that operates Chinese factories that produce 40 per cent of the world’s consumer electronic products. At the Foxconn factories that make iPhones and iPads in China, 18 employees attempted suicide in 2010, most by leaping to their deaths. After the eleventh suicide, the company placed suicide nets that reach 20 feet out around the perimeter of each building.91 An extensive New York Times investigation found that employees often worked seven days a week, were exposed to dangerous chemicals and lived in crowded, companysupplied dorm rooms, some with as many as 20 people per three-bedroom apartment. However, Apple, which had been conducting audits of its suppliers’ manufacturing facilities for many years, was slow to respond. A consultant with Business for Social Responsibility, a company Apple hired for advice on labour issues, said, ‘We’ve spent years telling Apple there are serious problems and recommending changes. They don’t want to pre-empt problems, they just want to avoid embarrassments’. A former Apple executive said, ‘If you see the same pattern of problems, year after year, that means the company’s ignoring the issue rather than solving it. Non-compliance is tolerated, as long as the suppliers promise to try harder next time. If we meant business, core violations would disappear’.92 After the New York Times story, Apple began working with the Fair Labor Association, a non-profit organisation that promotes and monitors safe working conditions. Four years after the problems began, following the Fair Labor Association’s report, Apple and Foxconn agreed to increase pay, limit employees to a maximum of 49 hours a week, build more dormitories and hire thousands of additional employees.93 A company using an accommodative accommodative strategy will accept responsibility for a strategy a social responsiveness problem and take a progressive approach strategy in which a by doing all that can be expected to solve company accepts responsibility for a the problem. Big banks in Australia are problem and does all that often derided in the media for putting their society expects to solve that problem huge profits ahead of people and the community; however, the banks are also often at the forefront of the relief effort following natural disasters such as droughts, fires, floods and storms. ANZ, NAB, Westpac and Commonwealth Bank have made supporting drought relief a centrepiece of their rural business.

AAP Images/David Mariuz

Health Organization (WHO) now believes that, thanks to Merck’s contributions, river blindness is on the verge of being completely eliminated in Africa.98 In support of new WHO guidelines, Merck announced in November 2017 that they would expand their drug donation program to reach up to an additional 100 million people per year through to 2025 as part of the global effort to eliminate river blindness. The program covers more than 250 million people in the areas where river blindness occurs. 99 Figure 4.4 summarises the discussion of social responsiveness.

Since 2008, IBM’s Corporate Service Corps has sent 1400 employees, in teams of eight to 15, to emerging countries to solve significant economic and social problems. Prior to leaving, teams prepare for three months, learning about cultures, researching the problems they’ll be addressing and using technology to begin building relationships with the local government, business and civic leaders with whom they’ll be working. When a team of 10 from IBM visited the Philippines, a local tour turned into a team project when they learned that a well in a village had not been completed because of mistakes and a lack of money. IBM’s employees immediately suspended their trip to begin pulling together local contacts with engineering knowledge to conduct the work. The team also paid for the project to be completed. As a result, local residents no longer walk 6.4 kilometres to retrieve drinkable water for their homes and families.94 Likewise, other IBM Corporate Service Corps members have redesigned Kenya’s postal system and developed plans to grow the eco-tourism industry in Tanzania. While these experiences develop the global and leadership skills of its employees, there are tremendous benefits for the people and societies they help.95 Finally, a company using a proactive strategy will anticipate responsibility for a problem before it occurs, do more than expected to address the proactive strategy a social responsiveness problem and lead the industry in its strategy in which a approach. Twenty-five years ago, Merck, company anticipates a pharmaceutical company, began giving responsibility for a problem before it occurs and does away its drug for river blindness, which more than society expects thrives and spreads easily along fertile to address the problem riverbanks in Africa and Latin America. River blindness affects 37 million people worldwide and could infect up to 140 million others.96 Merck’s drug program is the largest ongoing medical donation program in history. Since 1987, Merck has given away more than 2 billion treatments in 28 countries in Africa, six countries in Latin America and Yemen at a cost of more than $4 billion. Roy Vegas, Merck’s CEO in 1987, said, ‘We decided the company would do it at that point at no charge. We announced [in 1987] that Merck would contribute the drug free of charge for as long as it was needed’.97 The World

Reactive

Defensive

Fight all the way

Do only what is required

Withdrawal

Public relations approach

Accommodative Be progressive Legal approach

Bargaining

Proactive Lead the industry Problem solving

DO NOTHING FIGURE 4.4

DO MUCH

Social responsiveness

Source: A. B. Carroll, ‘A three-dimensional conceptual model of corporate performance’ (Figure 3.3), Academy of Management Review, 4, 1979. Republished with Permission of Academy of Management, P.O. Box 3020, Briar Cliff Manor, NY, 10510-8020. Reproduced by Permission of the Publisher via Copyright Clearance Center, Inc.

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SOCIAL RESPONSIBILITY AND ECONOMIC PERFORMANCE

One question that managers often ask is, ‘Does it pay to be socially responsible?’ In previous editions of this textbook, the answer tended to be ‘no’, as early research indicated that there was not an inherent relationship between social responsibility and economic performance.100 Recent research, however, leads to different conclusions. There is no trade-off between being socially responsible and economic performance,101 and there is a small, positive relationship between being socially responsible and economic performance that strengthens with corporate reputation.102 Let’s explore what each of these results means. First, as noted earlier, there is no trade-off between being socially responsible and economic performance.103 Being socially responsible usually won’t make a business less profitable. What this suggests is that the costs of being socially responsible – and those costs can be high, especially early on – can be offset by a better product or corporate reputation, which results in stronger sales or higher profit margins. When businesses enhance their reputations by being socially responsible, they hope to maximise willingness to pay; that is, customers paying more for products and services that are socially responsible. Australian company Cotton On has established a scheme to provide aid in the form of education opportunities

CHAPTER 4 Ethics and social responsibility

negative free cash flow, which means that Tesla was burning more cash than it was generating.106 Indeed, as Tesla finally delivered its more reasonably priced $35 000 Model 3 in 2018, five years late to market, founder Elon Musk explained that Tesla’s cash will drop ‘close to the edge’.107 Musk further projects that Tesla will not be profitable until 2020 when it reaches full production capacity on all three of its cars.108 Tesla could ultimately disrupt the automotive industry and be wildly profitable. But if it does so on Musk’s estimated schedule, it will have taken 17 years just to get to consistent profitability. Being socially responsible may be the right thing to do, and it is usually associated with increased profits, but it doesn’t guarantee business success.

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in developing nations. The Cotton On Foundation aims to provide 20 000 education places by 2020, funded by selling special products in their stores. The products sold to support the Cotton On Foundation include bottled water, mints, wrist bands, pocket packs of tissues and re-useable tote bags. Since 2007, the Cotton On Foundation has raised over $72 million for its charitable projects.104 Second, it usually does pay to be socially responsible, and that relationship becomes stronger particularly when a company or its products have a strong reputation for social responsibility.105 Finally, even if there is generally a small positive relationship between social responsibility and economic performance that becomes stronger when a company or its products have a positive reputation for social responsibility, and even if there is no trade-off between being socially responsible and economic performance, there is no guarantee that socially responsible companies will be profitable. Simply put, socially responsible companies experience the same ups and downs in economic performance that traditional businesses do. For all of the positive press that Tesla gets for its highperforming, environmentally friendly, very expensive cars (without options, Model S prices range from $71 000 to $137 800 while Model X prices range from $89 000 to $139 000), few people realise that Tesla has reported a quarterly profit just twice since going public in 2010 (Tesla was founded in 2003). Every other quarter resulted in millions of dollars of losses. Part of this is because Tesla is a startup automotive company, which is a cash-intensive business. As of February 2017, Tesla reported 10 straight quarters of

PART 1, CHAPTERS 1– 4

What can you take from your progress through this part of MGMT4 1

Management

☑ You have developed your understanding of the four functions of management and covered the different kinds of managers – including the major roles and sub-roles that managers perform in their jobs.

☑ You can articulate what companies look for in managers and you will be able to describe the transition that employees go through when they are promoted to management positions.

OVERALL AIM OF PART1

make mistakes, and you can now identify and discuss the top mistakes that managers make in their jobs.

To introduce management, its history and its applications in contemporary workplaces

Listen to an audio summary of each chapter in the End of Part summary

☑ You understand that companies can create competitive advantage through people. ☑ You have learned that sometimes managers HAPTER 1

History of management

☑ You have developed your understanding of the history of management and you have covered conceptual, theoretical and analytical aspects of management.

☑ You are able to discuss the origins of management, comparing them with the ideas and practices of managers today.

☑ You understand the history of scientific management, bureaucratic and administrative management, and you have learnt about the contributions to management theory and practice by key thinkers in the field. PTER Listen to an audio summary of each chapter in the End of Part summary

relations management and can apply the lessons learnt from 3

☑ You have covered the history of human

Organisational environments and cultures

☑ You will be able to articulate and adopt certain processes that companies

Listen to an audio summary of each chapter in the End of Part summary

HAPTER 23

use to make sense of their changing environments, and expand upon how organisational cultures are created and how they can help companies be successful. Ethics and social responsibility

☑ You have learnt how to identify common kinds of workplace deviance, and understand the role of the Australian Competition and Consumer Commission (ACCC) in the Australian business environment.

☑ Your study of ethical decision making has allowed you to discuss how companies are encouraged to behave ethically and how they may be punished for unethical behaviour.

☑ You are able to explain and apply practical steps that managers can take to improve ethical decision making.

☑ You understand the key concept of social responsibility, and can explain to whom organisations are socially responsible, why they are socially responsible and how they can choose to respond to societal demands for social responsibility. illustrate whether social responsibility hurts or helps an organisation’s economic performance.

Listen to an audio summary of each chapter in the End of Part summary

HAPTER 4

☑ In simulations and examples, you can

CHAPTER 4 Ethics and social responsibility

PART

TWO 5

Planning and decision making

Organisational strategy

Innovation and change

Global management

PLANNING

1 5

Planning and decision making

LEARNING OUTCOMES

1 Discuss the benefits and pitfalls of planning.

PLANNING

2 Describe how to make a plan that works. 3 Discuss how companies can use plans at all management levels, from top to bottom.

4 Explain the steps (and the limits) of rational decision making.

5 Explain how group decisions and decisionmaking techniques can improve decision making.

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Even inexperienced managers know that planning and decision making are central parts of their jobs. They have to decide what the problem is. They need to generate potential solutions or plans.They have to pick the best one and make it work. Experienced managers, however, know how hard it really is to make good plans and decisions. One seasoned manager says: ‘I think the biggest surprises are the problems. Maybe I had never seen it before. Maybe I was protected by my management when I was in sales. Maybe I had delusions of grandeur, I don’t know. I just know how disillusioning and frustrating it is to be hit with problems and conflicts all day and not be able to solve them very cleanly’.1 Planning is choosing a goal and developing a method or strategy to achieve that goal. German-owned discount supermarket chain Aldi, which has 13.2 per cent of grocery sales in the supermarket sector ($11.9 billion), opened its 500th Australian store in 2017, and continued an aggressive store roll-out with 32 new stores opening in 2018. The company built new distribution centres in Sydney and Melbourne to cope with the expected expansion. Aldi continues to expand in the Australian market at a rapid pace. For good reason too, with a total grocery market of just over $90bn in Australia, every 0.1per cent of market share is worth nearly $100 million.2 Aldi’s plan also differs from traditional full-line supermarkets in that the range of products offered by the store is limited. Unlike a full-line supermarket, Aldi stocks only about 1000 grocery items, more than 95 per cent of which are private-label rather than name-brand products. By restricting its range to just one of each type of item, Aldi can drastically reduce the size of its stores and, therefore, its overheads and prices. In addition to market-leading

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prices, shoppers are also enticed with a range of constantly changing general merchandise, shifting from gardening equipment one week to children’s clothes the next.3 After reading the next three sections, you should be able to: ● discuss the benefits and pitfalls of planning ● describe how to make a plan that works ● discuss how companies APPLY can use plans at all Get started with the management levels, media quiz: Plant Fantasies: Managerial Decision Making from top to bottom.

Aldi supermarkets are becoming rapidly more common, with the company opening at least 30 new outlets per year

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BENEFITS AND PITFALLS OF PLANNING

Are you one of those naturally organised people who always make a daily to-do list and never miss a deadline? Or are you one of those flexible, creative, go-with-the-flow people who dislike planning because it restricts your freedom? Some people are natural planners. They love it and can see only its benefits. Others dislike planning and can see only its disadvantages. It turns out that both views have real value. Planning has advantages and disadvantages. Let’s learn about: ● the benefits of planning ● the pitfalls of planning.

BENEFITS OF PLANNING Planning offers several important benefits: intensified effort, persistence, direction and creation of task strategies.4 First, managers and employees put forth greater effort when following a plan. Take two employees. Instruct one to ‘do your best’ to increase production, and instruct the other to achieve a 2 per cent increase in production each month. Research shows that the one with the specific plan will work harder.5 76

Second, planning leads to persistence; that is, working hard for long periods. In fact, planning encourages persistence even when there may be little chance of shortterm success.6 McDonald’s founder Ray Kroc, a keen believer in the power of persistence, had this quotation from President Calvin Coolidge hung in all of his executives’ offices: ‘Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent’.7 The third benefit of planning is direction. Plans encourage managers and employees to direct their persistent efforts towards activities that help accomplish their goals and away from activities that don’t.8 The fourth benefit of planning is that it encourages the development of task strategies. In other words, planning not only encourages people to work hard for extended periods and to engage in behaviours directly related to goal accomplishment, it also encourages them to think of better ways to do their jobs. Finally, perhaps the most compelling benefit of planning is that it has been proven to work for both companies and individuals. On average, companies with plans have larger profits and grow much faster than companies that don’t.9 The same holds true for individual managers and employees: there is no better way to improve the performance of the people who work in a company than to have them set goals and develop strategies for achieving those goals.

PLANNING PITFALLS Despite the significant benefits associated with planning, planning is not a cure-all. Plans won’t fix all organisational problems. In fact, many management authors and consultants believe that planning can harm companies in several ways.10 The first pitfall of planning is that it can impede change and prevent or slow needed adaptation. Sometimes companies become so committed to achieving the goals set forth in their plans, or on following the strategies and tactics spelled out in them, that they fail to see that their plans aren’t working or that their goals need to change. In 2015, only 25 per cent of the makers of luxury Swiss mechanical watches thought Apple’s new smart watch would have a ‘meaningful impact’ on sales.11 But by the end of 2015, sales had dropped by $2 billion, or 1.6 per cent. By the end of 2016, sales had fallen again, by 9.9 per cent, or nearly or $19 billion.12 To avoid price discounts, Swiss watch makers bought back nearly 10 per cent of unsold watch inventory from retailers and dismantled those watches for parts.13 Analysts estimate that Apple sold nearly 12 million Apple Watches in 2016, accounting for half

to sell these two-pound (1 kg) ice cream cakes because head office said that’s what we had to sell’.18 Plans are meant to be guidelines for action, not abstract theories. Consequently, planners need to be familiar with the daily details of their business if they are to produce plans that can work.

LO2 MGMT IN PRACTICE

PLANNING … Works for you by: • intensifying effort • increasing persistence • providing direction • creating task strategies. Works against you by: • impeding change • creating a false sense of certainty • allowing planners to plan things they don’t understand how to accomplish.

Planning is a double-edged sword. If done right, planning brings about tremendous increases in individual and organisational performance. If planning is done wrong, however, it can have just the opposite effect and harm individual and organisational performance. In this section, you will learn how to make a plan that works. As depicted in Figure 5.1, planning consists of: ● setting goals ● developing commitment to the goals ● developing effective action plans ● tracking progress towards goal achievement ● maintaining flexibility in planning.

SETTING GOALS P

P LY E A Since planning involves Get an overview of goal setting using the choosing a goal and developing SMART approach a method or strategy to achieve that goal, the first step in planning is to set goals. To direct behaviour and increase effort, goals need to be specific and challenging.19 For example, deciding to ‘increase sales this year’ won’t direct and energise employees as much as deciding to ‘increase sales in Malaysia by 4 per cent in the next six months’. Specific, challenging goals provide a target for which to aim and a standard against which to measure success. One way of writing effective goals for yourself, your job or your company is to use the SMART guidelines. SMART goals are specific, SMART goals goals that are specific, measurable, attainable, realistic and measurable, attainable, 20 timely. Let’s take a look at Nissan’s zero- realistic and timely emissions program, which led to the all-electric car Leaf, to see how it measures up to the SMART goals. First, is the goal specific? Yes, because ‘zero emissions’ tells us that Nissan isn’t just looking to reduce emissions but to eliminate them. Also, ‘all electric’ rules out gaselectric hybrids like those produced by competitors. In addition to being specific, the goal is also measurable, since Nissan has put a number on the emissions – namely, zero. Whether the goal is attainable or not depends on whether the all-electric car performs as expected. Nissan has been researching lithium-ion battery technology for

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The second pitfall is that planning can create a false sense of certainty. Planners sometimes feel that they know exactly what the future holds for their competitors, their suppliers and their companies. However, all plans are based on assumptions; for example, ‘the price of petrol will increase by 4 per cent per year’, or ‘exports will continue to rise’. For plans to work, the assumptions on which they are based must hold true. If the assumptions turn out to be false, then the plans based on them are likely to fail. The third potential pitfall of planning is the detachment of planners. In theory, strategic planners and top-level managers are supposed to focus on the big picture; that is, carrying out the plan, and not concerning themselves with the details of implementation. According to management professor Henry Mintzberg, detachment leads planners to plan for things they don’t understand.17 Andrew Cosslett, former CEO of InterContinental Hotels in London, described one of his earliest experiences working as a sales representative for Wall’s Ice Cream (Streets in Australia), a subsidiary of London-based Unilever. Cosslett’s supervisors passed to him a sales plan crafted by upper management that involved making sales calls on roughly 600 shops. Speaking of the detachment of planners, Cosslett said: ‘The biggest thing I remember from those days … was how much of what comes out of corporate offices is of absolutely no purpose, and how far removed some people are from the front line. I was out there expected to sell this ice cream in the middle of winter in Liverpool. It was pretty tough, and I was in there trying

HOW TO MAKE A PLAN THAT WORKS

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the market share and 80 per cent of the profits in global smart watches.14 Will luxury buyers come back to mechanical watches? Hong Kong’s Jai Ignacio says, ‘This [Apple Watch] is more practical for me. I can change the bracelet to steel links when I need to dress up.’15 Canalysis, a market research company, estimates that smart watch sales may total 67 per cent of Swiss watch sales by the end of 2017.16

CHAPTER 5 Planning and decision making

1 Set goals

Maintain flexibility

Develop commitment

Revise existing plan or Begin planning process anew

Track progress toward goal achievement

Develop effective action plans

JAN

FIGURE 5.1

How to make a plan that works

almost 20 years and claims to have developed a battery that can power a car up to 160 kilometres and recharge in just eight hours. Current trends in government regulation, consumer preferences for more environmentally friendly vehicles and increasing petrol prices suggest that an all-electric car is realistic from a business standpoint, but that can’t be determined until the Leaf is available to consumers. Finally, the goal is timely, since Nissan’s goal was to roll out the Leaf in Japan and the United States in 2010, which it achieved, and then to Europe, North America and Asia by 2012 (which it achieved).21

DEVELOPING COMMITMENT TO GOALS Just because a company sets a goal doesn’t mean that people will try to accomplish it. If employees don’t care about a goal, that goal won’t encourage them to work harder or smarter. Thus, the second step in planning is to develop commitment to goals.22

Who What When How

Goal commitment is the determination goal commitment the determination to to achieve a goal. Commitment to achieve achieve a goal a goal is not automatic. Managers and employees must choose to commit themselves to a goal. Edwin Locke, Professor Emeritus of Management at the University of Maryland and the foremost expert on how, why and when goals work, tells a story about an overweight friend who finally lost 34 kilograms. Locke says, ‘I asked him how he did it, knowing how hard it was for most people to lose so much weight’. His friend responded, ‘Actually, it was quite simple. I simply decided that I really wanted to do it’.23 Put another way, goal commitment is really wanting to achieve a goal. So how can managers bring about goal commitment? The most popular approach is to set goals participatively. Rather than assigning goals to employees (‘Johnson, you’ve got until Tuesday of next week to redesign the flux capacitor so it gives us 10 per cent more output’), managers and employees choose goals together. The goals are more likely to be realistic and attainable if

employees participate in setting them. Another technique for gaining commitment to a goal is to make the goal public by having individuals or work units tell others about their goals. Or alternatively, to increase goal commitment, obtain top management’s support. Top management can show support for a plan or program by providing funds, speaking publicly about the plan or participating in the plan itself.

DEVELOPING EFFECTIVE ACTION PLANS

iStock.com/mattjeaco*ck

The third step in planning is to develop effective action plans. An action plan lists the specific steps (how), people (who), resources (what) and time period (when) for accomplishing a goal. Unlike most action plan CEOs, the CEO of Ocean Spray has a the specific steps, people unique goal that requires an extraordinary and resources needed to accomplish a goal action plan. The CEO of Ocean Spray has to buy all of the cranberries that the cranberry farmers produce (Ocean Spray is a farmer cooperative) and must buy the crop at the highest possible price. Then, it’s the CEO’s job to figure out how to sell the entire crop of high-cost berries. A former Ocean Spray CEO stated, ‘Imagine if Pepsi had to maximise the aluminium it used, and at the highest price it could afford!’ To maximise the return on the cranberry crop, Ocean Spray began looking for alternative uses for cranberries beyond the traditional juice and canned products. The company invented dried-fruit Craisins by reinfusing juice into husks that used to be thrown away.

WORKPLACE AND COMMUNITY

DON’T REMIND ME At 76 million people, baby boomers, born between 1946 and 1964, represent the largest and wealthiest demographic in business history. But with the first boomers now about to turn 70, companies that have not traditionally targeted older consumers have to test, change and improve their products and services to adapt to these customers. But with boomers, those changes come with one critical caveat: don’t suggest those changes have anything to do with ageing! Ken Romanzi, while chief operating officer at Ocean Spray Cranberries, Inc., which has prospered by selling to health-conscious boomers, said, ‘We don’t do anything to remind boomers that they are getting older’25

Craisins have grown into a US$100 million product line. Ocean Spray also developed a set of light drinks that had just 40 calories, mock berries that could be infused with other flavours (blueberry, strawberry, etc.) and used in muffins and cereals, and was the first company to introduce juice boxes.24

TRACKING PROGRESS The fourth step in planning is to track progress towards goal achievement. There are two accepted methods of tracking progress. The first is to set proximal goals and distal goals. Proximal goals proximal goals short-term goals or sub-goals are short-term goals or sub-goals, distal goals whereas distal goals are long-term or long-term or primary goals primary goals.26 The idea behind setting proximal goals is that achieving them may be more motivating and rewarding than waiting to reach far-off distal goals. The second method of tracking progress is to gather and provide performance feedback. Regular, frequent performance feedback allows employees and managers to track their progress towards goal achievement and make adjustments in effort, direction and strategies.27 For example, Figure 5.2 shows the result of providing feedback on safety behaviour to the makeup and wrapping workers in a large bakery company. During the baseline period, workers in the makeup department – who measure and mix ingredients, roll the bread dough and put it into baking pans – performed their jobs safely about 70 per cent of the time (see graph line 1 in Figure 5.2). The baseline safety record for workers in the wrapping department – who bag and seal baked bread and assemble, pack and tape cardboard cartons for shipping – was somewhat better at 78 per cent (see graph line 2). After the company gave employees 30 minutes of safety training, set a goal of 90 per cent safe behaviour and then provided daily feedback (such as a chart similar to Figure 5.2), performance improved dramatically. During the intervention period, the percentage of safely performed behaviours rose to an average of 95.8 per cent for wrapping workers (see graph line 3) and 99.3 per cent for workers in the makeup department (see graph line 4), and never fell below 83 per cent. Thus, the combination of training, a challenging goal and feedback led to a dramatic increase in performance. The importance of feedback alone can be seen in the reversal stage, when the company quit posting daily feedback on safe behaviour. Without daily feedback, the percentage of safely performed behaviour returned to baseline levels: 70.8 per cent for the wrapping department (see arrow 5) and 72.3 per cent for the makeup department

CHAPTER 5 Planning and decision making

Baseline Wrapping department

Intervention (safety training, specific goals, and daily feedback)

Reversal (no daily feedback)

100

Percentage of incidents performed safely

90 80

3 Safety average increases to 95.8%

70 60 50

70.8%

1 Safety average 70%

0 Intervention

Baseline Makeup department

Reversal

Without feedback, safety average falls back

100 90

Safety average increases to 99.3%

80 70 60 50

72.3%

Safety average 78%

0 5

Observation sessions

FIGURE 5.2

Effects of goal setting, training and feedback on safe behaviour in a bread factory

Source: J. Komaki, K. D. Barwick & L. R. Scott, ‘A behavioral approach to occupational safety: pinpointing and reinforcing safe performance in a food manufacturing plant’, Journal of Applied Psychology, 1978: 63.

MAINTAINING FLEXIBILITY

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PLANNING FROM TOP TO BOTTOM

Planning works best when the goals and action plans at the bottom and middle of the organisation support the goals and action plans at the top of the organisation.

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Because action plans are sometimes poorly conceived, and goals sometimes turn out not to be achievable, the last step in developing an effective plan is to maintain flexibility. One method of maintaining flexibility while planning is to adopt an options-based approach.29 The goal of options-based planning is to keep options open by making small, simultaneous investments in many alternative plans. Then, when options-based one or a few of these plans emerge planning maintaining planning flexibility as likely winners, you invest even by making small, simultaneous more in these plans while investments in many alternative plans discontinuing or reducing investment in the others. In part, options-based planning is the opposite of traditional planning. While the purpose of an action plan is to

commit people and resources to a particular course of action, the purpose of options-based planning is to leave those commitments open by maintaining slack resources: in other slack resources a cushion of extra words, a cushion of resources, such as resources that can be extra time, people, money or production used with options-based planning to adapt to capacity, that can be used to address unanticipated change, and adapt to unanticipated changes, problems or opportunities problems or opportunities. 30 Holding options open gives you choices, and choices, combined with slack resources, give you flexibility. Notice that, while we often use the word ‘slack’ in negative connotations, a slight cushion PPLY E A Get an of slack resources can be very overview of planning process key concepts good in providing flexibility. ENGAG

(see arrow 6). For planning to be effective, employees need both a specific, challenging goal and regular feedback to track their progress. Indeed, further research indicates that the effectiveness of goal setting can be doubled by the addition of feedback.28

In other words, planning works best when everybody pulls in the same direction. Figure 5.3 illustrates this planning continuity, beginning at the top with a clear definition of the company vision and ending at the bottom with the execution of operational plans. Let’s see how: ● top managers create the organisational vision and mission ● middle managers develop tactical plans and use management by objectives to motivate employee efforts towards the overall vision and mission ● first-level managers use operational, single-use and standing plans to implement the tactical plans.

connected future’. The purpose statement goes on to say

STARTING AT THE TOP

Furthermore, Telstra’s vision is clear, inspirational and consistent with Telstra’s company values and the principles that guide the company. Another example of an effective organisational vision that has been particularly effective is that of Assa Abloy, the parent company of many well-known brands including Lockwood and Whitco, which has the vision statement ‘… lead in innovation and provide well designed, convenient, safe and secure solutions that give true added value to our customers’.33 The mission, which flows from the mission vision, is a more specific goal that a statement of a company’s overall goal that unifies unifies company-wide efforts, stretches company-wide efforts toward and challenges the organisation, and its vision, stretches and challenges the organisation, possesses a finish line and a time and possesses a finish line and frame. For example, in 1961, American a time frame President John F. Kennedy established

Top management is responsible for developing long-term strategic plans that make clear how the strategic plans company will serve customers and overall company plans that clarify how the position itself against competitors in the company will serve next two to five years. Strategic planning customers and position begins with the creation of an organisational itself against competitors over the next two to five vision and an organisational mission. years A vision is a statement of a company’s vision purpose or reason for existing.31 Vision a statement of a company’s purpose or statements should be brief – no more than reason for existing two sentences. They should also be enduring, inspirational, clear and consistent with widely shared company beliefs and values. An excellent example of a well-crafted vision statement is that of Telstra, the iconic Australian telecommunications company. Telstra states that ‘its Purpose (vision) is to create a brilliant

tical plans Tac

Vision

ing Stand

FIGURE 5.3

ob nt by jectives

rational plans Ope

me ge

Singleuse pla ns Ma na Mission

n pla

that: • To createis our responsibility. The brilliant connected future won’t happen on its own. It has to be delivered – and only Telstra can bring together all the parts to create it. • A brilliant connected future is our aspiration. It’s what we need to build for every one of our customers. It’s our responsibility to the nation and every market we work in. • For everyone is crucial. We serve everyone. Change doesn’t happen if only a chosen few benefit. Transformation happens when enough people get the technologies that create social, economic and cultural change. This all adds up to a single, guiding fact: it’s why we do what we do.’32

Vision Top managers

Middle managers

First-level managers

Mission

Tactical plans

Ope ratio plan nal s

nt eme Manag by ves e j b o cti

Standing plans

leS in g use s plan

Planning from top to bottom

CHAPTER 5 Planning and decision making

an organisational mission for NASA with this simple statement: ‘Achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to earth’.34 NASA achieved this goal on 20 July 1969, when astronaut Neil Armstrong walked on the moon. Once a mission has been accomplished, a new one should be chosen. Again, however, the new mission must grow out of the organisation’s vision, which does not change significantly over time. For example, NASA’s 2018 mission statement was: ‘Lead an innovative and sustainable program of exploration with commercial and international partners to enable human expansion across the solar system and bring new knowledge and opportunities back to earth. support growth of the nation’s economy in space and aeronautics, increase understanding of the universe and our place in it, work with industry to improve America’s aerospace technologies, and advance American leadership.’ 35

SMART MGMT

BENDING IN THE MIDDLE Middle management is responsible for developing and carrying out tactical plans to accomplish the organisation’s

mission. Tactical plans specify how a tactical plans company will use resources, budgets and plans created and implemented by middle people to accomplish specific goals within managers that specify its mission. Whereas strategic plans and how the company will use objectives are used to focus company resources, budgets and people over the next six efforts over the next two to five years, months to two years to accomplish specific goals tactical plans and objectives are used to within its mission direct behaviour, efforts and attention over the next six months to two years. Like many other newspapers around the world, Fairfax’s The Age and Sydney Morning Herald have experienced declining profits over the past few years. The income from classified advertising, once called ‘rivers of gold’, has dried up as customers turn to online alternatives. With subscriptions also declining, the Melbourne and Sydney ‘quality broadsheet’ newspapers are changing their plans. To return to profitability, Greg Hywood, the CEO of Fairfax, announced that Fairfax would de-emphasise print media and focus on delivering digital content to computers and mobile devices. As part of this shift, the newspaper announced a tactical plan to reduce its staff by 1900, reorganise the newsroom from its traditional content sections and move to set up ‘pay walls’ to start charging for the online versions of the papers which were previously free to view.37 Management by objectives is a management technique often used to develop and carry out tactical plans. Management by objectives, or MBO, is a four-step process in which managers and their employees: ● discuss possible goals management by ● participatively select goals that are objectives (MBO) challenging, attainable and consistent a four-step process in which managers and with the company’s overall goals employees discuss and ● jointly develop tactical plans that lead select goals, develop tactical plans and meet to the accomplishment of tactical goals regularly to review progress towards goal and objectives ● meet regularly to review progress accomplishment towards accomplishment of those goals.

FINISHING AT THE BOTTOM Lower-level managers are responsible for developing and carrying out operational plans, which are the day-to-day plans for producing or delivering the operational plans organisation’s products and services. day-to-day plans, Operational plans direct the behaviour, developed and implemented by lowerefforts and priorities of operative level managers, to direct employees for periods ranging from 30 the behaviour, efforts and priorities of operative days to six months. There are three kinds employees for periods of operational plans: single-use plans, ranging from 30 days to six months standing plans and budgets.

Shutterstock.com/Stephen Rees

If you encounter a problem that you’ve seen before, someone in your company has probably written a standing plan that explains how to address it

Single-use plans deal with unique, one-time-only events. After a devastating earthquake and tsunami critically disabled a nuclear power single-use plans plant, several Japanese electric plans that cover unique, one-time-only events companies warned that they might not be able to provide enough power for businesses and residents. The Japanese government then required heavy power users to cut their consumption by 15 per cent, which required many businesses to enact conservation plans. Sony, for example, announced that it would encourage all employees to leave their offices by 5 p.m., one hour earlier than usual, and shut off the air conditioning at 6 p.m. promptly. The company also decided to extend summer holidays at several factories in order to reduce power consumption.38 Another company that had to take action was Komatsu, a manufacturer of heavy machinery. It announced that it would close two stories of its 10-storey headquarters building and give employees one day off per week. Nissan, meanwhile, installed power meters at its factories so that it could stop its operations when its daily power consumption target was exceeded.39 Unlike single-use plans that are created, carried out and then never used again , standing plans save managers’ time because once the standing plans plans are created, they can be used plans used repeatedly to handle frequently recurring repeatedly to handle frequently events recurring events. If you encounter a problem that you’ve seen before, someone in your company has probably written a standing plan that explains how to address it. There are three kinds of standing plans: policies, procedures, and rules and regulations. Policies indicate the general course of action that company managers should take in response to a

particular event or situation. A well- policy written policy will also specify why a standing plan that indicates general course of action the policy exists and what outcome the that should be taken in the policy is intended to produce. response to a particular event For example, many surveys have or situation shown that employees, if able to, spend work time on ‘private’ Internet use, with usage times ranging from one hour to three hours per day.40 But evidence tends to suggest that well-designed Internet usage policies can reduce excessive workplace use.41 Procedures are more specific than policies because they indicate the series of steps that should be taken in response to a particular event. A procedure manufacturer’s procedure for handling a standing plan that indicates defective products might include the the specific steps that should be taken in response to a following steps: particular event ● Step 1: Rejected material is locked in a secure area with ‘reject’ documentation attached. ● Step 2: Material Review Board (MRB) identifies the defect and how far outside the standard the rejected products are. ● Step 3: MRB determines the disposition of the defective product as either scrap or as rework. ● Step 4: Scrap is either discarded or recycled, and rework is sent back through the production line to be fixed. ● Step 5: If delays in delivery will result, a MRB member notifies the customer.42 Rules and regulations are even more specific than procedures because they specify what must happen or not happen. They describe rules and regulations precisely how a particular action standing plans that describe should be performed. For instance, how a particular action should performed, or what must many companies have rules and be happen or not happen in regulations forbidding managers response to a particular event from writing job reference letters for employees who have worked at their organisations because a negative reference may prompt a former employee to sue for defamation of character.43 Budgets are the third kind of operational plan. Budgeting is quantitative planning because it forces managers to decide how to allocate available money to best accomplish company goals. According to Jan King, author of budgeting Business Plans to Game Plans,

‘Money sends a clear message about your priorities. Budgets act as a language for communicating your goals to others’.44

quantitative planning through which managers decide how to allocate available money to best accomplish company goals

CHAPTER 5 Planning and decision making

WHAT IS RATIONAL DECISION MAKING?

Decision making is the process of choosing a solution from available alternatives.45 Rational decision making is a systematic process in which managers define problems, evaluate alternatives and choose optimal solutions that provide maximum benefits to their organisation. After reading the next two decision making sections, you should be able to: the process of choosing a solution from available ● explain the steps and limits to alternatives rational decision making rational decision ● explain how group decisions and making a systematic process of group decision-making techniques defining problems, evaluating can improve decision making.

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alternatives and choosing optimal solutions

Complete the ‘Management decision’ worksheet for Chapter 5

STEPS AND LIMITS TO RATIONAL DECISION MAKING

There are six steps in the rational decision-making process. Let’s learn more about each of these steps: 1 define the problem 2 identify decision criteria 3 weight the criteria 4 generate alternative courses of action 5 evaluate each alternative 6 compute the optimal decision. Then we’ll consider the limits to rational decision making.

DEFINE THE PROBLEM The first step in decision making is identifying and defining the problem. A problem exists when there is a gap between a desired state (what is wanted) and an existing state (the problem a gap between a desired state situation you are actually facing). and an existing state Because it can hold 550 to 850

passengers, Airbus’ A380 super-jumbo jetliner could generate tremendous revenues for airlines. But with wings larger than a small passenger jet and wheels so large that it takes a crane to move them, the A380 was several tonnes too heavy. A representative from Boeing, Airbus’ competitor, says, ‘If the plane’s heavier, it consumes more fuel. That drives up landing and navigation fees, and also maintenance costs, especially for wheels, tires and brakes’.46 Fearing exorbitant costs, the airlines told Airbus they wouldn’t buy the A380 unless it was substantially lighter. 47 The Boeing 787 Dreamliner represents an alternative approach to Airbus, perhaps addressing a different problem. Boeing believes that the travelling public wants jets that fly them to their destinations, not to giant hubs where they had to catch other airplanes home.48 The existence of a gap between an existing state and a desired state is no guarantee that managers will make decisions to solve problems. Three things must occur for this to happen. Managers have to be aware of the gap. But that isn’t enough. Managers also have to be motivated to reduce the gap. In other words, managers have to know there is a problem and want to solve it. Finally, it’s not enough to be aware of a problem and be motivated to solve it.49 Managers must also have the knowledge, skills, abilities and resources to fix the problem. So, how did Airbus reduce the weight of its A380 super-jumbo jet? Engineers achieved the biggest weight savings by substituting a light carbon-fibre composite material for heavier aluminium in the rear fuselage and the large structural ribs in the wings. Altogether, these changes and others reduced the A380’s weight by 4 tonnes.50 Despite being a revolution in civilian aircraft technology the composite wings have proven to have unforeseen problems. In 2011 cracks started to appear in some A380 wing components. In 2012 Airbus announced that the cause of the cracks was connected to the technology used to achieve weight losses. With more experience and a greater knowledge of the composite technology, Airbus have developed new skills to address the wing crack issue. With an expensive lesson learned (estimated to reach as high as A$640 million) Airbus is applying those lessons to fixing the new problem.51 Airbus has applied the technological solutions developed for the A380 weight issues to the new generation A350 wide body aircraft, which competes for sales with the Boeing 787 Dreamliner. The A350 makes extensive use of composite technology, to the extent that the body and wings are made of carbon-fibre reinforced plastic.52 The first use of composite materials for the wings and body of a major commercial jet was in the Boeing 787 Dreamliner.53

IDENTIFY DECISION CRITERIA Decision criteria are the standards used to guide

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judgements and decisions. Typically, the more criteria a potential solution meets, the better that decision criteria solution will be. the standards used to Imagine that your boss asks for a guide judgements and decisions recommendation on outfitting the sales force, many of whom travel regularly, with new laptops. What general factors would be important when purchasing these computers? Reliability, price, warranty, on-site service and compatibility with existing software, printers and computers would all be important, but you must also consider the technical details. With technology changing so quickly, you’ll probably want to buy laptops with as much capability and flexibility as you can afford. What are your options? Well, laptops come in a variety of types. There are budget models that are good for routine office work, but are usually saddled with a slower processor; workhorse models that are not lightweight, but have everything included; slim models for travelling, which are less powerful but lighter and more durable; and convertible models like Microsoft’s Surface Pro. But what will the sales force really need? What graphic or performance specifications will each user need? How many files and programs will they need to store on their hard drives, or how much can be ‘cloud based’? Do they need a touch screen or to be able to convert to a tablet? Answering questions like these will help you identify the criteria that will guide the purchase of the new equipment.

The managers at Airbus knew there was a problem, wanted to solve it and had the knowledge, skills, abilities and resources to fix it

WEIGHT THE CRITERIA After identifying decision criteria, the next step is deciding which criteria are more or less important. Although there are numerous mathematical models for absolute weighting decision criteria, all require the comparisons decision maker to provide an initial a process in which each decision criterion is ranking of the criteria. Some use compared to a standard or absolute comparisons, in which each ranked on its own merits

criterion is compared to a standard or ranked on its own merits. For example, Australia’s Choice magazine uses an absolute comparison approach when evaluating consumer products such as vacuum cleaners or kitchen appliances or the amount of salt in snack foods, as does the Consumer Council in Hong Kong. Similarly, the internationally respected US consumer magazine Consumer Reports uses this checklist when it rates and recommends new cars: predicted reliability, previous owners’ satisfaction, predicted depreciation (the price you could expect if you sold the car), ability to avoid an accident, fuel economy, crash protection, acceleration, ride and front-seat comfort.54 Table 5.1 shows the absolute weights that someone buying a car might use. Because these weights are absolute, each criterion is judged on its own importance, using a fivepoint scale, with ‘5’ representing ‘critically important’ and ‘1’ representing ‘completely unimportant’. In this instance, predicted reliability, fuel economy and front-seat comfort were rated most important, and acceleration and predicted depreciation were rated least important.

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STEPS OF THE RATIONAL DECISION-MAKING PROCESS 1 2 3 4 5 6

Define the problem. Identify decision criteria. Weight the criteria. Generate alternative courses of action. Evaluate each alternative. Compute the optimal decision.

Another method uses relative comparisons, in which each criterion is compared directly to every other criterion.55 For example, Table 5.2 shows six relative criteria that someone might use when comparisons buying a house. Moving down the first a process in which each decision criterion is column we see that the time of the compared directly to every daily commute has been rated less other criterion important (–1) than school system quality; more important (+1) than having an in-ground pool, sun room or a quiet street; and just as important as the house being brand new (0). Total weights, which are obtained by adding up the scores in each column, indicate that the daily commute and school quality are the most important factors to this home buyer, while an in-ground pool, sun room and a quiet street are the least important. So with relative comparison, criteria are directly compared to each other.

CHAPTER 5 Planning and decision making

1. completely unimportant

2 not very important

3 somewhat important

4 important

5 critically important

Predicted reliability

✓ ✓

Owner satisfaction Predicted depreciation

✓ ✓

Avoiding accidents

✓

Fuel economy

✓

Crash protection Acceleration

✓ ✓

Ride

✓

Front-seat comfort

TABLE 5.1

Absolute weighting of decision criteria for a car purchase

Home characteristics

Daily commute (L)

SSQ

NBH

–1

School system quality (SSQ)

–1

In-ground pool (IP)

Sun room (SR)

Quiet street (QS)

Newly built house (NBH)

–1

Total weight

–3

–2

TABLE 5.2

0 0

Relative comparison of home characteristics

Source: J. Komaki, K. D. Barwick, and L. R. Scott. “A Behavioral Approach to Occupational Safety: Pinpointing and Reinforcing Safe Performance in a Food Manufacturing Plant,” Journal of Applied Psychology 63 (1978).

GENERATE ALTERNATIVE COURSES OF ACTION After identifying and weighting the criteria that will guide the decision-making process, the next step is to identify possible courses of action that could solve the problem. In general, at this step, the idea is to generate as many alternatives as possible. For instance, let’s assume that you’re trying to select a city in Europe to be the location of a major office. After meeting with your staff, you generate a list of possible alternatives: Amsterdam, the Netherlands; Barcelona or Madrid, Spain; Berlin or Frankfurt, Germany; Brussels, Belgium; London, England; Milan, Italy; Paris, France; and Zurich, Switzerland.

EVALUATE EACH ALTERNATIVE The next step is to systematically evaluate each alternative against each criterion. Because of the amount of information

that must be collected, this step can take much longer and be much more expensive than other steps in the decisionmaking process. For example, in selecting a European city for your office, you could contact economic development offices in each city, systematically interview businesspeople or executives who operate there, retrieve and use published government data on each location or rely on published studies such as Cushman & Wakefield’s European Cities Monitor, which conducts an annual survey of more than 500 senior European executives who rate 30 European cities on 12 business-related criteria.56 No matter how you gather the information, once you have it, the key is to systematically use that information to evaluate each alternative against each criterion. For example, Table 5.3 shows how each of the 10 cities on your staff’s list fared on each of the 12 criteria (higher scores are better), from qualified staff to freedom from pollution. Although Paris has good access to markets and

Telecommunications

Travel to/from city

Cost of staff

Business climate

Languages spoken

Cost & value of office space

Travel within city

Available office space

Quality of life

Freedom from pollution

Criteria weights:

60%

59%

54%

53%

40%

27%

26%

25%

24%

21%

18%

Amsterdam

0.45

0.28

0.4

0.25

0.37

1.13

0.44

0.41

0.29

0.52

0.60

2.03

Barcelona

0.31

0.32

0.22

0.21

0.60

0.45

0.30

0.41

0.51

0.42

1.14

0.49

1.71

Berlin

0.38

0.29

0.42

0.27

0.46

0.29

0.49

0.67

0.62

0.73

0.31

0.25

1.78

Brussels

0.44

0.55

0.31

0.50

0.18

0.44

1.02

0.35

0.34

0.33

0.39

0.30

1.88

Frankfurt

0.55

0.72

0.57

1.29

0.11

0.17

0.58

0.28

0.25

0.37

0.22

0.15

2.29

London

1.32

1.37

1.21

1.71

0.11

0.52

1.38

0.18

1.11

0.49

0.42

0.11

4.27

Madrid

0.39

0.40

0.34

0.48

0.22

0.37

0.51

0.47

0.50

0.19

1.76

Munich

0.51

0.39

0.41

0.15

0.11

0.29

0.18

0.54

0.36

0.81

0.56

1.67

Paris

0.79

1.11

0.79

1.39

0.21

0.26

0.57

0.31

1.10

0.45

0.61

0.16

3.22

Zurich

0.28

0.22

0.31

0.26

0.13

0.66

0.54

0.12

0.39

0.16

0.61

0.95

1.41

Ranking

Weighted average

Access to markets

Criteria ratings used to determine the best location for a new office

Qualified staff

TABLE 5.3

Source: Cushman & Wakefield, European Cities Monitor, 2008, accessed 20 May 2009, http://www.cushwake.com/cwglobal/docviewer/2008_European_Cities_Monitor.pdf.

very good travel to and from the city, it has a poor business climate and relatively few different languages are spoken in its business community. On the other hand, Barcelona has the lowest costs for employing staff, but weak access to markets and poor ease of travel to and from the city.

these scores are added together to produce the optimal value, as follows:

COMPUTE THE OPTIMAL DECISION

Since London has a weighted average of 4.27 compared to 3.22 for Paris and 2.29 for Frankfurt (the cities with the next-best ratings), London clearly ranks as the best location for your company’s new European office because of its large number of qualified staff; easy access to markets; outstanding ease of travel to, from and within the city; excellent telecommunications; and top-notch business climate.

The sixth and final step in the decision-making process is to compute the optimal decision by determining each alternative’s optimal value. This is done by multiplying the rating for each criterion (Step 5) by the weight for that criterion (Step 3) and then adding up those scores for each alternative course of action that you generated (Step 4). For example, the 500 executives participating in Cushman & Wakefield’s survey of the best European cities for business rated the 12 decision criteria in terms of importance, as shown in the first column of Table 5.3. Access to quality staff, markets, telecommunication and easy travel to and from the city were the four most important factors, while quality of life and freedom from pollution were the least important factors. To calculate the optimal value for Paris, its score in each category is multiplied by the weight for each category (0.60 × 0.79 in the qualified staff category, for example). Then all of

(0.60 × 0.79) + (0.59 × 1.11) + (0.54 × 0.79) + (0.53 × 1.39) + (0.40 × 0.21) + (0.27 × 0.26) + (0.27 × 0.57) + (0.26 × 0.31) + (0.25 × 1.10) + (0.24 × 0.45) + (0.21 × 0.61) + (0.18 × 0.16) = 3.22

LIMITS TO RATIONAL DECISION MAKING In general, managers who diligently complete all six steps of the rational decision-making model will make better decisions than those who don’t. So, when they can, managers should try to follow the steps in the rational decision-making model, especially for big decisions with long-range consequences. To make perfect decisions, managers have to operate in perfect worlds with no real-world constraints. Of course, it never works like that in the real world. Managers face

CHAPTER 5 Planning and decision making

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time and money constraints. They often don’t have time to make extensive lists of decision criteria. And they often don’t have the resources to test all possible solutions against all possible criteria. In theory, fully rational decision makers maximise decisions by choosing the optimal solution. In practice, however, limited resources, along with attention, memory and expertise problems, make it nearly impossible for managers to maximise decisions. Consequently, most managers don’t maximise – they ‘satisfice’. Whereas maximising is choosing the best alternative, satisficing is choosing a ‘good enough’ alternative. In reality, however, the manager’s limited time, money and maximising expertise mean that only a few choosing the best alternative satisficing alternatives will be assessed against a choosing a ‘good enough’ few decision criteria. For example, alternative consider a manager deciding on the best options for the company’s social media strategy. With so many options and the fast pace of change, deciding isn’t easy. In other words, there’s no optimal solution that will satisfy all possible goals. For instance, if you’re trying to increase your search rankings, you might use Facebook and YouTube, both of which are directly linked to Facebook and Google search algorithms. If you’re interested in providing customer support, then pay close attention to what your customers are saying on Facebook and Twitter, and reach out to them when they’re having problems or are dissatisfied. If your target market is teenagers, use Instagram and SnapChat. If it is young single women ages 18–25, use Facebook, SnapChat or Instagram. If it’s married women ages 25–35, use Pinterest. If reaching out directly to consumers, use Pinterest and Facebook, but if reaching out to businesses, use LinkedIn and Twitter. Finally, if your strategy focuses on visual content, use Pinterest; if your intent is to demonstrate what your product or service does, use YouTube; and if you’ve got detailed, complex knowledge, use Twitter and blogs.57 The decision will be complete when they find a “good enough alternative” that does the best job of meeting the decision criteria.

LO5

USING GROUPS TO IMPROVE DECISION MAKING

According to a study reported in Fortune magazine, 91 per cent of US companies use teams and groups to solve specific problems (i.e. make decisions).58 Why so many? Because when done properly, group decision making can lead to much better decisions than decisions typically made by individuals. In fact, numerous studies show that groups consistently outperform individuals on complex tasks. Let’s explore the advantages and pitfalls of group decision making. And see how the following group decisionmaking methods can be used to improve decision making: ● structured conflict ● the nominal group technique ● the Delphi technique ● electronic brainstorming.

ADVANTAGES AND PITFALLS OF GROUP DECISION MAKING Groups can do a much better job than individuals in two important steps of the decision-making process: defining the problem and generating alternative solutions. Still, group decision making is subject to some pitfalls that can quickly erase these gains. One possible pitfall is groupthink. Groupthink occurs in highly cohesive groups when group members feel intense pressure to agree with each other so that groupthink a barrier to good decision the group can approve a proposed making caused by pressure solution.59 Because groupthink leads to within the group for members to agree with consideration of a limited number of each other solutions and restricts discussion of any considered solutions, it usually results in poor decisions. Groupthink is most likely to occur when: ● the group is insulated from others with different perspectives ● the group leader begins by expressing a strong preference for a particular decision ● the group has no established procedure for systematically defining problems and exploring alternatives ● group members have similar backgrounds and experiences.60 Groupthink may be one of the key reasons behind the failure of Lehman Brothers in 2008, one of Wall Street’s largest and most storied investment banks, and the secondlargest bankruptcy of all time. Lehman Brothers was highly leveraged, which means most of the money it had invested was borrowed money. This is a highly risky strategy. Imagine walking into a casino with $100 in your pocket. But, before sitting down at the blackjack table, you take out

a $4000 cash advance on a credit card. Now, instead of making small bets, you can make huge ones. If you win, that big bet brings huge payoffs. But if you lose, which is more likely, you owe $4000 plus the interest on that loan. Well, Lehman Brothers was highly leveraged, and they began to lose. But, instead of getting out and limiting their losses – which is what you’d expect an organisation of financial professionals to do – they kept right on betting. Why? In part, groupthink. Lehman’s risk management staff kept telling top management that it was too highly leveraged and that economic conditions could quickly lead to huge losses, but Lehman’s leadership wouldn’t listen. Lawrence McDonald, a Lehman Brothers executive, said that when CEO Dick Fuld was warned by the company’s fixed-income manager that huge losses were likely, Fuld ‘decided to bully him, to belittle him publicly’.61 A second potential problem with group decision making is that it takes considerable time. Reconciling schedules so that group members can meet takes time. Furthermore, it’s a rare group that consistently holds productive task-oriented meetings to effectively work through the decision process. Some of the most common complaints about meetings (and therefore about group decision making) are that the meeting’s purpose is unclear, participants are unprepared, critical people are absent or late, conversation doesn’t stay focused on the problem and no one follows up on the decisions that were made. When she was Google’s vice-president of search products and user experience, Marissa Mayer held over 70 meetings a week and was the last executive to hear a pitch before it was made to the co-founders. To keep meetings on track, Mayer set down six guidelines. Meetings must have a firm agenda and an assigned notetaker. Meetings must occur during established office hours, and preferably in short, 10-minute micro-meetings. Those running the meeting should discourage office politics and rely on data, and above all, they should stick to the clock. Mayer’s guidelines helped meetings stay focused and productive.62 A third possible pitfall of group decision making is that sometimes one or two people – perhaps the boss or a strong-willed, vocal group member – dominate group discussion, restricting consideration of different problem definitions and alternative solutions. Another potential problem is that, unlike with their own decisions and actions, group members may not feel accountable for the decisions made and actions taken by the group. Although these pitfalls can lead to poor decision making, this doesn’t mean that managers should avoid using groups to make decisions. When done properly, group decision making can lead to much better decisions. The pitfalls of group decision making are not inevitable. Managers can overcome most of them by using the various techniques described next.

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REASONS GROUPS ARE BETTER AT DEFINING PROBLEMS AND GENERATING POSSIBLE SOLUTIONS 1 Group members usually possess different knowledge, skills, abilities and experiences, so groups are able to view problems from multiple perspectives. Being able to view problems from different perspectives, in turn, can help groups perform better on complex tasks and make better decisions than individuals.63 2 Groups can find and access much more information than individuals alone. 3 The increased knowledge and information available to groups make it easier for them to generate more alternative solutions. Studies show that generating lots of alternative solutions is critical to improving the quality of decisions. 4 If groups are involved in the decision-making process, group members will be more committed to making chosen solutions work.

STRUCTURED CONFLICT Most people view conflict negatively. Yet the right kind of conflict can lead to much better group decision making. C-type conflict, or ‘cognitive conflict ’, focuses on problem- and issue-related differences of opinion.64 In c-type conflict, group members disagree c-type conflict (cognitive conflict) because their different experiences and disagreement that focuses expertise lead them to view the problem on problem- and issueand its potential solutions differently. related differences of C-type conflict is also characterised by a opinion willingness to examine, compare and reconcile those differences to produce the best possible solution. One senior manager has described how a company can encourage c-type conflict: After an idea is presented, we open the floor to objective, and often withering, critiques. And if the idea collapses under scrutiny, we move on to another: no hard feelings. We’re judging the idea, not the person. At the same time, we don’t really try to regulate emotions. Passionate conflict means that we’re getting somewhere, not that the discussion is out of control. But one person does act as referee – by asking basic questions like ‘Is this good for the customer?’ or ‘Does it keep our time-to-market advantage intact?’ By focusing relentlessly on the facts, we’re able to see the strengths and weaknesses of an idea clearly and quickly.65

By contrast, a-type conflict, meaning ‘affective conflict’, refers to the emotional reactions that can occur when disagreements become personal rather than professional. A-type conflict often results in hostility, anger, resentment, distrust, cynicism and apathy. Unlike c-type conflict, a-type conflict undermines team

a-type conflict (affective conflict) disagreement that focuses on individuals or personal issues

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effectiveness by preventing teams from engaging in the activities characteristic of c-type conflict that are critical to team effectiveness. Examples of a-type conflict statements are ‘your idea’, ‘our idea’, ‘my department’, ‘you don’t know what you are talking about’ or ‘you don’t understand our situation’. Rather than focusing on issues and ideas, these statements focus on individuals.66 The devil’s advocacy approach can be used to create c-type conflict by assigning an individual or a sub-group the role of critic. The following five steps establish a devil’s advocacy program: 1 Generate a potential solution. 2 Assign a devil’s advocate to criticise and question the solution. 3 Present the critique of the potential solution to key decision makers. 4 Gather additional relevant information. 5 Decide whether to use, change or not use the originally proposed solution.67 When properly used, the devil’s advocacy approach introduces c-type conflict into the decision-making process. Further, contrary to the common belief that conflict is bad, studies show that this leads to less a-type conflict, improved decision quality and greater acceptance of decisions once they have been made.68 Another method of creating c-type conflict is dialectical inquiry, which creates c-type conflict by forcing decision makers to state the assumptions of a proposed solution (a thesis) and then generate a solution that is the opposite (antithesis) of the proposed solution. The five steps of the dialectical inquiry process are: 1 Generate a potential solution. 2 Identify the assumptions underlying the potential solution. 3 Generate a conflicting counterproposal based on the opposite assumptions. 4 Have advocates of each position present their arguments and engage in a debate in front of key decision makers. 5 Decide whether to use, change, or not use the originally proposed solution.69

Sometimes working as a group is the only way to get the job done

NOMINAL GROUP TECHNIQUE ‘Nominal’ means ‘in name only’. Accordingly, the nominal group technique received its name because it begins with ‘quiet time’, in which nominal group group members independently write technique down as many problem definitions and a decision-making method that begins and ends by alternative solutions as possible. In having group members other words, the nominal group quietly write down and technique begins by having group evaluate ideas to be shared with the group members act as individuals. After the ‘quiet time’, the group leader asks each group member to share one idea at a time with the group. As they are read aloud, ideas are posted on flipcharts or wallboards for all to see. This step continues until all ideas have been shared. In the next step, the group discusses the advantages and disadvantages of the ideas. The nominal group technique closes with a second ‘quiet time’, in which group members independently rank the ideas presented. Group members then read their rankings aloud, and the idea with the highest average rank is selected.70 The nominal group technique improves group decision making by decreasing a-type conflict. In doing so, however, it also restricts c-type conflict. Consequently, the nominal group technique typically produces poorer decisions than does the devil’s advocacy approach. Nonetheless, more than 80 studies have found that nominal groups produce better ideas than those produced by traditional groups.71

DELPHI TECHNIQUE In the Delphi technique, the members of a panel of experts respond to questions and to each other until they reach agreement on an issue. The first step is to assemble a panel of experts. Unlike other approaches Delphi technique to group decision making, however, it isn’t a decision-making method in which members of a necessary to bring the panel members panel of experts respond together in one place. Because the Delphi to questions and to each technique does not require the experts to other until reaching agreement on an issue leave their offices or disrupt their schedules, they are more likely to participate. The second step is to create a questionnaire consisting of a series of open-ended questions for the experts. In Step 3, the panel members’ written responses are analysed, summarised and fed back to the panel for reactions until the members reach agreement. Asking the members why they agree or disagree is important because it helps uncover their unstated assumptions and beliefs. Again, this process of summarising panel feedback and obtaining reactions to that feedback continues until the panel members reach agreement.

ELECTRONIC BRAINSTORMING

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Brainstorming, in which group members build on others’

AVOIDING BLAMESTORMING AND COBLABBERATION Without serious planning and adherence to brainstorming guidelines and procedures, brainstorming can quickly degenerate into blamestorming (where zero progress is made) or coblabberation (settling for an unimaginative solution just to get the session over with). Indeed, Professor Paul Paulus of the University of Texas at Arlington conducted a study comparing the number and quality of ideas of four people brainstorming versus four individuals working alone. Results showed the brainstormers were only half as effective as the solo thinkers. Professor David Perkins of Harvard is not surprised. He prefers having people write down their ideas and then bring them in. That way, you get diversity without all the politicking.73 Shutterstock.com/Pressmaster

ideas, is a technique for generating a large number of alternative solutions. Brainstorming has four rules: 1 The more ideas, the better. 2 All ideas are acceptable, no matter how wild or crazy they might seem. 3 Other group members’ ideas should be used to come up with even more ideas. 4 Criticism or evaluation of ideas is not allowed. Though brainstorming is great fun and can help managers generate a large number of alternative solutions, it does have a number of disadvantages. brainstorming Fortunately, electronic brainstorming, a decision-making method in which group members use computers in which group members to communicate and generate build on others’ ideas to generate as many alternative solutions, overcomes the alternative solutions as disadvantages associated with face-topossible face brainstorming.72 electronic brainstorming The first disadvantage that electronic a decision-making method brainstorming overcomes is production in which group members use computers to build blocking, which occurs when you have on each other’s ideas and an idea but have to wait to share it because generate many alternative solutions someone else is already presenting an production blocking idea to the group. During this short delay, a disadvantage of faceyou may forget your idea or decide that it to-face brainstorming in which a group member really wasn’t worth sharing. With must wait to share an idea electronic brainstorming, production because another member is presenting an idea blocking doesn’t happen. All group members are seated at computers, so everyone can type in ideas whenever they occur. There’s no ‘waiting your turn’ to be heard by the group. The second disadvantage that electronic brainstorming overcomes is evaluation apprehension; that is, being afraid of what others will think of your ideas. With electronic brainstorming, all ideas are anonymous. evaluation When you type in an idea and hit the apprehension ‘Enter’ key to share it with the group, fear of what others will think of your ideas group members see only the idea. Furthermore, many brainstorming software programs also protect anonymity by displaying ideas in random order. So, if you laugh maniacally when you type ‘Cut top management’s pay by 50 per cent!’ and then hit the ‘Enter’ key, it won’t show up immediately on everyone’s screen. This makes it doubly difficult to determine who is responsible for which comments. In the typical layout for electronic brainstorming, all participants sit in front of computers around a U-shaped table. This configuration allows them to see their computer screens, the other participants, a large main screen and a meeting leader or facilitator. The first step in electronic

brainstorming is to anonymously generate as many ideas as possible. Groups commonly generate 100 ideas in a half-hour period. Step 2 is to edit the generated ideas, categorise them and eliminate redundancies. Step 3 is to rank the categorised ideas in terms of quality. Step 4, the last step, has three parts: generate a series of action steps, decide the best order for accomplishing these steps and identify who is responsible for each step. All four steps are accomplished with computers and electronic brainstorming software.74 Studies show that electronic brainstorming is much more productive than face-to-face brainstorming. Fourperson electronic brainstorming groups produce 25 to 50 per cent more ideas than four-person regular brainstorming groups, and 12-person electronic brainstorming groups produce 200 per cent more ideas than regular groups of the same size! In fact, because production blocking (i.e. waiting your turn) is not a problem for electronic brainstorming, the number and quality of ideas generally increase with group size.75

CHAPTER 5 Planning and decision making

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MGMT FACT

WHOSE BIG IDEA WAS BRAINSTORMING?

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Advertising executive and co-founder of BBDO Alex Osborn is considered the father of brainstorming. His book Your Creative Power, published in 1948, introduced to America the idea-generation technique BBDO had been using in-house for years. Osborn advocated having employees storm corporate problems ‘in commando fashion’. Eventually, Osborn’s career as a writer overtook his advertising career and, after more than 40 years at the helm, he retired from BBDO.77

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Even though it works much better than traditional brainstorming, electronic brainstorming has disadvantages too. An obvious problem is the expense of computers, networks, software and other equipment. As these costs continue to drop, however, electronic brainstorming will become cheaper. Another problem is that the anonymity of ideas may bother people who are used to having their ideas accepted by virtue of their position (i.e. the boss). On the other hand, one CEO said, ‘Because the process is anonymous, the sky’s the limit in terms of what you can say and as a result it is more thought-provoking. As a CEO, you’ll probably discover things you might not want to hear but need to be aware of’.76 A third disadvantage is that outgoing individuals who are more comfortable expressing themselves verbally may find it difficult to express themselves in writing. Finally, the most obvious problem is that participants have to be able to type. Those who can’t type, or who type slowly, may be easily frustrated APPLY and find themselves Find out more about your at a disadvantage to skills in setting and achieving your own goals with this self assessment experienced typists.

1 6

Organisational strategy

LEARNING OUTCOMES

1 Define strategy, and explain what strategy is and what it isn’t.

BASICS OF ORGANISATIONAL STRATEGY

2 Specify the components of sustainable competitive advantage and explain why it is important.

3 Describe the steps involved in the strategy-making process.

4 Explain the different kinds of corporate-level strategies.

5 Describe the different kinds of industry-level strategies.

6 Explain the components and kinds of firm-level strategies.

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What is strategy? Strategy is not a thing – it is not a person, a meeting, a bound document, a PowerPoint presentation, a letter from a CEO in an annual report. Strategy, rather, is an ongoing process. Strategy is a way of thinking about a business, of assessing its strengths, of diagnosing its weaknesses, of envisioning its possibilities.1

As recently as 2010, there was no market for tablet computers. A number of computer makers sold touch-screen laptops, but apart from some programs which allowed users to handwrite notes, they weren’t really all that different from traditional laptops. That all changed when Apple released the iPad – a tablet computer controlled by a multi-touch display that can run thousands of applications allowing users to do things like read books, watch movies, listen to music, check the weather and play games. With this new product, Apple was in effect creating a new market for portable touchbased tablet computers. Of course, the iPad isn’t without its competitors. There is, for example, the Amazon Kindle Fire, Barnes & Noble’s Nook HD, Samsung’s Android-based Galaxy Tab and other new entrants into the tablet market. There is also the Microsoft Surface, which comes with a touch screen, combination cover and detachable keyboard, and two versions of the Windows operating system. The competition, however, has done little to dim the enthusiasm for the iPad among the available offerings. Despite the drop of overall demand, Apple still dominates the tablet market. In 2017, Apple managed sales of 43.78 million iPads, which amounts to 26.8 per cent of global tablet sales.2 In contrast, Samsung sold 24.9 million units of its Galaxy Tab range, covering 15.2 per cent of

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the total market share. In the same year, the next closest competitor Amazon sold 16.7 million of its Kindle Fire series, covering only 10.2 per cent total market shares.3 Recently, Apple has introduced the 9.7-inch iPad with pencil support, which enables users to both work and play with the tablet. With the addition of this new feature and business strategy, iPad sales increased by 27.5 per cent in the first quarter of 2018, which is 13.17 million units, compared to 10.33 million iPads sold in the final quarter of 2017.4

possibilities. In fact, what is clear is that managers can be inclined to label any decision as a ‘strategy’ because it makes it sound important.5 Canadian Management Professor Henry Mintzberg (discussed in Chapter 1, along with his explanation of the roles of managers) has famously described strategy as ‘The Five Ps’: plan, ploy, pattern, position and perspective. It is a plan because there needs to be some intended course of action. It can be a ploy, as in a trick or manoeuvre to get an advantage over a competitor. Strategy can be a pattern, because it can emerge from behaviours, intended or not intended, which follow plans or other management action. It can also be a position , which locates the organisation in its environment or market niche. Finally, according to Mintzberg, strategy can be a perspective, looking inside the organisation and defining its ‘personality’ or how it perceives the world.6

LO2 Apple’s new 9.7-inch iPad brings pencil support

How can a company like Apple, which dominates a particular industry, maintain its competitive advantage as strong, well-financed competitors enter the market? What steps can Apple and other companies take to better manage their strategy-making process? How does strategy relate to sustainable competitive advantage? After reading the next three sections, you should be able to: ● define strategy, and explain what it is and what it isn’t ● specify the components of sustainable competitive advantage and explain why it is important ● describe the steps involved in the strategy-making process.

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Get started with the media quiz: Theo Chocolate: Strategy Formulation and Execution

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WHAT IS STRATEGY?

Strategy is a word which has been taken from the military and been moved into the world of organisations and management. It is based on an ancient Greek word for ‘generalship’ as applied to large-scale military operations. In its more modern and more general sense, it means skilful management directed towards attaining an end. Management scholars tend to strategy agree that there is no single, simple, skilful management directed towards attaining clear and universally accepted an end definition of strategy that covers all 94

SUSTAINABLE COMPETITIVE ADVANTAGE

Every organisation possesses resources, but a few of them outperform their competitors and dominate in the industry. These winning organisations know how to use their resources to gain competitive advantage over their competitors. In this section, we will learn about resources, and strategies to transform resources into a competitive advantage to gain sustainable competitive resources advantage. the assets, capabilities, Resources are the assets, capabilities, processes, information processes, employee time, information and and knowledge that an organisation uses to knowledge that an organisation controls. improve its effectiveness and efficiency, create Organisations use their resources to and sustain competitive improve organisational effectiveness and advantage, and fulfil a efficiency. Resources are critical to need or solve a problem organisational strategies because they can help companies create and sustain an advantage over competitors.7 Organisations can achieve a competitive advantage by using their resources to provide greater value for customers than their competitors can. For example, the iPad’s competitive advantage came from its competitive sleek, attractive design and partly from the advantage reputation of Apple’s iPod and iPhone as providing greater value for customers than innovative, easy-to-use products. competitors can The goal of most organisational strategies sustainable competitive is to create and then sustain a competitive advantage advantage. A competitive advantage becomes a competitive advantage a sustainable competitive advantage that other companies have tried unsuccessfully to when other companies cannot duplicate the duplicate and have, for the value an organisation is providing to moment, stopped trying to duplicate customers. Sustainable competitive

switches apps from personal computer mode (when a keyboard is attached) to tablet mode. Detach the keyboard and Windows 10 asks if you want to switch into Tablet mode based on touch screen gestures, rather than mouse and keyboard clicks. In other words, Apple is no longer the only software/hardware provider to create an operating system that is easily used across multiple devices or input formats. PC Magazine even argues that Windows 10 ‘leads in innovation when it comes to desktop operating systems’.9 As this example shows, valuable and rare resources can create temporary competitive advantage. For sustained competitive advantage, however, other organisations must be unable to imitate or find substitutes for those valuable, rare resources. Imperfectly imitable resources are imperfectly imitable those resources that are impossible or resource extremely costly or difficult to duplicate. a resource that is impossible, or extremely Microsoft, Google, Amazon and other costly or difficult, for other Apple competitors buy standard ‘off the companies to duplicate shelf’ computer chips from Intel and other chipmakers. Because they all use the same chip architectures, none has an advantage with the ‘digital engines’ that power their devices. By contrast, for over a decade Apple’s semiconductor team has designed the unique chips used in Apple iPhones. Why does this matter? Because it would take billions in investment and years for competitors to catch up.10 Apple then takes the chips first designed for iPhones and reuses them in other devices, such as iPads, Apple TVs and Apple Watches. Tech analyst Steve Cheney says, ‘Because of Apple’s scale in smart phones, and reuse of chips in other device categories like the watch and TV, Apple has massive influence with suppliers’.11 In short, it would be extremely costly and difficult for Apple’s competitors to match its chip design capabilities. Apple’s chip design advantage may be an imperfectly imitable resource. Getty Images/Justin Sullivan

advantage is not the same as a long-lasting competitive advantage, though companies obviously want a competitive advantage to last a long time. Instead, a competitive advantage is sustained if competitors have tried unsuccessfully to duplicate the advantage and have, for the moment, stopped trying to duplicate it. It’s the corporate equivalent of your competitors saying, ‘We give up. You win. We can’t do what you do, and we’re not even going to try to do it anymore’. Four conditions must be met if an organisation’s resources are to be used to achieve a sustainable competitive advantage. The resources must be valuable, rare, imperfectly imitable and non-substitutable. Va l ua b l e r e s o u r c e s allow valuable resource companies to improve their efficiency a resource that allows companies to and effectiveness. Unfortunately, improve efficiency and changes in customer demand and effectiveness preferences, competitors’ actions and technology can make once-valuable resources much less valuable. Before the iPad was introduced, netbooks appeared to be the next big thing in mobile computing. These were small, light, ultra-portable laptops which were very affordable, priced somewhere between US$200 and US$500. They could run basic programs like Web browsing and word processing. At first sales were brisk – in 2009, 7.5 million netbooks were sold in the US, and over 34 million worldwide. Then all that changed. The iPad had a touch screen, an intuitive operating system and an enormous selection of app software. Netbooks were often criticised for having small, hard-to-use keyboards, a slow operating system and few software options. It took only 28 days for Apple to sell its first million iPads, while netbook sales fell 40 per cent in one year.8 For sustained competitive advantage, valuable resources must also be rare. Rare rare resource resources are those not controlled or a resource that is not controlled or possessed possessed by many competing by many competing organisations, and they are necessary to organisations sustain a competitive advantage. Think about it! How can a company sustain a competitive advantage if all of its competitors have similar resources and capabilities? One of Apple’s truly rare resources is its ability to reconfigure existing technology into a package that is easy to use, elegantly designed and consequently highly desired by customers. Apple leveraged its experience with the iPod, iPod touch and iPhone to develop the iOS operating system into a single platform giving users the same experience across multiple devices. Because of iOS, iPhone users instantly know how to use their new iPads. But they might have trouble learning the macOS operating system on Apple Mac personal computers, which is substantially different. By contrast, with Windows 10, the Microsoft Surface Pro 4 automatically and seamlessly

Apple iTunes is the largest online music store, capitalising on its size and the company’s reputation for customer-friendly software

Valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if they are also non-substitutable resources, meaning that no other resources can

non-substitutable resource a resource that produces value or competitive advantage and has no equivalent substitutes or replacements

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replace them and produce similar value or competitive advantage. This is most evident in the example of Apple’s iTunes software. The industry has tried to produce substitutes for iTunes, but competitors have had to experiment with other business models to get customers to accept them. For example, Amazon MP3 not only gives customers access to over 20 million digital songs, it allows customers to store their files on Amazon’s cloud servers. This means that users can buy a song from Amazon and stream it to any device they want, from their desktop computer to their Android tablet. Apple has responded by introducing its own cloud-based service called iCloud, which, combined with a service called iTunes Match, provides customers with an online locker where they can store music, video or photo files, as well as apps, and access them from multiple devices, whether they bought them from Apple or not. In addition, iCloud lets users synchronise other data, like appointments, email and documents, between their iPhone, iPad and Mac computers. Likewise, iTunes has faced growing competition from subscription music streaming services like Spotify. Although Spotify’s rate of growth has been impressive, increasing from 20 million paying subscribers in 2015 to 75 million in mid 2018, compare this to iTunes, with over 800 million accounts.12 Apple has also responded to Spotify and other music streaming companies by adding another 56 new countries to the iTunes store, bringing the number to 155 worldwide. In addition, Apple also launched Apple

Step 1

Assess need for strategic change

Music, its own music streaming service, which had just over 40 million subscribers as of May 2018.13 In summary, Apple has reaped the rewards of a first mover advantage from its launch of the iPad. The company’s history of developing customer-friendly software, the innovative capabilities of the iPad, the uniformity of experience and the security of the App Store provide customers with a service that has been valuable, rare, relatively non-substitutable and, in the past, imperfectly imitable. Past success is, however, no guarantee of future success; Apple needs to continually change and develop its offerings or risk being unseated by a more nimble competitor whose products are more relevant and have higher perceived value to consumers.

LO3

STRATEGY-MAKING PROCESS

Companies use a strategy-making process to create strategies that produce sustainable competitive advantage.14 Figure 6.1 displays the three steps of the strategy-making process: ● assess the need for strategic change ● conduct a situational analysis ● choose strategic alternatives. Let’s examine each of these steps in more detail.

Step 2

Conduct situational analysis

Step 3

Choose strategic alternatives

Strengths • Distinctive competence Avoid competitive inertia Look for strategic dissonance. (Are strategic actions consistent with the company’s strategic intent?)

Risk-avoiding strategies

• Core capability Weaknesses

Strategic reference points

Opportunities • Environmental scanning • Strategic groups

Risk-seeking strategies

• Shadowstrategy task force Threats

FIGURE 6.1

Three steps in the strategy-making process

ASSESSING THE NEED FOR STRATEGIC CHANGE The external business environment is much more turbulent than it used to be. With customers’ needs constantly growing and changing, and with competitors working harder, faster and smarter to meet those needs, the first step in strategy making is determining the need for strategic change. In other words, the company should determine whether it needs to change its strategy to sustain a competitive advantage.15 Determining the need for strategic change might seem easy to do but, in reality, it’s not. There’s a great deal of uncertainty in strategic business environments. Furthermore, top-level managers are often slow to recognise the need for strategic change, especially at successful companies that have created and sustained competitive advantages. Because they are acutely aware of the strategies that made their companies successful, they continue to rely on those strategies, even as the competition changes. In other words, success often leads to competitive inertia – a reluctance to competitive inertia change strategies or competitive practices a reluctance to change strategies or competitive that have been successful in the past. practices that have been Sony, the Japanese electronics company, successful in the past is a good example of competitive inertia. For three decades, Sony was the world’s premier electronics company, known for innovative products like the Sony Walkman (portable music player), PlayStation (video games console) and CyberShot (digital camera). Sony’s Trinitron TV sets commanded premium prices for their much brighter and sharper pictures. Over this time, Sony’s different divisions – computers, TV, media, video games, etc. – operated independently. For 30 years the strategy worked, producing innovative, market-leading products. However, it eventually led each division to produce too many products – for instance, 10 different kinds of camcorders and 30 different TVs. With too many high-priced products, a lack of innovation, too many people and extraordinary costs, Sony faced losses of US$6.4 billion in 2012, without having produced a profit since 2008. Its TV division lost money for nine straight years.16 However, with the strategic change in innovation, particularly in number of games, speed and style of its PS4 gaming console, Sony got back on track to produce a profit in 2016–2017.17 So why did Sony stick with a losing strategy for so long? Because it had been successful for three decades. This competitive inertia seems to be coming to an end. Kazou Hirai, Sony’s CEO, vowed, ‘The time for Sony to change is now’. The company plans to focus on three areas: mobile products (smartphones and tablets), cameras and camcorders, and games. Costs in the TV division were to be cut by 60 per cent.18

Besides being aware of the dangers of competitive inertia, what can managers do to improve the speed and accuracy with which they determine the need for strategic change? One method is to actively look for signs of strategic dissonance. Strategic dissonance is a strategic discrepancy between a company’s dissonance intended strategy and the strategic actions a discrepancy between a company’s intended m a n a g e r s t a ke w h e n a c tu a l l y strategy and the strategic actions managers take implementing that strategy.19 implementing that Google has long been a leading when strategy innovator in voice technology, that is, using voice commands and natural language to interact with computer devices. Indeed, 20 per cent of mobile searches (‘Hey Google …’) are done by voice. So it was surprising that Amazon’s Echo, which uses voice commands to search for information (‘Hey Alexa, what’s the weather today?’) and to order things on amazon.com (‘Hey Alexa, order barbecue potato chips.’), beat Google Home, Google’s voice-activated assistant, to market by almost two years. Professor Scott Galloway said, ‘Amazon got there first, which is super impressive, and it has been a huge hit.’20 Google was seriously invested in bringing voice capabilities to market. Its largest team was working on a standalone voice app for different smartphones. The Android team was working on building voice directly into the Android operating system for phones and tablets. But Google’s hardware divisions, which manufacture the phones, tablets and Chromecast TV devices, never coordinated with those teams. So, in a clear case of strategic dissonance, no one was actually working on a voice device for people’s homes, despite Google’s strategic commitment to voice processing.21 Note, however, that strategic dissonance is not the same thing as when a strategy does not produce the results that it’s supposed to. Airbus created the wide-body, double decker A380, the largest passenger jet in the world capable of flying 853 passengers. The idea was that airlines would use the A380 for their most profitable, heavily travelled, long-haul international flights. But even with low jet fuel prices, the A380 is expensive to operate, which means it has to fly as full as possible to cover costs. So airlines are cancelling orders and leases for the A380. Airbus delivered 27 planes last year, but only made 14 in 2017 and 12 in 2018.22

SITUATIONAL ANALYSIS A situational analysis can also help managers to determine the need for strategic change. A situational analysis, also called a SWOT analysis for Strengths, Weaknesses, Opportunities and Threats, is an assessment of the strengths and weaknesses in an

situational (SWOT) analysis an assessment of the strengths and weaknesses in an organisation’s internal environment and the opportunities and threats in its external environment

CHAPTER 6 Organisational strategy

Alamy Stock Photo/Robert Stainforth

organisation’s internal environment and the opportunities environmental scanning involves searching the environment and threats in its external environment.23 Ideally, as shown for important events or issues that might affect the in step 2 of Figure 6.1, a SWOT analysis helps a company organisation, such as pricing trends or new products and technology. In a situational analysis, however, managers determine how to increase internal strengths and minimise internal weaknesses while maximising external use environmental scanning to identify specific opportunities opportunities and minimising external threats. and threats that can either improve or harm the company’s An analysis of an organisation’s internal environment – ability to sustain its competitive advantage. Identification that is, a company’s strengths and weaknesses – often of strategic groups and formation of shadow-strategy task forces are two ways to do this. begins with an assessment of its distinctive competencies Strategic groups are not actual groups; they are and core capabilities. A distinctive distinctive companies, usually competitors, that managers closely competence is something that a competence what a company can follow. More specifically, a strategic company can make, do or perform better strategic group make, do or perform better than its competitors. For example, Honda group is a group of other companies a group of companies than its competitors within an industry that top managers within an industry that and Subaru cars are consistently ranked top managers choose to choose for comparing, evaluating and compare, evaluate and among the top car manufacturers for quality and reliability benchmarking their company’s strategic benchmark strategic in leading consumer choice magazines.24 Similarly, PC threats and opportunities Magazine readers ranked Apple’s desktop and laptop threats and opportunities.28 (Benchmarking computers best in terms of service and reliability.25 involves identifying outstanding practices, processes and strategies at other companies and adapting them as a Whereas distinctive competencies are tangible – for standard practice for one’s own company.) Typically, example, a product or service is faster, cheaper or better – managers include companies as part of their strategic the core capabilities that produce distinctive competencies group if they compete directly with those companies for are not. Core capabilities are the less core capabilities the internal decisionvisible, internal decision-making routines, customers or if those companies use strategies similar to making routines, problemproblem-solving processes and theirs. solving processes and organisational cultures that determine Malaysian entrepreneur Dato Tony Fernandes, a former organisational cultures that determine how how efficiently inputs can be turned into music industry executive with Time Warner, adopted a wellefficiently inputs can be outputs. 26 Distinctive competencies planned strategy to create a profitable business from a turned into outputs once debt-ridden government-owned airline. With this cannot be sustained for long without strategy Dato Tony Fernandes became the founder of the superior core capabilities. IKEA’s core capability is the way successful Malaysian low-cost carrier (LCC) airline AirAsia. it works with 1800 suppliers in 55 countries who exclusively AirAsia has been expanding rapidly since 2001, to become make IKEA’s products. IKEA operates in many regions of the largest LCC in Asia. With a fleet of 204 aircraft, AirAsia the world and has stores in Australia, Malaysia, Singapore operates daily flights from Malaysia, Thailand, Indonesia, and Hong Kong as well as in mainland China. IKEA the Philippines and Japan, with plans for continued employees in 43 local trading offices work closely with expansion.29 these suppliers to improve quality, cut costs and improve employee safety. When IKEA develops a new product – AirAsia operates a no-frills, low-fare business strategy such as the ‘Faktum’ kitchen cabinet range – the trading based on keeping costs low and aiming for high efficiency offices, with the help of their suppliers, compete to earn in every part of the business. AirAsia has cut operating the right to produce that product. IKEA uses the same approach for product design. This ability to work with so many suppliers and designers, and to keep suppliers happy by guaranteeing them a high volume of work, is the core capability that generates IKEA’s distinctive competence: selling goodvalue, low-cost furniture, which it does better than anyone else in the world.27 After examining internal strengths and weaknesses, the second part of a situational analysis is to look outside the company and assess the opportunities and threats in the external environment. IKEA’s core capabilities help to keep its stores stocked with the merchandise customers want to buy In Chapter 3, you learned that 98

Alamy Stock Photo/Steven May

costs in key areas, implementing the region’s fastest turnaround time at only 25 minutes. By cutting the time that each aircraft is on the ground refuelling, changing crews and disembarking passengers, AirAsia is able to increase the time each aircraft is in the air earning money. High aircraft utilisation is one part of the strategy; AirAsia also focuses on a ‘point-to-point’ network of routes. Pointto-point means that the airline can focus on servicing only specific destinations without the need to have elaborate systems in place to interconnect passengers, luggage and freight at transport hubs. This reduces administrative overheads and cuts operating costs.30 It’s likely that the managers at AirAsia assess strategic threats and opportunities by comparing their company to a strategic group consisting of the other low-cost airlines. In fact, when scanning the environment for strategic threats and opportunities, managers tend to categorise the different companies in their industries as core or secondary firms.31 Core firms are the central companies in core firms a strategic group. In the very competitive the central companies in a strategic group budget airline market in Asia and Australasia, AirAsia, with its 204 aircraft and over 110 destinations, competes with Cathay-Dragon, a Cathay Pacific offshoot based in Hong Kong with over 42 aircraft and 53 destinations, largely focused on mainland China. Another major budget airline competitor is Scoot , a subsidiary of Singapore Airlines and based in Singapore, which has a fleet of 40 aircraft flying to 60 destinations. Also in the market is Jetstar, offspring of the Australian major airline Qantas, with some 75 aircraft and 75 destinations.32

AirAsia keeps costs low by operating on a point-to-point network

Jetstar is the closest to AirAsia geographically and in terms of destinations, and is clearly its closest competitor. Jetstar would thus be classified as the ‘core firm’ in AirAsia’s strategic group. Cathay-Dragon is relatively small but is also an offshoot of an aviation giant (Cathay Pacific) and is located in Hong Kong with flights to some of the same destinations as AirAsia; however, the focus of CathayDragon is the Chinese domestic market. AirAsia’s other competitor, Scoot, has an almost equal number of aircraft and flies to more destinations than Cathay-Dragon; however, their focus, mainly on Singapore and Australia,

would also prevent it from being considered a core firm from AirAsia’s perspective.33 Secondary firms are organisations secondary firms that use strategies related to, but the firms in a strategic group that follow somewhat different from, those of core strategies related to, but somewhat different from, firm. Malaysian Airlines is a full-service airline and operates around 80 aircraft, but those of the core firms even though it flies to many of the same destinations as AirAsia, the company focuses on providing a full range of traditional services including first class and business class seating options and, as the ‘flag carrier’ for Malaysia, flies to destinations around the world. While AirAsia does fly to some international destinations, because it focuses on being a LCC and most of its destinations are in the region, it would likely classify Malaysian Airlines as a secondary firm in its strategic group analysis.34 Managers need to be aware of the potential threats and opportunities posed by secondary firms, but they usually spend more time assessing the threats and opportunities associated with core firms.

CHOOSING STRATEGIC ALTERNATIVES After determining the need for strategic change and conducting a situational analysis, the last step in the strategy-making process is to choose strategic alternatives that will help the company create or maintain a sustainable competitive advantage. According to strategic reference point theory, managers choose between two basic alternative strategies. They can choose a conservative, riskavoiding strategy that aims to protect an existing competitive advantage. Or they can choose an aggressive, risk-seeking strategy that aims to extend or create a sustainable competitive advantage. The choice to seek risk or avoid risk typically depends on whether top management views the company as falling above or below strategic reference points. Strategic reference points are the strategic reference points targets that managers use to measure the strategic targets managers use to measure whether their organisation has developed whether an organisation the core competencies that it needs to has developed the core achieve a sustainable competitive competencies it needs to achieve a sustainable advantage. If a hotel chain decides to competitive advantage compete by providing superior quality and service, then top management will track the success of this strategy through customer surveys or published hotel ratings, such as those provided by the internationally prestigious Michelin Guide or on review websites like TripAdvisor. By contrast, if a hotel chain decides to compete on price, it will regularly conduct market surveys to check the prices of other hotels. The competitors’ prices are the hotel managers’ strategic reference points against which to compare their own pricing strategy. If competitors can consistently underprice them, then the managers need to determine whether their staff and resources have the core competencies to compete on price.

CHAPTER 6 Organisational strategy

As shown in Figure 6.2, when a company is performing above or better than its strategic reference points, top management will typically be satisfied with the company’s strategy. Ironically, this satisfaction tends to make top management conservative and risk-averse. After all, since the company already has a sustainable competitive advantage, the worst thing that could happen would be to lose it. Consequently, new issues or changes in the company’s external environments are viewed as threats. In contrast, when a company is performing below or worse than its strategic reference points, top management will typically be dissatisfied with the company’s strategy. In this instance, managers are much more likely to choose a daring, risk-taking strategy. After all, if the current strategy is producing substandard results, the company has nothing to lose by switching to risky new strategies in the hopes that it can create a sustainable competitive advantage. Consequently, managers of companies in this situation view new issues or changes in external environments as opportunities for potential gain. However, strategic reference point theory is not deterministic. Managers are not predestined to choose risk-averse or risk-seeking strategies for their companies. Indeed, one of the most important elements of the theory is that managers can influence the strategies chosen by their company by actively changing and adjusting the strategic reference points they use to judge strategic performance. To illustrate, if a company has become complacent after consistently surpassing its strategic reference points, then top management can change from a risk-averse to a risk-taking orientation by raising the standards of performance (i.e. strategic reference points). This is exactly what happened at eBay. When John Donahoe joined eBay in 2008, Amazon was growing, Google helped shoppers find what they wanted on other websites, and eBay’s auction business was shrinking dramatically. However, few at eBay saw the problem. According to the Wall Street Journal, employees ‘became

Current situation

Strategic

Reference points

FIGURE 6.2

so absurdly self-congratulatory that people clapped at the end of meetings, even after discussions over declining customer satisfaction’.35 Founder Pierre Omidyar said, ‘They didn’t seem to see what was going on outside the company in terms of competition. They had lost their ability to innovate, to create new things’.36 In other words, success had made eBay complacent and risk-averse. As a result eBay started to lose its competitive advantage and market share to its competitor, Amazon. In 2015, eBay appointed Devin Wenig as its new CEO and continued to adapt new business strategies. Wenig is focused on differentiating eBay’s business practices from its close competitor Amazon. According to eBay’s Chief Strategy Officer, Kristine Miller, Wenig ‘wants eBay to be the anti-Amazon, excelling in areas where Amazon lags’.37 The first strategy was to make product searches on eBay platform easier. With the help of artificial intelligence tools such as ShopBot on Facebook’s Messenger app, eBay can attract social media users to eBay stores by helping them find the right product quickly without having to leave the social media platform. Second, eBay developed a mobile app to provide mobile users with a speedy online shopping experience. Third, eBay follows up with customers to ensure it collects more product reviews. This review data enables sellers to match their products more effectively with customers’ demands. Fourth, eBay continues working toward bringing more unique and differentiated inventory by acquiring new small business sellers and brands.38 In 2016, eBay listed over $900 million of sellers’ inventory on their platform. With these raised standards and by changing the strategic reference points, eBay’s annual net revenue rose steadily from US$8.592 billion in 2015 to US$9.567 billion in 2017, while securing a total of 170 million active buyers globally.39 So even when (or perhaps especially when) companies have achieved a sustainable competitive advantage, top managers must adjust or change strategic reference points to challenge themselves and their employees to develop

Perception of new issues

Response or behaviour

Current situation • Satisfied • Sitting on top of the world

Perception of new issues • Threats • Potential loss • Negativity

Response or behaviour • Risk-averse • Conservative • Defensive

Current situation • Dissatisfied • At the bottom looking up

Perception of new issues • Opportunity • Potential gain • Positivity

Response or behaviour • Risk-taking • Daring • Offensive

Undesired result

Desired result

Strategic reference points

Source: Based on A. Fiegenbaum, S. Hart & D. Schendel, ‘Strategic reference point theory’, Strategic Management Journal, 17, 1996: 219–35.

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new core competencies for the future. In the long run, effective organisations will frequently revise their strategic reference points to better focus managers’ attention on the new challenges and opportunities that occur in their everchanging business environments.

CORPORATE-, INDUSTRY- AND FIRM-LEVEL STRATEGIES

To formulate effective strategies, companies must be able to answer these three basic questions: ● What business are we in? ● How should we compete in this industry? ● Who are our competitors, and how should we respond to them? These simple but powerful questions are at the heart of corporate-, industry- and firm-level strategies. After reading the next three sections, you should be able to: ● explain the different kinds of corporate-level strategies ● describe the different kinds of industry-level strategies ● explain the components and kinds of firm-level strategies.

LO4

CORPORATE-LEVEL STRATEGIES

Corporate-level strategy is the overall organisational strategy that addresses the question, ‘What business or businesses are we in or should we be in?’ There are two major approaches to corporate-level strategy corporate-level strategy that companies the overall organisational use to decide which businesses they strategy that addresses the should be in: questions ‘What business or businesses are we in or ● portfolio strategy40 should we be in?’, ‘How ● grand strategy. should we compete in this industry?’ and ‘Who are our competitors and how should we respond to them?’

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One of the standard strategies for stock market investors is diversification: owning stocks in a variety of APPLY Get an companies in different industries. overview of portfolio strategy The purpose of this strategy is to reduce risk in the overall stock portfolio (the entire collection of stocks). The basic idea is simple: if you invest in 10 companies in 10 different EO VID

PORTFOLIO STRATEGY

industries, you won’t lose your entire diversification investment if one company performs a strategy for reducing risk by owning a variety poorly. Furthermore, because they’re in of items (stocks or, in the different industries, one company’s losses case of a corporation, are likely to be offset by another types of businesses) so that the failure of one company’s gains. Portfolio strategy is stock or one business based on these same ideas. We’ll start by does not doom the entire portfolio taking a look at the theory and ideas behind portfolio strategy and then proceed with a critical review that suggests that some of the key ideas behind portfolio strategy are not supported. Portfolio strategy is a corporate- portfolio strategy level strategy that minimises risk by a corporate-level strategy that minimises risk by diversifying investment among various diversifying investment businesses or product lines. Just as a among various businesses diversification strategy guides an investor or product lines who invests in a variety of stocks, portfolio strategy guides the strategic decisions of corporations that compete in a variety of businesses. For example, portfolio strategy could be used to guide the strategy of a company like 3M, which makes 55 000 products for seven different business sectors: consumers and offices (Post-its, Scotch tape, etc.); displays and graphics (for computers, mobile phones, PDAs, TVs); electronics and communications (flexible circuits used in printers and electronic displays); health care (medical, surgical, dental and personal care products); industrial (tapes, adhesives, supply chain software); safety, security and protection services (glass safety, fire protection, respiratory products); and transport (products and components for the manufacture, repair and maintenance of cars, aircraft, boats and other vehicles).41 Furthermore, just as investors consider the mix of shares in their stock portfolio when deciding which shares to buy or sell, managers following portfolio strategy try to acquire companies that fit well with the rest of their corporate portfolio and to sell those that don’t. Proctor & Gamble used to be big in the food business, selling everything from cake mixes to juice. However, the company decided it should focus on its core business of household, beauty and healthcare items. It began selling off products and brands that did not relate to its core business, and completed this process when it sold the Pringles line of potato chips to Kellogg’s for $2.7 billion.42 According to portfolio strategy, the more businesses in which a corporation competes, the smaller its overall chances of failing. Think of a corporation as a stool and its businesses as the legs of the stool. The more legs or businesses added to the stool, the less likely it is to tip over. Using this analogy, portfolio strategy reduces 3M’s risk of failing because the corporation’s survival depends on seven different business sectors. Because the emphasis is on adding ‘legs to the stool’, managers who use portfolio strategy acquisition are often on the lookout for acquisitions; the purchase of a company by another company that is, other companies to buy.

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Diversification is critical to reduce the risk of an overall share portfolio

Second, beyond adding new businesses to the corporate portfolio, portfolio strategy predicts that companies can reduce risk even more unrelated through unrelated diversification – diversification creating or acquiring companies in creating or acquiring companies in completely completely unrelated businesses (more unrelated businesses on the accuracy of this prediction later). According to portfolio strategy, when businesses are unrelated, losses in one business or industry should have minimal effect on the performance of other companies in the corporate portfolio. General Electric, founded in part by Thomas Edison, is one of the largest corporations in the world with a presence in a wide range of businesses. Its appliances division produces refrigerators, ovens and dishwashers. Its consumer electronics divisions make everything from digital cameras to portable generators. Its lighting division sells light bulbs, of course, but also traffic signals and speciality lighting. Its aviation division is a world leader in making jet engines. GE also has divisions in energy distribution, energy production, business and consumer finance, health care, oil and gas, rail, software and services, and water.43 Because most internally grown businesses tend to be related to existing products or services, portfolio strategy suggests that acquiring new businesses is the preferred method of unrelated diversification.

MGMT IN PRACTICE

CORPORATE-LEVEL STRATEGIES Portfolio strategy

Grand strategy

• • • •

• Growth • Stability • Retrenchment/ recovery

Acquisitions Unrelated diversification Related diversification Single businesses

• Boston Consulting Group matrix: • Stars • Question marks • Cash cows • Dogs 102

Third, investing the profits and cash flows BCG matrix a portfolio strategy from mature, slow-growth businesses into newer, faster-growing businesses can reduce analysis tool, developed by the Boston Consulting long-term risk. The best-known method of Group, that categorises a looking at portfolio strategy for guiding corporation’s businesses by growth rate and relative investment in a corporation’s businesses is the market share, and helps managers decide how to Boston Consulting Group (BCG) matrix. The invest corporate funds BCG matrix is a tool for portfolio strategy star analysis that managers use to categorise their a company with a large corporation’s businesses by growth rate and share of a fast-growing market relative market share, helping them decide question mark how to invest corporate funds. The matrix, a company with a small shown in Figure 6.3, separates businesses share of a fast-growing market into four categories based on how fast the cash cow market is growing (high-growth or low-growth) a company with a large and the size of the business’ share of that share of a slow-growing market market (small or large). Stars are companies dog that have a large share of a fast-growing a company with a small share of a slow-growing market. To take advantage of a star’s fastmarket growing market and its strength in that market (large share), the corporation must invest substantially in it. The investment is usually worthwhile, however, because many stars produce sizeable future profits. Question marks are companies that have a small share of a fastgrowing market. If the corporation invests in these companies, they may eventually become stars, but their relative weakness in the market (small share) makes investing in question marks more risky than investing in stars. Cash cows are companies that have a large share of a slow-growing market. Companies in this situation are often highly profitable, hence the name ‘cash cow’. Finally, dogs are companies that have a small share of a slowgrowing market. As the name ‘dogs’ suggests, having a small share of a slow-growth market is often not profitable. Since the idea is to redirect investment from slowgrowing to fast-growing companies, the BCG matrix starts by recommending that while the substantial cash flows from cash cows last, they should be reinvested in stars (see arrow 1 in Figure 6.3) to help them grow even faster and obtain even more market share. Using this strategy, current profits help produce future profits. Over time, as their market growth slows, some stars may turn into cash cows (see arrow 2). Cash flows should also be directed to some question marks (see arrow 3). Though riskier than stars, question marks have great potential because of their fast-growing market. Managers must decide which question marks are most likely to turn into stars, and therefore warrant further investment, and which ones are too risky and should be sold. Over time, it is hoped that some question marks will become stars as their small markets become large ones (see arrow 4). Finally, because dogs lose money, the corporation should ‘find them new owners’ or ‘take them to the pound’. In other words, dogs

left side of the curve shows that single businesses with no diversification are extremely risky (if the single business Questions Question marks can 4 fails, the entire business fails). So, in part, Stars become Stars High the portfolio strategy of diversifying is marks correct – competing in a variety of different businesses can lower risk. However, Company C Company D portfolio strategy is partly wrong, too – the right side of the curve shows that Stars conglomerates composed of completely Company B Stars can 1 can unrelated businesses are even riskier than become become Cash Cash Cash Cows. single, undiversified businesses. Cash cows Flows flows A second set of problems with 2 portfolio strategy has to do with the Company G dysfunctional consequences that occur Company C when companies are categorised as stars, Dogs Cash cows cash cows, question marks or dogs. Low Contrary to expectations, the BCG matrix often yields incorrect judgements about a company’s potential. This is because it Company E relies on past performance (i.e. previous Company H Sold market share and previous market Company F growth), which is a notoriously poor 5Sold Small Large predictor of future company performance. Relative market share Furthermore, using the BCG matrix Boston Consulting Group matrix FIGURE 6.3 can also weaken the strongest performer in the corporate portfolio: the cash cow. As funds are redirected from cash cows should either be sold to other companies or closed down to stars, corporate managers essentially take away the and liquidated for their assets (see arrow 5). resources needed to take advantage of the cash cow’s new Although the BCG matrix and other forms of portfolio business opportunities. As a result, the cash cow becomes strategy are relatively popular among managers, portfolio less aggressive in seeking new business or in defending strategy has some drawbacks. The most significant is that its present business. contrary to the predictions of portfolio strategy, the Finally, labelling a top performer as a cash cow can harm evidence does not support the usefulness of acquiring employee morale. Cash cow employees realise that they unrelated businesses. As shown in Figure 6.4, there is a have inferior status and that, instead of working for U-shaped relationship between diversification and risk. The themselves, they are now working to fund the growth of stars and question marks. High So, what kind of portfolio strategy does the best job of helping managers decide which companies to buy or sell? The U-shaped curve in Figure 6.4 indicates that, contrary to the predictions of portfolio strategy, the best approach is probably related diversification, in related which the different business units share diversification Creating or acquiring similar products, manufacturing, companies that share marketing, technology or cultures. The similar products, key to related diversification is to acquire manufacturing, marketing, technology or cultures. or create new companies with core capabilities that complement the core capabilities of Low Single Related Unrelated businesses already in the corporate portfolio. business diversification diversification We began this section with the example of 3M and its 55 000 products sold in over seven different business FIGURE U-shaped relationship between diversification 6.4 and risk sectors. While seemingly different, most of 3M’s product divisions are based in some fashion on its distinctive Source: A. McWilliams & C. Williams, Academy of Management Executive (New York: Academy of Management, Question Marks can become Stars.

Company A

Risk

flo sh w s

Market growth

Company A

1996). Reproduced with permission of Academy of (NY) in the format Textbook via Copyright Clearance Center. Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202

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MGMT FACT

MICROSOFT OFFICE – A DIVERSIFICATION CONUNDRUM The Office productivity suite (Word, PowerPoint, Excel) has long been one of Microsoft’s two cash cows (the other is its Windows operating system).44 But with free alternatives, such as Google Docs, Apache’s Open Office and Apple’s Pages, Numbers and Keynote apps (free on every Mac computer, iPhone and iPad), and strongly declining sales of PCs worldwide, Office, while still highly profitable, is facing major challenges that threaten its long-time dominance and ability to throw off cash.45 These threats come at a time when Microsoft needs to divert cash from Office into its cloud-based file storage and Azure (cloud services, big data, servers, virtual machines, and website hosting) platforms to turn those questions marks into future stars, as well as its Surface tablets, a business which it hopes to transform from a dog to a question mark (and eventually a star). The risk, however, is that diverting cash from Office may make it less able to defend its current business or to grow by seeking new business.46

competencies in adhesives and tape (e.g. wet or dry sandpaper, Post-it notes, Scotchgard fabric protector, transdermal skin patches, reflective material used in traffic signs, etc.). Furthermore, all of 3M’s divisions share its strong corporate culture that promotes and encourages risk taking and innovation. In summary, in contrast to a single, undiversified business or unrelated diversification, related diversification reduces risk because the different businesses can work as a team, relying on each other for needed experience, expertise and support.

GRAND STRATEGY A grand strategy is a broad strategic plan used to help an organisation achieve its strategic goals.47 Grand strategies guide the strategic alternatives that managers of individual businesses, or subunits, may use in deciding what businesses they should be in. There are three kinds of grand strategies: growth, stability and retrenchment/recovery. The purpose of a grow th strategy is to increase profits, grand strategy revenues, market share or the number a broad corporate-level strategic plan used to of places (stores, offices, locations) in achieve strategic goals which the company does business. and guide the strategic Companies can grow in several ways. alternatives that managers of individual businesses or They can grow externally by merging subunits may use with or acquiring other companies in growth strategy the same or different businesses. a strategy that focuses on increasing profits, Google paid $12.5 billion to buy revenues, market share or Motorola Mobility, which makes the number of places in which the company does smartphones. Why would that grow business Google’s search-based advertising 104

business, which is driven by its search engine website and by YouTube and Gmail? Google gives away its smartphone Android operating system software so that people using Android phones like the Samsung Galaxy will use built-in services like Google search and Gmail, from which it earns even more advertising revenue. So why pay $12.5 billion to acquire Motorola Mobility? Because, like Apple with the iPhone and iPad, Google will be better able to integrate the hardware and software of its smartphones and tablets and should be able to dramatically improve the quality of those products. If that happens, more people will buy Android phones, and Google’s core business of search engine advertising will grow even more.48

SMART MGMT

Atlassian Corporation is an Australian origin software development company. Atlassian’s popular products are Jira (issue tracking application), Confluence (team collaboration software) and Wiki products (software for sharing intra-organisational knowledge). The company was set up jointly by two university friends in 2002, who financed the venture with a $10 000 credit card debt. In 2006, the company was awarded Australian Entrepreneurship of the Year.49 Today, the company has grown to one of the biggest technology organisations in the world by building software platforms and tools for businesses.50 Some organisations who use Atlassian’s software include NASA, Toyota and Netflix, as well as social media giants Facebook and Twitter. The organisation employs over 2500 staff worldwide, based in with offices located in six countries. In 2017 Atlassian announced revenue of $619.9 million.51

Another way to grow is internally, directly expanding the company’s existing business or creating and developing new businesses. Nestlé, the largest food company in the world, faced a serious challenge. It had to find a way to grow while dealing with record high prices for cocoa and sugar, two key ingredients for its chocolate products. To boost growth, Nestlé spent to promote its Aero, a chocolate bar filled with bubbles of air. While the bubbles give the bar a creamier texture, they also help to bulk it up without extra ingredients: helpful in a time of high commodity costs. Because of the company’s increased promotion, Aero’s sales grew 20 per cent in one year, helping Nestlé earn a profit of $10.3 billion with overall sales growth of 7.5 per cent.52 The purpose of a stability strategy stability strategy is to continue doing what the company a strategy that focuses on improving the way in which has been doing, but just do it better. the company sells the same Consequently, companies following a products or services to the same customers stability strategy try to improve the way in which they sell the same products or services to the same customers. For example, Subaru has been making fourwheel-drive station wagons for 30 years. Over the last

LO5

INDUSTRY-LEVEL STRATEGIES

industry-level strategy a corporate strategy that addresses the question, ‘How should we compete in this industry?’

POSITIONING STRATEGIES The main purpose of an industry level strategy is to protect a company from the negative effects of industry-wide competition by creating differences between the company’s position and those of its competitors. According to Harvard Professor Michael Porter, there are three positioning strategies: cost leadership, differentiation and focus.55 Cost leadership means producing a cost leadership product or service of acceptable quality at the positioning strategy consistently lower production costs than of producing a product or service of acceptable competitors so that the company can offer quality, at consistently the product or service at the lowest price lower production costs than competitors can, so in the industry. Cost leadership protects that the company can offer companies from industry forces by the product or service at the lowest price in the deterring new entrants, who will have to industry match low costs and prices. Cost leadership also forces down the prices of substitute products and services, attracts bargain-seeking buyers and increases bargaining power with suppliers, who have to keep their prices low if they want to do business with the cost leader. In the Australian retail market, examples of companies operating cost leadership strategies are Dan Murphy (a major liquor retailing chain: ‘Lowest liquor prices guaranteed’), Bunnings Hardware stores (‘Lowest prices are just the beginning’) and Aldi supermarkets (‘Good different’). Differentiation means making your differentiation product or service sufficiently different the positioning strategy of providing a product or from competitors’ offerings such that service that is sufficiently customers are willing to pay a premium different from competitors’ offerings that customers price for the extra value or performance are willing to pay a that it provides. Differentiation protects premium price for it companies from industry forces by reducing the threat of substitute products. It also protects Alamy Stock Photo/Richard Levine

decade, it strengthened this focus by manufacturing only all-wheel-drive vehicles, like the Subaru Legacy and Outback (both come in four-door sedans or two-door coupes), which are popular in snowy and mountainous regions.53 Companies often choose a stability strategy when their external environment doesn’t change much or after they have struggled with periods of explosive growth. The purpose of a retrenchment retrenchment strategy is to turn around very poor strategy company performance by shrinking the a strategy that focuses on turning around very poor size or scope of the business or, if a company performance by company is in multiple businesses, by shrinking the size or scope of the business closing or shutting down different lines of the business. The first step of a typical retrenchment strategy might include making significant cost reductions; laying off employees; closing poorly performing stores, offices or manufacturing plants; or closing or selling entire lines of products or services.54 After cutting costs and reducing a business’ size or scope, the second step in a retrenchment strategy is recovery, which consists of the recovery strategic actions that a company takes the strategic actions taken to return to a growth strategy. This twoafter retrenchment to return to a growth strategy step process of cutting and recovery is analogous to pruning roses. Prior to each growing season, roses should be cut back to twothirds their normal size. Pruning doesn’t damage the roses; it makes them stronger and more likely to produce beautiful, fragrant flowers. The retrenchment-andrecovery process is similar. Cost reductions, layoffs and plant closings are sometimes necessary to restore companies to ‘good health’. But, like pruning, those cuts are intended to allow companies to eventually return to growth strategies (i.e. recovery). So, when company performance drops significantly, a strategy of retrenchment and recovery may help the company return to a successful growth strategy.

Industry-level strategy addresses the

question, ‘How should we compete in this industry?’ Let’s find out more about industrylevel strategies by discussing: ● the positioning strategies ● adaptive strategies that companies can use to achieve sustained competitive advantage and above-average profits. ● the five industry forces that determine overall levels of competition in an industry.

Differentiation is what makes LG’s $1800 washer–dryer combination a hot product

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companies by making it easier to retain customers and more difficult for new entrants trying to attract new customers. For example, why would anyone pay $1800 for LG’s deluxe washer–dryer combination, when they could purchase a basic top-loading washing machine and separate dryer for $1000 or less? The answer is that the LG washer does huge loads, with just 73 litres of water, compared to around 100 litres for conventional washers. So it’s more efficient in terms of water and energy, and saves consumers time because they can wash and dry more clothes at the same time.56 With a focus strategy, a company focus strategy the positioning strategy of uses either cost leadership or using cost leadership or differentiation to produce a specialised differentiation to produce product or service for a limited, specially a specialised product or service for a limited, targeted group of customers in a particular specially targeted group of geographic region or market segment. customers in a particular geographic region or Focus strategies typically work in market market segment niches that competitors have overlooked or have difficulty serving. Harvey Norman is an Australianbased company that has stores in Singapore and Malaysia. They sell electrical items, furniture and bedding, and that is what they do exclusively. In contrast, for example, their former competitor Carrefour, the giant French chain of stores which also operated in Malaysia and Singapore, sold the same items, as well as clothing, groceries, bicycles and much more.

ADAPTIVE STRATEGIES Adaptive strategies are another set of industry-level strategies. Whereas the aim of positioning strategies is to minimise the effects of industry competition and build a sustainable competitive advantage, the purpose of adaptive strategies is to choose an industry-level strategy that is best suited to changes in the organisation’s external environment. There are four kinds of adaptive strategies: defenders, prospectors, analysers and reactors.57 Defenders seek moderate, steady defender an adaptive strategy growth by offering a limited range of aimed at defending products and services to a well-defined strategic positions by set of customers. In other words, seeking moderate, steady growth and by offering defenders aggressively ‘defend’ their a limited range of highcurrent strategic position by doing the quality products and services to a well-defined best job they can to hold on to customers set of customers in a particular market segment. Not surprisingly, ultra-premium car manufacturers, such as Ferrari and Aston-Martin, are not as interested in growth as they are in retaining the luxury brand image. That’s because higher sales volume leads to ubiquity, which makes it harder to charge premium pricing. The retail price of a new Ferrari California is roughly $200 000, but a new LaFerrari model has an MSRP of $1.4 million. To retain its exclusivity, Ferrari has a self-imposed production cap of

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7000 vehicles a year. At Aston-Martin, the level is much lower, at 4000 cars per year. ‘This is not a car company that is ever going to be selling a lot of cars’, said Andy Palmer, CEO of Aston Martin. ‘Part of its mystique is its exclusivity.’58 Prospectors seek fast growth by prospector searching for new market opportunities, an adaptive strategy encouraging risk taking and being the first that seeks fast growth by searching for new to bring innovative new products to market opportunities, market. Prospectors are analogous to gold encouraging risk taking and being the first to bring miners who ‘prospect’ for gold nuggets innovative new products (i.e. new products) in the hope that the to market nuggets will lead them to a rich deposit of gold (i.e. fast growth). 3M has long been known for its innovative products, particularly in the area of adhesives. Since 1904, it has invented sandpaper; masking, cellophane, electrical and Scotch tapes; the first commercially available audiotapes and videotapes; and its most famous invention, Post-it notes. Lately, 3M has invented a film that increases the brightness of LCD displays on laptop computers; developed a digital system for construction companies to detect underground telecommunication, gas, water, sewer or electrical lines without digging; and created a pheromone spray that, by preventing harmful insects from mating, will protect apple, walnut, tomato, cranberry and grape crops. For more on 3M’s innovative products, see the 3M innovation archive (http://solutions.3m.com /innovation/ en_US/). Analysers are a blend of the defender analyser and prospector strategies. Analysers seek an adaptive strategy that moderate, steady growth and limited seeks to minimise risk and maximise profits by opportunities for fast growth. Analysers following or imitating are rarely first to market with new the proven successes of prospectors products or services. Instead, they try to simultaneously minimise risk and maximise profits by following or imitating the proven successes of prospectors. Facebook admits to using an analyser strategy in copying the key features of Snapchat, the popular social media app in which users share pictures and videos. Facebook product manager Connor Hayes said, ‘The way people create content is changing to be from text to photos and videos. This is in turn changing the way they’re sharing with one another and interacting online. This is something that Snapchat has really pioneered.’ Facebook has copied Snapchat’s features four times. First, Snapchat opens in camera view. Facebook made the camera available with one swipe. Second, it added the one-swipe capability to take and post pictures and videos to its Instagram, WhatsApp and Messenger apps. Third, similar to Snapchat stories, it named these features Facebook Stories. Fourth, just like in SnapChat, users can choose to create photos and stories that only exist for 24 hours. Facebook’s adoption of SnapChat features has

already slowed Snapchat’s user growth. Instagram Stories has 150 million daily users, while Snapchat’s daily user base is 158 million.59 Finally, unlike defenders, prospectors reactor or analysers, reactors do not follow a an adaptive strategy of not following a consistent strategy, consistent strategy. Rather than but instead reacting to changes anticipating and preparing for external in the external environment after they occur opportunities and threats, reactors tend to ‘react’ to changes in their external environment after they occur. Not surprisingly, reactors tend to be poorer performers than defenders, prospectors or analysers. A reactor approach is inherently unstable and companies that fall into this mode of operation must change their approach or face almost certain failure.

Threat of new entrants

Bargaining power of suppliers

Character of rivalry

Bargaining power of buyers

Threat of substitute products or services FIGURE 6.5

Porter’s five industry forces

Source: Based on the Porter, M. E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press, 1980. Simon & Schuster, Inc.

GORE-Y PROSPECTS W.L. Gore, creator of GoreTex, encourages its employees to spend at least 10 per cent of their work time on speculative ventures. The Elixir acoustic guitar string, a coated plastic string that is now the market leader, started out as one of those ventures. An employee working on bicycle cabling and gearing drafted another employee who had recently developed Glide dental floss. After two years of experimentation, their team launched Elixir. When music stores refused to carry it because it cost A$15 per string, or three to five times more than traditional strings, Gore decided to give away 20 000 free samples valued at $15 each. Within a year, Elixir had a 35 per cent market share.60

FIVE INDUSTRY FORCES

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EO VID

A company may select any (single or integrated) of the above industry-level strategies to position itself that is different from its competitors. Therefore, it is better to analyse the nature of competition P AP LY Get an and attractiveness of the industry overview of Porter’s five forces model before selecting any industry-level strategy. According to Michael Porter, five industry forces determine an industry’s overall attractiveness and potential for long-term profitability: ● character of the rivalry ● threat of new entrants ● threat of substitute products or services ● bargaining power of suppliers ● bargaining power of buyers.61 The stronger these forces, the less attractive the industry becomes to corporate investors because it is more difficult for companies to be profitable. Porter’s industry forces are illustrated in Figure 6.5. Let’s examine how these industry forces are bringing changes to several kinds of industries.

Character of the rivalry is a measure character of the of the intensity of competitive behaviour rivalry between companies in an industry. Is the a measure of the intensity of competitive behaviour competition among organisations between companies in an aggressive and cutthroat, or do industry competitors focus more on serving customers than on attacking each other? Both industry attractiveness and profitability decrease when rivalry is cutthroat. The threat of new entrants is a threat of new measure of the degree to which barriers entrants to entry make it easy or difficult for new a measure of the degree to which barriers to entry companies to get started in an industry. If make it easy or difficult new companies can easily enter the for new companies to get started in an industry industry, then competition will increase and prices and profits will fall. However, if there are sufficient barriers to entry, such as large capital requirements to buy expensive equipment or plant facilities or the need for specialised knowledge, then competition will be weaker, and prices and profits will generally be higher. The automobile industry has traditionally had a high barrier to entry. So when Tesla entered the market in 2003 to manufacture a completely electric sports car, it was the first new car company in a generation. With billions of dollars in startup funding, the company hired thousands of engineers, built new manufacturing facilities and created a complex supply chain to source, manufacture and assemble 10 000 component parts. While its stock is valued at US$30 billion, Tesla has never made a profit. In fact, the company has burned through US$100 million a month in expenses since going public in 2010. With six new competitors poised to enter the automotive industry (including Apple, Google and an upstart founded by a team of former Tesla executives), the barrier to entry is falling and competition is rising. Becoming profitable PPLY E A may take longer than Tesla Complete the ‘Management decision’ planned as barriers to entry worksheet for Chapter 6 62 fall and competition rises. ENGAG

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threat of substitute products or services a measure of the ease with which customers can find substitutes for an industry’s products or services

The threat of substitute products or services is a measure of the ease

with which customers can find substitutes for an industry’s products or services. If customers can easily find substitute products or services, the competition will be greater and profits will be lower. If there are few or no substitutes, competition will be weaker and profits will be higher. In many cities, hailing a taxi can be frustrating and expensive. Enter ‘Uber’, a smartphone app to connect people needing rides with drivers willing to take them where they need to go. Open the Uber app, choose the preferred vehicle (e.g. standard or luxury car), put the pin on the app’s map to show where you want to be picked up, enter the destination and then the app can estimate the cost, charge your credit card or PayPal account, email a receipt, show how far away your car is and let you know when the driver has arrived. The average wait time is three to 10 minutes, and Uber maintains quality control by using social media to gain feedback on drivers’ timeliness, politeness and service. Drivers with significant negative feedback lose the chance to drive for Uber. Of course, taxi services are not happy with competing with this new service provided. In some places, they have taken legal action (without major successes so far) to shield themselves from the new competition.63

bargaining power of suppliers a measure of the influence that suppliers of parts, materials and services to organisations in an industry have on the prices of these inputs

Bargaining power of suppliers

is a measure of the influence that suppliers of parts, materials and services to organisations in an industry have on the prices of these inputs. When companies can buy parts, materials and services from numerous suppliers, the companies will be able to bargain with the suppliers to keep prices low. Today, there are so many suppliers of inexpensive standardised parts, computer chips and video screens that dozens of new companies are beginning to manufacture flat-screen TVs. In other words, the weak bargaining power of suppliers has made it easier for new firms to enter the HDTV business. On the other hand, if there are few suppliers, or if a company is dependent on a supplier with specialised skills and knowledge, then the suppliers will have the bargaining power to dictate price levels. Bargaining power of buyers is a bargaining power of measure of the influence that customers buyers a measure of the influence have on an organisation’s prices. If a that customers have on a company sells a popular product or company’s prices service to multiple buyers, then the company has more power to set prices. By contrast, if a company is dependent on just a few high-volume buyers, those buyers will typically have enough bargaining power to dictate prices. Most agricultural commodities such as 108

beef and soy beans are sold by farmers to commodity traders who then sell them to buyers around the world. Australian farmers, the world’s second-largest growers of wheat, beef, cotton and sugar, typically sell their produce to Archer Daniels Midland, Bunge Ltd, Cargill and Dreyfus, known as the ABCD trading houses, which control 60 per cent of the wheat bought and shipped from Australia. These trading houses have tremendous bargaining power, meaning that Australian farmers end up with lower prices for their products. Some Australian farmers are trying to counter this bargaining power by selling directly to global buyers. Glen Rogan, a Queensland cotton farmer, says, ‘To make a reasonable living as a farmer under current prices was becoming untenable’. He sold 6500 bales of cotton directly to Asian cotton mills, getting 30 per cent more than he would have through the established trading houses. According to Rogan, selling directly to the cotton mills ‘was the only way I could see to stay relevant and viable’.64

LO6

FIRM-LEVEL STRATEGIES

Microsoft brings out its Xbox One video-game console; Sony counters with its PlayStation 4. Virgin Australia drops prices to a popular holiday destination; Jetstar strikes back with more flights to the same destination and even lower prices. Starbucks Coffee opens a store, and nearby coffee shops respond by improving services, increasing portions, holding the line on prices or increasing ‘loyalty’ benefits. Attack and respond, respond and attack. firm-level strategy Firm-level strategy addresses the a corporate strategy that the question, question, ‘How should we compete addresses ‘How should we compete against a particular firm?’ against a particular firm?’ Let’s find out more about firm-level strategies (i.e. direct competition between companies) by reading about: ● the basics of direct competition ● the strategic moves involved in direct competition between companies.

DIRECT COMPETITION Although Porter’s five industry forces indicate the overall level of competition in an industry, most companies do not compete directly with all the organisations in their industry. For example, McDonald’s and Hong Kong’s Café De Coral are both in the restaurant business, but no one would characterise them as competitors. McDonald’s offers American-style ‘burger and fries’ fast food in a ‘seat yourself’ restaurant, while Café De Coral offers Chinese food with waiting staff and a bar. Instead of ‘competing’ with the industry, most companies compete directly with just a few other

in terms of market commonality in the way that McDonald’s and Hungry Jack’s are. Although, like Subway, McDonald’s is now selling itself as a provider of healthy fast food. Shutterstock.com/Olga Kashubin

companies. Direct competition is the rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive positions as they act and react to each other’s strategic actions.65 Two factors determine the extent to which companies will be in direct competition with each other: market commonality and resource similarity. Market commonality is the degree to which two companies have overlapping products, services or customers in multiple markets. The more markets in which there is product, service or customer overlap, the more intense the direct competition between the two companies. Resource similarity is the extent to which a competitor has similar amounts and kinds of resources; that is, similar assets, capabilities, processes, information and knowledge used to create and sustain an advantage over competitors. From a competitive standpoint, resource similarity means that your direct competitors can probably match the strategic actions that your company takes. When companies are in direct competition they have similar resources at their disposal and a high degree of market commonality. These companies try to sell similar products and services to similar customers. McDonald’s and Hungry Jacks would clearly fit the description of direct competitors. Companies are also in competition when they are going after similar customers with some similar products or services, but doing so with different competitive resources. McDonald’s McCafe and Starbucks would fit here. McCafe is chasing the same coffee consumers that Starbucks is. Nevertheless, with its more expensive coffees and snacks, Starbucks is less of a direct competitor to McCafe than Hungry Jack’s is for McDonald’s burger menu. As mentioned earlier, McDonald’s and Café De Coral might be said to be competitors, but although both are in the fast-food business, there is almost no overlap in terms of products and customers. For example, Café De Coral sells Chinese dishes, none of which are available at McDonald’s. Furthermore, Café De Coral customers aren’t likely to eat at McDonald’s. These two companies have different competitive resources and little market commonality. Finally, McDonald’s and Subway compete with similar resources but with little market commonality. In terms of resources, McDonald’s sales are much larger, but Subway, with its faster growth and over 44 608 stores worldwide, more than McDonald’s stores, which now has just over 37 241 restaurants worldwide.66 Though Subway and McDonald’s compete, they aren’t direct competitors

direct competition the rivalry between two companies that offer similar products and services, acknowledge each other as rivals, and act and react to each other’s strategic actions market commonality the degree to which two companies have overlapping products, services or customers in multiple markets resource similarity the extent to which a competitor has similar amounts and kinds of resources

McDonalds and Hungry Jack’s have high resource similarity as they are competing for the attention of similar customers

STRATEGIC MOVES OF DIRECT COMPETITION While corporate-level strategies help managers decide what business to be in and industry-level strategies help them determine how to compete within an industry, firmlevel strategies help managers determine when, where and what strategic actions should be taken against a direct competitor. Companies in direct competition can make two basic strategic moves: attacks and responses. These moves occur all the time in virtually every industry, but they are most noticeable in industries where multiple large competitors are pursuing customers in the same market space. An attack is a competitive move attack designed to reduce a rival’s market share a competitive move or profits. For example, hoping to designed to reduce a rival’s market share or profits increase its market share at its competitors’ expense, Tigerair offered 13 000 single flights for just $1, hundreds of dollars less than their usual price, in some cases. The offer was applied for all 23 domestic routes in Australia and sales took off quickly for the airline.67 Even after integration, Tigerair continues attacking on price as they claims ‘to be up to 40% cheaper than other airlines’.68 By contrast, a response is a countermove, prompted by a rival’s attack, that is designed to response defend or improve a company’s market a competitive share or profit. There are two kinds of countermove, prompted by a rival’s attack, to defend responses.69 The first is to match or mirror or improve a company’s your competitor’s move. This is what market share or profit

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Jetstar did to Tigerair when it responded by selling free flights (plus taxes and charges).70 The second kind of response, however, is to respond along a different dimension from your competitor’s move or attack. For example, instead of cutting prices, Jetstar could have introduced more flights per day to the same destinations or offered cheaper flights to different, more popular destinations to attract customers away from Tigerair. Market commonality and resource similarity determine the likelihood of an attack or response; that is, whether a company is likely to attack a direct competitor or to strike back with a strong response when attacked. When market commonality is strong and companies have overlapping products, services or customers in multiple markets, there is less motivation to attack and more motivation to respond to an attack. The reason for this is straightforward: when organisations are direct competitors in a large number of markets, they have a great deal at stake. So when Tigerair launched an aggressive price war with its cheap flights, its

MGMT IN PRACTICE

Using the ocean as a metaphor, professors Renée Mauborgne and W. Chan Kim describe highly competitive markets as shark-infested waters. The water is red with blood from continual attacks and responses, and any gains made by one company are incremental at best and bound to be conceded in the next shark fight. The only hope for survival is to pursue innovations that take you out of the red ocean and into the deep blue ocean, where there are no competitors. If it sounds hard, that’s because it is – but it’s not impossible. Cirque du Soleil created a whole new category of entertainment, Gmail lets you store unlimited emails for free and Nintendo’s Wii has redefined video gaming with simple games that combine elements of virtual reality. Understanding your competitive arena and competitors’ strengths and weaknesses is a critical component of market orientation. Read more in Blue Ocean Strategy (Harvard University Press, 2005).

