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Saylor URL: http://www.saylor.org/books Saylor.org 313 Chapter 10 Leading an Ethical Organization: Corporate Governance, Corporate Ethics, and Social Responsibility LEARNING OBJECTIVES After reading this chapter, you should be able to understand and articulate answers to the following questions: 1.What are the key elements of effective corporate governance? 2.How do individuals and firms gauge ethical behavior? 3.What influences and biases might impact and impede decision making?TOMS Shoes: Doing Business with Soul Under the business model used by TOMS Shoes, a pair of their signature alpargata footwear is donated for every pair sold.Image courtesy of Parke Ladd,http://www.flickr.com/photos/parke-ladd/5389801209.
Saylor URL: http://www.saylor.org/books Saylor.org 314 In 2002, Blake Mycoskie competed with his sister Paige onThe Amazing Race—a reality show where groups of two people with existing relationships engage in a global race to win valuable prizes, with the winner receiving a coveted grand prize. Although Blake’s team finished third in the second season of the show, the experience afforded him the opportunity to visit Argentina, where he returned in 2006 and developed the idea to build a company around the alpargata—a popular style of shoe in that region.The premise of the company Blake started was a unique one. For every shoe sold, a pair will be given to someone in need. This simple business model was the basis for TOMS Shoes, which has now given away more than one million pairs of shoes to those in need in more than twenty countries worldwide.[1]The rise of TOMS Shoes has inspired other companies that have adopted the “buy-one-give-one” philosophy. For example, the Good Little Company donates a meal for every package purchased.[2]This business model has also been successfully applied to selling (and donating) other items such as glasses and books.The social initiatives that drive TOMS Shoes stand in stark contrast to the criticisms that plagued Nike Corporation, where claims of human rights violations, ranging from the use of sweatshops and child labor to lack of compliance with minimum wage laws, were rampant in the 1990s.[3]While Nike struggled to win back confidence in buyers that were concerned with their business practices, TOMS social initiatives are a source of excellent publicity in pride in those who purchase their products. As further testament to their popularity, TOMS has engaged in partnerships with Nordstrom, Disney, and Element Skateboards.Although the idea of social entrepreneurship and the birth of firms such as TOMS Shoes are relatively new, a push toward social initiatives has been the source of debate for executives for decades. Issues that have sparked particularly fierce debate include CEO pay and the role of today’s modern corporation. More than a quarter of a century ago,famed economist Milton Friedman argued, “The social responsibility of business is to increase its profits.” This notion is now being challenged by firms such as TOMS and their entrepreneurial CEO, who argue that serving other stakeholders beyond the owners and shareholders can be a powerful, inspiring, and successful motivation for growing business.
Saylor URL: http://www.saylor.org/books Saylor.org 315 This chapter discusses some of the key issues and decisions relevant to understanding corporate and business ethics. Issues include how to govern large corporations in an effective and ethical manner, what behaviors are considered best practices in regard to corporate social performance, and how different generational perspectives and biases may hold a powerful influence on important decisions. Understanding these issues may provide knowledge that can encourage effective organizational leadership like that of TOMS Shoes and discourage the criticisms of many firms associated with the corporate scandals of the late 1990s and early 2000s.[1] Oloffson, K. 2010, September 29. In Toms’ Shoes: Start-up copy “one-for-one” model.Wall Street Journal. Retrieved from http://online.wsj.com/article/SB1000142405274870411 6004575522251507063936.html[2] Nicolas, S. 2011, February. The great giveaway. Director, 64, 37–39. [3] McCall, W. 1998. Nike battles backlash from overseas sweatshops. Marketing News, 9, 14.
Saylor URL: http://www.saylor.org/books Saylor.org 316 10.1 Boards of Directors LEARNING OBJECTIVES 1.Understand the key roles played by boards of directors. 2.Know how CEO pay and perks impact the landscape of corporate governance. 3.Explain different terms associated with corporate takeovers. The Many Roles of Boards of Directors “You’re fired!” is a commonly used phrase most closely associated with Donald Trump as he dismisses candidates on his reality show,The Apprentice. But who would have the power to utter these words to today’s CEOs, whose paychecks are on par with many of the top celebrities and athletes in the world? This honor belongs to theboardofdirectors—a group of individuals that oversees the activities of an organization or corporation.Potentially firing or hiring a CEO is one of many roles played by the board of directors in their charge to provide effectivecorporategovernancefor the firm. An effective board plays many roles, ranging from the approval of financial objectives, advising on strategic issues, making the firm aware of relevant laws, and representingstakeholderswho have an interest in the long-term performance of the firm.Effective boards may help bring prestige and important resources to the organization. For example, General Electric’s board often has included the CEOs of other firms as well as former senators and prestigious academics. Blake Mycoskie of TOMS Shoes was touted as an ideal candidate for an “all-star” board of directors because of his ability to fulfill his company’s mission “to show how together we can create a better tomorrow by taking compassionate action today.”[1]The key stakeholder of most corporations is generally agreed to be the shareholders of the company’s stock. Most large, publicly traded firms in the United States are made up of thousands of shareholders. While 5 percent ownership in many ventures may seem modest, this amount is considerable in publicly traded companies wheresuch ownership is generally limited to other companies, and ownership in this amount could result in representation on the board of directors.
Saylor URL: http://www.saylor.org/books Saylor.org 317 The possibility of conflicts of interest is considerable in public corporations. On the one hand, CEOs favor large salaries and job stability, and these desires are often accompanied by a tendency to make decisions that would benefit the firm (and their salaries) in the short term at the expense of decisions considered over a longer time horizon. In contrast, shareholders prefer decisions that will grow the value of their stock in the long term. This separation of interest creates anagencyproblemwherein the interests of the individuals that manage the company (agents such as the CEO) may not align with the interest of the owners (such as stockholders).The composition of the board is critical because the dynamics of the board play an important part in resolving the agency problem. However, who exactly should be on the board is an issue that has been subject to fierce debate. CEOs often favor the use ofboardinsiderswho often have intimate knowledge of the firm’s business affairs. In contrast, manyinstitutionalinvestorssuch as mutual funds and pension funds that hold large blocks of stock in the firm often prefer significant representation byboardoutsidersthat provide a fresh, nonbiased perspective concerning a firm’s actions.One particularly controversial issue in regard to board composition is the potential forCEOduality, a situation in which the CEO is also the chairman of the board of directors. This has also been known to create a bitter divide within a corporation.For example, during the 1990s, The Walt Disney Company was often listed in BusinessWeek’s rankings for having one of the worst boards of directors.[2]In 2005, Disney’s board forced the separation of then CEO (and chairman of the board) Michael Eisner’s dual roles. Eisner retained the role of CEO but later stepped down from Disney entirely. Disney’s story reflects a changing reality that boards are acting with considerably more influence than in previous decades when they were viewed largely as rubber stamps that generally folded to the whims of the CEO.Managing CEO CompensationOne of the most visible roles of boards of directors is settingCEO pay. The valuation of the human capital associated with the rare talent possessed by some CEOs can be illustrated in a story of an encounter one tourist had with the legendary artist Pablo Picasso. As the story goes, Picasso was once spotted by a
Saylor URL: http://www.saylor.org/books Saylor.org 318 woman sketching. Overwhelmed with excitement at the serendipitous meeting, the tourist offered Picasso fair market value if he would render a quick sketch of her image. After completing his commission, she was shocked when he asked for five thousand francs, responding, “But it only took you a few minutes.” Undeterred, Picasso retorted, “No, it took me all my life.”[3]Picasso’sGarçon á la pipewas one of the most expensive works ever sold at more than $100 million.Image courtesy of Wikipedia,http://en.wikipedia.org/wiki/File:Gar%C3%A7on_%C3%A0_la_pipe.jpg.This story illustrates the complexity associated with managing CEO compensation. On the one hand, large corporations must pay competitive wages for the scarce talent that is needed to manage billion-dollar corporations. In addition, like celebrities and sport stars, CEO pay is much more than a function of a day’s work for a day’s pay. CEO compensation is a function of the competitive wages that other corporations would offer for a potential CEO’s services.On the other hand, boards will face considerable scrutiny from investors if CEO pay is out of line with industry norms. From the year 1980 to 2000, the gap between CEO pay and worker pay grew from 42 to 1
Saylor URL: http://www.saylor.org/books Saylor.org 319 to 475 to 1.[4]Although efforts to close this gap have been made, as recently as 2008 reports indicate the ratio continues to be as high as 344 to 1, much higher than other countries, where an 80 to 1 ratio is common, or in Japan where the gap is just 16 to 1.[5]Meanwhile, shareholders need to be aware that research studies have found that CEO pay is positively correlated with the size of firms—the bigger the firm, the higher the CEO’s compensation.[6]Consequently, when a CEO tries to grow a company, such as by acquiring a rival firm, shareholders should question whether such growth is in the company’s best interest or whether it is simply an effort by the CEO to get a pay raise.In most publicly traded firms, CEO compensation generally includes guaranteed salary, cash bonus, and stock options. But perks provide another valuable source of CEO compensation. In addition to the controversy surrounding CEO pay, such perks associated with holding the position of CEO have also come under considerable scrutiny. The termperks, derived fromperquisite,refers to special privileges, or rights, as a function of one’s position. CEO perks have ranged in magnitude from the sweet benefit of ice cream for life given to former Ben & Jerry’s CEO Robert Holland, to much more extreme benefits that raise the ears of investors while outraging employees. One such perk was provided to John Thain, who, as former head of NYSE Euronext, received more than $1 million to renovate his office. While such perks may provide powerful incentives to stay with a company, they may result in considerable negative press and serve only to motivate vigilant investors wary of the value of such investments to shop elsewhere.The Market for Corporate Governance An old investment cliché encourages individuals to buy low and sell high. When a publicly traded firm loses value, often due to lack of vigilance on the part of the CEO and/or board, a company may become a target of a takeover wherein another firm or set of individuals purchases the company. Generally, the top management team is charged with revitalizing the firm and maximizing its assets.In some cases, the takeover is in the form of aleveragedbuyout(LBO)in which a publicly traded company is purchased and then taken off the stock market. One of the most famous LBOs was of RJR Nabisco, which inspired the book (and later film)Barbarians at the Gate. LBOs historically are associated with reduction in workforces to streamline processes and decrease costs. The managers who instigate buyouts
Saylor URL: http://www.saylor.org/books Saylor.org 320 generally bring a more entrepreneurial mind-set to the firm with the hopes of creating a turnaround from the same fate that made the company an attractive takeover target (recentpoor performance).[7]Many takeover attempts increase shareholder value. However, because most takeovers are associated with the dismissal of previous management, the terminology associated with change of ownership has a decidedly negative slant against the acquiring firm’s management team. For example, individuals or firms that hope to conduct a takeover are often referred to as corporateraiders. An unsolicited takeover attempt is often dubbed a hostiletakeover, withsharkrepellentas the potential defenses against such attempts. Although the poor management of a targeted firm is often the reason such businesses are potential takeover targets, when another firm that may be more favorable to existing management enters the picture as an alternative buyer, awhiteknightis said to have entered the picture.The negative tone of takeover terminology also extends to the potential target firm. CEOs as well as board members are likely to lose their positions after a successful takeover occurs, and a number of antitakeover tactics have been used by boards to deter a corporate raid. For example, many firms are said to paygreenmailby repurchasing large blocks of stock at a premium to avoid a potential takeover. Firms may threatento take apoisonpillwhere additional stock is sold to existing shareholders, increasing the shares needed for a viable takeover. Even if the takeover is successful and the previous CEO is dismissed, agoldenparachutethat includes a lucrative financialsettlement is likely to provide a soft landing for the ousted executive.KEY TAKEAWAY xFirms can benefit from superior corporate governance mechanisms such as an active board that monitors CEO actions, provides strategic advice, and helps to network to other useful resources. When such mechanisms are not in place, CEO excess may go unchecked, resulting in negative publicity, poor firm performance, and potential takeover by other firms. EXERCISES 1.Divide the class into teams and see who can find the most egregious CEO perk in the last year.
