How Do Multinational Companies Manage Employees in Other Countries?
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C H A P T E R 1 3 Managing Groups and Teams FIGURE 13.1 The coordination needed by a symphony to perform in unison is a prime example of teamwork.
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W H A T ’ S I N I T F O R M E ?
Reading this chapter will help you do the following:
1. Recognize and understand group dynamics and development. 2. Understand the difference between groups and teams. 3. Understand how to organize effective teams. 4. Recognize and address common barriers to team effectiveness. 5. Build and maintain cohesive teams.
FIGURE 13.2 The P-O-L-C Framework
Groups and teams are ubiquitous on the organizational landscape and managers will find that team management
skills are required within each of the planning-organizing-leading-controlling (P-O-L-C) functions. For instance,
planning may often occur in teams, particularly in less centralized organizations or toward the higher levels of the
firm. When making decisions about the structure of the firm and individual jobs, managers conducting their
organizing function must determine how teams will be used within the organization. Teams and groups have
implications for the controlling function because teams require different performance assessments and rewards.
Finally, teams and groups are a facet of the leading function. Today’s managers must be both good team members
and good team leaders. Managing groups and teams is a key component of leadership.
In your personal life, you probably already belong to various groups such as the group of students in your
management class; you may also belong to teams, such as an athletic team or a musical ensemble. In your career,
you will undoubtedly be called on to be part of, and mostly likely to manage, groups and teams.
1. CASE IN POINT: GENERAL ELECTRIC ALLOWS TEAMWORK TO TAKE FLIGHT
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In Durham, North Carolina, Robert Henderson was opening a factory for General Electric Company (NYSE: GE). The goal of the factory was to manufacture the largest commercial jet engine in the world. Henderson’s op- portunity was great and so were his challenges. GE hadn’t designed a jet engine from the ground up for over 2 decades. Developing the jet engine project had already cost GE $1.5 billion. That was a huge sum of money to invest—and an unacceptable sum to lose should things go wrong in the manufacturing stage.
How could one person fulfill such a vital corporate mission? The answer, Henderson decided, was that one person couldn’t fulfill the mission. Even Jack Welch, GE’s CEO at the time, said, “We now know where pro- ductivity comes from. It comes from challenged, empowered, excited, rewarded teams of people.”
Empowering factory workers to contribute to GE’s success sounded great in theory. But how to accomplish these goals in real life was a more challenging question. Factory floors, traditionally, are unempowered work- places where workers are more like cogs in a vast machine than self-determining team members.
In the name of teamwork and profitability, Henderson traveled to other factories looking for places where worker autonomy was high. He implemented his favorite ideas at the factory at Durham. Instead of hiring gen- eric “mechanics,” for example, Henderson hired staffers with FAA (Federal Aviation Administration) mechanic’s licenses. This superior training created a team capable of making vital decisions with minimal oversight, a fact that upped the factory’s output and his workers’ feelings of worth.
Henderson’s “self-managing” factory functioned beautifully. And it looked different, too. Plant manager Jack Fish described Henderson’s radical factory, saying Henderson “didn’t want to see supervisors, he didn’t want to see forklifts running all over the place, he didn’t even want it to look traditional. There’s clutter in most plants, racks of parts and so on. He didn’t want that.”
Henderson also contracted out non-job-related chores, such as bathroom cleaning, that might have been as- signed to workers in traditional factories. His insistence that his workers should contribute their highest talents to the team showed how much he valued them. And his team valued their jobs in turn.
330 PRINCIPLES OF MANAGEMENT
group
A collection of individuals who interact with each other such that one person’s actions have an impact on the others.
Six years later, a Fast Company reporter visiting the plant noted, “GE/Durham team members take such pride in the engines they make that they routinely take brooms in hand to sweep out the beds of the 18-wheelers that transport those engines—just to make sure that no damage occurs in transit.” For his part, Henderson, who re- mained at GE beyond the project, noted, “I was just constantly amazed by what was accomplished there.”
GE’s bottom line showed the benefits of teamwork, too. From the early 1980s, when Welch became CEO, until 2000, when he retired, GE generated more wealth than any organization in the history of the world.
Case written by Talya Bauer and Berrin Erdogan to accompany Carpenter, M., Bauer, T., & Erdogan, B. (2009). Principles of management (1st ed.). New York: Flat World Knowledge. Based on information from Fishman, C. (1999, September). How teamwork took flight. Fast Company. Retrieved August 1, 2008, from http://www.fastcompany.com/node/38322/print; Lear, R. (1998, July–August). Jack Welch speaks: Wisdom from the world’s greatest business leader. Chief Executive; Guttman, H. (2008, January–February). Leading high-performance teams: Horizontal, high-performance teams with real decision-making clout and accountability for results can transform a company. Chief Executive, pp. 231–233.
D I S C U S S I O N Q U E S T I O N S
1. Teams are an essential part of the leading facet of the P-O-L-C framework. Looking at the team role typology, how might you categorize the roles played by the teams in this case?
2. What do you think brought individuals at GE together to work as a cohesive team?
3. In the case of GE, do you view the team members or the management leaders as the most important part of the story?
4. How do you think Henderson held his team members accountable for their actions?
5. Do you think that GE offered a support system for its employees in order to create this type of team cohesion? If so, how might this have been accomplished?
6. What are the benefits of creating a team whose members are educated to make vital decisions with minimal oversight, as GE did in hiring staffers with FAA mechanic’s licenses?
2. GROUP DYNAMICS
L E A R N I N G O B J E C T I V E S
1. Understand the difference between informal and formal groups. 2. Learn the stages of group development. 3. Identify examples of the punctuated equilibrium model. 4. Learn how group cohesion, social loafing, and collective efficacy can affect groups.
Because many tasks in today’s world have become so complex, groups and teams have become an es- sential component of an organization’s success. The success of the group depends on the successful management of its members and making sure all aspects of work are fair for each member. Being able to work in a group is a key skill for managers and employees alike.
2.1 Types of Groups: Formal and Informal What is a group? A group is a collection of individuals who interact with each other such that one per- son’s actions have an impact on the others. In organizations, most work is done within groups, and managing groups is key to each of the P-O-L-C functions. How groups function has important implic- ations for organizational productivity. Groups where people get along, feel the desire to contribute, and are capable of coordinating their efforts may have high performance levels, whereas those characterized by extreme levels of conflict or hostility may demoralize members of the workforce.
CHAPTER 13 MANAGING GROUPS AND TEAMS 331
informal work groups
Groups made up of two or more individuals who are associated with one another in ways not prescribed by the formal organization.
formal work group
A group made up of managers, subordinates, or both with close associations among group members that influence the behavior of individuals in the group.
Forming-Storming-Norming- Performing Model
A model proposed by Bruce Tuckman in 1965 involving a four-stage map of group evolution.
adjourning
The fifth and final stage of the Tuckman model.
forming
The stage in which the group comes together for the first time.
In organizations, groups can be classified into two basic types: informal and formal. Informal work groups are made up of two or more individuals who are associated with one another in ways not prescribed by the formal organization. For example, a few people in the company who get together to play tennis on the weekend would be considered an informal group. A formal work group is made up of managers, subordinates, or both with close associations among group members that influence the behavior of individuals in the group. We will discuss many different types of formal work groups later on in this chapter.
2.2 Stages of Group Development American organizational psychologist Bruce Tuckman presented a robust model in 1965 that is still widely used today. On the basis of his observations of group behavior in a variety of settings, he pro- posed a four-stage map of group evolution, known as the Forming-Storming-Norming-Perform- ing Model.[1] Later he enhanced the model by adding a fifth and final stage, adjourning. The phases are illustrated in the Stages of the Group Development Model. Interestingly enough, just as an indi- vidual moves through developmental stages such as childhood, adolescence, and adulthood, so does a group, although in a much shorter period of time.
According to this theory, to facilitate a group successfully, the leader needs to move through vari- ous leadership styles over time. Generally, this is accomplished by first being more direct, eventually serving as a coach, and later, once the group is able to assume more power and responsibility for itself, shifting to delegator.
While research has not confirmed that this is descriptive of how groups progress, knowing and fol- lowing these steps can help groups be more effective. For example, groups that do not go through the storming phase early on will often return to this stage toward the end of the group process to address unresolved issues. Another example of the validity of the group development model involves groups that take the time to get to know each other socially in the forming stage. When this socialization oc- curs, groups tend to handle future challenges better because the individuals have an understanding of each other’s needs.
FIGURE 13.4 Stages of the Group Development Model
Forming
In the Forming stage, the group comes together for the first time. The members may already know each other or they may be total strangers. In either case, there is a level of formality, some anxiety, and a degree of guardedness as group members are not sure what is going to happen next. “Will I be accep- ted? What will my role be? Who has the power here?” These are some of the questions participants think about during this stage of group formation. Because of the large amount of uncertainty, members tend to be polite, conflict avoidant, and observant. They are trying to figure out the “rules of the game” without being too vulnerable. At this point, they may also be quite excited and optimistic about the task, perhaps experiencing a level of pride at being chosen to join a particular group.
Group members are trying to achieve several goals at this stage, although this may not necessarily be done consciously. First, they are trying to get to know one another. Often this can be accomplished by finding some common ground. Members also begin to explore group boundaries to determine what will be considered acceptable behavior. “Can I interrupt? Can I leave when I feel like it?” This trial phase may also involve testing the appointed leader or seeing whether a leader emerges from the group. At this point, group members are also discovering how the group will work in terms of what needs to be done and who will be responsible for each task. This stage is often characterized by abstract discus- sions about issues to be addressed by the group; those who like to get moving can become impatient with this part of the process. This phase is usually short in duration, perhaps a meeting or two.
332 PRINCIPLES OF MANAGEMENT
storming
Group members begin to explore their power and influence and they often stake out their territory by differentiating themselves from the other group members rather than seeking common ground.
norming
The stage in which participants find it easy to establish their own ground rules (or norms) and define their operating procedures and goals.
performing
The stage in which participants are not only getting the work done, but they also pay greater attention to how they are doing it.
Storming
Once group members feel sufficiently safe and included, they tend to enter the Storming phase. Parti- cipants focus less on keeping their guard up as they shed social facades, becoming more authentic and more argumentative. Group members begin to explore their power and influence, and they often stake out their territory by differentiating themselves from the other group members rather than seeking common ground. Discussions can become heated as participants raise conflicting points of view and values, or disagree over how tasks should be done and who is assigned to them. It is not unusual for group members to become defensive, competitive, or jealous. They may take sides or begin to form cliques within the group. Questioning and resisting direction from the leader is also quite common. “Why should I have to do this? Who designed this project in the first place? What gives you the author- ity to tell me what to do?”
Although little seems to get accomplished at this stage, it actually serves an important purpose: group members are becoming more authentic as they express their deeper thoughts and feelings. What they are really exploring is “Can I truly be me, have power, and be accepted?” During this chaotic stage, a great deal of creative energy that was previously buried is released and available for use, but it takes skill to move the group from Storming to Norming. In many cases, the group gets stuck in the Storm- ing phase.
Once group members discover that they can be authentic and that the group is capable of handling differences without dissolving, they are ready to enter the next stage, Norming.
Norming
“We survived!” is the common sentiment as this stage. Group members often feel elated at this point, and they are much more committed to each other and the group’s goal. Feeling energized by knowing they can handle the “tough stuff,” group members are now ready to get to work. Finding themselves more cohesive and cooperative, participants find it easy to establish their own ground rules (or norms) and define their operating procedures and goals. The group tends to make big decisions, while sub- groups or individuals handle the smaller decisions. It is hoped at this point the group members are more open and respectful toward each other and willing to ask one another for both help and feedback. They may even begin to form friendships and share more personal information.
At this point, the leader should become more of a facilitator by stepping back and letting the group assume more responsibility for its goal. Since the group’s energy is running high, this is an ideal time to host a social or team-building event.
Performing
Galvanized by a sense of shared vision and a feeling of unity, the group is ready to go into high gear. Members are more interdependent, individuality and differences are respected, and group members feel themselves to be part of a greater entity. At the Performing stage, participants are not only getting the work done, but they also pay greater attention to how they are doing it. They ask such questions as, “Do our operating procedures best support productivity and quality assurance? Do we have suitable means for addressing differences that arise so we can preempt destructive conflicts? Are we relating to and communicating with each other in ways that enhance group dynamics and help us achieve our goals? How can I further develop as a person to become more effective?” By now, the group has ma- tured, becoming more competent, autonomous, and insightful.
Group leaders can finally move into coaching roles and help members grow in skill and leadership. These leadership shifts are essential for managers enacting the Leadership function to keep in mind. In fact, a manager who leads multiple teams may find it necessary to shift leadership styles not only over time but between teams at different stages.
Adjourning
Just as groups form, so do they end. For example, many groups or teams formed in a business context are project-oriented and therefore are temporary. Alternatively, a working group may dissolve because of an organizational restructuring. As with graduating from school or leaving home for the first time, these endings can be bittersweet, with group members feeling a combination of victory, grief, and in- security about what is coming next. For those who like routine and bond closely with fellow group members, this transition can be particularly challenging. Group leaders and members alike should be sensitive to handling these endings respectfully and compassionately. An ideal way to close a group is to set aside time to debrief (“How did it all go? What did we learn?”), acknowledge one another, and celebrate a job well done.
CHAPTER 13 MANAGING GROUPS AND TEAMS 333
punctuated equilibrium
The theory that change within groups occurs in rapid, radical spurts rather than gradually over time.
cohesion
The degree of camaraderie within the group.
2.3 The Punctuated-Equilibrium Model As you may have noted, the five-stage model we have just reviewed is a linear process. According to the model, a group progresses to the Performing stage, at which point it finds itself in an ongoing, smooth- sailing situation until the group dissolves. In reality, subsequent researchers, most notably Joy H. Kar- riker, have found that the life of a group is much more dynamic and cyclical in nature.[2] For example, a group may operate in the Performing stage for several months. Then, because of a disruption, such as a competing emerging technology that changes the rules of the game or the introduction of a new CEO, the group may move back into the Storming phase before returning to Performing. Ideally, any regres- sion in the linear group progression will ultimately result in a higher level of functioning. Proponents of this cyclical model draw from behavioral scientist Connie Gersick’s study of punctuated equilibri- um.[3]
The concept of punctuated equilibrium was first proposed in 1972 by paleontologists Niles Eldredge and Stephen Jay Gould, who both believed that evolution occurred in rapid, radical spurts rather than gradually over time. Identifying numerous examples of this pattern in social behavior, Ger- sick found that the concept applied to organizational change. She proposed that groups remain fairly static, maintaining a certain equilibrium for long periods. Change during these periods is incremental, largely due to the resistance to change that arises when systems take root and processes become institu- tionalized. In this model, revolutionary change occurs in brief, punctuated bursts, generally catalyzed by a crisis or a problem that breaks through the systemic inertia and shakes up the deep organizational structures in place. At this point, the organization or group has the opportunity to learn and create new structures that are better aligned with current realities. Whether the group does this is not guaranteed. In sum, in Gersick’s model, groups can repeatedly cycle through the Storming and Performing stages, with revolutionary change taking place during short transitional windows. For organizations and groups who understand that disruption, conflict, and chaos are inevitable in the life of a social system, these disruptions represent opportunities for innovation and creativity.
FIGURE 13.5 The Punctuated Equilibrium Model
2.4 Cohesion, Social Loafing, and Collective Efficacy Cohesion can be thought of as a kind of social glue. It refers to the degree of camaraderie within the group. Cohesive groups are those in which members are attached to each other and act as one unit. The more cohesive a group, the more productive it will be and the more rewarding the experience will be for the group’s members.[4] Cohesive groups tend to have the following characteristics: they have a col- lective identity; they experience a moral bond and a desire to remain part of the group; they share a sense of purpose, working together on a meaningful task or cause; and they establish a structured pat- tern of communication.
334 PRINCIPLES OF MANAGEMENT
groupthink
A group pressure phenomenon that increases the risk of the group making flawed decisions by allowing reductions in mental efficiency, reality testing, and moral judgment.
The fundamental factors affecting group cohesion include the following: < Similarity. The more similar group members are in terms of age, sex, education, skills, attitudes,
values, and beliefs, the more likely the group will bond. < Stability. The longer a group stays together, the more cohesive it becomes. < Size. Smaller groups tend to have higher levels of cohesion. < Support. When group members receive coaching and are encouraged to support their fellow team
members, group identity strengthens. < Satisfaction. Cohesion is correlated with how pleased group members are with one another’s
performance, behavior, and conformity to group norms. As you might imagine, there are many benefits in creating a cohesive group. Members are generally more personally satisfied and feel greater self-confidence and self-esteem in a group where they feel they belong. For many, membership in such a group can be a buffer against stress, which can improve mental and physical well-being. Because members are invested in the group and its work, they are more likely to regularly attend and actively participate in the group, taking more responsibility for the group’s functioning. In addition, members can draw on the strength of the group to persevere through challenging situations that might otherwise be too hard to tackle alone.
Can a Group Have Too Much Cohesion?
Despite the advantages of cohesion, too much cohesion can be detrimental to a group. Because mem- bers can come to value belonging over all else, an internal pressure to conform may arise where some members modify their behavior to adhere to group norms. Members may become conflict avoidant, fo- cusing on trying to please one another so as not to be ostracized. In some cases, members might censor themselves to maintain the party line. As such, the group is dominated by a superficial sense of har- mony and discourages diversity of thought. Having less tolerance for deviants, who threaten the group’s static identity, cohesive groups will often disapprove of members who dare to disagree. Mem- bers attempting to make a change may be criticized, undermined, or even ostracized by other mem- bers, who perceive their attempts as a threat to the status quo. The painful possibility of being margin- alized can keep many members in line with the majority.
The more strongly members identify with the group, the easier it is to see outsiders as inferior or, in extreme cases, as enemies. It is easy to see how this can lead to increased insularity. This form of pre- judice can have a downward spiral effect. The group is not getting corrective feedback from within its own confines, and it is closing itself off from input and a cross-fertilization of ideas from the outside. In such an environment, groups can easily adopt extreme ideas that will not be challenged. Denial in- creases as problems are ignored and failures are blamed on external factors. With limited, often biased, information and no internal or external opposition, groups like these can make disastrous decisions.
Groupthink is a group pressure phenomenon that increases the risk of the group making flawed decisions by allowing reductions in mental efficiency, reality testing, and moral judgment. A famous example of groupthink is the decision to invade Cuba made by President John F. Kennedy and his cab- inet in 1961. In a matter of days, Cuban forces repelled the invaders, whose objective was to overthrow the entire Cuban government, resulting in many casualties and captured troops. In retrospect, there were many reasons why the Bay of Pigs invasion was doomed from the start, but the planning and ap- proval were characterized by a belief that the insiders knew best and did not need to consider “devil’s advocate” points of view. As this example illustrates, groupthink is a serious risk in highly cohesive groups.[5]
Cohesive groups can go awry in much milder ways. For example, group members can value their social interactions so much that they have fun together but spend little time on accomplishing their as- signed task. Or a group’s goal may begin to diverge from the larger organization’s goal and those trying to uphold the organization’s goal may be criticized (for example, students may tease the class “brain” for doing well in school).
In addition, research shows that cohesion leads to acceptance of group norms.[6] Groups with high task commitment tend to do well, but suppose you belong to a group in which the norms are to work as little as possible! As you might imagine, these groups accomplish little and can actually work togeth- er against the organization’s goals.
CHAPTER 13 MANAGING GROUPS AND TEAMS 335
social loafing
The tendency of individuals to put in less effort when working in a group context.
collective efficacy
A group’s perception of its ability to successfully perform well.
FIGURE 13.6
Groups with high cohesion and high task commitment tend to be the most effective.
Social Loafing
Social loafing refers to the tendency of individuals to put in less effort when working in a group con- text. This phenomenon, also known as the Ringelmann effect, was first noted by French agricultural engineer Max Ringelmann in 1913. In one study, he had people pull on a rope individually and in groups. He found that as the number of people pulling increased, the group’s total pulling force was less than the sum of individual efforts had been when measured alone.[7]
Why do people work less hard when they are working with other people? Observations show that as the size of the group grows, this effect becomes larger as well.[8] The social loafing tendency is not so much a matter of laziness as a matter of perceiving that one will receive neither one’s fair share of re- wards if the group is successful nor blame if the group fails. Rationales for this behavior include, “My own effort will have little effect on the outcome.” “Others aren’t pulling their weight, so why should I?” Or “I don’t have much to contribute, and no one will notice anyway.” This is a consistent effect across a great number of group tasks and countries.[9] Research also shows that perceptions of fairness are re- lated to less social loafing.[10] Therefore, teams that are deemed as more fair should also see less social loafing.
Collective Efficacy
Collective efficacy refers to a group’s perception of its ability to successfully perform well.[11] A group with high collective efficacy is one whose members share a belief in the group’s capability to pursue its agreed-upon course of action and attain its goals. Collective efficacy is influenced by a number of factors, including watching others (“that group did it and we’re better than them”), verbal persuasion (“we can do this”), and how a person feels (“this is a good group”). Research shows that a group’s col- lective efficacy is positively related to its performance.[12] In addition, this relationship is stronger when task interdependence (the degree an individual’s task is linked to someone else’s work) is high rather than low.
K E Y T A K E A W A Y
Groups may be either formal or informal. Groups go through developmental stages much like individuals do. The Forming-Storming-Norming-Performing-Adjourning Model is useful in prescribing stages that groups should pay attention to as they develop. The punctuated-equilibrium model of group development argues that groups often move forward during bursts of change after long periods without change. Groups that are similar, stable, small, supportive, and satisfied tend to be more cohesive than groups that are not. Cohesion can help support group performance if the group values task completion, but too much cohesion can also be a concern for groups. Social loafing increases as groups become larger. When collective efficacy is high, groups tend to perform better.
336 PRINCIPLES OF MANAGEMENT
process loss
Any aspect of group interaction that inhibits group functioning.
team
A cohesive coalition of people working together to achieve mutual goals.
E X E R C I S E S
1. How do the tactics related to group dynamics involve the managerial functions outlined by the P-O-L-C framework?
2. If you believe the punctuated-equilibrium model is true about groups, how can you use this knowledge to help your own group?
3. Think about the most cohesive group you have ever been in. How did it compare to less cohesive groups in terms of similarity, stability, size, support, and satisfaction?
4. Why do you think social loafing occurs within groups? What can be done to combat it?
5. Have you seen instances of collective efficacy helping or hurting a team? Please explain your answer.
3. UNDERSTANDING TEAM DESIGN CHARACTERISTICS
L E A R N I N G O B J E C T I V E S
1. Understand the difference between groups and teams. 2. Understand the factors leading to the rise in the use of teams. 3. Understand how tasks and roles affect teams. 4. Identify different types of teams. 5. Identify team design considerations.
Effective teams give companies a significant competitive advantage. In a high-functioning team, the sum is truly greater than the parts. Team members not only benefit from one another’s diverse experi- ences and perspectives but also stimulate each other’s creativity. Plus, for many people, working in a team can be more fun than working alone. Let’s take a closer look at what a team is, the different team characteristics, types of teams companies use, and how to design effective teams.
3.1 Differences Between Groups and Teams Organizations consist of groups of people. What exactly is the difference between a group and a team? A group is a collection of individuals. Within an organization, groups might consist of project-related groups such as a product group or division or they can encompass an entire store or branch of a com- pany. The performance of a group consists of the inputs of the group minus any process losses such as the quality of a product, ramp-up time to production, or the sales for a given month. Process loss is any aspect of group interaction that inhibits group functioning.
Why do we say group instead of team? A collection of people is not a team, though they may learn to function in that way. A team is a particular type of group: a cohesive coalition of people working to- gether to achieve mutual goals. Being on a team does not equate to a total suppression of personal agendas, but it does require a commitment to the vision and involves each individual working toward accomplishing the team’s objective. Teams differ from other types of groups in that members are fo- cused on a joint goal or product, such as a presentation, discussing a topic, writing a report, creating a new design or prototype, or winning a team Olympic medal. Moreover, teams also tend to be defined by their relatively smaller size. For instance, according to one definition, “A team is a small number of people with complementary skills who are committed to a common purpose, performance goals, and approach for which they are mutually accountable.”[13]
CHAPTER 13 MANAGING GROUPS AND TEAMS 337
FIGURE 13.7
Teams are only as good as their weakest link. While Michael Phelps has been dubbed “the world’s greatest swimmer” and received a great deal of personal attention, such as meeting President George W. Bush, he could not have achieved his record eight gold medals in one Olympic games without the help of his teammates Aaron Peirsol, Brendan Hansen, and Jason Lezak.
Source: http://simple.wikipedia.org/wiki/
Image:Michael_Phelps_with_President
_Bush_-_20080811.jpeg
The purpose of assembling a team is to accomplish larger, more complex goals than what would be possible for an individual working alone or even the simple sum of several individuals working independently. Teamwork is also needed in cases where multiple skills are tapped or where buy-in is required from several individuals. Teams can, but do not always, provide improved performance. Working together to further a team agenda seems to increase mutual cooperation between what are often competing factions. The aim and purpose of a team is to perform, get results, and achieve victory in the workplace. The best managers are those who can gather together a group of indi- viduals and mold them into an effective team.
The key properties of a true team include collaborative action where, along with a common goal, teams have collaborative tasks. Conversely, in a group, individuals are responsible only for their own area. They also share the rewards of strong team per- formance with their compensation based on shared outcomes. Compensation of indi- viduals must be based primarily on a shared outcome, not individual performance. Members are also willing to sacrifice for the common good in which individuals give up scarce resources for the common good instead of competing for those resources. For example, teams occur in sports such as soccer and basketball, in which the individuals actively help each other, forgo their own chance to score by passing the ball, and win or lose collectively as a team.
3.2 Teams in Organizations The early 1990s saw a dramatic rise in the use of teams within organizations, along with dramatic results such as the Miller Brewing Company increasing productivity 30% in the plants that used self-directed teams compared with those that used the traditional organization. This same method allowed Texas Instruments in Malaysia to reduce de- fects from 100 parts per million to 20 parts per million. In addition, Westinghouse re- duced its cycle time from 12 weeks to 2 weeks, and Harris Electronics was able to achieve an 18% reduction in costs.[14] The team method has served countless compan- ies over the years through both quantifiable improvements and more subtle individual worker-related benefits.
Companies such as Square D, a maker of circuit breakers, switched to self-directed teams and found that overtime on machines like the punch press dropped 70% under teams. Productivity increased because the setup operators were able to manipulate the work in much more effective ways than a supervisor could dictate.[15] In 2001, clothing retailer Chico’s FAS was looking to grow its business. The company hired Scott Ed- monds as president, and two years later revenues had almost doubled from $378 mil- lion to $760 million. By 2006, revenues were $1.6 billion, and Chico’s had nine years of double-digit same-store sales growth. What did Edmonds do to get these results? He created a horizontal organization “ruled by high-performance teams with real decision- making clout and accountability for results, rather than by committees that pass de-
cisions up to the next level or toss them over the wall into the nearest silo.” The use of teams also began to increase because advances in technology have resulted in more
complex systems that require contributions from multiple people across the organization. Overall, team-based organizations have more motivation and involvement, and teams can often accomplish more than individuals.[16] It is no wonder organizations are relying on teams more and more.
Do We Need a Team?
Teams are not a cure-all for organizations. To determine whether a team is needed, organizations should consider whether a variety of knowledge, skills, and abilities are needed, whether ideas and feedback are needed from different groups within the organization, how interdependent the tasks are, if wide cooperation is needed to get things done, and whether the organization would benefit from shared goals.[17] If the answer to these questions is “yes,” then a team or teams might make sense. For example, research shows that the more team members perceive that outcomes are interdependent, the better they share information and the better they perform.[18]
3.3 Team Tasks and Roles Teams differ in terms of the tasks they are trying to accomplish and the roles team members play.
338 PRINCIPLES OF MANAGEMENT
production tasks
Tasks that include actually making something such as a building, product, or a marketing plan.
idea generation tasks
Creative tasks such as brainstorming a new direction or creating a new process.
problem-solving tasks
Tasks involving coming up with plans for actions and making decision.
task interdependence
The degree that team members depend on one another to get information, support, or materials from other team members to be effective.
FIGURE 13.8
Production tasks include actually making something such as a team of construction workers creating a new building.
© 2010 Jupiterimages Corporation
As early as the 1970s, J. R. Hackman identified three major classes of tasks: (1) production tasks, (2) idea generation tasks, and (3) problem-solving tasks.[19] Production tasks include actually making something, such as a building, a product, or a marketing plan. Idea generation tasks deal with creat- ive tasks, such as brainstorming a new direction or creating a new process. Problem-solving tasks refer to coming up with plans for actions and making decisions, both facets of managerial P-O-L-C functions (planning and leading). For example, a team may be charged with coming up with a new marketing slogan, which is an idea generation task, while another team might be asked to manage an entire line of products, including making decisions about products to produce, managing the produc- tion of the product lines, marketing them, and staffing their division. The second team has all three types of tasks to accomplish at different points in time.
Task Interdependence
Another key to understanding how tasks are related to teams is to understand their level of task inter- dependence. Task interdependence refers to the degree that team members depend on one another to get information, support, or materials from other team members to be effective. Research shows that self-managing teams are most effective when their tasks are highly interdependent.[20]
CHAPTER 13 MANAGING GROUPS AND TEAMS 339
pooled interdependence
This exists when team members may work independently and simply combine their efforts to create the team’s output.
sequential interdependence
Where one person’s output becomes another person’s input.
reciprocal interdependence
The point at which team members work on each task simultaneously.
outcome interdependence
A time when rewards that an individual receives depend on the performance of others.
There are three types of task interdependence. Pooled interdependence exists when team mem- bers may work independently and simply combine their efforts to create the team’s output. For ex- ample, when students meet to divide the sections of a research paper and one person simply puts all the sections together to create one paper, the team is using the pooled interdependence model. However, they might decide that it makes more sense to start with one person writing the introduction of their research paper, then the second person reads what was written by the first person and, drawing from this section, writes about the findings within the paper. Using the findings section, the third person writes the conclusions. If one person’s output becomes another person’s input, the team would be ex- periencing sequential interdependence. And finally, if the student team decided that in order to cre- ate a top notch research paper they should work together on each phase of the research paper so that their best ideas would be captured at each stage, they would be undertaking reciprocal interdepend- ence. Another important type of interdependence that is not specific to the task itself is outcome in- terdependence, where the rewards that an individual receives depend on the performance of others.
Team Roles
While relatively little research has been conducted on team roles, recent studies show that individuals who are more aware of team roles and the behavior required for each role perform better than indi- viduals that do not. This fact remains true for both student project teams as well as work teams, even after accounting for intelligence and personality.[21] Early research found that teams tend to have two categories of roles: those related to the tasks at hand and those related to the team’s functioning. For example, teams that only focus on production at all costs may be successful in the short run, but if they pay no attention to how team members feel about working 70 hours a week, they are likely to experi- ence high turnover.
On the basis of decades of research on teams, 10 key roles have been identified.[22] Team leadership is effective when leaders are able to adapt the roles they are contributing to or asking others to contrib- ute to fit what the team needs, given its stage and the tasks at hand.[23] Ineffective leaders might always engage in the same task role behaviors when what they really need to do is focus on social roles, put disagreements aside, and get back to work. While these behaviors can be effective from time to time, if the team doesn’t modify its role behaviors as things change, they most likely will not be effective.
FIGURE 13.9
Teams are based on many roles being carried out as summarized by the Team Role Typology. These 10 roles include task roles (green), social roles (yellow), and boundary spanning roles (orange).
Source: Mumford, T. V., Van Iddekinge, C. H., Morgeson, F. P., & Campion, M. A. (2008). The team role test: Development and validation of a team
role knowledge situational judgment test. Journal of Applied Psychology, 93, 250–267; Mumford, T. V., Campion, M. A., & Morgeson, F. P. (2006).