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RED OCEAN, BLUE OCEAN

Tigerair’s $1 return flights were a direct attack on their close competitor Jetstar to increase the airline’s market-share

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competitor (Jetstar) had no choice but to respond by cutting its own prices. Whereas market commonality affects the likelihood of an attack or a response to an attack, resource similarity largely affects response capability; that is, how quickly and forcefully a company can respond to an attack. When resource similarity is strong, the responding company will generally be able to match the strategic moves of the attacking company. Consequently, a company is less likely to attack companies with similar levels of resources because it is unlikely to gain any sustained advantage when the responding companies strike back. On the other hand, if one company is substantially stronger than another (i.e. low resource similarity), then a competitive attack is more likely to produce sustained competitive advantage. In general, the more moves (i.e. attacks) a company initiates against direct competitors, and the greater a company’s tendency to respond when attacked, the better its performance. More specifically, attackers and early responders (companies that are quick to launch a retaliatory attack) tend to gain market share and profits at the expense of late responders. This is not to suggest that a ‘full-attack’ strategy always works best. In fact, attacks can provoke harsh retaliatory responses. Consequently, when deciding when, where and what strategic actions to take against a direct c o m p e t i t o r, PPLY managers should always E A Find out more about your attitudes strategic planning consider the possibility of with this self assessment retaliation.

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Innovation and change

LEARNING OUTCOMES

1 Explain the differences between change and innovation.

ORGANISATIONAL INNOVATION

2 Explain why innovation matters to organisations.

3 Discuss the different methods that managers can use for effective management of innovation in their organisations.

4 Discuss why not changing can lead to organisational decline.

5 Discuss the different methods that managers can use for better management of change as it happens.

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What kind of car will you be driving in the future? Although we might have a general impression that petroleum prices, fuel scarcity and concerns about pollution will cause a gradual movement away from petrol engines, it all seems like a distant and vague future. However, online car review sites like Drive.com.au and USANews.com have both rated the all-electric Tesla Model S the Number One Large Luxury Car (for 2014 and 2015 respectively).1 That’s the recent past now, not the vague future! Then, of course, when you have your new electric car, you might need to recharge while away from home. Imagine pulling into a fast-food drive-through and saying, ‘Hi, I’d like two medium Big Mac meals, and recharge my car please’. Recharge your car? Yes, now that electric ‘plug-in’ cars are becoming more mainstream, organisations are doing deals with fast-food chains to provide fast recharge facilities. Already, some fast charge/ fast-food facilities are operating in the Czech Republic and the USA; soon we’ll see them in Kuala Lumpur, Singapore, Melbourne and Auckland. The Land Transport Authority of Singapore has set a target of installing 2000 car charging points nationwide by 2020. Eighty per cent of these charging points will be located in residential estates across Singapore.2 In Malaysia, the Government has planned to set up 25 000 charging points in the country by 2030.3 In comparison to Singapore and Malaysia, installation of electric car charging points has been growing slowly in Australia. The electric vehicle pioneer Tesla’s charger network in Australia has just 22 locations. Recently Porsche – the German Automaker – declared that they would set up a supercharger network in Australia by 2020.4 This changing technology for how we power our cars will be an opportunity for other types of businesses

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ideas in an organisation.5 It is designed to bring about improvements in products, services or processes for the organisation. Creativity, which is a form of creativity organisational innovation, is the production of the production of novel novel and useful ideas.6 In the first part of this and useful ideas chapter, you will learn why innovation matters and how to manage innovation to create and sustain a competitive advantage. In the second part, we will focus on organisational change, which is a difference in the form, quality or condition of an organisation over time.7 You will also learn about the risk of not changing and the ways in which companies can manage change. Locals in this Victorian town showed initiative by modifying an old petrol bowser into a charging station.

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in other industries. If powering up at McDonald’s is an option, where else can we expect to see similar arrangements: supermarket car parks? After reading the next three sections on organisational innovation, you should be able to: ● explain the difference between change and innovation ● explain why innovation matters to organisations ● discuss the different methods that managers can use for effective management APPLY of innovation in their Get started with the media quiz: Holden Outerwear: organisations. Managing Change and Innovatio

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THE DIFFERENCE BETWEEN CHANGE AND INNOVATION

Managers will need to deal with and discuss change, innovation and creativity, so it is important to have a clear understanding of what these words mean. Let’s begin with change, meaning any alteration in change existing circ*mstances. This is a really any alteration in existing circ*mstances comprehensive or ‘big picture’ definition, which is not restricted to change in organisations or to things that managers do. For example, if yesterday was sunny but today is rainy, that’s a change, but it is not something that managers can control. Change can be important or minor, short-term or long-term, planned or unexpected, implemented by managers or imposed on managers by circ*mstances. It can lead to good outcomes or bad outcomes. While managers need to be alert to change and to the need (often) to respond, it will sometimes be completely outside their powers to avoid change. If we accept this broad definition of change, then it becomes clearer that innovation is a small organisational and specialised subset of change. innovation the successful Organisational innovation is the implementation of creative successful implementation of creative ideas in organisations 112

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WHY INNOVATION MATTERS

We can only guess what changes technological innovations will bring in the next 20 years. It may be a fairly safe bet that apps will be a lot smarter, that batteries will be much better, that computers will be smaller and faster, and that wi-fi will be found everywhere – that’s really only the continuation of current trends. And it can only be presumed that things are going to happen in technology, in medical science and in the ways that humans live which haven’t even been thought of yet. Maybe your car will drive itself; of course, that has been thought of, and now the idea is being worked on by car companies. Maybe TVs will be activated by hand gestures, so it won’t matter if you lose the remote (just don’t wave your arms around too much when your team scores a goal). Who knows? The only thing we do know about the next 20 years is that innovation will continue to change our lives. Let’s begin our discussion of innovation by learning about: ● technology cycles ● innovation streams.

TECHNOLOGY CYCLES In Chapter 3, you learned that technology is the knowledge, tools and techniques used to transform inputs (raw materials, information, etc.) into outputs (products and services). A technology technology cycle cycle begins with the ‘birth’ of a new a cycle that begins with technology and ends when that technology the ‘birth’ of a new technology and ends when reaches its limits and ‘dies’ as it is replaced that technology reaches by a newer, substantially better technology.8 its limits and ‘dies’, and is replaced by a newer, For example, technology cycles occurred substantially better when air conditioning supplanted fans, when technology Henry Ford’s Model T replaced horse-drawn carriages and when planes replaced trains as a means of cross-country travel. From Gutenberg’s invention of the printing press in the 1400s to the rapid advance of the Internet, studies of

hundreds of technological innovations have shown that nearly all technology cycles follow the typical S-curve pattern of innovation shown in S-curve pattern of innovation Figure 7.1.9 Early in a technology cycle, a pattern of technological there is a lot that has to be learned, so innovation characterised progress is slow, as depicted by point A by slow initial progress, then rapid progress and on the S-curve. The flat slope indicates then slow progress again that even intense and increased efforts as a technology matures and reaches its limits (i.e. money, research and development) will only lead to small improvements in technological performance. Fortunately, as the new technology matures, researchers work out how to get better performance from it. This is represented by point B of the S-curve in Figure 7.1. The steeper slope indicates that small amounts of additional effort will result in significant increases in performance. At point C, the flat slope again indicates that further efforts to develop this particular technology will only result in small increases in performance. More importantly, however, point C indicates that the performance limits of that particular technology are being reached. In other words, additional significant improvements in performance are highly unlikely. Intel, based in California, is the world’s biggest producer of microprocessors for computers. The company’s technology cycles for developing new, more powerful and faster chips have followed this S-curve pattern. Intel spends billions to develop new computer chips and to build new production facilities to produce them. The company has found that the technology cycle for its integrated circuits is about three years. In each three-year cycle, Intel spends billions to introduce a new chip, improves the chip by making it a little bit faster each year and then replaces that chip at the end of the cycle with a brand new, different chip that is substantially faster than the old chip. At first, however, the billions Intel spends typically produce only small improvements in performance (point A). But after six months to a year with a new chip design, Intel’s engineering

and production people typically work out how to make the new chips much faster than they were initially (point B). Yet, despite impressive gains in performance, Intel is unable to make a particular computer chip run any faster because it reaches its design limits. After a technology has reached its limits at the top of the S-curve, significant improvements in performance usually come from radical new designs or new performance-enhancing materials (point C). In Figure 7.1, that new technology is represented by the second S-curve. The changeover or discontinuity between the old and new technologies is represented by the dotted line. At first, the old and new technologies are likely to coexist. Eventually, however, the new technology will replace the old technology. When that happens, the old technology cycle will be completed, and a new one will have started. The changeover between Intel’s newer and older computer chip designs typically takes about one year. Over time, improving existing technology (tweaking the performance of the current technology cycle), combined with replacing old technology with new technology cycles (i.e. new, faster computer chip designs replacing older ones), has increased the speed of Intel’s computer processors by a factor of 300.10 Although the evolution of Intel’s microprocessors has been used to illustrate S-curves and technology cycles, it’s important to note that technology cycles and technological innovation are not restricted to ‘high technology’ or ‘computer technology’. Remember, technology is simply the knowledge, tools and techniques used to transform inputs into outputs. So a technology cycle occurs whenever there are major advances or changes in the knowledge, tools and techniques of a field or discipline. For example, one of the most important technology cycles in the history of civilisation occurred in 1859 when 2092 kilometres of central sewer line were constructed throughout London to carry human waste to

Performance

Discontinuity New technology

Old technology

A Effort

FIGURE 7.1

S-curves and technological innovation

Source: R. N. Foster, Innovation: the attacker’s advantage (New York: Summitt, 1986).

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The technology cycle for Intel’s integrated circuits is about three years

the sea more than 17 kilometres away. This sewer system replaced the practice of dumping raw sewage into streets where it drained into public wells that supplied drinking water. Preventing waste runoff from contaminating water supplies stopped the spread of cholera that had killed millions of people for centuries in cities throughout the world.11 Indeed, the water you drink today is safe thanks to this ‘technology’ breakthrough. So, when you think about technology cycles, don’t automatically think ‘high technology’. Instead, broaden your perspective by considering historical advances or any changes in knowledge, tools and techniques.

INNOVATION STREAMS In Chapter 6, you learned that organisations can create competitive advantage for themselves if they have a distinctive competence that allows them to make, do or perform something better than their competitors. Furthermore, a competitive advantage becomes sustainable if other companies cannot duplicate the benefits obtained from that distinctive competence. Technological innovation, however, can not only enable competitors to duplicate the benefits obtained from a company’s distinctive advantage but can also quickly turn a company’s competitive advantage into a competitive disadvantage. For more than 110 years, Eastman Kodak was the dominant producer of photographic film worldwide. That is, until Kodak invented the digital camera in 1975 (patent 4 131 919). Kodak itself was unprepared for the rapid acceptance of its new technology, and its managers watched film quickly become obsolete for the majority of camera users. In 2012 Kodak filed for bankruptcy protection in the US and started to reshape the business around a core activity of providing photo printing services. Technological innovation turned Kodak’s competitive advantage into a competitive disadvantage.12 As the Kodak example shows, companies that want to sustain a competitive advantage must understand and

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protect themselves from the strategic threats of innovation. In the long run, the best way for a company to do this is to create a stream of its own innovative ideas and products year after year. Consequently, we define innovation streams as patterns of innovation streams patterns of innovation innovation over time that can create over time that can create sustainable competitive advantage.13 sustainable competitive advantage Remember, as we saw earlier in the chapter, a technology cycle begins with a new technology and ends when that technology is replaced by a newer, substantially better technology. An innovation stream begins with a technological technological discontinuity, in which a discontinuity scientific advance or a unique combination a scientific advance or a unique combination of existing technologies creates a of existing technologies significant breakthrough in performance or creates a significant breakthrough in function. Technological discontinuities are performance or function followed by discontinuous change, discontinuous change which is characterised by technological the phase of a technology substitution and design competition. cycle characterised by Technological substitution occurs technological substitution and design competition when customers then purchase new technological technologies to replace older technologies. substitution Discontinuous change is also the purchase of new technologies to replace characterised by design competition, in older ones which the old technology and several design competition different new technologies compete to competition between old and new technologies establish a new technological standard or to establish a new dominant design. Because of large technological standard or dominant design investments in old technology, and because the new and old technologies are often incompatible with each other, companies and consumers are reluctant to switch to a different technology during a design competition. Indeed, the telegraph was so widely used as a means of communication in the late 1800s that, at first, almost no one understood why telephones would be a better way to communicate. In addition, during design competition, the older technology usually improves significantly in response to the competitive threat from the new technologies; this response also slows the changeover from older to newer technologies. Discontinuous change is followed by the emergence of a dominant design, which becomes the dominant design new accepted market standard for a new technological design or process that technology.14 Dominant designs emerge in becomes the accepted several ways. One is critical mass, market standard meaning that a particular technology can become the dominant design simply because most people use it. This happened in the design competition between different mobile operating systems used in today’s smartphones. Apple’s iOS and Google’s Android are two major mobile operating systems that dominate the

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smartphone market. From the 2007 debut of iPhone until 2012, iOS enjoyed unrivalled dominance in the market. Since 2012, this domination has dissolved and currently only 14.8 per cent of smartphones use iOS compared to 85.1 per cent that use Android. The ‘open’ nature of Android (applicable across the products of different companies) in comparison to the ‘closed application’ nature (only applicable to Apple products) attracts more people to use Android devices.15 Thus, we can see dominance of one design can be easily lost because of accessibility and popular use of a competing design. The nature of ‘closed application’ of iOS (only applicable to Apple products) in comparison to ‘open application’ nature of Android is often cited as a key reason for Apple’s iOS losing dominance.

Joseph Balgazette designed the first interceptor sewers to carry London’s sewage down the banks of the Thames to be dumped into the estuary

Likewise, a design can become dominant if it solves a practical problem. For example, the QWERTY keyboard (named for the top left line of six letter keys) became the dominant design for typewriters because it slowed down typists who, by typing too fast, caused mechanical typewriter keys to jam. Though computers can easily be switched to the DVORAK keyboard layout, which doubles typing speed and cuts typing errors by half, QWERTY lives on as the standard keyboard. Thus, the best technology doesn’t always become the dominant design. Dominant designs can also emerge through independent standards bodies. The International Telecommunications Union (http://www.itu.ch) is an independent organisation that establishes standards for the communications industry. The ITU was founded in Paris in 1865 because European countries all had different telegraph systems that could not communicate with each other. After three months of negotiations, 20 countries signed the International Telegraph Convention, which standardised equipment and instructions, enabling telegraph messages to flow seamlessly from country to country.16

Today, as in 1865, various standards are proposed, discussed, negotiated and changed until agreement is reached on a final set of standards that communication industries (i.e. Internet, telephony, satellites, radio, etc.) will follow worldwide. For example, because most mobile phones have different charger interfaces (i.e. plugs) and electrical requirements, you’ve probably had to buy new chargers – one for home, one for work and one for your car – each time you got a new mobile phone. That’s now a thing of the past, as the ITU has adopted a micro-USB standard (look at the connector that plugs into your digital camera) that can be used with almost any phone (iPhone excluded). This new standard now makes it easy to borrow someone else’s charger when you leave yours at home, and prevents consumers from throwing away 51 000 tonnes of obsolete chargers each year (that worked with their old phones but not their new ones). The new chargers are also much more energy efficient.17 No matter how it happens, the emergence of a dominant design is a key event in an innovation stream. First, the emergence of a dominant design indicates that there are winners and losers. Technological innovation is both competence enhancing and competence destroying. Companies that bet on the now-dominant design usually prosper. By contrast, when companies bet on the wrong design or the old technology, they may experience technological lockout, which occurs technological when a new dominant design (i.e. a lockout when a new dominant significantly better technology) prevents a design (i.e. a significantly company from competitively selling its better technology) prevents a company from products or makes it difficult to do so.18 competitively selling its products or makes it Adobe’s Flash software, which supports animation and video on web difficult to do so pages and ads, was once ubiquitous in website design, including video streaming platforms YouTube and Netflix. In 2010, due to resource intensity and security issues, Apple stopped supporting Flash on iPhones and iPads. By 2015, YouTube, Facebook and Netflix had removed Flash, opting for the new HTML5 video standard.19 As of 2017, Google’s Chrome Browser did not automatically run Flash (unless users configure it).20 Scott Symonds, managing director at AQKA advertising firm, said, ‘It takes a kick in the pants from a major player like Google to really accelerate a switch over that could have taken years.’21 Today, Flash is now used on just 6 per cent of Internet homepages.22 The fact is that more companies are likely to go out of business in a time of discontinuous change and changing standards than in an economic recession or slowdown. Second, the emergence of a dominant design signals a shift from design experimentation and competition to

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manage innovation streams, companies need to be good at three things: ● managing sources of innovation ● managing innovation during discontinuous change ● managing innovation during incremental change.

MANAGING SOURCES OF INNOVATION ENGAG

Though now thoroughly outdated, typewriters were once an example of a dominant design

incremental change, a phase in which companies innovate by lowering the cost and improving the functioning and performance of the dominant design. For example, during a technology cycle, manufacturing efficiencies enable Intel to cut the cost of its chips by one-half to two-thirds, while doubling or tripling their speed. This focus on improving the dominant design continues until the next technological discontinuity occurs.

incremental change the phase of a technology cycle in which companies innovate by lowering costs and improving the functioning and performance of the dominant technological design

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As the discussion of technology cycles and innovation streams showed, managers must be equally good at managing innovation in two APPLY Complete the very different circ*mstances. ‘What would you do?’ worksheet for Chapter 7 First, during discontinuous change, companies must find a way to anticipate and survive the technological changes that can suddenly transform industry leaders into industry losers, or industry unknowns into powerhouses. Companies that can’t manage innovation following technological discontinuities risk quick organisational decline and dissolution. Second, after a new dominant design emerges following discontinuous change, companies must manage the very different process of incremental improvement and innovation. Companies that can’t manage incremental innovation deteriorate slowly as they fall further behind industry leaders. Unfortunately, what works well when managing innovation during discontinuous change doesn’t work well when managing innovation during periods of incremental change (and vice versa). Consequently, to successfully EO VID

MANAGING INNOVATION

Organisational encouragement Supervisory encouragement

Challenging work Creative work environments Lack of organisational impediments

Work group encouragement

Freedom

FIGURE 7.2

Components of creative work environments

Source: Based on T. M. Amabile, R. Conti, H. Coon, J. Lazenby, and M. Herron, “Assessing the Work Environment for Creativity,” Academy of Management Journal 39 (1996): 1154–1184.

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PPLY Innovation comes from great E A Get an ideas. So a starting point for overview of innovation management managing innovation is to manage the sources of innovation; that is, where new ideas come from. One place that new ideas originate is with brilliant inventors. Only a few companies, however, have the likes of an Edison, Marconi or Graham Bell working for them. Given that great thinkers and inventors are in short supply, what might companies do to ensure a steady flow of good ideas? Well, when we say that innovation begins with great ideas, we’re really saying that innovation begins with creativity. As we saw earlier in the chapter, creativity is the production of novel and useful ideas.23 Although companies can’t command employees to be creative (‘You will be more creative!’), they can jump-start innovation by building creative work environments, in which employees perceive that creative thoughts and ideas are welcomed and valued. As Figure 7.2 shows, creative creative work work environments have six components environments that encourage creativity: challenging workplace cultures in which employees perceive work, organisational encouragement, that new ideas are supervisory encouragement, work group welcomed, valued and encouraged encouragement, freedom and a lack of organisational impediments.24

Work is challenging when it requires effort, demands attention and focus, and is perceived as important to others in the organisation. According to researcher Mihaly Csikszentmihalyi, challenging work promotes creativity because it creates a rewarding psychological experience known as ‘flow’. Flow is a psychological flow a psychological state of state of effortlessness, in which you effortlessness, in which become completely absorbed in what you become completely you are doing and time seems to fly.25 A absorbed in what you are doing and time seems to key part of creating flow experiences pass quickly leading to creative work environments is to achieve a balance between skills and task challenge. When employees can do more than is required of them they become bored, and when their skills aren’t developed enough to accomplish a task they become anxious. When skills and task challenge are balanced, however, flow and creativity can occur. A creative work environment requires three kinds of encouragement: organisational, supervisory and work group encouragement. Organisational encouragement of creativity occurs when management encourages risk taking and new ideas, supports the generation of new ideas and evaluates them fairly, rewards and recognises creativity and encourages the sharing of new ideas throughout different parts of the company. It also requires a different approach to failure. At X, Alphabet’s (Alphabet is Google’s new corporate name) research and development lab, which is also called the ‘moonshot factory’, failure is celebrated. Because of the extreme difficulty of X’s projects, from self-driving cars to trying to get fuel from seawater, there is a strong expectation that success will be preceded by multiple failures. So like at GE Healthcare, X encourages risk taking by celebrating failure. One way that’s done is by letting employees put stickers of crumpled paper (signifying that it’s time to go back to the proverbial drawing board) on their laptops whenever they abandon ideas or methods that weren’t working.26 Astro Teller, X’s Captain of Moonshots, says, ‘We keep people brave by rewarding teams that kill their projects. We see killing projects as a normal part of doing business because it means we can go faster and take on ideas that are more promising.’27 Supervisory encouragement of creativity occurs when supervisors provide clear goals, encourage open interaction with subordinates and actively support development teams’ work and ideas. When General Electric launched the Ecomagination initiative to emphasise energy efficiency and ecologically friendly products, the company knew that clear goals were important. According to Lorraine Bolsinger, the GE executive running the program, ‘At a company full of engineers, a business initiative can’t just be a feel-good plan. Setting hard targets made it an honest GE initiative.’28

Bolsinger’s hard targets for this initiative included doubling the $700 million budget for researching clean technology, doubling the $10 million annual revenue from Ecomagination products (such as wind turbines, efficient jet engines, MRI systems and hybrid locomotives), cutting water usage by 20 per cent and cutting greenhouse-gas emissions by 1 per cent – all within five to seven years. Within five years, investment in clean technology research reached $5 billion, annual revenues from Ecomagination products hit an amazing $85 billion, water usage dropped 42 per cent and greenhouse gases dropped 31 per cent.29 Work group encouragement occurs when group members have diverse experience, education and backgrounds, and the group fosters mutual openness to ideas, positive constructive challenges to ideas and shared commitment to ideas. In Hollywood, ‘creative interference’, in which noncreative managers such as marketing, accounting or financial executives influence key decisions about storylines or actors, is a common impediment to creativity. At Pixar Studios (now owned by Disney), however, creative interference is minimised because each film project is ‘filmmaker led’. In other words, when Pixar’s producers and directors made Inside Out, Finding Nemo and the Toy Story series of films, they knew that company management, rules and procedures would not get in the way of producing great films. In fact, at Pixar, it’s just the opposite. According to Ed Catmull, Pixar co-founder and president of Pixar and Disney Animation Studios, ‘During production, we leave the operating decisions to the film’s leaders, and we don’t second-guess or micromanage them. Indeed, even when a production runs into a problem, we do everything possible to provide support without undermining their authority’.30 Freedom means having autonomy over one’s day-to-day work and a sense of ownership and control over one’s ideas. Numerous studies have indicated that creative ideas thrive under conditions of freedom. One example of this in practice is at Netflix, the television production and distribution company with a reputation both for innovation and for being a great place to work. Netflix employees can take unlimited paid holidays and they don’t need manager approval for expenses. They are just asked to act ‘in Netflix’s best interest’. The company gives its employees the freedom to take risks and to be innovative, thus allowing them to avoid being hindered by process.31 To foster creativity, companies may also have to remove impediments to creativity from their work environments. Internal conflict and power struggles, rigid management structures and a conservative bias towards the status quo can all discourage creativity. They create the perception that others in the organisation will decide which ideas are acceptable and deserve support.

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EXPERIENTIAL APPROACH: MANAGING INNOVATION DURING DISCONTINUOUS CHANGE A study of 72 product-development projects (i.e. innovation) in 36 computer companies across the US, Europe and Asia found that companies that succeeded in periods of discontinuous change (characterised by technological substitution and design competition, as described earlier) typically followed an experiential approach to innovation.32 The experiential approach to experiential approach to innovation assumes that innovation is innovation occurring within a highly uncertain an approach to innovation environment and that the key to fast that assumes a highly uncertain environment product innovation is to use intuition, and uses intuition, flexible flexible options and hands-on experience options and hands-on experience to reduce to reduce uncertainty and accelerate uncertainty and accelerate learning and understanding. The learning and understanding experiential approach to innovation has five aspects: design iterations, testing, milestones, multifunctional teams and powerful leaders.33 An ‘iteration’ is really just a repetition. design iteration So a design iteration is a cycle of a cycle of repetition in which a company repetition in which a company tests a tests a prototype of a prototype of a new product or service, new product or service, improves on that design improves on the design and then builds and then builds and tests and tests the improved product or the improved prototype ser vice protot ype. A p r o d uc t product prototype a full-scale working model prototype is a full-scale working model that is being tested for that is being tested for design, function design, function and reliability and reliability. Testing is a systematic testing comparison of different product designs the systematic comparison or design iterations. Companies that of different product designs or design want to create a new dominant design iterations following a technological discontinuity quickly build, test, improve and retest a series of different product prototypes. While many companies are developing driverless cars, prototype testing has occurred in controlled environments (Google’s driverless car always has a driver at the wheel when on public roads – just in case) that often lack the authenticity – and chaos – of daily driving. That changed in 2015 with the opening of M City, a 23-acre mini-metropolis in Ann Arbor, Michigan, with 40 building facades, a bridge, a tunnel, a traffic circle, gravel roads, angled intersections, obstructed views and even robotic jaywalkers pushing baby carriages. M City allows researchers to test what happens if, say, a red light fails, something they could never do on real city streets. Hideki Hada, an electronics systems manager at Toyota, said, ‘We would never do any dangerous or risky tests on the open road, so this will be a good place to test some of the next technology.’34 By trying a number of very different designs, or by making successive improvements and changes in the 118

same design, frequent design iterations reduce uncertainty and improve understanding. Simply put, the more prototypes you build, the more likely you are to learn what works and what doesn’t. Also, when designers and engineers build a number of prototypes, they are less likely to ‘fall in love’ with a particular prototype. Instead, they’ll be more concerned with improving the product or technology as much as they can. Testing speeds up and improves the innovation process too. When two very different design prototypes are tested against each other, or the new design iteration is tested against the previous iteration, product design strengths and weaknesses quickly become apparent. Likewise, testing uncovers errors early in the design process when they are easiest to correct. Finally, testing accelerates learning and understanding by forcing engineers and product designers to examine hard data about product performance. When there’s hard evidence that prototypes are testing well, the confidence of the design team grows. Also, personal conflict between design team members is less likely when testing focuses on hard measurements and facts rather than personal hunches and preferences. At Pixar and Disney Animation Studios, there are 14 steps involved in creating a full-length animated film, from pitching story ideas, to drawing storyboards, to recording character voices, to using ‘digital light’ (the equivalent of stage lighting) to light each scene in the movie. When it comes time to animate each scene in the movie, Pixar’s animation team is always on a short, tight schedule. As a result, the film director uses daily milestones to review progress and keep the film on budget and on schedule. Ed Catmull explains that at the end of each day’s work, the artists performing the computerised animation will ‘show work in an incomplete state to the whole animation crew, and although the director makes decisions, everyone is encouraged to comment’ . The benefits from these reviews – what Pixar calls ‘dailies’ – are tremendous. Says Catmull: First, once people get over the embarrassment of showing work still in progress, they become more creative. Second, the director or creative leads guiding the review process can communicate important points to the entire crew at the same time. Third, people learn from and inspire each other; a highly creative piece of animation will spark others to raise their game. Finally, there are no surprises at the end: When you’re done, you’re done. People’s overwhelming desire to make sure their work is ‘good’ before they show it to others increases the possibility that their finished version won’t be what the director wants. The dailies process avoids such wasted efforts.35

Milestones are formal project review

milestones

points used to assess progress and formal project review points performance. For example, a company used to assess progress and performance that has put itself on a 12-month schedule to complete a project might schedule milestones at the three-month, six-month and nine-month points on the

schedule. By making people regularly assess what they’re doing, how well they’re performing and whether they need to take corrective action, milestones provide structure to the general chaos that follows technological discontinuities. Milestones also shorten the innovation process by creating a sense of urgency that keeps everyone on task. Multifunctional teams are work multifunctional teams teams made up of people from different work teams composed departments. Multifunctional teams of people from different accelerate learning and understanding by departments mixing and integrating technical, marketing and manufacturing activities. By involving all key departments in development from the start, multifunctional teams speed up innovation through early identification of new ideas or problems that would typically not have been generated or addressed until much later. Powerful leaders provide the vision, discipline and motivation to keep the innovation process focused, on time and on target. Powerful leaders are able to get resources when they are needed, are typically more experienced, have high status in the company and are held directly responsible for the product’s success or failure. On average, powerful leaders can get innovation-related projects done nine months faster than leaders with little power or influence.

The experiential approach is used to manage innovation in highly uncertain environments during periods of discontinuous change. In contrast, the compression approach is used to manage innovation in more certain environments during periods of incremental change. Where the goals of the experiential approach are significant improvements in performance and the establishment of a new dominant design, the goals of the compression approach are lower costs and incremental improvements in the performance and function of the existing dominant design. The general strategies in each approach are different, too. With the experiential approach, the general strategy is to build something new, different and substantially better. Because there’s so much uncertainty – no one knows which technology will become the market leader – companies adopt a winner-takes-all approach by trying to create the market-leading, dominant design. With the compression approach, the general strategy is to compress the time and steps needed to bring about small, consistent improvements in performance and functionality. Because a dominant technology design already exists, the general strategy is to continue improving the existing technology as rapidly as possible. For example, after using an experiential approach and investing US$50 billion to develop its groundbreaking 787 Dreamliner passenger jet, Boeing is now switching to a compression approach to innovation.

SMART MGMT

CREATIVE WORK Stealing ideas is never a good idea. By taking credit for other people’s great work, you’re totally disregarding the efforts that they put into thinking of and developing the next great idea that will fuel your company’s success. But did you know that stealing ideas is also bad for the entire organisation? When you steal ideas from others, it actually squashes the creative powers in your company. After all, if someone else is just going to take credit for all of your creative work and get all of the benefits, then what’s the point? Why even bother thinking of anything innovative? So do the right thing and don’t steal others’ ideas. It will help keep the creative juices flowing.38 iStock.com/Bart Coenders

COMPRESSION APPROACH: MANAGING INNOVATION DURING INCREMENTAL CHANGE

Chief Operating Officer Dennis Muilenburg said, ‘In the past, we may have said our best engineers are working on the new thing. Now we want our best engineers working on innovative reuse.’36 Likewise, Ray Conner, CEO of Boeing’s commercial airplane unit, said, ‘It’s not to say you don’t innovate [but] how do you innovate to make it more producible? How do you innovate to make it more reliable?’37

In short, a compression approach to innovation assumes that innovation

compression approach to innovation an approach to innovation that assumes that incremental innovation can be planned using a series of steps and that compressing those steps can speed innovation

is a predictable process, that incremental innovation can be planned using a series of steps and that compressing the time it takes to complete those steps can speed up innovation. The compression approach to innovation has five aspects: planning, supplier involvement, shortening the time of individual steps, overlapping steps and multifunctional teams. In Chapter 5, planning was defined as choosing a goal and a method or strategy to achieve that goal. When planning for incremental innovation, the goal is to squeeze

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MGMT TREND

A 270 000-MEMBER IDEA MACHINE

iStock.com/Rudyanto Wijaya

In an effort to tap unaffiliated scientific talent and expertise, companies are turning to the likes of InnoCentive. Funded and launched by Eli Lilly in 2001, InnoCentive now boasts an army of 270 000 scientists willing to tackle problems posted to its website by companies like Procter & Gamble, DuPont and Boeing (called ‘Seekers’). Seekers pay ‘Solvers’ anywhere from $10 000 to $100 000 per solution. The purpose of the site is to spur innovation in chemistry, biology, biochemistry and materials science.39 On behalf of its partner companies, InnoCentive has paid contributors over $55 million for creative ideas.40

or compress development time as much as possible, and the general strategy is to create a series of planned steps to accomplish that goal. Planning for incremental innovation helps avoid unnecessary steps and enables developers to sequence steps in the right order to avoid wasted time and delays between steps. Planning also reduces misunderstandings and improves coordination. Most planning for incremental generational change innovation is based on the idea of change based on incremental improvements generational change. Generational to a dominant change occurs when incremental technological design improvements are made to a dominant such that the improved technology is fully technological design so that the improved backward compatible with version of the technology is fully backward the older technology compatible with the older version.41 Software is backward compatible if a new version of the software will work with files created by older versions. Most computers, for instance, have USB (universal serial bus) input slots to connect and power USB thumb drives, monitors or external hard drives used for backup storage. USB 3.1 (Gen 2), the latest USB standard, can transfer more than 10 Gbps (gigabytes per second), compared to USB 3.0 devices, which operate at 5 Gbps, or USB 2.0 devices, which operate at roughly 1/2 Gbps.42 What happens if you buy a new computer with USB 3.1 slots, but still own a USB 3.0 external hard drive and a USB 2.0 thumb drive? Both will work, but at slower speeds, because they are backward compatible with USB 3.1. 120

Because the compression approach assumes that innovation can follow a series of pre-planned steps, one of the ways to shorten development time is supplier involvement. Delegating some of the pre-planned steps in the innovation process to outside suppliers reduces the amount of work that internal development teams must do. Plus, suppliers provide an alternative source of ideas and expertise that can lead to better designs. Another way to shorten development time is simply to shorten the time of individual steps in the innovation process. A common way to do that is through computer-aided design (CAD). CAD speeds up the design process by allowing designers and engineers to make and test design changes using computer models rather than physically testing expensive prototypes. CAD also speeds innovation by making it easy to see how design changes affect engineering, purchasing and production. The big news in computer-aided design right now is the use of 3D printing to make low-cost prototypes from CAD models. The CAD drawing on the screen can now be quickly turned into a physical item made of plastic or metal for testing. In a sequential design process, each step must be completed before the next step begins. But sometimes multiple development steps can be performed at the same time. Overlapping steps shorten the development process by reducing delays or waiting time between steps. Warner Bros. used overlapping steps to reduce the time taken to make the entire series of eight Harry Potter films – one for each of the first six books and two for the final book in J. K. Rowling’s series. Because the actors were ageing and would soon resemble adults more than high school students, Warner Bros. used new directors and new production teams for each of the movies in the Harry Potter series so it could begin shooting the next film while the previous one was in postproduction and the one prior to that was in the theatres.43 After reading the next two sections on organisational change, you should be able to: ● discuss why not changing can lead to organisational decline. ● discuss the different methods that managers can use for better management of change as it happens.

LO4

ORGANISATIONAL DECLINE: THE RISK OF NOT CHANGING

Businesses operate in a constantly changing environment. Recognising and adapting to internal and external changes can mean the difference between continued success and going out of business. Companies that fail to change run the risk of organisational decline.44

Organisational decline occurs when companies don’t anticipate, recognise, neutralise or adapt to the internal or external pressures that threaten their survival.45 In other words, decline occurs when organisations don’t recognise the need for change. Nokia’s loss of market share in the mobile phone industry, dropping 23.8 per cent overall and 50.8 per cent in the smartphone segment during early 2012,46 is an example of organisational decline. In an effort to reverse this decline, Nokia sold its handset unit including mobile device manufacturing facilities to Microsoft Corporation in 2014 (though it didn’t sell its brand name ‘Nokia’). Finding no success with Microsoft’s Windows operated Nokia-Lumia phones, Nokia started to fight desperately to recover its position. In late 2014, Nokia partnered with Foxconn and produced Android tablets. In 2016, after the expiry of its non-compete agreement with Microsoft, Nokia produced Android-operated Nokia smartphone under HMD Global. In its debutant year 2017, Nokia Mobile sold 8.7 million smartphones, which claimed 1 per cent of the global market.

organisational decline a large decrease in organisational performance that occurs when companies don’t anticipate, recognise, neutralise or adapt to the internal or external pressures that threaten their survival

TABLE 7.1

There are five stages of organisational decline: blinded, inaction, faulty action, crisis and dissolution, which are outlined in Table 7.1.47 Note that because decline is reversible at each of the first four stages, not all companies in decline reach final dissolution. For example, GM is trying to aggressively cut costs, stabilise its shrinking market share and use innovative production techniques in an effort to reverse a decline that has lasted nearly a decade and resulted in all-time low stock prices.

LO5

MANAGING CHANGE

According to social psychologist Kurt change forces Lewin, change is a function of the forces forces that produce that promote change and the opposing differences in the form, quality or condition of an forces that slow or resist change. 48 organisation over time Change forces lead to differences in the form, quality or condition of an organisation over time. By contrast, resistance forces support the status quo; that is, the existing conditions in organisations. Change is

Five stages of organisational decline

Stage

Causes and effects

Blinded stage

• Decline begins because key managers fail to recognise the internal or external changes that will harm their organisations. • This ‘blindness’ may be due to a simple lack of awareness about changes or an inability to understand their significance. It may also come from the overconfidence that can develop when a company has been successful.

Inaction stage

• As organisational performance problems become more visible, management may recognise the need to change but still take no action. • The managers may be waiting to see if the problems will correct themselves. Or they may find it difficult to change the practices and policies that previously led to success. Possibly, too, they wrongly assume that they can easily correct the problems, so they don’t feel the situation is urgent.

Faulty action stage

• Faced with rising costs and decreasing profits and market share, management will announce ‘belt-tightening’ plans designed to cut costs, increase efficiency and restore profits. • Rather than recognising the need for fundamental changes, managers assume that if they just run a ‘tighter ship’, company performance will return to previous levels.

Crisis stage

• If this stage is reached, bankruptcy or dissolution (i.e. breaking up the company and selling off the various parts) is likely to occur unless the company completely reorganises the way it does business. • At this point, however, companies typically lack the resources to fully change how they run their businesses. Cutbacks and layoffs will have reduced the level of talent among employees. Furthermore, talented managers who were savvy enough or well informed enough to see the crisis coming will have found jobs with other companies (often with competitors).

Dissolution stage

• After failing to make the changes needed to sustain the organisation, the company is dissolved through bankruptcy proceedings or by selling assets in order to pay suppliers, banks and creditors. • At this point, a new CEO may be brought in to oversee the closing of stores, offices and manufacturing facilities, the final layoff of managers and employees, and the sale of assets.

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difficult under any circ*mstances. Indeed, in a study of heart bypass patients, doctors told participants straightforwardly to change their eating and health habits or they would die. Unbelievably, a full 90 per cent of participants did not change their habits at all!49 This fierce resistance to change also applies to organisations. Resistance to change is caused by resistance to change self-interest, misunderstanding and opposition to change distrust, and a general intolerance of resulting from selfchange.50 People resist change out of selfinterest, misunderstanding and distrust, and a general interest because they fear that change intolerance of change will cost or deprive them of something they value. For example, resistance might stem from a fear that the changes will result in a loss of pay, power, responsibility or even perhaps one’s job. The Associated Press (AP), a news agency employing over 10 000 journalists worldwide, recently changed its policy on employees’ use of social media. According to the policy, any material on an employee’s Facebook site, even messages from friends, must conform to AP standards concerning decency and political neutrality. The policy states, ‘Monitor your [Facebook] profile page to make sure material posted by others doesn’t violate AP standards: any such material should be deleted’. AP reporters resisted the change in policy, not only because of the potential violation of free speech rights, but also because they could be suspended or fired for what other people posted on their Facebook pages.51 People also resist change because of misunderstanding and distrust; they don’t understand the change or the reasons for it, or they distrust the people, typically management, behind the change. However, resistance isn’t always visible at first; some of the strongest resisters may initially support the changes in public, nodding and smiling their agreement, but then ignore the changes in private and do their jobs as they always have. Management consultant Michael Hammer calls this deadly form of resistance the ‘Kiss of Yes’.52 Resistance may also come from a generally low tolerance for change. Some people are simply less capable of handling change than others. People with a low tolerance for change feel threatened by the uncertainty associated with change and worry that they won’t be able to learn the new skills and behaviours needed to successfully negotiate change in their companies. In the next section you will learn about: ● managing resistance to change ● what not to do when leading organisational change ● different change tools and techniques. resistance forces forces that support the existing state of conditions in organisations

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MANAGING RESISTANCE TO CHANGE According to social psychologist Kurt Lewin, managing organisational change is a basic process of unfreezing, change intervention and refreezing. Unfreezing is getting the people affected unfreezing getting the people affected by change to believe that change is by change to believe that needed. During the change intervention change is needed itself, employees and managers change change intervention the process used to get their behaviour and work practices. employees and managers to Refreezing is supporting and reinforcing change their behaviour and work practices the new changes so that they ‘stick’. refreezing Resistance to change is an example of supporting and reinforcing frozen behaviour. Given the choice between new changes so that they ‘stick’ changing and not changing, most people would rather not change. Because resistance to change is natural and inevitable, managers need to unfreeze resistance to change to create successful change programs.The following methods can be used to manage resistance to change: education and communication, participation, negotiation, top management support and coercion.53 When resistance to change is based on insufficient, incorrect or misleading information, managers should educate employees about the need for change and communicate change-related information to them. Managers must also supply the information and funding or other support employees need to make changes. For example, resistance to change can be particularly strong when one company buys another company. A common technique used by organisations to reduce resistance to change is to designate mentors – staff who are in a position to explain change – to coach individuals, groups and departments about new procedures and practices. As one healthcare industry manager says, ‘Keeping employees informed every step of the way is so important. It’s also important to tell the truth, whatever you do. If you don’t know, say you don’t know’.54 Another way to reduce resistance to change is to have those affected by the change participate in planning and implementing the change process . Employees who participate have a better understanding of the change and the need for it. The San Diego Zoo and Wild Animal Park took innovative steps in order to reposition itself as a leader in conservation. A core element of the planning was input from the zoo’s staff, as the strategy team invited employees from all departments to provide insights on what they felt the zoo did well and what it could do better. Through this process, the zoo enacted a plan that would highlight its internal resources and capabilities through an expansion of its consulting business, the use of facilities to display sustainable technology and products, and hosting events that would highlight the knowledge of zoo scientists.56

MGMT IN PRACTICE

WHAT TO DO WHEN EMPLOYEES RESIST CHANGE Unfreezing Share reasons

Share the reasons for change with employees.

Empathise

Be empathetic to the difficulties that change will create for managers and employees.

Communicate

Communicate the details simply, clearly, extensively, verbally and in writing.

Change Benefits

Explain the benefits, ‘what’s in it for them’.

Champion

Identify a highly respected manager to manage the change effort.

Input

Allow the people who will be affected by change to express their needs and offer their input.

Timing

Don’t begin change at a bad time; for example, during the busiest part of the year or month.

Security

If possible, maintain employees’ job security to minimise fear of change.

Training

Offer training to ensure that employees are both confident and competent to handle new requirements.

Pace

Change at a manageable pace. Don’t rush.55

Employees are also less likely to resist change if they are allowed to discuss and agree on who will do what after change occurs. In particular, resistance to change decreases when change efforts receive significant managerial support. Managers must do more than talk about the importance of change, though. They must provide the training, resources and autonomy to make change happen. For example, with a distinguished 80-year history of handdrawing Hollywood’s most successful animated films (Snow White, Bambi, The Little Mermaid, Beauty and the Beast), animators at Walt Disney Company naturally resisted the move to computer-generated (CG) animation. Disney supported the difficult change by putting all of its animators through a six-month ‘CG Boot Camp’, where they learned how to ‘draw’ animated characters with computers.57 Finally, resistance to change can be managed through coercion, or the use of coercion using formal power and formal power and authority to force others authority to force others to to change. For example, managers could change indicate that employees who are not willing

to adopt new, changed ways of working will either be demoted or made redundant. Because of the intense negative reactions this can create (e.g. fear, stress, resentment, sabotage of company products or equipment), coercion should only be used when a crisis exists or when all other attempts to reduce resistance to change have failed. People don’t like being threatened, pushed or forced, and they will often push back!

WHAT NOT TO DO WHEN LEADING CHANGE So far, you’ve learned about the basic change process (unfreezing, change, refreezing) and managing resistance to change. However, Harvard Business School professor John Kotter argues that knowing what not to do is just as important as knowing what to do when it comes to achieving successful organisational change.58 On 3 October 2017, Toyota announced the massive change of shutting down its car-manufacturing factory in Australia. The closure marked the end of 54 years of manufacturing for Toyota in Australia, producing more than 2 million vehicles in the factory since it opened in 1995. Then Toyota Australia president and CEO Max Yasuda led the change in the right way. He informed the urgency of the change to employees in 2014, far ahead of the closure date in 2017. He explained to his employees, ‘This is devastating news for all of our employees who have dedicated their lives to the company during the past 50 years.’ Then added, ‘We did everything that we could do to transform our business, but the reality is that … an unfavourable dollar rate, high operating costs, low economies of scale, a fragmented market and the effect of free-trade agreements were all contributing factors to this change.’59 Top leaders of Toyota Australia further managed the change by re-appointing one-third of its redundant employees to its ‘national sales and distribution unit’. The company also provided exclusive training to other redundant employees so that they could work in other manufacturing factories. The CEO stated, ‘Our focus will now be to work with our employees and the unions as we transition to a national sales and distribution company. Support services will be available to our employees … and we will do everything that we can to minimise the impact of this change on our employees.’60 After completion of all these change-management measures, on the day of closure the Chief Information Officer expressed his satisfaction: ‘The change brought about by the end of manufacturing is “huge”. But the mood of employees today, given the circ*mstances, is positive.’ That is how Toyota led a smooth transition and change.61 Managers commonly make certain errors when they lead change. The first two errors occur during the unfreezing phase, when managers try to get the people affected by change to believe that change is really needed. The first and

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that more than half of all change efforts fail because the people affected are not convinced that change is necessary. People will feel a greater sense of urgency if a leader in the company makes a public, candid assessment of the company’s problems and weaknesses.62 The second mistake that occurs in the unfreezing process is not creating a powerful enough coalition. Change often starts with one or two people, but to build enough momentum to change an entire department, division or company, change has to be supported by a critical and growing group of people. Besides top management, Kotter recommends that key employees, managers, board members, customers and even union leaders be members of a core change coalition, which guides and supports organisational change.63 For GE’s Ecomagination initiative, that core change coalition included a group of engineers who were responsible for finding ways to achieve the company’s overall goals of reducing emissions and water usage while increasing energy efficiency. Initiative leader Lorraine Bolsinger said, ‘We started doing what we called “treasure hunts” [to] see if there were ways to use our own products at our own facilities to improve efficiency.’64 Many of these treasure hunts paid off. For example, one team at a jet engine testing facility figured out how to save 3 million gallons of jet fuel per year by moving engine tests indoors, reducing the run times needed for accurate testing and better calculating the placement of weights used to balance the hundreds of fans on jet engines, resulting in a smoother, easier-turning, more efficient jet engine.65 The next three errors that managers make occur during the change phase, when a change intervention is used to try to get employees and managers to change their behaviour and work practices. Lacking a vision for change is a significant error at this point. As you learned in Chapter 5, a vision is a statement of a company’s purpose or reason for existing. A vision for change makes clear where a company or department is headed and why the change is occurring. Change efforts that lack vision tend to be confused, chaotic and contradictory. By contrast, change efforts guided by visions are clear and easy to understand and can be effectively explained in less than five minutes. Undercommunicating the vision by a factor of 10 is another mistake in the change phase. According to Kotter, companies mistakenly hold just one meeting to announce the vision, or the new vision receives heavy emphasis in executive speeches or company newsletters, and then senior management undercuts the vision by behaving in ways contrary to it. Successful communication of the vision requires that top managers link everything the company

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potentially most serious error is not establishing a great enough sense of urgency. Indeed, John Kotter estimates

A public, candid assessment of the company’s problems and weaknesses, delivered by a leader, can help communicate a business’ urgency to change

MGMT IN PRACTICE

ERRORS MANAGERS MAKE WHEN LEADING CHANGE Unfreezing 1 Not establishing a great enough sense of urgency. 2 Not creating a powerful enough guiding coalition. Change 3 Lacking a vision. 4 Undercommunicating the vision by a factor of 10. 5 Not systematically planning for and creating short-term wins. Refreezing 6 Declaring victory too soon. 7 Not anchoring changes in the corporation’s culture.66

does to the new vision and that they ‘walk the talk’ by behaving in ways consistent with the vision.67 Another error in the change phase is not systematically planning for and creating short-term wins. Most people don’t have the discipline and patience to wait two years to see if the new change effort works. Change is threatening and uncomfortable, so people need to see an immediate payoff if they are to continue to support change. Kotter recommends that managers create short-term wins by actively picking people and projects that are likely to work extremely well early in the change process.68 The last two errors that managers make occur during the refreezing phase, when attempts are made to support

and reinforce changes so that they ‘stick’. The first is declaring victory too soon, a tempting mistake in the refreezing phase. Managers typically declare victory right after the first large-scale success in the change process. Declaring success too early has the same effect as draining the petrol out of a car: it stops change efforts dead in their tracks. With success declared, supporters of the change process stop pushing to make change happen. After all, why push when success has been achieved? Rather than declaring victory, managers should use the momentum from short-term wins to push for even bigger or faster changes. This maintains urgency and prevents change supporters from slacking off before the changes are frozen into the company’s culture. The last mistake that managers make is not anchoring changes in the corporation’s culture. An organisation’s culture

is the set of key values, beliefs and attitudes shared by organisational members that determines the ‘accepted way of doing things’ in a company. As you learned in Chapter 3, changing cultures is extremely difficult and slow. According to Kotter, two things help anchor changes in a corporation’s culture. The first is directly showing people that the changes have actually improved performance. The second is to make sure that the people who get promoted fit the new culture. If they don’t, it’s a clear sign that the changes were only temporary.69

CHANGE TOOLS AND TECHNIQUES

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Imagine that your boss came to you and said, ‘All right, genius, you wanted it. You’re in charge of turning around the division’. How would you APPLY Get an overview of start? Where would you strategic change through a begin? How would you results-driven approach encourage change-resistant managers to change? What would you do to include others in the change process? How would you get the change process off to a quick start? Finally, what long-term approach would you use to promote long-term effectiveness and performance? Results-driven change, the General Electric workout and organisational development are different change tools and techniques that can be used to address these issues. One of the reasons that organisational change efforts fail is that they are activity oriented rather than results oriented, meaning that they focus primarily on changing company procedures, management philosophy or employee behaviour. Typically, there is much build-up and preparation as consultants are brought in, presentations are made, books are read and employees and managers are trained. There’s a tremendous emphasis on ‘doing

things the new way’. But, with all the focus on activities, on ‘doing’, almost no attention is paid to results; to seeing if all this activity has actually made a difference. By contrast, results-driven change results-driven replaces the emphasis on activity with a change created quickly laser-like focus on quickly measuring and change by focusing on the improving results.70 For example, top measurement and managers at the Korean car manufacturer improvement of results Hyundai knew that if they were to compete successfully against the likes of the Japanese companies Honda and Toyota, they would have to substantially improve the quality of their cars. Consequently, top managers guided the company’s results-driven change process by increasing the number of quality teams from 100 to 865. Then, all employees were required to attend seminars on quality improvement and use the results of industry quality studies, like those published annually by J.D. Power and Associates, as their benchmark. Before the change, a new Hyundai averaged 23.4 initial quality problems; after the resultsdriven change efforts, that number dropped to 9.6.71 Now, according to J.D. Power and Associates, Hyundai ranks fourth overall out of 33 automakers in initial car quality, behind Lexus, Porsche and Cadillac.72 Another advantage of results-driven change is that managers introduce changes in procedures, philosophy or behaviour only if they are likely to improve measured performance. In other words, managers and employees actually test to see if changes make a difference. A third advantage of results-driven change is that quick, visible improvements motivate employees to continue to make additional changes to improve measured performance. Table 7.2 describes the basic steps of results-driven change. TABLE 7.2

Results-driven change programs

1 Management should create measurable, short-term goals to improve performance. 2 Management should use action steps only if they are likely to improve measured performance. 3 Management should stress the importance of immediate improvements. 4 Consultants and staffers should help managers and employees achieve quick improvements in performance. 5 Managers and employees should test action steps to see if they actually yield improvements. Action steps that don’t should be discarded. 6 It takes few resources to get results-driven change started. Source: Based on R. H. Schaffer & H.A. Thomson, JD, ‘Successful change programs begin with results’, Harvard Business Review on Change (Boston: Harvard Business School Press, 1998): 189–213.

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The General Electric workout is a special kind of results-driven change. It is a three-day meeting that brings together managers and employees from different levels and parts of an organisation to quickly generate and act on solutions to specific business problems.73 On the first morning of a workout, the boss discusses the agenda and targets specific business problems that the group is to try to solve. Then the boss leaves, and an outside facilitator breaks up the group – typically 30 to 40 people – into five or six teams and helps them spend the next day and a half discussing and debating solutions. On day three, in what GE calls a ‘town meeting’, the teams present specific solutions to their boss, who has been gone since day one. As each team’s spokesperson

Alamy Stock Photo/Greg Balfour Evans

General Electric workout a three-day meeting in which managers and employees from different levels and parts of an organisation quickly generate and act on solutions to specific business problems

Hyundai used a process of resultsdriven change to significantly improve the initial quality of their cars

TABLE 7.3

makes specific suggestions, the boss has only three options: agree on the spot, say no or ask for more information so that a decision can be made by a specific, agreed-on date.74 Organisational development is organisational both a philosophy and a series of planned development change interventions designed to improve a philosophy and collection of planned change an organisation’s long-term health and interventions designed to performance. Organisational development improve an organisation’s long-term health and takes a long-range approach to change. It performance assumes that top management support is necessary for change to succeed; it creates change by educating employees and managers to change ideas, beliefs and behaviours so that problems can be solved in new ways; and it emphasises employee participation in diagnosing, solving and evaluating problems.75 As shown in Table 7.3, organisational development interventions begin with the recognition of a problem. Then, the company designates a change change agent agent to be formally in charge of guiding the person formally in the change effort. This person can be charge of guiding a change effort someone from the company or a professional consultant. The change agent clarifies the problem, gathers information, works with decision makers to create and implement an action plan, helps to evaluate the plan’s effectiveness, implements the plan throughout the company and then leaves (if from outside the company) after making sure the change intervention will continue to work.

General steps for organisational development interventions

1 Entry

A problem is discovered and the need for change becomes apparent. A search begins for someone to deal with the problem and facilitate change.

2 Startup

A change agent enters the picture and works to clarify the problem and gain commitment to a change effort.

3 Assessment & feedback

The change agent gathers information about the problem and provides feedback about it to decision makers and those affected by it.

4 Action planning

The change agent works with decision makers to develop an action plan.

5 Intervention

The action plan, or organisational development intervention, is carried out.

6 Evaluation

The change agent helps decision makers assess the effectiveness of the intervention.

7 Adoption

Organisational members accept ownership and responsibility for the change, which is then carried out through the entire organisation.

8 Separation

The change agent leaves the organisation after first ensuring that the change intervention will continue to work. Source: W. J. Rothwell, R. Sullivan & G. M. McLean, Practicing Organizational Development: A guide for consultants (San Diego, CA: Pfeiffer & Co., 1995).

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TABLE 7.4

Find out more about your attitude towards change and innovation with this self-assessment

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increase interpersonal effectiveness by helping people become aware of their attitudes and behaviours and acquire new skills and knowledge. Table 7.4 describes the most frequently used organisational development interventions for large systems, small groups and individuals. PPLY E A

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Organisational development interventions are aimed at changing large systems, small groups or individuals.76 More specifically, the purpose of large system interventions is to change the character and performance of an organisation, business unit or department. Small group intervention focuses on assessing how a group functions and helping it work more effectively to accomplish its goals. Individual-focused intervention is intended to

Different kinds of organisational development interventions

Large system interventions Socio-technical systems

An intervention designed to improve how well employees use and adjust to the work technology used in an organisation.

Survey feedback

An intervention that uses surveys to collect information from the members, reports the results of that survey to the members and then uses those results to develop action plans for improvement.

Team building

An intervention designed to increase the cohesion and cooperation of work group members.

Unit goal setting

An intervention designed to help a work group establish short- and long-term goals. Person-focused interventions

Counselling/coaching

An intervention designed so that a formal helper or coach listens to managers or employees and advises them on how to deal with work or interpersonal problems.

Training

An intervention designed to provide individuals with the knowledge, skills or attitudes they need to become more effective at their jobs. Source: W. J. Rothwell, R. Sullivan & G. M. McLean, Practicing Organizational Development: A guide for consultants (San Diego, CA: Pfeiffer & Co., 1995).

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Global management

LEARNING OUTCOMES

1 Understand the concept of globalisation, and discuss the impact of global business and the trade rules that govern it.

WHAT IS GLOBALISATION?

2 Explain how to find a favourable business climate.

3 Explain why companies choose to standardise or adapt their business procedures when operating internationally.

4 Discuss the importance of identifying and adapting to cultural differences.

5 Explain the different ways that companies can organise to do business globally.

6 Explain how to successfully prepare workers for international assignments.

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In the news media, in politics, in business and in economics, ‘globalisation’ is now one of the most commonly used expressions. Go to any dictionary printed more than 15 or 20 years ago, and you won’t find it mentioned. This tells us that it’s a ‘modern’ phenomenon, but what does it mean? There is no short, simple or generally accepted definition of globalisation. In fact, it is estimated that there are hundreds of varying definitions used in scholarly literature.1 Obviously, globalisation must be much more than international trade, because there has been international trade – and quite welldeveloped and large-scale trade – for thousands of years. Ancient examples are the Babylonian merchants of the Mediterranean Sea, and the famous Silk Road linking China, India and the Middle East. In more recent times (from the 1400s) we have the examples of the Portuguese, Spanish, British and other European colonial nations spreading their influence and trade into Africa, India and ‘the New World’, or Australia’s economic foundations on the exporting of wool, wheat or gold from about the 1850s. Many people credit Theodore Levitt with popularising the term through his Harvard Business Review article ‘The globalization of markets’ in 1983.2 Levitt was referring to the emergence of global markets for standardised consumer products on a new and massive scale. While Levitt may indeed have given the word its modern prominence, it was probably in limited use from the 1940s or 1950s.Trying to merge the main points from the multiple globalisation definitions, we could say: Globalisation is the accelerating, deepening and broadening the accelerating, deepening and broadening process of integration and process of integration and connectedness connectedness affecting affecting the movement of goods, services, the movement of goods, services, communications communications and ideas between different and ideas between countries, and increasingly, worldwide.3

different countries

Shutterstock.com/Petr Kopka

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Buying a watch that was made in Switzerland from Watch Shoppe in Kuala Lumpur, to be worn in Australia, is a great example of participating in global business

How can you be sure that the way you run your business in one country is the right way to run that business in another?This chapter discusses how organisations answer that question. We will start by examining global business in two ways: first, by exploring its impact on Asia–Pacific businesses, and second, by reviewing the basic rules and agreements that govern global trade. Next, we will examine how and when companies go global by examining the trade-off between consistency and adaptation, and by discussing how to organise a global company. Finally, we will look at how companies decide where to expand globally, including finding the best business climate, adapting to cultural differences and better preparing employees for international assignments. So, what is global business? global business Global business is the buying and the buying and selling selling of goods and services by people of goods and services from different countries. The watch on by people from different countries my wrist as I write this chapter was purchased at a Watch Shoppe store in Kuala Lumpur International Airport in Malaysia.The watch was made in Switzerland and I’m wearing it in Australia, and I participated in global business when I paid for the watch with my Visa credit card. The Watch Shoppe, for its part, had already paid the import/export company, which had paid the company that employs the Swiss managers and workers who made my watch. What would be really great is if the Swiss watchmaker had a better idea of geography outside Europe. When it came time to have my watch serviced I found that the only authorised service agent for Australia is in Brisbane, about 2000 km away. When contacted by email the watch company said

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WHAT IS GLOBAL BUSINESS?

it was usual to have only one agent in each country and suggested that I could ‘easily drive there’. As you’ll see as you read this chapter, going global is more involved than just sending your goods for sale to another country. Of course, there is more to global business than buying imported products. After reading the next section, you should be able to discuss the impact of global business and the trade rules PPLY E A Get started with the media and agreements that quiz: Holder Outerwear: Managing in a govern it. Global Environment

GLOBAL BUSINESS, TRADE RULES AND TRADE AGREEMENTS

If you want a simple demonstration of the impact of global business, look at the tag on your shirt, the inside of your shoes, on the back of your computer and the inside of your mobile phone. Chances are that all of these items were made in different places around the world. As I write this, my shirt, shoes, computer and mobile phone were made in Malaysia, China, Japan and South Korea. Where were yours made? Let’s learn more about: ● the impact of global business ● how tariff and non-tariff trade barriers have historically restricted global business ● how today, global and regional trade agreements are reducing those trade barriers worldwide ● how consumers are responding to those changes in trade rules and agreements.

THE IMPACT OF GLOBAL BUSINESS Multinational corporations are

multinational

corporations that own businesses in two corporation or more countries. In 1970, more than a corporation that owns businesses in two or more half of the world’s 7000 multinational countries corporations had their headquarters in just two countries: the United States and the United Kingdom. According to the United Nations Conference on Trade and Development (UNCTAD), there are now over 100 000 multinational corporations, with the majority of them having their headquarters in a wide range of countries – including Germany, Italy, Canada, Japan, China, Australia and South Africa. So, today, multinational companies can be found by the thousands all over the world! direct foreign Another way to appreciate the impact investment method of investment in of global business is by considering direct awhich a company builds foreign investment. Direct foreign a new business or buys investment occurs when a company an existing business in a foreign country

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builds a new business or buys an existing business in a foreign country. Malaysian car manufacturer Proton made a direct foreign investment when it purchased the legendary British car maker Lotus. Germany’s BMW made a direct foreign investment when it invested in a joint venture with China’s Brilliance Group to build a state-of-the-art car manufacturing facility in Shenyang, Liaoning province.4 Royal Dutch Shell, the Netherlands-based oil company, made a direct foreign investment into Africa by buying Cove Energy, an oil and gas exploration company with assets in Mozambique, Tanzania and Kenya, for $1.6 billion in 2012.5 Of course, this flow of investment is not one-way. Companies from many other countries also own businesses in, say, the United Kingdom or have partnerships with companies in China or have investments in Australia. Companies from the US, the UK, Japan, Germany, the Netherlands, Canada, France, Switzerland and Luxembourg have large direct foreign investment in the Asia–Pacific region. In 2017, foreign companies invested more than US$4 trillion a year to do business in the United States.6 Australia is ranked in the top 10 globally in terms of investor confidence, and direct foreign investment has been growing by at least $61 billion a year to 2016–2017 (see Figure 8.1).7 Direct foreign investment in the Asia–Pacific region is just part of the story. Companies from the region have also made large direct foreign investments in countries throughout the world. Globally, four of the largest foreign investors are the US, Japan, China and the UK. Overall, the combined direct foreign investment of these four nations exceeds US$727 billion a year to do business in other countries.8

So whether foreign companies invest in the Asia–Pacific region or Asian companies invest abroad, direct foreign investment is an increasingly important and common method of conducting global business.

Trade barriers Although today’s consumers seem not to care where the products they buy come from (as will be discussed later in this chapter), national governments have traditionally preferred that consumers buy domestically made products in hopes that such purchases would increase the number of domestic businesses and workers. Indeed, governments have done much more than hope that you will buy from domestic companies. Historically, governments have actively used trade barriers to make it much more expensive or difficult (or trade barriers sometimes impossible) for consumers government-imposed to buy or consume imported goods. For regulations that increase cost and restrict the example, in 2018 the US Trump the number of imported goods administration placed a 25 per cent tariff on steel and 10 per cent on aluminium imported into the US.9 The tariff on steel and aluminium, aimed at China but affecting other countries, resulted in the European Union (EU) putting restrictions on the importation of US made Harley Davidson motorcycles – adding around $2200 to their price in the EU.10 In China, there is a 25 per cent tariff on imported motor vehicles.11 Malaysia imposes a 30 per cent tariff on imported cars from countries with a ‘Most Favoured Nation’ status and a 10 per cent tariff on cars from ASEAN countries – but all face a local excise duty of 75 per cent.12 By establishing these

Foreign Investment in Australia, 2017 ($ Billion) $1 000 $900

$897

$800 $700 $600 $481

$500 $400

$305

$300

$219 $200 $82

$100

$117 $65

$0 United States of America

FIGURE 8.1

United Kingdom

Belgium

Japan

Singapore

China

Hong Kong (SAR of China)

Direct foreign investment for 2017

Source: Adapted using statistics from Department of Foreign Affairs and Trade (https://dfat.gov.au/trade/resources/investment-statistics/Pages/statistics-on-who-investsin-australia.aspx). CC BY 3.0 AU licence (https://creativecommons.org/licenses/by/3.0/au/).

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restrictions and taxes, governments are engaging in protectionism, which is the use of trade barriers to protect local companies and their workers from foreign competition. Governments have used two general kinds of trade barriers: tariff and nontariff barriers. A tariff is a direct tax on imported goods. Like the Australian 5 per cent tax on imported textiles, clothing and footwear, tariffs increase the cost of imported goods relative to that of domestic goods. Non-tariff barriers are non-tax methods of increasing the cost or reducing the volume of imported goods. There are five types of non-tariff barriers: quotas, voluntary export restraints, government import standards, government subsidies and customs valuation/ classification. Because there are so many different kinds of non-tariff barriers, they can be an even more potent method of shielding domestic industries from foreign competition. Quotas are specific limits on the quota a limit on the number number or volume of imported products. or volume of imported For example, the Chinese government products only allows 34 imported movies each year. China also limits the amount of foreign content available on video-streaming websites to no more than 30 per cent. To get around the quota, films must be at least partially shot in China, co-financed by a Chinese firm and have some Chinese cultural elements.13 Like quotas, voluntary export voluntary export restraints limit the amount of a product restraints voluntarily imposed limits that can be imported annually. The on the number or volume difference is that the exporting country, of products exported to a particular country rather than the importing country, imposes restraints. Usually, however, the ‘voluntary’ offer to limit exports occurs because the importing country has implicitly threatened to impose quotas. For example, to protect Brazilian car manufacturers from cheaper Mexican-made cars, the Brazilian iStock.com/ricardoazoury

protectionism a government’s use of trade barriers to shield domestic companies and their workers from foreign competition tariff a direct tax on imported goods non-tariff barriers non-tax methods of increasing the cost or reducing the volume of imported goods

To protect their automotive industry, the Brazilian government convinced Mexico to ‘voluntarily’ limit exports of Mexican-made vehicles to Brazil

government convinced Mexico to ‘voluntarily’ restrict automobile exports to Brazil to no more than $1.55 billion a year for three years.14 In 2015 Mexico and Brazil agreed to continue the voluntary restriction until 2019. According to the World Trade Organization (WTO), voluntary export restraints are illegal and should not be used to restrict imports.15 In theory, government import government import standards are established to protect the standard a standard ostensibly health and safety of citizens. In effect, established to protect such standards can often act to restrict the health and safety of citizens but, in reality, or ban imported goods. For example, often used to restrict New Zealand apple growers were imports prevented from selling their fruit in Australia because of the presence of the fire blight bacteria in some New Zealand orchards. This was effectively a ban on New Zealand apple exports to Australia. The ban on the importation of New Zealand apples into Australia was lifted in 2011. Similarly, Japan banned the importation of nearly all US apples, which are one-third the cost of Japanese apples. The US apple ban was also imposed by the Japanese government to prevent the transmission of fire blight bacteria to Japanese apple orchards. Both New Zealand and US farmers have argued that the Australian and Japanese governments were actually using this official import standard to protect the economic interests of their apple farmers. US and NZ farmers took their argument to the WTO, which ruled that there was no scientific basis for the bans, thus forcing Japan and Australia to allow US and New Zealand apples to be imported without restrictions.16 Many nations also use subsidies, subsidies such as long-term low-interest loans, cash government loans, grants tax deferments given grants and tax deferments, to develop and to domestic companies to and protect companies in special protect them from foreign industries. Not surprisingly, many competition businesses complain about what they see as unfair trade practices when the foreign companies they are competing with receive government subsidies.17 In 2016, the WTO ruled that the European Union illegally provided billions in subsidies to Airbus Group SE, a European conglomerate that designs and manufactures passenger jets. The office of the US Trade Representative said, ‘The EU did not come into compliance with respect to the subsidies previously found, and it further breached WTO rules by granting more than $4 billion in new subsidized financing for the A350XWB [Airbus’s long-haul plane].’18 US Trade Representative Michael Froman said, ‘EU aircraft subsidies have cost American companies tens of billions of dollars in lost revenue.’19 The United States indicated that Airbus received EU subsidies totalling US$22 billion and that it would seek US$10 billion a year in retaliatory tariffs.20 The European Union is appealing the fine.

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customs classification a classification assigned to imported products by government officials that affects the size of the tariff and imposition of import quotas

The last type of non-tariff barrier is

customs classification. As products are

imported into a country, they are examined by customs agents, who must decide into which of the many thousands of categories they should classify a product (see the Tariff Schedule of Australia21 for more information). Classification is important because the category assigned by customs agents can greatly affect the size of the tariff and whether the item is subject to import quotas. For example, in the Tariff Schedule of Australia, there are several customs classifications for imported tyres. The tariff on imported tyres from most other countries is 5 per cent for car, bus or truck tyres, with different rates for agricultural vehicles and zero for motorcycle tyres. Importers are expected to ‘self-assess’ their classification, with potentially heavy penalties for wrong assessment.22

TRADE AGREEMENTS Thanks to the trade barriers described above, buying imported goods has often been much more expensive and difficult than buying domestic goods. During the 1990s, however, the regulations governing global trade were transformed. The most significant change was that 124 countries agreed to adopt the General General Agreement on Tariffs and Trade (GATT) a worldwide trade agreement that reduced and eliminated tariffs, limited government subsidies and established protections for intellectual property World Trade Organization (WTO) the successor to GATT, it is the only international organisation dealing with the global rules of trade between nations; it ensures that trade flows as smoothly, predictably and freely as possible

Agreement on Tariffs and Trade (GATT). Although GATT itself was replaced by the World Trade Organization (WTO) in 1995, the

changes that it made continue to encourage international trade. Through tremendous decreases in tariff and non-tariff barriers, GATT made it much easier and cheaper for consumers in all countries to buy imported products. First, tariffs were cut by 40 per cent on average worldwide by 2005. Second, tariffs were eliminated in 10 specific industries: beer, alcohol, construction equipment, farm machinery, furniture, medical equipment, paper, pharmaceuticals, steel and toys. Third, stricter limits were put on government subsidies. Fourth, GATT established protections for intellectual property, such as trademarks, patents and copyrights. Protection of intellectual property has become an increasingly important issue in global trade because of widespread product piracy. For example, according to the International Federation of the Phonographic Industry, which represents the global recording industry, 95 per cent of all music downloads violate copyrights and one-third of all Internet users download music from illegal access sites.23 Likewise, according to a 2018 report from the BSA/ The Software Alliance, 37 per cent of all software used in the world is pirated. The same report states that malware

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(malicious code often hidden in pirated software) is costing companies US$359 billion a year.24

MGMT FACT

WORLD TRADE ORGANIZATION Location: Geneva, Switzerland

Functions:

Established: 1 January 1995

Administering WTO trade agreements

Created by: Uruguay Round negotiations (1986–94)

Forum for trade negotiations

Membership: 164 countries (31 December 2018)

Handling trade disputes

Budget: 197 million Swiss francs for 2017

Monitoring national trade policies

Secretariat staff: 634

Technical assistance and training for developing countries

Head: Roberto Azevedo (Director-General)

Cooperation with other international organisations

Source: World Trade Organization, ‘Fact file: what is the WTO?’, 2013; World Trade Organization, ‘WTO budget 2017’, https://www.wto.org/english/thewto_e/secre_e/budget_e/budget2017_e.pdf.

In Australia, a survey run by the Department of Communications and the Arts estimates that about 43 per cent of consumers had committed at least some copyright violations by illegal downloading of files – a very high level compared with other countries such as the United Kingdom, where it was reported as 21 per cent.25 Finally, trade disputes between countries now are fully settled by arbitration panels from the WTO. In the past, countries could use their veto power to cancel a panel’s decision. For instance, the French government routinely vetoed rulings that its large cash grants to French farmers were unfair subsidies. Now, however, countries which are members of the WTO no longer have veto power, so WTO rulings are complete and final. The second major development that regional trading has reduced trade barriers has been the zones creation of regional trading zones, in areas in which tariff and non-tariff barriers on trade which tariff and non-tariff barriers are between countries are reduced or eliminated for countries within reduced or eliminated the trading zone. The largest and most important trading zones are: ● Europe: the Maastricht Treaty ● Asia: the Association of Southeast Asian Nations (ASEAN), and Asia–Pacific Economic Cooperation (APEC) ● North America: United States–Mexico–Canada Agreement (USMCA) ● Pacific: Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam.

Maastricht Treaty of Europe Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom (EU membership ends on 31 October, 2019). ASEAN (Association of Southeast Asian Nations) Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. APEC (Asia–Pacific Economic Cooperation) Australia, Canada, Chile, the People's Republic of China, Hong Kong (China), Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, the United States, and all members of ASEAN except Cambodia, Lao PDR, and Myanmar.

NAFTA (North American Free Trade Agreement) Canada, Mexico, and the United States. CAFTA-DR (Dominican Republic-Central American Free Trade Agreement) Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States. UNASUR (Union of South American Nations) Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname, Uruguay, and Venezuela. Tripartite Free Trade Agreement (TFTA) Angola, Botswana, Burundi, Comoros, Djibouti, Democratic Republic of the Congo, Egypt, Eritrea, Ethiopia, Kenya, Lesotho, Libya, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Seychelles, South Africa, South Sudan, Sudan, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe.

FIGURE 8.2

Global map of regional trade agreements

The map in Figure 8.2 shows the extent to which free trade agreements govern global trade. Association of The Association of Southeast Southeast Asian Nations (ASEAN) Asian Nations (ASEAN) and Asia– a regional trade agreement between Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam Asia–Pacific Economic Cooperation (APEC) a regional trade agreement between Australia, Canada, Chile, the People’s Republic of China, Hong Kong, Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, the United States and all the members of ASEAN except Cambodia, Laos and Myanmar

Pacific Economic Cooperation (APEC) are the two largest and most important regional trading groups in Asia. ASEAN is a trade agreement between Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, which form a market of more than 620 million people. Total US goods and ser vices trade with ASEAN countries exceeds A$325 billion a year.26 In fact, the United States is ASEAN’s fourth largest trading partner (China is its largest), and ASEAN’s member nations constitute the fifth-largest

trading partner of the United States. ASEAN’s members have agreed to create an ASEAN-free trade area beginning in 2015 for the six original countries (Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand) and in 2018 for the newer member countries Cambodia, Lao PDR, Myanmar and Vietnam.27 APEC is a broader agreement that includes Australia, Canada, Chile, the People’s Republic of China, Hong Kong (China), Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, the United States and all the members of ASEAN except Cambodia, Lao PDR and Myanmar.28 APEC’s 21 member countries have a total population of 2.8 billion people and combined GDP of more than $43.4 trillion.29 APEC countries began reducing trade barriers in 2000, though all the reductions will not be completely phased in until 2020. In 1992, Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain and the United Kingdom implemented the Maastricht

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Maastricht Treaty of Europe a regional trade agreement between most European countries

Treaty of Europe. The purpose of this

treaty was to transform their 12 different economies and 12 currencies into one common economic market, called the European Union (EU), with one common currency. Austria, Finland and Sweden joined the EU in 1995, followed by Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia in 2004, Bulgaria and Romania in 2007 and Croatia in 2013, bringing the total membership to 28 countries.30 Macedonia, Albania, Montenegro, Serbia and Turkey have applied and are being considered for membership.31 On 1 January 2002, a single common currency, the euro, went into circulation in 12 of the EU’s members (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain). In June 2016, the United Kingdom voted to leave the EU. On 30 March 2017, UK Prime Minister Theresa May triggered ‘Article 50’, which provides exactly two years to negotiate the UK’s exit from the EU.32 Prior to the treaty, trucks carrying products were stopped and inspected by customs agents at each border. Furthermore, since the required paperwork, tariffs and government product specifications could be radically different in each country, companies often had to file 12 different sets of paperwork, pay 12 different tariffs, produce 12 different versions of their basic product to meet various government specifications and exchange money in 12 different currencies. Likewise, open business travel from state to state, which now occurs in most countries, was once complicated by inspections at each border crossing. If you lived in Germany, but worked in Luxembourg, your car was stopped and your passport was inspected twice every day, as you travelled to and from work. Also, every business transaction required a currency exchange; for example, from German deutschemarks to Italian lira, or from French francs to Dutch guilders. Imagine all of this happening to millions of trucks, cars and businesspeople, and you can begin to appreciate the difficulty and cost of conducting business across Europe before the Maastricht Treaty. The United States–Mexico–Canada Agreement (USMCA) between the United States, Canada and Mexico was announced in 2018.33 The predecessor agreement to the USMCA, NAFTA, liberalised trade between countries so that businesses could plan for one market, North America, rather than for three separate markets – the United States, Canada and Mexico. One of NAFTA’s most important achievements was to eliminate most product tariffs and prevent Canada, the United States and Mexico from increasing existing tariffs or NAFTA introducing new ones. Overall, both a regional trade Mexican and Canadian exports to the agreement between the United States, Canada United States have doubled since and Mexico. NAFTA went into effect. The new 134

USMCA agreement is presented as a refinement of NAFTA, a sort of NAFTA 2.0, which is intended to address perceived imbalances in the terms of the old agreement. According to the Office of the United States Trade Representative, ‘The new United States-Mexico-Canada Agreement (USMCA) is a mutually beneficial win for North American workers, farmers, ranchers, and businesses. When finalised and implemented, the agreement will create more balanced, reciprocal trade that supports highpaying jobs for Americans and grows the North American economy.’34 While the United States, Mexico and Canada have concluded a new, rebalanced agreement in 2018, NAFTA remains in effect as of the time of writing. The USMCA can come into effect following the completion of normal trade negotiation procedures, including a Congressional vote on an implementing bill. Much energy and activity in recent bilateral trading years has been directed to bilateral agreements trading agreements – specific, formal specific, formal agreements between agreements between countries – rather countries than trading blocks. In 2015, Australia Trans-Pacific completed a free trade agreement with Partnership (TPP) currently being negotiated China, and in 2018 concluded a free trade between Australia, Brunei, agreement with Indonesia. Typically, these Canada, Chile, Japan, Malaysia, Mexico, New provide for lower tariff barriers and reduced Zealand, Peru, Singapore, bureaucracy designed to encourage more the United States and Vietnam trade. The ambitious and potentially farreaching development was progress towards the Trans-Pacific Partnership (TPP) involving the current negotiating parties Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. Objectives included ‘the elimination of tariffs on goods’ and freeing up of barriers to trade in services.35 However, political change in the US resulted in that country withdrawing from the TPP negotiations. The agreement has been redrafted as the Comprehensive and Progressive Agreement for TransPacific Partnership (TPP-11) which includes Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam.36 CAFTA–DR, the Dominican Republic–Central America Free Trade Agreement among the United States, the Dominican Republic and the Central American countries of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, went into effect in August 2005. With a combined population of 52 million, the CAFTA–DR countries together are the sixteenth-largest US export market in the world. US companies export nearly $29 billion in goods each year to the CAFTA–DR countries.37 On 23 May 2008, 12 South American countries signed the Union of South American Nations (UNASUR) Constitutive Treaty, which united the countries of the Mercosur trade group (Argentina, Brazil, Paraguay, Uruguay and Venezuela) and the countries of the Andean Community (Bolivia, Colombia, Ecuador and Peru) with Guyana, Suriname and

Shutterstock/Ray A Akey

Chile. UNASUR aims to create a unified South America by permitting free movement between nations, creating a common infrastructure that includes an interoceanic highway and establishing the region as a single market by eliminating all tariffs by 2019. UNASUR is one of the largest trading zones in the world, encompassing 418 million people in South America with a combined gross domestic product (GDP) of nearly $4.2 trillion.38

The Ambassador Bridge in Detroit is the busiest border crossing between Canada and the United States, carrying 25 per cent of all trade between the two countries, or roughly $100 billion in annual trade going in both directions

CONSUMERS, TRADE BARRIERS AND TRADE AGREEMENTS

Shutterstock.com/Jovan Nikolic; Shutterstock.com/Oleg_Mit; Shutterstock.com/Robyn Mackenzie; Shutterstock.com/charles taylor; Shutterstock.com/Jjustas

If you travel around the Asia–Pacific region you will quickly notice that the average wages of workers are different in each country. You will also notice that your money (Singapore dollar, Malaysian ringgit, Australian dollar, Chinese yuan or Hong Kong dollar) will either buy you more or less depending on which country you go to (see Figure 8.3). The relative strength of your currency often has a big influence on your cost of living; some nationalities can buy

What 1 Australian dollar converts to in Chinese Yuan FIGURE 8.3

much more with their incomes than those in other countries can. However, the cost of living varies widely and usually reflects the average wages of workers in the country and the relative strength of their currency. Looking at the living expenses for students quoted by universities around the region, you can see how much this can vary. For example, in Malaysia one university suggests that accommodation expenses are about RM1650 per month (A$561), in Singapore they are quoted as S$1500 per month (A$1547), in Hong Kong HK$4900 per month (A$875) and in Australia A$1500 per month.39 Despite the variation in cost (more than tripling from lowest to highest), students in each of these cities would live in similar accommodation, travel similar distances from home to university, eat similar quantities of food of similar quality and enjoy similar recreation and entertainment. However, some countries can buy more with their money than others. Arguably, this can be traced to industries that have been heavily protected from foreign competition by trade barriers. For example, it is cheaper to buy a locally made car in Malaysia than it is to buy a car of similar quality from Europe. In order to protect a developing local car industry from more developed foreign competition, the Malaysian government has set relatively high tariffs on imported cars. However, for the most part, consumers (and businesses) in the Asia–Pacific region have had plentiful choice among locally made and foreign-made products. More importantly, the high level of competition between foreign and domestic companies that create these choices helps to keep prices low in the Asia–Pacific nations. Furthermore, it is precisely the lack of choice and the low level of competition that keep prices higher in countries that have not been as open to foreign companies and products.40 So why do trade barriers and free trade agreements matter to consumers? They’re important because free

What 1 Australian dollar converts to in Thai Baht

Relative strength of currency

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trade agreements increase choices, competition and purchasing power and thus decrease what people pay for food, clothing, necessities and luxuries. Accordingly, for some things, today’s consumers rarely care where their products and services come from. For supermarket shoppers in Australia it is said that people don’t care where the groceries are from, they just want the lowest prices. Walk along the shelves in your local supermarket and you’ll find things like painkillers made in India, cleaning products made in China, canned fish from Thailand and paper towels from Indonesia. Why do trade barriers and free-trade agreements matter to managers? The reason, as you are about to read, is that while free-trade agreements create new business opportunities, they also intensify competition, and addressing that competition is a manager’s job.

HOW TO GO GLOBAL

Once a company has decided that it will go global, it must decide how to go global. For example, if you decide to sell in Beijing, should you try to find a local business partner who speaks Mandarin, knows the laws and understands the customs and norms of China’s culture, or should you simply export your products from your home country? What do you do if you are also entering Eastern Europe, perhaps starting in Moscow? Should you use the same approach in Russia that you used in China? Although there is no magical formula for answering these questions, after reading the next two sections, you should be able to: ● explain why companies choose to standardise or adapt their business procedures ● explain the different ways that companies can organise to do business globally.

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CONSISTENCY OR ADAPTATION?

In this section, we return to a key issue: how can you be sure that the way you run your business in one country is the right way to run that business in another country? In other words, how can you strike the right balance between global consistency and local adaptation?

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SMART MGMT

IT PAYS TO ADAPT German luxury car maker Audi faced stiff competition in the Chinese market when it introduced its Germandesigned cars there. Competing with BMW and Mercedes in the mid-level luxury car sector, Audi didn’t have the rear leg room or head space that were highly valued by the Chinese car buyers in this segment. Audi refined its German spec A6 model and produced the China-only A6L (L for Long). In a press release for the launce of the A6L in China the CEO of Volkswagen Automobile Group (VAG) stated: ‘The Audi A6L will be built exclusively as a long-wheelbase version in China for the Chinese market. This premium product … is wholly orientated to our Chinese customers’. Since its release the Audi A6 and A6L variants have accounted for 780 000 sales in China. According to one survey, half of all Audi A6 sales in the world are in China.41

Global consistency means that global consistency when a multinational company has offices, when a multinational company has offices, manufacturing plants and distribution manufacturing plants and facilities in different countries, it will use distribution facilities in different countries and the same ‘head office’ rules, guidelines, runs them all using the policies and procedures to run those same rules, guidelines, offices, plants and facilities. Managers at policies and procedures local adaptation company headquarters value global when a multinational consistency because it simplifies company modifies its decisions. In contrast, a company with a rules, guidelines, policies and procedures to adapt local adaptation policy modifies its to differences in foreign standard operating procedures to adapt to customers, governments and regulatory agencies differences in foreign customers, governments and regulatory agencies. Local adaptation is typically more important to local managers who are charged with making the international business successful in their countries. Amazon chose local adaptation to grow its video services in India by developing new shows specifically for Indian viewers. Roy Price, chief of Amazon Studios, said, ‘You can have a global service, but there are no global customers. There are only local customers.’42 Amazon is developing a dozen original Indian shows. For example, the animated series Baahubali: The Lost Legends, based on a popular Indian movie, will be produced in Hindi and English, as well as Tamil and Telugu, two regional languages.43 Local adaptation is typically preferred by local managers who are charged with making the international business successful in their countries. If companies lean too much toward global consistency, they run the risk of using management procedures that are poorly suited to particular countries’ markets, cultures and employees (i.e. a lack of local adaptation). For instance, Swedish-based H&M is said to be the world’s third-largest clothing retailer, with stores in 61 countries. Much of its

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FORMS OF GLOBAL BUSINESS •

MGMT IN PRACTICE

FOREIGN COMPANIES IN CHINA In China, foreign investment is used as a means of overcoming the shortage of domestic funds and of improving China’s management, productivity and competitiveness. Foreign investment is also used to build China’s links with the world economy. Foreign investment is an important means of economic development in China.47 Since the opening of China to foreign investment and trade in 1978, many types of foreign investment have emerged:48 • Equity joint ventures (EJVs): the foreign and Chinese parties pool money in agreed proportions. They invest in and operate the

EXPORTING PPLY When companies E A Get an overview of exporting including intermediaries produce products in and opportunities for SMEs their home countries and sell those products to customers in foreign countries, they exporting are exporting. For example, the London- selling domestically products to based company Fremantle Media produced customers in foreign originally developed the Pop Idol TV show countries in Britain and then exported a nearly identical version to Malaysia as Malaysian Idol, to Singapore as Singapore Idol, to the Philippines as Pinoy Idol, to Australia as Australian Idol and to Hong Kong as Hong Kong Idol. It has now exported similar versions of the show to about 40 different countries.49 Exporting as a form of global business offers many advantages. It makes the company less dependent on sales in its home market and provides a greater degree of control over research, design and production decisions.50 Though advantageous in a number of ways, exporting also has its disadvantages. The primary disadvantage is that many exported goods are subject to tariff and non-tariff barriers that can substantially increase their final cost to consumers. A second disadvantage is that transport costs can significantly increase the price of an exported product. Chinese regulations require live imported animals to be slaughtered within 55 miles of their point of entry. To meet China’s growing demand for fresh beef, Australian farmers

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Historically, companies have generally followed the phase model of globalisation, in which a company makes the transition from a domestic company to a global company in the following sequential phases: 1 exporting 2 cooperative contracts 3 strategic alliances 4 wholly owned affiliates. Note that this is ‘one model’ with ‘four sequential phases’: it is not ‘four phase models’. At each step, the company grows much larger, uses those resources to enter more global markets, is less dependent on home country sales and is more committed in its orientation to global business. Some companies, however, do not follow the phase model of globalisation.45 Some skip phases on their way to becoming more global and less domestic. Others don’t follow the phase model at all. These are known as global new ventures. The following sections review these forms of global business.46

venture, sharing profits and losses in proportion to their equity stake. This is the form of investment preferred by China. Wholly foreign-owned subsidiaries (WFSs): wholly owned subsidiaries of foreign companies and wholly owned companies can be incorporated in China. The investor will be responsible for capital and input costs, marketing and management of the venture, which runs for an agreed period. Profits after tax can be remitted overseas. Contractual joint ventures (CJVs): the Chinese enterprise provides the land, factory buildings and labour services for a foreign organisation, which provides equipment, capital and technical expertise. The period of investment is shorter than those for the above methods, usually five to seven years, and the flexibility and short period make CJVs popular with foreign investors. Joint explorations: a form of cooperation seen in the joint exploration for offshore oil. During the two stages of exploration and extraction the Chinese and foreign partners take different levels of risk. For example, in the exploration stage, the financial and other risks lie with the foreign party, whereas in production, both sides contribute to the business.

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success is due to the fact that all of its stores carry the same products all over the world. However, this also limits the areas in which H&M can do business. Because most of its clothes are designed for climates that are similar to Sweden – in other words, long cold winters and short summers – up until recently H&M has been unable to enter markets that have drastically different climates. However, since 2012, H&M has been opening stores in Asia (China, Hong Kong, Japan, Malaysia, Singapore, Indonesia, South Korea and Thailand) and is expanding rapidly in Australia, with the opening of a store in Adelaide in 2018 bringing their total to 37 stores.44

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have begun flying cattle on 747 jumbo jets to ports of entry thousands of miles inland. By switching from ships to jets, exporters have been able to expand the market for fresh beef in inland China.51 And a final disadvantage is that companies that export depend on foreign importers for product distribution. This means that if, for example, the foreign importer makes a mistake on the paperwork that accompanies a shipment of imported goods, those goods can be returned to the foreign manufacturer at the manufacturer’s expense.52

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from US television networks generally only cover 50–65 per cent of that, so foreign licensing agreements are critical to covering the remaining production costs. For example, in order to air these shows in the United Kingdom, Britain’s Channel 5 (the licensee) pays Warner Bros. (the licensor) a US$780 000-per-episode fee.53 Forty per cent of the revenue generated by popular television shows comes from foreign broadcast licenses.54 One of the most important advantages of licensing is that it allows companies to earn additional profits without investing more money. As foreign sales increase, the royalties paid to the licensor by the foreign licensee increase. Moreover, the licensee, not the licensor, invests in production equipment and facilities to produce the licensed product. Licensing also helps companies avoid tariff and non-tariff barriers. Since the licensee manufactures the product within the foreign country, tariff and non-tariff barriers don’t apply.

The popular reality TV show Australian Idol is one of many exported versions of a show originally developed in the UK

COOPERATIVE CONTRACTS When an organisation wants to expand its business globally without making a large financial commitment to do so, it may sign a cooperative contract with cooperative a foreign business owner, who pays the contract an agreement in which a company a fee for the right to conduct foreign business owner that business in his or her country. There pays a company a fee for the right to conduct that are two kinds of cooperative contracts: business in his or her licensing and franchising. country Under a licensing agreement, a licensing an agreement in which a domestic company – the licensor – domestic company, the receives royalty payments for allowing licensor, receives royalty payments for allowing another company – the licensee – to another company, the produce its product, sell its service or use licensee, to produce the licensor’s product, its brand name in a particular foreign sell its service or use its market. For example, many brands of brand name in a specified domestic cleaning products that you see foreign market on the supermarket shelves in Singapore, Auckland or Melbourne, such as BAM or Harpic, which consumers associate with local companies, are not really local products. A British company, Reckitt Benckiser, licenses those products to a local manufacturer for local production. In the case of Australia, the cleaning products are licensed to a wholly owned subsidiary, Reckitt Benckiser (Australia) Pty Ltd, and in Malaysia the licensee is Reckitt Benckiser (Malaysia) Sdn Bhd. It costs more than $4 million to produce a single episode of a television series like Blacklist, CSI or Gotham. Payments

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Because Germans associate the word ‘idol’ with Hitler, producers exporting the popular ‘Pop Idol’ television show changed the name to ‘Deutschland sucht den SuperStar’ (Germany Seeks the Superstar)

The biggest disadvantage associated with licensing is that the licensor may give up control over the quality of the product or service sold by the foreign licensee. Unless the licensing agreement contains specific restrictions, the licensee controls the entire business, from production to marketing to final sales. Many licensors include inspection clauses in their licence contracts, but closely monitoring product or service quality from thousands of kilometres away can be difficult. An additional disadvantage is that licensees can eventually become competitors, especially when a licensing agreement includes access to important technology or proprietary business knowledge. An overeager licensor can dilute the value of a brand or damage the brand’s reputation through overexposure. Luxury fashion brands like Louis Vuitton, Celine, Gucci, Yves Saint Laurent and Burberry recently ended long-term licensing agreements, citing a lack of control over the products sold under their brand names. Burberry ended a 45-year agreement with its Japanese licensee, Sanyo Shokai, because the company opened hundreds of stores and flooded Japan with too many moderately priced items.

strategic alliance an agreement in which companies combine key resources, costs, risk, technology and people joint venture a strategic alliance in which two existing companies collaborate to form a third, independent company

companies remain intact and unchanged, except that together they now own the newly created joint venture. One of the oldest and most successful global joint ventures is Fuji-Xerox, which is a joint venture between Fuji Film of Japan and US-based Xerox Corporation, which makes copiers and automated office systems. More than 45 years after its creation, Fuji-Xerox employs over 45 000 employees and has close to US$10.3 billion in revenue.57 One of the advantages of global joint ventures is that, like licensing and franchising, they help companies avoid tariff and non-tariff barriers to entry. Another advantage is that companies participating in a joint venture bear only part of the costs and the risks of that business. Many companies find this attractive because of the expense of entering foreign markets or developing new products. For example, Starbucks has established a fifty-fifty joint venture with Tata Global Beverages, part of the largest conglomerate in India, Tata Group. Starbucks has established over 100 stores throughout India, with store number 100 opening in Mumbai in 2017, and hopes to expand with more stores in the future, to take advantage of a growing and fast-evolving market.58 Global joint ventures can be especially advantageous to smaller local partners who link up with larger, more experienced foreign organisations that can bring advanced management, resources and business skills to the joint venture. However, global joint ventures are not without problems. Because companies share costs and risks with their joint venture partners, they must also share profits. Managing global joint ventures can also be difficult because they represent a merging of four cultures: the country and the organisational cultures of the first partner, and the country and organisational cultures of the second partner. Often, to be ‘fair’ to all involved, each partner in the global joint venture will have equal ownership and power, but this can result in power struggles and a lack of leadership. Because of these problems, companies forming global joint ventures should carefully develop detailed contracts that specify the Alamy Stock Photo/Lou Linwei

After cancelling the contract, Burberry reduced the number of Japanese stores from more than 400 to two dozen and replaced Sanyo Shokai’s mid-tier products with ones costing up to 10 times more. According to the CEO for Burberry in Asia, Pascal Perrier, ‘The license has been suffering from overexposure. We will never do that again.’55 A franchise is a collection of franchise a collection of networked networked organisations in which the companies in which the manufacturer or marketer of a product or manufacturer or marketer service – the franchisor – licenses the of a product or service, the franchisor, licenses the entire entire business or business system to business to another person or another person or organisation – the organisation, the franchisee franchisee. For the price of an initial franchise fee plus royalties, franchisors provide franchisees with training, assistance with marketing and advertising, and an exclusive right to conduct business in a particular location. Overall, franchising is a fast way to enter foreign markets. Next time you walk through the Sunway Pyramid shopping centre in Kuala Lumpur, take a stroll along Hennessy Road, or Wan Chai, in Hong Kong, or go to St Kilda beach in Melbourne, and you will probably see one particular franchise business next to the local stores – McDonald’s. Of course, McDonald’s charges its franchisees substantial fees, with an initial fee of around $45 000, and additional investment needed to establish each restaurant varying from $1 million to $2 million depending on the country. Although franchisees typically borrow part of their start-up costs from a bank, McDonald’s requires them to put down 40 per cent of their initial investment in cash. Typical franchise royalties range from 2 per cent to 12.5 per cent of gross sales, with franchisors well rewarded for the help they provide.56 Despite the many advantages of franchising, franchisors face a loss of control when they sell businesses to franchisees who are thousands of kilometres away. While there are exceptions (McDonald’s being one), franchising success may be somewhat culture-bound. In other words, because most global franchisors begin by franchising their businesses in similar countries or regions and because more than half of franchisors make absolutely no change in their business for overseas franchisees, that success may not generalise to cultures with different lifestyles, values, preferences and technological infrastructures.

STRATEGIC ALLIANCES Companies forming strategic alliances combine key resources, costs, risks, technology and people. The most common strategic alliance is a joint venture, which occurs when two existing companies collaborate to form a third company. The two founding

One of the oldest and most successful global joint ventures is Fuji-Xerox, which is a joint venture between Fuji Film of Japan and US-based Xerox Corporation

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obligations of each party. This is important, because the rate of failure for global joint ventures is estimated to be as high as 70 per cent.59

WHOLLY OWNED AFFILIATES (BUILD OR BUY) Approximately one-third of multinational companies enter foreign markets through wholly owned affiliates. Unlike licensing arrangements, franchises or wholly owned joint ventures, wholly owned affiliates are affiliates 100 per cent owned by the parent foreign offices, facilities and manufacturing plants company. For example, Honda Motors of that are 100 per cent Thailand in Ayudhya province is 100 per owned by the parent company cent owned by Honda Motors of Japan. The primary advantage of wholly owned businesses is that the parent company receives all of the profits and has complete control over the foreign facilities. The biggest disadvantage is the expense of building new operations or buying existing businesses. While the payoff can be enormous if wholly owned affiliates succeed, the losses can be immense if they fail, because the parent company assumes all of the risk.

online design business with the aim of tapping into the idea of ‘crowdsourcing’. So far they have hosted over hundreds of thousands of design ‘contests’ for clients’ design needs, awarded over US$250 million (AUD$350 million) of designer ‘prize money’, have over 900 000 design projects launched and serve over 500 000 customers. They have opened offices in Berlin and Oakland, California and employ over 120 staff.62 Crowdsourcing is a way for freelance service providers to find work that uses a distributed approach to getting solutions. Normally problems are distributed via the Internet to a group of problem solvers or, as is the case with 99designs, to designers in the form of an open call for solutions. For 99designs, designers (the ‘crowd’) submit design solutions for clients. The designs then become the property of the company that broadcast the design request in the first place (the ‘crowdsourcer’). The designer who contributes the winning design is compensated with the prize (money).63

GLOBAL NEW VENTURES Companies used to evolve slowly from small operations selling in their home markets to large businesses selling to foreign markets. Furthermore, as companies went global, they usually tended to follow the phase model of globalisation. Since the 1990s, however, three trends have combined to allow companies to skip the phase model when going global. First, quick, reliable air travel can transport people to nearly any point in the world within one day. Second, low-cost communication technologies, such as email, the Internet, teleconferencing and phone conferencing, make it easier to communicate with global customers, suppliers, managers and employees. Third, there is now a critical mass of businesspeople with extensive personal experience in all aspects of global business. 60 This combination of developments has made it possible to start companies that are global from inception. With sales, employees and financing in different countries, global global new ventures new ventures are companies that are new companies that are founded with an active founded with an active global strategy.61 global strategy and have Although there are several different sales, employees and kinds of global new ventures, all share financing in different countries two common factors. First, the company founders successfully develop and communicate the company’s global vision from inception. Second, rather than going global one country at a time, new global ventures bring a product or service to market in several foreign markets at the same time. 99 designs is a global business that started in the inner city Melbourne suburb of Collingwood. Founders Mark Harbottle, Lachlan Donald and Paul Annesley set up their 140

WHERE TO GO GLOBAL

Deciding where to go global is just as important as deciding how your company will go global. After reading the next three sections, you should be able to: ● explain how to find a favourable business climate ● discuss the importance of identifying and adapting to cultural differences ● explain how to successfully prepare workers for international assignments.

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FINDING THE BEST BUSINESS CLIMATE

When deciding where to go global, companies try to find countries or regions with promising business climates. An attractive global business climate: ● positions the company for easy access to growing markets ● is an effective but cost-efficient place to build an office or manufacturing facility ● minimises the political risk to the company.

The most important factor in an attractive business climate is access to a growing market. For example, probably no product in the world is as well-known or as frequently purchased by as many people as Coca-Cola. The Coca-Cola Company claims to provide over 1.9 billion beverages every day to consumers all around the world. Yet even co*ke, available in over 200 countries, has tremendous potential for further growth. Coca-Cola gets more than half of its total revenue from outside North America, and emerging markets have the fastest growth.64 Two factors help companies determine the growth potential of foreign markets: purchasing power and foreign competitors. Purchasing power is purchasing power measured by comparing the relative cost a comparison of the of a standard set of goods and services in relative cost of a standard different countries. Purchasing power is set of goods and services in different countries relatively strong in countries like Indonesia, India and China, which have low average levels of income. This is because basic living expenses, such as food, shelter and transport, are very inexpensive in those countries, so consumers still have money to spend after paying for necessities. As a result, millions of Indonesian, Indian and Chinese consumers increasingly have extra

Typically, the higher the purchasing power in a country, the better that country will be for doing business. Why? Because higher purchasing power means that consumers have more money to spend on non-essential products, like soft drinks. Coca-Cola has found that per capita consumption of Coca-Cola; that is, the average number of soft drinks a person will drink per year, rises directly with purchasing power (see the solid line).

Even Coca-Cola, which is available in over 200 countries, still has tremendous potential for further global growth. Currently, the Coca-Cola Company gets about 80 per cent of its sales from its 16 largest markets.

Purchasing power (per capita real GDP)

$50 000

United States

$45 000 Canada

$40 000 Japan $35 000

South Korea

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money to spend on what they want, in addition to what they need.65 Consequently, countries with high and growing levels of purchasing power are good choices for companies looking for attractive global markets. As Figure 8.4 shows, CocaCola has found that the per capita consumption of co*ke, or the number of co*kes a person drinks per year, rises directly with purchasing power. The more purchasing power people have, the more likely they are to purchase soft drinks.66 The second part of assessing the growth potential of global markets involves analysing the degree of global competition, which is determined by the number and quality of companies that already compete in a foreign market. For example, Marcopolo, Brazil’s largest bus maker with A$1.1 billion in annual sales, focuses on selling buses in emerging-market countries like Argentina, Mexico, Colombia and South Africa, where there’s strong demand and little competition. Embraer, Brazil’s leading aeroplane manufacturer, gets one-third of its sales from emerging markets (compared to 1 per cent in 2005). Unlike Marcopolo, however, Embraer has more recently seen increased competition from Russia’s Sukhio and the Commercial Aircraft Corporation of China for sales in these markets.67

GROWING MARKETS

Australia

United Kingdom

France

$30 000 Malta $25 000 $20 000

Russia Chile

$15 000 China Thailand Egypt Indonesia India Kenya

$10 000 $5 000

Brazil

Mexico

South Africa

$0 0

100

200

300

400

500

600

700

Per capita consumption of Coca-Cola

FIGURE 8.4

How consumption of Coca-Cola varies with purchasing power around the world

Sources: ‘Coca-Cola 2012 annual review’, Coca-Cola Company, accessed 10 June 2013, http://www.coca-colacompany.com/annual-review/2012/year_in_review.html; ‘GNI per capita ranking, atlas method and PPP based’, The World Bank, 15 April 2013, accessed 10 June 2013, http://data.worldbank.org/data-catalog/GNI-per-capita-Atlas-and-PPP-table.

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CHOOSING AN OFFICE OR MANUFACTURING LOCATION Companies do not have to establish an office or manufacturing location in each country they enter. They can license, franchise or export to foreign markets, or they can serve a larger region from one country. Thus, the criteria for choosing an office or manufacturing location are different from the criteria for entering a foreign market. Rather than focusing on costs alone, companies should consider both qualitative and quantitative factors. Two key qualitative factors are workforce quality and company strategy. Workforce quality is important because it is often difficult to find workers with the specific skills, abilities and experience that a company needs to run its business. Organisations will look very carefully at the availability of skilled and highly educated workers when assessing where to establish themselves. Workforce quality is one reason that many companies doing business in Europe locate their customer call centres in the Netherlands. Workers in the Netherlands are the most linguistically gifted in Europe, with 77 per cent trilingual (speaking Dutch, English and a third language) and 90 per cent bilingual (Dutch and English). Comparable numbers across Europe are 25 per cent and 54 per cent.68 Furthermore, compared to 60 countries worldwide, the Netherlands ranks fourth in terms of the supply of skilled labour, tenth for workers with financial skills and second for competent managers (the US ranks fifteenth, seventh and fifth).69 A company’s strategy is also important when choosing a location. For example, a company pursuing a low-cost strategy may need plentiful raw materials, low-cost transportation and low-cost labour. A company pursuing a differentiation strategy (typically a higher-priced, better product or service) may need access to high-quality materials and a highly skilled and educated workforce. Quantitative factors, such as the kind of facility being built, tariff and non-tariff barriers, exchange rates, and transport and labour costs, should also be considered when choosing an office or manufacturing location. In the apparel industry, low costs and short distances from field to factory are critical success factors for every manufacturer. That’s why VF Corporation, owner of brands such as Wrangler, North Face and Timberland, is sourcing products from Ethiopia. In addition to having the ability to go from fibre to factory in one country, Ethiopia also boasts a low average salary for garment workers ($21 per month versus up to $297 per month in China), low energy costs and a free-trade agreement with the United States. The Ethiopian government built a $250 million industrial park exclusively for foreign investors in the apparel industry and is building a railroad through neighboring Djibouti to give its landlocked country access to a sea port. M. Raghuraman, 142

CEO of Brandix, Sri Lanka’s largest clothing exporter, is interested in Ethiopia as a manufacturing location because ‘Ethiopia seems to be the best location from a government, labor, and power point of view’70 Companies rely on studies such as FM Global’s annually published ‘Resilience Index’ to compare business climates throughout the world.71 Figure 8.5 shows the world’s top cities for global business. This information is a good starting point if your company is trying to decide where to put an international office or manufacturing plant.

MINIMISING POLITICAL RISK When managers think about political risk in global business, they envision burning factories and riots in the streets. Although political events such as these receive dramatic and extended coverage from the media, the political risks that most companies face usually are not covered as breaking stories on the TV news bulletins. Nonetheless, the negative consequences of ordinary political risk can be just as devastating to companies that fail to identify and minimise that risk.72 When conducting global business, companies should attempt to identify two types of political risk: political uncertainty and policy uncertainty. 73 political uncertainty Political uncertainty is associated with the risk of major changes in political regimes that the risk of major changes in political can result from war, regimes that can result from war, revolution, death of revolution, death of political leaders, social political leaders, social unrest or other influential unrest or other influential events. Policy events uncertainty refers to the risk associated policy uncertainty risk associated with with changes in laws and government the changes in laws and policies that directly affect the way foreign government policies that directly affect the companies conduct business. way foreign companies Policy uncertainty is the most common conduct business form of political risk in global business and perhaps the most frustrating, especially when changes in laws and government policies directly undercut sizeable investments made by foreign companies. The British exit (Brexit) from the European Union, currently to be effective 29 March 2019, has created tremendous uncertainty for British-based firms who don’t know how much post-Brexit access, if any, they will have to EU markets. A UK government report released in November 2018 predicts a dramatic impact on the UK economy following Brexit – but even the government is uncertain about the actual size of the impact. The report estimates that the UK economy could shrink by 3.9 per cent if there is a workable exit agreement, but the decline could be as much as 9.3 per cent if no exit agreement is put in place.74 Businesses are also trying to predict an uncertain future. Banks like JP Morgan Chase, which has 16 000 British employees, are studying where to establish sizable offices in Europe. Chase staff have spent nine months studying and visiting eight European cities, such

Best 10 Countries 1. 2. 3. 4. 5.

FIGURE 8.5

Switzerland Norway Ireland Germany Luxembourg

6. 7. 8. 9. 10.

The Netherlands United States Canada Australia Denmark

Worst 10 Countries 1. 2. 3. 4. 5.

Venezuela Dominican Republic Kyrgyz Republic Nicaragua Mauritania

6. 7. 8. 9. 10.

Ukraine Egypt Algeria Jamaica Honduras

World’s best cities for business.

Sources: “Table 1: The Top 10 in 2016,” Resilience Index 2016, FM Global, http://www.fmglobal.com/assets/pdf/Resilience_Methodology.pdf, p. 5; “Table 2: The Bottom 10 in 2016,” Resilience Index 2016, FM Global, http://www.fmglobal.com/research-and-resources/tools-and-resources/resilienceindex#!year=2016&idx=Index&handler=map.

as Paris, Frankfurt, Luxembourg and Dublin. CEO Jamie Dimon estimates that 25 per cent of Chase’s staff may need to move to Europe to maintain Chase’s access to EU markets.75 Likewise, British-based EasyJet would be required by EU law to set up a separate European operating company and have more than half of its publicly held stock be owned by Europeans. The difficulty is that businesses don’t know what rules will or won’t apply. Companies that wait until specific terms are negotiated for their businesses may not leave themselves enough time to set up operations and relocate staff to Europe. Companies that move staff and operations before Brexit terms are finalised risk incurring unnecessary costs should the EU and UK agree to relatively open access to each other’s markets.76 Several strategies can be used to minimise or adapt to the political risk inherent in global business. An avoidance strategy is used when the political risks associated with a foreign country or region are viewed as too great. If organisations are already invested in high-risk areas, they may divest or sell their businesses. If they have not yet invested, they will most likely postpone their investment until the risk shrinks. Figure 8.6 shows the long-term political risk for various countries in the Middle East (higher scores indicate less political risk). The following factors, which were used to compile these ratings, indicate greater political risk: government instability, poor socioeconomic

conditions, internal or external conflict, military involvement in politics, religious and ethnic tensions, high foreign debt as a percentage of gross domestic product, exchange rate instability and high inflation.77 An avoidance strategy would likely be used for the riskiest countries shown in Figure 8.6, such as Iran and Saudi Arabia, but would probably not be needed for the least risky countries, such as Israel or the United Arab Emirates. Risk conditions and factors change, so be sure to make risk decisions with the latest available information from resources such as the PRS Group (http:// www.prsgroup.com), which supplies information about political risk to 80 per cent of the Fortune 500 companies. Control is an active strategy to prevent or reduce political risks. Organisations using a control strategy lobby foreign governments or international trade agencies to change laws, regulations or trade barriers that hurt their business in that country. Uber’s low-cost European ride-sharing service, UberPop, has faced a number of setbacks in recent years, including massive protests from professional taxi drivers and restrictive government regulations. UberPop has even been banned outright in France, Germany and Spain.78 To deal with these setbacks, Uber hired veteran lobbyist Mark MacGann. MacGann appealed to European Union officials in Belgium, saying, ‘This is supposed to be a single market [but] what we’re finding is that we’re getting treated in

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Higher scores indicate less long-term political risk, which is calculated by estimating government instability, socioeconomic conditions, internal or external conﬂicts, military involvement in politics, religious and ethnic tensions, foreign debt as a percent of gross domestic product, exchange rate instability, and whether there is high inﬂation.

90 80

57.8

65.5

61.2

56.4

54.9

68.9

68.4

54.8

Emerging Market Averages

66.6

63.5

Regional Averages

Long-Term Political Risk

71.3 70

50 40 30 20

FIGURE 8.6

Global Market Averages

United Arab Emirates

Tunisia

Saudi Arabia

Oman

Lebanon

Kuwait

Jordan

Israel

Iran

Egypt

Bahrain

Overview of political risk in the Middle East

Source: “United Arab Emirates Country Risk Report, 2016 2nd Quarter,” Business Monitor International, March 8, 2016, pp. 1–37.

completely different ways in different countries, and even within individual countries.’79 Thus far, Uber has made little progress controlling the political risks in these countries. Another method for dealing with political risk is cooperation, which involves using joint ventures and collaborative contracts, such as franchising and licensing. Although cooperation does not eliminate the political risk of doing business in a country, it can limit the risk associated with foreign ownership of a business. For example, a German company forming a joint venture with a Chinese company to do business in China may structure the joint venture contract so that the Chinese company owns 51 per cent or more of the joint venture. Doing so qualifies the joint venture as a Chinese company and exempts it from Chinese laws that apply to foreign-owned businesses.

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National culture is the EO VID

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BECOMING AWARE OF CULTURAL DIFFERENCES

Get an overview of cultural differences in a business context

set of shared values and beliefs that affects the perceptions, decisions and behaviour of the people from a particular country. The first step in dealing with culture is to recognise that there are meaningful differences. Professor Geert Hofstede spent

20 years studying cultural differences in national culture 53 different countries. His research the set of shared values and beliefs that affects the shows that there are generally five perceptions, decisions and behaviour of the people from a consistent cultural dimensions across countries: power distance, individualism, particular country masculinity, uncertainty avoidance and short-term versus long-term orientation.80 Power distance is the extent to which people in a country accept that power is distributed unequally in society and organisations. In countries where power distance is weak, such as Denmark and Sweden, employees don’t like their organisation or their boss to have power over them or tell them what to do. They want to have a say in decisions that affect them. As Figure 8.7 shows, Russia and China, with scores of 93 and 80, respectively, are much stronger in power distance than Germany (35), the Netherlands (38) and the US (40). Individualism is the degree to which societies believe that individuals should be self-sufficient. In individualistic societies, employees put loyalty to themselves first and loyalty to their company and work group second. In Figure 8.7, the US (91), the Netherlands (80), France (71) and Germany (67) are the strongest in individualism, while Indonesia (14), Hong Kong (25) and China (20) are the weakest. Masculinity and femininity capture the difference between highly assertive and highly nurturing cultures. Masculine cultures emphasise assertiveness, competition,

To determine the cultural characteristics of a country, compare the number and vertical distance (higher means more) of that country on a particular cultural dimension (color coded and labeled on the right side of the exihibit) with those of other countries. For example, with a score of 87, China has the second-highest long-term orientation; it is exceeded only by Japan, which has a score of 88. By contrast, with a score of 13, Nigeria has the weakest long-term orientation. Likewise, while China has a strong long-term orientation (87), it has a very weak individualistic orientation (20). 42

Hofstede’s Cultural Dimensions

48 40

88 81

83 26 46

38 17

92 86

62 66

67 40

USA

FIGURE 8.7

Germany

46 54

Japan

France

13 95 55

Uncertainty Avoidance Masculinity

Individualism

Indonesia

Nigeria

Russia

India

Netherlands Hong Kong

Power Distance

Indulgence Long-Term Orientation

14 71

39 30

20 80

China

Hofstede’s five cultural dimensions

Source: G. H. Hofstede, ‘Cultural constraints in management theories,’ Academy of Management Executive, 7 (1), 1993: 81–94; G. Hofstede and G. J. Hofstede, ‘6 Dimensions for Web Site 2015 12 08 0-100,’ accessed 28 April 2016, http://www.geerthofstede.eu/dimension-data-matrix.

material success and achievement, whereas feminine cultures emphasise the importance of relationships, modesty, caring for the weak and quality of life. In Figure 8.7, Japan (95), Germany (66) and the US (62) have the most masculine orientations, while the Netherlands (14) has the most feminine orientation. The cultural difference of uncertainty avoidance is the degree to which people in a country are uncomfortable with unstructured, ambiguous, unpredictable situations. In countries with strong uncertainty avoidance, like Greece and Portugal, people tend to be assertive and seek security (rather than uncertainty). In Figure 8.7, Japan (92), France (86) and Russia (90) are strongest in uncertainty avoidance, while Hong Kong (29) is the weakest. Short-term/long-term orientation addresses whether cultures are oriented to the present and seek immediate gratification, or to the future and defer gratification. Not surprisingly, countries with short-term orientations are consumer driven, whereas countries with long-term orientations are savings driven. In Figure 8.7, Japan (88) and China (87) have very strong long-term orientations, while Nigeria (13) and the United States (26) have very strong short-term orientations. To generate a graphical comparison of two different countries’ cultures, go to https://geerthofstede.com> Compare countries. Select a ‘home culture’. Then select a ‘host culture’. A graph comparing the

countries on each of Hofstede’s five cultural differences will automatically be generated. A comparison of Australia with Malaysia, China, Hong Kong and New Zealand using this online tool is shown in Figure 8.8. Cultural differences affect perceptions, understanding and behaviour. Recognising cultural differences is critical to succeeding in global business. Nevertheless, as Hofstede pointed out, descriptions of cultural differences are based on averages – the average level of uncertainty avoidance in China, the average level of power distance in Malaysia and so forth. Accordingly, says Hofstede, ‘If you are going to spend time with a Japanese colleague, you shouldn’t assume that overall cultural statements about Japanese society automatically apply to this person’.81 Similarly, cultural beliefs may differ significantly from one part of a country to another.82 After becoming aware of cultural differences, the second step is deciding how to adapt your company to those differences. Unfortunately, studies investigating the effects of cultural differences on management practice point more to difficulties than to easy solutions. One problem is that different cultures will probably perceive management policies and practices differently. For example, blue-collar workers in France and Argentina, all of whom performed the same factory jobs for the same multinational company, perceived its company-wide

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New Zealand

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100

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Australia in comparison with Malaysia

Australia in comparison with Hong Kong

Australia

China

Hofstede’s model dimensions for selected countries

Shuttertock.com/Photobank.kiev.ua

Based on Geert Hofstede, Gert Jan Hofstede, Michael Minkov, “Cultures and Organizations, Software of the Mind”, Third Revised Edition, McGrawHill 2010, ISBN 0-07-166418-1. © Geert Hofstede B.V. quoted with permission.

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WORKPLACE AND COMMUNITY

MGMT TREND

WHERE IN THE WORLD …?

BILINGUALISM: A GROWING TREND

There are quite a few International agency and business media sources which provide rankings of the best and worst places in the world to do business. Rankings change from year to year and according to the survey methodology or the critical factors considered. Still, they provide some useful information. Forbes magazine ranks Denmark, New Zealand, Norway, Ireland and Sweden (in that order) as the best business locations, and Guinea, Libya, Haiti and Myanmar as the worst, with the African country of Chad at the very bottom. Bottom-ranked countries are generally characterised by corruption, instability and low levels of freedom.82

There are many people in the Asia–Pacific region who speak more than one language. Chances are, regardless of where a person lives in the region, that when he or she goes home from studying they speak a language other than English with their family. A high value is placed on the ability to speak multiple languages in the region; for example, many Malaysians are multilingual, speaking three or more languages such as Bahasa Malaysia, Chinese and English. Being able to communicate in multiple languages is an important asset in any business and can help give a company the edge it needs to succeed in a competitive market.

safety policy differently. French workers perceived that safety wasn’t very important to the company, but Argentinian workers thought that it was.84 The fact that something as simple as a safety policy can be perceived differently across cultures shows just how difficult it can be to standardise management practices across different countries and cultures.

LO6

PREPARING FOR AN INTERNATIONAL ASSIGNMENT

When Joanna first arrived in Argentina from Melbourne, she was invited to an asado, or Argentinian barbecue, scheduled for 8 p.m. Not wanting to be late, she arrived at 7:30 p.m. The catering chef explained that in Argentina, ‘you never arrive early to an asado’.85 When Argentinian guests arrived after 9 p.m., Joanna said, ‘Not a single apology was given for arriving late.’86 And because drinks and appetisers weren’t served until 9:30 p.m., Joanna, who usually ate much earlier, said she was so hungry she could ‘eat the tablecloth’. Dinner was eventually served at 10:30 p.m. Now, however, Joanna has adjusted to Argentina’s cultural expectations regarding time. Today, she says, ‘when I make plans to meet my Argentine friends for coffee or lunch, all I have to do is add an hour to our meeting time and voila, I will be on time.’87 An expatriate is someone who expatriate lives and works outside his or her someone who lives and works outside his or her native countr y. The difficulty of native country adjusting to language, cultural and social differences is the primar y reason for expatriate failure in overseas assignments. For example, although there have recently been disagreements among researchers about these numbers, 5 to 20 per cent of expatriates sent abroad by their companies will return home before they have successfully completed their assignments.88 Of those who do complete their international assignments, about one-third are judged by their companies to be no better than marginally effective.89 Because even wellplanned international assignments can cost as much as three to five times an employee’s annual salary, failure in those assignments can be extraordinarily expensive.90 Furthermore, while it is difficult to find reliable indicators, studies typically show that 8–25 per cent of expatriate managers leave their companies following an international assignment.91 Since the average cost of sending an employee on a three-year international assignment is $1 million, failure in those assignments can be extraordinarily expensive.92

The chances for a successful international assignment can be increased through: ● language and cross-cultural training ● consideration of spouse, family and dual-career issues.

LANGUAGE AND CROSS-CULTURAL TRAINING Predeparture language and cross-cultural training can reduce the uncertainty that expatriates feel, the misunderstandings that take place between expatriates and natives, and the inappropriate behaviours that expatriates unknowingly commit when they travel to a foreign country. Indeed, simple things like using a phone, locating a public toilet, asking for directions, finding out how much things cost, exchanging greetings or understanding what people want can become tremendously complex when expatriates don’t know a foreign language or a country’s customs and cultures. Even after spending years in China planning for the opening of Shanghai Disneyland, it was still challenging to clearly translate names, concepts and ideas from English into Chinese. For example, when Qi Zhu visited Shanghai Disneyland, the slogan ‘Ignite the magical dream within your heart’ translated as ‘strange dream’. Qi said, ‘What is a strange dream? [And] Why would I want a strange dream in a park?’93 Fangxing Pitcher, who is part of the park design group for Disney Imagineering, said, ‘Every time we come up with a name, we had to make sure it has a whimsical Disney feel, it resonates with Chinese people and it conveys what the experience is. If you just do a straight translation, all of that gets lost.’94 It has been shown that expatriates who receive predeparture language and cross-cultural training make faster adjustments to foreign cultures and perform better on their international assignments.95 Unfortunately, only one-third of the managers who go on international assignments are offered any kind of predeparture training, and only half of those actually participate in the training!96 This is somewhat surprising given the failure rates for expatriates and the high cost of those failures. Furthermore, with the exception of some language courses, pre-departure training is not particularly expensive or difficult to provide. Three methods can be used to prepare workers for international assignments: documentary training, cultural simulations and field experiences. Documentary training focuses on identifying specific critical differences between cultures. For example, when preparing to do business in India, Australians would learn that while they might prefer to make eye contact and shake hands firmly when greeting others, Indians, as a sign of respect, do just the opposite, avoiding eye contact and shaking hands limply.97

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SPOUSE, FAMILY AND DUAL-CAREER ISSUES

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Not all international assignments are difficult for expatriates and their families, but the evidence clearly shows that how well an expatriate’s spouse and family adjust to the foreign culture is the most important factor in determining the success or failure of an international assignment.98 In fact, a Harvard Business Review study found that 32 per cent of those offered international assignments turned them down because they did not want their families to have to relocate, while 28 per cent turned them down ‘to protect their marriages’.99 Unfortunately, despite its importance, there has been little systematic research on what does and does not help expatriates’ families successfully adapt. A number of companies, however, have found that adaptability screening and intercultural training for families can lead to more successful overseas adjustment. Adaptability screening is used to assess how well managers and their families are likely to adjust to foreign cultures. For example, Prudential Relocation

Management’s international division has developed an ‘Overseas Assignment Inventory’ to assess a spouse’s and family’s open-mindedness, respect for others’ beliefs, sense of humour and marital communication. Likewise, AMP, a worldwide producer of electrical connectors, conducts extensive psychological screening on expatriates and their spouses when making international assignments. Only 40 per cent of expatriates’ families receive language and cross-cultural training, yet such training is just as important for the families of expatriates as for the expatriates themselves.100 In fact, it may be more important because, unlike expatriates, whose professional jobs often shield them from the full force of a country’s culture, spouses and children are fully immersed in foreign neighbourhoods and schools. Households must be run, shopping must be done and bills must be paid – all usually in direct contact with the local population and probably in the local language. So is globalisation a good thing or a bad thing? This is something you will need to make up your own mind about after looking at all the evidence. You will notice that whenever the WTO has a meeting, or whenever a new bilateral or multilateral free trade agreement is proposed, there will be protests: often violent and prolonged protests. Still, as you have seen in this chapter, globalisation exists and it is spreading and speeding up rather than retreating. Any change process can lead to winners and losers – especially in the short term. Some reports indicate that globalisation has significantly improved living standards for many poor people in developing countries over the past quarter of a centur y, while causing greater inequalities in developed countries – with the rich in rich countries getting richer and the ‘poor’ in rich countries getting poorer.101 It is difficult to envisage some future where economic conditions in developing countries are actually improved by maintaining or increasing barriers to trade, so the PPLY globalisation E A Find out more about your process appears attitude to working in your home versus a foreign country with this self-assessment set to continue. ENGAG

After learning specific critical differences through documentary training, trainees can then participate in cultural simulations, in which they practise adapting to cultural differences. After learning about key differences between their home culture and Indian culture, they could practise adapting to those differences by role playing. Some workers could take the roles of Indian workers, while other workers could play themselves and try to behave in a way consistent with Indian culture. Finally, field simulation training places trainees in an ethnic neighbourhood for three to four hours to talk to residents about cultural differences. For example, an electronics manufacturer might prepare workers for assignments in China by having trainees explore a nearby Chinese neighbourhood and talk to shopkeepers and people on the street about Chinese family orientation and day-to-day living practices.

PART 2, CHAPTERS 5– 8

To understand management planning and strategy in a contemporary workplaces 5

Planning and Decision Making

☑ You have developed your understanding of the benefits and pitfalls of planning and you have covered the different kinds of managers.

☑ You are able to articulate how to make a plan that works, and you can describe how companies use plans at all management levels.

☑ You are familiar with the steps (and the limits) of rational decision-making and you will be able to identity and discuss how group decisions and group decision-making techniques can improve decision making.