Saylor URL: http://www.saylor.org/books Saylor.org 321 2.Find a listing of members of a board of directors for a Fortune 500 firm. Does the board seem to be composed of individuals who are likely to fulfill all the board roles effectively? 3.Research a hostile takeover in the past five years and examine the long-term impact on the firm’s stock market performance. Was the takeover beneficial or harmful for shareholders? 4.Examine the AFL-CIO Executive Paywatch website (http://www.aflcio.org/corporatewatch/paywatch) and select a company of interest to see how many years you would need to work to earn a year’s pay enjoyed by the firm’s CEO. [1] Bunting, C. 2011, February 23. Board of dreams: Fantasy board of directors. Business News Daily. Retrieved from http://www.businessnewsdaily.com/681-board-of-directors-fantasy-picks-small-business.html[2] Lavelle, L. 2002, October 7. The best and worst boards: How corporate scandals are sparking a revolution in governance. BusinessWeek, 104. [3] Kay, I. 1999. Don’t devalue human capital. Wall Street Journal—Eastern Edition, 233, A18. [4] Blumenthal, R. G. 2000, September 4. The pay gap between workers and chiefs looks like a chasm. Barron’s, 10. [5] Feltman, P. 2009. Experts examine pay disparity, other executive compensation issues.SEC Filings Insight, 15, 1–6. [6] Tosi, H. L., Werner, S., Katz., J. P., & Gomez-Mejia, L. R. 2000. How much does performance matter? A meta-analysis of CEO pay studies. Journal of Management, 26, 301–339. [7]Wright, M., Hoskisson, R. E., & Busenitz, L. W. 2001. Firm rebirth: Buyouts as facilitators of strategic growth and entrepreneurship. Academy of Management Executive,15, 111–125.
Saylor URL: http://www.saylor.org/books Saylor.org 322 10.2 Corporate Ethics and Social Responsibility LEARNING OBJECTIVES 1.Know the three levels and six stages of moral development suggested by Kohlberg. 2.Describe famous corporate scandals. 3.Understand how the Sarbanes-Oxley Act of 2002 provides a check on corporate ethical behavior in the United States. 4.Know the dimensions of corporate social performance tracked by KLD. Stages of Moral Development How do ethics evolve over time? PsychologistLawrence Kohlberg suggests that there are six distinct stages of moral development and that some individuals move further along these stages than others.[1]Kohlberg’s six stages were grouped into three levels: (1) preconventional, (2) conventional, and (3) postconventional.The preconventional level of moral reasoning is very egocentric in nature, and moral reasoning is tied to personal concerns. In stage 1, individuals focus on the direct consequences that their actions will have—for example, worry about punishment or getting caught. In stage 2, right or wrong is defined by the reward stage, where a “what’s in it for me” mentality is seen.In the conventional level of moral reasoning, morality is judged by comparing individuals’ actions with the expectations of society. In stage 3, individuals are conformity driven and act with the goal of fulfilling social roles. Parents that encourage their children to be good boys and girls use this form of moral guidance.In stage 4, the importance of obeying laws, social conventions, or other forms of authority to aid in maintaining a functional society is encouraged. You might witness encouragement under this stage when using a cell phone in a restaurant or when someone is chatting too loudly in a library.The postconventional level, or principled level, occurs when morality is more than simply following social rules or norms. Stage 5 considers different values and opinions. Thus laws are viewed as social contracts that promote the greatest good for the greatest number of people. Following democratic principles or
Saylor URL: http://www.saylor.org/books Saylor.org 323 voting to determine an outcome is common when this stage of reasoning is invoked. In stage 6, moral reasoning is based on universal ethical principles. For example, the golden rule that you should do unto others as you would have them do unto you illustrates one such ethical principle. At this stage, laws are grounded in the idea of right and wrong. Thus individuals follow laws because they are just and not because they will be punished if caught or shunned by society. Consequently, with this stage there is an idea of civil disobedience that individuals have a duty to disobey unjust laws.Corporate Scandals and Sarbanes-Oxley In the 1990s and early 2000s, several corporate scandals were revealed in the United States that showed a lack of board vigilance. Perhaps the most famous involves Enron, whose executive antics were documented in the filmThe Smartest Guys in the Room. Enron used accounting loopholes to hide billions of dollars in failed deals. When their scandal was discovered, top management cashed out millions in stock options while preventing lower-level employees from selling their stock. The collective acts of Enron led many employees to lose all their retirement holdings, and many Enron execs were sentenced to prison.In response to notable corporate scandals at Enron, WorldCom, Tyco, and other firms, Congress passed sweeping new legislation with the hopes of restoring investor confidence while preventing future scandals. Signed into law by President George W. Bush in 2002, Sarbanes-Oxley contained eleven aspects that represented some of the most far-reaching reforms since the presidency of Franklin Roosevelt. These reformscreate improved standards that affect all publicly traded firms in the United States. The key elements of each aspect of the act are summarized as follows:1.Because accounting firms were implicated in corporate scandal, an oversight board was created to oversee auditing activities.2.Standards now exist to ensure auditors are truly independent and not subject to conflicts of interest in regard to the companies they represent.3.Enron executives claimed that they had no idea what was going on in their company,but Sarbanes-Oxley requires senior executives to take personal responsibility for the accuracy of financial statements.
Saylor URL: http://www.saylor.org/books Saylor.org 324 4.Enhanced reporting is now required to create more transparency in regard to a firm’s financial condition.5.Securities analysts must disclose potential conflicts of interest.6.To prevent CEOs from claiming tax fraud is present at their firms, CEOs must personally sign the firm’s tax return.7.The Securities and Exchange Commission (SEC) now has expanded authority to censor or bar securities analysts from acting as brokers, advisers, or dealers.8.Reports from the comptroller general are required to monitor any consolidations among public accounting firms, the role of credit agencies in securities market operations, securities violations, and enforcement actions.9.Criminal penalties now exist for altering or destroying financial records.10.Significant criminal penalties now exist for white-collar crimes.11.The SEC can freeze unusually large transactions if fraud is suspected.The changes that encouragedthe creation of Sarbanes-Oxley were so sweeping that comedian Jon Stewart quipped, “Did Wall Street have any rules before this? Can you just shoot a guy for looking at you wrong?” Despite the considerable merits of Sarbanes-Oxley, no legislation can provide a cure-all for corporate scandal. As evidence, the scandal by Bernard Madoff that broke in 2008 represented the largest investor fraud ever committed by an individual. But in contrast to some previous scandals that resulted in relatively minor punishments for their perpetrators, Madoff was sentenced to 150 years in prison.Measuring Corporate Social Performance TOMS Shoes’ commitment to donating a pair of shoes for every shoe sold illustrates the concept ofsocialentrepreneurship, in which a business is created with a goal of bettering both business and society.[2]Firms such as TOMS exemplify a desire to improvecorporatesocialperformance(CSP)in which a commitment to individuals, communities, and thenatural environment is valued alongside the goal of creating economic value. Although determining the level of a firm’s social responsibility is subjective, this challenge has been addressed in detail by Kinder, Lydenberg and Domini & Co. (KLD), a Boston-based
Saylor URL: http://www.saylor.org/books Saylor.org 325 firm that rates firms on a number of stakeholder-related issues with the goal of measuring CSP. KLD conducts ongoing research on social, governance, and environmental performance metrics of publicly traded firms and reports such statistics to institutional investors. The KLD database provides ratings on numerous “strengths” and “concerns” for each firm along a number of dimensions associated with corporate social performance. The results of their assessment are used to develop the Domini social investments fund, which has performed at levels roughly equivalent to the S&P 500.Assessing the community dimension of CSP is accomplished by assessing community strengths, such as charitable or innovative giving that supports housing, education, or relations with indigenous peoples, as well as charitable efforts worldwide, such as volunteer efforts or in-kind giving. A firm’s CSP rating is lowered when a firm is involved in tax controversies or other negative actions that affect the community, such as plant closings that can negatively affect property values.Chick-fil-A encourages education through their program that has provided more than $25 million in financial aid to more than twenty-five thousand employees since 1973.Image courtesy of SanFranAnnie,http://www.flickr.com/photos/sanfranannie/2472244829.CSP diversity strengths are scored positively when the company is known for promoting women and minorities, especially for board membership and the CEO position. Employment of the disabled and the
Saylor URL: http://www.saylor.org/books Saylor.org 326 presence of family benefits such as child or elder care would also result in a positive score by KLD. Diversity concerns include fines or civil penalties in conjunction with an affirmative action or other diversity-related controversy. Lack of representation by women on top management positions—suggesting that a glass ceiling is present at a company—would also negatively impact scoring on this dimension.The employee relations dimension of CSP gauges potential strengths such as notable union relations, profit sharing and employee stock-option plans, favorable retirement benefits, and positive health and safety programs noted by theUS Occupational Health and Safety Administration. Employee relations concerns would be evident in poor union relations, as well as fines paid due to violations of health and safety standards. Substantial workforce reductions as well as concerns about adequate funding of pension plans also warrant concern for this dimension.The environmental dimension records strengths by examining engagement in recycling, preventing pollution, or using alternative energies. KLD would also score a firm positively if profits derived from environmental products or services were a part of the company’s business. Environmental concerns such as penalties for hazardous waste, air, water, or other violations or actions such as the production of goods or services that could negatively impact the environment would reduce a firm’s CSP score.Product quality/safety strengths exist when a firm has an established and/or recognized quality program; product quality safety concerns are evident when fines related to product quality and/or safety have been discovered or when a firm has been engaged in questionable marketing practices or paid fines related to antitrust practices or price fixing.Corporate governance strengths are evident when lower levels of compensation for top management and board members exist, or when the firm owns considerable interest in another company rated favorably by KLD; corporate governance concerns arise when executive compensation is high or when controversies related to accounting, transparency, or political accountability exist.Strategy at the Movies Thank You for Smoking
Saylor URL: http://www.saylor.org/books Saylor.org 327 Does smoking cigarettes cause lung cancer? Not necessarily, according to a fictitious lobbying group called the Academy of Tobacco Studies (ATS) depicted inThank You for Smoking(2005). The ATS’s ability to rebuff the critics of smoking was provided by a three-headed monster of disinformation: scientist Erhardt Von Grupten Mundt who had been able to delay finding conclusive evidence of the harms of tobacco for thirty years, lawyers drafted from Ivy League institutions to fight against tobacco legislation, and a spin control division led by the smooth-talking Nick Naylor.The ATS was a promotional powerhouse. In just one week, the ATS and its spin doctor Naylor distracted the American public by proposing a $50 million campaign against teen smoking, brokered a deal with a major motion picture producer to feature actors and actresses smoking after sex, and bribed a cancer-stricken advertising spokesman to keep quiet. But after the ATS’s transgressions were revealed and cigarette companies were forced to settle a long-standing class-action lawsuit for $246 billion, the ATS was shut down. Although few organizations promote a product as harmful as cigarettes, the lessons offered inThank You for Smokinghave wide application. In particular, the film highlights that choosing between ethical and unethical business practices is not only a moral issue, but it can also determine whether an organization prospers or dies.KEY TAKEAWAY xThe work of Lawrence Kohlberg examines how individuals can progress in their stages of moral development. Lack of such development by many CEOs led to a number of scandals, as well as legislation such as the Sarbanes-Oxley Act of 2002 that was enacted with the hope of deterring scandalous behavior in the future. Firms such as KLD provide objective measures of both positive and negative actions related to corporate social performance. EXERCISES 1.How would your college or university fare if rated on the dimensions used by KLD? 2.Do you believe that executives will become more ethical based on legislation such as Sarbanes-Oxley? [1] Kohlberg, L. 1981. Essays in moral development: Vol. 1. The philosophy of moral development. New York, NY: Harper & Row.
Saylor URL: http://www.saylor.org/books Saylor.org 328 [2] Schectman, J. 2010. Good business. Newsweek, 156, 50.
Saylor URL: http://www.saylor.org/books Saylor.org 329 10.3 Understanding Thought Patterns: A Key to Corporate Leadership?LEARNING OBJECTIVES 1.Know the three major generational influences that make up the majority of the current workforce and their different perspectives and influences. 2.Understand how decision biases may impede effective decision making. Generational Influences on Work Behavior Psychologist Kurt Lewin, known as the “founder of social psychology,” created a well-known formula B = ƒ(P,E) that states behavior is a function of the person and their environment. One powerful environmental influence that can be seen in organizations today is based on generational differences. Currently, four generations of workers (traditionalists, baby boomers, Generation X, Generation Y) coexist in many organizations. The different backgrounds and behaviors create challenges for leading these individuals that often have similar shared experiences within their generation but different sets of values, motivations, and preferences in contrast to other generations. Effective management of these four different generations involves a realization of their differences and preferred communication styles.[1]The generation born between 1925 and 1946 that fought in World War II and lived through the Great Depression are referred to astraditionalists. The perseverance of this generation has led journalist Tom Brokaw to dub this group “The Greatest Generation.” As a reflection of a generation that was molded by contributions to World War II, members of this generation value personal communication, loyalty, hierarchy,and are resistant to change. This group now makes up roughly 5 percent of the workforce.