Situational judgments in work teams: A team role typology. In J. A. Weekley & R. E. Ployhart (Eds.), Situational judgment tests: Theory, measurement
(pp. 319–343). Mahwah, NJ: Lawrence Erlbaum.
340 PRINCIPLES OF MANAGEMENT
task force
A temporary team that is asked to address a specific issue or problem until it is resolved.
product development teams
A type of team that may be either temporary or ongoing.
cross-functional teams
Teams that involve individuals from different parts of the organization staff.
virtual teams
Teams in which members are not located in the same physical place.
Task Roles
Five roles make up the task portion of the role typology. The contractor role includes behaviors that serve to organize the team’s work, including creating team time lines, production schedules, and task sequencing. The creator role deals more with changes in the team’s task process structure. For ex- ample, reframing the team goals and looking at the context of goals would fall under this role. The con- tributor role is important because it brings information and expertise to the team. This role is charac- terized by sharing knowledge and training those who have less expertise to strengthen the team. Re- search shows that teams with highly intelligent members and evenly distributed workloads are more effective than those with uneven workloads.[24] The completer role is also important as it is often where ideas are transformed into action. Behaviors associated with this role include following up on tasks such as gathering needed background information or summarizing the team’s ideas into reports. Fin- ally, the critic role includes “devil’s advocate” behaviors which go against the assumptions being made by the team.
Social Roles
Social roles serve to keep the team operating effectively. When the social roles are filled, team members feel more cohesive and the group is less prone to suffer process losses or biases, such as social loafing, groupthink, or a lack of participation from all members. Three roles fall under the umbrella of social roles. The cooperator role includes supporting those with expertise toward the team’s goals. This is a proactive role. The communicator role includes behaviors that are targeted at collaboration such as practicing good listening skills and appropriately using humor to diffuse tense situations. Having a good communicator helps the team to feel more open to sharing ideas. And the calibrator role is an important one and serves to keep the team on track in terms of suggesting any needed changes to the team’s process. This role includes initiating discussions about potential team problems such as power struggles or other tensions. Similarly, this role may involve settling disagreements or pointing out what is working and what is not in terms of team process.
Boundary-Spanning Roles
The final two roles are related to activities outside of the team that help to connect the team to the lar- ger organization.[25] Teams that engage in a greater level of boundary-spanning behaviors increase their team effectiveness.[26] The consul role includes gathering information from the larger organiza- tion and informing those within the organization about team activities, goals, and successes. Often the consul role is filled by team managers or leaders. The coordinator role includes interfacing with others within the organization so that the team’s efforts are in line with other individuals and teams within the organization.
3.4 Types of Teams There are many different types of teams, and a given team may be described according to multiple types. For example, a team of scientists writing a research article for publication may be temporary, vir- tual, and cross-functional.
Teams may be permanent or long term, but more typically, a team exists for a limited time. In fact, one-third of all teams in the United States are temporary.[27] An example of a temporary team is a task force that addresses a specific issue or problem until it is resolved. Other teams may be temporary or ongoing such as product development teams. In addition, matrix organizations have cross-func- tional teams where individuals from different parts of the organization staff the team, which may be temporary or long-standing.
Virtual Teams
Virtual teams are teams in which members are not located in the same physical place. They may be in different cities, states, or even different countries. Some virtual teams are formed by necessity, such as to take advantage of lower labor costs in different countries; one study found that upward of 8.4 million individuals worldwide work virtually in at least one team.[28] Often, virtual teams are formed to take advantage of distributed expertise or time—the needed experts may be living in different cities. A com- pany that sells products around the world, for example, may need technologists who can solve custom- er problems at any hour of the day or night. It may be difficult to find the caliber of people needed who would be willing to work at 2 a.m. on a Saturday, for example. So companies organize virtual technical support teams. BakBone Software, for instance, has a 13-member technical support team. Each mem- ber has a degree in computer science and is divided among offices in California, Maryland, England,
CHAPTER 13 MANAGING GROUPS AND TEAMS 341
trust
The belief that the other party will show integrity, fairness, and predictability in one’s actions toward the other.
wiki
An Internet-based method for many people to collaborate and contribute to a document or discussion.
top management teams
Teams that are appointed by the chief executive officer (CEO) and, ideally, reflect the skills and areas that the CEO considers vital for the company.
traditional or manager-led teams
Teams where the manager serves as the team leader.
and Tokyo. BakBone believes it has been able to hire stronger candidates by drawing from a diverse tal- ent pool and hiring in different geographic regions rather than limiting hiring to one region or time zone.[29]
Despite potential benefits, virtual teams present special management challenges, particularly to the controlling function. Managers often think that they have to see team members working to believe that work is being done. Because this kind of oversight is impossible in virtual team situations, it is import- ant to devise evaluation schemes that focus on deliverables. Are team members delivering what they said they would? In self-managed teams, are team members producing the results the team decided to measure itself on?
Another special challenge of virtual teams is building trust. Will team members deliver results just as they would in face-to-face teams? Can members trust one another to do what they said they would do? Companies often invest in bringing a virtual team together at least once so members can get to know one another and build trust.[30] In manager-led virtual teams, managers should be held account- able for their team’s results and evaluated on their ability as a team leader.
Finally, communication is especially important in virtual teams, through e-mail, phone calls, con- ference calls, or project management tools that help organize work. If individuals in a virtual team are not fully engaged and tend to avoid conflict, team performance can suffer.[31] A wiki is an Internet- based method for many people to collaborate and contribute to a document or discussion. Essentially, the document remains available for team members to access and amend at any time. The most famous example is Wikipedia, which is gaining traction as a way to structure project work globally and get in- formation into the hands of those that need it. Empowered organizations put information into every- one’s hands.[32] Research shows that empowered teams are more effective than those that are not em- powered.[33]
Top Management Teams
Top management teams are appointed by the chief executive officer (CEO) and, ideally, reflect the skills and areas that the CEO considers vital for the company. There are no formal rules about top management team design or structure. The top management team often includes representatives from functional areas, such as finance, human resources, and marketing or key geographic areas, such as Europe, Asia, and North America. Depending on the company, other areas may be represented such as legal counsel or the company’s chief technologist. Typical top management team member titles include chief operating officer (COO), chief financial officer (CFO), chief marketing officer (CMO), or chief technology officer (CTO). Because CEOs spend an increasing amount of time outside their companies (i.e., with suppliers, customers, regulators, and so on), the role of the COO has taken on a much higher level of internal operating responsibilities. In most American companies, the CEO also serves as chair- man of the board and can have the additional title of president. Companies have top management teams to help set the company’s vision and strategic direction, key tasks within the planning P-O-L-C function. Top teams make decisions on new markets, expansions, acquisitions, or divestitures. The top team is also important for its symbolic role: how the top team behaves dictates the organization’s cul- ture and priorities by allocating resources and by modeling behaviors that will likely be emulated lower down in the organization. Importantly, the top team is most effective when team composition is func- tionally and demographically diverse and when it can truly operate as a team, not just as group of indi- vidual executives.[34]
That “the people make the place” holds especially true for members of the top management team. In a study of 15 firms that demonstrated excellence, defined as sustained performance over a 15-year period, leadership researcher Jim Collins noted that those firms attended to people first and strategy second. “They got the right people on the bus, moved the wrong people off the bus, ushered the right people to the right seats—then they figured out where to drive it.”[35] The best teams plan for turnover. Succession planning is the process of identifying future members of the top management team. Effect- ive succession planning allows the best top teams to achieve high performance today and create a leg- acy of high performance for the future.
3.5 Team Leadership and Autonomy Teams also vary in terms of how they are led. Traditional or manager-led teams are teams in which the manager serves as the team leader. The manager assigns work to other team members. These types of teams are the most natural to form, wherein managers have the power to hire and fire team mem- bers and are held accountable for the team’s results.
342 PRINCIPLES OF MANAGEMENT
self-managed teams
Teams that manage themselves and do not report directly to a supervisor. Instead, team members select their own leader, and they may even take turns in the leadership role.
empowered teams
Teams that have the responsibility as well as the authority to achieve their goals.
self-directed teams
A special form of self-managed teams in which members determine who will lead them with no external oversight.
Self-managed teams are a new form of team that rose in popularity with the Total Quality Movement in the 1980s. Unlike manager-led teams, these teams manage themselves and do not report directly to a supervisor. Instead, team members select their own leader, and they may even take turns in the leadership role. Self-managed teams also have the power to select new team members. As a whole, the team shares responsibility for a significant task, such as assembly of an entire car. The task is ongo- ing rather than temporary such as a charity fund drive for a given year.
Organizations began to use self-managed teams as a way to reduce hierarchy by allowing team members to complete tasks and solve problems on their own. The benefits of self-managed teams ex- tend much further. Research has shown that employees in self-managed teams have higher job satisfac- tion, increased self-esteem, and grow more on the job. The benefits to the organization include in- creased productivity, increased flexibility, and lower turnover. Self-managed teams can be found at all levels of the organization, and they bring particular benefits to lower-level employees by giving them a sense of ownership of their jobs that they may not otherwise have. The increased satisfaction can also reduce absenteeism because employees do not want to let their team members down.
Typical team goals are improving quality, reducing costs, and meeting deadlines. Teams also have a “stretch” goal, which is difficult to reach but important to the business unit. Many teams also have special project goals. Texas Instruments (TI), a company that makes semiconductors, used self-directed teams to make improvements in work processes.[36] Teams were allowed to set their own goals in con- junction with managers and other teams. TI also added an individual component to the typical team compensation system. This individual component rewarded team members for learning new skills that added to their knowledge. These “knowledge blocks” include topics such as leadership, administration, and problem solving. The team decides what additional skills people might need to help the team meet its objectives. Team members would then take classes or otherwise demonstrate their proficiency in that new skill on the job to be certified for mastering the skill. Individuals could then be evaluated based on their contribution to the team and how they are building skills to support the team.
Self-managed teams are empowered, which means that they have the responsibility as well as the authority to achieve their goals. Team members have the power to control tasks and processes and to make decisions. Research shows that self-managed teams may be at a higher risk of suffering from neg- ative outcomes due to conflict, so it is important that they are supported with training to help them deal with conflict effectively.[37] Self-managed teams may still have a leader who helps them coordinate with the larger organization.[38] For a product team composed of engineering, production, and market- ing employees, empowerment means that the team can decide everything about a product’s appear- ance, production, and cost without having to get permission or sign-off from higher management. As a result, empowered teams can more effectively meet tighter deadlines. At AT&T, for example, the mod- el-4200 phone team cut development time in half while lowering costs and improving quality by using the empowered team approach.[39] A special form of self-managed teams are self-directed teams in which they also determine who will lead them with no external oversight.
FIGURE 13.10
Team leadership is a major determinant of how autonomous a team can be.
3.6 Designing Effective Teams Designing an effective team means making decisions about team composition (who should be on the team), team size (the optimal number of people on the team), and team diversity (should team
CHAPTER 13 MANAGING GROUPS AND TEAMS 343
FIGURE 13.11
The ideal size for a team depends on the task. Groups larger than 10 members tend to be harder to coordinate and often break into subteams to accomplish the work.
© 2010 Jupiterimages Corporation
members be of similar background, such as all engineers, or of different backgrounds). Answering these questions will depend, to a large extent, on the type of task that the team will be performing. Teams can be charged with a variety of tasks, from problem solving to generating creative and innovat- ive ideas to managing the daily operations of a manufacturing plant.
Who Are the Best Individuals for the Team?
A key consideration when forming a team is to ensure that all the team members are qualified for the roles they will fill for the team. This process often entails understanding the knowledge, skills, and abil- ities (KSAs) of team members as well as the personality traits needed before starting the selection pro- cess.[40] When talking to potential team members, be sure to communicate the job requirements and norms of the team. To the degree that this is not possible, such as when already existing groups are used, think of ways to train the team members as much as possible to help ensure success. In addition to task knowledge, research has shown that individuals who understand the concepts covered in this chapter and in this book such as conflict resolution, motivation, planning, and leadership actually per- form better on their jobs. This finding holds for a variety of jobs, including officer in the United States Air Force, an employee at a pulp mill, or a team member at a box manufacturing plant.[41]
How Large Should My Team Be?
Interestingly, research has shown that regardless of team size, the most active team member speaks 43% of the time. The difference is that the team member who participates the least in a three-person team is still active 23% of the time versus only 3% in a 10-person team.[42] When deciding team size, a good rule of thumb is a size of 2 to 20 members. The majority of teams have 10 members or less be- cause the larger the team, the harder it is to coordinate and interact as a team. With fewer individuals, team members are more able to work through differences and agree on a common plan of action. They have a clearer understanding of others’ roles and greater accountability to fulfill their roles (remember social loafing?). Some tasks, however, require larger team sizes because of the need for diverse skills or because of the complexity of the task. In those cases, the best solution is to create subteams where one member from each subteam is a member of a larger coordinating team. The relationship between team size and performance seems to greatly depend on the level of task interdependence, with some studies finding larger teams outproducing smaller teams and other studies finding just the opposite.[43] The bottom line is that team size should be matched to the goals of the team.
How Diverse Should My Team Be?
Team composition and team diversity often go hand in hand. Teams whose members have complementary skills are often more successful because members can see each other’s blind spots. One team member’s strengths can compensate for another’s weak- nesses.[44] For example, consider the challenge that companies face when trying to fore- cast future sales of a given product. Workers who are educated as forecasters have the analytic skills needed for forecasting, but these workers often lack critical information about customers. Salespeople, in contrast, regularly communicate with customers, which means they’re in the know about upcoming customer decisions. But salespeople often lack the analytic skills, discipline, or desire to enter this knowledge into spread- sheets and software that will help a company forecast future sales. Putting forecasters and salespeople together on a team tasked with determining the most accurate product forecast each quarter makes the best use of each member’s skills and expertise.
Diversity in team composition can help teams come up with more creative and effective solutions. Research shows that teams that believe in the value of diversity per- formed better than teams that do not.[45] The more diverse a team is in terms of expert- ise, gender, age, and background, the more ability the group has to avoid the problems of groupthink.[46] For example, different educational levels for team members were re- lated to more creativity in research and development teams and faster time to market
for new products.[47] Members will be more inclined to make different kinds of mistakes, which means that they’ll be able to catch and correct those mistakes.
344 PRINCIPLES OF MANAGEMENT
norms
Shared expectations about how things operate within a group or team.
K E Y T A K E A W A Y
Teams, though similar to groups, are different in both scope and composition. A team is a particular type of group: a cohesive coalition of people working together to achieve mutual goals. In the 21st century, many companies have moved toward the extensive use of teams. The task a team is charged with accomplishing affects how they perform. In general, task interdependence works well for self-managing teams. Team roles consist of task, social, and boundary-spanning roles. Different types of teams include task forces, product de- velopment teams, cross-functional teams, and top management teams. Team leadership and autonomy varies depending on whether the team is traditionally managed, self-managed, or self-directed. Teams are most effective when teams consist of members with the right KSAs for the tasks, are not too large, contain diversity across team members. Decisions about where and how to use teams, the leadership of teams, and the struc- ture of teams illustrate the overlap in the design and leading P-O-L-C functions.
E X E R C I S E S
1. Think of the last team you were in. Did the task you were asked to do affect the team? Why or why not?
2. Which of the 10 work roles do you normally take in a team? How difficult or easy do you think it would be for you to take on a different role?
3. Have you ever worked in a virtual team? If so, what were the challenges and advantages of working virtually?
4. How large do you think teams should be and why?
4. ORGANIZING EFFECTIVE TEAMS
L E A R N I N G O B J E C T I V E S
1. Understand how to create team norms, roles, and expectations. 2. Identify keys to running effective team meetings.
When a team is well organized, it tends to perform well. Well-designed teams are able to capitalize on positive events while maintaining composure when facing a negative event. There are several strategies that can boost team effectiveness through effective organization.
4.1 Establishing Team Norms and Contracts A key to successful team design is to have clear norms, roles, and expectations among team members. Problems such as social loafing or groupthink can be avoided by paying careful attention to team mem- ber differences and providing clear definitions for roles, expectancy, measurement, and rewards.
Team Norms
Norms are shared expectations about how things operate within a group or team. Just as new employ- ees learn to understand and share the assumptions, norms, and values that are part of an organization’s culture, they also must learn the norms of their immediate team. This understanding helps teams be more cohesive and perform better. Norms are a powerful way of ensuring coordination within a team. For example, is it acceptable to be late to meetings? How prepared are you supposed to be at the meet- ings? Is it acceptable to criticize someone else’s work? These norms are shaped early during the life of a team and affect whether the team is productive, cohesive, and successful.
Explore some ideas about team norms by doing the Square Wheels exercise.
Square Wheels Exercise and Group Discussion
Sometimes it can be challenging to start a conversation around team ground rules and performance. The following exercise can be used to get a team talking about what works and what doesn’t in teams they’ve worked in and how your team can be designed most effectively.
CHAPTER 13 MANAGING GROUPS AND TEAMS 345
team contract
A contract that includes agreements on established ground rules, goals, and roles.
This picture of a cart with square wheels is an illustration of how many organizations seem to operate. Print out the illustration and have everyone in your team write on the paper, identifying as many of the key issues and opportunities for improvement as you can. Following this, have a conversation around what this illustration might mean for your own team.
Used with permission. © Performance Management Company, 1992–2004 Square Wheels® is a registered servicemark of PMC. http://www.SquareWheels.com email: [email protected] 864-292-8700
Team Contracts
Scientific research as well as experience working with thousands of teams show that teams that are able to articulate and agree on established ground rules, goals, and roles and develop a team contract around these standards are better equipped to face challenges that may arise within the team.[48] Hav- ing a team contract does not necessarily mean that the team will be successful, but it can serve as a road map when the team veers off course. Questions that can help to create a meaningful team contract include:
< Team Values and Goals: What are our shared team values? What is our team goal? < Team Roles and Leadership: Who does what within this team? (Who takes notes at the meeting?
Who sets the agenda? Who assigns tasks? Who runs the meetings?) Does the team have a formal leader? If so, what are his or her roles?
< Team Decision Making: How are minor decisions made? How are major decisions made? < Team Communication: Who do you contact if you cannot make a meeting? Who communicates
with whom? How often will the team meet? < Team Performance: What constitutes good team performance? What if a team member tries hard
but does not seem to be producing quality work? How will poor attendance/work quality be dealt with?
4.2 Team Meetings Anyone who has been involved in a team knows it involves team meetings. While few individuals relish meetings, they serve an important function in terms of information sharing and decision making. They also serve an important social function and can help to build team cohesion and a task function in terms of coordination. Unfortunately, we’ve all attended lengthy meetings that were a waste of time and where little happened that couldn’t have been accomplished by reading an e-mail in five minutes. To run effective meetings, it helps to think of meetings in terms of three sequential steps.[49]
Before the Meeting
Much of the effectiveness of a meeting is determined before the team gathers. There are three key things you can do to ensure the team members get the most out of their meeting.
First, ask yourself: Is a meeting needed? Leaders should do a number of things before the meeting to help make it effective. The first thing is to be sure a meeting is even needed. If the meeting is primarily informational, ask yourself whether it is imperative that the group fully understands the information and whether future decisions will be built on this information. If so, a meeting may be needed. If not, perhaps simply communicating with everyone in a written format will save valuable time. Similarly, decision-making meetings make the most sense when the problem is complex and important, there are questions of fairness to be resolved, and commitment is needed moving forward.
Second, create and distribute an agenda. An agenda is important in helping to inform those invited about the purpose of the meeting. It also helps organize the flow of the meeting and keep the team on track.
346 PRINCIPLES OF MANAGEMENT
Third, send a reminder before the meeting. Reminding everyone of the purpose, time, and location of the meeting helps everyone prepare themselves. Anyone who has attended a team meeting only to find there is no reason to meet because members haven’t completed their agreed-upon tasks knows that, as a result, team performance or morale can be negatively affected. Follow up to make sure every- one is prepared. As a team member, inform others immediately if you will not be ready with your tasks so they can determine whether the meeting should be postponed.
During the Meeting
During the meeting, there are several things you can do to make sure the team starts and keeps on track.
Start the meeting on time. Waiting for members who are running late only punishes those who are on time and reinforces the idea that it’s OK to be late. Starting the meeting promptly sends an import- ant signal that you are respectful of everyone’s time.
Follow the meeting agenda. Veering off agenda communicates to members that it is not important. It also makes it difficult for others to keep track of where you are in the meeting and can facilitate im- portant points not being addressed.
Manage group dynamics for full participation. As you’ve seen in this chapter, there are a number of group dynamics that can limit a team’s functioning. Be on the lookout for full participation and en- gagement from all team members as well as any potential problems such as social loafing, group con- flict, or groupthink.
FIGURE 13.13
© The New Yorker Collection 1979 Henry Martin from cartoonbank.com. All Rights Reserved.
Summarize the meeting with action items. Be sure to clarify team member roles moving forward. If in- dividual’s tasks are not clear, chances are role confusion will arise later. There should be clear notes from the meeting regarding who is responsible for each action item and the timeframes associated with next steps.
End the meeting on time. This is vitally important as it shows that you respect everyone’s time and are organized. If another meeting is needed to follow up, schedule it later, but don’t let the meeting run over.
After the Meeting
Follow up on action items. After the meeting you probably have several action items. In addition, it is likely that you’ll need to follow up on the action items of others.
CHAPTER 13 MANAGING GROUPS AND TEAMS 347
FIGURE 13.14
Conducting meetings standing up saves time yet keeps information flowing across the team. [50]
Photo used by permission by Jason Yip.
K E Y T A K E A W A Y
Much like group development, team socialization takes place over the life of the team. The stages move from evaluation to commitment to role transition. Team norms are important for the team process and help to es- tablish who is doing what for the team and how the team will function. Creating a team contract helps with this process. Keys to address in a team contract are team values and goals, team roles and leadership, team de- cision making, team communication expectations, and how team performance is characterized. Team meet- ings can help a team coordinate and share information. Effective meetings include preparation, management during the meeting, and follow up on action items generated in the meeting.
E X E R C I S E S
1. Have the norms for most of the teams you have belonged to been formal or informal? How do you think that has affected these teams?
2. Have you ever been involved in creating a team contract? Explain how you think that may have influenced how the team functioned?
3. Should the person requesting a meeting always prepare a meeting agenda? Why or why not?
4. Do you think conducting team meetings standing up is a good idea? Why or why not?
5. BARRIERS TO EFFECTIVE TEAMS
L E A R N I N G O B J E C T I V E
1. Recognize common barriers to effective teams and how to address them
Problems can arise in any team that will hurt the team’s effectiveness. Here are some common prob- lems faced by teams and how to deal with them.
348 PRINCIPLES OF MANAGEMENT
5.1 Common Barriers to Effective Teams
Challenges of Knowing Where to Begin
At the start of a project, team members may be at a loss as to how to begin. Also, they may have reached the end of a task but are unable to move on to the next step or put the task to rest.
Floundering often results from a lack of clear goals, so the remedy is to go back to the team’s mis- sion or plan and make sure that it is clear to everyone. Team leaders can help move the team past floundering by asking, “What is holding us up? Do we need more data? Do we need assurances or sup- port? Does anyone feel that we’ve missed something important?”
Dominating Team Members
Some team members may have a dominating personality that encroaches on the participation or air- time of others. This overbearing behavior may hurt the team morale or the momentum of the team.
A good way to overcome this barrier is to design a team evaluation to include a “balance of parti- cipation” in meetings. Knowing that fair and equitable participation by all will affect the team’s per- formance evaluation will help team members limit domination by one member and encourage parti- cipation from all members, even shy or reluctant ones. Team members can say, “We’ve heard from Mary on this issue, so let’s hear from others about their ideas.”
Poor Performance of Some Team Members
Research shows that teams deal with poor performers in different ways, depending on members’ per- ceptions of the reasons for poor performance.[51] In situations in which the poor performer is perceived as lacking in ability, teams are more likely to train the member. In situations in which members per- ceive the individual as simply being low on motivation, they are more likely to try to motivate or reject the poor performer.
Keep in mind that justice is an important part of keeping individuals working hard for the team.[52] Be sure that poor performers are dealt with in a way that is deemed fair by all the team members.
Poorly Managed Team Conflict
Disagreements among team members are normal and should be expected. Healthy teams raise issues and discuss differing points of view because that will ultimately help the team reach stronger, more well-reasoned decisions. Unfortunately, sometimes disagreements arise because of personality issues or feuds that predated the teams’ formation.
Ideally, teams should be designed to avoid bringing adversaries together on the same team. If that is not possible, the next best solution is to have adversaries discuss their issues privately, so the team’s progress is not disrupted. The team leader or other team member can offer to facilitate the discussion. One way to make a discussion between conflicting parties meaningful is to form a behavioral contract between the two parties. That is, if one party agrees to do X, the other will agree to do Y.[53]
K E Y T A K E A W A Y
Barriers to effective teams include the challenges of knowing where to begin, dominating team members, the poor performance of team members, and poorly managed team conflict.
E X E R C I S E S
1. Have you ever been involved in a team where one or more dominating team members hurt the team’s performance? Share what happened and how the team dealt with this.
2. Have you ever been involved in a team where conflict erupted between team members? How was the situation handled?
CHAPTER 13 MANAGING GROUPS AND TEAMS 349
6. DEVELOPING YOUR TEAM SKILLS
L E A R N I N G O B J E C T I V E
1. Identify guidelines for developing cohesion in your team.
6.1 Steps to Creating and Maintaining a Cohesive Team There are several steps you can take as a manager to help build a cohesive team. For example, you can work to:
< Align the group with the greater organization. Establish common objectives in which members can get involved.
< Let members have choices in setting their own goals. Include them in decision making at the organizational level.
< Define clear roles. Demonstrate how each person’s contribution furthers the group goal—everyone is responsible for a special piece of the puzzle.
< Situate group members in proximity to one another. This builds familiarity. < Give frequent praise, both to individuals and to the group, and encourage them to praise each
other. This builds individual self-confidence, reaffirms positive behavior, and creates an overall positive atmosphere.
< Treat all members with dignity and respect. This demonstrates that there are no favorites and everyone is valued.
< Celebrate differences. This highlights each individual’s contribution while also making diversity a norm.
< Establish common rituals. Thursday morning coffee, monthly potlucks—these reaffirm group identity and create shared experiences.
K E Y T A K E A W A Y
There are many things you can do to help build a cohesive team. One key thing to remember is that too much cohesion without strong performance norms can be a problem. Many of the ways to build cohesive groups are also fun, such as celebrating successes and creating rituals.
E X E R C I S E S
1. Think of the most cohesive group you have ever been in. What factors made the group so close?
2. What are some challenges you see to creating a cohesive group?
3. How does team size affect cohesion?
350 PRINCIPLES OF MANAGEMENT
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CHAPTER 13 MANAGING GROUPS AND TEAMS 351
53. Scholtes, P. (1988). The team handbook. Madison, WI: Joiner Associates.
352 PRINCIPLES OF MANAGEMENT
motivation
This is defined as “the intention of achieving a goal, leading to goal-directed behavior.”
ability
The characteristic of having the skills and knowledge required to perform the job.
C H A P T E R 1 4 Motivating Employees FIGURE 14.1 Rewards are more effective than punishments in altering individual behavior.
© 2010 Jupiterimages Corporation
W H A T ’ S I N I T F O R M E ?
Reading this chapter will help you do the following:
1. Understand need-based theories of motivation. 2. Understand process-based theories of motivation. 3. Describe how fairness perceptions are determined and their consequences. 4. Learn to use performance appraisals in a motivational way. 5. Learn to apply organizational rewards in a motivational way. 6. Develop your personal motivation skills.
Motivation is defined as “the intention of achieving a goal, leading to goal-directed behavior.”[1] When we refer to
someone as being motivated, we mean that the person is trying hard to accomplish a certain task. Motivation is
clearly important for someone to perform well. However, motivation alone is not sufficient. Ability—having the
skills and knowledge required to perform the job—is also important and is sometimes the key determinant of
effectiveness. Finally, environmental factors—having the resources, information, and support one needs to perform
well—are also critical to determine performance.
FIGURE 14.2 The P-O-L-C Framework
What makes employees willing to “go the extra mile” to provide excellent service, market a company’s products
effectively, or achieve the goals set for them? Answering questions like this is of utmost importance to understand
and manage the work behavior of our peers, subordinates, and even supervisors. As with many questions involving
human beings, the answers are anything but simple. Instead, there are several theories explaining the concept of
motivation.
FIGURE 14.3 According to this equation, motivation, ability, and environment are the major influences over employee performance.
Source: Mitchell, T. R. (1982). Motivation: New directions for theory, research, and practice. The Academy of Management Review, 7, 80–88; Porter, L.
W. & Lawler, E. E. (1968). Managerial attitudes and performance. Homewood, IL: Dorsey Press
1. CASE IN POINT: ZAPPOS CREATES A MOTIVATING PLACE TO WORK
© Thinkstock
354 PRINCIPLES OF MANAGEMENT
It is unique to hear about a CEO who studies happiness and motivation and builds those principles into the company’s core values or about a company with a 5-week training course and an offer of $2,000 to quit any- time during that 5 weeks if you feel the company is not a good fit. Top that off with an on-site life coach who also happens to be a chiropractor, and you are really talking about something you don’t hear about every day. Zappos is known as much for its 365-day return policy and free shipping as it is for its innovative corporate cul- ture. Although acquired in 2009 by Amazon (NASDAQ: AMZN), Zappos managed to move from number 23 in 2009 on Fortune magazine’s “100 Best Companies to Work For” list to 15 in 2010.
Performance is a function of motivation, ability, and the environment in which you work. Zappos seems to be creating an environment that encourages motivation and builds inclusiveness. The company delivers above and beyond basic workplace needs and addresses the self-actualization needs that most individuals desire from their work experience. CEO Tony Hsieh believes that the secret to customer loyalty is to make a corporate culture of caring a priority. This is reflected in the company’s 10 core values and its emphasis on building a team and a family. During the interview process, applicants are asked questions relating to the company’s val- ues, such as gauging their own weirdness, open-mindedness, and sense of family. Although the offer to be paid to quit during the training process has increased from its original number of $400, only 1% of trainees take the offer. Work is structured differently at Zappos as well. For example, there is no limit to the time cus- tomer service representatives spend on a phone call, and they are encouraged to make personal connections with the individuals on the other end rather than try to get rid of them.
Although Zappos has over 1,300 employees, the company has been able to maintain a relatively flat organiza- tional structure and prides itself on its extreme transparency. In an exceptionally detailed and lengthy letter to employees, Hsieh spelled out what the new partnership with Amazon would mean for the company, what would change, and more important, what would remain the same. As a result of this type of company struc- ture, individuals have more freedom, which can lead to greater satisfaction.
Although Zappos pays its employees well and offers attractive benefits such as employees receiving full health-care coverage and a compressed workweek, the desire to work at Zappos seems to go beyond that. As Hsieh would say, happiness is the driving force behind almost any action an individual takes. Whether your goals are for achievement, affiliation, or simply to find an enjoyable environment in which to work, Zappos strives to address these needs.
Case written by Carlene Reynolds, Talya Bauer, and Berrin Erdogan to accompany Carpenter, M., Bauer, T., & Erdogan, B. (2009). Principles of management (1st ed.). New York: Flat World Knowledge. Based on information from Robischon, N. (2009, July 22). Amazon buys Zappos for $847 million. Fast Company. Retrieved February 28, 2010, from http://www.fastcompany.com/blog/noah-robischon/editors-desk/amazon -buys-zappos-807-million; Walker, A. (2009, March 14). Zappos’ Tony Hsieh on Twitter, phone calls and the pursuit of happiness. Fast Company. Retrieved February 27, 2010, from http://www.fastcompany.com/blog/alissa-walker/member-blog/tony-hsiehs-zapposcom; Happy feet—Inside the online shoe utopia. (2009, September 14). New Yorker. Retrieved February 28, 2010, from http://about.zappos.com/press-center/media-coverage/ happy-feet-inside-online-shoe-utopia; 100 best companies to work for. (2010, February 8). Fortune. Retrieved February 26, 2010, from http://money.cnn.com/magazines/fortune/bestcompanies/2010/snapshots/15.html.
