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Individual

Management Planning Presentation

Imagine you are an executive for BP, and you are preparing a presentation for the board of directors about the organization’s direction.

Create a 10- to 15-slide Microsoft® PowerPoint® presentation, with speaker notes, in which you address the following:

·  Evaluate the planning function of management as it relates to the organization’s goals and strategies. Use steps in the planning process outlined in the text.

·  Analyze the influence that legal issues, ethics, and corporate social responsibility have had on management planning at BP. Provide at least one example for each.

·  Analyze at least three factors that influence the company’s strategic, tactical, operational, and contingency planning.

Format your paper consistent with APA guidelines.

APPENDIX B
APPENDIX B

Managing in Our Natural
Environment
BUSINESS AND THE ENVIRONMENT:
CONFLICTING VIEWS
Some people believe everyone wins when business tackles envi-
ronmental issues. 1 Others disagree.

The Win-Win Mentality Business used to look at environ-
mental issues as a no-win situation: You either help the envi-
ronment and hurt your business, or help your business only at
a cost to the environment. Fortunately, things have changed.
“When Americans first demanded a cleanup of the environment
during the early 1970s, corporations threw a tantrum. Their
response ran the psychological gamut from denial to hostility,
defiance, obstinacy, and fear. But today, when it comes to green
issues, many U.S. companies have turned from rebellious under-
achievers to active problem solvers.” 2 Table B.1 gives just a few
examples of things U.S. corporations are doing to help solve
environmental problems.

The Earth Summit in Rio in 1992 helped increase aware-
ness of environmental issues. This led to the Kyoto Protocol, an
international effort to control global warming that included an
unsuccessful meeting in the Hague in November 2000. 3 “There
has been an evolution of most groups—whether industry, gov-
ernments, or nongovernmental organizations—toward a recog-
nition that everyone plays a part in reaching a solution.” 4

Being “green” is potentially a catalyst for innovation, new
market opportunities, and wealth creation. Advocates believe
that this is truly a win-win situation; actions can be taken that
benefit both business and the environment. For example, Procter
& Gamble in a span of five years reduced disposable wastes by
over 50 percent while increasing sales by 25 percent. 5 Win-win
companies will come out ahead of those companies that have
an us-versus-them, we-can’t-afford-to-protect-the-environment
mentality.

Is the easy part over? 6 Companies have found a lot of easy-
to-harvest, “low-hanging fruit”—that is, overly costly practices
that were made environmentally friendlier and that saved money
at the same time. Many big companies have made these easy
changes, and reaped benefits from them. Many small companies
still have such low-hanging fruit to harvest, 7 and plenty remains
to be done.

The Dissenting View The critics of environmentalism in
business are vocal. Some economists maintain that not a single
empirical analysis supports the “free lunch view” that spending
money on environmental problems provides full payback to the
firm. 8 Skepticism should continue, they say; the belief that every-
one will come out a winner is naive.

What really upsets many businesspeople is the financial cost
of complying with environmental regulations. 9 Consider a few
examples:

• GM spent $1.3 billion to comply with California requirements
that 10 percent of the cars sold there be emission-free.
European automakers spent $7 billion to install pollution-
control equipment in all new cars during a five-year period.

• At Bayer, 20 percent of manufacturing costs were for the
environment. This is approximately the same amount spent
for labor.

• The Clean Air Act alone was expected to cost U.S. petro-
leum refiners $37 billion, more than the book value of the
entire industry.

• California’s tough laws are a major reason why manufactur-
ers moved to Arkansas or Nevada.

In industries like chemicals and petroleum, environmental reg-
ulations were once considered a threat to their very survival. 10

Balance A more balanced view is that business must weigh
the environmental benefits of an action against value destruc-
tion. The advice here is: Don’t obstruct progress, but pick your
environmental initiatives carefully. Compliance and remediation
efforts will protect, but not increase, shareholder value. 11 And
it is shareholder value, rather than compliance, emissions, or
costs, that should be the focus of objective cost-benefit analyses.
Such an approach is environmentally sound but also hard-headed
in a business sense, and is the one approach that is truly sustain-
able over the long term.

Johan Piet maintains, “Only win-win companies will survive,
but that does not mean that all win-win ideas will be successful.” 12
In other words, rigorous analysis is essential. Thus, some compa-
nies maintain continuous improvement in environmental perfor-
mance, but fund only projects that meet financial objectives.

Most people understand that business has the resources and
the competence to bring about constructive change, and that
this creates great opportunity—if well managed—for both busi-
ness and the environment.

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190 Part Two Planning: Delivering Strategic Value

TABLE B.1
What Companies Are Doing to Enhance the Environment

Toyota established an “ecotechnologies” division both
for regulatory compliance and to shape corporate
direction, including the development of hybrid
electric-combustion automobiles.

Interface Corporation’s new Shanghai carpet factory
circulates liquid through a standard pumping loop like
those used in most industries. But simply by using
fatter pipes and short, straight pipes instead of long
and crooked pipes, it cut the power requirements by
92 percent.

Xerox used “zero-waste-to-landfill” engineering to
develop a new remanufacturable copier. AT&T cut
paper costs by 15 percent by setting defaults on
copiers and printers to double-sided mode.

Electrolux uses more environmentally friendly water-
based and powder paints instead of solvent-based
paints, and introduced the first refrigerators and
freezers free of chlorofluorocarbons.

Many chemical and pharmaceutical companies,
including Novo Nordisk and Empresas La Moderna,
are exploring “green chemistry” and seeking biological
substitutes for synthetic materials.

Anheuser-Busch saved 21 million pounds of metal a
year by reducing its beer-can rims by 1/8 of an inch
(without reducing its contents).

Nissan enlisted a group of ecologists, energy experts,
and science writers to brainstorm about how an
environmentally responsible car company might
behave. Among the ideas: to produce automobiles
that snap together into electrically powered trains for
long trips and then detach for the dispersion to final
destinations.

SOURCES: P. M. Senge and G. Carstedt, “Innovating Our Way to the Next
Industrial Revolution,” Sloan Management Review, Winter 2001, pp. 24–38;
M. P. Polonsky and P. J. Rosenberger III, “Reevaluating Green Marketing:
A Strategic Approach,” Business Horizons, September–October, 2001, pp. 21–30;
C. Garfield, Second to None: How Our Smartest Companies Put People First (Burr
Ridge, IL; Business One-Irwin, 1992); H. Bradbury and J. A. Clair, “Promoting
Sustainable Organizations with Sweden’s Natural Step,” Academy of Management
Executive, November 1999, pp. 63–74; A. Loving, L. Hunter Lovins, and
P. Hawken, “A Road Map for Natural Capitalism,” Harvard Business Review,
May–June 1999, pp. 145–58; P. Hawken, A. Lovings, and L. Hunter Lovins, Natural
Capitalism (Boston: Little Brown, 1999); and S. L. Hart and M. B. Milstein, “Global
Sustainability and the Creative Destruction of Industries,” Sloan Management
Review, Fall 1999, pp. 23–32.

TABLE B.2
Some U.S Environmental Laws

Superfund [Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA)]:
Establishes potential liability for any person or
organization responsible for creating an environmental
health hazard. Individuals may be prosecuted, fined,
or taxed to fund cleanup.

Clean Water Act [Federal Water Pollution Control
Act]: Regulates all discharges into surface waters,
and affects the construction and performance of
sewer systems. The Safe Drinking Water Act similarly
protects groundwaters.

Clean Air Act: Regulates the emission into the air of
any substance that affects air quality, including nitrous
oxides, sulfur dioxide, and carbon dioxide.

Community Response and Right-to-Know Act:
Mandates that all facilities producing, transporting,
storing, using, or releasing hazardous substances
provide full information to local and state authorities
and maintain emergency-action plans.

Federal Hazardous Substances Act: Regulates
hazards to health and safety associated with
consumer products. The Consumer Product Safety
Commission has the right to recall hazardous
products.

Hazardous Materials Transportation Act: Regulates
the packaging, marketing, and labeling of shipments
of flammable, toxic, and radioactive materials.

Resource Conservation and Recovery Act: Extends
to small-quantity generators the laws regulating
generation, treatment, and disposal of solid and
hazardous wastes.

Surface Mining Control and Reclamation Act:
Establishes environmental standards for all
surface-mining operations.

Toxic Substances Control Act: Addresses the
manufacture, processing, distribution, use, and
disposal of dangerous chemical substances and
mixtures.

SOURCE: Dennis C. Kinlaw, Competitive and Green: Sustainable Performance in the
Environmental Age (Amsterdam: Pfeiffer & Co., 1993). Reprinted by permission of
the author.

WHY MANAGE WITH THE ENVIRONMENT IN MIND?
Business is turning its full attention to environmental issues for
many reasons, including legal compliance, cost effectiveness,
competitive advantage, public opinion, and long-term thinking.

