PART 3 Planning

INTRODUCTION
Good planning is essential so that the organization can function effectively. Planning or goal setting
means to adapt to the uncertainty of the future and make a plan of action to achieve certain desired
results. Management skills to plan effectively will facilitate organizations to achieve the objectives,
mission and vision of the organization. However, there are many difficulties in forming plans that really
work. This is due to a lack of experience and skills among managers. Efficient planning can help firms to
compete in dynamic and volatile environments, enabling the firm to respond to demands, market
conditions, and requirements of clients.

PLANNING
According to Certo, planning is the process of determining how the management system will achieve its
objectives. Planning determines how an organization can be led in the desired direction. 1

According to Daft, a goal is a desired future state that the organization attempts to realize, while a plan is
a blueprint for goal achievement and specifies the necessary resource allocations, schedules, tasks, and
other actions.2

Planning is the process that managers use to identify and select appropriate goals and courses of action for
an organization. This planning process details how managers intend to achieve these goals. Planning will
also include formulating and implementing strategy. A strategy is a cluster of related managerial
decisions and actions to help an organization attain one of its goals. 4

Planning is a dynamic process because it involves a lot of variables from the external and internal
environment of the organization. Planning is also a mechanism to analyze strengths, weaknesses,
opportunities and threats. Planning also ensures early preparation of possible challenges or problems that
may be encountered. Planning can help managers achieve the vision, mission, goals and objectives of the
organization.

IMPORTANCE OF ORGANIZATION PLANNING

In almost all organizations, planning is the first management function that proceeds before other
management functions, such as organizing, leading and controlling. Every manager needs to implement
plans to ensure organizational goals are achieved on time with the allocation of resources provided.
Effective planning will enable organizations to improve performance through an increase in sales growth,
earnings, profits and waste reduction. Among the reasons planning is important:
1. To ensure efficient use of resources.
Planning the use of resources should be made available in advance of the activities of the organizations,
including the use of human resources, and production and marketing of the products.
2. To ensure high morale among subordinates.
Good planning creates opportunities for subordinates to develop themselves and their careers. A good
manager provides career planning and development of subordinates through training programs
3. To be sensitive to market changes and competitive pressures.
Economic and business changes lead a manager to carefully plan every function and department in the
organization.
4. To help carry out strategy and achieve goals.

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Planning is essential for managers for the implementation of the strategy and achieving the goals set by
the organization. Planning creates goals and sets the foundation for organizing resources and courses of
action to achieve those goals.

BENEFITS AND ADVANTAGES OF

ORGANIZATION PLANNING
Planning is important for managers at all levels. Planning affects a company’s performance.
Advantages
1. Generate intensive efforts
By having some kind of plan, with an objective and a strategy, employees will work more diligently
because they know specifically what they have to achieve by the end of the day.
2. Continued efforts
Planning involves a certain period of time. Employees who have plans need to know that their goasl
pursued can be achieved when the time comes.
3. Provide direction
By having a plan, employees know what goals are to be achieved, and what work strategies are to be
followed.
4. Development of a research strategy
When a goal is set, employees will then automatically develop strategies to be followed. These strategies
will be guides to determine what activities should be planned so that the objectives are achieved.
5. Proven effective
Planning has proven to be effective for organizations and individuals. On average, an organization that
has plans gains more and grows faster than organizations that do not have plans.
6. Check the progress of a task.
An employee in the office would not know of his progress unless he checks himself. It is important for an
employee to have goals.
7. Assist in coordinating an activity.
With the coordination of activities, goals can come together and things that can harm an organization's
reputation can be avoided. Planning can also help us to think ahead.
8. Dealing with uncertainty.
It is a plan for the conditions of the less pleasant and unexpected. Uncertainty is a situation where we do
not know or predict the environmental conditions that will apply to the actions that we do in the present.
There are three types of uncertainty, namely uncertainty of the situation, the uncertainty effect and
uncertainty response.

PLANNING DIMENSIONS
There are two major dimensions that influence the activity of planning, namely:
1. Time pressure
Managers have the opportunity through planning to align the organization with the environment
instead of responding to its changes or uncertainty.
2. Speed of decision making.
Planning is used and needed by managers to guide and control the internal management of the business. It
also enhances the survival rate of the organization by managing the risks related to the future. Plans help
and provide the organization the chance to adapt rather than to react to changes in the environment.