OVERALL AIM OF PART 2

To understand management planning and strategy in a contemporary workplace

☑ You understand how operational plans –

Listen to an audio summary of this chapter in the End of Part summary

HAPTER 5

including budget processes, alternative approaches to business objectives, policies, practices and procedures – achieve organisational objectives. Organisational Strategy

☑ You have studied and can explain what strategy is and what it isn’t. You will be able to specify the components of sustainable competitive advantage and explain why it is important.

☑ You have covered the steps involved in the

Listen to an audio summary of this chapter in the End of Part summary

HAPTER 6

strategy-making process and can explain the different kinds of corporate-level strategies, industry-level strategies and firm-level strategies. Innovation and Change

☑ You have developed your understanding of the differences between change and innovation.

☑ You can articulate why innovation matters to organisations and you can discuss the different methods that managers can use for effective management of innovation.

☑ You have covered different methods that managers can use for better ☑ You can outline the rationale for change and show that not changing can lead to organisational decline. 8

HAPTER 7

management of change as it happens. Listen to an audio summary of this chapter in the End of Part summary

Global Management

☑ You understand the concept of globalisation, and you can discuss the impact of global business and the trade rules and agreements that govern it.

☑ You can show that you understand why companies choose to standardise or adapt their business procedures when operating internationally.

☑ You can articulate the different ways that companies can organise to do business globally and, in practice, you will know how to find a favourable business climate.

☑ You have learnt about the importance Listen to an audio summary of this chapter in the End of Part summary

HAPTER 8

of identifying and adapting to cultural differences and you can devise a plan to successfully prepare workers for international assignments.

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PART

THREE 9

Designing adaptive organisations

Managing teams

Managing people: human resource management

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ORGANISING

Designing adaptive organisations

LEARNING OUTCOMES

1 Describe the departmentalisation approach and the various organising principles which can be applied to organisational structure.

STRUCTURE AND PROCESS

2 Explain organisational authority. 3 Discuss different methods for job design. 4 Explain the methods that companies are using to redesign internal organisational processes.

5 Describe the methods that companies are using to redesign external organisational processes.

ENGAG

EO VID

Organisational structure is the

organisational structure the vertical and horizontal configuration of departments, authority and jobs within a company

vertical and horizontal configuration of departments, authority and jobs within a company. Organisational structure is concerned with questions such as ‘Who reports to whom?’, ‘Who does what?’ and ‘Where is the work done?’. Village Roadshow was founded in 1954 by Rok Kirby, who built an old-school drive-in movie theatre in the Melbourne suburb of Croydon. He swiftly expanded to owning about 40 drive-ins, and moved on to traditional suburban ‘hardtop’ cinemas. Rok eventually handed over control of the company to his two sons, Robert and John Kirby, who continued a program of expansion and diversification.1 The company now covers: ● A Cinema Exhibition division: Village Cinemas (1800 employees, with 700 screens at 74 sites in Australia) ● Village Roadshow Limited (200 employees, central company administration) ● A Film Distribution division (135 employees): Roadshow Films, distributing movies to cinemas, pay television and free-to-air television, and Roadshow Entertainment, distributer of DVD, Blu-Ray and digital content, and major supplier of movies to Foxtel, Stan and Netflix ● A Theme Parks division (3400 employees): Village Roadshow Theme Parks: Warner Bros Movie World, Sea World, Wet’n’Wild Gold Coast, Paradise County, Australian Outback Spectacular and Sea World Resort and Water Park. While these are all based in Queensland, the company also has two overseas theme parks: Wet’n’Wild Las Vegas, and Wet’n’Wild Haikou (Southern China)

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Windows Insider Program

Alamy Stock Photo/Takatoshi Kurikawa

● A Marketing Solutions division (100 employees): Edge provides business promotions and customer loyalty and incentive programs; Opia, based in the UK, focuses on digital and telecommunication programs for sales promotion and customer loyalty. In business, neither size nor diversification are guarantees of future success. The 2019 reports say that Village Roadshow had lost $500 million in market value over the past five years (including substantial losses on Wet’n’Wild Sydney, sold cheaply to Spanish interests). It was also reported that the Kirby brothers were engaged in a ‘feud’ over their different visions of where to take the business in future.2 In the first half of the chapter, you will learn about the traditional vertical and horizontal approaches to organisational structure, including departmentalisation, organisational authority and job design. An organisational process is the organisational process collection of activities that transforms the collection of activities that transform inputs into outputs inputs into outputs that customers that customers value value.3 For example, Microsoft uses basic internal and external processes

to write computer software, as shown in Figure 9.1. The process starts when Microsoft gets feedback from customers through Internet newsgroups, email, phone calls, social media or letters, or from the Windows Insider Program and the Windows Insider Program for Business. This information helps Microsoft understand customers’ needs and problems, and identify important software issues and needed changes and functions.

Windows Insider Program for Business

Feedback Hub App

Customer needs/problems

Identify software Issues Changes Functions

Recode software

Test software at Microsoft

Changes to beta software

Feedback from Windows Insiders beta testers Distribute and sell software to customers

FIGURE 9.1

152

Process view of Microsoft’s organisation

ENGAG

LO1

DEPARTMENTALISATION

When organisations are very small, or are just starting up, there is not a lot of need for sophisticated organisational structure. A small shop, say, can operate with one or maybe two levels of hierarchy and direct lines of reporting to ‘the boss’ as long as there are only about five to 10 employees. As organisations grow and become more complex, however, there comes a point at which a single manager cannot keep track of or communicate effectively with all the employees. This is where different kinds of structure come in.The organisation needs some better way of managing things rather than referring every decision to the most senior management, and it needs some logical way of clustering the employees into groups.This is where organisational departmentalisation and its various organising principles, discussed below, come into play.

EO VID

Traditionally, organisational structures have been based on some form of departmentalisation, a departmentalisation method of subdividing work and workers subdividing work and into separate organisational units that take workers into separate organisational units responsibility for completing particular responsible for completing tasks.5 For example, the Sony corporation particular tasks has separate departments or divisions for electronics, music, movies, computer games and game consoles, and theatres.6 Although we have chosen to use the word departmentalisation throughout to describe this process, it doesn’t matter if the ‘organisational units’ are called departments, sections, groups, teams or divisions: many authors refer to ‘divisionalisation’. Whatever the name, the principles remain the same. Traditionally, organisational structures have been created by departmentalising work according to one of the following: ● functional departmentalisation ● product departmentalisation ● customer departmentalisation ● geographic PPLY E A departmentalisation Get an overview of organisational structure ● matrix through departmentalisation departmentalisation. ENGAG

DESIGNING ORGANISATIONAL STRUCTURES

After reading the next three sections, you’ll have a better understanding of the importance of organisational structure because you should be able to: ● describe the departmentalisation approach to organisational structure ● explain organisational PPLY E A authority Get started with the media quiz: Modern Shed: ● discuss the different Designing Adaptive Organizations. methods for job design.

EO VID

Microsoft then rewrites the software, testing it internally at the company and then externally through its betatesting process, where customers who volunteer or are selected by Microsoft give the company extensive feedback, which is then used to make improvements. Ten million people, from every country on earth except two (Cuba and North Korea), participate as Microsoft or Windows Insiders. Using the Feedback Hub App, they report bugs that crash programs and indicate what changes and functionality they want. After final corrections are made, Microsoft distributes the officially updated version to its broader base of 400 million customers. The feedback process never ends, however, because as soon as Microsoft releases a new version of Windows, that release is followed by a beta version for testing and feedback from Microsoft’s 10 million Windows Insiders.4 This process view of Microsoft shown in Figure 9.1, which focuses on how to get things done, is very different from the hierarchical or structural view of a company, which focuses on accountability, responsibility and positions within the chain of command. In the second half of the chapter, you will learn how companies use reengineering and empowerment to redesign their internal organisational processes. Towards the end of the chapter, there will be a discussion of ways in which organisations are redesigning their external processes; that is, how they are changing to improve their interactions with those outside the organisation. In that section, we will explore the basics of modular and virtual organisational structures.

FUNCTIONAL DEPARTMENTALISATION The most common organisational structure is functional departmentalisation. Companies tend to use this structure when they are small or just starting out, although nearly a quarter of large companies (50 000 or more employees) also use functional departmentalisation.7

Functional departmentalisation organises work and workers into separate units responsible for particular business functions or areas of expertise. The basic organising principle underlying this kind of structure is ‘What job do you do?’, or in

functional departmentalisation organising work and workers into separate units responsible for particular business functions or areas of expertise

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slightly more formal terms, ‘What function are you working on?’ A common functional structure might have individuals organised into accounting, sales, marketing, production and human resources departments. If a new employee with marketing skills is hired to work on marketing functions, they will move into the marketing department. Not all functionally departmentalised companies have the same functions, however. Both the insurance company and the advertising agency shown in Figure 9.2 have sales, accounting, human resources and information systems departments, as indicated by the orange boxes. The blue and green boxes indicate the functions that are different. As would be expected, the insurance company has separate departments for life, car, home and health insurance. The advertising agency has departments that cover artwork and production, creative work, media buying and online development, as well as the ‘service’ functions mentioned above. The kind of functional departments in a functional structure will depend, in part, on the business or industry a company is in. Functional departmentalisation has some advantages. First, it allows work to be done by highly qualified specialists.

Insurance company

Sales

Information systems

Accounting

Human resources

Life insurance

Car insurance

Home insurance

Health insurance

Advertising agency

FIGURE 9.2

Sales

Information systems

Accounting

Human resources

Art & production

Media buying

Creative department

Online development

Functional departmentalisation: Examples

While the accountants in the accounting department take responsibility for producing accurate revenue and expense figures, the engineers in research and development can

154

focus their efforts on designing a product that is reliable and simple to manufacture. New employees benefit from being located with these experienced specialists, and they can often see a clear career path, if they work well and are promoted, in their area of specialty. Second, it lowers costs by reducing duplication. When the engineers in research and development come up with that fantastic new product, they don’t have to worry about creating an aggressive advertising campaign to sell it. That task belongs to the advertising and promotions experts in marketing. Third, with everyone in the same department having similar work experience or training, communication and coordination are less problematic, within the group, for departmental managers. At the same time, functional departmentalisation has a number of disadvantages. To start, cross-department coordination can be difficult. Managers and employees are often more interested in doing what’s right for their function than in doing what’s right for the entire organisation. As companies grow, functional departmentalisation may also lead to slower decision making as problems are referred up the chain of command, and it tends to produce managers and employees with narrow experience and expertise. Communication across the various departments can be difficult, as different occupations and specialties often have their own culture and jargon.

PRODUCT DEPARTMENTALISATION Product departmentalisation organises work and employees into separate units responsible for producing particular products or services. Here, the product organising principle is ‘What product or departmentalisation organising work and service do you work on?’ Figure 9.3 shows workers into separate a n ex a m p l e o f t h e p r o d u c t units responsible for producing particular departmentalisation structure as used by products or services United Technologies Corporation (UTC), which is organised along four different areas, each with its own product lines: Climate, Controls & Security (Carrier heating, ventilating and air-conditioning; Fire safety, security products and services; and food/transport refrigeration), Pratt & Whitney jet engines (Pratt & Whitney Commercial Engines, Pratt & Whitney Military Engines, Pratt & Whitney Canada and Pratt & Whitney Aero-Power), UTC Aerospace Systems (wing and co*ckpit controls, landing systems and sensors, aerostructures, electric power systems, and plane interiors) and Otis (elevators, escalators and moving walkways). 8 UTC’s Corporate Headquarters are in Farmington, Connecticut, with major divisions managed from other locations.9 One of the advantages of product departmentalisation is that, like functional departmentalisation, it allows managers and workers to specialise in one area of expertise. Unlike the narrow expertise and experiences in functional departmentalisation, however, managers and

UTC Climate, Controls & Security

Carrier HVAC

Fire Safety and Security

Food & Transport Refrigeration

Pratt & Whitney

Pratt & Whitney Commercial Engines

Pratt Pratt Wing and co*ckpit controls, Pratt & & landing systems and & Whitney Whitney sensors, aerostructures, Whitney Military Aeroelectric power systems Canada Engines Power and plane interiors.

Customer Service

Administrative Services

Engineering

Communication & Public Relations

Human Resources Information Technology

Customer Service & Support

Legal

E-Business

Maintenance & Field Operations

Engineering

Manufacturing Marketing & Sales Sourcing & Logistics

UTC Aerospace Systems

Otis

Elevators, escalators, and moving walkways

Enterprise Resource Planning Environmental Health & Safety Facilities & Services Human Resources Legal Manufacturing Procurement Quality

FIGURE 9.3

Product departmentalisation: United Technologies

Source: ‘At a Glance’, UTC, accessed 11 April 2017, http://www.utc.com/Our-Businesses/Pages/At-A-Glance.aspx.

workers develop a broader set of experiences and expertise related to an entire product line. Likewise, product departmentalisation makes it easier for top managers to assess work-unit performance. Because of the clear separation of their four different major product divisions, UTC’s top managers can easily compare the performance of UTC Aerospace Systems division and the Pratt & Whitney aircraft engines division. In 2016, Pratt & Whitney’s sales ($15.1 billion) were slightly larger than UTC Aerospace’s ($14.5 billion), but UTC Aerospace had a profit of $2.3 billion (a 15.9% margin) compared to Pratt & Whitney’s profit of $1.8 billion (11.9% margin).10 With this kind of structure, organisational decision making should be faster because managers and workers are responsible for the entire product line rather than for separate functional departments. Therefore, there are fewer conflicts (compared to functional departmentalisation) and it is more likely that decisions can be taken within the department rather than being referred ‘up the line’. Th e p r i m a r y d i s a d va n t a g e o f p r o d u c t departmentalisation is duplication. In Figure 9.3, you can see that both the UTC Climate, Controls & Security division and the Pratt & Whitney division have customer ser vice, engineering, human resources, legal,

manufacturing and procurement (similar to sourcing and logistics) departments. Duplication like this often results in higher costs. If UTC was organised by function, one legal department would handle matters related to both air conditioners and aircraft engines rather than working on only one or the other. A second disadvantage is the challenge of coordinating across the different product departments. UTC would probably have difficulty standardising its policies and procedures in product departments as different as the Carrier (heating, ventilating and air-conditioning) and UTC Aerospace (co*ckpit controls and landing systems) divisions.

CUSTOMER DEPARTMENTALISATION Customer departmentalisation organises work and workers into separate customer departmentalisation units responsible for particular kinds of organising work and customers. The organising principle is workers into separate units responsible for particular ‘What kind of customers do you work kinds of customers with?’ For example, a t ypical telecommunications company could be organised into departments that cater to business customers, individual consumers and mobile broadband operations.

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Chief Executive Ofﬁcer

Product & Technology – Group Executive

FIGURE 9.4

Consumer & Small Business – Group Executive

Enterprise – Group Executive

Global Business Services – Group Executive

Networks & IT – Group Executive

Transformation & People – Group Executive

Legal & Corporate Affairs – Group Executive and General Counsel

Telstra InfraCo – Chief Executive Ofﬁcer

The organisational structure of Telstra

In 2018, Telstra announced a major restructure, resulting in divisions or ‘teams’ focusing on different markets – as well as groups for internal service functions and development of new technology. This change, illustrated in Figure 9.4, resulted in the major divisions in Telstra’s new structure being: ● Product and Technology team ● Enterprise team (focused on major Australian and international businesses and on government clients) ● Consumer and Small Business team ● Networks and IT division ● Telstra InfraCo (focused on wholesale marketing to other telecommunications companies, plus management of Telstra’s fixed network assets.11 The primary advantage of customer departmentalisation is that it focuses the organisation on customer needs rather than on products or business functions. Furthermore, creating separate departments to serve specific kinds of customers allows companies to specialise and adapt their products and services to customer needs and problems. The primary disadvantage of customer departmentalisation is that, like product departmentalisation, it leads to duplication of resources. As with product departmentalisation, it can also be difficult to achieve coordination across different customer departments. Finally, in extreme cases, the emphasis on meeting customers’ needs may lead employees to make decisions that please customers but hurt the business.

GEOGRAPHIC DEPARTMENTALISATION geographic departmentalisation organising work and workers into separate units responsible for doing business in particular geographic areas

Geographic departmentalisation

organises work and workers into separate units responsible for doing business in particular geographic areas. Here, the organising principle is ‘What area are you responsible for?’ This can be applied at the suburban, city, state or province, national or global grouping level, depending on the size and coverage of the organisation. In Australia, Coca-Cola Amatil (CCA) produces CocaCola (co*ke) and other beverages for sale in Australia, New

156

Chief Financial Ofﬁcer & Head of Strategy

Zealand, Indonesia, Fiji and Papua New Guinea. CCA is one of the largest bottlers of non-alcoholic beverages in the Asia–Pacific region and one of the world’s top five CocaCola bottlers. CCA employs more than 13 000 people and claims more than 950 000 customers every day. The company has organised itself into specific geographical regions for production, sales and distribution.12 Coca-Cola has identified a Greater China and Korea region (included in the Pacific region of which the Australian operation is a part), Eurasia and Africa, Europe as well as the Americas. For example, Figure 9.5 shows the geographic departmentalisation used by Coca-Cola Enterprises (CCE), the largest bottler and distributor of Coca-Cola products in the world. Coca-Cola has five regional groups (Pacific Group, Eurasia and Africa Group, Europe Group, Latin America Group, North America Group), and Figure 9.5 shows the two CCE regional groups: Europe and North America. As the table in the figure shows, each of these regions would be a sizeable company by itself. The primary advantage of geographic departmentalisation is that it helps companies respond to the demands of different markets. This can be especially important when the company sells in different countries. For example, CCE’s geographic divisions sell products suited to taste preferences in different countries. Another advantage is that geographic departmentalisation can reduce costs by locating unique organisational resources closer to customers. For instance, it is much cheaper to build bottling plants in China than to bottle co*ke in Australia and then transport it to Hong Kong. The primary disadvantage of geographic departmentalisation is that it can lead to duplication of resources. For example, while it may be necessary to adapt products and marketing to different geographic locations, it’s doubtful that Coca-Cola needs significantly different inventory tracking systems from location to location. Also, even more than with the other forms of departmentalisation, it can be difficult to coordinate departments that are literally thousands of kilometres from each other and whose managers have very limited contact with each other.

Territories of operation CANADA

Bellevue Northwest

Toronto Canada Needham Heights New England

Eagan Midwest

Niles Lakeshore Pittsburgh Eastern Hawthorne UNITED STATES OF AMERICA Great Lakes New York Oakland Northern Lakota Cincinnati Columbia California Mid-America St Charles Tri-State Mid-Atlantic Central States Knoxville Los Angeles Southern States Southern California Atlanta Dallas Phoenix Desert Atlanta North Texas Mountain New Orleans Gulf State San Antonio Southwest Texas

Tampa Florida

PER CAPITA 1

POPULATION CONSUMPTION

North American 263m group

EMPLOYEES FACILITIES

300

63000

399

European 146m group

174

11000

Total company

255

74000

431

409m

(1) Number of eight-ounce servings consumed per person per year. (2) Facilities include 18 production, 335 sales/distribution and 46 combination sales and production plants in North America; and 3 production and 17 sales/distribution plants in Europe.

FIGURE 9.5

Great Britain Germany Rotterdam The Netherlands London Brussels Belgium Luxembourg Paris EUROPE Austria Switzerland France

Ireland

Italy Spain

Geographic departmentalisation: Coca-Cola Enterprises

Source: ‘Territories of operation, 2004 annual report’, Coca-Cola Enterprises, 2005.

MATRIX DEPARTMENTALISATION matrix departmentalisation a hybrid organisational structure in which two or more forms of departmentalisation, most often product and functional, are used together

Matrix departmentalisation is a hybrid

structure in which two or more forms of departmentalisation are used together. It is not simple to apply any one organising principle to matrix structure, although often an organisation will move to matrix departmental structure if its work is on a series of separate projects. The most common matrix combines the product and functional forms of departmentalisation, but other forms may also be used. An example of an organisation working on projects which could benefit from matrix departmentalisation would be a big construction and engineering company that could be involved in different major projects at the same time: a skyscraper in Shanghai, a bridge in Vietnam, a tunnel in Australia. In those cases, functional experts could be moved into project teams, each responsible for its single project and reporting to the project manager. Figure 9.6 shows the matrix structure used by USbased Procter & Gamble (P&G), which has 105 000 employees working in 70 different countries.13 The company

produces personal care and household consumer goods, including some of the world’s best-known brands such as Gillette, Vicks, Olay and Head & Shoulders. Across the top of Figure 9.6, you can see that the company uses a product-related business unit structure related first to the types of products and then further divided into departments responsible for specific brands. Managers will be responsible for the global efforts of their various branded products. In the blue boxes at the sides of the corporate diagram in Figure 9.6, you can see that the company also divides responsibility by function, with divisions or departments covering the specialised functions of Selling and Market Operations, Finance, Legal Matters, Human Resources, Communications, Information Technology and Global Business Services. Several things distinguish matrix departmentalisation from the other traditional forms of departmentalisation.14 First, most employees report to two bosses, one from each core part of the matrix. For example, in Figure 9.6, the manager responsible for Old Spice would report to the executive responsible for Beauty, Hair and Personal Care, and to the executive responsible for Finance. Second, by virtue of their hybrid design, matrix structures lead to much

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Business Units Baby, Feminine, & Family Care

Fabric & Home Care

Beauty, Hair, & Personal Care

Baby Care

Family Care

Feminine Care

Oral Care

Personal Health Care

Shave Care

Fabric Care

Home Care

Hair Care

Skin & Personal Care

Finance

Pampers

Bounty

Tampax

Crest

Vicks

Gillette

Tide

Swiffer

Pantene

Old Spice

Human resources

Pampers

Bounty

Tampax

Crest

Vicks

Gillette

Tide

Swiffer

Pantene

Old Spice

Communications

Pampers

Bounty

Tampax

Crest

Vicks

Gillette

Tide

Swiffer

Pantene

Old Spice

Legal

Pampers

Bounty

Tampax

Crest

Vicks

Gillette

Tide

Swiffer

Pantene

Old Spice

Information Pampers technology

Bounty

Tampax

Crest

Vicks

Gillette

Tide

Swiffer

Pantene

Old Spice

Bounty

Tampax

Crest

Vicks

Gillette

Tide

Swiffer

Pantene

Old Spice

Global business services

FIGURE 9.6

Health & Grooming

Pampers

Selling & Market Operations (SMOs)

Matrix departmentalisation: Procter & Gamble

Source: ‘Corporate Structure’, Procter & Gamble, accessed 11 April 2017, http://us.pg.com/who_we_are/structure_governance/corporate_structure.

more cross-functional interaction than other forms of departmentalisation. In fact, while matrix employees are typically members of only one functional department (based on their work experience and expertise), they are also commonly members of several ongoing project, product or customer groups. Third, because of the high level of cross-functional interaction, matrix departmentalisation requires significant coordination between managers in the different parts of the matrix. In particular, managers have the complex job of tracking and managing the multiple demands (project, product, customer or functional) on employees’ time. The primary advantage of matrix departmentalisation is that it allows companies to efficiently manage large, complex tasks like researching, developing and marketing pharmaceuticals, carrying out complex global businesses, or focusing on major projects with tight deadlines. Efficiency comes from avoiding duplication. For example, rather than having an entire marketing function for each project, the company simply assigns and reassigns employees from the marketing department as they are needed at various stages of product completion. More specifically, an employee from a department may simultaneously be part of five different ongoing projects, but may be actively completing work on only a few projects at a time. Another advantage is the pool of resources available to carry out large, complex tasks. Because of the ability to quickly pull in expert help from all the functional areas of the company, matrix project managers have a much more 158

diverse set of expertise and experience at their disposal than do managers in the other forms of departmentalisation. The primary disadvantage of matrix departmentalisation is the high level of coordination required to manage the complexity involved with running large, ongoing projects at various levels of completion. Matrix structures are notorious for confusion and conflict between project bosses in different parts of the matrix. At P&G, such confusion or conflict could occur between managers in, say, the Skin and Personal Care Division and managers in the Selling and Market Operations Group. Disagreements or misunderstandings about schedules, budgets, available resources and the availability of employees with particular functional expertise are common in matrix organisations. Another disadvantage is that matrix structures require much more management skill than the other forms of departmentalisation. Because of these problems, many simple matrix matrix structures evolve from a simple a form of matrix departmentalisation in which matrix , in which managers in different managers in different parts of parts of the matrix negotiate conflicts the matrix negotiate conflicts and resources and resources directly, to a complex complex matrix matrix , in which specialised matrix a form of matrix managers and departments are added departmentalisation in which managers in different parts to the organisational structure. In a of the matrix report to matrix complex matrix, managers from managers, who help them sort out conflicts and problems different parts of the matrix might report to the same matrix manager, who helps them sort out conflicts and problems.

LO2

ORGANISATIONAL AUTHORITY

The second part of traditional organisational structures is authority, which is the right to give commands, take action and make decisions to achieve organisational objectives.15 Traditionally, organisational authority has been characterised by the following dimensions: ● chain of command ● line versus staff authority ● delegation of authority ● degree of centralisation.

authority the right to give commands, take action and make decisions to achieve organisational objectives

CHAIN OF COMMAND Let’s take Sony Corporation’s organisational structure as an example. A manager in any of the corporation’s divisions ultimately reports to the head of that division. That division head, in turn, reports to the corporation’s global Chairman, Kazuo Hirai. This line, which vertically connects every job in the company to higher levels of management, represents the chain of command. The chain of chain of command the vertical line of authority command is the vertical line of authority that clarifies who reports that clarifies who reports to whom to whom throughout the throughout the organisation. People organisation higher in the chain of command have the right, if they so choose, to give commands, take action and make decisions concerning activities occurring anywhere below them in the chain. In the following discussion about delegation and decentralisation, you will learn that managers don’t always choose to exercise their authority directly. One of the key assumptions underlying the chain of command is unity of command, which unity of command means that employees should report to just a management principle that employees should one boss.16 In practical terms, this means report to just one boss that only one person can be in charge at a time. Matrix organisations, in which employees have two bosses, automatically violate this principle. This is one of the primary reasons that matrix organisations are difficult to manage. The purpose of unity of command is to prevent the confusion that might arise when an employee receives conflicting commands from two different bosses.

LINE VERSUS STAFF AUTHORITY line authority the right to command immediate subordinates in the chain of command staff authority the right to advise, but not command, others who are not subordinates in the chain of command

A second dimension of authority is the distinction between line and staff authority. Line authority is the right to command immediate subordinates in the chain of command. For example, Thomson Reuters CEO James C. Smith has line authority over the president of the company’s

Financial & Risk Information division. Smith can issue orders to that division president and expect them to be carried out. In turn, the president of the Financial & Risk Information division can issue orders to his subordinates, who run the trading, investors, marketplaces, and governance, risk and compliance divisions and expect them to be carried out. The terms line and staff are also used to describe different functions within the organisation. A line line function function is an activity that contributes an activity that contributes directly to creating or directly to creating or selling the company’s selling the company’s products. So, for example, activities that products take place within the manufacturing and staff function an activity that does not marketing departments would be contribute directly to considered line functions. A staff function, creating or selling the such as accounting, human resources or company’s products, but instead supports line legal services, does not contribute directly activities to creating or selling the company’s products, but instead supports line activities. For example, marketing managers might consult with the legal staff to make sure the wording of a particular advertisem*nt is legal.

DELEGATION OF AUTHORITY Managers can exercise their authority directly by completing the tasks themselves, or they can choose to pass on some of their authority to subordinates. delegation of Delegation of authority is the assignment authority of direct authority and responsibility to a the assignment of direct authority and subordinate to complete tasks for which the responsibility to a subordinate to complete manager is normally responsible. tasks for which the When a manager delegates work, manager is normally three transfers occur, as illustrated in responsible Figure 9.7. First, the manager transfers full responsibility for the assignment to the subordinate. Many managers find giving up full responsibility somewhat difficult. At Apple, when you have been delegated to do a certain task, you become the ‘DRI’ or the ‘directly responsible individual’. As a former Apple employee explains, ‘Any effective meeting at Apple will have an action list. Next to each action item will be the DRI, who of course is responsible for completing that delegated responsibility. Furthermore, when you’re trying to figure out who to contact to get something done in Apple’s corporate structure, people simply ask, “Who’s the DRI on that?”’17 TripAdvisor’s Matthew Mamet says, ‘When I’m the DRI on a task, it can sometimes come with a bit of apprehension (*Gulp*, not 100% sure how I’m going to do that ... but ok I’ll figure it out), or maybe with a bit of grumbling (oh man, I guess I gotta do that, too), but being the DRI always comes with a sense of responsibility to the team.’18 Another problem is that managers often fear that the task won’t be done as well as if they did it themselves. Some management consultants and scholars talk about a ‘saviour complex’ under which managers believe that they are the only person who could do the job effectively. However, one

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Manager

Responsibility

Subordinate

Authority

Accountability

FIGURE 9.7

Delegation: responsibility, authority and accountability

CEO says, ‘If you can delegate a task to somebody who can do it 75 per cent to 80 per cent as well as you can today, you delegate it immediately’. Why? The reason is that many tasks don’t need to be done perfectly; they just need to be done. Delegating tasks that someone else can do frees managers to assume other important responsibilities. Sometimes managers delegate only to later interfere with how the worker is performing the task. ‘Why are you doing it that way? That’s not the way I do it.’ In contrast, delegating full responsibility means that the worker – not the manager – is now completely responsible for task completion. The second transfer that occurs with delegation is that the manager gives the subordinate full authority over the budget, resources and personnel needed to do the job. To do the job effectively, subordinates must have the same tools and information at their disposal that managers had when they were responsible for the same task. In other words, for delegation to work, delegated authority must be commensurate with delegated responsibility. The third transfer that occurs with delegation is the transfer of accountability. The subordinate now has the authority and responsibility to do the job and in return is accountable for getting the job done. In other words, managerial authority and responsibility is delegated to subordinates in exchange for results.

DEGREE OF CENTRALISATION If you’ve ever called a company’s toll-free number with a complaint or a special request and been told by the customer service representative, ‘I’ll have to ask my manager’, or ‘I’m not authorised to do that’, you know that centralisation of authority exists in that company. Centralisation of authority is the location of most authority at the upper 160

levels of the organisation. In these organisations, managers make most centralisation of decisions, even the relatively small ones. authority the location of most authority That’s why the customer service at the upper levels of the representative you called couldn’t make a organisation decision without first asking the manager. If you are lucky, however, you may have talked to a customer service representative at another company who said, ‘I can take care of that for you right now’. In other words, the person was able to handle your problem without any input from, or consultation with, company management. Decentralisation is the location of a significant amount of authority in the lower levels of the organisation. An organisation is decentralised if it has a high degree of delegation at all levels. In decentralisation a decentralised organisation, workers the location of a significant amount of authority in the closest to problems are authorised to lower levels of the organisation make the decisions necessary to solve the problems on their own.

MGMT IN PRACTICE

HOW TO BE A MORE EFFECTIVE DELEGATOR 1 Trust your staff to do a good job. Recognise that others have the talent and ability to complete projects. 2 Avoid seeking perfection. Establish a standard of quality and provide a time frame for reaching it. 3 Give effective job instructions. Make sure employees have enough information to complete the job successfully.

Shutterstock.com/Michal Kowalski

Decentralisation has a number of advantages. It develops employee capabilities throughout the company and leads to faster decision making and more satisfied customers and employees. Furthermore, a study of 1000 large companies found that companies with a high degree of decentralisation outperformed those with a low degree of decentralisation in terms of return on assets (6.9 per cent versus 4.7 per cent), return on investment (14.6 per cent versus 9 per cent), return on equity (22.8 per cent versus 16.6 per cent) and return on sales (10.3 per cent versus 6.3 per cent). Surprisingly, the same study found that few large companies actually are decentralised. Specifically, only 31 per cent of employees in these 1000 companies were responsible for recommending improvements to management. Overall, just 10 per cent of employees received the training and information needed to support a truly decentralised approach to management.20 With results like these, the key question is no longer whether companies should decentralise, but where they should decentralise. One rule of thumb is to stay centralised where standardisation is important and to standardisation decentralise where standardisation is solving problems by unimportant. Standardisation is solving consistently applying the same rules, procedures problems by consistently applying the and processes same rules, procedures and processes.

LO3

JOB DESIGN APPLY

E ‘Welcome to McDonald’s. Complete the ‘Management decision’ May I have your order worksheet for Chapter 9 please?’ 2 Listen to the order. Repeat it for accuracy. State the total cost. ‘Please drive to the second window.’ 3 Take the money. Give change. 4 Give customers drinks, straws and napkins. 5 Give customers food. 6 ‘Thank you for coming to McDonald’s.’ Could you stand to do the same simple tasks an average of 50 times per hour, 400 times per day, 2000 times per week, 8000 times per month? Few can. Fast-food employees rarely stay on the job more than six months. Indeed, McDonald’s and other fast-food restaurants have well over 100 per cent employee turnover each year.21 In this next section, you will learn about job design – the number, kind and job design variety of tasks that individual employees the number, kind and variety of tasks that perform in doing their jobs. You will learn: individual employees ● why companies continue to use perform in doing their jobs specialised jobs like the McDonald’s drive-through job ● how job rotation, job enlargement and job enrichment can be used to overcome the problems associated with job specialisation ● how the job characteristics model is being used to overcome the problems associated with job specialisation. ENGAG

EO VID

4 Know your true interests. Delegation is difficult for some people who actually prefer doing the work themselves rather than managing it. 5 Follow up on progress. Build in checkpoints to help identify potential problems. 6 Praise the efforts of your staff. 7 Don’t wait until the last minute to delegate. Avoid crisis management by routinely delegating work. 8 Ask questions, expect answers and assist employees to help them complete the work assignments as expected. 9 Provide the resources you would expect if you were doing an assignment yourself. 10 Delegate to the lowest possible level to make the best possible use of organisational resources, energy and knowledge.19

JOB SPECIALISATION Job specialisation occurs when a job is job composed of a small part of a larger task or specialisation process. Specialised jobs are characterised a job composed of a small part of a larger by simple easy-to-learn steps, low variety task or process and high repetition, like the McDonald’s drive-through window job just described. One of the clear disadvantages of specialised jobs is that, being so easy to learn, they quickly become boring. This, in turn, can lead to low job satisfaction and high absenteeism and employee turnover, all of which are very costly to organisations. Why, then, do companies continue to create and use specialised jobs? The primary reason is that specialised jobs are very economical. As we saw in Chapter 2, looking at the work of Frederick Taylor, and Frank and Lillian Gilbreth with scientific management, once a job has been specialised, it takes little time to learn and master. Consequently, when experienced employees quit or are absent, the company can replace them with new employees and lose little productivity. For example, next time you’re at McDonald’s, notice the pictures of the food on the cash registers. These

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Alamy Stock Photo/John Morrison

of specialised work. At the same time, the greater variety of tasks can make the work less boring and more satisfying for employees. On the other hand, the jobs are generally at the same level of pay and responsibility, and employees can sometimes respond with comments like ‘I used to have one boring job, and now I rotate between two boring jobs’. Another way to counter the disadvantages of specialisation is to enlarge the job. Job job enlargement enlargement increases the number of increasing the number different tasks that an employee performs of different tasks that an employee performs within one within one particular job. So, instead of particular job being assigned just one task, employees with enlarged jobs are given several tasks to perform. For example, an enlarged ‘mirror attacher’ job might include attaching the mirror, checking to see that the mirror’s power adjustment controls work and then cleaning the mirror’s surface. Once again, as with job rotation, the work is generally at the same level of skill, responsibility and pay. Though job enlargement increases variety, many employees report feeling more stress when their jobs are enlarged. Consequently, many employees view enlarged jobs as simply ‘more work’, especially if they are not given additional time to complete the additional tasks. In comparison, job enrichment attempts to overcome the job enrichment deficiencies in specialised work by increasing the number of tasks increasing the number of tasks and by in a particular job and giving employees the authority and giving employees the authority and control control to make meaningful to make meaningful decisions about their decisions about their work work.23

McDonald’s has numerous processes which enhance job specialisation

pictures make it easy for McDonald’s trainees to quickly learn to take orders. Likewise, to simplify and speed operations, the drink dispensers behind the counter are set to automatically fill drink cups. Put a medium cup below the dispenser. Punch the medium drink button. The soft drink machine then fills the cup to within a centimetre of the top while that same employee goes to get your fries. At McDonald’s, every task has been simplified in this way. Because the work is designed to be simple, wages can remain low since it isn’t necessary to pay high salaries to attract highly experienced, educated or trained employees.

Because of the efficiency of specialised jobs, companies are often reluctant to eliminate them. Consequently, job redesign efforts have focused on modifying jobs to keep the benefits of specialised jobs, while reducing their obvious costs and disadvantages. Three methods – job rotation, job enlargement and job enrichment – have been used to try to improve specialised jobs.22 Note that job rotation, job enlargement and job enrichment are not part of the job characteristics model (JCM) which is explained in the next section. While still useful in the right circ*mstances, they are part of earlier moves to improve employees’ experience of their jobs. Job rotation attempts to overcome job rotation the disadvantages of job specialisation by periodically moving employees from one periodically moving employees from one specialised job to another specialised job to another to give them to give them more variety and the opportunity to use more variety and the opportunity to use different skills different skills. For example, an office receptionist who does nothing but answer phones could be systematically rotated to a different job, such as typing, filing or data entry, every day or two. Likewise, a ‘mirror attacher’ working in a car manufacturing plant might attach mirrors in the first half of the day’s work shift and then install bumpers during the second half. Because employees simply switch from one specialised job to another, job rotation allows companies to retain the economic benefits 162

Getty Images/Andy Sacks

JOB ROTATION, ENLARGEMENT AND ENRICHMENT

Job rotation, enlargement or enrichment might be used in a car manufacturing plant where many of the employees work on specialised tasks

JOB CHARACTERISTICS MODEL In contrast to job rotation, job job characteristics enlargement and job enrichment, which model (JCM) an approach to job redesign focus on providing variety in job tasks, that seeks to formulate jobs in the job characteristics model ways that motivate employees and lead to positive work (JCM) is an approach to job redesign outcomes that seeks to formulate jobs in ways that motivate employees and lead to positive work outcomes.24 As shown in Figure 9.8, the primary goal of the model is to create jobs that result in positive personal

Redesigning jobs

Core job characteristics

Critical psychological states

Personal and work outcomes

Combining tasks Skill variety Forming natural work units Task identity Establishing client relationships Vertically loading the job

Task significance

Autonomy

Feedback Opening feedback channels

FIGURE 9.8

Experienced meaningfulness of the work Experienced responsibility for the outcomes of work Knowledge of the actual results of work activity

High internal work motivation High ‘growth’ satisfaction High general job satisfaction High work effectiveness

Job characteristics model (JCM)

Source: J. R. Hackman and G. R. Oldham, Work Redesign (Reading, MA: Addison-Wesley, 1980).

and work outcomes such as internal work motivation, satisfaction with one’s job and work effectiveness. Of these, the central concern of the JCM internal motivation is internal motivation, which is the motivation that comes from the job itself rather motivation that comes from the job than from outside rewards itself rather than from outside rewards, such as a raise or praise from the boss. If employees feel that performing the job well is itself rewarding, then the job has internal motivation. Statements such as ‘I get a nice sense of accomplishment’ or ‘I feel good about myself and what I’m producing’ are examples of internal motivation. In Figure 9.8, you can see that the JCM specifies three critical psychological states that must occur for work to be internally motivating: 1 Employees must experience the work as meaningful – they must view their job as being important. 2 Employees must experience responsibility for work outcomes – they must feel personally responsible for the work being done well. 3 Employees must have knowledge of results – they must know how well they are performing their jobs. For example, supermarket cashiers usually have knowledge of results. When you’re slow, your checkout line grows long. If you make a mistake, customers point it out: ‘No, I think that’s on sale for $2.99, not $3.99’. Likewise, cashiers experience responsibility for work outcomes. At the end of the day, the register is totalled

and the money is counted. Ideally, the money matches the total sales in the register. If the money in the cash draw is less than what’s recorded in the register, some stores make the cashier pay the difference. Consequently, most cashiers are very careful to avoid being caught short at the end of the day. Nonetheless, despite knowing the results and experiencing responsibility for work outcomes, it can be presumed that most supermarket cashiers would not be internally motivated because it might be difficult for them to consider their work as meaningful. With scanners, it takes little skill to learn or do the job – anyone can do it. In addition, cashiers have few decisions to make and the job is highly repetitive. Of course, this raises the question: what kinds of jobs produce the three critical psychological states? Moving a step to the left in Figure 9.8, you can see that these psychological states arise from jobs that are strong on five core job characteristics: ● skill variety ● task identity ● task significance skill variety the number of different ● autonomy activities performed in ● feedback. a job Skill variety is the number of task identity different activities performed in a job. the degree to which a job, beginning to end, Task identity is the degree to which a from requires the completion of job, from beginning to end, requires a whole and identifiable completion of a whole and identifiable piece of work

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piece of work. Task significance is the degree to which a job is perceived to have a substantial impact on others inside or outside the organisation. Autonomy is the degree to which a job gives employees the discretion, freedom and independence to decide how and when to accomplish the work. Finally, feedback is the amount of information the job provides to employees about their work performance. To illustrate how the core job characteristics work together, let’s use them to more thoroughly assess why the McDonald’s drive-through window job is not particularly satisfying or motivating. For starters, skill variety is low. Except for the size of an order or special requests (‘no pickles’), the process is the same for each customer. At best, task identity is moderate. Although you take the order, handle the money and deliver the food, others are responsible for a larger part of the process – preparing the food. Task identity will be even lower if the McDonald’s has two drive-through windows because each drive-through window employee will have an even more specialised task. The first is limited to taking the order and making change, while the second just delivers the food. Task significance, the impact you have on others, is probably low. Autonomy is also very low: McDonald’s has strict rules about dress, cleanliness and procedures, often with detailed checklists to follow and scripts to repeat. But the job does provide immediate feedback, such as positive and negative customer comments, car horns honking, the amount of time it takes to process orders and the number of cars in the drive-through. With the exception of feedback, the low levels of the core job characteristics show why the drive-through window job is not internally motivating for many employees. What can managers do when jobs aren’t internally motivating? The far left column of Figure 9.8 lists five job redesign techniques that managers can use to strengthen a job’s core characteristics. Combining tasks increases skill variety and task identity by joining separate, specialised tasks into larger work modules. For example, some trucking companies are now requiring truck drivers to load their rigs as well as drive them. The hope is that involving drivers in loading will ensure that trucks are properly loaded, thus reducing damage claims. Work can be formed into natural work units by arranging tasks according to logical or meaningful groups. Although many trucking companies around the world randomly assign drivers to trucks, some have begun assigning drivers to particular customers, geographic locations or to truckloads that require

task significance the degree to which a job is perceived to have a substantial impact on others inside or outside the organisation autonomy the degree to which a job gives employees the discretion, freedom and independence to decide how and when to accomplish the job feedback the amount of information a job provides to employees about their work performance

164

special driving skills when being transported (e.g. oversized loads, chemicals, etc.). Forming natural work units increases task identity and task significance. Establishing client relationships increases skill variety, autonomy and feedback by giving employees direct contact with clients and customers. In some companies, truck drivers are expected to establish business relationships with their regular customers. When something goes wrong with a shipment, the customer is told to call the driver directly. Vertical loading means pushing some managerial authority down to employees. For truck drivers, this means that they have the same authority as managers to resolve customer problems. In some companies, if a late shipment causes problems for a customer, the driver has the authority to fully refund the cost of that shipment (without first obtaining management’s approval). The last job redesign technique offered by the model, opening feedback channels, means finding additional ways to give employees direct, frequent feedback about their job performance.

DESIGNING ORGANISATIONAL PROCESSES

More than 40 years ago, Tom Burns and G.M. Stalker described how two kinds of organisational designs, mechanistic and organic, are appropriate for different kinds of organisational environments. 25 mechanistic Mechanistic organisations are organisation characterised by specialised jobs and an organisation characterised by specialised jobs and responsibilities; precisely defined, responsibilities; precisely unchanging roles; and a rigid chain of defined, unchanging roles; command based on centralised authority and a rigid chain of command based on centralised authority and vertical communication. This type of and vertical communication organisation works best in stable, organic organisation unchanging business environments. By an organisation characterised contrast, organic organisations are by broadly defined jobs and responsibility; loosely defined, characterised by broadly defined jobs and frequently changing roles; responsibility; loosely defined, frequently and decentralised authority changing roles; and decentralised authority and horizontal communication based on task knowledge and horizontal communication based on task knowledge. This type of organisation works best in dynamic, changing business environments. As management scholars put it more recently, because organisations have to be ever more adaptable, flexible and innovative in linking to their environment, ‘organisational

structures also are gradually transforming from vertical, hierarchical, functional structures that were suitable for stable and predictable environments, into increasingly more horizontal, team-oriented, adaptable forms’.26 The organisational design techniques described in the first half of this chapter – departmentalisation, authority and job design – are better suited to mechanistic organisations and the stable business environments that were more prevalent before 1980. In contrast, the organisational design techniques discussed next, in the second part of the chapter, are more appropriate for organic organisations and the increasingly dynamic environments in which today’s businesses compete. The key difference between these approaches is that whereas mechanistic organisational designs focus on organisational structure, organic organisational designs are concerned with organisational process, the collection of activities that transform inputs into outputs valued by customers. After reading the next two sections, you should be able to: ● explain the methods that companies are using to redesign internal organisational processes (i.e. intraorganisational processes) ● describe the methods that companies are using to redesign external organisational processes (i.e. interorganisational processes).

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INTRA-ORGANISATIONAL PROCESSES

An intra-organisational process is the collection of activities that take place within an organisation to transform inputs into outputs that customers value. Let’s take a look at how companies are using reengineering and empowerment to redesign intraorganisational processes.

intra-organisational process the collection of activities that take place within an organisation to transform inputs into outputs that customers value

REENGINEERING In their best-selling book Reengineering the corporation, Michael Hammer and James Champy define reengineering as ‘the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed’.27 Hammer and Champy further explain the four key words shown in italics in this definition. The first key word is fundamental. When reengineering organisational designs, managers must ask themselves, ‘Why do we do what we

do?’ and ‘Why do we do it the way we do?’ The usual answer is, ‘Because that’s the way we’ve always done it’. The second key word is radical. Reengineering is about significant change, about starting over by throwing out the old ways of getting work done. The third key word is processes. Hammer and Champy noted that ‘most business people are not process oriented; they are focused on tasks, on jobs, on people, on structures, but not on processes’. The fourth key word is dramatic. Reengineering is about achieving a quantum leap in company performance.28 An example from IBM Credit’s operation illustrates how work can be reengineered. IBM Credit lends businesses money to buy IBM computers. Previously, the loan process began when an IBM salesperson called the home office to obtain credit approval for a customer’s purchase. The first department involved in the process took the credit information over the phone from the salesperson and recorded it on the credit form. The credit form was sent to the credit checking department, then to the pricing department (where the interest rate was determined) and on through a total of five departments. In all, it took the five departments six days to approve or deny the customer’s loan. Of course, this delay cost IBM business. Some customers got their loans elsewhere. Others, frustrated by the wait, simply cancelled their orders. Finally, two IBM managers decided to walk a loan straight through each of the departments involved in the process. At each step, they asked the employees to stop what they were doing and immediately process their loan application. They were shocked by what they found. From start to finish, the entire process took just 90 minutes! The six-day turnaround time was almost entirely due to delays in handing on the work from one department to another. The solution: IBM redesigned the process so that one person, not five people in five separate departments, now handles the entire loan approval process without any extra handling. Approval time dropped from six days to four hours and allowed IBM Credit to increase the number of loans it handled by a factor of 100!29 Reengineering changes an organisation’s orientation from vertical to horizontal. Instead of ‘taking orders’ from upper management, lower- and middle-level managers and employees ‘take orders’ from a customer who is at the beginning and end of each process. Instead of running independent functional departments, managers and employees in different departments take ownership of cross-functional processes. Instead of simplifying work so that it becomes increasingly specialised, reengineering complicates work by giving employees increased autonomy and responsibility for complete processes. task In essence, reengineering changes interdependence the extent to which work by changing t a s k i n t e r - collective action is dependence , the extent to which required to complete an collective action is required to complete entire piece of work

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Pooled interdependence

MGMT IN PRACTICE

IN PLAIN ENGLISH … The definition of intra-organisational process tells you exactly what it is, but here’s a quick example to help you get to ‘Oh, that’s it’. The steps involved in an automobile insurance claim are a good example of an intra-organisational process: • Document the loss (i.e. the accident). • Assign an appraiser to determine the dollar amount of damage. • Make an appointment to inspect the vehicle. • Inspect the vehicle. • Write an appraisal and get the repair shop to agree to the damage estimate. • Pay for the repair work. • Return the repaired car to the customer.

Finished product

Sequential interdependence Finished product

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Reciprocal interdependence

Finished product

FIGURE 9.9

an entire piece of work. There are three kinds of task interdependence, as shown in Figure 9.9.30 In pooled interde pendenc e , each job or department independently contributes to the whole. In sequential interdependence , work must be performed in succession, as one group’s or job’s outputs become the inputs for the next group or job. For example, the chassis and then the body need to move along the auto assembly line before the engine can be put into place. Finally, in reciprocal interdependence, different jobs or groups work together in a back-and-forth manner to complete the process. An example of this is when the in-flight air crew on short-haul intercity flights hands over the aircraft to the ground crew, refuelling staff, engineers, caterers and cleaners, who need to finish their tasks before the aircraft can be handed back to the air crew to start the next leg.

pooled interdependence work completed by having each job or department independently contribute to the whole sequential interdependence work completed in succession, with one group’s or job’s outputs becoming the inputs for the next group or job reciprocal interdependence work completed by different jobs or groups working together in a back-and-forth manner

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Reengineering and task interdependence

By reducing the handoffs between different jobs or groups, reengineering decreases sequential interdependence. Likewise, reengineering decreases pooled interdependence by redesigning work so that formerly independent jobs or departments now work together to complete processes. Finally, reengineering increases reciprocal interdependence by making groups or individuals responsible for larger, more complete processes in which several steps may be accomplished at the same time. As an organisational design tool, reengineering promises big rewards, but it has also come under severe criticism. The most serious complaint is that because it allows a few employees to do the work formerly done by many, reengineering is simply a corporate code word for cost cutting and employee layoffs.31 Likewise, for that reason, detractors claim that reengineering hurts morale and performance. As an example of this, even though the American clothing company Levi Strauss found that they could reduce their ordering times from three weeks to three days, the company decided to end an $850 million reengineering project because of the fear and turmoil it created in the company’s workforce. One low point occurred when Levi management, encouraged by its reengineering

Employees feel competent when they believe they can perform an activity with skill. The belief that they are having an impact comes from a feeling that they can affect work outcomes. And the feeling of self-determination arises from employees’ belief that they have the autonomy to choose how best to do their work.

consultants, told 4000 workers that they would have to ‘reapply for their jobs’ as the company shifted from its traditional vertical structure to a process-based form of organising. Thomas Kasten, Levi Strauss’s vice president for reengineering and customer service at that time, said, ‘We felt the pressure building up [over reengineering efforts], and we were worried about the business.’32 Today, even reengineering gurus Hammer and Champy admit that roughly 70 per cent of all reengineering projects fail because of the effects on people in the workplace. Says Hammer, ‘I wasn’t smart enough about that [the people issues]. I was reflecting my engineering background and was insufficiently appreciative of the human dimension. I’ve [now] learned that’s critical’.33

SMART MGMT

EMPOWERMENT IN THE HOTEL INDUSTRY In the Ritz-Carlton Hotel group, all employees are empowered to spend up to $2000 to solve customer service problems. That’s not $2000 per year or even $2000 per day: it’s $2000 per incident. And, employees can spend that $2000 without asking for any managerial approval. Carmine Gallo, president of Gallo Communications Group, and his wife, were eating in a Ritz-Carlton restaurant which was particularly busy, meaning that service was slow. Gallo says, ‘During one especially busy time at the hotel’s restaurant, the waiter apologized for the wait, gave us complimentary appetizers, and paid for our desserts. When I asked him why he did so, he said, “I’m empowered to keep my guests happy”’.37

EMPOWERMENT Get an overview of employee empowerment

Employees experience strong feelings of empowerment when they are given the proper information and resources, and are allowed to make good decisions. Empowerment is a feeling of intrinsic motivation, in which employees perceive their work to have impact and meaning, and perceive themselves to be competent and capable of self-determination.36 Work has meaning when it is consistent with personal standards and beliefs.

empowerment feelings of intrinsic motivation, in which employees perceive their work to have impact and meaning, and perceive themselves to be competent and capable of self-determination

Empowerment can lead to changes in organisational processes because meaning, competence, impact and self-determination produce empowered employees who take active, rather PPLY E A than passive, roles Find out more about your attitude toward flexibility and structure in in their work. the workplace with this self assessment

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A warehouse employee can see on the intranet that a shipment is late but has no authority to accelerate its delivery. A project manager knows – and can mathematically demonstrate – that a seemingly minor spec change will bust both her budget and her schedule. The spec must be changed anyway. An airline reservations agent tells the Executive Platinum Premier frequent flier that first class appears wide open for an upgrade. However, the airline’s yield management software won’t permit any upgrades until just four hours before the flight, frequent fliers (and reservations) be damned. In all these cases, the employee has access to valuable information. Each one possesses the ‘knowledge’ to do the job better. But the knowledge and information are irrelevant and useless. Knowledge isn’t power; the ability to act on knowledge is power.35

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Another way of redesigning intraorganisational processes is through empowerment. Empowering employees means permanently empowering passing decision-making authority and employees responsibility from managers to permanently passing decision-making authority employees. For employees to be fully and responsibility from empowered, companies must give them managers to employees by giving them the the information and resources they need information and resources to make and carry out good decisions, and they need to make and carry out good decisions then reward them for taking individual initiative.34 Unfortunately, this doesn’t happen often enough. As Michael Schrage, author and MIT researcher, wrote: E

Shutterstock.com/chrisdorney

APPLY

INTER-ORGANISATIONAL PROCESSES

An inter-organisational process is a collection of activities that occurs among companies to transform inputs into outputs that customers value. In other words, many companies work together to

inter-organisational process a collection of activities that take place among companies to transform inputs into outputs that customers value

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create a product or service that keeps customers happy. For example, when you purchase a product from the Body Shop, you’re not just buying from your local store, you’re also buying from a network of hundreds of suppliers in dozens of countries as diverse as Ghana, Guatemala, India, Ireland and Italy that produces the ingredients and the entire line of products.38 In this section, you’ll explore inter-organisational processes by learning about: ● modular organisations ● virtual organisations.39

MODULAR ORGANISATIONS Except for the core business activities that they can perform better, faster and cheaper than others, modular modular organisations outsource all organisation an organisation that remaining business activities to outside outsources non-core companies, suppliers, specialists or business activities to outside companies, consultants. The term modular is used suppliers, specialists or because the business activities purchased consultants from outside companies can be added

and dropped as needed, much like adding pieces to a threedimensional puzzle. Figure 9.10 depicts a modular organisation in which the company has chosen to keep training, human resources, sales, product design, manufacturing, customer service, research and development, and information technology as core business activities, but it has outsourced the non-core activities of product distribution, webpage design, advertising, payroll, accounting and packaging. Modular organisations have several advantages. First, because modular organisations pay for outsourced labour, expertise or manufacturing capabilities only when needed, they can cost significantly less to run than traditional organisations. For example, most of the design and marketing work for Apple’s new iPad is run out of company headquarters in the US (Cupertino, California). Most of the components for the device, however, are outsourced to other companies. Two South Korean companies, LG and Samsung, make the iPad Retina display, while Texas Instruments supplies chips for the touch-screen interface. Broadcom, based in Irvine, California, produces the

Core business activities

Outsourced non-core business activities

Sales

Advertising

Product design

Webpage design

Manufacturing

Product distribution

Human resources

Payroll

Information technology

Accounting

Customer service

Packaging

Training

Research and development

FIGURE 9.10

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Modular organisation

for a modular organisation, a ‘potluck dinner’, where each guest brings along a dish to contribute to the meal, is an appropriate metaphor for a virtual organisation. All participants bring their finest food dish, but eat only what they want. Another difference is that the working relationships between modular organisations and outside companies tend to be more stable and longer lasting than the shorter, often temporary relationships found among the virtual companies in a network alliance. The composition of a virtual organisation is always changing. The combination of network partners that a virtual corporation has at any one time depends on the expertise needed to solve a particular problem or provide a specific product or service. Virtual organisations have a number of advantages. They let companies share costs. And, because members can quickly combine their efforts to meet customers’ needs, they are fast and flexible. Because each member of the network alliance is the best at what it does, virtual

chipsets that control the iPad’s wireless connections. Final assembly of the product is handled by Foxconn in China.40 To obtain these advantages, however, modular organisations need reliable partners – vendors and suppliers with whom they can work closely and can trust. Modular organisations have disadvantages, too. The primary disadvantage is the loss of control that occurs when key business activities are outsourced to other companies. Also, companies may reduce their competitive advantage in two ways if they mistakenly outsource a core business activity. First, as a result of competitive and technological change, the non-core business activities a company has outsourced may suddenly become the basis for competitive advantage. Second, related to that point, suppliers to whom work is outsourced can sometimes become competitors.

WORKPLACE AND COMMUNITY

DEMOCRATISE THE WORKPLACE TO EMPOWER WORKERS?

MGMT TREND

At some companies, small and large decisions are made not by managers, but by a worker vote. At software company InContext, for example, workers recently voted on whether to have standing desks, cubicles or open tables. After organizing visits to two locations, marketing technology firm Media-Math let workers decide the location of its new headquarters. Employees at 1Sale.com voted on whether the company should continue to pay for employee lunches, or whether it should use that money to lower the cost of health insurance. According to 1Sale’s Shmuli Bortunk, ‘They asked us, do you prefer to have your belly full or your wallet full?’ While voting can take more time, it can also empower employees and improve morale. With democratized decisions, says InContext Product manager Mackenzie Siren, ‘People feel like they have a real voice.’

CROWDSOURCING Companies – and individuals – are tapping into an army of people willing to work for literally pennies. If you turn back to Chapter 8 you’ll see the example of 99designs from Melbourne and how it is tapping into the idea of ‘crowdsourcing’ (see page 140). Crowdsourcing is another way for companies to outsource tasks to freelance service providers. Normally problems are distributed via the Internet to a group of problem solvers, or as is the case with 99designs, to designers, in the form of an open call for solutions. For 99designs, designers (the ‘crowd’) submit design solutions for clients. The designs are then owned by the company that published the design request in the first place (the crowdsourcer). The designer who contributes the winning design is compensated with the prize (money). Crowdsourcing has grown from being mostly used by the information technology industry to get computer code written quickly and cheaply for a wide range of applications.41

VIRTUAL ORGANISATIONS In contrast to modular organisations in which the inter-organisational process revolves around a central company, a virtual organisation is part of a network in which many companies share skills, costs, capabilities, markets and customers with each other. Unlike modular organisations, in which the outside organisations are tightly linked to one central company, virtual organisations work with some companies in the network alliance, but not with all. So, whereas a puzzle with various pieces is a fitting metaphor

virtual organisation an organisation that is part of a network in which many companies share skills, costs, capabilities, markets and customers to collectively solve customer problems or provide specific products or services

Shutterstock.com/Dario Sabljak

SOURCE: R. SILVERMAN, ‘WORKPLACE DEMOCRACY CATCHES ON’, WALL STREET JOURNAL, 27 MARCH 2016, ACCESSED 29 APRIL 2016, HTTP:// WWW.WSJ.COM/ ARTICLES/WORKPLACE-DEMOCRACY-CATCHES-ON-1459117910.

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organisations should, in theory, provide better products and services in all respects. As with modular organisations, a disadvantage of virtual organisations is that once work has been outsourced, it can be difficult to control the quality of work done by network partners. The greatest disadvantage, however, is that tremendous managerial skills are required to make a network of independent organisations work well together, especially since their relationships tend to be short and based on a single task or project. Virtual organisations are using two methods to solve this problem. The first is to use a broker. In traditional,

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hierarchical organisations, managers plan, organise and control. But with the horizontal, inter-organisational processes that characterise virtual organisations, the job of a broker is to create and assemble the knowledge, skills and resources from different companies for outside parties, such as customers.42 The second way to make networks of virtual organisations more manageable is to use a virtual organisation agreement that, somewhat like a contract, specifies the schedules, responsibilities, costs, payouts and liabilities for participating organisations.43

10 1

Managing teams

LEARNING OUTCOMES

1 Explain the good and bad of using teams. 2 Recognise and understand the different

WHY WORK TEAMS?

kinds of teams.

3 Understand the general characteristics of work teams.

4 Explain how to enhance work team effectiveness.

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A growing number of organisations are significantly improving their effectiveness by establishing work teams. In fact, 91 per cent of US companies use teams and groups of one kind or another to solve specific problems. 1 Nonetheless, with the exception of early adopters such as Procter & Gamble and Cummins Engine, which began using teams in 1962 and 1973, respectively, many companies did not establish work teams until the mid to late 1980s. Boeing, Caterpillar, Champion International, Ford Motor Company and General Electric, for example, set up their first teams in the 1980s.2 Nowadays, however, attitudes have changed. As Michelle Marks observes, ‘Teams are ubiquitous. Whether we are talking about software development, Olympic hockey, disease outbreak response, or urban warfare, teams represent the critical unit that “gets things done” in today’s world.’3 Work teams consist of a small number work team of people with complementary skills who a small number of people with complementary skills hold themselves mutually accountable for who hold themselves pursuing a common purpose, achieving mutually accountable performance goals and improving for pursuing a common purpose, achieving interdependent work processes.4 Using performance goals and this definition, computer programmers improving interdependent working on separate projects in the same work processes department of a company would not be considered a team. To be a team, the programmers would have to be interdependent and share responsibility and accountability for the quality and amount of computer code they produced.5 Teams are becoming more important in many industries because they help organisations respond to specific problems and challenges. Though work teams are not the answer for every situation or organisation, if the right teams are used properly and in the right settings, teams can

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dramatically improve company performance over more traditional management approaches while also instilling a sense of vitality in the workplace that is otherwise difficult to achieve. After reading the next two sections, you should be able to: ● explain the good and bad of using teams ● recognise and PPLY E A Get started with understand the the media quiz: Holden different kinds of Outerwear: Leading Teams teams.

THE GOOD AND BAD OF USING TEAMS

Let’s begin our discussion of teams by learning about: ● the advantages of teams ● the disadvantages of teams ● when to use and not to use teams.

THE ADVANTAGES OF TEAMS Companies are making greater use of teams because teams have been shown to improve customer satisfaction, product and service quality, speed and efficiency in product development, employee job satisfaction, and decision making. 6 For example, one survey indicated that 80 per cent of companies with more than 100 employees use teams, and a large percentage of all employees work part of their day in a team.7 Teams help businesses increase customer satisfaction in several ways. One way is to create work teams that are trained to meet the needs of specific customers. Hewitt Associates, a consulting company, manages benefits administration for hundreds of multinational client organisations. To ensure customer satisfaction, Hewitt reengineered its customer service centre and created specific teams to handle benefits-related questions posed by employees of specific client organisations.8 Businesses also create problem-solving teams and employee involvement teams to study ways to improve overall customer satisfaction and make recommendations for improvements. Teams like these typically meet on a weekly or monthly basis. Teams also help companies improve product and service quality in several ways. 9 In contrast to traditional organisational structures, in which management is responsible for organisational outcomes and performance, teams take direct responsibility for the quality of the products and services they produce and sell. Oriental Trading Company (OTC) sells party supplies, arts and crafts, toys and games, and teaching supplies on 172

the Internet. Like most retail websites, OTC’s site allows customers to write comments about the products they buy. When customers complained about the Inflatable Solar System OTC sold, giving it two stars out of five, members of OTC’s intradepartmental teams sprang into action. A team member from the quality department worked directly with the manufacturer to improve quality. Another from copywriting worked with a team member from merchandising to post new photos of the improved product along with a more accurate product description. Other members of the team contacted dissatisfied customers to tell them that OTC had listened and had taken steps to address their concerns. Seven weeks after the first negative comment appeared on OTC’s website, the improved product was available for sale. Customers consistently rate the new version at four out of five stars.10 Another reason for using teams is that teamwork often leads to an increase in job satisfaction.11 One reason that teamwork can be more satisfying than traditional work is that it gives employees a chance to improve their skills. This is often accomplished through cross-training, in which team members are cross-training taught how to do all or most of the jobs training team members to do all performed by the other team members. The or most of the jobs advantage for the organisation is that cross- performed by the other training allows a team to function normally team members when one member is absent, quits or is transferred. The advantage for employees is that cross-training broadens their skills and increases their capabilities, while also making their work more varied and interesting. A second reason that teamwork is satisfying is that work teams often receive proprietary business information that is available only to managers at most companies. For example, at Buffer, the social media management company, team members are given full access to all information of the company including financial information, everyone’s salaries and the formula used to calculate these salaries.12 Company reports show employees are highly satisfied since management respect each employee’s right to company information.

MGMT TREND

COLLABORATION TOOL OVERLOAD IS KILLING TEAMS A multitude of ways to communicate, from intranet discussion platforms to company chat programs like Facebook Workplace and Google Chat, video chat apps like Skype and Google Hangouts, and file-sharing apps like Google Drive and Dropbox, overwhelms today’s work teams. Forrester Research’s Craig Le Clair says, ‘Workers don’t want nine collaboration platforms.’ Add email to the list and it’s the equivalent of having 10 different inboxes!

Seeking a simpler approach, J. Walter Thompson adopted Microsoft Teams, a threaded chat-based tool integrated into Office365, which means that Office Apps like Excel, Word and PowerPoint, and file storage and sharing like Microsoft’s OneDrive, are available without leaving Teams. Slack, which originated this way of communicating, has even greater functionality. Users can access file storage, task managers, phone and video calls, calendars and meeting scheduling, sales and accounting—1000 apps in all—without leaving Slack. Slack users report a one-third increase in productivity, a 49 per cent drop in email and 25 per cent fewer meetings. Kill collaboration tool overload. Make your teams more effective. SOURCE: J. GREENE, ‘BEWARE COLLABORATION-TOOL OVERLOAD’, WALL STREET JOURNAL, 12 MARCH 2017, ACCESSED 15 APRIL 2017, HTTPS://WWW.WSJ.COM/ ARTICLES /BEWARE-COLLABORATION-TOOL-OVERLOAD-1489370400; J. NADLER, ‘HOW TO SURVIVE TEAM COLLABORATION TOOL OVERLOAD’, MITEL, 22 SEPTEMBER 2016, ACCESSED 15 APRIL 2017, HTTP://WWW.MITEL.COM/BLOG/SMB/2016/09/ HOW-SURVIVE-TEAM -COLLABORATION-TOOL-OVERLOAD.

Team members also gain job satisfaction from unique leadership responsibilities when working in teams that typically are not available in traditional organisations. For example, rotating leadership among team members can lead to more participation and cooperation in team decision making and improve team performance.13 Finally, teams share many of the advantages of group decision making discussed in Chapter 5. For instance, because team members possess different knowledge, skills, abilities and experiences, a team is able to view problems from multiple perspectives. This diversity of viewpoints increases the odds that team decisions will solve the underlying causes of problems and not just address the symptoms. The increased knowledge and information available to teams also make it easier for them to generate more alternative solutions, which is a critical part of improving the quality of decisions. Because team members are involved in decision-making processes, they are also likely to be more committed to making those decisions work. In short, teams can do a much better job than individuals in two important steps of the decision-making process: defining the problem and generating alternative solutions.

THE DISADVANTAGES OF TEAMS Although teams can significantly improve customer satisfaction, product and service quality, speed and efficiency in product development, employee job satisfaction and decision making, using teams does not guarantee these positive outcomes. In fact, if you’ve ever participated in team projects in your classes, you’re probably already aware of some of the problems inherent in work teams. Despite all of their promises, teams and teamwork are also prone to these significant disadvantages: initially high turnover (when first introduced), social loafing and the problems associated with group decision making.

The first disadvantage of work teams is initially high turnover. Teams aren’t for everyone, and when teams are introduced into a traditional work setting some employees baulk at the responsibility, effort and learning required in team settings. When Zappos, the online shoe company, changed from a traditional to a team-based structure where there are no bosses, no titles and employees manage themselves (what it calls Holacracy), it offered everyone in the company three months of severance pay to leave if they decided that it wasn’t right for them. Turns out that of its 1500 employees, 14 per cent decided to leave. After 10 months, that figure had risen to 18 per cent overall and 38 per cent among members of a special technology team charged with migrating Zappos’s website to Amazon servers. Zappos’s John Bunch, who is managing the transition to Holacracy, said, ‘Whatever the number of people who took the offer was the right number as they made the decision that was right for them and right for Zappos.”14 Social loafing is another disadvantage social loafing of work teams. Social loafing occurs behaviour in which team when employees withhold their efforts and members withhold their efforts and fail to perform fail to perform their share of the work.15 A their share of the work nineteenth-century French engineer named Maximilian Ringlemann first documented social loafing when he found that one person pulling on a rope alone exerted an average of 63 kilograms of force on the rope. In groups of three, the average force dropped to 53 kilograms per person. In groups of eight, the average dropped to just 31 kilograms per person. Ringlemann concluded that the larger the team, the smaller the individual effort. In fact, social loafing is more likely to occur in larger groups, where identifying and monitoring the efforts of individual team members can be difficult.16 In other words, social loafers count on being able to blend into the background, where their lack of effort isn’t easily spotted. From team-based class projects, most students already know about social loafers or ‘slackers’, who contribute poor, little or no work whatsoever. Not surprisingly, a study of 250 student teams found that the most talented students are typically the least satisfied with teamwork because of having to carry ‘slackers’ and do a disproportionate share of their team’s work. Perceptions of fairness are negatively related to the extent of social loafing within teams.17 Finally, teams share many of the disadvantages of group decision making discussed in Chapter 5, such as groupthink, where members of highly cohesive groups feel intense pressure not to disagree with each other so that the group can approve a proposed solution. Because groupthink restricts discussion and leads to consideration of a limited number of alternative solutions, it usually results in poor decisions. Also, team decision making takes considerable time, and team meetings can often be unproductive and inefficient. Another possible pitfall is minority domination,

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where just one or two people dominate team discussions, thus restricting consideration of different problem definitions and alternative solutions. Finally, team members may not feel accountable for the decisions and actions taken by the ‘team’.

WHEN TO USE TEAMS As the two previous subsections made clear, teams have both significant advantages and significant disadvantages. Therefore, the question is not whether to use teams, but when and where to use teams for maximum benefit and minimum cost. As most of the academic writing about teams will tell us, teams are a means to an end, not the end itself. Companies should only use teams if they are right for the circ*mstances, not just because teams are ‘fashionable’. Figure 10.1 provides some additional guidelines on when to use or not to use teams.18 First, teams should be used when there is a clear, engaging reason or purpose for using them. Too many companies use teams because they’re popular or because the companies assume that teams can fix all problems. Teams are much more likely to succeed if they know why they exist and what they are supposed to accomplish, and more likely to fail if they don’t. Second, teams should be used when the job can’t be done unless people work together. This typically means that teams are needed when tasks are complex, require multiple perspectives or require repeated interaction with others to complete. Because of the enormous complexity of today’s cars, you would think that car companies routinely use interconnected design teams. After all, the typical car has 30 000 parts, 80 different computer modules, indicators sensing how close other cars are when parking or going 110 km/h, and the ability to automatically adjust braking, cornering, fuel mileage and acceleration. But car companies don’t routinely use interconnected design teams, as most designers are responsible for separate sections or parts of the car. At VW Automobile’s Audi Group, Achim Badstübner, head of exterior design, says, ‘We tend to make the

Use teams when

• there is a clear, engaging reason or purpose • the job can’t be done unless people work together • rewards can be provided for teamwork and team performance • ample resources are available • teams will have clear authority to manage and change how work gets done.

FIGURE 10.1

mistake that we have an exterior department, an interior department and a technology department, and they all know what they’re doing but the connection is not so good’. Audi, however, takes a team approach. Badstübner says, ‘I think it’s very important to basically lock them in one room, literally speaking. Then there is an interaction: you talk to the guy who does seats and he tells you something about his expertise and you might take something from him that helps you to develop a new wheel, for example’. Badstübner says by connecting the teams, ‘you get a different result because through this method you get the best of every brain. I think you can’t survive if you just depend on one brain to do a complex thing like [design] a car’.19

MGMT IN PRACTICE

FACTORS THAT ENCOURAGE PEOPLE TO WITHHOLD EFFORT IN TEAMS •

•

Don’t use teams when

• there isn’t a clear, engaging reason or purpose • the job can be done by people working independently • rewards are provided for individual effort and performance • the necessary resources are not available • management will continue to monitor and influence how work gets done.

When to use or not to use teams Source: Adapted from R. Wageman, ‘Critical success factors for creating superb self-managing teams’, Organisational Dynamics, 26 (1), 1997: 49–61.

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Third, teams should be used when rewards can be provided for teamwork and team performance. Team rewards that depend on team performance, rather than individual performance, are the key to rewarding team behaviours and efforts. You’ll read more about team rewards later in the chapter, but for now it’s enough to know that if the level of rewards (individual versus team) is not matched to the level of performance (individual versus team), groups won’t work.

LO2

KINDS OF TEAMS

Let’s continue our discussion of teams by learning about the different kinds of teams that companies use to make themselves more competitive. We look at: ● how teams differ in terms of autonomy, the key dimension that makes one team different from another ● special kinds of teams. ENGAG

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AUTONOMY – THE KEY DIMENSION Teams can be classified in a number of ways, such as permanent or temporary or functional or cross-functional. However, studies indicate that the key dimension that makes teams different from each other is the amount of autonomy possessed by a team.21 Autonomy is the degree to which employees have the discretion, freedom and independence to decide how and when to accomplish their jobs. Figure 10.2 shows how five kinds of teams differ in terms of autonomy. Moving from left to right across the autonomy continuum at the top of the figure, traditional work groups and employee involvement groups have the least autonomy, semi-autonomous work groups have more autonomy and, finally, self-managing teams and selfdesigning teams have the most autonomy. Moving from bottom to top along the left side of Figure 10.2, note that the number of responsibilities given to each kind of team increases directly with its autonomy. Let’s review each of

Get an overview of what makes a successful team

Low team autonomy

Responsibilities

Traditional work groups

High team autonomy

Employee involvement groups

Semiautonomous work groups

Selfmanaging teams

Selfdesigning teams

Control design of • Team • Tasks • Membership Production/service tasks • Make decisions • Solve problems Major production/service tasks • Make decisions • Solve problems Information • Give advice/make suggestions • Execute task FIGURE 10.2

Team autonomy continuum

Source: R. D. Banker, J. M. Field, R. G. Schroeder & K. K. Sinha, ‘Impact of work teams on manufacturing performance: a longitudinal field study’, Academy of Management Journal, 39, 1996: 867–90; J. R. Hackman, ‘The psychology of self-management in organizations’, in Psychology and Work: Productivity, change and employment, ed. M. S. Pallak & R. Perlof (Washington, DC: American Psychological Association), 85–136.

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these kinds of teams and their autonomy and responsibilities in more detail. The smallest amount of autonomy is found in traditional work groups, where two traditional work or more people work together to achieve group a group composed of two a shared goal. In these groups, employees or more people who work are responsible for doing the work or together to achieve a shared goal ‘executing the task’, but they do not have direct responsibility or control over their work. Employees report to managers, who are responsible for their performance and have the authority to hire and fire them, make job assignments and control resources. For instance, suppose that an experienced worker blatantly refuses to do his share of the work, saying, ‘I’ve done my time. Let the younger employees do the work.’ In a team with high autonomy, the responsibility of getting this employee to put forth his fair share of effort would belong to his teammates. But, in a traditional work group, that responsibility belongs to the boss or supervisor. The supervisor in this situation calmly confronted the employee and told him, ‘We need your talent, [and] your knowledge of these machines. But if you won’t work, you’ll have to go elsewhere.’ Within days, the employee’s behaviour improved.22 Employee involvement teams, employee which have somewhat more autonomy, involvement team meet within company time on a weekly a team that provides advice or makes or monthly basis to provide advice or suggestions to make suggestions to management management concerning specific issues concerning specific issues, such as plant safety, customer relations or product quality.23 Though they offer advice and suggestions, they do not have the authority to make decisions. Membership on these teams is often voluntary, but members may be selected because of their expertise. The idea behind employee involvement teams is that the people closest to the problem or situation are best able to recommend solutions. For more than three years, production of Boeing’s 787 Dreamliner was delayed by multiple problems – parts shortages, improper installation, failed test flights and more. Because of production delays, Boeing had to build 10 planes per month, up from the typical two and a half planes. To meet this aggressive goal, it established nearly 200 employee involvement teams to analyse the way 787s are assembled and make changes to maximise efficiency. For example, one employee involvement team found that ducts already installed in the plane were being damaged because workers were kicking and stepping on them while doing other work. The damaged ducts then had to be removed and replaced. The team recommended that temporary covers be placed over the ducts, thus eliminating delays and increased costs.24

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semi-autonomous

not only provide advice and suggestions to work group a group that has the management, but also have the authority authority to make to make decisions and solve problems decisions and solve related to the major tasks required to problems related to the major tasks of producing a produce a product or service. Semi- product or service autonomous groups regularly receive information about budgets, work quality and performance, and competitors’ products. Furthermore, members of semi-autonomous work groups are typically cross-trained in a number of different skills and tasks. In short, semiautonomous work groups give employees the authority to make decisions that are typically made by supervisors and managers. That authority is not complete, however. Managers still play a role, though much reduced compared to traditional work groups, in supporting the work of semi-autonomous work groups. In semi-autonomous work groups, managers ask good questions, provide resources and facilitate performance of group goals. Self-managing teams differ from semi- self-managing team a team that manages and autonomous work groups in that team controls all of the major members manage and control all of the major tasks of producing a tasks directly related to production of a product product or service or service without first getting approval from management. This includes managing and controlling the acquisition of materials, making a product or providing a service and ensuring timely delivery. Spotify, the streaming music company, organises its 2000 employees into self-organising teams called squads. No larger than eight people, squads are completely responsible for a particular product function, like search algorithms, and decide what to do, how to do it, who to work with (other squads) and selecting their leaders. Squads receive feedback from other squads and customers, and conduct postmortems every few weeks to analyse what is or is not working. All of these decisions are made without management’s input or approval.25 Self-designing teams have all the self-designing team characteristics of self-managing teams, but a team that has the characteristics of selfthey can also control and change the design managing teams but also of the teams themselves, the tasks they do controls team design, work tasks and team and how and when they do them, and the membership membership of the teams.

SPECIAL KINDS OF TEAMS Companies are also increasingly using several other kinds of teams that can’t easily be categorised in terms of autonomy: cross-functional teams, virtual teams and project teams. Depending on how these teams are designed, they can be either low-or high-autonomy teams.

Cross-functional teams are intentionally composed of employees from different functional areas of the organisation.26 Because their members have different functional backgrounds, education and experience, cross-functional teams usually attack problems from multiple perspectives and generate more ideas and alternative solutions, all of which are especially important when trying to innovate or do creative problem solving.27 Cross-functional teams can be used almost anywhere in an organisation and are often used in conjunction with matrix and product organisational structures (see Chapter 9). They can also be used either with part-time or temporary team assignments or with full-time, long-term teams.

together across three continents and many time zones through the use of technology.30 The principal advantage of virtual teams is their flexibility. Employees can work with each other regardless of physical location, time zone or organisational affiliation.31 Because the team members don’t meet in a physical location, virtual teams also find it much easier to include other key stakeholders, such as suppliers and customers. Plus, virtual teams have certain efficiency advantages over traditional team structures. Because the teammates do not meet face-to-face, a virtual team typically requires a smaller time commitment than a traditional team does.32 A drawback of virtual teams is that the team members must learn to express themselves in new contexts.33 The give-and-take that naturally occurs in face-to-face meetings is more difficult to achieve through videoconferencing or other methods of virtual teaming. Indeed, several studies have shown that physical proximity enhances information processing in teams.34 Therefore, some companies bring virtual team members together in offices or special trips on a regular basis to try to minimise these problems. Project teams are created to project team complete specific, one-off projects or a team created to tasks within a limited time.35 Project teams complete specific, one-off projects or tasks within a are often used to develop new products, limited time significantly improve existing products, roll out new information systems or build new factories or offices. The project team is typically led by a project manager, who has the overall responsibility for planning, staffing and managing the team, which usually includes employees from different functional areas. Effective project teams demand both individual and collective responsibility.36

cross-functional team a team composed of employees from different functional areas of the organisation

Melbourne’s 99designs utilise virtual teams to work effectively across three continents

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TIPS FOR MANAGING SUCCESSFUL VIRTUAL TEAMS Alamy Stock Photo/Jochen Tack

Cessna, which manufactures aeroplanes, created cross-functional teams for purchasing parts. With workers from purchasing, manufacturing engineering, quality engineering, product design engineering, reliability engineering, product support and finance, each team addressed make-versus-buy decisions (make it themselves or buy from others), sourcing (who to buy from), internal plant and quality improvements and the external training of suppliers to reduce costs and increase quality.28 Virtual teams are groups of virtual team geographically and/or organisationally a team composed of geographically and/or dispersed co-workers who use a organisationally dispersed combination of telecommunications and co-workers who use information technologies to accomplish telecommunications and information technologies an organisational task.29 to accomplish an When it comes to virtual teams, organisational task Melbourne’s 99designs is a standout example. A design company working with a crowdsourcing approach, 99designs has offices in Melbourne and San Francisco. As they say on their webpage, ‘From our gallery-style offices in Melbourne to the piers of San Francisco, we’ve got the most talented and passionate staff …’ Growing from just three staff (the founders) to 120 in just under four years, 99designs keeps the team

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Select people who are self-starters and strong communicators.

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Keep the team focused by establishing clear, specific goals and by explaining the consequences and importance of meeting these goals. Provide frequent feedback so that team members can measure their progress. Keep team interactions upbeat and actionoriented by expressing appreciation for good work and completed tasks. ‘Personalise’ the virtual team by periodically bringing team members together and by encouraging team members to share information with each other about their personal lives. This is especially important when the virtual team first forms. Improve communication through increased telephone calls, emails and Internet messaging, and videoconference sessions. Periodically ask team members how well the team is working and what can be done to improve performance. Empower virtual teams so they have the discretion, freedom and independence to decide how and when to accomplish their jobs.37

One advantage of project teams is that drawing employees from different functional areas can reduce or eliminate communication barriers. In turn, as long as team members feel free to express their ideas, thoughts and concerns, free-flowing communication encourages cooperation among separate departments and typically speeds up the design process.38 Another advantage of project teams is their flexibility. When projects are finished, project team members either move on to the next project or return to their functional units. For example, publication of this book required designers, editors, typesetters and web designers, among others. When the task was finished, these people applied their skills to other textbook projects. Because of this flexibility, project teams are often used with the matrix organisational designs discussed in Chapter 9.

LO3

WORK TEAM CHARACTERISTICS

Understanding the characteristics of work teams is essential for making teams an effective part of an organisation. Therefore, in this section you’ll learn about: ● team norms ● team cohesiveness ● team size ● team conflict ● the stages of team development.

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‘Why did I ever let you talk me into teams?They’re nothing but trouble.’39 Lots of managers have this reaction after making the move to teams. Many don’t realise that this reaction is normal, both for them and for employees. In fact, such a reaction is characteristic of the storming stage of team development (discussed later in the chapter). Managers who are familiar with the stages of team development and with the other important characteristics of teams will be better prepared to manage the predictable changes that occur when companies make the switch to team-based structures. After reading the next two sections, you should be able to: ● understand the general characteristics of work teams ● explain how to enhance work team effectiveness.

TEAM NORMS Over time, teams develop norms, informally norm agreed-on standards that regulate team an informally agreed-on standard that regulates behaviour.40 Norms are valuable because they team behaviour let team members know what is expected of them. While leading Orbis International, a non-profit organisation in which a DC-10 jet, converted to a ‘Flying Eye hospital’, transports volunteer doctors and nurses to treat eye disease throughout the world, Jilly Stephens noticed a problem with punctuality. She said, ‘When I first got to the field, you would have the nurses, engineers, whoever, waiting, and you would maybe have one [person] who just couldn’t drag himself out of bed and everybody’s waiting’. So she simply decided that there would be a new norm for the team: they leave on time. ‘If they aren’t there [on time], the bus leaves. You get to the airport yourself. If we were in Tunisia that meant finding a bike and cycling across the desert to get to the airport.’ Says Stephens, ‘We saw behaviours change fairly rapidly’.41 Studies indicate that norms are one of the most powerful influences on work behaviour. Team norms are often associated with positive outcomes, such as stronger organisational commitment, more trust in management and stronger job and organisational satisfaction.42 In general, effective work teams develop norms about the quality and timeliness of job performance, absenteeism,

safety and honest expression of ideas and opinions. The power of norms also comes from the fact that they regulate the everyday behaviour that allows teams to function effectively. At Google, a special taskforce called Project Aristotle spent four years reviewing published research on teams, as well as analysing internal data on 180 Google work teams.43 Unable to find identifiable patterns related to the sizes, skills or tenures of teams or their team members, Project Aristotle eventually found that Google’s most successful teams had positive norms with high levels of psychological safety, a concept that Harvard Business School professor Amy Edmondson defines as ‘a sense of confidence that the team will not embarrass, reject or punish someone for speaking up ... the team is safe for interpersonal risk taking.’44 Building on that study, a team of researchers led by Carnegie Mellon professor Anita Woolley, found that the best-performing teams engaged in conversational turn-taking. Woolley explained, ‘As long as everyone got a chance to talk, the team did well. But if only one person or a small group spoke all the time, the collective intelligence [of the team] declined.’45 Woolley’s findings are consistent with the previously discussed research showing that overly dominant team leaders minimised discussion and hurt team performance. Norms can also influence team behaviour in negative ways. For example, most people would agree that damaging organisational property; saying or doing something to hurt someone at work; intentionally doing one’s work badly, incorrectly or slowly; griping about co-workers; deliberately bending or breaking rules; or doing something to harm the company or boss are negative behaviours. Nonetheless, a study of workers from 34 teams in 20 different organisations found that teams with negative norms strongly influenced their team members to engage in these types of negative behaviour. In fact, the longer individuals were members of a team with negative norms and the more frequently they interacted with their teammates, the more likely they were to perform negative behaviour. Since team norms typically develop early in the life of a team, these results indicate how important it is for teams to establish positive norms from the outset.46

TEAM COHESIVENESS Cohesiveness is another important characteristic of work teams. Cohesiveness is the cohesiveness the extent to which team extent to which team members are members are attracted to attracted to a team and motivated to a team and motivated to remain in it.47 The level of cohesiveness remain in it in a group is important for several reasons. First, cohesive groups have a better chance of retaining their members. As a result, cohesive groups typically experience lower turnover.48 Second, team

cohesiveness promotes cooperative behaviour, generosity and a willingness on the part of team members to assist each other.49 When team cohesiveness is high, team members are more motivated to contribute to the team because they want to gain the approval of other team members. For these reasons and others, studies have clearly established that cohesive teams consistently perform better.50 Furthermore, cohesive teams quickly achieve high levels of performance. By contrast, teams low in cohesion take much longer to reach the same levels of performance.51 What can be done to promote team cohesiveness? First, make sure that all team members are present at team meetings and activities. Team cohesiveness suffers when members are allowed to withdraw from the team and miss team meetings and events.52 Second, create additional opportunities for teammates to work together by rearranging work schedules and creating common workspaces. When task interdependence is high and team members have lots of chances to work together, team cohesiveness tends to increase.53 Third, engaging in non-work activities as a team can help build cohesion. At one company where teams put in extraordinarily long hours coding computer software, the software teams maintained cohesion by doing ‘fun stuff’ together. Team leader Tammy Urban says, ‘We went on team outings at least once a week. We’d play darts, shoot pool. Teams work best when you get to know each other outside of work – what people’s interests are, who they are. Personal connections go a long way when you’re developing complex applications in our kind of time frames’.54 Finally, companies build team cohesiveness by making employees feel that they are part of a ‘special’ organisation. For example, at Disney World in Hong Kong, all the new ‘cast members’ (as all Disney staff are called) are required to take a course on ‘Disney Traditions Training’, where they learn the traditions and history of the Walt Disney Company (including the names of the seven dwarfs!). The purpose of Traditions Training is to instil a sense of team pride in working for Disney.55

TEAM SIZE There appears to be a curvilinear relationship between team size and performance. Very small or very large teams may not perform as well as moderately sized teams. For most teams, the right size is somewhere between six and nine members.56 This size is conducive to high team cohesion, which has a positive effect on team performance, as discussed above. A team of this size is small enough for the team members to get to know each other and for each member to have an opportunity to contribute in a meaningful way to the success of the team. At the same time, the team is also large enough to take advantage of team

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members’ diverse skills, knowledge and perspectives. It is also easier to instil a sense of responsibility and mutual accountability in teams of this size.57 Wall Street Journal’s Sue Shellenbarger says managers invite too many people to meetings. For analysing possible causes of problems, invite four to six people.58 Bain & Company’s Michael Mankins follows the ‘rule of seven’, which says the chances of making good decisions drop 10 per cent for every person beyond seven. Says Mankins, ‘By the time you get 17 people, the chances of your actually making a decision are zero.’59 So, for making decisions, invite four to seven. Team size has a significant impact on the value of a company as well. Among companies with a market capitalisation of $10 billion or more, those with smaller boards of directors outperform their peers by 8.5 per cent, and those with larger boards underperform their peers by nearly 11 per cent. With only seven directors, Netflix’s board was able to spend nine months discussing a potential price increase. Director Jay Hoag says, ‘We get in-depth. That’s easier with a small group.’ Netflix outperforms its sector peers by 32 per cent.60 Nonetheless, when teams get too large, team members find it difficult to get to know one another and the team may splinter into smaller subgroups. When this occurs, subgroups sometimes argue and disagree, weakening overall team cohesion. As teams grow, there is also a greater chance of minority domination, where just a few team members dominate team discussions. Even if minority domination doesn’t occur, larger groups may not have time for all team members to share their input. Unfortunately, when team members feel that their contributions are unimportant or not needed, the result is less involvement, effort and accountability to the team.61 Large teams also face logistical problems, such as finding an appropriate time or place to meet. Finally, the incidence of social loafing, discussed earlier in the chapter, is much higher in large teams. Just as team performance can suffer when a team is too large, it can also be negatively affected when a team is too small. Teams with just a few people may lack the diversity of skills and knowledge found in larger teams. Also, teams that are too small are unlikely to gain the advantages of team decision making (i.e. multiple perspectives, generating more ideas and alternative solutions, and stronger commitment) found in larger teams. What signs indicate that a team’s size needs to be changed? If decisions are taking too long, if the team has difficulty making decisions or taking action, if a few members dominate the team or if the commitment or efforts of team members are weak, chances are the team is too big. In contrast, if a team is having difficulty coming up with ideas or generating solutions, or if the team does not have the expertise to address a specific problem, chances are the team is too small.

Conflict and disagreement are inevitable in most teams

TEAM CONFLICT Conflict and disagreement are inevitable in most teams. But this shouldn’t surprise anyone. From time to time, people who work together are going to disagree about what and how things get done. What causes conflict in teams? Although almost anything can lead to conflict – casual remarks that unintentionally offend a team member or fighting over scarce resources – the primary cause of team conflict is disagreement over team goals and priorities.62 Other common causes of team conflict include disagreements over task-related issues, interpersonal incompatibilities and simple fatigue. Though most people view conflict negatively, the key to dealing with team conflict is not avoiding it, but rather making sure that the team experiences the right kind of conflict. In Chapter 5, you learned about c-type conflict, or cognitive conflict, which focuses on problem-related differences of opinion, and a-type conflict, or affective conflict, which refers to the emotional reactions that can occur when disagreements become personal rather than professional.63 Cognitive conflict is strongly associated with improvements in team performance, whereas affective conflict is strongly associated with decreases in team performance. 64 Why does this happen? With cognitive conflict, team members disagree because their different experiences and expertise lead them to different views of the problem and solutions. Indeed, managers who participated in teams that emphasised cognitive conflict described their teammates as ‘smart’, ‘team players’ and ‘best in the business’. They described their teams as ‘open’, ‘fun’ and ‘productive’. One manager summed up the positive attitude that team members had about cognitive conflict by saying, ‘We scream a lot, then laugh, and then resolve the issue’.65 Thus, cognitive conflict is also characterised by a willingness to examine, compare and reconcile differences to produce the best possible solution.

WORKPLACE AND COMMUNITY

HIGH-PERFORMANCE TEAM: DESIGNING CURIOSITY’S PERFECT LANDING ON MARS

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NASA talks about the Mars Rover Curiosity as if it is a child: ‘She’s cute, she packs a laser …’ Curiosity also has 1.2 million Twitter followers, which isn’t bad for a robot. Curiosity landed on 5 August 2012, and NASA’s web-streaming video of the event had eight million hits in less than a minute. The pinpoint accuracy of the landing that was crucial to the success of the mission relied on the development of an innovative guided entry system. This guidance system was the work of a high-performance team of NASA specialists. Working with NASA’s Jet Propulsion Lab’s (JPL) supercomputing team for 16 months, Curiosity’s Entry, Descent and Landing (EDL) team created a fully customised supercomputing environment capable of handling highly detailed simulations and computing the probability of each outcome. Based on these results, Curiosity was programmed to navigate accurately as ‘she’ decelerated from 21 000 km/h on entry to a complete stop on the surface of Mars in just seven minutes. After a nine-month journey of over 560 million kilometres, Curiosity landed with her wheels down, ready and able to start her investigation of Mars.66

By contrast, affective conflict often results in hostility, anger, resentment, distrust, cynicism and apathy. Managers who participated in teams that emphasised affective conflict described their teammates as ‘manipulative’, ‘secretive’, ‘burned out’ and ‘political’.67 Not surprisingly, affective conflict can make people uncomfortable and cause them to withdraw and decrease their commitment to a team.68 Affective conflict also lowers the satisfaction of team members, may lead to personal hostility between co-workers, and can decrease team cohesiveness.69 So, unlike cognitive conflict, affective conflict undermines team performance by preventing teams from engaging in the kinds of activities that are critical to team effectiveness.

So, what can be done to manage team conflict? First, managers need to realise that emphasising cognitive conflict alone won’t be enough. Studies show that cognitive and affective conflicts often occur together in the same teams! Therefore, sincere attempts to reach agreement on a difficult issue can quickly deteriorate from cognitive to affective conflict if the discussion turns personal and tempers and emotions flare. So, while cognitive conflict is clearly the better approach to take, efforts to engage in cognitive conflict should be approached with caution. Can teams disagree and still get along? Fortunately, they can. There are several ways teams can have a ‘good fight’:70 ● Work with more, rather than less, information: if data is plentiful, objective and up-to-date, teams will focus on issues, not personalities. ● Develop multiple alternatives to enrich debate: focusing on multiple solutions diffuses conflict by getting the team to keep searching for a better solution. Positions and opinions are naturally more flexible with five alternatives than with just two. ● Establish common goals: remember, most team conflict arises from disagreements over team goals and priorities. Therefore, common goals encourage collaboration and minimise conflict over a team’s purpose. ● Inject humour into the workplace: humour relieves tension, builds cohesion and just makes being in teams fun. ● Maintain a balance of power: involve as many people as possible in the decision process. ● Resolve issues without forcing a consensus: consensus means nothing gets done until everyone agrees, which, of course, is nearly impossible. This usually promotes affective rather than cognitive conflict. If team members can’t agree after constructively discussing their options, it’s better to have the team leader make the final choice. Most team members can accept the team leader’s choice if they’ve been thoroughly involved in the decision process.

STAGES OF TEAM DEVELOPMENT As teams develop and grow, they pass through four stages of development. As shown in Figure 10.3, those stages are forming, storming, norming and performing.71 Although not every team passes through each of these stages, teams that do tend to be better performers.72 This holds true even for teams composed of seasoned executives. After a period of time, however, if a team is not managed well, its performance may start to deteriorate as the team begins a process of decline and progresses through the stages of de-norming, de-storming and de-forming.73

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Storming

De-storming

Forming

De-forming Time

FIGURE 10.3

Stages of team development

Source: J. F. McGrew, J. G. Bilotta & J. M. Deeney, ‘Software team formation and decay: extending the standard model for small groups’, Small Group Research, 30 (2), 1999: 209–34; B. W. Tuckman, ‘Development sequence in small groups’, Psychological Bulletin, 63 (6), 1965: 384–99.

LO4

ENHANCING WORK TEAM EFFECTIVENESS

Making teams work is a challenging and difficult process. Nonetheless, companies can increase the likelihood that teams will succeed by carefully managing: ● the setting of team goals and priorities ● how work team members are selected ● how work teams are trained ● how work teams are compensated.76

SETTING TEAM GOALS AND PRIORITIES

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Forming is the initial stage of team development. This is the getting acquainted stage, when team members first meet each other, form initial impressions and try to get a sense of what it will be like to be part of the team. Some of the first team norms will be established during this stage, as team members begin to find out what behaviours will and won’t be accepted by the team. During this stage, team leaders should allow time for team members to get to know each other, set early ground rules and begin to set up a preliminary team structure. Conflicts and disagreements often storming characterise the second stage of team the second stage development, known as storming. As of development, characterised by conflict team members begin working together, and disagreement, in different personalities and work styles which team members may clash. Team members become more disagree over what the team should do and how it assertive at this stage and more willing to should do it state opinions. This is also the stage when team members jockey for position and try to establish a favourable role for themselves in the team. In addition, team members are likely to disagree about what the group should do and how it should do it. Team performance is still relatively low, given that team cohesion is weak and team members are still reluctant to support each other. Since teams that get stuck in the storming stage are almost always ineffective, it is important for team leaders to focus the team on team goals and on improving team performance. Team norming members need to be particularly patient the third stage of team and tolerant with each other in this stage. development, in which team members begin to During norming, the third stage of settle into their roles, team development, team members begin group cohesion grows and positive team norms to settle into their roles as team members. develop Positive team norms will have developed forming the first stage of team development, in which team members meet each other, form initial impressions and begin to establish team norms

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De-norming

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Team performance

Performing

by this stage and teammates should know what to expect from each other. Petty differences should have been resolved, friendships will have developed and group cohesion will be relatively strong. At this point, team members will have accepted team goals, be operating as a unit and, as indicated by the increase in performance, be working together effectively. This stage can be very short and is often characterised by someone on the team saying, ‘I think things are finally coming together’. Note, however, that teams may also cycle back and forth between storming and norming several times before finally settling into norming. In the last stage of team development, performing performing , performance improves the fourth and final stage of team development, in which because the team has finally matured performance improves into an effective, fully functioning team. because the team has into an effective, At this point, members should be fully matured fully functioning team committed to the team and think of themselves as ‘members of a team’ and not just ‘employees’. Team members often become intensely loyal to one another at this stage and feel mutual accountability for team successes and failures. Trivial disagreements, which can take time and energy away from the work of the team, should be rare. At this stage, teams get a lot of work done, and it is fun to be a team member. The team should not become complacent, however, because without effective management, its performance may begin to decline as the team passes through the stages of de-norming, de-storming and de-forming.74 Indeed, as one senior manufacturing manager has said, ‘The books all say you start in this state of chaos and march through these various stages, and you end up in this state of ultimate self-direction, where everything is going just great. They never tell you it can go back in the other PPLY E A direction, sometimes Find out more about your attitude toward teamwork just as quickly’.75 in this self-assessment

In Chapter 5, you learned that having specific, measurable, attainable, realistic and timely (i.e. SMART) goals is one of

the most effective means for improving individual job performance. Fortunately, team goals also improve team performance. In fact, team goals lead to much higher team performance 93 per cent of the time.77 For example, a steel company sets specific, challenging hourly goals for each of its production teams, which consist of first-line supervisors and production and maintenance workers. The average in the steel industry is 10 tons (just over 9000 kg) of steel per hour. Company production teams have a goal of 8 tons (around 7200 kg) per hour, but get a 5 per cent bonus for every ton over 8 tons that they produce each hour. With no limit on the bonuses they can receive, production teams produce an average of 35 to 40 tons (around 31 000 to 36 000 kg) of steel per hour!78 Why is setting specific, challenging team goals so critical to team success? One reason is that increasing a team’s performance is inherently more complex than just increasing one individual’s job performance. For instance, consider that any team is likely to involve at least four different kinds of goals: each member’s goal for the team, each member’s goal for himself or herself on the team, the team’s goal for each member and the team’s goal for itself.79 In other words, without a specific, challenging goal for the team itself (the last of the four goals listed), team members may head off in all directions at once pursuing these other goals. Consequently, setting a specific, challenging goal for the team clarifies team priorities by providing a clear focus and purpose. Specific, challenging team goals also affect how hard team members work. In particular, challenging team goals greatly reduce the incidence of social loafing. When faced with difficult goals, team members necessarily expect everyone to contribute. Consequently, they are much more likely to notice and complain if a teammate isn’t doing his or her share. In fact, when teammates know each other well, when team goals are specific, when team communication is good and when teams are rewarded for team performance (discussed below), there is only a one in 16 chance that teammates will be social loafers.80 What can companies and teams do to ensure that team goals lead to superior team performance? One increasingly popular approach is to give teams stretch goals. Stretch goals are extremely ambitious goals that employees don’t know how to reach.81 The purpose of stretch goals is to achieve extraordinary improvements in performance by forcing managers and employees to throw away old, comfortable solutions and adopt radical, never-used-before solutions.82 Four things must occur for stretch goals to effectively motivate teams.83 First, teams must have a high degree of autonomy or control over how they achieve their goals. Second, teams must be empowered with control

over resources, such as budgets, structural workspaces, computers or whatever else accommodation ability to change they need to do their jobs. Third, teams the organisational need structural accommodation. structures, policies and Structural accommodation means practices in order to meet stretch goals giving teams the ability to change bureaucratic organisational structures, policies and immunity practices if doing so helps them meet the ability to make changes without their stretch goals. Finally, teams need first getting approval bureaucratic immunity. Bureaucratic from managers or other parts of an immunity means that teams no longer organisation have to go through the frustratingly slow process of multilevel reviews and sign-offs to get management approval before making changes. Once granted bureaucratic immunity, teams are immune from the influence of various organisational groups and are accountable only to top management. Therefore, teams can act quickly and even experiment with little fear of failure.

SELECTING PEOPLE FOR TEAMWORK Professor of Management Edward Lawler of the University of Southern California says, ‘People are very naive about how easy it is to create a team. Teams are the Ferraris of work design. They’re high performance but high maintenance and expensive’.84 It’s almost impossible to have an effective work team without carefully selecting people who are suited for teamwork or for working on a particular team. A focus on teamwork (individualism– collectivism), team level and team diversity can help companies choose the right team members.85 Are you more comfortable working alone or with others? If you strongly prefer to work alone, you may not be well suited to teamwork. Indeed, studies show that job satisfaction is higher in teams when team members prefer working with others.86 An indirect way to measure someone’s preference for teamwork is to assess the person’s degree of individualism or collectivism. Individualism–collectivism is the individualism– degree to which a person believes that collectivism people should be self-sufficient and that the degree to which a person believes loyalty to one’s self is more important than that people should be loyalty to one’s team or company.87 self-sufficient and that loyalty to one’s self is Individualists, who put their own welfare more important than and interests first, generally prefer loyalty to one’s team or company independent tasks in which they work alone. In contrast, collectivists, who put group or team interests ahead of self-interests, generally prefer interdependent tasks in which they work with others. Collectivists would also rather cooperate than compete and are fearful of disappointing team members or of being ostracised from teams.

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All Qantas maintenance workers must have the relevant CASA qualifications to become members of the Qantas team

Given these differences, it makes sense to select team members who are collectivists rather than individualists. Indeed, many companies use individualism–collectivism as an initial screening device for team members. If team diversity is desired, however, individualists may also be appropriate, as discussed below. To determine your preference for teamwork, take the team player inventory shown in Table 10.1. Team level is the average level of team level ability, experience, personality or any the average level of other factor of a team. For example, a ability, experience, personality or any other high level of team experience means that factor of a team a team has particularly experienced team members. This does not mean that every member of the team has considerable experience, but that enough team members do to significantly raise the average level of experience in the team. Team level is used to guide

TABLE 10.1

selection of teammates when teams need a particular set of skills or capabilities to do their jobs well. For example, all Qantas maintenance engineers must have Civil Aviation Safety Authority (CASA)-recognised qualifications before they are permitted to work on aircraft.88 Whereas team level represents the team diversity average level or capability on a team, team the variances or diversity represents the variances or differences in ability, experience, personality or differences in ability, experience, personality any other factor on a team or any other factor on a team.89 From a practical perspective, why is team diversity important? Professor John Hollenbeck explains, ‘Imagine if you put all the extroverts together. Everyone is talking, but nobody is listening. [By contrast] with a team of [nothing but] introverts, you can hear the clock ticking on the wall’.90 Strong teams not only have talented members (i.e. team level), but those talented members are also different in terms of ability, experience or personality. For example, teams with strong team diversity on job experience have a mix of team members, ranging from seasoned veterans, to people with three or four years of experience, to rookies with little or no experience. Team diversity is used to guide the selection of team members when teams must complete a wide range of different tasks or when tasks are particularly complex. From a practical perspective, why is team diversity important? MIT researcher Alex Pentland’s research at MIT’s Human Dynamics lab shows that the most successful teams, (1) talk with everyone on the team, balancing talking with listening, (2) have a diversity of ideas and team members who are open to new ideas and (3) are

The team player inventory

Strongly disagree

Strongly agree

I enjoy working on team/group projects.

Team/group project work easily allows others to not ‘pull their weight’.

Work that is done as a team/group is better than the work done individually.

I do my best work alone rather than in a team/group.

Team/group work is overrated in terms of the actual results produced.

Working in a team/group gets me to think more creatively.

Teams/groups are used too often, when individual work would be more effective.

My own work is enhanced when I am in a team/group situation.

My experiences working in team/group situations have been primarily negative.

More solutions/ideas are generated when working in a team/group situation than when working alone.

Reverse score items 2, 4, 5, 7 and 9. Then add the scores for items 1 to 10. Higher scores indicate a preference for teamwork, whereas lower total scores indicate a preference for individual work.

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goal oriented. Pentland says, ‘You need everyone exploring slightly different things, but going in the same direction.’91 Team diversity ensures that strong teams not only have talented members (that is, a high team level), but those talented members also have different abilities, experiences and personalities from which to view and solve problems. Industrial Light & Magic’s Experience Lab (xLAB) has assembled a team of artists, engineers, sound designers and storytellers to create a virtual reality experience based on Star Wars: The Force Awakens. Building the future of immersive cinema requires both dreamers and rocket builders, says Vicki Dobbs Beck, the executive in charge of xLAB. ‘The dreamers are constantly thinking about what’s possible, and the rocket builders figure out how to get us there.’92

MGMT TREND

SETTING STRETCH GOALS Hyundai recently set a goal of having its entire product line average 80 kilometres per 3.8 litres or better by 2025, an improvement of nearly 60 per cent over current ratings. While John Krafcik, a spokesman for Hyundai, recognised the difficulty of the goal, saying, ‘We don’t know precisely how to get there right now’, he reaffirmed the company’s commitment to setting high ambitions, stating, ‘We want to help set the trajectory for the industry’.93

Once the right team has been put together in terms of individualism–collectivism, team level and team diversity, it’s important to keep the team together as long as practically possible. Interesting research by the US National Transportation Safety Board shows that 73 per cent of the serious mistakes made by jet co*ckpit crews are made the very first day that a crew flies together as a team, and that 44 per cent of serious mistakes occur on their very first flight together (pilot teams fly two to three flights per day). Moreover, research has shown that fatigued pilot crews who have worked together before make significantly fewer errors than rested crews who have never worked together.94 Their experience working together helps them overcome their fatigue and outperform new teams that have not worked together before. So, once you’ve created effective teams, keep them together as long as possible.

TEAM TRAINING After selecting the right people for teamwork, you need to train them. And, to be successful, teams need significant training, particularly in interpersonal skills, decision making

and problem solving, conflict resolution and technical training. Team leaders need training, too. Organisations that create work teams often underestimate the amount of training required to make teams effective. This mistake occurs frequently in successful organisations, where managers assume that if employees can work effectively on their own, they can work effectively in teams. In reality, companies that successfully use teams provide thousands of hours of training to make sure that teams work. Stacy Myers, a consultant who helps companies implement teams, says, ‘When we help companies move to teams, we also require that employees take basic quality and business knowledge classes as well. Teams must know how their work affects the company, and how their success will be measured’.95 Most commonly, members of work teams receive training in interpersonal skills, such as interpersonal skills listening, communicating, questioning and skills, such as listening, providing feedback. All of these skills communicating, questioning and providing enable people to have effective working feedback, that enable relationships with others. Because of people to have effective working relationships with teams’ autonomy and responsibility, many others companies also give team members training in decision-making and problem-solving skills to help them do a better job of cutting costs and improving quality as well as customer service. Many organisations also teach teams conflict resolution skills. At one American company, for example, if a particular employee within a team is creating issues, it is up to the team members themselves to resolve the conflict. This normally involves two of the team members working at a resolution with the team member causing the issue; and failing that, the whole team will get together to try to work through the problem together. It is only after these steps fail that a team leader would be asked to adjudicate, but that seldom happens.96 Organisations must also provide team members with the technical training they need to do their jobs, particularly if they are being cross-trained to perform all of the different jobs on the team. Cross-training is less appropriate for teams of highly skilled workers. For instance, it is unlikely that a group of engineers, computer programmers and systems analysts would be cross-trained for each other’s jobs. Finally, companies need to provide training for team leaders, who often feel unprepared for their new duties. New team leaders face countless problems, ranging from confusion about their new roles as team leaders (compared to their old jobs as managers or employees) to not knowing where to go for help when their teams have problems. The solution to this is extensive training for team leaders.

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Organisations that create work teams often underestimate the amount of training required to make teams effective

TEAM COMPENSATION AND RECOGNITION APPLY

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Compensating teams correctly is very difficult. One of the problems, according to Susan Mohrman of the Center for Effective Organizations, is that ‘there is a very strong set of beliefs in most organisations that people should be paid for how well they do. So when people first get put into team-based organisations, they really balk at being paid for how well the team does. It sounds illogical to them. It sounds like their individuality and their sense of self-worth are being threatened’. 97 Consequently, companies need to carefully choose a team compensation plan and then fully explain how teams will be rewarded. One basic requirement for team compensation to work is that the level of rewards (individual versus team) must match the level of performance (individual versus team). Employees can be compensated for team participation and accomplishments in three ways: ● skill-based pay ● gainsharing ● non-financial rewards. Skill-based pay programs pay skill-based pay employees for learning additional skills or a compensation system that pays employees for knowledge.98 These programs encourage learning additional skills employees to acquire the additional skills or knowledge they will need to perform multiple jobs within a team and to share knowledge with others within their work groups.99 For example, Procter and Gamble (P&G), one of the largest consumer goods companies globally, has introduced skill-based pay (SBP) system for several years. At P&G, employees are paid for the range, depth and types of skills they are capable of using, rather than for the job they are performing.100 The company also uses market data to set minimum, maximum and average pay levels for its employees. Employees who participate in in-house training E

Get an overview of team compensation

and learn the entire production flow of the company get incentives. The company uses self-managing work teams, high levels of training, extensive communication of business information and various reward innovations to make P&G a success.101 In gainsharing programs, companies gainsharing share the financial value of performance a compensation system gains, such as productivity increases, cost in which companies share the financial value savings or quality improvements, with their of performance gains, employees. 102 Non-financial rewards are such as productivity, cost savings or quality, with another way to reward teams for their their employees performance. These rewards, which can range from holiday trips to T-shirts, plaques and coffee mugs, are especially effective when coupled with management recognition, such as awards, certificates and praise.103 Non-financial rewards tend to be most effective when teams or team-based interventions, such as total quality management (see Chapter 17), are first introduced.104 Which team compensation plan should your company use? In general, skill-based pay is most effective for selfmanaging and self-directing teams performing complex tasks. In these situations, the more each team member knows and can do, the better the whole team performs. By contrast, gainsharing works best in relatively stable environments where employees can focus on improving the productivity, cost savings or quality of their current work system.

MGMT IN PRACTICE

TOP 10 PROBLEMS REPORTED BY TEAM LEADERS 1 Confusion about their new roles and about what they should be doing differently. 2 Feeling they’ve lost control. 3 Not knowing what it means to coach or empower. 4 Having personal doubts about whether the team concept will really work. 5 Uncertainty about how to deal with employees’ doubts about the team concept. 6 Confusion about when a team is ready for more responsibility. 7 Confusion about how to share responsibility and accountability with the team. 8 Concern about promotional opportunities, especially about whether the ‘team leader’ title carries any prestige. 9 Uncertainty about the strategic aspects of the leader’s role as the team matures. 10 Not knowing where to turn for help with team problems, as few, if any, of their organisation’s leaders have led teams.105

11 1

Managing people: human resource management

LEARNING OUTCOMES

HUMAN RESOURCE MANAGEMENT

1 Explain how different employment legislation and laws affect human resource practice.

2 Explain how companies use recruiting to find qualified job applicants.

3 Describe the selection techniques and procedures that companies use when deciding which applicants should receive job offers.

4 Describe how to determine training needs and select the appropriate training methods.

5 Discuss how to use performance appraisal to give meaningful performance feedback.

6 Describe basic compensation strategies and

Human resource management (HRM), or the process of finding,

human resource management (HRM) the process of finding, developing and keeping the right people to form a qualified workforce

developing and keeping the right people to form a qualified workforce, is one of the most difficult and important of all management tasks. This chapter is organised around the three parts of the human resource management process shown in Figure 11.1.

discuss the four kinds of employee separations.

7 Explain diversity and the types of antidiscrimination legislation governing employment in Australia.

8 Understand the special challenges that the

Recruiting Attracting qualified employees Selection

dimensions of surface-level diversity pose for managers.

9 Explain how the dimensions of deep-level diversity affect individual behaviour and interactions in the workplace.

10 Explain the basic principles and practices

Training Developing qualified employees

that can be used to manage diversity.

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Performance appraisal

Compensation Keeping qualified employees Employee separation

FIGURE 11.1

The human resource management process

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The chapter begins by reviewing the laws that govern human resource management decisions, with a focus on these laws in Australia. Similar or counterpart laws apply in most developed economies. Next, we explore how companies use recruiting and selection techniques to attract and hire qualified employees to fulfil those needs. The next part of the chapter discusses how training and performance appraisal can develop the knowledge, skills and abilities of the workforce. The chapter continues with a review of compensation and employee separation; that is, how companies can keep their best employees through effective compensation practices and how they can manage the separation process when employees leave the organisation. Finally, the chapter concludes with a discussion of workplace diversity, why it is important and how it can be managed. Before exploring how human resource systems work, you need to better understand the complex legal environment in which they exist. After reading the next section, you should be able to explain how different employment laws APPLY Get started with the affect human resource media quiz: Barcelona Restaurant practice. Group: Managing Human Resources

LO1

EMPLOYMENT LEGISLATION

The human resource planning process occurs in a very complicated legal environment. Let’s explore employment legislation by reviewing: ● the major federal or Commonwealth employment laws that affect human resource practice ● how the concept of adverse impact is related to employment discrimination ● the laws regarding sexual harassment in the workplace.

EMPLOYMENT LAWS Employment laws in Australia provide an essential framework for the management of people in organisations. In 2009 the Australian government enacted new legislation for the regulation of the employment relationship, the Fair Work Act 2009, which replaced the Workplace Relations Act 1996 and incorporated ‘WorkChoices’ changes. The Fair Work Act 2009 received Royal Assent on 7 April 2009, and started on 1 July of the same year.1 Since then this act has been amended several times to incorporate various human-resource provisions. The latest amendment was on 20 September 2017, with the amendment title as Fair Work Amendment (Protecting Vulnerable Workers) Act 2017.2

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Fair Work applies to the same employers as did the Workplace Relations Act 1996; i.e. it does not apply to

partnerships or individual persons who are employers. It applies to constitutional employers (Proprietary Limited, or Pty Ltd, companies), trading corporations and the like. Fair Work introduces 10 National Employment Standards (NES), which are minimum terms and conditions that apply to all national system employees, replacing the Australian Fair Pay and Condition Standards. The Australian Industrial Relations Commission and the Workplace Ombudsman were abolished and replaced with a ‘one stop shop’, the Fair Work Commission (formerly Fair Work Australia). This means that national minimum wage orders are made by the Fair Work Commission for award/agreement-free employees. Historically, wage setting in Australia has been a process based on centralised, industry-wide ‘awards’. The last two decades have seen a move away from centralised systems and towards enterprise-based agreements and, from the mid-1990s to 2008, to individual employment contracts. Fair Work returns the focus to enterprise level collective bargaining. On 1 January 2010 a number of changes took place in the national workplace relations system. The changes included: ● the Australian Industrial Relations Commission (AIRC) and the Australian Industrial Registry (Registry) ceased operations ● the Fair Work Commission (FWC) took over all remaining functions of the AIRC and the Registry ● modern awards and the new NES ● the ‘better off overall’ test replaced the no-disadvantage test for assessing enterprise agreements ● applications for approval of enterprise agreements must be lodged with the FWC within 14 days of the agreement being made ● there are no longer any legislative provisions for the making of individual agreements.

The national workplace relations system From 1 January 2010, New South Wales, Queensland, South Australia and Tasmania referred industrial relations powers to the Commonwealth, which created a national workplace relations system. The national system now includes virtually all private sector employment except that of non-constitutional corporations in Western Australia (not Pty Ltd companies). Victoria, the Northern Territory and the Australian Capital Territory were already under the national workplace relations system. In Western Australia, some employees and employers not previously covered by state industrial relations systems, because the employer was not a constitutional corporation,

are now covered by the national industrial relations system established by the Fair Work Act 2009 (Cth). Due to these changes, some public sector and local government employment in Western Australia, which was previously under the national system, are now covered by a state system. Employers and employees in the national system have the same workplace rights and obligations, regardless of the state they work in. Features of the national industrial relations system include: ● a set of 10 minimum NES ● modern awards that apply nationally for specific industries and occupations ● a national minimum wage order (where it applies) ● enterprise bargaining ● protection from unfair dismissal.3 Modern awards, together with the NES and the national minimum wage order, make up a new safety net for employees covered by the national workplace relations system.4 In addition to the laws outlined here, there are other important laws and regulations governing safety standards. First, labour laws regulate the interaction between management and the labour unions that represent groups of employees. Second, at the state and federal level in Australia there are various occupational health and safety acts which require that employers provide employees with a workplace free from hazards that are likely to cause harm.

EMPLOYMENT DISCRIMINATION All employers are required to create a workplace that is free from discrimination and harassment. These responsibilities are set out in a range of state and federal laws which help protect people from unlawful behaviour. In addition, there are a range of Acts which cover employers, such as various state work health and safety Acts, the Equal Opportunity in the Workplace Act, the Public Service Act and the Fair Work Amendment Act 2012, and more. The Australian Human Rights Commission, established in 1986, is responsible for the implementation of federal human rights and anti-discrimination law in Australia. The commission administers the five Commonwealth laws that cover discrimination and breaches of human rights: ● Age Discrimination Act 2004 ● Disability Discrimination Act 1992 ● Racial Discrimination Act 1975 ● Sex Discrimination Act 1984 ● Human Rights and Equal Opportunity Commission Act 1986.5 We’ll talk about this legislation in more detail later in the chapter.

FINDING QUALIFIED WORKERS

Staffing is absolutely critical to the success of every company. To be competitive in today’s economy, companies need the best people to create ideas and execute them for the organisation. Without a competent and talented workforce, organisations will stagnate and eventually perish. The right employees are the most important resources of companies today.6 After reading the next two sections, you should be able to: ● explain how companies use recruiting to find qualified job applicants ● describe the selection techniques and procedures that companies use when deciding which applicants should receive job offers.

LO2

RECRUITING

Recruiting is the process of developing

recruiting

a pool of qualified job applicants. Note that the process of developing it is ‘developing a pool’, which is different a pool of qualified job applicants from the actual hiring process. Now let’s examine: ● what job analysis is and how it is used in recruiting ● how companies use internal recruiting ● how companies use external recruiting to find qualified job applicants.

JOB ANALYSIS AND RECRUITING Job analysis is a ‘purposeful, systematic

job analysis

process for collecting information on the a purposeful, systematic process for collecting important work-related aspects of a job’.7 information on the Typically a job analysis collects four kinds important work-related aspects of a job of information: ● work activities, such as what workers do and how, when and why they do it ● the tools and equipment used to do the job ● the context in which the job is performed, such as the actual working conditions or schedule ● the personnel requirements for performing the job, meaning the knowledge, skills and abilities needed to do a job well.8

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Job analysis information can be collected by having existing employees and/or supervisors complete questionnaires about their jobs, by direct observation, by interviews or by filming workers as they perform their jobs. The most important results of a job analysis are ‘job descriptions’ and ‘job specifications’. A job description is a written job description description of the basic tasks, duties and a written description of responsibilities required of an employee the basic tasks, duties and responsibilities required holding a particular job. Job of an employee holding a specifications , often included as a particular job separate section of a job description, are a job specification a written summary of the summary of the qualifications needed to qualifications needed to successfully perform the job. Table 11.1 successfully perform a particular job shows the job description for an assistant lecturer at Monash University in Melbourne. TABLE 11.1

Because a job analysis specifies what a job entails, as well as the knowledge, skills and abilities that are needed to do the job well, companies must complete a job analysis before beginning to recruit job applicants. Job analysis, job descriptions and job specifications are the foundation on which all critical human resource activities are built. They are used during recruiting and selection to match applicant qualifications with the requirements of the job. They are used throughout the staffing process to ensure that selection devices and the decisions based on these devices are job related. For example, the questions asked in an interview should be based on the most important work activities identified by a job analysis. Likewise, during performance appraisals, employees should be evaluated in areas that a job analysis has identified as the most important in a job.

Job description for an assistant lecturer at Monash University in Melbourne

Level A (Assistant Lecturer)

A Level A academic is expected to make contributions to the teaching effort of the university, particularly at undergraduate level, and to carry out activities to develop her/his scholarly, research and/or professional expertise relevant to the profession or discipline in Accounting Information Systems. Specific duties required of a Level A academic may include: • the conduct of tutorials • the preparation and delivery of lectures and seminars provided that skills and experience demonstrate this capacity • enrolment in a higher research degree • the conduct of research • consultation with students • marking and assessment • development of teaching support material with appropriate guidance from the chief examiner • administrative functions primarily connected with units in which the academic teaches • attendance at department meetings, seminars and workshops • involvement in professional activity. A Level A academic shall work with support and direction from academic staff classified at Level B and above and with an increasing degree of autonomy as the academic gains in skill and experience. Chief examiner duties should not be carried out by a Level A academic. Skill base

A Level A academic will normally have completed four years of tertiary study in the relevant discipline and/or have equivalent qualifications and/ or professional experience. A position at this level will formally require an honours degree or higher qualifications, or a three-year degree with a postgraduate diploma. In determining experience relative to qualifications, regard is given to teaching experience, experience in research, experience outside tertiary education, and/or professional contributions. Key selection criteria

Essential: 1. honours degree in relevant discipline area or equivalent 2. enrolment in, or willingness to enrol in, a higher degree by research 3. demonstrated academic knowledge of relevant discipline area 4. commitment to undertake research 5. effective communication skills in order to facilitate student learning and to provide support and advice to students 6. ability to work independently and as a member of a team, including an understanding of the importance of contributing to staff meetings and departmental committees 7. organisational and administrative abilities. Desirable: 1. evidence of teaching ability/quality including conduct of tutorials, assessment and exam marking, student evaluations, experience in developing teaching materials or experience in unit administration 2. eligibility for membership of appropriate professional bodies. Source: Monash University.

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With permission SEEK Limited

Job analyses, job descriptions and job specifications also help companies meet the legal requirement that their human resource decisions be job related. To be judged job related, recruitment, selection, training and performance appraisals must be valid and be directly related to the important aspects of the job, as identified by a careful job analysis.