Legal Compliance Table B.2 shows just some of the most
important U.S. environmental laws. Government regulations
and liability for damages provide strong economic incentives to
comply with environmental guidelines. Most industries already
have made environmental protection regulation and liability an

integral part of their business planning. 13 The U.S. Justice Depart-
ment has handed out tough prison sentences to executives
whose companies violate hazardous-waste requirements.

Some businesspeople consider the regulations to be too rigid,
inflexible, and unfair. In response to this concern, regulatory
reform may become more creative. The Aspen Institute Series
on the Environment in the Twenty-First Century is trying to
increase the cost-effectiveness of compliance measures through
more flexibility in meeting standards and relying on market-
based incentives. Such mechanisms, including tradable permits,
pollution charges, and deposit refund systems, provide positive
financial incentives for good environmental performance. 14

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Ethics and Corporate Responsibility Chapter 5 191

and low key, but much pressure is exerted by environmental
organizations, aroused citizen groups, societies and associations,
international codes of conduct, and environmentally conscious
investors. 20

Another important reason for paying attention to environ-
mental impact is TRI, the Toxic Release Inventory. 21 Starting in
1986, the EPA required all the plants of approximately 10,000
U.S. manufacturers to report annual releases of 317 toxic chemi-
cals into the air, ground, and water. The substances include freon,
PCBs, asbestos, and lead compounds. Hundreds of others have
been added to the list. The releases are not necessarily illegal,
but they provide the public with an annual environmental bench-
mark. TRI provides a powerful incentive to reduce emissions.

Finally, it is useful to remember that companies recover very
slowly in public opinion from the impact of an environmental
disaster. Adverse public opinion may affect sales as well as the
firm’s ability to attract and retain talented people. You can see
why companies like P&G consider concern for the environment
a consumer need, making it a basic and critical business issue.

Long-Term Thinking Long-term thinking about resources
helps business leaders understand the nature of their responsi-
bilities with regard to environmental concerns. For example, you
read about sustainable growth in the chapter. 22 Economic argu-
ments and the tragedy of the commons also highlight the need
for long-term thinking.

Economic arguments In Chapter 3, we discussed long-term
versus short-term decision making. We stated that it is common
for managers to succumb to short-term pressure for profits and
to avoid spending now when the potential payoff is years down
the road. In addition, some economists maintain that it is the
responsibility of management to maximize returns for share-
holders, implying the preeminence of the short-term profit goal.

But other economists argue that such a strategy caters to
immediate profit maximization for stock speculators and neglects
serious investors who are with the company for the long haul.
Attention to environmental issues enhances the organization’s
long-term viability because the goal is the long-term creation of
wealth for the patient, serious investors in the company 23 —not
to mention the future state of our planet and the new genera-
tions who will inhabit it.

The tragedy of the commons In a classic article in Science,
Garrett Hardin described a situation that applies to all business
decisions and social concerns regarding scarce resources like
clean water, air, and land. 24 Throughout human history, a com-
mons was a tract of land shared by communities of people on
which they grazed their animals. A commons has limited car-
rying capacity, or the ability to sustain a population, because
it is a finite resource. For individual herders, short-term inter-
est lies in adding as many animals to the commons as they can.
But problems develop as more herders add more animals to
graze the commons. This leads to tragedy: As each herder acts
in his short-term interest, the long-run impact is the destruction
of the commons. The solution is to make choices according to
long-run rather than short-run consequences.

In many ways, we are witnessing this tragedy of the com-
mons. Carrying capacities are shrinking as precious resources,

Cost Effectiveness Environmentally conscious strategies can
be cost-effective. 15 In the short run, company after company
is realizing cost savings from repackaging, recycling, and other
approaches. Union Carbide faced costs of $30 a ton for dis-
posal of solid wastes and $2,000 a ton for disposal of hazardous
wastes. By recycling, reclaiming, or selling its waste, it avoided
$8.5 million in costs and generated $3.5 million in income during
a six-month period. Dow Chemical launched a 10-year program
to improve its environmental, health, and safety performance
worldwide. Dow projected savings of $1.8 billion over the
10-year period. 16

Environmentally conscious strategies offer long-run cost
advantages as well. Companies that are functioning barely within
legal limits today may incur big costs—being forced to pay dam-
ages or upgrade technologies and practices—when laws change
down the road.

A few of the other cost savings include fines, cleanups, and
litigation; lower raw materials costs; reduced energy use; less
expensive waste handling and disposal; lower insurance rates;
and possibly higher interest rates.

Competitive Advantage Corporations gain a competitive
advan tage by channeling their environmental concerns into entre-
preneurial opportunities and by producing higher-quality prod-
ucts that meet consumer demand. Business opportunities abound
in pollution protection equipment and processes, waste cleanup,
low-water-use plumbing, new lightbulb technology, and market-
ing of environmentally safe products like biodegradable plastics.
With new pools of venture capital, government funding, and spe-
cialized investment funds available, environmental technology has
become a major sector of the venture-capital industry. 17

In addition, companies that fail to innovate in this area will be
at a competitive disadvantage. Environmental protection is not
only a universal need; it is also a major export industry. U.S.
trade suffered as other countries—notably Germany—took
the lead in patenting and exporting anti–air pollution and other
environmental technologies. If the United States does not pro-
duce innovative, competitive new technologies, it will forsake a
growth industry and see most of its domestic spending for envi-
ronmental protection go to imports. 18

In short, competitive advantage can be gained by maintaining
market share with old customers, and by creating new products
for new market opportunities. And if you are an environmental
leader, you may set the standards for future regulations—regu-
lations that you are prepared to meet, while your competitors
are not.

Public Opinion The majority of the U.S. population believes
business must clean up; few people think it is doing its job well.
Gallup surveys show that more than 80 percent of U.S. con-
sumers consider environmentalism in making purchases. An
international survey of 22 countries found that majorities in
20 countries gave priority to environmental protection even at
the risk of slowing economic growth. Consumers seem to have
reached the point of routinely expecting companies to come up
with environmentally friendly alternatives to current products
and practices. 19

Companies also receive pressure from local communities and
from their own employees. Sometimes the pressure is informal

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192 Part Two Planning: Delivering Strategic Value

is conservation. The conservation movement is anthropocen-
tric (human centered), technologically optimistic, and concerned
chiefly with the efficient use of resources. The movement seeks
to avoid waste, promote the rational and efficient use of natural
resources, and maximize long-term yields, especially of renew-
able resources.

The environmental movement, in contrast, historically
has posed dilemmas for business management. Following the
lead of early thinkers like George Perkins Marsh (1801–1882),
it has shown that the unintended negative effects of human eco-
nomic activities on the environment often are greater than the
benefits. For example, there are links between forest cutting and
soil erosion and between the draining of marshes and lakes and
the decline of animal life.

Other early environmentalists, such as John Muir (1838–1914)
and Aldo Leopold (1886–1948), argued that humans are not
above nature but a part of it. Nature is not for humans to subdue
but is sacred and should be preserved not simply for economic
use but for its own sake—and for what people can learn from it.

Science and the Environment Rachel Carson’s 1962 best-
selling book, The Silent Spring, helped ignite the modern environ-
mental movement by alerting the public to the dangers of unre-
stricted pesticide use. 27 Carson brought together the findings
of toxicology, ecology, and epidemiology in a form accessible
to the public. Blending scientific, moral, and political arguments,
she connected environmental politics and values with scientific
knowledge.

Barry Commoner’s Science and Survival (1963) continued in
this vein. Commoner expanded the scope of ecology to include
everything in the physical, chemical, biological, social, politi-
cal, economic, and philosophical worlds. 28 He argued that all
of these elements fit together, and have to be understood as
a whole. According to Commoner, the symptoms of environ-
mental problems are in the biological world, but their source
lies in economic and political organizations.

Economics and the Environment Economists promote
growth for many reasons: to restore the balance of payments,
to make nations more competitive, to create jobs, to reduce
the deficit, to provide for the elderly and the sick, and to reduce
poverty. Environmentalists criticize economics for its notions of
efficiency and its emphasis on economic growth. 29 For example,
environmentalists argue that economists do not adequately con-
sider the unintended side effects of efficiency. Environmentalists
hold that economists need to supplement estimates of the eco-
nomic costs and benefits of growth with estimates of other fac-
tors that historically were not measured in economic terms. 30

Economists and public policy analysts argue that the benefits
of eliminating risk to the environment and to people must be bal-
anced against the costs. Reducing risk involves determining how
effective the proposed methods of reduction are likely to be
and how much they will cost. There are many ways to consider
cost factors. Analysts can perform cost-effectiveness analyses,
in which they attempt to figure out how to achieve a given goal
with limited resources, or they can conduct more formal risk-
benefit and cost-benefit analyses, in which they quantify both the
benefits and the costs of risk reduction. 31

water chief among them, become scarcer. Inevitably, conflict
arises—and solutions are urgently needed.