Saylor URL: http://www.saylor.org/books Saylor.org 330 Photographer Dorothea Lange’s photoMigrant Mother, taken in 1936, embodied the struggles of the traditionalist generation that lived during the Great Depression.Image courtesy of Dorothea Lange,http://en.wikipedia.org/wiki/File:Lange-MigrantMother02.jpg.The generation known asbabyboomerswas born between 1946 and 1964, corresponding with a population “boom” following the end of World War II. This group witnessed Beatlemania, Vietnam, and the Watergate scandal. College graduates should be aware that this group makes up the majority of the workforce and that boomer managers often view face time as an important contribution to a successful work environment.[2]In addition, a realization that this generation wants to be included in office activities and values recognition is important to achievingcohesiveness between generations.
Saylor URL: http://www.saylor.org/books Saylor.org 331 GenerationX,born between 1965 and 1980, is marked by an X symbolizing their unknown nature. In contrast to the baby boomer’s value on office face time, Gen X members prize flexibility in their jobs and dislike the feeling that they are being micromanaged.[3]Because of the desire for independence as well as adaptability associated with this generation, you should try to answer the “What’s in it for me?” question to avoid the risk of Gen X members moving on to other employment opportunities.The generation that followed Generation X is known asGenerationYor millennials. This generation is highlighted by positive attributes such as the ability to embrace technology. More than previous generations, this group prizes job and life satisfaction highly, so making the workplace an enjoyable environment is key to managing Generation Y.Wise members of this generation will also be aware of the negative attributes surrounding them. For example, millennials are associated with their “helicopter” parents who are often too comfortably involved in the lives of their children. For example, such parents have been known to show up to their children’s job orientations, often attempting to interfere with other workplace experiences such as pay and promotion discussions that may be unwelcome by older generations. In addition, this generation is viewed as needing more feedback than previous groups. Finally, the trend toward discouraging some competitive activities among individuals in this agegroup has led millennials to be dubbed “Trophy Kids” by more cynical writers.Rational Decision Making Understanding generational differences can provide valuable insight into the perspectives that shape the behaviors of individuals born at different periods of time. But such knowledge does not answer a more fundamental question of interest to students of strategic management, namely, why do CEOs make bad, unethical, or other questionable decisions with the potential to lead their firms to poor performanceor firm failure? Part of the answer lies in the method by which CEOs and other individuals make decisions. Ideally, individuals would make rational decisions for important choices such as buying a car or house, or choosing a career or place to live. The process of rational decision making involves problem identification, establishment and weighing of decision criteria, generation and evaluation of alternatives, selection of the best alternative, decision implementation, and decision evaluation.
Saylor URL: http://www.saylor.org/books Saylor.org 332 Rational Decision-Making ModelReproduced with permissionWhile this model provides valuable insights by providing an ideal approach by which to make decisions, there are several problems with this model when applied to many complex decisions. First, many strategic decisions are not presented in obvious ways, and many CEOs may not be aware their firms are having problems until it’s too late to create a viable solution. Second, rational decision making assumes that options are clear and that a single best solution exists. Third, rational decision making assumes no time or cost constraints. Fourth, rational decision making assumes accurate information is available. Because of these challenges, some have joked that marriage is one of the least rational decisions a person can make because no one can seek out and pursue every possible alternative—even with all the online dating and social networking services inthe world.
Saylor URL: http://www.saylor.org/books Saylor.org 333 Decision Biases In reality, decision making is not rational because there are limits on our ability to collect and process information. Because of these limitations, Nobel Prize-winner Herbert Simon argued that we can learn more by examining scenarios where individuals deviate from the ideal. These decision biases provide clues to why individuals such as CEOs make decisions that in retrospect often seem very illogical—especially when they lead to actions that damage the firm and its performance. A number of the most common biases with the potential to affect business decision making are discussed next.Anchoringandadjustmentbiasoccurs when individuals react to arbitrary or irrelevant numbers when setting financial or other numerical targets. For example, it is tempting for college graduates to compare their starting salaries at their first career job to the wages earned at jobs used to fund school. Comparisons to siblings, friends, parents, and others with different majors are also very tempting while being generally irrelevant. Instead, research the average starting salary for your background, experience, and other relevant characteristics to get a true gauge. This bias could undermine firm performance if executives make decisions about the potential value of a merger or acquisition by making comparisons to previous deals rather than based on a realistic and careful study of a move’s profit potential. Theavailabilitybiasoccurs when more readily available information is incorrectly assessed to also be more likely. For example, research shows that most people think that auto accidents cause more deaths than stomach cancer because auto accidents are reported more in the media than deaths by stomach cancer at a rate of more than 100 to 1. This bias could cause trouble for executives if they focus on readily available information such as their own firm’s performance figures but fail to collect meaningful data on their competitors or industry trends that suggest theneed for a potential change in strategic direction.The idea of “throwing good money after bad” illustrates the bias of escalationofcommitment, when individuals continue on a failing course of action even after it becomes clear that this may be a poor path to follow. This can be regularly seen at Vegas casinos when individuals think the next coin must be more likely to hit the jackpot at the slots. The concept of escalation of commitment was chronicled in the 1990 bookBarbarians at the Gate: The Rise and Fall of RJR Nabisco. The book follows the buyout of RJR
Saylor URL: http://www.saylor.org/books Saylor.org 334 Nabisco and the bidding war that took place between then CEO of RJR Nabisco F. Ross Johnson and leverage buyout pioneers Henry Kravis and George Roberts. The result of the bidding war was an extremely high sales price of the company that resulted in significant debt for the new owners.Providing an excellent suggestion to avoid a nonrational escalation of commitment, old school comedian W. C. Fields once advised, “If at first you don’t succeed, try, try again. Then quit. There’s no point being a damn fool about it.”Image courtesy of Bain News Service, http://wikimediafoundation.org/wiki/File:Wcfields36682u_cropped.jpgFundamentalattributionerroroccurs when good outcomes are attributed to personal characteristics but undesirable outcomes are attributed to external circumstances. Many professors lament a common scenario that, when a student does well ona test, it’s attributed to intelligence. But when a student performs poorly, the result is attributed to an unfair test or lack of adequate teaching based on the professor. In a similar vein, some CEOs are quick to take credit when their firm performs well, but often attribute poor performance to external factors such as the state of the economy.Hindsightbiasoccurs when mistakes seem obvious after they have already occurred. This bias is often seen when second-guessing failed plays on the football fieldand is so closely associated with watching
Saylor URL: http://www.saylor.org/books Saylor.org 335 National Football League games on Sunday that the phrase Monday morning quarterback is a part of our business and sports vernacular. The decline of firms such as Kodak as victims to the increasing popularity of digital cameras may seem obvious in retrospect. It is easy to overlook the poor quality of early digital technology and to dismiss any notion that Kodak executives had good reason not to view this new technology as a significant competitive threat when digital cameras were first introduced to the market.Judgmentsaboutcorrelationandcausalitycan lead to problems when individuals make inaccurate attributions about the causes of events. Three things are necessary to determine cause—or why one element affects another. For example, understanding how marketing spending affects firm performance involves (1) correlation (do sales increase when marketing increases), (2) temporal order (does marketing spending occur before sales increase), and (3) ruling out otherpotential causes (is something else causing sales to increase: better products, more employees, a recession, a competitor went bankrupt, etc.). The first two items can be tracked easily, but the third is almost impossible to isolate because there are always so many changing factors. In economics, the expressionceteris paribus(all things being equal or constant) is the basis of many economic models; unfortunately, the only constant in reality is change. Of course, just because determining causality is difficult and often inconclusive does not mean that firms should be slow to take strategic action. As the old business saying goes, “We know we always waste half of our marketing budget, we just don’t know which half.”Misunderstandingsaboutsamplingmay occur when individuals draw broad conclusions from small sets of observations instead of more reliable sources of information derived from large, randomly drawn samples. Many CEOs have been known to make major financial decisions based on their own instincts rather than on careful number crunching.Overconfidencebiasoccurs when individuals are more confident in their abilities to predict an event than logic suggests is actually possible. For example, two-thirds of lawyers in civil cases believe their side willemerge victorious. But as the famed Yankees player/manager Yogi Berra once noted, “It’s hard to make predictions, especially about the future.” Such overconfidence is common in CEOs that have had success in the past and who often rely on their own intuition rather than on hard data and market research.
Saylor URL: http://www.saylor.org/books Saylor.org 336 Representativenessbias occurs when managers use stereotypes of similar occurrences when making judgments or decisions. In some cases, managers may draw from previous experiences to make good decisions when changes in the environment occur. In other cases, representativeness can lead to discriminatory behaviors that may be both unethical and illegal.Framingbias occurs when the way information is presented alters the decision an individual will make. Poor framing frequently occurs in companies because employees are often reluctant to bring bad news to CEOs. To avoid an unpleasant message, they might be tempted to frame information in a more positive light than reality, knowing that individuals react differently to news that a glass is half empty versus half full.Satisficingoccurs when individuals settle for the first acceptable alternative instead of seeking the best possible (optimal) decision. While this bias might actually be desirable when others are waiting behind you at a vending machine, research shows that CEOs commonly satisfice with major decisions such as mergers and takeovers.KEY TAKEAWAY xGenerational differences provide powerful influences on the mind-set of employees that should be carefully considered to effectively manage a diverse workforce. Wise managers will also be aware of the numerous decision biases that could impede effective decision making. EXERCISES 1.Explain how a specific decision bias mentioned in this chapter led to poor decision making by a firm. 2.Are there negative generational tendencies in your age group that you have worked to overcome? [1] Rathman, V. 2011. Four generations at work. Oil & Gas, 109, 10.[2] Fogg, P. 2008, July 18. When generations collide: Colleges try to prevent age-old culture clashes as four distinct groups meet in the workplace. Education Digest, 25–30. [3] Burk, B., Olsen, H., & Messerli, E. 2011, May. Navigating the generation gap in the workplace from the perspective of Generation Y. Parks & Recreation, 35–36.
Saylor URL: http://www.saylor.org/books Saylor.org 337 10.4 Conclusion This chapter explains the role of boards of directors in the corporate governance of organizations such as large, publicly traded corporations. Wise boards work to manage the agency problem that creates a conflict of interest between top managers such as CEO and other groups with a stake in the firm. When boards fail to do their duties, numerous scandals may ensue. Corporate scandals became so widespread that new legislation such as the Sarbanes-Oxley Act of 2002 has been developed with the hope of impeding future actions by executives associated with unethical or illegal behavior. Finally, firms should be aware of generational influences as well as other biases that may lead to poor decisions.EXERCISES 1.Divide your class into four or eight groups, depending on the size of the class. Each group should select a different industry. Find positive and negative examples of corporate social performance based on the dimensions used by KLD. 2.This chapter discussed Blake Mycoskie and TOMS Shoes. What other opportunities exist to create new organizations that serve both social and financial goals?
BMGT 495 – Project 4: Strategy Selection, Implementation, and Evaluation (Week 8)
NOTE: All submitted work is to expectations concerning proper citation sources as specified in the APA Publication Manual, 7th Ed. (Students are held accountable for in-text citations and an associated reference list only.)
COMPANY: Exxon Mobil Corp. (NYSE: XOM)
Background
Purpose and Expectations
This project is the last of four projects. You will generate a pool of alternative strategies, evaluate these alternative strategies, and select the best strategy using the tools and concepts learned throughout the course. You will develop implementation plans, evaluative plans to control the implementation process, and plan for post-evaluation measures. You will also draw from previous business courses to understand how organizations develop and manage strategies to establish, safeguard, and sustain their position in a competitive market.
Skill Building:
In this project, you build many different skills, including research, critical thinking, writing, and developing analytical skills related to various financial analysis tools and strategy tools used in business. In addition, you will select optimal strategies, design how to implement them, and evaluate the implementation process of the optimal strategies.