THE PLANNING PREPARATION

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Planning preparation involves forecasting organization resource needs and the availability of the
difference between needs and availability so that appropriate programs can be implemented to reconcile
differences. There are five steps in the planning process:
1. Forecasting resource requirements.
Forecasting the need or demand resources such as financial, information, physical resources and
manpower are estimated resources required by the organization in the future.
2. Prediction of resources availability.
Prediction of resource availability or supply forecasting is to determine whether the organization is able to
acquire the required resources in the required amount or otherwise.
3. Comparing needs with availability requires managers to compare the amount of resources needed by
existing resources.
4. Formulation and implementation of any imbalanced plans between needs and availability of resources
can be coordinated through the actions deemed appropriate.
5. Evaluation plans: at this stage, managers are required to monitor the implementation of all the
programs to evaluate the effectiveness of the plans.

PLANNING AND CONTROL CYCLE

Some manner or form of control is necessary because when managers develop plans and strategies, they
must ensure that the plans are carried out. If the plan is not implemented peoperly, the management
should take steps to correct the situation. This is the main function of control in management. It can be
concluded that planning effectively helps in the control and implementation of the plan. Planning
develops a framework of the future by providing the blueprint for control.

FRAMEWORK FOR PLANNING

A. Mission and Vision
A mission is a statement of the purpose of the establishment of the organization. The mission of the
organization is the responsibility of senior management and the board. The vision is a long-term goal
describing what the organization wants to become. It states the future direction the organization needs.
B. Objectives and Goals.
Good planning should be based on goals. Goals set by the organization must be met efficiently and
effectively. Therefore, the goals must be focused, measurable, attainable, results-oriented and time
targeted (or SMART for short).

 Specific goals should be clear and easily understood by workers. When goals are clear,
employees have a clear understanding of the contribution of the individuals to achieve
organizational goals.
 Good goals should be measurable and can be counted accurately. This means that these goals can
be measured quantitatively.
 Goals should be challenging but set at levels that are realistic and achievable. In addition, a goal
with a high target is difficult to achieve and goals that are too low will dull the employees.
 Result-oriented relates to the vision of providing support to the mission of the organization. It is
important for directing the organization’s vision and the actions needed to achieve it. Goals must
be reasonable and feasible.
 Good goals should outline the date of final achievement. Goals delayed do not give value to the
organization.

TYPES OF PLANS

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There is planning for the long-term and the short-term. These plans are established by management based
on organizational hierarchy. This plan is also known as top-down planning and consists of strategic plans,
tactical plans and operational plans.
Strategic Planning
It is the organization's overall planning that will explain how the organization will serve the customer and
how it will position itself in the market as compared to its competitors (positioning). Strategic planning is
usually made for a period of two to five years. Top management is responsible for developing the plan.
Tactical planning
The plan is developed and implemented by middle managers. It explains how the organization will
allocate and utilize resources, budget (finance) and name the individuals within the organization who are
to achieve the goals set. A tactical plan is usually made for a period of six months to two years. Middle
managers implement policies and plans made by top managers to oversee and coordinate the activities of
front-line managers who are under them.
Operations planning
It is a daily plan, designed and implemented by lower-level managers, also known as line managers.
Typically, this plan describes the production and distribution of products for a period of 30 days to 6
months. Job titles for front-line managers can be the head unit, the group leader or the supervisor.

Although each level of management planning is done separately, the plan can only be effective when the
goals and plan of action made at the lower level support and are consistent with the goals and plan of
action of the upper and middle levels. No matter what type of planning, the basic goal is the same: to
achieve organizational goals.

Apart from the duration, plans also differ in terms of usage. Some planning is used only once and some
planning is used repeatedly. Planning that is only used once is known as single-use plans. Planning that is
used repeatedly is known as a fixed plan (standing plan). This planning is used for recurring events.

There are three types of regular planning of policies, procedures and regulations.
. Policy - A policy is a general guideline for the management of an event.
. Procedure - procedure refers to actions to be taken in the event of a specific event. It is more specific
than the policy.
. Regulations - the rules for specific guidelines in taking action. Regulations are usually more specific
than the procedure.