The Environmental Movement The 1990s were labeled the
“earth decade” when a “new environmentalism” with new fea-
tures emerged. 25 For example, proponents of the new envi-
ronmentalism asked companies to reduce their wastes, use
resources prudently, market safe products, and take responsi-
bility for past damages. These requests were formalized in the
CERES principles (see Table B.3 ).

The new environmentalism combined many diverse view-
points, but initially it did not blend easily with traditional business
values. Some of the key aspects of this philosophy are noted in
the following discussion of the history of the movement. 26

Conservation and Environmentalism A strand of environ-
mental philosophy that is not at odds with business management

TABLE B.3
The CERES Principles

Scie
sell
men
stri
of t
to t
she
kno

this
eve
cal,
of t
a w
men
lies

Eco
gro
to
the
pov
effic
env
side
hold
nom
tors

of e
anc
effe
and
cos
in w
with
ben
b

Protection of the biosphere: Minimize the release of
pollutants that may cause environmental damage.

Sustainable use of natural resources: Conserve
nonrenewable resources through efficient use and
careful planning.

Reduction and disposal of waste: Minimize the
creation of waste, especially hazardous waste, and
dispose of such materials in a safe, responsible
manner.

Wise use of energy: Make every effort to use
environmentally safe and sustainable energy sources
to meet operating requirements.

Risk reduction: Diminish environmental, health, and
safety risks to employees.

Marketing of safe products and services: Sell
products that minimize adverse environmental impact
and are safe for consumers.

Damage compensation: Accept responsibility for any
harm the company causes the environment; conduct
bioremediation; and compensate affected parties.

Disclosure of environmental incidents: Public
dissemination of accidents relating to operations that
harm the environment or pose health or safety risks.

Environmental directors: Appoint at least one board
member who is qualified to represent environmental
interests; create a position of vice president for
environmental affairs.

Assessment and annual audit: Produce and
publicize each year a self-evaluation of progress
toward implementing the principles and meeting
all applicable laws and regulations worldwide.
Environmental audits will also be produced annually
and distributed to the public.

SOURCES: Chemical Week, September 20, 1989, copyright permission granted by
Chemical Week magazine. CERES Coalition Handbook.

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Ethics and Corporate Responsibility Chapter 5 193

tally conscious. Italy, Ireland, Spain, Portugal, and Greece are in
the early stages of developing environmental policies. Poland,
Hungary, the Czech Republic, and former East Germany are the
most polluted of the world’s industrialized nations. 35

U.S. companies need to realize that there is a large growth
market in western Europe for environmentally “friendly” prod-
ucts. U.S. managers also need to be fully aware of the envi-
ronmental movement in western Europe. Environmentalists in
Europe have been successful in halting many projects. 36 China
has been paying a high ecological price for its rapid economic
growth. But the government has begun recognizing the problem
and is creating some antipollution laws. 37

Industries that pollute or make polluting products will have
to adjust to the new reality, and companies selling products
in certain parts of the world must take into account a grow-
ing consumer consciousness about environmental protection.
Manufacturers may even be legally required to take products
and packaging back from customers after use, to recycle or dis-
pose of. In order to meet these requirements in Germany, and
be prepared for similar demands in other countries, Hewlett-
Packard redesigned its office-machine packaging worldwide.

WHAT MANAGERS CAN DO
To be truly “green”—that is, a cutting-edge company with respect
to environmental concerns—legal compliance is not enough. Pro-
gressive companies stay abreast and ahead of the laws by going
beyond marginal compliance and anticipating future requirements
and needs. 38 But companies can go further still by experiment-
ing continually with innovations that protect the environment.
McDonald’s, for example, conducted tests and pilot projects in
composting food scraps and in offering refillable coffee mugs and
starch-based (biodegradable) cutlery. 39

Systems Thinking The first thing managers can do to better
understand environmental issues in their companies is to engage
in systems thinking. Environmental considerations relate to the
organization’s inputs, processes, and outputs. 40 Inputs include
raw materials and energy. Environmental pressures are causing
prices of some raw materials, such as metals, to rise. This greatly
increases the costs of production. Higher energy costs are caus-
ing firms to switch to more fuel-efficient sources.

Firms are considering new processes or methods of produc-
tion that will reduce water pollution, air pollution, noise and
vibration, and waste. They are incorporating technologies that
sample and monitor (control) these by-products of business
processes. Some chemical plants have a computerized system
that flashes warnings when a maximum allowable pollution level
is soon to be reached. Many companies keep only minimal stocks
of hazardous materials, making serious accidents less likely.

Outputs have environmental impact, whether the products
themselves or the waste or by-products of processes. To reduce
the impact of its outputs, Herman Miller recycles or reuses nearly
all waste from the manufacturing process. It sells fabric scraps to
the auto industry, leather trim to luggage makers, and vinyl to
stereo and auto manufacturers. It buys back its old furniture,
refurbishes it, and resells it. Its corporatewide goal is to send
zero waste to landfills. Environmental manager Paul Murray says,
“There is never an acceptable level of waste at Miller. There are
always new things we can learn.” 41

Qualitative Judgments in Cost-Benefit Analysis Formal,
quantitative approaches to balancing costs and benefits do not
eliminate the need for qualitative judgments. For example, how
does one assess the value of a magnificent vista obscured by
air pollution? What is the loss to society if a particular genetic
strain of grass or animal species becomes extinct? How does
one assess the lost opportunity costs of spending vast amounts
of money on air pollution that could have been spent on produc-
tivity enhancement and global competitiveness?

Fairness cannot be ignored when doing cost-benefit analysis. 32
For example, the costs of air pollution reduction may have to be
borne disproportionately by the poor in the form of higher gaso-
line and automobile prices. Intergenerational fairness also plays a
role. 33 Future generations have no representatives in the current
market and political processes. To what extent should the cur-
rent generation hold back on its own consumption for the sake
of posterity? This question is particularly poignant because few
people in the world today are well off. To ask the poor to reduce
their life’s chances for the sake of a generation yet to come is
asking for a great sacrifice.

International Perspectives Environmental problems present
a different face in various countries and regions of the world.
The United States and Great Britain lag behind Germany and
Japan in mandated emissions standards. 34 In Europe, the Dutch,
the Germans, and the Danes are among the most environmen-

The environmental movement is a worldwide phenomenon. The
“Greens,” pictured here demonstrating in LePuy, France, are an
important growing European political party.

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194 Part Two Planning: Delivering Strategic Value

environmental audits. 44 The Community Environmental
Responsibility …

“ ”
The business executive is by profession a decision maker. Uncertainty is his opponent. Overcoming it is
his mission.

— John McDonald

Managerial Decision Making

chapter

3

LEARNING OBJECTIVES

After studying Chapter 3, you will be

able to:

1 Describe the kinds of decisions you
will face as a manager. p. 86

2 Summarize the steps in making
“rational” decisions. p. 89

3 Recognize the pitfalls you should
avoid when making decisions. p. 95

4 Evaluate the pros and cons of using
a group to make decisions. p. 98

5 Identify procedures to use in leading
a decision-making group. p. 100

6 Explain how to encourage creative
decisions. p. 102

7 Discuss the processes by which
decisions are made in organizations.
p. 104

8 Describe how to make decisions in a
crisis. p. 105

LO

LO

LO

LO

LO

LO

LO

LO

CHAPTER OUTLINE

Characteristics of Managerial Decisions

Lack of Structure
Uncertainty and Risk
Conflict

The Stages of Decision Making

Identifying and Diagnosing the Problem
Generating Alternative Solutions
Evaluating Alternatives
Making the Choice
Implementing the Decision
Evaluating the Decision

The Best Decision

Barriers to Effective Decision Making

Psychological Biases
Time Pressures
Social Realities

Decision Making in Groups

Potential Advantages of Using a Group
Potential Problems of Using a Group

Managing Group Decision Making

Leadership Style
Constructive Conflict
Encouraging Creativity
Brainstorming

Organizational Decision Making

Constraints on Decision Makers
Models of Organizational Decision Processes
Decision Making in a Crisis

bat37241_ch03_084-123.indd 84 12/4/09 3:04:17 PM

Management Close-Up
HOW DID ANNE MULCAHY’S DECISIONS PULL XEROX BACK FROM THE BRINK?

While Xerox had stayed the course with an outdated
business plan, nimbler and more innovative competi-
tors like Ricoh and Canon were snatching away mar-
ket share. To add to the company’s woes, shortly after
Mulcahy became CEO, the Securities and Exchange

Commission announced that it
would investigate Xerox on
suspected billing and account-
ing irregularities.