Outcomes Met with This Project:
Examine the impact of ethical decision making, social responsibility, stakeholder analysis, and corporate governance on organizations and society;
Utilize a set of useful analytical skills, tools, and techniques for analyzing a company strategically;
Integrate ideas, concepts, and theories from previously taken functional courses including, accounting, finance, market, business, and human resource management;
Analyze and synthesize strengths, weaknesses, opportunities, and threats (SWOT) to generate, prioritize, and implement alternative strategies to revise a current plan or write a new plan and present a strategic plan;
Evaluate the outcomes of identified strategies to determine their success and impact on short-term and long-term objectives.
Instructions:
Course Material and Research
You must research information about the specific company Exxon Mobil Corp. (NYSE: XOM) and the environment for this project. You are accountable for using the course materials to support the ideas, reasoning, and conclusions made. Course material’s use goes beyond defining terms and explains the ‘why and how’ of a situation. Using one or two in-text citations from the course materials and then relying on Internet source material will not earn many points on the assignment. A variety of source material is expected, and what is presented must be relevant and applicable to the topic being discussed. Avoid merely making statements but close the loop of the discussion by explaining how something happens or why something happens, which focuses on importance and impact. In closing the loop, you will demonstrate the ability to think clearly and rationally, showing an understanding of the logical connections between the ideas presented from the research, the course material, and the question(s) being asked.
Note: Your report is based on the research results performed and not on any prepared documentation. What this means is that you will research and draw your own conclusions that are supported by the research and the course material rather than the use of any source material that puts together any of the tools or techniques whether from the Internet, for-pay websites, or any pre-prepared document, video or source material. A zero will be earned for not doing your own analysis.
Success: The analysis is based on research and not opinion. You are not making recommendations, and you will not attempt to position the specific company in a better or worse light than other companies within the industry merely because you are completing an analysis on this particular company. The analysis must be based on factual information. Any conclusions drawn have to be based on factual information rather than leaps of faith. To ensure success, as stated above, you are expected to use the course materials and research on the specific company’s global industry and the specific company. The opinion does not earn credit, nor does it use external sources when course materials can be used. It is necessary to provide explanations (the why and how) rather than making statements. Avoid stringing one citation after another, as doing so does not show detailed explanations.
Preparation
Research
In completing the report, you will use the chapters in the eBook as a guide and perform research on the same company as in Projects 1 and 2. Answer the required elements below in narrative form following the steps.
Note: Your report is based on the research results performed and not on any prepared documentation. What this means is that you will research and draw your own conclusions that are supported by the research and the course material rather than the use of any source material that puts together any of the tools or techniques whether from the Internet, for-pay websites, or any document, video or source material. A zero will be earned for not doing your own analysis.
Library Resources (Company Required)
All the information needed for your assigned company must be obtained from one of the library’s suggested online company research databases. To use these resources, go to the main navigation bar in the classroom, select Academic Support, and then select Library. Next, select Databases by Title (A-Z). Since your primary online company research database is Statista, select S from the alphabet list, and scroll down to select Statista Online.
Dun and Bradstreet’s Hoovers Database, among others listed using the link directory below, is another excellent source of company research, competitor and industry information.
You can find relevant and significant additional information required for company project research by using .
Additional Library Resources
Research for Company Financial Ratios: Financial Research.
Research for Industry Financial Ratios: CSI Market.
Use “OneSearch” to find scholarly articles by clicking Library under Academic Support on the classroom main menu bar and checkmark “Scholarly Journals Only” prior to starting a search.
Library Support Personal Assistance
Extensive library resources and services are available online, 24 hours a day, seven days a week at to support you in your studies. In addition, the UMGC Library provides research assistance in creating search strategies, selecting relevant databases, and evaluating and citing resources in various formats via its “Ask a Librarian” service at.
Specific Company for All Four Projects Exxon Mobil Corp. (NYSE: XOM)
For this project, your instructor has specifically assigned each student to write an independent report on one specific company. The assigned company must be used for all four projects in this course. You cannot write reports on any other company different from the company specifically assigned by your instructor. Students who fail to use the specifically assigned companies from the list or use an unapproved company will receive a zero for the project.
The company that your instructor has assigned to you will be used for this project.
Preparation for the Project
Before you begin writing the report, you will read the following requirements that will help you meet the writing and APA requirements.
You will be analyzing the selected company Exxon Mobil Corp. (NYSE: XOM). When doing analysis, you are not merely making statements that may be cited. Instead, you will be supporting the statements made. “Support” is the process of explaining, discussing, and analyzing “why” and “how,” which is a higher-level critical analytical skill that is required for this class. Support is needed to do well on this project.
Read the grading rubric for the project. Then, use the grading rubric while writing the report to ensure all requirements are met, leading to the highest possible grade.
Writing the Report
Step 1 How to Set Up the Project
The document has to be written in Word or RTF. No other format is acceptable. No pdf files will be graded. Use 12-point font for a double-spaced report. The final product is expected 10-12 pages. The final project may not be more than 12 pages, excluding the title page and reference page. Those items identified in the implementation and action plans should appear under the appropriate heading in the paper. Do no use an Appendix.
Create a title page with the title, your name, date, the course number, the instructor’s name.
Create Topic Headings that correspond to exact sections of the project requirements.
Use the following template using the headings to separate elements. Do not use bullets in your paper as the required format is in narrative format with indented paragraphs and no extra space between paragraphs.
Step 2 Introduction
(The Introduction paragraph is the first paragraph of the paper and will describe to the reader the intent of the paper, explaining the main points covered in the paper. This intent should be understood before reading the remainder of the paper so the reader knows exactly what is being covered in the paper. Therefore, write the introduction last to ensure all of the main points are covered.)
Step 3 Alternative Strategy Generation
To generate a pool of strategies, you will look at the organization’s business-level strategy, corporate-level strategy, and global strategy. Then, using the information and data collected from your research and the analytical outcomes from (a) external factor analysis in your Project 1 and (b) internal factor analysis in Project 2, you will generate a pool of strategies.
Generate (create) a minimum of three possible alternative strategies for the company.
Identify and discuss cultural and organizational factors that should be considered in analyzing and choosing among the alternative strategies.
Step 4 Strategy Prioritization
Prioritize strategies and explain using the course material to support the reasoning – Use the tools learned in the course.
Step 5 Strategy Selection
Your strategy selection will be based on the use of the Quantitative Strategic Planning Matrix (QSPM). The QSPM produces a composite analysis. A composite analysis is one in which you will bring in a combination of relevant factors from the various analyses (EFE Matrix, IFE matrix, CPM matrix, SWOT, Grand Strategy Matrix, and QSPM). The QSPM is a tool that helps determine the relative attractiveness of feasible alternative strategies based on the external and internal key success factors.
Develop a Quantitative Strategic Planning Matrix (QSPM) analysis.
Discuss the value of a QSPM analysis for strategy selection. Be specific.
Step 6 Strategy Implementation
Recommend procedures for strategy implementation.
Discuss who, what and how to implement the selected strategy or strategies at the corporate level, business-unit level, and functional level.
Step 7 Strategy Evaluation
Use frameworks and tools discussed throughout the course. Support the reasoning and conclusions made.
Discuss procedures for strategy review and evaluation
Discuss the appropriate evaluative measures (including who, what, when, and how at the corporate level, business-unit level, and functional level)
Discuss a corrective action plan (including who, what, when, and how) at the corporate, business unit, and functional levels.
Step 8 Conclusion
Create a conclusion. The Conclusion is intended to emphasize the purpose/significance of the analysis, emphasize the significance/consequence of findings, and indicate the wider applications derived from the main points of the project’s requirements. Finally, you will conclude the findings of the external environment analysis.
References
Step 9 Review the Paper
Read the paper, using the rubric to ensure all required elements are present.
The following are specific requirements that you will follow. Use the checklist to mark off that you have followed each specific requirement.
Pointers for Project
This paper is a culmination of the learning across the eight weeks of the course. You will want to draw on your work in the earlier projects as well as material covered throughout this class and earlier classes in the program.
Generating strategies means creating your own new strategies that you would recommend to the company. Ideally, these will be at the corporate or global level.
The expectation is that students will generate new alternative strategies for the focal company rather than identify strategies the company is already pursuing.
Have your papers and notes from the earlier projects handy so you can easily refer to them.
You may want to review material in this and earlier classes related to
company culture.
the strategy implementation process.
the control function.
Note that, unlike the earlier projects, this project requires an introduction.
Read the provided information about the QSPM carefully so you know how each element in the matrix is determined and what it means.
https://www.knbcomm.com/blog/differentiating-goals-objectives-strategies-and-tactics-key-components-successful-strategic-plan
(When using video as reference, please input the time of the video)
Ethics in Business:
Businesses today face complex challenges, and social media ensures that every step a company takes is, or could quickly be, in the spotlight. In addition, the most recent annual ethics survey notes that there is higher than ever pressure to compromise and behave unethically (Ethics and Compliance Initiative, 2021, para. 4). A post in University of Redlands business and society blog notes that Gartner, a global research company, recommends that business ethics be incorporated with the company’s operations. The same post observed that one survey found high integrity/honesty to be the second most important skill for business leaders (Schroeder, 2021, para. 4 & 6).
Social Responsibility:
A strong CSR program has become a significant tool in attracting and keeping the best talent. Frank and Smith (2016, p. 3) draw on earlier research into compensating wage differentials to suggest that job candidates are willing to take a salary cut to work for a company that they see as socially responsible. In other words, they would ‘pay’, through reduced income, for the opportunity to work for an organization that supports the world around it.
While companies themselves need to be seen to care about society and the world around them, interacting with that outside world in items of corporate social responsibility can be difficult. As a result, many companies set up separate philanthropic organizations referred to as Corporate Foundations, or CFs. These foundations are often easier for non-profits to approach and work with (Handy, n.d., pg. 4 -6).
Below is an image highlighting where a sloid CSR program has impact. This aligns well with Gartner’s findings above that corporate ethics should be interwoven with the company’s operations. Much the same can be said of its CSR.
Read and review the instructions and the rubric to be sure you have included all of the requirements for the assignment.
References
Ethics and Compliance Initiative. (2021, December 28). Ethics & compliance in the workplace: A look at global trends.). Global Business Ethics Survey.
Frank, D. H., & Smith, C. (2016). Will employees pay to work for a more socially responsible organization? Academy of Management Annual Proceedings. 2016, Vol. 2016 Issue 1, p868-873. 6p. DOI: 10.5465/AMBPP.2016.271.
Handy, F. (n.d.). Corporate social responsibility: Workable models for corporate philanthropy and corporate foundations – international examples. Satell Institute.
Saylor URL: http://www.saylor.org/books Saylor.org 273 Chapter 9 Executing Strategy through Organizational Design LEARNING OBJECTIVES After reading this chapter, you should be able to understand and articulate answers to the following questions: 1.What are the basic building blocks of organizational structure? 2.What types of structures exist, and what are advantages and disadvantages of each? 3.What is control and why is it important? 4.What are the different forms of control and when should they be used? 5.What are the key legal forms of business, and what implications does the choice of a business form have for organizational structure? Can Oil Well Services Fuel Success for GE?