THE PLANNING PROCESS

The planning process consists of six steps. To ensure the plan is effective, the following steps should be
taken by the manager:
(A) Determine the objective of the organization
A clear statement of the objectives of the organization should be known before a manager is to plan the
organization. Through clear organizational objectives, an overview of the elements that have made plans
can be obtained.
(B) List of Alternatives
When the objectives of the organization are identified managers need to consider appropriate alternative
lists to achieve the objectives.
(C) Build premise or assumptions and selecting the best Alternative

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Managers need to list all premises used as the basis for each alternative. Evaluation of the premise for
each alternative should be taken into consideration. The process of eliminating the inappropriate
alternatives is to determine the best alternative that can be used to achieve the objectives.
(E) Develop a Plan
After the best alternative has been selected, the manager begins to form strategic planning (long-term)
and tactical planning (short-term).
(F) Make a Plan for Action
When plans for the long term and short term have been established, they will be implemented.

MANAGEMENT BY OBJECTIVES 􀈍MBO􀈎

Management by objectives has been popularized by Peter Drucker. Its main purpose is to motivate
employees. It is a process where managers and employees at all levels in the organization set objectives
together, share information, discuss the situation and drive towards the achievement of goals while
meeting often to review the progress that has been achieved.

INFLUENCE OF ENVIRONMENTAL FACTORS ON

PLANNING
An organization exists and operates in an environment that is constantly changing and evolving. Factors
influencing the environment change many objectives, strategies and the management of organization in
world-class businesses. There are several environmental factors that affect or impact the planning of the
organization. Among the factors to be identified are:
1. Demographic changes.
Organizational capacity and capability to meet the needs of the labor force depends on the
competitiveness of human resources available in the community.
2. Economic changes.
Planning is also affected by the current economic situation. Economic changes directly affect the supply
and demand of resources and products
3. Changes in technology.
Technological changes in the future will provide new challenges to organizations, especially those
involving planning the use of resources. Organizations need to plan resources effectively to suit the
technological changes that occur.
4. Laws and government regulations.
Practices that involve planning and management are greatly influenced by factors such as applicable laws
and government regulations. Laws and government regulations directly shape human resource demand
and affect plans.

MAXIMIZING EFFECTIVENESS OF THE PLANNING

PROCESS
Successful implementation of planning is not easy. Due to the larger size of some organizations, the task
of planning becomes increasingly difficult and requires a lot of individuals who need a lot of information;
it involves complex decisions.

A guide to help ensure the success of organizational planning.

(a) Top Management Support
The members of the organization would not normally be concerned with the planning activities without
support from top management. This support is important regardless of the type of organization, small or
large, domestic or international
(b) Efficiency and Effectiveness Planning Organization

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Planners need to design an organization with efficient and effective planning. The organization plan needs
to have three internal characteristics:
(i) It should be designed to use the management system that has existed in the organization.
(ii) It should be complex enough to make the effort of the members of the coordinated planning group as
simple as possible.
(iii) Planning should be flexible and able to respond to changes in the environment.
(c) Planning Focuses on Implementation
All planning should aim to be (implemented) as the final product planning process of an action that will
meet the achievement of organizational objectives that have been set.
(d) Participation Individual Fit
A plan will fail unless the planning process involves the appropriate person or individual. Managers need
to be involved in the implementation plan developed and should provide feedback to the designer about
the implementation of a plan.

WEAKNESSES OF PLANNING
(a) Restricting change and adaptation
Typically, plans are in place for a period of time. When there is a change in the environment, the existing
planning should be updated. Failure to realize the necessity of this change will result in failure of the
implementation of the existing plan.
(b) Assumptions based
Planning is based on assumptions about the future. For the success of a plan, the assumption about what
will happen in the future must be correct. If the predictions made are wrong, then planning based on this
assumption eventually will fail.
(c) Separation between planners and implementers
Generally, the management of the planning and implementation was done by lower-level employees. This
separation sometimes causes problems when it does not match the ability of the operating level workers.