At that point, Mulcahy could
have simply caved to angry
share holders, killed the famed
Xerox culture, shut down
research and development,
filed for bankruptcy, or turned

out the lights—all advice she received from many peo-
ple. But Mulcahy was a Xerox believer. Besides her time
in the sales force, she had headed the human resource
department and the company’s $6 billion desktop print-
ing division. Anne Mulcahy had just begun to fight. 1

Anne Mulcahy is not your typical English major. After
college graduation she joined Xerox Corporation’s sales
force and rose through the ranks. Twenty-five years
later, she became chairman and CEO of the world’s lead-
ing document management and services enterprise. But
her promotion brought a host
of problems. King of the hill in
the 1970s and 1980s, Xerox
had faltered badly with its com-
puter division during the 1990s
as competitors undercut it on
price. By 2000, once-mighty
Xerox Corporation was in the
red and sinking fast.

Stepping into the corner
office in August 2001, Mulcahy found a company in
total disarray. Her predecessor, former IBMer Richard
Thoman, had lasted only 13 months in the job. Xerox
was nearly $18 billion in debt. It had exhausted a $7 bil-
lion line of credit, and its credit ratings were tanking.

When Mulcahy took the reins at Xerox,
the company was in a mess, seemingly
with no way out except bankruptcy.
As you read this chapter, consider
the decisions managers face—and how
Mulcahy approached the decision-
making process.

{ }

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86 Part One Foundations of Management

The best managers make decisions constantly. Some are big and difficult, like those
Anne Mulcahy faced when she became head of a global empire on the brink of bank-
ruptcy. But managers also make countless smaller decisions that affect day-to-day
operations and procedures. Karen Lancaster, chief information officer at Western
Marine Insurance, makes many decisions about her firm’s computer systems. For
example, she had to decide on a plan to back up and store the company’s data to pro-
tect the company. If Western Marine’s computers ever lost power or failed, the com-
pany needed to store data off-site. So Lancaster compared offers from three vendors
and chose Courtesy Computers, which uses an Internet connection to back up the
company’s data automatically at the end of each day.

Backing up data is hardly glamorous, but a crisis can bring home the importance
of these decisions, as Lancaster well knows. One day the phone company was digging
outside Western Marine’s building in Stockton, California, and cut a line, causing
the company’s Internet firewall to go down, which in turn allowed a hacker access to
the company’s server, clogging it with spam so that it crashed. Another time a power
surge caused a loss of data in the computers. In both situations, the online backup
solved the problem. Lancaster says, “When you’re creating your disaster plan, you
need to think about every scenario.” 2

Decisions. If you can’t make them, you won’t be an effective manager. This chapter
discusses what kinds of decisions managers face, how they are made, and how they
should be made.

Characteristics of Managerial Decisions
Managers face problems and opportunities constantly. Some situations that require a
decision are relatively simple; others seem overwhelming. Some demand immediate
action, while others take months or even years to unfold.

Actually, managers often ignore problems. 3 M. For several reasons, they avoid tak-
ing action. 4 First, managers can’t be sure how much time, energy, or trouble lies ahead
once they start working on a problem. Second, getting involved is risky; tackling a
problem but failing to solve it successfully can hurt a manager’s track record. Third,
because problems can be so perplexing, it is easier to procrastinate or to get busy with
less demanding activities. For these reasons, managers may lack the insight, courage,
or will to decide.

It is important to understand why decision making can be so challenging. Figure 3.1
illustrates several characteristics of managerial decisions that contribute to their diffi-
culty and pressure. Most managerial decisions lack structure and entail risk, uncer-
tainty, and conflict.

LO 1

You’ll be making
decisions

constantly.
It may seem

obvious, but it’s
worth stating: If
you know how

to make good decisions, you’ll
deliver good results.

Risk

Lack of
structure

Uncertainty

Conflict
FIGURE 3.1
Characteristics of
Managerial Decisions

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Managerial Decision Making Chapter 3 87

Lack of Structure
Lack of structure is the usual state
of affairs in managerial decision
making. 5 Although some decisions are routine and clear-cut, for most there is no auto-
matic procedure to follow. Problems are novel and unstructured, leaving the decision
maker uncertain about how to proceed.

An important distinction illustrating this point is between programmed and non-
programmed decisions. Programmed decisions have been encountered and made
before. They have objectively correct answers and can be solved by using simple rules,
policies, or numerical computations. If you face a programmed decision, a clear pro-
cedure or structure exists for arriving at the right decision. For example, if you are a
small-business owner and must decide the amounts for your employees’ paychecks,
you can use a formula—and if the amounts are wrong, your employees will prove it to
you. Table 3.1 gives some other examples.

If most important decisions were programmed, managerial life would be much
easier. But managers typically face nonprogrammed decisions: new, novel, complex
decisions having no certain outcomes. They have a variety of possible solutions, all
of which have merits and drawbacks. The decision maker must create or impose a
method for making the decision; there is no predetermined structure on which to rely.
As Table 3.1 suggests, important, difficult decisions tend to be nonprogrammed, and
they demand creative approaches.

Uncertainty and Risk
If you have all the information you need, and can predict precisely the consequences
of your actions, you are operating under a condition of certainty. 6 Managers are
expressing their preference for certainty when they are not satisfied hearing about
what might have happened or may happen, and insist on hearing what did or will hap-
pen. 7 But perfect certainty is rare. For important, nonprogrammed managerial deci-
sions, uncertainty is the rule.

Uncertainty means the manager has insufficient information to know the conse-
quences of different actions. Decision makers may have strong opinions—they may
feel sure of themselves—but they are still operating under conditions of uncertainty if

programmed decisions

Decisions encountered
and made before, having
objectively correct answers,
and solvable by using simple
rules, policies, or numerical
computations.

nonprogrammed
decisions

New, novel, complex
decisions having no proven
answers.

certainty

The state that exists when
decision makers have
accurate and comprehensive
information.

uncertainty

The state that exists when
decision makers have
insufficient information.

A moderate ego demonstrates wisdom.
Lao-tzu

Programmed Decisions Nonprogrammed Decisions

Problem Frequent, repetitive, routine.
Much certainty regarding
cause-and-effect relationships.

Novel, unstructured. Much
uncertainty regarding cause-
and-effect relationships.

Procedure Dependence on policies, rules,
and definite procedures.

Necessity for creativity,
intuition, tolerance for
ambiguity, creative problem
solving.

Examples

Business firm Periodic reorders of inventory. Diversification into new
products and markets.

University Necessary grade-point average
for good academic standing.

Construction of new
classroom facilities.

Health care Procedure for admitting
patients.

Purchase of experimental
equipment.

Government Merit system for promotion of
state employees.

Reorganization of state
government agencies.

TABLE 3.1
Comparison of Types of
Decisions

SOURCE: J. Gibson, J. Ivancevich, and J. Donnelly Jr., Organizations: Behavior, Structure, Processes, 10th ed. Copyright © 2000
by The McGraw-Hill Companies. Reprinted with permission of The McGraw-Hill Companies.

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88 Part One Foundations of Management

they lack pertinent information and cannot estimate accurately the likelihood of dif-
ferent results of their actions.

When you can estimate the likelihood of various consequences but still do not
know with certainty what will happen, you are facing risk. Risk exists when the prob-
ability of an action being successful is less than 100 percent and losses may occur. If
the decision is the wrong one, you may lose money, time, reputation, or other impor-
tant assets.

Risk, like uncertainty, is a fact of life in managerial decision making. But this is
not the same as taking a risk. Although it sometimes seems as though risk takers are
admired and that entrepreneurs and investors thrive on taking risks, the reality is that
good decision makers prefer to manage risk. They accept the fact that decisions have
consequences entailing risk, but they do everything they can to anticipate the risk,
minimize it, and control it.

Consider the choices involved in preparing a restaurant menu. The Center for
Science in the Public Interest recently criticized restaurant chains for selling entrées,
appetizers, and desserts containing 1,400 calories or more (a typical American might
eat 2,000 calories in an entire day). Making no changes could give those restaurants
a reputation for contributing to obesity, but if a restaurant offers more healthful
alternatives, will diners bite? The riskiest approach would be to change the entire
menu. Instead, restaurateurs including T.G.I. Friday’s are more likely to lower uncer-
tainty by retaining popular choices and adding some new selections. Some entrées
are smaller versions of items already being offered, and others are new but similar to
popular dishes. 8

A T-shirt company called Threadless reduces uncertainty and manages risk by
basing its whole marketing model on collaboration with customers. Professional and
amateur graphic designers submit their ideas for T-shirt designs at the Threadless
Web site, where customers vote on the designs they like. From hundreds of submis-
sions, the company selects four to six of the top vote getters each week and pays their
designers $1,000. But it makes and sells them only after a minimum number of cus-
tomers have already ordered the shirt design. 9

Conflict
Important decisions are even more difficult because of the conflict managers face.
Conflict, which exists when a manager must consider opposing pressures from differ-
ent sources, occurs at two levels.