Saylor URL: http://www.saylor.org/books Saylor.org 274 General Electric’s logo has changed little since its creation in the 1890s, but the company has grown to become the sixth largest in the United States.Image courtesy of The General Electric Company, http://en.wikipedia.org/wiki/File:Early_General_Electric_logo_1899.png.In February 2011, General Electric (GE) reached an agreement to acquire the well-support division of John Wood Group PLC for $2.8 billion. This was GE’s third acquisition of a company that provides services to oil wells in only five months. In October 2010, GE added the deepwater exploration capabilities of Wellstream Holdings PLC for $1.3 billion. In December 2010, part and equipment maker Dresser was acquired for $3 billion. By spending more than $7 billion on these acquisitions, GE executives made it clear that they had big plans within the oil well services business.While many executives would struggle to integrate three new companies into their firms, experts expected GE’s leaders to smoothly execute the transitions. In describing the acquisition ofJohn Wood Group PLC, for example, one Wall Street analyst noted, “This is a nice bolt-on deal for GE.”[1]In other words, this analyst believed that John Wood Group PLC could be seamlessly added to GE’s corporate empire. The way that GE was organized fueled this belief.GE’s organizational structure includes six divisions, each devoted to specific product categories: (1) Energy (the most profitable division), (2) Capital (the largest division), (3) Home & Business Solutions, (4) Healthcare, (5) Aviation, and (6) Transportation. Within the Energy division, there are three subdivisions: (1) Oil & Gas, (2) Power & Water, and (3) Energy Services. Rather than having the entire organization involved with integrating John Wood Group PLC, Wellstream Holdings PLC, and Dresser into GE, these three newly acquired companies would simply be added to the Oil & Gas subdivisions within the Energy division.In addition to the six product divisions, GE also had a division devoted to Global Growth & Operations. This division was responsible for all sales of GE products and services outside the United States. The Global Growth & Operations division was very important to GE’s future. Indeed, GE’s CEO Jeffrey Immelt expected that countries other than the United States will accountfor 60 percent of GE’s sales in the
Saylor URL: http://www.saylor.org/books Saylor.org 275 future, up from 53 percent in 2010. To maximize GE’s ability to respond to local needs, the Global Growth & Operations was further divided into twelve geographic regions: China, India, Southeast Asia, Latin/South America, Russia, Canada, Australia, the Middle East, Africa, Germany, Europe, and Japan.[2]Finally, like many large companies, GE also provided some centralized services to support all its units. These support areas included public relations, business development, legal, global research, human resources, and finance. By having entire units of the organization devoted to these functional areas, GE hoped not only to minimize expenses but also to create consistency across divisions.Growing concerns about the environmental effects of drilling, for example, made it likely that GE’s oil well services operations would need the help of GE’s public relations and legal departments in the future. Other important questions about GE’s acquisitions remained open as well. In particular, would the organizational cultures of John Wood Group PLC, Wellstream Holdings PLC, and Dresser mesh with the culture of GE? Most acquisitions in the business world fail to deliver the results that executives expect, and the incompatibility of organizational cultures is one reason why.GE fits a dizzying array of businesses into a relatively simple organizational chart.
Saylor URL: http://www.saylor.org/books Saylor.org 276 Adapted from company document posted at http://www.ge.com/pdf/company/ge_organization_chart.pdfThe wordexecutingused in this chapter’s title has two distinct meanings. These meanings were cleverly intertwined in a quip by John McKay. McKay had the misfortune to be the head coach of a hapless professional football team. In one game, McKay’s offensive unit played particularly poorly. When McKay was asked after the game what he thought of his offensive unit’s execution, he wryly responded, “I am in favor of it.”In the context of business, execution refers to how well a firm such as GE implements the strategies that executives create for it. This involves the creation and operation of both an appropriate organizational structure and an appropriate organizational control processes. Executives who skillfully orchestrate structure and control are likely to lead their firms to greater levels of success. In contrast, those executives who fail to do so are likely to be viewed by stakeholders such as employees and owners in much the same way Coach McKay viewed his offense: as worthy of execution.[1] Layne, R. 2011, February 14. GE agrees to buy $2.8 billion oil-service unit; shares surge. Bloomsberg Businessweek. Retrieved fromhttp://www.businessweek.com/news/2011-02-14/ge-agrees-to-buy-2-8-billion-oil-service-unit-shares-surge.html[2] GE names vice chairman John Rice to lead GE Global Growth & Operations [Press release]. 2010, November 8. GE website. Retrieved fromhttp://www.genewscenter.com/ Press-Releases/GE-Names-Vice-Chairman-John-Rice-to-Lead-GE-Global-Growth-Operations-2c8a.aspx
Saylor URL: http://www.saylor.org/books Saylor.org 277 9.1 The Basic Building Blocks of Organizational Structure LEARNING OBJECTIVES 1.Understand what division of labor is and why it is beneficial. 2.Distinguish between vertical and horizontal linkages and know what functions each fulfills in an organizational structure. Division of Labor General Electric (GE) offers a dizzying array of products and services, including lightbulbs, jet engines, and loans. One way that GE could produce its lightbulbs would be to have individual employees work on one lightbulb at a time from start to finish. This would be very inefficient, however, so GE and most other organizations avoid thisapproach. Instead, organizations rely ondivisionoflaborwhen creating their products. Division of labor is a process of splitting up a task (such as the creation of lightbulbs) into a seriesof smaller tasks, each of which is performed by a specialist.
Saylor URL: http://www.saylor.org/books Saylor.org 279 The leaders at the top of organizations have long known that division of labor can improve efficiency. Thousands of years ago, for example, Moses’s creation of a hierarchy of authority by delegating responsibility to other judges offered perhapsthe earliest known example.In the eighteenth century, Adam Smith’s bookThe Wealth of Nationsquantified the tremendous advantages that division of labor offered for a pin factory. If a worker performed all the various steps involved in making pins himself, he could make about twenty pins per day. By breaking the process into multiple steps, however, ten workers could make forty-eight thousand pins a day. In other words, the pin factory was a staggering 240 timesmore productive than it would have been without relying on division of labor. In the early twentieth century, Smith’s ideas strongly influenced Henry Ford and other industrial pioneers who sought to create efficient organizations.Division of labor allowed eighteenth-century pin factories to dramatically increase their efficiency.While division of labor fuels efficiency, it also creates a challenge—figuring out how to coordinate different tasks and the people who perform them. The solution isorganizationalstructure, which is defined as how tasks are assigned and grouped together with formal reporting relationships. Creating a structure that effectively coordinates a firm’s activities increases the firm’s likelihood of success. Meanwhile, a structure that does not match well with a firm’s needs undermines the firm’s chances of prosperity.
Saylor URL: http://www.saylor.org/books Saylor.org 280 Division of labor was central to Henry Ford’s development of assembly lines in his automobile factory. Ford noted, “Nothing is particularly hard if you divide it into small jobs.”Image courtesy of the Ford Company,http://en.wikipedia.org/wiki/File:A-line1913.jpg.Vertical and Horizontal LinkagesMost organizations use a diagram called anorganizationalchartto depict their structure. These organizational charts show how firms’ structures are built using two basic building blocks: vertical linkages and horizontal linkages.Verticallinkagestie supervisors and subordinates together. These linkages show the lines of responsibility through which a supervisor delegates authority to subordinates, oversees their activities, evaluates their performance, and guides them toward improvement when necessary. Every supervisor except for the person at the very top of the organization chart also serves as a subordinate to someone else. In the typical business school, for example, a department chair supervises a set of professors. The department chair in turn is a subordinate of the dean.Most executives rely on theunityofcommandprinciple when mapping out the vertical linkages in an organizational structure. This principle states that each person should only report directly to one supervisor. If employees have multiple bosses, they may receive conflicting guidance about how to do
Saylor URL: http://www.saylor.org/books Saylor.org 281 their jobs. The unity of command principle helps organizations to avoid such confusion. In the case of General Electric, for example, the head of the Energy division reports only to the chief executive officer. If problems were to arise with executing the strategic move discussed in this chapter’s opening vignette—joining the John Wood Group PLC with GE’s Energy division—the head of the Energy division reports would look to the chief executive officer for guidance.Horizontallinkagesare relationships between equals in an organization. Often these linkages are called committees, task forces, or teams. Horizontal linkages are important when close coordination is needed across different segments of an organization. For example, most business schools revise their undergraduate curriculumevery five or so years to ensure that students are receiving an education that matches the needs of current business conditions. Typically, a committee consisting of at least one professor from every academic area (such as management, marketing, accounting, and finance) will be appointed to perform this task. This approach helps ensure that all aspects of business are represented appropriately in the new curriculum.Organic grocery store chain Whole Foods Market is a company that relies heavily on horizontal linkages. As noted on their website, “At Whole Foods Market we recognize the importance of smaller tribal groupings to maximize familiarity and trust. We organize our stores and company into a variety of interlocking teams. Most teams have between 6 and100 Team Members and the larger teams are divided further into a variety of sub-teams. The leaders of each team are also members of the Store Leadership Team and the Store Team Leaders are members of the Regional Leadership Team. This interlocking team structure continues all the way upwards to the Executive Team at the highest level of the company.”[1]This emphasis on teams is intended to develop trust throughout the organization, as well as to make full use of the talents and creativity possessed by every employee.Informal LinkagesInformallinkagesrefer to unofficial relationships such as personal friendships, rivalries, and politics. In the long-running comedy seriesThe Simpsons, Homer Simpson is a low-level—and very low-performing—employee at a nuclear power plant. In one episode, Homer gains power and influence with the plant’s owner, Montgomery Burns, which far exceeds Homer’s meager position in the organization chart, because
Saylor URL: http://www.saylor.org/books Saylor.org 282 Mr. Burns desperately wants to be a member of the bowling team that Homer captains. Homer tries to use his newfound influence for his own personal gain and naturally the organization as a whole suffers. Informal linkages such as this one do not appear in organizational charts, but they nevertheless can have (and often do have) a significant influence on how firms operate.KEY TAKEAWAY xThe concept of division of labor (dividing organizational activities into smaller tasks) lies at the heart of the study of organizational structure. Understanding vertical, horizontal, and informal linkages helps managers to organize better the different individuals and job functions within a firm. EXERCISES 1.How is division of labor used when training college or university football teams? Do you think you could use a different division of labor and achieve more efficiency? 2.What are some formal and informal linkages that you have encountered at your college or university? What informal linkages have you observed in the workplace? [1] John Mackey’s blog. 2010, March 9. Creating the high trust organization [Web blog post]. Retrieved fromhttp://www2.wholefoodsmarket.com/blogs/jmackey/2010/03/09/creating-the-high-trust-organization/
Saylor URL: http://www.saylor.org/books Saylor.org 283 9.2 Creating an Organizational Structure LEARNING OBJECTIVES 1.Know and be able to differentiate among the four types of organizational structure. 2.Understand why a change in structure may be needed. Within most firms, executives rely on vertical and horizontal linkages to create a structure that they hope will match the needs of their firm’s strategy. Four types of structures are available to executives: (1) simple, (2) functional, (3) multidivisional, and (4) matrix. Like snowflakes, however, no two organizational structures are exactly alike. When creating a structure for their firm, executives willtake one of these types and adapt it to fit the firm’s unique circumstances. As they do this, executives must realize that the choice of structure will influence their firm’s strategy in the future. Once a structure is created, it constrains future strategic moves. If a firm’s structure is designed to maximize efficiency, for example, the firm may lack the flexibility needed to react quickly to exploit new opportunities.Simple Structure Many organizations start out with asimplestructure. In this type of structure, an organizational chart is usually not needed. Simple structures do not relyon formal systems of division of labor.If the firm is a sole proprietorship, one person performs all the tasks the organization needs to accomplish. For example, on the TV seriesThe Simpsons, both bar owner Moe Szyslak and the Comic Book Guy are shown handling all aspects of their respective businesses.