D I S C U S S I O N Q U E S T I O N S
1. Motivation is an essential element of the leading facet of the P-O-L-C framework. What are other means that organizations use to motivate employees besides those used by Zappos?
2. What potential organizational changes might result from the acquisition by Amazon?
3. Why do you think Zappos’ approach is not utilized more often? In other words, what are the challenges to these techniques?
4. Why do you think Zappos offers a $2,000 incentive to quit?
5. Would you be motivated to work at Zappos? Why or why not?
CHAPTER 14 MOTIVATING EMPLOYEES 355
physiological needs
The need for air, food, and water.
safety needs
The need to be safe from danger, pain, or an uncertain future.
social needs
The need to bond with other human beings, to be loved, and to form lasting attachments with them.
esteem needs
The desire to be respected by one’s peers, feeling important, and being appreciated.
self-actualization
The quality of “becoming all you are capable of becoming.”
2. NEED-BASED THEORIES OF MOTIVATION
L E A R N I N G O B J E C T I V E S
1. Explain how employees are motivated according to Maslow’s hierarchy of needs. 2. Explain how ERG theory addresses the limitations of Maslow’s hierarchy. 3. Describe the difference between factors contributing to employee motivation and how these
differ from factors contributing to dissatisfaction. 4. Describe the needs for achievement, power, and affiliation, and how these needs affect work
behavior.
The earliest answer to motivation involved understanding individual needs. Specifically, early research- ers thought that employees try hard and demonstrate goal-driven behavior to satisfy needs. For ex- ample, an employee who is always walking around the office talking to people may have a need for companionship and his behavior may be a way of satisfying this need. There are four major theories in the need-based category: Maslow’s hierarchy of needs, ERG theory, Herzberg’s dual factor theory, and McClelland’s acquired needs theory.
2.1 Maslow’s Hierarchy of Needs Abraham Maslow is among the most prominent psychologists of the 20th century and the hierarchy of needs, accompanied by the pyramid representing how human needs are ranked, is an image familiar to most business students and managers. Maslow’s theory is based on a simple premise: Human beings have needs that are hierarchically ranked.[2] There are some needs that are basic to all human beings, and in their absence, nothing else matters. As we satisfy these basic needs, we start looking to satisfy higher-order needs. Once a lower-level need is satisfied, it no longer serves as a motivator.
The most basic of Maslow’s needs are physiological needs. Physiological needs refer to the need for air, food, and water. Imagine being very hungry. At that point, all your behavior may be directed at finding food. Once you eat, though, the search for food ceases and the promise of food no longer serves as a motivator. Once physiological needs are satisfied, people tend to become concerned about safety. Are they safe from danger, pain, or an uncertain future? One level up, social needs refer to the need to bond with other human beings, to be loved, and to form lasting attachments. In fact, having no attach- ments can negatively affect health and well-being.[3] The satisfaction of social needs makes esteem needs more salient. Esteem needs refer to the desire to be respected by one’s peers, feeling important, and being appreciated. Finally, at the highest level of the hierarchy, the need for self-actualization refers to “becoming all you are capable of becoming.” This need manifests itself by acquiring new skills, taking on new challenges, and behaving in a way that will lead to the satisfaction of one’s life goals.
356 PRINCIPLES OF MANAGEMENT
FIGURE 14.5 Maslow’s Hierarchy of Needs
Source: Adapted from Maslow, A. H. (1954). Motivation and personality. New York: Harper.
Maslow’s hierarchy is a systematic way of thinking about the different needs employees may have at any given point and explains different reactions they may have to similar treatment. An employee who is trying to satisfy her esteem needs may feel gratified when her supervisor praises her. However, an- other employee who is trying to satisfy his social needs may resent being praised by upper management in front of peers if the praise sets him apart from the rest of the group.
So, how can organizations satisfy their employees’ various needs? By leveraging the various facets of the planning-organizing-leading-controlling (P-O-L-C) functions. In the long run, physiological needs may be satisfied by the person’s paycheck, but it is important to remember that pay may satisfy other needs such as safety and esteem as well. Providing generous benefits, including health insurance and company-sponsored retirement plans, as well as offering a measure of job security, will help satisfy safety needs. Social needs may be satisfied by having a friendly environment, providing a workplace conducive to collaboration and communication with others. Company picnics and other social get-to- gethers may also be helpful if the majority of employees are motivated primarily by social needs (but may cause resentment if they are not and if they have to sacrifice a Sunday afternoon for a company picnic). Providing promotion opportunities at work, recognizing a person’s accomplishments verbally or through more formal reward systems, job titles that communicate to the employee that one has achieved high status within the organization are among the ways of satisfying esteem needs. Finally, self-actualization needs may be satisfied by providing development and growth opportunities on or off the job, as well as by assigning interesting and challenging work. By making the effort to satisfy the different needs each employee may have at a given time, organizations may ensure a more highly mo- tivated workforce.
CHAPTER 14 MOTIVATING EMPLOYEES 357
existence
This need corresponds to Maslow’s physiological and safety needs.
relatedness
This need corresponds to social needs.
growth
This need refers to Maslow’s esteem and self-actualization.
FIGURE 14.6
© The New Yorker Collection 1995 Leo Callum from cartoonbank.com. All Rights Reserved.
2.2 ERG Theory ERG theory of Clayton Alderfer is a modification of Maslow’s hierarchy of needs.[4] Instead of the five needs that are hierarchically organized, Alderfer proposed that basic human needs may be grouped un- der three categories, namely, Existence, Relatedness, and Growth (see the following figure). Exist- ence need corresponds to Maslow’s physiological and safety needs, relatedness corresponds to social needs, and growth need refers to Maslow’s esteem and self actualization.
FIGURE 14.7 ERG Theory
Source: Based on Alderfer, C. P. (1969). An empirical test of a new theory of human needs. Organizational Behavior and Human Performance, 4,
142–175.
ERG theory’s main contribution to the literature is its relaxation of Maslow’s assumptions. For ex- ample, ERG theory does not rank needs in any particular order and explicitly recognizes that more than one need may operate at a given time. Moreover, the theory has a “frustration-regression” hypo- thesis, suggesting that individuals who are frustrated in their attempts to satisfy one need may regress to another one. For example, someone who is frustrated by the lack of growth opportunities in his job and slow progress toward career goals may regress to relatedness needs and start spending more time socializing with one’s coworkers. The implication of this theory is that we need to recognize the
358 PRINCIPLES OF MANAGEMENT
hygiene factors
The factors that include company policies, supervision, working conditions, salary, safety, and security on the job.
motivators
The factors that are intrinsic to the job, such as achievement, recognition, interesting work, increased responsibilities, advancement, and growth opportunities.
multiple needs that may be driving an individual at a given point to understand his behavior and to motivate him.
2.3 Two-Factor Theory Frederick Herzberg approached the question of motivation in a different way. By asking individuals what satisfies them on the job and what dissatisfies them, Herzberg came to the conclusion that aspects of the work environment that satisfy employees are very different from aspects that dissatisfy them.[5] Herzberg labeled factors causing dissatisfaction of workers as “hygiene” factors because these factors were part of the context in which the job was performed, as opposed to the job itself. Hygiene factors included company policies, supervision, working conditions, salary, safety, and security on the job. To illustrate, imagine that you are working in an unpleasant work environment. Your office is too hot in the summer and too cold in the winter. You are being harassed and mistreated. You would certainly be miserable in such a work environment. However, if these problems were solved (your office temperat- ure is just right and you are not harassed at all), would you be motivated? Most likely, you would take the situation for granted. In fact, many factors in our work environment are things that we miss when they are absent, but take for granted if they are present.
In contrast, motivators are factors that are intrinsic to the job, such as achievement, recognition, interesting work, increased responsibilities, advancement, and growth opportunities. According to Herzberg’s research, motivators are the conditions that truly encourage employees to try harder.
FIGURE 14.8 Two-Factor Theory of Motivation
Source: Based on Herzberg, F., Mausner, B., & Snyderman, B. (1959). The motivation to work. New York: Wiley; Herzberg, F. (1965). The motivation
to work among Finnish supervisors. Personnel Psychology, 18, 393–402.
Herzberg’s research, which is summarized in the figure above, has received its share of criticism.[6] One criticism relates to the classification of the factors as hygiene or motivator. For example, pay is viewed as a hygiene factor. However, pay is not necessarily a contextual factor and may have symbolic value by showing employees that they are being recognized for their contributions as well as communicating to them that they are advancing within the company. Similarly, quality of supervision or relationships employees form with their supervisors may determine whether they are assigned interesting work, whether they are recognized for their potential, and whether they take on more responsibilities. Despite its limitations, the two-factor theory can be a valuable aid to managers because it points out that im- proving the environment in which the job is performed goes only so far in motivating employees.
CHAPTER 14 MOTIVATING EMPLOYEES 359
FIGURE 14.9
Plaques and other recognition awards may motivate employees if these awards fit with the company culture and if they reflect a sincere appreciation of employee accomplishments.
© 2010 Jupiterimages Corporation
need for achievement
Having a strong need to be successful.
high need for affiliation
The need to be liked and accepted by others.
need for power
The desire to influence others and control their environment.
2.4 Acquired Needs Theory Among the need-based approaches to motivation, Douglas McClelland’s acquired needs theory is the one that has received the greatest amount of support. According to this theory, individuals acquire three types of needs as a result of their life experiences. These needs are need for achievement, need for affiliation, and need for power. All in- dividuals possess a combination of these needs.
Those who have high need for achievement have a strong need to be successful. A worker who derives great satisfaction from meeting deadlines, coming up with bril- liant ideas, and planning his or her next career move may be high in need for achieve- ment. Individuals high on need for achievement are well suited to positions such as sales where there are explicit goals, feedback is immediately available, and their effort often leads to success.[7] Because of their success in lower-level jobs, those in high need for achievement are often promoted to higher-level positions.[8] However, a high need for achievement has important disadvantages in management. Management involves getting work done by motivating others. When a salesperson is promoted to be a sales manager, the job description changes from actively selling to recruiting, motivating, and training salespeople. Those who are high in need for achievement may view mana- gerial activities such as coaching, communicating, and meeting with subordinates as a waste of time. Moreover, they enjoy doing things themselves and may find it difficult to delegate authority. They may become overbearing or micromanaging bosses, expecting
everyone to be as dedicated to work as they are, and expecting subordinates to do things exactly the way they are used to doing.[9]
Individuals who have a high need for affiliation want to be liked and accepted by others. When given a choice, they prefer to interact with others and be with friends.[10] Their emphasis on harmoni- ous interpersonal relationships may be an advantage in jobs and occupations requiring frequent inter- personal interaction, such as social worker or teacher. In managerial positions, a high need for affili- ation may again serve as a disadvantage because these individuals tend to be overly concerned about how they are perceived by others. Thus, they may find it difficult to perform some aspects of a man- ager’s job such as giving employees critical feedback or disciplining poor performers.
Finally, those with high need for power want to influence others and control their environment. Need for power may be destructive of one’s relationships if it takes the form of seeking and using power for one’s own good and prestige. However, when it manifests itself in more altruistic forms, such as changing the way things are done so that the work environment is more positive or negotiating more resources for one’s department, it tends to lead to positive outcomes. In fact, need for power is viewed as important for effectiveness in managerial and leadership positions.[11]
McClelland’s theory of acquired needs has important implications for motivating employees. While someone who has high need for achievement may respond to goals, those with high need for affiliation may be motivated to gain the approval of their peers and supervisors, whereas those who have high need for power may value gaining influence over the supervisor or acquiring a position that has decision-making authority. And, when it comes to succeeding in managerial positions, individuals who are aware of the drawbacks of their need orientation can take steps to overcome these drawbacks.
K E Y T A K E A W A Y
Need-based theories describe motivated behavior as individual efforts to meet needs. According to this per- spective, the manager’s job is to identify what people need and then to make sure that the work environment becomes a means of satisfying these needs. Maslow’s hierarchy categorizes human needs into physiological, safety, social, esteem, and self-actualization needs. ERG theory is a modification of Maslow’s hierarchy, where the five needs are collapsed into three categories (existence, relatedness, and growth). The two-factor theory differentiates between factors that make people dissatisfied on the job (hygiene factors) and factors that truly motivate employees. Finally, acquired-needs theory argues that individuals possess stable and dominant motives to achieve, acquire power, or affiliate with others. Each of these theories explains characteristics of a work environment that motivate employees.
360 PRINCIPLES OF MANAGEMENT
referent
A person we compare ourselves to in equity theory.
E X E R C I S E S
1. Many managers assume that if an employee is not performing well, the reason must be lack of motivation. What is the problem with this assumption?
2. Review Maslow’s hierarchy of needs. Do you agree with the particular ranking of employee needs?
3. Review the hygiene and motivators in the two-factor theory. Are there any hygiene factors that you would consider to be motivators and vice versa?
4. A friend of yours is competitive, requires frequent and immediate feedback, and enjoys accomplishing things. She has recently been promoted to a managerial position and seeks your advice. What would you tell her?
5. Which motivation theory have you found to be most useful in explaining why people behave in a certain way? Why?
3. PROCESS-BASED THEORIES
L E A R N I N G O B J E C T I V E S
1. Explain how employees evaluate the fairness of reward distributions. 2. List the three questions individuals consider when deciding whether to put forth effort at work. 3. Describe how managers can use learning and reinforcement principles to motivate employees. 4. Learn the role that job design plays in motivating employees. 5. Describe why goal setting motivates employees.
In contrast to the need-based theories we have covered so far, process-based theories view motivation as a rational process. Individuals analyze their environment, develop reactions and feelings, and react in certain ways. Under this category, we will review equity theory, expectancy theory, and reinforce- ment theory. We will also discuss the concepts of job design and goal setting as motivational strategies.
3.1 Equity Theory Imagine that your friend Marie is paid $10 an hour working as an office assistant. She has held this job for six months. She is very good at what she does, she comes up with creative ways to make things easi- er in the workplace, and she is a good colleague who is willing to help others. She stays late when neces- sary and is flexible if asked to rearrange her priorities or her work hours. Now imagine that Marie finds out her manager is hiring another employee, Spencer, who is going to work with her, who will hold the same job title and will perform the same type of tasks. Spencer has more advanced computer skills, but it is unclear whether these will be used on the job. The starting pay for Spencer will be $14 an hour. How would Marie feel? Would she be as motivated as before, going above and beyond her duties?
If your reaction to this scenario was along the lines of “Marie would think it’s unfair,” your feelings may be explained using equity theory.[12] According to this theory, individuals are motivated by a sense of fairness in their interactions. Moreover, our sense of fairness is a result of the social comparisons we make. Specifically, we compare our inputs and outputs with someone else’s inputs and outputs. We perceive fairness if we believe that the input-to-output ratio we are bringing into the situation is similar to the input/output ratio of a comparison person, or a referent. Perceptions of inequity create tension within us and drive us to action that will reduce perceived inequity. This process is illustrated in the Equity Formula.
CHAPTER 14 MOTIVATING EMPLOYEES 361
FIGURE 14.10 The Equity Formula
Source: Based on Adams, J. S. (1965).
Inequity in social exchange. In L.
Berkowitz (Ed.), Advances in
Experimental Social Psychology (Vol.
2, pp. 267–299). New York: Academic
Press.
What Are Inputs and Outputs?
Inputs are the contributions the person feels he or she is making to the environment. In the previous example, the hard work Marie was providing, loyalty to the organization, the number of months she has worked there, level of education, training, and her skills may have been relevant inputs. Outputs are the rewards the person feels he or she is receiving from the situation. The $10 an hour Marie is re- ceiving was a salient output. There may be other outputs, such as the benefits received or the treatment one gets from the boss. In the prior example, Marie may reason as follows: “I have been working here for six months. I am loyal and I perform well (inputs). I am paid $10 an hour for this (outputs). The new guy, Spencer, does not have any experience here (referent’s inputs) but will be paid $14 (referent’s outcomes). This situation is unfair.”
We should emphasize that equity perceptions develop as a result of a subjective process. Different people may look at exactly the same situation and perceive different levels of equity. For example, an- other person may look at the same scenario and decide that the situation is fair because Spencer has computer skills and the company is paying extra for these skills.
Who Is the Referent?
The referent other may be a specific person or an entire category of people. For example, Marie might look at want ads for entry-level clerical workers and see whether the pay offered is in the $10 per hour range; in this case, the referent other is the category of entry-level clerical workers, including office as- sistants, in Marie’s local area. Referents should be comparable to us—otherwise the comparison is not meaningful. It would be illogical for Marie to compare herself to the CEO of the company, given the differences in the nature of inputs and outcomes. Instead, she would logically compare herself to those performing similar tasks within the same organization or a different organization.
Reactions to Unfairness
The theory outlines several potential reactions to perceived inequity, which are summarized in Table 14.1. Oftentimes, the situation may be dealt with perceptually, by distorting our perceptions of our own or referent’s inputs and outputs. For example, Marie may justify the situation by downplaying her own inputs (“I don’t really work very hard on this job”), valuing the outputs more highly (“I am gaining valuable work experience, so the situation is not that bad”), distorting the other person’s inputs (“Spencer really is more competent than I am and deserves to be paid more”) or distorting the other person’s outputs (“Spencer gets $14 but will have to work with a lousy manager, so the situation is not unfair”).
TABLE 14.1 Potential Responses to Inequity
Reactions to inequity
Example
Distort perceptions Changing one’s thinking to believe that the referent actually is more skilled than previously thought
Increase referent’s inputs
Encouraging the referent to work harder
Reduce own input Deliberately putting forth less effort at work. Reducing the quality of one’s work
Increase own outcomes
Negotiating a raise for oneself or using unethical ways of increasing rewards such as stealing from the company
Change referent Comparing oneself to someone who is worse off
Leave the situation Quitting one’s job
Seek legal action Suing the company or filing a complaint if the unfairness in question is under legal protection
Source: Based on research findings reported in Carrell, M. R., & Dittrich, J. E. (1978). Equity theory: The recent literature, methodological
considerations, and new directions. Academy of Management Review, 3, 202–210; Goodman, P. S., & Friedman, A. (1971). An examination of
Adams’s theory of inequity. Administrative Science Quarterly, 16, 271–288; Greenberg, J. (1993). Stealing in the name of justice: Informational and
interpersonal moderators of theft reactions to underpayment inequity. Organizational Behavior and Human Decision Processes, 54, 81–103; Schmidt,
D. R., & Marwell, G. (1972). Withdrawal and reward reallocation as responses to inequity. Journal of Experimental Social Psychology, 8, 207–211.
Another way of addressing perceived inequity is to reduce one’s own inputs or increase one’s own out- puts. If Marie works less hard, perceived inequity would be reduced. And, indeed, research shows that people who perceive inequity tend to reduce their work performance or reduce the quality of their in- puts.[13] Increasing one’s outputs can be achieved through legitimate means such as negotiating a pay raise. At the same time, research shows that those feeling inequity sometimes resort to stealing to
362 PRINCIPLES OF MANAGEMENT
equity sensitivity
A personality trait that explains different reactions to inequity.
benevolents
Individuals who give without waiting to receive much in return.
entitleds
Individuals who expect to receive a lot without giving much in return.
distributive justice
The degree to which the outcomes received from the organization are fair.
procedural justice
The degree to which fair decision-making procedures are used to arrive at a decision.
balance the scales.[14] Other options include changing the comparison person (for example, Marie may learn that others doing similar work in different organizations are paid only minimum wage) and leav- ing the situation by quitting one’s job.[15] We might even consider taking legal action as a potential out- come of perceived inequity. For example, if Marie finds out that the main reason behind the pay gap is gender, she may react to the situation by taking legal action because sex discrimination in pay is illegal in the United States.
Overpayment Inequity
What would you do if you felt you were overrewarded? In other words, how would you feel if you were the new employee, Spencer (and you knew that your coworker Marie was being paid $4 per hour less than you)? Originally, equity theory proposed that overrewarded individuals would experience guilt and would increase their effort to restore perceptions of equity. However, research does not provide support for this argument. Instead, it seems that individuals experience less distress as a result of being overrewarded.[16] It is not hard to imagine that individuals find perceptual ways to deal with a situation like this, such as believing that they have more skills and bring more to the situation compared with the referent person. Therefore, research does not support equity theory’s predictions with respect to people who are overpaid.[17]
Individual Differences in Reactions to Inequity
So far, we have assumed that once people feel that the situation is inequitable, they will be motivated to react. However, does inequity disturb everyone equally? Researchers identified a personality trait that explains different reactions to inequity and named this trait equity sensitivity.[18] Equity sensitive in- dividuals experience distress when they feel they are overrewarded or underrewarded and expect to maintain equitable relationships. At the same time, there are some individuals who are benevolents who give without waiting to receive much in return and entitleds who expect to receive a lot without giving much in return. Thus, the theory is more useful in explaining the behavior of equity sensitive in- dividuals, and organizations will need to pay particular attention to how these individuals view their relationships.
Fairness Beyond Equity: Procedural and Interactional Justice
Equity theory looks at perceived fairness as a motivator. However, the way equity theory defines fair- ness is limited to fairness regarding rewards. Starting in the 1970s, researchers of workplace fairness began taking a broader view of justice. Equity theory deals with outcome fairness, and therefore, it is considered to be a distributive justice theory. Distributive justice refers to the degree to which the outputs received from the organization are fair. Two other types of fairness have been identified: Pro- cedural justice and interactional justice.
Let’s assume that Marie found out she is getting a promotion that will include a pay raise, in- creased responsibilities, and prestige. If Marie feels she deserves to be promoted, she would perceive high distributive justice (“getting the promotion is fair”). However, Marie later found out that the de- partment manager picked her name out of a hat! What would she feel? She might still like the outcome but feel that the decision-making process was unfair since it wasn’t based on performance. This re- sponse would involve feelings of procedural injustice. Procedural justice refers to the degree to which fair decision-making procedures are used. Research shows that employees care about procedural justice for many organizational decisions, including layoffs, employee selection, surveillance of employees, performance appraisals, and pay decisions.[19] They tend to care about procedural justice particularly when they do not get the outcome they feel they deserve.[20] If Marie does not get the promotion and finds out that management chose the candidate by picking a name out of a hat, she may view this as adding insult to injury. When people do not get the rewards they want, they tend to hold management responsible if procedures are not fair.[21]
Research has identified many ways of achieving procedural justice. For example, giving employees advance notice before laying them off, firing them, or disciplining them is perceived as fairer.[22] Allow- ing employees voice into decision making is also important.[23] When designing a performance appraisal system or implementing a reorganization, asking employees for their input may be a good idea because it increases perceptions of fairness. Even when it is not possible to have employees participate, provid- ing explanations is helpful in fostering procedural justice.[24] Finally, people expect consistency in treat- ment.[25] If one person is given extra time when taking a test while another is not, individuals would perceive decision making as unfair.
CHAPTER 14 MOTIVATING EMPLOYEES 363
interactional justice
The degree to which people are treated with respect, kindness, and dignity in interpersonal interactions.
expectancy
The extent to which a person believes that high levels of effort will lead to outcomes of interest such as performance or success.
instrumentality
The degree to which the person believes that performance is related to secondary outcomes such as rewards.
valence
The value of the rewards awaiting the person as a result of performance.
Now let’s imagine Marie’s boss telling her she is getting the promotion. The manager’s exact words: “Yes, Marie, we are giving you the promotion. The job is so simple that we thought even you can handle it.” Now what is Marie’s reaction? The unpleasant feelings she may now experience are ex- plained by interactional justice. Interactional justice refers to the degree to which people are treated with respect, kindness, and dignity in interpersonal interactions. We expect to be treated with dignity by our peers, supervisors, and customers. When the opposite happens, we feel angry. Even when faced with negative outcomes such as a pay cut, being treated with dignity and respect serves as a buffer and alleviates our stress.[26]
Employers would benefit from paying attention to all three types of justice perceptions. In addition to being the right thing to do, justice perceptions lead to outcomes companies care about. Injustice is directly harmful to employee psychological health and well-being and contributes to stress.[27] High levels of justice create higher levels of employee commitment to organizations, are related to higher job performance, higher levels of organizational citizenship (behaviors that are not part of one’s job de- scription but help the organization in other ways such as speaking positively about the company and helping others), and higher levels of customer satisfaction, whereas low levels of justice lead to retali- ation and supporting union certification movements.[28]
3.2 Expectancy Theory According to expectancy theory, individual motivation to put forth more or less effort is determined by a rational calculation.[29] According to this theory, individuals ask themselves three questions.
FIGURE 14.11 Summary of Expectancy Theory
Source: Based on Porter, L. W., & Lawler, E. E. (1968). Managerial attitudes and performance. Homewood, IL: Irwin; Vroom, V. H. (1964). Work and
motivation. New York: Wiley.
The first question is whether the person believes that high levels of effort will lead to desired outcomes. This perception is labeled as expectancy. For example, do you believe that the effort you put forth in a class is related to learning worthwhile material and receiving a good grade? If you do, you are more likely to put forth effort.
The second question is the degree to which the person believes that performance is related to sec- ondary outcomes such as rewards. This perception is labeled as instrumentality. For example, do you believe that passing the class is related to rewards such as getting a better job, or gaining approval from your instructor, from your friends, or parents? If you do, you are more likely to put forth effort.
Finally, individuals are also concerned about the value of the rewards awaiting them as a result of performance. The anticipated satisfaction that will result from an outcome is labeled as valence. For example, do you value getting a better job or gaining approval from your instructor, friends, or par- ents? If these outcomes are desirable to you, you are more likely to put forth effort.
As a manager, how can you influence these perceptions to motivate employees? In fact, managers can influence all three perceptions.[30] To influence their expectancy perceptions, managers may train their employees, or hire people who are qualified for the jobs in question. Low expectancy may also be due to employees feeling that something other than effort predicts performance, such as political beha- viors on the part of employees. In this case, clearing the way to performance and creating an environ- ment in which employees do not feel blocked will be helpful. The first step in influencing instrumental- ity is to connect pay and other rewards to performance using bonuses, award systems, and merit pay. Publicizing any contests or award programs is helpful in bringing rewards to the awareness of employ- ees. It is also important to highlight that performance and not something else is being rewarded. For example, if a company has an employee-of-the-month award that is rotated among employees, em- ployees are unlikely to believe that performance is being rewarded. In the name of being egalitarian, such a reward system may actually hamper the motivation of highest performing employees by eroding instrumentality. Finally, to influence valence, managers will need to find out what their employees
364 PRINCIPLES OF MANAGEMENT
value. This can be done by talking to employees, or surveying them about what rewards they find valuable.
3.3 Reinforcement Theory Reinforcement theory is based on the work of Ivan Pavlov in behavioral conditioning and the later work B. F. Skinner did on operant conditioning.[31] According to this theory, behavior is a function of its consequences. Imagine that even though no one asked you to, you stayed late and drafted a report. When the manager found out, she was ecstatic and took you out to lunch and thanked you genuinely. The consequences following your good deed were favorable, and therefore you are more likely to do similar good deeds in the future. In contrast, if your manager had said nothing about it and ignored the sacrifice you made, you would be less likely to demonstrate similar behaviors in the future, or your be- havior would likely become extinct.
Despite the simplicity of reinforcement theory, how many times have you seen positive behavior ignored or, worse, negative behavior rewarded? In many organizations, this is a familiar scenario. People go above and beyond the call of duty, and yet their behaviors are ignored or criticized. People with disruptive habits may receive no punishments because the manager is afraid of the reaction the person will give when confronted. They may even receive rewards such as promotions so that the per- son is transferred to a different location and becomes someone else’s problem! Moreover, it is common for people to be rewarded for the wrong kind of behavior. Steven Kerr labeled this phenomenon as “the folly of rewarding A while hoping for B.”[32] For example, a company may make public statements about the importance of quality. Yet, they choose to reward shipments on time regardless of the num- ber of known defects contained in the shipments. As a result, employees are more likely to ignore qual- ity and focus on hurrying the delivery process.
Reinforcement Interventions
FIGURE 14.12 Reinforcement Methods
Reinforcement theory describes four interventions to modify employee behavior. Two of these are methods of increasing the frequency of desired behaviors while the remaining two are methods of re- ducing the frequency of undesired behaviors.
CHAPTER 14 MOTIVATING EMPLOYEES 365
positive reinforcement
Reinforcement that involves making sure that behavior is met with positive consequences.
negative reinforcement
Reinforcement that involves removal of unpleasant outcomes once desired behavior is demonstrated.
extinction
The removal of rewards following negative behavior.
punishment
The presentation of negative consequences following unwanted behaviors.
continuous schedule
A schedule in which reinforcers follow all instances of positive behavior.
fixed ratio schedule
A schedule in which reinforcers reward every nth time the right behavior is demonstrated.
fixed interval schedule
A schedule in which reinforcers reward after a specified period of time.
variable ratio
A schedule that involves providing the reinforcement on a random pattern.
OB Mod
A systematic application of reinforcement theory to modify employee behaviors in the workplace.
Positive reinforcement is a method of increasing the desired behavior.[33] Positive reinforce- ment involves making sure that behavior is met with positive consequences. Praising an employee for treating a customer respectfully is an example of positive reinforcement. If the praise immediately fol- lows the positive behavior, the employee will see a link between behavior and positive consequences and will be motivated to repeat similar behaviors.
Negative reinforcement is also used to increase the desired behavior. Negative reinforcement involves removal of unpleasant outcomes once desired behavior is demonstrated. Nagging an employee to complete a report is an example of negative reinforcement. The negative stimulus in the environ- ment will remain present until positive behavior is demonstrated. The problem with negative rein- forcement may be that the negative stimulus may lead to unexpected behaviors and may fail to stimu- late the desired behavior. For example, the person may start avoiding the manager to avoid being nagged.
Extinction occurs when a behavior ceases as a result of receiving no reinforcement. For example, suppose an employee has an annoying habit of forwarding e-mail jokes to everyone in the department, cluttering up people’s in-boxes and distracting them from their work. Commenting about the jokes, whether in favorable or unfavorable terms, may be encouraging the person to keep forwarding them. Completely ignoring the jokes may reduce their frequency.
Punishment is another method of reducing the frequency of undesirable behaviors. Punishment involves presenting negative consequences following unwanted behaviors. Giving an employee a warn- ing for consistently being late to work is an example of punishment.
Reinforcement Schedules
In addition to types of reinforcements, the timing or schedule on which reinforcement is delivered has a bearing on behavior.[34] Reinforcement is presented on a continuous schedule if reinforcers follow all instances of positive behavior. An example of a continuous schedule would be giving an employee a sales commission every time he makes a sale. Fixed ratio schedules involve providing rewards every nth time the right behavior is demonstrated, for example, giving the employee a bonus for every 10th sale he makes. Fixed interval schedules involve providing a reward after a specified period of time, such as giving a sales bonus once a month regardless of how many sales have been made. Variable ra- tio involves a random pattern, such as giving a sales bonus every time the manager is in a good mood.