First, individual decision makers
expe rience psychological conflict when
several options are attractive, or when
none of the options is attractive. For
instance, a manager may have to decide
whom to lay off, when she doesn’t want
to lay off anyone. Or she may have
three promising job applicants for one
position—but choosing one means she
has to reject the other two.

Second, conflict arises between peo-
ple. A chief financial officer argues in
favor of increasing long-term debt to
finance an acquisition. The chief exec-
utive officer, however, prefers to mini-
mize such debt and find the funds
else where. A marketing department
wants more product lines to sell, and
the engineers want higher-quality

risk

The state that exists when
the probability of success is
less than 100 percent and
losses may occur.

conflict

Opposing pressures from
different sources, occurring
on the level of psychological
conflict or of conflict
between individuals or
groups.

T-shirt designers have a chance to
get their designs printed through
the Threadless Web site, but only
after customers have given them
high ratings and ordered a shirt.

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Managerial Decision Making Chapter 3 89

products. But the production people want to lower costs by having longer production
runs of fewer products with no changes. Few decisions are without conflict.

The Stages of Decision Making
Faced with these challenges, how can you make good decisions? The ideal decision-
making process includes six stages. As Figure 3.2 illustrates, decision makers should
(1) identify and diagnose the problem, (2) generate alternative solutions, (3) evalu-
ate alternatives, (4) make the choice, (5) implement the decision, and (6) evaluate the
decision.

Identifying and Diagnosing the Problem
The first stage in the decision-making process is to recognize that a problem exists
and must be solved. Typically, a manager realizes some discrepancy between the cur-
rent state (the way things are) and a desired state (the way things ought to be). Such
discrepancies—say, in organizational or unit performance—may be detected by com-
paring current performance against (1) past performance, (2) the current performance
of other organizations or units, or (3) future expected performance as determined
by plans and forecasts. 10 Larry Cohen, who founded Accurate Perforating with his
father, knew his company was having difficulty making a profit, because costs at the
metal company were rising while the prices customers were willing to pay remained
unchanged. However, when the company’s bank demanded immediate payment of
its $1.5 million loan, Cohen realized the problem had to be solved, or the company
would have to sell off all its assets and close. 11 We will refer to this example through-
out this section.

The “problem” may actually be an opportunity that
needs to be exploited: a gap between what the orga-
nization is doing now and what it can do to create a
more positive future. In that case, decisions involve
choosing how to seize the opportunity. To recognize
important opportunities as a manager, you will need
to understand your company’s macro- and competitive
environments (described in Chapter 2), including the
opportunities offered by technological developments.
Cisco Systems CEO John Chambers advises managers
to stay current by talking to people who challenge you
and are willing to teach you. Says Chambers, “When
somebody travels with me, they have to teach me a
topic. When I review engineers, at the end they have
to teach me two topics. I listen.” 12

Recognizing that a problem or opportunity exists is
only the beginning of this stage. The decision maker
must dig in deeper and attempt to diagnose the situ-
ation. For example, a sales manager knows that sales
have dropped drastically. If he is leaving the company
soon or believes the decreased sales volume is due to the
economy (which he can’t do anything about), he won’t
take action. But if he does try to solve the problem,
he should not automatically reprimand his sales staff,
add new people, or increase the advertising budget.
He must analyze why sales are down and then develop
a solution appropriate to his analysis. Asking why, of
yourself and others, is essential to understanding the

LO 2

Identifying and
diagnosing
the problem

Generating
alternative
solutions

Evaluating
alternatives

Making the
choice

Implementing
the decision

Evaluating
the decision

FIGURE 3.2
The Stages of Decision
Making

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90 Part One Foundations of Management

real problem. Unfortunately, in the case of Accurate Perforating, described earlier,
Larry Cohen did not ask why profits were declining; he simply assumed that the com-
pany’s costs were too high. 13

The following questions are useful to ask and answer in this stage: 14

Is there a difference between what is actually happening and what should be
happening?

How can you describe the deviation, as specifically as possible?
What is/are the cause(s) of the deviation?
What specific goals should be met?
Which of these goals are absolutely critical to the success of the decision?

Bookseller Borders faced a problem: declining sales. The book industry in general had
become sluggish, as consumers filled leisure time with other activities. And consumers
who did choose to buy books were often doing so online. But Borders didn’t recognize
that not having its own Web site was a problem, choosing instead to create an alliance
with Amazon.com to sell its books online. At the time, CEO Greg Josefowicz defended
the decision, saying it would “help us to focus on what we do best,” which meant building
more stores. But the customers didn’t come. As the overall book market declined, online
sales soared.

Borders’s new CEO, George Jones, admits that the firm’s previous strategy was wrong,
saying that an online presence will be “a necessary component of our business” going for-
ward. In addition, says Jones, Borders will invest in more superstores, reduce the number
of CDs they carry, and strengthen the firm’s publishing business—all in an effort to boost
those flagging sales.15

Generating Alternative Solutions
The second stage of decision making links problem diagnosis to the development of
alternative courses of action aimed at solving the problem. Managers generate at least
some alternative solutions based on past experiences. 16

Solutions range from ready made to custom made. 17 Decision makers who search
for ready-made solutions use ideas they have tried before or follow the advice of oth-
ers who have faced similar problems. Custom-made solutions, by contrast, must be
designed for specific problems. This technique often combines ideas into new, creative
solutions. For example, Yamaha Corporation drew on ideas from its customer com-
munity, which said that hobby guitarists were interested in an instrument they could
play without a lot of practice. Designers at Yamaha created an idea for a guitar that
could read electronically entered songs and display lights on the fingerboard showing
users where to put their fingers. Customers provided ideas for modifications, and the
back and forth eventually generated more than the minimum number of orders for
the company to produce the innovative product. 18 Potentially, custom-made solutions
can be devised for any challenge. Later in the chapter, we will discuss how to generate
creative ideas.

Often, many more alternatives are available than managers may realize. For exam-
ple, what would you do if one of your competitors reduced prices? Cutting prices in
response to a competitor’s price cuts is not your only option, although sometimes
it is assumed to be. Alternatives include emphasizing consumer risks to low-priced
products, building awareness of your products’ features and overall quality, and com-
municating your cost advantage to your competitors so they realize that they can’t win
a price war. If you do decide to cut your price as a last resort, do it fast—if you do it
slowly, your competitors will gain sales in the meantime, which may embolden them
to employ the same tactic again in the future. 19

ready-made solutions

Ideas that have been seen or
tried before.

custom-made
solutions

New, creative solutions
designed specifically for the
problem.

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Managerial Decision Making Chapter 3 91

The case of Accurate Perforating shows the importance of looking for every alter-
native. The company had become successful by purchasing metal from steel mills,
punching many holes in it to make screenlike sheets, and selling this material in bulk
to distributors, who sold it to metal workshops, which used it to make custom prod-
ucts. Cohen admits, “We stayed away from sophisticated products, and as a result we
wound up in a very competitive situation where the only thing we were selling was
price.” Management responded by cutting costs wherever possible, avoiding invest-
ment in new machinery or processes. The result was an out-of-date factory managed
by people who had grown accustomed to resisting change. Only after the bank called
in its loan did Cohen begin to see alternatives. The bank offered one painful idea: liq-
uidate the company. It also suggested a management consultant, who advised another
alternative: renegotiating payment schedules with the company’s suppliers. Cohen
also received advice from managers of a company Accurate had purchased a year
before. That company, Semrow Perforated & Expanded Metals, sold more sophis-
ticated products directly to manufacturers, and Semrow’s managers urged Cohen to
invest more in finished metal products such as theirs. 20

Evaluating Alternatives
The third stage of decision making involves determining the value or adequacy of the
alternatives that were generated. In other words, which solution will be the best?

Too often, alternatives are evaluated with insufficient thought or logic. At Accurate
Perforating, Cohen made changes to cut costs but dismissed the idea to invest in mar-
keting finished metal products, even though these product lines were more profitable.
Accurate’s general manager, Aaron Kamins, counseled that money spent on finished
metal products would be a distraction from Accurate’s core business. That reasoning
persuaded Cohen, even though it meant focusing on unprofitable product lines. 21

Obviously, alternatives should be evaluated more carefully. Fundamental to this
process is to predict the consequences that will occur if the various options are put
into effect. Managers should consider several types of consequences, including quanti-
tative measures of success, such as lower costs, higher sales, lower employee turnover,
and higher profits.