Saylor URL: http://www.saylor.org/books Saylor.org 284 There is a good reason most sole proprietors do not bother creating formal organizational charts.If the firm consists of more than one person, tasks tend to be distributed among them in an informal manner rather than each person developing a narrow area of specialization. In a family-run restaurant or bed and breakfast, for example, each person must contribute as needed to tasks, such as cleaning restrooms, food preparation, and serving guests (hopefully not in that order). Meanwhile, strategic decision making in a simple structure tends to be highly centralized. Indeed, often the owner of the firm makes all the important decisions. Because there is little emphasis on hierarchy within a simple structure, organizations that use this type of structure tend to have very few rules and regulations. The process of evaluating and rewarding employees’ performance also tends to be informal.The informality of simple structures creates both advantages and disadvantages. On the plus side, the flexibility offered by simple structures encourages employees’ creativity and individualism. Informality has potential negative aspects, too. Important tasks may be ignored if no one person is specifically assigned accountability for them. A lack of clear guidance from the top of the organization can create confusion for employees, undermine their motivation, and make them dissatisfied with their jobs. Thus when relying on a simple structure, the owner of a firm must be sure to communicate often and openly with employees.Functional Structure
Saylor URL: http://www.saylor.org/books Saylor.org 285 As a small organization grows, the person in charge of it often finds that a simple structure is no longer adequate to meet the organization’s needs. Organizations become more complex as they grow, and this can require more formal division of labor and a strong emphasis on hierarchy and vertical links. In many cases, these firms evolve from using a simple structure to relying on a functionalstructure.Within a functional structure, employees are divided into departments that each handle activities related to a functional area of the business, such as marketing, production, human resources, information technology, and customer service. Each of these five areas would be headed up by a manager who coordinates all activities related to her functional area. Everyone in a company that works on marketing the company’s products, for example, would report to the manager of the marketing department. The marketing managers and the managers in charge of the other four areas in turn would report to the chief executive officer.An example of a functional structureReproduced with permissionUsing a functional structure creates advantages and disadvantages. An important benefit of adopting a functional structure is that each person tends to learn a great deal about his or her particular function. By being placed in a department that consists entirely of marketing professionals, an individual has a great opportunity to become an expert in marketing. Thus a functional structure tends to create highly skilled specialists. Second, grouping everyone that serves a particular function into one department tends to keep costs low and to create efficiency. Also, because all the people in a particular department share the same
Saylor URL: http://www.saylor.org/books Saylor.org 286 background training, they tend to get along with one another. In other words, conflicts within departments are relatively rare.Using a functional structure also has a significant downside: executing strategic changes can be very slow when compared with other structures. Suppose, for example, that a textbook publisher decides to introduce a new form of textbook that includes “scratch and sniff” photos that let students smell various products in addition to reading about them. If the publisher relies on a simple structure, the leader of the firm can simply assign someone to shepherd this unique new product through all aspects of the publication process.If the publisher is organized using a functional structure, however, every department in the organization will have to be intimately involved in the creation of the new textbooks. Because the new product lies outside each department’s routines, it may become lost in the proverbial shuffle. And unfortunately for the books’ authors, the publication process will be halted whenever a functional area does not live up to its responsibilities in a timely manner. More generally, because functional structures are slow to execute change, they tend to work best for organizations that offer narrow and stable product lines.The specific functional departments that appear in an organizational chart vary across organizations that use functional structures. In the example offered earlier in this section, a firm was divided into five functional areas: (1) marketing, (2) production, (3) human resources, (4) information technology, and (5) customer service. In the TV showThe Office, a different approach toa functional structure is used at the Scranton, Pennsylvania, branch of Dunder Mifflin. As of 2009, the branch was divided into six functional areas: (1) sales, (2) warehouse, (3) quality control, (4) customer service, (5) human resources, and (6) accounting. A functional structure was a good fit for the branch at the time because its product line was limited to just selling office paper.
Saylor URL: http://www.saylor.org/books Saylor.org 287 Multidivisional Structure Many organizations offer a wide variety of products and services. Some of these organizations sell their offerings across an array of geographic regions. These approaches require firms to be very responsive to
Saylor URL: http://www.saylor.org/books Saylor.org 288 customers’ needs. Yet, as noted, functional structures tend to be fairly slow to change. As a result, many firms abandon the use of a functional structure as their offerings expand. Often the new choice is amultidivisionalstructure. In this type of structure, employees are divided into departments based on product areas and/or geographic regions.General Electric (GE) is an example of a company organized this way. As shown in the organization chart that accompanies this chapter’s opening vignette, most of the company’s employees belong to one of six product divisions (Energy, Capital, Home & Business Solutions, Health Care, Aviation, and Transportation) or to a division that is devoted to all GE’s operations outside the United States (Global Growth & Operations).A big advantage of a multidivisional structure is that it allows a firm to act quickly. When GE makes a strategic movesuch as acquiring the well-support division of John Wood Group PLC, only the relevant division (in this case, Energy) needs to be involved in integrating the new unit into GE’s hierarchy. In contrast, if GE was organized using a functional structure, the transition would be much slower because all the divisions in the company would need to be involved. A multidivisional structure also helps an organization to better serve customers’ needs. In the summer of 2011, for example, GE’s Capital division started to make real-estate loans after exiting that market during the financial crisis of the late 2000s.[1]Because one division of GE handles all the firm’s loans, the wisdom and skill needed to decide when to reenter real-estate lending was easily accessible.Of course, empowering divisions to act quickly can backfire if people in those divisions take actions that do not fit with the company’s overall strategy. McDonald’s experienced this kind of situation in 2002. In particular, the French division of McDonald’s ran a surprising advertisement in a magazine called Femme Actuelle. The ad included a quote from a nutritionist that asserted children shouldnoteat at a McDonald’s more than once per week. Executives at McDonald’s headquarters in suburban Chicago wereconcerned about the message sent to their customers, of course, and they made it clear that they strongly disagreed with the nutritionist.Another downside of multidivisional structures is that they tend to be more costly to operate than functional structures. While a functional structure offers the opportunity to gain efficiency by having just
Saylor URL: http://www.saylor.org/books Saylor.org 289 one department handle all activities in an area, such as marketing, a firm using a multidivisional structure needs to have marketing units within each of its divisions. In GE’s case, for example, each of its seven divisions must develop marketing skills. Absorbing the extra expenses that are created reduces a firm’s profit margin.GE’s organizational chart highlights a way that firms can reduce some of these expenses: the centralization of some functional services. As shown in the organizational chart, departments devoted to important aspects of public relations, business development, legal, global research, human resources, and finance are maintained centrally to provide services to the six product divisions and the geographic division. By consolidating some human resource activities in one location, for example, GE creates efficiency and saves money.An additional benefit of such moves is that consistency is created across divisions. In 2011, for example, the Coca-Cola Company created an Office of Sustainability to coordinate sustainability initiatives across the entire company. Bea Perez was named Coca-Cola’s chief sustainability officer and was put in charge of the Office of Sustainability. At the time, Coca-Cola’s chief executive officer Muhtar Kent noted that Coca-Cola had “made significant progress with our sustainability initiatives, but our current approach needs focus and better integration.”[2]In other words, a department devoted to creating consistency across Coca-Cola’s sustainability efforts was needed for Coca-Cola to meet its sustainability goals.Matrix Structure Within functional and multidivisional structures, vertical linkages between bosses and subordinates are the most elements.Matrixstructures, in contrast, rely heavily on horizontal relationships.[3]In particular, these structures create cross-functional teams that each work on a different project. This offers several benefits: maximizing the organization’s flexibility, enhancing communication across functional lines, and creating a spirit of teamwork and collaboration. A matrix structure can also help develop new managers. In particular, a person without managerial experience can be put in charge of a relatively small project as a test to see whether the person has a talent for leading others.
Saylor URL: http://www.saylor.org/books Saylor.org 290 Using a matrix structure can create difficulties too. One concern is that using a matrix structure violates the unity of command principle because each employee is assigned multiple bosses. Specifically, any given individual reports to a functional area supervisor as well as one or more project supervisors. This creates confusion for employees because they are left unsure about who should be giving them direction. Violating the unity of command principle also creates opportunities for unsavory employees to avoid responsibility by claiming to each supervisor that a different supervisor is currently depending on their efforts.The potential for conflicts arising between project managers within a matrix structure is another concern. Chances are that you have had some classes with professors who are excellent speakers while you have been forced to suffer through a semester of incomprehensible lectures in other classes. This mix of experiences reflects a fundamental reality of management: in any organization, some workers are more talented and motivated than others. Within a matrix structure, each project manager naturally will want the best people in the company assigned to her project because their boss evaluates these managers based on how well their projects perform. Because the best people are a scarce resource, infighting and politics can easily flare up around which people are assigned to each project.Giventhese problems, not every organization is a good candidate to use a matrix structure. Organizations such as engineering and consulting firms that need to maximize their flexibility to service projects of limited duration can benefit from the use of a matrix. Matrix structures are also used to organize research and development departments within many large corporations. In each of these settings, the benefits of organizing around teams are so great that they often outweigh the risks of doing so.
Saylor URL: http://www.saylor.org/books Saylor.org 291 Strategy at the Movies Office SpaceHow much work can a man accomplish with eight bosses breathing down his neck? For Peter Gibbons, an employee at information technology firm Initech in the 1999 movieOffice Space, the answer was zero. Initech’s use of a matrix structure meant that each employee had multiple bosses, each representing a different aspect of Initech’s business. High-tech firms often use matrix to gain the flexibility needed to manage multiple projects simultaneously. Successfully using a matrix structure requires excellent communication among various managers—however, excellence that Initech could not reach. When
Saylor URL: http://www.saylor.org/books Saylor.org 292 Gibbons forgot to put the appropriate cover sheet on his TPS report, each of his eight bosses—and a parade of his coworkers—admonished him. This fiasco and others led to Gibbons to become cynical about his job.Simpler organizational structures can be equally frustrating. Joanna, a waitress at nearby restaurant Chotchkie’s, had only one manager—a stark contrast to Gibbons’s eight bosses. Unfortunately, Joanna’s manager had an unhealthy obsession with the “flair” (colorful buttons and pins) used by employees to enliven their uniforms. A series of mixed messages about the restaurant’s policy on flair led Joanna to emphatically proclaim—both verbally and nonverbally—her disdain for the manager. She then quit her job and stormed out of the restaurant.Office Spaceillustrates the importance of organizational design decisions to an organization’s culture and to employees’ motivation levels. Amatrix structure can facilitate resource sharing and collaboration but may also create complicated working relationships and impose excessive stress on employees. Chotchkie’s organizational structure involved simpler working relationships, but these relationships were strained beyond the breaking point by a manager’s eccentricities. In a more general sense,Office Spaceshows that all organizational structures involve a series of trade-offs that must be carefully managed.Boundaryless Organizations Most organizational charts show clear divisions and boundaries between different units. The value of a much different approach was highlighted by former GE CEO Jack Welch when he created the term boundarylessorganization. A boundaryless organization is one that removes the usual barriers between parts of the organization as well as barriers between the organization and others.[4]Eliminating all internal and external barriers is not possible, of course, but making progress toward being boundaryless can help an organization become more flexible and responsive. One example is W.L. Gore, a maker of fabrics, medical implants, industrial sealants, filtration systems, and consumer products. This firm avoids organizational charts, management layers, and supervisors despite having approximately nine thousand employees across thirty countries. Rather than granting formal titles to certain people, leaders with W.L. Gore emerge based on performance and they attract followers to their ideas over time. As one employee noted, “We vote with our feet. If you call a meeting, and people show up, you’re a leader.”[5]
Saylor URL: http://www.saylor.org/books Saylor.org 293 The boundaryless approach to structure embraced by W.L. Gore drives the kind of creative thinking that led to their most famous product, GORE-TEX.Image courtesy of adifansnet, http://www.flickr.com/photos/adifans/3706215019.An illustration of how removing barriers can be valuable has its roots in a very unfortunate event. During 2005’s Hurricane Katrina, rescue efforts were hampered by a lack of coordination between responders from the National Guard (who are controlled by state governments) and from active-duty military units (who are controlled by federal authorities). According to one National Guard officer, “It was just like a solid wall was between the two entities.”[6]Efforts were needlessly duplicated in some geographic areas while attention to other areas was delayed or inadequate. For example, poor coordination caused the evacuation of thousands of people from the New Orleans Superdome to be delayed by a full day. The results were immense human suffering and numerous fatalities.