A systematic way in which reinforcement theory principles are applied is called Organizational Be- havior Modification (or OB Mod).[35] This is a systematic application of reinforcement theory to modify employee behaviors. The model consists of five stages. The process starts with identifying the behavior that will be modified. Let’s assume that we are interested in reducing absenteeism among em- ployees. In step 2, we need to measure the baseline level of absenteeism. In step 3, the behavior’s ante- cedents and consequences are determined. Why are employees absent? More importantly, what is hap- pening when an employee is absent? If the behavior is being unintentionally rewarded, we may expect these to reinforce absenteeism behavior. For example, suppose that absences peak each month on the days when a departmental monthly report is due, meaning that coworkers and supervisors must do ex- tra work to prepare the report. To reduce the frequency of absenteeism, it will be necessary to think of financial or social incentives to follow positive behavior and negative consequences to follow negative behavior. In step 4, an intervention is implemented. Removing the positive consequences of negative behavior may be an effective way of dealing with the situation, for example, starting the monthly report preparation a few days earlier, or letting employees know that if they are absent when the monthly re- port is being prepared, their contribution to the report will be submitted as incomplete until they finish it. Punishments may be used in persistent cases. Finally, in step 5 the behavior is measured periodically and maintained. Studies examining the effectiveness of OB Mod have been supportive of the model in general. A review of the literature found that OB Mod interventions resulted in an average of 17% im- provement in performance.[36]
366 PRINCIPLES OF MANAGEMENT
job specialization
Breaking down tasks to their simplest components and assigning them to employees so that each person would perform few tasks in a repetitive manner.
FIGURE 14.13
Properly designed sales commissions are widely used to motivate sales employees. The blend of straight salary and commissions should be carefully balanced to achieve optimum sales volume, profitability, and customer satisfaction.
© 2010 Jupiterimages Corporation
FIGURE 14.14 Stages of OB Modification
Based on information presented in Stajkovic, A. D., & Luthans, F. (1997). A meta-analysis of the effects of organizational behavior modification on
task performance, 1975-1995. Academy of Management Journal, 40, 1122–1149.
3.4 Job Design Many of us assume that the most important motivator at work would be pay. Yet, studies point to a different factor as the major influence over worker motivation: Job design. How a job is designed has a major impact on employee motivation, job satisfaction, commitment to organization, as well as absent- eeism and turnover. Job design is just one of the many organizational design decisions managers must make when engaged in the organizing function.
The question of how to properly design jobs so that employees are more productive and more sat- isfied has received managerial and research attention since the beginning of the 20th century.
Scientific Management and Job Specialization
Perhaps the earliest attempt to design jobs was presented by Frederick Taylor in his 1911 book Prin- ciples of Scientific Management. Scientific management proposed a number of ideas that have been in- fluential in job design. One idea was to minimize waste by identifying the best method to perform the job to ensure maximum efficiency. Another one of the major advances of scientific management was job specialization, which entails breaking down tasks to their simplest components and assigning them to employees so that each person would perform few tasks in a repetitive manner. While this technique may be very efficient in terms of automation and standardization, from a motivational per- spective, these jobs will be boring and repetitive and therefore associated with negative outcomes such as absenteeism.[37] Job specialization is also an ineffective way of organizing jobs in rapidly changing environments where employees close to the problem should modify their approach based on the de- mands of the situation.[38]
CHAPTER 14 MOTIVATING EMPLOYEES 367
FIGURE 14.15
This Ford panel assembly line in Berlin, Germany, is an example of specialization. Each person on the line has a different job.
© 2010 Jupiterimages Corporation
job rotation
Moving employees from job to job at regular intervals.
job enlargement
Expanding the tasks performed by employees to add more variety.
job enrichment
A job redesign technique that allows workers more control over how they perform their own tasks.
job characteristics model
A model that describes five core job dimensions leading to three critical psychological states, which lead to work-related outcomes.
Rotation, Job Enlargement, and Enrichment
One of the early alternatives to job specialization was job rotation, which involves moving employees from job to job at regular intervals, thereby relieving the monotony and boredom typical in repetitive jobs. For example, Maids International, a company that provides cleaning services to households and businesses, uses job rotation such that maids cleaning the kitchen in one house would clean the bed- room in another house.[39] Using this technique, among others, the company was able to reduce its turnover level. In a study conducted in a supermarket, cashiers were rotated to work in different de- partments. As a result of the rotation, employee stress level was reduced as measured by their blood pressure. Moreover, they reported fewer pain symptoms in their neck and shoulders.[40]
Job rotation has a number of advantages for organizations. It is an effective way for employees to acquire new skills, as the rotation involves cross-training to new tasks; this means that organizations increase the overall skill level of their employees.[41] In addition, job rotation is a means of knowledge transfer between departments.[42] For the employees, rotation is a benefit because they acquire new skills, which keeps them marketable in the long run.
Anecdotal evidence suggests that companies successfully rotate high-level employees to train their managers and increase innovativeness in the company. For example, Nokia uses rotation at all levels, such as assigning lawyers to act as country managers or moving network engineers to handset design. These approaches are thought to bring a fresh perspective to old problems.[43] India’s information tech- nology giant Wipro, which employs about 80,000 employees, uses a 3-year plan to groom future leaders of the company by rotating them through different jobs.[44]
Job enlargement refers to expanding the tasks performed by employees to add more variety. Like job rotation, job enlargement can reduce boredom and monotony as well as use human resources more effectively. When jobs are enlarged, employees view themselves as being capable of performing a broader set of tasks.[45] Job enlargement is positively related to employee satisfaction and higher-qual- ity customer services, and it increases the chances of catching mistakes.[46] At the same time, the effects of job enlargement may depend on the type of enlargement. For example, exclusively giving employees simpler tasks had negative consequences on employee satisfaction with the job of catching errors, whereas giving employees more tasks that require them to be knowledgeable in different areas seemed to have more positive effects.[47]
Job enrichment is a job redesign technique that allows workers more control over how they per- form their own tasks, giving them more responsibility. As an alternative to job specialization, compan- ies using job enrichment may experience positive outcomes such as reduced turnover, increased pro- ductivity, and reduced absences.[48] This may be because employees who have the authority and re- sponsibility over their own work can be more efficient, eliminate unnecessary tasks, take shortcuts, and overall increase their own performance. At the same time, there is some evidence that job enrichment may sometimes cause employees to be dissatisfied.[49] The reason may be that employees who are given additional autonomy and responsibility may expect greater levels of pay or other types of compensa- tion, and if this expectation is not met, they may feel frustrated. One more thing to remember is that job enrichment may not be suitable for all employees.[50] Not all employees desire to have control over how they work, and if they do not have this desire, they may feel dissatisfied in an enriched job.
Job Characteristics Model
The job characteristics model is one of the most influential attempts to design jobs to increase their motivational properties.[51] Proposed in the 1970s by Hackman and Oldham, the model describes five core job dimensions, leading to three critical psychological states, which lead to work-related out- comes. In this model, shown in the following figure, there are five core job dimensions.
FIGURE 14.16 Job Characteristics Model
Adapted from Hackman, J. R., & Oldham, G. R. (1975). Development of the job diagnostic survey. Journal of Applied Psychology, 60, 159–170.
368 PRINCIPLES OF MANAGEMENT
skill variety
The extent to which the job requires the person to use multiple high-level skills.
task identity
The degree to which the person is in charge of completing an identifiable piece of work from start to finish.
task significance
The degree to which the person’s job substantially affects other people’s work, health, or well-being.
autonomy
The degree to which the person has the freedom to decide how to perform one’s tasks.
feedback
The degree to which the person learns how effective he or she is being at work.
SMART
A goal that is specific, measurable, achievable, realistic, and timely.
Skill variety refers to the extent to which the job requires the person to use multiple high-level skills. A car wash employee whose job consists of directing employees into the automated carwash demon- strates low levels of skill variety, whereas a car wash employee who acts as a cashier, maintains carwash equipment, and manages the inventory of chemicals demonstrates high skill variety.
Task identity refers to the degree to which the person completes a piece of work from start to fin- ish. A Web designer who designs parts of a Web site will have low task identity because the work blends in with other Web designers’ work, and in the end, it will be hard for the person to claim re- sponsibility for the final output. The Webmaster who designs the entire Web site will have high task identity.
Task significance refers to whether the person’s job substantially affects other people’s work, health, or well-being. A janitor who cleans the floor at an office building may find the job low in sig- nificance, thinking it is not an important job. However, janitors cleaning the floors at a hospital may see their role as essential in helping patients recover in a healthy environment. When they see their tasks as significant, employees tend to feel that they are making an impact on their environment and their feelings of self worth are boosted. [52]
Autonomy is the degree to which the person has the freedom to decide how to perform tasks. As an example, a teacher who is required to follow a predetermined textbook, cover a given list of topics, and use a specified list of classroom activities has low autonomy, whereas a teacher who is free to choose the textbook, design the course content, and use any materials she sees fit has higher levels of autonomy. Autonomy increases motivation at work, but it also has other benefits. Autonomous work- ers are less likely to adopt a “this is not my job” attitude and instead be proactive and creative.[53] Giv- ing employees autonomy is also a great way to train them on the job. For example, Gucci’s CEO Robert Polet describes autonomy he received while working at Unilever as the key to his development of lead- ership talents.[54]
Feedback refers to the degree to which the person learns how effective he or she is at work. Feed- back may come from other people such as supervisors, peers, subordinates, customers, or from the job. A salesperson who makes informational presentations to potential clients but is not informed whether they sign up has low feedback. If this salesperson receives a notification whenever someone who has heard his presentation becomes a client, feedback will be high.
The mere presence of feedback is not sufficient for employees to feel motivated to perform better, however. In fact, in about one-third of the cases, feedback was detrimental to performance.[55] In addi- tion to whether feedback is present, the character of the feedback (positive or negative), whether the person is ready to receive the feedback, and the manner in which feedback was given will all determine whether employees feel motivated or demotivated as a result of feedback.
3.5 Goal Setting Theory Goal setting theory [56] is one of the most influential and practical theories of motivation. It has been supported in over 1,000 studies with employees, ranging from blue-collar workers to research and de- velopment employees, and there is strong evidence that setting goals is related to performance im- provements.[57] In fact, according to one estimate, goal setting improves performance between 10% and 25% or more.[58] On the basis of evidence such as this, thousands of companies around the world are using goal setting in some form, including companies such as Coca-Cola, PricewaterhouseCoopers, Nike, Intel, and Microsoft to name a few.
Setting SMART Goals
The mere presence of a goal does not motivate individuals. Think about New Year’s resolutions that you may have made and failed to keep. Maybe you decided that you should lose some weight but then never put a concrete plan in action. Maybe you decided that you would read more but didn’t. Why did you, like 97% of those who set New Year’s resolutions, fail to meet your goal?
Accumulating research evidence indicates that effective goals are SMART. SMART goals are spe- cific, measurable, achievable, realistic, and timely. Here is a sample SMART goal: Wal-Mart recently set a goal to eliminate 25% of the solid waste from its U.S. stores by the year 2009. This goal meets all the conditions of being SMART if we assume that it is an achievable goal.[59] Even though it seems like a simple concept, in reality many goals that are set within organizations may not be SMART. For ex- ample, Microsoft recently conducted an audit of its goal-setting and performance review system and found that only about 40% of the goals were specific and measurable.[60]
CHAPTER 14 MOTIVATING EMPLOYEES 369
FIGURE 14.17
Why do SMART goals motivate?
Based on information contained in Latham, G. P. (2004).
The motivational benefits of goal setting. Academy of
Management Executive, 18, 126–129; Seijts, G. H., &
Latham, G. P. (2005). Learning versus performance goals:
When should each be used? Academy of Management
Executive, 19, 124–131; Shaw, K. N. (2004). Changing the
goal-setting process at Microsoft. Academy of Management
Executive, 18, 139–142.
Why Do SMART Goals Motivate?
There are at least four reasons why goals motivate.[61] First, goals give us direction; therefore, goals should be set carefully. Giving employees goals that are not aligned with company goals will be a problem because goals will direct employee’s energy to a certain end. Second, goals energize people and tell them not to stop until they reach that point. Third, having a goal provides a challenge. When people have goals and when they reach them, they feel a sense of accomplishment. Finally, SMART goals urge people to think outside the box and rethink how they are working. If a goal is substan- tially difficult, merely working harder will not get you the results. Instead, you will need to rethink the way you usually work and devise a creative way of working. It has been argued that this is how designers and engineers in Japan came up with the bullet train. Having a goal that went way beyond the current speed of trains prevented engineers from making minor improvements and urged them to come up with a radically differ- ent concept.[62]
Are There Downsides to Goal Setting?
As with any management technique, there may be some downsides to goal setting.[63] First, setting goals for specific outcomes may hamper employee performance if employ- ees lack skills and abilities to reach the goals. In these situations, setting goals for beha- viors and for learning may be more effective than setting goals for outcomes. Second, goal setting may motivate employees to focus on a goal and ignore the need to respond to new challenges. For example, one study found that when teams had difficult goals and when employees within the team had high levels of performance orientation, teams had difficulty adapting to unforeseen circumstances.[64] Third, goals focus employee at- tention on the activities that are measured, which may lead to sacrificing other import- ant elements of performance. When goals are set for production numbers, quality may suffer. As a result, it is important to set goals touching on all critical aspects of perform- ance. Finally, aggressive pursuit of goals may lead to unethical behaviors. Particularly when employees are rewarded for goal accomplishment but there are no rewards what-
soever for coming very close to reaching the goal, employees may be tempted to cheat. None of these theories are complete by themselves, but each theory provides us with a framework
we can use to analyze, interpret, and manage employee behaviors in the workplace, which are import- ant skills managers use when conducting their leading function. In fact, motivation is important throughout the entire P-O-L-C framework because most managerial functions involve accomplishing tasks and goals through others.
K E Y T A K E A W A Y
Process-based theories use the mental processes of employees as the key to understanding employee motiva- tion. According to equity theory, employees are demotivated when they view reward distribution as unfair. In addition to distributive justice, research identified two other types of fairness (procedural and interactional), which also affect worker reactions and motivation. According to expectancy theory, employees are motivated when they believe that their effort will lead to high performance (expectancy), that their performance will lead to outcomes (instrumentality), and that the outcomes following performance are desirable (valence). Rein- forcement theory argues that behavior is a function of its consequences. By properly tying rewards to positive behaviors, eliminating rewards following negative behaviors and punishing negative behaviors, leaders can in- crease the frequency of desired behaviors. In job design, there are five components that increase the motivat- ing potential of a job: Skill variety, task identity, task significance, autonomy, and feedback. These theories are particularly useful in designing reward systems within a company. Goal-setting theory is one of the most in- fluential theories of motivation. To motivate employees, goals should be SMART (specific, measurable, achiev- able, realistic, and timely). Setting goals and objectives is a task managers undertake when involved in the planning portion of the P-O-L-C function.
370 PRINCIPLES OF MANAGEMENT
E X E R C I S E S
1. Your manager tells you that the best way of ensuring fairness in reward distribution is to keep the pay a secret. How would you respond to this assertion?
2. What are the distinctions among procedural, interactional, and distributive justice? List ways in which you could increase each of these justice perceptions.
3. Using an example from your own experience in school or at work, explain the concepts of expectancy, instrumentality, and valence.
4. Some practitioners and researchers consider OB Mod as unethical because it may be viewed as employee manipulation. What would be your reaction to this criticism?
5. Consider a job you held in the past. Analyze the job using the framework of job characteristics model.
6. If a manager tells you to “sell as much as you can,” is this goal likely to be effective? Why or why not?
4. DEVELOPING YOUR PERSONAL MOTIVATION SKILLS
L E A R N I N G O B J E C T I V E S
1. Understand what you can do to give feedback through an effective performance appraisal. 2. Learn guidelines for proactively seeking feedback.
4.1 Guidelines for Giving Feedback in a Performance Appraisal Meeting[65]
Before the meeting, ask the person to complete a self-appraisal. This is a great way of making sure that employees become active participants in the process and are heard. Complete the performance apprais- al form and document your rating using several examples. Be sure that your review covers the entire time since the last review, not just recent events. Handle the logistics. Be sure that you devote sufficient time to each meeting. If you schedule them tightly back to back, you may lose your energy in later meetings. Be sure that the physical location is conducive to a private conversation.
During the meeting, be sure to recognize effective performance through specific praise. Do not start the meeting with a criticism. Starting with positive instances of performance helps establish a better mood and shows that you recognize what the employee is doing right. Give employees opportunities to talk. Ask them about their greatest accomplishments, as well as opportunities for improvement. Show empathy and support. Remember: your job as a manager is to help the person solve performance prob- lems. Identify areas where you can help. Conclude by setting goals and creating an action plan for the future.
After the meeting, continue to give the employee periodic and frequent feedback. Follow through on the goals that were set.
4.2 Five Guidelines for Seeking Feedback[66]
Research shows that receiving feedback is a key to performing well. If you are not receiving enough feedback on the job, it is better to seek it instead of trying to guess how well you are doing.
1. Consider seeking regular feedback from your boss. This also has the added benefit of signaling to the manager that you care about your performance and want to be successful.
2. Be genuine in your desire to learn. When seeking feedback, your aim should be improving yourself as opposed to creating the impression that you are a motivated employee. If your manager thinks that you are managing impressions rather than genuinely trying to improve your performance, feedback seeking may hurt you.
3. Develop a good relationship with your manager as well as the employees you manage. This would have the benefit of giving you more feedback in the first place. It also has the upside of making it easier to ask direct questions about your own performance.
CHAPTER 14 MOTIVATING EMPLOYEES 371
4. Consider finding trustworthy peers who can share information with you regarding your performance. Your manager is not the only helpful source of feedback.
5. Be gracious when you receive unfavorable feedback. If you go on the defensive, there may not be a next time. Remember, even if it may not feel like it sometimes, feedback is a gift. You can improve your performance by using feedback constructively. Consider that the negative feedback giver probably risked your goodwill by being honest. Unless there are factual mistakes in the feedback, do not try to convince the person that the feedback is inaccurate.
K E Y T A K E A W A Y
Giving effective feedback is a key part of a manager’s job. To do so, plan the delivery of feedback before, dur- ing, and after the meeting. In addition, there are a number of ways to learn about your own performance. Take the time to seek feedback and act on it. With this information, you can do key things to maximize your success and the success of those you manage.
E X E R C I S E S
1. Why can discussing performance feedback with employees be so hard?
2. What barriers do you perceive in asking for feedback?
3. How would you react if one of your employees came to you for feedback?
4. Imagine that your good friend is starting a new job next week. What recommendations would you give to help your friend do a great job seeking feedback?
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Lepine, J. A. (2005). Adaptation of teams in response to unforeseen change: Effects of goal difficulty and team composition in terms of cognitive ability and goal orienta- tion. Journal of Applied Psychology, 90, 1153–1167.
Make employee appraisals more productive. (2007. September). HR Focus, 84(9), 1, 11–15; Ryan, L. (2007, January 1). Coping with performance-review anxiety. Business Week Online, p. 6; Stone, D. L. (1984). The effects of feedback sequence and expertise of the rater on perceived feedback accuracy. Personnel Psychology, 37, 487–506; Sulkowicz, K. (2007, September 10). Straight talk at review time. Business Week, 16.
Adapted from ideas in Jackman, J. M., & Strober, M. H. (2003, April). Fear of feedback. Harvard Business Review, 81(4), 101–107; Wing, L., Xu, H., & Snape, E. (2007). Feedback- seeking behavior and leader-member exchange: Do supervisor-attributed motives matter? Academy of Management Journal, 50, 348–363; Lee, H. E., Park, H. S., Lee, T. S., & Lee, D. W. (2007). Relationships between LMX and subordinates’ feedback-seeking behaviors. Social Behavior & Personality: An International Journal, 35, 659–674.
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C H A P T E R 1 5 The Essentials of Control FIGURE 15.1 Control lets managers monitor and regulate actions to align performance with expectations.
© 2010 Jupiterimages Corporation
W H A T ’ S I N I T F O R M E ?
Reading this chapter will help you do the following:
1. Understand what is meant by organizational control. 2. Differentiate among different levels, types, and forms of control. 3. Know the essentials of financial controls. 4. Know the essentials of nonfinancial controls. 5. Know the basics of lean control systems. 6. Craft a Balanced Scorecard for an organization or yourself.
This chapter helps you to understand the key elements of organizational control, often seen in the form of internal
systems and processes, as they relate to the planning-organizing-leading-controlling (P-O-L-C) framework. While
there are many possible forms and formats, organizational controls should serve two basic functions. First, they
should help managers determine whether and why their strategy is achieving the desired results. Second, they
should be an early warning system in cases where the organization is getting a little (or a lot) off track.
FIGURE 15.2 The P-O-L-C Framework
1. CASE IN POINT: NEWELL RUBBERMAID LEVERAGES COST CONTROLS TO GROW
© Thinkstock
Newell Company grew to be a diversified manufacturer and marketer of simple household items, cookware, and hardware. In the early 1950s, Newell Company’s business consisted solely of manufactured curtain rods that were sold through hardware stores and retailers like Sears. Since the 1960s, however, the company has di- versified extensively through acquisitions of businesses for paintbrushes, writing pens, pots and pans, hair- brushes, and the like. Over 90% of its growth can be attributed to these many small acquisitions, whose per- formance Newell improved tremendously through aggressive restructuring and its corporate emphasis on cost cutting and cost controls. Usually within a year of the acquisition, Newell would bring in new leadership and install its own financial controller in the acquired unit. Then, three standard sets of controls were intro- duced: an integrated financial accounting system, a sales and order processing and tracking system, and a flexible manufacturing system. Once these systems were in place, managers were able to control costs by lim- iting expenses to those previously budgeted. Administration, accounting, and customer-related financial ac- counting aspects of the acquired business were also consolidated into Newell’s corporate headquarters to fur- ther reduce and control costs.
While Newell Company’s 16 different lines of business may appear quite different, they all share the common characteristics of being staple manufactured items sold primarily through volume retail channels like Wal-Mart, Target, and Kmart. Because Newell operates each line of business autonomously (separate manufacturing, re- search and development [R&D], and selling responsibilities for each), it is perhaps best described as pursuing a
376 PRINCIPLES OF MANAGEMENT
related, linked diversification strategy. The common linkages are both internal (accounting systems, product merchandising skills, and acquisition competency) and external (distribution channel of volume retailers). Bey- ond its internal systems and processes, Newell was also able to control costs through outcome controls. That is, business managers were paid a bonus based on the profitability of their particular unit—in fact, the firm’s strategy is to achieve profits, not simply growth at the expense of profits. Newell managers could expect a base salary equal to the industry average but could earn bonuses ranging from 35% to 100% based on their rank and unit profitability.
In 1999, Newell acquired Rubbermaid, a U.S.-based manufacturer of flexible plastic products like trash cans, re- heatable and freezable food containers, and a broad range of other plastic storage containers designed for home and office use. While Rubbermaid was highly innovative (over 80% of its growth has come from internal new product development), it had difficulty controlling costs and was losing ground against powerful cus- tomers like Wal-Mart. Newell believed that the market power it wielded with retailers like Wal-Mart would help it turn Rubbermaid’s prospects around. The acquisition deal between these two companies resulted in a single company that was twice as big and became known as Newell Rubbermaid Inc. (NYSE: NWL). In 2010, Fortune named Newell Rubbermaid the number 7 “Most Admired Company” in the home equipment and fur- nishings category.
Case written by Mason Carpenter to accompany Carpenter, M., Bauer, T., & Erdogan, B. (2009). Principles of management (1st ed.). New York: Flat World Knowledge. Based on information retrieved April 3, 2010, from http://www.bain.com/masteringthemerger/ case_example_new_rbbmd_trans.asp and from the Newell Rubbermaid Web site: http://www.newellrubbermaid.com/public/Our-Company/ Our-History.aspx.
D I S C U S S I O N Q U E S T I O N S
1. The controlling facet of the P-O-L-C framework introduces you to a variety of controls. What do other organizations you are familiar with do with regard to control that is similar to or different from what we see in the case of Newell?
2. What types of controls does Newell use?
3. Does Newell use behavioral controls? What are some examples?
4. Does Newell use outcome controls? What are some examples?
5. How do the controls Newell uses fit its strategy?
6. At the end of the case, how has Newell adjusted its strategy? What changes in controls has it made as a result?
2. ORGANIZATIONAL CONTROL
L E A R N I N G O B J E C T I V E S
1. Know what is meant by organizational control. 2. Recognize that controls have costs. 3. Understand the benefits of controls.
Up to this point you have probably become familiar with the planning, organizing, and leading com- ponents of the P-O-L-C framework. This section addresses the controlling component, often taking the form of internal systems and process, to complete your understanding of P-O-L-C. As you know, plan- ning comprises all the activities associated with the formulation of your strategy, including the estab- lishment of near- and long-term goals and objectives. Organizing and leading are the choices made about the way people work together and are motivated to achieve individual and group goals and objectives.
CHAPTER 15 THE ESSENTIALS OF CONTROL 377
organizational control
The process by which an organization influences its subunits and members to behave in ways that lead to the attainment of organizational goals and objectives.
2.1 What Is Organizational Control? The fourth facet of P-O-L-C, organizational control, refers to the process by which an organization influences its subunits and members to behave in ways that lead to the attainment of organizational goals and objectives. When properly designed, such controls should lead to better performance because an organization is able to execute its strategy better.[1] As shown in the the P-O-L-C framework figure, we typically think of or talk about control in a sequential sense, where controls (systems and processes) are put in place to make sure everything is on track and stays on track. Controls can be as simple as a checklist, such as that used by pilots, flight crews, and some doctors.[2] Increasingly, however, organiza- tions manage the various levels, types, and forms of control through systems called Balanced Score- cards. We will discuss these in detail later in the chapter.
Organizational control typically involves four steps: (1) establish standards, (2) measure perform- ance, (3) compare performance to standards, and then (4) take corrective action as needed. Corrective action can include changes made to the performance standards—setting them higher or lower or identifying new or additional standards. Sometimes we think of organizational controls only when they seem to be absent, as in the 2008 meltdown of U.S. financial markets, the crisis in the U.S. auto in- dustry, or the much earlier demise of Enron and MCI/Worldcom due to fraud and inadequate con- trols. However, as shown in the figure, good controls are relevant to a large spectrum of firms beyond Wall Street and big industry.
The Need for Control in Not-for-Profit Organizations
We tend to think about controls only in the for-profit organization context. However, controls are relevant to a broad spectrum of organizations, including governments, schools, and charities. Jack Siegel, author of A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good, outlines this top 10 list of financial controls that every charity should put in place:
Control 1—Require two signatures for checks written on bank and investment accounts. This prevents unap- proved withdrawals and payments.
Control 2—The organization’s bank statements should be reconciled on a monthly basis by someone who does not have signature authority over the accounts. This is a further check against unapproved withdrawals and payments.
Control 3—Since cash is particularly susceptible to theft, organizations should eliminate the use of cash to the extent possible.
Control 4—Organizations should only purchase goods from an approved list of vendors. This provides protec- tion from phony invoices submitted by insiders.
Control 5—Many charities have discovered “ghost employees” on their payrolls. To minimize this risk, organiz- ations should tightly control the payroll list by developing a system of reports between payroll/accounting and the human resources department.
Control 6—Organizations should require all otherwise reimbursable expenses to be preauthorized. Travel and entertainment expenses should be governed by a clearly articulated written policy that is provided to all employees.
Control 7—Physical inventories should be taken on a regular and periodic basis and then be reconciled against the inventories carried on the books. Besides the possible detection of theft, this control also provides a basis for an insurance claim in the case of a fire, flood, or other disaster.
Control 8—Every organization should develop an annual budgeting process. The nonprofit’s employees should prepare the budget, but the board should review and approve it.
Control 9—Organizations should use a competitive bidding process for purchases above a certain threshold. In reviewing bids, organizations should look for evidence of collusion.
Control 10—Organizations that regularly received grants with specific requirements should have someone who is thoroughly versed in grant administration.
Retrieved January 30, 2009, from http://www.charitygovernance.com/charity_governance/2007/10/ten-financial-c.html#more.
2.2 The Costs and Benefits of Organizational Controls Organizational controls provide significant benefits, particularly when they help the firm stay on track with respect to its strategy. External stakeholders, too, such as government, investors, and public
378 PRINCIPLES OF MANAGEMENT
interest groups have an interest in seeing certain types or levels of control are in place. However, con- trols also come at a cost. It is useful to know that there are trade-offs between having and not having organizational controls, and even among the different forms of control. Let’s look at some of the pre- dominant costs and benefits of organizational controls, which are summarized in the following figure.
Costs
Controls can cost the organization in several areas, including (1) financial, (2) damage to culture and reputation, (3) decreased responsiveness, and (4) botched implementation. An example of financial cost is the fact that organizations are often required to perform and report the results of a financial audit. These audits are typically undertaken by external accounting firms, which charge a substantial fee for their services; the auditor may be a large firm like Accenture or KPMG, or a smaller local ac- counting office. Such audits are a way for banks, investors, and other key stakeholders to understand how financially fit the organization is. Thus, if an organization needs to borrow money from banks or has investors, it can only obtain these benefits if it incurs the monetary and staffing costs of the finan- cial audit.
Controls also can have costs in terms of organization culture and reputation. While you can ima- gine that organizations might want to keep track of employee behavior, or otherwise put forms of strict monitoring in place, these efforts can have undesirable cultural consequences in the form of reduced employee loyalty, greater turnover, or damage to the organization’s external reputation. Management researchers such as the late London Business School professor Sumantra Ghoshal have criticized theory that focuses on the economic aspects of man (i.e., assumes that individuals are always opportunistic). According to Ghoshal, “A theory that assumes that managers cannot be relied upon by shareholders can make managers less reliable.”[3] Such theory, he warned, would become a self-fulfilling prophecy.
Less theoretical are practical examples such as Hewlett-Packard’s (HP) indictment on charges of spying on its own board of directors. In a letter to HP’s board, director Tom Perkins said his accounts were “hacked” and attached a letter from AT&T explaining how the breach occurred. Records of calls made from Perkins’s home phone were obtained simply with his home phone number and the last four digits of his Social Security number. His long-distance account records were obtained when someone called AT&T and pretended to be Perkins, according to the letter from AT&T.[4] HP Chairman Patricia Dunn defended this rather extreme form of control as legal, but the amount of damage to the firm’s reputation from these charges led the firm to discontinue the practice. It also prompted the resignation of several directors and corporate officers.[5]
The third potential cost of having controls is that they can afford less organizational flexibility and responsiveness. Typically, controls are put in place to prevent problems, but controls can also create problems. For instance, the Federal Emergency Management Agency (FEMA) is responsible for help- ing people and business cope with the consequences of natural disasters, such as hurricanes. After Hur- ricane Katrina devastated communities along the U.S. Gulf Coast in 2005, FEMA found that it could not provide prompt relief to the hurricane victims because of the many levels of financial controls that it had in place.[6]
The fourth area of cost, botched implementation, may seem obvious, but it is more common than you might think (or than managers might hope). Sometimes the controls are just poorly understood, so that their launch creates significant unintended, negative consequences. For example, when Hershey Foods put a new computer-based control system in place in 1999, there were so many problems with its installation that it was not able to fulfill a large percentage of its Halloween season chocolate sales that year. It did finally get the controls in working order, but the downtime created huge costs for the company in terms of inefficiencies and lost sales.[7] Some added controls may also interfere with others. For instance, a new quality control system may improve product performance but also delay product deliveries to customers.
Benefits
Although organizational controls come at some cost, most controls are valid and valuable management tools. When they are well designed and implemented, they provide at least five possible areas of be- nefits, including (1) improved cost and productivity control, (2) improved quality control, (3) oppor- tunity recognition, (4) better ability to manage uncertainty and complexity, and (5) better ability to de- centralize decision making. Let’s look at each one of these benefits in turn.
CHAPTER 15 THE ESSENTIALS OF CONTROL 379
Summary of Control Costs and Benefits
< Key Costs
< Financial costs—direct (i.e., paying for an accountant for an audit) and indirect (i.e., people such as internal quality control the organization employs whose primary function is related to control).