Environmental changes require companies to think through new alternatives and
their consequences. When the recent downturn in the U.S. economy required cut-
backs, organizations as diverse
as the State of California, Gulf-
stream Aerospace, and Gannett
evaluated the alternatives of lay-
offs (permanent job cuts) versus
furloughs (requiring employees
to take some unpaid time off until
demand picks up again). While
layoffs save more money per
employee, because the company
doesn’t have to continue paying
for benefits, furloughs attempt to
maintain relationships with tal-
ented employees, who are more
likely than laid-off workers to return when the company needs them again. Furloughs
may seem kinder to employees, who can hope to return to work eventually, but workers
may not be eligible for unemployment compensation during the furlough period. 22

To evaluate alternatives, refer to your original goals, defined in the first stage.
Which goals does each alternative meet, and fail to meet? Which alternatives are most
acceptable to you and to other important stakeholders? If several alternatives may
solve the problem, which can be implemented at the lowest cost or greatest profit? If

When managers make decisions, they often draw on other people’s insights to help
them evaluate alternatives. In a survey of Canadian executives, more than two-thirds
said the opinion of their assistant was important in deciding which job candidate to
hire—a useful point to remember the next time you are job hunting.23

37%

32%
11%

6%
3%

11%

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92 Part One Foundations of Management

no alternative achieves all your goals, perhaps you can combine two or more of the
best ones. Several additional questions help: 24

Is our information about alternatives complete and current? If not, can we get
more and better information?

Does the alternative meet our primary objectives?
What problems could we have if we implement the alternative?

Of course, results cannot be forecast with perfect accuracy. But sometimes decision
makers can build in safeguards against an uncertain future by considering the poten-
tial consequences of several different scenarios. Then they generate contingency
plans —alternative courses of action that can be implemented depending on how the
future unfolds.

For example, scenario planners making decisions about the future might consider
four alternative views of the future state of the U.S. economy: 25 (1) an economic boom

with 5 to 6 percent
annual growth and the
United States much
stronger than its global
competitors; (2) a mod-
erately strong economy
with 2 to 3 percent
growth; (3) a pessimistic
outlook with no growth,

rising unemployment, and recession; or (4) a worse scenario with global depression,
massive unemployment, and widespread social unrest.

Some scenarios will seem more likely than others, and some may seem highly
improbable. Ultimately, one of the scenarios will prove to be more accurate than the
others. The process of considering multiple scenarios raises important “what if?” ques-
tions for decision makers and highlights the need for preparedness and contingency
plans. As you read this, what economic scenario is unfolding? What are the important
current events and trends? What scenarios could evolve six or eight years from now?
How will you prepare?

Making the Choice
Once you have considered the possible consequences of your options, it is time to make
your decision. Some managers are more comfortable with the analysis stage. Especially
with all the advanced technology that is available, quantitatively inclined people can eas-
ily tweak the assumptions behind every scenario in countless ways. But the temptation

can lead to “paralysis by analysis”—
that is, indecisiveness caused by too
much analysis rather than the asser-
tive decision making that is essential
if an organization is ever to seize new
opportunities or thwart challenges. In
contrast, as described in the “Manage-
ment Close-Up: Taking Action” fea-
ture, Xerox’s Anne Mulcahy behaved
decisively.

As you make your decision, impor-
tant concepts include maximizing, sat-
isficing, and optimizing. 27

Maximizing is achieving the best
possible outcome. The maximizing
decision realizes the greatest positive

contingency plans

Alternative courses of action
that can be implemented
based on how the future
unfolds.

A scenario may use numbers that sound reasonable, but you should look at the
data in different ways to check your assumptions. As Dean Kamen’s company
developed the Segway scooter, Kamen decided …

Managing Chapter 1 1

Foundations of Management

• Managing
• The External Environment

and Organizational Culture
• Managerial Decision

Making

Planning:
Delivering Strategic Value

• Planning and Strategic
Management

• Ethics and Corporate
Responsibility

• International Management
• Entrepreneurship

Strategy Implementation

Organizing: Building
a Dynamic Organization

• Organization Structure
• Organizational Agility
• Human Resources

Management
• Managing the Diverse

Workforce

Leading:
Mobilizing People

• Leadership
• Motivating for Performance
• Teamwork
• Communicating

Controlling:
Learning and Changing

• Managerial Control
• Managing Technology and

Innovation
• Creating and Managing

Change

bat37241_ch01_001-045.indd 1 12/3/09 2:39:40 PM

“ ”
Management means, in the last analysis, the substitution of thought for brawn and muscle, of knowledge
for folklore and tradition, and of cooperation for force.

— Peter Drucker

Managing
chapter

1
P A R T O N E FOUNDATIONS OF MANAGEMENT

LEARNING OBJECTIVES

After studying Chapter 1, you will be

able to:

1 Summarize the major challenges of
managing in the new competitive
landscape. p. 4

2 Describe the sources of competitive
advantage for a company. p. 9

3 Explain how the functions of
management are evolving in today’s
business environment. p. 14

4 Compare how the nature of
management varies at different
organizational levels. p. 18

5 Define the skills you need to be an
effective manager. p. 20

6 Understand the principles that will
help you manage your career. p. 22

LO

LO

LO

LO

LO

LO

CHAPTER OUTLINE

Managing in the New Competitive
Landscape

Globalization
Technological Change
Knowledge Management
Collaboration across “Boundaries”

Managing for Competitive Advantage

Innovation
Quality
Service
Speed
Cost Competitiveness
Delivering All Five

The Functions of Management

Planning: Delivering Strategic Value
Organizing: Building a Dynamic Organization
Leading: Mobilizing People
Controlling: Learning and Changing
Performing All Four Management Functions

Management Levels and Skills

Top-Level Managers
Middle-Level Managers
Frontline Managers
Working Leaders with Broad Responsibilities
Management Skills

You and Your Career

Be Both a Specialist and a Generalist
Be Self-Reliant
Be Connected
Actively Manage Your Relationship with Your
Organization
Survive and Thrive

bat37241_ch01_001-045.indd 2 12/3/09 2:39:40 PM

Management Close-Up
CAN ELON MUSK KEEP TESLA MOTORS RUNNING?

future for electric cars. But the two often disagreed
about how to move the company forward. Costs and
conflicts escalated until 2007, when the board of direc-
tors ousted Eberhard.

With Tesla at a turning
point, Musk helped the com-
pany regroup, introducing its
first model, the all-electric
Roadster, in 2008. The two-
seat sports car goes from 0 to
60 miles per hour in four sec-
onds and hits a top speed of
135 mph. Powered solely by a
lithium-ion battery, the Road-
ster operates without engine
noise and can travel nearly
250 miles on a single charge. It

also doesn’t emit any gases to the environment.
Despite its substantial $109,000 price tag, the Tesla

Roadster sold out almost immediately. Today, Tesla
ships 10 of the cars each week and has a year-long wait-
ing list. 1

A small player in the struggling global auto market,
California-based start-up Tesla Motors is trying to
revolutionize its industry. Headed by chief executive
Elon Musk, Tesla has an ambitious vision: to mass pro-
duce electric cars that end
Americans’ dependence on
fossil fuels and cut greenhouse
gas emissions. The South
African–born Musk, who holds
degrees in both physics and
finance, predicts that by 2030,
the majority of cars made in the
United States will be electric.

A bold prediction? Maybe.
But Elon Musk is a skilled man-
ager. By his thirties he had led
two successful Internet compa-
nies: Zip2 (later sold to Compaq) and X.com (which
morphed into what is now known as PayPal). In 2004
Musk became chairman of Tesla Motors, a start-up
founded the year before by CEO Martin Eberhard. Self-
professed car geeks, Musk and Eberhard saw a bright

To be effective, a manager is often
compelled to create change. But
bringing about change is hard, especially
in a difficult business environment.
As you read this chapter, think about
the challenges Elon Musk faces as his
company attempts to fundamentally
change the way Americans think about
their cars.

{ }

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4 Part One Foundations of Management

Tesla Motors’ Elon Musk is arguably one of the most interesting leaders in business
today. He combines strong creative skills with a keen ability to see the big picture—
and he’s been remarkably successful at building organizations. Of course, not every
manager or organization succeeds. A recent story of failure that shocked many Ameri-
cans involved the care provided to wounded soldiers at the Walter Reed Army Medi-
cal Center in Washington, D.C. Reporters investigating outpatient facilities of Walter
Reed—which ranks among the nation’s top military hospitals—discovered that in
some facilities, outpatients were coping with mold, roaches, rodents, and damaged
walls and doors. Many outpatients, some with serious injuries and mental impair-
ments, complained of paperwork problems that kept them from receiving services.
Testifying before Congress, General Richard A. Cody, the Army’s vice chief of staff,
admitted fundamental management problems:

Our counselors and case managers are overworked, and they do not receive enough training.
We do not adequately communicate necessary information. Our administrative processes are
needlessly cumbersome and . . . take too long. Our medical holding units are not manned to

the proper level, and we do not assign leaders who can ensure a proper accountability, proper
discipline and well-being, . . . and our facilities are not maintained to the standards that we

know is [sic] right. 2

Major General George W. Weightman, who lost his job as Walter Reed’s commander
as a result of the scandal, acknowledged that the organization had experienced a “fail-
ure of leadership.” 3

Companies, like individuals, succeed or fail for a variety of reasons. Some of these
reasons are circumstantial. Most are personal and human and include the decisions
managers make and the actions they take.