Saylor URL: http://www.saylor.org/books Saylor.org 294 In 2005, boundaries between organizations hampered rescue efforts following Hurricane Katrina.Image courtesy of Kyle Niemi, http://upload.wikimedia.org/wikipedia/commons/3/3d/KatrinaNewOrleansFlooded_edit2.jpg.To avoid similarproblems from arising in the future, barriers between the National Guard and active-duty military units are being bridged by special military officers called dual-status commanders. These individuals will be empowered to lead both types of units during a disaster recovery effort, helping to ensure that all areas receive the attention they need in a timely manner.Reasons for Changing an Organization’s Structure
Saylor URL: http://www.saylor.org/books Saylor.org 295 Creating an organizational structure is not a onetime activity. Executives must revisit an organization’s structure over time and make changes to it if certain danger signs arise. For example, a structure might need to be adjusted if decisions with the organization are being made too slowly or if the organization is performing poorly. Both these problems plagued Sears Holdings in 2008, leading executives to reorganize the company.Although it was created to emphasize the need for unity among the American colonies, this famous 1754 graphic by Ben Franklin also illustrates a fundamental truth about structure: If the parts that make up a firm do not work together, the firm is likely to fail.Image courtesy of Wikipedia, http://upload.wikimedia.org/wikipedia/commons/9/9c/Benjamin_Franklin_-_Join_or_Die.jpg.Sears’s new structure organized the firm around five types of divisions: (1) operating businesses (such as clothing, appliances, and electronics), (2) support units (certain functional areas such as marketing and finance), (3) brands (which focus on nurturing the firm’s various brands such as Lands’ End, Joe Boxer, Craftsman, and Kenmore), (4) online, and (5) real estate. At the time, Sears’s chairman Edward S. Lampert noted that “by creating smaller focused teams that are clearly responsible for their units, we
Saylor URL: http://www.saylor.org/books Saylor.org 296 [will] increase autonomy and accountability, create greater ownership and enable faster, better decisions.”[7]Unfortunately, structural changes cannot cure all a company’s ills. Asof July 2011, Sears’s stock was worth just over half what it had been worth five years earlier.Sometimes structures become too complex and need to be simplified. Many observers believe that this description fits Cisco. The company’s CEO, John Chambers, has moved Cisco away from a hierarchical emphasis toward a focus on horizontal linkages. As of late 2009, Cisco had four types of such linkages. For any given project, a small team of people reported to one of forty-seven boards. The boards averaged fourteen members each. Forty-three of these boards each reported to one of twelve councils. Each council also averaged fourteen members. The councils reported to an operating committee consisting of Chambers and fifteen other top executives. Four of the forty-seven boards bypassed the councils and reported directly to the operating committee. These arrangements are so complex and time consuming that some top executives spend 30 percent of their work hours serving on more than ten of the boards, councils, and the operating committee.Because it competes in fast-changing high-tech markets, Cisco needs to be able to make competitive moves quickly. The firm’s complex structural arrangements are preventing this. In late 2007, Hewlett-Packard (HP) started promoting a warranty service that provides free support and upgrades within the computer network switches market. Because Cisco’s response to this initiative had to work its way through multiple committees, the firm did not take action until April 2009. During the delay,Cisco’s share of the market dropped as customers embraced HP’s warranty. This problem and others created by Cisco’s overly complex structure were so severe that one columnist wondered aloud “has Cisco’s John Chambers lost his mind?”[8]In the summer of 2011, Chambers reversed course and decided to return Cisco to a more traditional structure while reducing the firm’s workforce by 9 percent. Time will tell whether these structural changes will boost Cisco’s stock price, which remained flat between 2006 andmid-2011.KEY TAKEAWAY xExecutives must select among the four types of structure (simple, functional, multidivisional, and matrix) available to organize operations. Each structure has unique advantages, and the selection of structures involves a series of trade-offs.
Saylor URL: http://www.saylor.org/books Saylor.org 297 EXERCISES 1.What type of structure best describes the organization of your college or university? What led you to reach your conclusion? 2.The movie Office Space illustrates two types of structures. What are some other scenes or themes from movies that provide examples or insights relevant to understanding organizational structure? [1] Jacobius, A. 2011, July 25. GE Capital slowly moving back into lending waters. Pensions & Investments. Retrieved fromhttp://www.pionline.com/article/20110725/PRINTSUB/110729949[2] McWilliams, J. 2011, May 19. Coca-Cola names Bea Perez chief sustainability officer.Atlantic-Journal Constitution. Retrieved from http://www.ajc.com/business/coca-cola-names-bea-951741.html [3] This discussion of matrix structures is adapted from Ketchen, D. J., & Short, J. C. 2011. Separating fads from facts: Lessons from “the good, the fad, and the ugly.” Business Horizons, 54, 17–22. [4] Askenas, R., Ulrich, D., Jick, T., & Kerr, S. 1995. The boundaryless organization: Breaking down the chains of organizational structure. San Francisco, CA: Jossey-Bass. [5] Hamel, G. 2007, September 27. What Google, Whole Foods do best. CNNMoney. Retrieved from http://money.cnn.com/2007/09/26/news/companies/management_hamel. fortune/index.htm [6] Elliott, D. 2011, July 3. New type of commander may avoid Katrina-like chaos. Yahoo! News. Retrieved from http://news.yahoo.com/type-commander-may-avoid-katrina-chaos-153 143508.html [7] Sears restructures business units. Retail Net. Retrieved from http://www.retailnet.com /story.cfm?ID=41613. [8] Blodget, H. 2009, August 6. Has Cisco’s John Chambers lost his mind? Business Insider. Retrieved from http://www.businessinsider.com/henry-blodget-has-ciscos-john- chambers-lost-his-mind-2009-8
Saylor URL: http://www.saylor.org/books Saylor.org 298 9.3 Creating Organizational Control Systems LEARNING OBJECTIVES 1.Understand the three types of control systems. 2.Know the strengths and weaknesses of common management fads. In addition to creating an appropriate organizational structure, effectively executing strategy depends on the skillful use of organizational control systems. Executives create strategies to try to achieve their organization’s vision, mission, and goals.Organizationalcontrolsystemsallowexecutives to track how well the organization is performing, identify areas of concern, and then take action to address the concerns. Three basic types of control systems are available to executives: (1) output control, (2) behavioral control, and (3) clan control. Different organizations emphasize different types of control, but most organizations use a mix of all three types.Output Control Outputcontrolfocuses on measurable results within an organization. Examples from the business world include the number of hits a website receives per day, the number of microwave ovens an assembly line produces per week, and the number of vehicles a car salesman sells per month (Figure 9.6 “Output Controls”). In each of these cases, executives must decide what level of performance is acceptable, communicate expectations to the relevant employees, track whether performance meets expectations, and then make any needed changes. In an ironic example, a group of post office workers in Pensacola, Florida, were once disappointed to learn that their paychecks had been lost—by the US Postal Service! The corrective action was simple: they started receiving their pay via direct deposit rather than through the mail.Many times the stakes are much higher. In early 2011, Delta Air Lines was forced to face some facts as part of its use of output control. Data gathered by the federal government revealed that only 77.4 percent of Delta’s flights had arrived on time during 2010. This performance led Delta to rank dead last among the major US airlines and fifteenth out of eighteen total carriers.[1]In response, Delta took important corrective steps. In particular, the airline added to its ability to service airplanes and provided more
Saylor URL: http://www.saylor.org/books Saylor.org 299 customer service training for its employees. Because some delays are inevitable, Delta also announced plans to staff a Twitter account called Delta Assist around the clock to help passengers whose flights are delayed. These changes and others paid off. For the second quarter of 2011, Delta enjoyed a $198 million profit, despite having to absorb a $1 billion increase in its fuel costs due to rising prices.[2]Output control also plays a big part in the college experience. For example, test scores and grade point averages are good examples of output measures. If you perform badly on a test, you might take corrective action by studying harder or by studying in a group for the next test. At most colleges and universities, a student is put on academic probation when his grade point average drops below a certain level. If the student’s performance does not improve, he may be removed from his major and even dismissed. On the positive side, output measures can trigger rewards too. A very high grade point average can lead to placement on the dean’s list and graduating with honors.While most scholarships require a high GPA, comedian David Letterman created a scholarship for a “C” student at Ball State University. Ball State later named a new communications and media building after its very famous alumnus.Image courtesy of Kyle Flood,http://upload.wikimedia.org/wikipedia/commons/e/eb/David_Letterman_building.jpg.
Saylor URL: http://www.saylor.org/books Saylor.org 300 Behavioral Control While output control focuses on results,behavioralcontrolfocuses on controlling the actions that ultimately lead to results. In particular, various rulesand procedures are used to standardize or to dictate behavior. In most states, for example, signs are posted in restaurant bathrooms reminding employees that they must wash their hands before returning to work. The dress codes that are enforced within many organizations are another example of behavioral control. To try to prevent employee theft, many firms have a rule that requires checks to be signed by two people. And in a somewhat bizarre example, some automobile factories dictate to workers how many minutes they can spend in restrooms during their work shift.Behavioral control also plays a significant role in the college experience. An illustrative (although perhaps unpleasant) example is penalizing students for not attending class. Professors grade attendance to dictate students’ behavior; specifically, to force students to attend class. Meanwhile, if you were to suggest that a rule should be created to force professors to update their lectures at least once every five years, we would not disagree with you.Outside the classroom, behavioral control is a major factor within college athletic programs. The National Collegiate Athletic Association (NCAA) governs college athletics using a huge set of rules, policies, and procedures. The NCAA’s rulebook on behavior is so complex that virtually all coaches violate its rules at one time or another. Critics suggest that the behavioral controls instituted by the NCAA have reached an absurd level. Nevertheless, some degree of behavioral control is needed within virtually all organizations.Creating an effective reward structure is key to effectively managing behavior because people tend to focus their efforts on the rewarded behaviors. Problems can arise when people are rewarded for behaviors that seem positive on the surface but that can actually undermine organizational goals under some circumstances. For example, restaurant servers are highly motivated to serve their tables quickly because doing so can increase their tips. But ifa server devotes all his or her attention to providing fast service, other tasks that are vital to running a restaurant, such as communicating effectively with managers, host staff, chefs, and other servers, may suffer. Managers need to be aware of such trade-offs and strive to align
Saylor URL: http://www.saylor.org/books Saylor.org 301 rewards with behaviors. For example, waitstaff who consistently behave as team players could be assigned to the most desirable and lucrative shifts, such as nights and weekends.Although some behavioral controls are intendedfor employees and not customers, following them is beneficial to everyone.Image courtesy of Sterilgutassistentin, http://en.wikipedia.org/wiki/File:Manhattan_New_York_City_2009_PD_20091130_209.JPG.Clan Control Instead of measuring results (as in outcome control) or dictating behavior (as in behavioral control),clancontrolis an informal type of control. Specifically, clan control relies on shared traditions, expectations, values, and norms to lead people to work toward the good of their organization.Clan control is often used heavily in settings where creativity is vital, such as many high-tech businesses. In these companies, output is tough to dictate, and many rules are not appropriate. The creativity of a research scientist would be likely to be stifled, for example, if she were given a quota of
Saylor URL: http://www.saylor.org/books Saylor.org 302 patents that she must meet each year (output control) or if a strict dress code were enforced (behavioral control).Google is a firm that relies on clan control to be successful. Employees are permitted to spend 20 percent of their workweek on their own innovative projects. The company offers an ‘‘ideas mailing list’’ for employees to submit new ideas and to comment on others’ ideas. Google executives routinely make themselves available two to three times per week for employees to visit with them to present their ideas. These informal meetings have generated a number of innovations, including personalized home pages and Google News, which might otherwise have never been adopted.As part of the team-building effort at Google, new employees are known as Noogles and are given a propeller hat to wear.Image courtesy of TdukAlex Lozupone,http://en.wikipedia.org/wiki/File:Noogler.png.