< Culture and reputation costs—the intangible costs associated with any form of control. Examples include damaged relationships with employees, or tarnished reputation with investors or government.
< Responsiveness costs—downtime between a decision and the actions required to implement it due to compliance with controls.
< Poorly implemented controls—implementation is botched or the implementation of a new control conflicts with other controls.
< Key Benefits
< Cost and productivity control—ensures that the firm functions effectively and efficiently.
< Quality control—contributes to cost control (i.e., fewer defects, less waste), customer satisfaction (i.e., fewer returns), and greater sales (i.e., repeat customers and new customers).
< Opportunity recognition—helps managers identify and isolate the source of positive surprises, such as a new growth market. Though opportunities can also be found in internal comparisons of cost control and productivity across units.
< Manage uncertainty and complexity—keeps the organization focused on its strategy, and helps managers anticipate and detect negative surprises and respond opportunistically to positive surprises.
< Decentralized decision making—allows the organization to be more responsive by moving decision making to those closest to customers and areas of uncertainty.
First, good controls help the organization to be efficient and effective by helping managers to control costs and productivity levels. Cost can be controlled using budgets, where managers compare actual ex- penses to forecasted ones. Similarly, productivity can be controlled by comparing how much each per- son can produce, in terms of service or products. For instance, you can imagine that the productivity of a fast-food restaurant like McDonald’s depends on the speed of its order takers and meal preparers. McDonald’s can look across all its restaurants to identify the target speed for taking an order or wrap- ping a burger, then measure each store’s performance on these dimensions.
Quality control is a second benefit of controls. Increasingly, quality can be quantified in terms of response time (i.e., How long did it take you to get that burger?) or accuracy (Did the burger weigh one-quarter pound?). Similarly, Toyota tracks the quality of its cars according to hundreds of quantified dimensions, including the number of defects per car. Some measures of quality are qualitat- ive, however. For instance, Toyota also tries to gauge how “delighted” each customer is with its vehicles and dealer service. You also may be familiar with quality control through the Malcolm Baldrige Na- tional Quality Program Award. The Baldrige award is given by the president of the United States to businesses—manufacturing and service, small and large—and to education, health care, and nonprofit organizations that apply and are judged to be outstanding in seven areas: leadership; strategic planning; customer and market focus; measurement, analysis, and knowledge management; human resource fo- cus; process management; and results.[8] Controlling—how well the organization measures and ana- lyzes its processes—is a key criterion for winning the award. The Baldrige award is given to organiza- tions in a wide range of categories and industries, from education to ethics to manufacturing.
The third area by which organizations can benefit from controls is opportunity recognition. Op- portunities can come from outside of the organization and typically are the result of a surprise. For in- stance, when Nestlé purchased the Carnation Company for its ice cream business, it had also planned to sell off Carnation’s pet food line of products. However, through its financial controls, Nestlé found that the pet food business was even more profitable than the ice cream, and kept both. Opportunities can come from inside the organization too, as would be the case if McDonald’s finds that one of its res- taurants is exceptionally good at managing costs or productivity. It can then take this learned ability and transfer it to other restaurants through training and other means.
Controls also help organizations manage uncertainty and complexity. This is a fourth area of be- nefit from well-designed and implemented controls. Perhaps the most easily understood example of this type of benefit is how financial controls help an organization navigate economic downturns. Without budgets and productivity controls in place, the organization might not know it has lost sales or expenses are out of control until it is too late.
380 PRINCIPLES OF MANAGEMENT
Control Criteria for the Baldrige National Quality Award
Measurement, Analysis, and Improvement of Organizational Performance: How Do You Measure, Analyze, and then Improve Organizational Performance? (45 points)
Describe how your organization measures, analyzes, aligns, reviews, and improves its performance using data and information at all levels and in all parts of your organization. Describe how you systematically use the res- ults of reviews to evaluate and improve processes.
Within your response, include answers to the following questions:
1. Performance Measurement
1.1. How do you select, collect, align, and integrate data and information for tracking daily operations and for tracking overall organizational performance, including progress relative to strategic objectives and action plans? What are your key organizational performance measures, including key short-term and longer-term financial measures? How do you use these data and information to support organizational decision making and innovation?
1.2. How do you select and ensure the effective use of key comparative data and information to support operational and strategic decision making and innovation?
1.3. How do you keep your performance measurement system current with business needs and directions? How do you ensure that your performance measurement system is sensitive to rapid or unexpected organizational or external changes?
2. Performance Analysis, Review, and Improvement
2.1. How do you review organizational performance and capabilities? What analyses do you perform to support these reviews and to ensure that the conclusions are valid? How do you use these reviews to assess organizational success, competitive performance, and progress relative to strategic objectives and action plans? How do you use these reviews to assess your organization’s ability to respond rapidly to changing organizational needs and challenges in your operating environment?
2.2. How do you translate organizational performance review findings into priorities for continuous and breakthrough improvement and into opportunities for innovation? How are these priorities and opportunities deployed to work group and functional-level operations throughout your organization to enable effective support for their decision making? When appropriate, how are the priorities and opportunities deployed to your suppliers, partners, and collaborators to ensure organizational alignment?
2.3. How do you incorporate the results of organizational performance reviews into the systematic evaluation and improvement of key processes?
Retrieved January 30, 2009, from http://www.quality.nist.gov.
The fifth area of benefit in organizational control is related to decentralized decision making. Organiza- tion researchers have long argued that performance is best when those people and areas of the organiz- ation that are closest to customers and pockets of uncertainty also have the ability (i.e., the information and authority) to respond to them.[9] Going back to our McDonald’s example, you can imagine that it would be hard to give a store manager information about her store’s performance and possible choices if information about performance were only compiled at the city, region, or corporate level. With store-level performance tracking (or, even better, tracking of performance by the hour within a store), McDonald’s gives store managers the information they need to respond to changes in local demand. Similarly, it equips McDonald’s to give those managers the authority to make local decisions, track that decision-making performance, and feed it back into the control and reward systems.
K E Y T A K E A W A Y
This chapter introduced the basics of controls, the process by which an organization influences its subunits and members to behave in ways that lead to attaining organizational goals and objectives. When properly de- signed, controls lead to better performance by enabling the organization to execute its strategy better. Man- agers must weigh the costs and benefits of control, but some minimum level of control is essential for organiz- ational survival and success.
CHAPTER 15 THE ESSENTIALS OF CONTROL 381
FIGURE 15.4
Controls allow you to align the pieces with the big picture.
© 2010 Jupiterimages Corporation
strategic control
The process by which an organization tracks the strategy as it is being implemented, detecting any problem areas or potential problem areas that might suggest that the strategy is incorrect, and making any necessary adjustments.
operational control
A process concerned with executing the strategy.
E X E R C I S E S
1. What do properly conceived and implemented controls allow an organization to do?
2. What are three common steps in organizational control?
3. What are some of the costs of organizational controls?
4. What are some of the benefits of organizational controls?
5. How do managers determine when benefits outweigh costs?
3. TYPES AND LEVELS OF CONTROL
L E A R N I N G O B J E C T I V E S
1. Know the difference between strategic and operational controls. 2. Understand the different types of controls. 3. Be able to differentiate between financial and nonfinancial controls.
Recognizing that organizational controls can be categorized in many ways, it is helpful at this point to distinguish between two sets of controls: (1) strategic controls and (2) management controls, sometimes called operating controls. [10]
3.1 Two Levels of Control: Strategic and Operational Imagine that you are the captain of a ship. The strategic controls make sure that your ship is going in the right direction; management and operating controls make sure that the ship is in good condition before, during, and after the voyage. With that analogy in mind, strategic control is concerned with tracking the strategy as it is being imple- mented, detecting any problem areas or potential problem areas suggesting that the strategy is incorrect, and making any necessary adjustments.[11] Strategic controls allow you to step back and look at the big picture and make sure all the pieces of the picture are correctly aligned.
Ordinarily, a significant time span occurs between initial implementation of a strategy and achievement of its intended results. For instance, if you wanted to captain your ship from San Diego to Seattle you might need a crew, supplies, fuel, and so on. You might also need to wait until the weather lets you make the trip safely! Similarly, in
larger organizations, during the time you are putting the strategy into place, numerous projects are un- dertaken, investments are made, and actions are undertaken to implement the new strategy. Mean- while, the environmental situation and the firm’s internal situation are developing and evolving. The economy could be booming or perhaps falling into recession. Strategic controls are necessary to steer the firm through these events. They must provide some means of correcting direction on the basis of intermediate performance and new information.
Operational control, in contrast to strategic control, is concerned with executing the strategy. Where operational controls are imposed, they function within the framework established by the strategy. Normally these goals, objectives, and standards are established for major subsystems within the organization, such as business units, projects, products, functions, and responsibility centers.[12] Typical operational control measures include return on investment, net profit, cost, and product qual- ity. These control measures are essentially summations of finer-grained control measures. Corrective action based on operating controls may have implications for strategic controls when they involve changes in the strategy.
3.2 Types of Control It is also valuable to understand that, within the strategic and operational levels of control, there are several types of control. The first two types can be mapped across two dimensions: level of proactivity and outcome versus behavioral. The following table summarizes these along with examples of what such controls might look like.
382 PRINCIPLES OF MANAGEMENT
feedforward controls
The active monitoring of problems in a way that provides their timely prevention, rather than after-the-fact reaction.
concurrent controls
Processes that entail monitoring and adjusting ongoing activities.
feedback controls
Processes that involve the gathering of information about a completed activity, evaluating that information, and taking steps to improve the similar activities in the future.
FIGURE 15.5 Controls as Part of a Feedback Loop
Proactivity
Proactivity can be defined as the monitoring of problems in a way that provides their timely preven- tion, rather than after the fact reaction. In management, this is known as feedforward control; it ad- dresses what can we do ahead of time to help our plan succeed. The essence of feedforward control is to see the problems coming in time to do something about them. For instance, feedforward controls in- clude preventive maintenance on machinery and equipment and due diligence on investments.
TABLE 15.1 Types and Examples of Control
Control Proactivity
Behavioral control Outcome control
Feedforward control
Organizational culture Market demand or economic forecasts
Concurrent control
Hands-on management supervision during a project
The real-time speed of a production line
Feedback control Qualitative measures of customer satisfaction Financial measures such as profitability, sales growth
Concurrent Controls
The process of monitoring and adjusting ongoing activities and processes is known as concurrent control. Such controls are not necessarily proactive, but they can prevent problems from becoming worse. For this reason, we often describe concurrent control as real-time control because it deals with the present. An example of concurrent control might be adjusting the water temperature of the water while taking a shower.
Feedback Controls
Finally, feedback controls involve gathering information about a completed activity, evaluating that information, and taking steps to improve the similar activities in the future. This is the least proactive of controls and is generally a basis for reactions. Feedback controls permit managers to use information on past performance to bring future performance in line with planned objectives.
Control as a Feedback Loop
In this latter sense, all these types of control function as a feedback mechanism to help leaders and managers make adjustments in the strategy, as perhaps is reflected by changes in the planning, organiz- ing, and leading components. This feedback loop is characterized in the following figure.
Why might it be helpful for you to think of controls as part of a feedback loop in the P-O-L-C process? Well, if you are the entrepreneur who is writing the business plan for a completely new business, then you would likely start with the planning compon- ent and work your way to controlling—that is, spell out how you are going to tell whether the new venture is on track. However, more often, you will be stepping into an organization that is already operating, and this means that a plan is already in place. With the plan in place, it may be then up to you to figure out the organizing, leading, or control challenges facing the organization.
CHAPTER 15 THE ESSENTIALS OF CONTROL 383
outcome controls
Processes that are generally preferable when just one or two performance measures (say, return on investment or return on assets) are good gauges of a business’s health.
behavioral controls
The direct evaluation of managerial and employee decision making, not of the results of managerial decisions.
financial control
The management of a firm’s costs and expenses to control them in relation to budgeted amounts.
nonfinancial controls
Processes that track aspects of the organization that aren’t immediately financial in nature but are expected to lead to positive financial performance outcomes.
Outcome and Behavioral Controls
Controls also differ depending on what is monitored, outcomes or behaviors. Outcome controls are generally preferable when just one or two performance measures (say, return on investment or return on assets) are good gauges of a business’s health. Outcome controls are effective when there’s little ex- ternal interference between managerial decision making on the one hand and business performance on the other. It also helps if little or no coordination with other business units exists.
Behavioral controls involve the direct evaluation of managerial and employee decision making, not of the results of managerial decisions. Behavioral controls tie rewards to a broader range of criteria, such as those identified in the Balanced Scorecard. Behavioral controls and commensurate rewards are typically more appropriate when there are many external and internal factors that can affect the rela- tionship between a manager’s decisions and organizational performance. They’re also appropriate when managers must coordinate resources and capabilities across different business units.
Financial and Nonfinancial Controls
Finally, across the different types of controls in terms of level of proactivity and outcome versus behavi- oral, it is important to recognize that controls can take on one of two predominant forms: financial and nonfinancial controls. Financial control involves the management of a firm’s costs and expenses to control them in relation to budgeted amounts. Thus, management determines which aspects of its fin- ancial condition, such as assets, sales, or profitability, are most important, tries to forecast them through budgets, and then compares actual performance to budgeted performance. At a strategic level, total sales and indicators of profitability would be relevant strategic controls.
Without effective financial controls, the firm’s performance can deteriorate. PSINet, for example, grew rapidly into a global network providing Internet services to 100,000 business accounts in 27 coun- tries. However, expensive debt instruments such as junk bonds were used to fuel the firm’s rapid ex- pansion. According to a member of the firm’s board of directors, PSINet spent most of its borrowed money “without the financial controls that should have been in place.”[13] With a capital structure un- able to support its rapidly growing and financially uncontrolled operations, PSINet and 24 of its U.S. subsidiaries eventually filed for bankruptcy.[14] While we often think of financial controls as a form of outcome control, they can also be used as a behavioral control. For instance, if managers must request approval for expenditures over a budgeted amount, then the financial control also provides a behavior- al control mechanism as well.
Increasing numbers of organizations have been measuring customer loyalty, referrals, employee satisfaction, and other such performance areas that are not financial. In contrast to financial controls, nonfinancial controls track aspects of the organization that aren’t immediately financial in nature but are expected to lead to positive performance outcomes. The theory behind such nonfinancial con- trols is that they should provide managers with a glimpse of the organization’s progress well before fin- ancial outcomes can be measured.[15] And this theory does have some practical support. For instance, GE has found that highly satisfied customers are the best predictor of future sales in many of its busi- nesses, so it regularly tracks customer satisfaction.
K E Y T A K E A W A Y
Organizational controls can take many forms. Strategic controls help managers know whether a chosen strategy is working, while operating controls contribute to successful execution of the current strategy. Within these types of strategy, controls can vary in terms of proactivity, where feedback controls were the least pro- active. Outcome controls are judged by the result of the organization’s activities, while behavioral controls in- volve monitoring how the organization’s members behave on a daily basis. Financial controls are executed by monitoring costs and expenditure in relation to the organization’s budget, and nonfinancial controls comple- ment financial controls by monitoring intangibles like customer satisfaction and employee morale.
E X E R C I S E S
1. What is the difference between strategic and operating controls? What level of management would be most concerned with operating controls?
2. If feedforward controls are the most proactive, then why do organizations need or use feedback controls?
3. What is the difference between behavioral and outcome controls?
4. What is the difference between nonfinancial and financial controls? Is a financial control a behavioral or an outcome control?
384 PRINCIPLES OF MANAGEMENT
FIGURE 15.6
Financial controls tell you when good organizational performance is reflected in good financial outcomes.
© 2010 Jupiterimages Corporation
budgeting
A listing of all planned expenses and revenues.
4. FINANCIAL CONTROLS
L E A R N I N G O B J E C T I V E S
1. Understand the nature of financial controls. 2. Know how a balance sheet works. 3. Know how an income profit and loss statement works. 4. See the sources of cash flow.
As we discussed in the previous section, financial controls are a key element of organizational success and survival. There are three basic financial reports that all managers need to understand and interpret to manage their businesses successfully: (1) the balance sheet, (2) the income/profit and loss (P&L) statement, and (3) the cash flow statement. These three reports are often referred to collectively as “the financials.” Banks often require a projection of these statements to obtain financing.
Financial controls provide the basis for sound management and allow managers to establish guidelines and policies that enable the business to succeed and grow. Budgeting, for instance, gener- ally refers to a simple listing of all planned expenses and revenues. On the basis of this listing, and a starting balance sheet, you can project a future one. The overall budget you create is a monthly or quarterly projection of what the balance sheet and income statement will look like but again based on your list of planned expenses and revenues.
While you do not need to be an accountant to understand this section, good managers have a good grasp of accounting fundamentals. You might want to open a window to AccountingCoach.com or a similar site as you work through this section to begin to build your accounting knowledge tool kit.[16]
4.1 The Nature of Financial Controls Imagine that you are on the board of Success-R-Us, an organization whose financial controls are man- aged in an excellent manner. Each year, after the organization has outlined strategies to reach its goals and objectives, funds are budgeted for the necessary resources and labor. As money is spent, statements are updated to reflect how much was spent, how it was spent, and what it obtained. Managers, who re- port to the board, use these financial statements, such as an income statement or balance sheet, to monitor the progress of programs and plans. Financial statements provide management with informa- tion to monitor financial resources and activities. The income statement shows the results of the organ- ization’s operations, such as revenues, expenses, and profit or loss. The balance sheet shows what the organization is worth (assets) at a single point in time, and the extent to which those assets were fin- anced through debt (liabilities) or owner’s investment (equity).
Success-R-Us conducts financial audits, or formal investigations, to ensure that financial manage- ment practices follow generally accepted procedures, policies, laws, and ethical guidelines. In Success- R-Us, audits are conducted both internally—by members of the company’s accounting depart- ment—and externally by Green Eyeshade Inc., an accounting firm hired for this purpose.
Financial ratio analysis examines the relationship between specific figures on the financial state- ments and helps explain the significance of those figures: By analyzing financial reports, the managers at Success-R-Us are able to determine how well the business is doing and what may need to be done to improve its financial viability.
While actual financial performance is always historical, Success-R-Us’s proactive managers plan ahead for the problems the business is likely to encounter and the opportunities that may arise. To do this, they use pro forma financials, which are projections; usually these are projected for three fiscal years. Being proactive requires reading and analyzing the financial statements on a regular basis. Monthly, and sometimes daily or weekly, financial analysis is preferred. (In the business world as a whole, quarterly is more common, and some organizations do this only once a year, which is not often enough.) The proactive manager has financial data available based on actual results and compares them to the budget. This process points out weaknesses in the business before they reach crisis proportion and allows the manager to make the necessary changes and adjustments before major problems develop.
Years ago, Success-R-Us experienced problems because its management style was insufficiently proactive. A reactive manager waits to react to problems and then solves them by crisis management. This type of manager goes from crisis to crisis with little time in between to notice opportunities that may become available. The reactive manager’s business is seldom prepared to take advantage of new opportunities quickly. Businesses that are managed proactively are more likely to be successful, and
CHAPTER 15 THE ESSENTIALS OF CONTROL 385
current assets
Assets that are cash or can be readily converted to cash in the short term, such as accounts receivable or inventory.
this is the result that Success-R-Us is experiencing since it instituted a company-wide initiative to pro- mote proactive controls.
Like most organizations, Success-R-Us uses computer software programs to do record keeping and develop financials. These programs provide a chart of accounts that can be individualized to the busi- ness and the templates for each account ledger, the general ledgers, and the financial reports. These programs are menu driven and user-friendly, but knowing how to input the data correctly is not enough. A manager must also know where to input each piece of data and how to analyze the reports compiled from the data. Widely accepted accounting guidelines dictate that if you have not learned a manual record-keeping system, you need to do this before attempting to use a computerized system.
4.2 The Balance Sheet The balance sheet is a snapshot of the business’s financial position at a certain point in time. This can be any day of the year, but balance sheets are usually done at the end of each month. With a budget in hand, you project forward and develop pro forma statements to monitor actual progress against expectations.
As shown in the following table, this financial statement is a listing of total assets (what the busi- ness owns—items of value) and total liabilities (what the business owes). The total assets are broken down into subcategories of current assets, fixed assets, and other assets. The total liabilities are broken down into subcategories of current liabilities, long-term liabilities/debt, and owner’s equity.
Assets
Current assets are those assets that are cash or can be readily converted to cash in the short term, such as accounts receivable or inventory. In the balance sheet shown for Success-R-Us, the current as- sets are cash, petty cash, accounts receivable, inventory, and supplies.
TABLE 15.2 Sample Balance Sheet
Success-R-Us Balance Sheet December 31, 2009
Assets Liabilities
Current Assets Current Liabilities
Cash $12,300 Notes Payable $5,000
Petty Cash 100 Accounts Payable 35,900
Wages Payable 14,600
Accounts Receivable 40,500 Interest Payable 2,900
Inventory 31,000 Warranty Liability 1,100
Supplies 5,300
Total Current Assets 89,000 Total Current Liabilities 61,000
Investments 36,000 Long-term Liabilities
Notes Payable 20,000
Property, Plant and Equipment Bonds Payable 400,000
Land 5,500 Total Long-term Liabilities 420,000
Land Improvements 6,500
Buildings 180,000
Equipment 201,000 Total Liabilities 481,000
Less Accum. Depreciation (56,000)
Prop., Plant, and Equipment net 337,000
Intangible Assets Stockholders’ Equity
Goodwill 105,000 Common Stocks 110,000
Trade Names 200,000 Retained Earnings 229,000
Total Intangible Assets 305,000 Less Treasury Stock (50,000)
Other Assets 3,000
Total Assets $770,000 Total Liability and Stockholder Equity $770,000
386 PRINCIPLES OF MANAGEMENT
fixed assets
Assets that are not easily converted to cash in the short term; that is, they are assets that only change over the long term. Land, buildings, equipment, vehicles, furniture, and fixtures are some examples of fixed assets.
intangible asset
An asset that cannot be physically touched, or is not physical in nature.
current liabilities
Liabilities coming due in the short term, usually the coming year.
long-term debt
Liabilities may be bank notes or loans made to purchase the business's fixed asset structure. Long-term debt/ liabilities come due in a time period of more than 1 year.
Some business people define current assets as those the business expects to use or consume within the coming fiscal year. Thus, a business’s noncurrent assets would be those that have a useful life of more than 1 year. These include fixed assets and intangible assets.
Fixed assets are those assets that are not easily converted to cash in the short term; that is, they are assets that only change over the long term. Land, buildings, equipment, vehicles, furniture, and fix- tures are some examples of fixed assets. In the balance sheet for Success-R-Us, the fixed assets shown are furniture and fixtures and equipment. These fixed assets are shown as less accumulated depreciation.
Intangible assets (net) may also be shown on a balance sheet. These may be goodwill, trade- marks, patents, licenses, copyrights, formulas, and franchises. In this instance, net means the value of intangible assets minus amortization.
Liabilities
Current liabilities are those coming due in the short term, usually the coming year. These are ac- counts payable; employment, income and sales taxes; salaries payable; federal and state unemployment insurance; and the current year’s portion of multiyear debt. A comparison of the company’s current as- sets and its current liabilities reveals its working capital. Many managers use an accounts receivable aging report and a current inventory listing as tools to help them in management of the current asset structure.
Long-term debt, or liabilities, may be bank notes or loans made to purchase the business’s fixed asset structure. Long-term debt/liabilities come due in a period of more than 1 year. The portion of a bank note that is not payable in the coming year is long-term debt/liability.
For example, Success-R-Us’s owner may take out a bank note to buy land and a building. If the land is valued at $50,000 and the building is valued at $50,000, the business’s total fixed assets are $100,000. If $20,000 is made as a down payment and $80,000 is financed with a bank note for 15 years, the $80,000 is the long-term debt.
Owner’s Equity
Owner’s equity refers to the amount of money the owner has invested in the firm. This amount is de- termined by subtracting current liabilities and long-term debt from total assets. The remaining capital/ owner’s equity is what the owner would have left in the event of liquidation, or the dollar amount of the total assets that the owner can claim after all creditors are paid.”
4.3 The Income Profit and Loss Statement (P&L) The profit and loss statement (P&L) shows the relation of income and expenses for a specific time in- terval. The income/P&L statement is expressed in a 1-month format, January 1 through January 31, or a quarterly year-to-date format, January 1 through March 31. This financial statement is cumulative for a 12-month fiscal period, at which time it is closed out. A new cumulative record is started at the begin- ning of the new 12-month fiscal period.
The P&L statement is divided into five major categories: (1) sales or revenue, (2) cost of goods sold/cost of sales, (3) gross profit, (4) operating expenses, and (5) net income. Let’s look at each cat- egory in turn.
CHAPTER 15 THE ESSENTIALS OF CONTROL 387
TABLE 15.3 Sample Income Statement
Success-R-Us Income Statement For the year ended December 31, 2009
Sales/Revenues (all on credit) $500,000
Cost of Goods Sold 380,000
Gross Profit 120,000
Operating Expenses
Selling Expenses 35,000
Administrative Expenses 45,000
Total Operating Expenses 80,000
Operating Income 40,000
Interest Expense 12,000
Income before Taxes 28,000
Income Tax Expense 5,000
Net Income after Taxes 23,000
Sales or Revenue
The sales or revenue portion of the income statement is where the retail price of the product is ex- pressed in terms of dollars times the number of units sold. This can be product units or service units. Sales can be expressed in one category as total sales or can be broken out into more than one type of sales category: car sales, part sales, and service sales, for instance. In our Success-R-Us example, the company sold 20,000 books at a retail price of $25 each, for total revenues of $500,000. Because Success-R-Us sells all of its books on credit (i.e., you can charge them on your credit card), the com- pany does not collect cash for these sales until the end of the month, or whenever the credit card com- pany settles up with Success-R-Us.
Cost of Goods Sold/Cost of Sales
The cost of goods sold/sales portion of the income statement shows the cost of products purchased for resale, or the direct labor cost (service person wages) for service businesses. Cost of goods sold/sales also may include additional categories, such as freight charges cost or subcontract labor costs. These costs also may be expressed in one category as total cost of goods sold/sales or can be broken out to match the sales categories: car purchases, parts, purchases, and service salaries, for example.
Breaking out sales and cost of goods sold/sales into separate categories can have an advantage over combining all sales and costs into one category. When you break out sales, you can see how much each product you have sold costs and the gross profit for each product. This type of analysis enables you to make inventory and sales decisions about each product individually.
Gross Profit
The gross profit portion of the income/P&L statement tells the difference between what you sold the product or service for and what the product or service cost you. The goal of any business is to sell enough units of product or service to be able to subtract the cost and have a high enough gross profit to cover operating expenses, plus yield a net income that is a reasonable return on investment. The key to operating a profitable business is to maximize gross profit.
If you increase the retail price of your product too much above the competition, you might lose units of sales to the competition and not yield a high enough gross profit to cover your expenses. However, if you decrease the retail price of your product too much below the competition, you might gain additional units of sales but not make enough gross profit per unit sold to cover your expenses.
While this may sound obvious, a carefully thought out pricing strategy maximizes gross profit to cover expenses and yield a positive net income. At a very basic level, this means that prices are set at a level where marginal and operating costs are covered. Beyond this, pricing should carefully be set to reflect the image you want portrayed and, if desired, promote repeat business.
Operating Expenses
The operating expense section of the income/P&L statement is a measurement of all the operating ex- penses of the business. There are two types of expenses, fixed and variable. Fixed expenses are those ex- penses that do not vary with the level of sales; thus, you will have to cover these expenses even if your
388 PRINCIPLES OF MANAGEMENT
sales are less than the expenses. The entrepreneur has little control over these expenses once they are set. Some examples of fixed expenses are rent (contractual agreement), interest expense (note agree- ment), an accounting or law firm retainer for legal services of X amount per month for 12 months, and monthly charges for electricity, phone, and Internet connections.
Variable expenses are those expenses that vary with the level of sales. Examples of variable ex- penses include bonuses, employee wages (hours per week worked), travel and entertainment expenses, and purchases of supplies. (Note: categorization of these may differ from business to business.) Ex- pense control is an area where the entrepreneur can maximize net income by holding expenses to a minimum.
Net Income
The net income portion of the income/P&L statement is the bottom line. This is the measure of a firm’s ability to operate at a profit. Many factors affect the outcome of the bottom line. Level of sales, pricing strategy, inventory control, accounts receivable control, ordering procedures, marketing of the business and product, expense control, customer service, and productivity of employees are just a few of these factors. The net income should be enough to allow growth in the business through reinvestment of profits and to give the owner a reasonable return on investment.
4.4 The Cash Flow Statement The cash flow statement is the detail of cash received and cash expended for each month of the year. A projected cash flow statement helps managers determine whether the company has positive cash flow. Cash flow is probably the most immediate indicator of an impending problem, since negative cash flow will bankrupt the company if it continues for a long enough period. If company’s projections show a negative cash flow, managers might need to revisit the business plan and solve this problem.
You may have heard the joke: “How can I be broke if I still have checks in my check book (or if I still have a debit/credit card, etc.)?” While perhaps poor humor, many new managers similarly think that the only financial statement they need to manage their business effectively is an income/P&L state- ment; that a cash flow statement is excess detail. They mistakenly believe that the bottom-line profit is all they need to know and that if the company is showing a profit, it is going to be successful. In the long run, profitability and cash flow have a direct relationship, but profit and cash flow do not mean the same thing in the short run. A business can be operating at a loss and have a strong cash flow posi- tion. Conversely, a business can be showing an excellent profit but not have enough cash flow to sus- tain its sales growth.
The process of reconciling cash flow is similar to the process you follow in reconciling your bank checking account. The cash flow statement is composed of: (1) beginning cash on hand, (2) cash re- ceipts/deposits for the month, (3) cash paid out for the month, and (4) ending cash position.
K E Y T A K E A W A Y
The financial controls provide a blueprint to compare against the actual results once the business is in opera- tion. A comparison and analysis of the business plan against the actual results can tell you whether the busi- ness is on target. Corrections, or revisions, to policies and strategies may be necessary to achieve the busi- ness’s goals. The three most important financial controls are: (1) the balance sheet, (2) the income statement (sometimes called a profit and loss statement), and (3) the cash flow statement. Each gives the manager a different perspective on and insight into how well the business is operating toward its goals. Analyzing monthly financial statements is a must since most organizations need to be able to pay their bills to stay in business.
E X E R C I S E S
1. What are financial controls? In your answer, describe how you would go about building a budget for an organization.
2. What is the difference between an asset and a liability?
3. What is the difference between the balance sheet and an income statement? How are the balance sheet and income statement related?
4. Why is it important to monitor an organization’s cash flow?
CHAPTER 15 THE ESSENTIALS OF CONTROL 389
FIGURE 15.7
Customer satisfaction is an increasingly important metric in strong nonfinancial controls.
© 2010 Jupiterimages Corporation
5. NONFINANCIAL CONTROLS
L E A R N I N G O B J E C T I V E S
1. Become familiar with nonfinancial controls. 2. Learn about common mistakes associated with nonfinancial controls. 3. Be able to devise possible solutions to common mistakes in nonfinancial controls.
If you have ever completed a customer satisfaction survey related to a new product or service purchase, then you are already familiar with nonfinancial controls. Nonfinancial controls are defined as controls where nonfinancial performance outcomes are measured. Why is it important to measure such out- comes? Because they are likely to affect profitability in the long term.
How do we go about identifying nonfinancial controls? In some areas it is easy to do, and in others more difficult. For instance, if Success-R-Us were having trouble retaining employees (meaning that turnover is high), it might be incurring higher recruiting and training costs and lower customer satis- faction, as a result. Some possible nonfinancial controls are described next.