In business, there is no replacement for effective management. Companies may fly
high for a while, but they cannot do well for very long without good management. It’s
the same for individuals: BusinessWeek ’s Managers of the Year succeed by focusing on
fundamentals, knowing what’s important, and managing well. The aim of this book is
to help you succeed in those pursuits.

Managing in the New Competitive Landscape
When the economy is soaring, business seems easy. Starting an Internet company
looked easy in the 1990s, and ventures related to the real estate boom looked like a
sure thing during much of the past decade. But investors grew wary of dot-com start-
ups, and the demand for new homes dropped off the table when the economy crashed
in late 2008. At such times, it becomes evident that management is a challenge requir-
ing constant adaptation to new circumstances.

What defines the competitive landscape of today’s business? You will be reading
about many relevant issues in the coming chapters, but we begin here by highlighting
four key elements that make the current business landscape different from the past:
globalization, technological change, the importance of knowledge and ideas, and col-
laboration across organizational “boundaries.”

Globalization
Far more than in the past, today’s enterprises are global, with offices and production
facilities in countries all over the world. Corporations operate worldwide, transcend-
ing national borders. Companies that want to grow often need to tap international
markets, where incomes are rising and demand is increasing. GE, which became a
massive and profitable corporation by selling appliances, light bulbs, and machinery
to U.S. customers, recently announced that it expected its foreign sales to equal its
sales within the United States. GE’s biggest foreign customers are in Europe, but sales
volume in China and India is rising fast. 4

LO 1

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Managing Chapter 1 5

Globalization also means that a
company’s talent can come from any-
where. As with its sales, half of GE’s
employees work outside the United
States. 5 Cisco, a leader in equipment
for computer networking, considers
maintaining operations in India to be
an essential tactic for staying com-
petitive. Cisco serves the fast-growing
Indian Internet market at a crucial
time: the growth in demand is attract-
ing low-cost competition from Chi-
nese businesses. 6

Another force that is making glo-
balization both more possible and more
inevitable is the Internet. Now that
more than a billion users have come online, more and more of the new users are in
developing nations such as China, India, Russia, and Brazil. 7 As people in developing
nations increasingly turn to the power of the Web, they become a force to develop
content in their own languages and suited to their own means of access, such as inex-
pensive laptops.

Globalization has changed the face
of the workforce. Management in
this new competitive landscape
will need to attract and effectively
manage a talent pool from all over
the globe.

The global reach of the Internet pushed Mitch Free to expand his business, MFG.com, into
China. MFG.com runs a Web site where manufacturers that need parts post their speci-
fications online, and suppliers bid to provide those parts. Free, who grew up in a small
town in Georgia and had barely traveled outside the United States, had never planned
to be an international manager, but Chinese suppliers soon began submitting requests to
participate. At the same time, manufacturers were pressing MFG.com to include Asian
suppliers, which often could offer the best prices.

So Free traveled to Shanghai, China. He learned about the business culture, such as
the importance of cultivating business relationships and networks. After a difficult search,
he made a key hiring decision: general manager James Jin, who speaks fluent English, stud-
ied global management, and has experience in manufacturing both in the United States
and China. The effort was well rewarded. Jin has helped Free navigate the fast-growing,
ambitious business landscape of his native China. Sales in China accounted for more than
10 percent of MFG.com’s total annual sales and are growing faster than overall sales.8

Companies can get their message to users on every continent and often are expected
to provide service anytime, anywhere. This can affect how and when people work.
Laura Asiala, a manager for Dow Corning, based in Midland, Michigan, supervises
employees in Tokyo, Seoul, Hong Kong, Shanghai, and Brussels. To keep in touch
with them, she may start working at 5:00 a.m. some days and end as late as midnight.
She takes a break from 3:30 to 9:30 each day, and technology makes it possible to do
some of her communicating from home. 9

Successful CEOs know that the change from a local to a global marketplace is gain-
ing momentum and is irreversible. 10 For example, PepsiCo’s chief executive, Indra
Nooyi, brings a much-needed global viewpoint to a company whose international
business has been growing three times faster than sales in the United States. Nooyi,
who was raised in India and educated there and in the United States, has steered the
company toward more “better for you” and “good for you” snacks with acquisitions
including a nut packager in Bulgaria and a hummus producer in Israel. 11

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6 Part One Foundations of Management

Thus globalization affects small companies as well as large. Many small companies
export their goods. Many domestic firms assemble their products in other countries.
And companies are under pressure to improve their products in the face of intense
competition from foreign manufacturers. Firms today must ask themselves, “How can
we be the best in the world?”

For students, it’s not too early to think about the personal ramifications. In the
words of CEO Jim Goodnight of SAS, the largest privately held software company
in the world, “The best thing business schools can do to prepare their students is to
encourage them to look beyond their own backyards. Globalization has opened the
world for many opportunities, and schools should encourage their students to take
advantage of them.” 12

Technological Change
The Internet’s impact on globalization is only one of the ways that technology is
vitally important in the business world. Technology both complicates things and cre-
ates new opportunities. The challenges come from the rapid rate at which commu-
nication, transportation, information, and other technologies change. 13 For example,
after just a couple of decades of widespread desktop use, customers switched to laptop
models, which require different accessories. 14 Any company that serves desktop users
has to rethink its customers’ wants and needs, not to mention the possibility that these
customers are now working at the airport or a local Starbucks outlet, rather than in
an office.

Later chapters will discuss
technology further, but here we
highlight the rise of the Internet
and its effects. Why is the Inter-

net so important to business? 15 It is a marketplace, a means for manufacturing goods
and services, a distribution channel, an information service, and more. It drives down
costs and speeds up globalization. It improves efficiency of decision making. It facili-
tates design of new products, from pharmaceuticals to financial services. Managers
can watch and learn what other companies are doing—on the other side of the world.
While these advantages create business opportunities, they also create threats as com-
petitors sometimes capitalize on new developments more than you do.

It may be hard to imagine that just a few years ago, going online to order plane
tickets, read the news, or share photos was a novelty. Some online success stories, such
as Amazon, Monster, and Google, are purely Internet businesses. Other companies,
including Barnes & Noble, Best Buy, and Office Depot, have incorporated online
channels into an established business strategy.

The Internet’s impact is felt not only at the level of businesses as a whole but also by
individual employees and managers. Just as globalization has stretched out the work-
days of some people, high-tech gadgets have made it possible to stay connected to
work anytime, anywhere. This ability is both a convenience and a potential source of
stress. The stress comes when employees or their supervisors don’t set limits on being
connected. Facilities manager Cherri Chiodo loves the convenience of her BlackBerry
but finds that it sometimes replaces face-to-face communication with family members.
Real estate broker Ted Helgans calls his BlackBerry a “traveling office” and a valu-
able tool for getting and sharing information. Helgans emphasizes that users can and
should decide when to turn the devices off. 17 Jean Chatzkey, an editor for Money mag-
azine, found that she constantly interrupted whatever she was doing to check e-mail
on her Palm Treo. Realizing that the device had become more of a distraction than a

help, Chatzkey began reminding
herself that the messages were not
emergencies; in fact, many came
from subscriptions that Chatzkey

Google search sites span the Internet in more than 100 languages.

Among people who work long hours in high-stress jobs, 59% said technology
lengthens rather than shortens their workday.16

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Managing Chapter 1 7

decided she could happily live with-
out. 18 Thus, using technology effec-
tively is more than a matter of learning
new skills; it also involves making judg-
ments about when and where to apply
the technology for maximum benefit.

Knowledge Management
Companies and managers face a grow-
ing need for good, new ideas. Because
companies in advanced economies have
become so efficient at producing physi-
cal goods, most workers have been
freed up to provide services or “abstract
goods” such as software, entertainment,
data, and advertising. Efficient factories
with fewer workers produce the cereals
and cell phones the market demands;
meanwhile, more and more workers create software and invent new goods and services.
These workers, whose primary contributions are ideas and problem-solving expertise,
are often referred to as knowledge workers. Managing these workers poses some particu-
lar challenges, which we will examine throughout this book. For example, determining
whether they are doing a good job can be difficult, because the manager cannot simply
count or measure a knowledge worker’s output. Also, these workers often are most
motivated to do their best when the work is interesting, not because of a carrot or stick
dangled by the manager. 19

Because the success of modern businesses so often depends on the knowledge used
for innovation and the delivery of services, organizations need to manage that knowl-
edge. Knowledge management is the set of practices aimed at discovering and har-
nessing an organization’s intellectual resources—fully utilizing the intellects of the
organization’s people. Knowledge management is about finding, unlocking, sharing,
and altogether capitalizing on the most precious resources of an organization: people’s
expertise, skills, wisdom, and relationships. Knowledge managers find these human
assets, help people collaborate and learn, help people generate new ideas, and harness
those ideas into successful innovations.