A job description along with job specifications will often be given in the advertisem*nts on recruitment websites like Seek

INTERNAL RECRUITING internal recruiting the process of developing a pool of qualified job applicants from people who already work in the company

Internal recruiting is the process of

developing a pool of qualified job applicants from people who already work in the company. Internal recruiting, sometimes called ‘promotion from within’, can improve employee commitment, morale and motivation. Recruiting current employees also reduces recruitment start-up time and costs, and because employees are already familiar with the company’s culture and procedures, they are more likely to succeed in new jobs. Job posting and career paths are two methods of internal recruiting. Job posting is a procedure for advertising job openings within the company to existing employees. A job description and requirements are typically posted on a bulletin board, in a company newsletter or in the organisation’s intranet or internal email communications which are accessible only to employees. Job postings help organisations discover hidden talent, allows employees to take responsibility for career planning and makes it easier for companies to retain talented workers who are dissatisfied in their current jobs and would otherwise leave the company.9 In fact, a LinkedIn survey of workers who changed jobs found that 42 per cent would have stayed with their former employers if a relevant position had been available.10 LinkedIn vice president Parker Barrile says it’s often the case that ‘People quit their job, not the company’.11 Ally Financial

posts jobs via career roundtables in which managers fill openings with internal candidates. Ally Financial’s Tony Jefferson got promoted to middle management after discussing his finance skills and managerial aspirations with 12 executives. The roundtable, he says, was ‘a good opportunity to get your name and face in front of the senior leadership team’.12 A study of 70 large global companies found that organisations that formalise internal recruiting and job posting have a lower average rate of turnover (11%) compared to companies that don’t (15%).13 Likewise, a University of Pennsylvania study found external hires generally are more costly, less reliable hires. Specifically, external hires get paid 18 to 20 per cent more than internal hires, are 61 per cent more likely to be fired and are 21 per cent more likely to quit their jobs.14 A career path is a planned sequence of jobs through which employees may advance within an organisation. For example, a person who starts as a sales representative may move up to sales manager and then to district or regional sales manager. Career paths help employees focus on long-term goals and development and also help companies increase employee retention. According to Maureen Henson, vice-president of human resources at the Henry Ford Bi-County Hospital in Michigan, USA, internal recruitment ‘provides a higher level of employee satisfaction, so certainly it can be a retention driver’. Internal applicants also represent a ‘known commodity’, reducing some of the risks of making bad hiring decisions.15

EXTERNAL RECRUITING External recruiting is the process of

external recruiting

developing a pool of qualified job applicants the process of developing a pool of qualified job from outside the organisation. External applicants from outside recruitment methods include advertising the organisation (company website, newspapers, magazines, direct mail, radio or television), employee referrals (asking current employees to recommend possible job applicants), walk-ins (people who apply on their own), outside organisations (universities, technical/trade schools, professional societies), employment services (state or private employment agencies, temporary help agencies and professional search companies), special events (career conferences or job fairs) and Internet job websites. Which external recruiting method should you use? In recent times, the biggest change in external recruiting has been the increased use of the Internet. Some companies now recruit applicants through Internet job websites, such as careerone.com.au (which is known as Monster.com.hk in Hong Kong, Monster.com.my in Malaysia and monster.com.sg in Singapore), seek.com.au, mycareer.com and careersonline.com.au. Companies can post job openings for 30 days on one of these websites for about half of what it used to cost to run an

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Once the recruitment process PPLY E A Get an has produced a pool of overview of selection qualified applicants, the techniques selection process is used to determine which applicants have the best selection chance of performing well on the job. the process of gathering More specifically, selection is the process information about job applicants to decide who of gathering information about job should be offered a job applicants to decide who should be offered validation a job. To make sure that selection decisions the process of determining how well a selection test are accurate and ‘legal’, all selection or procedure predicts procedures should be carefully validated. future job performance. The better or more Validation is the process of determining accurate the prediction of how well a selection test or procedure future job performance, the more valid a test is predicts future job performance. The said to be better or more accurate the prediction of future job performance, the more valid a test is said to be. ENGAG

Services such as LinkedIn can help companies target new recruits

advertisem*nt just once in a newspaper. Plus, research shows that Internet job listings can generate nine times as many résumés as one advertisem*nt in the newspaper.16 Because these websites attract so many applicants and offer so many services, companies save by finding qualified applicants without having to use more expensive recruitment and search firms, which typically charge one-third or more of a new employee’s annual salary.17 Recently, social media sites and industry-specific job boards have been gaining momentum at the expense of generalist job boards and newspapers. Facebook’s job search platform is used effectively to recruit lower-skilled workers, and sites such as LinkedIn and theLadders.com tend to attract more highly skilled or senior-level job seekers.18 Even though 67 per cent of people seeking jobs through social media use Facebook, LinkedIn continues to be where recruiters look for promising candidates. A recent survey found that a whopping 92 per cent of recruiters use social media for outreach – 87 per cent of whom use LinkedIn.19 According to one Australian consulting group, Australians seeking work ranked highest on a list of 37 countries in their use of the Internet to find jobs, with the majority finding their most recent position online. Online recruitment was used more often than other forms of recruitment including direct approaches (walk-ins), newspaper advertising and ‘word of mouth’ (employee referrals). Of the Australians seeking work, 54 per cent found their most recent job online, the highest of any country in the survey, followed by Thailand (52 per cent), Hong Kong (51 per cent), China (50 per cent), New Zealand (43 per cent) and Indonesia (43 per cent).20

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RECRUITING CHALLENGES The recruitment challenges facing companies in Australia are cyclical; that is to say, they change with the state of the national economic conditions. In good times recruitment challenges include finding talented candidates and retaining them. Employees who join a company only to leave after a short time in search of higher pay are also a problem of the good times. Economic growth brings many job opportunities and tempting choices for staff to pursue. High turnover of staff is expensive and naturally something to be avoided or minimised where possible. Similarly, maintaining realistic salary levels is difficult during good economic times. Like any market, the price for high-quality staff will rise if there is strong demand. Companies have to ensure they have good market intelligence so that they can offer salaries and conditions that will attract the best candidates without offering unrealistically high amounts. An example of this cyclical change is shown in skilled information and communications technology (ICT) workers in Australia. While the Clarius Skills Survey in 2014 reported a surplus of skilled ICT workers over job opportunities21, the annual study by Deloitte Access Economics and the Australian Computer Society in 2017 forecasts a significant shortage of ICT workers in Australia. The study finds that the ICT sector is increasing its importance to the country’s gross domestic product, shifting from 5.1 per cent in 2014 to a forecast 7 per cent in 2020.22 Australian Computer Society president Anthony Wong predicts, ‘By 2022 the sector will have created an additional 81 000 jobs, so the big

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question for policy makers is where all the people will come from when we only have 3000 to 4000 graduates a year?’23 Thus, employers need to carefully assess recruiting plans before finding new staff. While unemployment in Australia remains fairly stable and at relatively low levels (5.4 per cent in June 2018, according to the Australian Bureau of Statistics24), employers will need to compete for the best of applicants, although there will be fluctuations in the demand for particular occupations.

Let’s examine common selection procedures, such as: ● application forms and résumés ● references and background checks ● selection tests.

APPLICATION FORMS AND RÉSUMÉS The first selection devices that most job applicants encounter when they seek a job are application forms and résumés (also known as a CV or curriculum vitae). Both contain similar information about an applicant, such as name, address, job and educational history, and so forth. Though an organisation’s application form often asks for information already provided by the applicant’s résumé, most organisations prefer to collect this information in their own format for entry into a human resource information system. Employment laws apply to application forms, just as they do to all selection devices. Application forms may ask applicants for only valid, job-related information. There are many types of information that companies are not allowed to ask for on application forms, during job interviews or in any other part of the selection process. However, this will differ from place to place. The questions that you cannot ask in Australia may be considered routine in China. To avoid possible cultural insensitivity, or possible litigation, be sure to check the legislation in your country of operation, and ask only those questions that directly relate to the candidate’s ability and motivation to perform the job. Résumés also pose problems for companies, but in a different way. Studies show that as many as one-third of job applicants intentionally falsify some information on their résumés and that 80 per cent of the information on résumés may be misleading. Therefore, managers should verify the information collected via résumés and application forms by comparing it with additional information collected during interviews and other stages of the selection process, such as references and background checks, which are discussed next.

REFERENCES AND BACKGROUND CHECKS Nearly all companies ask an applicant to provide employment references employment from people who are ‘referees’, such as reference a source such as a previous employers, supervisors or co- previous employer or coworkers, that they can contact to learn worker who can provide information more about the candidate. Background job-related about a job candidate c he c ks are used to verify the background check truthfulness and accuracy of information a procedure used to the truthfulness that applicants provide about themselves verify and accuracy of and to uncover negative, job-related information that an background information not provided by applicant has provided about themselves, and applicants. Background checks are to uncover negative, conducted by contacting educational job-related background information not provided institutions and prior employers either by the applicant by telephone, mail or email. Where appropriate it may also include a police background check; for example, for security work or for working with children. Unfortunately, previous employers are increasingly reluctant to provide references or background check information for fear of being sued by previous employees for defamation. If former employers provide potential employers with unsubstantiated information that damages applicants’ chances of being hired, applicants can (and do) sue for defamation. As a result, many employers provide only dates of employment, positions held and date of separation. An emerging, and some would say worrying, trend is the use of Facebook and other social media as a means of conducting a background check. While it is an appropriate technique to peruse the publicly available information posted by someone on their Facebook page, many companies are taking the practice a step (or two) further. Cases are surfacing where job applicants are being asked to hand over their Facebook password to their interviewer so that a background check can be done. Implicit in the request is the fact that if the information is not provided the candidate will not get the job. The practice is sufficiently widespread that lawmakers in several countries are proposing legislation against it. Even without password access, many companies currently use Facebook to filter out ‘undesirable’ candidates. According to a study published in The Atlantic magazine, 69 per cent of the companies surveyed used Facebook for background checks and based a rejection on what they found. The reasons given for these rejections included posting information about drinking, making discriminatory comments, inappropriate comments, negative comments about a previous employer, sharing confidential information about a previous employer, posting inappropriate photos and showing poor communication skills.25

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SELECTION TESTS Selection tests give organisational decision makers a chance to know who will be likely to do well in a job and who won’t. The basic idea behind selection testing is to have applicants take a test that measures something directly or indirectly related to doing well on the job. The selection tests discussed here include: ● specific ability tests ● cognitive ability tests ● biographical data ● personality tests ● work sample tests ● assessment centres. Specific ability tests measure the specific ability test (aptitude test) extent to which an applicant possesses a test that measures the particular kind of ability needed to do the extent to which an a job well. Specific ability tests are also applicant possesses the particular kind of ability called aptitude tests because they needed to do a job well measure aptitude for doing a particular task well. Specific ability tests also exist for mechanical, clerical, sales and physical work. For example, clerical workers have to be good at accurately reading and scanning numbers as they type or enter data. Figure 11.2 shows items similar to those found on the Minnesota Clerical Test, in which applicants have only a short time to check if the two columns of numbers and letters are identical. Applicants who are good at this are likely to do well as clerical or data-entry workers. Cognitive ability tests measure cognitive ability test the extent to which applicants have a test that measures the extent to which abilities in perceptual speed, verbal applicants have abilities in comprehension, numerical aptitude, perceptual speed, verbal comprehension, numerical general reasoning and spatial aptitude. In aptitude, general other words, these tests indicate how reasoning and spatial aptitude quickly and how well people understand words, numbers, logic and spatial dimensions. Whereas specific ability tests predict job performance in only particular types of jobs, cognitive ability tests accurately predict job performance in almost

SAME NUMBERS/LETTERS Yes 1 3468251 2. 4681371 3. 7218510 4. ZXYAZAB 5. ALZYXMN 6. PRQZYMN FIGURE 11.2

3467251 4681371 7218520 ZXYAZAB ALZYXNM PRQZYMN

Clerical test items similar to those found in the Minnesota Clerical Test Source: Based on N. W. Schmitt & R. J. Klimoski, Research methods in human resource management, (Mason, OH: South-Western, 1991).

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all kinds of jobs.26 Why is this so? The reason is that people with strong cognitive or mental abilities are usually good at learning new things, processing complex information, solving problems and making decisions, and these abilities are important in almost all jobs.27 In fact, cognitive ability tests are almost always the best predictors of job performance. Consequently, if you were allowed to use just one selection test, a cognitive ability test would be the one to use.28 In practice, though, larger companies use a battery of different tests because doing so leads to much more accurate selection decisions. Biographical data, or biodata, are extensive surveys that ask applicants questions about their personal backgrounds and life experiences. The basic idea behind biodata is that past behaviour (personal background and life experience) is the best predictor of future behaviour. For example, during the Second World War, the US Air Force had to test tens of thousands of men without flying experience to determine who was likely to be a good pilot. Since flight training took several months and was very expensive, quickly selecting the right people for training was important. After examining extensive biodata, they found that one of the best predictors of success in flight school was whether students had ever built model aeroplanes that actually flew. This one, seemingly trivial, biodata item was almost as good a predictor as the entire set of selection tests that the Air Force was using at the time.29 Most biodata questionnaires have over 100 items that gather information about habits and attitudes, health, interpersonal relations, money, what it was like growing up in your family (parents, siblings, childhood years, teen years), personal habits, current home (spouse, children), hobbies, education and training, values, preferences and work.30 In general, biodata are very good predictors of future job performance, especially in entry-level jobs. You may have noticed that some of the information requested in biodata surveys is related to those topics employers should avoid in applications, interviews or other parts of the selection process. This information can be requested in biodata questionnaires provided that the company can demonstrate that the information is job related (i.e. valid) and does not result in adverse impact against protected groups of job applicants. Biodata surveys should be validated and tested for adverse impact before they are used to make selection decisions.31 Psychological or psychometric psychological testing is a tool used to assist with the (psychometric) test recruitment and selection of candidates. a test that measures the psychological make-up Psychological tests should not be used of a candidate and their as the only selection method. Often readiness to undertake called (wrongly) ‘personality testing’, the the job use of psychometric instruments in staff selection has been a controversial issue in academic literature and

estate agents, must demonstrate what they would do in these realistic situations.33 This work sample simulation gives real estate companies direct evidence of whether applicants can do the job if they are hired. Work sample tests are generally very good at predicting future job performance; however, they can be expensive to administer and can be used for only one kind of job. For example, a car dealership could not use a work sample test for mechanics as a selection test for sales representatives. Shutterstock.com/Christophe Jossic

among human resource management practitioners, but they are still frequently used. They are best used in combination with a number of other selection tools. There is also some recent research indicating that psychometric tests may be best used right at the start of the recruitment and selection process to ‘weed out’ applicants who are clearly unsuitable before they proceed further.32 The psychological tests generally used in staff selection are carefully developed for specific purposes and are designed to help fit the talents, personality and attributes of a candidate to a specific job in the organisation. Reliable and reputable tests have been rigorously researched before being released and there is evidence available of their reliability and validity. The benefits of psychological testing are as follows: ● Objectivity: good psychological tests are standardised on a large sample and provide normative data across a wide range of demographics and age cohorts. ● Validity: psychometric tests can be a more valid method of assessment than interviews, academic achievement and reference checks, and when utilised in combination (for example, in an assessment centre) are highly predictive of future job performance. ● Cost: the cost of selecting the wrong employee can be high. Psychometric tests can help minimise cost while ensuring there is a strong fit between the candidate and the job. Personality inventory questionnaires are also used by many organisations and will typically contain between 100– 300 statements that applicants relate to themselves and how they would behave in certain situations. There are no right or wrong answers for these types of tests and job candidates are encouraged to answer the questions as truthfully as possible. These tests are often used in staff development or team building programs, but can be used in recruitment to match a candidate to a particular team or work environment. Some examples of personality inventories include Myers Briggs Type Indicator and Human Dynamic, Learning Styles Questionnaire and Occupational Personality Questionnaire. Work sample tests, also called work sample test performance tests, require applicants to a test that requires the applicant to perform tasks perform tasks that are actually done on that are actually done on the job. So, unlike specific ability, the job cognitive ability and personality tests, which are indirect predictors of job performance, work sample tests directly measure job applicants’ capability to do the job. For example, a computer-based work sample test has applicants assume the role of a real estate agent who must decide how to interact with ‘virtual clients’ in a game-like scenario. The applicants, just like actual real

Personality inventories like the Myers Briggs Type Indicator can help assess whether a candidate is innately suited to a role

Assessment centres use a series of

assessment centre

job-specific simulations that are graded by a series of managerial graded by multiple trained observers to determine simulations, trained observers, that applicants’ abilities to perform managerial are used to determine an work. Unlike the previously described applicant’s capability for managerial work selection tests that are commonly used for specific jobs or entry-level jobs, assessment centres are most often used to select applicants who have high potential to be managers. Assessment centres often take two to five days and require participants to complete a number of tests and exercises that simulate managerial work. Some of the more common assessment centre exercises are in-tray exercises, role-plays, small-group presentations and leaderless group discussions. An intray exercise is commonly a pen and paper test in which an applicant is given a manager’s ‘in-tray’ containing memos, phone messages, organisational policies and other communications normally received by and available to managers. Applicants have a limited time to read through the in-tray, prioritise the items and decide how to deal with each item. Experienced managers then score the applicants’ decisions and recommendations. Figure 11.3 shows an item that could be used in an assessment centre for evaluating applicants for a job as a store manager.

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ENGAG

FIGURE 11.3

In-tray item for an assessment centre for store managers

Source: Adapted from N. W. Schmitt & R. J. Klimoski, Research Methods in Human Resource Management (Mason, OH: South-Western 1991).

In a leaderless group discussion, another common assessment centre exercise, a group of six applicants is given approximately two hours to solve a problem, but no one is put in charge (hence the name ‘leaderless’ group discussion). Trained observers watch and score each participant on the extent to which he or she facilitates discussion, listens, leads, persuades and works well with others. Are tests perfect predictors of job performance? No, they aren’t. Some people who do well on selection tests will do poorly in their jobs. Likewise, some people who do poorly on selection tests (and therefore weren’t hired) would have been very good performers. Nonetheless, valid tests will minimise these selection errors (hiring people who should not have been hired, and not hiring people who should have been hired) while maximising correct selection decisions (hiring people who should have been hired, and not hiring people who should not have been hired). In short, tests increase the chances that you’ll hire the right person for the job; that is, someone who turns out to be a good performer. So, although tests aren’t perfect, and they can be expensive, few techniques predict future job performance as well as the selection tests discussed here.

INTERVIEWS In interviews, representatives of the hiring organisation ask job applicants jobrelated questions to determine whether they are qualified for the job. Interviews are probably the most frequently used and relied on selection device. There are several basic kinds of interviews: unstructured, structured and semi-structured.

interview a selection tool in which a company representative asks a job applicant job-related questions to determine whether they are qualified for the job

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In unstructured interviews , unstructured interviewers are free to ask applicants interview an interview in which the anything they want, and studies show that interviewer is free to ask they do. Because interviewers often the applicant anything disagree about which questions should be they want asked during interviews, different interviewers tend to ask applicants very different questions.34 Furthermore, individual interviewers even seem to have a tough time asking the same questions from one interview to the next. This high level of inconsistency lowers the validity of unstructured interviews as a selection device because comparing applicant responses can be difficult. As a result, unstructured interviews are about half PPLY E A Find out more as accurate as structured about your interview readiness interviews at predicting with this self-assessment which job applicants should be hired. structured interview By contrast, with structured a type of interview in which each applicant is interviews, standardised interview asked the same set of questions are prepared in advance so that standardised questions, including all applicants are asked the same usually situational, behavioural, 35 job-related questions. The primary background and jobadvantage of structured interviews is that knowledge questions comparing applicants is much easier because they are all asked the same questions. Structuring interviews also ensures that interviewers ask only for important, jobrelated information. Not only is the accuracy, usefulness and validity of the interview improved, but the chances that interviewers will ask questions about topics that break employment laws are reduced. Laszlo Bock, Google’s head of human resources, explains why structured interviews are so effective: ‘... think about the last five people you interviewed for a similar job. Did you give them similar questions or did each person get different questions? Did you cover everything you needed to with each of them, or did you run out of time? Did you hold them to exactly the same standard, or were you tougher on one because you were tired, cranky and having a bad day? Did you write up detailed notes so that other interviewers could benefit from your insights? A concise hiring rubric [via structured interviews containing the same questions] addresses all these issues because it distills messy, vague and complicated work situations down to measurable, comparable results.’ 36 Four kinds of questions are typically asked in structured interviews. Situational questions ask applicants how they would respond in a hypothetical situation (‘What would you do if ...?’). These questions are more appropriate for hiring new graduates, who are unlikely to have encountered real-work situations because of their limited work experience. Behavioural questions ask applicants what they did in previous jobs that were similar to the job for which they are applying (‘In your previous jobs, tell me about ...’).

Interview stage

FIGURE 11.4

interviews can rival that of cognitive ability tests. Even more important, because interviews are especially good at assessing applicants’ interpersonal skills, they work particularly well with cognitive ability tests. The combination (i.e. smart people who work well in conjunction with others) leads to even better selection decisions than using either alone.39 Figure 11.4 provides a set of guidelines for conducting effective structured employment interviews. Shutterstock.com/stockfour

These questions are more appropriate for hiring experienced individuals. Background questions ask applicants about their work experience, education and other qualifications (‘Tell me about the training you received at ...’). Job-knowledge questions ask applicants to demonstrate their job knowledge (for example, nurses might be asked, ‘Give me an example of a time when one of your patients had a severe reaction to a medication. How did you handle it?’).37 Semi-structured interviews are somewhere between structured and unstructured interviews. A major part of the semi-structured interview (perhaps as much as 80 per cent) is based on structured questions, but some time is set aside for unstructured interviewing to allow the interviewer to probe into ambiguous, interesting or missing information uncovered during the structured part of the interview. How well do inter views predict future job performance? Contrary to what you’ve probably heard, recent evidence indicates that even unstructured interviews do a fairly good job. 38 When conducted properly, however, structured interviews can lead to much more accurate hiring decisions than unstructured interviews. In some cases, the validity of structured

The core advantage of a structured interview is the ability to compare candidates’ responses against each other

What to do

Planning the interview

• Identify and define the knowledge, skills, abilities and other (KSAO) characteristics needed for successful job performance. • For each essential KSAO, develop key behavioural questions that will elicit examples of past accomplishments, activities and performance. • For each KSAO, develop a list of things to look for in the applicant’s responses to key questions.

Conducting the interview

• Create a relaxed, non-stressful interview atmosphere. • Review the applicant’s application form, résumé and other information. • Allocate enough time to complete the interview without interruption. • Put the applicant at ease; don’t jump right into heavy questioning. • Tell the applicant what to expect. Explain the interview process. • Obtain job-related information from the applicant by asking those questions prepared for each KSAO. • Describe the job and the organisation to the applicant. Applicants need adequate information to make a selection decision about the organisation.

After the interview

• Immediately after the interview, review your notes and make sure they are complete. • Evaluate the applicant on each essential KSAO. • Determine each applicant’s probability of success and make a hiring decision.

Guidelines for conducting effective structured interviews

Source: Based on B. M. Farrell, ‘The art and science of employment interviews’, Personnel Journal, 65, 1986: 91–4.

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KINDS OF QUESTIONS TYPICALLY ASKED IN STRUCTURED INTERVIEWS •

•

Situational questions: ask applicants how they would respond in a hypothetical situation (e.g. ‘What would you do if …?’). These questions are more appropriate for hiring new graduates, as they are unlikely to have encountered real-work situations because of their limited work experience. Behavioural questions: ask applicants what they did in previous jobs that were similar to the job for which they are applying (e.g. ‘In your previous jobs, tell me about …’). These questions are more appropriate for hiring experienced individuals. Background questions: ask applicants about their work experience, education and other qualifications (e.g. ‘Tell me about the training you received at …’). Job knowledge questions: ask applicants to demonstrate their job knowledge (e.g. for nurses, ‘Give me an example of a time when one of your patients had a severe reaction to a medication. How did you handle it?’)40

DEVELOPING QUALIFIED WORKERS

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TRAINING

Training means providing opportunities for

training

employees to develop the job-specific skills, developing the skills, experience and knowledge they need to do experience and knowledge employees need to their jobs or improve their performance. perform their jobs or Human resource management practitioners improve their performance will often draw a distinction between training (for specific skills: e.g. ‘You will really need to do the advanced Excel course for this job’) and development (providing employees with opportunities to expand their experience: e.g. ‘It would really be good for you to do a six-month posting to our parent company in London’). Companies typically spend a significant part of their annual budget each year on training, and sometimes spend large amounts on specialised training venues. For example, the Australian Bureau of Statistics found that over 80 per cent of Australian companies provided staff training during 2016–2017. On average, these companies spent around 2 per cent of their total wages bill on training and education.42 In 2017, Australia Post allocated $22 million for skills training of frontline employees.43 In 2014, the Victorian government built the Victorian Emergency Management Training Centre (VEMTC) at a cost of $109 million for the Metropolitan Fire Brigade (MFB). In 2017, VEMTC spent $3 338 000 for training and development of 4274 fire fighters, which involved 20 350 hours of training activities.44 To make sure those training dollars are well spent, companies need to: ● determine specific training needs ● select appropriate training methods ● evaluate training.

DETERMINING TRAINING NEEDS According to management research, a typical investment in employee training increases productivity by an average of 17 per cent, reduces employee turnover and makes companies more profitable.41 Giving employees the knowledge and skills they need to improve their performance is just the first step in developing employees, however. The second step, and not enough companies do this, is giving employees formal feedback about their actual job performance. After reading the next two sections, you should be able to: ● describe how to determine training needs and select the appropriate training methods ● discuss how to use performance appraisal to give meaningful performance feedback.

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Needs assessment is the process of needs assessment identifying and prioritising the learning the process of identifying and prioritising the needs of employees. Needs assessments learning needs of can be conducted by identifying employees performance deficiencies, listening to customer complaints, surveying employees and managers or formally testing employees’ skills and knowledge. Note that training should never be conducted without first performing a needs assessment. Sometimes, training isn’t needed at all or isn’t needed for all employees. Unfortunately, however, many organisations simply require all employees to attend training, whether they need to or not. As a result, employees who are not interested or don’t need the training may react negatively during or after

training. Likewise, employees who should be sent for training but aren’t may also react negatively. Consequently, a needs assessment is an important tool for deciding who should or should not attend training. In fact, employment law restricts employers from discriminating on the basis of age, sex, race, colour, religion, national origin or disability when selecting training participants. Just like hiring decisions, the selection of training participants should be based on job-related information.

TRAINING METHODS Assume that you’re a training manager for a bank and that you’re in charge of making sure that all bank employees know what to do in case of a robbery. Table 11.2 lists a number of training methods you could use: films and videos, lectures, planned readings, case studies, coaching and mentoring, group discussions, on-the-job training, role-playing, simulations and games, vestibule training and computer-based learning. Which method would be best?

TABLE 11.2

To choose the best method, you should consider a number of factors, such as the number of people to be trained, the cost of training and the objectives of the training. For instance, if the training objective is to impart information or knowledge to trainees, then you should use films and videos, lectures and planned readings. In our robbery training example, trainees would hear, see or read about what to do in case of a robbery. If developing analytical and problem-solving skills is the objective, then use case studies, coaching and mentoring, and group discussions. In our example, trainees would read about a real robbery, talk to people who had been through robberies and discuss what to do. If practising, learning or changing job behaviours is the objective, then use on-the-job training, role-playing, simulations and games, and vestibule training. In our example, trainees would learn about robbery situations on the job, pretend that they were in a robbery situation or participate in a highly realistic mock robbery. If training is supposed to meet more than one of these objectives, then your best choice may be to combine one of the previous methods with computer-based training.

Training objectives and methods

Training objective

Training method

Impart information and knowledge

• Films and videos: share information, illustrate problems and solutions, and effectively hold trainees’ attention. • Lectures: trainees listen to instructors’ oral presentations. • Planned readings: trainees read about concepts or ideas before attending training.

Develop analytical and problem-solving skills

• Case studies: cases are analysed and discussed in small groups. Each one presents a specific problem or decision, and trainees develop methods for solving the problem or making the decision. • Coaching and mentoring: managers give trainees informal advice, suggestions and guidance. This method is helpful for reinforcing other kinds of training and for trainees who benefit from support and personal encouragement. • Group discussions: small groups of trainees actively discuss specific topics. The instructor may perform the role of discussion leader.

Practise, learn or change job behaviour

• On-the-job training (OJT): new employees are assigned to experienced employees. The trainee learns by watching the experienced employee perform the job and eventually by working alongside the experienced employee. Gradually, the trainee is left on his or her own to perform the job. • Role-playing: trainees assume job-related roles and practise new behaviours by acting out what they would do in job-related situations. • Simulations and games: experiential exercises place trainees in realistic job-related situations and give them the opportunity to experience a job-related condition in a relatively low-cost setting. The trainee benefits from ‘hands-on experience’ before actually performing the job, where mistakes may be more costly. • Vestibule training: procedures and equipment similar to those used in the actual job are set up in a special area called a ‘vestibule’. The trainee is then taught how to perform the job at his or her own pace without disrupting the actual flow of work, making costly mistakes or exposing the trainee and others to dangerous conditions.

Impart information and knowledge, develop analytical and problem-solving skills, and practise, learn or change job behaviour

• Computer-based learning: interactive videos, software, personal computers, teleconferencing and the Internet may be combined to present multimedia-based training. Source: A. Fowler, ‘How to decide on training methods’, People Management, 25 (1), 1995: 36.

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These days, many companies are adopting Internet training, or ‘e-learning’. E-learning can offer several advantages. Because employees don’t need to leave their jobs, travel costs are greatly reduced. Also, because employees can take training modules when it is convenient (in other words, employees can take online modules while at their desk between tasks, or take them at home if they like), workplace productivity should increase and employee stress should decrease. Finally, if the company’s technology infrastructure can support it, e-learning can be much faster than traditional training methods. This is especially true of micro-learning apps. With micro-learning, training is accomplished via short, focused lessons that can generally be completed in fewer than five minutes and are often followed by a quiz to check learning. For example, Uber drivers in Brazil, Colombia and Mexico can practise their English skills using Duolingo, a foreign language app that delivers micro-instruction through audio, video, text and pictures. After demonstrating proficiency by advancing to a certain level in the app, a driver’s vehicle is listed as an option for English-speaking passengers looking for a driver who speaks their language.45 There are, however, several disadvantages to e-learning. First, despite its increasing popularity, it’s not always the appropriate training method. E-learning can be a good way to impart information, but it isn’t always as effective for changing job behaviours. Second, e-learning requires a significant investment in computers and high-speed Internet and network connections for all employees. Finally, though e-learning can be faster, many employees find it so unengaging that they may choose to do their jobs rather than complete e-learning courses when sitting alone at their desks. E-learning may become more interesting, however, as more companies incorporate game-like features, such as avatars and competition, into their e-learning courses.

Training bank tellers to handle a robbery attempt could take several different forms depending on which part of the robbery the training was meant to address

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EVALUATING TRAINING After selecting a training method and conducting the training, the last step is to evaluate the training. This can be done in four ways: on reactions, how satisfied trainees were with the program; on learning, how much employees improved their knowledge or skills; on behaviour, how much employees actually changed their on-the-job behaviour because of training; or on results, how much training improved job performance, such as increased sales or quality, or decreased costs.46 In general, if done well, training provides meaningful benefits for most companies. For example, a US study showed that a training budget as small as $680 per employee can increase a company’s total return on investment by 6 per cent.47 Similar results in Australia are shown in studies conducted by the National Centre for Vocational Education Research (NCVER).48

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PERFORMANCE APPRAISAL

Performance appraisal is the process

performance

of assessing how well employees are appraisal doing their jobs. Most employees and the process of assessing how well employees are managers intensely dislike the performance doing their jobs appraisal process. UCLA’s Professor Samuel Culbert says there is nothing constructive about performance appraisals and calls them a ‘dysfunctional pretense’. Culbert says, ‘It’s a negative to corporate performance, an obstacle to straight-talk relationships, and a prime cause of low morale at work’.49 As an example, one manager says, ‘I hate annual performance reviews. I hated them when I used to get them, and I hate them now that I give them. If I had to choose between performance reviews and paper cuts, I’d take paper cuts every time. I’d even take razor burns and the sound of fingernails on a blackboard’.50 Unfortunately, attitudes like this are all too common. In fact, 70 per cent of employees are dissatisfied with the performance appraisal process in their companies. Likewise, according to one study, 90 per cent of human resource managers are dissatisfied with the performance appraisal systems used by their companies.51 Performance appraisals are used for four broad purposes: making administrative decisions (e.g. pay increases, promotions, retention), providing feedback for staff development (e.g. job performance, developing career plans), evaluating human resource programs (e.g. validating selection systems) and for documentation (e.g. documenting performance ratings and decisions based on those ratings).52 Let’s explore how companies can avoid some of these problems with performance appraisals by: ● accurately measuring job performance ● effectively sharing performance feedback with employees.

MGMT TREND

TRAINING ONLINE

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Using Learning Management Systems (LMS) just like the ones used in your university (for example, Blackboard, Collaborate, Desire to Learn or Moodle), organisations like Dow Chemical have provided training to staff, who collectively completed more than a million hours of web-based courses. Likewise, Cisco Systems, who make corporate LMSs, offers e-learning courses to its managers and employees. The use of LMSs to provide training for induction, workplace safety and anti-discrimination is more and more common in organisations.53

ACCURATELY MEASURING JOB PERFORMANCE Employees sometimes have strong doubts about the accuracy of their performance appraisals – and they may be right. For example, it’s known that assessors are prone to errors when rating employee performance. Three of the most common rating errors are central tendency, halo and leniency. Central tendency error occurs when assessors rate all workers as average or in the middle of the scale. Halo error occurs when assessors rate all workers as performing at the same level (good, bad or average) in all parts of their jobs. Leniency error occurs when assessors rate all workers as performing particularly well. One of the reasons that managers make these errors is that they often don’t spend enough time gathering or reviewing performance data. Facebook reduces appraisal errors by having managers work together to finalise appraisal ratings. ‘Managers sit together and discuss their reports face-to-face, defending and championing, debating and deliberating, and incorporating peer feedback. Here, the goal is to minimise the “idiosyncratic rater effect” – also known as personal opinion. [This way] people aren’t unduly punished when

individual managers are hard graders or unfairly rewarded when they’re easy graders.’54 What can be done to minimise rating errors and improve the accuracy with which job performance is measured? In general, two approaches have been used: improving performance appraisal measures themselves and training performance raters to be more accurate. One of the ways companies try to improve performance appraisal measures is to use as many objective performance measures as possible. Objective objective performance measures are easily and performance measures directly counted or quantified. Common measures of job objective performance measures include performance that are output, scrap, waste, sales, customer easily and directly counted or quantified complaints and rejection rates. But when objective performance measures aren’t available, and frequently they aren’t, subjective performance measures have to be used instead. Subjective performance measures require that someone judge or assess an employee’s performance. The most common kind of subjective performance measure is the Graphic Rating Scale (GRS) shown in Figure 11.5. Graphic rating scales are most widely used because they are easy to construct, but they are very susceptible to rating errors. A popular alternative to graphic rating scales is the behaviour observation behavioural scale (BOS). BOS requires raters to rate observation scale the frequency with which workers perform (BOS) a rating scale that specific behaviours representative of the indicates the frequency job dimensions that are critical to with which a worker performs specific successful job performance. Figure 11.5 behaviours that are also shows a BOS for two important job representative of the job dimensions critical dimensions for a retail salesperson: to successful job customer service and money handling. performance Notice that each dimension lists several specific behaviours characteristic of a worker who excels in that dimension of job performance. (Normally, the scale would list seven to 12 items per dimension, not three as in Figure 11.5.) Notice also that the behaviours are good behaviours, meaning they indicate good performance, and the rater is asked to judge how frequently an employee engaged in those good behaviours. The logic behind the BOS is that better performers engage in good behaviours more often. Not only do BOSs work well for rating critical dimensions of performance, but studies also show that managers strongly prefer BOSs for giving performance feedback, accurately differentiating between poor, average and good workers, identifying training needs and accurately measuring performance. The second approach to improving the rater training measurement of employees’ job training performanceperformance is rater training. The most appraisal raters in how to avoid rating errors and effective is frame-of-reference training in increase rating accuracy

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Very poor (20% errors) 1

Poor (15% errors) 2

Average (10% errors) 3

Good (5% errors) 4

Graphic rating scale

Very good (less than 5% errors) 5

Example 1: Quality of work performed is .................

Example 2: Quality of work performed is .................

Behavioural observation

Almost never 1

Almost always 5

Dimension: customer service 1. Greets customers with a smile and a ‘hello’. ................ 2. Calls other stores to help customers find merchandise that is not in stock. ................ 3. Promptly handles customer concerns and complaints. ................

Dimension: money handling 1. Accurately makes change from customer transactions. ................ 2. Accounts balance at the end of the day, no shortages or surpluses. ................ 3. Accurately records transactions in computer system. ................

FIGURE 11.5

Subjective performance measures: Graphic Rating Scale (GRS)

which a group of trainees learns how to do performance appraisals by watching a video recording of an employee at work. Next, they evaluate the performance of the person in the video. A trainer (i.e. subject matter expert) then shares his or her evaluations, and trainees’ evaluations are compared with the expert’s. The expert then explains rationales behind his or her evaluations. This process is repeated until the difference in evaluations given by trainees and evaluations by the expert are minimised. The underlying logic behind the frame-of-reference training is that by adopting the frame of reference used by an expert, trainees will be able to accurately observe, judge and use the scale to evaluate the performance of others.55

SHARING PERFORMANCE FEEDBACK After gathering accurate performance data, the next step is to share performance feedback with employees. Unfortunately, even when performance appraisal ratings are accurate, the appraisal process often breaks down at the feedback stage. Employees may become defensive and dislike hearing any negative assessments of their work, 202

no matter how small. Managers may become defensive, too, and dislike giving appraisal feedback as much as employees dislike receiving it. In response, many companies are asking managers to ease up on harsh feedback and instead accentuate the positive by focusing on employee strengths. In the past, Michelle Russell of Boston Consulting Group says, ‘We would bring them in and beat them down a bit.’56 Some employees would suffer a crisis of confidence and performance and then quit. At Intel , telling employees they ‘need improvement’ deflates morale, says HR manager Devra Johnson. ‘We call them the walking wounded.’57 What can be done to overcome the inherent difficulties in performance appraisal feedback sessions? Since performance appraisal ratings have traditionally been the judgements of just one person, the boss, one possibility is to use 360-degree 360-degree feedback feedback. In this approach, feedback a performance appraisal process in which feedback comes from four sources: the boss, obtained from the subordinates, peers and co-workers, and is boss, subordinates, peers the employees themselves. The data, and co-workers, and the which are obtained anonymously (except employees themselves

General discussion of possible plans and goals for the coming year.

self-appraisals lead to more candid self-assessments than traditional supervisory reviews.60

MGMT FACT

COMMON RATING ERRORS •

•

Central tendency error: occurs when assessors rate all employees as average or in the middle of the scale. Halo error: occurs when assessors rate all employees as performing at the same level (good, bad or average) in all parts of their jobs. Leniency error: occurs when assessors rate all employees as performing particularly well.

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from the boss), are compiled into a feedback report comparing the employee’s self-ratings with those of the boss, subordinates, peers and co-workers. Usually, a consultant or human resource specialist discusses the results with the employee. The advantage of 360-degree feedback programs is that negative feedback (‘You don’t listen’) is often more credible when it comes from several people. Herbert Meyer, who has been studying performance appraisal feedback for more than 30 years, recommends a list of topics for discussion in performance appraisal feedback sessions (see Figure 11.6).58 First, managers should separate developmental feedback, which is designed to improve future performance, from administrative feedback, which is used as a reward for past performance, such as for pay rises. When managers give developmental feedback, they’re acting as coaches, but when they give administrative feedback, they’re acting as judges. These roles, coaches and judges, are clearly incompatible. As coaches, managers are encouraging, pointing out opportunities for growth and improvement, and employees are typically open and receptive to feedback. But as judges, managers are evaluative, and employees are typically defensive and closed to feedback. Second, Meyer suggests that performance-appraisal feedback sessions be based on self-appraisals, in which employees carefully assess their own strengths, weaknesses, successes and failures in writing.59 Because employees play an active role in the review of their performance, managers can be coaches rather than judges. Also, because the focus is on future goals and development, both employees and managers are likely to be more satisfied with the process and more committed to future plans and changes. Because the focus is on development and not administrative assessment, studies show that

Overall progress – an analysis of accomplishments and shortcomings.

Long-range plans and opportunities – for the job and for the individual’s career.

Problems encountered in meeting job requirements.

Opportunities to improve performance.

FIGURE 11.6

What to discuss in a performance appraisal feedback session

Source: Adapted from H. H. Meyer, ‘A solution to the performance appraisal feedback enigma’, Academy of Management Executive, 5 (1), 1991: 68–76.

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Finally, what people do with the performance feedback they receive really matters. A study of 1361 senior managers found that managers who reviewed their 360-degree feedback with an executive coach (hired by the company) were more likely to set specific goals for improvement, ask their bosses for ways to improve and subsequently improve their performance.61 Also, a five-year study of 252 managers found that their performance improved dramatically if they met with their subordinates to discuss their 360-degree feedback (‘You don’t listen’) and how they were going to address it (‘I’ll restate what others have said before stating my opinion’). Performance was dramatically lower for managers who never discussed their 360-degree feedback with subordinates and for managers who did not routinely do so (some managers did not review their 360-degree feedback with subordinates each year of the study). Why is discussing 360-degree feedback with subordinates so effective? These discussions help managers better understand their weaknesses, force them to develop a plan to improve and demonstrate to the subordinates the managers’ public commitment to improving.62 In short, it helps to have people discuss their performance feedback with others, but it particularly helps to have them discuss their feedback with the people who provided it.

KEEPING QUALIFIED WORKERS

China has a population of well over a billion people, but 80 per cent of its manufacturers are having difficulty finding and keeping employees. Employers are responding by hiking wages, which increased 74 per cent over four years. Pacific Resources International, which has 10 Chinese factories, pays its employees 20 per cent more than the minimum wage, provides insurance and free meals, and only asks employees to work 40 to 45 hours a week – low for China. Still, it loses employees to the insurance industry, where salaries are 40 per cent higher.63 Raising pay may not be enough, however, and factories which already offer higher salaries are now addressing non-financial issues in the hope of becoming more attractive places to work. For example, Flextronics International sponsors company picnics, karaoke talent shows, speed-dating for unmarried employees, sports facilities for soccer and basketball, and hair salons. Chief Procurement Officer Tom Linton says: ‘If you are able to

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get employees connected socially, they’re more likely to stay’.64 After reading the next section, you should be able to: ● describe basic compensation strategies ● discuss the four kinds of employee separations.

LO6

COMPENSATION AND REMUNERATION

Compensation includes both the compensation the financial and nonfinancial and the non-financial rewards financial rewards that that organisations give employees in organisations give exchange for their work. Employee employees in exchange for their work separation is a broad term covering the employee loss of an employee for any reason. separation the voluntary or Involuntary separation occurs when involuntary loss of an employers decide to terminate or lay off employee employees. Voluntary separation occurs when employees decide to quit or retire. Because employee separations affect recruiting, selection, training and compensation, organisations should forecast the number of employees they expect to lose through terminations, redundancy, turnover or retirements when doing human resource planning. Let’s learn more about compensation and employee separation by examining the compensation decisions that managers must make, as well as: ● terminations ● downsizing ● retirement ● turnover.

COMPENSATION DECISIONS There are three basic kinds of compensation decisions: pay level, pay variability and pay structure.65 Pay-level decisions are decisions about whether to pay employees at a level that is below, above or at current market wages. Companies use job evaluation to set their pay structures. Job evaluation job evaluation determines the worth of each job a process that determines by determining the market value of the the worth of each job in a company by evaluating knowledge, skills and requirements the market value of the needed to perform it. After conducting knowledge, skills and needed to a job evaluation, most companies try to requirements perform it pay the ‘going rate’, meaning the current market wage. There are always companies, however, whose financial situation causes them to pay considerably less than current market wages.

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Some companies choose to pay above-average wages to attract and keep employees. For most of the years between 2000 and 2017, during the period of sustained growth in the resources sector in Australia, mining industry workers were paid higher wages than they would have gained working in similar jobs in other industries. 66 Competition among employers for skilled workers drove mining operators to offer better than average pay to attract workers to remote locations.67 Above-market wages can attract a larger, more qualified pool of job applicants, increase the rate of job acceptance, decrease the time it takes to fill positions and increase the time that employees stay.68

such as profit sharing, employee stock ownership plans and stock options, to encourage teamwork and cooperation. With profit sharing , employees profit sharing receive a portion of the organisation’s a compensation system in profits over and above their regular which a company pays a percentage of its profits to compensation. The more profitable the employees in addition to company, the more profit is shared. For their regular compensation example, Delta Airlines posted a profit of US$5.9 billion in 2015. Thanks to the company’s generous profit sharing plan, US$1.5 billion of that was distributed to employees – the largest payout in the history of US corporate profit sharing.69

Employee stock ownership plans (ESOPs) compensate employees by

Job evaluation helps employers determine the worth of each job in a company

Pay-variability decisions concern the extent to which employees’ pay varies with individual and organisational performance. Linking pay to performance is intended to increase employee motivation, effort and job performance. Piecework, sales commissions, profit sharing, employee stock ownership plans and stock options are common payvariability options. For instance, under piecework pay plans, employees are piecework a compensation system in paid a set rate for each item produced up which employees are paid to some standard (e.g. A$1 per item a set rate for each item they produce produced for output up to 100 units per day). Once productivity exceeds the standard, employees are paid a set amount for each unit of output over the standard (e.g. 45 cents for each unit above 100 units). Under a sales commission plan, salespeople are paid commission a percentage of the purchase price of a compensation system in which employees earn a items they sell. The more they sell, the percentage of each sale more they earn. they make Because pay plans such as piecework and commissions are based on individual performance, they can reduce the incentive that people have to work together. Therefore, companies also use group incentives (discussed in Chapter 10) and organisational incentives,

employee stock ownership plan (ESOP) a compensation system that awards employees shares of company stock in addition to their regular compensation stock options a compensation system that gives employees the right to purchase shares of stock at a set price, even if the value of the stock increases above that price

awarding them shares of the company stock in addition to their normal compensation. By contrast, stock options give employees the opportunity to purchase shares of stock at a set price. Proponents of stock options argue that this gives employees and managers a strong incentive to work hard to make the company successful. If they do, the company’s profits and stock price increase, and their stock options increase in value. If they don’t, profits stagnate or turn into losses, and their stock options decrease in value or become worthless. Pay-structure decisions are concerned with internal pay distributions, meaning the extent to which people in the company receive very different levels of pay.70 With hierarchical pay structures, there are big differences from one pay level to another. The highest pay levels are for people near the top of the pay distribution. The basic idea behind hierarchical pay structures is that large differences in pay between jobs or organisational levels should motivate people to work harder to obtain those higher-paying jobs. Many publicly owned companies have hierarchical pay structures by virtue of the huge amounts they pay their top managers and CEOs. A survey in 2017 by the Australian Council of Superannuation Investors found pay packets of Australia’s top 100 chief executives rose by 12.4 per cent and reached a median pay of $4.36 million a year.71 The top executive pay jump occurred at a time when most Australians are experiencing stagnating wages. By contrast, compressed pay structures typically have fewer pay levels and smaller differences in pay between levels. Pay is less dispersed and more similar across jobs in the company. The basic idea behind the compressed pay structure is that similar pay levels should lead to higher levels of cooperation, feelings of fairness and a common purpose, and better group and team performance. So should companies choose hierarchical or compressed pay structures? The evidence isn’t straightforward, but

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studies seem to indicate that there are significant problems with the hierarchical approach. The most damaging finding is that there appears to be little link between organisational performance and the pay of top managers.72 Likewise, one study has shown that managers are twice as likely to quit their jobs when their companies have very strong hierarchical pay structures (i.e. when they’re paid dramatically less than the people above them).73 For now, it seems that hierarchical pay structures work best for independent work, where it’s easy to determine the contributions of individual performers and little coordination with others is needed to get the job done. In other words, hierarchical pay structures work best when clear links can be drawn between individual performance and individual rewards. By contrast, compressed pay structures, in which everyone receives similar pay, seem to work best for interdependent work, which requires employees to work together. Some companies are pursuing a middle ground: combining hierarchical and compressed pay structures by giving ordinary employees the chance to earn more through ESOPs, stock options and profit sharing.

TERMINATING EMPLOYEES

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Hopefully, the words ‘You’re fired!’ have never been directed at you. Getting fired is a terrible thing, but many managers make it even worse by bungling the firing process, needlessly provoking the person who was fired and unintentionally causing distress. The family of one Australian employee who committed suicide the day after being fired received a WorkCover compensation payout of $367 000 as the courts determined that the sacking contributed to the employee’s depression.74 Though firing is never pleasant (and managers hate firings nearly as much as employees do), managers can do several things to minimise the problems inherent in firing employees. First, in most situations, firing should not be the first option. Instead, employees should be given a chance to change their behaviour. When problems arise, employees should have ample warning and must be specifically informed as to the nature and seriousness of the trouble they’re in. After being notified, they should be given sufficient time to change. If the problems continue, the employees should again be counselled about their job performance, what could be done to improve it and the possible consequences if things don’t change (e.g. written reprimand, suspension without pay or firing). Sometimes this is enough to solve the problem. If the problem isn’t corrected after several rounds of warnings and Complete the ‘What would you do’ discussions, however, the worksheet for Chapter 11 employee may be terminated.75

In most situations, firing an employee should not be the first option

Second, employees should be fired only for a good reason. As employees and unions began contesting unreasonable, wrongful or unfair dismissals in court, the principle of wrongful dismissal emerged. Wrongful dismissal is a legal doctrine wrongful dismissal that requires employers to have a job- the legal doctrine that related reason to terminate employees. In employers must have a job-related reason for other words, like other major human terminating employees resource decisions, termination decisions should be made on the basis of job-related factors, such as violating company rules or consistently poor performance. A wrongful dismissal occurs where a term of the employment contract has been breached; for example, where the employee is not given sufficient notice to terminate the contract, or where any contractual procedures required prior to dismissal are not followed. Employees who believe they have been unfairly dismissed can challenge their employer’s decision by making an unfair dismissal claim. There are no fixed rules about what constitutes an unfair dismissal. The question of fairness is a discretionary decision, taking into account all surrounding circ*mstances. Claims alleging unlawful termination are filed initially with the Fair Work Commission. The FWC will attempt to resolve the claim through conciliation. However, if this is unsuccessful, unlawful

termination claims are referred to the Federal Court (or other common law courts) for hearing and determination. In Australia, state and federal equal opportunity laws have been enacted to provide equitable access to employment opportunities during all phases of the employment relationship, including termination. According to the FWC, ‘employers cannot dismiss their employees in circ*mstances that are “harsh, unjust or unreasonable”’.76 What is harsh, unjust or unreasonable will depend on the circ*mstances of each case. However, it is important to be fair to employees, particularly when it comes to termination of employment. They should be given reasons for dismissal and an opportunity to respond to those reasons. Importantly, employers that employ fewer than 15 employees are covered by special dismissal arrangements which are different to those that apply to larger businesses. The special arrangements that apply to employers with fewer than 15 employees are: ● employees will need to have worked for the business for 12 months in order to be eligible to make a claim for unfair dismissal ● if a small business employer strictly follows the Small Business Fair Dismissal Code and the dismissal of their employee is not harsh, unjust or unreasonable, then the dismissal will be deemed to be fair.77 Employees are protected against unlawful dismissal under the Fair Work Act. There are no exemptions for a small business in this area. Examples of unlawful dismissal include dismissing someone because of their race, sex, colour, sexual preference, age, physical or mental disability, marital status, family or carer’s responsibilities, pregnancy, religion, political opinion, national extraction or social origin. It is also unlawful to terminate an employee’s employment if they are temporarily absent from work because of illness or injury, because of union involvement or non-involvement, or because of absence from work during parental leave. Additionally, the Fair Work Act states that an employer cannot take adverse action against an employee because they exercised a workplace right or engaged in industrial activity. Examples of adverse action include dismissing an employee, injuring or altering the employee’s employment, discriminating between one employee and others or refusing to hire a prospective employee. Employers can be liable for penalties if they subject their existing or prospective employees to adverse action.78

DOWNSIZING downsizing the planned elimination of jobs in a company

Downsizing is the planned elimination

of jobs in a company. Whether it’s because of cost cutting, declining market share or outsourcing, companies typically only downsize when absolutely necessary.

In 2016, Fairfax slashed 120 staff and saved $15 million from its wages budget. The iconic Australian publisher started a round of redundancies at The Age and the Sydney Morning Herald newspapers as part of the major reshaping of the organisation.79 Australia Post announced a reduction of 1900 jobs over three years 2015–2018, largely as a result of declines in its traditional letters delivery business.80 Does downsizing work? In theory, downsizing is meant to achieve lesser operating losses (or higher productivity and profits), better stock performance and increased organisational flexibility. However, numerous studies demonstrate that it doesn’t. For instance, a 15-year study of downsizing found that downsizing 10 per cent of a company’s workforce produced only a 1.5 per cent decrease in costs; that organisations that downsized increased their stock price by only 4.7 per cent over three years, compared with 34.3 per cent for organisations that didn’t; and that profitability and productivity were generally not improved by downsizing.81 These results make it clear that the best strategy is to conduct effective human resource planning and avoid downsizing altogether. Indeed, downsizing should always be a last resort. However, if companies find themselves in financial or strategic situations where downsizing is required for survival, they should train managers in how to break the news to downsized employees, have senior managers explain in detail why downsizing is necessary and time the announcement so that employees hear it from the company and not from other sources, such as TV or newspaper reports.82 Finally, companies should do everything they can to help downsized employees find other jobs. One of the best ways to do this is to use outplacement outplacement services that provide employment- services counselling services for employees faced employment-counselling services offered to with downsizing. Outplacement services employees who are losing often include advice and training in their jobs because of downsizing preparing résumés, getting ready for job interviews and even identifying job opportunities in other companies.

RETIREMENT Early retirement incentive programs (ERIPs), Voluntary Departure Packages

early retirement incentive programs (ERIPs) programs that offer financial benefits to employees to encourage them to retire early

(VDPs) or Voluntary Separation Packages (VSPs) offer financial benefits to employees to encourage them to retire early. Companies use ERIPs to reduce the number of employees in the organisation, to lower costs by eliminating positions after employees retire, to lower costs by replacing high-paid retirees with lower-paid, lessexperienced employees or to create openings and job opportunities for people inside the company.

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Although ERIPs can save companies money, they can pose a big problem for managers if they fail to accurately predict which employees – the good performers or the poor performers – and how many will retire early. Consultant Ron Nicol says, ‘The thing that doesn’t work is just asking for volunteers. You get the wrong volunteers. Some of your best people will feel they can get a job anywhere. Or you have people who are close to retirement and are a real asset to the company’.83 Because of the problems associated with ERIPs, many companies are now offering phased phased retirement retirement , in which employees employees transition to transition to retirement by working retirement by working reduced hours over a reduced hours over a period of time period of time before before completely retiring. The advantage completely retiring for employees is that they have more free time, but continue to earn salaries and benefits without changing companies or careers.The advantage for companies is that it allows them to reduce salaries and hiring and training costs and retain experienced, valuable employees.84

DIVERSITY AND WHY IT MATTERS

Diversity means variety. Therefore, diversity exists in organisations when diversity a variety of demographic, there is a variety of demographic, cultural cultural and personal and personal differences among the differences among an people who work there and the customers organisation’s employees and customers who do business there. Why is diversity important? A statement from one leading Australian private hospital, the Peter MacCallum Institute, explains it well: Diversity has been a prominent feature of the Australian population for many decades. Australians [are] coming from more than 200 different ancestries and speaking more than 300 different languages at home. Australia has effectively managed this diversity with proactive and positive multicultural policies that have fostered social inclusion and embraced cultural, linguistic and faith diversity.87 After reading the next section, you should be able to: ● explain diversity ● outline the types of anti-discrimination legislation which govern employment in Australia.

EMPLOYEE TURNOVER Employee turnover is the loss of

employees who voluntarily choose to leave the company. In general, most companies try to keep the rate of employee turnover low to reduce recruiting, hiring, training and replacement costs. Not all kinds of employee turnover are bad for organisations, however; in fact, some turnover can actually be good. For instance, functional turnover is the loss of poor-performing employees who choose to leave the organisation. 85 Functional turnover gives the organisation a chance to replace poor performers with better workers. By contrast, dysfunctional turnover, the loss of high performers who choose to leave, is a costly loss to the organisation. Employee turnover should be carefully analysed to determine whether good or poor performers are choosing to leave the organisation. If the company is losing too many high performers, managers should determine the reasons and find ways to reduce the loss of valuable employees. The company may have to raise salary levels, offer enhanced benefits or improve working conditions to retain skilled employees. One of the best ways to influence functional and dysfunctional turnover is to link pay directly to performance. A study of four sales forces found that when pay was strongly linked to performance via sales commissions and bonuses, poor performers were much more likely to leave (i.e. functional turnover). By contrast, poor performers were much more likely to stay when paid large, guaranteed monthly salaries and small sales commissions and bonuses.86

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employee turnover the loss of employees who voluntarily choose to leave a company functional turnover the loss of poorperforming employees who voluntarily choose to leave a company dysfunctional turnover the loss of high-performing employees who voluntarily choose to leave a company

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ANTI-DISCRIMINATION LEGISLATION AND DIVERSITY

We begin our exploration of diversity and discrimination by learning about: ● age discrimination ● disability discrimination ● racial discrimination ● sex discrimination ● workplace bullying ● how to build a business case for diversity. Under federal and state legislation, unlawful discrimination occurs when a person, or a group of people, are treated less favourably than another person or group because of their race, colour, national or ethnic origin, sex, pregnancy or marital status, age, disability, religion, sexual preference, membership of a trade union, or some other characteristic specified under anti-discrimination or human rights legislation. The Age Discrimination Act 2004 (ADA) makes it unlawful to treat people less favourably because of their age, protecting both younger and older Australians.88

AGE DISCRIMINATION direct age discrimination when a person is treated less favourably because of their age than a person of another age group would be treated in the same or similar circ*mstances

Direct age discrimination happens

when a person is treated less favourably because of their age than a person of another age group would be treated in the same or similar circ*mstances. It would be direct age discrimination if someone who is the best person for the job is not employed simply because of their age.

If the requirement is unreasonable, it indirect age could be indirect age discrimination. discrimination there is It could be indirect discrimination if an when an unreasonable employer requires an older person to requirement or condition meet a physical fitness test which only or practice that is the same for everyone but younger people can meet, if the fitness disadvantages a person standard is not reasonable for the job. because of their age However, it is not unlawful for an employer to discriminate against a person because of their age where a person cannot perform the ‘inherent requirements’ of a job. What can companies do to reduce age discrimination? To start, managers need to recognise that age discrimination is much more pervasive than they probably think. Whereas ‘old’ used to mean mid-50s, in today’s workplace, ‘old’ is closer to 40. When 773 CEOs were asked the survey question, ‘At what age does a worker’s productivity peak?’, the average age they gave was 43.89 Thus, age discrimination may be affecting more workers because perceptions about age have changed. In addition, with the ageing of the baby boomers, age discrimination is more likely to occur simply because there are many more older workers than there used to be. Because studies show that interviewers rate younger job candidates as more qualified (even when they aren’t), companies need to train managers and recruiters to make hiring and promotion decisions on the basis of qualifications, not age. Finally, companies need to ensure that younger and older employees interact with each other. One study found that younger workers generally hold positive views of older workers and that the more time they spent working with older co-workers, the more positive their attitudes became.90

DISABILITY DISCRIMINATION

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The Disability Discrimination Act 1992 (DDA) makes it unlawful to discriminate against a person because of their disability. The Act also covers people who are relatives, friends or carers of people with a disability.

Direct disability discrimination

Australia effectively manages diversity with proactive and positive multicultural policies

Discrimination also happens when there is a requirement, condition or practice that is the same for everyone but disadvantages a person because of their age.

happens when a person with a disability is treated less favourably than someone without a disability would be treated in the same or similar circ*mstances. Discrimination also happens when there is a requirement, condition or practice that is the same for everyone but has an unfair effect on a particular group of people. This is known as indirect disability discrimination. For example, requiring a deaf employee to attend meetings where no Auslan interpreter is provided to enable them to understand

direct disability discrimination when a person with a disability is treated less favourably than someone without a disability would be treated in the same or similar circ*mstances indirect disability discrimination when there is an unreasonable requirement, condition or practice that is the same for everyone but disadvantages a person because of their disability or has an adverse effect on a particular group of people

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what is being said could be indirect discrimination. The legislation does allow that in some circ*mstances it is not unlawful to discriminate against a person with a disability. For example, where a person cannot perform the inherent requirements of a job it is not unlawful for an employer to not employ the person. However, the employer has to have considered whether the person could perform the requirements of the job with ‘reasonable adjustment’ for the disability.91 The DDA makes disability discrimination unlawful in Australia and aims to promote equal opportunity and access for people with disabilities. Under the DDA, individuals can lodge complaints of discrimination and harassment with the Australian Human Rights Commission. It is often difficult to define precisely what is meant by a ‘disability’, but in general terms it can be considered as a condition that in some way hampers or hinders a person in terms of their ability to carry out day-to-day activities. The extent to which a condition hinders a person will vary from individual to individual, and the general range of disabilities varies from conditions that are mild (for example, the need to wear reading glasses) to severe (for example, some forms of brain injury). The definition of disability for the purposes of the DDA is: ● total or partial loss of the person’s bodily or mental functions ● total or partial loss of a part of the body ● the presence in the body of organisms causing disease or illness ● the presence in the body of organisms capable of causing disease or illness ● the malfunction, malformation or disfigurement of a part of the person’s body ● a disorder or malfunction that results in the person learning differently from a person without the disorder or malfunction ● a disorder, illness or disease that affects a person’s thought processes, perception of reality, emotions or judgement or that results in disturbed behaviour.92 The DDA requires that people with disabilities be given equal opportunity to participate in and contribute to the full range of economic, social, cultural and political activities. Access for people with disabilities, including access to the goods, services and facilities provided by businesses, should be an integral part of business thinking. What can companies do to make sure that people with disabilities have the same opportunities as everyone else? Beyond educational efforts to address incorrect stereotypes and expectations, a good place to start is to develop an action plan. The objective of the DDA, the creation of a fairer society, is compatible with the objective of creating or maintaining 210

WORKPLACE AND COMMUNITY

WORKFORCE HEALTH IS IMPORTANT The Australian Institute of Health and Welfare (AIHW) publishes information about the incidence of overweight and obesity. According to AIHW’s 2017 report, nearly 63 per cent (almost two in every three) of Australian adults were overweight or obese, as were 26 per cent (one in four) of Australian children aged 5–17.93 The prevalence of overweight and obesity of Australian adults has steadily increased, up from 57 per cent in 1995. This is the second-highest contributor to the overall burden of disease in Australia.94 According to the Australian Bureau of Statistics (ABS), the way employed people self-assessed their health varied considerably according to the type of work they did. Blue-collar workers were 16 per cent less likely than white-collar workers to rate their own health as excellent or very good. Seventy per cent of professionals self-assessed their health as excellent or very good. By contrast, 50 per cent of machinery operators and drivers, and 54 per cent of labourers, rated their health as excellent or very good.95 To help to get a real picture of personal health, the Victorian government’s WorkHealth department offered free WorkHealth checks up until 2013. During a WorkHealth check, workers completed a lifestyle survey and had their cholesterol, waist, blood glucose and blood pressure measured by a trained health professional. Workers were also provided with advice on how to lead a healthy lifestyle and reduce the risk of chronic disease. The program aimed to deliver far reaching benefits to workers, employers, the Victorian government and the community at large, by reducing the risk and incidence of chronic disease across the state’s working population and the impact of illness and injury on working families. • For Victorian workers, addressing lifestyle risk factors can improve their health and wellbeing, reduce the likelihood of developing a chronic disease, improve their quality of life and reduce the likelihood of being injured at work. • For Victorian employers, improving the overall health of workers can result in improved worker productivity, vitality and engagement, and reductions in costs associated with absenteeism and work-related injury. • For Victoria, the benefits of improved health and wellbeing and reduced chronic disease flow through to reduced workers compensation and healthcare costs. The economy will benefit through increased participation and productivity in the workforce.96

a successful business. In implementing a DDA action plan, a business and the community as a whole will benefit significantly. An action plan will assist to increase the market share and enhance the image of a business, and

the whole community will benefit from the additional economic participation of people with a disability. People with disabilities comprise over 18 per cent of the Australian population. When we take into account their friends, relations and colleagues, who are also affected by the effects of a person’s disability, it is clear that eliminating discrimination makes good business sense.

RACIAL DISCRIMINATION direct racial discrimination treating someone less favourably because of their race, colour, descent, national origin or ethnic origin than someone of a different ‘race’ would be treated in a similar situation

Direct racial discrimination is treating

someone less favourably because of their race, colour, descent, national origin or ethnic origin than someone of a different ‘race’ would be treated in a similar situation. For example, an employer refuses to hire a suitably qualified Aboriginal shop assistant and hires a less qualified non-Aboriginal assistant instead, and justifies it by saying that because of the prejudice of his customers he could lose business. Direct discrimination cannot be justified even for business reasons such as this. It is also racial discrimination to make everyone satisfy the same criterion when the effect is that a higher proportion of people of one ‘race’ cannot satisfy it, unless the criterion is reasonable and relevant to the particular circ*mstances. This is known as indirect indirect racial racial discrimination. For example, a discrimination where everyone has to minimum height requirement of 175 satisfy the same criterion centimetres for police recruits will but the effect is that exclude a higher proportion of applicants a higher proportion of people of one ‘race’ of Asian descent. Unless the police cannot satisfy it service can justify the minimum height requirement, it will be unlawful. Australian police services no longer impose a minimum height requirement.

SEX DISCRIMINATION The Sex Discrimination Act 1984 (Cth) (SDA) makes it unlawful to discriminate against someone because of their sex, marital status or because they are pregnant or might become pregnant. It is also against the law to dismiss a person from their employment because of their family responsibilities. Direct sex direct sex discrimination means being treated discrimination treating someone less less favourably because of gender, favourably because of marital status, pregnancy or the potential gender, marital status, to become pregnant. For example, it pregnancy or the potential to become pregnant would be direct sex discrimination if a company paid men more than women who are doing the same work. Discrimination also occurs when there is a condition, requirement or practice imposed which appears to treat

everyone the same, but disadvantages a person because of their gender, marital status, pregnancy or potential to become pregnant. If the requirement is unreasonable, it could be indirect sex indirect sex discrimination. discrimination In July 2010, the Australian government’s a condition, requirement or practice imposed Sex Discrimination Commissioner, Elizabeth which appears to treat Broderick, launched her Gender Equality everyone the same, but disadvantages a person Blueprint 2010 which highlights issues because of their gender, considered to be significant and in need of marital status, pregnancy or potential to become action. pregnant The blueprint identified the following five priority areas for addressing sex discrimination and promoting gender equality in Australia:97 ● Balancing paid work and family and caring responsibilities: Australia’s first national Paid Parental Leave (PPL) scheme commenced on 1 January 2011. There are two payments under the scheme, i) Parental Leave Pay, which provides up to 18 weeks’ pay at the rate of the national minimum wage to eligible primary carers (usually mothers) since 1 January 2011. ii) Dad and Partner Pay, which provides up to two weeks’ pay at the rate of the national minimum wage to eligible dads or partners caring for a child born or adopted from 1 January 2013.98 ● Ensuring women’s lifetime economic security: the gap between the superannuation savings of Australian men and women is caused by the current superannuation system being linked to paid work. It disadvantages women who are more likely to move in and out of paid work to care for family members. Because of the concentration of women in part-time, lower-paid or noncontinuous jobs, they tend to contribute less to superannuation and retirement savings schemes. Even with Australia’s compulsory superannuation scheme, the average Australian woman retires with about half the superannuation savings balance of the average Australian man. ● Promoting women in leadership: in virtually all sectors of the paid workforce, women are under-represented in leadership positions. The statistics in corporate Australia show that women are under-represented in leadership roles. The Equal Opportunity for Women in the Workplace Agency (EOWA) 2018 Australian Census of Women in Leadership showed that only 13.7 per cent of chair positions, 24.9 per cent of board directorships and 16.5 per cent of CEO positions were held by women in Agency reporting organisations. The number of female directors in the ASX 200 was 26.2 per cent in January 2018.99 Further, 73.8 per cent of ASX 200 companies had no women on the board of directors in 2018.

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sexual harassment a form of discrimination in which unwelcome sexual advances, requests for sexual favours or other verbal or physical conduct of a sexual nature occurs while performing one’s job

The Australian Senate passed the Equal Opportunity for Women in the Workplace Amendment Bill 2012. As a result, the Equal Opportunity for Women in the Workplace Act 1999 (EOWW Act) was replaced by the Workplace Gender Equality Act 2012 (WGE Act). This replacement puts a focus on promoting and improving gender equality and outcomes for both women and men in the workplace. Similarly, the Equal Opportunity for Women in the Workplace Agency has been renamed the Workplace Gender Equality Agency (Agency). The principal objectives of the WGE Act are to: ● promote and improve gender equality (including equal remuneration between women and men) in employment and in the workplace ● support employers to remove barriers to the full and equal participation of women in the workforce, in recognition of the disadvantaged position of women in relation to employment matters ● promote, among employers, the elimination of discrimination on the basis of gender in relation to employment matters (including in relation to family and caring responsibilities) ● foster workplace consultation between employers and employees on issues concerning gender equality in employment and in the workplace ● improve the productivity and competitiveness of Australian business through the advancement of gender equality in employment and in the workplace.103

Preventing violence against women and sexual harassment: even after 34 years

of legislation, sexual harassment remains a problem in the workplace. Sexual harassment places a considerable cost on both the individuals affected and business. Employers should take active steps to prevent sexual harassment and respond effectively when it occurs. – Sexual harassment is defined in the SDA as when a ‘person makes an unwelcome sexual advance, or an unwelcome request for sexual favours, to the person harassed; or engages in other unwelcome conduct of a sexual nature in relation to the person harassed’.100 – A Personal Safety Survey conducted by the Australian Bureau of Statistics in 2016 found that 53 per cent or 5 million women and 25 per cent or 2.2 million men had experienced sexual harassment in the workplace during their lifetime.101

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● Strengthening national gender equality laws, agencies and monitoring: sex discrimination remains a reality for many Australian women, who continue to experience unfair treatment in the workplace and other parts of their lives. Complaints on the grounds of the SDA have risen in recent years: – in 2013–14 the commission received 474 complaints – in 2014–15 the commission received 453 complaints – in 2015–16 the commission received 409 complaints – in 2016–17 the commission received 465 complaints.102

In Australia it is unlawful to discriminate against a person because they are, or may become, pregnant

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Julia Gillard broke the glass ceiling by becoming Australia’s first female prime minister

Returning to the discussion on sexual harassment, the Sex Discrimination Act defines the nature and circ*mstances

when sexual harassment is unlawful. It is also unlawful for a person to be victimised for making, or proposing to make, a complaint of sexual harassment to the Australian Human Rights Commission. Determining if the behaviour is unwelcome is a subjective test: it looks at how the conduct in question was perceived and experienced by the recipient, rather than the intention behind it. Whether the behaviour was offensive, humiliating or intimidating is an objective test: it looks at whether a reasonable person would have anticipated that the behaviour would have this effect. Sexual harassment is not behaviour which is based on mutual attraction, friendship and respect. If the interaction is consensual, welcome and reciprocated it is not sexual harassment. To what extent do women face sex discrimination in the workplace? In some ways, there is much less sex discrimination than there used to be, but the numbers in Australia could be better. Since 2002, the Agency has conducted a biennial census to measure the status of women on boards and women executive managers in the nation’s top 200 companies listed on the Australian Stock Exchange (ASX). The Workplace Gender Equality Agency (WGEA) reported in 2018 that the percentage of women on ASX 200 company boards had more than tripled since 2010, from 8.3 per cent to 26.2 per cent: still a low figure. On a brighter note, they report a significant increase in the number of women on boards, with at least 25 per cent of new appointments to ASX 200 boards in January 2018 being women.104 The WGEA 2018 Australian Census of Women in Leadership shows that women’s participation becomes lower towards the higher senior executive positions. Critically for the future participation of women at senior levels, they are also under-represented in positions which prepare them for senior leadership, especially in crucial line management roles. In the study of ASX 200 companies, women constitute only 29.7 per cent of key management personnel in Agency reporting organisations. In 2017, women in senior management positions held 34.9 per cent in comparison to 65.1 per cent of male senior managers. Finally, women still earn less than men on average. In the WGEA report of 2018, it was noted that there is a 22.4 per cent total remuneration gender pay gap for full-time employees in Australia.105 Although progress is being made, sex discrimination continues to operate via the glass ceiling glass ceiling at higher levels in organisations. Is sex the invisible barrier that prevents women and discrimination the sole reason for the slow minorities from advancing rate at which women have been promoted to the top jobs in to middle and upper levels of management organisations and corporate boards? Some studies indicate that it’s not.106 In some instances, the slow progress

appears to be due to career and job choices. Whereas men’s career and job choices are often driven by the search for higher pay and advancement, women are more likely to choose jobs or careers that also give them a greater sense of accomplishment, more control over their work schedules and easier movement in and out of the workplace.107 Furthermore, women are historically much more likely than men to prioritise family over work at some time in their careers. For example, 96 per cent of 600 female Harvard MBAs held jobs while they were in their 20s. That dropped to 71 per cent in their late 30s when they had children, but then increased to 82.5 per cent in their late 40s as their children became older.108 Beyond these reasons, however, it’s likely that sex discrimination does play a role in women’s slow progress into the higher levels of management. And even if you don’t think so, many of the women you work with probably do. Indeed, one study found that more than 90 per cent of executive women believed that the glass ceiling had hurt their careers. In another study, 80 per cent of women said they left their last organisation because the glass ceiling had limited their chances for advancement.109 A third study indicated that the glass ceiling is prompting more and more women to leave companies to start their own businesses.110 So, what can companies do to make sure that women have the same opportunities for development and advancement as men? One strategy is mentoring, or pairing promising female executives with senior executives from whom they can seek advice and support. Another strategy is to make sure that male-dominated social activities don’t unintentionally exclude women. Nearly half (47 per cent) of women in the workforce believe that ‘exclusion from informal networks’ makes it more difficult to advance their careers. By contrast, just 18 per cent of CEOs thought this was a problem.111 One final strategy is to designate a ‘go-to person’, other than their supervisors, that women can talk to if they believe that they are being held back or discriminated against because of their sex. Make sure this person has the knowledge and authority to conduct a fair, confidential internal investigation.112

MGMT TREND

SCRUB RÉSUMÉS TO REMOVE BIAS In an effort to reduce hiring biases and improve workplace diversity, some companies have begun using a technique called blind hiring. With blind hiring, information such as a person’s name and alma mater are redacted from his or her résumé and work sample before reviewing them. This way, the hiring manager can evaluate candidates based solely on their past experiences and actual work performance. The goal is to reduce unconscious biases that may

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result in giving preferential treatment to a candidate of a particular sex or ethnicity, or with work experience at a prominent company or a degree from an elite school, things that are not always accurate predictors of a good fit. SOURCE: R. FEINTZEIG, ‘TOSSING OUT THE RÉSUMÉ IN FAVOR OF “BLIND HIRING”’, WALL STREET JOURNAL, 6 JANUARY 2016, B1.

SEXUAL ORIENTATION DISCRIMINATION

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Sexual orientation defines a person’s preference to the same and/or different gender. Sexual orientation discrimination occurs when people are treated differently because of their sexual orientation. Usually, sexual orientation discrimination occurs toward lesbian, hom*osexual, bisexual or transgender people. Though less frequent, heterosexual people can be discriminated against, too. According to the Sex Discrimination Act 1984 (SDA), it is unlawful to treat a person less favourably than another in a similar situation because of his/her sexual orientation, gender identity or intersex status.113 The SDA guards Australians from discrimination on the basis of sexual orientation, gender identity or intersex status in several areas of public life, including employment, education, receiving or using services, or renting or buying accommodations. In order to avoid sexual orientation discrimination, the country legalised same-sex marriage on 9 December 2017.114 The SDA also declares it unlawful to discriminate against a person because of his/her sexual orientation when advertising jobs, recruiting and selecting, making decisions about training, transfer and promotion opportunities, and termination of employment. The SDA covers recruitment processes organised through

Bullying in the workplace can be overt or subtle, and bullies often have formal or informal power over their victims

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recruitment and employment agencies. All types of employers – including public and private sector employees; full-time, part-time and casual employees; and apprentices and probationers – are covered under the SDA.115

WORKPLACE BULLYING Workplace bullying is an area of concern for managers as well. One definition of workplace bullying is ‘repeated and unreasonable behaviour directed towards a worker or a group of workers that creates a risk to health and safety’.116 Bullies usually utilise power attributed to their status, skills or position in the workplace, and both men and women can be the targets of bullying or the bully. Workplace bullying can occur between a worker and a manager or supervisor, or between co-workers. Bullying behaviour can range from very obvious verbal or physical assault to very subtle psychological abuse. According to the Fair Work Amendment Act 2013, this behaviour may include: ● physical or verbal abuse ● yelling, screaming or offensive language ● excluding or isolating employees ● psychological harassment ● intimidation ● assigning meaningless tasks unrelated to the job ● giving employees impossible jobs ● deliberately changing work rosters to inconvenience particular employees ● undermining work performance by deliberately withholding information vital for effective work performance.117 There are a range of psychological and physical illnesses and injuries that can be caused by exposure to bullying in the workplace, including anxiety disorders, stress, depression and insomnia. Many people refer to bullying as harassment or discrimination. However, while the effects are essentially the same, bullying may not be unlawful under federal and state anti-discrimination legislation unless the bullying is linked to, or based on, one of the attributes covered by various federal anti-discrimination legislation (age, sex, race, disability and so forth). Under federal and state occupational health and safety acts, employers and employees have a legal responsibility to comply with any measures that promote health and safety in the workplace. Because of this duty, employers need to eliminate or reduce the risks to employees’ health and safety caused by workplace bullying.118 In Victoria, anti-bullying legislation, known as Brodie’s Law, commenced in June 2011 and made serious bullying a crime punishable by up to 10 years in jail. Brodie’s Law was introduced after the tragic suicide of a young woman, Brodie Panlock, who was subjected to relentless bullying in her workplace. Brodie’s Law makes serious bullying a criminal offence by extending the application of the stalking

provisions in the Crimes Act 1958 to include behaviour that involves serious bullying.119

DIVERSITY MAKES GOOD BUSINESS SENSE ENGAG

EO VID

Those who support the idea of diversit y in organisations often claim that diversity is simply the ‘right thing to do’. However, diversity also makes good business sense in several ways: cost savings, attracting and retaining talent and driving business growth.120 Diversity helps companies with cost savings by reducing turnover and decreasing absenteeism.121 Because of lost productivity and the cost of recruiting and selecting new employees, companies lose substantial amounts of money when employees quit their jobs. In fact, turnover costs typically amount to more than 90 per cent of employees’ salaries. Diversity programs also save companies money by helping them avoid being prosecuted for discrimination, which has increased since the 1970s. Diversity also makes business sense by helping companies attract and retain talented workers.122 Indeed, diversity-friendly companies tend to attract better and more diverse job applicants. The third way that diversity makes business sense is by driving business growth. Diversity helps companies grow by improving their understanding of the marketplace. When companies have diverse workforces, they are better able to understand the needs of their increasingly diverse customer bases. Diversity also helps companies grow through higherquality problem solving. Though diverse groups initially have more difficulty working together than hom*ogeneous groups, after several months diverse groups do a better job of identifying problems and generating alternative solutions, the two most important steps in problem solving.123

PPLY E A

Get an overview of how to encourage and manage diverse workforces

of differences that are immediately observable, typically unchangeable and easy to measure.125 In other words, independent observers can usually agree on dimensions of surface-level diversity, such as another person’s age, sex, ethnicity or physical capabilities. While most people start by using easily observable characteristics, such as surface-level diversity, to categorise or stereotype other people, those initial, surface-level categorisations typically give way to deeper impressions formed from knowledge of others’ behaviour and psychological characteristics, such as personality and attitudes.126 When you think of others this way, you are focusing deep-level diversity on deep-level diversity. Deep-level diversity consists of differences that differences such as attitudes and personality are communicated through verbal and that are communicated through verbal and nonnon-verbal behaviour and are learned verbal behaviour and only through extended interaction are learned only through 127 with others. Examples of deepextended interaction with others level diversity include personality differences, attitudes, beliefs and values. In other words, as people in diverse workplaces get to know each other, the initial focus on surface-level differences such as age, ethnicity, gender and physical capabilities is replaced by deeper, more accurate knowledge of co-workers. If managed properly, the shift from surface- to deeplevel diversity (see Figure 11.7) can accomplish two things. First, coming to know and understand each other better can result in reduced prejudice and conflict. Second, it can lead to social integration stronger social integration. Social the degree to which integration is the degree to which group members are psychologically attracted group members are psychologically to working with each other attracted to working with each other to to accomplish a common accomplish a common objective, or, as objective one manager put it, ‘working together to get the job done’.128

DIVERSITY AND INDIVIDUAL DIFFERENCES

surface-level diversity differences such as age, sex, race/ethnicity and physical disabilities that are observable, typically unchangeable and easy to measure

A survey that asked managers ‘What is meant by diversity to decision makers in your organisation?’ found that they most frequently mentioned race, culture, gender, national origin, age, religion and regional origin.124 When managers describe workers this way, they are focusing on surface-level diversity. Surface-level diversity consists

Deep-level diversity

Surface-level diversity

Age

Gender

Personality

Physical capabilities

Attitudes

Race/ethnicity

Values/beliefs

FIGURE 11.7

Surface- and deep-level diversity

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After reading the next two sections, you should be able to: ● understand the special challenges that the dimensions of surface-level diversity pose for managers ● explain how the dimensions of deep-level diversity affect individual behaviour and interactions in the workplace.

As people in diverse workplaces get to know each other, the initial focus on surface-level differences is replaced by deeper, more accurate knowledge of co-workers

LO8

SURFACE-LEVEL DIVERSITY

Because age, gender, race/ethnicity and disabilities are usually immediately observable, many managers and employees use these dimensions of surface-level diversity to form initial impressions and categorisations of coworkers, bosses, customers or job applicants. Whether intentionally or not, sometimes those initial categorisations and impressions lead to decisions or behaviour that discriminates. Consequently, these dimensions of surfacelevel diversity pose special challenges for managers who are trying to create positive work environments where everyone feels comfortable and no one is advantaged or disadvantaged.

LO9

DEEP-LEVEL DIVERSITY

People often use the dimensions of surface-level diversity to form initial impressions about others. Over time, however, as people have a chance to get to know each other, initial impressions based on age, gender, race/ ethnicity and mental or physical disabilities give way to deeper impressions based on behaviour and psychological

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characteristics. When we think of others this way, we are focusing on deep-level diversity. Deep-level diversity represents differences that can be learned only through extended interaction with others. Examples of deep-level diversity include differences in personality, attitudes, beliefs and values. In short, recognising deep-level diversity requires getting to know and understand one another better. That matters, because it can result in less prejudice, discrimination and conflict in the workplace. These changes can then lead to better social integration, the degree to which organisational or group members are psychologically attracted to working with each other to accomplish a common objective. Stop for a second and think about your boss (or the boss you had in your last job). What words would you use to describe him or her? Is your boss introverted or extraverted? Emotionally stable or unstable? Agreeable or disagreeable? Organised or disorganised? Open or closed to new experiences? When you describe your boss or others in this way, what you’re really doing is describing dispositions and personality. A disposition is the tendency to disposition respond to situations and events in a the tendency to respond to situations and events in a predetermined manner. Personality is predetermined manner the relatively stable set of behaviours, personality attitudes and emotions displayed over the relatively stable set of behaviour, attitudes and time that makes people different from emotions displayed over each other.129 For example, which of your time that makes people aunts or uncles is a little out of the different from each other ordinary? What was that aunt or uncle like when you were small? What is she or he like now? Chances are she or he is pretty much the same exceptional person. In other words, the person’s core personality hasn’t changed. For years, personality researchers studied thousands of different ways to describe people’s personalities. In the last decade, however, personality research conducted in different cultures, different settings and different languages has shown that five basic dimensions of personality account for most of the differences in peoples’ behaviours, attitudes and emotions. The Big Five Personality Dimensions are extraversion, emotional stability, agreeableness, conscientiousness and openness to experience.130 Extraversion is the degree to which extraversion someone is active, assertive, gregarious, the degree to which sociable, talkative and energised by others. someone is active, assertive, gregarious, In contrast to extraverts, introverts are less sociable, talkative and active, prefer to be alone and are shy, quiet energised by others and reserved. For the best results in the emotional stability the degree to which workplace, introverts and extraverts should someone is not angry, depressed, anxious, be correctly matched to their jobs. insecure and Emotional stability is the degree to emotional, excitable which someone is not angry, depressed,

anxious, emotional, insecure or excitable. People who are emotionally stable respond well to stress. In other words, they can maintain a calm, problem-solving attitude in even the toughest situations (e.g. conflict, hostility, dangerous conditions or extreme time pressures). By contrast, under only moderately stressful situations, emotionally unstable people find it difficult to handle the most basic demands of their jobs and become distraught, tearful, self-doubting and anxious. Emotional stability is particularly important for highstress jobs, such as police work, firefighting, emergency medical treatment or piloting planes. Agreeableness is the degree to agreeableness which someone is cooperative, polite, the degree to which someone is cooperative, flexible, forgiving, good-natured, tolerant polite, flexible, forgiving, and trusting. Basically, agreeable people good-natured, tolerant and trusting are easy to work with and be around, conscientiousness whereas disagreeable people are the degree to which distrusting and difficult to work with and someone is organised, hard-working, responsible, be around. persevering, thorough and Conscientiousness is the degree to achievement oriented which someone is organised, hardworking, responsible, persevering, thorough and achievement oriented. One management consultant wrote about his experiences with a conscientious employee: ‘He arrived at our first meeting with a typed copy of his daily schedule, a sheet bearing his home and office phone numbers, addresses and his email address. At his request, we established a timetable for meetings for the next four months. He showed up on time every time, day planner in hand and carefully listed tasks and due dates. He questioned me exhaustively if he didn’t understand an assignment and returned on schedule with the completed work or with a clear explanation as to why it wasn’t done’.131 Openness to experience is the openness to degree to which someone is curious, experience the degree to which broad-minded and open to new ideas, someone is curious, things and experiences; is spontaneous; broadminded and open to new ideas, things and has a high tolerance for ambiguity. and experiences; is People in marketing, advertising, research spontaneous; and has or other creative jobs need to be curious, a high tolerance for ambiguity open to new ideas and spontaneous. By contrast, openness to experience is not particularly important to accountants, who need to consistently apply stringent rules and formulas to make sense out of complex financial information. Which of the Big Five Personality Dimensions has the largest impact on behaviour in organisations? The cumulative results indicate that conscientiousness is related to job performance across five different occupational groups (professionals, police, managers, sales and skilled or semiskilled jobs).132 In short, people ‘who are dependable, persistent, goal directed and organised tend to be higher performers on virtually any job; viewed negatively, those who

are careless, irresponsible, low-achievement striving and impulsive tend to be lower performers on virtually any job’.133 The results also indicate that extraversion is related to performance in jobs, such as sales and management, which involves significant interaction with others. In peopleintensive jobs like these, it helps to be sociable, assertive and talkative and to have energy and be able to energise others. Finally, people who are extraverted and open to experience seem to do much better in training. Being curious and open to new experiences, as well as sociable, assertive, talkative and full of energy, helps people perform better in learning situations.134

HOW CAN DIVERSITY BE MANAGED?

According to most of the academic literature, diversity in itself does not necessarily bring major benefits to organisations. For a diverse group to perform well, it must be managed well.135 How much should companies change their standard business practices to accommodate the diversity of their employees? What do you do when a talented top executive has a drinking problem that only seems to affect his behaviour at company business parties (for entertaining clients), where he has made inappropriate advances toward female employees? What do you do when, despite aggressive company policies against racial discrimination, employees continue to tell racist jokes and publicly post cartoons displaying racial humour? No doubt about it, questions like these make managing diversity one of the toughest challenges that managers face.136 Nonetheless, there are steps companies can take to begin to address these issues. After reading the next section, you should be able to explain the basic principles and practices that can be used to manage diversity.

L10

MANAGING DIVERSITY

As discussed earlier, diversity programs try to create a positive work environment where no one is advantaged or disadvantaged, where ‘we’ is everyone, where everyone can do his or her best work, where differences are respected and not ignored, and where everyone

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feels comfortable. Let’s begin to address those goals by learning about: ● different diversity paradigms ● diversity principles.

DIVERSITY PARADIGMS

There are several different methods or paradigms for managing diversity: the discrimination and fairness paradigm, the access and legitimacy paradigm and the learning and effectiveness paradigm.137 The discrimination and fairness paradigm, which is most meaningful in the US context but less so in other countries, focuses on equal opportunity, fair treatment, recruitment of minorities and strict compliance with the equal employment opportunity laws. Under this approach, success is usually measured by how well companies achieve recruitment, promotion and retention goals for women, people of different racial/ethnic backgrounds or other under-represented groups. According to a workplace diversity practices survey conducted by the Society for Human Resource Management, 66 to 91 per cent of companies use specialised strategies to recruit, retain and promote talented women and minorities. The percentages increase with company size, and companies of more than 500 employees are the most likely to use these strategies. Of companies with more than 500 employees, 77 per cent systematically collect measurements on diversity-related practices.138 One manager says, ‘If you don’t measure something, it doesn’t count. You measure your market share. You measure your profitability. The same should be true for diversity. There has to be some way of measuring whether you did, in fact, cast your net widely and whether the company is better off today in terms of the experience of people of color than it was a few years ago. I measure my market share and my profitability. Why not this?’139 The primary benefit of the discrimination and fairness paradigm is that it generally brings about procedurally fairer treatment of employees and increases demographic diversity. The primary limitation is that the focus of diversity remains on the surface-level diversity dimensions of sex, race and ethnicity.

MGMT IN PRACTICE

CREATING A LEARNING AND EFFECTIVENESS DIVERSITY PARADIGM IN AN ORGANISATION 1 The leadership must understand that a diverse workforce will embody different perspectives and approaches to work, and must truly value variety of opinion and insight. 2 The leadership must recognise both the learning opportunities and the challenges that the 218

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expression of different perspectives presents for an organisation. The organisational culture must create an expectation of high standards of performance for everyone. The organisational culture must stimulate personal development. The organisational culture must encourage openness and a high tolerance for debate and support constructive conflict on work-related matters. The culture must make workers feel valued. The organisation must have a well-articulated and widely understood mission. This keeps discussions about work differences from degenerating into debates about the validity of people’s perspectives. The organisation must have a relatively egalitarian, non-bureaucratic structure.140 REPRINTED BY PERMISSION OF HARVARD BUSINESS REVIEW. COPYRIGHT © 1996 BY HARVARD BUSINESS PUBLISHING; ALL RIGHTS RESERVED.

The access and legitimacy paradigm focuses on the acceptance and celebration of differences to ensure that the diversity within the company matches the diversity found among primary stakeholders, such as customers, suppliers and local communities. The basic idea behind this approach is, ‘We are living in an increasingly multicultural country, and new ethnic groups are quickly gaining consumer power. Our company needs a demographically more diverse workforce to help us gain access to these differentiated segments’.141 The learning and effectiveness paradigm focuses on integrating deep-level diversity differences, such as personality, attitudes, beliefs and values, into the actual work of the organisation. The learning and effectiveness paradigm is consistent with achieving organisational plurality. Organisational plurality is a work organisational plurality environment where (1) all members are work environment empowered to contribute in a way that awhere (1) all members are maximises the benefits to the organisation, empowered to contribute in a way that maximises customers and themselves, and (2) the the benefits to the individuality of each member is respected organisation, customers by not segmenting or polarising people on and themselves, and (2) the individuality of each the basis of their membership of a member is respected by not segmenting or particular group.142 polarising people on the The learning and effectiveness basis of their membership diversity paradigm offers four benefits.143 of a particular group First, it values common ground. Professor Dave Thomas of the Harvard Business School explains: ‘Like the fairness paradigm, it promotes equal opportunity for all individuals … like the access paradigm, it acknowledges cultural differences among people and

recognises the value in those differences. Yet this new model for managing diversity lets the organisation internalise differences among employees so that it learns and grows because of them. Indeed, with the model fully in place, members of the organisation can say, “We are all on the same team, with our differences – not despite them”’.144 Second, this paradigm makes a distinction between individual and group differences. When diversity focuses only on differences between groups, such as females versus males, large differences within groups are ignored.145 For example, think of the women you know at work. Now, think for a second about what they have in common. After that, think about how they’re different. If your situation is typical, the list of differences should be just as long as the list of commonalties, if not longer. In short, managers can achieve a greater understanding of diversity and their employees by treating them as individuals and by realising that not all people want the same things at work.146 Third, because the focus is on individual differences, the learning and effectiveness paradigm is less likely to encounter the conflict, backlash and divisiveness sometimes associated with diversity programs that focus only on group differences. Finally, unlike the other diversity paradigms that simply focus on the value of being different (primarily in terms of surface-level diversity), the learning and effectiveness paradigm focuses on bringing different talents and perspectives together (i.e. deep-level diversity) to make the best organisational decisions and to produce innovative, competitive products and services.

DIVERSITY PRINCIPLES While diversity paradigms represent general approaches or strategies for managing diversity, several diversity principles will help managers do a better job of managing company diversity programs, no matter which diversity paradigm they choose.147

Begin by carefully and faithfully following and enforcing federal and state laws regarding equal opportunity employment. Diversity programs can’t and won’t succeed if the company is being sued for discriminatory actions and behaviour. Start by learning more at the Australian Human Rights Commission website (https://www.humanrights. gov.au/). Following the law also means strictly and fairly enforcing company policies. Treat group differences as important, but not special. Surface-level diversity dimensions such as age, sex and race/ethnicity should be respected, but should not be treated as more important than other kinds of differences (i.e. deep-level diversity). Remember, the shift from surfaceto deep-level diversity helps people know and understand each other better, reduces prejudice and conflict, and leads to stronger social integration with people wanting to work together and get the job done. Also, find the common ground. While respecting differences is important, it’s just as important, especially with diverse workforces, to actively find ways for employees to see and share commonalities. Tailor opportunities to individuals, not groups. Special programs for training, development, mentoring or promotions should be based on individual strengths and weaknesses, not on group status. Instead of making mentoring available for just one group of employees, create mentoring opportunities for everyone who wants to be mentored. Solicit negative as well as positive feedback. One way to do that is to use a series of measurements to see if progress is being made. L’Oréal, the cosmetics company, has goals and measurements to track its progress in diversity with respect to recruitment, retention and advancement, as well as the extent to which the company buys goods and services from minority- and women-owned suppliers.148 Set high but realistic goals. Just because diversity is difficult doesn’t mean that organisations shouldn’t try to accomplish as much as possible. Even if progress is slow, companies should not shrink from these goals.

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PART 3, CHAPTERS 9–11

To examine the organisation of companies, teams and human resources 9

Designing adaptive organisations

☑ You have learnt how to describe the departmentalisation approach and the various organising principles, which can be applied to organisational structure.

☑ Your study of organisational authority allows you to discuss different methods for job design and explain the methods that companies use to redesign both external and internal organisational processes.

OVERALL AIM OF PART 3

organisational processes and intraorganisational processes.

☑ You have an understanding of inter-

HAPTER 9

Listen to an audio summary of this chapter in the End of Part summary

10 Managing teams

To examine the organisation of companies, teams and human resources

☑ You have learnt how to explain the good and bad aspects of teams and you can recognise and understand the different kinds of teams in the workplace.

☑ You understand the general characteristics of work teams and you are able to explain how to enhance a work team.

☑ You can explain how group dynamics can Listen to an audio summary of this chapter in the End of Part summary

TER HAP 10

support or hinder team performance; outline strategies that can support team cohesion, participation and performance; explain strategies for gaining consensus; and explain issue resolution strategies. 11 Managing people: human resource management

☑ You have learned about human resource management, and you can explain how companies use recruiting to find qualified job applicants. You may have applied selection techniques and procedures that companies use in class activities.

☑ You understand how to review performance and give meaningful performance feedback.

☑ You can explain the basic compensation strategies and discuss the four kinds of employee separations.

☑ You have covered the key idea of employee diversity. You can outline the types of anti-discrimination legislation governing employment in Australia and can explain the special challenges that the dimensions of surface-level diversity pose for managers. diversity and how these affect individual behaviour.

220

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TE HAP R 11

☑ You understand the dimensions of deep-level

PART

FOUR LEADING 12

Motivation

Leadership

Managing communication

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Motivation

LEARNING OUTCOMES

1 Explain the basics of motivation, including needs (or ‘content’) theories of motivation, and understand their limitations.

WHAT IS MOTIVATION?

2 Use equity theory to explain how employees’ perceptions of fairness affect motivation.

3 Use expectancy theory to describe how workers’ expectations about rewards influence motivation.

4 Explain how reinforcement theory works and how it can be used to motivate.

5 Describe the components of goal setting theory and how managers can use them to motivate workers.

6 Discuss how the entire motivation model can be used to motivate workers.

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What makes people happiest, most productive and most willing to put in efforts at work? Is it money, benefits, opportunities for growth, interesting work, being part of a team of good people or something else altogether? If people want different things, how can an organisation keep everyone motivated? It takes insight and hard work to motivate workers to join the organisation, perform well and stay on. Indeed, when they are surveyed about the biggest challenges facing them in their work, managers are inclined to rank ‘motivating employees’ among their top two or three problems.1 So what is motivation? Motivation motivation the set of forces that initiates, directs is the set of forces that initiates, directs and makes people persist and makes people persist in their efforts in their efforts to accomplish to accomplish a goal.2 In this definition, a goal initiation of effort is concerned with the choices that people make about how much effort to put into their jobs (‘Do I really push myself for the next round of performance appraisals or should I just do a decent job?’). Direction of effort is concerned with the choices that people make in deciding where to put effort in their jobs (‘Should I start contacting all of last year’s clients again, or should I learn this new computer system?’). Persistence of effort is concerned with the choices that people make about how long they will put effort into their jobs before reducing or eliminating those efforts (‘I’m only halfway through the project, and I’m exhausted. Should I struggle on to the end, or just call it quits?’). Initiation, direction and persistence are at the heart of motivation. Initiation + Direction + Persistence → Motivation After reading the next section, you should be able to explain the basics of motivation.

Shutterstock.com/Anastasios71

In practice, it’s almost impossible to talk about work motivation without mentioning work performance. Not surprisingly, managers often assume motivation to be the only determinant of performance, saying things such as ‘Your performance was really terrible last quarter. What’s the matter? Aren’t you as motivated as you used to be?’ In fact, motivation is just one of three primary determinants of job performance. In industrial psychology, job performance is frequently represented by this equation: Job performance = Motivation × Ability × Situational constraints

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What makes a person train for years, struggle through injuries and form-slumps, and then put themselves through the pain of running a 42 kilometre marathon? What makes an ‘ordinary’ team member put in extraordinary efforts, working longer and working harder than other members of the team? The answer lies in their motivation. Let’s learn more about motivation by building a basic model of motivation out of: ● effort and performance ● need satisfaction ● extrinsic and intrinsic rewards. This is followed by a discussion APPLY Get an on how to motivate people with overview of employee this basic model of motivation. motivation techniques EO VID

BASICS OF MOTIVATION

EFFORT AND PERFORMANCE When most people think of work motivation, they think that working hard (effort) should lead to a good job (performance). Figure 12.1 shows a basic model of work motivation and performance, displaying this process.

Effort • Initiation • Direction

Performance

• Persistence

FIGURE 12.1

A basic model of work motivation and performance

In this formula, job performance is how well someone performs the requirements of the job. Motivation, as defined above, is effort: the degree to which someone works hard to do the job well. Ability is the degree to which workers possess the knowledge, skills and talent needed to do a job well. Situational constraints are factors beyond the control of individual employees, such as the tools, equipment, policies and resources that have an effect on job performance. Since job performance (as seen in the equation above) is motivation multiplied by ability, multiplied by situational constraints, then job performance will suffer if any one of these components is weak. Does this mean that motivation doesn’t matter? No, not at all. It just means that all the motivation in the world won’t translate into high performance if workers have little ability or have high situational constraints. Even though we will spend this chapter developing a model of work motivation, it is important to remember that ability and situational constraints will strongly affect job performance as well.

NEED SATISFACTION In Figure 12.1, we started with a very basic model of motivation in which effort leads to job performance. However, managers want to know ‘What leads to effort?’ Determining employee needs is the first step in answering that question. Needs are the physical or need a physical or psychological requirements that must be psychological requirement met to ensure survival and wellbeing.3 As that must be met to ensure survival and wellbeing shown on the left side of Figure 12.2, a person’s unmet need creates an uncomfortable, internal state of tension that must be resolved. For example, if you normally skip breakfast, but then have to work through lunch, the chances are you’ll be so hungry by late afternoon that the only thing you’ll be motivated to do is find something to eat. So, according to needs theories, people are motivated by unmet needs. But once a need is met, it no longer motivates. When this occurs, people become satisfied, as shown on the right side of Figure 12.2. Note: throughout the chapter, as we build on the basic model shown in Figure 12.1, the parts of the model that we’ve already discussed will appear shaded in green. You will notice

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Effort Unsatisfied need

Tension

Energised to take action

• Initiation • Direction

Performance

Satisfaction

• Persistence

As shown on the left side of this exhibit, a person’s unsatisfied need creates an uncomfortable, internal state of tension that must be resolved. So, according to needs theories, people are motivated by unmet needs. But once a need is met, it no longer motivates. When this occurs, people become satisfied, as shown on the right side of the exhibit.

FIGURE 12.2

Adding need satisfaction to the model

Maslow’s hierarchy

Alderfer’s ERG

Higher-order

Self-actualisation Esteem Belongingness

Growth Relatedness

Lower-order

Safety Physiological

Existence

FIGURE 12.3

Power Achievement Affiliation

Needs classification of different theories

that in Figure 12.2 the components of the ‘effort performance’ part of the model are shown with a green background, denoting that we’ve already discussed those. When we add new parts to the model, they will have an orange background. In Figure 12.2, we added ‘need satisfaction’ to the model; the need–satisfaction components of ‘unsatisfied need’, ‘tension’, ‘energised to take action’ and ‘satisfaction’ are shown with an orange background. This shading convention should make it easier to understand the work motivation model as we add to it in each section of the chapter. Since people are motivated by unmet needs, managers must learn what those unmet needs are and address them. This is not always a straightforward task, however, because different needs theories suggest different needs categories. Consider three well-known needs theories. American psychologist Abraham Maslow developed his Hierarchy of Needs theory in the 1940s and 1950s. His hierarchy of needs suggests that people are motivated by physiological (food and water), safety (physical and economic), belongingness (friendship, love and social interaction), esteem (achievement and recognition) and self-actualisation (realising your full potential) needs.4 Alderfer’s ERG Theory collapses Maslow’s five needs into three: existence (safety and physiological needs), relatedness (belongingness) and growth (esteem and self-actualisation).5 McClelland’s Learned Needs Theory suggests that people are motivated by the need for affiliation (to be liked and accepted), the need for achievement (to accomplish challenging goals) or the need for power (to influence others).6 Things become even more complicated when we consider the different predictions made by these theories. According to Maslow, needs are arranged in a hierarchy 224

Mcclelland’s learned needs

from low (physiological) to high (self-actualisation). Within this hierarchy, people are motivated by their lowest unsatisfied need. As each need is met, they work their way up the hierarchy from physiological to self-actualisation needs. This is called the ‘satisfaction/progression’ principle. By contrast, Alderfer says that people can be motivated by more than one need at a time. Furthermore, he suggests that people are just as likely to move down the needs hierarchy as up, particularly when they are unable to achieve satisfaction at the next higher need level (a ‘frustration/ regression’ principle, also contrary to Maslow). McClelland argues that the degree to which particular needs motivate varies tremendously from person to person, with some people being motivated primarily by achievement and others by power or affiliation. Moreover, McClelland says that needs are learned, not innate. That is, from earliest childhood, people are learning (or ‘acquiring’) needs from their observation of their environment and social contacts.7 For instance, some classic studies showed that children whose parents owned a small business or worked in a managerial position were much more likely to have a high need for achievement.8 (See Figure 12.3 for a summary of the classification of different theories.) So, with three different sets of needs and three very different ideas about how needs motivate, how do we provide a practical answer to managers who just want to know ‘What leads to effort?’ Fortunately, the research evidence tends to simplify things a bit. To start, studies indicate that there are two basic kinds of needs categories.9 As you would expect, lower-order needs are concerned with safety and with physiological and existence requirements, whereas higher-order needs are concerned with relationships

thought that there is little evidence for ranking of needs, or indeed, for a hierarchy at all.12 Shutterstock.com/Aliona Ursu

(belongingness, relatedness and affiliation), challenges and accomplishments (esteem, self-actualisation, growth and achievement) and influence (power). Studies generally show that higher-order needs will not motivate people as long as lower-order needs remain unsatisfied.10 For example, imagine that you graduated from university six months ago and are still looking for your first job. With money running short (you’re probably living on your credit cards) and the possibility of having to move back in with your parents looming (if this doesn’t motivate you, what will?), your basic needs for food, shelter and security drive your thoughts, behaviour and choices at this point. But once you land that job, find a great place (of your own!) to live and put some money in the bank, these basic needs should decrease in importance as you begin to think about making new friends and taking on challenging work assignments. In fact, once lower-order needs are satisfied, it’s difficult for managers to predict which higher-order needs will motivate behaviour.11 Some people will be motivated by affiliation, while others will be motivated by growth or esteem. Also, the relative importance of the various needs may change over time, but not necessarily in any predictable pattern. So, what leads to effort? In part, needs do. It is important for students and managers to have a basic understanding of needs theories. This is because they are part of the vocabulary of managers, and have been part of most courses of study in management and marketing for many years. Maslow’s hierarchy of needs, in particular, seems to be the most popular, best known and most remembered theory of motivation among practising managers, possibly because of its attractive (and simple) triangle or pyramid diagram. Nevertheless, Maslow’s intuitively appealing hierarchy appears to have little supporting evidence, and to be impossible to demonstrate experimentally. In modern psychology, it is

D s

F sense

Maslow’s Hierarchy of Needs

So, if needs only tell part of the motivation story, we will need to look at the role of rewards, and then, later in the chapter, at ‘process’ theories of motivation such as equity theory, expectancy theory and goal setting theory, which seem to have better predictive value.

EXTRINSIC AND INTRINSIC REWARDS No discussion of motivation would be complete without considering rewards. Let’s add two kinds of rewards, extrinsic and intrinsic, to the model, as shown in Figure 12.4.13 Extrinsic rewards are tangible and extrinsic reward visible to others and are given to a reward that is tangible, employees contingent on the performance visible to others and given to employees contingent of specific tasks or behaviours.14 External on the performance of agents (managers, for example) determine specific tasks or behaviours

Intrinsic rewards Effort Unsatisfied need

• Initiation Tension

Energised to take action

• Direction

Satisfaction

Performance

• Persistence Extrinsic rewards

Performing a job well can be rewarding intrinsically (the job itself is fun, challenging or interesting) or extrinsically (as you receive better pay or promotions, etc.). Intrinsic and extrinsic rewards lead to satisfaction of various needs. FIGURE 12.4

Adding rewards to the model

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and control the distribution, frequency and amount of extrinsic rewards, such as pay, company stock, benefits and promotions. Performance bonuses, paid when a worker or work group achieves a performance target, are a common form of extrinsic reward. The aim of bonuses is to help to increase employee performance and boost morale. Australia-based QBE Insurance Group, one of the world’s top 20 insurance companies, with over 14 000 employees, prides itself on its employees ‘being rewarded for their performance’. In 2018, QBE was reported to be paying its employees an average of more than $8000 each in annual bonuses on top of salaries.15 Although bonuses can sometimes be dismissed as ‘just extrinsic rewards’, they can also play an important role in feedback to employees. Bonuses and awards do indeed provide extrinsic financial rewards, but they can also be an important source of positive feedback to recipients, telling them that they are doing the right thing.16 Why do companies need extrinsic rewards? To get people to do things they wouldn’t otherwise do. Companies use extrinsic rewards to motivate people to perform four basic behaviours: join the organisation, regularly attend their jobs, perform their jobs well and stay with the organisation.17 Think about it. Would you show up to work every day to do the best possible job that you could just out of the goodness of your heart? Very few people would. Intrinsic rewards are the natural intrinsic reward a natural reward rewards associated with performing a task associated with or activity for its own sake. For example, performing a task or besides the external rewards management activity for its own sake offers for doing something well, employees often find the activities or tasks they perform interesting and enjoyable. Examples of intrinsic rewards include a sense of accomplishment or achievement, a feeling of responsibility, the chance to learn something new or interact with others, or simply the fun that comes from performing an interesting, challenging and engaging task. Video games have grown rapidly in popularity. It has been estimated that Australia alone has about 9.5 million regular gamers, and that the size of the Australian video games industry, in financial terms, is over $3 billion per year.18 The global video games industry was expecting revenues of $US138 billion in 2018.19 People around the world spend millions of hours every week on video games. Why? Because they’re interesting, challenging and engaging (i.e. intrinsically rewarding).20 Companies are now beginning to apply ‘gamification’ – meaning levels, points, time limits and friendly competition – to organisational tasks like training, data entry, sales leads, carpooling, etc. Gabe Zichermann, who organises the Gamification Summit conference, says, ‘The reason why gamification is so hot is that most people’s jobs are really freaking boring’.21 Does it work? Well, if you play Guitar 226

Hero you’re more likely to actually learn to play a real

guitar. Likewise, at work, people trained via video games learn more information, remember it longer and progress to higher skill levels. Which types of rewards are most important to workers in general? Experienced managers suggest that both extrinsic and intrinsic rewards are important. According to Jason White, the National Leader, People Services for accounting firm KPMG Australia, ‘The assumption that cash-based rewards are the only thing that matter to employees is being challenged by more contemporary views around the intrinsic motivators that people have around work.’ Examples could be flexibility, education, professional development or technology training. ‘Some people might want additional leave, or to structure things so they can spend more time with their children. There is also opportunity to develop the purpose of an organisation, and how employees can engage with the social good that the organisation does’, Travers says.22 Interestingly, employee preferences for intrinsic and extrinsic rewards appear to be relatively stable. Studies conducted over the last three decades have consistently found that employees are twice as likely to indicate that ‘important and meaningful work’ matters more to them than what they are paid.23 Indeed, when workers were asked ‘If you were to get enough money to live as comfortably as you would like for the rest of your life, would you continue to work or would you stop working?’, 69 per cent of respondents said they would keep working. Clearly, intrinsic rewards matter.24

MOTIVATING WITH THE BASICS So, given the basic model of work motivation in Figure 12.4, what practical steps can managers take to motivate employees to increase their effort? Well, start by asking people what their needs are. If managers don’t know what their employees’ needs are, they won’t be able to provide them the opportunities and rewards that can satisfy those needs. Andrew Henderson, chief executive of Leadership Management Australia (LMA), says, ‘There’s a lot more to the individual than their title and job description … what gets them excited and puts their sparkle back in their eye?’ A recent LMA survey suggests that job dissatisfaction is one of three major emerging trends, indicating that managers who get to know their staff can significantly reduce employee dissatisfaction and turnover.25 Next, satisfy lower-order needs first. Since higher-order needs will not motivate people as long as lower-order needs remain unsatisfied, companies should satisfy lowerorder needs first. In practice, this means providing the equipment, training and knowledge to create a safe workplace free of physical risks, paying employees well enough to provide financial security and offering an

WORKPLACE AND COMMUNITY

JOIN COGNEX – AND STAY – AND TRAVEL THE WORLD Years of service

Reward

Engraved watch.

Gold pin, extra weekend holiday trip (paid for by the company).

A planned, all-expenses-paid trip for the employee and his or her spouse to one of the wonders of the world, $1000 spending money and an extra week of paid holiday to enjoy the trip.

Same as 15 years, only this time the trip is for the employee and his or her spouse, plus eight of their best friends and $1500 in spending money.

Cognex sets up a charitable giving account of $25 000 and names the longtime employee as trustee. The employee can contribute to any governmentapproved charity at any time and in any amount.27

security as more important than personal and family time, which is more important to younger employees.29 Finally, as needs change and lower-order needs are satisfied, create opportunities for employees to satisfy higherorder needs. Recall that intrinsic rewards, such as

accomplishment, achievement, learning something new and interacting with others, are the natural rewards associated with performing a task or activity for its own sake. With the exception of influence (power), intrinsic rewards correspond very closely to higher-order needs that are concerned with relationships (belongingness, relatedness and affiliation) and challenges and accomplishments (esteem, self-actualisation, growth and achievement). Therefore, one way for managers to meet employees’ higher-order needs is to create opportunities for employees to experience intrinsic rewards by providing challenging work, encouraging employees to take greater responsibility for their work and giving employees the freedom to pursue tasks and projects they find naturally interesting.

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HOW PERCEPTIONS AND EXPECTATIONS AFFECT MOTIVATION

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EQUITY THEORY APPLY

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E Fai rne ss, or wh at Get an overview of equity theory as an approach people perceive to be to employee motivation fair, is a critical issue in organisations. Equity theory says that people will be motivated at work when they perceive that they are

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attractive benefits package. Indeed, a survey based on a representative sample of workers in the US found that when people choose jobs or organisations, three of the four most important factors – starting pay/salary (62 per cent), employee benefits (57 per cent) and job security (47 per cent) – are lower-order needs.26 Third, managers should expect people’s needs to change. As some needs are satisfied or situations change, what motivated people before may not motivate them now. Likewise, what motivates people to accept a job (pay and benefits) may not necessarily motivate them once they have the job (the job itself, opportunities for advancement). Managers should also expect needs to change as people mature.28 For older employees, benefits like retirement planning and the size of the company contribution to pensions and superannuation schemes are as important as pay, which is always ranked as more important by younger employees. Also, older employees rank job

As previously discussed, people are motivated to achieve intrinsic and extrinsic rewards. When employees believe that rewards are not fairly awarded, or if they don’t believe they can achieve the performance goals the company has set for them, they won’t be very motivated. The next two sections will introduce the ‘process’ or ‘cognitive’ theories of motivation, which look at how our thought processes affect motivation. After reading these sections, you should be able to: ● use equity theory to explain how employees’ perceptions of fairness affect motivation ● use expectancy theory to describe how employees’ expectations about rewards, effort and the link between rewards and performance influence motivation.

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being treated fairly. In particular, equity theory stresses the importance of perceptions. So, regardless of the actual level of rewards people receive, they must also perceive that, relative to others, they are being treated fairly. For example, a 2017 survey found that Australian chief executives earned an average of $4.75 million per year, or 78 times the earnings of the average worker. The highest salary, $24.6 million, went to Alan Joyce, the CEO of Qantas Airlines. The survey also showed that, on average, CEO salaries had risen 46 per cent faster than average workers’ earnings in the previous 12 months.30 Many people believe that CEO pay is excessively high and unfair, not only because the gap between workers and executives is so wide but also because of the perceived lack of fairness with the excessive size of executive remuneration in the light of some relatively poor company performance.

Shutterstock.com/Fer Gregory

equity theory a theory that states that people will be motivated when they perceive that they are being treated fairly

On average, in 2017 CEOs of Australian companies each earned $4.75 million per year

Let’s learn more about equity theory by examining: ● the components of equity theory ● how people react to perceived inequities ● how to motivate people using equity theory.

COMPONENTS OF EQUITY THEORY The basic components of equity theory are input inputs, outcomes and referents. Inputs in equity theory, the are the contributions employees make to contribution an employee makes to the organisation the organisation. Inputs include education and training, intelligence, experience, effort, number of hours worked and ability. Outcomes are what employees receive outcome in equity theory, the reward in exchange for their contributions to the an employee receives for organisation. Outcomes include pay, fringe their contributions to the benefits, status symbols and job titles, and organisation assignments. Also, since perceptions of equity depend on comparisons, referents referent in equity theory, someone are others with whom people compare with whom a person themselves to determine if they have been compares themselves to treated fairly. The referent can be a single determine if they have been treated fairly person (comparing yourself with a coworker), a generalised other (comparing yourself with ‘students in general’, for example) or could be with yourself over time (‘I was better off last year than I am this year’). Usually, people choose to compare themselves to referents who hold the same or similar jobs or who are otherwise similar in gender, race, age, tenure or other characteristics.33 According to the equity theory outcome/input (O/I) process, employees compare their ratio outcomes (the rewards they receive from in equity theory, an employee’s perception of the organisation) to their inputs (their how the rewards received contributions to the organisation). This from an organisation compare with the comparison of outcomes to inputs is employee’s contributions to that organisation called the outcome/input (O/I) ratio. OUTCOMESSELF

The Global Financial Crisis sparked a call for limits on executive salaries around the world, especially in those cases where governments have used taxpayer’s money to ‘bail out’ the faltering companies. The call for limits was based on a view that where pay for performance was a key criterion for high executive salaries, the obviously poor performance of major companies should not be rewarded with high salaries or huge bonuses.31 In a more recent example, the Royal Commission into the Australian banking industry, which has revealed poor behaviour and advice from major banks, has led to calls for removal of bonuses for senior banking executives.32 As explained below, equity theory doesn’t focus on objective equity (i.e. that CEOs make 75 times more than average workers). Instead, equity theory says that equity, like beauty, is in the eye of the beholder. 228

INPUTSSELF

OUTCOMESREFERENT INPUTSREFERENT

After an internal comparison in which they compare their outcomes to their inputs, employees then make an external comparison in which they compare their O/I ratio with the O/I ratio of a referent.34 When people perceive that their O/I ratio is equal to the referent’s O/I ratio, they conclude that they are being treated fairly. But when people perceive that their O/I ratio is different from their referent’s O/I ratio, they conclude that they have been treated inequitably or unfairly. Students should note (as mentioned earlier) that it is the ratio of inputs to outcomes that underlies our perceptions of fairness and equity, not the objective differences in dollar amounts of pay or rewards. Workers will generally consider it fair for a colleague who works harder, smarter or longer than they do to receive more in salary or bonuses.

Inequity can take two forms: underreward and over-reward. Under-reward occurs when your O/I ratio is worse than your referent’s O/I ratio. In other words, you are getting fewer outcomes relative to your inputs than the referent you compare yourself to is getting. When people perceive that they have been under-rewarded, they tend to experience anger or frustration. By contrast, over-reward occurs when over-reward a form of inequity in which your O/I ratio is better than your referent’s you are getting more O/I ratio. In this case, you are getting more outcomes relative to inputs outcomes relative to your inputs than your than your referent referent is. In theory, when people perceive that they have been over-rewarded, they experience guilt. But, not surprisingly, people have a very high tolerance for over-reward. It takes a tremendous amount of overpayment before people decide that their pay or benefits are more than they deserve.

perceived inequity affects satisfaction. In the case of underreward, this usually translates into frustration or anger; with over-reward, the reaction is guilt. These reactions lead to tension and a strong need to take action to restore equity in some way. At first, a slight inequity may not be strong enough to motivate an employee to take immediate action. If the inequity continues or there are multiple inequities, however, tension may build over time until a point of intolerance is reached, and the person is energised to take action.35 When people perceive that they have been treated unfairly, they may try to restore equity by reducing inputs, increasing outcomes, rationalising inputs or outcomes, changing the referent or simply leaving. We will discuss these possible responses in terms of the inequity associated with under-reward, which is much more common than the inequity associated with over-reward. People who perceive that they have been under-rewarded may try to restore equity by decreasing or withholding their inputs (i.e. effort). For example, during a recent state election in Victoria, the Labor Party was strongly supported in its election campaign by firefighters and ambulance paramedics. The paramedics, who had been engaged in a long and difficult negotiation with the former state government, were

under-reward a form of inequity in which you are getting fewer outcomes relative to inputs than your referent is getting

HOW PEOPLE REACT TO PERCEIVED INEQUITY What happens when people perceive that they have been treated inequitably at work? Figure 12.5 shows that

Restoring equity • Decrease inputs Perceived equity/inequity

• Increase outcomes • Rationalise inputs or outcomes • Change the referent • Leave

Intrinsic rewards Effort

Unsatisﬁed need

• Initiation Tension

Energised to take action

• Direction

Performance

Satisfaction

• Persistence Extrinsic rewards

Perceived equity/inequity

When people perceive that they have been treated inequitably at work because of the intrinsic or extrinsic rewards they receive relative to their efforts, they are dissatisfied (or frustrated or angry), their needs aren’t met and those reactions lead to tension and a strong need to take action to restore equity in some way (as explained in the ‘Restoring equity’ box).

FIGURE 12.5

Adding equity theory to the model

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Newspix Images/Norm Ooloff

able to bargain for a 6 per cent increase in 2014 with a further 3 per cent in 2015 and 3 per cent in 2016 with the new regime. The firefighters found themselves being offered 5 per cent in 2015 plus 2.5 per cent in 2016 and 2017. Despite the offer being in line with other public sector pay outcomes, the firefighters felt betrayed and turned their energies to helping Labor win the election.36 Increasing outcomes is another way people try to restore equity. This might include asking for a raise or pointing out the inequity to the boss and hoping that he or she takes care of it. Sometimes, however, employees may go to external organisations, such as trade unions, federal agencies or the courts, for help in increasing outcomes to restore equity. Another method of restoring equity is to rationalise or distort inputs or outcomes. Instead of decreasing inputs or increasing outcomes, employees restore equity by making mental or emotional ‘adjustments’ in their O/I ratios or the O/I ratios of their referents. For example, suppose that a company downsizes 10 per cent of its workforce. It’s likely that the survivors, the people who still have jobs, will be angry or frustrated with company management because of the layoffs. If alternative jobs are difficult to find, however, these survivors may rationalise or distort their O/I ratios and conclude, ‘Well, things could be worse. At least I still have my job’. Rationalising or distorting outcomes may be used when other ways to restore equity aren’t available. Changing the referent is another way of restoring equity. In this case, people compare themselves to someone other than the referent they had been using for previous

Trade unions can be called upon to influence disputes between employees and their companies, or in some cases the government

230

O/I ratio comparisons. Since people usually choose to compare themselves to others who hold the same or similar jobs or who are otherwise similar (i.e. friends, family members, neighbours who work at other companies), they may change referents to restore equity when their personal situations change, such as a decrease in job status or pay.37 Finally, when none of these methods – reducing inputs, increasing outcomes, rationalising inputs or outcomes, or changing referents – are possible or restore equity, employees may leave by quitting their jobs, transferring or increasing absenteeism.38 For example, with Australian companies now working out how to do business in a world which wants reduced carbon emissions, opportunities for environmental scientists have increased. This has created an opportunity for people in traditional scientific roles to look for work in corporate organisations and could lead to a shortage of workers in traditional scientific jobs. Ray Fleming, General Manager Professional and Technical at Kelly Scientific Resources, says: ‘… the corporate arena traditionally remunerates at a higher level than the scientific sector, coupled with the idea that companies looking to attract skills in this area will be more willing to offer negotiable terms of employment, will no doubt entice some to consider a career change’.39

MOTIVATING WITH EQUITY THEORY What practical steps can managers take to use equity theory to motivate employees? They can start by looking for and correcting major inequities. Among other things, equity theory makes us aware that an employee’s sense of fairness is based on subjective perceptions. What one employee considers grossly unfair may not affect another employee’s perceptions of equity at all. Although these different perceptions make it difficult for managers to create conditions that satisfy all employees, it’s critical that they do their best to take care of major inequities that can energise employees to take disruptive, costly or harmful actions, such as decreasing inputs or leaving. So, whenever possible, managers should look for and correct major inequities. Second, managers can reduce employees’ inputs. Increasing outcomes is often the first and only strategy that companies use to restore equity, yet reducing employee inputs is just as viable a strategy. In fact, with dual-career couples working 50-hour weeks, more and more employees are looking for ways to reduce stress and restore a balance between work and family. Consequently, it may make sense to ask employees to do less, not more: to have them identify and eliminate the 20 per cent of their jobs that doesn’t increase productivity or add value for customers, and to eliminate company-imposed requirements that really aren’t critical to the performance of managers, employees or the company (e.g. unnecessary meetings and reports). According to Chinese labour laws, employees may not work more than 36 hours of overtime per month, or no

more than nine overtime hours per week. However, one company, Foxconn, broke this law after a catastrophic plant explosion and a series of employee suicides disrupted production at a factory in China. Factory employees, who assemble everything from iPads to laptop computers, worked 80 to 100 overtime hours each month on top of their 174 regular hours to make up for the production shortfalls. During this time, employees regularly worked 12-hour shifts, six days a week, which amounted to 60 hours a month over the legal limit. As a result of pressure from Apple and from international workers’ rights groups, Foxconn agreed to immediately increase pay as much as 25 per cent and limit the number of hours an employee works to 49 per week.40 With 1.3 million employees on the Chinese mainland, Foxconn is by far the biggest private sector employer in China. Recent reports indicate that while improvements in employment conditions have been made, life in the company’s massive factories (of up to 350 000 workers) remains harsh.41 Finally, managers should make sure decision-making processes are fair. Equity theory focuses on distributive justice, the degree to distributive justice the perceived degree which outcomes and rewards are fairly to which outcomes distributed or allocated. However, and rewards are fairly distributed or allocated procedural justice, the fairness of the procedural justice procedures used to make reward the perceived fairness of allocation decisions, is just as important.42 the process used to make reward allocation decisions Procedural justice matters because even when employees are unhappy with their outcomes (i.e. low pay), they’re much less likely to be unhappy with company management if they believe that the procedures used to allocate outcomes were fair. For example, employees who are made redundant tend to be hostile towards their employer when they perceive that the procedures leading to the redundancies were unfair. By contrast, employees who perceive layoff procedures to be fair tend to continue to support and trust their employers.43 Also, if employees perceive that their outcomes are unfair (i.e. distributive injustice), but that the decisions and procedures leading to those outcomes were fair (i.e. procedural justice), they are much more likely to seek constructive ways of restoring equity, such as discussing these matters with their manager. In contrast, if employees perceive both distributive and procedural injustices, they may resort to more destructive tactics, such as withholding effort, absenteeism, tardiness, or even sabotage and theft.44

LO3

EXPECTANCY THEORY

One of the hardest things about motivating people is that rewards that are attractive to some employees are unattractive to others. Expectancy theory says that people will be motivated to the extent to which they believe

that their efforts will lead to good performance, that good performance will be rewarded and that they will be offered attractive rewards.45 Let’s learn more about expectancy theory by examining: ● the components of expectancy theory ● how to use expectancy theory as a motivational tool.

expectancy theory a theory that states that people will be motivated to the extent to which they believe that their efforts will lead to good performance, that good performance will be rewarded and that they will be offered attractive rewards

COMPONENTS OF EXPECTANCY THEORY Expectancy theory holds that people make conscious choices about their motivation. The three factors that affect those choices are valence, expectancy and instrumentality. Valence is the attractiveness or valence desirability of various rewards or outcomes the attractiveness or to the individuals involved. Expectancy desirability of a reward or outcome theory recognises that the same reward or outcome, say, a promotion, will be

SMART MGMT

A $50 ‘THANK YOU’ FOR YOUR HELP How would you like to arrive at your office and find a $50 on-the-spot bonus from a co-worker as their way of saying ‘bravo’ for a job well done, or ‘thanks’ for helping out on a big project? That scenario really happens in some Australian companies. Amgen Australia is a regular member of lists of the best Australian companies to work for. It was ranked at number 16 in BRW’s top 50 in 2013, and in 2017 was still ranked as a ‘Five Star’ Great Place to Work.46 The company offers benefits that include flexible work hours, paternity leave and a strong teamwork culture. The company also offers employees some unique opportunities.47 Amgen addresses employee work–life balance with a program that offers more flexible ways to work, such as work from home, staggered start and finish times, time off in lieu for work conducted over weekends, and Family and Friends Fridays (early finish at 2 p.m. on one Friday each month and every Friday in January).48 Career development is supported through the Amgen Global Career Framework and annual individual development plans, development opportunities that range from project work, working on cross-functional teams to secondment, training programs for managers and all staff at Amgen, and study assistance. Amgen provides an employee wellness program with free counselling services (employee assistance program), wellness health checks and flu vaccinations to all staff.49 The company says ‘Our goal is to secure the longterm financial, physical and overall wellbeing of our staff and those whose lives they touch every day. We do so through award-winning retirement plans, combined compensation, and robust and inclusive benefits including incentives for healthy living and paid time-off for volunteering’.50

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resort trip could not overcome the negative valence of getting stuck with large food, drink and resort expenses.51 Expectancy is the perceived expectancy relationship between effort and the perceived relationship effort and performance. When expectancies are between performance strong, employees believe that their hard work and efforts will result in good performance, so they work harder. By contrast, when expectancies are weak, employees figure that no matter what they do or how hard they work, they won’t be able to perform their jobs successfully, so they don’t work as hard. Instrumentality is the perceived instrumentality the perceived relationship relationship between performance and performance and rewards. When instrumentality is strong, between rewards employees believe that improved performance will lead to better and more rewards, so they choose to work harder. When instrumentality is weak, employees don’t believe that better performance will result in more or better rewards, so they choose not to work as hard. Expectancy theory holds that for people to be highly motivated, all three variables – valence, expectancy and

highly attractive to some people, will be highly disliked by others and will not make much difference one way or the other to still others. Note that valence is not ‘value’ in monetary terms: it is the attractiveness of the particular reward to the individual concerned. Accordingly, when people are deciding how much effort to put forth, expectancy theory says that they will consider the valence of all possible rewards and outcomes that they can receive from their jobs. The greater the sum of those valences, each of which can be positive, negative or neutral, the more effort people will choose to put into the job. Consultant Carol Schultz spent nine years working for a company where the boss rewarded top-performing employees with five-day trips to expensive resorts, with the company paying for the flight, hotel and one dinner, leaving employees to pay for the rest of their food and all of their drinks and resort activities. Said Schultz, ‘It always irked me that they’d fly us to some expensive resort and expect us to pay for everything outside of our flight and hotel room. To me, this was no “reward”’. In other words, when Schultz assessed her personal valence in relation to the work rewards, the positive valence of an expensive

Restoring equity • Decrease inputs Perceived equity/inequity

• Increase outcomes • Rationalise inputs or outcomes • Change the referent • Leave

Intrinsic rewards Effort Unsatisfied need

• Initiation Tension

Energised to take action

Valence

Performance

• Direction

Satisfaction

• Persistence

Instrumentality

Expectancy

Extrinsic rewards

Perceived equity/inequity

If rewards are attractive (valence) and linked to performance (instrumentality), then people are energised to take action. In other words, good performance gets them rewards that they want. Intended effort (i.e., becoming energised to take action) turns into actual effort when people expect that their hard work and efforts will result in good performance. After all, why work hard if that hard work is wasted?