Examples of Nonfinancial Performance Controls
< Human Resources
< Employee satisfaction
< Average tenure
< Turnover
< Marketing
< New products launched
< Customer satisfaction
< Brand power
< Production
< Number of defects
< Product returns
< Capacity utilization
< Purchasing
< New products introduced by suppliers
< Quality of purchased inputs
< Research and Development
< New patents
< Number of employees with PhDs
< Customer Service
< Average complaint response time
< Average wait time
5.1 Common Mistakes with Nonfinancial Controls In a review of current nonfinancial control practices, Harvard professors Chris Ittner and David Larck- er commented, “Tracking things like customer satisfaction and employee turnover can powerfully sup- plement traditional bookkeeping. Unfortunately, most companies botch the job.”[17]
Ittner and Larcker somewhat cynically conclude their study by stating, “The original purpose of nonfinancial performance measures was to fill out the picture provided by traditional accounting. In- stead, such measures have become a shabby substitute for financial performance.”[18] However, re- search also shows that those firms that put these nonfinancial controls in place, and can validate them, earn much higher profits than those that don’t.[19] With the aim of working toward an understanding of how to put such controls into place, let’s first look at common mistakes that organizations make.
390 PRINCIPLES OF MANAGEMENT
Not Using Nonfinancial Controls
While poorly conceived and implemented nonfinancial controls are certainly a cost for organizations, such ineptness is no defense for not including them in every modern organization’s system of controls. If management were a poker game, then the ability to use nonfinancial controls would be a table stake in the game—that is, you only get to play if you have skills with them. The world is simply changing too fast, and competitors’ capabilities are evolving too quickly, such that managers who relied only on fin- ancial controls would soon find their organizations in trouble. You can help us come up with plenty of examples here, but let’s simply look at the relationship between customer satisfaction and a retail store’s sales. A dissatisfied customer is hard to get back (and may have been dissatisfied enough to leave the store before even making that first purchase)!
While interest in nonfinancial controls is exploding, it seems somewhat disappointing that they aren’t living up to the job. Why do so many companies appear to misunderstand how to set and use nonfinancial controls effectively? Let’s take a look at four additional top mistakes Ittner and Larcker identified in their research.
Not Linked to Strategy
This mistake appears to be a common one but its root cause—failure to adapt the control system to the specific strategy of the organization—is not obvious. Growth in interest in nonfinancial controls has led to widespread adoption of such systems as the Balanced Scorecard, Performance Prism, or the Intellec- tual Capital Navigator. However, because these systems are complex, managers tend to put them in place without tailoring them to the specific needs and characteristics of their organization.
Several things can go wrong when nonfinancial controls are not linked to the strategy. First, con- trol systems tend to be tied to reward systems, and if managers and employees are being paid based on the achievement of certain nonstrategic, nonfinancial outcomes, then the firm’s strategy and, hence, performance, could suffer. Second, if the controls are not linked to the strategy, or the linkages are un- clear, then managers do not really understand which nonfinancial controls are the most important. This leads us to the second common mistake.
Failing to Validate the Links
There are two big challenges that organizations face when trying to use nonfinancial controls. First, nonfinancial controls are indirectly related to financial performance; the relationship is like a sequence of nonfinancial outcomes that cascade down to financial performance. For instance, (1) good employee recruiting leads to (2) satisfied employees, which leads to (3) an employee base that creates value, which leads to (4) satisfied customers, which leads to (5) profitable customer buying patterns, which lead to (6) good profitability. Yikes! You can see how these six nonfinancial outcomes might lead to good financial performance, but you can also imagine that it might be challenging to identify and man- age the inputs to each step.
The second challenge is, once you’ve taken the step of identifying these linkages, to show that the linkages actually exist. However, while more companies are putting such models into place, few are col- lecting the information to test and validate the actual relationships in their organization. In fact, Ittner and Larcker found that less than a quarter of the firms that they surveyed actually did any formal valid- ation of the nonfinancial model they had developed.
You can imagine the possible problems that might be created with such an unvalidated system. For one, the organization might be investing in all these steps, without any evidence of their effectiveness. Worse, some of the steps might actually lead to lower performance—unfortunately, without validation, managers just don’t know. For example, an organization might believe that better technology in a product leads to more sales. If this technology also leads to a higher-cost product, and customers are very price-sensitive, then the new technology nonfinancial control could lead to worse financial performance.
Failing to Set Appropriate Performance Targets
The third common area of weakness in the use of nonfinancial controls is somewhat related to the second. Our example with technology shows this relationship well. For instance, managers might not have validated the link between better technology and downstream customer purchasing preferences; or, technology might have been important, but only up to the point that it did not affect product price. So, while technology was a valid part of our nonfinancial controls, we also need to consider the appro- priate level of technology—that is, set the right nonfinancial objective for level of technology, customer service, or whatever nonfinancial control is of interest.
You can imagine that a firm might want to set high goals, and therefore control, for such things as customer satisfaction or employee turnover. But you can probably also imagine what the costs might be
CHAPTER 15 THE ESSENTIALS OF CONTROL 391
of getting 100% customer satisfaction or zero employee turnover. At some point, you have to make some cost-benefit decisions unless your resources (time, money, etc.) are unlimited.
Failing to set appropriate performance targets can take on another form. In such cases, instead of setting inappropriate nonfinancial controls and related targets, the organization simply has set too many.[20] This can happen when a new control system is put in place, but the old one is not removed. Just as often, it can occur because management has not made the hard choices about which nonfinan- cial controls are most important and invested in validating their usage.
Measurement Failure
We have seen so far that the first three common failings are (1) failure to tie nonfinancial controls to the strategy, (2) failure to validate the relationships between nonfinancial and financial controls, and (3) failure to set the appropriate nonfinancial control targets. The fourth failing is somewhat technical, but it also relates to validity and validation—that is, in many cases, an inappropriate measure is used to assess whether a targeted nonfinancial control is being achieved.
This can happen for a number of reasons. First, different parts of the business may assess customer satisfaction differently. This makes it very hard to evaluate consistently the relationship between cus- tomer satisfaction (a nonfinancial control) and financial performance. Second, even when a common basis for evaluation is used, the meaning may not be clear in the context of how it is measured. For ex- ample, if you created a simple survey of customer satisfaction, where you were scored on a range from 1 (satisfied) to 7 (unsatisfied), what does each individual score between 1 and 7 mean? Finally, some- times the nonfinancial control or objective is complex. Customer or employee satisfaction, for instance, are not necessarily easily captured on a scale of 1 to 7. Now imagine trying to introduce controls for leadership ability (i.e., we know if we have strong leaders, they make good choices, which eventually lead to good financial performance) or innovativeness (i.e., cool products lead to more customer en- thusiasm, which eventually leads to financial performance). Such intangibles are extremely difficult to measure and to track.
5.2 Possible Solutions Now that you have an understanding of the common challenges and mistakes that organizations face when working with nonfinancial controls, including the omission of them entirely, you have the found- ation for understanding how to use them effectively. For organizations that manage well with nonfin- ancial controls, the benefits definitely outweigh the costs. Since we outlined five possible areas for mis- takes, let’s work briefly through five possible solution areas.
Use Nonfinancial Controls
As we mentioned earlier in this section, the delayed and historic nature of financial controls makes it risky to rely on them alone. Step back and reflect on the organization’s strategy, then pick one or sever- al nonfinancial controls such as customer or employee satisfaction as a starting point. It is critical that you start with a conceptual model using simple boxes and arrows in terms of what nonfinancial control leads to another, and so on.
The following figure shows a working model of these relationships for a retail store that sells unique products. This leads us to our second solution.
392 PRINCIPLES OF MANAGEMENT
FIGURE 15.8 Sample Mix of Nonfinancial and Financial Controls
Tie the Controls to the Strategy
Be sure to confirm that whichever nonfinancial controls are in place, they reflect and reinforce the unique strategy of the organization. This also should remind you that, if the strategy ever changes, you should go back and revalidate the links between the nonfinancial controls and the strategy. For in- stance, in our retail store example, part of the strategy is to sell unique products, which means that em- ployees with particular work experience and education may provide better customer service than inex- perienced employees. If the store changed its strategy to sell more generic products, however, it might not need such experienced or educated employees anymore.
Validate the Links Between Nonfinancial and Financial Controls
As you recall, organizations often use more than one nonfinancial control with the assumption that they cascade down to bottom-line financial performance. Of course, when there are fewer nonfinancial controls, it is easier to detect relationships among them. Regardless, with information collected about the controls, management must seek to use simple statistical techniques to verify the causal relation- ship between one control and another, and eventually financial performance. For instance, if nonfinan- cial controls were functioning as assumed, you might find that when employees are more satisfied, cus- tomers are more satisfied, and when both are more satisfied, more higher-profit-margin products are sold. If such relationships can’t be proved, then managers must revisit their choice of nonfinancial controls.
Set Appropriate Performance Targets
Extending the prior example, you would want to be sure that you set employee and customer satisfac- tion control targets appropriately. Assuming that you validated the linkages, while it might be nice to reach 100% satisfaction levels across employees and customers, it might not be cost-effective. This does not mean that you abandon the use of such controls; instead you must determine whether 90% satisfac- tion (or some other number) still leads to greater product sales.
Validate the Performance Measures
Finally, make sure that what you ultimately measure fits well with the control objectives. For instance, with our retail store example, would you measure work experience by the number of years that an ap- plicant has worked? Or would you want experience with a particular type of product or service? Simil- arly, with regard to education, you would want to make a choice as to measuring grade-point average, standardized test score, or major. As a reminder, this type of validation is relevant to nonfinancial and financial measures alike. For instance, if our hypothetical store’s sales are growing, but profitability is going down, then we would want to figure out why these financial controls aren’t painting the same
CHAPTER 15 THE ESSENTIALS OF CONTROL 393
lean
A system of nonfinancial controls used to improve product and service quality and decrease waste.
picture. For example, it might be that we’ve hired more salespeople, who help us sell more, but that we are not selling enough to cover the additional costs of the added people’s salaries. These examples should help you see the point about using the right measure.
K E Y T A K E A W A Y
Nonfinancial controls, such as those related to employee satisfaction, customer service, and so on, are an im- portant and increasingly applied form of organizational control. While firms that use nonfinancial controls well also perform much better than firms that don’t use them, there is a plethora of managerial mistakes made with regard to their conceptualization, implementation, or both. Beyond simply using nonfinancial controls, best practices around such controls include aligning them with the strategy, validating the links between nonfinancial controls and financial controls, setting appropriate control performance targets, and confirming the right measure of the desired control.
E X E R C I S E S
1. What are nonfinancial controls? Name some examples.
2. What should be the relationship between nonfinancial and financial controls?
3. What are some common mistakes made by managers with regard to nonfinancial controls?
4. What are some solutions to the common mistakes you identified?
6. LEAN CONTROL
L E A R N I N G O B J E C T I V E S
1. Know what is meant by lean controls, and why the subject can be confusing. 2. Understand the application of lean. 3. Know the five core principals of lean.
Lean control, or simply lean, has become an immensely popular business control and improvement methodology in recent years. Lean control is a highly refined example of nonfinancial controls in ac- tion. Lean is a system of nonfinancial controls used to improve product and service quality and de- crease waste. Research suggests that up to 70% of manufacturing firms are using some form of lean in their business operations.[21] Lean was initially focused on improving manufacturing operations but is now used to improve product development, order processing, and a variety of other nonmanufacturing processes (sometimes called “lean in the office”).
6.1 What Is Meant by Lean Control? Lean’s popularity has both resulted from, and been driven by, an explosion in the volume of lean-re- lated educational resources. Amazon offers almost 1,800 books and other materials about lean, and Ya- hoo! hosts over 90 online discussion groups relating to lean. Colleges and universities, industry trade associations, and private consulting firms routinely offer courses, seminars, and conferences to explain what lean is and how to use it.
Lean control is a number of things. According to James Womack, “it is a process for measuring and reducing inventory and streamlining production. It is a means for changing the way a company measures plant performance. It is a knowledge-based system. It takes years of hard work, preparation and support from upper management. Lean is so named because it purports to use much less of certain resources (space, inventory, workers, etc.) than is used by normal mass-production systems to produce comparable output.” The term came into widespread use with the 1990 publication of the book The Machine That Changed the World, by James P. Womack, Daniel T. Jones, and Daniel Roos.[22]
This abundance of education resources on the topic of lean is actually a mixed blessing for man- agers who are just now becoming interested in lean. On the one hand, today’s managers don’t have to search far to find lean materials or programs. But the wealth of lean resources can also be a source of confusion for two main reasons. First, there is no universal definition of lean and little agreement about
394 PRINCIPLES OF MANAGEMENT
FIGURE 15.9
Lean organizations strive to improve flow by reducing the size of production batches, and in the process, they increase flexibility and lower costs.
© 2010 Jupiterimages Corporation
muda
A Japanese term for activity that is wasteful and doesn’t add value.
what the truly core principles of lean are. For instance, quality programs such as Six-Sigma, or even lean Six Sigma, are other titles competing for the “lean” intellectual space. Therefore, lean experts often approach the subject from differing perspectives and describe lean in different ways. To make matters worse, lean is a topic that produces a significant amount of zealotry. So, many experts strongly argue that their particular “brand” of lean is the one right way to implement and use lean. In these circum- stances, it’s no wonder that managers become confused about where and how to begin.
6.2 Lean Applications Lean will always be associated with Toyota Motor Corporation because most lean tools and techniques were developed by Toyota in Japan beginning in the 1950s. After World War II, Toyota’s leaders were determined to make the company a full-range car and truck manufacturing enterprise, but they faced several serious challenges. The Japanese motor vehicle market was small and yet demanded a fairly wide range of vehicle types. This meant that Toyota needed to find a way to earn a profit while manu- facturing a variety of vehicles in low volumes. In addition, capital was extremely scarce, which made it impossible for Toyota to make large purchases of the latest production equipment. To succeed, or even survive, Toyota needed a way to build vehicles that would require fewer resources. To achieve this goal, Toyota’s leaders, principally Eiji Toyoda and Taiichi Ohno, began to create and implement the produc- tion techniques and tools that came to be known as lean.[23]
To gain the most benefits from lean, managers must be able to determine what specific lean tools and techniques will be effective in their particular business. And to make that determination, they must clearly understand what lean is designed to accomplish (its primary objectives) and what core prin- ciples lean is based on. With this understanding, managers can decide which lean tools will work well in their business, which lean tools will need to be modified or adapted to work well, and which tools are simply not appropriate.
What, then, are the major objectives and core principles of lean? Despite the arguments and de- bates that often surround attempts to define and describe lean, it is clear that the ultimate objective of lean is the avoidance of muda, or wasteful activity, in all business operations. As shown in the follow- ing figure, muda comprises seven deadly wastes. In the lean world, waste means any activity or condi- tion that consumes resources but creates no value for customers. Therefore, waste includes the produc- tion of defective products that must be remade or fixed, the production of more products than the mar- ket will buy, excessive work-in-process inventories, overprocessing (processing steps that aren’t really needed or that add no value), unnecessary movement of people or products, and unnecessary waiting by employees.
Elimination of Waste Is the Soul of Lean
Muda is a Japanese term for activity that is wasteful and doesn’t add value. It is also a key concept in lean con- trol. Waste reduction is an effective way to increase profitability. Here are the seven deadly wastes, along with their definitions:
1. Defects prevent the customer from accepting the product produced. The effort to create these defects is wasted. New waste management processes must be added in an effort to reclaim some value for the otherwise scrap product.
2. Overproduction is the production or acquisition of items before they are actually required. It is the most dangerous waste of the company because it hides the production problems. Overproduction must be stored, managed, and protected.
3. Transportation is a cost with no added value. In addition, each time a product is moved it stands the risk of being damaged, lost, and delayed. Transportation does not transform the product in any way that the consumer is willing to pay for.
4. Waiting refers to both the time spent by the workers waiting for resources to arrive, the queue for their products to empty as well as the capital sunk in goods and services that are not yet delivered to the customer. It is often the case that there are processes to manage this waiting.
5. Inventory in the form of raw materials, work-in-progress, or finished goods represents a capital outlay that has not yet produced an income either by the producer or for the consumer. Any of these three items not being actively processed to add value is waste.
CHAPTER 15 THE ESSENTIALS OF CONTROL 395
6. Motion refers to the actions performed by the producer, worker, or equipment. Motion has significance to damage, wear, and safety. It also includes the fixed assets and expenses incurred in the production process.
7. Overprocessing is defined as using a more expensive or otherwise valuable resource than is needed for the task or adding features that are designed for but unneeded by the customer. There is a particular problem with this item regarding people. People may need to perform tasks that they are overqualified for to maintain their competency. This training cost can be used to offset the waste associated with overprocessing.
6.3 The Five Core Principles of Lean Lean methodologies are lean because they enable a business to do more with less. A lean organization uses less human effort, less equipment, less facilities space, less time, and less capital—while always coming closer to meeting customers’ exact needs. Therefore, lean is not just another cost-cutting pro- gram of the kind we often see in business organizations. Lean is much more about the conservation of valuable resources than it is about cost cutting.
In their best-selling book, Lean Thinking, James Womack and Daniel Jones identified five core principles of lean.[24] Let’s examine them one by one.
Define Value from the Customer’s Perspective
The first core principle in the Womack/Jones lean framework is that value must be defined and spe- cified from the customer’s perspective. While this seems simple enough, it requires much more than high-sounding, generic statements. To be meaningful, value must be defined in terms of specific products. This means that managers must understand how each specific product meets the needs of specific customers at a specific price and at a specific time.
Describe the Value Stream for Each Product or Service
The second core principle of lean is to describe the value stream for each product or service (or, in some cases, for groups or families of similar products). The value stream is the set of activities that the business is performing to bring a finished product to a customer. It includes both direct manufacturing activities and indirect activities such as order processing, purchasing, and materials management. Developing a detailed description or map of each value stream usually reveals huge amounts of waste. It enables managers to identify which value stream activities add value to the product, which activities add no value but cannot be immediately eliminated for various reasons, and which activities create no value and can be immediately eliminated (or at least reduced substantially).
Create Flow in Each Value Stream
The third essential principle of lean is embodied in the word flow. When a value stream has been com- pletely described as unnecessary, non-value-adding activities have been eliminated, the basic idea of flow is to arrange the remaining activities sequentially, so that products will move smoothly and con- tinuously from one activity to the next. However, flow means more than ease of movement. Flow is the lean principle that directly challenges the traditional “batch-and-queue” model of manufacturing, where people and equipment are organized and located by function, and products (and component parts) are manufactured in large batches. Lean organizations strive to improve flow by reducing the size of production batches, and in the process, they increase flexibility and lower costs.
Produce at the Pace (Pull) of Actual Customer Demand
Producing at the pace or pull of actual customer demand is the fourth key principle of lean. One of the greatest benefits of moving from traditional batch-and-queue manufacturing to continuous flow pro- duction is that lead times fall dramatically. Reduced lead times and increased flexibility mean that lean organizations can respond to actual customer demand rather than attempt to predict in advance what that level of demand will be. This allows lean organizations to substantially lower both finished goods and work-in-process inventories.
396 PRINCIPLES OF MANAGEMENT
kaizen
The Japanese term for continuous improvement.
Balanced Scorecard
A framework designed to translate an organization’s vision and mission statements and overall business strategy into specific, quantifiable goals and objectives and to monitor the organization’s performance in terms of achieving these goals.
Strive to Continuously Improve All Business Operations
The fifth core principle of lean is continuous improvement, expressed in Japanese by the word kaizen. Companies that implement lean adopt the mind-set that it is always possible to improve any business activity, and they regularly conduct kaizen events throughout their organizations to improve specific processes or operations. Today, Toyota is recognized as one of the most “lean” business enterprises in the world. Even more daunting, and humbling, is the fact that Toyota is still striving to improve.
K E Y T A K E A W A Y
Lean control, or simply lean, is the system of nonfinancial controls used to improve product and service quality and decrease waste. While popularized through the dramatic successes of Toyota in auto manufacturing, lean processes are used to improve quality and decrease waste in most service and manufacturing industries around the world. In this section, you saw examples of the seven deadly wastes (muda) and the five core prin- ciples of lean which culminate in continuous improvement, or kaizen.
E X E R C I S E S
1. What is lean control?
2. What types of industries might find lean controls valuable?
3. What does muda mean and what are some examples of it? 4. What are the five lean principles?
5. Pick a company you are familiar with—what would it need to do differently to comply with the five lean principles?
7. CRAFTING YOUR BALANCED SCORECARD
L E A R N I N G O B J E C T I V E S
1. Understand the Balanced Scorecard concept. 2. See how the Balanced Scorecard integrates nonfinancial and financial controls. 3. Be able to outline a personal Balanced Scorecard.
7.1 An Introduction to the Balanced Scorecard You have probably learned a bit about Balanced Scorecards already from this book or other sources. The Balanced Scorecard was originally introduced to integrate financial and nonfinancial controls in a way that provided a balanced understanding of the determinants of firm performance. It has since evolved into a strategic performance management tool of sorts because it helps managers identify and understand the way that operating controls are tied to strategic controls, and ultimately, firm perform- ance. In this broader sense, a Balanced Scorecard is a control system that translates an organization’s vision, mission, and strategy into specific, quantifiable goals and to monitor the organization’s per- formance in terms of achieving these goals.
According to Robert S. Kaplan and David P. Norton, the Balanced Scorecard approach “examines performance in four areas. Financial analysis, the most traditionally used performance indicator, in- cludes assessments of measures such as operating costs and return-on-investment. Customer analysis looks at customer satisfaction and retention. Internal analysis looks at production and innovation, measuring performance in terms of maximizing profit from current products and following indicators for future productivity. Finally, learning and growth analysis explores the effectiveness of management in terms of measures of employee satisfaction and retention and information system performance.”[25]
CHAPTER 15 THE ESSENTIALS OF CONTROL 397
FIGURE 15.10
Just as tasters can rate a wine on numerous dimensions, the Balanced Scorecard integrates a variety of measures of organizational quality and performance.
© 2010 Jupiterimages Corporation
Whereas the scorecard identifies financial and nonfinancial areas of performance, the second step in the scorecard process is the development of a strategy map. The idea is to identify key performance areas in learning and growth and show how these cascade forward into the internal, customer, and fin- ancial performance areas. Typically, this is an iterative process where managers test relationships among the different areas of performance. If the organization is a for-profit business like IBM, then managers would want to be able to show how and why the choice made in each area ultimately led to high profitability and stock prices.
FIGURE 15.11 The Balanced Scorecard Hierarchy
With the scorecard and strategy map in hand, managers then break broad goals down successively into vision, strategies, strategic initiatives, and metrics. As an example, imagine that an organization has a goal of maintaining employee satisfaction in its vision and mission statements. This would be the or- ganization’s vision in the domain of learning and growth, since employee satisfaction is indirectly re- lated to financial performance. Strategies for achieving that learning and growth vision might include approaches such as increasing employee-management communication. Initiatives undertaken to im- plement the strategy could include, for example, regularly scheduled meetings with employees. Metrics could include quantifications of employee suggestions or employee surveys. Finally, managers would want to test their assumptions about the relationship between employee satisfaction and the down- stream areas such as internal, customer, and financial performance. For example, satisfied employees may be more productive and less likely to quit (internal), which leads to better products or services and customer relations (customer), which leads to lower employee recruiting and training costs and greater sales and repeat sales (financial). This sequence of causal relationships is summarized in the following figure.
398 PRINCIPLES OF MANAGEMENT
FIGURE 15.12 The Strategy Map: A Causal Relationship between Nonfinancial and Financial Controls
7.2 Your Personal Balanced Scorecard Now that you have an understanding of nonfinancial and financial controls, and specific cases such as lean control systems and the Balanced Scorecard, it’s time to apply the notion of the Balanced Score- card to your personal situation. Recall that the figure shows your position in the context of the Bal- anced Scorecard—it asks you to state your personal objectives, in the context of the organization’s ob- jectives. However, in developing your own Balanced Scorecard, you will be laying out a road map to achieve your personal and professional objectives (or mission and vision more broadly), which may overlap a lot or very little with the organization’s objectives. While you can choose to focus the score- card more narrowly on something like your career, you will be much better served by the personal Bal- anced Scorecard if you pursue a holistic (personal + professional) approach. For example, you may have particular personal goals about financial independence, and this would relate to other choices you might want to make about your personal and professional priorities.
Social psychologist Hubert Rampersad has sought to translate the business Balanced Scorecard in- to a personal balanced score by providing you with the following four suggestions.[26]
1. Learning and growth: your skills and learning ability. How do you learn, and how can you be successful in the future? For example, the course that you are taking in conjunction with this book may lead to a degree, be a prerequisite for other courses, and so on.
2. Internal: your physical health and mental state. How can you control these to create value for yourself and others? How can you remain feeling good at work as well as in your spare time? For instance, your objectives and activities related to physical and emotional fitness.
3. Customer (external): relations with your spouse, children, friends, employer, colleagues, and others. How do they see you?
4. Financial: financial stability. To what degree are you able to fulfill your financial needs? Again, do you seek financial independence, resources to fund other endeavors?
The best way to put these suggestions into action is to work on the scorecard in several sessions, as there is a wide range of factors to consider. Your objective for the first session should be to develop your personal vision statement and list several areas of development in learning, internal, customer, and financial facets of the scorecard. You should be able to fit the scorecard on a single page, for easy and frequent reference. You can use your next session with the scorecard to refine your developmental ob- jectives and set relevant measures and near-term objectives. Post the scorecard where you can refer to it often. And, just as with organizations, if your circumstances change, then that is the critical time to re- validate or revise your personal Balanced Scorecard.
CHAPTER 15 THE ESSENTIALS OF CONTROL 399
K E Y T A K E A W A Y
You learned about the essential components of the Balanced Scorecard and saw how, when correctly con- ceived and implemented, it integrates an organization’s vision, mission, and strategy with its nonfinancial and financial controls. As with correctly implemented nonfinancial controls, the components of the Balanced Scorecard need to be clearly tied to the strategy, and relationships among nonfinancial and financial controls validated. Appropriate control performance targets need to be set, and the appropriate indicators of perform- ance used to gauge nonfinancial and financial performance. This section concluded by outlining for you the steps you might follow in building a personal Balanced Scorecard.
E X E R C I S E S
1. What is a Balanced Scorecard? What is the difference between a Balanced Scorecard and a simple list of nonfinancial and financial controls?
2. What roles do vision, mission, and strategy play in the development of a Balanced Scorecard?
3. What might be some of the differences between an organization’s Balanced Scorecard and your personal Balanced Scorecard? What might be some of the similarities?
4. Under what circumstances should an organization’s or an individual’s Balanced Scorecard be revised?
400 PRINCIPLES OF MANAGEMENT
1.
2.
3.
4. 5. 6.
7.
8.
9.
10.
11.
12. 13. 14.
15.
16. 17.
18.
19.
20. 21.
22.
23. 24. 25.
26.
ENDNOTES
Kuratko, D. F., Ireland, R. D., & Hornsby. J. S. (2001). Improving firm performance through entrepreneurial actions: Acordia’s corporate entrepreneurship strategy. Academy of Management Executive, 15(4), 60–71.
Retrieved December 9, 2008, from http://www.thehealthcareblog.com/ the_health_care_blog/2007/12/pilots-use-chec.html
Ghoshal S., & Moran, P. (1996). Bad for practice: A critique of the transaction cost the- ory. Academy of Management Review. 21(1), 13–47.
Retrieved January 30, 2009, from http://i.n.com.com/pdf/ne/2006/perkins_letter.pdf
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U.S. Government Printing Office. (2006, February 15). Executive summary. Select Bi- partisan Committee to Investigate the Preparation for and Response to Hurricane Katrina.
Retrieved January 30, 2009, from Hershey profits for 4Q 1999 down 11% due to SAP implementation problem. http://www.greenspun.com/bboard/ q-and-a-fetch-msg.tcl?msg_id=002SUM
Retrieved January 30, 2009, from http://www.nist.gov/public_affairs/factsheet/ baldfaqs.htm
Galbraith, J. R. (1974). Organization design: An information processing view. Inter- faces, 4, 28–36. Galbraith believes that “the greater the uncertainty of the task, the greater the amount of information that must be processed between decision makers during the execution of the task to get a given level of performance.” Firms can re- duce uncertainty through better planning and coordination, often by rules, hier- archy, or goals. Galbraith states that “the critical limiting factor of an organizational form is the ability to handle the non-routine events that cannot be anticipated or planned for.”
Harrison, J. S., & St. John, C. H. (2002). Foundations in Strategic Management (2nd ed., 118–129). Cincinnati, OH: South-Western College.
Venkataraman, S., & Sarasvathy, S. D. (2001). Strategy and entrepreneurship: Outlines of an untold story. In M. A. Hitt, R. E. Freeman, & J. S. Harrison (Eds.), Handbook of stra- tegic management (650–668). Oxford: Blackwell.
Matthews, J. (1999). Strategic moves. Supply Management, 4(4), 36–37.
Woolley, S. (2001, May). Digital hubris. Forbes, 66–70.
Retrieved January 30, 2009, from PSINet announces NASDAQ delisting. (2001, June 1). http://www.psinet.com
Ittner, C., & Larcker, D. F. (2003, November). Coming up short on nonfinancial per- formance measurement. Harvard Business Review, 2–8.
Retrieved October 21, 2008, from http://www.accountingcoach.com.
Ittner, C., & Larcker, D. F. (2003, November). Coming up short on nonfinancial per- formance measurement. Harvard Business Review, 2–8.
Ittner, C., & Larcker, D. F. (2003, November). Coming up short on nonfinancial per- formance measurement. Harvard Business Review, 2–8.
Ittner, C., & Larcker, D. F. (2003, November). Coming up short on nonfinancial per- formance measurement. Harvard Business Review, 2–8.
Brown, M. G. (1996). Keeping score. New York: Productivity Press.
PrintPlanet launches lean manufacturing forum. (2008, August 11). Retrieved January 30, 2009, from http://members.whattheythink.com/home/wttnews080811.cfm
Womack, J. P., Jones, D. T., & Roos, D. (1990). The machine that changed the world. New York: Rawson Associates, 1990.
Retrieved January 30, 2009, from http://www.toyota.co.jp/en/history/index.html.
Womack, J. P., & Jones, D. T. (2003). Lean thinking. New York: Simon & Schuster.
Kaplan, R., & Norton, D. (2001). The strategy-focused organization. Boston: Harvard Business School Press.
Rampersad, H. K. (2006). The personal Balanced Scorecard: The way to individual happi- ness, personal integrity, and organizational effectiveness. Greenwich, CT: Information Age.
CHAPTER 15 THE ESSENTIALS OF CONTROL 401
402 PRINCIPLES OF MANAGEMENT
C H A P T E R 1 6 Strategic Human Resource Management FIGURE 16.1 Strategic human resource management ensures that the organization’s human resources are in the right place at the right time to secure competitive advantage.
© 2010 Jupiterimages Corporation
W H A T ’ S I N I T F O R M E ?
Reading this chapter will help you do the following:
1. Understand the scope and changing role of strategic human resource management (SHRM) in principles of management.
2. Visualize the battlefield in the war for talent. 3. Engage in effective selection and placement strategies. 4. Understand the roles of pay structure and pay for performance. 5. Design a high-performance work system. 6. Use the human resources Balanced Scorecard to gauge and proactively manage human
capital, including your own.
You have probably heard the saying, people make the place. In today’s fast-changing environment, organizations
need employees who understand the organization’s strategy and are empowered to execute it. To achieve this,
organizations need to follow a strategic human resource management (SHRM) approach. SHRM ensures that
people are a key factor in a firm’s competitive advantage. Thus, as summarized in the following figure, SHRM is an
integral part of the control portion of the planning-organizing-leading-controlling (P-O-L-C) framework.