Saylor URL: http://www.saylor.org/books Saylor.org 303 Some executives look to clan control to improve the performance of struggling organizations. In 2005, Florida officials became fed up with complaints about surly clerks within the state’s driver’s license offices. The solution was to look for help with training employees from two companies that are well-known for friendly, engaged employees and excellent customer service. The first was The Walt Disney Company, which offers world-famous hospitality at its Orlando theme parks. The second was regional supermarket chain Publix, a firm whose motto stressed that “shopping is a pleasure” in its stores. The goal of the training was to build the sort of positive team spirit Disney and Publix enjoy. The state’s highway safety director summarized the need for clan control when noting that “we’ve just got to change a little culture out there.”[3]Clan control is also important on many college campuses. Philanthropic and social organizations such as clubs, fraternities, and sororities often revolve around shared values and team spirit. More broadly, many campuses have treasured traditions that bind alumni together across generations. Purdue University, for example, proudly owns the world’s largest drum. The drum is beaten loudly before home football games to fire up the crowd. After athletic victories, Auburn University students throw rolls of toilet paper into campus oak trees. At Clark University, Rollins College, and Emory University, time-honored traditions that involve spontaneously canceling classes surprise and delight students. These examples and thousands of others spread across the country’s colleges and universities help students feel like they belong to something special.Management Fads: Out of Control? Don’t chase the latest management fads. The situation dictates which approach best accomplishes the team’s mission.-Colin PowellThe emergence and disappearance of fads appears to be a predictable aspect of modern society. A fad arises when some element of popular culture becomes enthusiastically embraced by a group of people. Over the past few decades, for example, fashion fads have included leisure suits (1970s), “Members Only” jackets (1980s), Doc Martens shoes (1990s), and Crocs (2000s). Ironically, the reason a fad arises is also
Saylor URL: http://www.saylor.org/books Saylor.org 304 usually the cause of its demise. The uniqueness (or even outrageousness) of a fashion, toy, or hairstyle creates “buzz” and publicity but also ensures that its appeal is only temporary.[4]Fads also seem to be a predictable aspect of the business world. As with cultural fads, many provocative business ideas go through a life cycle of creating buzz, captivating a group of enthusiastic adherents, and then giving way to the next fad. Bookstore shelves offer a seemingly endless supply of popular management books whose premises range from the intriguing to the absurd. Within the topic of leadership, for example, various books promise to reveal the “leadership secrets” of an eclectic array of famous individuals such as Jesus Christ, Hillary Clinton, Attila the Hun, and Santa Claus.Beyond the striking similarities between cultural and business fads, there are also important differences. Most cultural fads are harmless, and they rarely create any long-term problems for those that embrace them. In contrast, embracing business fads could lead executives to make bad decisions. As our quote from Colin Powell suggests, relying on sound business practices is much more likely to help executives to execute their organization’s strategy than are generic words of wisdom from Old St. Nick.Many management fads have been closely tied to organizational control systems. Forexample, one of the best-known fads was an attempt to use output control to improve performance.Managementbyobjectives(MBO)is a process wherein managers and employees work together to create goals. These goals guide employees’ behaviors and serve as the benchmarks for assessing their performance. Following the presentation of MBO in Peter Drucker’s 1954 bookThe Practice of Management, many executives embraced the process as a cure-all for organizational problems and challenges.Like many fads, however, MBO became a good idea run amok. Companies that attempted to create an objective for every aspect of employees’ activities eventually discovered that this was unrealistic. The creation of explicit goals can conflict with activities involving tacit knowledge about the organization. Intangible notions such as “providing excellent customer service,” “treating people right,” and “going the extra mile” are central to many organizations’ success, but these notions are difficult if not impossible to
Saylor URL: http://www.saylor.org/books Saylor.org 305 quantify. Thus, in some cases, getting employees to embrace certain values and other aspects of clan control is more effective than MBO.Quality circles were a second fad that built on the notion of behavioral control. Quality circles began in Japan in the 1960s and were first introduced in the United States in 1972. Aqualitycircleis a formal group of employees that meets regularly to brainstorm solutions to organizational problems. As the name “quality circle” suggests, identifying behaviors that would improve thequality of products and the operations management processes that create the products was the formal charge of many quality circles.While the quality circle fad depicted quality as the key driver of productivity, it quickly became apparent that this perspective was too narrow. Instead, quality is just one of four critical dimensions of the production process; speed, cost, and flexibility are also vital. Maximizing any one of these four dimensions often results in a product that simply cannot satisfy customers’ needs. Many products with perfect quality, for example, would be created too slowly and at too great a cost to compete in the market effectively. Thus trade-offs among quality, speed, cost, and flexibility are inevitable.Improving clan control was the aim ofsensitivity-traininggroups(orT-groups)that were used in many organizations in the 1960s. This fad involved gatherings of approximately eight to fifteen people openly discussing their emotions, feelings, beliefs, and biases about workplace issues. In stark contrast to the rigid nature of MBO, the T-group involved free-flowing conversations led by a facilitator. These discussions were thought to lead individuals to greater understanding of themselves and others. The anticipated results were more enlightened workers and a greater spirit of teamwork.Research on social psychology has found that groups are often far crueler than individuals. Unfortunately, this meant that the candid nature of T-group discussions could easily degenerate into accusations and humiliation. Eventually, the T-group fad gave way to recognition that creating potentially hurtful situations has no place within an organization. Hints of the softer side of T-groups can still be observed in modern team-building fads, however. Perhaps the best known is the “trust game,” which claims to build trust between employees by having individuals fall backward and depend on their coworkers to catch them.
Saylor URL: http://www.saylor.org/books Saylor.org 306 Improving clan control was the basis for the fascination with organizationalculturethatwas all the rage in the 1980s. This fad was fueled by a best-selling 1982 book titledIn Search of Excellence: Lessons from America’s Best-Run Companies. Authors Tom Peters and Robert Waterman studied companies that they viewed as stellar performers and distilled eight similarities that were shared across the companies. Most of the similarities, including staying “close to the customer” and “productivity through people,” arose from powerful corporate cultures. The book quickly became an international sensation; more than three million copies were sold in the first four years after its publication.Soon it became clear that organizational culture’s importance was being exaggerated. Before long, both the popular press and academic research revealed that many of Peters and Waterman’s “excellent” companies quickly had fallen on hard times. Basic themes such as customer service and valuing one’s company are quite useful, but these clan control elements often cannot take the place of holding employees accountable for their performance.The history of fads allows us to make certain predictions about today’s hot ideas, such as empowerment, “good to great,” and viral marketing. Executives who distill and act on basic lessons from these fads are likely to enjoy performance improvements. Empowerment, for example, builds on important research findings regarding employees—many workers have important insights to offer to their firms, and these workers become more engaged in their jobs when executives take their insights seriously. Relying too heavily on a fad, however, seldom turns out well.Just as executives in the 1980s could not treatIn Search of Excellenceas a recipe for success, today’s executives should avoid treating James Collins’s 2001 best-selling bookGood to Great: Why Some Companies Make the Leap…and Others Don’tas a detailed blueprint for running their companies. Overall, executives should understand that management fads usually contain a core truth that can help organizations improve but that a balance of output, behavioral, and clan control is needed within most organizations. As legendary author Jack Kerouac noted, “Great things are not accomplished by those who yield to trends and fads and popular opinion.”KEY TAKEAWAY
Saylor URL: http://www.saylor.org/books Saylor.org 307 xOrganizational control systems are a vital aspect of executing strategy because they track performance and identify adjustments that need to be made. Output controls involve measurable results. Behavioral controls involve regulating activities rather than outcomes. Clan control relies on a set of shared values, expectations, traditions, and norms. Over time, a series of fads intended to improve organizational control processes have emerged. Although these fads tend to be seen as cure-alls initially, executives eventually realize that an array of sound business practices is needed to create effective organizational controls.EXERCISES 1.What type of control do you think works most effectively with you and why? 2.What are some common business practices that you predict will be considered fads in the future?3.How could you integrate each type of control intro a college classroom to maximize student learning? [1] Yamanouchi, K. 2011, February 10. Delta ranks near bottom in on-time performance.Atlanta-Journal Constitution. Retrieved from http://www.ajc.com/business/delta-ranks-near-bottom-834380.html[2] Yamanouchi, K. 2011, July 27. Delta has $198 million profit, says 2,000 took buyouts.Atlanta-Journal Constitution. Retrieved from http://www.ajc.com/business/delta-has-198-million-1050461.html[3] Bousquet, S. 2005, September 23. For surly license clerks. a pound of charm. St Petersburg Times. Retrieved fromhttp://www.sptimes.com/2005/09/23/State/For_surly_license _cle.shtml [4] This discussion of management fads is adapted from Ketchen, D. J., & Short, J. C. 2011. Separating fads from facts: Lessons from “the good, the fad, and the ugly.” Business Horizons, 54, 17–22.
Saylor URL: http://www.saylor.org/books Saylor.org 308 9.4 Legal Forms of Business LEARNING OBJECTIVES 1.Know the three basic legal forms of business. 2.Know the two specialized types of corporations. Choosing a Form of Business The legal form a firm chooses to operate under is an important decision with implications for how a firm structures its resources and assets. Several legal forms of business are available to executives. Each involves a different approach to dealing with profits and losses (Figure 9.10 “Business Forms”).There are three basic forms of business. Asoleproprietorshipis a firm that is owned by one person. From a legal perspective, the firm and its owner are considered one and the same. On the plus side, this means that all profits are the property of the owner (after taxes are paid, of course). On the minus side, however, the owner is personally responsible for the firm’s losses and debts. This presents a tremendous risk. If a sole proprietor is on the losing end of a significant lawsuit, for example, the owner could find his personal assets forfeited. Most sole proprietorships are small and many have no employees. In most towns, for example, there are a number of self-employed repair people, plumbers, and electricians who work alone on home repair jobs. Also, many sole proprietors run their businesses from their homes to avoid expenses associated with operating an office.In apartnership, two or more partners share ownership of a firm. A partnership is similar to a sole proprietorship in that the partners are the only beneficiaries of the firm’s profits, but they are also responsible for any losses and debts. Partnerships can be especially attractive if each person’s expertise complements the others. For example, an accountant who specializes in preparing individual tax returns and another who has mastered business taxes might choose to join forces to offer customers a more complete set of tax services than either could offer alone.From a practical standpoint, a partnership allows a person to take time off without closing down the business temporarily. Sander & Lawrence is a partnership of two home builders in Tallahassee, Florida.
Saylor URL: http://www.saylor.org/books Saylor.org 309 When Lawrencesuffered a serious injury a few years ago, Sander was able to take over supervising his projects and see them through to completion. Had Lawrence been a sole proprietor, his customers would have suffered greatly. However, a person who chooses to be part of a partnership rather than operating alone as a sole proprietor also takes on some risk; your partner could make bad decisions that end up costing you a lot of money. Thus developing trust and confidence in one’s partner is very important.Most large firms, such as Southwest Airlines, are organized as corporations. A key difference between acorporationon the one hand and a sole proprietorship and a partnership on the other is that corporations involve the separation of ownership and management. Corporations sell shares of ownership that are publicly traded in stock markets, and they are managed by professional executives. These executives may own a significant portion of the corporation’s stock, but this is not a legal requirement.Another unique feature of corporations is how they deal with profits and losses. Unlike in sole proprietorships and partnerships, a corporation’s owners (i.e., shareholders) do not directly receive profits or absorb losses. Instead, profits and losses indirectly affect shareholders in two ways. First, profits and losses tend to be reflected in whether the firm’s stock price rises or falls. When a shareholder sells her stock, the firm’s performance while she has owned the stock will influence whether she makes a profit relative toher stock purchase. Shareholders can also benefit from profits if a firm’s executives decide to pay cash dividends to shareholders. Unfortunately, for shareholders, corporate profits and any dividends that these profits support are both taxed. This doubletaxation is a big disadvantage of corporations.A specialized type of corporation called anScorporationavoids double taxation. Much like in a partnership, the firm’s profits and losses are reported on owners’ personal tax returns in proportion with each owner’s share of the firm. Although this is an attractive feature, an S corporation would be impractical for most large firms because the number of shareholders in an S corporation is capped, usually at one hundred. In contrast, Southwest Airlines has more than ten thousand shareholders. For smaller firms, such as many real-estate agencies, the S corporation is an attractive form of business.A final form of business is very popular, yet it is not actually recognized by the federal government as a form ofbusiness. Instead, the ability to create a limitedliabilitycompany(LLC)is granted in state laws. LLCs mix attractive features of corporations and partnerships. The owners of an LLC are not personally
Saylor URL: http://www.saylor.org/books Saylor.org 310 responsible for debts that the LLC accumulates (like in a corporation) and the LLC can be run in a flexible manner (like in a partnership). When paying federal taxes, however, an LLC must choose to be treated as a corporation, a partnership, or a sole proprietorship. Many home builders (including Sander & Lawrence), architectural businesses, and consulting firms are LLCs.KEY TAKEAWAY xThe three major forms of business in the United States are sole proprietorships, partnerships, and corporations. Each form has implications for how individuals are taxed and resources are managed and deployed. EXERCISES 1.Why are so many small firms sole proprietorships? 2.Find an example of a firm that operates as an LLC. Why do you think the owners of this firm chose this form of business over others? 3.Why might different forms of business be more likely to rely on a different organizational structure?
Saylor URL: http://www.saylor.org/books Saylor.org 311 9.5 Conclusion This chapter explains elements of organizational design that are vital for executing strategy. Leaders of firms, ranging from the smallest sole proprietorship to the largest global corporation, must make decisions about the delegation of authority and responsibility when organizing activities within their firms. Deciding how to best divide labor to increase efficiency and effectiveness is often the starting point for more complex decisions that lead to the creation of formal organizational charts. While small businesses rarely create organization charts, firms that embrace functional, multidivisional, and matrix structures often have reporting relationships with considerable complexity. To execute strategy effectively, managers also depend on the skillful use of organizational control systems that involve output, behavioral, and clan controls. Although introducing more efficient business practices to improve organizational functioning is desirable, executives need to avoid letting their firms become “out of control” by being skeptical of management fads. Finally, the legal form a business takes is an important decision with implications for a firm’s organizational structure.
Saylor URL: http://www.saylor.org/books Saylor.org 312 EXERCISES 1.The following chart is an organizational chart for the US federal government. What type of the four structures mentioned in this chapter best fits what you see in this chart? 2.How does this structure explain why the government seems to move at an incredibly slow pace? 3.What changes could be made to speed up the government? Would they be beneficial?
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