FIGURE 12.6

232

Adding expectancy theory to the model

instrumentality – must be high. Thus, expectancy theory can be represented by the following simple equation: Motivation = Valence × Expectancy × Instrumentality If any one of these variables (valence, expectancy or instrumentality) declines, overall motivation will decline, too. Figure 12.6 incorporates the expectancy theory variables into our motivation model. Valence and instrumentality combine to affect employees’ willingness to put forth effort (i.e. the degree to which they are energised to take action), while expectancy transforms intended effort (‘I’m really going to work hard in this job’) into actual effort. If you’re offered rewards that you desire and you believe that you will in fact receive these rewards for good performance, you’re highly likely to be energised to take action. However, you’re not likely to actually exert effort unless you also believe that you can do the job at the level required (i.e. that your efforts will lead to successful performance).

Finally, managers should empower employees to make decisions if management really wants them to believe that their hard work and effort will lead to good performance. If attractive rewards are linked to good performance, people should be energised to take action. However, this works only if they also believe that their efforts will lead to good performance. One of the ways that managers destroy the expectancy that hard work and effort will lead to good performance is by restricting what employees can do or by ignoring employees’ ideas. In Chapter 9, you learned that empowerment is a feeling of intrinsic motivation, in which workers perceive their work to have meaning and perceive themselves to be competent, to have an impact and to be capable of selfdetermination.54 So, if managers want employees to have strong expectancies, they should empower them to make decisions. Doing so will motivate employees to take active rather than passive roles in their work.

MOTIVATING WITH EXPECTANCY THEORY HOW REWARDS AND GOALS AFFECT MOTIVATION

What practical steps can managers take to use expectancy theory to motivate employees? First, they can systematically gather information to find out what employees want from their jobs. In addition to individual managers directly asking

employees what they want from their jobs (see the earlier section ‘Motivating with the basics’), companies need to survey their employees regularly to determine their wants, needs and dissatisfactions. Since people consider the valence of all the possible rewards and outcomes that they can receive from their jobs, regular identification of wants, needs and dissatisfactions gives companies the chance to turn negatively valent rewards and outcomes into positively valent rewards and outcomes, thus raising overall motivation and effort. Therefore, employers should routinely survey employees to identify not only the range of rewards that are valued by most employees but also to understand preferences of specific employees. Second, managers can take specific steps to link rewards to individual performance in a way that is clear and understandable to employees . Unfortunately, most

employees are extremely dissatisfied with the link between pay and performance in their organisations. In one study, based on a representative sample, 80 per cent of the employees surveyed wanted to be paid according to a different kind of pay system. Moreover, only 32 per cent of employees were satisfied with how their annual pay raises were determined, and only 22 per cent were happy with the way the starting salaries for their jobs were determined.52 One way to make sure that employees see the connection between pay and performance (see Chapter 11 for a discussion of compensation strategies) is for managers to publicise the way in which pay decisions are made. This is especially important given that only 41 per cent of employees know how their pay increases are determined.53

When used properly, rewards motivate and energise employees, but when used incorrectly, they can demotivate, baffle and even anger them. Goals are also supposed to motivate employees; however, leaders who focus blindly on meeting goals at all costs often find that they destroy motivation. After reading the next three sections, you should be able to: ● explain how reinforcement theory works and how it can be used to motivate ● describe the components of goal-setting theory and how managers can use them to motivate workers ● discuss how the entire motivation model can be used to motivate workers.

LO4

REINFORCEMENT THEORY

Reinforcement theory says that behaviour is a function of its consequences, that behaviours followed by positive consequences (i.e. reinforced) will occur more frequently and that behaviours followed by negative consequences, or not followed by positive consequences, will occur less frequently.55 More specifically, reinforcement is the process of changing behaviour by changing the consequences that follow the behaviour. Our understanding of reinforcement comes mainly from the work of

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will follow those behaviours and the schedule schedule of by which those consequences will be reinforcement rules that specify delivered.57 which behaviours will Figure 12.7 incorporates reinforcement be reinforced, which contingencies and reinforcement schedules consequences will follow those behaviours and the into our motivation model. First, notice that schedule by which those consequences will be extrinsic rewards and the schedules of delivered reinforcement used to deliver them are the primary method for creating PPLY E A Complete the reinforcement contingencies in ‘Management decision’ organisations. In turn, those worksheet for Chapter 12 reinforcement contingencies directly affect valences (the attractiveness of rewards), instrumentality (the perceived link between rewards and performance) and effort (how hard employees will work). Let’s learn more about reinforcement theory by examining: ● the components of reinforcement theory ● the different schedules for delivering reinforcement ● how to motivate with reinforcement theory. ENGAG

controversial American behaviourist B. F. Skinner, based on his experiments with rats and pigeons in the 1940s and 1950s, which he then extended to findings on human reinforcement.56 Reinforcement has two parts: reinforcement contingencies and s ch e d u l e s o f r e i n f o r c e m e n t . Reinforcement contingencies are the cause-and-effect relationships between the performance of specific behaviours and specific consequences. For example, if you get docked an hour’s pay for being late to work, then a reinforcement contingency exists between a behaviour – being late to work – and a consequence – losing an hour’s pay. A schedule of reinforcement is the set of rules regarding reinforcement contingencies, such as which behaviours will be reinforced, which consequences

Restoring equity • Decrease inputs Perceived equity/inequity

• Increase outcomes • Rationalise inputs or outcomes • Change the referent • Leave

Intrinsic rewards Effort Unsatisfied need

• Initiation Energised to take action

Tension

Valence

Satisfaction

Performance

• Direction • Persistence

Instrumentality

Expectancy

Reinforcement contingencies

Extrinsic rewards

Perceived equity/inequity

Schedules of reinforcement

Extrinsic rewards and the schedules of reinforcement used to deliver them are the primary method for creating reinforcement contingencies in organisations. In turn, those reinforcement contingencies directly affect valences (the attractiveness of rewards), instrumentality (the perceived link between rewards and performance) and effort (how hard employees will work).

FIGURE 12.7

234

Adding reinforcement theory to the model

EO VID

reinforcement theory a theory that states that behaviour is a function of its consequences, that behaviours followed by positive consequences will occur more frequently and that behaviours followed by negative consequences, or not followed by positive consequences, will occur less frequently reinforcement the process of changing behaviour by changing the consequences that follow behaviour reinforcement contingency the cause-and-effect relationship between the performance of a specific behaviour and a specific consequence

COMPONENTS OF REINFORCEMENT THEORY As just described, reinforcement contingencies are the cause-and-effect relationships between the performance of specific behaviours and specific consequences. There are four kinds of reinforcement contingencies: positive reinforcement, negative reinforcement, punishment and extinction. Positive reinforcement strengthens positive behaviour (i.e. increases its frequency) by reinforcement reinforcement that following behaviours with desirable strengthens behaviour by consequences. By contrast, negative following behaviours with desirable consequences reinforcement strengthens behaviour by negative withholding an unpleasant consequence reinforcement when employees perform a specific reinforcement that strengthens behaviour by behaviour. Negative reinforcement is also withholding an unpleasant called avoidance learning because workers consequence when employees perform a perform a behaviour to avoid a negative specific behaviour consequence. For example, at a small florist business, the Florist Network, company management instituted a policy of requiring good attendance for employees to receive their annual bonuses. Employee attendance has improved significantly now that excessive absenteeism can result in the loss of A$1500 or more.58 By contrast, punishment weakens punishment reinforcement that weakens behaviour (i.e. decreases its frequency) behaviour by following by following behaviours with undesirable behaviours with undesirable consequences. For example, the consequences standard disciplinary or punishment process in most companies is a verbal warning (‘Don’t ever do that again’), followed by a written warning (‘This letter is to discuss the serious problem you’re having with …’), followed by three days’ suspension from work (‘While you’re at home not being paid, we want you to think hard about …’), followed by being fired (‘That was your last chance’). Though punishment can weaken behaviour, managers have to be careful to avoid the backlash that sometimes occurs when employees are punished at work. This occurred at Toyota, which, after a devastating stretch of quality problems and recalls, saw a decade low in sales, market share decline for the first time in years and a loss for the first time in more than 50 years. Because of this performance, Toyota cut the pay of CEO Akio Toyoda and his top managers by 10 per cent. Toyoda and his senior managers also forfeited their bonuses for two years in a row.59 TABLE 12.1

Extinction is a reinforcement strategy extinction in which a positive consequence is no reinforcement in which a positive consequence is no longer allowed to follow a previously longer allowed to follow reinforced behaviour. By removing the a previously reinforced positive consequence, extinction weakens behaviour, thus weakening the behaviour the behaviour, making it less likely to occur. Based on the idea of positive reinforcement, most companies give company leaders and managers substantial financial rewards when the company performs well. Based on the idea of extinction, you would then expect that leaders and managers would not be rewarded (i.e. removing the positive consequence) when companies perform poorly. If companies really want pay to reinforce the right kinds of behaviours, then rewards have to be removed when company management doesn’t produce successful performance. As another example, if a team member regularly delays and disrupts regular team meetings by, say, telling time-wasting jokes, then this behaviour will continue as long as the team leader gives positive reinforcement by laughing. If the team leader removes this positive reinforcement – they stop laughing at the jokes – then the disruptive team member will quickly get the message, and the joke-telling behaviour will ‘become extinct’.

SCHEDULES FOR DELIVERING REINFORCEMENT As mentioned earlier, a schedule of reinforcement is the set of rules regarding reinforcement contingencies, such as which behaviours will be reinforced, which consequences will follow those behaviours, and the schedule by which those consequences will be delivered. There are two categories of reinforcement schedules: continuous and intermittent. With continuous reinforcement continuous reinforcement schedules, a consequence follows every schedule instance of a given behaviour. For example, a schedule that requires a consequence to be employees working on a piece-rate pay administered following system earn money (consequence) for every instance of a behaviour every part they manufacture (behaviour). intermittent The more they produce, the more they reinforcement earn. By contrast, with intermittent schedule a schedule in which reinforcement s c h e d u l e s , consequences are consequences are delivered after a delivered after a specified or average time has specified or average time has elapsed or elapsed or after a specified after a specified or average number of or average number of behaviours has occurred behaviours has occurred. As Table 12.1

Intermittent reinforcement schedules

Fixed

Variable

Interval (time)

Consequences follow behaviour after a fixed time has elapsed.

Consequences follow behaviour after different times, some shorter and some longer, that vary around a specific average time.

Ratio (behaviour)

Consequences follow a specific number of behaviours.

Consequences follow a different number of behaviours, sometimes more and sometimes less, that vary around a specified average number of behaviours.

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shows, there are four types of intermittent reinforcement schedules. Two of these are based on time and are called interval reinforcement schedules, while the other two, based on behaviours, are known as ratio schedules. With fixed interval reinforcement fixed interval schedules , consequences follow a reinforcement schedule behaviour only after a fixed time has an intermittent schedule elapsed. For example, most people in which consequences follow a behaviour only receive their pay on a fixed interval after a fixed time has schedule (e.g. once or twice per month). elapsed As long as they work (behaviour) during variable interval reinforcement a specified pay period (interval), they get schedule a pay (consequence). With variable an intermittent schedule interval reinforcement schedules, in which the time between a behaviour consequences follow a behaviour after and the following different times, some shorter and some consequences varies around a specified longer, that vary around a specified average average time. On a 90-day variable interval reinforcement schedule, you might receive a bonus after 80 days or perhaps after 100 days, but the average interval between performing your job well (behaviour) and receiving your bonus (consequence) would be 90 days. With fixed ratio reinforcement fixed ratio schedules, consequences are delivered reinforcement schedule following a specific number of behaviours. an intermittent schedule For example, a car salesperson might in which consequences are delivered following receive a $1000 bonus after every 10 a specific number of sales. Therefore, a salesperson with only behaviours nine sales would not receive the bonus variable ratio reinforcement until he or she finally sold a 10th car. schedule With variable ratio reinforcement an intermittent schedule in which consequences schedules, consequences are delivered are delivered following following a different number of behaviours, a different number of sometimes more and sometimes less, behaviours, sometimes more and sometimes that vary around a specified average less, that vary around a number of behaviours. With a 10-car specified average number of behaviours variable ratio reinforcement schedule, a salesperson might receive the bonus after seven car sales or after 12, 11 or nine sales, but the average number of cars sold before receiving the bonus would be 10 cars. Which reinforcement schedules work best? In the past, the standard advice was to use continuous reinforcement when employees were learning new behaviours because reinforcement after each success leads to faster learning. Likewise, the standard advice was to use intermittent reinforcement schedules to maintain behaviour after it is learned because intermittent rewards are supposed to make behaviour much less subject to extinction.60 Research shows, however, that except for interval-based systems, which usually produce weak results, the effectiveness of continuous reinforcement, fixed ratio and variable ratio schedules differs very little.61 In organisational settings, all 236

three produce consistently large increases over noncontingent reward schedules. Hence managers should choose whichever of these three is easiest to use in their companies.

MOTIVATING WITH REINFORCEMENT THEORY What practical steps can managers take to use reinforcement theory to motivate employees? University business professor Fred Luthans, who has studied the effects of reinforcement theory in organisations for more than a quarter of a century, says that there are five steps to motivating workers with reinforcement theory: identify, measure , analyse , intervene and evaluate critical performance-related behaviours.62 Identify means identifying critical, observable, performance-related behaviours. These are the behaviours that are most important to successful job performance. In addition, they must also be easily observed so that they can be accurately measured. Measure means measuring the baseline frequencies of these behaviours. In other words, find out how often workers perform them. Analyse means analysing the causes and consequences of these behaviours. Analysing the causes helps managers create the conditions that produce these critical behaviours, and analysing the consequences helps them determine if these behaviours produce the results that they want. Intervene means changing the organisation by using positive and negative reinforcement to increase the frequency of these critical behaviours. Evaluate means evaluating the extent to which the intervention actually changed workers’ behaviour. This is done by comparing behaviour after the intervention to the original baseline of behaviour before the intervention. In addition to these five steps, managers should remember three other key things when motivating with reinforcement theory. Don’t reinforce the wrong behaviours. Although reinforcement theory sounds simple, it’s actually very difficult to put into practice. One of the most common mistakes is accidentally reinforcing the wrong behaviours. In fact, sometimes managers reinforce behaviours that they don’t want! Managers should also correctly administer punishment at the appropriate time. Many managers believe that punishment can change workers’ behaviour and help them improve their job performance. Furthermore, managers believe that fairly punishing workers also lets other workers know what is or isn’t acceptable.63 A danger of using punishment is that it can produce a backlash against managers and companies, but if administered properly, punishment can weaken the frequency of undesirable behaviours without creating a backlash.64 To be effective, the punishment must be strong enough to stop the undesired behaviour and must be administered objectively (same rules applied to everyone), impersonally

(without emotion or anger), consistently and contingently (each time improper behaviour occurs) and quickly (as soon as possible following the undesirable behaviour). In addition, managers should clearly explain what the appropriate behaviour is and why the employee is being punished. Employees typically respond well when punishment is administered this way.65 Finally, managers should choose the simplest and most effective schedule of reinforcement. When choosing a schedule of reinforcement, managers need to balance effectiveness against simplicity. In fact, the more complex the schedule of reinforcement, the more likely it is to be

WORKPLACE AND COMMUNITY

SHOW UP TO WIN

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Electric Boat, a manufacturer of nuclear submarines, uses a variable reinforcement system to encourage good attendance among employees. The company uses a lottery that gives employees with good attendance a chance to win sizeable rewards. Eligibility for the various rewards depends on the level of attendance. For example, 933 employees with two years of perfect attendance were placed in a lottery in which 20 of them would win US$2500. Likewise, 1400 employees with a year of perfect attendance were placed in a lottery in which 75 would win US$1000, 50 would win US$500, 25 would win prime parking spaces and all would win a $25 gift certificate for the company store. Greg Angelini, who won a US$1000 prize, says, ‘I’m not a gambler, but it sure was nice to get that cheque right before Christmas. And it was just as nice that the powers that be noticed that I’ve had perfect attendance’. Electric Boat’s lottery system is so rewarding that on average an amazing 41 per cent of its employees have perfect attendance.66

misunderstood and resisted by managers and employees. Since continuous reinforcement, fixed ratio and variable ratio schedules are equally effective, continuous reinforcement schedules may be the best choice in many instances by virtue of their simplicity.

LO5

GOAL-SETTING THEORY

The basic model of motivation with which we began this chapter (Figure 12.2) showed that individuals feel tension after becoming aware of an unfulfilled need. Once they experience tension, they search for and select courses of action that they believe will eliminate this tension. In other words, they direct their behaviour towards something. This something is a goal, goal a target, objective or result which is a target, objective or result that that someone tries to accomplish someone tries to accomplish. Goal-setting theory says that goal-setting theory a theory that states that people will be motivated to the extent to people will be motivated to the extent to which which they accept specific, challenging they accept specific, goals and receive feedback that indicates challenging goals and their progress towards goal achievement. receive feedback that Let’s learn more about goal setting by indicates their progress towards goal achievement examining: ● the components of goal-setting theory ● how to motivate with goal-setting theory.

COMPONENTS OF GOAL-SETTING THEORY The basic components of goal-setting theory are goal specificity, goal difficulty, goal acceptance and performance feedback.67 Goal specificity is the extent goal specificity to which goals are detailed, exact and the extent to which goals detailed, exact and unambiguous. Specific goals, such as ‘I’m are unambiguous going to have a Distinction average this goal difficulty semester’, are more motivating than the extent to which a goal hard or challenging to general goals, such as ‘I’m going to get is accomplish better grades this semester’. goal acceptance Goal difficulty is the extent to which the extent to which people understand a goal is hard or challenging to accomplish. consciously and agree to goals Difficult goals, such as ‘I’m going to have a High Distinction average and win the prize for best academic performance this semester’, are more motivating than easy goals, such as ‘I’m going to have a Credit average this semester’. Goal acceptance, which is similar to the idea of goal commitment discussed in Chapter 5, is the extent to which people consciously understand and agree to goals. Accepted goals, such as ‘I really want to get a High Distinction average this semester to show my parents how much I’ve improved’, are more motivating than unaccepted goals, such as ‘My parents really want me to get a High Distinction average this semester, but there’s so much more I’d rather do on campus than study!’

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how goals directly affect tension, effort and the extent to which employees are energised to take action.

MOTIVATING WITH GOAL-SETTING THEORY

SMART goals are an important type of specific goals

Pe r f o r ma n c e f e e d b a c k i s information about the quality or quantity of past performance and indicates whether progress is being made toward the accomplishment of a goal. Performance feedback, such as ‘My lecturer said I need a 92 on the final exam to get a High Distinction in that subject’, is more motivating than no feedback: ‘I have no idea what my grade is in that subject’. In short, goal-setting theory says that people will be motivated to the extent to which they accept specific, challenging goals and receive feedback that indicates their progress toward goal achievement. How does goal setting work? To start, challenging goals focus employees’ attention (i.e. direction of effort) on the critical aspects of their jobs and away from unimportant areas. Goals also energise behaviour. When faced with unaccomplished goals, employees typically develop plans and strategies to reach those goals. Goals also create tension between the goal, which is the desired future state of affairs, and where the employee or company is now, meaning the current state of affairs. This tension can be satisfied only by achieving or abandoning the goal. Finally, goals influence persistence. Since goals only ‘go away’ when they are accomplished, employees are more likely to persist in their efforts in the presence of goals. Figure 12.8 incorporates goals into the motivation model by showing

performance feedback information about the quality or quantity of past performance that indicates whether progress is being made toward the accomplishment of a goal

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What practical steps can managers take to use goal-setting theory to motivate employees? One of the simplest, most effective ways to motivate workers is to assign them specific, challenging goals. Second, managers should make sure workers truly accept organisational goals. Specific, challenging goals won’t motivate workers unless they really accept, understand and agree to the organisation’s goals. For this to occur, people must see the goals as fair and reasonable. Plus, they must trust management and believe that managers are using goals to clarify what is expected from them rather than to exploit or threaten them (‘If you don’t achieve these goals …’). Participative goal setting, in which managers and employees generate goals together, can help increase trust and understanding and therefore acceptance of goals. Furthermore, providing workers with training can help increase goal acceptance, particularly when workers don’t believe they are capable of reaching the organisation’s goals.68 Finally, managers should provide frequent, specific, performance-related feedback . Once employees have accepted specific, challenging goals, they should receive frequent performance-related feedback so that they can track their progress toward goal completion. Feedback leads to stronger motivation and effort in three ways.69 Receiving specific feedback that indicates how well they’re performing can encourage employees who don’t have specific, challenging goals to set goals to improve their performance. Once people meet goals, performance feedback often encourages them to set higher, more difficult goals. Furthermore, feedback lets people know whether they need to increase their efforts or change strategies in order to accomplish their goals.

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MOTIVATING WITH THE INTEGRATED MODEL

Recent developments in the study of human motivation tend to focus on the neuroscience underpinning behaviour: What takes place within the human brain when we are curious or bored, motivated or weary? Although this research is promising in the long term, most managers would have difficulty with concepts such as ‘activating motivational systems (including midbrain dopaminergic neurons and dopamine-recipient structures)’.70 The research does, however, emphasise the role of thinking in motivation, and the overriding importance of intrinsic rewards.

Restoring equity • Decrease inputs Perceived equity/inequity

• Increase outcomes • Rationalise inputs or outcomes • Change the referent • Leave

Intrinsic rewards Goals Effort Unsatisfied need

Energised to take action

Tension

Valence

• Initiation Performance

• Direction

Satisfaction

• Persistence

Instrumentality

Expectancy

Extrinsic rewards

Perceived equity/inequity

Goals create tension between the goal, which is the desired future state of affairs, and where the employee or company is now, meaning the current state of affairs. This tension can be satisfied only by achieving or abandoning the goal. Goals also energise behaviour. When faced with unaccomplished goals, employees typically develop plans and strategies to reach those goals. Finally, goals influence persistence.

Adding goal-setting theory to the model

how to motivate their workers: ‘What leads to effort?’ While the answer to that question is likely to be different for each employee, the table on your review card for this chapter helps you begin to answer it by consolidating the practical advice from the theories reviewed in this chapter in one convenient location. So, if you’re having difficulty figuring out why people aren’t motivated where you work, PPLY check your review card E A Find out more for a useful, theoryabout what motivates you at work with this self assessment based starting point.

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In practical terms, we should perhaps focus on the understanding of needs theories as part of the historical development of the field, and as giving managers common vocabulary on motivation. We can look to process theories such as equity, expectancy and goal setting, and to reinforcement theory for specific (and complementary) guidance on how to motivate workers. We began this chapter by defining motivation as the set of forces that initiates, directs and makes people persist in their efforts to accomplish a goal. We also asked the basic question that managers ask when they try to understand

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FIGURE 12.8

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Leadership

LEARNING OUTCOMES

WHAT IS LEADERSHIP?

1 Explain what leadership is. 2 Describe who leaders are and what effective leaders do.

3 Explain Fiedler’s contingency theory. 4 Describe how path–goal theory works.

What does it take to be a leader? Will your natural style convince people to follow you, or do need to learn from and adapt to the people in your group? One thing seems certain: leaders seldom have continuous unbroken success, and they need to be resilient. AirAsia CEO Tan Sri Tony Fernandes bought a failing Malaysian airline for the token price of 1 ringgit (about 25 cents) and transformed it into Asia’s first low-cost, shorthaul carrier. Using marketing and management experience from the music industry, Fernandes took on the moribund domestic division of a government-owned airline and created a successful business. From two old aircraft flying one route (Kuala Lumpur to Langkawi), and with a debt of over $US11 million, AirAsia has expanded to over 200 modern aircraft (average age 3.5 years) with more than 200 more on order, flying to 88 destinations through its eight airlines: AirAsia Berhad, AirAsia X Berhad, AirAsia Indonesia, Indonesia AirAsia X,

5 Explain the normative decision theory. 6 Explain how visionary leadership helps

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leaders achieve strategic leadership.

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LEADERS VERSUS MANAGERS

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Whether you run an airline, create and innovate to develop new products or services, help a company gain competitive advantage or even work in the non-profit sector, leadership is the process of influencing others to achieve group or organisational goals. The knowledge and skills you’ll learn in this chapter won’t make the task of leadership less daunting, but they will help you navigate your journey as a leader. According to university PPLY E A Get an overview business professor Warren of the differences between a leader and a manager Be n n i s , t h e p r i m a r y difference between leaders and managers is that leaders are concerned with doing the right thing, while managers are concerned with doing things right.10 In other words, leaders begin with the question, ‘What should we be doing?’ while managers start with ‘How can we do what we’re already doing better?’ Leaders focus on vision, mission, goals and objectives, while managers focus on productivity and efficiency. Managers see themselves as preservers of existing circ*mstances (the ‘status quo’), while leaders see themselves as promoters of change and challengers of the status quo by encouraging creativity and risk taking. Another difference is that managers have a relatively short-term perspective, while leaders take a long-term view. Managers are concerned with control and limiting the choices of others, while leaders are more concerned with expanding people’s choices and options.11 Additionally, managers solve problems so that others can do their work, while leaders inspire and motivate others to find their own solutions. Finally, managers are also more concerned with means, how to get things done, while leaders are more concerned with ends, what gets done. Although leaders are different from managers, organisations need them both. Managers are critical to getting the day-to-day work done, and leaders are critical to inspiring employees and setting the organisation’s longterm direction. The key issue for any organisation is the extent to which it is properly led and properly managed. As Warren Bennis said in summing up the difference between leaders and managers, ‘American organisations (and probably those in much of the rest of the industrialised world) are underled and overmanaged. They do not pay enough attention to doing the right thing, while they pay too much attention to doing things right’.12

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Thai AirAsia, Thai AirAsia X, Philippines AirAsia and AirAsia India.1 Although he has undoubted marketing skills, Fernandes’ initial successes seem to have been built on his belief in people. For him, ‘employees come number one, customers come number two. If you have a happy workforce they’ll look after your customers anyway’. He argues that ‘You can have all the money you want in the world, and you can have all the brilliant ideas but if you don’t have the people, forget it’.2 Fernandes uses a ‘management by walking around’ approach. Every month he works in different parts of the airline, on the ground or with the cabin crew. He says he learns a lot from working on the airline himself. ‘When we moved from the 737 to the Airbus, the Airbus is slightly higher off the ground and my guys said we need belt loaders. It would have cost us about US$1 million. We used to just put the bags manually into the cargo hold on a 737,’ he said.3 Fernandes initially rejected the idea of using belt loaders. However, when he worked alongside ground staff on the Airbus, he says he almost ‘broke his back’ loading the plane. He told his staff ‘“… you’re right, we’ll get belt loaders”… I made the decision instantaneously.’4 Things seemed to be going well until December 2014, when AirAsia Indonesia flight QZ8501 crashed into the Java Sea on a flight from Surabaya to Singapore, with the loss of all 162 passengers and crew. Against the advice of his lawyers, Fernandes flew to Indonesia to meet the families of all the crash victims. He also gave them his mobile phone number, and remained in personal contact with the families, even some years later.5 Despite the tragic circ*mstances, this people-focused approach earned him positive feedback.6 Naturally, after an airline disaster, there will be falls in passenger numbers, profits and share price. AirAsia has also had some legal problems relating to its expansion in India.7 Nevertheless, in 2015, Tony Fernandes was listed in Time Magazine’s World’s 100 Most influential People, the airline’s share price has since more than recovered and in 2017 AirAsia was named in the Skytrax Awards as the World’s Best Low-Cost Airline for the ninth year in a row.8 The company says it has now carried over 220 million guests.9 Leadership often isn’t easy, and things don’t always go smoothly. As Tony Fernandes and the rest of the managers at AirAsia have discovered, despite any difficulties you may face, leadership is the process of leadership influencing others to achieve group or the process of influencing others to achieve group or organisational goals. organisational goals After reading the next two sections, you should be able to: ● explain what leadership is PPLY E A Get started ● describe who leaders are and with the media quiz: Camp Bow Wow: Leadership what effective leaders do.

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It’s hard to imagine the Virgin group launching a new venture without the extravert Richard Branson playing to the cameras. Branson lost a bet with fellow airline owner Tony Fernandes over the outcome of a Formula One race and had to dress as a female flight attendant on one of Fernandes’ AirAsia flights. On time, and in a dress, Branson turned his cross-dressing shift on AirAsia into a PR event with ticket sales donated to charity. Branson and Fernandes are extroverts. Indra Nooyi, PepsiCo’s CEO, talks straight, has a sharp sense of humour and sings in the hallways wherever she is. Nooyi is also an extrovert. By contrast, Douglas Conant, former CEO of Campbell Soup Company, is an introvert who says that he feels exhausted after spending time in large groups of people he doesn’t know.13 Which one is likely to be successful as a CEO? According to a survey of 1542 senior managers, it’s the extrovert. Forty-seven per cent of those 1542 senior managers felt that extroverts make better CEOs, while 65 per cent said that being an introvert hurts a CEO’s chances of success.14 So clearly, senior managers believe that extroverted CEOs are better leaders. But are they? Not necessarily. In fact, a relatively high percentage of CEOs, 40 per cent, are introverts. Former Sara Lee CEO Brenda Barnes said, ‘I’ve always been shy … People wouldn’t call me that [an introvert], but I am’.15 Indeed, as CEO, Barnes turned down all speaking requests and rarely gave interviews. So what makes a good leader? Does leadership success depend on who leaders are, such as introverts or extroverts, or on what leaders do and how they behave? Let’s learn more about who leaders are by investigating: ● leadership traits ● leadership behaviours.

LEADERSHIP TRAITS Trait theory is one way to describe who leaders are. Trait theory says that effective leaders possess a similar set of traits or characteristics. Traits are relatively stable characteristics, such as abilities, psychological motives or consistent patterns of behaviour. For example, according to trait theory, leaders are taller and more confident and have greater physical stamina (i.e. higher energy levels) than non-leaders. Indeed, while just 14.5 per cent of men are over 1.8 metres tall, 58 per cent of CEOs from companies listed in business magazine Fortune’s top 500 are 1.8 metres or taller.16 Trait theory is also known as the ‘great person’ theory because early versions of the theory stated that leaders are born, not made. In other words, you either have the ‘right stuff’ to be a leader, or you don’t. More to the point, if you don’t, there is no way to get ‘it’.

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For some time, it was thought that trait theory was wrong and that there are no consistent trait differences between leaders and non-leaders, or between effective and ineffective leaders. However, more recent evidence shows that successful leaders are indeed different from the rest of us.17 More specifically, leaders are different from non-leaders in the following traits: drive, the desire to lead, honesty/ integrity, self-confidence, emotional stability, cognitive ability and knowledge of the business (see Figure 13.1).18

WHO LEADERS ARE AND WHAT LEADERS DO

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Honesty and integrity Emotional stability

Drive

Knowledge of the business Cognitive ability

Desire to lead Self-confidence

FIGURE 13.1

There are many ways that leaders are different from non-leaders Source: D. Sacks, ‘The accidental guru’, Fast Company, 1 January 2005: 64.

Drive refers to high levels of effort and is characterised by achievement, motivation, initiative, energy and tenacity. In terms of achievement and ambition, leaders always try to make improvements or achieve success in what they’re doing. Because of their initiative, they have strong desires to promote change or solve problems. At Amazon, founder Jeff Bezos calls this ‘high-velocity decision making’. Bezos says, ‘… most decisions should probably be made with somewhere around 70 per cent of the information you wish you had. If you wait for 90 per cent, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.’19 Leaders typically have more energy, and they have to, given the long hours they put in and followers’ expectations that they be positive and ‘up’. Some surveys show that many famous leaders average fewer hours of sleep and many more hours of work than non-leaders. For example, Britain’s wartime leader Winston Churchill slept for about five hours per night, with an afternoon nap. Inventors Leonardo da Vinci and Thomas Edison allegedly slept two

to three hours per day, Barack Obama and Richard Branson slept for six hours, Margaret Thatcher for four and Donald Trump is said to sleep three hours a night ‘to stay ahead of the competition’.20 Leaders are also more tenacious than non-leaders and are better at overcoming obstacles and problems that would deter most of us. Successful leaders also have a stronger desire to lead. They want to be in charge and think about ways to influence or convince others about what should or shouldn’t be done. Honesty and integrity is also important to leaders. Honesty, being truthful with others, is a cornerstone of leadership. Without honesty, leaders won’t be trusted. When leaders have it, subordinates are willing to overlook other flaws. Amazon’s Jeff Bezos says, ‘If you have conviction on a particular direction even though there’s no consensus, it’s helpful to say, “Look, I know we disagree on this but will you gamble with me on it? Disagree and commit?”’21 He cites the example of a new Amazon Studios TV show that he didn’t like, but which was still approved for funding. ‘I told the team my [negative] view … They had a completely different opinion and wanted to go ahead. I wrote back right away with, “I disagree and commit and hope it becomes the most watched thing we’ve ever made.”’22 Integrity is the extent to which leaders do what they say they will do. Leaders may be honest and have good intentions, but if they don’t consistently deliver on what they promise, they won’t be trusted.

WORKPLACE AND COMMUNITY

CONSIDERATE LEADER BEHAVIOUR: SHOULD THE BOSS BE A HUGGER? Receptionist Felicia Flewelling gets a hug and a twirl from her boss each morning. She says, ‘You go in for like a regular hug and then you just spin in a circle. It makes it a lot easier to come into work.’ Sam Lavoie got hugged by the same boss during his job interview. ‘I was like, “Oh, OK, this is happening” … It was two strangers just hugging.’ Now that he’s been hired, he’s declared a non-hugging policy, which the boss respects. Attorney Aaron Goldstein warns his corporate clients against initiating hugs. The only safe hug, he says, is the ‘HR hug’, which is a sideways, one-armed momentary hug across the back of the shoulders to be used when you’re ‘looking not to offend anyone’. Similar concerns have given rise to legal action in Australia. As an example, the Commonwealth Fair Work Commission in January 2018 ruled that Secure Cash, a Perth cash courier company, was justified in sacking a middle-aged male employee who hugged and asked for a birthday kiss from an 18 year-old fellow employee. SOURCE: R. FEINTZEIG, ‘EMBRACEABLE YOU: WHEN THE CEO IS A HUGGER’, WALL STREET JOURNAL, 16 APRIL 2017, ACCESSED 30 APRIL 2017, HTTPS://WWW.WSJ.COM/ARTICLES/ EMBRACEABLE-YOU-WHEN-THE-CEO-IS-A-HUGGER-1492380506; D. MARIN-GUZMAN, ‘FAIR WORK COMMISSION RULES HUGGING TEENAGE STAFF GROUNDS FOR DISMISSAL’, AUSTRALIAN FINANCIAL REVIEW, 31 JANUARY 2018, ACCESSED 28 FEBRUARY 2019, HTTPS:// WWW.AFR.COM/NEWS/POLICY/INDUSTRIAL-RELATIONS/FAIR-WORK-COMMISSION-RULESHUGGING-TEENAGE-STAFF-GROUNDS-FOR-DISMISSAL-20180131-H0QY9M.

Self-confidence , believing in one’s abilities, also distinguishes leaders from non-leaders. Self-confident leaders are more decisive and assertive and are more likely to gain others’ confidence. Moreover, self-confident leaders will admit mistakes because they view them as learning opportunities rather than as refutation of their leadership capabilities. This also means that leaders have emotional stability. Even when things go wrong, they remain even-tempered and consistent in their outlook and in the way they treat others. After experiencing disappointing results in its mobile unit, Samsung appointed D. J. Koh, who is known for his even-tempered demeanour, to lead the division. Having joined Samsung out of college, Koh quickly rose through the company ranks because he was well-liked and kept a low-profile. In contrast to his hard-charging predecessor, employees describe Koh as a ‘predictable, realistic and reasonable executive who is hardworking and direct’. One of his close colleagues adds, ‘He’s not a screamer.’23 Leaders who can’t control their emotions, who anger quickly or attack and blame others for mistakes, are unlikely to be trusted. Leaders are also smart; they typically have strong cognitive abilities. This doesn’t mean that leaders are geniuses, far from it. But it does mean that leaders have the capacity to analyse large amounts of seemingly unrelated, complex information and see patterns, opportunities or threats where others might not see them. Finally, leaders also ‘know their stuff’, which means they have superior technical knowledge about the businesses they run. Leaders who have a good knowledge of the business understand the key technological decisions and concerns facing their companies. More often than not, studies indicate that effective leaders have long, extensive experience in their industries.

LEADERSHIP BEHAVIOUR So far, you’ve read about who leaders are. Traits alone are not enough to make a successful leader; however, they are a precondition for success. After all, it’s hard to imagine a truly successful leader who lacks all of these qualities. Leaders who have these traits (or many of them) must then take actions that encourage people to achieve group or organisational goals.24 Therefore, we now examine what leaders do, meaning the behaviours they perform or the actions they take to influence others to achieve group or organisational goals. When asked in an interview, ‘Are leaders born or made?’, the former CEO of Procter & Gamble, Alan G. Lafley, answered, ‘Clearly made. You choose to lead. You choose to want to make a difference, to make the world better in some meaningful way. Until that choice is made, you don’t have a leader. You have a lump of clay’.25 Researchers at the University of Michigan, Ohio State University and the University of Texas examined the specific

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behaviours that leaders use to improve subordinate satisfaction and performance. Hundreds of studies were conducted and hundreds of leader behaviours were examined. At all three universities, two basic leader behaviours emerged as central to successful leadership: initiating structure (called job-centred leadership at the University of Michigan and concern for production at the University of Texas) and considerate leader behaviour (called employee-centred leadership at the University of Michigan and concern for people at the University of Texas).26 These two leader behaviours form the basis for many of the leadership theories discussed in this chapter. Initiating structure is the degree to initiating structure which a leader structures the roles of the degree to which a leader structures the roles followers by setting goals, giving directions, of followers by setting setting deadlines and assigning tasks. A goals, giving directions, setting deadlines and leader’s ability to initiate structure primarily assigning tasks affects subordinates’ job performance. While the late Steve Jobs was famous as a visionary leader for Apple, he was also famous for his temper. In the words of one commentator, his successor, current Apple CEO Tim Cook ‘... behaves much more like a coach who trusts his players than the manipulative mastermind Jobs was’.27 While Steve Jobs was focused on the development of the iPhone, Cook takes a more measured approach and looks to software and the App Store (now Apple’s fastest growing segment) for his company’s continued growth and development.28 Consideration is the extent to which consideration a leader is friendly, approachable and the extent to which a leader is friendly, supportive and shows concern for approachable and employees. Consideration primarily supportive and shows concern for employees affects subordinates’ job satisfaction. Specific leader consideration behaviours include listening to employees’ problems and concerns, consulting with employees before making decisions and treating employees as equals. At Airbnb, Chip Conley joined at age 52 as the strategic advisor for hospitality and leadership. He had previously run a boutique hotel chain for 24 years, but he’d never used Airbnb, didn’t know how to code software, was twice as old as most employees and had a new boss, ‘a smart guy’ 21 years his junior. He quickly adopted a considerate leadership style. He says, ‘More than anything, I listened and watched intently, with as little judgment or ego as possible … Part of my job was to just observe. Often I would leave a meeting and discreetly ask one of my fellow leaders, who might be two decades younger than I was, if they were open to some private feedback on how to read the emotions in the room, or the motivations of a particular engineer, a little more effectively.’29 Often he would say, ‘I’ll offer you some emotional intelligence for your digital intelligence.’30 Similarly, at Twitter, CEO Jack Dorsey says that he has stopped being a micromanager and become a listener, who 244

asks questions to facilitate discussion and strategic direction with his leadership team.31 Although researchers at all three universities mentioned earlier generally agreed that initiating structure and consideration were basic leader behaviours, their interpretation of the interaction and effectiveness of these behaviours differed. The University of Michigan studies indicated that initiating structure and consideration were mutually exclusive behaviours on opposite ends of the same continuum. In other words, leaders who wanted to be more considerate would have to do less initiating of structure (and vice versa). The University of Michigan studies also indicated that only considerate leader behaviours (i.e. employeecentred behaviours) were associated with successful leadership. By contrast, researchers at Ohio State University and the University of Texas found that initiating structure and consideration were independent behaviours, meaning that leaders can be considerate and initiate structure at the same time. Additional evidence confirms this finding.32 The same researchers also concluded that the most effective leaders excelled at both initiating structure and considerate leader behaviours. This ‘high–high’ approach can be seen in the upper right corner of the Blake/Mouton leadership grid, shown in Figure 13.2. Blake and Mouton used two leadership behaviours, concern for people (i.e. consideration) and concern for production (i.e. initiating structure), to categorise five different leadership styles. Both behaviours are rated on a nine-point scale, with 1 representing ‘low’ and 9 representing ‘high’. Blake and Mouton suggest that a ‘high–high’ or ‘9, 9’ leadership style is the best. They call this style team management because leaders who use it display a high concern for people (9) and a high concern for production (9). By contrast, leaders use a ‘9, 1’ authority–compliance leadership style when they have a high concern for production and a low concern for people. A ‘1, 9’ country club style occurs when leaders care about having a friendly, enjoyable work environment but don’t really pay much attention to production or performance. The worst leadership style, according to the grid, is the ‘1, 1’ impoverished leader, who shows little concern for people or production and does the bare minimum needed to keep his or her job. Finally, the ‘5, 5’ middle-of-the-road style occurs when leaders show a moderate amount of concern for both people and production.33 Is the team management style, with a high concern for production and a high concern for people, the ‘best’ leadership style? Logically, it would seem so. Why wouldn’t you want to show high concern for both people and production? Nonetheless, nearly 50 years of research indicates that there isn’t one ‘best’ leadership style. The ‘best’ leadership style depends on the situation. In other words, no one leadership behaviour by itself and no one combination of leadership behaviours works well across all situations and employees.

High 9

1, 9 Country club management Thoughtful attention to the needs of people for satisfying relationships leads to a comfortable, friendly organisation atmosphere and work tempo.

9, 9 Team management Work accomplished is from committed people: interdependence through a ‘common stake’ in organisation purpose leads to relationships of trust and respect.

Concern for people

6 5, 5 Middle-of-the-road management Adequate organisation performance is possible through balancing the necessity to get out work with maintaining morale of people at a satisfactory level.

Low

1, 1 Impoverished management Exertion of minimum effort to get required work done is appropriate to sustain organisation membership.

Low

FIGURE 13.2

9, 1 Authority-compliance Efﬁciency in operations results from arranging conditions of work in such a way that human elements interfere to a minimum degree.

Concern for production

9 High

Blake/Mouton leadership grid

Source: R. R. Blake & A. A. McCanse, ‘The Leadership Grid®’, Leadership Dilemmas – Grid Solutions (Houston: Gulf Publishing Company): 21. Copyright © 1991, by Scientific Methods, Inc. Reproduced by permission of the owners.

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After leader traits and behaviours, the situational approach to leadership is the third major method used in the study of leadership. We review three major situational approaches to leadership – Fiedler’s contingency theory, path–goal theory and Vroom and leadership style Yetton’s normative decision model. All the way a leader generally behaves towards followers assume that the effectiveness of any leadership style, the way a leader generally behaves PPLY A E Complete the towards followers, depends ‘Management decision’ worksheet for Chapter 13 on the situation.34

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SITUATIONAL APPROACHES TO LEADERSHIP

According to situational leadership theories, there is no one ‘best’ leadership style. But one of these situational theories differs from the other two in one significant way. Fiedler’s contingency theory assumes that leadership styles are consistent and difficult to change. Therefore, leaders must be placed in or ‘matched’ to a situation that fits their leadership style. In contrast, the other situational theories assume that leaders are capable of adapting and adjusting their leadership styles to fit the demands of different situations. After reading the next three sections, you should be able to: ● explain Fiedler’s contingency theory ● describe how path–goal theory works ● explain the normative decision theory.

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PUTTING LEADERS IN THE RIGHT SITUATION: FIEDLER’S CONTINGENCY THEORY

Fiedler’s contingency theory states that in order to maximise work group performance, leaders must be matched to the right leadership situation.35 More specifically, the first basic assumption of Fiedler’s theory is that leaders are effective when the work groups they lead perform well. So, instead of judging leaders’ effectiveness by what the leaders do (i.e. initiating structure and consideration) or who they are (i.e. trait theory), Fiedler assesses leaders by the conduct and performance of the people they supervise. Second, Fiedler assumes that leaders are generally unable to change their leadership styles and that they will be more effective when their styles are matched to the proper situation. Third, Fiedler assumes that the favourableness of a situation for a leader depends on the degree to which the situation permits the leader to influence the behaviour of group members. Thus, Fiedler’s third assumption is consistent with our definition of leadership, which is the process of influencing others to achieve group or organisational goals. Let’s learn more about Fiedler’s contingency theory by examining: ● the least-preferred co-worker leadership style ● situational favourableness ● how to match leadership styles to situations.

contingency theory a leadership theory that states that in order to maximise work group performance, leaders must be matched to the situation that best fits their leadership style

LEADERSHIP STYLE: LEAST-PREFERRED CO-WORKER When Fiedler refers to leadership style, he means the way that leaders generally behave towards their followers. Do the leaders yell and scream and blame others when things

go wrong? Or do they correct mistakes by listening and then quietly, but directly, making their point? Do they let others make their own decisions and hold them accountable for the results? Or do they micromanage, insisting that all decisions be approved first by them? Fiedler also assumes that leadership styles are tied to leaders’ underlying needs and personalities. Furthermore, since personality and needs are relatively stable, he assumes that leaders are generally incapable of changing their leadership styles. In other words, the way that leaders treat people now is probably the way they’ve always treated others. Fiedler uses a questionnaire called the least-preferred co-worker (LPC) scale to measure leadership style (see Figure 13.3). When completing the LPC scale, people are instructed to consider all of the people with whom they have ever worked and then to choose the one person with whom they have worked least well. Fiedler explains, ‘This does not have to be the person you liked least well, but should be the one person with whom you have the most trouble getting the job done’.36 Would you describe your LPC as pleasant, friendly, supportive, interesting, cheerful and sincere? Or would you describe the person as unpleasant, unfriendly, hostile, boring, gloomy and insincere? People who describe their LPC in a positive way (scoring 64 and above on the full inventory of 18 oppositional pairs) have relationship-oriented leadership styles. After all, if they can still be positive about their least-preferred co-worker, they must be people oriented. By contrast, people who describe their LPC in a negative way (scoring 57 or below) have task-oriented leadership styles. Given a choice, they’ll focus first on getting the job done and second on making sure everyone gets along. Finally, those with moderate scores (from 58 to 63) have a more flexible leadership style and can be somewhat relationship oriented or somewhat task oriented. (See Table 13.1 for a quick summary of all of the different descriptions and their leadership styles.)

Pleasant

Unpleasant

Friendly

Unfriendly

Supportive

Hostile

Boring

Interesting

Gloomy

Cheerful

Insincere

Sincere

FIGURE 13.3

Fiedler’s least-preferred co-worker (LPC) scale. How would you rank your least-preferred co-worker?

Source: F. E. Fiedler & M. M. Chemers, Improving leadership effectiveness: the leader match concept, 2nd ed. (New York: John Wiley & Sons, 1984).

246

TABLE 13.1

ENGAG

How LPC is described

Leadership style

positively

relationship-oriented

negatively

task-oriented

moderately

flexible

EO VID

PPLY E A

Descriptions of the LPC and their corresponding leadership style

SITUATIONAL FAVOURABLENESS

Find out more about leadership style in relation to the LPC scale with this self-assessment

Fiedler assumes that leaders will be more effective when their leadership styles are matched to the proper situation. More specifically, F i e d l e r d e fi n e s s i t u a t i o n a l situational favourableness favourableness as the degree to which the degree to which a a particular situation either permits or particular situation either denies a leader the chance to influence permits or denies a leader the chance to influence the behaviour of group members.37 In the behaviour of group highly favourable situations, leaders find members that their actions influence followers, but in highly unfavourable situations, leaders have little or no success influencing the people they are trying to lead. Three situational factors determine the favourability of a situation: leader–member relations, task structure and position power. The most important situational factor is leader–member relations, which leader–member relations refers to how well followers respect, the degree to which trust and like their leaders. When leader– followers respect, trust and member relations are good, followers like their leaders task structure trust the leader and there is a friendly the degree to which work atmosphere. Task structure is the the requirements of a degree to which the requirements of a subordinate’s tasks are clearly specified subordinate’s tasks are clearly specified. position power With highly structured tasks, employees the degree to which have clear job responsibilities, goals and leaders are able to hire, fire, reward and punish procedures. Position power is the workers degree to which leaders are able to hire, fire, reward and punish workers. The more influence leaders have over hiring, firing, rewards and punishments, the greater their power. Table 13.2 shows how leader–member relations, task structure and position power can be combined into eight situations that differ in their favourability to leaders. TABLE 13.2

In general, Situation I, on the left side of Table 13.2, is the most favourable leader situation. Followers like and trust their leaders and know what to do because their tasks are highly structured. Also, the leaders have the formal power to influence workers through hiring, firing, rewarding and punishing them. Therefore, in Situation I, it’s relatively easy for a leader to influence followers. By contrast, Situation VIII, on the right side of Table 13.2, is the least favourable situation for leaders. Followers don’t like or trust their leaders. Followers are not sure what they’re supposed to be doing because their tasks or jobs are highly unstructured. Finally, leaders find it difficult to influence followers without the ability to hire, fire, reward or punish the people who work for them. In short, it’s very difficult to influence followers given the conditions found in Situation VIII.

MATCHING LEADERSHIP STYLES TO SITUATIONS After studying thousands of leaders and followers in hundreds of different situations, Fiedler found that the performance of relationship- and task-oriented leaders followed the pattern displayed in Figure 13.4. Relationshiporiented leaders, with high LPC scores, were better leaders (i.e. their groups performed more effectively) under moderately favourable situations. In moderately favourable situations, the leader may be liked somewhat, tasks may be somewhat structured and the leader may have some position power. In this situation, a relationship-oriented leader improves leader–member relations, which is the most important of the three situational factors. In turn, morale and performance improve. By contrast, as Figure 13.4 shows, task-oriented leaders, with low LPC scores, are better leaders in highly favourable situations or in situations which are very unfavourable. Task-oriented leaders do well in favourable situations where leaders are liked, tasks are structured and the leader has the power to hire, fire, reward and punish. In these favourable situations, task-oriented leaders effectively step on the accelerator of a well-tuned car. Their focus on performance sets the goal for the group, which then charges forward to meet it. But task-oriented leaders also do well in unfavourable situations where leaders are disliked, tasks are unstructured and the leader doesn’t have

Situational favourableness

Leader–member relations

Good

Poor

Task structure

High

Low

High

Low

Position power

Strong

Weak

Strong

Weak

Strong

Weak

Strong

Weak

III

VII

VIII

Situation

Favourable

Moderately favourable

Unfavourable

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Group performance

Good

Poor

Leader–member relations

Good

Poor

Task structure

High

Low

High

H igh

Power Situation

Low

Strong

Weak

Strong

Weak

Strong

Weak

Strong

Weak

III

VII

VIII

Moderately favourable

Relationshiporiented leaders

Unfavourable

Matching leadership styles to situations

the power to hire, fire, reward and punish. In these unfavourable situations, the task-oriented leader sets goals, which focus attention on performance and clarify what needs to be done, thus overcoming low task structure. This is enough to jump-start performance, even if workers don’t like or trust the leader. Finally, though not shown in Figure 13.4, people with moderate LPC scores, who can be somewhat relationship oriented or somewhat task oriented, tend to do fairly well in all situations because they can adapt their behaviour. Typically, though, they don’t perform quite as well as relationship-oriented or task-oriented leaders whose leadership styles are well matched to the situation. Recall that Fiedler assumes that leaders are incapable of changing their leadership styles. Accordingly, the key to applying Fiedler’s contingency theory in the workplace is to accurately measure and match leaders to situations or to teach leaders how to change situational favourableness by changing leader–member relations, task structure or position power. Though matching or placing leaders in appropriate situations works particularly well, practising managers have had little luck with ‘reengineering situations’ to fit their leadership styles. The primary problem, as you’ve no doubt realised, is the complexity of the theory. In a study designed to teach leaders how to reengineer their situations to fit their leadership styles, Fiedler found that most of the leaders simply did not understand what they were supposed to do to change their leadership situations. Furthermore, if they didn’t like their LPC profile (perhaps they felt they were more relationship oriented than their scores indicated), they arbitrarily changed it to better suit their view of themselves. Of course, the theory won’t work as well if leaders are attempting to change situational factors to fit their perceived leadership style and not their real leadership style.38

248

Low

Poor

Position

Favourable

FIGURE 13.4

Poor

Taskoriented leaders

LO4

ADAPTING LEADER BEHAVIOUR: PATH–GOAL THEORY

Just as its name suggests, path–goal path–goal theory theory states that leaders can increase a leadership theory that states that leaders can subordinate satisfaction and performance increase subordinate by clarifying and clearing the paths to satisfaction and performance by clarifying, goals, and by increasing the number and and clearing the paths to kinds of rewards available for goal goals and by increasing the number and kinds of attainment. Put another way, leaders need rewards available for goal to clarify how followers can achieve attainment organisational goals, take care of problems that prevent followers from achieving goals and then find more and varied rewards to motivate followers to achieve those goals.39 Leaders must meet two conditions for path clarification, path clearing and rewards to increase followers’ motivation and effort. First, leader behaviour must be a source of immediate or future satisfaction for followers. Therefore, the things you do as a leader must please your followers today or lead to activities or rewards that will satisfy them in the future. Second, while providing the coaching, guidance, support and rewards necessary for effective work performance, leader behaviours must complement and not duplicate the characteristics of followers’ work environments. Thus, leader behaviours must offer something unique and valuable to followers beyond what they’re already experiencing as they do their jobs or what they can already do for themselves. In contrast to Fiedler’s contingency theory, path–goal theory assumes that leaders can change and adapt their leadership styles. Figure 13.5 illustrates this process, showing that leaders change and adapt their leadership styles contingent on their subordinates or the environment in which those subordinates work.

Subordinate contingencies • Perceived ability • Locus of control • Experience

Leadership styles • Directive • Supportive • Participative • Achievement-oriented

Outcomes • Subordinate satisfaction • Subordinate performance

Environmental contingencies • Task structure • Formal authority system • Primary work group FIGURE 13.5

LEADERSHIP STYLES As illustrated in Figure 13.5, the four leadership styles in path–goal theory are directive, supportive, participative and achievement oriented. 42 Directive leadership involves letting employees know precisely what is expected of them, giving them specific guidelines for the performance of their tasks, scheduling work, setting standards of performance and making sure that people follow standard rules and regulations.

directive leadership a leadership style in which the leader lets employees know precisely what is expected of them, gives them specific guidelines for performing tasks, schedules work, sets standards of performance and makes sure that people follow standard rules and regulations

Path–goal theory MGMT FACT

Let’s learn more about path–goal theory by examining: ● the four kinds of leadership styles that leaders use ● the subordinate and environmental contingency factors that determine when different leader styles are effective ● the outcomes of path–goal theory in improving employee satisfaction and performance.

WORKPLACE AND COMMUNITY

KNOWING WHEN TO GO Have you noticed that, sometimes, when a sporting team is losing and no one really knows why, the coach is often dismissed and the team’s performance suddenly improves? Knowing when to go is one of the skills (or sometimes one of the necessities) of leadership. AMP Limited has been one of the biggest, best known and most trusted of Australia’s wealth-management companies. Founded in Sydney in 1849 as the Australian Mutual Provident Society, it was a non-profit life insurance provider, later ‘de-mutualised’ to become one of Australia’s biggest corporations. By 2018, AMP Limited had 5600 employees, 3.8 million customers in Australia and New Zealand, about 750 000 shareholders (mainly ‘Mum and Dad’ investors) and about $12 billion in funds under management.40 However, during 2018, in hearings of the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Commission was told of AMP’s 2013 decision to charge customers for a range of services which were not provided. The Chairperson of AMP since 2016 was Catherine Brennan, one of the country’s most highly-regarded businesspeople, and one of the few women to head a really major corporation. While it was not alleged that Brennan personally authorised those practices, sufficient heat and controversy was generated for her to resign in April 2018.41 Sometimes a leader has to leave, in the interests of the organisation.

TURNOVER STATS A Price Waterhouse Cooper’s survey in 2016 found that time in the job for CEOs had increased in Australia to a median tenure of 5.5 years, ahead of the global median (5.3 years) for the first time since 2010. The survey also found that 9 per cent of Australian CEOs were women, ahead of the global average of 3 per cent. PwC’s analysis of CEO tenure suggested that there were two main factors behind the more stable CEO employment – an increased emphasis on internal promotion from within the company, and better succession planning and preparation.43

Supportive leadership involves

supportive leadership a leadership style in which the leader is friendly and approachable, shows concern for employees and their welfare, treats them as equals and creates a friendly climate

being approachable and friendly to employees, showing concern for them and their welfare, treating them as equals and creating a friendly climate. Supportive leadership is very similar to considerate leader behaviour. Supportive leadership often results in employee satisfaction with the job and with leaders. This leadership style may also result in improved performance when it increases employee confidence, lowers employee job stress or improves relations and trust between employees and leaders.44 participative Participative leadership involves leadership consulting employees for their a leadership style in which the leader consults suggestions and input before making employees for their decisions. Participation in decision making suggestions and input should help followers understand which before making decisions achievementgoals are most important and clarify the oriented leadership paths to accomplishing them. a leadership style in Furthermore, when people participate in which the leader sets challenging goals, has decisions, they become more committed high expectations of employees and displays to making them work.

Achievement-oriented leadership means setting challenging goals, having high expectations of employees and Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202

confidence that employees will assume responsibility and put in extraordinary effort

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displaying confidence that employees will assume responsibility and put forth extraordinary effort. Asustek, a Taiwanese computer and phone maker, is the world’s largest producer of computer motherboards and the fifth largest producer of laptop computers (sold under the Asus brand). CEO Jerry Shen has challenged his managers and employees to make Asustek the world’s largest supplier of touch-screen notebooks and the world’s second-largest seller of tablets, just behind Apple. Chen believed its Nexus 7, a US$199 Android tablet with a 7-inch screen, and its VivoBook, a US$500 Android tablet with an 11.6-inch screen, combined with its plans to offer an inexpensive 7-inch Windows 8 tablet, would help Asustek achieve this challenging goal. One year after announcing the goal, Asustek had moved ahead of Amazon’s Kindle tablets to third place behind Samsung and Apple.45

SUBORDINATE AND ENVIRONMENTAL CONTINGENCIES As shown in Figure 13.5, path–goal theory specifies that leader behaviours should be fitted to subordinate characteristics. The theory identifies three kinds of subordinate contingencies: perceived ability, experience and locus of control. Perceived ability is simply how much ability subordinates believe they have for doing their jobs well. Subordinates who perceive that they have a great deal of ability will be dissatisfied with directive leader behaviours. Experienced employees are likely to react in a similar way. Since they already know how to do their jobs (or perceive that they do), they don’t need or want close supervision. By contrast, subordinates with little experience or little perceived ability will welcome directive leadership. Locus of control is a personality measure that indicates the extent to which people believe that they have control over what happens to them in life. Internals believe that what happens to them, good or bad, is largely a result of their choices and actions. Externals, on the other hand, believe that what happens to them is caused by external forces beyond their control. Accordingly, externals are much more comfortable with a directive leadership style, while internals greatly prefer a participative leadership style because they like to have a say in what goes on at work. Path–goal theory specifies that leader behaviours should complement rather than duplicate the characteristics of followers’ work environments. There are three kinds of environmental contingencies: task structure, the formal authority system and the primary work group. As in Fiedler’s contingency theory, task structure is the degree to which the requirements of a subordinate’s tasks are clearly specified. When task structure is low and tasks are unclear, directive leadership should be used because it complements the work environment. When task structure is high and tasks are clear, however, directive leadership is

250

not needed because it duplicates what task structure provides. Alternatively, when tasks are stressful, frustrating or dissatisfying, leaders should respond with supportive leadership.

MGMT IN PRACTICE

BASIC ASSUMPTIONS OF PATH–GOAL THEORY • • • • •

Define goals and clarify paths to meet those goals. Enable goal attainment by removing or circumventing any obstacles. Motivate employees by offering rewards for goal attainment. Enhance employee satisfaction by increasing the types of reward available for good performance. Offer employees something beyond what they’re experiencing or can already do for themselves.46

The formal authority system is an organisation’s set of procedures, rules and policies. When the formal authority system is unclear, directive leadership complements the situation by reducing uncertainty and increasing clarity. But when the formal authority system is clear, directive leadership is redundant and should not be used. Primary work group refers to the amount of workoriented participation or emotional support that is provided by an employee’s immediate work group. Participative leadership should be used when tasks are complex and there is little existing work-oriented participation in the primary work group. When tasks are stressful, frustrating or repetitive, supportive leadership is called for. Finally, since keeping track of all of these subordinate and environmental contingencies can get a bit confusing, Table 13.3 provides a summary of when directive, supportive, participative and achievement-oriented leadership styles should be used.

OUTCOMES Does following path–goal theory improve subordinate satisfaction and performance? Evidence suggests that it does.47 In particular, people who work for supportive leaders are much more satisfied with their jobs and their bosses. Likewise, people who work for directive leaders are satisfied with their jobs and bosses (but not quite as much as when their bosses are supportive) and perform their jobs better, too. Does adapting one’s leadership style to subordinate and environmental characteristics improve subordinate satisfaction and performance? At that point, because of the difficulty of completely testing this complex theory, it was too early to tell.48 However, since the data clearly show that it makes sense for leaders to be both

TABLE 13.3

Path–goal theory: when to use directive, supportive, participative or achievement-oriented leadership

Directive leadership

Supportive leadership

Participative leadership

Unstructured tasks

Structured, simple, repetitive tasks; Complex tasks stressful, frustrating tasks

Workers with external locus of control

Workers lack confidence

Workers with internal locus of control

Inexperienced workers

Clear formal authority system

Experienced workers

Workers with low perceived ability

Workers with high perceived ability

supportive and directive, it also makes sense that leaders could improve subordinate satisfaction and performance by adding participative and achievement-oriented leadership styles to their capabilities as leaders.

LO5

ADAPTING LEADER BEHAVIOUR: NORMATIVE DECISION THEORY

normative decision theory a theory that suggests how leaders can determine an appropriate amount of employee participation when making decisions

Achievement-oriented leadership

Unchallenging tasks

Jago model) helps leaders decide how much employee participation (from none to letting employees make the entire decision) should be used when making decisions.49 Let’s learn more about normative decision theory by investigating: ● decision styles ● decision quality and acceptance.

DECISION STYLES

Many people believe that making tough decisions is at the heart of leadership. Yet experienced leaders will tell you that deciding how to make decisions is just as important. The normative decision theory (also known as the Vroom-Yetton-

Leader solves the problem or makes the decision

Unlike nearly all of the other leadership theories discussed in this chapter, which have specified leadership styles – that is, the way a leader generally behaves towards followers – the normative decision theory specifies five different decision styles, or ways of making decisions. (See Chapter 5 for a more complete review of decision making in organisations.) As shown in Figure 13.6, those styles vary from autocratic

Leader is willing to accept any decision supported by the entire group

AI Using information available at the time, the leader solves the problem or makes the decision.

CI The leader shares the problem and gets ideas and suggestions from relevant employees on an individual basis. Individuals are not brought together as a group. Then the leader makes the decision, which may or may not reflect their input.

AII The leader obtains necessary information from employees, and then selects a solution to the problem. When asked to share information, employees may or may not be told what the problem is.

CII The leader shares the problem with employees as a group, obtains their ideas and suggestions, and then makes the decision, which may or may not reflect their input.

GII The leader shares the problem with employees as a group. Together, the leader and employees generate and evaluate alternatives and try to reach an agreement on a solution. The leader acts as a facilitator and does not try to influence the group. The leader is willing to accept and implement any solution that has the support of the entire group.

FIGURE 13.6

Normative theory, showing different decision styles and the appropriate levels of employee participation

Source: Adapted from V. H. Vroom & P. W. Yetton, Leadership and Decision Making (Pittsburgh: University of Pittsburgh Press, 1973): 13. Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202

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decisions (AI or AII) on the left, in which leaders make the decisions by themselves; to consultative decisions (CI or CII),

in which leaders share problems with subordinates but still make the decisions themselves; to group decisions (GII) on the right, in which leaders share the problems with subordinates and then have the group make the decisions.

DECISION QUALITY AND ACCEPTANCE According to the normative decision theory, using the right degree of employee participation improves the quality of decisions and the extent to which employees accept and are committed to decisions. Table 13.4 lists the decision rules that normative decision theory uses to increase decision quality and employee acceptance and commitment. The quality, leader information, subordinate information, goal congruence and problem structure rules are used to increase decision quality. For example, the leader information rule states that if a leader doesn’t have enough information to make a decision on his or her own, then the leader should not use an autocratic decision style. The commitment probability, subordinate conflict and commitment requirement rules shown in Table 13.4 are used to increase employee acceptance and commitment to decisions. For example, the ‘commitment requirement rule’ says that if decision acceptance and commitment are important, and the subordinates share the organisation’s goals, then you shouldn’t use an autocratic or consultative style. In other words, if followers want to do what’s best for the company and you need their acceptance and commitment to make a decision work, then use a group decision style and let them make the decision.

TABLE 13.4

As you can see, these decision rules help leaders improve decision quality and follower acceptance and commitment by eliminating decision styles that don’t fit the decision or situation they’re facing. Normative decision theory then allows leaders to operationalise these decision rules in the form of yes/no questions, which are shown in the decision tree displayed in Figure 13.7. You start at the left side of the model and answer the first question, ‘How important is the technical quality of this decision?’ by choosing ‘high’ or ‘low’. Then you continue by answering each question as you proceed along the decision tree until you get to a recommended decision style. Let’s use the model to make the decision of whether to change from a formal business attire policy to a casual wear policy. The problem sounds simple, but it is actually more complex than you might think. Follow the yellow line in Figure 13.7 as we work through the decision in the discussion below.

PROBLEM: CHANGE TO CASUAL WEAR? 1 Quality requirement: How important is the technical quality of this decision? High. This question has to do with whether there are quality differences in the alternatives and whether those quality differences matter. Although most people would assume that quality isn’t an issue here, it really is, given the overall positive changes that generally accompany changes to casual wear. 2 Joint commitment requirement: How important is subordinate commitment to the decision? High. Changes in culture, like dress codes, require subordinate commitment or they fail.

Normative decision theory rules

Decision rules to increase decision quality

Quality rule: if the quality of the decision is important, then don’t use an autocratic decision style. Leader information rule: if the quality of the decision is important, and if the leader doesn’t have enough information to make the decision on his or her own, then don’t use an autocratic decision style. Subordinate information rule: if the quality of the decision is important, and if the subordinates don’t have enough information to make the decision themselves, then don’t use a group decision style. Goal congruence rule: if the quality of the decision is important and subordinates’ goals are different from the organisation’s goals, then don’t use a group decision style. Problem structure rule: if the quality of the decision is important, the leader doesn’t have enough information to make the decision on his or her own and the problem is unstructured, then don’t use an autocratic decision style. Decision rules to increase decision acceptance

Commitment probability rule: if having subordinates accept and commit to the decision is important, then don’t use an autocratic decision style. Subordinate conflict rule: if having subordinates accept the decision is important and critical to successful implementation and subordinates are likely to disagree or end up in conflict over the decision, then don’t use an autocratic or consultative decision style. Commitment requirement rule: if having subordinates accept the decision is absolutely required for successful implementation and subordinates share the organisation’s goals, then don’t use an autocratic or consultative style. Source: Adapted from V. H. Vroom, ‘Leadership’, in Handbook of industrial and organizational psychology, ed. M. D. Dunnette (Chicago: Rand McNally, 1976); V. H. Vroom & A. G. Jago, The new leadership: managing participation in organizations (Englewood Cliffs, NJ: Prentice Hall, 1988).

252

Leadership style Yes

Yes

Ye s

Yes

CP GC

H ig h

Yes

CII AII

Yes

Yes No

Yes

GII

H ig h

SI S1

No PS

Yes

No LI

CII

No No

GII

Yes

CI CII

Yes State QR the problem

Low

Low CR

Yes

High

GII

Problem attributes

FIGURE 13.7

Quality requirement:

How important is the technical quality of this decision?

Commitment requirement:

How important is subordinate commitment to the decision?

Leader’s information:

Do you have sufficient information to make a high-quality decision?

Problem structure:

Is the problem well structured?

Commitment probability:

If you were to make the decision by yourself, is it reasonably certain that your subordinate(s) would be committed to the decision?

Goal congruence:

Do subordinates share the organisational goals to be attained in solving this problem?

Subordinate conflict:

Is conflict among subordinates over preferred solutions likely?

Subordinate information:

Do subordinates have sufficient information to make a high-quality decision?

Normative decision theory tree for determining the level of participation in decision making

3 Leader’s information: Do you have sufficient information to make a high-quality decision? Yes. Let’s assume that you’ve done your homework. Much has been written about casual wear, from how to make the change to the effects it has in companies (almost all positive). 4 Commitment probability: If you were to make the decision by yourself, is it reasonably certain that your

subordinate(s) would be committed to the decision? No. Studies of casual wear find that employees’ reactions are almost uniformly positive. Nonetheless, employees are likely to be angry if you change something as personal as clothing policies without consulting them.

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5 Goal congruence: Do subordinates share the organisational goals to be attained in solving this problem? Yes. The goals that usually accompany a change to casual dress policies are a more informal culture, better communication and less money spent on business attire. 6 Subordinate information: Do subordinates have sufficient information to make a high-quality decision? No. Most employees know little about casual wear policies or even what constitutes casual wear in most companies. Consequently, most companies have to educate employees about casual wear practices and policies before making a decision. 7 CII is the answer: With a CII, or consultative decision process, the leader shares the problem with employees as a group, obtains their ideas and suggestions and then makes the decision, which may or may not reflect their input. So, given the answers to these questions (remember, different managers won’t necessarily answer these questions the same way), the normative decision theory recommends that leaders consult with their subordinates before deciding whether to change to a casual wear policy. How well does the normative decision theory work? A prominent leadership scholar has described it as the best supported of all leadership theories.50 In general, the more managers violate the decision rules in Table 13.4, the less effective their decisions are, especially with respect to subordinate acceptance and commitment.51

STRATEGIC LEADERSHIP

LO6

VISIONARY LEADERSHIP

In Chapter 5, we defined vision as a statement of a company’s purpose or reason for existing. Similarly, visionary leadership creates a positive visionary leadership image of the future that motivates leadership that creates a positive image of the organisational members and provides future that motivates direction for future planning and goal organisational members and provides direction for setting.53 future planning and goal Two kinds of visionary leadership are: setting ● charismatic leadership ● transformational leadership. Even though 25 per cent of Japanese online purchases are made on rakuten.com, CEO Hiroshi Mikitani worried about Japan’s shrinking population, so he acquired Ebates, the US shopping reward website, and invested in Lyft and Pinterest. His biggest strategic investment in Rakuten’s future was requiring all 8000 employees to use English in all written and spoken communication. Mikitani said, ‘To grow, we need to go outside Japan. To do that, we need talented, nonJapanese people, and we need to have a standard of communication, which is spoken English. Therefore, the Japanese staff need to be able to communicate in English so that we don’t alienate non-Japanese speakers. And it is working extremely well. Already, close to 40 per cent of our engineers in Japan are non-Japanese. We are hiring from all over the world. Now our e-commerce team can speak with our Ebates team without any trouble. Five years ago, it was almost impossible. We needed to have a translator.’54 Thus, strategic leadership captures how leaders inspire their companies to change and their followers to give extraordinary effort to accomplish organisational goals.

CHARISMATIC LEADERSHIP

Strategic leadership is the ability to anticipate, envision, maintain flexibility, think strategically and work with others to initiate changes that will create a positive future for an organisation.52 Therefore, strategic leadership captures how leaders inspire their companies to change and their followers to give extraordinary effort to accomplish organisational goals. After reading the next section, you should be able to explain how visionary leadership (i.e. charismatic and transformational leadership) helps leaders achieve strategic leadership.

strategic leadership the ability to anticipate, envision, maintain flexibility, think strategically and work with others to initiate changes that will create a positive future for an organisation

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Charisma is a Greek word meaning ‘divine gift’. The ancient Greeks saw people with charisma as inspired by the gods and capable of incredible accomplishments. German sociologist Max Weber viewed charisma as a special bond between leaders and followers.55 Weber wrote that the special qualities of charismatic leaders enable them to strongly influence followers. Weber also noted that charismatic leaders tend to emerge in times of crisis and that the radical solutions they propose enhance the admiration that followers feel for them. Indeed, charismatic leaders tend to have incredible influence over their followers, who may be inspired by their leaders and become fanatically devoted to them. From this perspective, charismatic leaders are often seen as larger-than-life or uniquely special.

taxes, and part of the deal was that workers’ payments would not increase over time. Over time, its labour costs shrunk, but its reputation as a caring employer among Indian managers and workers persisted.59 As you would expect, ethical charismatics produce stronger commitment, higher satisfaction, more effort, better performance and greater trust. By contrast, unethical charismatics unethical control and manipulate followers, do what charismatics charismatic leaders who is best for themselves instead of their control and manipulate organisations, want to hear only positive followers, do what is best for themselves instead feedback, share only information that is of their organisations, beneficial to themselves and have moral want to hear only positive feedback, share standards that put their interests before only information that is beneficial to themselves everyone else’s. Because followers can and have moral standards become just as committed to unethical that put their interests charismatics as to ethical characteristics, before everyone else’s. unethical charismatics pose a tremendous risk for companies. John Thompson, a management consultant, warns, ‘Often what begins as a mission becomes an obsession. Leaders can cut corners on values and become driven by self-interest. Then they may abuse anyone who makes a mistake’.60 Steven Cohen is the billionaire owner of the US company SAC Capital Advisors, located in Stamford and New York. He was renowned for being rude and impatient with his staff of financial analysts and managers. One of his standard responses when portfolio managers couldn’t answer a question about a stock was, ‘Do you even know how to do your f***ing job?’ Once, during the first week of January, he yelled at an employee for not having come up with any good trading ideas so far that year. Cohen routinely pitted traders against each other by displaying their profits and losses in real time. He also pushed them to compete to have their picks included in his personal portfolio. Under his leadership, SAC Capital pleaded guilty to insider trading, paying $1.8 billion in fines.61 Cohen, after being banned from managing clients’ money for two years, is now trying to rebuild his firm and to ‘show the government he’s squeaky clean’.62 iStock.com/Yagi-Studio

Charismatic leaders have strong, confident, dynamic personalities that attract followers and enable the leaders to create strong bonds with their followers. Followers trust charismatic leaders, are loyal to them and are inspired to work towards the accomplishment of the leader’s vision. Followers who become devoted to charismatic charismatic leaders may go to extraordinary leadership lengths to please them. Therefore, we can the behavioural tendencies and personal define charismatic leadership as the characteristics of behavioural tendencies and personal leaders that create an characteristics of leaders that create an exceptionally strong relationship between them exceptionally strong relationship between and their followers them and their followers. Charismatic leaders also: ● articulate a clear vision for the future that is based on strongly held values or morals ● model those values by acting in a way consistent with the vision ● communicate high performance expectations to followers ● display confidence in followers’ abilities to achieve the vision.56 Does charismatic leadership work? Studies indicate that it often does. In general, the followers of charismatic leaders are more committed and satisfied, are better performers, are more likely to trust their leaders and simply work harder.57 Nonetheless, charismatic leadership also has risks that are at least as large as its benefits. The problems are likely to occur with ego-driven charismatic leaders who take advantage of fanatical followers. In general, there are two kinds of charismatic leaders: ethical charismatics and unethical ethical charismatics charismatics. 58 Ethical charismatics ethical charismatics provide developmental opportunities for provide developmental followers, are open to positive and negative opportunities for followers, are open to feedback, recognise others’ contributions, positive and negative share information and have moral standards feedback, recognise others’ contributions, that emphasise the larger interests of the share information and group, organisation or society. have moral standards that emphasise the larger In 1993, J. J. Irani, CEO of Tata Steel, had interests of the group, to close down a money-losing steel plant in organisation or society Jamshedpur, India. Given that Tata not only guaranteed all employees’ jobs but also jobs for their children (once you had worked at Tata 25 years), this was the first time that any Tata employees would lose their jobs. Rather than doing only what was best for Tata, Irani decided that laid-off employees, age 40 or under, would receive full salaries for the remainder of their working lives. Laid-off employees over 40 would get salaries plus a 20 per cent to 50 per cent bonus, depending on how close they were to retirement. Moreover, workers’ families would receive the payments even if the workers died prior to retiring. Tata benefitted, too, because it no longer had to pay payroll

There are stark differences between ethical and unethical charismatic leader behaviours

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TABLE 13.5

Ethical and unethical charismatics

Charismatic leader behaviours Ethical charismatics

Unethical charismatics

Exercising power

Power is used to serve others.

Power is used to dominate or manipulate others for personal gain.

Creating the vision

Followers help develop the vision.

Vision comes solely from leader and serves his or her personal agenda.

Communicating with followers

Two-way communication. Seek out viewpoints on critical issues.

One-way communication. Not open to input and suggestions from others.

Accepting feedback

Open to feedback. Willing to learn from criticism.

Inflated ego thrives on attention and admiration of sycophants. Avoid or punish candid feedback.

Stimulating followers

Want followers to think and question status quo as well as leader’s views.

Don’t want followers to think. Want uncritical, intellectually unquestioning acceptance of leader’s ideas.

Developing followers

Focus on developing people with whom they interact. Express confidence in them and share recognition with others.

Insensitive and unresponsive to followers’ needs and aspirations.

Living by moral standards

Follow self-guided principles that may go against popular opinion. Have three virtues: courage, a sense of fairness or justice, and integrity.

Follow standards only if they satisfy immediate self-interests. Manipulate impressions so that others think they are ‘doing the right thing’. Use communication skills to manipulate others to support their personal agenda.

Source: J. M. Howell & B. J. Avolio, ‘The ethics of charismatic leadership: submission or liberation?’ Academy of Management Executive, 6, (2), 1992: 43–54.

Table 13.5 shows the stark differences between ethical and unethical charismatics for several leader behaviours: exercising power, creating the vision, communicating with followers, accepting feedback, stimulating followers intellectually, developing followers and living by moral standards. For example, when creating a vision, ethical charismatics include followers’ concerns and wishes by having them participate in the development of the company vision. By contrast, unethical charismatics develop a vision by themselves solely to meet their personal agendas. One unethical charismatic said, ‘The key thing is that it is my idea; and I am going to win with it at all costs’.63 Why do we fall for charismatics? According to Fast Company, ‘We’re worshipful of top executives who seem charismatic, visionary and tough. So long as they’re lifting profits and stock prices, we’re willing to overlook that they can also be callous, cunning, manipulative, deceitful, verbally and psychologically abusive, remorseless, exploitative, self-delusional, irresponsible and megalomaniacal’.64

TRANSFORMATIONAL LEADERSHIP While charismatic leadership involves articulating a clear vision, modelling values consistent with that vision, communicating high performance transformational expectations and establishing very leadership leadership that generates strong relationships with followers, awareness and transformational leadership goes acceptance of a group’s purpose and mission and further by generating awareness and gets employees to see acceptance of a group’s purpose and beyond their own needs mission and by getting employees to see and self-interests for the good of the group beyond their own needs and self-interest

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for the good of the group.65 Like charismatic leaders, transformational leaders are visionary, but they transform their organisations by getting their followers to accomplish more than they intended and even more than they thought possible. Transformational leaders make their followers feel that they are a vital part of the organisation and help them see how their jobs fit with the organisation’s vision. By linking individual and organisational interests, transformational leaders encourage followers to make sacrifices for the organisation because they know that they will prosper when the organisation prospers. Transformational leadership has four components: charismatic leadership or idealised influence, inspirational motivation, intellectual stimulation and individualised consideration.66 Charismatic leadership or idealised influence means that transformational leaders act as role models for their followers. Because transformational leaders put others’ needs ahead of their own and share risks with their followers, they are admired, respected and trusted, and followers want to emulate them. Therefore, in contrast to purely charismatic leaders (especially unethical charismatics), transformational leaders can be counted on to do the right thing and maintain high standards for ethical and personal conduct. After Jim McNerney became Boeing’s third CEO in three years, he pushed company lawyers to settle ethics violations that occurred under his predecessors. Under the settlement with the US Justice Department, Boeing agreed to pay a $615 million penalty. But that wasn’t enough for McNerney. He apologised before a Senate committee and refused to take a $200 million tax deduction to which

Boeing was entitled for its costs in obtaining the settlement. Critics charge that McNerney’s decision not to take the tax deduction wrongly cost Boeing shareholders $200 million. McNerney, who was responsible for restoring the company’s commitment to ethical behaviour, said, ‘I thought it was the right thing to do’. McNerney also instituted a new organisation-wide ethics program and has linked bonuses and promotion to ethical behaviour.67 The company has also adopted a new and stringent Code of Conduct for its employees.68 Inspirational motivation means that transformational leaders motivate and inspire followers by providing meaning and challenge to their work. By clearly communicating expectations and demonstrating commitment to goals, transformational leaders help followers envision future states, such as the organisational vision or mission. In turn, this leads to greater enthusiasm and optimism about the future. Intellectual stimulation means that transformational leaders encourage followers to be creative and innovative, to question assumptions and to look at problems and situations in new ways, even if their ideas are different from the leader’s. Guive Balooch, global vice president for L’Oreal’s Technology Incubator, leads a 26-person team charged with marrying beauty products to technology. Says Balooch, ‘If you put a UX (user experience) designer, a physicist, a biologist and a micro-engineer all together in a room, the tension between their ideas creates really cool things.’69 One of their first products, the MakeupGenius App, combines the camera on a smartphone with software to ‘select that new shade of eyeshadow or lipstick and virtually try it on yourself’.70 Just like in a store, the app uses augmented reality technology to ‘apply’ the makeup to your image on your smart phone or tablet, allowing you to see how you look from any angle in real time. Balooch says, ‘My team has freedom to create, to innovate, to embrace the very best in industrial design, in science, and technology and adapt it for the beauty industry.’71 Individualised consideration means that transformational leaders pay special attention to followers’ individual needs by creating learning opportunities, accepting and tolerating individual differences, encouraging two-way communication and being good listeners.

Finally, a distinction needs to be drawn between transformational leadership and transactional leadership. While transformational leaders use visionary and inspirational appeals to influence followers, transactional transactional leadership is based on an leadership exchange process, in which followers are leadership based on an exchange process, rewarded for good performance and in which followers are punished for poor performance. When rewarded for good performance and punished leaders administer rewards fairly and offer for poor performance followers the rewards that they want, followers will often reciprocate with effort. A problem, however, is that transactional leaders often rely too heavily on discipline or threats to bring performance up to standards. Though this may work in the short run, it’s much less effective in the long run. Also, as discussed in Chapters 11 and 12, many leaders and organisations have difficulty successfully linking pay practices to individual performance. As a result, studies consistently show that transformational leadership is much more effective on average than transactional leadership. In Australia, the United States, Canada, Japan and India and at all organisational levels, from first-level supervisors to upper-level executives, followers view transformational leaders as much better leaders and are much more satisfied when working for them. Furthermore, companies with transformational leaders have significantly better financial performance.72

MGMT IN PRACTICE

REDUCE THE RISKS ASSOCIATED WITH UNETHICAL CHARISMATICS • • • •

•

Have a clearly written code of conduct that is fairly and consistently enforced for all managers. Recruit, select and promote managers with high ethical standards. Train leaders to value, seek and use diverse points of view. Train leaders and subordinates regarding ethical leader behaviours so that abuses can be recognised and corrected. Reward people who exhibit ethical behaviours, especially ethical leader behaviours.73

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Managing communication

LEARNING OUTCOMES

1 Explain the role that perception plays in communication and communication problems.

WHAT IS COMMUNICATION?

2 Describe the communication process and

3 Explain how managers can manage effective one-on-one communication.

4 Describe how managers can manage effective organisation-wide communication.

ENGAG

EO VID

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EO VID

It has been estimated that managers spend over 80 per cent of their day communicating with others.1 Indeed, much of the basic management process – planning, organising, leading and controlling – can’t be performed without effective communication. If this in itself isn’t sufficient motivation for studying communication, consider that effective oral communication, such as listening, following instructions, conversing and giving feedback, is consistently ranked the most important skill for graduates entering the workforce.2 Poor communication skills also rank as the single most important reason that people do not advance in their careers.3 Billionaire entrepreneur Richard Branson says, ‘Communication is the most important skill that a leader can possess’.4 communication Communication can be defined as can be defined as the process of transferring information or the process of transferring meaning from one individual or group to information or meaning from one individual or another. While some bosses sugar-coat group to another. While bad news, smart managers understand some bosses sugarthat in the end, effective, straightforward coat bad news, smart managers understand communication between managers and that in the end, effective, employees is essential for success. straightforward After reading the next two sections, you communication between managers and employees should be able to: is essential for success. ● explain the role that perception plays in communication and communication problems ● describe the communication process and the PPLY various kinds of E A Get started with the communication media quiz: Plant Fantasies: Managing Communication in organisations. ENGAG

the various kinds of communication in organisations.

LO1

PERCEPTION AND COMMUNICATION PROBLEMS

Stimulus Stimulus

In one classic study, when employees were asked if their supervisor gave recognition for good work, only 13 per cent said their supervisor gave a pat on the back and 14 per cent said their supervisor gave sincere and thorough praise. But when the supervisors of these employees were asked if they gave recognition for good work, 82 per cent said they gave pats on the back, while 80 per cent said that they gave sincere and thorough praise.5 How could managers and employees have had such different perceptions of something as simple as praise? Let’s learn more about perception and communication problems by examining: ● the basic perception process ● perception problems ● how we perceive others ● how we perceive ourselves. We’ll also consider how all of these factors make it difficult for managers to achieve effective communication.

Stimulus

Perceptual

Attention

Filter

Perceptual

Organisation

Filter

Perceptual

Interpretation

Filter

Perceptual

Retention

Filter

Perception

BASIC PERCEPTION PROCESS As shown in Figure 14.1, perception is the process by which individuals attend to, organise, interpret and retain information from their environments. Since communication is the process of transferring information or meaning from one individual or group to another, perception is obviously a key part of communication. But perception can also be a key obstacle to communication. As people perform their jobs, they are exposed to a wide variety of informational stimuli. Examples could include emails, direct conversations with the boss or coworkers, rumours heard over lunch, stories about the company in the press or a video broadcast of a speech from the CEO to all employees. Just being exposed to an informational stimulus, however, is no guarantee that an individual will pay attention or attend to that stimulus. People experience stimuli through their perceptual filter own perceptual filters – the a personality, psychology differences based on personality, or experienced-based psychology or experience which difference that influences a person to ignore or pay influence them to ignore or pay attention attention to a particular to particular stimuli. Because of filtering, stimulus people exposed to the same information will often disagree about what they saw or heard. As shown in Figure 14.1, perceptual filters affect each part of the perception process: attention, organisation, interpretation and retention.

perception the process by which individuals attend to, organise, interpret and retain information from their environments

FIGURE 14.1

Basic perception process

Attention is the process of noticing or becoming aware of particular stimuli. Because of perceptual filters, we attend to some stimuli and not others. Organisation is the process of incorporating new information (from the stimuli that you notice) into your existing knowledge. Because of perceptual filters, we are more likely to incorporate new knowledge that is consistent with what we already know or believe. Interpretation is the process of attaching meaning to new knowledge. Because of perceptual filters, our preferences and beliefs strongly influence the meaning we attach to new information (e.g. ‘This must mean that top management supports our project’.) Finally, retention is the process of remembering interpreted information. In other words, retention is what we recall and commit to memory after we have perceived something. Of course, perceptual filters also affect retention – that is, what we’re likely to remember in the end. In one famous and popular study run by American psychologists Daniel Simons and Christopher Chabris in the late 1990s, groups of Harvard students were asked to watch a video of some young people moving around and passing basketballs back and forth. In the video, one team of three wore white shirts, and the other team of three had black shirts. The viewers were asked to count how many times the white team passed the ball, and to ignore how many times the black-shirted players passed. Most people

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were able to count the passes, or to get close. What half of the audience didn’t see, however, was that during the video, a man in a gorilla suit walked among the players, turned to the camera and beat his chest, and then walked off. Those who did not notice the gorilla would deny that anything unusual had happened, and were shocked when shown the video again. How could they miss something so obvious? It is because their perceptual filters had been narrowed by asking them to concentrate on the whiteshirted players and their passes.6 This phenomenon is called selective attention. You can look at the original video or later variations on YouTube (just search the authors or the subject), but now that you know there is a gorilla involved, why not show it to some friends who may not know and see how many of them notice? Because of perception and perceptual filters, people are likely to pay attention to different things, organise and interpret what they pay attention to differently and, finally, remember things differently. Consequently, even when people are exposed to the same communications (e.g. organisational memos, discussions with managers or customers), they can end up with very different perceptions and understandings. This is why communication can be so difficult and frustrating for managers. Let’s review some of the communication problems created by perception and perceptual filters.

places with one of the young men carrying the door. The pedestrian doesn’t see this, of course, because the door is blocking the view. Like in the ‘invisible gorilla’ example above, in 50 per cent of the cases, people don’t even notice that they are talking to someone different and go right back to giving directions. Selective perception is one of the biggest contributors to misunderstandings and miscommunication, because it strongly influences what people see, hear, read and understand at work.7 Once we have initial information about a person, event or process, closure is the closure tendency to fill in gaps tendency to fill in the gaps where the of missing information; information is missing; that is, to assume to assume that what we that what we don’t know is consistent don’t know is consistent with what we already with what we already know. If employees know are told that budgets must be cut by 10 per cent, they may automatically assume that 10 per cent of employees will lose their jobs, too, even if that isn’t the case. Not surprisingly, when closure occurs, people sometimes ‘fill in the gaps’ with inaccurate information, and this can create problems for organisations.

PERCEPTIONS OF OTHERS Attribution theory says that we all have

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Shutterstock.com/SpeedKingz

PERCEPTION PROBLEMS Perception creates communication problems for organisations because people exposed to the same communication and information can end up with completely different ideas and understandings. Two of the most common perception problems in organisations are selective perception and closure. At work, we are constantly bombarded with sensory stimuli – phones ringing, people talking in the background, computers dinging as new email arrives, people calling our names and so forth. As limited processors of information, we cannot possibly notice, receive and interpret all of this information. As a result, we attend to and accept some stimuli but screen out and reject others. This is not a random process. Sele c tive selective perception perception is the tendency to notice the tendency to notice and accept objects and and accept objects and information information consistent consistent with our values, beliefs with our values, beliefs and expectations, while and expectations, while ignoring or ignoring, screening out or screening out inconsistent not accepting inconsistent information. For example, in one information research study, pedestrians were stopped on the footpath by a man asking directions. Ten seconds into giving directions, two people carrying a door walk between the man who asked for directions and the pedestrian who is giving directions. As the door is passing by, the man who asked for directions quickly switches

attribution theory

a basic need to understand and explain the a theory that states that we all have a basic need causes of other people’s behaviour.8 In to understand and explain other words; we need to know why people the causes of other people’s behaviour do what they do. According to attribution theory, we use two general reasons or attributions to explain people’s behaviour: an internal attribution, in which behaviour is thought to be voluntary or under the control of the individual, and an external attribution, in which behaviour is thought to be involuntary and outside the control of the individual. For example, have you ever seen someone changing a flat tyre on the side of the road and thought to yourself, ‘What rotten luck – somebody’s having a bad day’? If you

Defensive bias is the tendency for people to perceive themselves as personally and situationally similar to someone who is having difficulty or trouble

did, you perceived the person through an external attribution known as the defensive bias. The defensive bias defensive bias is the tendency for people the tendency for people to perceive themselves as personally and to perceive themselves situationally similar to someone who is as personally and situationally similar to having difficulty or trouble.9 When we someone who is having identify with the person in a situation, we difficulty or trouble tend to use external attributions (i.e. the situation) to explain the person’s behaviour. For instance, since flat tyres are common, it’s easy to perceive ourselves in that same situation and put the blame on external causes, such as running over a nail. Now, let’s assume a different situation, this time in the workplace: a utility company worker puts a ladder on a utility pole and then climbs up to do his work. As he’s doing his work, he falls from the ladder and seriously injures himself.10 Answer this question: Who or what caused the accident? If you thought, ‘It’s not the worker’s fault. Anybody could fall from a tall ladder’, then you’re still operating from a defensive bias in which you see yourself as personally and situationally similar to someone who is having difficulty or trouble. In other words, you made an external attribution by attributing the accident to an external cause, meaning the situation.

The co-worker

How can they expect us to make sales if they don’t have hot-selling inventory in stock? We can’t sell what’s not there.

Defensive bias: the tendency for people to perceive themselves as personally and situationally similar to someone who is having difficulty or trouble.

FIGURE 14.2

Typically, 60 to 80 per cent of workplace accidents each year are blamed on ‘operator error’. That is, they are blamed on the employees themselves. In reality, more complete investigations usually show that workers are responsible for only 30 to 40 per cent of workplace accidents. Why are accident investigators so quick to blame workers? The reason is that they are committing the fundamental fundamental attribution error, attribution error which is the tendency to ignore the tendency to ignore external causes of behaviour and to external causes of behaviour and to attribute attribute other people’s actions to other people’s actions to 11 internal causes. When investigators internal causes examine the possible causes of an accident, they’re much more likely to assume that the accident is a function of the person, not of the situation. Are workers more likely to use defensive bias or fundamental attribution error when things go wrong? In general, as shown in Figure 14.2, employees and co-workers are more likely to perceive events and explain behaviour from a defensive bias. Because they do the work themselves and see themselves as similar to others who make mistakes, have accidents or are otherwise held responsible for things that go wrong at work, employees and co-workers are likely to attribute problems to external causes, such as failed

The employee

That’s the third sale I’ve lost this week because company management doesn’t keep enough inventory in stock. I can’t sell it if we don’t have it.

Defensive bias: the tendency for people to perceive themselves as personally and situationally similar to someone who is having difficulty or trouble.

The boss The boss

That new employee isn’t very good. I may have to get rid of him if his sales don’t improve.

Fundamental attribution error: the tendency to ignore external causes of behaviour and to attribute other people’s actions to internal causes.

Defensive bias and fundamental attribution error

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machinery, poor support or inadequate training. By contrast, because they are typically observers who don’t do the work themselves and see themselves as situationally and personally different from workers, managers (i.e. bosses) tend to commit the fundamental attribution error and blame mistakes, accidents and other things that go wrong on workers (i.e. an internal attribution). Consequently, in most workplaces, when things go wrong, workers and managers can be expected to take opposite views. Together, the defensive bias, which is typically used by workers, and the fundamental attribution error, which is typically made by managers, present a significant challenge to effective communication and understanding in organisations.

SELF-PERCEPTION The self-serving bias is the tendency to overestimate our value by attributing successes to ourselves (internal causes) and attributing failures to others or the environment (external causes).12 The self-serving bias can make it especially difficult for managers to talk to employees about performance problems. In general, people have a need to maintain a positive self-image. This need is so strong that when people seek feedback at work, they typically want verification of their worth (rather than information about performance deficiencies) or assurance that mistakes or problems weren’t their fault. 13 When managerial communication threatens people’s positive self-image, they can become defensive and emotional, they stop listening and communication becomes ineffective. In the second half of the chapter, which focuses on improving communication, we’ll explain ways in which managers

self-serving bias the tendency to overestimate our value by attributing successes to ourselves (internal causes) and attributing failures to others or the environment (external causes)

Sender

KINDS OF COMMUNICATION

There are many kinds of communication – formal, informal, coaching and counselling, and non-verbal – but they all follow the same fundamental process. Let’s learn more about the different kinds of communication by examining: ● the communication process ● formal communication channels ● informal communication channels ● coaching and counselling, or one-on-one communication ● non-verbal communication.

THE COMMUNICATION PROCESS Earlier in the chapter, we defined communication as the process of transferring information or meaning from one individual or group to another. Figure 14.3 displays a model of the interpersonal communication process and its major components: the sender (message to be conveyed, encoding the message and transmitting the message), the receiver (receiving the message, decoding the message and the receiver’s understanding of the message), and noise, which is anything that interferes with the communication process. The communication process begins when a sender thinks of a message he or she wants to convey to another person. For example, your doctor gives you a flu shot and you develop a fever over the next nine days. You visit the doctor again: he or she asks a series of questions about appetite, fatigue, tenderness, soreness and the like. Then

Receiver

Message to be conveyed

Message that was understood

Encode message

Decode message

Transmit message

262

LO2

Feedback to sender

NOISE

FIGURE 14.3

can minimise this self-serving bias and improve one-onone communication with employees.

NOISE

Communication channel

NOISE Receive message

The interpersonal communication process

the doctor runs some tests and asks you (the receiver) to come back the next day for diagnosis and treatment. The next step is to encode the encoding message. Encoding means putting a putting a message into message into a written, verbal or symbolic a written, verbal or form that can be recognised and symbolic form that can be recognised and understood understood by the receiver. In our by the receiver example, the doctor has to take the pathology results and the technical language of medicine and communicate it in a way that the patient will understand. This is not easy, and it is made more difficult by the average doctor’s visit lasting 15 minutes. Not surprisingly, 60 per cent of patients surveyed in America feel that their doctors are rushing their examinations and explanations. Nevertheless, some 64 per cent of patients surveyed say that their doctors do a good job of explaining things to them.14 As we will see, that doesn’t mean that communication has been effective. In Australia, a recent survey of 2000 patients showed that 88 per cent reported getting no information beyond their doctors’ basic medical advice, suggesting that doctors overestimate patients’ abilities to retain and understand the information they are given.15 The sender then transmits the message via communication channels. With some communication channels such as telephones and face-to-face interactions, the sender receives immediate feedback, whereas with many other forms of communication (e.g. email) the sender must wait for the receiver to respond. Considering doctor–patient communication mentioned earlier, doctors have traditionally done most communication with patients face-to-face in the doctor’s office. Some studies show that, with the introduction of electronic health records, many doctors spend most of a patient examination looking at a computer rather than the patient, and that doctors can forget to give patients critical information about one-third of the time. Another study showed that, across 30 medical conditions, patients received all the information they needed from their doctors only 55 per cent of the time.16 Unfortunately, because of technical difficulties (e.g. software or file compatibility problems, mobile phone problems, etc.) or people-based transmission problems (e.g. forgetting to pass on a message), messages aren’t always transmitted. If the message is transmitted and received, however, the next step is for the receiver to decode it. Decoding is the process by decoding the process by which the which the receiver translates the written, receiver translates the verbal or symbolic form of the message written, verbal or symbolic into an understood message. The form of a message into an understood message message, as understood by the receiver, isn’t always the same message that was intended by the sender. As just mentioned, time pressure is one of the ‘transmission problems’ for a doctor’s communication with patients. In an average 15-minute doctor’s visit, the doctor spends just 1.3 minutes telling the

WORKPLACE AND COMMUNITY

REPLY ALL? NO! ‘Reply all’; it’s just about the most hated button on everyone’s email. Of course, in theory, it’s a great way to send a quick message about something important to a big group of people. However, most of the time it is used carelessly or accidentally, and everybody in your department might end up reading the email you sent to a friend about how sick your dog was last night. A number of companies are coming up with creative ideas on how to stop the ‘Reply all’ madness. A sales manager at the US company Wells Fargo set up an agreement among his work colleagues that no one would ever use ‘Reply all’. Other organisations are finding software solutions; for example, Microsoft added a plug-in to its Outlook program to prevent users sending an email to everyone. Sperry Software, meanwhile, created the Reply to All Monitor, which asks the user to confirm that they really want to reply to all.18

patient about their condition, prognosis and treatment. That 1.3 minutes is typically filled with information too complex and technical for the average patient to understand.17 It is no surprise to find that the doctor’s message is often decoded incorrectly by the patient. The last step of the communication process occurs when the receiver gives the sender feedback. Feedback to sender is a feedback to sender In the communication return message to the sender that process, a return message indicates the receiver’s understanding to the sender that of the message (of what the receiver indicates the receiver’s understanding of the was supposed to know, do or not do). message. Feedback makes senders aware of possible miscommunications and enables them to continue communicating until the receiver understands the intended message. Because of the difficulties of communicating complex medical information in too little time, studies show that half of all patients don’t know what they are supposed to do after seeing the doctor (when to take medicine, for how long, when to start the next phase of treatment and the like). Indeed, patients immediately forget 80 per cent of the medical information received from their doctors, and half of what they remember is wrong. As a result, many doctors are starting to use the ‘teach back’ method, where they ask the patient to explain, in their own words, what they have just heard the doctor say about their problem (the diagnosis), whether they will get better (the prognosis) and what they need to do when they leave the doctor’s office (the treatment plan and management of medications).19 Unfortunately, feedback does not always occur in the communication process. Complacency and overconfidence about the ease and simplicity of

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communication can lead senders and receivers to simply assume that they share a common understanding of the message and to not use feedback to improve the effectiveness of their communication. This is a serious mistake, especially since messages and feedback are always transmitted with and against noise a background of noise. Noise is anything that interferes with the transmission of the anything that interferes with the intended message transmission of the intended message. Noise can occur in any of the following situations: ● the sender isn’t sure what message to communicate ● the message is not clearly encoded ● the wrong communication channel is chosen ● the message is not received or decoded properly ● the receiver doesn’t have the experience or time to understand the message. Any idea what ‘rightsizing’, ‘de-layering’, ‘un-siloing’ and ‘knowledge acquisition’ mean? Rightsizing means laying off workers. De-layering means firing managers, or getting rid of layers of management. Un-siloing means getting workers in different parts of the company (i.e. different vertical silos) to work with others outside their own areas. Knowledge acquisition means teaching workers new knowledge or skills. These are all examples of jargon , which is jargon vocabulary particular to a vocabulary particular to a profession profession or group or group, and is another form of noise that interferes with communication in the workplace. Unfortunately, the business world is rife with jargon. Try reading this without being confused: I am confident that, at the end of the day, we will gain some quick wins through onboarding then socialising the concept of eliminating jargon. Going forward, we will all be on the same page – indeed singing from the same song sheet – and be thinking out of the box when it comes to the language we utilise in the C-suite. Initially, it will be similar to herding cats, and the process will identify the square pegs in the round holes, but we will achieve some upside and a paradigm shift as we reach out and break the silos through the use of intelligible language.20

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In Australia, author Don Watson has mounted a personal crusade against corporate jargon such as this, calling it ‘weasel words’. If you look on his website (http://www. weaselwords.com.au/home/) you’ll see that universities and government departments are among the worst offenders. Carol Hymowitz, former Senior Editor, of the Wall Street Journal points out that, ‘A new crop of buzzwords usually sprouts every three to five years, or about the same length of time many top executives have to prove themselves. Some can be useful in swiftly communicating, and APPLY spreading, new business Get an concepts. Others are less overview of communication channels useful, even devious’.21

FORMAL COMMUNICATION CHANNELS An organisation’s formal communication channel is the system of official channels that carry organisationally approved messages and information. formal Organisational objectives, rules, policies, communication procedures, instructions, commands channel the system of official and requests for information are all channels that carry transmitted via the formal communication organisationally approved system or ‘channel’. There are three messages and information downward formal communication channels: communication downward communication, upward communication that flows c o m m u n i c a t i o n a n d h o r i zo n t a l from higher to lower levels in an organisation communication.22 Downward communication flows from higher to lower levels in an organisation. Downward communication is used to issue orders down the organisational hierarchy, to give organisational members job-related information, to give managers and workers performance reviews from upper managers and to clarify organisational objectives and goals.23 Emeritus Professor Michael Beer of the Harvard Business School says, ‘You can never over-communicate. When you think you’ve communicated well, go out three or four more times and communicate again’. Beer’s consultancy company, TruePoint, studied 40 CEOs whose companies had been above-average performers for more than a decade. He found that the outstanding leaders spend an enormous amount of time in communicating downward: ‘They have a simple story, and that story gets out every place they go’.24 Upward communication flows from upward communication lower levels to higher levels in an that flows organisation. Upward communication is communication from lower to higher used to give higher-level managers feedback levels in an organisation about operations, issues and problems; to help higher-level managers assess organisational performance and effectiveness; to encourage lower-level managers and employees to participate in organisational decision making; and to give those at lower levels the chance to share their concerns with higher-level authorities. Many senior managers are finding creative ways to encourage upward communication. This can include ‘open door’ policies, sharing of email and mobile phone details with staff, regular meetings and online suggestion forums. Horizontal communication flows horizontal among managers and workers who are at communication the same organisational level, such as communication that flows among managers and when a day-shift nurse comes in at workers who are at the 7.30 a.m. for a half-hour discussion with the same organisational level midnight nurse supervisor who leaves at 8 a.m. Horizontal communication helps facilitate coordination and cooperation between different parts of an organisation and allows coworkers to share relevant information. It also helps people at the same level resolve conflicts and solve problems

DOWNWARD COMMUNICATION • Overusing downward communication by sending too many messages • Issuing contradictory messages • Hurriedly communicating vague, unclear messages • Issuing messages that indicate management’s low regard for lower-level workers

FIGURE 14.4

UPWARD COMMUNICATION

HORIZONTAL COMMUNICATION • Management discouraging or punishing horizontal communication, viewing it as small talk • Not giving managers and workers the time or opportunity for horizontal communication • Not enough opportunities or channels for lower-level workers to engage in horizontal communication

• The risk involved with telling upper management about problems (i.e. fear of retribution) • Managers reacting angrily and defensively when workers report problems • Not enough opportunities or channels for lower-level workers to contact upper levels of management

Common problems with downward, upward and horizontal communication

without involving higher levels of management. Studies show that communication breakdowns, which occur most often during horizontal communication, such as when patients are handed over from one nurse or doctor to another, are the largest source of medical errors in hospitals.25 Some of the common problems with downward, upward and horizontal communication are outlined in Figure 14.4. So what, in general, can managers do to improve formal communication? First, decrease reliance on downward communication. Second, increase chances for upward communication by increasing personal contact with lowerlevel managers and workers. Third, encourage much better use of horizontal communication.

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Source: Based on G. L. Kreps, Organizational communication: theory and practice (New York: Longman, 1990).

INFORMAL COMMUNICATION CHANNELS An organisation’s informal communication channel, sometimes called the grapevine , is the transmission of messages from employee to employee outside formal communication channels. The grapevine arises out of curiosity; that is, the need to know what is going on in an organisation and how it might affect you or others. To satisfy this curiosity, employees need a consistent supply of relevant, accurate, in-depth information about ‘who is doing what and what changes are occurring within the organisation’.26 Employees say things like ‘If employees don’t have a definite explanation from management, they tend to interpret for themselves’.27 Grapevines arise out of informal communication networks, such as the gossip or cluster chains shown in Figure 14.5. In a gossip chain, one ‘highly connected’ individual shares information with many other managers and workers. By contrast, in a cluster chain, numerous people simply tell a few of their friends. The result in both cases is that information flows freely and quickly through the organisation. Some believe that grapevines are a waste of employees’ time, that they promote gossip and rumours that fuel political speculation and that they are sources of highly

informal communication channel (grapevine) the transmission of messages from employee to employee outside formal communication channels

Because grapevines typically carry ‘juicy’ information that is interesting and timely, information spreads rapidly

Gossip chain

FIGURE 14.5

Cluster chain

Grapevine communication networks Source: K. Davis & J. W. Newstrom, Human behavior at work: organizational behavior, 8th ed. (New York: McGraw-Hill, 1989).

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COACHING AND COUNSELLING: ONE-ON-ONE COMMUNICATION When the Wyatt Company surveyed 531 US companies undergoing major changes and restructuring, it asked their CEOs, ‘If you could go back and change one thing, what would it be?’ The answer? ‘The way we communicated with our employees.’ The CEOs said that instead of flashy videos, printed materials or formal meetings, they would make greater use of one-on-one communication, especially with employees’ immediate supervisors instead of with higher-level executives that employees didn’t know.32 Recent research confirms the importance of one-on-one and informal communication for effective management.33 coaching communicating with someone Coaching and counselling are two for the direct purpose of kinds of one-on-one communication. improving the person’s on-the-job performance or Coaching is communicating with behaviour someone for the direct purpose of 266

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HEY COACH! Management coaching has grown into a multimilliondollar business worldwide and is no longer just for the likes of the most senior executives. Many companies use coaching as a means to help overachievers (i.e. task-oriented managers) develop their people skills. Major Australian businesses use coaching services to groom internal candidates for future executive positions within the company.37 Shutterstock.com/fitzkes

unreliable, inaccurate information. Yet studies clearly show that grapevines are highly accurate sources of information for a number of reasons.28 First, because grapevines typically carry ‘juicy’ information that is interesting and timely, information spreads rapidly. Second, since information is typically spread by face-to-face conversation, receivers can send feedback to make sure they understand the message that is being communicated. This reduces misunderstandings and increases accuracy, even though the information in the first place might not be correct. Third, since most of the information in a company moves along the grapevine, as opposed to formal communication channels, people can, but don’t always, verify the accuracy of information by ‘checking it out’ with others. What can managers do to ‘manage’ organisational grapevines? The very worst thing managers can do is withhold information or try to punish those who share information with others. The grapevine abhors a vacuum, and in the absence of information from company management, rumours and anxiety will flourish. Why does this occur? According to workplace psychologist Nicholas DiFonzo, ‘The main focus of rumour is to figure out the truth. It’s the group trying to make sense of something that’s important to them’.29 A better strategy is to embrace the grapevine and keep employees informed about possible changes and strategies. Failure to do so will just make things worse. In addition to using the grapevine to communicate with others, managers should not overlook the grapevine as a tremendous source of valuable information and feedback. In fact, information flowing through organisational grapevines is estimated to be 75 to 95 per cent accurate.30 More recent research continues to emphasise the importance for managers to understand how grapevines contribute to organisational success, and using their local grapevines appropriately.31

improving the person’s on-the-job performance or behaviour.34 Managers tend to make several mistakes when coaching employees, however. First, they wait for a problem before coaching. Jim Concelman, former manager for leadership development at the consultancy company Development Dimensions International, which has offices in Australia, New Zealand, China, Singapore and Malaysia, says, ‘Of course, a boss has to coach an employee if a mistake has been made, but they shouldn’t be waiting for the error. While it is a lot easier to see a mistake and correct it, people learn more through success than through failure, so bosses should ensure that employees are experiencing as many successes as possible. Successful employees lead to a more successful organisation’.35 Second, when mistakes are made, managers wait much too long before talking to the employee about the problem. Management professor Ray Hilgert says, ‘A manager must respond as soon as possible after an incident of poor performance. Don’t bury your head … When employees are told nothing, they assume everything is okay’.36 By contrast, counselling is counselling communicating with someone about communicating with someone about non-jobnon-job-related issues that may be related issues that may affecting or interfering with the person’s be affecting or interfering with the person’s performance. However, counselling performance does not mean that managers should try to be clinicians, even though an estimated 20 per cent of employees are dealing with personal problems at any one time. As one employee assistance professional says, ‘We call it the quicksand. If

you’re a good supervisor, you do care about your employees, but it’s not your job to be a therapist’.38 Instead, managers should discuss specific performance problems, listen if the employee chooses to share personal issues and then recommend that the employee call the company’s Employee Assistance Program (EAP). EAPs are typically free when provided as part of a company’s benefit package. In emergencies or times of crisis, EAPs can offer immediate counselling and support; they can also provide referrals to organisations and professionals that can help employees and their family members address personal issues.

NON-VERBAL COMMUNICATION non-verbal communication any communication that doesn’t involve words

Non-verbal communication is any communication that doesn’t involve words. Non-verbal communication and messages almost always accompany verbal communication and may support and reinforce the verbal message or contradict it. The importance of non-verbal communication is well established. Researchers have estimated that as much as 93 per cent of any message is transmitted non-verbally, with 55 per cent coming from body language and facial expressions and 38 per cent coming from the tone and pitch of the voice.39 Since many non-verbal cues are unintentional, receivers often consider non-verbal communication to be a more accurate representation of what senders are thinking and feeling than the words they use. Kinesics and paralanguage are two kinds of non-verbal communication.40 Kinesics (from the kinesics movements of the body Greek word kinesis, meaning ‘movement’) and face are movements of the body and face.41 These movements include arm and hand gestures, facial expressions, eye contact, folding arms, crossing legs and leaning towards or away from another person. It turns out that kinesics play an incredibly important role in communication. Studies of married couples’ kinesic interactions can predict whether they will stay married with 93 per cent accuracy.42 The key is the ratio of positive to negative kinesic interactions that husbands and wives make as they communicate. Negative kinesic expressions such as eye rolling suggest contempt, whereas positive kinetic expressions such as maintaining eye contact and nodding suggest listening and caring. When the ratio of positive to negative interactions drops below 5 to 1, the chances for divorce quickly increase. Kinesics operate in a similar way in the workplace, providing clues about people’s true feelings, over and beyond what they say (or don’t say). One of the most powerful ways is mirroring, in which people in conversations mimic or mirror physical gestures,

facial expressions or pitch and tone of voice. Brain scanning studies indicate that when mirroring occurs during conversations, people’s brains react in similar positive ways at the same time. Mirroring, while usually done unconsciously, can be used intentionally by managers as a positive non-verbal behaviour. David Hoffeld, author of The Science of Selling, says, ‘It’s not something you do to someone. It’s something you do with someone. The very process of mirroring will help you keep your focus where it should be – on the other person.’43 Kinesics provide clues about people’s true feelings. Unfortunately, not making or maintaining eye contact is an increasingly frequent and negative occurrence in today’s workplace. American communication consultant Suzanne Bates, a former network broadcaster and author of Speak Like a CEO, says that some of her CEO clients check their phones so much during appointments that, ‘it’s the equivalent of not showing up for half of the meeting.’ This, she says, breeds resentment in others who think, ‘I’m just as busy as the CEO. I just have different things to juggle.’44 In fact, a survey of business professionals found that strong majorities think it is inappropriate to answer phone calls (86%) or write texts or emails (84%) in meetings or at business lunches (66%). The kinesics related to checking smartphones in these situations communicate a lack of respect, attention, listening and self-control.45 TalentSmart’s Travis Bradberry says, ‘Take a page out of the Old West and put a basket by the conference room door with an image of a smartphone and the message, “Leave your guns at the door.”’46

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GIVING THE RIGHT ADVICE Problem or need

Service provided

Stress, depression, relationships, substance abuse

Counselling

Pregnancy, adoption, child care, nutrition, fertility

Child care

Health and nutrition, care options, Alzheimer’s disease

Senior care

Wills, leases, estate plans, adoptions

Legal services

Referrals and discounts on chiropractic care, acupuncture, massage therapy, vitamins

Health/lifestyle assistance

Pet-sitting resources, obedience training, veterinarians

Pet care

Retirement planning, debt consolidation, budgeting

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Paralanguage includes the pitch, rate, tone, volume and speaking pattern (i.e. use of silences, pauses or hesitations) of one’s voice. For example, when people are unsure what to say, they tend to decrease their communication effectiveness by speaking softly. When people are nervous, they tend to talk faster and louder. These characteristics have a tremendous influence on whether listeners are receptive to what speakers are saying. One study in which 1000 people listened to 120 different speeches found that the tone of the speaker’s voice accounted for 23 per cent of the difference in listeners’ evaluations of the speech, compared to speech content, which accounted for only 11 per cent.47 The paralanguage was twice as important as what was actually said. In short, because non-verbal communication is so informative, especially when it contradicts verbal communication, managers need to learn how to monitor and control their non-verbal behaviour.

paralanguage the pitch, rate, tone, volume and speaking pattern (i.e. use of silences, pauses or hesitations) of one’s voice

HOW TO IMPROVE COMMUNICATION

When it comes to improving communication, managers face two primary tasks: managing one-on-one communication and managing organisation-wide communication. After reading the next two sections, you should be able to: ● explain how managers can manage effective one-onone communication ● describe how managers can manage effective organisation-wide communication.

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MANAGING ONE-ON-ONE COMMUNICATION

In Chapter 1, you learned that, on average, first-line managers spend 57 per cent of their time with people, middle managers spend 63 per cent of their time directly with people and top managers spend as much as 78 per cent of their time dealing with people.49 These numbers make it clear that managers spend a great deal of time in one-on-one communication with others.

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Learn more about managing one-on-one communication by reading how to: ● choose the right communication medium ● be a good listener ● give effective feedback.

CHOOSING THE RIGHT COMMUNICATION MEDIUM Sometimes messages are poorly communicated simply because they are delivered using the wrong communication medium, which is the communication medium method used to deliver a message. For the method used to deliver example, the wrong communication an oral or written message medium is being used if an employee returns from lunch, picks up the note left on her office chair and learns she has been fired. There are two general kinds of communication media: oral and written communication. Oral communication includes face-to-face and group meetings through telephone calls, videoconferencing or any other means of sending and receiving spoken messages. Studies show that managers generally prefer oral communication over written because it provides the opportunity to ask questions about parts of the message that they don’t understand. Oral communication is also a rich communication medium because it allows managers to receive and assess the non-verbal communication that accompanies spoken messages (i.e. body language, facial expressions and the voice characteristics associated with paralanguage). Furthermore, you don’t need a personal computer and an Internet connection to conduct oral communication. Oral communication should not be used for all communication, however. In general, when the message is simple, such as a quick request or a presentation of straightforward information, a memo or email is often the better communication medium. Amit Singh, president of Google for Work, agrees. He says that because ‘so much gets lost in translation in emails’, companies should make greater use of face-to-face discussions, where there is ‘a clash of ideas, but a respectful clash’.50 Former Wall Street Journal columnist Jason Fry worries that voicemail and email have made managers less willing to engage in meaningful, face-to-face oral communication than before. In fact, 67 per cent of managers admit to using email as a substitute for face-toface conversations. While there are advantages to email (for example, it creates a record of what’s been said), it’s often better to talk to people instead of just emailing them. Fry writes, ‘If you’re close enough that the person you’re emailing uses the plonk of your return key as a cue to look for the little Outlook envelope, [it’s] best [to] think carefully about whether you should be typing instead of talking.’51 Oral communication should not be used for all communication, however. In general, when the message

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Choosing the right medium is critical to successful one-on-one communication

Written communication, such as email, is well suited to delivering straightforward messages and information. Furthermore, with email accessible at the office, at home and on the road (by laptop computer or smartphone), managers can use email to stay in touch from anywhere at almost any time. Since email and other written communications don’t have to be sent and received simultaneously, messages can be sent and stored for reading at any time. Consequently, managers can send and receive many more messages using email than using oral communication, which requires people to get together in person or by phone or videoconference. Written communication, however, is not well suited to complex, ambiguous or emotionally laden messages, which are better delivered through oral communication.

LISTENING ENGAG

PPLY Are you a good listener? You E A Get an overview of listening and its importance probably think so. But, in to effective communication fact, most people, including managers, are terrible listeners, retaining only about 25 per cent of what they hear.54 You qualify as a poor listener if you frequently interrupt others, jump to conclusions about what people will say before they’ve said it, hurry the speaker to finish his or her point, are a passive listener (not actively working at your listening) or simply don’t pay attention to what people are saying.55 On this last point, attentiveness, students were periodically asked to record their thoughts during a psychology course. On average, 20 per cent of the students were paying attention (only 12 per cent were actively working at being good listeners), 20 per cent were thinking about sex, 20 per cent were thinking about things they had done before class and the remaining 40 per cent were thinking about other things unrelated to the class (e.g. worries, religion, lunch, daydreaming).56 A large-scale survey by the Microsoft Corporation found that people’s average attention span had reduced from 12 seconds in the year 2000 to eight seconds in 2015. This seemed to be related to increased use of mobile phones and screen-based equipment in the modern and increasingly digitalised lifestyle.57 How important is it to be a good listener? In general, about 45 per cent of the total time you spend communicating with others is spent listening. Furthermore, listening is important for managerial and business success, even for those at the top of an organisation. Bill Marriott, executive chairman of Marriott International Hotels, says, ‘The most important thing a successful executive can do – is listen and learn’.58 Listening is a more important skill for managers than ever because of an increasing employee expectation of having a high level of interaction with their supervisors. They want feedback on their performance, but they also want to offer feedback and know that it is heard. In fact, managers with

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is simple, such as a quick request or a presentation of straightforward information, a memo or email is often the better communication medium. Written communication includes letters, email and memos. Although most managers still like and use oral communication, email in particular is changing how they communicate with workers, customers and each other. Email is the fastest-growing form of communication in organisations primarily because of its convenience and speed. For instance, because people read six times faster than they can listen, they usually can read 30 email messages in 10 to 15 minutes.52 By contrast, dealing with voice messages can take a considerable amount of time. One of the drawbacks of email is the sheer volume that employees receive each day. At global IT-services company Atos, workers were spending 15 to 20 hours every week corresponding by email – and that just includes emails to and from other Atos employees. According to the company’s human resource manager Philippe Mareine, email ‘was becoming a burden to our employees rather than an enabler’. To curb the time spent on emails, management began urging employees to use the company’s internal social network, BlueKiwi. Since this move, employees’ average email load has dropped to just six messages per day, and the time sales consultants take to resolve queries collaboratively has dropped from two hours (over email) to 45 minutes (using BlueKiwi). Over the past five years, email volume has fallen 70 per cent at Atos, while operating margins have increased 60 per cent.53

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better listening skills are rated more highly by their employees and are much more likely to be promoted.59 So, what can you do to improve your listening ability? First, understand the difference between hearing and listening. According to Webster’s New World Dictionary, hearing is the ‘act hearing or process of perceiving sounds’, the act or process of perceiving sounds whereas listening is ‘making a listening conscious effort to hear’. In other making a conscious effort words, we react to sounds, such as to hear active listening bottles breaking or music being played assuming half the too loud, because hearing is an responsibility for involuntary physiological process. By successful communication by actively giving the contrast, listening is a voluntary speaker non-judgemental behaviour. So, if you want to be a good feedback that shows you’ve accurately heard listener, you have to choose to be a what he or she said good listener. Typically, that means choosing to be an active, empathetic listener.60 Active listening means assuming half the responsibility for successful communication by actively giving the speaker non-judgemental feedback that shows you have accurately heard what he or she said. Active listeners make it clear from their behaviour that they are listening carefully to what the speaker has to say. Active listeners put the speaker at ease, maintain eye contact and show the speaker that they are attentively listening by nodding and making short statements. Several specific strategies can help you be a better active listener. First, you should clarify responses by asking the speaker to explain confusing or ambiguous statements. Second, when there are natural breaks in the speaker’s delivery, you can use this time to paraphrase or summarise what has been said. Paraphrasing is restating what has been said in your own words. Summarising is reviewing the speaker’s main points or emotions. Paraphrasing and summarising give the speaker the chance to correct the message if the active listener has attached the wrong meaning to it. TABLE 14.1

Paraphrasing and summarising also show the speaker that the active listener is interested in the speaker’s message. Table 14.1 lists specific statements that listeners can use to clarify responses, paraphrase or summarise what has been said. Active listeners also avoid evaluating the message or being critical until the message is complete; they recognise that their only responsibility during the transmission of a message is to receive it accurately and derive the intended meaning from it. Evaluation and criticism can take place after the message is accurately received. Finally, active listeners also recognise that a large portion of any message is transmitted non-verbally and so they pay very careful attention to empathetic listening the non-verbal cues transmitted by the understanding the speaker. speaker’s perspective Empathetic listening means and personal frame of reference and giving understanding the speaker’s perspective feedback that conveys and personal frame of reference and that understanding to the speaker giving feedback that conveys that understanding to the speaker. Empathetic listening goes beyond active listening because it depends on our ability to put aside our own attitudes or relationships to be able to see and understand things through someone else’s eyes. Empathetic listening is just as important as active listening, especially for managers, because it helps build rapport and trust with others. The key to being a more empathetic listener is to show your desire to understand and to reflect people’s feelings. You can show your desire to understand by listening; that is, asking people to talk about what’s most important to them and then giving them sufficient time to talk before responding or interrupting. Reflecting feelings is also an important part of empathetic listening because it demonstrates that you understand the speaker’s emotions. Unlike active listening, in which you restate or summarise the informational content of what has been said, the focus is on the affective part of the message.