FIGURE 16.3 Strategic human resource management is concerned with the “people” factor as a source of competitive advantage.
© 2010 Jupiterimages Corporation
FIGURE 16.2 The P-O-L-C Framework
Organizations need human resources (HR) to be a partner in identifying, attracting, and hiring the type of
employees who will be most qualified to help the company achieve its goals. SHRM requires attracting the right
employees to the company, identifying metrics to help employees stay on target to meet the company’s goals, and
rewarding them appropriately for their efforts so that they stay engaged and motivated. Having all these
components in place—designing a high-performance work system—improves organizational performance and
unleashes employee talent.
1. CASE IN POINT: KRONOS USES SCIENCE TO FIND THE IDEAL EMPLOYEE
Source: Kensavage/Wikimedia Commons.
You are interviewing a candidate for a position as a cashier in a supermarket. You need someone polite, cour- teous, patient, and dependable. The candidate you are talking to seems nice. But how do you know who is the right person for the job? Will the job candidate like the job or get bored? Will they have a lot of accidents on the job or be fired for misconduct? Don’t you wish you knew before hiring? One company approaches this problem scientifically, saving companies time and money on hiring hourly wage employees.
Retail employers do a lot of hiring, given their growth and high turnover rate. According to one estimate, re- placing an employee who leaves in retail costs companies around $4,000. High turnover also endangers cus- tomer service. Therefore, retail employers have an incentive to screen people carefully so that they hire people with the best chance of being successful and happy on the job. Unicru, an employee selection company, de- veloped software that quickly became a market leader in screening hourly workers. The company was ac- quired by Massachusetts-based Kronos Inc. (NASDAQ: KRON) in 2006 and is currently owned by a private equity firm.
The idea behind the software is simple: If you have a lot of employees and keep track of your data over time, you have access to an enormous resource. By analyzing this data, you can specify the profile of the “ideal” em- ployee. The software captures the profile of the potential high performers, and applicants are screened to as- sess their fit with this particular profile. More important, the profile is continually updated as studies that com- pare employee profiles to job performance are conducted. As the number of studies gets larger, the software does a better job of identifying the right people for the job.
404 PRINCIPLES OF MANAGEMENT
If you applied for a job in retail, you may have already been a part of this database: the users of this system in- clude giants such as Universal Studios, Costco Wholesale Corporation, Burger King, and other retailers and chain restaurants. In companies such as Albertsons or Blockbuster, applicants can either use a kiosk in the store to answer a list of questions and to enter their background, salary history, and other information or apply on- line from their home computers. The software screens people on basic criteria such as availability in schedul- ing as well as personality traits.
Candidates are asked to agree or disagree with statements such as “I often make last-minute plans” or “I work best when I am on a team.” Additionally, questions about how an applicant would react in specific job-related situations and about person-job fit are included. After the candidates complete the questions, hiring man- agers are sent a report complete with a color-coded suggested course of action. Red means the candidate does not fit the job, yellow indicates the hiring manager should proceed with caution, and green means the candidate is likely a good fit. Because of the use of different question formats and complex scoring methods, the company contends that faking answers to the questions of the software is not easy because it is difficult for candidates to predict the desired profile.
Matching candidates to jobs has long been viewed as a key way of ensuring high performance and low turnover in the workplace, and advances in computer technology are making it easier and more efficient to as- sess candidate–job fit. Companies using such technology are cutting down the time it takes to hire people, and it is estimated that using such technologies lowers their turnover by 10%–30%.
Case written by Berrin Erdogan and Talya Bauer to accompany Carpenter, M., Bauer, T., & Erdogan, B. (2009). Principles of management (1st ed.). New York: Flat World Knowledge. Based on information from Berta, D. (2002, February 25). Industry increases applicant screening amid labor surplus, security concerns. Nation’s Restaurant News, 36(8), 4; Frauenheim, E. (2006, March 13). Unicru beefs up data in latest screening tool. Workforce Management, 85(5), 9–10; Frazier, M. (2005, April). Help wanted. Chain Store Age, 81(4), 37–39; Haaland, D. E. (2006, April 17). Safety first: Hire conscientious employees to cut down on costly workplace accidents. Nation’s Restaurant News, 40(16), 22–24; Overholt, A. (2002, February). True or false? You’re hiring the right people. Fast Company, 55, 108–109; Rafter, M. V. (2005, May). Unicru breaks through in the science of “smart hiring.” Workforce Management, 84(5), 76–78.
D I S C U S S I O N Q U E S T I O N S
1. Strategic human resource management (SHRM) is included in your P-O-L-C framework as an essential element of control. Based on what you have learned about Kronos, how might SHRM be related to the planning, organizing, and leading facets of the P-O-L-C framework?
2. What can a company do in addition to using techniques like these to determine whether a person is a good candidate for a job?
3. What are potential complicating factors in using personality testing for employee selection?
4. Why do you think that retail companies are particularly prone to high turnover rates?
5. What steps do you take as a job seeker to ensure that an organization is a good fit for you?
2. THE CHANGING ROLE OF STRATEGIC HUMAN RESOURCE MANAGEMENT IN PRINCIPLES OF MANAGEMENT
L E A R N I N G O B J E C T I V E S
1. Understand how HR is becoming a strategic partner. 2. Understand the importance of an organization’s human capital. 3. List the key elements of SHRM. 4. Explain the importance of focusing on outcomes.
The role of HR is changing. Previously considered a support function, HR is now becoming a strategic partner in helping a company achieve its goals. A strategic approach to HR means going beyond the administrative tasks like payroll processing. Instead, managers need to think more broadly and deeply about how employees will contribute to the company’s success.
CHAPTER 16 STRATEGIC HUMAN RESOURCE MANAGEMENT 405
strategic human resource management (SHRM)
An organizational level approach to human resources management with a concern for the effects of HRM practices on firm performance.
human capital
The collective sum of the attributes, life experience, knowledge, inventiveness, energy, and enthusiasm that its people choose to invest in their work.
2.1 HR as a Strategic Partner Strategic human resource management (SHRM) is not just a function of the HR department—all managers and executives need to be involved because the role of people is so vital to a company’s com- petitive advantage.[1] In addition, organizations that value their employees are more profitable than those that do not.[2] Research shows that successful organizations have several things in common, such as providing employment security, engaging in selective hiring, using self-managed teams, being de- centralized, paying well, training employees, reducing status differences, and sharing information.[3] When organizations enable, develop, and motivate human capital, they improve accounting profits as well as shareholder value in the process.[4] The most successful organizations manage HR as a strategic asset and measure HR performance in terms of its strategic impact.
Here are some questions that HR should be prepared to answer in this new world.[5]
< Competence: To what extent does our company have the required knowledge, skills, and abilities to implement its strategy?
< Consequence: To what extent does our company have the right measures, rewards, and incentives in place to align people’s efforts with the company strategy?
< Governance: To what extent does our company have the right structures, communications systems and policies to create a high-performing organization?
< Learning and Leadership: To what extent can our company respond to uncertainty and learn and adapt to change quickly?
2.2 The Importance of Human Capital Employees provide an organization’s human capital. Your human capital is the set of skills that you have acquired on the job, through training and experience, and which increase your value in the mar- ketplace. The Society of Human Resource Management’s Research Quarterly defined an organization’s human capital as follows: “A company’s human capital asset is the collective sum of the attributes, life experience, knowledge, inventiveness, energy and enthusiasm that its people choose to invest in their work.”[6]
2.3 Focus on Outcomes Unfortunately, many HR managers are more effective in the technical or operational aspects of HR than they are in the strategic, even though the strategic aspects have a much larger effect on the com- pany’s success.[7] In the past, HR professionals focused on compliance to rules, such as those set by the federal government, and they tracked simple metrics like the number of employees hired or the num- ber of hours of training delivered. The new principles of management, however, require a focus on out- comes and results, not just numbers and compliance. Just as lawyers count how many cases they’ve won—not just how many words they used—so, too must HR professionals track how employees are us- ing the skills they’ve learned to attain goals, not just how many hours they’ve spent in training.[8]
John Murabito, executive vice president and head of HR and Services at Cigna, says that HR exec- utives need to understand the company’s goals and strategy and then provide employees with the skills needed. Too often, HR execs get wrapped up in their own initiatives without understanding how their role contributes to the business. That is dangerous, because when it comes to the HR department, “anything that is administrative or transactional is going to get outsourced,” Murabito says. [9] Indeed, the number of HR outsourcing contracts over $25 million has been increasing, with 2,708 active con- tracts under way in 2007.[10] For example, the Bank of America outsourced its HR administration to Arinso. Arinso will provide timekeeping, payroll processing, and payroll services for 10,000 Bank of America employees outside the U.S.[11] To avoid outsourcing, HR needs to stay relevant and accept ac- countability for its business results. In short, the people strategy needs to be fully aligned with the com- pany’s business strategy and keep the focus on outcomes.
2.4 Key Elements of HR Beyond the basic need for compliance with HR rules and regulations, the four key elements of HR are summarized in the following figure. In high-performing companies, each element of the HR system is designed to reflect best practice and to maximize employee performance. The different parts of the HR system are strongly aligned with company goals.
406 PRINCIPLES OF MANAGEMENT
job design
The process of putting together various elements to form a job, bearing in mind organizational and individual worker requirements.
FIGURE 16.5 Key HR Elements
Selection and Placement
When hiring, acquaint prospective new hires with the nature of the jobs they will be expected to fulfill. This includes explaining the technical competencies needed (for example, collecting statistical data) and defining behavioral competencies. Behavioral competencies may have a customer focus, such as the ability to show empathy and support of customers’ feelings and points of view, or a work manage- ment focus, such as the ability to complete tasks efficiently or to know when to seek guidance.
In addition, make the organization’s culture clear by discussing the values that underpin the or- ganization—describe your organization’s “heroes.” For example, are the heroes of your company the people who go the extra mile to get customers to smile? Are they the people who toil through the night to develop new code? Are they the ones who can network and reach a company president to make the sale? By sharing such stories of company heroes with your potential hires, you’ll help reinforce what makes your company unique. This, in turn, will help the job candidates determine whether they’ll fit into your organization’s culture.
Job Design
Design jobs that involve doing a whole piece of work and are challenging but doable. Job design refers to the process of putting together various elements to form a job, bearing in mind organizational and individual worker requirements, as well as considerations of health, safety, and ergonomics. Train em- ployees to have the knowledge and skills to perform all parts of their job and give them the authority and accountability to do so.[12] Job enrichment is important for retaining your employees.
One company that does training right is Motorola. As a global company, Motorola operates in many countries, including China. Operating in China presents particular challenges in terms of finding and hiring skilled employees. In a recent survey conducted by the American Chamber of Commerce in Shanghai, 37% of U.S.-owned enterprises operating in China said that recruiting skilled employees was their biggest operational problem.[13] Indeed, more companies cited HR as a problem than cited regu- latory concerns, bureaucracy, or infringement on intellectual property rights. The reason is that Chinese universities do not turn out candidates with the skills that multinational companies need. As a result, Motorola has created its own training and development programs to bridge the gap. For ex- ample, Motorola’s China Accelerated Management Program is designed for local managers. Another program, Motorola’s Management Foundation program, helps train managers in areas such as com- munication and problem solving. Finally, Motorola offers a high-tech MBA program in partnership with Arizona State University and Tsinghua University so that top employees can earn an MBA in- house.[14] Such programs are tailor-made to the low-skilled but highly motivated Chinese employees.
Compensation and Rewards
Evaluate and pay people based on their performance, not simply for showing up on the job. Offer re- wards for skill development and organizational performance, emphasizing teamwork, collaboration, and responsibility for performance. Help employees identify new skills to develop so that they can ad- vance and achieve higher pay and rewards. Compensation systems that include incentives, gainsharing,
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profit-sharing, and skill-based pay reward employees who learn new skills and put those skills to work for the organization. Employees who are trained in a broad range of skills and problem solving are more likely to grow on the job and feel more satisfaction. Their training enables them to make more valuable contributions to the company, which, in turn, gains them higher rewards and greater commit- ment to the company.[15] The company likewise benefits from employees’ increased flexibility, pro- ductivity, and commitment.
When employees have access to information and the authority to act on that information, they’re more involved in their jobs and more likely to make the right decision and take the necessary actions to further the organization’s goals. Similarly, rewards need to be linked to performance, so that employees are naturally inclined to pursue outcomes that will gain them rewards and further the organization’s success at the same time.
Diversity Management
Another key to successful SHRM in today’s business environment is embracing diversity. In past dec- ades, “diversity” meant avoiding discrimination against women and minorities in hiring. Today, di- versity goes far beyond this limited definition; diversity management involves actively appreciating and using the differing perspectives and ideas that individuals bring to the workplace. Diversity is an in- valuable contributor to innovation and problem-solving success. As James Surowiecki shows in The Wisdom of Crowds, the more diverse the group in terms of expertise, gender, age, and background, the more ability the group has to avoid the problems of groupthink.[16] Diversity helps company teams to come up with more creative and effective solutions. Teams whose members have complementary skills are often more successful because members can see one another’s blind spots. Members will be more inclined to make different kinds of mistakes, which means that they’ll be able to catch and correct those mistakes.
K E Y T A K E A W A Y
Human resources management is becoming increasingly important in organizations because today’s know- ledge economy requires employees to contribute ideas and be engaged in executing the company’s strategy. HR is thus becoming a strategic partner by identifying the skills that employees need and then providing em- ployees with the training and structures needed to develop and deploy those competencies. All the elements of HR—selection, placement, job design, and compensation—need to be aligned with the company’s strategy so that the right employees are hired for the right jobs and rewarded properly for their contributions to furthering the company’s goals.
E X E R C I S E S
1. What are the advantages of the new SHRM approach?
2. Name three elements of HR.
3. What must HR do to be a true strategic partner of the company?
4. What benefits does a diverse workforce provide the company?
5. If you were an HR manager, what steps would you take to minimize the outsourcing of jobs in your department?
408 PRINCIPLES OF MANAGEMENT
war for talent
Competition between organizations to attract and retain the most able employees.
FIGURE 16.6
The war for talent is about attracting, developing, and retaining the most capable employees.
© 2010 Jupiterimages Corporation
talent management
Anticipating the need for human capital and setting a plan to meet it.
succession planning
A process whereby an organization ensures that employees are recruited and developed to fill each key role within the company.
3. THE WAR FOR TALENT
L E A R N I N G O B J E C T I V E S
1. Define talent management. 2. Attract the right workers to your organization. 3. Understand how to keep your stars. 4. Understand the benefits of good talent management.
You have likely heard the term, the war for talent, which reflects competition among organizations to attract and retain the most able employees. Agencies that track demographic trends have been warning for years that the U.S. workforce will shrink in the second and third decades of the 21st century as the baby boom generation (born 1945–1961) reaches retirement age. According to one source, there will be 11.5 million more jobs than workers in the United States by 2010.[17] Even though many boomers say they want to (or have to) continue working past the traditional age of retirement, those who do retire or who leave decades-long careers to pursue “something I’ve always wanted to do” will leave employers scrambling to replace well-trained, experienced workers. As workers compete for the most desirable jobs, employers will have to compete even more fiercely to find the right talent.
3.1 What Talent Management Means Peter Cappelli of the Wharton School[18] defines talent management as anticipating the need for hu- man capital and setting a plan to meet it. It goes hand in hand with succession planning, the process whereby an organization ensures that employees are recruited and developed to fill each key role with- in the company. Most companies, unfortunately, do not plan ahead for the talent they need, which means that they face shortages of critical skills at some times and surpluses at other times. Other com- panies use outdated methods of succession planning that don’t accurately forecast the skills they’ll need in the future.
Interestingly, however, techniques that were developed to achieve productivity breakthroughs in manufacturing can be applied to talent management. For example, it is expensive to develop all talent internally; training people takes a long time and requires accurate predictions about which skill will be needed. Such predictions are increasingly difficult to make in our uncertain world. Therefore, rather than developing everyone internally, companies can hire from the outside when they need to tap spe- cific skills. In manufacturing, this principle is known as “make or buy.” In HR, the solution is to make and buy; that is, to train some people and to hire others from the external marketplace. In this case, “making” an employee means hiring a person who doesn’t yet have all the needed skills to fulfill the role, but who can be trained (“made”) to develop them. The key to a successful “make” decision is to distinguish between the high-potential employees who don’t yet have the skills but who can learn them from the mediocre employees who merely lack the skills. The “buy” decision means hiring an employee who has all the necessary skills and experience to fulfill the role from day one. The “buy” decision is useful when it’s too difficult to predict exactly which skills will be needed in the future.[19]
Another principle from manufacturing that works well in talent management is to run smaller batch sizes. That is, rather than sending employees to 3-year-long training programs, send them to shorter programs more frequently. With this approach, managers don’t have to make the training de- cision so far in advance. They can wait to decide exactly which skills employees will learn closer to the time the skill is needed, thus ensuring that employees are trained on the skills they’ll actually use.
3.2 Attracting the Right Workers to the Organization Winning the war for talent means more than simply attracting workers to your company. It means at- tracting the right workers—the ones who will be enthusiastic about their work. Enthusiasm for the job requires more than having a good attitude about receiving good pay and benefits—it means that an employee’s goals and aspirations also match those of the company. Therefore, it’s important to identify employees’ preferences and mutually assess how well they align with the company’s strategy. To do this, the organization must first be clear about the type of employee it wants. Companies already do this with customers: marketing executives identify specific segments of the universe of buyers to target for selling products. Red Bull, for example, targets college-age consumers, whereas SlimFast goes for adults of all ages who are overweight. Both companies are selling beverages but to completely different
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consumer segments. Similarly, companies need to develop a profile of the type of workers they want to attract. Do you want entrepreneurial types who seek autonomy and continual learning, or do you want team players who enjoy collaboration, stability, and structure? Neither employee type is inherently “better” than another, but an employee who craves autonomy may feel constrained within the very same structure in which a team player would thrive.
Earlier, we said that it was important to “mutually assess” how well employees’ preferences aligned with the company’s strategy. One-half of “mutual” refers to the company, but the other half refers to the job candidates. They also need to know whether they’ll fit well into the company. One way to help prospective hires make this determination is to describe to them the “signature experience” that sets your company apart. As Tamara Erickson and Lynda Gratton define it, your company’s signature ex- perience is the distinctive practice that shows what it’s really like to work at your company.[20]
For example, here are the signature experiences of two companies, Whole Foods and Goldman Sachs: At Whole Foods, team-based hiring is a signature experience—employees in each department vote on whether a new employee will be retained after a 4-week trial period. This demonstrates to po- tential hires that Whole Foods is all about collaboration. In contrast, Goldman Sachs’s signature exper- ience is multiple one-on-one interviews. The story often told to prospective hires is of the MBA student who went through 60 interviews before being hired. This story signals to new hires that they need to be comfortable meeting endless new people and building networks across the company. Those who enjoy meeting and being interviewed by so many diverse people are exactly the ones who will fit into Gold- man’s culture.
The added benefit of hiring workers who match your organizational culture and are engaged in their work is that they will be less likely to leave your company just to get a higher salary.
3.3 Keeping Star Employees The war for talent stems from the approaching shortage of workers. As we mentioned earlier in this chapter, the millions of baby boomers reaching retirement age are leaving a gaping hole in the U.S. workforce. What’s more, workers are job-hopping more frequently than in the past. According to the U.S. Bureau of Labor Statistics, the average job tenure has dropped from 15 years in 1980 to 4 years in 2007. As a manager, therefore, you need to give your employees reasons to stay with your company. One way to do that is to spend time talking with employees about their career goals. Listen to their likes and dislikes so that you can help them use the skills they like using or develop new ones they wish to acquire.[21]
Don’t be afraid to “grow” your employees. Some managers want to keep their employees in their department. They fear that helping employees grow on the job will mean that employees will outgrow their job and leave it.[22] But, keeping your employees down is a sure way to lose them. What’s more, if you help your employees advance, it’ll be easier for you to move up because your employees will be bet- ter able to take on the role you leave behind.
In some cases, your employees may not be sure what career path they want. As a manager, you can help them identify their goals by asking questions such as:
< What assignments have you found most engaging? < Which of your accomplishments in the last six months made you proudest? < What makes for a great day at work?[23]
What Employees Want
Employees want to grow and develop, stretching their capabilities. They want projects that engage their heads as well as their hearts, and they want to connect with the people and things that will help them achieve their professional goals.[24] Here are two ways to provide this to your employees: First, connect people with mentors and help them build their networks. Research suggests that successful managers dedicate 70% more time to networking activities and 10% more time to communication than their less successful counterparts.[25] What makes networks special? Through networks, people energize one an- other, learn, create, and find new opportunities for growth. Second, help connect people with a sense of purpose. Focusing on the need for purpose is especially important for younger workers, who rank meaningful work and challenging experiences at the top of their job search lists.[26]
3.4 Benefits of Good Talent Management Global consulting firm McKinsey & Company conducted a study to identify a possible link between a company’s financial performance and its success in managing talent. The survey results, reported in May 2008, show that there was indeed a relationship between a firm’s financial performance and its
410 PRINCIPLES OF MANAGEMENT
global talent management practices. Three talent management practices in particular correlated highly with exceptional financial performance:
< Creating globally consistent talent evaluation processes. < Achieving cultural diversity in a global setting. < Developing and managing global leaders.[27]
The McKinsey survey found that companies achieving scores in the top third in any of these three areas had a 70% chance of achieving financial performance in the top third of all companies.[28]
Let’s take a closer look at what each of these three best practices entail. First, having consistent tal- ent evaluation means that employees around the world are evaluated on the same standards. This is important because it means that if an employee from one country transfers to another, his or her man- ager can be assured that the employee has been held to the same level of skills and standards. Second, having cultural diversity means having employees who learn something about the culture of different countries, not just acquire language skills. This helps bring about open-mindedness across cultures. Finally, developing global leaders means rotating employees across different cultures and giving them international experience. Companies who do this best also have policies of giving managers incentives to share their employees with other units.
K E Y T A K E A W A Y
The coming shortage of workers makes it imperative for managers to find, hire, retain, and develop their em- ployees. Managers first need to define the skills that the company will need for the future. Then, they can “make or buy”—that is, train or hire—employees with the needed skills. Retaining these employees requires engaging them on the job. Good talent management practices translate to improved financial performance for the company as a whole.
E X E R C I S E S
1. How might a manager go about identifying the skills that the company will need in the future?
2. Describe the “make or buy” option and how it can be applied to HR.
3. How would you go about attracting and recruiting talented workers to your organization? Suggest ideas you would use to retain stars and keep them happy working for you.
4. What skills might an organization like a bank need from its employees?
4. EFFECTIVE SELECTION AND PLACEMENT STRATEGIES
L E A R N I N G O B J E C T I V E S
1. Explain why a good job description benefits the employer and the applicant. 2. Describe how company culture can be used in selecting new employees. 3. Discuss the advantages and disadvantages of personnel testing. 4. Describe some considerations in international staffing and placement
Selecting the right employees and placing them in the right positions within the company is a key HR function and is vital to a company’s success. Companies should devote as much care and attention to this “soft” issue as they do to financial planning because errors will have financial impact and adverse effects on a company’s strategy.
4.1 Job-Description Best Practices Walt has a problem. He works as a manager in a medium-sized company and considers himself fortu- nate that the organizational chart allows him a full-time administrative assistant (AA). However, in the two years Walt has been in his job, five people have held this AA job. The most recent AA, who
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resigned after four weeks, told Walt that she had not known what the job would involve. “I don’t do numbers, I’m not an accountant,” she said. “If you want someone to add up figures and do calculations all day, you should say so in the job description. Besides, I didn’t realize how long and stressful my commute would be—the traffic between here and my house is murder!”
Taken aback, Walt contacted the company’s HR department to clarify the job description for the AA position. What he learned was that the description made available to applicants was, indeed, inad- equate in a number of ways. Chances are that frequent turnover in this AA position is draining Walt’s company of resources that could be used for much more constructive purposes.
An accurate and complete job description is a powerful SHRM tool that costs little to produce and can save a bundle in reduced turnover. While the realistic description may discourage some applicants (for example, those who lack an affinity for calculations might not bother to apply for Walt’s AA posi- tion), those who follow through with the application process are much more likely to be satisfied with the job once hired. In addition to summarizing what the worker will actually be doing all day, here are some additional suggestions for writing an effective job description:
< List the job requirements in bullet form so that job seekers can scan the posting quickly. < Use common industry terms, which speak to knowledgeable job seekers. < Avoid organization-specific terms and acronyms, which would confuse job seekers. < Use meaningful job titles (not the internal job codes of the organization). < Use key words taken from the list of common search terms (to maximize the chance that a job
posting appears on a job seeker’s search). < Include information about the organization, such as a short summary and links to more detailed
information. < Highlight special intangibles and unusual benefits of the job and workplace (e.g., flextime, travel,
etc.). < Specify the job’s location (and nearest large city) and provide links to local community pages (to
entice job seekers with quality-of-life information).
4.2 Tailoring Recruitment to Match Company Culture Managers who hire well don’t just hire for skills or academic background; they ask about the potential employee’s philosophy on life or how the candidate likes to spend free time. These questions help the manager assess whether the cultural fit is right. A company in which all work is done in teams needs team players, not just “A” students. Ask questions like, “Do you have a personal mission statement? If not, what would it be if you wrote one today?”[29] to identify potential hires’ preferences.
At Google, for example, job candidates are asked questions like, “If you could change the world us- ing Google’s resources, what would you build?”[30] Google wants employees who will think and act on a grand scale, employees who will take on the challenges of their jobs, whatever their job may be. Take Josef DeSimone, who’s Google’s executive chef. DeSimone, who’s worked everywhere from family-style restaurants to Michelin-caliber ones, was amazed to learn that Google had 17 cafes for its employees. “Nobody changes the menu daily on this scale,” he says. “It’s unheard of.” When he was hired, DeSi- mone realized, “Wow, you hire a guy who’s an expert in food and let him run with it! You don’t get in his way or micromanage.”[31] Google applies this approach to all positions and lets employees run with the challenge.
Traditionally, companies have built a competitive advantage by focusing on what they have—structural advantages such as economies of scale, a well-established brand, or dominance in cer- tain market segments. Companies such as Southwest Airlines, by contrast, see its people as their ad- vantage: “Our fares can be matched; our airplanes and routes can be copied. But we pride ourselves on our customer service,” said Sherry Phelps, director of corporate employment. That’s why Southwest looks for candidates who generate enthusiasm and leans toward extraverted personalities.[32] Southwest hires for attitude. Flight attendants have been known to sing the safety instructions, and pilots tell jokes over the public address system.
Southwest Airlines makes clear right from the start the kind of people it wants to hire. For ex- ample, recruitment ads showed Southwest founder Herb Kelleher dressed as Elvis and read: “Work in a Place Where Elvis Has Been Spotted…The qualifications? It helps to be outgoing. Maybe even a bit off- center. And be prepared to stay awhile. After all, we have the lowest employee turnover rate in the in- dustry.” People may scoff or question why Southwest indulges in such showy activities or wonder how an airline can treat its jobs so lightly. Phelps answers, “We do take our work seriously. It’s ourselves that we don’t.” People who don’t have a humane, can-do attitude are fired. Southwest has a probation- ary period during which it determines the compatibility of new hires with the culture. People may be excellent performers, but if they don’t match the culture, they are let go. As Southwest’s founder
412 PRINCIPLES OF MANAGEMENT
at-will employment doctrine
A doctrine of American law that defines an employment relationship in which either party can break the relationship with no liability, provided there was no express contract for a definite term governing the employment relationship and that the employer does not belong to a collective bargaining unit (i.e., a union).
situational interview
A job interview where candidates are asked in-depth questions about specific job situations in the past or future.
Kelleher once said, “People will write me and complain, ‘Hey, I got terminated or put on probation for purely subjective reasons.’ And I’ll say, ‘Right! Those are the important reasons.’”
In many states, employees are covered under what is known as the at-will employment doctrine. At-will employment is a doctrine of American law that defines an employment relationship in which either party can break the relationship with no liability, provided there was no express con- tract for a definite term governing the employment relationship and that the employer does not belong to a collective bargaining unit (i.e., a union).[33] However, there are legal restrictions on how purely subjective the reasons for firing can be. For instance, if the organization has written hiring and firing procedures and does not follow them in selective cases, then those cases might give rise to claims of wrongful termination. Similarly, in situations where termination is clearly systematic, for example, based on age, race, religion, and so on, wrongful termination can be claimed.
4.3 Tools and Methods: Interviewing and Testing To make good selection and placement decisions, you need information about the job candidate. Two time-tested methods to get that information are testing and interviewing.
A detailed interview begins by asking the candidate to describe his work history and then getting as much background on his most recent position (or the position most similar the open position). Ask about the candidate’s responsibilities and major accomplishments. Then, ask in-depth questions about specific job situations. Called situational interviews, these types of interviews can focus on past ex- perience or future situations. For example, experienced-based questions are “Tell me about a major ini- tiative you developed and the steps you used to get it adopted.” Or, “Describe a problem you had with someone and how you handled it.” In contrast, future-oriented situation interview questions ask can- didates to describe how they would handle a future hypothetical situation, such as: “Suppose you came up with a faster way to do a task, but your team was reluctant to make the change. What would you do in that situation?”
In addition to what is asked, it is also important that interviewers understand what they should not ask, largely because certain questions lead to answers that may be used to discriminate. There are five particularly sensitive areas. First, the only times you can ask about age are when it is a requirement of a job duty or you need to determine whether a work permit is required. Second, it is rarely appropriate or legal to ask questions regarding race, color, national origin, or gender. Third, although candidates may volunteer religious or sexually-orientated information in an interview, you still need to be careful not to discriminate. Ask questions that are relevant to work experience or qualifications. Fourth, firms cannot discriminate for health or disabilities; you may not ask about smoking, health-related questions, or disabilities in an interview. Finally, you may not ask questions about marital status, children, per- sonal life, pregnancy, or arrest record. These kinds of questions could be tempting to ask if you are in- terviewing for a position requiring travel; however, you can only explain the travel requirements and confirm that the requirements are acceptable.
In addition to interviews, many employers use testing to select and place job applicants. Any tests given to candidates must be job related and follow guidelines set forth by the Equal Opportunity Em- ployment Commission to be legal. For the tests to be effective, they should be developed by reputable psychologists and administered by professionally qualified personnel who have had training in occupa- tions testing in an industrial setting. The rationale behind testing is to give the employer more informa- tion before making the selection and placement decision—information vital to assessing how well a candidate is suited to a particular job. Most preemployment assessment tests measure thinking styles, behavioral traits, and occupational interests. The results are available almost immediately after a can- didate completes the roughly hour-long questionnaire. Thinking styles tests can tell the potential em- ployer how fast someone can learn new things or how well he or she can verbally communicate. Beha- vioral traits assessments measure energy level, assertiveness, sociability, manageability, and attitude. For example, a high sociability score would be a desirable trait for salespeople.[34]
4.4 International Staffing and Placement In our increasingly global economy, managers need to decide between using expatriates or hiring locals when staffing international locations. On the surface, this seems a simple choice between the firm-spe- cific expertise of the expatriate and the cultural knowledge of the local hire. In reality, companies often fail to consider the high probability and high cost of expatriates failing to adapt and perform in their international assignments.
CHAPTER 16 STRATEGIC HUMAN RESOURCE MANAGEMENT 413
FIGURE 16.7
Living and working in another place, such as São Paulo, Brazil, can be exciting, rewarding, and challenging.
© 2010 Jupiterimages Corporation
For example, cultural issues can easily create misunderstandings between expatriate managers and employees, suppliers, customers, and local government officials. At an estimated cost of $200,000 per failed expatriate, international assignment decisions are often made too lightly in many companies. The challenge is to overcome the natural tendency to hire a well-known, corporate insider over an un- known local at the international site. Here are some indications to use to determine whether an expat- riate or a local hire would be best.