In hospitals, important knowledge includes patients’ histories, doctors’ orders,
billing information, dietary requirements, prescriptions administered, and much
more. With lives at stake, many hospitals have embraced knowledge management.
For example, at Virginia Commonwealth University (VCU) Health System, a single
information system lets doctors write prescriptions, look up patient information and
lab results, and consult with one another. Billing also is automated as part of VCU’s
knowledge management system, making the process more efficient and connect-
ing with patient data so that it can remind the physician of all the conditions being
treated—and billed for. 20 Hospitals may also give patients access to the knowledge
management system so that they can schedule appointments, request prescription
refills, and send questions to their doctors.

Collaboration across “Boundaries”
One of the most important processes of knowledge management is to ensure that peo-
ple in different parts of the organization collaborate effectively with one another. This
requires productive communications among different departments, divisions, or other
subunits of the organization. For example, British Petroleum wants “T-shaped” man-
agers who break out of the traditional corporate hierarchy to share knowledge freely

knowledge
management

Practices aimed at
discovering and harnessing
an organization’s intellectual
resources.

Will Wright, creator of “The
Sims” video games, poses with a
computer image of the game. His
newest creation, “Spore,” will
undoubtedly build on the success
of “The Sims.”

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8 Part One Foundations of Management

across the organization (the horizontal part of the T) while remaining fiercely com-
mitted to the bottom-line performance of their individual business units (the vertical
part). This emphasis on dual responsibilities for performance and knowledge sharing
also occurs at pharmaceutical giant GlaxoSmithKline, large German industrial com-
pany Siemens, and London-based steelmaker Ispat International. 21

For example, Toyota keeps its product development process efficient by bring-
ing together design engineers and manufacturing employees from the very beginning.
Often, manufacturing employees can see ways to simplify a design so that it is easier to
make without defects or unnecessary costs. Toyota expects its employees to listen to
input from all areas of the organization, so this type of collaboration is a natural part
of the organization’s culture. Employees use the software to share their knowledge—
best practices they have developed for design and manufacturing. 22 Thus, at Toyota,
knowledge management supports collaboration, and vice versa.

Collaboration across “boundaries” occurs even beyond the boundaries of the orga-
nization itself. Companies today must motivate and capitalize on the ideas of people
outside the organization. How can a company best use the services of its consultants,
ad agencies, and suppliers? To obtain the product development software that supports
collaboration between manufacturing and design, Toyota collaborated with a software
developer, PTC. Toyota and PTC together identified how software could support
the company’s strategy of “lean product development,” and they kept meeting regu-
larly to continue improving the software. This collaboration not only helped Toyota
obtain a superior product but also helped PTC improve the value of the software it
offers to its other customers. 23

Collaboration with investors helped a pair of entrepreneurs launch their com-
pany in the seriously risky business of making games. When Richard Tait and Whit
Alexander developed their unusual board game Cranium, they confidently ordered
20,000 units from a Chinese manufacturer before winning any orders from retailers.
But retailers generally are reluctant to take a chance on new products. The solution
was to collaborate with a different kind of distributor. Howard Schultz, chairman of
the Starbucks coffee chain, thought the game was great, so he let Tait and Alexander
place samples of Cranium in Starbucks outlets, where customers could try playing it.
Customers loved it. Thanks to its track record at Starbucks, Cranium became not only
the first game sold at Starbucks but also the first board game sold on Amazon.com,

which had earlier turned it down. That
success enabled Cranium the company
to launch a dozen more games, now
sold in 30 countries. 24

Customers, too, can be collabo-
rators. Companies must realize that
the need to serve the customer drives
everything else. Best serving the cus-
tomer can start with involving the cus-
tomer more in company decisions. For
example, companies like Procter &
Gamble are getting customers to think
creatively and talk with one another
online to come up with new product
and service ideas. 25 Tapping into the
popularity of social networking Web
sites like Facebook and MySpace,
P&G has set up Web sites aimed at
bringing its customers together. One
site is a discussion group for women,
where they can discuss health and
other concerns. Although such sites

Innovation and collaboration are
the key factors in the phenomenal
success of Cranium. This board
game was the fastest selling
game in history when it was
released in 1998, with 100,000
units sold within seven months.
Creators Richard Tait, left, and
Whit Alexander are shown
here demonstrating their highly
successful board game.

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Managing Chapter 1 9

The rise of the Internet turned careers (and lives) upside down. Students dropped out
of school to join Internet start-ups or start their own. Managers in big corporations
quit their jobs to do the same. Investors salivated, and invested heavily. The risks were
often ignored, or downplayed—sometimes tragically, as the boom went bust. Or con-
sider an earlier industry with similar transforming power: automobiles. There have
been at least 2,000 car makers, but now only three U.S. car companies are left in the
United States. In recent years, even these three have struggled to stay afloat as sales
declined. Despite plant closings, layoffs, and other belt-tightening, the financial sta-
tus of General Motors and Chrysler remained so shaky that, with talk of bankruptcy,
President Obama tried to assure the country that the U.S.-based auto industry would
not “vanish.” 27

What is the lesson to be learned from the failures in these important transforma-
tional industries? A key to understanding the success of a company—whether tradi-
tional, Internet-based, or a combination of both—is not how much the industry in
which it operates will affect society or how much it will grow. The key is the competi-
tive advantage held by a particular company and how well it can sustain that advan-
tage. Good managers know that they are in a competitive struggle to survive and win.

To survive and win, you have to gain advantage over your competitors and earn a
profit. You gain competitive advantage by being better than your competitors at doing
valuable things for your customers. But what does this mean, specifically? To succeed,
what must managers deliver? The fundamental success drivers are innovation, quality,
service, speed, and cost competitiveness.

Innovation
Google’s search engine quickly became a hit, and investors bid up the stock price of
the company when it went public. But now that the free search service is used around
the world, what can the company do next? Competitors are working hard to take away
some of Google’s share of the market. Google management knows that they need to
come up with the next big idea, so they require their engineers to devote one-fifth of
their time to special projects of their own. 28

Innovation is the introduction of new goods and services. Your firm must adapt
to changes in consumer demands and to new competitors. Products don’t sell forever;
in fact, they don’t sell for nearly as long as they used to, because so many competitors
are introducing so many new products all the time. Your
firm must innovate, or it will die. Likewise, you have to
be ready with new ways to communicate with customers
and deliver the products to them. When the Net allowed
merchants to bypass traditional distribution channels and
reach buyers directly, traditional marketers had to learn
how to innovate to remain competitive.

Sometimes the most important innovation isn’t the
product itself but the way it is delivered. Borrowing an idea
that has proved popular in Europe, Opaque–Dining in the
Dark has collaborated with the Braille Institute of America
to present dining events at the Hyatt West Hollywood in
total darkness. Diners select gourmet meals from a menu
in a lighted lounge and then are led into a dark banquet
room by blind or visually impaired waiters. The attraction

LO 2

The bottom line
Innovation

Because it’s easy for managers
to get so caught up in being

busy, get distracted, and
lose sight of what really

drives performance, you
will periodically see icons

as “bottom-line” reminders
of the need for innovation,
quality, service, speed, and

cost competitiveness.

innovation

The introduction of new
goods and services.

offer advertising opportunities, P&G uses them primarily as a way to learn more
about consumers’ attitudes. 26

Managing for Competitive Advantage

People entering the Dans le Noir
(In the Black) restaurant in Paris
where they will enjoy a dining
experience in complete darkness
as if they were blind. Blind waiters
serve as guides. The concept is an
innovative approach to fine dining,
and restaurants such as this are
spreading around the globe.

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10 Part One Foundations of Management

is that diners experience the meal in a completely new way because they are forced to
concentrate on their senses of taste, smell, and touch. 29

The need for innovation is driven in part by globalization. One obvious reason is
that when facilities in other countries can manufacturer appliances or write software
code at a lower cost than facilities in the United States, U.S. facilities are operating at
a disadvantage. They have to deliver something that their foreign competitors don’t
offer—and often that means something new. Philips, which started out making light
bulbs in the Netherlands in the 1890s, later expanded into X-ray machines, record
albums, and then semiconductors …