Immediacy behaviours, and paraphrasing and summarising responses for active listeners

Immediacy behaviours

Clarifying responses

Paraphrasing responses

Summarising responses

Put your phone away.

Could you explain that again?

What you’re really saying is . . .

Let me summarise . . .

Turn off the TV.

I don’t understand what you mean.

If I understand you correctly . . .

Okay, your main concerns are . . .

Sit close and lean forward.

I’m not sure how . . .

In other words . . .

To recap, what you’ve said . . .

Make eye contact.

I’m confused. Would you run through that again?

So your perspective is that . . .

So far, you’ve discussed . . .

Use “yes,” “uh-huh,” “okay,” and other short words to encourage the speaker to continue.

Tell me if I’m wrong, but what you seem to be saying is . . .

Source: E. Atwater, I Hear You, rev. ed. (New York: Walker, 1992); E. Bernstein, “How ‘Active Listening’ Makes Both Participants in a Conversation Feel Better,” Wall Street Journal, January 12, 2015, accessed May 13, 2015, http://www.wsj.com/articles/how-active-listening-makes-both-sides-of-a-conversation-feel-better-1421082684.

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GIVING FEEDBACK In Chapter 11, you learned that performance appraisal feedback (i.e. judging) should be separated from developmental feedback (i.e. coaching).63 At this point, we now focus on the steps needed to communicate feedback one-on-one to employees. To start, managers need to recognise that feedback can be constructive or destructive. destructive feedback Destructive feedback is disapproving feedback that disapproves without any intention of being helpful and without any intention of being helpful and almost almost always causes a negative or always causes a negative defensive reaction in the recipient. In or defensive reaction in the recipient fact, one study found that 98 per cent of employees responded to destructive feedback from their bosses with either verbal aggression (two-thirds) or physical aggression (one-third).64 By contrast, constructive feedback constructive is intended to be helpful, corrective and/ feedback feedback intended to be or encouraging. It is aimed at correcting helpful, corrective and/or performance deficiencies and motivating encouraging employees. Randstad, a global HR services company active in Australia, adopted a philosophy of radical candour out of concerns that managers and employees were not having honest, constructive discussions about performance. A recipient of radically candid feedback said it ‘cut me to the bone’. Wendy Finlason Seymour, a director of talent

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As an empathetic listener, you can use the following statements to reflect the speaker’s emotions: ● So, right now it sounds like you’re feeling … ● You seem as if you’re … ● Do you feel a bit … ? ● I could be wrong, but I sense that you’re feeling … In the end, says management consultant Terry Pearce, empathetic listening involves these three steps. First, wait 10 seconds before you answer or respond. It will seem an eternity, but waiting prevents you from interrupting others and rushing your response. Second, to be sure you understand what the speaker wants, ask questions to clarify the speaker’s intent. Third, only then should you respond first with feelings and then facts (notice that facts follow feelings).61 A word of caution, however: Not everyone appreciates having what they said repeated back to them. Manager Candy Friesen says that whenever she did that, ‘I seemed to engender animosity or hostility ... the person to whom you’re speaking may not appreciate having his thoughts paraphrased one little bit’.62 So, when applying these listening techniques, pay attention to the body language and tone of voice of the person you’re APPLY Find out more communicating with to make about your listening style sure they appreciate your with this self-assessment attempts to be a better listener.

Immediate feedback following an incident has a better chance of being constructive because the manager and employee can both accurately recall the details

management, said the candid feedback is ‘not there to destroy’, but ‘sometimes the truth can hurt’.65 For feedback to be constructive rather than destructive, it must be immediate, focused on specific behaviours and problem oriented. Immediate feedback is much more effective than delayed feedback because manager and employee can recall the mistake or incident more accurately and discuss it in detail. For example, if an employee is rude to a customer and the customer immediately reports the incident to management, and the manager, in turn, immediately discusses the incident with the employee, there should be little disagreement over what was said or done. By contrast, if the manager waits several weeks to discuss the incident, it’s unlikely that either the manager or the worker will be able to accurately remember the specifics of what occurred. When that happens, it’s usually too late to have a meaningful conversation. Employees at PricewaterhouseCoopers use an app called Snapshot to request short, immediate assessments from their managers on everything from overall business acumen to specific technical capabilities. The feedback is visible to the employee, career coach, direct supervisor, HR manager and the partner in charge of the team, and analytics tools assess the quality of the feedback and how quickly the manager responded. PwC vice chairman Tim Ryan says that the goal is to develop employees in real time: ‘We analogize it to athletes. They get feedback every time they come off the court.’66 Specific feedback focuses on particular acts or incidents that are clearly under the control of the employee. For instance, instead of telling an employee that he or she is ‘always late for work’, it’s much more constructive to say, ‘In the last three weeks, you have been 30 minutes late on four occasions and more than an hour late on two others’. Furthermore, specific feedback isn’t very helpful unless

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employees have control over the problems that the feedback addresses. Indeed, giving negative feedback about behaviours beyond someone’s control is likely to be seen as unfair. Similarly, giving positive feedback about behaviours beyond someone’s control may be viewed as insincere. Last, problem-oriented feedback focuses on the problems or incidents associated with the poor performance rather than on the worker or the worker’s personality. Giving feedback does not give managers the right to attack workers personally. Though managers may be frustrated by a worker’s poor performance, the point of problemoriented feedback is to draw attention to the problem in a non-judgemental way so that the employee has enough information to correct it.

LO4

MANAGING ORGANISATION-WIDE COMMUNICATION

Although managing one-on-one communication is important, managers must also know how to communicate effectively with a larger number of people throughout an organisation. Learn more about organisation-wide communication by reading the following sections about: ● improving transmission by getting the message out ● improving reception by finding ways to hear what others feel and think. online discussion forums The in-house equivalent of an Internet newsgroup. By using web- or softwarebased discussion tools that are available across the company, employees can easily ask questions and share knowledge with each other. televised or filmed speeches A speech or meeting originally made to a smaller audience that is either simultaneously broadcast to other locations in the company or recorded for subsequent distribution and viewing.

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THE RIGHT TO DISCONNECT FROM EMAIL? France’s right to disconnect law requires companies with 50 or more employees to ‘switch off’ after-hours email and communication. The goal is to protect employees from unpaid work that constantly intrudes on their home lives. France has long had a 35-hour work week, but in reality, most managers and a third of employees get around the law by working at home on evenings or weekends. While noble in intent, can it work in the real world? Professor Anna Cox says, ‘Some people want to work for two hours every evening, but want to be able to switch off between 3 and 5 p.m. when they pick their kids up and are cooking dinner. Others are happy to use their daily commute to get ahead before they arrive in the office.’ Under a similar law, German companies such as Volkswagen only allow emails to be received during work hours. Is this enforceable, or would companies and their employees ‘cheat’? Would this policy increase or decrease email stress in your life? SOURCE: A. LEVITT, ‘FRANCE IS FORCING ITS EMPLOYEES TO POWER DOWN: WILL IT WORK?’, QUICKBASE, 14 FEBRUARY 2017, ACCESSED 2 MAY 2017, HTTP://WWW.QUICKBASE. COM/ BLOG/FRANCE-IS-FORCING-ITS-EMPLOYEES-TO-POWER-DOWN-WILL-IT-WORK.

IMPROVING TRANSMISSION: GETTING THE MESSAGE OUT

Several methods of electronic communication – email, online discussion forums, televised or filmed speeches and conferences, and broadcast voicemail – now make it easier for managers to communicate with people throughout the organisation and ‘get the message out’. Although we normally think of email as a means of one-on-one communication, it also plays an important role in organisation-wide communication. With the click of a button, managers can send email to everyone in the company via Complete the email distribution lists. ‘Management decision’ worksheet for Chapter 14

IMPROVING RECEPTION: HEARING WHAT OTHERS FEEL AND THINK When people think of ‘organisation-wide’ communication, they think of the CEO and top managers getting their 272

WORKPLACE AND COMMUNITY

FIGURE 14.6

Step 1

Knowledge audit

Step 2

Online directory

Step 3

Discussion groups on intranet

Step 4

Reward information sharing

Establishing online discussion forums Source: Based on G. McWilliams & M. Stepanek, ‘Knowledge management: taming the info monster’, Business Week, 22 June 1998: 170.

message out to people in the company. But organisationwide communication also means finding ways to hear what people throughout the organisation are feeling and thinking. This is important because most employees and managers are reluctant to share their thoughts and feelings with top managers. Surveys indicate that only 29 per cent of firstlevel managers feel that their companies encourage employees to express their opinions openly. Another study of 22 companies found that 70 per cent of the people surveyed were afraid to speak up about problems they knew existed at work.

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Withholding information about organisational problems or issues is called organisational silence. Organisational silence occurs when employees believe that telling management about problems won’t make a difference or that they’ll be punished or hurt in some way for sharing such information. A survey of executives found that 85 per cent had at some point kept quiet when they saw a serious problem at work.67 Financial company Charles Schwab CEO Walt Bettinger explains that organisational silence isolates managers in two ways: ‘people telling you what they think you want to hear, and people being fearful to tell you things they believe you don’t want to hear’.68 Nandan Nilekani, a co-founder of Infosys, the India-based global information technology consulting firm, agrees, saying, ‘If you’re a leader, you can put yourself in a cocoon – a good-news cocoon.’ He notes, ‘Everyone tells you, “It’s all right – there’s no problem.” And the next day, everything’s wrong.’69 Company hotlines, survey feedback, frequent informal meetings, surprise visits and blogs are ways of overcoming organisational silence. At Jetstar Airways, an Australia-based airline, pilots were afraid to speak up about fatigue from flying too many hours. Captain Richard Woodward, vice-president of the Australian and International Pilots Association, said that his organisation had received dozens of complaints from Jetstar pilots, but that the pilots were afraid to complain to Jetstar management because ‘there was a culture of fear and intimidation at that airline’.70 One pilot scheduler told his pilots, ‘Toughen up princesses! You aren’t fatigued, you are tired and can’t be bothered to go into work’. A report from Australia’s Civil Aviation Safety Authority concluded, ‘There remains reluctance from a number of flight crew to report fatigue risk and/or to say no to an extension of duty based on the perceived punitive nature of taking such actions’.71 Company hotlines are phone company hotlines numbers or internal web addresses phone numbers that anyone in the company that anyone in the company can use can call anonymously to anonymously to leave information for leave information for upper management. upper management. For example, the survey feedback global professional services company information that is Deloitte Touche Tohmatsu has a freecollected by surveys from organisational members call hotline for employees to report any and then compiled, kind of problem or issue within the disseminated and used to develop action plans for company. Hotlines are particularly improvement important because 44 per cent of employees will not report misconduct. Why not? The reason is twofold: They don’t believe anything will be done, and they have concerns about the confidentiality of their report.72 For many organisations, hotlines or other anonymous and confidential reporting systems continue to be essential parts of their internal communications.73 organisational silence when employees withhold information about organisational problems or issues

Informal meetings between top managers and lower-level employees are one of the best ways for top managers to hear what others feel and think

Survey feedback is information that is collected by survey from organisation members and then compiled, disseminated and used to develop action plans for improvement. Many organisations make use of survey feedback by surveying their managers and employees several times a year. FedEx, for example, runs its own Survey Feedback Action program. The online survey, which is completed anonymously, includes sections for employees to evaluate their managers and the overall environment at FedEx, including benefits, incentives and working conditions. The results are compiled and then fed back to each FedEx work group to decide where changes and improvements need to be made and to develop specific action plans to address those problems. The final step is to look for improvements in subsequent employee surveys to see if those plans worked.74 Guardian News and Media, the publisher of the British newspaper The Guardian, conducts an annual survey of its employees to gauge their satisfaction and confidence in the company. After restructuring, during which more than 100 journalists, editors and editorial staff lost their jobs, the 2010 survey showed Guardian employees still had confidence in the company. Eighty-six per cent of respondents reported that they were still proud to work at The Guardian, while 93 per cent reported that they did extra work beyond what was required of them. And perhaps most importantly, 86 per cent stated that they understood the need for cost-cutting measures and layoffs given the declining readership challenges facing the newspaper and the news industry. Managing director Tim Brooks said: Some people – among them friends of mine who do similar jobs to me in other media companies – thought we were bonkers to be conducting the staff survey at a time of major reorganisation, cuts and redundancies. But why take someone’s temperature when they are feeling fine? Taking it when they are stressed tells you much more. And actually what this survey tells us – both from the scores themselves, many of which are as high or higher than in previous surveys, and from the participation rate, which is only one percentage point below last time (and much higher than the rate in most organisations) – is that although we are an organisation under stress, we are fundamentally in very good health.75

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everything’s a few weeks old. The real value of searching the net, including blogs, is that you get a live picture of what people are thinking about certain issues. It means that you can predict if there is going to be an issue that’s going to grow and become something you need to respond to before it gets to the mainstream press’.79 Some companies have created the new position of chief blogging officer to manage internal company blogs and to monitor what is said about the company and its products on external blogs.80 Monitoring social media, such as blogs, Twitter and Facebook, written by people outside the company can be a good way to find out what others are saying or thinking about your organisation or its products or actions. McDonald’s put together a social media plan called ‘Our Food. Your Questions’ to monitor and engage with both customers and critics. Laney Garcia, McDonald’s manager of brand reputation and public relations, said, ‘What we did was audit the conversations

MGMT TREND

TWEET TWEET Twitter can be a powerful communications tool, one that allows you and your company to communicate with hundreds and thousands of people in a split second. It can help you introduce new products, send out valuable updates and hear from your existing customers. But to use Twitter effectively, you have to understand why people follow companies on Twitter at all. A survey from ExactTarget, a marketing agency specialising in social media and email, shows that 38 per cent of people who follow companies on Twitter do so in order to get updates on future products. Thirty-two per cent, meanwhile, say they follow a company’s tweets to stay informed about what a company is doing. Saving money also seems to be a big motivation, as 31 per cent said they follow a company to get a discount, 30 per cent said they follow to get news of upcoming sales and 28 per cent said they follow to get free samples.82 Alamy Stock Photo/PSL Images

Frequent, informal meetings between top managers and lower-level employees are one of the best ways for top managers to hear what others feel and think. Many people assume that top managers are at the centre of everything that goes on in organisations, but top managers commonly feel isolated from most of their lower-level managers and employees. Consequently, more and more top managers are scheduling frequent, informal meetings with people throughout their companies. The World Bank, with 10 000 people in 120 offices worldwide, is a non-governmental organisation that aims to end extreme poverty and promote ‘income growth for the bottom 40 per cent of every country’.76 When James Wolfensohn became president of the World Bank, ‘he went on fact-finding trips to developing countries to understand the kinds of projects that the bank was doing. After several visits he realized that he was only being shown successful projects, smiling villagers, and grateful government officials’. He told consultant and author Ron Ashkenas that ‘he eventually learned to stray from his tour guides so that he could meet people who hadn’t been prepped for his visit, to see what was really happening. This dramatically changed his assessment of how much of the bank’s aid was getting through the local government, to the people who really needed it’.77 Have you ever been around when a supervisor learns that upper management is going to be paying a visit? First there’s panic, as everyone is told to drop what he or she is doing to polish, shine and spruce up the workplace so that it looks perfect for the visit. Then, of course, top managers don’t get a realistic look at what’s going on in the company. Consequently, one of the ways to get an accurate picture is to pay surprise visits to various parts of the organisation. Blogs are another way to hear what people are thinking and saying, both inside and outside the organisation. A blog is a personal website that blog a personal website that provides personal opinions or provides personal opinions recommendations, news summaries or recommendations, news and reader comments. At Google, summaries and reader comments which owns the blog-hosting service Blogger, hundreds of employees are writing internal blogs. One employee even wrote a blog for posting all the notes from the brainstorming sessions used to redesign the search page used by millions each day.78 External blogs and tweets (microblogs where entries are limited to 140 or 280 characters), written by people outside the company, can be a good way to find out what others are saying or thinking about your organisation or its products or actions. Tim Holmes, Ford’s executive director of public affairs, believes that companies have to pay attention to what is being said about them online. Says Holmes, ‘Like most big companies, we monitor the press, but the problem with that is it’s always retrospective,

that were happening from a social perspective. We looked at conversations that were happening on Twitter, Facebook, and we really scrubbed the data to find out when consumers have questions about our brand.’81 Common questions included, ‘Is your meat 100 per cent beef?’, ‘Are your eggs real?’, ‘Does your meat include pink slime?’ McDonald’s prepared answers to questions already posted on social media and assembled a team of rapid responders to address new questions. The result, says Garcia, was a sizable increase in traffic, both to the company’s website and to the videos where questions were answered. And, she says, ‘For the first time, we’ve seen customers really responding in the sense that they’re defending us.’83 Finally, in addition to being a way to deliver organisational communication, so-called town hall meetings can be an effective way for companies to hear feedback from employees. In 2016, Dubai-based Emirates Airline carried 51.9 million

passengers, and by 2020, it expects that number to rise to 70 million. To meet growing demand, Emirates Airline will hire 5000 additional cabin staff, but in the meantime, the 20 000 current cabin crew employees are working more hours on shorter layovers. Crew members who had worked their way to first-class assignments, a prestigious posting, are having to return to economy class to cover staff shortages. Many staff members have had annual leave allocations deferred. To better understand crew member complaints, the airline held three town hall meetings – the first of which lasted four hours – during which staff aired grievances to senior management. Terry Daly, Emirates’ senior vice president of service delivery, announced the meetings in an email, writing that he was ‘aware that there are a number of subjects that are causing concern at the moment’ and that the meetings would be ‘an opportunity to talk about these directly with me’.84

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PART 4, CHAPTERS 12–14

What can you take from your progress through this part of MGMT3 12 Motivation

☑ You have developed your knowledge of the basics of motivation. ☑ You are able to use equity theory to explain how employees’ perceptions of fairness affect motivation.

☑ You can apply motivation theory and you know how to use expectancy theory to describe how workers’ expectations about rewards, effort and the link between rewards and performance influence motivation.

☑ You can describe how reinforcement theory works and how it can be used to

To study how managers lead their organisations by motivating, communication and leading

motivate.

☑ You are familiar with the components of goal-setting theory and how managers can use them to motivate workers.

☑ You can identify and discuss how the entire motivation model can be used to motivate workers.

Listen to an audio summary of each chapter in the End of Part summary

TER HAP 12

OVERALL AIM OF PART4

13 Leadership

☑ You can articulate what leadership is and describe who leaders are and what effective leaders do.

☑ You are familiar with normative decision theory and Fiedler’s contingency theory and you can describe how path–goal theory works.

☑ In a discussion about leadership style, you are able to explain how visionary leadership, charismatic leadership and transformational leadership help leaders achieve strategic leadership. management and leadership can support or hinder innovation.

Listen to an audio summary of each chapter in the End of Part summary

TER HAP 13

☑ You have learnt how different approaches to

14 Managing communication

☑ You have learnt about organisational communication and you are able to describe the various kinds of communication and related processes in organisations.

☑ You can explain the role that perception plays in communication and communication problems. effective one-on-one communication and organisation-wide communication concepts.

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Listen to an audio summary of each chapter in the End of Part summary

TER HAP 14

☑ You understand how managers apply

PART

FIVE CONTROLLING 15

Control

Managing information

Managing service and manufacturing operations

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Control

LEARNING OUTCOMES

1 Describe the basic control process. 2 Discuss the various methods that managers

BASICS OF CONTROL

can use to maintain control.

3 Describe the behaviours, processes and

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Control is a regulatory process

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outcomes that today’s managers are choosing to control in their organisations.

of establishing standards to achieve organisational goals, comparing actual performance against the standards and taking corrective control action when necessary to restore performance a regulatory process of establishing standards to those standards. Control is achieved when to achieve organisational behaviour and work procedures conform to goals, comparing actual standards and company goals are performance against the standards and taking accomplished.1 As one of the classic functions corrective action when of management we looked at in Chapter 1, necessary control is also the function which is said to integrate the other three management functions. While planning sets out objectives and the means of reaching them, leading seeks to motivate and inspire members of the organisation so that they achieve those same objectives, and organising puts the right resources and relationships in place so that objectives are achieved, control then integrates these three functions by checking ‘Are we actually achieving our initial objectives, and if not, what should we do about it?’ Control is not just an after-the-fact process, however. Preventive measures are also a form of control. A gun-wielding thief robbed the Bellagio casino in Las Vegas, speeding off with US$1.5 million in casino chips that he hoped to cash in later. However, thanks to the casino’s security procedures (i.e. their control systems), the stolen chips were quickly made worthless, as the casino replaced its entire stock of chips. According to Alan Feldman, spokesperson for the owners of the Bellagio resort, MGM Resorts International, ‘The new set was put out probably half an hour after the robbery took place’.2 When control fails, though, it can be catastrophic.Take, for example, the recent Volkswagen Dieselgate scandal

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(discussed in Chapter 4). The company was engulfed in a scandal when it was discovered that from 2009 to 2015, approximately half a million Volkswagen vehicles had been made with illegal software designed to make the exhaust systems appear to run cleaner – but only during government and official testing.This is a failure of internal management controls (Volkswagen senior executives claimed that the responsibility for the cheating scheme lay with ‘a handful of rogue software developers’), a failure of manufacturing quality controls, and a failure of government emissions controls (these vehicles have been pumping out more than permitted pollutants and contributing to greenhouse gas emissions). According to Reuters reports, the German-based company had lost around $A40 billion through fines, legal actions and replacement of defective software up to 2017 as a direct result of this scandal, and was expecting to face further losses of around $A8 billion in 2018.3 While these enormous financial effects are disastrous for Volkswagen, perhaps more importantly, what does this do to the company’s previous reputation for quality, reliability and high corporate standards? After reading the next section, you should be able to describe the basic control process.

The recent scandal at Volkswagen stemmed from a lack of appropriate standards and controls

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THE CONTROL PROCESS

The basic control process: ● begins with the establishment of clear standards of performance ● involves a comparison of performance to those standards ● takes corrective action, if needed, to repair performance deficiencies ● is a dynamic, cybernetic process ● consists of three basic methods: feedback control, concurrent control and feed-forward control. However, as much as managers would like it to be, control isn’t always worthwhile or possible.

STANDARDS The control process begins when managers set goals, such as ‘satisfying 90 per cent of customers’ or ‘increasing sales by 5 per cent’. Organisations then specify the performance standards that must be met to accomplish those goals. Standards are a basis of comparison for standard measuring the extent to which a basis of comparison organisational performance is satisfactory for measuring the extent to which various or unsatisfactory. For example, many kinds of organisational pizza shops use 30–40 minutes as the performance are satisfactory or standard for delivery times. Since anything unsatisfactory longer is viewed as unsatisfactory, they’ll typically reduce the price if they can’t deliver a hot pizza to you within that time period. So how do managers set standards? How do they decide which levels of performance are satisfactory and which are unsatisfactory? The first criterion for a good standard is that it must enable goal achievement. If you’re meeting the standard, but still not achieving company goals, then the standard may have to be changed. For example, to maintain low-priced airfares and cut costs, many budget carriers now charge customers for items that were once included in the normal airline ticket price. These are now called ‘extras’. Food, drink, sometimes checked baggage or in-flight entertainment are optional extras that can be paid for online when booking or on board. In another example, credit card use has skyrocketed in the last 20 years because consumers like the convenience of not carrying cash and retailers like the convenience of guaranteed payment. Credit card issuers, however, have lost billions from stolen credit card numbers hacked via the credit card swipe machines used in retail stores. Credit card issuers changed the standard

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from convenience to security when they informed retailers that they would need to pay for new, more secure pin and chip swipe machines by October 2016. Credit card issuers would continue to pay for fraudulent credit card charges as long as retailers used the pin and chip swipe machines. Retailers who continued using the older insecure swipe machines would now, for the first time, have to pay for fraudulent charges themselves.4 Companies also determine standards by listening to customers’ comments, complaints and suggestions or by observing competitors’ products and services. By January 2017, one-third of retailers used the pin and chip credit card swipe machines mentioned above. However, customers hated them! The Wall Street Journal’s Joanna Stern described using the new swipe machines like this: ‘1. Swipe card. 2. Get scolded by cashier to use the chip reader. 3. Insert chip and cancel all foreseeable plans. 4. Wait. 5. Wait some more. 6. Celebrate once you hear that joyless “Remove card” sound.’5 Stern found the pin and chip machines took 13 seconds to approve payment. As a result, some retailers continued using the less-secure swipe machines, despite liability for fraudulent charges, just to avoid long cash register lines.6 Fortunately, the new swipe machines also process even more secure smartphone payments (using Apple Pay, Samsung Pay and Android Pay) in 6 seconds or less. So, thanks to customers, the more secure standard for credit card payments will also be fast and convenient. Standards can also be determined by benchmarking other companies. Benchmarking is the benchmarking process of determining how well other the process of identifying outstanding practices, organisations (not necessarily processes and standards competitors) perform business functions in other organisations and adapting them to your or tasks. In other words, benchmarking organisation is the process of determining the

COMPARISON TO STANDARDS The next step in the control process is to compare actual performance to performance standards. Although this sounds straightforward, the quality of the comparison largely depends on the measurement and information systems a company uses to keep track of performance. The better the system, the easier it is for companies to track their progress and identify problems that need to be fixed. One way for retailers to verify that performance standards are being met is to use ‘secret shoppers’ who visit stores pretending to be customers, but are really there to determine whether employees provide helpful customer service. Secret shopper Cliff Fill recalls the fast-food restaurant where the workers discussed their dating plans as he stood in front of them ready to order. After ignoring him for 90 seconds (secret shoppers often carry timers with them), they turned to him and said, ‘We’ll be done with our conversation in a minute and be with you’.8

CORRECTIVE ACTION

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The next step in the control process is to identify performance deviations, PPLY E A analyse those deviations Complete the ‘Develop your career potential’ and then develop and worksheet for Chapter 15 implement programs to correct them. Beta versions of software programs are a common tool that developers use to monitor deviations from the standard and take corrective action – before the product is released on the market. Microsoft has an internal program called Software Quality Metrics (SQM) that company software developers use when creating new software releases. SQM helps the developers determine how each change in the software code will affect the functionality of the program and uses a system of comparison charts to show how the changes will affect

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standards used by others. When setting standards by benchmarking, the first step is to determine what to benchmark. Companies can benchmark anything, from cycle time (how fast), to quality (how well), to client satisfaction (how happy) to price (how much). The next step is to identify the organisations against which to benchmark your standards. The last step is to collect data to determine others’ performance standards. The Australian Taxation Office has developed an extensive free program to help small businesses benchmark their activities and performance against companies in a wide range of industries. Designed for organisations with turnover of up to $A15 million per year, the ATO releases new data each year, based on its database of more than 1.4 million small business tax returns, to help businesses compare their operations through an app or an online tool.7

DYNAMIC, CYBERNETIC PROCESS

Set standards

Develop and implement program for corrective action

Measure performance

Compare with standards

Analyse deviations

FIGURE 15.1

Identify deviations

Cybernetic control process

Source: Originally published in H. Koontz and R. W. Bradspies, ‘A future-directed view’, Business Horizons, 15, 25–36, Copyright Elsevier (1972).

The three basic control methods are feedback control, concurrent control and feed-forward control control. Feedback control is a feedback a mechanism for gathering mechanism for gathering information information about about performance deficiencies after they performance deficiencies after they occur occur. This information is then used to correct or prevent performance deficiencies. Study after study has clearly shown that feedback improves both individual and organisational performance. In most instances, any feedback PPLY E A Find out more about is better than no your customer management style with this self assessment feedback. But, if there is a downside to feedback, it is that it is always after the fact; in other words, it happens after performance deficiencies occur. Concurrent control addresses the concurrent control problems inherent in feedback control by a mechanism for gathering gathering information about performance information about performance deficiencies deficiencies as they occur. Thus, it is an as they occur, thereby improvement over feedback because it eliminating or shortening the delay between attempts to eliminate or shorten the delay performance and feedback between performance and feedback about the performance. Apple and Nike teamed up to create a real-time exercise feedback system called Nike + iPod. After a runner installs the system in his or her shoes, it transmits concurrent information to his or her iPod. The system measures time, distance, calories burned and pace. Runners can actually track their efforts every moment of their run and make changes as they run.12 Feed-for ward control is a feed-forward control mechanism for gathering information a mechanism for about performance deficiencies before monitoring performance inputs rather than outputs they occur. In contrast to feedback and to prevent or minimise concurrent control, which provide performance deficiencies feedback on the basis of outcomes and before they occur results, feed-forward control provides information about performance deficiencies by monitoring inputs, not outputs. So feed-forward control seeks to prevent or minimise performance deficiencies before they happen. Of course, because feed-forward control operates at the organisational ‘front end’ it can often involve inspections or testing of raw materials and components before they are approved for use. This can bring processing delays and high expenses. EO VID

As shown in Figure 15.1, control is a continuous, dynamic, cybernetic process. Control begins by setting standards, measuring performance and then comparing performance to the standards. If the performance deviates from the standards, then managers and employees analyse the deviations and develop and implement corrective programs that (hopefully) achieve the desired performance by meeting the standards. Managers must repeat the entire process again and again in an endless feedback loop (a continuous process). Thus, control is not a one-off achievement or result. It continues over time (i.e. it is dynamic) and requires daily, weekly and monthly attention from managers to maintain performance cybernetic levels at the standard (i.e. it is cybernetic). the process of steering or Cybernetic derives from the Greek keeping on course word kubernetes, meaning ‘steersman’; that is, one who steers or keeps on course.11 Therefore, the control process shown in Figure 15.1 is cybernetic because of the feedback loop in which actual performance is compared to standards so that deviations from those standards can be minimised or corrected.

FEEDBACK, CONCURRENT AND FEED-FORWARD CONTROL

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users of new software.9 Microsoft and some third parties use these systems to collect data on bugs and problems, such as crash logs and systems information. Some of these developments have raised concerns about the extent to which software companies and ‘personal assistant’ programs like Google Now, autocorrect keyboard applications or Siri collect user data to ‘personalise’ the experience (and the targeted advertising they can send us).10

CONTROL ISN’T ALWAYS WORTHWHILE OR POSSIBLE Control is achieved when behaviour and work procedures conform to standards and goals are accomplished. By contrast, control loss occurs when behaviour and

control loss the situation in which behaviour and work procedures do not conform to standards

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introduced in 2014 in response to a high-profile, fatal onepunch assault. Sydney’s liquor restrictions also prevent people from standing on the footpath outside a pub with their drink, and place a ban on ordering shots after midnight.17 After four years in operation, there is still debate over whether the Sydney lockout laws improve local amenity and reduce crime, or whether they merely push poor behaviour to other areas.18 The costs of any controls, PPLY E A Get an including government regulatory overview of the control controls, always need to be process weighed carefully against any proposed benefits. Another factor to consider is cybernetic cybernetic feasibility, the extent to feasibility which it is possible to implement each the extent to which it is possible to implement step in the control process: clear standards each step in the control process of performance, comparison of performance to standards and corrective action. If one or more steps cannot be implemented, then maintaining effective control may be difficult or impossible.

HOW AND WHAT TO CONTROL

Baggage handlers at Sydney’s international airport are subject to overt and covert video surveillance. Of the 800 baggage handlers who work at the airport, a very small number have been charged with pilfering or smuggling drugs (one famous case was in 2005 when one employee was charged for smuggling over 9 kilograms of cocaine). The official aim of the surveillance is to guard against criminal activity and to ensure passenger safety. However, covert surveillance of employees raises ethical questions about privacy issues. Many employees resent covert and overt surveillance, claiming that the system is in place not to ensure safety and security but to provide management with a means of controlling worker behaviour. The Transport Workers’ Union, which represents baggage handlers, argued that covert surveillance cameras were unnecessary and that existing visible cameras were sufficient.The union claimed that at Melbourne airport, no worker had been charged with pilfering for the 10 years prior to the Sydney incident. Are there better ways to ensure safety and security without compromising the privacy of employees? What would you do if you were a manager at Sydney airport?19 While these concerns about surveillance seem to have quietened down at Sydney and Melbourne airports,

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work procedures do not conform to standards.13 Maintaining control is important because control loss prevents goal achievement. When control loss occurs, managers need to find out what, if anything, they could have done to prevent it. Usually, as discussed above, that means identifying deviations from standard performance, analysing the causes of those deviations and taking corrective action. Implementing controls, however, isn’t always worthwhile or possible. Let’s look at regulation costs and cybernetic feasibility to see why. To determine whether control is regulation cost worthwhile, managers need to carefully a cost associated with implementing or assess regulation costs; that is, maintaining control whether the costs and both the intended and unintended consequences of control exceed its benefits. In the United States, local city and state recycling programs paid for themselves for decades as the cost of collecting recyclables was exceeded by the revenue from reselling millions of tons of glass, aluminium and plastic. However, in the last couple of years, recycled aluminium can prices have dropped 28 per cent, while prices for recycled plastic bottles are down 44 per cent. The major consequence of lower prices is that the cost of collecting recyclable materials now exceeds revenues. Because regulation costs now exceed regulation benefits, 700 of California’s 2400 recycling centres have closed. Fewer recycling centres also means that consumers have to drive further to get paid 5 cents per recycled bottle or can. Californian Hiro Tani said, ‘It kind of defeats the purpose if you have to drive that far.’14 Jose Ponce, who runs six recycling businesses, says, ‘If it keeps going the way it is, I don’t know if I’m going to make it. That would be bad for the environment and also bad for people.’15 Likewise, at this rate, California’s Beverage Container Recycling Fund could run out of money in 2018. A similar situation arose in Australia in 2018, with local councils forced to suspend recycling of their curbside bin collections or to look at increasing collection charges on ratepayers and residents, due to drastically reduced prices for recycled materials, which had previously been sold profitably to Chinese companies.16 Publisher of the lifestyle magazine Monacle, Tyler Brulé, is critical of what he sees as Australian over-control, saying: ’This country is on the verge of becoming the world’s dumbest nation. There will be a collapse of common sense here if health and safety wins out on every single discussion’. Sydney’s lockout laws and the Sydney airport curfew, which prevents planes from entering or taking off between 11pm and 6am, were reportedly on his list of specific complaints. ‘If you want to be globally attractive, you do need to have bars open until whatever hour of the day’, he said. The lockout laws, which prevent new patrons from entering a pub in the Sydney Central Business District after 1.30 a.m. and call ‘last drinks’ at 3 a.m., were

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some problems obviously remain, with more recent reports about police actions over the smuggling of large quantities of cannabis through Brisbane airport – but by passengers, not baggage handlers.20 After reading the next two sections, you should be able to: ● discuss the various methods that managers can use to maintain control ● describe the behaviours, processes and outcomes that today’s managers are choosing to control in their organisations.

Baggage handlers at Sydney airport were subjected to video surveillance due to criminal activity by a minority of employees

LO2

CONTROL METHODS

Managers can use five different methods to achieve control in their organisations: ● bureaucratic ● objective ● normative ● concertive ● self-control.

BUREAUCRATIC CONTROL When most people think of managerial control, what they have in mind is bureaucratic control. Bureaucratic control is top-down control, in which managers bureaucratic control the use of hierarchical try to influence employee behaviour by authority to influence rewarding or punishing employees for employee behaviour by compliance or non-compliance with rewarding or punishing employees for compliance organisational policies, rules and or non-compliance with procedures. Most employees, however, organisational policies, rules and procedures would argue that bureaucratic managers emphasise punishment for noncompliance much more than rewards for compliance. For instance, when visiting a training company’s regional offices and managers, one senior manager, who was known for his temper and for micromanaging others, would get some toilet paper from the restrooms and aggressively ask, ‘What’s this?’ When the managers answered, ‘Toilet

paper’, the manager would scream that it was two-ply toilet paper that the company couldn’t afford. When told of a cracked toilet seat in one of the women’s restrooms, he said, ‘If you don’t like sitting on that seat, you can stand up like I do!’21 Ironically, bureaucratic management and control were created to prevent just this type of managerial behaviour. By encouraging managers to apply well-thought-out rules, policies and procedures in an impartial, consistent manner to everyone in the organisation, bureaucratic control is supposed to make companies more efficient, effective and fair. Unfortunately, it frequently has just the opposite effect. Managers who use bureaucratic control often emphasise following the rules above all else. Another characteristic of bureaucratically controlled companies is that due to their rule- and policy-driven decision making, they are highly resistant to change and slow to respond to customers and competitors. Recall from Chapter 2 that even Max Weber, the German philosopher who is largely credited with popularising bureaucratic ideals in the late nineteenth century, referred to bureaucracy as the ‘iron cage’. He said, ‘Once fully established, bureaucracy is among those social structures which are the hardest to destroy’.22 Not surprisingly, governments and government departments are often accused of excessive bureaucratic control. Governments in many countries have started campaigns to reduce the burden of excessive regulation (‘red tape’) through ‘red tape reduction programs’. In 2015, the Australian government claimed that it had saved businesses $2.5 billion over two years through cuts to ‘compliance costs’. Examples were that people buying pre-paid mobile phones would only need one identity check (not two), saving $6.2 million, and that scrapping the regulations which stopped people using mobile devices during aircraft take-off and landing would save $17 million. 23 Of course, efforts to reduce government compliance costs need to continue: in 2017, the Australian Taxation Office brought in significant simplification to the rules on Goods and Services Tax reporting, which were warmly welcomed by the small business community.24

OBJECTIVE CONTROL In many companies, bureaucratic control has evolved into objective control, which is the use of objective control observable measures of employee the use of observable of employee behaviour or output to assess performance measures behaviour or outputs to and influence behaviour. While assess performance and bureaucratic control focuses on whether influence behaviour policies and rules are followed, objective control focuses on the observation or measurement of worker behaviour or output.

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For example, cyberloafing, or wasting time online while at work, is estimated to cost US companies US$85 billion a year due to decreased worker productivity, reduced available bandwidth and damage from viruses and malware. Rather than blocking websites, one US agricultural company uses software to divide the Internet into sites that employees can always, sometimes or never visit. Sites that eat up too much bandwidth (such as YouTube) and those that may cause legal problems for the company (such as p*rnography) are forbidden. Otherwise, an on-screen warning alerts employees that a site may not be work related. Employees can browse non-work-related sites for 10 minutes at a time – up to 90 minutes per day. If they exceed this amount, they must explain to their managers why they need more time on such sites. The company believes that the software ‘provided [employees] with a reminder of the acceptable uses for Internet resources while at work and what is expected of them.’25 There are two kinds of objective control: behaviour control and output control. Behaviour control is regulating behaviour control the regulation of the behaviours and actions that workers behaviours and actions perform on the job. The basic assumption that workers perform on of behaviour control is that if you do the the job right things (i.e. exhibit the right behaviours) every day, then those things should lead to goal achievement. Behaviour control is still management-based, however, which means that managers are responsible for monitoring and rewarding or punishing workers for exhibiting desired or undesired behaviours. Instead of measuring what managers and workers do, output control measures the results of output control their efforts. Whereas behaviour control the regulation of workers’ results or outputs through regulates, guides and measures how rewards and incentives workers behave on the job, output control gives managers and workers the freedom to behave as they see fit as long as they accomplish prespecified, measurable results. Output control is often coupled with rewards and incentives. Three things must occur for output control and rewards to lead to improved business results. First, output control measures must be reliable, fair and accurate. Second, employees and managers must believe that they can produce the desired results. If they don’t, then the output controls won’t affect their behaviour. Third, the rewards or incentives tied to outcome control measures must truly be dependent on achieving established standards of performance. For example, at BHP Billiton, bonus payments are not given unless clearly defined targets are met. BHP Billiton’s Remuneration Committee believes that by setting targets against key performance indicators (KPIs), and the relative weightings given to the different categories of KPI, an effective incentive is established for short-term performance. At the end of each year, the performance

Virgin seeks to employ people who are passionate about music to work in over 400 businesses in 30 countries

level achieved against each KPI is measured and awards are calculated and paid according to the level of performance.26 In a unique form of output control, Aetna, an American healthcare and health insurance company, is rewarding employees who get extra sleep. CEO Mark Bertolini said, ‘If they can prove they get 20 nights of sleep for seven hours or more in a row [via Fitbit fitness trackers], we will give them $25 a night, up [to] $500 a year.’ Bertolini says, ‘If we can make … business fundamentals better by investing in our people, then that’s going to show up in our revenue.’27 Arianna Huffington, cofounder of the Huffington Post, said, ‘It really changes the cultural delusion that most businesses have been operating under, which has been ... the more exhausted and burned out the employees are, the more productive they are.’28

NORMATIVE CONTROL Rather than monitoring rules, behaviour or output, another way to control what goes on in organisations is to use normative control to shape the beliefs normative control and values of the people who work there. the regulation of With normative controls, a company’s employee’s behaviour and decisions through widely widely shared values and beliefs guide shared organisational values and beliefs employee’s behaviour and decisions. Normative controls are created in two ways. First, companies that use normative controls are very careful about who they hire. While many companies screen potential applicants on the basis of their abilities, normatively controlled companies are just as likely to screen potential applicants based on their attitudes and values. Billionaire Sir Richard Branson, founder of Virgin, which has 300 branded companies (Virgin Airways, Virgin Mobile, Virgin Megastore, etc.) employing 50 000 people in 30 countries, hires entrepreneurial people with positive attitudes. He says, ‘We stumbled on this formula when we were launching our record store business in the late 1960s. We decided to look for employees who were passionate about music, because we thought their enthusiasm and

knowledge would be as important a draw as the beanbag chairs, coffee and listening posts we planned to feature in our first stores, and that turned out to be correct’. Branson says, ‘When we launched Virgin Records a couple of years later … we put a lot of effort into finding and hiring the right people and then we made sure that they felt empowered to run the business as they saw fit, that’s what we had hired them for. This approach helped us to attract and keep great talent … Virgin has launched 400 businesses in more than 40 years of expansion; our focus on employees is one of the main reasons for our success’.29 Second, with normative controls, managers and employees learn what they should and should not do by observing experienced employees and by listening to the stories they tell about the company. At Virgin, Richard Branson also understands that normative controls mean that he needs to trust his employees: ‘the company culture has always been: “Don’t sweat it: rules were meant to be broken”’.30

CONCERTIVE CONTROL Whereas normative controls are based on beliefs that are strongly held and widely shared throughout a company, concertive controls are based on concertive control beliefs that are shaped and negotiated by the regulation of workers’ behaviour and decisions work groups. 31 Whereas normative through work group values controls are driven by strong and beliefs organisational cultures, concertive controls usually arise when companies give autonomous work groups complete autonomy and responsibility for task completion. (See Chapter 10 for a detailed discussion of the role of autonomy in groups and teams.) The most autonomous groups operate without managers and are completely responsible for controlling work group processes, outputs and behaviour. Such groups do their own hiring, firing, worker discipline, work schedules, materials ordering, budget making and meeting, and decision making. Concertive control is not established overnight. Highly autonomous work groups evolve through two phases as they develop concertive control. In the first phase, group members learn to work with each other, supervise each other’s work and develop the values and beliefs that will guide and control their behaviour. Because they develop these values and beliefs themselves, work group members feel strongly about following them. The second phase in the development of concertive control is the emergence and formalisation of objective rules to guide and control behaviour. The beliefs and values established in phase one usually develop into more objective rules as new members join teams. The clearer those rules, the easier it becomes for new members to figure out how and how not to behave.

Ironically, concertive control may lead to even more stress for workers to conform to expectations than bureaucratic control. Under bureaucratic control, most workers only have to worry about pleasing the boss. But with concertive control, their behaviour has to satisfy the rest of their team members. For example, one team member working in the US steel industry says, ‘I don’t have to sit there and look for the boss to be around; and if the boss is not around, I can sit there and talk to my neighbour or do what I want. Now the whole team is around me and the whole team is observing what I’m doing’.32 With concertive control, team members have a second, much more stressful role to perform – that of making sure that other team members adhere to team values and rules.

SELF-CONTROL Self-control, also known as selfmanagement, is a control system in

self-control (selfmanagement) a control system in which managers and workers control their own behaviour by setting their own goals, monitoring their own progress and rewarding themselves for goal achievement

which managers and workers control their own behaviour.33 Self-control does not result in anarchy in which everyone gets to do whatever he or she wants. In selfcontrol or self-management, leaders and managers provide workers with clear boundaries within which they may guide and control their own goals and behaviours.34 Leaders and managers also contribute to self-control by teaching others the skills they need to maximise and monitor their own work effectiveness. In turn, individuals who manage and lead themselves establish self-control by setting their own goals, monitoring their own progress, rewarding or punishing themselves for achieving or for not achieving their self-set goals and constructing positive thought patterns that remind them of the importance of their goals and their ability to accomplish them.35 For example, let’s assume you need to do a better job of praising and recognising the good work that your staff does for you. You can use goal setting, self-observation and self-reward to self-manage this behaviour. For selfobservation, write ‘praise/recognition’ on a 7 × 12 centimetre card. Put the card in your pocket. Put a tick on the card each time you praise or recognise someone (wait until the person has left before you do this). Keep track for a week. This serves as your baseline or starting point. Simply keeping track will probably increase how often you do this. After a week, assess your baseline or starting point, and then set a specific goal. For instance, if your baseline was twice a day, you might set a specific goal to praise or recognise others’ work five times a day. Continue monitoring your performance with your cards. Once you’ve achieved your goal every day for a week, give yourself a reward (perhaps a movie, or lunch with a friend at a new restaurant) for achieving your goal.36

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LO3

WHAT TO CONTROL

In the first section of this chapter, we discussed the basics of the control process and that control isn’t always worthwhile or possible. In the second section, we looked at the various ways in which control can be obtained. In this third and final section, we address an equally important issue, ‘What should managers control?’ The way managers answer this question has critical implications for most businesses. If you control for just one thing, such as costs, then other dimensions, like marketing, customer service and quality, are likely to suffer. If you try to control for too many things, then managers and employees become confused about what’s really important. In the end, successful companies find a balance that comes from doing three or four things right, like managing costs, providing value and keeping customers and employees satisfied. After reading this section, you should be able to explain the ‘balanced scorecard’ approach to control and how companies can achieve balanced control of a company performance by choosing to control: ● budgets, cash flows and economic value added ● customer defections ● quality ● waste and pollution.

THE BALANCED SCORECARD Most companies measure performance using standard financial and accounting measures such as return on capital, return on assets, return on investments, cash flow, net income and net margins. The balanced scorecard balanced scorecard encourages measurement of organisational managers to look beyond traditional performance in four financial measures to four different equally important areas: finances, customers, perspectives on company performance: internal operations, and How do customers see us (the customer innovation and learning perspective)? What must we excel in (the internal perspective)? Can we continue to improve and create value (the innovation and learning perspective)? How do we look to shareholders (the financial perspective)?37

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As you can see, the components of self-management, self-set goals, self-observation and self-reward have their roots in the motivation theories you read about in Chapter 12. The key difference, though, is that the goals, feedback and rewards originate from employees themselves and not from their managers or organisations.

Managers contribute to self-control by teaching others the skills they need to maximise and monitor their own work effectiveness

The balanced scorecard has several advantages over traditional control processes that rely solely on financial measures. First, it forces managers at each level of the company to set specific goals and measure performance in each of the four areas. For example, Figure 15.2 shows that the National Library of Australia uses five different measures in its balanced scorecard. Of those, only one is a measure of financial performance. In addition to the focus on finances, the library considers customer needs and feedback, stakeholders (including communities, state and territory governments and businesses), their own organisational processes and organisational learning.38 The second major advantage of the balanced scorecard approach to control is that it minimises the sub-optimisation chances of sub-optimisation, which performance improvement occurs when performance improves in one in one part of an organisation but at the area, but at the expense of decreased expense of decreased performance in another performance in others. As the chief part medical director at a large children’s hospital says, ‘… we could increase productivity … by assigning more patients to a nurse, but doing so would raise the likelihood of errors – an unacceptable trade-off’.39 Although the balanced scorecard was originally developed for use in private-sector companies, in more recent years it has become much more popular and prevalent in public-sector organisations, especially in Australia.40 Let’s examine some of the ways in which companies are controlling the four basic parts of the balanced scorecard: the financial perspective (budgets, cash flows and economic value added), the customer perspective (customer defections), the internal perspective (total quality management) and the innovation and learning perspective (waste and pollution).

customer

measure achievement of strategic directions

link strategic directions with the budget process

stakeholder

financial Through the balanced scorecard the library is better able to:

focus on achieving longer-term objectives

focus on implementation of strategic directions

FIGURE 15.2

process

learning and growth

The National Library of Australia’s balanced scorecard

Source: National Library of Australia

THE FINANCIAL PERSPECTIVE: CONTROLLING BUDGETS, CASH FLOWS AND ECONOMIC VALUE ADDED cash flow analysis a type of analysis that predicts how changes in a business will affect its ability to take in more cash than it pays out balance sheet an accounting statement that provides a snapshot of a company’s financial position at a particular time income statement an accounting statement, also called a ‘profit and loss statement’, that shows what has happened to an organisation’s income, expenses and net profit over a period of time financial ratio a calculation typically used to track a business’ liquidity (cash), efficiency and profitability over time compared to other businesses in its industry

The traditional approach to controlling financial performance focuses on accounting tools, such as cash flow analysis, balance sheets, income statements, financial ratios and budgets. Cash flow analysis predicts how changes in a business will affect its ability to take in more cash than it pays out. Balance sheets provide a snapshot of a company’s financial position at a particular time (but not the future). Income statements, also called profit and loss statements, show what has happened to an organisation’s income, expenses and net profit (income less expenses) over a period of time. Financial ratios are typically used to track a business’ liquidity (cash), efficiency and profitability over time compared to other businesses in its

industry. Finally, budgets are used to budget project costs and revenues, prioritise and a quantitative plan through which managers decide control spending, and ensure that how to allocate available expenses don’t exceed available funds money to best accomplish company goals and revenues. In a typical budgeting process, a manager will use the previous year’s budget and adjust it to reflect the current situation. However, with zero-based budgeting, managers create a new budget from scratch each year. The Financial Review Card found in the back of this book contains tables that (1) show the basic steps or parts for cash flow analyses, balance sheets and income statements; (2) list a few of the most common financial ratios and explain how they are calculated, what they mean and when to use them; and (3) review the different kinds of budgets managers can use to track and control company finances. By themselves, none of these tools – cash flow analyses, balance sheets, income statements, financial ratios or budgets – tell the whole financial story of a business. They must be used together when assessing a company’s financial performance. Since these tools are usually reviewed in detail in accounting and finance classes, only a brief overview is provided here. Still, these are

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necessary tools for controlling organisational finances and expenses, and they should be part of your business toolbox. Unfortunately, most managers don’t have a good understanding of these accounting tools even though they should.41 Though no one would dispute the importance of cash flow analyses, balance sheets, income statements, financial ratios or budgets, accounting research also indicates that the complexity and sheer amount of information contained in these accounting tools can shut down the brain and glaze over the eyes of even the most experienced manager.42 Sometimes, there’s simply too much information. The balanced scorecard simplifies things by focusing on one simple question when it comes to finances: ‘How do we look to shareholders?’ One way to answer that question is through something called ‘economic value added’. Conceptually, economic value economic value added (EVA) is not the same thing as added (EVA) the amount by which profits. It is the amount by which profits company profits (revenues, exceed the cost of capital in a given year. minus expenses, minus taxes) exceed the cost of It is based on the simple idea that capital capital in a given year is necessary to run a business and that capital comes at a cost. Although most people think of capital as cash, capital, once invested (i.e. spent), is more likely to be found in a business in the form of computers, manufacturing plants, employees, raw materials and so forth. Just like the interest that a homeowner pays on a mortgage or that a university student pays on a student loan, there is a cost to that capital. The most common costs of capital are the interest paid on long-term bank loans used to buy all those resources, the interest paid to bondholders (who lend organisations their money) and the dividends (cash payments) and growth in stock value that accrue to shareholders. EVA is positive when company profits (revenues, minus expenses, minus taxes) exceed the cost of capital in a given year. In other words, if a business is to truly grow, its revenues

TABLE 15.1

288

must be large enough to cover both short-term costs (annual expenses and taxes) and long-term costs (the cost of borrowing capital from bondholders and shareholders). If you’re a bit confused, the late Roberto Goizueta, the former CEO of Coca-Cola, explained it this way: ‘You borrow money at a certain rate and invest it at a higher rate and pocket the difference. It is simple. It is the essence of banking’.43 Table 15.1 shows how to calculate EVA. First, starting with a company’s income statement, you calculate the net operating profit after taxes (NOPAT) by subtracting taxes owed from income from operations. (Remember, a quick review of an income statement is on the Financial Review Card found at the back of your book.) The NOPAT shown in Table 15.1 is $3 500 000. Second, identify how much capital the company has invested (i.e. spent). Total liabilities (what the company owes) less accounts payable and less accrued expenses, neither of which you pay interest on, provides a rough approximation of this amount. In Table 15.1, total capital invested is $16 800 000. Third, calculate the cost (i.e. rate) paid for capital by determining the interest paid to bondholders (who lend organisations their money), which is usually somewhere between 5 and 8 per cent, and the return that stockholders want in terms of dividends and stock price appreciation, which is historically about 13 per cent. Take a weighted average of the two to determine the overall cost of capital. In Table 15.1, the cost of capital is 10 per cent. Fourth, multiply the total capital ($16 800 000) from step 2 by the cost of capital (10 per cent) from step 3. In Table 15.1, this amount is $1 680 000. Fifth, subtract the total dollar cost of capital in step 4 from the NOPAT in step 1. In Table 15.1, this value is $1 820 000, which means that our example company has created economic value or wealth this year. If our EVA number had been negative, meaning that the company didn’t make enough profit to cover the cost of capital from bondholders and shareholders, then the company would have destroyed economic value or wealth by taking in more money than it returned.44

Calculating economic value added (EVA)

Calculate net operating profit after taxes (NOPAT).

$3 500 000

Identify how much capital the company has invested (i.e. spent).

Determine the cost (i.e. rate) paid for capital (usually between 5 per cent and 13 per cent).

Multiply capital used (step 2) times cost of capital (step 3).

(10% × $16 800 000) = $1 680 000

Subtract the total dollar cost of capital from net profit after taxes.

$3 500 000 NOPAT −$1 680 000 Total cost of capital $1 820 000 Economic value added

$16 800 000 10%

Getty Images/Xavier Arnau

Capital isn’t just cash; once invested (i.e. spent), it is more likely to be found in a business in the form of computers, manufacturing plants, employees, raw materials and so forth

But why is EVA so important? First and most importantly, because it includes the cost of capital, it shows whether a business, division, department, profit centre or product is really paying for itself. The key is to make sure that managers and employees can see how their choices and behaviour affect the company’s EVA. Second, because EVA can easily be determined for subsets of a company, such as divisions, regional offices, manufacturing plants and sometimes even departments, it makes managers and workers at all levels pay much closer attention to their segment of the business. When company offices were being refurbished at one company, a worker who had EVA training handed the CEO $4000 in cash. The worker explained that he now understood the effect his job had on the company’s ability to survive and prosper. Furthermore, since the company was struggling, he had sold the old doors that had been removed during remodelling so that the company could have the cash.45 Another example is that, because of EVA training and information systems, factory workers at Herman Miller, a leading office furniture manufacturer, understand that using more efficient materials, such as less expensive wood-dust board instead of real wood sheeting, contributes an extra dollar of EVA from each desk the company makes. On its website, Herman Miller explains that: Under the terms of the EVA plan, we shifted our focus from budget performance to long-term continuous improvements and the creation of economic value. When we make plans for improvements around here, we include an EVA analysis. When we make decisions to add or cut programs, we look at the impact on EVA. Every month we study our performance in terms of EVA, and this measurement system is one of the first things new recruits to the company learn.46 The result is a highly motivated and businessliterate workforce that challenges convention and strives to create increasingly greater value for both customers and owners. Every month the company and all employees review performance in terms of EVA, which has proven to be a strong corollary to shareholder value.47

In other words, EVA motivates managers and workers to think like small-business owners who must scramble to contain costs and generate enough business to meet their bills each month. Unlike many kinds of financial controls, EVA doesn’t specify what should or should not be done to improve performance. Thus, it encourages managers and workers to be creative in looking for ways to improve EVA performance. Remember that EVA is the amount by which profits exceed the cost of capital in a given year. The more that EVA exceeds the total dollar cost of capital, the better a company has used investors’ money that year. For example, Apple had an EVA of US$41.9 billion in 2016, by far the largest EVA in the world. The next-closest company was Alphabet (parent company of Google) at US$10.1 billion. Apple’s EVA financial performance in 2016 was extraordinary and the third largest ever achieved by any company.48

THE CUSTOMER PERSPECTIVE: CONTROLLING CUSTOMER DEFECTIONS The second aspect of organisational performance that the balanced scorecard helps managers monitor is customers. It does so by forcing managers to address the question, ‘How do customers see us?’ Unfortunately, most companies try to answer this question through customer satisfaction surveys, but these are often misleadingly positive. Most customers are reluctant to talk about their problems because they don’t know who to complain to or think that complaining will not do any good. One study found that 96 per cent of unhappy customers never complain to anyone in the company.49 One reason that customer satisfaction surveys can be misleading is that sometimes even very satisfied customers will leave to do business with competitors. Rather than poring over customer satisfaction surveys from current customers, studies indicate that companies may do a better job of answering the question, ‘How do customers see us?’ by closely monitoring customer customer defection defections; that is, by identifying which a performance assessment which a company customers are leaving the company and in identifies which customers measuring the rate at which they are are leaving and measures leaving. Unlike the results of customer the rate at which they are leaving satisfaction surveys, customer defections and retention do have a great effect on profits. For example, very few managers realise that obtaining a new customer costs five times as much as keeping a current one. In fact, the cost of replacing old customers with new ones is so great that most companies could double their profits by increasing the rate of customer retention by just 5 to 10 per cent per year.50 Similarly, if a company can keep a customer for life, the benefits are even larger. In most retail situations the lifetime value of a

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in the world. It has been named ‘best’ 18 years in a row by readers of Conde Nast Traveller magazine.53 It has also received various ‘best airline’ awards from the Asian Wall Street Journal, Business Traveller International, Germany Business Traveller, Travel and Leisure, and Fortune.54 While

many airlines try to cram passengers into every available inch on a plane, Singapore Airlines delivers creature comforts to encourage repeat business and customers willing to pay premium prices. Singapore Airlines was the first airline, in the 1970s, to introduce a choice of meals, complimentary drinks and earphones in economy class. It was the first to introduce worldwide video, news, telephone and fax services, and the first to feature personal video monitors for movies, news, documentaries and games. Singapore Airlines has had AC power for laptop computers for some time, and it was also the first airline to introduce on-board, high-speed Internet access.55

customer will vary between five and seven per cent. According to research carried out by Go Direct in New Zealand, the lifetime value of a customer might be $250 000 for a supermarket customer, $150 000 for a car customer, $90 000 for a women’s wear customer and $30 000 for a menswear customer.51 Beyond the clear benefits to the bottom line, the second reason to study customer defections is that customers who have left are much more likely than current customers to tell you what you were doing wrong. Finally, companies that understand why customers leave can not only take steps to fix ongoing problems, but can also identify which customers are likely to leave and make changes to prevent them from leaving.

THE INTERNAL PERSPECTIVE: CONTROLLING QUALITY The third part of the balanced scorecard, the internal perspective, consists of the processes, decisions and actions that managers and workers make within the organisation. In contrast to the financial perspective of EVA and the outward-looking customer perspective, the internal perspective asks the question, ‘What must we excel in?’ Consequently, the internal perspective of the balanced scorecard usually leads managers to a focus on quality. For McDonald’s, it could be processes and systems that enable the company to provide consistent, quick, low-cost food. For Toyota, it could be reliability – when you turn on your car it starts, no matter whether the car has 20 000 or 200 000 kilometres on it. Yet no matter what area a company chooses, the key is to excel in that area. Consequently, the internal perspective of the balanced scorecard usually leads managers to a focus on quality. Quality is typically defined and measured in three ways: excellence, value and conformance to expectations.52 When the company defines its quality goal as excellence, then managers must try to produce a product or service of unsurpassed performance and features. For example, by almost any standard, Singapore Airlines is the best airline

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The lifetime value of a retained supermarket customer might be as high as $250 000

Singapore Airlines’ customers perceive that they’re getting excellent value for money because the airline has always gone ‘above and beyond’

Value is the customer perception that value the product quality is excellent for the price customer perception that the product quality offered. At a higher price, for example, is excellent for the price customers may perceive the product to be offered of less value. When a company emphasises value as its quality goal, managers must simultaneously control excellence, price, durability or other features of a product or service that customers strongly associate with value. Aldi, a grocery store company with 10 000 stores worldwide, operates on the single principle of bringing maximum value to customers. Aldi stocks only 3 per cent of the products that a typical grocery store carries, and most of its products are store brands. Customers bring their own bags and pick products off pallets rather than store shelves. Yet, Aldi’s store brands have consistently beaten the name brand rivals in taste and quality, and in Germany, Aldi was voted the most trusted name in the grocery business.56 When a company defines its quality goal as ‘conformance to specifications’, employees must base decisions and actions on whether services and products measure up to standard specifications. In contrast to excellence and value-based definitions of quality that can be somewhat ambiguous, measuring whether products

Quality checklist for buying fresh fish Fresh whole fish

Acceptable

Not acceptable

Bright red, free of slime, clear mucus

Brown to grayish, thick, yellow mucus

Clear, bright, bulging, black pupils

Dull, sunken, cloudy, gray pupils

Inoffensive, slight ocean smell

Ammonia, putrid smell

Opalescent sheen, scales adhere tightly to skin

Dull or faded colour, scales missing or easily removed

Firm and elastic to touch, tight to the bone

Soft and flabby, separating from the bone

No viscera or blood visible, lining intact, no bone protruding

Incomplete evisceration, cuts or protruding bones, off-odour

Gills Eyes Smell

Skin Flesh Belly cavity

FIGURE 15.3

Conformance to specifications checklist for buying fresh fish Source: ‘A closer look: buy it fresh, keep it f resh’, Consumer Reports Online, thttp://www.seagrant.sunysb.edu; ‘How to purchase: buying fish’, AboutSeaFood website, http://www.aboutseafood.com, 20 June 2005.

and services are ‘in spec’ is relatively easy. Furthermore, while conformance to specifications (i.e. precise tolerances for a part’s weight or thickness) is usually associated with manufacturing, it can be used equally well to control quality in non-manufacturing jobs. Figure 15.3 shows a checklist that a cook or restaurant owner would use to ensure quality when buying fresh fish.

TABLE 15.2

The way in which a company defines quality affects the methods and measures that workers use to control quality. Accordingly, Table 15.2 shows the advantages and disadvantages associated with the excellence, value and conformance to specification definitions of quality.

Advantages and disadvantages of different measures of quality

Quality measure

Excellence

Advantages

Disadvantages

Promotes clear organisational vision

Provides little practical guidance for managers

Being/providing the ‘best’ motivates and inspires managers and employees

Excellence is ambiguous. What is it? Who defines it?

Appeals to customers, who ‘know excellence when they see it’

Difficult to measure and control

Customers recognise differences in value

Can be difficult to determine what factors influence whether a product/service is seen as having value

Easier to measure and compare whether products/services differ in value

Controlling the balance between excellence and cost (i.e. affordable excellence) can be difficult

If specifications can be written, conformance to specifications is usually measurable

Many products/services cannot be easily evaluated in terms of conformance to specifications

Should lead to increased efficiency

Promotes standardisation, so may hurt performance when adapting to changes is more important

Promotes consistency in quality

May be less appropriate for services, which are dependent on a high degree of human contact

Value

Conformance to specifications

Source: Academy of Management review by C. A. Reeves & D. A. Bednar. Copyright 1994 by Academy of Management (NY). Reproduced with permission of Academy of Management (NY) in the format Textbook via Copyright Clearance Center.

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THE INNOVATION AND LEARNING PERSPECTIVE: CONTROLLING WASTE AND POLLUTION

Shutterstock.com/berkut; Shutterstock.com/Oleksandr Malysh; Shutterstock.com/Drawlab19; Shutterstock.com/Arcady

The last part of the balanced scorecard, the innovation and learning perspective, addresses the question, ‘Can we continue to improve and create value?’ Therefore, the innovation and learning perspective involves continuous improvement in ongoing products and services (discussed in Chapter 17), as well as relearning and redesigning the processes by which products and services are created (discussed in Chapter 7). Figure 15.4 shows the four levels of waste minimisation, from waste disposal, which produces the smallest minimisation of waste, to waste prevention and reduction, which produces the greatest minimisation.57 The goals of the top level, waste prevention and reduction, are to prevent waste and pollution before they occur or to reduce them when they do occur. There are three strategies for waste prevention and reduction. 1 Good housekeeping: performing regularly scheduled preventive maintenance for offices, factories and equipment. Quickly fixing leaky valves, turning off lights or equipment when not in use and making sure machines are running properly so that they don’t use more fuel than necessary are examples of good housekeeping. 2 Material/product substitution: replacing toxic or hazardous materials with less harmful materials. As part of its Pollution Prevention Pays program over the last 30 years, 3M eliminated 1 billion kilograms of pollutants and saved US$1 billion by using benign substitutes for toxic solvents in its manufacturing processes.58 3 Process modification: changing steps or procedures to eliminate or reduce waste. At the second level of waste minimisation, recycle and reuse, wastes are reduced by reusing materials as long as possible or by collecting materials for on- or off-site recycling. For example, the Ford Motor Company uses recycled tyres and soy-based plastics to make engine

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Waste prevention and reduction

FIGURE 15.4

Recycle and reuse

gaskets and seals for its Ford F-150, Escape, Mustang, Focus and Fiesta models. According to Ford, ‘The gaskets and seals are derived from 25 per cent post-consumer recycled tyre particulate and 17 per cent bio-renewable content from soy’. By doing this, Ford reused about 1000 tonnes of auto tyres which would otherwise have ended up in landfill. Similarly, Ford recycled 1900 tonnes of carpet to make cylinder head covers for its vehicles.59 A growing trend in recycling is design for disassembly, where products are designed from the start for easy disassembly, recycling and reuse once they are no longer usable. For example, the European Union (EU) is moving towards prohibiting companies from selling products unless most of the product and its packaging can be recycled.60 Since companies, not consumers, will be held responsible for recycling the products they manufacture, they must design their products from the start with recycling in mind.61 At reclamation centres throughout Europe, companies will have to be able to recover and recycle 80 per cent of the parts that go into their original products.62 Under the EU’s end-of-life vehicle program, all cars built in Europe since June 2002 are subject to the 80 per cent requirement, which rose to 85 per cent in 2006 and 95 per cent in 2015 for cars. Moreover, effective from 2007, the EU requires car manufacturers to pay to recycle all the cars they made between 1989 and 2002.63 At the third level of waste minimisation, waste treatment, companies use biological, chemical or other processes to turn potentially harmful waste into harmless compounds or useful by-products. For example, during ‘pickling’, a process in the manufacture of steel sheets, the steel is bathed in an acid solution to clean impurities and oxides (which would rust) from its surface. Fortunately, Magnetics International has found a safe, profitable way to treat the pickle juice, which it sprays into a 30-metre-high chamber at 650°C to form pure iron oxide that can be transformed into a useful magnetic powder, which is reused in electric motors, stereo speakers and refrigerator gaskets.64 The fourth and lowest level of waste minimisation is waste disposal. Wastes that cannot be prevented, reduced,

Waste treatment

Waste diposal

Four levels of waste minimisation

WORKPLACE AND COMMUNITY

MAKING LEGO BRICKS OUT OF AGRICULTURAL WASTE Since 1963, LEGO has made its iconic plastic bricks from the same petroleum-based formulation – acrylonitrile butadiene styrene (ABS). In 2015, however, LEGO announced that it was launching a research and development effort to reformulate its

SOURCE: L. CHAO, ‘LEGO TRIES TO BUILD A BETTER BRICK’, WALL STREET JOURNAL, 14 JULY 2015, B4.

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plastic using biodegradable plant-based materials. Ideally, says senior director for environmental sustainability Tim Guy Brooks, the new plastic will be derived from agricultural waste that doesn’t have any other apparent potential use, such as corn stalk. Even though oil prices have plummeted in recent years, LEGO remains committed to replacing its petroleumbased plastics with bio-plastic. The company estimates that it will take 15 years to develop a biobased alternative to replace the 77 000 metric tons of petroleum granules it currently uses to make bricks every year – a main contributor to the company’s overall carbon footprint. ‘This is the right thing to do for LEGO – fossil fuels are a finite resource and we know that’, says Brooks.

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recycled, reused or treated should be safely disposed of in processing plants or in environmentally secure landfills that prevent leakage and contamination of APPLY Get an soil and underground water supplies. overview of For example, with the average stainability waste computer lasting just three years, approximately 60 million computers come out of service each year creating disposal problems for organisations all over the world.65 But with lead-containing cathode ray tubes in the monitors, toxic metals in the circuit boards, paint-coated plastic and metal coatings that can contaminate ground water, old computers can’t just be thrown away.66 Many manufacturers and retailers are now offering recycling and drop-off programs to keep electronic equipment out of landfill.

Electronic waste is a growing concern, and many companies are offering incentives to ensure that it is properly recycled

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Managing information

LEARNING OUTCOMES

1 Explain the strategic importance of information.

WHY INFORMATION MATTERS

2 Describe the characteristics of useful information (i.e. its value and costs).

3 Explain the basics of capturing, processing

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PPLY As little as a generation ago, IT E A Get started had little to do with managing with the media quiz: 4 Describe how companies can access and Numi Organic Tea business information. Rather share information and knowledge. than storing information on hard drives or servers, managers stored it in filing cabinets. Instead of spreadsheets, calculations were made on adding machines. Managers communicated by sticky notes, not email. Phone messages were written down by assistants and co-workers, not left on voicemail. There were no smartphones, clouds or any of the plethora of digital tools that are now a part of everyday work. Today, digital technologies and devices are an integral part of managing business information. In large part, this is due to the advancement of information technology, which can be explained by Moore’s law. Gordon Moore Moore’s law is one of the founders of Intel Corporation, the prediction that every two years, computer which makes 75 per cent of the integrated processing power would processors used in personal computers. In double and its cost would 1965, Moore predicted that about every two drop by 50 per cent years, computer-processing power would double and its cost would drop by 50 per cent.1 As Figure 16.1 shows, Moore was right. Every few years, computer power, as measured by the number of transistors per computer chip, Throughout this more than doubled. Consequently, your current desktop or PPLY E A chapter the mobile device is not only smaller, but also much cheaper and MindTap more powerful than the large mainframe computer systems icon indicates used by Fortune 500 companies only 30 years ago. In fact, if an opportunity car manufacturers had achieved the same power increases to go online and access videos, audio, and cost decreases attained by computer manufacturers, quizzes and more. a fully optioned Lexus or Mercedes sedan raw data The highlighted text would cost around A$1000! facts and figures above the icon Raw data are facts and figures. For identifies the chapter example, 9, A$126, 32 and 2500 are some data that I used folder in which you can find it. the day I wrote this section of the chapter. However, facts and figures aren’t particularly useful unless they have Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned,For or duplicated, in whole or inprobably part. WCN 02-200-202 meaning. example, you can’t guess what

and protecting information.

16-Core SPARC T3 Six-Core Core i7 10-Core Xeon Westmere-EX Six-Core Xeon 7400 8-Core POWER7 AMD K10 Quad-core z196 AMD K10 Quad-Core Itanium Tukwila POWER6 8-Core Xeon Nehalem-EX Itanium 2 with 9 MB cache Six-Core Opteron 2400 AMD K10 Core i7 (Quad) Core 2 Duo Itanium 2 Cell

2 600 000 000 1 000 000 000

AMD K8

1 000 000 000

Transistor count

Pentium 4

10 000 000

Curve shows transistor count doubling every two years

1 000 000

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AMD K7 AMD K6-lll AMD K6 Pentium III Pentium II AMD K5 Pentium

80386 80286

100 000 68000 8086 8085 6800

10 000 8080 2300

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80186 8088 6809

Z80 MOS 6502

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1971

1980

1990

2000

2011

Date of introduction FIGURE 16.1

Moore’s Law

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these four pieces of raw data represent, can you?That’s why researchers make the distinction between raw data and information. Whereas raw data consist of facts and figures, information is useful data that can influence someone’s choices and behaviour. So what did those information useful data that can four pieces of data mean to me? Well, 9 influence people’s choices stands for the local digital TV channel on and behaviour which I watched the AFL (football) Grand Final; A$126 is how much it will cost me to rent a car for the weekend when I go to visit my mum interstate; 32 is the 32-gigabyte storage card I want to add to my digital camera; and 2500 refers to my car’s speedometer which means that it’s time to get the oil changed. After reading the next two sections, you should be able to: ● explain the strategic importance of information PPLY ● describe the characteristics E A Learn about your of useful information (i.e. attitude to using technology with this self assessment its value and costs).

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Source: W. G. Simon, ‘Microprocessor transistor count and Moore’s Law–2011’, Wikimedia Commons. CC BY-SA 3.0 International Licence (https://creativecommons.org/licenses/by-sa/3.0/deed.en).

Before the advent of digital technology, businesses used to store important information as hard copy in filing cabinets, and messages were communicated via letters and memos

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LO1

STRATEGIC IMPORTANCE OF INFORMATION

In today’s hypercompetitive business environments, information, whether it’s about furniture delivery, product inventory, pricing or costs, is as important as capital (i.e. money) for business success. It takes money to get businesses started, but businesses can’t survive and grow without the right information. Information has strategic importance for organisations because it can be used to: ● obtain first-mover advantage ● sustain a competitive advantage once it has been created.

Does the information technology create value? No

Competitive disadvantage

FIRST-MOVER ADVANTAGE first-mover advantage the strategic advantage that companies earn by being the first to use new information technology to substantially lower costs or to make a product or service different from that of competitors

First-mover advantage is the strategic

advantage that companies earn by being the first in an industry to use new information technology to substantially lower costs or to differentiate a product or service from that of competitors. McCafé, launched in coffee-loving Melbourne, Australia in 1993, is now truly an international brand of its own, providing an affordable café-style experience to its customers. The McCafé brand is currently featured in over 970 Australian McDonald’s stores and more than 14 000 McDonald’s stores in the United States. Despite intense competition from local and international coffee vendors, McCafé is the largest coffee shop brand in Australia and New Zealand with McCafé outlets generating 15 per cent more revenue than a regular McDonald’s store.2 First-mover advantages, like those established by Amazon.com, can be sizeable. On average, first movers earn a 30 per cent market share, compared to 19 per cent for the companies that follow.3 Likewise, over 70 per cent of market leaders started as first movers.4

SUSTAINING A COMPETITIVE ADVANTAGE As described above, companies that use information technology to establish first-mover advantage usually have higher market shares and profits. According to the resourcebased view of information technology shown in Figure 16.2, companies need to address three critical issues in order to sustain a competitive advantage through information technology. First, does the information technology create value for the company by lowering costs or providing a better product or service? If an information technology doesn’t add value, then investing in it would put the company at a competitive disadvantage to companies that choose information technologies that do add value.

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Yes

Is the information technology different across competing firms?

Yes

Competitive parity

Is it difficult for another firm to create or buy the information technology? No Yes

Temporary competitive advantage

FIGURE 16.2

Sustained competitive advantage

Using information technology to sustain a competitive advantage Source: Adapted from F. J. Mata, W. L. Fuerst & J. B. Barney, ‘Information technology and sustained competitive advantage: a resource-based analysis’, MIS Quarterly, 19 (4), December 1995: 487–505. Copyright © 1995.

Second, is the information technology the same or different across competing companies? If all the companies have access to the same information technology and use it in the same way, then no company has an advantage over another (i.e. there is competitive parity). Third, is it difficult for another company to create or buy the information technology used by the company? If so, then the company has established a sustainable competitive advantage over competitors through information technology. If not, then the competitive advantage is just temporary, and competitors should eventually be able to duplicate the advantages the leading company has gained from information technology. For more about sustainable competitive advantage and its sources, see Chapter 6 on organisational strategy.

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OzTAM, jointly owned by the Seven Network, Nine Network and Network 10, is an Australian audience measurement research organisation that collects and markets television ratings data. Traditionally, OzTAM has measured and provided minute-by-minute viewing data for more than 100 channels (free-to-air and subscription) across a number of demographic variables. In 2016, due to the way audiences now view and consume content, OzTAM introduced video player measurement (VPM), which looks at figures for viewing of Internet-delivered TV content. According to OzTAM CEO Doug Peiffer, ‘As is the case with time-shifted viewing, the most-watched catch-up programs are often those with the biggest broadcast audiences, while others – notably dramas – can attract a significant portion of their total audience from catch-up viewing’. In 2018, OzTAM unveiled VOZ (Virtual Australia) which will be an integrated database that brings viewing on TV sets and connected devices together. VOZ will deliver an all-screen, de-duplicated picture of what Australians are watching, who is watching and how they are watching (‘Total TV’). Including VPM and VOZ figures will provide a more complete picture of audience numbers for TV networks.5 The key to sustaining a competitive advantage is not just faster computers, more memory and larger amounts of data. The key is using information technology to continuously improve and support the core functions of a business. For example, a number of hotels and resorts, such as accommodation site Airbnb, now use social media to improve customer service. Staff members search for any mention of their hotel on Twitter, Facebook, blogs or websites like TripAdvisor and other websites. When they find a complaint, they offer an immediate apology and, more often than not, perks like room upgrades and free meals to make up for the problem. After Mark and Star King, a Canadian couple who rented out their house on Airbnb, returned to find it had been trashed in what police described as a ‘drug-induced orgy’, Airbnb immediately banned the offending guest from its site, offered their full assistance to law enforcement officials and worked to

reimburse the Kings under their ‘host guarantee’, which covers up to a million dollars in damages in such situations. By paying attention to social media, tech-savvy hotels and travel websites have found a way to get near-instantaneous feedback from customers and quickly resolve problems.6 Companies like Airbnb that achieve first-mover advantage with information technology, and then sustain it with continued investment, create a moving target that competitors have difficulty hitting.

LO2

CHARACTERISTICS AND COSTS OF USEFUL INFORMATION

An icon of the city of Melbourne, Australia, is its tram system. Melbourne has the biggest operating tram network in the world with 250 kilometres of double track. There are 475 trams in the fleet including modern low-floor vehicles and the iconic W Class. There are even roving ‘Restaurant Trams’ which provide a unique mobile dining experience. Operated by Yarra Trams, the system is a fleet of trams and a network of tram lines criss-crossing the city providing a service for commuters and tourists alike. Because the trams are connected through a low-frequency radio system, real-time information about tram locations is available. Passengers waiting at tram stops can view a weatherproof passenger information display (PID) to find out when the next tram will arrive and what route that next tram is taking. They can also check their smartphone app to get the same information as well as using the app to locate the nearest tram stop.7 As Melbourne’s tram system demonstrates, information is useful when it is: ● accurate ● complete ● relevant ● timely. However, there can be significant costs associated with gathering useful information, including: ● acquisition ● processing ● storage ● retrieval ● communications.

ACCURATE INFORMATION

Video player measurement tracks the engagement of people streaming TV content on their digital devices

Information is useful when it is accurate. Before relying on information to make decisions, you must know that the information is correct. But what if it isn’t? For example, in Japan, 7-Eleven used to rely on centralised sales data to determine the kind and quantity of products that its 20 600

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stores should stock on their shelves. The problem with that approach, however, is that a 7-Eleven in downtown Tokyo next to skyscrapers filled with office workers doesn’t sell the same kind and number of products as a 7-Eleven in suburban Sapporo, which is one-tenth the size of Tokyo. So, to provide more accurate sales information to each store, 7-Eleven Japan is giving its almost 250 000 sales clerks detailed information about what sells in their stores. Based on those data, each clerk makes educated hypotheses each morning about what will sell that day and receives feedback on what sold by the end of the day. Twice a week, data analysts work with the clerks at each store to help improve their sales predictions. Thanks to more accurate information, 7-Eleven Japan’s 20 600 stores are now filled with the products that their local customers desire.8

COMPLETE INFORMATION Information is useful when it is complete. Incomplete or missing information makes it difficult to recognise problems and identify potential solutions. For example, dispatchers at Star Track Express, a freight transportation company, are responsible for choosing truck routes that maximise vehicle loads, minimise expenses (time, kilometres and fuel) and get drivers home as soon as possible. On a typical day, Star Track’s dispatchers must consider the number of trucks and available drivers, locations and shipments. Dispatchers rely on information from the distribution centres as well as drivers to know if parcels have been dispatched, delivered, are in the warehouse or if they are still ‘on the road’.

RELEVANT INFORMATION You can have accurate, complete information, but if it doesn’t answer the problems you’re facing, then it’s irrelevant and not very useful. For example, in September 2018 needles were found in strawberries in Australia, causing panic among consumers who stopped eating strawberries. Many strawberry growers suffered as a result of the needle scare as consumers turned away from the popular fruit. Australians turned to social media to receive up-to-date information about what was happening in the strawberry industry. Local social media was the place where many Australian shared their inventive strawberry recipes and urged others to support farmers, giving rise to the trending tag #SmashaStrawb. ‘Smash’ is Australian slang which means to eat or drink something enthusiastically or quickly.9

TIMELY INFORMATION Finally, information is useful when it is timely. To be timely, the information must be available when needed to define

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a problem or to begin to identify possible solutions. If you’ve ever thought, ‘I wish I had known that earlier’, then you understand the importance of timely information and the opportunity cost of not having it.

ACQUISITION COSTS Acquisition cost is the cost of obtaining

acquisition cost

data that you don’t have. Social media the cost of obtaining data that you don’t have platform Facebook and search engine giant Google have repeatedly been accused of selling the personal information of their users to third parties. It is claimed that Facebook systematically intercepts ‘private’ Facebook messages, and scans, follows and searches for any third-party links in the Facebook messages to gain information about users’ web activity. Google ‘generates revenues and funds their maintenance’ with the information they gain from users’ data on their service which results in more relevant ads for the user, which are often integrated into the webpage you are viewing. While both Facebook and Google deny selling information that would uniquely identify the individual user, both companies do sell users’ browsing data directly to advertisers, with Facebook claiming that users ‘want to see ads that are more relevant to their interests’. In an effort to directly advertise themselves to current and potential customers, third parties pay for this data, which enables them to integrate truly unique ads based on the users’ preferences.10

PROCESSING COSTS Companies often have massive amounts of data, but not in the form or combination they need. Consequently, processing cost is the cost of turning processing cost raw data into usable information. For the cost of turning raw data example, the Large Hadron Collider (LHC), into usable information the world’s largest particle accelerator, which is used to conduct research on subatomic particles, generates four gigabytes of data per second. CERN, the agency that operates the LHC, created the Worldwide LHC Computing Grid (WLCG), a complex computer network connecting 130 research centres in 34 countries, to analyse, process and distribute this massive amount of data. The total cost of building the WLCG was US$640 million, and CERN will spend US$18 million annually to maintain and process the LHC’s data so it can be turned into usable information for scientific research.11

STORAGE COSTS Storage cost is the cost of physically or electronically archiving information for later use and retrieval. For instance, Google, Amazon and Microsoft Live have incurred large storage costs to make it

storage cost the cost of physically or electronically archiving information for later use and retrieval

retrieval cost the cost of accessing already-stored and processed information

Retrieval cost is the cost of accessing

Communication cost is the cost of

communication cost

transmitting information from one place the cost of transmitting to another. For example, the most information from one place to another important information that an electric utility company collects each month is the information from the electric meter attached to the side of your house or apartment block. In 2018, the Australian government mandated that all households and small businesses in the country (except Western Australia and Northern Territory) would introduce smart meters, which monitor the quantity of electricity used by a household or business at 30-minute intervals.14 These smart meters eliminated the need for a representative of the electricity company to come out to the home or business, manually read the meter and provide realtime data to the account holder about their energy consumption. Traditionally, electric companies employed meter readers to walk from house to house to gather information that would then be entered into company computers. Now, in the US, meter readers are losing their jobs to water, gas and electric meters built with radio frequency (RF) transmitters. The transmitters turn on when a meter reader drives by the house in a utility company van that has a laptop computer specially equipped to receive the RF signals. Such a van, travelling at legal speeds, can read 12 000 to 13 000 meters in an eight-hour day. By PPLY E A Get contrast, a meter reader on foot would an overview of costs record data from 500 meters per day.15

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a l r e a d y- s t o r e d a n d p r o c e s s e d information. One of the most common misunderstandings about information is that it is easy and cheap to retrieve once the company has it. Not so. First, you have to find the information. Then, you’ve got to convince whomever has it to share it with you. Then the information has to be processed into a form that is useful for you. By the time you get the information you need, it may not be timely anymore. For example, as companies move toward paperless office systems, how will employees quickly and easily retrieve archived emails, file records, website information, word processing documents or images? Likewise, how will managers and employees quickly and easily retrieve information about costs, inventory and sales? Retrieval cost is also a big factor for firms moving their data to the cloud. Which is why Amazon Web Services (AWS), the largest cloud service in the world, is offering its new Snowmobile service to transport huge amounts of corporate data to its AWS servers. Despite the name, Amazon’s Snowmobile uses a long-haul truck trailer, 45 feet long, that is stuffed with hard drives and servers capable of holding 100 petabytes of data (a petabyte is 1 million gigabytes). Since it’s not uncommon for large firms to have exabyte-sized amounts of data (an exabyte is 1 billion gigabytes), Amazon already has firms using the trucks to transfer data. Amazon estimates that it would take 26 years to transfer an exabyte of data from a corporate data warehouse to AWS servers using a 10 gigabyte-per-second broadband connection. However, it takes just under six months using 10 Snowmobile data trucks. At a cost of $500 000 per month per truck, the total cost of retrieval from one system to another would be $30 million for an exabyte of data.13

COMMUNICATION COSTS

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RETRIEVAL COSTS

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easy and fast for you to retrieve archived information. How costly can the storage for a simple web search be? Well, consider that each time you conduct a web search at Google, the company navigates the web by crawling through 60 trillion individual pages, which is around 100 million gigabytes of data. As you search, Google uses algorithms to deliver the best results possible, while minimising the amount of spam returned. All of this happens in less than a second. Google has a 65.2 per cent share of the global web search volume and processes over 40 000 search queries a second, which equates to over 3.5 billion searches per day and 1.2 trillion searches per year worldwide.12 What’s more, with the need for data storage doubling every 14 months, Amazon, Google, Microsoft and other large companies are building server farms, large collections of networked computer servers in 70 000-square-metre buildings to keep up with demand.

GETTING AND SHARING INFORMATION

In 1907, Metropolitan Life Insurance built a huge office building in New York City for its brand-new, state-of-theart information technology system. What was this great

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breakthrough in information management? Card files. That’s right, the same card file systems that every library in the world used before computers. Metropolitan Life’s information ‘technology’ consisted of 20 000 separate file drawers that sat in hundreds of file cabinets more than 4.5 metres tall.This filing system held 20 million insurance applications, 70 0000 accounting books and 500 000 death certificates. Metropolitan Life employed 61 workers who did nothing but sort, file and climb ladders to pull files as needed.16 Today, however, when policyholders buy a car, they call their insurance agent from the dealership to activate their insurance before driving off in their new car. Currently, insurance companies are marketing their products and services to customers directly from the Internet. How we get and share information has clearly changed. The cost, inefficiency and ineffectiveness of using this formerly state-of-the-art system would put an insurance company out of business within months. Today, if storms, fire or accidents damage a policyholder’s property, he or she can use the insurance company’s smartphone app to photograph and describe the damage. A company representative will then show up and write a check on the spot to cover the losses. As the claims process unfolds, the policyholder can ask questions, fill out forms and access documents on the company’s personalised web portal. From card files to Internet files in just under a century, the rate of change in information technology is spectacular. After reading the next two sections, you should be able to: ● explain the basics of capturing, processing and protecting information ● describe how companies can access and share information and knowledge.

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CAPTURING, PROCESSING AND PROTECTING INFORMATION

In this section, you will learn about the information technologies that companies use to: ● capture information ● process information ● protect information.

CAPTURING INFORMATION There are two basic methods of capturing information: manual and electronic. Manual capture of information is a slow, costly, labour-intensive process, which entails recording and entering data by hand into a data storage device. Consequently, companies are relying more on electronic capture, in which data are electronically recorded

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and entered into electronic storage devices. Bar codes, radio frequency identification tags and document scanners are methods of electronically capturing data. Bar codes represent numerical data bar code by varying the thickness and pattern of a visual pattern that vertical bars. The primary advantage that represents numerical data by varying the thickness bar codes offer is that the data they and pattern of vertical represent can be read and recorded in an bars instant with a handheld or pen-type scanner. Bar codes cut checkout times in half, reduce data entry errors by 75 per cent and save stores money because staff don’t have to go through the labour-intensive process of putting a price tag on each item in the store.17

Radio frequency identification (RFID) tags contain minuscule microchips

radio frequency identification (RFID) tag a tag containing minuscule microchips that transmits information via radio waves and can be used to track the number and location of the objects into which the tags have been inserted

and antennas that transmit information via radio waves.18 Unlike bar codes, which require direct line-of-sight scanning, RFID tags are read by turning on an RFID reader that, like a radio, tunes into a specific frequency to determine the number and location of products, parts or anything else to which the RFID tags are attached. Turn on an RFID reader, and every RFID tag within the reader’s range (from several hundred to several thousand metres) is accounted for. Airlines are now using this technology to speed up check-in and keep track of passenger luggage. In Australia, Qantas has distributed to its frequent flyers, and made available to all of its passengers, durable luggage tags that use the RFID technology. These luggage tags are an electronic form of personal identification that can be read by a machine from several metres away. Each year, airlines mishandle or lose four million of the over 700 million luggage bags checked by airline passengers. Around the world, airports are reducing those costs by attaching luggage tags with embedded RFID chips. RFID readers accurately read 99 per cent of RFID tagged bags, compared with 80 to 90 per cent of barcoded tags read by optical scanners. Industry estimates suggest that RFID can save airlines and airports around $700 million per year. It is small wonder that Australia’s airports as well as major world airports such as London’s Heathrow, which has 67 million passengers per year, are adopting RFID technology. Hong Kong International Airport (HKIA) is one of the largest hubs in Asia. Roughly 60 per cent of the passengers are connecting passengers through HKIA. By using RFID, they can also get the same kind of benefits London’s Heathrow has: more security, more efficiency and offcampus checking. HKIA also wanted to improve/reduce connection times, which they firmly believe RFID would provide. HKIA is adding an RFID label for connecting bags. What they hope to see is other airports adopting RFID for baggage, thus having RFID labels already tagged on the transfer baggage.

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a record of it to the website from which you picked up the cookie. Other cookies carry specific information that can be read by automatically generated advertising. Have you ever been browsing an online store and then seen advertising for that store or product appear in your social media feed soon after? This happens because of cookies.

PROCESSING INFORMATION Processing information means

RFID chips have many uses, including assisting with locating and tracking luggage at airports

Because they are inexpensive and easy to use, electronic scanners, which convert electronic scanner an electronic device that printed text and pictures into digital converts printed text and images, have become an increasingly pictures into digital images popular method of electronically capturing data. The first requirement for a good scanner is a document feeder that automatically feeds document pages into the scanner or turns the pages (often with a puff of air) when scanning books or bound documents.19 Text that has been digitised cannot be searched or edited like the regular text in your word processing software, however, so the second requirement for a good scanner is optical character recognition software to scan and optical character recognition convert original or digitised documents the ability of software into ASCII (American Standard Code for to convert digitised Information Interchange) text or Adobe documents into ASCII (American Standard PDF documents. ASCII text can be Code for Information searched, read and edited with standard Interchange) text that can be searched, read and word processing, email, desktop edited by word processing publishing, database management and and other kinds of software spreadsheet software, and PDF documents can be searched and edited with Adobe’s Acrobat software. Moreover, to be successful in the competitive market, companies are becoming more aggressive in how they capture information about their customers’ patterns, preferences, locations, activities and demographics. The more data they can collect, the more accurately they can refine the product and service offerings to meet customer needs. Some common tools that are used today to continually capture data about customers include cookies, social media, GPS, public wi-fi networks and purchase records, including loyalty cards.20 A cookie is a piece of computer code that gets ‘dropped’ into your browser when you visit certain websites or use certain apps. Some cookies track your browsing and send

processing

transforming raw data into meaningful information transforming raw data into information that can be applied to meaningful information business decision making. Evaluating sales data to determine the best- and worst-selling products, examining repair records to determine product reliability and monitoring the cost of long-distance phone calls are all examples of processing raw data into meaningful information. With automated, electronic capture of data, increased processing power and cheaper and more plentiful ways to store data, managers no longer worry about getting data. Instead, they scratch their heads about how to use the overwhelming amount of data that pours into their businesses every day. Furthermore, most managers know little about statistics and have neither the time nor the inclination to learn how to use them to analyse data. One promising tool to help managers dig out from under the avalanche of data is data data mining mining, a process of discovering the process of discovering patterns and relationships in large patterns and relationships in large amounts of data amounts of data.21 Data mining works by using complex algorithms such as neural networks, rule induction and decision trees. If you don’t know what those are, that’s OK. With data mining, you don’t have to. Most managers only need to know that data mining looks for patterns that are already in the data but are too complex for them to spot on their own. Many Airbnb hosts who rent their rooms or homes to travellers have trouble deciding how much to charge per night. Data mining showed Airbnb that adjusting prices for similarity, recency and location could maximise profits and occupancy rates. Similarity measured factors such as a home versus a private room, the number of bedrooms, the uniqueness of the property (Are you renting a room in a castle or in an apartment?) and the number of reviews. Why reviews? They give potential renters confidence regarding the property and its host. Travel is seasonal, and demand for rentals is affected by major events like holidays, trade shows and sporting events. Taking these and other recency factors into consideration, Airbnb can decide whether last week’s, last month’s or last year’s pricing should guide how much to charge today. Finally, data mining revealed that a rental’s location was critical to renters. Is it safe? Is it near transportation, restaurants and tourist sites? To measure the value of rentals’ locations, Airbnb hired cartographers

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patch’ uses wireless sensors and mobile apps to give realtime data to drivers and inspectors. While people have accused the local councils of installing the parking sensors as part of a ‘money grab’, the benefits of the technology greatly outweigh its negative associations. Endlessly driving around and around looking for a car park isn’t fun for anyone!25 Predictive patterns are just the opposite of association or affinity patterns. Whereas association or affinity patterns look for database elements that seem to go together, predictive patterns help identify predictive pattern database elements that are different. a pattern that helps During a post-holiday sale period, one identify database elements that are department store chain’s data mining different indicated that sales were unexpectedly slow for a boxed computer and printer combination that was offered at an extremely good price. Sales were slow everywhere, except at one particular store where sales greatly exceeded expectations. After noting the difference, headquarters called the store manager who said that the products were displayed in an open box that made it clear to customers that the low price was for the computer and the printer. Sales took off at all stores after headquarters relayed this simple message: ‘Open the box’.26 iStock.com/CactuSoup

to ‘map the boundaries of every neighborhood in our top cities all over the world’.22 Data mining typically splits a data set in half, finds patterns in one half and then tests the validity of those patterns by trying to find them again in the second half of the data set. The data typically come from a data warehouse that stores huge amounts data warehouse a database that stores of data that have been prepared for data huge amounts of data that mining analysis by being cleaned of errors have been prepared for and redundancy. The data in a data data mining analysis by being cleaned of errors warehouse can then be analysed using and redundancy two kinds of data mining. Supervised supervised data data mining usually begins with the mining the process when a user user telling the data mining software to tells data mining software look and test for specific patterns and to look and test for specific patterns and relationships relationships in a data set. Typically, this in a data set is done through a series of ‘what if’ unsupervised data questions or statements. For instance, a mining the process when a user grocery store manager might instruct the simply tells data mining data mining software to determine if software to uncover whatever patterns and coupons placed in the Sunday paper relationships it can find in increase or decrease sales. By contrast, a data set with unsupervised data mining, the user simply tells the data mining software to uncover whatever patterns and relationships it can find in a data set. Unsupervised data mining is particularly good at identifying association or affinity patterns, sequence patterns and predictive patterns. It can also identify what data mining ‘techies’ call data clusters.23 Association or affinity patterns occur association or affinity pattern when two or more database elements when two or more tend to occur together in a significant database elements tend to occur together in a way. FitBit, an activity tracking device significant way worn on the user’s wrist or hip to measure the number of steps walked, quality of sleep, steps climbed and heart rate, inadvertently revealed to one of its users that she was pregnant. This was due to the user’s resting heart rate consistently registering as high on the device, which was initially thought to be an issue with the FitBit sensor or the associated firmware. The user posted this anomaly on Reddit and asked for any tips on the glitch, as well as searching the FitBit website forums. The combination of data from the user’s FitBit and the online search prompted the user to visit her doctor, who in turn confirmed that she was indeed pregnant!24 Sequence patterns occur when sequence pattern two or more database elements occur when two or more database elements occur together in a significant pattern, but with together in a significant one of the elements preceding the other. pattern, but one of the elements precedes the Finding a car park can be frustrating and other overly time consuming. Many shopping centres and local councils now use parking sensors to help drivers find available car spots and parking inspectors find parking offenders. The ‘parking

Parking sensors save drivers time finding a spot to park, and also allow inspectors to quickly identify parking offenders

Data clusters are the last kind of pattern data cluster found by data mining. Data clusters occur when three or more when three or more database elements database elements occur together (i.e. cluster) in a occur together (i.e. cluster) in a significant significant way way. For example, after analysing several years’ worth of repair and warranty claims, a camera company might find that, compared with cameras made in its Chinese plant, the cameras it makes in Japan (first element) are more likely to have problems with the digital sensor (second element) that has ‘bad pixels’ (third element) and results in poor quality photos (fourth element), irate customers (fifth element) and payments for sensor

replacements (sixth element), which are paid for by the company’s 12-month warranty. Traditionally, data mining has been very expensive and very complex. Today, however, data mining services and analysis are much more affordable and within reach of most companies’ budgets. Of course, if it follows the path of most technologies, it will become even easier and cheaper to use in the future.

PROTECTING INFORMATION protecting information the process of ensuring that data are reliably and consistently retrievable in a usable format for authorised users, but no one else

Protecting information is the process

of ensuring that data are reliably and consistently retrievable in a usable format for authorised users, but no one else. For instance, when customers purchase items from eBay they want to be confident that their transaction is safe and that their personal information will be secure. In fact, eBay has an extensive privacy policy to make sure this is the case.27 Recently, the European Parliament introduced the General Data Protection Regulations (GDPR) to protect all EU citizens from privacy and data breaches. The regulations come into effect from 25 May 2019. The GDPR requires all companies who collect data on users and customers to get their explicit consent to both collect and use the data. It states that a company cannot rely on consent in the form of ‘silence, pre-ticked boxes or inactivity’ (article 7). Users must also be able to withdraw consent and have information on them deleted from the servers of an organisation if they change their mind. Under GDPR, a company can be fined €10 million (A$16 million) or up to 2 per cent of their previous year’s global turnover (article 28). These rules are applicable to data controllers and processors, including all ‘cloud’ services. While the GDPR is only a legal requirement inside the EU, many companies have adopted it as the best-practice standard in their operations outside the EU too.28 Companies like banks and other online traders find it necessary to protect information because of the numerous security threats to data and data security listed in Table 16.1. People inside and outside companies can steal or destroy company data in various ways, including denial-of-service Internet server attacks that can bring down some of the busiest and best-run websites on the Internet; viruses and spyware/adware that spread quickly and can result in data loss and business disruption; keystroke monitoring in which every mouse click and keystroke made is monitored, stored and sent to unauthorised users; password cracking software that steals supposedly secure passwords; and phishing, where fake but real-looking emails and websites trick users into sharing personal information (user names,

passwords, account numbers) that leads to unauthorised account access. Indeed, on average, 19 per cent of computers are infected with viruses, 80 per cent have spyware and only one-third are running behind a protected firewall (discussed shortly). Studies show that the threats listed in Table 16.1 are so widespread that automatic attacks will begin on an unprotected computer just 15 seconds after it connects to the Internet.29 As shown in the right-hand column of Table 16.1, numerous steps can be taken to secure data and data networks. Some of the most important are authentication and authorisation, firewalls, antivirus software for PCs and email servers, data encryption and virtual private networks.30 We will review those steps and then finish this section with a brief review of the dangers of wireless networks, which are exploding in popularity. Two critical steps are required to make sure that data can be accessed by authorised users and no one else. One is authentication; that is, making sure authentication users are who they claim to be.31 The making sure potential other is authorisation; that is, granting users are who they claim to be authenticated users approved access to authorisation data, software and systems. 32 For granting authenticated example, when an ATM prompts you to users approved access to data, software and enter your personal identification number systems (PIN), the bank is authenticating that you are who you say you are. Once you’ve been authenticated, you are authorised to access your funds and no one else’s. Of course, as anyone who has lost a PIN or password or had one stolen knows, user authentication systems are not foolproof. In particular, users create security risks by not changing their default account passwords (such as birthdates) or by using weak passwords such as names (‘Larry’) or complete words (‘football’) that are quickly guessed by password cracker software.33 This is why many companies are now two-factor turning to two-factor authentication, authentication which is based on what users know, such authentication based on what users know, as a password, and what they have, such such as a password, and as a secure ID card. For example, to log what they have in their possession, such as a onto their computer accounts, employees secure ID card or key in many Australian companies and government departments must enter a password, such as a four-digit PIN, plus a secure number that changes every 60 seconds and is displayed on the tiny screen of the secure electronic ID (about the size of a pack of chewing gum) they carry. For these same reasons, some biometrics companies are turning to biometrics for identifying users by authentication. With biometrics, such as unique, measurable body features, such as fingerprint recognition or face scanning, fingerprint recognition or users are identified by unique, measurable iris scanning body features.34 The latest smartphones now even offer facial recognition as a means of unlocking the screen.

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TABLE 16.1

Security threats to data and data networks

Security problem

Source

Affects

Severity

The threat

The solution

Denial of service, Internet server attacks and corporate network attacks

Internet hackers

All servers

High

Loss of data, disruption of service and theft of service.

Implement firewall, password control, server-side review, threat monitoring and bug fixes, and turn PCs off when not in use.

Password cracking software and unauthorised access to PCs

Local area network, Internet

All users, especially digital subscriber line and cable Internet users

High

Hackers take over PCs. Privacy can be invaded. Corporate users’ systems are exposed to other machines on the network.

Close ports and firewalls, disable file and print sharing, and use strong passwords.

Viruses, worms, Trojan horses and rootkits

Email, downloaded and distributed software

All users

Moderate to high

Monitor activities and cause data loss and file deletion. Compromise security by sometimes concealing their presence.

Use antivirus software and firewalls, and control Internet access.

Spyware, adware, malicious scripts and applets

Rogue webpages

All users

Moderate to high

Invade privacy, intercept passwords and damage files or file system.

Disable browser script support and use security, blocking and spyware/ adware software.

Email snooping

Hackers on your network and the Internet

All users

Moderate to high

People read your email from intermediate servers or packets, or they physically access your machine.

Encrypt messages, ensure strong password protection, and limit physical access to machines.

Keystroke monitoring

Trojan horses, people with direct access to PCs

All users

High

Records everything typed at the keyboard and intercepts keystrokes before password masking or encryption occurs.

Use antivirus software to catch Trojan horses, control Internet access to transmission and implement system monitoring and physical access control.

Phishing

Hackers on your network and the Internet

All users, including customers

High

Fake but real-looking emails and websites that trick users into sharing personal information on what they wrongly thought was the company’s website. This leads to unauthorised account access.

Educate and warn users and customers about the dangers. Encourage both not to click on potentially fake URLs, which might take them to phishing websites. Instead, have them type your company’s URL into the web browser.

Spam

All users and corporations

Mild to high

Clogs and overloads email servers and inboxes with junk mail. HTML-based spam may be used for profiling and identifying users.

Filter known spam sources and senders on email servers, and have users create further lists of approved and unapproved senders on their personal computers.

Websites you visit

Individual users

Mild to moderate

Trace web usage and permit the creation of personalised webpages that track behaviour and interest profiles.

Use cookie managers to control and edit cookies, and use ad blockers.

Sources: K. Bannan, ‘Look out: watching you, watching me’, PC Magazine, July 2002: 99; A. Dragoon, ‘Fighting phish, fakes, and frauds’, CIO, 1 September 2004: 33; B. Glass, ‘Are you being watched?’ PC Magazine, 23 April 2002: 54; K. Karagiannis, ‘DDoS: are you next?’ PC Magazine, January 2003: 79; B. Machrone, ‘Protect & defend’, PC Magazine, 27 June 2000: 168–81; ‘Top 10 security threats’, PC Magazine, 10 April 2007: 66; M. Sarrel, ‘Master end-user security’, PC Magazine, May 2008: 101.

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Alamy Stock Photo/Ian Shaw

Australia’s new digital ePassports use this biometric system to verify the identity of travellers when passing through Customs at an airport. Australia’s ePassport uses just one physical trait – the face. The information needed to generate the facial biometric information comes from the photograph supplied with the passport application. The Australian government digitises the photograph supplied with the traveller’s passport application. The digitised photo is stored in the passports database and in a computer chip in the ePassport. Using biometric technology, the passport photo can be digitally compared with another facial image to check that the two images are of the same person. The passport photo is used for identity verification and fraud detection.35This is another form of two-factor authentication.

Australia’s digital ePassport uses facial biometrics to identify travellers when passing through Customs at an airport

Unfortunately, stolen or cracked passwords are not the only way for hackers and electronic thieves to gain access to an organisation’s computer resources. Unless special safeguards are put in place, every time corporate users are online there’s literally nothing between their personal computers and the Internet (home users with high-speed DSL or cable Internet access face the same risks). Hackers can access files, run programs and control key parts of computers if precautions aren’t taken. To reduce these risks, companies use firewalls , firewall a protective hardware or hardware or software devices that sit software device that sits between the computers in an internal between the computers in organisational network and outside an internal organisational network and outside networks, such as the Internet. Firewalls networks, such as the filter and check incoming and outgoing Internet data. They prevent company insiders from accessing unauthorised websites or from sending confidential company information to people outside the company. Firewalls also prevent outsiders from identifying and gaining access to company computers and data. Indeed, if a firewall is working properly, the computers behind the company firewall literally cannot be seen or accessed by outsiders.

A virus is a program or piece of code virus that, without your knowledge, attaches a program or piece of code that, against your itself to other programs on your computer wishes, attaches itself to and can trigger anything from a harmless other programs on your flashing message, to the reformatting of computer and can trigger anything from a harmless your hard drive, to a system-wide network flashing message, to the shutdown. You used to have to do or run reformatting of your hard drive, to a system-wide something to get a virus, such as double- network shutdown clicking an infected email attachment. Today’s viruses are much more threatening. In fact, with some viruses, just being connected to a network can infect your computer. Antivirus software for personal computers scans email, downloaded files and computer hard drives, disk drives and memory to detect and stop computer viruses from doing damage. However, this software is effective only to the extent that users of individual computers have and use up-to-date versions. With new viruses appearing all the time, users should update their antivirus software weekly or, even better, configure their virus software to automatically check for, download and install updates. By contrast, corporate antivirus software automatically scans email attachments, such as Microsoft Word documents, graphics or text files, as they come across the company email server. It also monitors and scans all file downloads across company databases and network servers. So, while antivirus software for personal computers prevents individual computers from being infected, corporate antivirus software for email servers, databases and network servers adds another layer of protection by preventing infected files from multiplying and being sent to others.

WORKPLACE AND COMMUNITY

HABITS ARE HARD TO FAKE The common use of network access in society has also come with increased chances of unauthorised access and malicious attack. Apple’s security policy requires users to create strong passwords for use with their Apple ID. The user’s password must have eight or more characters and include uppercase and lowercase letters, and at least one number. The company encourages users to add extra characters and punctuation marks to make the password even stronger. Apple also uses security questions to provide users with a secondary method to identify themselves online. Furthermore, Apple offers optional security enhancements including two-step verification, two-factor authentication and a rescue email address, and encrypts all webpages with Secure Sockets Layer (SSL) to protect users’ privacy.36

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Another way of protecting information is to encrypt sensitive data. Data encryption data encryption transforms data into complex, scrambled the transformation of data into complex, scrambled digital codes that can be unencrypted digital codes that can only by authorised users who possess be unencrypted only by authorised users who unique decryption keys. This is especially possess unique decryption important with laptop computers, which keys are easily stolen. After a Boeing employee’s laptop was stolen from his hotel room, the company implemented a training program that requires managers and employees to have data encryption software installed on their laptops and become certified in using it. Those not following the encryption procedures can be reprimanded and even fired.37 With people increasingly gaining unauthorised access to email messages – email snooping – it’s also important to encrypt sensitive email messages and file attachments. You can use a system called ‘public key encryption’ to do so. First, give copies of your ‘public key’ to anyone who sends you files or email. Have the sender use the public key, which is actually a piece of software, to encrypt files before sending them to you. The only way to decrypt the files is with a companion ‘private key’ that you keep to yourself. Although firewalls can protect personal computers and network servers connected to the corporate network, people away from their offices (e.g. salespeople, business travellers, telecommuters who work at home) who interact with their company networks via the Internet face a security risk. Because Internet data are not encrypted, packet sniffer software (see Table 16.1) easily allows hackers to read everything sent or virtual private received, except files that have been network (VPN) encrypted before sending. Previously, the software that securely only practical solution was to have encrypts data sent by employees outside employees dial in to secure company the company network, phone lines for direct access to the decrypts the data when it arrives within the company company network. Of course, with computer network and international and long-distance phone does the same when data is sent back to employees calls, the costs quickly added up. Now, outside the network virtual private networks (VPNs) have

solved this problem by using software to encrypt all Internet data at both ends of the transmission process. Instead of making long-distance calls, employees connect to the Internet. But, unlike typical Internet connections in which Internet data packets are unencrypted, the VPN encrypts the data sent by employees outside the company computer network, decrypts the data when they arrive within the company network and does the same when data are sent back to the computer outside the network. Alternatively, many companies are now adopting webbased secure sockets layer (SSL) secure sockets layer encryption to provide secure off-site (SSL) encryption browser-based access to data and programs. If you’ve Internet encryption that provides ever entered your credit card in a web secure off-site web browser to make an online purchase, access to some data and programs you’ve used SSL technology to encrypt and protect that information. You can tell if SSL encryption is being used on a website if you see a padlock icon (gold in Internet Explorer or Firefox; green in Google Chrome; silver in Safari) or if the URL begins with ‘https’. SSL encryption works the same way in the workplace. Managers and employees who aren’t at the office simply connect to the Internet, open a web browser and then enter a user name and password to gain access to SSLencrypted data and programs. Many companies now have wireless networks, which make it possible for anybody with a laptop to access the company network from anywhere in the office. Though wireless networks come equipped with security and encryption capabilities that, in theory, permit only authorised users access, those capabilities are easily bypassed with the right tools. Furthermore, for ease of installation, many wireless networks are shipped with their security and encryption capabilities turned off.38 Plus, although it’s better to have it turned on than off, be wary of the WEP (Wired Equivalent Privacy) security protocol, which is easily compromised. See the Wi-Fi Alliance website at http:// www.wi-fi.org/ for the latest information on wireless security and encryption protocols that provide much stronger protection for your company’s wireless network. Finally, companies are combating security threats by hiring white hat hackers, so-called good guys, who test security weak points in information systems so that they can be fixed. While this is typically done using traditional hacking tools, as discussed in Table 16.1, white hat hackers also test security via social engineering, in which they trick people into giving up passwords and authentication protocols or unknowingly providing unauthorised access to company computers. One test involves emailing a picture of a cat with a purple mohawk and this subject line, ‘Check out these kitties!’ to employees PPLY E A with a link to more cute kitty photos. Get an overview of data When you click an embedded link to collection ‘more cute kitty photos’, you’re

taken to a company website warning about the dangers of phishing scams. Think that you wouldn’t fall for this? Fortyeight per cent of employees receiving this email click the link.39 Another test involves ‘lost or left-behind’ USB thumb drives, ostensibly belonging to competitors. When the person who picked up the thumb drive inserts it into a computer, it installs software that uses the webcam to snap a picture of the employee, who then receives a visit from the IT security team.40

ACCESSING AND SHARING INFORMATION AND KNOWLEDGE LO4

Today, information technologies are letting companies communicate data, share data and provide data access to workers, managers, suppliers and customers in ways that were unthinkable just a few years ago. After reading this section, you should be able to explain how companies use information technology to improve: ● internal access and sharing of information ● external access and sharing of information ● the sharing of knowledge and expertise.

INTERNAL ACCESS AND SHARING

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Executives, managers and workers inside the company use three kinds of information technology to access and share information: executive information systems, intranets and portals. An executive information executive information system system (EIS) uses internal and external (EIS) sources of data to provide managers and a data processing system executives with the information they that uses internal and external data sources to need to monitor and analyse provide the information organisational performance.41 The goal of needed to monitor and analyse organisational an EIS is to provide accurate, complete, performance relevant and timely information to managers. Managers at ColgateP P L Y E A Complete the Palmolive, which makes dental ‘Management decision’ worksheet for Chapter 16 (Colgate toothpastes), personal (Irish Spring soap and Speed Stick deodorants) and home care (Palmolive soaps) products, as well as pet nutrition (Hill’s Science Diet), use their EIS, which they call their ‘dashboard’, to see how well the company is running. Ruben Panizza, Colgate’s Global IT Director of Business Intelligence, says, ‘These real-time dashboards are a change for people who are used to seeing a lot of numbers with their data. But they quickly realise they can use the information as it’s presented in the dashboards to make faster decisions. In the past, executives

Academic publisher Cengage Learning uses an intranet site to share important documents, information and forms

relied on other people to get custom reports and data. Now, they can look at the information themselves. They see the real data as it is in the system much more easily and quickly. For the first time, many of the company’s business leaders are running BI [business intelligence] tools – in this case, dashboards – to monitor the business to see what’s going on at a high level’.42 intranet Intranets are private company a private company networks that allow employees to easily network that allows employees to easily access, share and publish information access, share and publish using Internet software. Intranet websites information using Internet software are just like external websites, but the firewall separating the internal company network from the Internet permits only authorised internal access.43 Companies typically use intranets to share information (e.g. about benefits) and to replace paper forms with online forms. Many company intranets are built on the web model as it existed a decade ago. Intranets are evolving to include: ● collaboration tools, such as wikis, where team members can post all relevant information for a project they’re working on together ● customisable email accounts ● presence awareness (information on whether someone you are looking for on the network is in the office, in a meeting, working from home, etc.) ● instant messaging ● simultaneous access to files for virtual team members. At IBM, however, the company intranet is used for electronic meetings, instant messaging, online libraries of policies and procedures, distance learning and training, online reimbursem*nt of travel expenses and travel schedules and reservations.44 Finally, corporate portals are a hybrid of executive information systems and intranets. While an EIS provides managers and executives with the information they need to monitor and analyse organisational

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corporate portal a hybrid of executive information systems and intranets that allows managers and employees to use a web browser to gain access to customised company information and to complete specialised transactions

performance, and intranets help companies distribute and publish information and forms within the company, corporate portals allow company managers and employees to access customised information and complete specialised transactions using a web browser.

EXTERNAL ACCESS AND SHARING Historically, companies have been unable or reluctant to let outside groups have access to corporate information. Now, however, a number of information technologies – electronic data interchange, extranets, web services and the Internet – are making it easier to share company data with external groups like suppliers and customers. They’re also reducing costs, increasing productivity by eliminating manual information processing (70 per cent of the data output from one company, like a purchase order, ends up as data input at another company, such as a sales invoice or shipping order), reducing data entry errors, improving customer service and speeding communications.

MGMT FACT

REASONS WHY COMPANIES BUILD INTRANETS (AKA EMPLOYEE PORTALS) Companies are committed to intranets and are working hard to increase their usability. Here are the main reasons cited by survey respondents for why their companies are implementing (or considering) intranets: • 94% let employees find information • 50% enable collaboration and information sharing • 44% automate business processes • 40% reduce costs • 25% provide secure, remote access to company data via the web • 17% provide online training.45

With electronic data interchange, or EDI, two companies convert purchase and ordering information to a standardised format to enable direct electronic transmission of that information from one company’s computer system to the other company’s system. For example, when a department store employee drags an Apple iPad across the checkout scanner, the department store’s computerised inventory system automatically reorders another iPad through the direct EDI connection that its computer has with Apple’s manufacturing and shipping

electronic data interchange (EDI) when two companies convert their purchase and ordering information to a standardised format to enable the direct electronic transmission of that information from one company’s computer system to the other company’s computer system

308

computer. No one at the department store or Apple fills out paperwork. No one makes phone calls. There are no delays to wait to find out whether Apple has the iPad in stock. The transaction takes place instantly and automatically because the data from both companies was translated into a standardised, shareable, compatible format. For example, company X, which has a seven digit parts numbering system, and company Y, which has an eight-digit parts numbering system, would agree to convert their internal parts numbering systems to identical 10-digit parts numbers when their computer systems talk to each other. Web services are another way for companies to directly and automatically transmit purchase and ordering information from one company’s computer system to another company’s computer system. Web services use standardised protocols to describe and transfer data from one company in such a way that those data can automatically be read, understood, transcribed and processed by different computer systems in another company.46 In EDI, the different purchasing and ordering applications in each company interact automatically without any human input. No one has to lift a finger to click a mouse, enter data or hit the ‘return’ key. An extranet, by contrast, allows companies to exchange information and extranet conduct transactions by purposely a network that allows providing outsiders with direct, Internet companies to exchange information and conduct browser based access to authorised parts transactions with of a company’s intranet or information outsiders by providing them direct, web-based system. Typically, user names and access to authorised parts passwords are required to access an of a company’s intranet or information system extranet.47 For example, to make sure that its distribution trucks don’t waste money by running halfempty (or make late deliveries to customers because it waited to ship until the trucks were full), food manufacturer General Mills (which owns and distributes brands like Latina and Old El Paso in Australia) uses an extranet to provide web-based access to its trucking database for 20 other companies that ship their products over similar distribution routes. When other companies are ready to ship products, they log on to General Mills’ trucking database, check the availability and then enter the shipping load, place and pickup time. Thus, by sharing shipping capacity on its trucks, General Mills can run its trucks fully loaded all the time. In several test areas, General Mills saved 7 per cent on shipping costs, or nearly A$2 million in the first year. Expanding the program company-wide produced even larger cost savings.48 Finally, similar to the way in which extranets are used to handle transactions with suppliers and distributors, companies are reducing paperwork and manual information processing by using the Internet to electronically automate transactions with customers. For example, most airlines have automated the ticketing process by eliminating paper

tickets altogether. Simply buy an e-ticket via the Internet, and then check yourself in online by printing your boarding pass from your personal computer or from a kiosk at the airport. Together, Internet purchases, ticketless travel and automated check-ins have fully automated the purchase of airline tickets. In the long run, the goal is to link customer Internet websites with company intranets (or EDI) and extranets so that everyone – all the employees and managers within a company, and the suppliers and distributors outside the company – who is involved in providing a service or making a product for a customer is automatically notified when a purchase is made. Companies that use EDI, extranets and the Internet to share data with customers and suppliers achieve increases in productivity 2.7 times larger than those that don’t.49

SMART MGMT

WE’VE GOT YOUR DATA! WHAT ARE YOU GOING TO DO ABOUT IT? Security through obscurity used to be a mantra of small businesses. Often operating in limited geographic areas, small businesses were too, well, small for cybercriminals to notice, let alone care – until recently. Small businesses are increasingly falling victim to ‘ransomware’, a type of malicious code introduced into their servers that locks up their data. The only way to regain access to the data is by paying a ransom. And even though the ransoms are generally low – $500 or so – the downtime associated with the attack, paying the ransom and getting back online can seem an eternity for small businesses, 80 per cent of which don’t use data protection. If your company falls victim to a ransomware attack, disconnect the computer from the network, scrub it and check other computers on the network for contamination. Then upgrade your Internet security protection. SOURCE: R. SIMON, ‘“RANSOMWARE” BECOMES BIGGER COMPANY THREAT’, WALL STREET JOURNAL, 16 APRIL 2015, B1.

SHARING KNOWLEDGE AND EXPERTISE At the beginning of the chapter, we distinguished between raw data, which consists of facts and figures, and information, which consists of useful data that influence someone’s choices and behaviour. One more important distinction needs to be made; namely, that data and information are not the same as knowledge. Knowledge is the knowledge the understanding that one understanding that one gains from gains from information information. Importantly, knowledge does not reside in information. Knowledge resides in people. That’s why companies hire consultants and why family doctors refer patients to

specialists. Unfortunately, it can be quite expensive to employ consultants, specialists and experts. So companies have begun using two information technologies, decision support systems and expert systems, to capture and then share the knowledge of consultants, specialists and experts with other managers and workers. Thanks to cheap computing power and the availability of ‘big data’, companies are now in the early stages of using systems in which knowledge resides in machines or computers via artificial intelligence. Whereas an executive information system speeds up and simplifies the acquisition of decision support information, a decision support system system (DSS) (DSS) helps managers understand an information system that helps managers problems and potential solutions by understand specific kinds acquiring and analysing information with of problems and potential solutions and analyse sophisticated models and tools. 50 the impact of different Furthermore, whereas EIS programs are decision options using ‘what if’ scenarios broad in scope and permit managers to retrieve all kinds of information about a company, DSS programs are usually narrow in scope and targeted towards helping managers solve specific kinds of problems. DSS programs have been developed to help managers pick the shortest and most efficient routes for delivery trucks, select the best combination of stocks for investors and schedule the flow of inventory through complex manufacturing facilities. It’s important to understand that DSS programs don’t replace managerial decision making; they improve it by furthering managers’ and workers’ understanding of the problems they face and the solutions that might work. Modern clinical DSS programs hold the promise of helping doctors make more accurate patient diagnoses. The main purpose of clinical decision support systems is to assist clinicians at the point of care. Clinicians are able to use a clinical DSS to help analyse and reach a diagnosis based on patient data. A 2014 systematic review found that clinical DSSs with integrated electronic health records (EHRs) have no effect on mortality and in fact they might somewhat improve the patient morbidity outcomes. Further reviews concluded that clinical DSSs improved practitioner performance in 64 per cent of cases, with patient outcomes improving in 13 per cent of cases. In Australia the planned transition to EHRs is slow, with most healthcare facilities still running completely paper-based systems. From 2003 until 2012, Victoria, through its HealthSMART program, unsuccessfully attempted to implement EHRs into its healthcare facilities. The project was cancelled due to the unexpectedly high costs associated with the process.51

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expert system an information system that contains the specialised knowledge and decision rules used by experts and experienced decision makers so that nonexperts can draw on this knowledge base to make decisions

Expert systems are created by

capturing the specialised knowledge and decision rules used by experts and experienced decision makers. They permit non-expert employees to draw on this expert knowledge base to make decisions. Most expert systems work by using a collection of ‘if–then’ rules to sort through information and recommend a course of action. An example centres around the security and fraud prevention procedures that Australian banks have in place to ensure that their customers are protected at all times. These include the National Australia Bank’s ‘NAB Defence’ and ANZ’s ‘ANZ Falcon’. When using your credit or debit card in Australia, NAB and ANZ will contact you and suspend the card if they identify any transactions as possibly suspect or unusual. Both banks also offer a ‘money back guarantee’ if you suffer a loss as a result of a fraudulent transaction on their credit or debit cards. Furthermore, if you travel overseas and fail to tell NAB or ANZ about your travel plans, your credit or debit card will be immediately cancelled given that ‘if’ your Australian credit card is

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People have knowledge: computers contain data and information

unexpectedly used to purchase something in a foreign country, ‘then’ it is most likely stolen.52 Devices and applications that have this capability to identify unusual activities such as potentially fraudulent transactions on a credit card are said to possess artificial intelligence. Artificial intelligence, or AI, is the capability of computerised systems to learn and adapt through experience.53 A common way to develop AI is to feed information into an AI system, have it analyse that information for patterns and then have the AI system make decisions (do this or that) or categorical distinctions (this is a picture of a wolf, not a dog), letting the system know when it was wrong or right. That feedback helps the AI system ‘learn’ and become more accurate over time. Though AI systems have improved greatly in recent years, they still have a long way to go to match the complex and nuanced decision making processes of the human brain.54 AI systems can streamline a large number of specific processes but for the time being, still require human supervision to manage information for today’s complex business.

Anti-fraud systems like ANZ Falcon or NAB Defence protect customers against unauthorised credit-card or online transactions

17 1

Managing service and manufacturing operations

LEARNING OUTCOMES

MANAGING FOR PRODUCTIVITY AND QUALITY

1 Discuss the different kinds of productivity and their importance in managing operations.

2 Explain the role that quality plays in managing operations.

3 Explain the essentials of managing a service business.

4 Describe the different kinds of manufacturing operations.

5 Explain why and how companies should

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manage inventory levels.

Furniture manufacturers, hospitals, restaurants, car makers, airlines and many other kinds of businesses struggle to find ways to efficiently produce quality products and services and then deliver them in a timely manner. Managing the daily production of goods and services, or operations management, is a key part of a manager’s job. But an organisation depends on the quality of its products and services as well as its productivity. After reading the next two sections, you should be able to: ● discuss the kinds of productivity and their importance in managing operations PPLY ● explain the role that E A Get started with quality plays in managing the media quiz: Barcelona Restaurants operations.