Managers may want to choose an expatriate when: < Company-specific technology or knowledge is important. < Confidentiality in the staff position is an issue. < There is a need for speed (assigning an expatriate is usually faster than hiring a local). < Work rules regarding local workers are restrictive. < The corporate strategy is focused on global integration/
Managers may want to staff the position with a local hire when: < The need to interact with local customers, suppliers, employees, or officials is paramount. < The corporate strategy is focused on multidomestic/market-oriented operations. < Cost is an issue (expatriates often bring high relocation/travel costs). < Immigration rules regarding foreign workers are restrictive. < There are large cultural distances between the host country and candidate expatriates.[35]
K E Y T A K E A W A Y
Effective selection and placement means finding and hiring the right employees for your organization and then putting them into the jobs for which they are best suited. Providing an accurate and complete job de- scription is a key step in the selection process. An important determination is whether the candidate’s person- ality is a good fit for the company’s culture. Interviewing is a common selection method. Situational interviews ask candidates to describe how they handled specific situations in the past (experience-based situational in- terviews) and how they would handle hypothetical questions in the future (future-oriented situational inter- views.) Other selection tools include cognitive tests, personality inventories, and behavioral traits assessments. Specific personalities may be best suited for positions that require sales, teamwork, or entrepreneurship, re- spectively. In our increasingly global economy, managers need to decide between using expatriates or hiring locals when staffing international locations.
E X E R C I S E S
1. What kind of information would you include in a job description?
2. Do you think it is important to hire employees who fit into the company culture? Why or why not?
3. List questions that you would ask in a future-oriented situational interview.
4. What requirements must personnel tests meet?
5. If you were hiring to fill a position overseas, how would you go about selecting the best candidate?
414 PRINCIPLES OF MANAGEMENT
bonus
A form of variable pay where the employee earns additional compensation based on achieved objectives.
5. THE ROLES OF PAY STRUCTURE AND PAY FOR PERFORMANCE
L E A R N I N G O B J E C T I V E S
1. Explain the factors to be considered when setting pay levels. 2. Understand the value of pay for performance plans. 3. Discuss the challenges of individual versus team-based pay.
Pay can be thought of in terms of the “total reward” that includes an individual’s base salary, variable pay, share ownership, and other benefits. A bonus, for example, is a form of variable play. A bonus is a one-time cash payment, often awarded for exceptional performance. Providing employees with an an- nual statement of all these benefits they receive can help them understand the full value of what they are getting.[36]
5.1 Pay System Elements As summarized in the following table, pay can take the form of direct or indirect compensation. Non- monetary pay can include any benefit an employee receives from an employer or job that does not in- volve tangible value. This includes career and social rewards, such as job security, flexible hours and opportunity for growth, praise and recognition, task enjoyment, and friendships. Direct pay is an em- ployee’s base wage. It can be an annual salary, hourly wage, or any performance-based pay that an em- ployee receives, such as profit-sharing bonuses.
TABLE 16.1 Elements of a Pay System
Nonmonetary pay Includes benefits that do not involve tangible value.
Direct pay Employee’s base wage
Indirect pay Everything from legally required programs to health insurance, retirement, housing, etc.
Basic pay Cash wage paid to the employee. Because paying a wage is a standard practice, the competitive advantage can only come by paying a higher amount.
Incentive pay A bonus paid when specified performance objectives are met. May inspire employees to set and achieve a higher performance level and is an excellent motivator to accomplish goals.
Stock options A right to buy a piece of the business that may be given to an employee to reward excellent service. An employee who owns a share of the business is far more likely to go the extra mile for the operation.
Bonuses A gift given occasionally to reward exceptional performance or for special occasions. Bonuses can show an employer appreciates his or her employees and ensures that good performance or special events are rewarded.
Indirect compensation is far more varied, including everything from legally required public protection programs such as social security to health insurance, retirement programs, paid leave, child care, or housing. Some indirect compensation elements are required by law: social security, unemployment, and disability payments. Other indirect elements are up to the employer and can offer excellent ways to provide benefits to the employees and the employer as well. For example, a working parent may take a lower-paying job with flexible hours that will allow him or her to be home when the children get home from school. A recent graduate may be looking for stable work and an affordable place to live. Both of these individuals have different needs and, therefore, would appreciate different compensation elements.
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job evaluation
An evaluation of the positions in an organization to understand job design requirements and identify positions critical to strategy and firm performance.
FIGURE 16.8
Regardless of country, pay is a critical managerial control.
© 2010 Jupiterimages Corporation
pay for performance
When pay is tied directly to an individual’s performance in meeting specific business goals or objectives.
5.2 Setting Pay Levels When setting pay levels for positions, managers should make sure that the pay level is fair relative to what other employees in the position are being paid. Part of the pay level is determined by the pay level at other companies. If your company pays substantially less than others, it’s going to be the last choice of employment unless it offers something overwhelmingly positive to offset the low pay, such as flexible hours or a fun, congenial work atmosphere. Besides these external factors, companies conduct a job evaluation to determine the internal value of the job—the more vital the job to the company’s success, the higher the pay level. Jobs are often ranked alphabetically—“A” positions are those on which the company’s value depends, “B” positions are somewhat less important in that they don’t deliver as much upside to the company, and “C” positions are those of least importance—in some cases, these are outsourced.
The most vital jobs to one company’s success may not be the same as in other companies. For ex- ample, information technology companies may put top priority on their software developers and pro- grammers, whereas for retailers such as Nordstrom, the “A” positions are those frontline employees who provide personalized service. For an airline, pilots would be a “B” job because, although they need to be well trained, investing further in their training is unlikely to increase the airline’s profits. “C” pos- itions for a retailer might include back office bill processing, while an information technology company might classify customer service as a “C” job.
When setting reward systems, it’s important to pay for what the company actually hopes to achieve. Steve Kerr, vice president of corporate management at General Electric, talks about the com- mon mistakes that companies make with their reward systems, such as saying they value teamwork but only rewarding individual effort. Similarly, companies say they want innovative thinking or risk taking, but they reward people who “make the numbers.”[37] If companies truly want to achieve what they hope for, they need payment systems aligned with their goals. For example, if retention of star employ- ees is important to your company, reward managers who retain top talent. At Pepsico, for instance, one-third of a manager’s bonus is tied directly to how well the manager did at developing and retaining employees. Tying compensation to retention makes managers accountable.[38]
Pay for Performance
As its name implies, pay for performance ties pay directly to an individual’s performance in meeting specific business goals or objectives. Managers (often together with the employees themselves) design performance targets to which the employee will be held accountable. The targets have accompanying metrics that enable employees and managers to track performance. The metrics can be financial indic- ators, or they can be indirect indicators such as customer satisfaction or speed of development. Pay- for-performance schemes often combine a fixed base salary with a variable pay component (such as bo- nuses or stock options) that vary with the individual’s performance.
Innovative Employee Recognition Programs
In addition to regular pay structures and systems, companies often create special programs that reward exceptional employee performance. For example, the financial software company Intuit, Inc., instituted a program called Spotlight. The purpose of Spotlight is to “spotlight performance, innovation and ser- vice dedication.”[39] Unlike regular salaries or year-end bonuses, spotlight awards can be given on the spot for specific behavior that meets the reward criteria, such as filing a patent, inventing a new product, or meeting a milestone for years of service. Rewards can be cash awards of $500 to $3,000 and can be made by managers without high-level approval. In addition to cash and noncash awards, two Intuit awards feature a trip with $500 in spending money.[40]
5.3 Pay Structures for Groups and Teams So far, we have discussed pay in terms of individual compensation, but many employers also use com- pensation systems that reward all of the organization’s employees as a group or various groups and teams within the organization. Let’s examine some of these less traditional pay structures.
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gainsharing
When an organization shares the financial gains with employees, such that employees receive a portion of the profit achieved from their efforts. (Sometimes called profit sharing.)
Gainsharing
Sometimes called profit sharing, gainsharing is a form of pay for performance. In gainsharing, the or- ganization shares the financial gains with employees. Employees receive a portion of the profit achieved from their efforts. How much they receive is determined by their performance against the plan. Here’s how gainsharing works: First, the organization must measure the historical (baseline) performance. Then, if employees help improve the organization’s performance on those measures, they share in the financial rewards achieved. This sharing is typically determined by a formula.
The effectiveness of a gainsharing plan depends on employees seeing a relationship between what they do and how well the organization performs. The larger the size of the organization, the harder it is for employees to see the effect of their work. Therefore, gainsharing plans are more effective in com- panies with fewer than 1,000 people.[41] Gainsharing success also requires the company to have good performance metrics in place so that employees can track their process. The gainsharing plan can only be successful if employees believe and see that if they perform better, they will be paid more. The pay should be given as soon as possible after the performance so that the tie between the two is established.
When designing systems to measure performance, realize that performance appraisals need to fo- cus on quantifiable measures. Designing these measures with input from the employees helps make the measures clear and understandable to employees and increases their buy-in that the measures are reasonable.
Team-Based Pay
Many managers seek to build teams, but face the question of how to motivate all the members to achieve the team’s goals. As a result, team-based pay is becoming increasingly accepted. In 1992, only 3% of companies had team-based pay. By 1996, 9% did, and another 39% were planning such sys- tems.[42] With increasing acceptance and adoption come different choices and options of how to structure team-based pay. One way to structure the pay is to first identify the type of team you have—parallel, work, project, or partnership—and then choose the pay option that is most appropriate to that team type. Let’s look at each team type in turn and the pay structures best suited for each.
Parallel teams are teams that exist alongside (parallel to) an individual’s daily job. For example, a person may be working in the accounting department but also be asked to join a team on productivity. Parallel teams are often interdepartmental, meet part time, and are formed to deal with a specific issue. The reward for performance on this team would typically be a merit increase or a recognition award (cash or noncash) for performance on the team.
A project team is likewise a temporary team, but it meets full time for the life of the project. For ex- ample, a team may be formed to develop a new project and then disband when the new product is completed. The pay schemes appropriate for this type of team include profit sharing, recognition re- wards, and stock options. Team members evaluate each other’s performance.
A partnership team is formed around a joint venture or strategic alliance. Here, profit sharing in the venture is the most common pay structure. Finally, with the work team, all individuals work togeth- er daily to accomplish their jobs. Here, skill-based pay and gainsharing are the payment schemes of choice, with team members evaluating one another’s performance.
5.4 Pay Systems That Reward Both Team and Individual Performance There are two main theories of how to reward employees. Nancy Katz[43] characterized the theories as two opposing camps. The first camp advocates rewarding individual performance, through plans such as commissions-sales schemes and merit-based-pay. The claim is that this will increase employees’ en- ergy, drive, risk taking, and task identification. The disadvantages of rewarding individual performance are that employees will cooperate less, that high performers may be resented by others in the corpora- tion, and that low performers may try to undermine top performers.
The second camp believes that organizations should reward team performance, without regard for individual accomplishment. This reward system is thought to bring the advantages of increased helping and cooperation, sharing of information and resources, and mutual-respect among employees. The disadvantages of team-based reward schemes are that they create a lack of drive, that low performers are “free riders,” and that high performers may withdraw or become tough cops.
Katz sought to identify reward schemes that achieve the best of both worlds. These hybrid pay sys- tems would reward individual and team performance, promoting excellence at both levels. Katz sugges- ted two possible hybrid reward systems. The first system features a base rate of pay for individual per- formance that increases when the group reaches a target level of performance. In this reward system, individuals have a clear pay-for-performance incentive, and their rate of pay increases when the group as a whole does well. In the second hybrid, the pay-for-performance rate also increases when a target is reached. Under this reward system, however, every team member must reach a target level of perform- ance before the higher pay rate kicks in. In contrast with the first hybrid, this reward system clearly
CHAPTER 16 STRATEGIC HUMAN RESOURCE MANAGEMENT 417
FIGURE 16.9
Computers and the Internet are revolutionizing HR practices.
© 2010 Jupiterimages Corporation
incentivizes the better performers to aid poorer performers. Only when the poorest performer reaches the target does the higher pay rate kick in.
K E Y T A K E A W A Y
Compensation plans reward employees for contributing to company goals. Pay levels should reflect the value of each type of job to the company’s overall success. For some companies, technical jobs are the most vital, whereas for others frontline customer service positions determine the success of the company against its competitors. Pay-for-performance plans tie an individual’s pay directly to his or her ability to meet perform- ance targets. These plans can reward individual performance or team performance or a combination of the two.
E X E R C I S E S
1. What factors would you consider when setting a pay level for a particular job?
2. What might be the “A” level positions in a bank?
3. If you were running a business decision, would you implement a pay-for-performance scheme? Why or why not?
4. Describe the difference between a base salary, a bonus, and a gainsharing plan.
5. Discuss the advantages and disadvantages of rewarding individual versus team performance.
6. DESIGNING A HIGH-PERFORMANCE WORK SYSTEM
L E A R N I N G O B J E C T I V E S
1. Define a high-performance work system. 2. Describe the role of technology in HR. 3. Describe the use of HR systems to improve organizational performance. 4. Describe succession planning and its value.
Now it is your turn to design a high-performance work system (HPWS). HPWS is a set of management practices that attempt to create an environment within an organization where the employee has greater involvement and responsibility. Designing a HPWS involves putting all the HR pieces together. A HPWS is all about determining what jobs a company needs done, designing the jobs, identifying and attracting the type of employee needed to fill the job, and then evaluating employee performance and compensating them appropriately so that they stay with the company.
6.1 e-HRM At the same time, technology is changing the way HR is done. The electronic human resource management (e-HRM) business solution is based on the idea that information technologies, including the Web, can be designed for human resources professionals and executive managers who need sup- port to manage the workforce, monitor changes, and gather the information needed in decision mak- ing. At the same time, e-HRM can enable all employees to participate in the process and keep track of relevant information. For instance, your place of work provides you with a Web site where you can lo- gin; get past and current pay information, including tax forms (i.e., 1099, W-2, and so on); manage in- vestments related to your 401(k); or opt for certain medical record-keeping services.
More generally, for example, many administrative tasks are being done online, including: < providing and describing insurance and other benefit options < enrolling employees for those benefits < enrolling employees in training programs < administering employee surveys to gauge their satisfaction
418 PRINCIPLES OF MANAGEMENT
Many of these tasks are being done by employees themselves, which is referred to as employee self-ser- vice. With all the information available online, employees can access it themselves when they need it.
Part of an effective HR strategy is using technology to reduce the manual work performance by HR employees. Simple or repetitive tasks can be performed self-service through e-HRM systems that provide employees with information and let them perform their own updates. Typical HR services that can be formed in an e-HRM system include:
< Answer basic compensation questions. < Look up employee benefits information. < Process candidate recruitment expenses. < Receive and scan resumes into recruiting software. < Enroll employees in training programs. < Maintain training catalog. < Administer tuition reimbursement. < Update personnel files.
Organizations that have invested in e-HRM systems have found that they free up HR professionals to spend more time on the strategic aspects of their job. These strategic roles include employee develop- ment, training, and succession planning.
6.2 The Value of High-Performance Work Systems Employees who are highly involved in conceiving, designing, and implementing workplace processes are more engaged and perform better. For example, a study analyzing 132 U.S. manufacturing firms found that companies using HPWSs had significantly higher labor productivity than their competitors. The key finding was that when employees have the power to make decisions related to their perform- ance, can access information about company costs and revenues, and have the necessary knowledge, training, and development to do their jobs—and are rewarded for their efforts—they are more product- ive.[44]
For example, Mark Youndt and his colleagues[45] demonstrated that productivity rates were sig- nificantly higher in manufacturing plants where the HRM strategy focused on enhancing human capit- al. Delery and Doty found a positive relationship between firm financial performance and a system of HRM practices. [46] Huselid, Jackson, and Schuler found that increased HRM effectiveness correspon- ded to an increase in sales per employee, cash flow, and company market value. [47]
HPWS can be used globally to good result. For example, Fey and colleagues studied 101 foreign- based firms operating in Russia and found significant linkages between HRM practices, such as incentive-based compensation, job security, employee training, and decentralized decision making, and subjective measures of firm performance. [48]
6.3 Improving Organizational Performance Organizations that want to improve their performance can use a combination of HR systems to get these improvements. For example, performance measurement systems help underperforming compan- ies improve performance. The utility company Arizona Public Service used a performance measure- ment system to rebound from dismal financial results. The company developed 17 “critical success in- dicators,” which it measures regularly and benchmarks against the best companies in each category. Of the 17, nine were identified as “major critical success indicators.” They are:
< cost to produce kilowatt hour < customer satisfaction < fossil plants availability < operations and maintenance expenditures < construction expenditures < ranking as corporate citizen in Arizona < safety all-injury incident rate < nuclear performance < shareholder value return on assets
Each department sets measurable goals in line with these indicators, and a gainsharing plan rewards employees for meeting the indicators.
CHAPTER 16 STRATEGIC HUMAN RESOURCE MANAGEMENT 419
In addition, companies can use reward schemes to improve performance. Better-performing firms tend to invest in more sophisticated HRM practices, which further enhances organizational perform- ance.[49] Currently, about 20% of firms link employee compensation to the firm’s earnings. They use re- ward schemes such as employee stock ownership plans, gainsharing, and profit sharing. This trend is increasing.
Researcher Michel Magnan wanted to find out: Is the performance of an organization with a profit-sharing plan better than other firms? And, does adoption of a profit-sharing plan lead to im- provement in an organization’s performance?
The reasons profit-sharing plans would improve organizational performance go back to employee motivation theory. A profit-sharing plan will likely encourage employees to monitor one another’s be- havior because “loafers” would erode the rewards for everyone. Moreover, profit sharing should lead to greater information sharing, which increases the productivity and flexibility of the firm.
Magnan studied 294 Canadian credit unions in the same region (controlling for regional and sector-specific economic effects). Of the firms studied, 83 had profit sharing plans that paid the bonus in full at the end of the year. This meant that employees felt the effect of the organizational perform- ance reward immediately, so it had a stronger motivational effect than a plan that put profits into a re- tirement account, where the benefit would be delayed (and essentially hidden) until retirement.
Magnan’s results showed that firms with profit-sharing plans had better performance on most fa- cets of organizational performance. They had better performance on asset growth, market capitaliza- tion, operating costs, losses on loans, and return on assets than firms without profit-sharing plans. The improved performance was especially driven by activities where employee involvement had a quick, predictable effect on firm performance, such as giving loans or controlling costs.
Another interesting finding was that when firms adopted a profit-sharing plan, their organization- al performance went up. Profit-sharing plans appear to be a good turnaround tool because the firms that showed the greatest improvement were those that had not been performing well before the profit- sharing plan. Even firms that had good performance before adopting a profit-sharing plan had better performance after the profit-sharing plan.[50]
Succession Planning
Succession planning is a process whereby an organization ensures that employees are recruited and de- veloped to fill each key role within the company. In a recent survey, HR executives and non-HR execut- ives were asked to name their top human capital challenge. Nearly one-third of both executive groups cited succession planning,[51] but less than 20% of companies with a succession plan addressed non- management positions. Slightly more than 40% of firms didn’t have a plan in place.
Looking across organizations succession planning takes a number of forms (including no form at all). An absence of succession planning should be a red flag, since the competitive advantage of a grow- ing percentage of firms is predicated on their stock of human capital and ability to manage such capital in the future. One of the overarching themes of becoming better at succession is that effective organiza- tions become much better at developing and promoting talent from within. The figure “Levels of Suc- cession Planning” summarizes the different levels that firms can work toward.
Levels of Succession Planning
< Level 1: No planning at all.
< Level 2: Simple replacement plan. Typically the organization has only considered what it will do if key individuals leave or become debilitated.
< Level 3: The company extends the replacement plan approach to consider lower-level positions, even including middle managers.
< Level 4: The company goes beyond the replacement plan approach to identify the competencies it will need in the future. Most often, this approach is managed along with a promote-from-within initiative.
< Level 5: In addition to promoting from within, the organization develops the capability to identify and recruit top talent externally. However, the primary source of successors should be from within, unless there are key gaps where the organization does not have key capabilities.
Dow Chemical exemplifies some best practices for succession planning: < Dow has a comprehensive plan that addresses all levels within the organization, not just executive
levels. < CEO reviews the plan, signaling its importance.
420 PRINCIPLES OF MANAGEMENT
< Managers regularly identify critical roles in the company and the competencies needed for success in those roles.
< Dow uses a nine-box grid for succession planning, plotting employees along the two dimensions of potential and performance.
< High potential employees are recommended for training and development, such as Dow Academy or an MBA.
Interpublic Group, a communications and advertising agency, established a formal review process in 2005 in which the CEOs of each Interpublic business would talk with the CEO about the leaders in their organization. The discussions span the globe because half of the company’s employees work out- side the United States. A key part of the discussions is to then meet with the individual employees to tell them about the opportunities available to them. “In the past, what I saw happen was that an em- ployee would want to leave and then all of a sudden they hear about all of the career opportunities available to them,” he says. “Now I want to make sure those discussions are happening before anyone talks about leaving,” said Timothy Sompolski, executive vice president and chief human resources officer at Interpublic Group.[52]
The principles of strategic human resource management and high-performance work systems ap- ply to nonprofit enterprises as well as for-profit companies, and the benefits of good HR practices are just as rewarding. When it comes to succession planning, nonprofits face a particularly difficult chal- lenge of attracting workers to a field known for low pay and long hours. Often, the people attracted to the enterprise are drawn by the cause rather than by their own aspirations for promotion. Thus, identi- fying and training employees for leadership positions is even more important. What’s more, the talent shortage for nonprofits will be even more acute: A study by the Meyer Foundation and CompassPoint Nonprofit Service found that 75% of nonprofit executive directors plan to leave their jobs by 2011.[53]
K E Y T A K E A W A Y
A high-performance work system unites the social and technical systems (people and technology) and aligns them with company strategy. It ensures that all the interrelated parts of HR are aligned with one another and with company goals. Technology and structure supports employees in their ability to apply their knowledge and skills to executing company strategy. HR decisions, such as the type of compensation method chosen, im- prove performance for organizations and enterprises of all types.
E X E R C I S E S
1. What are some ways in which HR can improve organizational performance?
2. What is the most important aspect of high performance work systems? Name three benefits of high performance work systems.
3. How does e-HRM help a company?
4. If you were designing your company’s succession planning program, what guidelines would you suggest?
CHAPTER 16 STRATEGIC HUMAN RESOURCE MANAGEMENT 421
Balanced Scorecard
A framework designed to translate an organization’s vision and mission statements and overall business strategy into specific, quantifiable goals and objectives and to monitor the organization’s performance in terms of achieving these goals.
Workforce Scorecard
An application of the Balanced Scorecard concept to an organization’s human capital to identify and measure the behaviors, skills, mind-sets, and results required for the workforce to contribute to the company’s success.
7. TYING IT ALL TOGETHER—USING THE HR BALANCED SCORECARD TO GAUGE AND MANAGE HUMAN CAPITAL, INCLUDING YOUR OWN
L E A R N I N G O B J E C T I V E S
1. Describe the Balanced Scorecard method and how it can be applied to HR. 2. Discuss what is meant by “human capital.” 3. Understand why metrics are important to improving company performance. 4. Consider how your human capital might be mapped on an HR Balanced Scorecard.
You may already be familiar with the Balanced Scorecard, a tool that helps managers measure what matters to a company. Developed by Robert Kaplan and David Norton, the Balanced Scorecard helps managers define the performance categories that relate to the company’s strategy. The managers then translate those categories into metrics and track performance on those metrics. Besides traditional financial measures and quality measures, companies use employee performance measures to track their people’s knowledge, skills, and contribution to the company.[54]
The employee performance aspects of Balanced Scorecards analyze employee capabilities, satisfac- tion, retention, and productivity. Companies also track whether employees are motivated (for example, the number of suggestions made and implemented by employees) and whether employee performance goals are aligned with company goals.
7.1 Applying the Balanced Scorecard Method to HR Because the Balanced Scorecard focuses on the strategy and metrics of the business, Mark Huselid and his colleagues took the Balanced Scorecard concept a step further and developed the HR and Work- force Scorecard to provide framework specific to HR. According to Huselid, the Workforce Score- card identifies and measures the behaviors, skills, mind-sets, and results required for the workforce to contribute to the company’s success. Specifically, as summarized in the figure, the Workforce Scorecard has four key sequential elements:[55]
< Workforce Mind-Set and Culture: First, does the workforce understand the strategy, embrace it, and does it have the culture needed to support strategy execution?
< Workforce Competencies: Second, does the workforce, especially in the strategically important or “A” positions, have the skills it needs to execute strategy? (“A” positions are those job categories most vital to the company’s success.)
< Leadership and Workforce Behaviors: Third, are the leadership team and workforce consistently behaving in a way that will lead to attaining the company’s key strategic objectives?
< Workforce Success: Fourth, has the workforce achieved the key strategic objectives for the business? If the organization can answer “yes” to the first three elements, then the answer should be yes here as well.[56]
422 PRINCIPLES OF MANAGEMENT
human capital
The collective sum of the attributes, life experience, knowledge, inventiveness, energy, and enthusiasm that its people choose to invest in their work.
FIGURE 16.10
The HR Balanced Scorecard bridges HR best practices and the firm’s comprehensive Balanced Scorecard.
Human Capital
Implementing the HR scorecard requires a change in perspective, from seeing people as a cost to seeing people as the company’s most important asset to be managed—human capital. According to the Soci- ety of Human Resource Management’s Research Quarterly, “A company’s human capital asset is the collective sum of the attributes, life experience, knowledge, inventiveness, energy and enthusiasm that its people choose to invest in their work.”[57] As you can tell by the definition, such an asset is difficult to measure because it is intangible, and factors like “inventiveness” are subjective and open to inter- pretation. The challenge for managers, then, is to develop measurement systems that are more rigorous and provide a frame of reference. The metrics can range from activity-based (transactional) metrics to strategic ones. Transactional metrics are the easiest to measure and include counting the number of new people hired, fired, transferred, and promoted. The measures associated with these include the cost of each new hire, the length of time and cost associated with transferring an employee, and so forth. Typical ratios associated with transactional metrics include the training cost factor (total training cost divided by the employees trained) and training cost percentage (total training cost divided by op- erating expense).[58] But, these transactional measures don’t get at the strategic issues, namely, whether the right employees are being trained and whether they are remembering and using what they learned. Measuring training effectiveness requires not only devising metrics but actually changing the nature of the training.
The Bank of Montreal has taken this step. “What we’re trying to do at the Bank of Montreal is to build learning into what it is that people are doing,” said Jim Rush of the Bank of Montreal’s Institute for Learning. “The difficulty with training as we once conceived it is that you’re taken off your job, you’re taken out of context, you’re taken away from those things that you’re currently working on, and you go through some kind of training. And then you’ve got to come back and begin to apply that. Well, you walk back to that environment and it hasn’t changed. It’s not supportive or conducive to you be- having in a different kind of way, so you revert back to the way you were, very naturally.” To overcome this, the bank conducts training such that teams bring in specific tasks on which they are working, so that they learn by doing. This removes the gap between learning in one context and applying it in an- other. The bank then looks at performance indices directly related to the bottom line. “If we take an en- tire business unit through a program designed to help them learn how to increase the market share of a particular product, we can look at market share and see if it improved after the training,” Rush said.[59]
CHAPTER 16 STRATEGIC HUMAN RESOURCE MANAGEMENT 423
Motorola has adopted a similar approach, using action learning in its Senior Executives Program. Action learning teams are assigned a specific project by Motorola’s CEO and are responsible for imple- menting the solutions they design. This approach not only educates the team members but also lets them implement the ideas, so they’re in a position to influence the organization. In this way, the train- ing seamlessly supports Motorola’s goals.
As we can see in these examples, organizations need employees to apply the knowledge they have to activities that add value to the company. In planning and applying human capital measures, man- agers should use both retrospective (lagging) and prospective (leading) indicators. Lagging indicators are those that tell the company what it has accomplished (such as the Bank of Montreal’s documenting the effect that training had on a business unit’s performance). Leading indicators are forecasts that help an organization see where it is headed. Leading indicators include employee learning and growth in- dices.[60]
The Payoff
Given the complexity of what we’ve just discussed, some managers may be inclined to ask, “Why both- er doing all this?” Research by John Lingle and William Schiemann provides a clear answer: Compan- ies that make a concerted effort to measure intangibles such as employee performance, innovation, and change in addition to measuring financial measures perform better. Lingle and Schiemann examined how executives measured six strategic performance areas: financial performance, operating efficiency, customer satisfaction, employee performance, innovation and change, and community/environment issues. To evaluate how carefully the measures were tracked, the researchers asked the executives, “How highly do you value the information in each strategic performance area?” and “Would you bet your job on the quality of the information on each of these areas?” The researchers found that the com- panies that paid the closest attention to the metrics and had the most credible information were the ones identified as industry leaders over the previous three years (74% of measurement-managed com- panies compared with 44% of others) and reported financial performance in the top one-third of their industry (83% compared with 52%).
The scorecard is vital because most organizations have much better control and accountability over their raw materials than they do over their workforce. For example, a retailer can quickly identify the source of a bad product, but the same retailer can’t identify a poor-quality manager whose negative attitude is poisoning morale and strategic execution.[61]
Applying the Balanced Scorecard Method to Your Human Capital
Let’s translate the HR scorecard to your own Balanced Scorecard of human capital. As a reminder, the idea behind the HR scorecard is that if developmental attention is given to each area, then the organiz- ation will be more likely to be successful. In this case, however, you use the scorecard to better under- stand why you may or may not be effective in your current work setting. Your scorecard will comprise four sets of answers and activities.
1. What is your mind-set and values? Do you understand the organization’s strategy and embrace it, and do you know what to do in order to implement the strategy? If you answered “no” to either of these questions, then you should consider investing some time in learning about your firm’s strategy. For the second half of this question, you may need additional coursework or mentoring to understand what it takes to move the firm’s strategy forward.
2. What are your work-related competencies? Do you have the skills and abilities to get your job done? If you have aspirations to key positions in the organization, do you have the skills and abilities for those higher roles?
3. What are the leadership and workforce behaviors? If you are not currently in a leadership position, do you know how consistently your leaders are behaving with regard to the achievement of strategic objectives? If you are one of the leaders, are you behaving strategically?
4. Your success? Can you tie your mind-set, values, competencies, and behaviors to the organization’s performance and success?
This simple scorecard assessment will help you understand why your human capital is helping the or- ganization or needs additional development itself. With such an assessment in hand, you can act to help the firm succeed and identify priority areas for personal growth, learning, and development.
424 PRINCIPLES OF MANAGEMENT
K E Y T A K E A W A Y
The Balanced Scorecard, when applied to HR, helps managers align all HR activities with the company’s stra- tegic goals. Assigning metrics to the activities lets managers track progress on goals and ensure that they are working toward strategic objectives. It adds rigor and lets managers quickly identify gaps. Companies that measure intangibles such as employee performance, innovation, and change perform better financially than companies that don’t use such metrics. Rather than investing equally in training for all jobs, a company should invest disproportionately more in developing the people in the key “strategic” (“A”) jobs of the company on which the company’s success is most dependent.
E X E R C I S E S
1. Define the Balanced Scorecard method.
2. List the elements of a Workforce Scorecard.
3. Discuss how human capital can be managed like a strategic asset.
4. Why is it important to align HR metrics with company strategy?
5. What kind of metrics would be most useful for HR to track?
CHAPTER 16 STRATEGIC HUMAN RESOURCE MANAGEMENT 425
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61. Becker, B., & Huselid, M. (2006). Strategic human resources management: Where do we go from here? Journal of Management, 32, 898–925.
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