PRODUCTIVITY

In recent years, China has been the largest and fastestgrowing motor vehicle market in the world: significantly bigger than the United States. From 2002 to 2016, China’s vehicle production (cars, trucks and buses) rose by stunning increases of at least 10 per cent per year. This reflected annual output of ‘units’ (vehicles) growing from a yearly base of two million to over 28 million. Although the rate of growth steadied in 2017 (a 3% increase), the size of the market still meant an extra 900 000 vehicles were produced.1 There is still potential for even more growth as hundreds of millions of new middle-class Chinese families want to buy a car. But since Chinese consumers earn only

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about $7500 a year, auto manufacturers will have to significantly cut development costs, which normally run to about $1 billion per car model and make cars too expensive for Chinese consumers to buy. Instead, automakers are slashing development costs and time by reusing designs from previously built cars. General Motors’ Chinese brand, Baojun, is built on platform designs that GM had already used in other countries. Likewise, Honda’s Chinese brand, Linian, is based on a previous generation of Honda’s City model, while Nissan uses a recently retired car, the Tiida, for its new Chinese brand, Qichen. Reusing older designs cuts development time, largely eliminates development costs and enables PPLY E A automakers to sell cars at Complete the ‘What would you do?’ prices that middle-class worksheet for Chapter 17 Chinese families can afford.2 At their core, organisations are production systems. Companies combine inputs, such as labour, raw materials, capital and knowledge, to produce outputs in the form of finished products productivity a measure of or services. Productivity is a measure performance that of performance that indicates how many indicates how many inputs it takes to produce inputs it takes to produce or create an or create an output output. Productivity = Inputs/Outputs The fewer inputs it takes to create an output (or the greater the output from one input), the higher the productivity. For example, a car’s fuel economy is a common measure of productivity. A car that uses 8 litres of fuel (input) per 100 kilometres (output) is more productive and fuel efficient than a car that uses 10 litres per 100 kilometres. Let’s examine: ● why productivity matters ● the different kinds of productivity.

WHY PRODUCTIVITY MATTERS Why does productivity matter? For companies, higher productivity, that is, doing more with less, results in lower costs. In turn, doing more with less can lead to lower prices, faster service, higher market share and higher profits. When Tan Sri Tony Fernandes set about improving performance at AirAsia, one of the first goals he set was to improve productivity. AirAsia is a low-cost carrier (LCC) which offers low fares but comparatively few extra features. Things like airport lounges, frequent flyer points and luggage charges or meals included in the ticket price are not features of a LCC. Traditional full-service airlines (like Qantas and Singapore Airlines) offer all of these features for a (usually) higher ticket price. AirAsia also aims to ensure that their aircraft are kept flying as much as possible. AirAsia’s first flight starts as early in the morning as commercially possible and the final flight typically ends at midnight. Furthermore,

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a fast turnaround is critical to make sure time spent on the ground is minimal – an airline makes money when the aircraft is flying, not when the aircraft is sitting at the airport terminal. AirAsia’s turnaround time is 25 minutes, compared to the usual one hour for a full-service carrier. On average, AirAsia’s utilisation per aircraft is 12 block hours per day; a full service carrier might do about eight block hours per day. That’s 50 per cent higher aircraft utilisation, or in other words 50 per cent more productivity.3 Another example, this time about making aircraft, comes from Boeing. Boeing has incorporated a series of changes to its assembly line to increase the rate at which it produces its wide-body 777 jets. For example, since each airline configures the floor layout of the planes it buys from Boeing, the floor panels had to be drilled by hand (to attach seats, kitchens, walls, lavatories, etc.) to accommodate those design differences. Boeing, however, bought automated floor-drilling equipment, which completes each aeroplane floor three to four times faster while also increasing quality. Jason Clark, Boeing’s former director of manufacturing for the 777, says, ‘The day we opened the box [for automated floor-drilling equipment] and put it on the airplane … we got a 93-per cent improvement in hole quality’.4 Boeing has also switched from painting wings by handspraying them, which only sprays paint in 1.2-metre widths, to an automated 19-axis painting process that sprays paint in 5.5-metre widths. As a result, the amount of time it takes to spray a 777 wing dropped from four-and-a-half hours to just 24 minutes. Likewise, the quality and consistency with which the paint is applied to the wing reduced the weight of each pair of wings by 20 to 28 kilos. Together, changes like this have increased productivity at Boeing’s 777 production line from 84 777s per year to 100 per year. With the average 777 selling for $310 million in 2015, the extra 16 planes that Boeing can make every year thanks to higher productivity yield approximately $4.9 billion in extra revenue.5 For countries, productivity matters because it results in a higher standard of living. One way productivity leads to a higher standard of living is through increased wages. When companies can do more with less, they can raise employee wages without increasing prices or sacrificing normal profits. For example, average weekly earnings in Australia were about $1586 in 2018. If productivity in Australia grew by 1 per cent per year, Australian workers would be averaging over $3000 per week by about 2090, but if productivity grew at 2 per cent a year, average weekly earnings would be over $3000 per week before 2050: the magic of compound interest growth!6 Rising income stemming from increased productivity also creates numerous other benefits. For example, economic growth in Australia has been averaging about

MGMT FACT

MULTITASKING TO HIGHER PRODUCTIVITY?

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Think multitasking is the answer to productivity increases? Think again. How effective can you be answering emails, reviewing a report and being attentive at a meeting – all at the same time? James C. Johnston, a research scientist at NASA, says, ‘Multitasking doesn’t look to be one of the great strengths of human cognition. It’s almost inevitable that each individual task will be slower and of lower quality’. Anyone who’s tried to hold a meaningful conversation and text-message another person at the same time probably understands this painfully well. (Ever said ‘yes’ when you meant ‘no’, or clicked ‘send’ at the wrong time?) The keys to productivity, namely focus and concentration, lead to doing things right the first time. Could ‘multitasking’ be code for not paying attention?7

actually made cars cheaper.9 In 1948 – the year the first Holden was sold for £733 (A$1466) – the average family needed 94 weeks (almost two years) of income to pay for the average car.10 Today, the average family needs only about 22 weeks of income to pay for a car loaded with safety features and accessories that weren’t even available in 1948, such as air bags, traction control, power steering and brakes, power windows, cruise control, stereo/CD/ DVD players, Bluetooth hands-free phone connection, airconditioning and satellite navigation. So in terms of real purchasing power, productivity gains have actually made today’s A$33 700 car more affordable than the A$1466 car of 1948.

KINDS OF PRODUCTIVITY Two common measures of productivity are partial productivity and multifactor productivity. Partial productivity indicates how much of a particular kind of input it takes to produce an output.

partial productivity a measure of performance that indicates how much of a particular kind of input it takes to produce an output

Partial productivity = Outputs/Single kind of input

2.5 per cent per year since 2011; it was 3.4 per cent in June 2018. During this time, unemployment has also remained low, with the lowest rate for five years (5.4 per cent) reported in mid 2018. This means more Australians in work at the same time as average household income rises.8 Another benefit of productivity improvement is that it makes products more affordable or better. For example, while inflation has pushed the average cost of a full-size family car in Australia to approximately A$33 700 (for a base model Holden Commodore), increases in productivity have

Labour is one kind of input that is frequently used when determining partial productivity. Labour productivity typically indicates the cost or number of hours of labour it takes to produce an output. In other words, the lower the cost of the labour to produce a unit of output, or the less time it takes to produce a unit of output, the higher the labour productivity. Labour cost as a percentage of revenue is a basic measure of labour productivity used in the airline industry. The lower the percentage of revenue attributable to labour costs, the more productively an airline uses labour to generate a unit of revenue (i.e. dollars, euros, etc.). In Europe, for example, Wizz Air (6.5 per cent), Ryanair (9.5 per cent) and EasyJet (12.4 per cent) have some of the lowest labour costs per unit of revenue, especially when compared to major carriers like British Airways (21.7 per cent), Lufthansa (23.4 per cent), Air France (29.9 per cent) and Scandinavian Airlines (32.1 per cent).11 Partial productivity assesses how efficiently companies use only one input, such as labour, when creating outputs. Multifactor productivity is an overall multifactor measure of productivity that assesses productivity how efficiently companies use all the an overall measure of performance that indicates inputs it takes to make outputs. More how much labour, capital, specifically, multifactor productivity materials and energy it takes to produce an output indicates how much labour, capital, materials and energy it takes to produce an output.12 Outputs Multifactor = Productivity (Labour+Capital+Materials+Energy)

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Multifactor Productivity (2005 = 100)

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FIGURE 17.1

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Multifactor productivity growth across industries

Source: ‘Nonmanufacturing Sectors and NIPA-level Nonmanufacturing Industries KLEMS Multifactor Productivity Tables by Industry: Table Multifactor Productivity and Related KLEMS Measures from the NIPA Industry Database, 1987 to 2014’, Bureau of Labor Statistics, Division of Industry Productivity Studies, 22 June 2016, accessed 8 May 2017. http://www.bls.gov/mfp/special_requests/klemsmfpxg.zip; ‘Manufacturing Sector and NIPA-level Manufacturing Industries KLEMS Multifactor Productivity Tables by Industry: Table Multifactor Productivity and Related KLEMS Measures from the NIPA Industry Database, 1987 to 2014’, Bureau of Labor Statistics, Division of Industry Productivity Studies, 22 June 2016, accessed 8 May 2017. http://www.bls.gov/mfp/special_requests/prod3.klemsmfp.zip.

Figure 17.1 shows the trends in multifactor productivity across a number of industries since 1987. With a 238 per cent increase between 2002 (scaled at 100) and 2010 (when it reached a level of 338) and a 27-fold increase since 1987, the growth in multifactor productivity in the computer and electronic products industry far exceeded the productivity growth in dairy products, pharmaceuticals, iron and steel production, air transportation and auto manufacturing, as well as most other industries tracked. Should managers use multiple or partial productivity measures? In general, they should use both. Multifactor productivity indicates a company’s overall level of productivity relative to its competitors. In the end, that’s what counts most. However, multifactor productivity measures don’t indicate the specific contributions that labour, capital, materials or energy make to overall productivity. To analyse the contributions of these individual components, managers need to use partial productivity measures.

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QUALITY

With the average full-size family car in Australia costing more than $33 000, car buyers want to make sure that they’re getting good quality for their money. Fortunately, as indicated by the number of problems per 100 cars (PP100), today’s cars are of much higher quality than earlier models. In 1981, Japanese cars averaged 240 PP100. General Motors cars averaged 670, Ford averaged 740 and Chrysler averaged 870 PP100! In other words, as measured by 314

PP100, the quality of GM, Ford and Chrysler cars was two to three times worse than that of Japanese cars.13 By 1992, however, US carmakers had made great strides, significantly reducing the number of problems to an average of 155 PP100. Japanese vehicles had improved, too, averaging just 125 PP100. According to the 2013 J.D. Power and Associates survey of initial car quality, as shown in Figure 17.2, however, overall quality improved to 113 problems per 100 vehicles, and even the worst-rated cars beat the scores of the Japanese cars of decades ago. Category leaders like Porsche, GMC, Lexus, Infiniti and Chevrolet came in with scores under 100; that equates to fewer than one problem per car!14 Quality is often defined in business quality literature in two ways. It can mean a product a product or service of deficiencies, or or service free of deficiencies, such as the free the characteristics of a number of problems per 100 cars, or it can product or service that mean the characteristics of a product or satisfy customer needs service that satisfy customer needs.15 In this sense, today’s cars with their additional standard features (power brakes and steering, Bluetooth connectivity, power windows and locks, keyless entry, cruise control) are of higher quality than those produced 40 years ago. Modern cars have fewer manufacturing faults and they meet current (higher) standards of customer needs for safety, comfort and convenience. In this part of the chapter, you will learn about: ● quality-related characteristics for products and services ● ISO 9000 and 14000 ● the Baldrige National Quality Award and the Australian Business Excellence Framework ● total quality management.

20 and 25 years. Furthermore, the energy savings from one $10 LED bulb means it will pay for itself within two years and then provide 20 more years of lighting while saving $149 in energy costs over the longer lifetime of the bulb.17 While high-quality products are characterised by reliability, serviceability and durability, services are different. With services, there’s no point in assessing durability. Unlike products, services don’t last. Services are consumed the minute they’re performed. For example, once a lawn service has mowed your lawn, the job is done until the mowers come back next month to do it again. Likewise, services don’t have serviceability. You can’t maintain or fix a service. If a service wasn’t performed correctly, all you can do is perform it again. Finally, the quality of service interactions often depends on how the service provider interacts with the customer. Was the service provider friendly, rude or helpful? Five characteristics – reliability, tangibles, responsiveness, assurance and empathy – typically distinguish a quality service.18 Service reliability is the ability to consistently perform a service well. Studies clearly show that reliability matters more to customers than anything else when buying services. When you take your clothes to the dry cleaner, you don’t want them returned with cracked buttons or wrinkles down the front. If your dry cleaner gives you back perfectly clean and pressed clothes every time, it’s providing a reliable service.

Problems per 100 Vehicles (PP100)

FIGURE 17.2

72 77 78 86 86 88 88 88 92 93 93 94 95 95 97 98 99 102 102 103 105 105 106 107 107 113 115 125 131 131 134 148 163

2013 J. D. Power initial quality survey Source: ‘New-Vehicle Initial Quality is Best Ever, J.D. Power Finds’, J.D. Power and Associates, 21 June 2017, accessed 31 August 2017, http://www.jdpower.com/ press-releases/2017-us-initial-quality-study-iqs.

QUALITY-RELATED CHARACTERISTICS FOR PRODUCTS AND SERVICES Quality products usually possess three characteristics: reliability, serviceability and durability.16 A breakdown occurs when a product stops working or doesn’t do what it was designed to do. The longer it takes for a product to break down, or the longer the time between breakdowns, the more reliable the product. Consequently, many companies define product reliability in terms of the average time between breakdowns. Serviceability refers to how easy or difficult it is to fix a product. The easier it is to maintain a working product or fix a broken product, the more serviceable that product is. A product breakdown assumes that a product can be repaired. However, some products don’t break down – they fail. Product failure means products can’t be repaired. They can only be replaced. Durability is defined as the mean time to failure. A typical incandescent lightbulb, for example, has a mean time of failure of 1000 hours. By contrast, LED bulbs, which use the same technology that lights up HDTVs and cell phone screens, have a mean time to failure of between

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Kia Genesis Porsche Ford Ram BMW Chevrolet Hyundai Lincoln Nissan Volkswagen MINI Buick Toyota Industry Average Lexus GMC Chrysler Mercedes-Benz Acura Cadillac Honda Dodge Infiniti Jeep Subaru Audi Mazda Land Rover Mitsubishi Volvo Jaguar Fiat

Durability, or the average time before failure, is a key part of LCD quality

Similarly, although services themselves are not tangible (you can’t see or touch them), services are provided in tangible places. Therefore, tangibles refer to the appearance of the offices, equipment and personnel involved with the delivery of a service. One of the best examples of the effect of tangibles on the perception of quality is the restroom. When you eat at a fancy restaurant, you expect clean, if not upscale, bathrooms. How different is your perception of a business, say a petrol station, if it has clean bathrooms versus if it has filthy ones?

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ISO 9000 AND 14000 ISO is the acronym for the International Organization for Standardization, which helps set standards for 164 countries. The purpose of this agency is to develop and publish standards that facilitate the international exchange of goods and services.21 ISO 9000 is a series ISO 9000 of five international standards, from ISO 9000 a series of five international standards, to ISO 9004, for achieving consistency in from ISO 9000 to ISO quality management and quality assurance in 9004, for achieving companies throughout the world. ISO 14000 consistency in quality management and quality is a series of international standards for assurance in companies managing, monitoring and minimising an throughout the world organisation’s harmful effects on the ISO 14000 a series of international environment.22 (For more on environmental standards for managing, monitoring and minimising quality and issues, see the section on an organisation’s harmful controlling waste and pollution in Chapter 15.) effects on the environment The ISO 9000 and 14000 standards publications, which are available from the ISO web page (http://www.iso.org/home.html), are general and can be used for manufacturing any kind of product or delivering any kind of service. Importantly, the ISO 9000 standards don’t describe how to make a better-quality car, computer or widget (a ‘widget’ is a notional unit of production – instead of saying ‘TVs’ or ‘cars’, management writers will often talk about ‘widgets’). Instead, they describe how companies can extensively document (and thus standardise) the steps they take to create and improve the quality of their products. ISO 9000 certification is increasingly becoming a requirement for doing business with many large companies and governments.23 To become certified to ISO standards, a process that can take months, a company must show that it is following its own procedures for improving production, updating design plans and specifications, keeping machinery in top condition, educating and training workers and satisfactorily International Organization for Standardization (ISO)

Responsiveness is the promptness and willingness with which service providers give good service (your dry cleaner returning your laundry perfectly clean and pressed in a day, or in an hour). Assurance is the confidence that service providers are knowledgeable, courteous and trustworthy. Empathy is the extent to which service providers give individual attention and care to customers’ concerns and problems. When Apple first launched its retail stores, they were widely predicted to fail given all of the locations where consumers could already buy computer and electronics equipment. Those predictions were wrong, however, as more than 400 million people visit Apple stores every year. Apple’s average annual revenue tops $50 million per store, and shopping centres with Apple Stores average 10 per cent more overall customer traffic than those without. 19 Why have Apple Stores achieved these extraordinary results? In addition to great products, the stores are great at delivering responsiveness, assurance and empathy. At Apple stores, responsiveness manifests itself in a sales philosophy of not selling. Instead, Apple store employees are trained to help customers solve problems. An Apple training manual says, ‘Your job is to understand all of your customers’ needs – some of which they may not even realize they have.’ David Ambrose, a former Apple store employee, says, ‘You were never trying to close a sale. It was about finding solutions for a customer and finding their pain points.’ Apple store employees demonstrate assurance through the high level of training that they receive. Apple ‘geniuses’, who staff the Genius Bar in each Apple store, are trained at Apple headquarters and, according to Apple’s website, ‘can take care of everything from troubleshooting your problems to actual repairs’. Geniuses are regularly tested on their knowledge and problem-solving skills to maintain their certification. Other Apple store employees are highly trained, too, and are not allowed to help customers until they’ve spent two to four weeks shadowing experienced store employees. The acronym APPLE instructs employees on how to engage empathetically with customers: ‘Approach customers with a personalized warm welcome’, ‘Probe politely to understand all the customer’s needs’, ‘Present a solution for the customer to take home today’, ‘Listen for and resolve any issues or concerns’ and ‘End with a fond farewell and an invitation to return’. And when customers are frustrated and become emotional, the advice is to ‘listen and limit your responses to simple reassurances that you are doing so. “Uh-huh”, “I understand”, etc.’ The results from Apple’s retail approach speak for themselves, as Apple retail sales average $5546 per square foot, higher than Tiffany & Co. jewellery stores ($2951), Lululemon Athletica ($1560) or Michael Kors ($1466).20

International Organization for Standardization (ISO)

dealing with customer complaints.24 Once a company has been certified as ISO 9000 compliant, an accredited third party will issue an ISO 9000 certificate that the company can use in its advertising and publications. Continued ISO 9000 certification is not guaranteed, however. Accredited third parties typically conduct periodic audits to make sure the company is still following quality procedures. If it is not, its certification is suspended or cancelled.

BALDRIGE NATIONAL QUALITY AWARD AND THE AUSTRALIAN BUSINESS EXCELLENCE FRAMEWORK The Baldrige National Quality Award, which is administered by the US government’s National Institute for Standards and Technology, is given ‘to recognise companies for their achievements in quality and business performance and to raise awareness about the importance of quality and performance excellence as a competitive edge’.25 Each year, up to three awards may be given in these categories: manufacturing, service, small business, education and health care. At a minimum, each company that applies receives an extensive report based on 300 hours of assessment from at least eight business and quality experts. Businesses that apply for the Baldrige Award are judged on a 1000-point scale based on the seven criteria in Table 17.1. With 450 out of 1000 points, ‘results’ are clearly the most important. In other words, in addition to the six other criteria, companies must show that they have achieved superior quality when it comes to products and services, customers, financial performance and market share, treatment of employees, organisational effectiveness and leadership and social responsibility. This emphasis on ‘results’ is what differentiates the Baldrige Award from the ISO 9000 standards. The Baldrige Award indicates the extent to which companies have actually achieved worldclass quality. The ISO 9000 standards simply indicate whether a company is following the management system it put in place to improve quality. In fact, ISO 9000 certification covers less than 10 per cent of the requirements for the Baldrige Award.26 Most companies that apply for the Baldrige Award do it to grow, prosper and stay competitive.27 Furthermore, the companies that have won the Baldrige Award have achieved superior financial returns. Since 1988, an investment in Baldrige Award winners would have outperformed the Standard & Poor’s 500 stock index 80 per cent of the time.28 A Business Excellence model similar to the Baldridge Awards (and related to them through co-membership of GEM, the Global Excellence Model Council) has operated in Australia as the Australia Quality Awards since 1988, and since 2013, as the Australian Organisational Excellence Awards.29

TABLE 17.1

Criteria for the Baldrige National Quality Award

2015–2016 Categories/Items

1 Leadership 1.1 Senior Leadership 1.2 Governance and Social Responsibilities 2 Strategy 2.1 Strategy Development 2.2 Strategy Implementation 3 Customers 3.1 Voice of the Customer 3.2 Customer Engagement 4 Measurement, Analysis, and Knowledge Management 4.1 Measurement, Analysis, and Improvement of Organizational Performance 4.2 Information and Knowledge Management 5 Workforce 5.1 Workforce Environment 5.2 Workforce Engagement 6 Operations 6.1 Work Processes 6.2 Operational Effectiveness 7 Results 7.1 Product and Process Results 7.2 Customer-Focused Results 7.3 Workforce-Focused Results 7.4 Leadership and Governance Results 7.5 Financial and Market Results Source: ‘Baldrige Criteria Commentary’, Baldrige Performance Excellence Program, 14 December 2016, accessed 8 May 2017, https://www.nist.gov/baldrige/baldrigecriteria-commentary.

TOTAL QUALITY MANAGEMENT Total quality management (TQM) is

total quality management (TQM) an integrated, principlebased, organisationwide strategy for improving product and service quality customer focus an organisational goal to concentrate on meeting customers’ needs at all levels of the organisation customer satisfaction an organisational goal to provide products or services that meet or exceed customers’ expectations

an integrated, organisation-wide strategy for improving product and service quality.30 TQM is not a specific tool or technique. Rather, TQM is a philosophy or overall approach to management that is characterised by three principles: customer focus and satisfaction, continuous improvement and teamwork.31 Contrary to the arguments of most economists, accountants and financiers that companies exist to earn profits for shareholders, TQM suggests that customer focus and customer satisfaction should be a company’s primary goals. Customer focus means that the entire organisation, from top to bottom, should be focused on meeting customers’ needs. The result of that customer focus should be customer satisfaction,

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given the incentive to work together and the responsibility and authority to make improvements and solve problems. At Valassis, a US-based printing company long famous for its use of teams, management turned to employees for additional suggestions when business fell during a recession. Teams offered so many ideas to cut costs and raise quality that the company was able to avoid layoffs.35 Together, customer focus and satisfaction, continuous improvement and teamwork mutually reinforce each other to improve quality throughout a company. Customerfocused continuous improvement is necessary to increase customer satisfaction. At the same time, continuous improvement depends on teamwork from different functional and hierarchical parts of the company.

Find out more about your customer management style with this self assessment

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which occurs when the company’s products or services meet or exceed customers’ expectations. At companies where TQM is taken seriously, pay and promotions depend on keeping customers satisfied. For example, Enterprise Rent-a-Car, which operates in 67 countries including Australia, the UK, France and the US, measures customer satisfaction with a detailed survey called the Enterprise Service Quality index. Enterprise not only ranks each branch office by operating profits and customer satisfaction, but it also makes promotions to higher-paying jobs contingent on aboveaverage customer satisfaction scores.32 Continuous improvement is continuous an ongoing commitment to increase improvement an organisation’s ongoing product and service quality by commitment to constantly constantly assessing and improving assess and improve the processes and procedures the processes and procedures used used to create products and to create those products and services services. How do companies know variation a deviation in the form, whether they’re achieving continuous condition or appearance of improvement? Besides higher a product from the quality standard for that product customer satisfaction, continuous improvement is usually associated with a reduction in variation. Variation is a deviation in the form, condition or appearance of a product from the quality standard for that product. The less a product varies from the quality standard, or the more consistently a company’s products meet a quality standard, the higher the quality. Freudenberg-NOK is a Michigan-based manufacturer of seals and gaskets for the automotive industry. The company was formed in 1989 as a joint venture of German and Japanese parent companies, and it now operates at locations in the US, Canada, Mexico, Brazil and Malaysia. For Freudenberg-NOK, continuous improvement means shooting for a goal of Six Sigma quality, meaning just 3.4 defective or non-standard parts per million (ppm). Achieving this goal would eliminate almost all product variation. In a recent year, FreudenbergNOK made over 200 million seals and gaskets with a defect rate of 9 ppm.33 This represents a significant improvement from seven years before, when FreudenbergNOK was averaging a defect rate of 650 ppm. Vice President Gary VanWambeke says, ‘The whole goal is variation reduction’, so Freudenberg-NOK expects the quality of its products to continue to improve.34 The third principle of TQM is teamwork collaboration between t e a m w o r k , w h i ch m e a n s managers and non-managers, collaboration between managers and across business functions and non-managers, across business between companies, customers and suppliers functions and between the company and its customers and suppliers. In short, quality improves when everyone in the company is PPLY E A

The goal of Six Sigma is to eliminate all product variation

MANAGING OPERATIONS

At the start of this chapter, you learned that operations management means managing the daily production of goods and services. Then you learned that to manage production, you must oversee the factors that affect productivity and quality. In this half of the chapter, you will learn about managing operations in service and manufacturing businesses. The chapter ends with a discussion of inventory management, a key factor in a company’s profitability. After reading the next three sections, you should be able to: ● explain the essentials of managing a service business ● describe the different kinds of manufacturing operations ● explain why and how companies should manage inventory levels.

LO3

SERVICE OPERATIONS

Imagine that your trusty washing machine breaks down as you try to clean your laundry. You’ve got two choices. You can run to the whitegoods store and spend A$500 to A$1000 (or more!) to purchase a new washing machine, or you can spend hundreds (you hope) to have it fixed at a repair shop. Either way you end up with the same thing, a working washing machine. However, the first choice, getting a new washing machine, involves buying a physical product (a ‘good’), while the second, dealing with a repair shop, involves buying a service. Services differ from goods in several ways. First, goods are produced or made, but services are performed. In other words, services are almost always labour intensive: someone typically has to perform the service for you. A repair shop could give you the parts needed to repair your old washing machine, but without the technician to perform the repairs, you’re still going to have a broken washing machine. Second, goods are tangible, but services are intangible. You can touch and see that new washing machine, but you can’t touch or see the service provided by the technician who fixed your old washing machine. All you can ‘see’ is that the washing machine works. Third, services are perishable and cannot be stored for later use. If you don’t use them when they’re available, they’re wasted. For example, if your washing machine repair shop is backlogged on repair jobs, then you’ll just have to wait until next week to get your washing machine repaired. You can’t store an unused service and use it when you like. By contrast, you can purchase a good, such as cooking oil, and store it until you’re ready to use it. Finally, services account for a larger proportion of Australia’s (non-farm) gross national product than manufacturing does.36 One service that contributes significantly to Australia’s export earnings is education. According to the Australian Government, education, both on-shore and offshore, is Australia’s third biggest export earner, bringing in over A$28 billion in 2017.37 Because services are different from goods, managing a service operation is different from managing a manufacturing or production operation. Let’s look at: ● the service-profit chain ● service recovery and empowerment. Upper

suggests that in service businesses, success begins with how well management treats service employees.38 The first step in the service-profit chain is internal service quality, meaning the quality of treatment that employees receive from a company’s internal service providers, such as management, payroll and benefits, human resources, and so forth. For example, Virgin Australia is well known for its positive culture and its excellent customer service. According to Virgin Australia’s former CEO, Brett Godfrey, that’s because their recruitment of customer service staff ‘focuses on finding employees who possess values such as fun, innovation and have a sense of flair’. ‘I think it’s really important to empower people to do their job, to support them in their decisions and to encourage “outside the box” thinking because this is where you can really make a difference. People will make mistakes, just as often as CEOs. Learn from it and move on. Full stop.’39 As depicted in Figure 17.3, good internal service leads to employee satisfaction and service capability. Employee satisfaction occurs when companies treat employees in a way that meets or exceeds their expectations. In other words, the better employees are treated, the more satisfied they are and the more likely they are to give high-value service that satisfies customers. Service capability is an employee’s perception of his or her ability to serve customers well. When an organisation serves its employees in ways that help them to do their jobs well, employees, in turn, are more likely to believe that they can and ought to provide high-value service to customers. Finally, according to the service-profit chain shown in Figure 17.3, high-value service leads to customer satisfaction and customer loyalty, which, in turn, lead to long-term profits and growth. What’s the link between customer satisfaction and loyalty and profits? To start, the average Internal service quality Employee satisfaction

Employees

Customer satisfaction Customer loyalty lead to

Customers

management

THE SERVICE-PROFIT CHAIN One of the key assumptions in the service business is that success depends on how well employees, that is, service providers, deliver their services to customers. However, the concept of the service-profit chain, depicted in Figure 17.3,

Profit and growth FIGURE 17.3

Service-profit chain Sources: R. Hallowell, L. A. Schlesinger & J. Zornitsky, ‘Internal service quality, customer and job satisfaction: linkages and implications for management’, Human Resource Planning, 19, 1996: 20–31; J. L. Heskett, T. O. Jones, G. W. Loveman, W. E. Sasser, Jr & L. A. Schlesinger, ‘Putting the service-profit chain to work’, Harvard Business Review, March–April 1994: 164–74. Reprinted with permission of Harvard Business Publishing. All rights reserved.

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business keeps only 70 to 90 per cent of its existing customers each year. No big deal, you say? Just replace leaving customers with new customers. Well, there’s one significant problem with that solution. It costs 10 times as much to find a new customer as it does to keep an existing customer. Also, new customers typically buy only 20 per cent as much as established customers. In fact, keeping existing customers is so cost-effective that most businesses could double their profits by simply keeping 5 per cent more customers per year!40

allowed to make changes of any kind’. In other words, company rules prevent them from engaging in acts of service recovery meant to turn dissatisfied customers back into satisfied customers. The result is frustration for customers and service employees and lost customers for the company. Now, however, many companies are empowering their service employees.42 In Chapter 9, you learned that empowering workers means permanently passing decisionmaking authority and responsibility from managers to workers. With respect to service recovery, empowering workers means giving service employees the authority and responsibility to make decisions that immediately solve customer problems.43 At the hotel I was staying in, all employees are empowered to solve customer problems. Empowering service workers does entail some costs, although they are usually less than the company’s savings from retaining customers.

LO4

Replacing a broken washing machine involves purchasing a new good; having the broken machine repaired is a service

SERVICE RECOVERY AND EMPOWERMENT When mistakes are made, when problems occur and when customers become dissatisfied with the service they’ve received, service businesses must switch from the process of service delivery to the process of service recovery service recovery; that is, restoring restoring customer satisfaction to customer satisfaction to strongly strongly dissatisfied dissatisfied customers.41 Sometimes, customers service recovery requires service employees to not only fix whatever mistake was made, but also to perform heroic service acts that delight highly dissatisfied customers by far surpassing their expectations of fair treatment. For example, when I recently checked into a hotel, I wasn’t happy. The company website had provided vague and contradictory directions. The airconditioning was malfunctioning, so my room was freezing cold. When I went to shower and change after travelling all day I found that the hot water in the shower wasn’t working. When I complained, the employee at the front desk immediately offered me a sincere apology, moved me to a better room and offered a complimentary dinner in the hotel restaurant. Unfortunately, when mistakes occur, service employees don’t always have the discretion to resolve customer complaints. Customers who want service employees to correct or make up for poor service are frequently told, ‘I’m not allowed to do that’, ‘I’m just following company rules’ or ‘I’m sorry, only managers are 320

MANUFACTURING OPERATIONS

Toyota makes cars, and Lenovo makes computers. Shell produces petrol, whereas Dulux makes paint. Boeing makes jet planes, but Carlton & United makes beer. Maxtor makes hard drives, and Fisher and Paykel makes appliances. The manufacturing operations of these companies all produce physical goods. But not all manufacturing operations are the same. Let’s learn how various manufacturing operations differ in terms of: ● the amount of processing that is done to produce and assemble a product ● the flexibility to change the number, kind and characteristics of products that are produced.

AMOUNT OF PROCESSING IN MANUFACTURING OPERATIONS Manufacturing operations can be classified according to the amount of processing or assembly that occurs after a customer order is received. The highest degree of processing occurs in make-to-order make-to-order operations. A make-to-order operation operation does not start processing or assembling a manufacturing operation that does not start products until it receives a customer processing or assembling products until a customer order. In fact, some make-to-order order is received operations may not even order parts until a customer order is received. Not surprisingly, make-toorder operations produce or assemble highly specialised or customised products for customers. For example, the John Deere 8R tractor comes with thousands of options that can be customised to the needs of a wheat farmer in Western Australia or a rice farmer in

Shutterstock.com/smereka

India. Buyers choose from six types of axles, five transmissions, 13 types of rear hitches and 54 different wheel and tyre configurations. There are 354 option bundles for the basic tractor and 114 option bundles for attachments. Thanks to so many option combinations, Deere produced 7800 unique 8R tractors in the last year. On average, each tractor configuration was built just 1.5 times, and over half of the configurations were built just once – truly a make-to-order operation.44 A moderate degree of processing assemble-to-order occurs in as semble -to - or de r operation a manufacturing operation operations. A company using an that divides manufacturing assemble-to-order operation divides its processes into separate parts or modules that are manufacturing or assembly process into combined to create semiseparate parts or modules. The company customised products orders parts and assembles modules ahead of customer orders. Then, based on actual customer orders or on research forecasting what customers will want, those modules are combined to create semicustomised products. For example, when a customer orders a new car, Toyota may have already ordered the basic parts or modules it needs from suppliers. In other words, based on sales forecasts, Toyota may already have ordered enough tyres, air-conditioning compressors, brake systems and seats from suppliers to accommodate nearly all customer orders on a particular day. Special orders from customers and car dealers are then used to determine the final assembly checklist for particular cars as they move down the assembly line.

John Deere 8R tractors are completely made to order

The lowest degree of processing occurs in make-to-stock operations (also called build-to-stock). Because the products are standardised, meaning each product is exactly the same as the next, a company using a make-to-stock operation starts ordering parts and assembling finished products before receiving customer orders. Customers then purchase these standardised products, such as plastic storage containers, microwave ovens and vacuum cleaners, at retail stores or directly from the manufacturer. Because parts are ordered and

make-to-stock operation a manufacturing operation that orders parts and assembles standardised products before receiving customer orders

products are assembled before customers order the products, make-to-stock operations are highly dependent on the accuracy of sales forecasts. If sales forecasts are incorrect, make-to-stock operations may end up building too many or too few products, or they may make products with the wrong features or without the features that customers want. These disadvantages are leading many companies to move from make-to-stock to build-to-order systems.

FLEXIBILITY OF MANUFACTURING OPERATIONS A second way to categorise manufacturing manufacturing operations is by manufacturing flexibility degree to which flexibility, meaning the degree to which the manufacturing operations manufacturing operations can easily and can easily and quickly change the number, kind quickly change the number, kind and and characteristics of characteristics of products they produce. products they produce Flexibility allows companies to respond quickly to changes in the marketplace (i.e. competitors and customers) and to reduce the lead time between ordering and final delivery of products. There is often a trade-off between flexibility and cost, however, with the most flexible manufacturing operations frequently having higher costs per unit and the least flexible operations having lower costs per unit.45 Some common manufacturing operations, arranged in order from the least flexible to the most flexible, are continuous-flow production, line-flow production, batch production and job shops. Most production processes generate finished products at a discrete rate. A product is completed and then, perhaps a few seconds, minutes or hours later, another is completed, and so forth. By contrast, in continuouscontinuous-flow flow production, products are produced production continuously, rather than at a discrete a manufacturing operation that produces goods at a rate. Like a water hose that is never turned continuous, rather than a off and just keeps on flowing, production discrete, rate of the final product never stops. Liquid chemicals and petroleum products are examples of continuous-flow production. Because of their complexity, continuous-flow production processes are the most standardised and least flexible manufacturing operations. Line-flow production processes are line-flow production pre-established, occur in a serial or linear manufacturing processes manner, and are dedicated to making one that are pre-established, occur in a serial or linear type of product. Line-flow production manner and are dedicated processes are inflexible because they are to making one type of product typically dedicated to manufacturing one kind of product. For example, nearly every city has a local bottling plant for soft drinks or beer. The processes or steps in bottling plants are serial, meaning they must occur in a particular order: sterilise bottles, fill with soft drinks or beer, crown or cap bottles, check for under-filling and missing

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WORKPLACE AND COMMUNITY

IS ANYTHING STILL MADE IN AUSTRALIA OR NEW ZEALAND? The conventional wisdom is that all manufacturing will ultimately go to the country where labour is cheapest, which doesn’t bode well for, say, Australia or New Zealand. In fact, much is still made in both countries. High-end products, bulky products and delicate products often continue to be produced in Australia and illustrate a key point for consideration in any discussion of globalisation: there are physical and strategic limits. Some business will always be better accomplished close to the customer.47

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Bombardier makes trams in Melbourne

iStock.com (× 3)

iStock.com/Kangah

Fisher and Paykel makes appliances in Auckland

EO VID

caps, apply label, inspect a final time, and then place bottles in cases, cases on pallets and pallets on delivery trucks.46 Batch production involves the batch production manufacture of large batches of different a manufacturing operation that produces products in standard lot sizes. This goods in large batches in production method is finding increasing standard lot sizes use among restaurant chains. To ensure consistency in the taste and quality of their products, many restaurants have central kitchens, or commissaries, that produce batches of food, such as mashed potatoes, pasta and cheese, rice, sauces and chilli, in volumes ranging from 40 to 750 litres. These batches are then delivered to restaurants, which serve the food to customers. Finally, job shops are typically job shops manufacturing operations small manufacturing operations that that handle custom handle special manufacturing processes orders or small batch jobs or jobs. In contrast to batch production, which handles large batches of different products, job shops typically handle very small batches, some as small as one product or process per ‘batch’. Basically, each ‘job’ in a job shop is different, and once a job is done, the job shop moves on to a completely different job or manufacturing process for, most likely, a different customer. For example, a small cabinet maker operating within its local area, made up of three skilled tradespeople and a semi-skilled ‘handyman’, has a small factory with modern equipment for making cabinets and other furniture. In any given week they could be making kitchen cabinets for several customers including builders, interior designers and individual home renovators. No two customers are the same and most of their job ‘batches’ are ‘one off’. From time to time they also have work commissioned by a builder who might want 20 identical kitchens made for a PPLY E A block of apartments, in Get an overview of manufacturing which case their batch size operations would be 20.

Victa still makes lawn mowers in Sydney

LO5

INVENTORY

As the end of the year approaches, new car dealers across Australia start discounting their stock. Any vehicle they can’t sell by 31 December becomes last year’s model, is less desirable to the buying public and has a lower sale price. The discount sales are designed to reduce the level of ‘inventory’ the dealerships have ‘on hand’ before it reduces further in value by becoming ‘old stock’. Inventory is the amount and number of raw materials, parts inventory and finished products that a company has in the amount and number of raw materials, parts its possession. All of that inventory has cost and finished products money to make or buy and the longer it sits that a company has in its possession unused, the higher the cost to the company.

When a devastating earthquake and accompanying tsunami damaged factories along the eastern coast of Japan, inventory shortages, arising from destroyed or damaged Japanese factories, disrupted production around the world. For example, because Toyota’s Japanese factories were producing fewer car parts, Toyota’s Indian division, Toyota Kirloskar Motor, had to limit car production to Tuesdays, Wednesdays and Thursdays for nearly six weeks.48 Likewise, Honda’s Japanese facilities suffered so much damage that it temporarily stopped taking orders from Honda dealers in the US. Furthermore, damage to a paint factory limited the number of colours that Honda factories could use in production. Finally, parts shortages were so severe that Honda’s North American plants, which rely heavily on parts from Japan, were only running at half of their normal production volume.49 In this section, you will learn about: ● the different types of inventory ● how to measure inventory levels

Manufacturing plant

ng hasi

Purc

Raw material inventories Fabrication

Vendors Purch a

sing

Component parts inventories Initial assembly Work-inprocess inventories Final assembly Finished goods inventories

Field warehouses

Distribution centres Wholesalers

Retailers

Customers

FIGURE 17.4

● the costs of maintaining an inventory ● the different systems for managing inventory.

TYPES OF INVENTORY Figure 17.4 shows the four kinds of inventory a manufacturer stores: raw materials, component parts, work-in-process and finished goods. The flow of inventory through a manufacturing plant begins when the purchasing department buys raw materials from vendors. Raw raw material material inventories are the basic inputs inventory in the manufacturing process. For example, a basic input in a manufacturing process to begin making a car, automobile manufacturers purchase raw materials like steel, iron, aluminium, copper, rubber and unprocessed plastic. Next, raw materials are fabricated or component parts processed into component parts inventory inventories, meaning the basic parts used a basic part used in manufacturing that is in manufacturing a product. For example, fabricated from raw in an automobile plant, steel is fabricated materials or processed into a car’s body panels, and steel and iron are melted and shaped into engine parts like pistons or engine blocks. Some component parts are purchased from vendors rather than fabricated in-house. The component parts are then work-in-process assembled to make unfinished work-in- inventory process inventories, which are also a partially finished good consisting of assembled known as partially finished goods. This component parts process is also called initial assembly. For example, steel body panels are welded to each other and to the frame of the car to make a ‘unibody’, which comprises the unpainted interior frame and exterior structure of the car. Likewise, pistons, camshafts and other engine parts are inserted into the engine block to create a working engine. Next, all the work-in-process finished goods inventories are assembled to create inventory finished goods inventories, which are a final output of manufacturing operations the final outputs of the manufacturing process. This process is also called final assembly. For a car, the engine, wheels, brake system, suspension, interior and electrical system are assembled into a car’s painted unibody to make the working automobile, which is the factory’s finished product. In the last step of the process, the finished goods are sent to field warehouses, distribution centres or wholesalers, and then to retailers for final sale to customers.

MEASURING INVENTORY As you’ll learn in the next section of this chapter, uncontrolled inventory can lead to huge costs for a manufacturing operation. Consequently, managers need good measures of inventory to prevent inventory costs from becoming too large. Three basic measures of inventory are average aggregate inventory, weeks of supply and inventory turnover.

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completely replenish its inventory every two weeks and have an average inventory of 20 000 widget parts and raw materials. By contrast, if company B turns its inventories only two times a year, it will completely replenish its inventory every 26 weeks and have an average inventory of 260 000 widget parts and raw materials. So, by turning its inventory more often, company A has 92 per cent less inventory on hand at any one time than company B. Across all kinds of manufacturing plants, the average number of inventory turns is approximately eight per year, although the average can be higher or lower for different industries.51 For example, whereas the average car maker turns its entire inventory 13 times per year, some of the best car makers more than double that rate, turning their inventory 27.8 times per year, or once every two weeks.52 For a car maker, turning inventory more frequently than the industry average can cut costs by several hundred million

WORKPLACE AND COMMUNITY

BEYOND RECYCLING CADILLAC STYLE The newest practice in making more efficient use of materials is upcycling. When a company recycles paper, it comes back as, well, paper. It’s taken to a plant where it’s processed, cleaned up and repackaged as another paper product. Upcycling, by contrast, turns material that is thrown out into something else. So, for example, Worn Again, a clothing and accessories manufacturer in London, makes bags out of old mailmen’s uniforms and jackets out of old hot-air balloons. Upcycling is based on the concept of ‘designing out waste’, in which plans are made for how a product will be recycled or reused even before it is made. Therefore, effective upcycling could lead to a closed loop, in which all products are made to be easily dismantled and completely reused. Interface, an Atlanta-based carpet manufacturer, uses upcycling so that all of its old products can be made into new product. According to the company, it has reduced the amount of garbage it sends to landfills by 80 per cent and its greenhouse gas emissions by 44 per cent.53 Shutterstock.com/Huguette Roe

If you’ve ever worked in a retail store and had to ‘take inventory’, you probably weren’t too excited about the process of counting every item in the store and storeroom. It’s an extensive task that’s a bit easier today because of bar codes that mark items and computers that can count and track them. Nonetheless, inventories still differ from day to day depending on when in the month or week they’re taken. Because of such differences, companies often measure average aggregate inventory, which is average aggregate the average overall inventory during a inventory average overall inventory particular time period. Average aggregate during a particular time inventory for a month can be determined period by simply averaging the inventory counts at the end of each business day for that month. One way companies know whether they’re carrying too much or too little inventory is to compare their average aggregate inventory to the industry average for aggregate inventory. Inventory is also measured in terms of weeks of supply, meaning the number of weeks it would take for a company to run out of its current supply of inventory. In general, there is an acceptable number of weeks of inventory for a particular kind of business. Too few weeks of inventory on hand and a company risks a stockout – stockout running out of inventory. Valtech makes the situation when a Magna-Tiles, colourful geometric shapes company runs out of finished product that connect with magnets, used by children to make plastic houses, rockets, pets or anything else they can imagine. When Thailand was struck by floods, 2 metres of water destroyed the machines that make Magna-Tiles, as well as months of inventory waiting to ship for the holiday buying season, which makes up 35 per cent of Valtech’s annual sales. The shortage caused stockouts and a huge run on the few Magna-Tiles left in stores, which doubled or tripled in price.50 On the other hand, a business that has too many weeks of inventory on hand incurs high costs (discussed below). Excess inventory can be reduced only by cutting prices or temporarily stopping production. Another common inventory measure, inventory turnover inventory turnover, is the number of the number of times per year that a company sells times per year that a company sells or or ‘turns over’ its average ‘turns over’ its average inventory. For inventory example, if a company keeps an average of 100 finished widgets (remember, a ‘widget’ is a notional unit of production) in inventory each month, and it sold 1000 widgets this year, then it ‘turned’ its inventory 10 times this year. In general, the higher the number of inventory ‘turns’, the better. In practice, a high turnover means that a company can continue its daily operations with just a small amount of inventory on hand. For example, let’s take two companies, A and B, which, over the course of a year, have identical inventory levels (520 000 widget parts and raw materials). If company A turns its inventories 26 times a year, it will

dollars per year. Finally, it should be pointed out that even make-to-order companies like Dell turn their inventory. In theory, make-to-order companies have no inventory. In fact, they do have inventory, but you have to measure it in hours. For example, in its factories, Dell turns its inventory 500 times a year, which means that on average it has 17 hours – that’s hours and not days – of inventory on hand in its factories.54

protect inventory from damage or theft, inventory taxes, the cost of obsolescence (holding inventory that is no longer useful to the company) and the opportunity cost of spending money on inventory that could have been spent elsewhere in the company. Stockout costs are the costs incurred stockout cost when a company runs out of a product. the cost incurred when a company runs out of There are two basic kinds of stockout a product, including costs. First, the company incurs the transaction costs to transaction costs of overtime work, replace inventory and the loss of customers’ shipping and the like in trying to quickly goodwill replace out-of-stock inventories with new inventories. The second and perhaps more damaging cost is the loss of customers’ goodwill when a company cannot deliver the products that it promised. A Monash University study from 2012 on Australian retail shopping reported that the majority of shoppers who bought their goods online after first going into a ‘bricks and mortar’ store did so because the item they wanted was out of stock. Sixty-one per cent of the 600 shoppers surveyed went online because the shelves in the shop didn’t have what they wanted. Managing inventory effectively could have kept those sales as they walked into the store.57 Some retailers are also using technology to try to retain customer goodwill and ensure stock levels meet their customers’ requirements. One small Australian shop owner, Hazem Sedda of the Redfern Convenience Store in Sydney, says that he spends two hours a day on Instagram replying to ‘hundreds of fans asking him about stock levels’. The store has 14 000 Instagram followers, and Hazem says that it is critical to respond to each customer message within hours. According to a newspaper report in The Age, this has ‘boosted the A$1 million company’s sales by as much as 30% and turned the business into a cult favourite’.58

COSTS OF MAINTAINING AN INVENTORY Maintaining an inventory incurs four kinds of costs: ordering, setup, holding and stockout. Ordering cost is not the cost of the inventory itself, but the costs associated with ordering the inventory. It includes the costs of completing paperwork, manually entering data into a computer, making phone calls, getting competing bids, correcting mistakes and simply determining when and how much new inventory should be reordered. For example, ordering costs are relatively high in the restaurant business because 80 per cent of food service orders (in which restaurants reorder food supplies) are processed manually. It’s estimated that the food industry could save billions of dollars worldwide if all restaurants converted to electronic data interchange (see Chapter 16).55 Setup cost is the cost of changing or setup cost adjusting a machine so that it can produce a the costs of downtime and lost efficiency that different kind of inventory.56 For example, 3M occur when a machine is uses the same production machinery to changed or adjusted to make several kinds of industrial tape, but it produce a different kind of inventory must adjust the machines whenever it switches from one kind of tape to another. There are two kinds of setup costs: downtime and lost efficiency. Downtime occurs whenever a machine is not being used to process inventory. So, if it takes five hours to switch a machine from processing one kind of inventory to another, then five hours of downtime has occurred. Downtime is costly because companies earn an economic return only when machines are actively turning raw materials into parts or parts into finished products. The second setup cost is lost efficiency. Typically, after a switchover, it takes some time to recalibrate a machine to its optimal settings. It may take several days of fine-tuning before a machine finally produces the number of highquality parts that it is supposed to. So, each time a machine has to be changed to handle a different kind of inventory, setup costs (downtime and lost efficiency) holding cost rise. the cost of keeping inventory until it is Holding cost, also known as carrying or used or sold, including storage cost, is the cost of keeping inventory storage, insurance, taxes, obsolescence and until it is used or sold. Holding cost includes opportunity costs the cost of storage facilities, insurance to

Shutterstock.com/KS Photography

ordering cost the costs associated with ordering inventory, including the cost of data entry, phone calls, obtaining bids, correcting mistakes and determining when and how much inventory to order

Toyota operates on a JIT inventory system

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MANAGING INVENTORY Inventory management has two basic goals. The first is to avoid running out of stock and thus angering and dissatisfying customers. Consequently, this goal seeks to increase inventory levels to a ‘safe’ level that won’t risk stockouts. The second is to efficiently reduce inventory levels and costs as much as possible without impairing daily operations. Thus, this goal seeks a minimum level of inventory. The following inventory management techniques – economic order quantity (EOQ), just-in-time inventory (JIT) and materials requirement planning (MRP) – are different ways of balancing these competing goals. Economic order quantity (EOQ) is economic order a system of formulas that helps determine quantity (EOQ) a system of formulas that how much and how often inventory minimises ordering and should be ordered. EOQ takes into holding costs and helps determine how much account the overall demand (D) for a and how often inventory product while trying to minimise ordering should be ordered costs (O) and holding costs (H). The formula for EOQ is:

EOQ =

2DO H

For example, if a factory uses 40 000 litres of paint a year (D), ordering costs (O) are $75 per order and holding costs (H) are $4 per litre, then the optimal quantity to order is 1225 litres: EOQ =

2(40 000)75 4

= 1225

And, with 40 000 litres of paint being used per year, the factory uses approximately 110 litres per day: 40 000 litres 365 days

= 110

Consequently, the factory would order 1225 new litres of paint approximately every 11 days: 1225 litres 110 litres per day

= 11.1days

While EOQ formulas try to minimise holding and ordering costs, the just-in-time (JIT) approach to inventory management attempts to eliminate holding costs by reducing inventory levels to near zero. just-in-time (JIT) With a just-in-time (JIT) inventory inventory system an inventory system in system, component parts arrive from which component parts suppliers just as they are needed at each arrive from suppliers just as they are needed at stage of production. By having parts each stage of production arrive ‘just in time’, the manufacturer has little inventory on hand and thus avoids the costs associated with holding inventory.

326

The just-in-time philosophy – having just the right amount of inventory arrive at just the right time – requires a tremendous amount of coordination between manufacturing operations and suppliers. JIT was developed by the Toyota corporation as part its worldwide Toyota Manufacturing System. One way to promote tight coordination under JIT is for suppliers and users to be situated in close proximity. As one example, most parts suppliers for Toyota’s JIT system at its former Altona plant near Melbourne, Australia, were located within 500 kilometres of the plant. Furthermore, with the Toyota system, parts were picked up from suppliers and delivered to Toyota as often as 16 times a day.59 A second way to promote close coordination under JIT is to have a shared information system that allows a manufacturer and its suppliers to know the quantity and kinds of parts inventory the other has in stock. Generally, factories and suppliers facilitate information sharing by using the same part numbers and names. Manufacturing operations and their parts suppliers can also facilitate close coordination by using the Japanese system of kanban. Kanban, which is kanban Japanese for ‘sign’, is a simple ticket-based a ticket-based JIT system indicates when to system that indicates when it is time to that reorder inventory reorder inventory. Suppliers attach kanban cards to batches of parts. Then, when an assembly-line worker uses the first part out of a batch, the kanban card is removed. The cards are then collected, sorted and quickly returned to the supplier, who begins resupplying the factory with parts that match the order information on the kanban cards. And, because prices and batch sizes are typically agreed to ahead of time, kanban tickets greatly reduce paperwork and ordering costs.60 A third method for managing inventory is materials materials requirement planning (MRP). requirement MRP is a production and inventory system planning (MRP) a production and inventory that, from beginning to end, precisely system that determines determines the production schedule, the production schedule, production batch sizes production batch sizes and inventories needed and inventory needed to to complete final products. The three key complete final products parts of MRP systems are the master production schedule, the bill of materials and inventory records. The master production schedule is a detailed schedule that indicates the quantity of each item to be produced, the planned delivery dates for those items and the time by which each step of the production process must be completed in order to meet those delivery dates. Based on the quantity and kind of products set forth in the master production schedule, the bill of materials identifies all the necessary parts and inventory, the quantity or volume of inventory to be ordered and the order in which the parts and inventory should be assembled. Inventory records indicate the kind, quantity and location of inventory that is on hand or that has been ordered. When inventory

records are combined with the bill of materials, the resulting report indicates what to buy, when to buy it and what it will cost to order. Today, nearly all MRP systems are available in the form of powerful, flexible computer software.61 Which inventory management system should you use? EOQ formulas are intended for use with independent demand systems, in which the level of one kind of inventory does not depend on another. For example, because inventory levels for automobile tyres are unrelated to the inventory levels of women’s dresses, a department

independent demand system An inventory system in which the level of one kind of inventory does not depend on another

store could use EOQ formulas to calculate dependent demand separate optimal order quantities for system dresses and tyres. By contrast, JIT and an inventory system in which the level of MRP are used with dependent demand inventory depends on the systems, in which the level of inventory number of finished units to be produced depends on the number of finished units to be produced. For example, if Yamaha makes 1000 motorcycles a day, then it will need 1000 seats, 1000 petrol tanks and 2000 wheels and tyres each day. So, when optimal inventory levels depend on the number of products to be produced, use a JIT or MRP management system.

CHAPTER 17 Managing service and manufacturing operations

327

PART 5, CHAPTERS 15–17

To understand the processes and outcomes of controlling information and operations 15 Control

☑ You can describe the basic control process and discuss the various methods that managers can use to maintain control. and outcomes that today’s managers are choosing to control in their organisations.

Listen to an audio summary of each chapter in the End of Part summary

TER HAP 15

☑ You can describe the behaviours, processes

16 Managing information

To understand the processes and outcomes of controlling information and operations

☑ You have covered the strategic importance of information and you are able to describe the characteristics of useful information, its value and its costs.

☑ You understand the relevant legislation, codes of practice and national standards relevant to information, freedom of information and knowledge management.

☑ You know the basics of capturing, processing and protecting information. ☑ You are able to evaluate the effectiveness of organisational policies and procedure such as records management, information management, customer service and commercial confidentiality.

☑ You are able to describe how companies can

Listen to an audio summary of each chapter in the End of Part summary

TER HAP 16

OVERALL AIM OF PART5

access and share information and knowledge. 17 Managing service and manufacturing operations

☑ You understand the principles of service and manufacturing, and can discuss the kinds of productivity and their importance in managing operations.

☑ You can explain the role that quality plays in managing operations. ☑ You have shown your familiarity with the essentials of managing a service business, and you are able to identity and discuss the different kinds of manufacturing operations. how companies should manage inventory levels.

328

Listen to an audio summary of each chapter in the End of Part summary

TE HAP R 17

☑ You are able to outline and evidence why and

ENDNOTES 17 18 19 20 21

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Endnotes

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Chapter 2 1 C. S. George, Jr, The History of Management Thought (Englewood Cliffs, NJ: Prentice Hall, 1972). 2 A. Erman, Life in Ancient Egypt (London: Macmillan & Co., 1984). 3 ‘History of the Organization of Work: Organization of Work in Preindustrial Times: Medieval Industry’, Britannica Online, http://www.eb.com, 15 January 1999. 4 Ibid. 5 J. B. White, ‘The Line Starts Here: Mass- Production Techniques Changed the Way People Work and Live throughout the World’, Wall Street Journal, 11 January 1999, R25. 6 R. B. Reich, The Next American Frontier (New York: Times Books, 1983). 7 ‘Factory’ Is this the name of an exhibition? add descriptor?, Museum Victoria, http://www. museumvictoria.com.au 8 C. Williams, Management, 4th edn (Melbourne: South-Western/Cengage Learning, Inc., 2007). Reproduced by permission http://www.cengage.com/ permissions. 9 J. Mickelwait & A. Wooldridge, The Company: A Short History of a Revolutionary Idea (New York: Modern Library, 2003).

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10 H. Kendall, ‘Unsystematized, Systematized, and Scientific Management’, in Scientific Management: A Collection of the More Significant Articles Describing the Taylor System of Management, ed. C. Thompson (Easton, PA: Hive Publishing, 1972): 103–31. 11 United States Congress, House Special Committee, Hearings to Investigate the Taylor and Other Systems of Shop Management, 3 (Washington D.C.: Government Printing Office, 1912). 12 A. Scharf, ‘Scripted Talk: From ‘“Welcome to McDonald’s” to “Paper or Plastic?” Employers Control the Speech of Service Workers’, Dollars & Sense, September–October 2003, 35; C. McCann, ‘Have a Nice Day and an Icy Stare’, Marketing Week, 2September 2004, 27. 13 ‘United States Congress, House, Special Committee, Hearings to Investigate the Taylor and Other Systems of Shop Management’. 14 F. W. Taylor, The Principles of Scientific Management (New York: Harper, 1911). 15 C. D. Wrege & R. M Hodgetts, ‘Frederick W. Taylor’s 1899 Pig Iron Observations’, The Academy of Management Journal, 43 (6), December 2000: 1283–91; J. R. Hough & M. White, ‘Using Stories to Create Change’, Journal of Management, 27 (5), October 2001: 585–601. 16 E. Locke, ‘The Ideas of Frederick W. Taylor: An Evaluation’, Academy of Management Review, 7, 1982: 14–24. 17 C. S. George, Jr, The History of Management Thought. 18 F. Gilbreth & L. Gilbreth, ‘Applied Motion Study’, in The Writings of the Gilbreths, ed. W. R. Spriegel & C.E. Myers (1917; rpr. Homewood, IL: Richard D.Irwin, 1953): 207–74. 19 D. Ferguson, ‘Don’t Call It “Time and Motion Study”’, IIE Solutions, 29 (5), 1997: 22–3. 20 J. Whiteney Gibson, ‘Leadership Lessons from the Past: Examining the Work of Mary Parker Follett and Lillian Gilbreth’, International Leadership Journal, 8 (1), 2016, http://www.tesu.edu/documents/ ILJ_Winter_2016.pdf#page=4. 21 P. Peterson, ‘Training and Development: The View of Henry L. Gantt (1861–1919)’, SAM Advanced Management Journal, Winter 1987: 20–3. 22 H. Gantt, ‘Industrial Efficiency’, National Civic Federation Report of the 11th Annual Meeting, New York, 12 January 1991, 103. 23 M. Weber, The Theory of Economic and Social Organization, trans. A. Henderson & T. Parsons (New York: The Free Press, 1947). 24 M. Weber, The Protestant Ethic and the Spirit of Capitalism (New York: Scribner’s, 1958). 25 George, The History of Management Thought. 26 F. Blancpain, “Les cahiers inédits d’Henri Fayol,” trans. D. Wren, Extrait du bulletin de l’institut international d’administration publique, 28–29, 1974: 1–48. 27 D. A. Wren, A. G. Bedeian & J. D. Breeze, ‘The Foundations of Henri Fayol’s Administrative Theory’, Management Decision, 40, 2002: 906–18. 28 H. Fayol, General and Industrial Management (London: Pittman & Sons, 1949). 29 P. Graham, ed., Mary Parker Follett – Prophet of Management: A Celebration of Writings from the 1920s (Boston: Harvard Business School Press, 1995). 30 Ibid. 31 D. Linden, ‘The Mother of Them All’, Forbes, 16 January 1995, 75. 32 J. H. Smith, ‘The Enduring Legacy of Elton Mayo’, Human Relation, 51 (3), 1998: 221–49. 33 E. Mayo, The Human Problems of an Industrial Civilization (New York: Macmillan, 1933). 34 Ibid. 35 ‘Hawthorne Revisited: The Legend and the Legacy’, Organizational Dynamics, Winter 1975: 66–80. 36 E. Mayo, The Social Problems of an Industrial Civilization (Boston: Harvard Graduate School of Business Administration, 1945), 65–67.

37 ‘Hawthorne Revisited: The Legend and the Legacy.’ 38 Mayo, The Social Problems of an Industrial Civilization. 39 J. Cunningham Wood, George Elton Mayo: Critical evaluations in business and management (London, United Kingdom: Routledge 2004), 471. 40 C. S. George, Jr, The History of Management Thought. 41 C. I. Barnard, The Functions of the Executive (Cambridge, MA: Harvard University Press, 1938): 4. 42 C. I. Barnard, The Functions of the Executive: 30th Anniversary Edition (Cambridge, MA: Harvard University Press, 1968), 5. 43 Ibid. 44 D. Wren and R. Greenwood, ‘Business Leaders: A Historical Sketch of Eli Whitney’, Journal of Leadership & Organizational Studies, 6, 1999: 131. 45 D. Ashmos & G. Huber, ‘The Systems Paradigm in Organization Theory: Correcting the Record and Suggesting the Future’, Academy of Management Review, 12, 1987: 607–21; F. Kast & J. Rosenzweig, ‘General Systems Theory: Applications for Organizations and Management’, Academy of Management Journal, 15, 1972: 447–65; D. Katz & R. Kahn, The Social Psychology of Organizations (New York: Wiley, 1966). 46 D. Ferguson, ‘How the Supermarkets Get Your Data and What They Do With It’. The Guardian, 8 June 2013, http://www.theguardian.com/money/2013/ jun/08/supermarkets-get-your-data. 47 R. Mockler, ‘The Systems Approach to Business Organization and Decision Making’, California Management Review, 11 (2), 1968: 53–8. 48 F. Luthans & T. Stewart, ‘A General Contingency Theory of Management’, Academy of Management Review, 2 (2), 1977: 181–95.

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Chapter 7 1 ‘2014 Drive Car of the Year, Best Luxury Car over $80,000, Tesla Model S’, http://www.drive.com. au/car-of-the-year/2014-drive-car-of-the-yearbest-luxury-car-over-80000-20141211-1226cd. html, viewed 4 May 2015; Tesla Model S: #1 in luxury Large Cars’, viewed 4 May 2015. http:// usnews.rankingsandreviews.com/cars-trucks/ Tesla_Model-S/2015 2 Feng Xue and Evan Gwee, 2017, ‘Electric Vehicle Development in Singapore and Technical Considerations for Charging Infrastructure’, Energy Procedia, 143, 3–14. 3 P. M. W. Salehen, M.S. Su’ait, H. Razali, & K.Sopian, (2017), ‘Battery Management Systems (BMS) Optimization for Electric Vehicles (EVs) in Malaysia’, 7th International Conference on Mechanical and Manufacturing Engineering: Proceedings of the 7th International Conference on Mechanical and Manufacturing Engineering, Sustainable Energy Towards Global Synergy, Jogjakarta, Indonesia (1–3 August 2016): AIP Conference Proceedings, 21 April 2017, vol. 1831(1). 4 Philip King, ‘Fast charger network on the way’. Australian[National, Australia], 9 March 2018, 8.Academic OneFile, accessed 24 May 2018, http:// link.galegroup.com/apps/doc/A530258211/AONE?u= swinburne1&sid=AONE&xid=55c8d6fd. 5 T. M. Amabile, R. Conti, H. Coon, J. Lazenby & M. Herron, ‘Assessing the Work Environment for Creativity’, Academy of Management Journal, 39, 1996: 1154–84. 6 Ibid. 7 A. H. Van de Ven & M. S. Poole, ‘Explaining Development and Change in Organizations’, Academy of Management Review, 20, 1995: 510–40. 8 P. Anderson & M. L. Tushman, ‘Managing through Cycles of Technological Change’, Research/ Technology Management, May– June 1991, 26–31. 9 R. N. Foster, Innovation: The Attacker’s Advantage (New York: Summitt, 1986). 10 ‘The Evolution of a Revolution’, Intel, accessed 2 June 2013, http://download.intel.com/pressroom/kits/ IntelProcessorHistory.pdf. 11 J. Burke, The Day the Universe Changed, (Boston: Little, Brown, 1985). 12 http://www.kodak.com; ‘Industry Snapshot’, Time, 5 December 2005, 110; W. Symonds, ‘Kodak: Is This the Darkest Hour?’, BusinessWeek, 8 August 2006, 3. 13 M. L. Tushman, P. C. Anderson & C. O’Reilly, ‘Technology Cycles, Innovation Streams, and Ambidextrous Organizations: Organization Renewal through Innovation Streams and Strategic Change’, in Managing Strategic Innovation and Change, ed. M. L. Tushman & P. Anderson (New York: Oxford Press, 1997): 3–23. 14 W. Abernathy & J. Utterback, ‘Patterns of Industrial Innovation’, Technology Review, 2, 1978: 40–7.

15 ‘Apple iOS Slips, Android Passes 80% Market Share: IDC’, Investor’s Business Daily, Los Angeles, 12 November 2013. 16 ‘Overview of ITU’s History’, http://www.itu.int/en/ history/Pages/ITUsHistory.aspx, accessed 22 April 2016. 17 ‘Universal Phone Charger Approved’, BBC News, 23 October 2009, viewed 8 November 2009, http:// www.news.bbc.co.uk. 18 M. Schilling, ‘Technological Lockout: An Integrative Model of the Economic and Strategic Factors Driving Technology Success and Failure’, Academy of Management Review, 23, 1998: 267–84; M. Schilling, ‘Technology Success and Failure in Winner-Take-All Markets: The Impact of Learning Orientation, Timing, and Network Externalities’, Academy of Management Journal, 45, 2002: 387–98. 19 R. McMillan, ‘Tech World Prepares Obituary for Adobe Flash’, Wall Street Journal, 20 July 2015, B1. 20 ‘Chromium Blog: Roll-out Plan for HTML5 by Default’, Chromium Blog, 9 December 2016, accessed 3April2017, https://blog.chromium.org/2016/12/rollout-plan-for-html5-by-default.html. 21 N. Tadena, ‘Agencies Ready for the Move Away From Flash Ad—CMO Today’, Wall Street Journal, 14 September 2015, accessed 3 April 2017, http://blogs. wsj.com/cmo/2015/09/14/agencies-ready-for-themove-away-from-flash-ads/. 22 ‘Usage Statistics of Flash for Websites’, W3Techs, 3 April 2017, accessed 3 April 2017, https://w3techs. com/technologies/details/cp-flash/all/all. 23 T. M. Amabile, R. Conti, H. Coon, J. Lazenby & M. Herron, ‘Assessing the Work Environment for Creativity’, Academy of Management Journal, 39, 1996: 1154–84. 24 Ibid. 25 M. Csikszentmihalyi, Flow: The Psychology of Optimal Experience (New York: Harper & Row, 1990). 26 C. Dougherty, ‘They Promised Us Jet Packs. They Promised the Bosses Profit’, New York Times, 23 July 2016, accessed 3 April 2017, https://www.nytimes. com/2016/07/24/technology/they-promised-us-jetpacks-they-promised-the-bosses-profit.html?_r=0. 27 A. Teller, ‘More Moonshot Secrets: Making Audacity the Path of Least Resistance’, Back Channel, 15 April 2016, accessed 3 April 2017, https://backchannel. com/the-head-of-x-explains-how-to-make-audacitythe-path-of-least-resistance-fac53c3338d. 28 R. Tetzeli, ‘9 Ways GE Executed Its Radical Green Reinvention’, FastCoexist.com, 11 December 2015, accessed 27 April 2016, http://www.fast-coexist. com/3054441/9-ways-ge-executed-its-radical-greenreinvention. 29 Ibid. 30 E. Catmull, ‘How Pixar Fosters Collective Creativity’, Harvard Business Review, September 2008, 64–72. 31 T. Stenovec, ‘One Reason For Netflix’s Success – It treats Employees Like Grownups 2015’, The Huffington Post, 28 February 2015, http://www. huffingtonpost.com.au/entry/netflix-culture-decksuccess_n_6763716. html?section=australia. 32 K. M. Eisenhardt, ‘Accelerating Adaptive Processes: Product Innovation in the Global Computer Industry’, Administrative Science Quarterly, 40, 1995: 84–110. 33 Ibid. 34 K. Naughton and J. Green, ‘Crash Test City’, Bloomberg BusinessWeek, 6–12 April, 2015, 19–20. 35 E. Catmull, ‘How Pixar Fosters Collective Creativity’, Harvard Business Review, September 2008, 64–72. 36 D. Gates, ‘McNerney: No More ‘Moonshots’ as Boeing Develops New Jets’, Seattle Times, 22 May 2014, accessed 4 May 2015, http://www. seattletimes.com/business/mcnerney-no-morelsquomoonshotsrsquo-as-boeing-develops-new-jets/. 37 Ibid.; J. Ostrower, ‘At Boeing, Innovation Means Small Steps, Not Giant Leap’, Wall Street Journal, 3 April 2015, B1.

38 S. Carson, ‘Plagiarism and Its Effect on Creative Work’, Psychology Today, 16 October 2010, http:// www.psychologytoday.com 39 J. Howe, ‘The Rise of Crowdsourcing’, Wired, June 2006, 176; ‘Facts and Stats’, Innocentive, http://www. innocentive.com. 40 S. Schweissguth, ‘Crowdsourcing Industry Trends: Unique Ways Companies are Leveraging the Crowd’, CrowdSource, 5 May 2014, http://www.crowdsource. com/blog/2014/05/crowdsourcing-industry-trendsunique-ways-companies-leveraging-crowd-willimpact-future-job-markets/. 41 M. W. Lawless & P. C. Anderson, ‘Generational Technological Change: Effects of Innovation and Local Rivalry on Performance’, Academy of Management Journal, 39, 1996:1185–217. 42 ‘USB.org—Hi-Speed FAQ’, USB Implementers Forum, accessed 4 April 2017, http://www.usb.org/ developers/usb20/faq20/; ‘USB.org—SuperSpeed USB’, USB Implementers Forum, accessed 4 April 2017, http://www.usb.org/developers/ssusb/. 43 http://www.movies.about.com/cs/. upcomingreleases/a/harrypotter4dir.htm; www. wizardnews.com. 44 P. Strebel, ‘Choosing the Right Change Path’, California Management Review, Winter 1994: 29–51. 45 W. Weitzel & E. Jonsson, ‘Reversing the Downward Spiral: Lessons from W.T. Grant and Sears Roebuck’, Academy of Management Executive, 5, 1991: 7–22. 46 A. Sadauskas, ‘Nokia Rapidly Burning Through Cash Reserves as Marketshare Collapses’, SmartCompany, 22 May 2012, http://www.smartcompany.com. 47 W. Weitzel & E. Jonsson, ‘Reversing the Downward Spiral: Lessons from W.T. Grant and Sears Roebuck’, Academy of Management Executive, 5, 1991: 7–22. 48 K. Lewin, Field Theory in Social Science: Selected Theoretical Papers (New York: Harper & Brothers, 1951). 49 A. Deutschman, ‘Making Change: Why Is It So Darn Hard to Change Our Ways?’, Fast Company, May 2005, 52–62. 50 K. Lewin, Field Theory in Social Science: Selected Theoretical Papers (New York: Harper & Brothers, 1951). 51 D. Kravets, ‘AP Issues Strict Facebook, Twitter Guidelines to Staff’, Wired.com, 23 June 2009, viewed 8 August 2010, http://www.wired.com. 52 A. B. Fisher, ‘Making Change Stick’, Fortune, 17 April 1995, 121. 53 J. P. Kotter & L. A. Schlesinger, ‘Choosing Strategies for Change’, Harvard Business Review, March–April 1979, 106–14. 54 M. Johne, ‘The Human Factor: Integrating People and Cultures after a Merger’, CMA Management, 1 April 2000, 30. 55 G. J. Iskat & J. Liebowitz, ‘What to Do When Employees Resist Change’, Supervision, 57 (8), August 1996: 3. 56 J. Scanlon, ‘San Diego Zoo’s Newest Exhibit: Innovation’, BusinessWeek, 14 October 2009, http:// www.businessweek.com. 57 B. Orwall, ‘Disney Decides It Must Draw Artists into Computer Age’, Wall Street Journal, 23 October 2003, A1. 58 J. P. Kotter, ‘Leading Change: Why Transformation Efforts Fail’, Harvard Business Review, 73 (2), March– April 1995, 59. Reprinted with permission of Harvard Business Publishing. All rights reserved. 59 K. Gomez (2014). ‘Toyota to Stop Building Cars in Australia’.Manufacturers’ Monthly,retrieved from https://search.proquest.com/docview/1503197692?a ccountid=14205. 60 S. Evans, ‘Toyota to Axe 2600 Jobs When CarMaking Stops on October 3’,The Australian Financial Review, 1 February 2017,retrieved from https:// search.proquest.com/docview/1863499785?account id=14205.

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61 G. Nott (2017), ‘Toyota Australia, Reborn: Auto Giant Plans Post-Manufacturing Tech-Driven Future’, CIO, retrieved from https://www.cio.com.au/ article/613784/toyota-australia-reborn-auto-giantplans-post-manufacturing-tech-driven-future/. 62 G. Pitts, ‘A Classic Turnaround – With Some Twists’, The Globe and Mail, 7 July 2008, B1. 63 Ibid. 64 R. Tetzeli, ‘9 Ways GE Executed Its Radical Green Reinvention’, FastCoexist.com, 11 December 2015, accessed 22 March 2016, http://www.fastcoexist. com/3054441/9-ways-ge-executed-its-radical-greenreinvention. 65 Ibid. 66 Kotter, ‘Leading Change: Why Transformation Efforts Fail’. 67 Ibid 68 Ibid 69 Ibid. 70 S. Cramm, ‘A Change of Hearts’, CIO, 1 April 2003, http://www.cio.com 71 M. Ihlwan, L. Armstrong & M. Eidam, ‘Hyundai: Kissing Clunkers Goodbye’, BusinessWeek, 17 May 2004, 46. 72 ‘Hyundai Quality Improves, J.D. Power Ranks Hyundai 4th in its 2009 Initial Quality Study’, Hyundai blog, viewed 18 January 2013, http://www.hyundai-blog. com; G. Pitts, ‘A Classic Turnaround – With Some Twists’, The Globe and Mail, 7 July 2008, B1. 73 R. N. Ashkenas & T. D. Jick, ‘From Dialogue to Action in GE Work Out: Developmental Learning in a Change Process’, in Research in Organizational Change and Development, 6, ed. W. A. Pasmore & R. W. Woodman (Greenwich, CT: JAI Press, 1992), 267–87. 74 T. Stewart, ‘GE Keeps Those Ideas Coming’, Fortune, 12 August 1991, 40. 75 W. J. Rothwell, R. Sullivan & G. M. McLean, Practicing Organizational Development: A Guide for Consultants (San Diego, CA: Pfeiffer & Co., 1995). 76 Ibid.

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134 Ibid. 135 S. Applebaum, O. Kryvenko, M. Rodriguez Parada, M. Rodica Soochan & B. Shapiro, ‘Racial-Ethnic Diversity in Canada: Competitive Edge or Corporate Encumbrance, Part 2’, Industrial and Commercial Training 47 (7), 2015: 386–93. 136 Staff, ‘The Diverse Work Force’, Inc., January 1993, 33. 137 D. A. Thomas & R. J. Ely, ‘Making Differences Matter: A New Paradigm for Managing Diversity’, Harvard Business Review, 74, September–October 1996: 79–90. 138 M. Bloom and J. Michel, ‘The Relationships Among Organizational Context, Pay Dispersion, and Managerial Turnover’, Academy of Management Journal, 45 (2002): 33–42. 139 S. Needleman, ‘Bad Firings Can Hurt Firm’s Reputation’, Wall Street Journal, 8 July 2008, D4, 126. J. Strickland, ‘Zynga Layoffs: The Aftermath’, Inc., 3 June 2013, accessed 6 May 2016, http:// www.inc.com/julie-strickland/zynga-lay-offeighteen-percent-staff-close-three-offices.html. 140 D. A. Thomas & R. J. Ely, ‘Making Differences Matter: A New Paradigm for Managing Diversity’, Harvard Business Review. 141 Ibid. 142 J. R. Norton & R. E. Fox, The Change Equation: Capitalizing on Diversity for Effective Organizational Change (Washington, DC: American Psychological Association, 1997). 143 Ibid. 144 Thomas & Ely, ‘Making Differences Matter: A New Paradigm for Managing Diversity’. 145 R. R. Thomas, Jr, Beyond Race and Gender: Unleashing the Power of Your Total Workforce by Managing Diversity (New York: AMACOM, 1991). 146 Ibid. 147 122 L. S. Gottfredson, ‘Dilemmas in Developing Diversity Programs’, in Diversity in the Workplace, ed. S. E. Jackson & Associates (New York: Guildford Press, 1992). 148 ‘L’Oréal Receives Diversity Best Practices 2004 Global CEO Leadership Award’, PR Newswire, 26 October 2004, 11: 01.

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Endnotes

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INDEX

A Abercrombie & Fitch, 68 ability, 223 above-market wages, 205 absolute comparisons, 85 access and legitimacy paradigm, 218 accommodative strategy, 70 accurate information, 297–8 achievement-oriented leadership, 249–50 achievement, 224 acquisition, 101 acquisition costs, 298 action plan, 79 active listening, 270 adaptability, 50 screening, 148 adaptive organisations departmentalisation, 153–8 designing organisational structures, 153 inter-organisational processes, 167–70 intra-organisational processes, 165–7 job design, 161–5 organisational authority, 159–61 structure and process, 151–3 adaptive strategies, 106–7 administrative feedback, 203 Administrative management, 25, 27 Adobe’s Flash software, 115 advocacy groups, 44–6 Aetna, 284 affective conflict. See a-type conflict affiliation, 224 age discrimination, 209 Age Discrimination Act 2004 (ADA), 189, 209 agreeableness, 217 AirAsia, 98–9, 240–2, 312 Airbnb, 44, 301–2 Alderfer’s ERG theory, 224 Ally Financial, 191 Alphabet, 11, 117 Amazon, 95 Echo, 97 Amazon Web Services (AWS), 299 American Standard Code for Information Interchange (ASCII), 301 Amgen, 231 AMP Limited, 249 analysers, 106 ancient managers, 21 Android (Google), 114–115 anti-bullying legislation, 214 anti-discrimination legislation and diversity, 209 age discrimination, 209 disability discrimination, 209–11 diversity, 215 racial discrimination, 211 sex discrimination, 211–13 sexual orientation discrimination, 214 workplace bullying, 214–15 ANZ Falcon, 310 Apple, 36 Apple iTunes, 95 Apple stores, 316

352

Index

Apple Watch, 76–7 application forms, 193 aptitude tests, 194 arrivers, 14 artificial intelligence (AI), 310 Asia–Pacific Economic Cooperation (APEC), 132–3 assemble-to-order operations, 321 assessment centres, 195 Associated Press (AP), 122 Association of Southeast Asian Nations (ASEAN), 132–3 association or affinity patterns, 302 assurance, 316 Atlassian Corporation, 104 attack, 109 attention, 259 attribution theory, 260 At Valassis, 318 a-type conflict, 89, 180–1 Audi, 136 Australia, 37 Australian Banking Association (ABA), 64 Australian banking industry, 228 Australian Broadcasting Corporation (ABC), 13 Australian Bureau of Statistics (ABS), 210 Australian Business Excellence Framework, 317 Australian Competition and Consumer Commission (ACCC), 43, 57 cooperation policy for enforcement matters, 58 Australian Food and Grocery Council (AFGC), 43 Australian government regulatory agencies and commissions, 45 Australian Idol, 137 Australian Industrial Registry, 188 Australian Industrial Relations Commission (AIRC), 188 Australian Institute of Health and Welfare (AIHW), 210 Australian Prudential Regulation Authority (APRA), 57 Australian Securities and Investments Commission (ASIC), 57 Australian Stock Exchange (ASX), 213 Australian Taxation Office, 280, 283 authentication, 303 authorisation, 303 authority, 159 centralisation of, 160 delegation of, 159–60 line, 159 staff, 159 ‘9, 1’ authority–compliance leadership style, 244 autocratic decisions, 251–2 autonomy, 164, 175–6 average aggregate inventory, 324 awards, 226

B background checks, 193 background questions, 198 baggage handlers, 282–3 balanced scorecard, 286 balance sheets, 287 Baldrige National Quality Award, 317 BAM, 138 Bank of Queensland (BOQ), 70 bar codes, 300 bargaining power of buyers, 108 bargaining power of suppliers, 108 ‘Bar Raisers’, 52 batch production, 322 behavioural addition, 52 behavioural questions, 198 behavioural substitution, 52 behaviour analysis, 236 behaviour control, 284 behaviour identification, 236 behaviour observation scale (BOS), 201 belongingness, 224

benchmarking, 98, 280 Benetton, 68 best business climate, 140 growing markets, 141 office or manufacturing location selection, 142 political risk minimisation, 142–4 Bilateral trading agreements, 134 bilingualism, 146 bill of materials, 326 biometrics, 303 Blake/Mouton leadership grid, 244 blind hiring, 213–4 blog, 274 Boeing, 312 Boeing 787 Dreamliner, 84, 176 bonuses, 226 Boston Consulting Group matrix (BCG matrix), 102–3 brainstorming, 91–2 Branson, Richard (founder of Virgin), 284–5 British exit (Brexit), 142 Brodie’s Law, 214–15 BSA/The Software Alliance, 132 budgeting, 83 budgets, 287 build-to-stock. See make-to-stock operations bureaucracy, 283 bureaucratic control, 283 bureaucratic immunity, 183 Bureaucratic management, 25–7 business confidence indices, 39 Business Plans to Game Plans (King), 83 Business Traveller International, 290 buyer dependence, 43

C CAFTA–DR, 134 Canalysis, 77 capturing information, 300–1 career path, 191 carrying. See holding cost cash cows, 102 cash flow analysis, 287 cash management, 33 Cathay-Dragon, 99 centralisation of authority, 160 central tendency error, 201, 203 Cessna, 177 chain of command, 159 change, 112 change agent, 126 change forces, 121 change intervention, 122 change management, 121 change tools and techniques, 125–7 leading change, 123–5 managing resistance to change, 122–3 character of rivalry, 107 charismatic leadership, 254–6 chief executive officer (CEO), 6 chief financial officer (CFO), 6 chief information officer (CIO), 6 chief operations officer (COO), 6 China, foreign companies in, 137 Civil Aviation Safety Authority (CASA), 184 closed systems, 33 closure, 260 cluster chain, 265 coaching, 266–7 coblabberation, 91 Coca-Cola Amatil (CCA), 156 Coca-Cola Company, 141 Coca-Cola Enterprises (CCE), 156 codes of ethics, 63–4 coercion, 123 Cognex, 227 cognitive abilities, 243 cognitive ability tests, 194 cognitive conflict. See C-type conflict cognitive maps, 47–8

cohesiveness, 179 Colgate-Palmolive, 307 collectivists, 183 Comambault, 27 commission, 205 commitment probability, 253 commitment requirement rule, 252 communication, 258 coaching and counselling, 266–7 formal communication channels, 264–5 informal communication channels, 265–6 non-verbal communication, 267–8 one-on-one communication, 268–72 organisation-wide communication, 272–5 perception and communication problems, 259–62 process, 262–4 communication costs, 299 communication medium, 268–9 company hotlines, 273 company mission, 50 compensation, 204–8 decisions, 204–6 downsizing, 207 employee turnover, 208 retirement, 207–8 terminating employees, 206–7 Competition and Consumer Act 2010 (CCA), 66 competitive advantage, 94–5 competitive analysis, 42 competitive inertia, 97 competitor component, 42–3 competitors, 42 complete information, 298 complex environments, 37 complex matrix, 158 component parts inventories, 323 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11), 132 compressed pay structures, 205 compression approach, 119–120 compression approach to innovation, 119 computer-aided design (CAD), 32, 120 computer-aided manufacturing (CAM), 32 computer-generated animation (CG animation), 123 concentration of effect, 59 conceptual skills, 13–14 concertive controls, 285 concurrent control, 281 Conde Nast Traveller magazine, 290 conflict resolution skills, 185 conformance to specifications, 290–1 conscientiousness, 217 consideration, 244 consistent organisational cultures, 50 constructive conflict. See C-type conflict constructive feedback, 271 consultative decisions, 252, 254 consumers, 135–6 contingency approach, 34 contingency management, 33–4 contingency theory (Fiedler), 246 leadership style, 246 matching leadership styles to situations, 247–8 situational favourableness, 247 continuous-flow production, 321 continuous improvement, 318 continuous reinforcement schedules, 235 contractual joint ventures (CJVs), 137 control, 143, 278–82, 286 balanced scorecard, 286 comparison to standards, 280 corrective action, 280–1 customer perspective, 289–90 dynamic, cybernetic process, 281 feedback, concurrent and feed-forward control, 281 financial perspective, 287–9 innovation and learning perspective, 292–3 internal perspective, 290–1

methods, 283–6 standards, 279–80 controlling, 5 control loss, 281–2 conventional level of moral development, 61 cookies, 301 cooperation, 144 cooperative contracts, 138–9 core capabilities, 98 core firms, 99 corporate cultures, 53 corporate-level strategy, 101, 109. See also industry-level strategy grand strategy, 104–5 portfolio strategy, 101–4 corporate portals, 308 Corporations Act 2001, 57 corrective action, 280–1 Cosslett, Andrew (former CEO of InterContinental Hotels), 77 cost leadership, 105 counselling, 266–7 ‘1, 9’ country club style, 244 creative interference, 117 creative work environments, 116–117 creativity, 112 credit card issuers, 279–80 Crimes Act (1958), 215 cross-cultural training, 147–8 cross-functional teams, 177 cross-training, 172, 185 crowdsourcing, 140, 169 C-type conflict, 27–9, 89, 180–1 cultural differences, aware of, 144–7 cultural simulations, 148 culture change, 49 culture in Googleplex, 7 curiosity, 181 curriculum vitae (CV), 193 customer defections, 289–90 customer departmentalisation, 155–6 customer focus, 317 customer loyalty, 319 customer satisfaction, 172, 317–19 customs classification, 132 cybernetic feasibility, 282 cybernetic process, 281 CyberShot, 97

D Dad and Partner Pay, 211 data clusters, 302 data encryption, 306 data mining, 301 data warehouse, 302 decentralisation, 160–1 decisional roles of managers, 11–12 decision criteria, 85 decision making, 84, 185 advantages and pitfalls of group, 88–9 electronic brainstorming, 91–2 groups using to improving, 88–92 nominal group technique, 90 structured conflict, 89–90 decision support system (DSS), 309 decoding, 263 deep-level diversity, 215–17 defenders, 107 defensive bias, 260–2 defensive strategy, 70 degree of centralisation, 160–1 degree of global competition, 141 de-layering, 264 Delegation of authority, 159–60 Delphi technique, 90 departmentalisation, 153 customer, 155–6 functional, 153–4 geographic, 156–7 matrix, 157–8 product, 154–5

Department of Communications and Arts, 132 dependent demand systems, 327 derailers, 14 design competition, 114 design iteration, 118 destructive feedback, 271 detachment of planners, 77 developmental feedback, 203 Development Dimensions International, 266 devil’s advocacy approach, 90 differentiation, 105–6 direct age discrimination, 209 direct competition, 108–9 strategic moves of, 109–110 direct disability discrimination, 209 direct foreign investment, 129–30 directive leadership, 249 direct racial discrimination, 211 direct sex discrimination, 211 disability, 210 discrimination, 209–11 Disability Discrimination Act 1992 (DDA), 189, 209–10 discontinuous change, 114 managing innovation during, 118–119 discretionary responsibilities, 70 discrimination and fairness paradigm, 218 disposition, 216 disseminator role, 10 distal goals, 79 distinctive competence, 98 distributive justice, 231 distributive justice principle, 62 disturbance handler role, 11 diversification, 101 diversity, 208, 215 management, 217–19 paradigms, 218–19 principles, 219 divisionalisation, 153 documentary training, 147 dogs, 102 dominant design, 114–15 Dominican Republic–Central America Free Trade Agreement, 134 downsizing, 207 downtime, 325 downward communication, 264 drive, 242 driverless car (Google), 118 durability, 315 DVORAK keyboard layout, 115 dynamic environments, 36 dysfunctional turnover, 208

E early retirement incentive programs (ERIPs), 207 eBay, 100, 303 Echo (Amazon), 97 Ecomagination, 117, 124 economic order quantity (EOQ), 326 economic performance, social responsibility and, 71–2 economic responsibility, 69 economic value added (EVA), 288–9 effective action plan development, 79 effectiveness, 3 efficiency, 3 effort of motivation, 223 e-learning, 200 Electric Boat, 237 electronic brainstorming, 91–2 electronic capture of information, 300 electronic data interchange (EDI), 308–9 electronic health records (EHRs), 309 electronic scanners, 301 emotional stability, 216–17 emotional stability, 243 empathetic listening, 270 empathy, 316

Index

353

Employee Assistance Program (EAP), 267 employee-centred leadership, 244 employee involvement teams, 176 employees involvement, 50 resist change, 123 employee separation, 204 employee shrinkage, 56 employee stock ownership plans (ESOPs), 205 employee turnover, 208 employment discrimination, 189 laws, 188–9 legislation, 188–9 employment references, 193 empowering employees, 167 empowering workers, 320 empowerment, 167–8, 320 encoding, 263 Enterprise Service Quality index, 318 entrepreneur role, 11 environmental change, 36–7 environmental complexity, 37 environmental scanning, 46–7, 98 environmental uncertainty, 38 ePassport, 305 Equal Opportunity for Women in Workplace Act 1999 (EOWW Act), 212 Equal Opportunity for Women in Workplace Agency (EOWA), 211 Equal Opportunity in Workplace Act, 189 equity joint ventures (EJVs), 137 equity theory, 227. See also reinforcement theory components, 228–9 motivating with, 230–1 people react to perceived inequity, 229–30 establishing client relationships, 164 esteem, 224 ethical behaviour, 55 ethical charismatics, 255–6. See also unethical charismatics ethical climate, 65–7 ethical decision making, 58–9 codes of ethics, 63–4 ethical climate, 65–7 ethical intensity of decision, 59–60 ethics training, 64–5 influences on, 59 moral development, 60–1 practical steps to, 63 principles of, 61–3 selecting and hiring ethical employees, 63 ethical intensity, 59 of decision, 59–60 ethical responsibility, 69 ethics, 54–5 determining punishment, 57–8 regulators and regulations, 57 training, 64–5 workplace deviance, 55–57 European Union (EU), 134, 292 evaluate behaviour, 236 evaluation apprehension, 91 executive information system (EIS), 307 existence, 224 expatriate, 147 expectancy, 232 expectancy theory, 231–3 experienced employees, 250 experiential approach to innovation, 118–119 expert systems, 310 exporting, 137–8 external recruiting, 191–2 externals, 250 access and sharing, 308–9 attribution, 260 environments, 35 extinction, 235 extranet, 308

354

Index

extraversion, 216 extrinsic rewards, 225–6

F Facebook, 88, 106 Fair Work Act (2009), 188–9, 207 Fair Work Amendment Act (2012), 189 Fair Work Amendment Act (2013), 214 Fair Work Amendment Act (2017), 188 Fair Work Commission (FWC), 188, 206–7 Fayol’s management functions, 3, 27 principles, 28 FedEx, 273 feed-forward control, 281 feedback, 164, 271–2 feedback control, 281 feedback to sender, 263 femininity 144–5 field simulation, 148 figurehead role, 9 file sharing, 61 final assembly. See finished goods inventories financial ratios, 287 Financial Review Card, 287 finished goods inventories, 323 firewalls, 305 firm-level strategies, 108 direct competition, 108–9 strategic moves of direct competition, 109–110 first-line managers, 7–8 first-mover advantage, 296 FitBit sensor, 302 Five industry forces, 107–8 fixed interval reinforcement schedules, 236 fixed ratio reinforcement schedules, 236 flow, 117 fly strike, 45 focus strategy, 106 Ford Motor Company, 292 foreign companies in China, 137 formal authority system, 250 formal communication channels, 264–5 forming, 182 forms of global business, 137 cooperative contracts, 138–9 exporting, 137–8 global new ventures, 140 strategic alliances, 139–40 wholly owned affiliates, 140 Foxconn, 70 franchise, 139 franchisor, 139 freedom, 117 Freudenberg-NOK, 318 front-line managers. See first-line managers Fuji-Xerox, 139 functional departmentalisation, 153–4 functional turnover, 208 fundamental attribution error, 261–2

G gainsharing programs, 186 Gantt charts, 24–5 General Agreement on Tariffs and Trade (GATT), 132 General Data Protection Regulations (GDPR), 303 General Electric, 102, 117 General Electric workout, 126 general environment, 38, 41 economy, 39 political/legal component, 40–1 sociocultural component, 40 technological component, 40 generational change, 120 geographic departmentalisation, 156–7 Gillette, 157

glass ceiling, 213 global business, 129 consumers, trade barriers and trade agreements, 135–6 forms, 137–44 impact, 129–30 trade agreements, 132–5 trade barriers, 130–2 global consistency, 136 Global Excellence Model Council (GEM), 317 Global Financial Crisis (GFC), 35, 52, 228 globalisation, 128, 148 global management aware of cultural differences, 144–7 consistency vs. adaptation, 136–7 finding best business climate, 140–4 forms of global business, 137–40 global business, 129–36 preparation for international assignment, 147–8 global new ventures, 140 global positioning satellite (GPS), 36 goal acceptance, 237 goal commitment, 78–9 goal difficulty, 237 goals, 233, 237 congruence rule, 252, 254 goal-setting theory, 237–8 goal specificity, 237 good housekeeping, 292 Goods and Services Tax reporting, 283 Google, 3, 11, 95, 97 Google Pixel, 36 Googleplex, 51 culture in, 7 gossip chain, 265 government import standards, 131 government requirements, principle of, 62 grand strategy, 104–5 grapevine. See informal communication channels graphic rating scale (GRS), 201 ‘great person’ theory. See trait theory gross domestic product (GDP), 135 group decision making, 88–9, 252 groupthink, 88 growing markets, 141 growth, 224 growth strategy, 104 Guardian, The (publisher of British newspaper), 273

H halo error, 201, 203 H&M, 68, 136–7 Hamburger University, 4 hand-to-mouth inventories, 32 hardcore tech culture, 51 Harpic, 138 Hawthorne Effect, 30 Hawthorne studies, 29–31 Head & Shoulders, 157 Health Transformation Alliance (HTA), 12 hearing, 270 Hierarchy of Needs theory (Maslow), 224–5 high-quality products, 315 high-value service, 319 higher-order needs, 224–5 ‘high–high’ approach, 244 hipsters, 40 holding cost, 325 Honda’s North American plants, 323 honesty, 243 Hong Kong Idol, 137 Hong Kong International Airport (HKIA), 300 horizontal communication, 264–5 HTC, 43 Hugo Boss, 68 human relations management, 27 constructive conflict, 27–9 Hawthorne studies, 29–31

human resource management (HRM), 52, 187 anti-discrimination legislation and diversity, 209–15 compensation and remuneration, 204–8 deep-level diversity, 216–17 diversity management, 217–19 employment legislation, 188–9 performance appraisal, 200–4 recruiting, 189–92 selection, 192–8 surface-level diversity, 216 training, 198–200 Human Rights and Equal Opportunity Commission Act (1986), 189 human skills, 13

I IBM’s Corporate Service Corps, 71 iCloud, 96 idealised influence. See charismatic leadership idiosyncratic rater effect, 201 ‘if–then’ rules, 310 immediate feedback, 271 imperfectly imitable resources, 95 1, 1’ impoverished leader, 244 in-tray exercises, 195 income statements, 287 incremental change, 116 incremental change, managing innovation during, 119–120 independent demand systems, 327 indirect age discrimination, 209 indirect disability discrimination, 209 indirect racial discrimination, 211 indirect sex discrimination, 211 individual-focused intervention, 127 individualised consideration, 257 individualism, 144 individualism–collectivism, 183 individualists, 183 individual rights, principle of, 62 Industrial Light & Magic’s Experience Lab (xLAB), 185 Industrial Revolution, 21 industry-level strategy, 105. See also corporate-level strategy adaptive strategies, 106–7 five industry forces, 107–8 positioning strategies, 105–6 industry forces, 107–8 Inflatable Solar System OTC, 172 informal communication channels, 265–6 informal meetings, 274 information, 295 accessing and sharing information and knowledge, 307–10 capturing, 300–1 characteristics and costs of useful information, 297–9 first-mover advantage, 296 management, 32–3, 294 processing, 301–3 protecting, 303–7 strategic importance, 296–7 sustaining competitive advantage, 296–7 informational roles of managers, 10 initial assembly. See work-in-process inventory initiating structure, 244 innovation, 111 innovation streams, 114–16 management, 116 management during discontinuous change, 118–19 management during incremental change, 119–20 source management, 116–17 technology cycles, 112–14 innovation streams, 114–16

inputs, 228 inspirational motivation, 257 instrumentality, 232 integrated model, 238–9 integrative conflict resolution, 29 integrity, 243 intellectual property protection, 132 intermittent reinforcement schedules, 235 internal environment, 48–9 internal motivation, 163 internal recruiting, 191 internal(s), 250 access and sharing, 307–8 attribution, 260 service quality, 319 international assignment, 147 language and cross-cultural training, 147–8 spouse, family and dual-career issues, 148 International Federation of the Phonographic Industry, 132 International Telecommunications Union, 115 inter-organisational processes, 167–8 modular organisations, 168–9 virtual organisations, 169–70 interpersonal roles of managers, 9–10 interpersonal skills, 185 interpretation, 259 interval reinforcement schedules, 236 intervene behaviour, 236 interviews, 196–7 intra-organisational processes, 165 empowerment, 167 reengineering, 165–6 intranets, 307 intrinsic rewards, 225–6 inventory, 32, 322 costs of maintaining, 325 managing, 326–7 measuring, 323–5 types, 323 inventory turnover, 324 involuntary separation, 204 iOS (Apple), 95, 114–15 iPad (Apple), 94–5 iPhone (Apple), 36 iPhone XS (Apple), 36 ISO 9000 and 14000, 316–17 iTunes Match, 96

J jargon, 264 Jet Propulsion Lab (JPL), 181 Jetstar Airways, 99, 273 job knowledge questions, 198 performance, 223 posting, 191 satisfaction, 172 job analysis, 189–91 job-centred leadership, 244 job characteristics model (JCM), 162–5 job description, 190 Job design, 161 job characteristics model, 162–5 job rotation, enlargement and enrichment, 162 job specialisation, 161–2 job enlargement, 162–5 job enrichment, 162–5 job evaluation, 204 job rotation, 162–5 enlargement and enrichment, 162–5 job shops, 322 Job specialisation, 161–2 job specifications, 190 joint commitment requirement, 252 joint explorations, 137 joint venture, 139 JP Morgan Chase, 142–3 just-in-time inventory system (JIT inventory system), 326

K KaiOS, 43 kanban, 326 Kew Gardens Principles, 65 key performance indicators (KPIs), 284 kinesics, 267 knowledge, 309 acquisition, 264 Kohlberg’s stages of moral development, 60

L labour productivity, 313 language training, 147–8 Large Hadron Collider (LHC), 298 large system interventions, 127 leaderless group discussions, 195 leader–member relations, 247 leader role, 9 leadership, 241. See also teams behaviour, 243–5 leaders vs. managers, 241 normative decision theory, 251–4 path–goal theory, 248–51 putting leaders in right situation, 246–8 situational approaches to, 245 traits, 242–3 visionary leadership, 254–7 Leadership Management Australia (LMA), 226 leadership style, 245 Fiedler contingency theory, 246 path–goal theory, 249–50 leaders information rule, 252–3 leading, 5 learning and effectiveness paradigm, 218 learning management systems (LMS), 201 least-preferred co-worker (LPC), 246–7 legal responsibility, 69 LEGO, 293 leniency error, 201, 203 LG, 36, 43 liaison role, 10 licensing, 138 line-flow production, 321–2 line authority, 159 line function, 159 LinkedIn, 88, 192 listening, 269–71 lobby groups. See advocacy groups local adaptation, 136–7 locus of control, 250 long-term self-interest, principle of, 61–2 lost efficiency, 325 low-cost carrier (LCC), 98, 312 lower-order needs, 224, 227

M Maastricht Treaty of Europe, 132–3 Mac OS 9 operating system, 50 Magnetics International, 292 magnitude of consequences, 59 make-to-order operations, 320 make-to-stock operations, 321 Malaysian Idol, 137 management, 2–3 bureaucratic and administrative, 25–7 coaching, 266 companies looking for in managers, 12–14 competitive advantage through people, 16–18 contingency management, 33–4 controlling, 5 cooperation and acceptance of authority, 31 evolution, 21–2 functions, 3–4 history of, 19 human relations, 27–31 information, 32–3 leading, 5 management ideas and practice throughout history, 19

Index

355

mistakes managers make, 14–15 operations, 31–2 organising, 4–5 origins, 19 planning, 4 practices, 18 requirement of managers, 20–1 scientific, 22–5 skills, 13 systems, 33 transition to, 15–16 type of managers, 5–9 management by objectives (MBO), 82 managerial functions, 3 managerial roles, 9–12 decisional roles, 11–12 informational roles, 10 interpersonal roles, 9–10 mistakes managers making, 14–15 managers, 241 companies looking for in, 12–14 first-line managers, 7–8 managerial roles, 9–12 middle managers, 7 team leader, 8–9 top managers, 6–7 types, 5–6 manual capture of information, 300 manufacturing flexibility, 321 manufacturing operations, 320 amount of processing in, 320–1 flexibility, 321–2 market commonality, 109 masculinity, 144–5 master production schedule, 326 material/product substitution, 292 materials requirement planning (MRP), 326 matrix departmentalisation, 157–8 matrix organisations, 159 maximising, 88 McCafé, 51, 109, 296 McClelland’s Learned Needs Theory, 224 measure behaviour, 236 mechanistic organisations, 164 media advocacy, 44 Melbourne’s 99designs, 177 Metropolitan Fire Brigade (MFB), 198 Metropolitan Life Insurance, 299–300 Microsoft, 47, 95 Office, 104 organisation, 152–3 Surface Pro, 85, 95 5, 5’ middle-of-the-road style, 244 middle management, 82 middle managers, 7 milestones, 118–19 Minnesota Clerical Test, 194 minority domination, 173–4 Mintzberg’s managerial roles, 9 mirroring, 267 mission, 81 ‘Mission Control Center’, 46–7 modular organisations, 168–9 monitor role, 10 Moore’s law, 294 moral development, 60–1 motion study, 24 motivation, 222 effort and performance, 223 equity theory, 227–31 expectancy theory, 231–3 extrinsic and intrinsic rewards, 225–6 goal-setting theory, 237–8 integrated model, 238–9 need satisfaction, 223–5 reinforcement theory, 233–7 motivation to manage, 14 multibranding, 42 multifactor productivity, 313–14 multifunctional teams, 119 multinational corporations, 129 multitasking, 313

356

Index

N NAB Defence, 310 NAFTA, 134 NAFTA 2.0, 134 National Australia Bank (NAB), 39 National Centre for Vocational Education Research (NCVER), 200 national culture, 144 National Employment Standards (NES), 188–9 National Library of Australia, 286 national workplace relations system, 188–9 natural disasters, 70 natural work units, 164 needs, 223 change, 227 satisfaction, 223–5 needs assessment, 198 negative reinforcement, 235 negotiator role, 12 Netflix, 117, 180 net operating profit after taxes (NOPAT), 288 99 designs, 140 Nissan, 77–8 noise, 264 Nokia, 42–3, 121 nominal group technique, 90 non-creative managers, 117 non-financial rewards, 186 non-substitutable resources, 95–6 non-tariff barriers, 131 non-verbal communication, 267–8. See also one-on-one communication normative control, 284–5 normative decision theory, 251. See also path– goal theory decision quality and acceptance, 252 decision styles, 251–2 problem, 252–4 norming, 182 norms, 178–9

O objective control, 283–4 objective performance measures, 201 Ocean Spray, 79 office or manufacturing location selection, 142 Olay, 157 one-on-one communication, 268 communication medium, 268–9 feedback, 271–2 listening, 269–71 online discussion forums, 272 opening feedback channels, 164 openness to experience, 217 open systems, 33 operational plans, 82 operations management, 31–2 Oppo, 36 opportunistic behaviour, 44 optical character recognition, 301 options-based planning, 80 oral communication, 268–9 Orbis International, 178 ordering cost, 325 organisation, 31, 259 organisation-wide communication, 272 improving reception, 272–5 improving transmission, 272 organisational authority, 159 chain of command, 159 degree of centralisation, 160–1 delegation of authority, 159–60 line vs. staff authority, 159 organisational culture, 49, 65 changing, 51–3 creation and maintenance of, 49–50 levels of, 51 successful, 50–1 organisational decline, 120–1 organisational development, 126–7

organisational encouragement of creativity, 117 organisational environments and cultures, 49–53 acting on threats and opportunities, 47–8 changing environments, 36 environmental change, 36–7 environmental complexity, 37 environmental scanning, 46–7 environmental uncertainty, 38 general environment, 38–41 interpreting environmental factors, 47 making sense of changing environments, 46 resource scarcity, 38 specific environment, 41–6 organisational heroes, 49–50 organisational innovation, 111–12 organisational plurality, 218 organisational process, 152 designing, 164–5 organisational silence, 273 organisational stories, 49 organisational strategy, 93–4 corporate-level strategies, 101–5 firm-level strategies, 108–110 industry-level strategy, 105–8 strategy-making process, 96–101 sustainable competitive advantage, 94–6 organisational structure, 151 designing, 153 organisational units, 153 organising, 4–5 Oriental Trading Company (OTC), 172 “Our Food. Your Questions” plan, 274 outcome/input ratio (O/I ratio), 228–9 outcomes, 228 outplacement services, 207 output control, 284 overeager licensor, 138 overlapping, 120 over-reward, 229 overt integrity test, 63 OzTAM, 297

P Paid Parental Leave (PPL), 211 paralanguage, 268 paraphrasing, 270 Parental Leave Pay, 211 partially finished goods. See work-in-process inventory partial productivity, 313 participative leadership, 249 passenger information display (PID), 297 path–goal theory, 248 basic assumptions, 250 leadership styles, 249–50 outcomes, 250–1 subordinate and environmental contingencies, 250 pay-level decisions, 204 pay-structure decisions, 205 pay-variability decisions, 205 People for Ethical Treatment of Animals (PETA), 44, 68 perceived ability, 250 perceived inequity, people react to, 229–30 perception basic perception process, 259–60 and communication problems, 259–62 of others, 260–2 problems, 260 self-perception, 262 perceptual filters, 259 performance appraisal, 200 accurately measuring job performance, 201–2 sharing performance feedback, 202–4 performance feedback, 238 performance of motivation, 223 performance tests. See work sample tests

performing, 182 personal aggression, 57 personal computer (PC), 37 personal identification number (PIN), 303 personal virtue, principle of, 62 personality, 216 personality-based integrity tests, 63 personal opinion. See idiosyncratic rater effect phased retirement, 208 physiological needs, 224 pickling, 292 piecework, 205 pinkification, 46 Pinoy Idol, 137 Pinterest, 88 planning, 4, 75–6 bending in middle, 82 benefits of, 76 developing commitment to goals, 78–9 developing effective action plans, 79 finishing at bottom, 82–3 for incremental innovation, 119–20 maintaining flexibility, 80 pitfalls, 76 planning from top to bottom, 80 setting goals, 77–8 starting at top, 80–2 tracking progress, 79–80 works, 77–8 plan, ploy, pattern, position and perspective strategy (Five Ps strategy), 94 PlayStation, 97 ‘point-to-point’ network, 99 policy, 83 policy uncertainty, 142 political deviance, 56 political risk minimisation, 142–4 political uncertainty, 142 pooled interdependence, 166 portfolio strategy, 101–4 position power, 247 positive reinforcement, 235 postconventional level of moral development, 61 power, 224 distance, 144 powerful leaders, 118–19 Pratt & Whitney jet engines, 154–5 preconventional level of moral development, 60 predictive patterns, 302 Prices Surveillance Authority (1983), 57 Price Waterhouse Coopers (PWC), 63 PricewaterhouseCoopers, 271 primary stakeholders, 67–68 primary work group, 250 proactive monitoring of customers, 42 proactive strategy, 71 probability of effect, 59 problem, 84 problem-oriented feedback, 272 problem-solving skills, 185 problems per 100 cars (PP100), 314 problem structure rule, 252 procedural justice, 231 procedures, 83 processing costs, 298 processing information, 301–3 process modification, 292 Procter & Gamble (P&G), 157, 186 product failure, 315 and service quality, 172 product boycott, 45 product departmentalisation, 154–5 production blocking, 91 production deviance, 55 productivity, 311–12 kinds, 313–14 matters, 312–13 multitasking, 313 product prototype, 118

profit & loss statement (P & L statement), 67 profit sharing, 205 Progressive Agreement for Trans-Pacific Partnership (TPP-11), 132, 134 Project Aristotle, 179 Project Oxygen, 3 project teams, 177 property deviance, 56 prospectors, 106 protecting information, 303–7 protectionism, 131 proximal goals, 79 proximity of effect, 59 psychological testing, 194–5 psychological traits, 63 psychometric testing. See psychological testing public communications, 44 public key encryption, 306 Public Service Act, 189 punctuated equilibrium theory, 36 punishment, 235 purchasing power, 141

Q QANTAS, 9, 52, 99, 184 QBE Insurance Group, 226 quality, 290, 314. See also productivity Australian Business Excellence Framework, 317 Baldrige National Quality Award, 317 ISO 9000 and 14000, 316–17 quality-related characteristics for products and services, 315–16 requirement, 252 rule, 252 TQM, 317–18 Qualtrics, 10 quantitative factors, 142 question marks, 102 quotas, 131 QWERTY keyboard, 115

R racial discrimination, 211 Racial Discrimination Act (1975), 189 radio frequency identification tags (RFID tags), 36, 300–1 radio frequency transmitters (RF transmitters), 299 rare resource, 95 rate buster, 22 rater training, 201 rational decision making, 84. See also ethical decision making computing optimal decision, 87 evaluating each alternative, 86–7 generate alternative courses of action, 86 identify decision criteria, 85 limits to, 87–8 problem, 84 steps and limits to, 84 weight criteria, 85–6 raw data, 294–5 raw material inventory, 323 reactive customer monitoring, 41–2 reactive strategy, 70 reactors, 107 reciprocal interdependence, 166 recovery, 105 recruiting, 189 challenges, 192–3 external, 191–2 internal, 191 job analysis, 189–91 recycle/recycling cadillac style, 324 and reuse, 292 red tape reduction programs, 283

reengineering, 165–7 referents, 228 reflecting feelings, 270 refreezing, 122 regional trading zones, 132 regulation costs, 282 reinforcement, 233 reinforcement contingencies, 234–5 reinforcement theory, 233. See also equity theory components, 235 motivating with, 236–7 schedules for delivering reinforcement, 235–6 related diversification, 103 relatedness, 224 relationship-oriented leadership styles, 246 relationship behaviour, 44 relative comparisons, 85 relevant information, 298 religious injunctions, principle of, 62 remuneration, 204–8 resistance forces, 121–2 resistance to change, 122 resource allocation, 13 resource allocator role, 11 resources, 94 resource scarcity, 38 resource similarity, 109 response, 109 responsiveness, 316 Restaurant Trams, 297 results-driven change, 125 résumés, 193 retention, 259 retirement, 207–8 retrenchment strategy, 105 retrieval costs, 299 revolutionary periods, 36 rewards, 233 rightsizing, 264 role-plays, 195 rules and regulations, 83 Ryanair, 52

S safety, 224 Samsung, 36, 43 satisfaction/progression’ principle, 224 satisficing, 88 schedule of reinforcement, 234 Science of Selling, The (Hoffeld), 267 scientific management, 22 Gantt charts, 24–5 motion studies, 24 Taylor, Frederick W, 22–4 S-curve pattern of innovation, 113 secondary firms, 99 secondary stakeholders, 68 secret shoppers, 280 secure sockets layer (SSL), 305 secure sockets layer encryption (SSL encryption), 306 selection, 192 application forms and résumés, 193 interviews, 196–7 process, 52 references and background checks, 193 tests, 194–6 selective attention, 260 selective perception, 260 self-actualisation, 224 self-confidence, 243 self-control, 285–6 self-designing teams, 176 self-management. See self-control self-managing teams, 176 self-perception, 262 self-serving bias, 262 semi-autonomous work groups, 176 semi-structured interviews, 197

Index

357

sequence patterns, 302 sequential interdependence, 166 service capability, 319 operations, 319–20 reliability, 315 service-profit chain, 319–20 serviceability, 315 service recovery, 320 setup cost, 325 7-Eleven, 297–8 sex discrimination, 211–13 Sex Discrimination Act 1984 (SDA), 40, 189, 211, 213–214 sexual harassment, 212 sexual orientation discrimination, 214 shareholder model, 67 sharing knowledge and expertise, 309–10 short-term/long-term orientation, 145 shorten development time, 120 simple environments, 37 simple matrix, 158 Singapore Airlines, 290 Singapore Idol, 137 single-use plans, 83 situational analysis, 97–9 situational constraints, 223 situational favourableness, 247 situational questions, 198 Six Sigma, 318 skill-based pay programs (SBP programs), 186 skill variety, 163 slack, 173 slack resources, 80 small group intervention, 127 presentations, 195 smart meters, 299 #SmashaStrawb, 298 Snapchat, 106 Snapshot, 271 social consensus, 59 social integration, 215 social loafing, 173 social media, 88 social responsibility, 66–7 and economic performance, 71–2 elements in organisations, 69–70 person in organisations, 67–9 responses to demands for, 70–1 social responsiveness, 70–1 Software Quality Metrics (SQM), 280 soldiering, 22 Sony, 36, 97 Trinitron TV, 97 specific ability tests, 194 specific environment, 39, 41 advocacy groups, 44–6 competitor component, 42–3 customer component, 41–2 industry regulation component, 44 supplier component, 43–4 specific feedback, 271–2 specific, measurable, attainable, realistic and timely (SMART goals), 77–8 spokesperson role, 10 sports utility vehicles (SUVs), 46 Spotify, 42 squads, 176 stability strategy, 104–5 stable environment, 36 staff authority, 159 staff function, 159 stakeholder model, 67–8 stakeholders, 33, 67 standardisation, 161 standards, 279–80 comparison to, 280 standing plans, 83 Starbucks, 139 stars, 102 stock options, 205

358

Index

stockout, 324 stockout costs, 325 storage costs, 298–9 storming, 182 strategic alliances, 139–40 strategic dissonance, 97 strategic group, 98 strategic leadership, 254 strategic plans, 81 strategic reference points, 99–100 strategy, 93–4 strategy-making process, 96 assessing need for strategic change, 97 choosing strategic alternatives, 99–101 situational analysis, 97–9 strengths, weaknesses, opportunities and threats analysis (SWOT analysis). See situational analysis stretch goals, 183 structural accommodation, 183 structured interviews, 196, 198 sub-optimisation, 286 subordinate conflict rule, 252 subordinate information rule, 252, 254 subsidies, 131 subsystems, 33 summarising, 90, 270 supervised data mining, 302 supervisory encouragement of creativity, 117 supplier dependence, 43 suppliers, 43 component, 43–4 involvement, 120 supportive leadership, 249 surface-level diversity, 215–16 survey feedback, 273 sustainable competitive advantage, 94 sweethearting, 56 synergy, 33 system, 33 management, 33

T tactical plans, 82 tangibles, 315 tariff, 131 task-oriented leadership styles, 246 task identity, 163 task interdependence, 165–6 task significance, 164 task structure, 247, 250 Taylor, Frederick W, 22–4 team diversity, 184 team leader, 8–9 team level, 184 teams. See also work teams advantages, 172–3 autonomy, 175–6 disadvantages, 173–4 factors encouraging people to withhold effort in, 174 good and bad of using, 172–5 management, 244 special kinds, 176–8 using, 174–5 teamwork, 318 technical skills, 12–13 technical training, 185 technological discontinuity, 114 technological innovation, 114 technological lockout, 115 technological substitution, 114 technology, 40 technology cycles, 112–14 televised or filmed speeches, 272 Telstra, 156 temporal immediacy, 59 terminating employees, 206–7 Tesla, 72, 107 testing, 118 threat of new entrants, 107

threat of substitute products or services, 108 3D printing, 120 360-degree feedback, 202 Timberland, 68 timely information, 298 time study, 24 top managers, 6–7 total quality management (TQM), 317–18 town hall meetings, 275 Toyota Kirloskar Motor, 323 tracking progress, 79–80 trade agreements, 132–5 trade barriers, 130–2, 135–6 Trade Practices Act 1974, 57 Trade Practices Commission (1974), 57 traditional work groups, 176 training, 198 evaluating, 200 methods, 199–200 needs, 198–9 online, 201 for team leaders, 185 traits, 242 trait theory, 242 Trans-Pacific Partnership (TPP), 134 transactional leadership, 257. See also visionary leadership transformational leadership, 256–7 Transport Workers’ Union, 282 “treasure hunts”, 124 Twitter, 88, 274 two-factor authentication, 303, 305

U Uber (Smartphone app), 108, 143 un-siloing, 264 uncertainty avoidance, 145 under-reward, 229 unethical amnesia, 63 unethical charismatics, 255–6 reducing risks associated with, 257 unfreezing, 122 Union of South American Nations Constitutive Treaty (UNASUR Constitutive Treaty), 134–5 United Nations Conference on Trade and Development (UNCTAD), 129 United States–Mexico–Canada Agreement (USMCA), 132, 134 United Technologies Corporation (UTC), 154–5 unity of command, 159 universal serial bus (USB), 120 University of Michigan studies, 244 unrelated diversification, 101 unstructured interviews, 196 unsupervised data mining, 302 upward communication, 264 US-based Xerox Corporation, 139 US Air Force, 194 utilitarian benefits, principle of, 62

V valence, 231–2 validation, 192 valuable resources, 95 value, 290 variable interval reinforcement schedules, 236 variable ratio reinforcement schedules, 236 variation, 318 vertical loading, 164 Vicks, 157 Victorian Emergency Management Training Centre (VEMTC), 198 video player measurement (VPM), 297 Village Roadshow, 151–2 Virgin, 284–5 virtual organisations, 169–70 virtual private networks (VPNs), 306 virtual teams, 177

virus, 305 visible artefacts, 52 vision, 81, 124 visionary leadership, 254–7 charismatic leadership, 254–6 transformational leadership, 256–7 Voice over Internet Protocol (VoIP), 47 Volkswagen Automobile Group (VAG), 136 Volkswagen Group (VW Group), 63–4 voluntary departure packages (VDPs), 207 voluntary export restraints, 131 voluntary separation, 204 voluntary separation packages (VSPs), 207 Vroom-Yetton-Jago model. See normative decision theory

W Wall Street Journal, 69, 100, 180 Walmart, 5, 49 waste disposal, 292–3 minimisation, 292 strategies for waste prevention and reduction, 292

Whistleblowing, 66 wholly foreign-owned subsidiaries (WFSs), 137 wholly owned affiliates, 140 Wired Equivalent Privacy security protocol (WEP security protocol), 306 wireless networks, 306 work-in-process inventory, 323 workforce health, 210 work group encouragement of creativity, 117 workplace bullying, 214–15 workplace deviance, 55–7 Workplace Gender Equality Act 2012 (WGE Act), 212 Workplace Gender Equality Agency (WGEA), 213 WGEA 2018 Australian Census of Women in Leadership, 213 Workplace Ombudsman, 188 Workplace Relations Act (1996), 188 work sample tests, 195 work teams, 171 characteristics, 178–82 cohesiveness, 179 conflict, 180–1 effectiveness, 182–6

norms, 178–9 problems reporting by team leaders, 186 selecting people for teamwork, 183–5 setting team goals and priorities, 182–3 size, 179–80 stages of team development, 181–2 team compensation and recognition, 186 team training, 185 World Health Organization (WHO), 71 World Trade Organization (WTO), 131, 132 Worldwide LHC Computing Grid (WLCG), 298 written communication, 268–9 wrongful dismissal, 206

X Xiaomi, 36

Y YouTube, 88, 115

Index

359

REVIEW KEY TERMS Management

Leader role

Getting work done through others.

The interpersonal role managers play when they motivate and encourage workers to accomplish organisational objectives.

Efficiency Getting work done with a minimum of effort, expense or waste.

Liaison role

Accomplishing tasks that help fulfil organisational objectives.

The interpersonal role managers play when they deal with people outside their units.

Planning

Monitor role

Effectiveness

Determining organisational goals and a means for achieving them.

Organising Deciding where decisions will be made, who will do what jobs and tasks and who will work for whom.

Leading Inspiring and motivating workers to work hard to achieve organisational goals.

Controlling Monitoring progress towards goal achievement and taking corrective action when needed.

Top managers Executives responsible for the overall direction of the organisation.

Middle managers Managers responsible for setting objectives consistent with top management’s goals and for planning and implementing subunit strategies for achieving these objectives.

First-line managers

The informational role managers play when they scan their environment for information.

Disseminator role The informational role managers play when they share information with others in their departments or companies.

Spokesperson role The informational role managers play when they share information with people outside their departments or companies.

Entrepreneur role The decisional role managers play when they adapt themselves, their subordinates and their units to change.

Disturbance handler role The decisional role managers play when they respond to severe problems that demand immediate action. The decisional role managers play when they decide who gets what resources.

Negotiator role

Team leaders

Technical skills

Figurehead role The interpersonal role managers play when they perform ceremonial duties.

LO1

Management is …

Good management is working through others to accomplish tasks that help fulfil organisational objectives as efficiently as possible. LO2

Management functions

Kinds of managers

Resource allocator role

Managers who train and supervise the performance of non-managerial employees who are directly responsible for producing the company’s products or services. Managers responsible for facilitating team activities toward goal accomplishment.

LEARNING OUTCOMES

The decisional role managers play when they negotiate schedules, projects, goals, outcomes, resources and employee raises. The ability to apply the specialised procedures, techniques and knowledge required to get the job done.

Human skills The ability to work well with others.

LO4

Managerial roles

Managers perform interpersonal, informational and decisional roles in their jobs. In fulfilling the interpersonal role, managers act as figureheads by performing ceremonial duties, as leaders by motivating and encouraging workers and as liaisons by dealing with people outside their units. In performing their informational role, managers act as monitors by scanning their environment for information, as disseminators by sharing information with others in the company and as spokespeople by sharing information with people outside their departments or companies. In fulfilling decisional roles, managers act as entrepreneurs by adapting their units to incremental change, as disturbance handlers by responding to larger problems that demand immediate action, as resource allocators by deciding resource recipients and amounts, and as negotiators by bargaining with others about schedules, projects, goals, outcomes and resources.

MANAGEMENT

REVIEW KEY TERMS Conceptual skills

Arrivers

The ability to see the organisation as a whole, understand how the different parts affect each other and recognise how the company fits into or is affected by its environment.

Managers who have made it to the top of a company.

Derailers Managers who were successful early in their careers, but stagnated in middle or upper management.

Motivation to manage An assessment of how enthusiastic employees are about managing the work of others.

LEARNING OUTCOMES LO5

What companies look for in managers

Companies do not want one-dimensional managers. They want managers with a balance of skills. They want managers who know their stuff (technical skills), are equally comfortable working with bluecollar and white-collar employees (human skills), are able to assess the complexities of today’s competitive marketplace and position their companies for success (conceptual skills) and want to assume positions of leadership and power (motivation to manage). Technical skills are most important for lower-level managers, human skills are equally important at all levels of management, and conceptual skills and motivation to manage increase in importance as managers rise through the managerial ranks. LO6

Mistakes managers make

Another way to understand what it takes to be a manager is to look at the top mistakes managers make. Five of the most important mistakes made by managers are being abrasive and intimidating; being cold, aloof or arrogant; betraying trust; being overly ambitious; and failing to build a team and then delegate to that team. LO7

The transition to management: the first year

Managers often begin their jobs by using more formal authority and less people management. However, most managers find that being a manager has little to do with ‘bossing’ their subordinates. After six months on the job, the managers were surprised at the fast pace and heavy workload and that ‘helping’ their subordinates was viewed as interference. After a year on the job, most of the managers had come to think of themselves not as doers but as managers who get things done through others. Also, because they finally realised that people management was the most important part of their job, most of them had abandoned their authoritarian approach for one based on communication, listening and positive reinforcement. LO8

Competitive advantage through people

Why does management matter? Well-managed companies are competitive because their workforces are smarter, better trained, more motivated and more committed. Furthermore, companies that practise good management consistently have greater sales revenues, profits and stock market performance than companies that don’t. Finally, good management matters because good management leads to satisfied employees who, in turn, provide better service to customers. Because employees tend to treat customers the same way that their managers treat them, good management can improve customer satisfaction.

MANAGEMENT

REVIEW KEY TERMS Scientific management

Organisation

Thoroughly studying and testing different work methods to identify the best, most efficient way to complete a job.

A system of consciously coordinated activities or forces created by two or more people.

Soldiering

A set of interrelated elements or parts that function as a whole.

When workers deliberately slow their pace or restrict their work outputs.

Rate buster A group member whose work pace is significantly faster than the normal pace in his or her group.

Time study Timing how long it takes good workers to complete each part of their jobs.

Motion study Breaking each task or job into its separate motions and then eliminating those that are unnecessary or repetitive.

Gantt chart A graphical chart that shows which tasks must be completed at which times in order to complete a project or task.

Bureaucracy The exercise of control on the basis of knowledge, expertise or experience.

Integrative conflict resolution An approach to dealing with conflict in which both parties deal with the conflict by indicating their preferences and then working together to find an alternative that meets the needs of both.

System

Subsystems Smaller systems that operate within the context of a larger system.

Synergy When two or more subsystems can produce more working together than they can working apart.

Closed systems Systems that can sustain themselves without interacting with their environments.

Open systems Systems that can sustain themselves only by interacting with their environments, on which they depend for their survival.

Contingency approach A theory which holds that there are no universal management theories, and that the most effective management theory or idea depends on the kinds of problems or situations that managers are facing at a particular time and place.

LEARNING OUTCOMES LO1

The origins of management

Management as a field of study is just 125 years old, but management ideas and practices have actually been used since 6000 BCE. From the ancient Sumerians to sixteenth-century Europe, there are historical antecedents for each of the functions of management discussed in this textbook: planning, organising, leading and controlling. However, there was no compelling need for managers until systematic changes in the nature of work and organisations occurred during the last two centuries. As work shifted from families to factories; from skilled labourers to specialised, unskilled labourers; from small, self-organised groups to large factories employing thousands under one roof; and from unique, small batches of production to large standardised mass production, managers were needed to impose order and structure, to motivate and direct large groups of workers, and to plan and make decisions that optimised overall company performance by effectively coordinating the different parts of organisational systems. LO2

Scientific management

Scientific management recommends studying and testing different work methods to identify the best, most efficient ways to complete a job. According to Frederick W. Taylor, the ‘father of scientific management’, managers should follow four scientific management principles. First, study each element of work to determine the ‘one best way’ to do it. Second, scientifically select, train, teach and develop workers to reach their full potential. Third, cooperate with employees to ensure implementation of the scientific principles. Fourth, divide the work and the responsibility equally between management and workers. Above all, Taylor felt these principles could be used to align managers and employees by determining a ‘fair day’s work’, what an average worker could produce at a reasonable pace, and ‘a fair day’s pay’, what management should pay workers for that effort. Taylor felt that incentives were one of the best ways to align management and employees. Frank and Lillian Gilbreth are best known for their use of motion studies to simplify work. Whereas Taylor used time study to determine ‘a fair day’s work’, based on how long it took a ‘first-class man’ to complete each part of his job, Frank Gilbreth used film cameras and micro chronometers to conduct motion studies to improve efficiency by eliminating unnecessary or repetitive motions. The Gilbreths also made significant contributions to the employment of workers with handicaps, encouraging the government to rehabilitate them, employers to identify jobs that they could perform and engineers to adapt and design machines they could use. Henry Gantt is best known for the Gantt chart, which graphically indicates when a series of tasks must be completed to perform a job or project, but he also developed ideas regarding pay-for-performance plans (where workers were rewarded for producing more, but were not punished if they didn’t) and worker training (all workers should be trained and their managers should be rewarded for training them).

REVIEW LEARNING OUTCOMES LO3

Bureaucratic and administrative management

Today, we associate bureaucracy with inefficiency and ‘red tape’. Yet German sociologist Max Weber believed that bureaucracy, that is, running organisations on the basis of knowledge, fairness and logical rules and procedures, would accomplish organisational goals much more efficiently than monarchies and patriarchies, where decisions were based on personal or family connections, personal gain and arbitrary decision making. Bureaucracies are characterised by seven elements: qualification-based hiring; merit-based promotion; chain of command; division of labour; impartial application of rules and procedures; recording rules, procedures and decisions in writing; and separating managers from owners. Nonetheless, bureaucracies are often inefficient and can be highly resistant to change.The Frenchman Henri Fayol, whose ideas were shaped by his 20-plus years of experience as a CEO, is best known for developing five management functions (planning, organising, coordinating, commanding and controlling) and 14 principles of management (division of work, authority and responsibility, discipline, unity of command, unity of direction, subordination of individual interests to the general interest, remuneration, centralisation, scalar chain, order, equity, stability of tenure of personnel, initiative and esprit de corps). He is also known for his belief that management could and should be taught to others. LO4

Human relations management

Unlike most people who view conflict as bad, Mary Parker Follett believed that it should be embraced and not avoided, and that of the three ways of dealing with conflict – domination, compromise and integration – the latter was the best because it focuses on developing creative methods for meeting conflicting parties’ needs. Elton Mayo is best known for his role in the Hawthorne Studies at the Western Electric Company. In the first stage of the Hawthorne Studies, production went up because the increased attention paid to the workers in the study and their development into a cohesive work group led to significantly higher levels of job satisfaction and productivity. In the second stage, productivity dropped because the workers had already developed strong negative norms. The Hawthorne Studies demonstrated that workers’ feelings and attitudes affected their work, that financial incentives weren’t necessarily the most important motivator for workers, and that group norms and behaviour play a critical role in behaviour at work. Chester Barnard, president of New Jersey Bell Telephone, emphasised the critical importance of willing cooperation in organisations and said that managers could gain workers’ willing cooperation through three executive functions: securing essential services from individuals (through material, non-material and associational incentives), unifying the people in the organisation with a clear purpose and providing a system of communication. Barnard maintained that it was better to induce cooperation through incentives, clearly formulated organisational objectives and effective communication throughout the organisation.

REVIEW LEARNING OUTCOMES LO5

Operations, information, systems and contingency management

Operations management uses a quantitative or mathematical approach to find ways to increase productivity, improve quality and manage or reduce costly inventories. The manufacture of standardised, interchangeable parts, the graphical and computerised design of parts and the discovery of just-in-time management were some of the most important historical events in operations management. Throughout history, organisations have pushed for and quickly adopted new information technologies that reduce the cost or increase the speed with which they can acquire, store, retrieve or communicate information. Historically, some of the most important technologies that have revolutionised information management were the creation of paper and the printing press in the fourteenth and fifteenth centuries, the manual typewriter in 1850, cash registers in 1879, the telephone in the 1880s, time clocks in the 1890s, the personal computer in the 1980s and the Internet in the 1990s. A system is a set of interrelated elements or parts that function as a whole. Organisational systems obtain inputs from the general and specific environments. Managers and workers then use their management knowledge and manufacturing techniques to transform those inputs into outputs, which, in turn, provide feedback to the organisation. Organisational systems must also address the issues of synergy, open versus closed systems and entropy. Finally, the contingency approach to management precisely states that there are no universal management theories. The most effective management theory or idea depends on the kinds of problems or situations that managers or organisations are facing at a particular time. This means that management is much harder than it looks.

REVIEW KEY TERMS External environments All events outside a company that have the potential to influence or affect it.

Environmental change The rate at which a company’s general and specific environments change.

Stable environment An environment in which the rate of change is slow.

Dynamic environment An environment in which the rate of change is fast.

Punctuated equilibrium theory A theory that holds that companies go through long, simple periods of stability (equilibrium), followed by short periods of dynamic, fundamental change (revolution), finishing with a return to stability (new equilibrium).

Environmental complexity The number of external factors in the environment that affect organisations.

Simple environment An environment with few environmental factors.

Complex environment An environment with many environmental factors.

Resource scarcity The abundance or shortage of critical organisational resources in an organisation’s external environment.

Environmental uncertainty

Business confidence indices Indices that show managers’ level of confidence about future business growth.

Technology The knowledge, tools and techniques used to transform inputs into outputs.

Competitors Companies in the same industry that sell similar products or services to customers.

Competitive analysis A process for monitoring the competition that involves identifying competition, anticipating their moves and determining their strengths and weaknesses.

Suppliers Companies that provide material, human, financial and informational resources to other companies.

Supplier dependence The degree to which a company relies on a supplier because of the importance of the supplier’s product to the company and the difficulty of finding other sources of that product.

General environment

The general environment consists of events and trends that affect all organisations. Because the economy influences basic business decisions, managers often use economic statistics and business confidence indices to predict future economic activity. Changes in technology (which transforms inputs into outputs) can be a benefit or a threat to a business. Sociocultural trends, like changing demographic characteristics, affect how companies run their businesses. Similarly, sociocultural changes in behaviour, attitudes and beliefs affect the demand for a business’ products and services. Court decisions and new federal and state laws have imposed much greater political/legal responsibilities on companies. The best way to manage legal responsibilities is to educate managers and employees about laws and regulations and potential lawsuits that could affect a business. General

Economy Technology

A transaction in which one party in the relationship benefits at the expense of the other.

General environment

LO2

Opportunistic behaviour

(also known as lobby groups) groups of concerned people who band together to try to influence the business practices of specific industries, businesses and professions.

The customers, competitors, suppliers, industry regulations and advocacy groups that are unique to an industry and directly affect how a company does business.

Changing environments

Environmental change, complexity and resource scarcity are the basic components of external environments. Environmental change is the rate at which conditions or events affecting a business change. Environmental complexity is the number of external factors in an external environment. Resource scarcity is the scarcity or abundance of resources available in the external environment. The greater the rates of environmental change, environmental complexity and resource scarcity, the less confident managers are that they can understand, predict and effectively react to the trends affecting their businesses. According to punctuated equilibrium theory, companies experience periods of stability followed by short periods of dynamic, fundamental change, followed by a return to periods of stability.

The degree to which a supplier relies on a buyer because of the importance of that buyer to the supplier and the difficulty of finding other buyers for its products.

Relationship behaviour

Specific environment

LO1

Buyer dependence

The extent to which managers can understand or predict which environmental changes and trends will affect their businesses. The economic, technological, sociocultural and political trends that indirectly affect all organisations.

LEARNING OUTCOMES

Mutually beneficial, long-term exchanges between buyers and suppliers.

Advocacy groups

Sociocultural trends Political/legal trends

LO3

Specific environment

The specific environment is made up of the five components shown here. Companies can monitor customers’ needs by identifying customers’ problems after they occur or by anticipating problems before they occur. Because they tend to focus on well-known competitors, managers often underestimate their competition or do a poor job of identifying future competitors. Suppliers and buyers are very dependent on each other, and that dependence sometimes leads to opportunistic behaviour, in which one benefits at the expense of the other. Regulatory agencies affect businesses by creating rules and then enforcing them. Advocacy groups cannot regulate organisations’ practices. Nevertheless, through public communications, media advocacy and product boycotts, they try to convince companies to change their practices.

REVIEW KEY TERMS Public communications

Organisational heroes

An advocacy group tactic that relies on voluntary participation by the news media and the advertising industry to get the advocacy group’s message out.

People celebrated for their qualities and achievements within an organisation.

Media advocacy An advocacy group tactic that involves framing issues as public issues; exposing questionable, exploitative or unethical practices; and forcing media coverage by buying media time or creating controversy that is likely to receive extensive news coverage.

Product boycott An advocacy group tactic that involves protesting a company’s actions by convincing consumers not to purchase its product or service.

Environmental scanning Searching the environment for important events or issues that might affect an organisation.

Cognitive maps Graphic depictions of how managers believe environmental factors relate to possible organisational actions.

Internal environment The events and trends inside an organisation that affect management, employees and organisational culture.

Organisational culture The values, beliefs and attitudes shared by organisational members.

Organisational stories Stories told by organisational members to make sense of organisational events and changes and to emphasise culturally consistent assumptions, decisions and actions.

LEARNING OUTCOMES

Specific

Company vision A business’ purpose or reason for existing.

Consistent organisational cultures When a company actively defines and teaches organisational values, beliefs and attitudes.

Behavioural addition The process of having managers and employees perform new behaviours that are central to and symbolic of the new organisational culture that a company wants to create.

Behavioural substitution The process of having managers and employees perform new behaviours central to the ‘new’ organisational culture in place of behaviours that were central to the ‘old’ organisational culture.

Visible artefacts Visible signs of an organisation’s culture, such as the office design and layout, company dress code and company benefits and perks like stock options, personal parking spaces or the private company dining room.

Customers

LO4

Competitors

Suppliers

Industry regulations

Advocacy groups

Making sense of changing environments

Managers use a three-step process to make sense of external environments: environmental scanning, interpreting information and acting on it. Managers scan their environments based on their organisational strategies, their need for up-to-date information and their need to reduce uncertainty. When managers identify environmental events as threats, they take steps to protect the company from harm. When managers identify environmental events as opportunities, they formulate alternatives for taking advantage of them to improve company performance. Using cognitive maps can help managers visually summarise the relationships between environmental factors and the actions they might take to deal with them. LO5

Organisational cultures: creation, success and change

Organisational culture is the set of key values, beliefs and attitudes shared by organisational members. Organisational cultures are often created by company founders and then sustained through the telling of organisational stories and the celebration of organisational heroes. Adaptable cultures that promote employee involvement, make clear the organisation’s strategic purpose and direction, and actively define and teach organisational values and beliefs can help companies achieve higher sales growth, return on assets, profits, quality and employee satisfaction. Organisational cultures exist on three levels: the surface level, where cultural artefacts and behaviours can be observed; just below the surface, where values and beliefs are expressed; and deep below the surface, where unconsciously held assumptions and beliefs exist. Managers can begin to change company cultures by focusing on the top two levels and by using behavioural substitution and behavioural addition, changing visible artefacts and selecting job applicants with values and beliefs consistent with the desired company culture.

REVIEW KEY TERMS Ethics The set of moral principles or values that defines right and wrong for a person or group.

Ethical behaviour Behaviour that conforms to a society’s accepted principles of right and wrong.

Workplace deviance Unethical behaviour that violates organisational norms about right and wrong.

Production deviance Unethical behaviour that hurts the quality and quantity of work produced.

Property deviance Unethical behaviour aimed at the organisation’s property or products.

Employee shrinkage Employee theft of company merchandise.

Political deviance Using one’s influence to harm others in the company.

Personal aggression Hostile or aggressive behaviour toward others.

Ethical intensity The degree of concern people have about an ethical issue.

Magnitude of consequences The total harm or benefit derived from an ethical decision.

Social consensus Agreement on whether behaviour is bad or good.

Probability of effect The chance that something will happen and then harm others.

Temporal immediacy The time between an act and the consequences the act produces.

Proximity of effect The social, psychological, cultural or physical distance between a decision maker and those affected by his or her decisions.

Concentration of effect The total harm or benefit that an act produces on the average person.

Preconventional level of moral development The first level of moral development in which people make decisions based on selfish reasons.

Conventional level of moral development The second level of moral development in which people make decisions that conform to societal expectations.

Postconventional level of moral development The third level of moral development in which people make decisions based on internalised principles.

Principle of long-term self-interest An ethical principle that holds that you should never take any action that is not in your or your organisation’s long-term selfinterest.

Principle of personal virtue An ethical principle that holds that you should never do anything that is not honest, open and truthful, and is not something that you would be glad to see reported in the newspapers or on TV.

Principle of religious injunctions An ethical principle that holds that you should never take any action that is not kind and that does not build a sense of community.

Principle of government requirements An ethical principle that holds that you should never take any action that violates the law, for the law represents the minimal moral standard.

Principle of utilitarian benefits An ethical principle that holds that you should never take any action that does not result in greater good for society.

Principle of individual rights An ethical principle that holds that you should never take any action that infringes on others’ agreed-upon rights.

ETHICS AND SOCIAL RESPONSIBILITY

LEARNING OUTCOMES LO1

Workplace deviance

Ethics is the set of moral principles or values that define right and wrong. By contrast, workplace deviance is behaviour that violates important organisational norms about right and wrong and harms the organisation or its workers. Production deviance and property deviance harm the company, whereas political deviance and personal aggression harm individuals within the company. LO2

Regulators and regulations

Regulation of the corporate sector in Australia is mainly undertaken by three government agencies: the Australian Competition and Consumer Commission (ACCC), the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). The ACCC deals with competition matters generally at a national level. The ACCC acts as the consumer and competition ‘watch dog’. ASIC grants licences to financial entities that enable them to offer financial products and services. APRA is the national regulator of prudential institutions – deposit takers (e.g. banks), insurance companies and superannuation funds. LO3

Influences on ethical decision making

Three factors influence ethical decisions: the ethical intensity of the decision, the moral development of the manager and the ethical principles used to solve the problem. Ethical intensity is strong when decisions have large, certain, immediate consequences and when we are physically or psychologically close to those affected by the decision. There are three phases of moral maturity, with two steps within each phase. At the pre-conventional level, decisions are made for selfish reasons. At the conventional level, decisions conform to societal expectations. At the post-conventional level, internalised principles are used to make ethical decisions. Finally, managers can use a number of different principles when making ethical decisions: self-interest, personal virtue, religious injunctions, government requirements, utilitarian benefits, individual rights and distributive justice. LO4

Practical steps to ethical decision making

Employers can increase their chances of hiring ethical employees by testing all job applicants. Most large companies now have corporate codes of ethics. In addition to offering general rules, ethics codes must also provide specific, practical advice. Ethics training seeks to increase employees’ awareness of ethical issues; make ethics a serious, credible factor in organisational decisions; and teach employees a practical model of ethical decision making. The most important factors in creating an ethical business climate are the personal examples set by company managers, involvement of management in the company ethics program, a reporting system that encourages whistleblowers to report potential ethics violations and fair but consistent punishment of violators. LO5

To whom are organisations socially responsible?

Social responsibility is a business’ obligation to benefit society. According to the shareholder model, a company’s only social responsibility is to maximise shareholder wealth by maximising company profits. According to the stakeholder model, companies must satisfy the needs and interests of multiple corporate stakeholders, not just shareholders. However, the needs of primary stakeholders, on which the organisation relies for its existence, take precedence over those of secondary stakeholders.

REVIEW KEY TERMS Principle of distributive justice An ethical principle that holds that you should never take any action that harms the least fortunate among us: the poor, the uneducated and the unemployed.

Overt integrity test A written test that estimates job applicants’ honesty by directly asking them what they think or feel about theft or about punishment of unethical behaviours.

Personality-based integrity test A written test that indirectly estimates job applicants’ honesty by measuring psychological traits, such as dependability and conscientiousness.

Whistleblowing Reporting others’ ethics violations to management or legal authorities.

Social responsibility A business’ obligation to pursue policies, make decisions and take actions that benefit society.

Shareholder model A view of social responsibility that holds that an organisation’s overriding goal should be profit maximisation for the benefit of shareholders.

Stakeholder model A theory of corporate responsibility that holds that management’s most important responsibility, longterm survival, is achieved by satisfying the interests of multiple corporate stakeholders.

Stakeholders Persons or groups with a ‘stake’ or legitimate interest in a company’s actions.

Primary stakeholder Any group on which an organisation relies for its longterm survival.

Secondary stakeholder

Economic responsibility The expectation that a company will make a profit by producing a valued product or service.

Legal responsibility A company’s social responsibility to obey society’s laws and regulations as it tries to meet its economic responsibilities.

Primary

Secondary

Governments

Media

Employees

Special interest groups

Customers

Trade associations

Suppliers Shareholders Local communities

Ethical responsibility A company’s social responsibility not to violate accepted principles of right and wrong when conducting its business.

Discretionary responsibility The expectation that a company will voluntarily serve a social role beyond its economic, legal and ethical responsibilities.

LO6

For what are organisations socially responsible?

Companies can best benefit their stakeholders by fulfilling their economic, legal, ethical and discretionary responsibilities. Being profitable, or meeting one’s economic responsibility, is a business’ most basic social responsibility. Legal responsibility consists of following a society’s laws and regulations. Ethical responsibility means not violating accepted principles of right and wrong when doing business. Discretionary responsibilities are social responsibilities beyond basic economic, legal and ethical responsibilities.

Social responsiveness A company’s strategy to respond to stakeholders’ economic, legal, ethical or discretionary expectations concerning social responsibility.

Discretionary

Ethical

Reactive strategy A social responsiveness strategy in which a company does less than society expects.

Legal

Defensive strategy

Economic

A social responsiveness strategy in which a company admits responsibility for a problem but does the least required to meet societal expectations.

Accommodative strategy A social responsiveness strategy in which a company accepts responsibility for a problem and does all that society expects to solve that problem.

Proactive strategy A social responsiveness strategy in which a company anticipates responsibility for a problem before it occurs and does more than society expects to address the problem.

Any group that can influence or be influenced by a company and can affect public perceptions about its socially responsible behaviour.

LEARNING OUTCOMES

$ LO7

Responses to demands for social responsibility

Social responsiveness is a company’s response to stakeholders’ demands for socially responsible behaviour. There are four social responsiveness strategies. When a company uses a reactive strategy, it denies responsibility for a problem. When it uses a defensive strategy, it takes responsibility for a problem but does the minimum required to solve it. When a company uses an accommodative strategy, it accepts responsibility for problems and does all that society expects to solve them. Finally, when a company uses a proactive strategy, it does much more than expected to solve social responsibility problems. LO8

Social responsibility and economic performance

Does it pay to be socially responsible? Sometimes it costs, and sometimes it pays. Overall, there is no clear relationship between social responsibility and economic performance. Consequently, managers should not expect an economic return from socially responsible corporate activities. If your company chooses to practise a proactive or accommodative social responsibility strategy, it should do so to better society and not to improve its financial performance.

REVIEW KEY TERMS

Choosing a goal and developing a strategy to achieve that goal.

SMART goals Goals that are specific, measurable, attainable, realistic and timely.

Goal commitment The determination to achieve a goal.

Action plan The specific steps, people and resources needed to accomplish a goal.

Proximal goals Short-term goals or sub-goals.

Distal goals Long-term or primary goals.

Options-based planning Maintaining planning flexibility by making small, simultaneous investments in many alternative plans.

Slack resources A cushion of extra resources that can be used with optionsbased planning to adapt to unanticipated change, problems or opportunities.

Strategic plans Overall company plans that clarify how the company will serve customers and position itself against competitors over the next two to five years.

Vision A statement of a company’s purpose or reason for existing.

Mission A statement of a company’s overall goal that unifies company-wide efforts toward its vision, stretches and challenges the organisation and possesses a finish line and a time frame.

Tactical plans Plans created and implemented by middle managers that specify how the company will use resources, budgets and people over the next six months to two years to accomplish specific goals within its mission.

Management by objectives (MBO) A four-step process in which managers and employees discuss and select goals, develop tactical plans and meet regularly to review progress toward goal accomplishment.

Operational plans Day-to-day plans, developed and implemented by lower-level managers, for producing or delivering the organisation’s products and services over a 30-day to six-month period.

Single-use plans Plans that cover unique, onetime-only events.

Standing plans Plans used repeatedly to handle frequently recurring events.

Policy A standing plan that indicates the general course of action that should be taken in response to a particular event or situation.

LO1

Benefits and pitfalls of planning

Planning is choosing a goal and developing a method for achieving it. Planning is one of the best ways to improve organisational and individual performance. It encourages people to work harder (intensified effort), to work hard for extended periods (persistence), to engage in behaviours directly related to goal accomplishment (directed behaviour) and to think of better ways to do their jobs (task strategies). However, planning also has three potential pitfalls. Companies that are overly committed to their plans may be slow to adapt to environmental changes. Planning is based on assumptions about the future and when those assumptions are wrong, plans can fail. Finally, planning can fail when planners are detached from the implementation of plans. LO2

How to make a plan that works

There are five steps to making a plan that works: (1) Set SMART goals – goals that are specific, measurable, attainable, realistic and timely. (2) Develop commitment to the goals. Managers can increase workers’ goal commitment by encouraging worker participation in goal setting, making goals public and getting top management to show support for workers’ goals. (3) Develop action plans for goal accomplishment. (4) Track progress toward goal achievement by setting both proximal and distal goals and by providing workers with regular performance feedback. (5) Maintain flexibility by keeping options open.

Procedure A standing plan that indicates the specific steps that should be taken in response to a particular event.

Rules and regulations Standing plans that describe how a particular action should be performed, or what must happen or not happen in response to a particular event.

Budgeting Quantitative planning through which managers decide how to allocate available money to best accomplish company goals.

LO3

Planning from top to bottom

Proper planning requires that the goals at the bottom and middle of the organisation support the objectives at the top of the organisation. Top management develops strategic plans, which start with the creation of an organisational vision and mission. Middle managers use techniques like management by objectives to develop tactical plans that direct behaviour, efforts and priorities. Finally, lower-level managers develop operational plans that guide daily activities in producing or delivering an organisation’s products and services. There are three kinds of operational plans: singleuse plans, standing plans (policies, procedures and rules and regulations) and budgets. Planning time lines

Decision making The process of choosing a solution from available alternatives.

Rational decision making A systematic process of defining problems, evaluating alternatives and choosing optimal solutions.

2 years

Strategic

5 years

6 months

Plans

Planning

LEARNING OUTCOMES

Tactical

2 years 30 days

Operational 6 months 0

Years

REVIEW KEY TERMS Problem A gap between a desired state and an existing state.

Decision criteria The standards used to guide judgements and decisions.

Absolute comparisons A process in which each decision criterion is compared to a standard or ranked on its own merits.

Relative comparisons A process in which each decision criterion is compared directly to every other criterion.

Maximising Choosing the best alternative.

Satisficing Choosing a ‘good enough’ alternative.

Groupthink A barrier to good decision making caused by pressure within the group for members to agree with each other.

C-type conflict (cognitive conflict) Disagreement that focuses on problem- and issue-related differences of opinion.

A-type conflict (affective conflict) Disagreement that focuses on individuals or personal issues.

Nominal group technique A decision-making method that begins and ends by having group members quietly write down and evaluate ideas to be shared with the group.

Delphi technique A decision-making method in which members of a panel of experts respond to questions and to each other until reaching agreement on an issue.

Brainstorming A decision-making method in which group members build on each others’ ideas to generate as many alternative solutions as possible.

Electronic brainstorming A decision-making method in which group members use computers to build on each other’s ideas and generate many alternative solutions.

Production blocking A disadvantage of face-to-face brainstorming in which a group member must wait to share an idea because another member is presenting an idea.

Evaluation apprehension Fear of what others will think of your ideas.

LEARNING OUTCOMES LO4

Steps and limits to rational decision making

Rational decision making is a six-step process in which managers define problems, evaluate alternatives and compute optimal solutions. The first step is identifying and defining the problem. Problems are gaps between desired and existing states. Managers won’t begin the decision-making process unless they are aware of the gap, motivated to reduce it and possess the necessary resources to fix it. Step 2 is defining the decision criteria used to judge alternatives. In step 3, an absolute or relative comparison process is used to rate the importance of the decision criteria. Step 4 involves generating many alternative courses of action (i.e. solutions). Potential solutions are assessed in step 5 by systematically gathering information and evaluating each alternative against each criterion. In step 6, criterion ratings and weights are used to compute the optimal value for each alternative course of action. Rational managers then choose the alternative with the highest optimal value. The rational decision-making model describes how decisions should be made in an ideal world without limits. However, bounded rationality recognises that in the real world, managers’ limited resources, incomplete and imperfect information and limited decision-making capabilities restrict their decision-making processes. LO5

Using groups to improve decision making

When groups view problems from multiple perspectives, use more information, have a diversity of knowledge and experience and become committed to solutions they help choose, they can produce better solutions than individual decision makers. However, group decisions can suffer from these disadvantages: groupthink, slowness, discussions dominated by just a few individuals and unfelt responsibility for decisions. Group decisions work best when group members encourage c-type conflict. However, group decisions don’t work as well when groups become mired in a-type conflict. The devil’s advocacy and dialectical inquiry approaches improve group decisions because they bring structured c-type (cognitive) conflict into the decision-making process. By contrast, the nominal group technique and the Delphi technique both improve decision making by reducing a-type (affective) conflict. The stepladder technique improves group decision making by adding each group member’s independent contributions to the discussion one by one. Finally, because it overcomes the problems of production blocking and evaluation apprehension, electronic brainstorming is more effective than face-to-face brainstorming.

REVIEW KEY TERMS Strategy Skilful management directed towards attaining an end.

Resources The assets, capabilities, processes, information and knowledge that an organisation uses to improve its effectiveness and efficiency, create and sustain competitive advantage and fulfil a need or solve a problem.

Situational (SWOT) analysis An assessment of the strengths and weaknesses in an organisation’s internal environment and the opportunities and threats in its external environment.

Distinctive competence What a company can make, do or perform better than its competitors.

Competitive advantage

Core capabilities

Providing greater value for customers than competitors can.

The internal decision-making routines, problem-solving processes and organisational cultures that determine how efficiently inputs can be turned into outputs.

Sustainable competitive advantage A competitive advantage that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate.

Valuable resource A resource that allows companies to improve efficiency and effectiveness.

Rare resource

Strategic group A group of companies within an industry that top managers choose to compare, evaluate and benchmark strategic threats and opportunities.

Core firms The central companies in a strategic group.

LO1

LO2

Imperfectly imitable resource A resource that is impossible, or extremely costly or difficult for other companies to duplicate.

Non-substitutable resource A resource that produces value or competitive advantage and has no equivalent substitutes or replacements.

Strategic reference points The strategic targets managers use to measure whether a firm has developed the core competencies it needs to achieve a sustainable competitive advantage.

Corporate-level strategy

A reluctance to change strategies or competitive practices that have been successful in the past.

The overall organisational strategy that addresses the question, ‘What business or businesses are we in or should we be in?’

Strategic dissonance

Diversification

Competitive inertia

A discrepancy between a company’s intended strategy and the strategic actions managers take when implementing that strategy.

A strategy for reducing risk by owning a variety of items (stocks or, in the case of a corporation, types of businesses) so that the failure of one stock or one business does not doom the entire portfolio.

ORGANISATIONAL STRATEGY

Sustainable competitive advantage

Companies can use their resources to create and sustain a competitive advantage; that is, to provide greater value for customers than competitors can. A competitive advantage becomes sustainable when other companies cannot duplicate the benefits it provides and have, for now, stopped trying. LO3

Strategy-making process

The first step in strategy making is determining whether a strategy needs to be changed to sustain a competitive advantage. The second step is to conduct a situational analysis that examines internal strengths and weaknesses, as well as external threats and opportunities. In the third step of strategy making, Strategic Reference Point Theory suggests that when companies are performing better than their strategic reference points, top management will typically choose a risk-averse strategy. When performance is below strategic reference points, risk-seeking strategies are more likely to be chosen.

Secondary firms The firms in a strategic group that follow strategies related to, but somewhat different from, those of the core firms.

What is strategy?

Strategy in a modern and general sense refers to skilful management directed towards attaining an end. As outlined in Chapter 1, Professor Henry Mintzberg famously described strategy as ‘The Five Ps’: plan, ploy, pattern, position and perspective.

LO4

Resources that are not controlled or possessed by many competing organisations.

LEARNING OUTCOMES

Corporate-level strategies

Corporate-level strategies, such as portfolio strategy and grand strategies, help managers determine what businesses they should be in. Portfolio strategy focuses on lowering business risk by being in multiple, unrelated businesses and by investing the cash flows from slow-growth businesses into faster-growing businesses. One portfolio strategy is the BCG matrix. The most successful way to use the portfolio approach to corporate strategy is to reduce risk through related diversification. The three kinds of grand strategies are growth, stability and retrenchment/ recovery. Companies can grow externally by merging with or acquiring other companies, or they can grow internally through direct expansion or creating new businesses. Companies choose a stability strategy when their external environment changes very little or after they have dealt with periods of explosive growth. Retrenchment strategy, shrinking the size or scope of a business, is used to turn around poor performance. If retrenchment works, it is often followed by a recovery strategy that focuses on growing the business again. LO5

Industry-level strategies

Industry-level strategies focus on how companies choose to compete in their industry. Five industry forces determine an industry’s overall attractiveness to corporate investors and its potential for long-term profitability. Together, a high level of these elements combine to increase competition and decrease profits. Positioning strategies (cost leadership, differentiation, focus) can help companies protect themselves from the negative effects of industry-wide competition. The four adaptive strategies help companies adapt to changes in the external environment. Defenders want to ‘defend’ their current strategic positions. Prospectors look for new market opportunities by bringing innovative new products to market. Analysers minimise risk by following the proven successes of prospectors. Reactors do not follow a consistent strategy, but instead react to changes in their external environment after they occur.

REVIEW KEY TERMS Portfolio strategy A corporate-level strategy that minimises risk by diversifying investment among various businesses or product lines.

Acquisition

turning around very poor company performance by shrinking the size or scope of the business.

Recovery

The purchase of a company by another company.

The strategic actions taken after retrenchment to return to a growth strategy.

Unrelated diversification

Industry-level strategy

Creating or acquiring companies in completely unrelated businesses.

A corporate strategy that addresses the question, ‘How should we compete in this industry?’

BCG matrix A portfolio strategy, developed by the Boston Consulting Group, that categorises a corporation’s businesses by growth rate and relative market share, and helps managers decide how to invest corporate funds.

Star A company with a large share of a fast-growing market.

Question mark A company with a small share of a fast-growing market.

Cash cow A company with a large share of a slow-growing market.

Dog A company with a small share of a slow-growing market.

Related diversification Creating or acquiring companies that share similar products, manufacturing, marketing, technology or cultures.

Grand strategy

The positioning strategy of providing a product or service that is sufficiently different from competitors’ offerings that customers are willing to pay a premium price for it.

Focus strategy The positioning strategy of using cost leadership or differentiation to produce a specialised product or service for a limited, specially targeted group of customers in a particular geographic region or market segment.

Defender

Prospector

A strategy that focuses on increasing profits, revenues, market share or the number of places in which the company does business.

An adaptive strategy that seeks fast growth by searching for new market opportunities, encouraging risk taking and being the first to bring innovative new products to market.

A strategy that focuses on

Firm-level strategies are concerned with direct competition between firms. Market commonality and resource similarity determine whether firms are in direct competition and thus likely to attack each other or respond to each other’s attacks. In general, the more markets in which there is product, service or customer overlap, and the greater the resource similarity between two firms, the more intense the direct competition between them. Market entries and exits are the most important kinds of attacks and responses.

Differentiation

Growth strategy

Retrenchment strategy

Firm-level strategies

The positioning strategy of producing a product or service of acceptable quality at consistently lower production costs than competitors can, so that the company can offer the product or service at the lowest price in the industry.

A broad corporate-level strategic plan used to achieve strategic goals and guide the strategic alternatives that managers of individual businesses or subunits may use.

A strategy that focuses on improving the way in which the company sells the same products or services to the same customers.

LO6

Cost leadership

An adaptive strategy aimed at defending strategic positions by seeking moderate, steady growth and by offering a limited range of high-quality products and services to a well-defined set of customers.

Stability strategy

LEARNING OUTCOMES

Analyser An adaptive strategy that seeks to minimise risk and maximise profits by following or imitating the proven successes of prospectors.

Reactor

Firm-level strategy

An adaptive strategy of not following a consistent strategy, but instead reacting to changes in the external environment after they occur.

A corporate strategy that addresses the question, ‘How should we compete against a particular firm?’

Character of the rivalry A measure of the intensity of competitive behaviour between companies in an industry.

The rivalry between two companies that offer similar products and services, acknowledge each other as rivals, and act and react to each other’s strategic actions.

Threat of new entrants

Market commonality

A measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry.

The degree to which two companies have overlapping products, services or customers in multiple markets.

Threat of substitute products or services

Resource similarity

A measure of the ease with which customers can find substitutes for an industry’s products or services.

Bargaining power of suppliers A measure of the influence that suppliers of parts, materials and services to organisations in an industry have on the prices of these inputs.

Direct competition

The extent to which a competitor has similar amounts and kinds of resources.

Attack A competitive move designed to reduce a rival’s market share or profits.

Response A competitive countermove, prompted by a rival’s attack, to defend or improve a company’s market share or profit.

Bargaining power of buyers A measure of the influence that customers have on a company’s prices.

REVIEW KEY TERMS Change

Technological lockout

Any alteration in existing circ*mstances.

When a new dominant design (i.e. a significantly better technology) prevents a company from competitively selling its products or makes it difficult to do so.

Organisational innovation The successful implementation of creative ideas in organisations.

Creativity The production of novel and useful ideas.

Technology cycle A cycle that begins with the ‘birth’ of a new technology and ends when that technology reaches its limits and is replaced by a newer, substantially better technology.

S-curve pattern of innovation

Incremental change The phase of a technology cycle in which companies innovate by lowering costs and improving the functioning and performance of the dominant technological design.

Creative work environments Workplace cultures in which workers perceive that new ideas are welcomed, valued and encouraged.

A pattern of technological innovation characterised by slow initial progress, then rapid progress and then slow progress again as a technology matures and reaches its limits.

Flow

Innovation streams

Experiential approach to innovation

Patterns of innovation over time that can create sustainable competitive advantage.

Technological discontinuity A scientific advance or a unique combination of existing technologies creates a significant breakthrough in performance or function.

Discontinuous change The phase of a technology cycle characterised by technological substitution and design competition.

Technological substitution The purchase of new technologies to replace older ones.

Design competition Competition between old and new technologies to establish a new technological standard or dominant design.

Dominant design A new technological design or process that becomes the accepted market standard.

A psychological state of effortlessness, in which you become completely absorbed in what you’re doing and time seems to pass quickly.

An approach to innovation that assumes a highly uncertain environment and uses intuition, flexible options and handson experience to reduce uncertainty and accelerate learning and understanding.

Design iteration A cycle of repetition in which a company tests a prototype of a new product or service, improves on that design and then builds and tests the improved prototype.

Product prototype A full-scale working model that is being tested for design, function and reliability.

Testing The systematic comparison of different product designs or design iterations.

Milestones Formal project review points used to assess progress and performance.

Multifunctional teams Work teams composed of people from different departments.

LEARNING OUTCOMES LO1

The difference between change and innovation

Managers deal with and discuss change, innovation and creativity, so it is important to have an understanding of what each word means. Broadly speaking, change means any alteration to existing circ*mstances. Change can be important, or minor, expected or unexpected, and may or may not be something that a manager can control. Change can lead to good or bad outcomes and a manager needs to expect and be able to respond to change. Organisational innovation is the successful implementation of creative ideas in an organisation, designed to bring about improvements in process, products and services. Creativity, a form of innovation, is the production of novel and useful ideas. LO2

Why innovation matters

Technology cycles typically follow an S-curve pattern of innovation. Early in the cycle, technological progress is slow and improvements in technological performance are small. As a technology matures, however, performance improves quickly. Finally, as the limits of a technology are reached, only small improvements occur. At this point, significant improvements in performance must come from new technologies. The best way to protect a competitive advantage is to create a stream of innovative ideas and products. Innovation streams begin with technological discontinuities that create significant breakthroughs in performance or function. Technological discontinuities are followed by discontinuous change, in which customers purchase new technologies and companies compete to establish the new dominant design. Dominant designs emerge because of critical mass, because they solve a practical problem or because of the negotiations of independent standards bodies. Because technological innovation is both competence enhancing and competence destroying, companies that bet on the wrong design often struggle, while companies that bet on the eventual dominant design usually prosper. Emergence of a dominant design leads to a focus on incremental change, lowering costs and making small but steady improvements in the dominant design. This focus continues until the next technological discontinuity occurs. LO3

Managing innovation

To successfully manage innovation streams, companies must manage the sources of innovation and learn to manage innovation during both discontinuous and incremental change. Since innovation begins with creativity, companies can manage the sources of innovation by supporting a creative work environment in which creative thoughts and ideas are welcomed, valued and encouraged. Creative work environments provide challenging work; offer organisational, supervisory and work group encouragement; allow significant freedom; and remove organisational impediments to creativity. Companies that succeed in periods of discontinuous change typically follow an experiential approach to innovation. The experiential approach assumes that intuition, flexible options and hands-on experience can reduce uncertainty and accelerate learning and understanding. A compression approach to innovation works best during periods of incremental change. This approach assumes that innovation can be planned using a series of steps and that compressing the time it takes to complete those steps can speed up innovation.

REVIEW KEY TERMS Compression approach to innovation An approach to innovation that assumes that incremental innovation can be planned using a series of steps and that compressing those steps can speed innovation.

Generational change Change based on incremental improvements to a dominant technological design such that the improved technology is fully backward compatible with the older technology.

Organisational decline A large decrease in organisational performance that occurs when companies don’t anticipate, recognise, neutralise or adapt to the internal or external pressures that threaten their survival.

Change forces Forces that produce differences in the form, quality or condition of an organisation over time.

Change intervention

Refreezing Supporting and reinforcing new changes so that they ‘stick’.

Compression approach to innovation: managing innovation during incremental change

Environment

• Highly uncertain • Discontinuous change – technological substitution and design competition

• Certain • Incremental change – established technology (i.e. dominant design)

Goals

• Speed • Significant improvements in performance • Establishment of new dominant design

• Speed • Lower costs • Incremental improvements in performance of dominant design

Approach

• Build something new, different and substantially better

• Compress time and steps needed to bring about small improvements

Steps

• • • • •

• Planning • Supplier involvement • Shortening the time of individual steps • Overlapping steps • Multifunctional teams

Coercion Using formal power and authority to force others to change.

Results-driven change Change created quickly by focusing on the measurement and improvement of results.

General Electric workout A three-day meeting in which managers and employees from different levels and parts of an organisation quickly generate and act on solutions to specific business problems.

Organisational development

Forces that support the existing state of conditions in organisations.

Resistance to change

Change agent

Opposition to change resulting from self-interest, misunderstanding and distrust, or a general intolerance for change.

Experiential approach to innovation: managing innovation during discontinuous change

The process used to get workers and managers to change their behaviour and work practices.

A philosophy and collection of planned change interventions designed to improve an organisation’s long-term health and performance.

Resistance forces

LEARNING OUTCOMES

The person formally in charge of guiding a change effort.

Unfreezing Getting the people affected by change to believe that change is needed.

LO4

Organisational decline: the risk of not changing

The five-stage process of organisational decline begins when organisations don’t recognise the need for change. In the blinded stage, managers fail to recognise the changes that threaten their organisation’s survival. In the inaction stage, management recognises the need to change, but doesn’t act, hoping that the problems will correct themselves. In the faulty action stage, management focuses on cost cutting and efficiency rather than facing up to the fundamental changes needed to ensure survival. In the crisis stage, failure is likely unless fundamental reorganisation occurs. Finally, in the dissolution stage, the company is dissolved through bankruptcy proceedings, by selling assets to pay creditors or through the closing of stores, offices and facilities. If companies recognise the need to change early enough, however, dissolution may be avoided. LO5

INNOVATION AND CHANGE

Design iterations Testing Milestones Multifunctional teams Powerful leaders

Managing change

The basic change process is unfreezing, change and refreezing. Resistance to change, which stems from self-interest, misunderstanding and distrust and a general intolerance for change, can be managed through education and communication, participation, negotiation, top management support and coercion. Knowing what not to do is as important as knowing what to do to achieve successful change. Managers should avoid these errors when leading change: not establishing urgency, not creating a guiding coalition, not having a vision, under-communicating the vision, not removing obstacles to the vision, not creating short-term wins, declaring victory too soon and not anchoring changes in the corporation’s culture. Finally, managers can use a number of change techniques. Results-driven change and the GE workout reduce resistance to change by getting change efforts off to a fast start. Organisational development is a collection of planned change interventions (large system, small group, person-focused), guided by a change agent, that are designed to improve an organisation’s long-term health and performance.

REVIEW LEARNING OUTCOMES Different kinds of organisational development interventions Large system interventions Sociotechnical systems

An intervention designed to improve how well employees use and adjust to the work technology used in an organisation.

Survey feedback

An intervention that uses surveys to collect information from the members, reports the results of that survey to the members, and then uses those results to develop action plans for improvement.

Team building

An intervention designed to increase the cohesion and cooperation of work group members.

Unit goal setting

An intervention designed to help a work group establish short-and long-term goals.

Small group interventions

Person-focused interventions Counselling/ coaching

An intervention designed so that a formal helper or coach listens to managers or employees and advises them on how to deal with work or interpersonal problems.

Training

An intervention designed to provide individuals with the knowledge, skills or attitudes they need to become more effective at their jobs.

Source: W. J. Rothwell, R. Sullivan, & G. M. McLean, Practicing organizational development: a guide for consultants (San Diego: Pfeiffer & Co., 1995).

REVIEW KEY TERMS Globalisation

Customs classification

The accelerating, deepening and broadening process of integration and connectedness affecting the movement of goods, services, communications and ideas between different countries.

A classification assigned to imported products by government officials that affects the size of the tariff and imposition of import quotas.

Global business

A worldwide trade agreement that reduced and eliminated tariffs, limited government subsidies and established protections for intellectual property.

The buying and selling of goods and services by people from different countries.

Multinational corporation A corporation that owns businesses in two or more countries.

General Agreement on Tariffs and Trade (GATT)

World Trade Organization (WTO)

LEARNING OUTCOMES LO1

Global business, trade rules and trade agreements

Multinational corporations are corporations that own businesses in two or more countries. In 1970, more than half of the world’s 7000 multinational corporations had their headquarters in just two countries: the United States and the United Kingdom. Today, there are there are over 100000 multinational corporations with the majority of them having their headquarters in a wide range of countries – including Germany, Italy, Canada, Japan, China, Australia and South Africa. So, multinational companies can be found by the thousands all over the world! Direct foreign investment in the Asia–Pacific region is just part of the story. Companies from the region have also made large direct foreign investments in countries throughout the world. Globally, four of the largest foreign investors are the US, Japan, China and the UK. Overall, the combined direct foreign investment of these four nations exceeds US$727 billion a year to do business in other countries.

A method of investment in which a company builds a new business or buys an existing business in a foreign country.

As the successor to GATT, the only international organisation dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.

Trade barriers

Regional trading zones

$700

Government-imposed regulations that increase the cost and restrict the number of imported goods.

Areas in which tariff and nontariff barriers on trade between countries are reduced or eliminated.

$600

Protectionism

Association of Southeast Asian Nations (ASEAN)

$300

Direct foreign investment

A government’s use of trade barriers to shield domestic companies and their workers from foreign competition.

Tariff A direct tax on imported goods.

Non-tariff barriers Non-tax methods of increasing the cost or reducing the volume of imported goods.

Quota A limit on the number or volume of imported products.

Voluntary export restraints Voluntarily imposed limits on the number or volume of products exported to a particular country.

Government import standard A standard ostensibly established to protect the health and safety of citizens but, in reality, often used to restrict imports.

Subsidies Government loans, grants and tax deferments given to domestic companies to protect them from foreign competition.

A regional trade agreement between Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Asia—Pacific Economic Cooperation (APEC) A regional trade agreement between Australia, Canada, Chile, the People’s Republic of China, Hong Kong, Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, the United States and all members of ASEAN, except Cambodia, Lao PDR and Myanmar.

Maastricht Treaty of Europe A regional trade agreement between most European countries.

North American Free Trade Agreement (NAFTA) A regional trade agreement between the United States, Canada and Mexico.

GLOBAL MANAGEMENT

Foreign Investment in Australia, 2017 ($ Billion) $1 000 $900

$897

$800

$500

$481

$400 $305 $219 $200 $117

$82

$100

$65

$0 United States United of America Kingdom

Belgium

Japan

Singapore

China

Hong Kong (SAR of China)

Source: Adapted from Department of Foreign Affairs and Trade website (www.dfat.gov.au)

Historically, tariffs and non-tariff trade barriers, such as quotas, voluntary export restraints, government import standards, government subsidies and customs classifications, have made buying foreign goods much harder or more expensive than buying domestically produced products. In recent years, however, worldwide trade agreements, such as GATT, along with regional trading agreements, like the Maastricht Treaty of Europe, United States-Mexico-Canada Agreement (USMCA), CAFTA-DR, Mercosur, SACN, ASEAN and APEC, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) including Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam have substantially reduced tariff and non-tariff barriers to international trade. Companies have responded by investing in growing markets in Asia, Eastern Europe and Latin America. Consumers have responded by purchasing products based on value, rather than geography. LO2

Consistency or adaptation?

Global business requires a balance between global consistency and local adaptation. Global consistency means using the same rules, guidelines, policies and procedures in each location. Managers at company headquarters like global consistency because it simplifies decisions. Local adaptation means adapting standard procedures to differences in markets. Local managers prefer a policy of local adaptation because it gives them more control. Not all businesses need the same combinations of global consistency and local adaptation. Some thrive by emphasising global consistency and ignoring local adaptation. Others succeed by ignoring global consistency and emphasising local adaptation.

REVIEW KEY TERMS bilateral trading agreements

LEARNING OUTCOMES

Strategic alliance

specific, formal agreements between countries

Trans-Pacific Partnership

An agreement in which companies combine key resources, costs, risk, technology and people.

Joint venture

currently being negotiated between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam

Global consistency When a multinational company has offices, manufacturing plants and distribution facilities in different countries and runs them all using the same rules, guidelines, policies and procedures.

Local adaptation

A strategic alliance in which two existing companies collaborate to form a third, independent company.

LO3

Forms of global business

The phase model of globalisation says that as companies move from a domestic to a global orientation, they use these organisational forms in sequence: exporting, cooperative contracts (licensing and franchising), strategic alliances and wholly owned affiliates. Yet not all companies follow the phase model. For example, global new ventures are global from their inception.

Wholly owned affiliates

Simpler

Foreign offices, facilities and manufacturing plants that are 100 per cent owned by the parent company.

Exporting

More complex

Cooperative contracts

Strategic alliances

Global new ventures New companies that are founded with an active global strategy and have sales, employees and financing in different countries.

Wholly owned affiliate

Global new ventures

Finding the best business climate

When a multinational company modifies its rules, guidelines, policies and procedures to adapt to differences in foreign customers, governments and regulatory agencies.

Purchasing power

LO4

A comparison of the relative cost of a standard set of goods and services in different countries.

Exporting

The risk of major changes in political regimes that can result from war, revolution, death of political leaders, social unrest or other influential events.

The first step in deciding where to take your company global is finding an attractive business climate. Be sure to look for a growing market where consumers have strong purchasing power and foreign competitors are weak. When locating an office or manufacturing facility, consider both qualitative and quantitative factors. In assessing political risk, be sure to examine political uncertainty and policy uncertainty. If the location you choose has considerable political risk, you can avoid it, try to control the risk or use a cooperation strategy.

Selling domestically produced products to customers in foreign countries.

Cooperative contract An agreement in which a foreign business owner pays a company a fee for the right to conduct that business in his or her country.

Licensing An agreement in which a domestic company, the licensor, receives royalty payments for allowing another company, the licensee, to produce the licensor’s product, sell its service or use its brand name in a specified foreign market.

Franchise A collection of networked companies in which the manufacturer or marketer of a product or service, the franchisor, licenses the entire business to another person or organisation, the franchisee.

Political uncertainty

Policy uncertainty The risk associated with changes in laws and government policies that directly affect the way foreign companies conduct business.

National culture The set of shared values and beliefs that affects the perceptions, decisions and behaviour of the people from a particular country.

Expatriate Someone who lives and works outside his or her native country.

LO5

Becoming aware of cultural differences

National culture is the set of shared values and beliefs that affects the perceptions, decisions and behaviour of the people from a particular country. The first step in dealing with culture is to recognise meaningful differences, such as power distance, individualism, masculinity, uncertainty avoidance and short-term/long-term orientation. Cultural differences should be carefully interpreted because they are based on averages, not individuals. Adapting managerial practices to cultural differences is difficult because policies and practices can be perceived differently in different cultures. Another difficulty is that cultural values may be changing in many parts of the world. Consequently, when companies try to adapt management practices to cultural differences, they need to be sure that they are not using outdated assumptions about a country’s culture. LO6

Preparing for an international assignment

Many expatriates return prematurely from international assignments because of poor performance. However, this is much less likely to happen if employees receive language and cross-cultural training, such as documentary training, cultural simulations or field experiences, before going on assignment. Adjustment of expatriates’ spouses and families, which is the most important determinant of success in international assignments, can be improved through adaptability screening and intercultural training.

GLOBAL MANAGEMENT

REVIEW KEY TERMS Organisational structure

Authority

The vertical and horizontal configuration of departments, authority and jobs within a company.

The right to give commands, take action and make decisions to achieve organisational objectives.

Organisational process

Chain of command

The collection of activities that transform inputs into outputs that customers value.

The vertical line of authority that clarifies who reports to whom throughout the organisation.

Departmentalisation

Unity of command

Subdividing work and workers into separate organisational units responsible for completing particular tasks.

A management principle that workers should report to just one boss.

Functional departmentalisation

The right to command immediate subordinates in the chain of command.

Organising work and workers into separate units responsible for particular business functions or areas of expertise.

Product departmentalisation

Line authority

Staff authority The right to advise, but not command, others who are not subordinates in the chain of command.

Organising work and workers into separate units responsible for producing particular products or services.

Line function

Customer departmentalisation

Staff function

Organising work and workers into separate units responsible for particular kinds of customers.

Geographic departmentalisation Organising work and workers into separate units responsible for doing business in particular geographic areas.

Matrix departmentalisation A hybrid organisational structure in which two or more forms of departmentalisation, most often product and functional, are used together.

Simple matrix A form of matrix departmentalisation in which managers in different parts of the matrix negotiate conflicts and resources.

Complex matrix A form of matrix departmentalisation in which managers in different parts of the matrix report to matrix managers, who help them sort out conflicts and problems.

An activity that contributes directly to creating or selling the company’s products. An activity that does not contribute directly to creating or selling the company’s products, but instead supports line activities.

Delegation of authority The assignment of direct authority and responsibility to a subordinate to complete tasks for which the manager is normally responsible.

Centralisation of authority The location of most authority at the upper levels of the organisation.

Decentralisation The location of a significant amount of authority in the lower levels of the organisation.

Standardisation Solving problems by consistently applying the same rules, procedures and processes.

Job design The number, kind and variety of tasks that individual workers perform in doing their jobs.

LEARNING OUTCOMES LO1

There are five traditional departmental structures: functional, product, customer, geographic and matrix structures. Functional departmentalisation is based on the different business functions or expertise used to run a business. Product departmentalisation is organised according to the different products or services a company sells. Customer departmentalisation focuses its divisions on the different kinds of customers a company has. Geographic departmentalisation is based on the different geographic areas or markets in which the organisation operates. Matrix departmentalisation is a hybrid form that combines two or more forms of departmentalisation, the most common being the product and functional forms. There is no ‘best’ departmental structure. Each structure has advantages and disadvantages. LO2

Organisational authority

Organisational authority is determined by the chain of command, line versus staff authority, delegation and the degree of centralisation in a company. The chain of command vertically connects every job in the company to higher levels of management and makes clear who reports to whom. Managers have line authority to command employees below them in the chain of command, but have only staff, or advisory, authority over employees not below them in the chain of command. Managers delegate authority by transferring to subordinates the authority and responsibility needed to do a task; in exchange, subordinates become accountable for task completion. In centralised companies, most authority to make decisions lies with managers in the upper levels of the company. In decentralised companies, much of the authority is delegated to the workers closest to problems, who can then make the decisions necessary for solving the problems themselves. LO3

Job design

Companies use specialised jobs because they are economical and easy to learn and don’t require highly paid workers. However, specialised jobs aren’t motivating or particularly satisfying for employees. Companies have used job rotation, job enlargement, job enrichment and the job characteristics model to make specialised jobs more interesting and motivating. The goal of the job characteristics model is to make jobs intrinsically motivating. For this to happen, jobs must be strong on five core job characteristics (skill variety, task identity, task significance, autonomy and feedback), and workers must experience three critical psychological states (knowledge of results, responsibility for work outcomes, and meaningful work). If jobs aren’t internally motivating, they can be redesigned by combining tasks, forming natural work units, establishing client relationships, vertical loading and opening feedback channels. LO4

DESIGNING ADAPTIVE ORGANISATIONS

Departmentalisation

Pooled interdependence

Finished product

Sequential interdependence Finished product

Reciprocal interdependence

Finished product

Intra-organisational processes

Today, companies are using reengineering and empowerment to change their intra-

REVIEW KEY TERMS Job specialisation A job made up of a small part of a larger task or process.

Mechanistic organisation

Periodically moving workers from one specialised job to another to give them more variety and the opportunity to use different skills.

An organisation characterised by specialised jobs and responsibilities, precisely defined, unchanging roles, and a rigid chain of command based on centralised authority and vertical communication.

Job enlargement

Organic organisation

Job rotation

Increasing the number of different tasks that a worker performs within one particular job.

Job enrichment Increasing the number of tasks in a particular job and giving workers the authority and control to make meaningful decisions about their work.

Job characteristics model (JCM) An approach to job redesign that seeks to design jobs in ways that motivate workers and lead to positive work outcomes.

Internal motivation Motivation that comes from the job itself rather than from outside rewards.

Skill variety The number of different activities performed in a job.

Task identity The degree to which a job, from beginning to end, requires the completion of a whole and identifiable piece of work.

Task significance The degree to which a job is perceived to have a substantial impact on others inside or outside the organisation.

Autonomy The degree to which a job gives workers the discretion, freedom and independence to decide how and when to do their tasks..

Feedback The amount of information the job gives workers about their work performance.

An organisation characterised by broadly defined jobs and responsibility, loosely defined, frequently changing roles, and decentralised authority and horizontal communication based on task knowledge.

Intra-organisational process The collection of activities that take place within an organisation to transform inputs into outputs that customers value.

Reengineering Fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical measures of performance, such as cost, quality, service and speed.

LEARNING OUTCOMES organisational processes. Reengineering changes an organisation’s orientation from vertical to horizontal, and its work processes by decreasing sequential and pooled interdependence and by increasing reciprocal interdependence. Reengineering promises dramatic increases in productivity and customer satisfaction, but it has been criticised as simply an excuse to cut costs and lay off workers. Empowering workers means taking decision-making authority and responsibility from managers and giving it to workers. Empowered workers develop feelings of competence and self-determination and believe that their work has meaning and impact. LO5

Inter-organisational processes

Organisations are using modular and virtual organisations to change inter-organisational processes. Because modular organisations outsource all non-core activities to other businesses, they are less expensive to run than traditional companies. However, modular organisations require extremely close relationships with suppliers, may result in a loss of control and could create new competitors if the wrong business activities are outsourced. Virtual organisations participate in a network in which they share skills, costs, capabilities, markets Product Today, Information design I’ll have ... technology and customers. Virtual organisations can reduce Purchasing costs, respond quickly and, if they can successfully coordinate their efforts, produce outstanding Manufacturing Advertising products and service.

Task interdependence The extent to which collective action is required to complete an entire piece of work.

Pooled interdependence Work completed by having each job or department independently contribute to the whole.

Sequential interdependence Work completed in succession, with one group or job output becoming the input for the next group or job.

Reciprocal interdependence Work completed by different jobs or groups working together in a back-and-forth manner.

Empowering workers Permanently passing decision-making authority and responsibility from managers to workers by giving them the information and resources they need to make and carry out good decisions.

Empowerment

Modular organisation

Feelings of intrinsic motivation, in which workers perceive their work to have impact and meaning and perceive themselves to be competent and capable of self-determination.

An organisation that outsources non-core business activities to outside companies, suppliers, specialists or consultants.

Inter-organisational process

An organisation that is part of a network in which many companies share skills, costs, capabilities, markets and customers to collectively solve customer problems or

A collection of activities that take place among companies to transform inputs into outputs that customers value.

Virtual organisation

provide specific products or services.

REVIEW KEY TERMS Work team

Project team

A small number of people with complementary skills who hold themselves mutually accountable for pursuing a common purpose, achieving performance goals and improving interdependent work processes.

A team created to complete specific, one-time projects or tasks within a limited time.

Cross-training Training team members to do all or most of the jobs performed by the other team members.

The extent to which team members are attracted to a team and motivated to remain in it.

Social loafing

Forming

Behaviour in which team members withhold their efforts and fail to perform their share of the work.

Traditional work group A group composed of two or more people who work together to achieve a shared goal.

Employee involvement team Team that provides advice or makes suggestions to management concerning specific issues.

Semi-autonomous work group A group that has the authority to make decisions and solve problems related to the major tasks of producing a product or service.

Self-managing team A team that manages and controls all of the major tasks of producing a product or service.

Self-designing team A team that has the characteristics of self-managing teams but also controls team design, work tasks and team membership.

Norm An informally agreed-on standard that regulates team behaviour.

Cohesiveness

The first stage of team development, in which team members meet each other, form initial impressions and begin to establish team norms.

Storming The second stage of development, characterised by conflict and disagreement, in which team members disagree over what the team should do and how it should do it. The third stage of team development, in which team members begin to settle into their roles, group cohesion grows and positive team norms develop.

In many industries, teams are growing in importance because they help organisations respond to specific problems and challenges. Teams have been shown to increase customer satisfaction (specific customer teams), product and service quality (direct responsibility) and employee job satisfaction (cross-training, unique opportunities and leadership responsibilities). Although teams can produce significant improvements in these areas, using teams does not guarantee these positive outcomes. Teams and teamwork have the disadvantages of initially high turnover and social loafing (especially in large groups). Teams also share many of the advantages (multiple perspectives, generation of more alternatives and more commitment) and disadvantages (groupthink, time, poorly run meetings, domination by a few team members and weak accountability) of group decision making. Finally, teams should be used for a clear purpose, when the work requires that people work together, when rewards can be provided for both teamwork and team performance, when ample resources can be provided and when teams can be given clear authority over their work. ADVANTAGES

DISADVANTAGES

Customer satisfaction

Initially high employee turnover

Product and service quality

Social loafing

Speed and efficiency in product development

Disadvantages of group decision making (groupthink, inefficient meetings, domination by a minority, lack of accountability)

Employee job satisfaction Better decision making and problem solving (multiple perspectives, more alternative solutions, increased commitment to decisions)

Advantages and disadvantages of teams

Kinds of teams

LO2

The fourth and final stage of team development, in which performance improves because the team has matured into an effective, fully functioning team.

Companies use different kinds of teams to make themselves more competitive. Autonomy is the key dimension that makes teams different. Traditional work groups (which execute tasks) and employee involvement groups (which make suggestions) have the lowest levels of autonomy. Semi-autonomous work groups (which control major, direct tasks) have more autonomy, while self-managing teams (which control all direct tasks) and self-designing teams (which control membership and how tasks are done) have the highest levels of autonomy. Cross-functional, virtual and project teams are common, but are not easily categorised in terms of autonomy. Cross-functional teams combine employees from different functional areas to help teams attack problems from multiple perspectives and generate more ideas and solutions. Virtual teams use telecommunications and information technologies to bring co-workers ‘together’, regardless of physical location or time zone. Virtual teams reduce travel and work time, but communication may suffer since team members don’t work face-to-face. Finally, project teams are used for specific, one-time projects or tasks that must be completed within a limited time. Project teams reduce communication barriers and promote flexibility; teams and team members are reassigned to their departments or new projects as old projects are completed.

Structural accommodation The ability to change organisational structures, policies and practices in order to meet stretch goals.

Bureaucratic immunity The ability to make changes without first getting approval from managers or other parts of an organisation.

Individualism— collectivism The degree to which a person believes that people should be self-sufficient and that loyalty to one’s self is more important than loyalty to team or company.

MANAGING TEAMS

The good and bad of using teams

Performing

A team composed of employees from different functional areas of the organisation. A team composed of geographically and/or organisationally dispersed co-workers who use telecommunication and information technologies to accomplish an organisational task.

LO1

Norming

Cross-functional team

Virtual team

LEARNING OUTCOMES

LO3

Work team characteristics

The most important characteristics of work teams are team norms, cohesiveness, size, conflict and development. Norms let team members know what is expected of them and can influence team behaviour in positive and negative ways. Positive team norms are associated with organisational commitment, trust and job satisfaction. Team cohesiveness helps teams retain members, promotes cooperative behaviour, increases

REVIEW KEY TERMS Team level

Skill-based pay

The average level of ability, experience, personality or any other factor on a team.

Compensation system that pays employees for learning additional skills or knowledge.

Team diversity

Gainsharing

The variances or differences in ability, experience, personality or any other factor on a team.

A compensation system in which companies share the financial value of performance gains, such as productivity, cost savings or quality, with their workers.

Interpersonal skills Skills, such as listening, communicating, questioning and providing feedback, that enable people to have effective working relationships with others.

LEARNING OUTCOMES motivation and facilitates team performance. Attending team meetings and activities, creating opportunities to work together and engaging in non-work activities can increase cohesiveness. Team size has a curvilinear relationship with team performance: teams that are very small or very large do not perform as well as moderate-sized teams of six to nine members. Teams of this size are cohesive and small enough for team members to get to know each other and contribute in a meaningful way, but are large enough to take advantage of team members’ diverse skills, knowledge and perspectives. Conflict and disagreement are inevitable in most teams. The key to dealing with team conflict is to maximise cognitive conflict, which focuses on issue-related differences, and minimise affective conflict, the emotional reactions that occur when disagreements become personal rather than professional. As teams develop and grow, they pass through four stages of development: forming, storming, norming and performing. After a period of time, however, if a team is not managed well, its performance may decline as the team regresses through the stages of de-norming, de-storming and de-forming.

1 Work with more, rather than less, information 2 Develop multiple alternatives to enrich debate 3 Establish common goals 4 Inject humor into the workplace 5 Maintain a balance of power 6 Resolve issues without forcing a consensus

How teams can have a good fight Source: K. M. Eisenhardt, J. L. Kahwajy, & L. J. Bourgeois III, ‘How management teams can have a good fight’, Harvard Business Review, 75, (4) July–August, 1997: 77–85.

LO4

MANAGING TEAMS

Enhancing work team effectiveness

Companies can make teams more effective by setting team goals and managing how team members are selected, trained and compensated. Team goals provide a clear focus and purpose, reduce the incidence of social loafing and lead to higher team performance 93 per cent of the time. Extremely difficult stretch goals can be used to motivate teams as long as teams have autonomy, control over resources, structural accommodation and bureaucratic immunity. Not everyone is suited for teamwork. When selecting team members, companies should select people who have a preference for teamwork (individualism–collectivism) and should consider team level (average ability on a team) and team diversity (different abilities on a team). Organisations that successfully use teams provide thousands of hours of training to make sure that teams work. The most common types of team training are for interpersonal skills, decision-making and problem-solving skills, conflict resolution, technical training to help team members learn multiple jobs (i.e. cross-training) and training for team leaders. Employees can be compensated for team participation and accomplishments in three ways: skill-based pay, gainsharing and nonfinancial rewards.

REVIEW KEY TERMS Human resource management (HRM)

Specific ability test (aptitude test)

The process of finding, developing and keeping the right people to form a qualified workforce.

A test that measures the extent to which an applicant possesses the particular kind of ability needed to do a job well.

Recruiting

Cognitive ability test

The process of developing a pool of qualified job applicants.

A test that measures the extent to which applicants have abilities in perceptual speed, verbal comprehension, numerical aptitude, general reasoning and spatial aptitude.

Job analysis A purposeful, systematic process for collecting information on the important work-related aspects of a job.

Job description

Psychological (psychometric) test

A written description of the basic tasks, duties and responsibilities required of an employee holding a particular job.

A test that measures the psychological make-up of a candidate and their readiness to undertake the job.

Work sample test

Job specification

A test that requires the applicant to perform tasks that are actually done on the job.

A written summary of the qualifications needed to successfully perform a particular job.

Internal recruiting The process of developing a pool of qualified job applicants from people who already work in the company.

External recruiting The process of developing a pool of qualified job applicants from outside the company.

Selection

A series of managerial simulations, graded by trained observers, that are used to determine an applicant’s capability for managerial work.

Interview A selection tool in which a company representative asks a job applicant job-related questions to determine whether they are qualified for the job.

Unstructured interview

Validation

Structured interview

Employment reference A source such as a previous employer or co-worker who can provide job-related information about a job candidate.

Background check A procedure used to verify the truthfulness and accuracy of information that an applicant has provided about themself, and to uncover negative, jobrelated background information not provided by the applicant.

LO1

Employment legislation

Human resource management is subject to state and federal employment laws and review by government agencies. All employers are required to create a workplace that is free from discrimination and harassment. These responsibilities are set out in a range of state and federal laws including various state occupational health and safety Acts, the Equal Opportunity in the Workplace Act, the Public Service Act and the Fair Work Act. The Australian Human Rights Commission is responsible for the implementation of federal human rights and antidiscrimination law. LO2

Recruiting

Recruiting is the process of finding qualified job applicants. The first step is to conduct a job analysis, which is used to write a job description of basic tasks, duties and responsibilities and to write job specifications indicating the knowledge, skills and abilities needed to perform the job. Whereas internal recruiting involves finding qualified job applicants from inside the company, external recruiting involves finding qualified job applicants from outside the company.

Assessment centre

The process of gathering information about job applicants to decide who should be offered a job. The process of determining how well a selection test or procedure predicts future job performance. The better or more accurate the prediction of future job performance,

LEARNING OUTCOMES

HR decisions • Recruiting • Selection • Training • Performance • Appraisal • Separation

HR Subsystems • Job description

An interview in which the interviewer is free to ask the applicant anything they want. A type of interview in which each applicant is asked the same set of standardised questions, usually including situational, behavioural, background and job-knowledge questions.

Training Developing the skills, experience and knowledge employees need to perform their jobs or improve their performance.

Needs assessment The process of identifying and prioritising the learning needs of employees.

Performance appraisal The process of assessing how well employees are doing their jobs.

• Job specification

Job analysis

Importance of job analysis to human resource management LO3

Selection

Selection is the process of gathering information about job applicants to decide who should be offered a job. Accurate selection procedures are valid, are legally defendable and improve organisational performance. Application forms and résumés are the most common selection devices. Managers should check references and conduct background checks. Selection tests generally do the best job of predicting applicants’ future job performance. The three kinds of job interviews are unstructured, structured and semi-structured interviews. LO4

Training

Training is used to give employees the job-specific skills, experience and knowledge they need to do their jobs or improve their job performance. To make sure training dollars are well spent, companies need to

REVIEW KEY TERMS Objective performance measures

Employee stock ownership plan (ESOP)

Measures of job performance that are easily and directly counted or quantified.

A compensation system that awards employees shares of company stock in addition to their regular compensation.

Behavioural observation scale (BOS)

A compensation system that gives employees the right to purchase shares of stock at a set price, even if the value of the stock increases above that price.

Rater training

Wrongful dismissal

Training performance-appraisal raters in how to avoid rating errors and increase rating accuracy.

A legal doctrine that requires employers to have a job-related reason to terminate employees.

360-degree feedback

The planned elimination of jobs in a company.

Compensation The financial and non-financial rewards that organisations give employees in exchange for their work.

Employee separation The voluntary or involuntary loss of an employee.

Job evaluation A process that determines the worth of each job in a company by evaluating the market value of the knowledge, skills and requirements needed to perform it.

Piecework A compensation system in which employees are paid a set rate for each item they produce.

Commission A compensation system in which employees earn a percentage of each sale they make.

Profit sharing A compensation system in which a company pays a percentage of its profits to employees in addition to their regular compensation.

determine specific training needs, select appropriate training methods and then evaluate the training.

Training objectives

Stock options

Rating scales that indicate the frequency with which workers perform specific behaviours that are representative of the job dimensions critical to successful job performance.

A performance appraisal process in which feedback is obtained from the boss, subordinates, peers and coworkers, and the employees themselves.

LEARNING OUTCOMES

Downsizing

Outplacement services Employment-counselling services offered to employees who are losing their jobs because of downsizing.

Early retirement incentive programs (ERIPs) Programs that offer financial benefits to employees to encourage them to retire early.

Phased retirement Employees transition to retirement by working reduced hours over a period of time before completely retiring.

Employee turnover The loss of employees who voluntarily choose to leave the company.

Impart information and knowledge

LO5

Practise, learn or change behaviours

Performance appraisal

The keys to successful performance appraisal are accurately measuring job performance and effectively sharing performance feedback with employees. Organisations should develop good performance appraisal scales, train raters in how to accurately evaluate performance, and impress upon managers the value of providing feedback in a clear, consistent and fair manner, setting goals and monitoring progress toward those goals. LO6

Compensation and remuneration

Compensation includes both the financial and the non-financial rewards that organisations give employees in exchange for their work. There are three basic kinds of compensation decisions: pay level, pay variability and pay structure. Employee separation is the loss of an employee, which can occur voluntarily or involuntarily. Companies use downsizing and early retirement incentive programs to reduce the number of employees and lower costs, but companies generally try to keep the rate of employee turnover low to reduce costs associated with finding and developing new employees. Pay level

Functional turnover The loss of poor-performing employees who voluntarily choose to leave a company.

Dysfunctional turnover The loss of high-performing employees who voluntarily choose to leave a company.

Develop analytic and problem-solving skills

• Job evaluation

Pay variability • Piecework • Commission • Profit sharing • Employee stock ownership plans • Stock options

Pay structure

• Hierarchical • Compressed

Diversity A variety of demographic, cultural and personal differences among an organisation’s employees and customers.

Kinds of compensation decisions

REVIEW KEY TERMS Direct age discrimination

Indirect sex discrimination

When a person is treated less favourably because of their age than a person of another age group would be treated in the same or similar circ*mstances.

A condition, requirement or practice imposed which appears to treat everyone the same, but disadvantages a person because of their gender, marital status, pregnancy or potential to become pregnant.

Indirect age discrimination When there is an unreasonable requirement or condition or practice that is the same for everyone but disadvantages a person because of their age.

Direct disability discrimination When a person with a disability is treated less favourably than someone without a disability would be treated in the same or similar circ*mstances.

Indirect disability discrimination When there is an unreasonable requirement, condition or practice that is the same for everyone but disadvantages a person because of their disability or has an adverse effect on a particular group of people.

Direct racial discrimination Treating someone less favourably because of their race, colour, descent, national origin or ethnic origin than someone of a different ‘race’ would be treated in a similar situation.

Indirect racial discrimination

Sexual harassment A form of discrimination in which unwelcome sexual advances, requests for sexual favours, or other verbal or physical conduct of a sexual nature occurs while performing one’s job.

Glass ceiling The invisible barrier that prevents women and minorities from advancing to the top jobs in organisations.

Surface-level diversity Differences such as age, sex, race/ethnicity and physical disabilities that are observable, typically unchangeable and easy to measure.

Deep-level diversity Differences such as personality and attitudes that are communicated through verbal and non-verbal behaviours and are learned only through extended interaction with others.

Social integration The degree to which group members are psychologically attracted to working with each other to accomplish a common objective.

Where everyone has to satisfy the same criterion but the effect is that a higher proportion of people of one ‘race’ cannot satisfy it.

Disposition

Direct sex discrimination

The relatively stable set of behaviour, attitudes and emotions displayed over time that makes people different from each other.

Treating someone less favourably because of gender, marital status, pregnancy or the potential to become pregnant.

The tendency to respond to situations and events in a predetermined manner.

Personality

Extraversion The degree to which someone is active, assertive, gregarious, sociable, talkative and energised by others.

LEARNING OUTCOMES LO7

Anti-discrimination legislation and diversity

Diversity exists in organisations when there is a variety of demographic, cultural and personal differences among the people who work there and the customers who do business there. Diversity is broad in focus, voluntary, and more positive in that it encourages companies to value all kinds of differences. Diversity also makes good business sense in terms of cost savings (reducing turnover and decreasing absenteeism), attracting and retaining talent, and driving business growth (improving marketplace understanding and promoting higher-quality problemsolving). LO8

Surface-level diversity

Age, sex, race/ethnicity and physical and mental disabilities are dimensions of surface-level diversity. Because those dimensions are (usually) easily observed, managers and workers tend to rely on them to form initial impressions and stereotypes, which can lead to discrimination in the workplace. To reduce discrimination, companies can train managers to make hiring and promotion decisions on the basis of specific criteria and make sure that everyone has equal access to training, mentors, reasonable work accommodations and assistivetechnology. LO9

Deep-level diversity

Deep-level diversity consists of dispositional and personality differences that can be learned only through extended interaction with others. Research conducted in different cultures, settings and languages indicates that there are five basic dimensions of personality: extraversion, emotional stability, agreeableness, conscientiousness and openness to experience. Of these, conscientiousness is perhaps the most important because conscientious workers tend to be better performers on virtually any job. Why is diversity important? This is what one leading Australian private hospital, the Peter MacCallum Institute, says: ‘Diversity has been a prominent feature of the Australian population for many decades. Australians [are] coming from more than 200 different ancestries and speaking more than 300 different languages at home. Australia has effectively managed this diversity with proactive and positive multicultural policies that have fostered social inclusion and embraced cultural, linguistic and faith diversity’. LO10

Managing diversity

The three paradigms for managing diversity are set out in the table below. What principles can companies use when managing diversity? Follow and enforce federal and state laws regarding equal employment opportunity. Treat group differences as important, but not special. Find the common ground. Tailor opportunities to individuals, not groups. Reexamine, but maintain, high standards. Solicit negative as well as positive feedback. Set high but realistic goals.

REVIEW KEY TERMS Emotional stability

Organisational plurality

The degree to which someone is not angry, depressed, anxious, emotional, insecure and excitable.

A work environment where (1) all members are empowered to contribute in a way that maximises the benefits to the organisation, customers and themselves, and (2) the individuality of each member is respected by not segmenting or polarising people on the basis of their membership in a particular group.

Agreeableness The degree to which someone is cooperative, polite, flexible, forgiving, good-natured, tolerant and trusting.

Conscientiousness The degree to which someone is organised, hard-working, responsible, persevering, thorough and achievement oriented.

Openness to experience The degree to which someone is curious, broadminded and open to new ideas, things and experiences; is spontaneous; and has a high tolerance for ambiguity.

LEARNING OUTCOMES DIVERSITY PARADIGM

FOCUS

SUCCESS MEASURED BY

BENEFITS

LIMITATIONS

Discrimination and fairness

• Equal opportunity • Fair treatment • Recruitment of minorities • Strict compliance with laws

• Recruitment, promotion and retention goals for underrepresented group

• Fairer treatment • Increased demographic diversity

• Focus on surfacelevel diversity

Access and legitimacy

• Acceptance and celebration of differences

• Diversity in company matches diversity of primary stakeholders

• Establishes a clear business reason for diversity

• Focus on surfacelevel diversity

Learning and effectiveness

• Integrating deep-level differences into organisation

• Valuing people on the basis of individual knowledge, skills and abilities

• Values common ground • Distinction between individual and group differences • Less conflict, backlash and divisiveness • Bringing different talents and perspectives together

• Focus on deep-level diversity is more difficult to measure and quantify

Paradigms for managing diversity

REVIEW KEY TERMS Motivation

Procedural justice

The set of forces that initiates, directs and makes people persist in their efforts to accomplish a goal.

The perceived fairness of the process used to make reward allocation decisions.

Need

A theory that states that people will be motivated to the extent to which they believe that their efforts will lead to good performance, that good performance will be rewarded, and that they will be offered attractive rewards.

A physical or psychological requirement that must be met to ensure survival and wellbeing.

Extrinsic reward A reward that is tangible, visible to others and given to employees contingent on the performance of specific tasks or behaviours.

Intrinsic reward A natural reward associated with performing a task or activity for its own sake.

Equity theory A theory that states that people are likely be motivated when they perceive that they are being treated fairly.

Input In equity theory, the contribution an employee makes to the organisation.

Outcome In equity theory, the reward an employee receives for their contribution to the organisation.

Referent In equity theory, someone a person will compare themselves with, in deciding if they have been treated fairly.

Outcome/input (O/I) ratio In equity theory, an employee’s perception of how the rewards received from an organisation compare with the employee’s contributions to that organisation.

Under-reward A form of inequity in which you are getting fewer outcomes relative to inputs than your referent is getting.

Over-reward A form of inequity in which you are getting more outcomes relative to inputs than your referent.

Expectancy theory

LEARNING OUTCOMES LO1

Basics of motivation

Motivation is the set of forces that initiates, directs and makes people persist in their efforts over time to accomplish a goal. Managers often confuse motivation and performance, but job performance is a multiplicative function of motivation times ability times situational constraints. Needs are the physical or psychological requirements that must be met to ensure survival and wellbeing. Different motivational theories (Maslow’s Hierarchy of Needs, Alderfer’s ERG Theory and McClelland’s Learned Needs Theory) specify a number of different needs. However, studies show that there are only two general kinds of needs: lower-order needs and higher-order needs. Both extrinsic and intrinsic rewards motivate people.

Valence The attractiveness or desirability of a reward or outcome to an individual.

Expectancy The perceived relationship between effort and performance.

Instrumentality The perceived relationship between performance and rewards.

Reinforcement theory A theory that states that behaviour is a function of its consequences, that behaviours followed by positive consequences will occur more frequently and that behaviours followed by negative consequences, or not followed by positive consequences, will occur less frequently.

LO2

The basic components of equity theory are inputs, outcomes and referents. After an internal comparison in which employees compare their outcomes (O) to their inputs (I), they then make an external comparison in which they compare their O/I ratio with the O/I ratio of a referent, that is, a person who works in a similar job or is otherwise similar. When their O/I ratio is equal to the referent’s O/I ratio, employees perceive that they are being treated fairly. When their O/I ratio is different from their referent’s O/I ratio, they perceive that they have been treated inequitably or unfairly. There are two kinds of inequity: under-reward and over-reward. Under-reward, which occurs when a referent’s O/I ratio is better than the employee’s O/I ratio, leads to anger or frustration. Over-reward, which occurs when a referent’s O/I ratio is worse than the employee’s O/I ratio, can lead to guilt, but only when the level of over-reward is extreme. Motivating with equity theory: • Look for and correct major inequities. • Reduce employees’ inputs. • Make sure decision-making processes are fair. LO3

Reinforcement The process of changing behaviour by changing the consequences that follow behaviour.

Reinforcement contingency The cause-and-effect relationship between the performance of a specific behaviour and a specific consequence.

Schedule of reinforcement Rules that specify which behaviours will be reinforced, which consequences will follow those behaviours and the schedule by which those consequences will be delivered.

Distributive justice The degree to which outcomes and rewards are perceived to be fairly distributed or allocated.

MOTIVATION

Equity theory

Expectancy theory

Expectancy theory holds that three factors affect the conscious choices people make about their motivation: valence, expectancy and instrumentality. Expectancy theory holds that for people to be highly motivated, all three factors must be high. If any one of these factors declines, overall motivation will decline, too. Motivating with expectancy theory: • Systematically gather information to find out what employees want from theirjobs. • Take specific steps to link rewards to individual performance in a way that is clear and understandable to employees. • Empower employees to make decisions if management really wants them to believe that their hard work and effort will lead to good performance. LO4

Reinforcement theory

Reinforcement theory says that behaviour is a function of its consequences. Reinforcement has two parts: reinforcement contingencies and schedules of reinforcement. The four kinds of reinforcement contingencies are positive reinforcement and negative reinforcement, which strengthen behaviour, and punishment and extinction, which weaken behaviour. There are two kinds of reinforcement schedules - continuous and intermittent. Intermittent schedules, in turn, can be divided into fixed and variable interval schedules and fixed and variable ratio schedules.

REVIEW KEY TERMS Positive reinforcement Reinforcement that strengthens behaviour by following behaviours with desirable consequences.

Negative reinforcement Reinforcement that strengthens behaviour by withholding an unpleasant consequence when employees perform a specific behaviour.

Fixed ratio reinforcement schedule An intermittent schedule in which consequences are delivered following a specific number of behaviours.

Variable ratio reinforcement schedule

Reinforcement that weakens behaviour by following behaviours with undesirable consequences.

An intermittent schedule in which consequences are delivered following a different number of behaviours, sometimes more and sometimes less, that vary around a specified average number of behaviours.

Extinction

Goal

Reinforcement in which a positive consequence is no longer allowed to follow a previously reinforced behaviour, thus weakening the behaviour.

Goal-setting theory

Punishment

Continuous reinforcement schedule A schedule that requires a consequence to be administered following every instance of a behaviour.

Intermittent reinforcement schedule A schedule in which consequences are delivered after a specified or average time has elapsed or after a specified or average number of behaviours has occurred.

Fixed interval reinforcement schedule An intermittent schedule in which consequences follow a behaviour only after a fixed time has elapsed.

Variable interval reinforcement schedule An intermittent schedule in which the time between a behaviour and the following consequences varies around a specified average.

A target, objective or result that someone tries to accomplish.

LEARNING OUTCOMES LO5

Goal-setting theory

A goal is a target, objective or result that someone tries to accomplish. Goal-setting theory says that people will be motivated to the extent to which they accept specific, challenging goals and receive feedback that indicates their progress toward goal achievement. The basic components of goal-setting theory are goal specificity, goal difficulty, goal acceptance and performance feedback. Goal specificity is the extent to which goals are detailed, exact and unambiguous. Goal difficulty is the extent to which a goal is hard or challenging to accomplish. Goal acceptance is the extent to which people consciously understand and agree to goals. Performance feedback is information about the quality or quantity of past performance and indicates whether progress is being made toward the accomplishment of a goal. LO6

Motivating with the integrated model

The basics

A theory that states that people will be motivated to the extent to which they accept specific, challenging goals and receive feedback that indicates their progress toward goal achievement.

Goal specificity The extent to which goals are detailed, exact and unambiguous.

Goal difficulty The extent to which a goal is hard or challenging to accomplish.

Expect people’s needs to change. As needs change and lower-order needs are satisfied, satisfy higher-order needs by looking for ways to allow employees to experience intrinsic rewards. Equity theory

Look for and correct major inequities. Reduce employees’ inputs. Make sure decision-making processes are fair.

Expectancy theory

Systematically gather information to find out what employees want from their jobs. Take specific steps to link rewards to individual performance in a way that is clear and understandable to employees.

Goal acceptance The extent to which people consciously understand and agree to goals.

Empower employees to make decisions, if management really wants them to believe that their hard work and efforts will lead to good performance.

Performance feedback Information about the quality or quantity of past performance that indicates whether progress is being made toward the accomplishment of a goal.

Ask people what their needs are. Satisfy lowerorder needs first.

Reinforcement theory

Identify, measure, analyse, intervene and evaluate critical performance-related behaviours. Don’t reinforce the wrong behaviours. Correctly administer punishment at the appropriate time. Choose the simplest and most effective schedules of reinforcement.

Goal-setting theory

Assign specific, challenging goals. Make sure workers truly accept organisational goals. Provide frequent, specific, performance-related feedback.

MOTIVATION

REVIEW KEY TERMS Leadership

Path—goal theory

The process of influencing others to achieve group or organisational goals. A leadership theory that holds that effective leaders possess a similar set of traits or characteristics.

A leadership theory that states that leaders can increase subordinate satisfaction and performance by clarifying and clearing the paths to goals and by increasing the number and kinds of rewards available for goal attainment.

Trait

Directive leadership

Trait theory

A relatively stable characteristic, such an ability, psychological motive or consistent pattern of behaviour.

Initiating structure The degree to which a leader structures the roles of followers by setting goals, giving directions, setting deadlines and assigning tasks.

Consideration The extent to which a leader is friendly, approachable and supportive and shows concern for employees.

Leadership style The way a leader generally behaves toward followers.

Contingency theory A leadership theory that states that in order to maximise work group performance, leaders must be matched to the situation that best fits their leadership style.

Situational favourableness The degree to which a particular situation either permits or denies a leader the chance to influence the behaviour of group members.

Leader—member relations The degree to which followers respect, trust and like their leaders.

Task structure The degree to which the requirements of an employee’s tasks are clearly specified.

Position power The degree to which leaders are able to hire, fire, reward and punish workers.

LEARNING OUTCOMES LO1

Management is getting work done through others; leadership is the process of influencing others to achieve group or organisational goals. Leaders are different from managers. The primary difference is that leaders are concerned with doing the right thing, while managers are concerned with doing things right. Organisations need both managers and leaders. But, in general, companies are over-managed and under-led.

A leadership style in which the leader lets employees know precisely what is expected of them, gives them specific guidelines for performing tasks, schedules work, sets standards of performance and makes sure that people follow standard rules and regulations.

Managers • • • • • •

Supportive leadership A leadership style in which the leader is friendly and approachable, shows concern for employees and their welfare, treats them as equals and creates a friendly climate.

Participative leadership A leadership style in which the leader consults employees for their suggestions and input before making decisions.

Achievement-oriented leadership A leadership style in which the leader sets challenging goals, has high expectations of employees, and displays confidence that employees will assume responsibility and make extraordinary efforts.

Normative decision theory A theory that suggests how leaders can determine an appropriate amount of employee involvement and participation when making decisions.

Strategic leadership The ability to anticipate, envision, maintain flexibility, think strategically and work with others to initiate changes that will create a positive future for an organisation.

Leaders versus managers

LO2

Do things right Status quo Short term Means Builders Problem solving

Leaders • • • • • •

Do the right things Change Long term Ends Architects Inspiring and motivating

Who leaders are and what leaders do

Trait theory says that effective leaders possess traits or characteristics that differentiate them from non-leaders. Those traits are drive, the desire to lead, honesty/integrity, self-confidence, emotional stability, cognitive ability and knowledge of the business. Traits alone aren’t enough for successful leadership, however. Leaders who have these traits (or many of them) must also behave in ways that encourage people to achieve group or organisational goals. Two key leader behaviours are initiating structure, which improves subordinate performance, and consideration, which improves subordinate satisfaction. There is no ‘best’ combination of these behaviours. The ‘best’ leadership style will depend on the situation. LO3

Putting leaders in the right situation: Fiedler’s contingency theory

Fiedler’s theory assumes that leaders are effective when their work groups perform well, that leaders are unable to change their leadership styles, that leadership styles must be matched to the proper situation and that favourable situations permit leaders to influence group members. According to the least preferred co-worker (LPC) scale, there are two basic leadership styles. People who describe their LPC in a positive way have relationship-oriented leadership styles. In contrast, people who describe their LPC in a negative way have task-oriented leadership styles. Situational favourableness, which occurs when leaders can influence followers, is determined by leader-member relations, task structure and position power. In general, relationship-oriented leaders with high LPC scores are better leaders under moderately favourable situations, while task-oriented leaders with low LPC scores are better leaders in highly favourable or in highly unfavourable situations. Since Fiedler assumes that leaders are incapable of changing their leadership styles, the key is to accurately measure and match leaders to appropriate situations, or to teach leaders how to change situational factors. Though matching or placing leaders in appropriate situations works well, ‘reengineering situations’ to fit leadership styles usually doesn’t, because of the complexity of the model, which makes it difficult for people to understand.

LEADERSHIP

REVIEW KEY TERMS Visionary leadership

Unethical charismatics

Leadership that creates a positive image of the future that motivates organisational members and provides direction for future planning and goal setting.

Charismatic leaders who control and manipulate followers, who do what is best for themselves instead of their organisations, who want to hear only positive feedback, who shareonly information that is beneficial to themselves and who have moral standards that put their interests before everyone else’s.

Charismatic leadership The behavioural tendencies and personal characteristics of leaders that create an exceptionally strong relationship between them and their followers.

Ethical charismatics Charismatic leaders who provide developmental opportunities for followers, are open to positive and negative feedback, recognise others’ contributions, share information and have moral standards that emphasise the larger interests of the group, organisation or society.

Transformational leadership Leadership that generates awareness and acceptance of a group’s purpose and mission and gets employees to see beyond their own needs and self-interests for the good of the group.

LEARNING OUTCOMES LO4

Adapting leader behaviour: path–goal theory

Path-goal theory states that leaders can increase subordinate satisfaction and performance by clarifying and clearing the paths to goals and by increasing the number and kinds of rewards available for goal attainment. For this to work, however, leader behaviour must be a source of immediate or future satisfaction for followers and must complement and not duplicate the characteristics of followers’ work environments. In contrast to Fiedler’s contingency theory, path–goal theory assumes that leaders can and do change and adapt their leadership styles (directive, supportive, participative and achievement oriented), depending on their subordinates (their experience, perceived ability and internal or external locus of control) and the environment in which those subordinates work (task structure, formal authority system and primary work group). Subordinate contingencies • Perceived ability • Locus of control • Experience

Transactional leadership Leadership based on an exchange process, in which followers are rewarded for good performance and punished for poor performance.

Leadership styles • Directive • Supportive • Participative • Achievement-oriented

Outcomes • Subordinate satisfaction • Subordinate performance

Environmental contingencies • Task structure • Formal authority system • Primary work group

Path–goal theory LO5

Adapting leader behaviour: normative decision theory

Normative decision theory helps leaders decide how much employee participation should be used when making decisions. Using the right degree of employee participation improves the quality of decisions and the extent to which employees accept and are committed to decisions. The theory specifies five different decision styles or ways of making decisions: autocratic decisions (AI or AII), consultative decisions (CI or CII) and group decisions (GII). The theory improves decision quality via quality, leader information, subordinate information, goal congruence and problem structure decision rules. The theory improves employee commitment and acceptance via the commitment probability, subordinate conflict and commitment requirement decision rules. These decision rules help leaders improve decision quality and follower acceptance and commitment by eliminating decision styles that don’t fit the decision or situation they’re facing. Normative decision theory then operationalises these decision rules in the form of yes/no questions.

LEADERSHIP

REVIEW LEARNING OUTCOMES LO6

Visionary leadership

Strategic leadership requires visionary, charismatic and transformational leadership. Visionary leadership creates a positive image of the future that motivates organisational members and provides direction for future planning and goal setting. Charismatic leaders have strong, confident, dynamic personalities that attract followers, enable the leader to create strong bonds and inspire followers to accomplish the leader’s vision. Followers of ethical charismatic leaders work harder, are more committed and satisfied, are better performers and are more likely to trust their leaders. Followers can be just as supportive and committed to unethical charismatics, but these leaders can pose a tremendous risk for companies. Unethical charismatics control and manipulate followers and do what is best for themselves instead of their organisations. Transformational leadership goes beyond charismatic leadership by generating awareness and acceptance of a group’s purpose and mission and by getting employees to see beyond their own needs and self-interests for the good of the group. The four components of transformational leadership are charisma or idealised influence, inspirational motivation, intellectual stimulation and individualised consideration.

LEADERSHIP

REVIEW KEY TERMS Communication

Encoding

The process of transmitting information from one person or place to another.

Putting a message into a written, verbal or symbolic form that can be recognised and understood by the receiver.

Perception The process by which individuals attend to, organise, interpret and retain information from their environments.

Perceptual filter A personality-, psychology- or experienced-based difference that influences a person to ignore or pay attention to a particular stimulus.

Selective perception The tendency to notice and accept objects and information consistent with our values, beliefs and expectations, while ignoring or screening out or not accepting inconsistent information.

Closure The tendency to fill in gaps of missing information by assuming that what we don’t know is consistent with what we already know.

Attribution theory

Decoding The process by which the receiver translates the written, verbal or symbolic form of a message into an understood message.

Feedback to sender In the communication process, a return message to the sender that indicates the receiver’s understanding of the message.

Noise Anything that interferes with the transmission of the intended message.

Jargon Vocabulary and language particular to a profession or group.

Formal communication channel The system of official channels that carry organisationally approved messages and information.

A theory that states that we all have a basic need to understand and explain the causes of other people’s behaviour.

Downward communication

Defensive bias

Upward communication

The tendency for people to perceive themselves as personally and situationally similar to someone who is having difficulty or trouble.

Fundamental attribution error The tendency to ignore external causes of behaviour and to attribute other people’s actions to internal causes.

Self-serving bias The tendency to overestimate our value by attributing successes to ourselves (internal causes) and attributing failures to others or the environment (external causes).

Communication that flows from higher to lower levels in an organisation. Communication that flows from lower to higher levels in an organisation.

Horizontal communication Communication that flows between and amongst managers and workers who are at the same organisational level.

Informal communication channel (grapevine) The transmission of messages from employee to employee outside formal communication channels.

LEARNING OUTCOMES LO1

Perception and communication problems

Perception is the process by which people attend to, organise, interpret and retain information from their environments. Perception is not a straightforward process, however. Because of perceptual filters, such as selective perception and closure, people exposed to the same information stimuli often end up with very different perceptions and understandings. Perception-based differences can also lead to differences in the attributions (internal or external) that managers and workers make when explaining workplace behaviour. In general, workers are more likely to explain behaviour from a defensive bias, in which they attribute problems to external causes (i.e. the situation). Managers, on the other hand, tend to commit the fundamental attribution error, Stimulus attributing problems to internal Stimulus Stimulus causes (i.e. the worker making a mistake or error). Consequently, when things go wrong, it’s Attention Perceptual Filter common for managers to blame workers and for workers to blame the situation or context in which they do their jobs. Finally, this Perceptual Organisation Filter problem is compounded by a selfserving bias that leads people to attribute successes to internal causes and failures to external Perceptual Interpretation Filter causes. When workers receive negative feedback from managers, they may become defensive and Retention emotional and not hear what Perceptual Filter their managers have to say. In short, perceptions and attributions represent a significant challenge Perception to effective communication and Basic perception process understanding in organisations. LO2

Kinds of communication

Organisational communication depends on the communication process, formal and informal communication channels, one-on-one communication and non-verbal communication. The major components of the communication process are the sender, the receiver, noise and feedback. Senders often mistakenly assume that they can pipe Sender Message to be conveyed

Message that was understood

Encode message

Decode message

NOISE

MANAGING COMMUNICATION

Receiver

Feedback to sender

Transmit message

NOISE

Communication channel

The interpersonal communication process

Receive message

REVIEW KEY TERMS Coaching

Constructive feedback

Communicating with someone for the direct purpose of improving the person’s on-thejob performance or behaviour.

Feedback intended to be helpful, corrective and/or encouraging.

Counselling Communicating with someone about non-job-related issues that may be affecting or interfering with the person’s performance.

Non-verbal communication Any communication that doesn’t involve words.

Kinesics Movements of the body and face.

Paralanguage The pitch, rate, tone, volume and speaking pattern (i.e. use of silences, pauses or hesitations) of one’s voice.

Communication medium The method used to deliver any message.

Hearing The act or process of perceiving sounds.

Listening Making a conscious effort to hear.

Active listening Assuming half the responsibility for successful communication by actively giving the speaker non-judgemental feedback that shows you’ve accurately heard what he or she said.

Empathetic listening Understanding the speaker’s perspective and personal frame of reference and giving feedback that conveys this understanding to the speaker.

Online discussion forum The in-house equivalent of an Internet newsgroup. By using web- or software-based discussion tools that are available across the company, employees can easily ask questions and share knowledge with each other.

Televised/recorded speech or meeting A speech or meeting originally made to a smaller audience that is either simultaneously broadcast to other locations in the company or recorded for subsequent distribution and viewing.

Organisational silence When employees withhold information about organisational problems or issues.

Company hotlines Phone numbers that anyone in the company can call anonymously to leave information for upper management.

Survey feedback Information that is collected by surveys from organisational members and then compiled, disseminated and used to develop action plans for improvement.

Blog A personal website that provides personal opinions or recommendations, news summaries and reader comments.

LEARNING OUTCOMES their intended messages directly into receivers’ heads with perfect clarity. Formal communication channels, such as downward, upward and horizontal communication, carry organisationally approved messages and information. By contrast, the informal communication channel, called the ‘grapevine’, arises out of curiosity and is carried out through gossip or cluster chains. There are two kinds of one-on-one communication. Coaching is used to improve on-the-job performance while counselling is used to communicate about non-job-related issues affecting job performance. Non-verbal communication, such as kinesics and paralanguage, accounts for as much as 93 per cent of a message’s content and understanding. LO3

Managing one-on-one communication

One-on-one communication can be managed by choosing the right communication medium, being a good listener and giving effective feedback. Managers generally prefer oral communication because it provides the opportunity to ask questions and assess non-verbal communication. Oral communication is best suited to complex, ambiguous or emotionally laden topics. Written communication is best suited to delivering straightforward messages and information. Listening is important for managerial success, but most people are poor listeners. To improve your listening skills, choose to be an active listener (clarify responses, paraphrase and summarise) and an empathetic listener (show your desire to understand, reflect feelings). Feedback can be constructive or destructive. To be constructive, feedback must be immediate, focused on specific behaviours and problem oriented. LO4

Managing organisation-wide communication

Managers need methods for managing organisation-wide communication and for making themselves accessible so that they can hear what employees throughout their organisations are feeling and thinking. Email, online discussion forums, televised/recorded speeches and conferences and broadcast voicemail make it much easier for managers to improve message transmission and ‘get the message out’. By contrast, anonymous company hotlines, survey feedback, frequent informal meetings and surprise visits help managers avoid organisational silence and improve reception by hearing what others in the organisation feel and think. Monitoring internal and external blogs is another way to find out what people are saying and thinking about your organisation.

Destructive feedback Feedback that disapproves without any intention of being helpful and almost always causes a negative or defensive reaction in the recipient.

REVIEW KEY TERMS Control

Objective control

A regulatory process of establishing standards to achieve organisational goals, comparing actual performance against the standards and taking corrective action when necessary.

The use of observable measures of worker behaviour or outputs to assess performance and influence behaviour.

Standard

Behaviour control The regulation of the behaviours and actions that workers perform on the job.

A basis of comparison for measuring the extent to which various kinds of organisational performance are satisfactory or unsatisfactory.

Output control

Benchmarking

The regulation of workers’ behaviour and decisions through widely shared organisational values and beliefs.

The process of identifying outstanding practices, processes and standards in other organisations and adapting them to your own.

Cybernetic The process of steering or keeping on course.

Feedback control A mechanism for gathering information about performance deficiencies after they occur.

Concurrent control A mechanism for gathering information about performance deficiencies as they occur, thereby eliminating or shortening the delay between performance and feedback.

Feed-forward control A mechanism for monitoring performance inputs rather than outputs to prevent or minimise performance deficiencies before they occur.

Control loss The situation in which behaviour and work procedures do not conform to standards.

Regulation cost

The regulation of workers’ results or outputs through rewards and incentives.

Normative control

The control process

The control process begins by setting standards, measuring performance and then comparing performance to the standards. The better a company’s information and measurement systems, the easier it is to make these comparisons. The control process continues by identifying and analysing performance deviations and then developing and implementing programs for corrective action. However, control is a continuous, dynamic, cybernetic process, not a one-time achievement or result. Control requires frequent managerial attention. The three basic control methods are feedback control (after-the-fact performance information), concurrent control (simultaneous performance information) and feed-forward control (preventive performance information). Control, however, has regulation costs and unanticipated consequences and therefore isn’t always worthwhile or possible. Set standards

The regulation of workers’ behaviour and decisions through workgroup values and beliefs.

Develop and implement program for corrective action

Self-control (selfmanagement) A control system in which managers and workers control their own behaviour by setting their own goals, monitoring their own progress and rewarding themselves for goal achievement.

Measure performance

Compare with standards

Balanced scorecard Measurement of organisational performance in four equally important areas: finances, customers, internal operations and innovation and learning.

Sub-optimisation Performance improvement in one part of an organisation but at the expense of decreased performance in another part.

Cash flow analysis A type of analysis that predicts how changes in a business will affect its ability to take in more cash than it pays out.

Cybernetic feasibility

Balance sheet

The extent to which it is possible to implement each step in the control process.

An accounting statement that provides a snapshot of a company’s financial position at a particular time.

The use of hierarchical authority to influence employee behaviour by rewarding or punishing employees for compliance or non-compliance with organisational policies, rules and procedures.

LO1

Concertive control

A cost associated with implementing or maintaining control.

Bureaucratic control

LEARNING OUTCOMES

Income statement An accounting statement, also called a ‘profit and loss statement’, that shows what has happened to an organisation’s income, expenses and net profit over a period of time.

Analyse deviations

Identify deviations

LO2

Control methods

There are five methods of control: bureaucratic, objective, normative, concertive and self-control (self-management). Bureaucratic and objective controls are top-down, management-based and measurementbased. Normative and concertive controls represent shared forms of control because they evolve from company-wide or team-based beliefs and values. Self-control, or self-management, is a control system in which managers turn much, but not all, control over to the individuals themselves. Bureaucratic control is based on organisational policies, rules and procedures. Objective controls are based on reliable measures of behaviour or outputs. Normative control is based on strong corporate beliefs and careful hiring practices. Concertive control is based on the development of values, beliefs and rules in autonomous work groups. Self-control is based on individuals’ setting their own goals, monitoring themselves, and rewarding or punishing themselves for success or failure in goal achievement. We end this section (flip over card) by noting that each of these control methods may be more or less appropriate depending on the circ*mstances.

CONTROL

REVIEW KEY TERMS Financial ratio

Customer defection

A calculation typically used to track a business’ liquidity (cash), efficiency and profitability over time compared to other businesses in its industry.

A performance assessment in which a company identifies which customers are leaving and measures the rate at which they are leaving.

Budget

Value

A quantitative plan through which managers decide how to allocate available money to best accomplish company goals.

Customer perception that the product or service quality is excellent for the price offered.

Economic value added (EVA) The amount by which company profits (revenues, minus expenses, minus taxes) exceed the cost of capital in a given year.

LEARNING OUTCOMES LO3

What to control

Deciding what to control is just as important as deciding whether to control or how to control. In most companies, performance is measured using financial measures alone. However, the balanced scorecard encourages managers to measure and control company performance from four perspectives: financial, customers, internal operations and innovation and learning. Traditionally, financial control has been achieved through cash flow analysis, balance sheets, income statements, financial ratios and budgets. (For a refresher on these traditional financial control tools, see the next card, which is a Financial Review Card.) Another way to measure and control financial performance, however, is through economic value added (EVA). Unlike traditional financial measures, EVA helps managers assess whether they are performing well enough to

Bureaucratic control

When it is necessary to standardise operating procedures. When it is necessary to establish limits.

Behaviour control

When it is easier to measure what workers do on the job than what they accomplish on the job. When ‘cause and effect’ relationships are clear; that is, when companies know which behaviours will lead to success and which won’t. When good measures of worker behaviour can be created.

Output control

When it is easier to measure what workers accomplish on the job than what they do on the job. When good measures of worker output can be created. When it is possible to set clear goals and standards for worker output. When ‘cause and effect’ relationships are unclear.

Normative control

When organisational culture, values and beliefs are strong. When it is difficult to create good measures of worker behaviour. When it is difficult to create good measures of worker output.

Concertive control

When responsibility for task accomplishment is given to autonomous work groups. When management wants workers to take ‘ownership’ of their behaviour and outputs. When management desires a strong form of worker-based control.

Self-control

When workers are intrinsically motivated to do their jobs well. When it is difficult to create good measures of worker behaviour. When it is difficult to create good measures of worker output. When workers have or are taught self-control and self-leadership skills.

When to use different methods of control

CONTROL

Sources: L. J. Kirsch, ‘The management of complex tasks in organizations: controlling the systems development process’, Organization Science, 7, 1996: 1–21; S. A. Snell, ‘Control theory in strategic human resource management: the mediating effect of administrative information’, Academy of Management Journal, 35, 1992: 292–327.

REVIEW LEARNING OUTCOMES pay the cost of the capital needed to run the business. Instead of using customer satisfaction surveys to measure performance, companies should pay attention to customer defectors, who are more likely to speak up about what the company is doing wrong. Performance of internal operations is often measured in terms of quality, which is defined in three ways: excellence, value and conformance to expectations. Minimisation of waste has become an important part of innovation and learning in companies. The four levels of waste minimisation are waste prevention and reduction, recycling and reuse, waste treatment and waste disposal. 1 Calculate net operating profit after taxes (NOPAT).

$3 500 000

2 Identify how much capital the company has invested (i.e. spent).

$16 800 000

3 Determine the cost (i.e. rate) paid for capital (usually between 5 per cent and 13 per cent).

10%

4 Multiply capital used (step 2) times cost of capital (step 3).

(10% × $16 800 000) = $1 680 000

5 Subtract the total dollar cost of capital from net profit after taxes.

$3 500 000 NOPAT −$1 680 000 Total cost of capital $1 820 000 Economic value added

Calculating economic value added (EVA)

CONTROL

FINANCIAL REVIEW KEY TERMS CARD Basic accounting tools for controlling financial performance

LEARNING OUTCOMES Steps for a basic cash flow analysis 1 Forecast sales (steady, up or down). 2 Project changes in anticipated cash inflows (as a result of changes). 3 Project anticipated cash outflows (as a result of changes). 4 Project net cash flows by combining anticipated cash inflows and outflows. Parts of a basic balance sheet (assets = liabilities + owner’s equity) 1 Assets a Current assets (cash, short-term investment, marketable securities, accounts receivable, etc.) b Fixed assets (land, buildings, machinery, equipment, etc.) 2 Liabilities a Current liabilities (accounts payable, notes payable, taxes payable, etc.) b Long-term liabilities (long-term debt, deferred income taxes, etc.) 3 Owners’ equity a Preferred stock and common stock b Additional paid-in capital c Retained earnings Basic income statement SALES REVENUE – sales returns and allowances + other income = NET REVENUE – cost of goods sold (beginning inventory, costs of goods purchased, ending inventory) = GROSS PROFIT – total operating expenses (selling, general and administrative expenses) = INCOME FROM OPERATIONS – interest expense = PRETAX INCOME – income taxes = NET INCOME

CONTROL

REVIEW LEARNING OUTCOMES Revenue budgets – used to project or forecast future sales.

• Accuracy of projection depends on economy, competitors, sales force estimates, etc. • Determined by estimating future sales volume and sales prices for all products and services.

Expense budgets – used within departments and divisions to determine how much will be spent on various supplies, projects or activities.

• One of the first places that companies look for cuts when trying to lower expenses.

Profit budgets – used by profit centres, which have ‘profit and loss’ responsibility.

• Profit budgets combine revenue and expense budgets into one budget.

Cash budgets – used to forecast how much cash a company will have on hand to meet expenses.

• Similar to cash flow analyses.

Capital expenditure budgets – used to forecast large, long-lasting investments in equipment, buildings and property.

• Help managers identify funding that will be needed to pay for future expansion or strategic moves designed to increase competitive advantage.

Variable budgets – used to project costs across revenues sales and varying levels of sales and revenues.

• Important because it is difficult to accurately predict sales revenue and volume.

• Typically used in large businesses with multiple plants and divisions.

• Used to identify cash shortfalls, which must be covered to pay bills, or cash excesses, which should be invested for a higher return.

• Lead to more accurate budgeting with respect to labour, materials and administrative expenses, which vary with sales volume and revenues. • Build flexibility into the budgeting process.

Common kinds of budgets

CONTROL

REVIEW LEARNING OUTCOMES FINANCIAL REVIEW CARD Ratios

Formula

LIQUIDITY RATIOS Current ratio

Current Assets Current Liabilities

Quick (acid test) ratio

(Current Assets − Inventories)

LEVERAGE RATIOS Debt to equity

Total Liabilities

Debt coverage

(Net Profit + Non-cash Expense)

Current Liabilities

Total Equity

Debt

EFFICIENCY RATIOS Inventory turnover

Average Value of Inventory

Average collections period

(Annual Net Credit Sales Divided by 365)

Cost of Goods Sold

Accounts Receivable

What it means

When to use

• Whether you have enough assets on hand to pay for short-term bills and obligations. • Higher is better. • Recommended level is two times as many current assets as current liabilities.

• Track monthly and quarterly. • Basic measure of your company’s health.

• Stricter than current ratio. • Whether you have enough (i.e. cash) to pay short-term bills and obligations. • Higher is better. • Recommended level is one or higher.

• Track monthly. • Also calculate quick ratio with potential customers to evaluate whether they’re likely to pay you in a timely manner.

• Indicates how much the company • Track monthly. is leveraged (in debt) by comparing • Lenders often use what is owed (liabilities) to what is this to determine the owned (equity). creditworthiness of a • Lower is better. A high debt-tobusiness (i.e. whether equity ratio could indicate that the to approve additional company has too much debt. loans). • Recommended level depends on industry. • Indicates how well cash flow covers debt payments. • Higher is better.

• Track monthly. • Lenders look at this ratio to determine if there is adequate cash to make loan payments.

• Whether you’re making efficient use of inventory. • Higher is better, indicating that inventory (dollars) isn’t purchased (spent) until needed. • Recommended level depends on industry.

• Track monthly by using a 12-month rolling average.

• Shows on average how quickly your customers are paying their bills. • Recommended level is no more than 15 days longer than credit terms. If credit is net 30 days, then average should not be longer than 45 days.

• Track monthly. • Use to determine how long company’s money is being tied up in customer credit.

CONTROL

REVIEW LEARNING OUTCOMES Ratios

Formula

PROFITABILITY RATIOS Gross profit Margin total sales

Return on net income Owner’s equity

Gross Profit Total Sales

Net Income Owner's Equity

What it means

When to use

• Shows how efficiently a business is using its materials and labour in the production process. • Higher is better, indicating that a profit can be made if fixed costs are controlled.

• Track monthly. • Analyse when unsure about product or service pricing. • Low margin compared to competitors means you’re underpricing.

• Shows what was earned on your investment in the business during a particular period. Often called ‘return on investment’. • Higher is better.

• Track quarterly and annually. • Use to compare to what you might have earned on the stock market, bonds or government Treasury bills during the same period.

CONTROL

REVIEW KEY TERMS Moore’s law The prediction that every 18 months, the cost of computing will drop by 50 per cent as computer-processing power doubles.

into ASCII (American Standard Code for Information Interchange) text that can be searched, read and edited by word processing and other kinds of software.

Raw data

Processing information

Facts and figures.

Transforming raw data into meaningful information.

Information Useful data that can influence people’s choices and behaviour.

First-mover advantage The strategic advantage that companies earn by being the first to use new information technology to substantially lower costs or to make a product or service different from that of competitors.

Data mining

The process when the user tells the data mining software to look and test for specific patterns and relationships in a data set.

The cost of physically or electronically archiving information for later use and retrieval.

Retrieval cost The cost of accessing already-stored and processed information.

Communication cost The cost of transmitting information from one place to another.

Bar code A visual pattern that represents numerical data by varying the thickness and pattern of vertical bars.

Radio frequency identification (RFID) tags Tags containing minuscule microchips that transmit information via radio waves and can be used to track the number and location of the objects into which the tags have been inserted.

Electronic scanner An electronic device that converts printed text and pictures into digital images.

Optical character recognition The ability of software to convert digitised documents

The first company to use new information technology to substantially lower costs or differentiate products or services often gains first-mover advantage, higher profits and larger market share. Creating a first-mover advantage can be difficult, expensive and risky, however. According to the resource-based view of information technology, sustainable competitive advantage occurs when information technology adds value, is different across firms and is difficult to create or acquire.

Stores huge amounts of data that have been prepared for data mining analysis by being cleaned of errors and redundancy.

Supervised data mining

Storage cost

Strategic importance of information

Does the information technology create value?

Data warehouse

The cost of obtaining data that you don’t have. The cost of turning raw data into usable information.

LO1

The process of discovering patterns and relationships in large amounts of data.

Acquisition cost

Processing cost

LEARNING OUTCOMES

Competitive disadvantage

Unsupervised data mining The process when the user simply tells the data mining software to uncover whatever patterns and relationships it can find in a data set.

Yes

Is the information technology different across competing firms?

Yes

Competitive parity

Is it difficult for another firm to create or buy the information technology?

Association or affinity pattern When two or more database elements tend to occur together in a significant way.

No Yes

Sequence pattern When two or more database elements occur together in a significant pattern, but one of the elements precedes the other.

Predictive pattern A pattern that helps identify database elements that are different.

Data cluster When three or more database elements occur together (i.e. cluster) in a significant way.

Protecting information The process of ensuring that data are reliably and consistently retrievable in a usable format for authorised users, but no one else.

Authentication Making sure potential users are who they claim to be.

MANAGING INFORMATION

Temporary competitive advantage

Sustained competitive advantage

LO2

Characteristics and costs of useful information

Raw data are facts and figures which do not become information until they are in a form that can affect decisions and behaviour. For information to be useful, it has to be reliable and valid (accurate), of sufficient quantity (complete), pertinent to the problems you’re facing (relevant) and available when you need it (timely). Useful information does not come cheaply. The five costs of obtaining good information are the costs of acquiring, processing, storing, retrieving and communicating information. LO3

Capturing, processing and protecting information

Electronic data capture (bar codes, radio frequency identification [RFID] tags, scanners and optical character recognition) is much faster, easier and cheaper than manual data capture. Processing information means transforming raw data into meaningful information that can be applied to business decision making. Data mining helps managers with this transformation by discovering unknown patterns and relationships in data. Supervised data mining looks for patterns specified by managers, while

REVIEW KEY TERMS Authorisation Granting authenticated users approved access to data, software and systems.

data sources to provide the information needed to monitor and analyse organisational performance.

Intranet

Two-factor authentication Authentication based on what users know, such as a password, and what they have in their possession, such as a secure ID card or key.

Biometrics Identifying users by unique, measurable body features, such as fingerprint recognition or iris scanning.

Firewall A protective hardware or software device that sits between the computers in an internal organisational network and outside networks, such as the Internet.

Virus A program or piece of code that, against your wishes, attaches itself to other programs on your computer and can trigger anything from a harmless flashing message to the reformatting of your hard drive to a system-wide network shutdown.

Data encryption The transformation of data into complex, scrambled digital codes that can be unencrypted only by authorised users who possess unique decryption keys.

A private company network that allows employees to easily access, share and publish information using Internet software.

Corporate portal

When two companies convert their purchase and ordering information to a standardised format to enable the direct electronic transmission of that information from one company’s computer system to the other company’s computer system.

Extranet A network that allows companies to exchange information and conduct transactions with outsiders by providing them direct, webbased access to authorised parts of a company’s intranet or information system.

Decision support system (DSS)

A data processing system that uses internal and external

Manual

LO4

Electronic

Processing

Supervised data mining

Unsupervised data mining

Protecting

Authentication/ authorisation

Firewall

Antivirus software

Data encryption

Virtual private networks

Secure sockets layer (SSL) encryption

Accessing and sharing information and knowledge

Executive information systems, intranets and corporate portals facilitate internal sharing and access to company information and transactions. Electronic data interchange and the Internet allow external groups, like suppliers and customers, to easily access company information. Both decrease costs by reducing or eliminating data entry, data errors and paperwork and by speeding up communication. Organisations use decision support systems and expert systems to capture and share specialised knowledge with non-expert employees.

Knowledge

Software that securely encrypts data sent by employees outside the company network, decrypts the data when they arrive within the company computer network and does the same when data are sent back to employees outside the network.

Executive information system (EIS)

Capturing

Electronic data interchange (EDI)

The understanding that one gains from information.

Internet browser-based encryption that provides secure off-site web access to some data and programs.

unsupervised data mining looks for four general kinds of data patterns: association/affinity patterns, sequence patterns, predictive patterns and data clusters. Protecting information ensures that data are reliably and consistently retrievable in a usable format by authorised users, but no one else. Authentication and authorisation, firewalls, antivirus software for PCs and corporate email and network servers, data encryption, virtual private networks and web-based secure sockets layer (SSL) encryption are some of the best ways to protect information. Be careful with wireless networks, which are easily compromised even when security and encryption protocols are in place.

A hybrid of executive information systems and intranets that allows managers and employees to use a web browser to gain access to customised company information and to complete specialised transactions.

Virtual private network (VPN)

Secure sockets layer (SSL) encryption

LEARNING OUTCOMES

An information system that helps managers understand specific kinds of problems and potential solutions and analyse the impact of different decision options using ‘what if’ scenarios.

Expert system An information system that contains the specialised knowledge and decision rules used by experts and experienced decision makers so that non-experts can draw on this knowledge base to make decisions.

REVIEW KEY TERMS Productivity

Variation

A measure of performance that shows what inputs it takes to produce or create an output.

A deviation in the form, condition, appearance or characteristics of a product or service from the quality standard.

Partial productivity A measure of performance that shows how much of a particular kind of input it takes to produce an output.

Multifactor productivity An overall measure of performance that shows how much labour, capital, materials and energy it takes to produce an output.

Quality

Teamwork Collaboration between managers and non-managers, across business functions and between companies, customers and suppliers.

ISO 9000

Assemble-to-order operation

A manufacturing operation that does not start processing or assembling products until a customer order is received.

A manufacturing operation that divides manufacturing processes into separate parts or modules that are combined to create semi-customised products.

A series of international standards for managing, monitoring and minimising an organisation’s harmful effects on the environment.

Make-to-stock operation

Total quality management (TQM)

Manufacturing flexibility

An integrated, principle-based, organisation-wide strategy for improving product and service quality.

Customer focus An organisational goal to concentrate on meeting customers’ needs at all levels of the organisation.

Customer satisfaction An organisational goal to provide products or services that meet or exceed customers’ expectations.

Continuous improvement An organisation’s ongoing commitment to constantly assess and improve the processes and procedures used to create products and services.

Productivity

Productivity is a measure of how many inputs it takes to produce or create an output. The greater the output from one input, or the fewer inputs it takes to create an output, the higher the productivity. Partial productivity measures how much of a single kind of input, such as labour, is needed to produce an output. Multifactor productivity is an overall measure of productivity that indicates how much labour, capital, materials and energy are needed to produce an output. Partial productivity =

Restoring customer satisfaction to strongly dissatisfied customers.

Make-to-order operation

ISO 14000

LO1

Service recovery

A product or service free of deficiencies, or the characteristics of a product or service that satisfy customer needs. A series of five international standards for achieving consistency in quality management and quality assurance in companies throughout the world.

LEARNING OUTCOMES

A manufacturing operation that orders parts and assembles standardised products before receiving customer orders. The degree to which manufacturing operations can easily and quickly change the number, kind and characteristics of products they produce.

Continuous-flow production A manufacturing operation that produces goods or services at a continuous, rather than a discrete, rate.

Line-flow production Manufacturing processes that are pre-established, occur in a serial or linear manner and are dedicated to making one type of product.

Batch production A manufacturing operation that produces goods in large batches in standard lot sizes.

Outputs Single kind of input

Outputs Multifactor = productivity (Labour + Capital + Materials + Energy) LO2

Quality

Quality can mean a product or service free of deficiencies, or the characteristics of a product or service that satisfy customer needs. Quality products usually possess three characteristics: reliability, serviceability and durability. Quality service means reliability, tangibles, responsiveness, assurance and empathy. ISO 9000 is a series of international standards for achieving consistency in quality management and quality assurance, while ISO 14000 is a set of standards for minimising an organisation’s harmful effects on the environment. The Baldrige National Quality Award recognises US companies for their achievements in quality and business performance. Each year, Baldrige Awards may be given for achievements in manufacturing, service, small business, education and health care. Total quality management (TQM) is an integrated organisation-wide strategy for improving product and service quality. TQM is based on three mutually reinforcing principles: customer focus and satisfaction, continuous improvement, and teamwork. LO3

Service operations

Internal service quality Services are different from goods. Goods Employee satisfaction are produced, tangible and storable. Services are Customer satisfaction = Customer loyalty performed, intangible lead to and perishable. Likewise, managing service operations Employees Customers Upper is different from management managing production Profit and growth operations. The Service-profit chain service-profit chain Source: R. Hallowell, L. A. Schlesinger, & J. Zornitsky, ‘Internal service quality, customer and indicates that job satisfaction: linkages and implications for management’, Human Resource Planning, 19, success begins 1996; J. L. Heskett, T. O. Jones, G. W. Loveman, W. E. Sasser, Jr & L. A. Schlesinger, ‘Putting the service-profit chain to work’, Harvard Business Review, March–April 1994: 164–74. with internal service quality, meaning how well management treats service employees. Internal service quality leads to employee satisfaction and service capability, which, in turn, lead to high-value service to customers, customer satisfaction, customer loyalty and long-term profits and growth. Keeping existing customers is far more cost-effective than finding new ones. Consequently, to prevent disgruntled customers from leaving, some companies are empowering service employees to

REVIEW KEY TERMS Job shops

Holding cost

Manufacturing operations that handle custom orders or small batch jobs.

The cost of keeping inventory until it is used or sold, including storage, insurance, taxes, obsolescence and opportunity costs.

Inventory The amount and number of raw materials, parts and finished products that a company has in its possession.

Stockout cost

A basic input in a manufacturing process.

The cost incurred when a company runs out of a product, including transaction costs to replace inventory and the loss of customers’ goodwill.

Component parts inventory

Economic order quantity (EOQ)

Raw material inventory

A basic part used in manufacturing that is fabricated from raw materials.

Work-in-process inventory A partially finished good consisting of assembled component parts.

Finished goods inventory A final output of manufacturing operations.

Average aggregate inventory Average overall inventory during a particular time period.

Stockout The situation when a company runs out of finished product.

Inventory turnover The number of times per year that a company sells or ‘turns over’ its average inventory.

Ordering cost The costs associated with ordering inventory, including the cost of data entry, phone calls, obtaining bids, correcting mistakes and determining when and how much inventory to order.

Setup cost The costs of downtime and lost efficiency that occur when a machine is changed or adjusted to produce a different kind of inventory.

A system of formulas that minimises ordering and holding costs and helps determine how much and how often inventory should be ordered.

Just-in-time (JIT) inventory system An inventory system in which component parts arrive from suppliers just as they are needed at each stage of production.

Kanban A ticket-based JIT system that indicates when to reorder inventory.

Materials requirement planning (MRP) A production and inventory system that determines the production schedule, production batch sizes and inventory needed to complete final products.

Independent demand system An inventory system in which the level of one kind of inventory does not depend on another.

Dependent demand system An inventory system in which the level of inventory depends on the number of finished units to be produced.

LEARNING OUTCOMES perform service recovery – restoring customer satisfaction to strongly dissatisfied customers – by giving them the authority and responsibility to immediately solve customer problems. The hope is that empowered service recovery will prevent customer defections. LO4

Manufacturing operations

Manufacturing operations produce physical goods. Manufacturing operations can be classified according to the amount of processing or assembly that occurs after receiving an order from a customer. Manufacturing operations can also be classified in terms of flexibility - the degree to which the number, kind and characteristics of products can easily and quickly be changed. Flexibility allows companies to respond quickly to competitors and customers and to reduce order lead times, but it can also lead to higher unit costs. LO5

More processing

Make-to-order operations

Assemble-to-order operations

Make-to-stock operations

Less processing

Inventory

There are four kinds of inventory: raw materials, component parts, work-in-process and finished goods. Because companies incur ordering, setup, holding and stockout costs when handling inventory, inventory costs can be enormous. To control those costs, companies measure and track inventory in three ways: average aggregate inventory, weeks of supply and turnover. Companies meet the basic goals of inventory management (avoiding stockouts and reducing inventory without hurting daily operations) through economic order quantity (EOQ) formulas, justin-time (JIT) inventory systems and materials requirement planning (MRP). EOQ =

Least flexible Continuous-flow production Line-flow production Batch production Job shops

Most flexible

2DO 4

Use EOQ formulas when inventory levels are independent, and use JIT and MRP when inventory levels are dependent on the number of products to be produced.

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References