REASONS FOR NOT PLANNING

There are various reasons planning is often overlooked by managers. Among them are:
1. Lack of time.
Planning takes time. Most managers do not have time to run or organize a plan. As a result, the
organization can be lost in search of the desired outcome.
2. Lack of knowledge and expertise.
Managers lack the knowledge and expertise of the planning process. They are not sure about the key
components that should be included in the planning process and the effects that may be encountered.
Managers do not make plans because they do not have the requisite expertise in planning.
3. Lack of trust and openness.
Managers sometimes do not trust others to be involved in planning. This is because they do not want to
share information or are not receptive to planning decisions made.

4. Assuming the implementation of the plan involves high costs.

Managers have the impression that the plans would high costs. Among these are the costs of the
preparation, administration, documentation and implementation. In fact, they consider planning
something trivial for managers, especially for long-term planning which may become obsolete in the
future.

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 CHAPTER 9

Strategic management

“You’ve got to think about big things while you’re doing small things, so that all the small things go in the
right direction.” ― Alvin Toffler

“Focus on a few key objectives… I only have three things to do. I have to choose the right people,
allocate the right number of dollars, and transmit ideas from one division to another with the speed of
light. So I’m really in the business of being the gatekeeper and the transmitter of ideas.” - Jack Welch

“Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac,
IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have,
and how you’re led.” – Steve Jobs

1. Defining Strategic Management

According to Daft, “Strategic management is the set of decisions and actions used to formulate and
implement strategies that will provide a competitively superior fit between the organization and its
environment so as to achieve organizational goals. 1” David and Coulter defines Strategic Management as
an “Art and science of formulating, implementing, and evaluating, cross-functional decisions that
enable an organization to achieve its objectives. 2” Robbins defines Strategic Management as “the
set of managerial decisions and actions that determines the long-run Performance of an
organization.3”

Strategic management helps establish new opportunities by analyzing the strategic goals. Managers
should decide which industries to venture into and how to compete. Strategic management is an attempt
to be different from everyone else by performing activities differently. 4
Tesco, IKEA, and AirAsia are some of the popular companies, which have developed unique and
consistent systems that help them gain advantage over their competitors.

Strategic management involves constant planning, monitoring, analyzing, and assessing all essential
factors in the environment, along with integrating several functional activities to achieve organizational
objectives. Strategic thought process has considerable impact on organizational performance. In strategic
management, managers develop strategies that involve all the basic managerial functions, namely,
planning, organizing, leading, and controlling. To be successful, organizations must know their customers,
and their needs and wants. They should come up with a strategy that could convince and satisfy them.

2. WHY STRATEGIC MANAGEMENT?

Strategic management helps strategic thinkers to recognize the changes that occur in their environment
well in advance, and guides them in bringing their organization to a position that is better than those of
their competitors.
According to Daft, strategic management answers the following questions:
 What developments and transformations are seen in the environment?
 What sort of products should we come up with?
 How are we going to come up with these products efficiently? 6

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Robbins and Coulter firmly believe that strategic management has noteworthy and positive effects on
organizational performance, and have highlighted the following:

 Success is produced by the right type of strategy adopted by the organization.

 In the present context, change is unavoidable for all organizations, irrespective of their type and
size. Managers should constantly scan the ever-changing environment and adapt to the required
changes. By following the strategic management process, managers should decide what to do
and how to do things in the best possible way.
 Most companies have diverse functions, departments, and divisions. Strategic management co-
ordinates all cross-functional activities and decisions, helping companies achieve the
organizational goals efficiently.
 Most of the decisions made by managers involve the use of strategic management, which is
widely used by all sectors at present.7

Strategic management includes analyzing internal and external factors, formulating continuous plans,
implementing action plans, and evaluating these plans. Strategic management creates a commitment to
strategic planning, which represents an organization’s ability to set objectives which, in turn, helps identify
the essential course of action that can produce these results. 8 Strategic management integrates several
functional units of a business, such as marketing, production, accounting, and others, to achieve
organizational goals. This process is initiated by the board of directors and executed by the company’s
chief executive officer (CEO) and his team. Strategic management is a continuous process of assessing
the industry in which the company is involved, evaluating the company’s competitors, and formulating
strategies that can tackle issues effectively. Companies must also evaluate their strategy regularly to
determine whether it is successful or whether they need a change of strategy to cope with the challenges
created by their competitors, new technology, or new socio-economic, financial, and political
environmental factors.9

Key Terms

Strategies

The term Strategies refers to the integration of a set of actions, which help exploit core competencies and
gain competitive advantage. These actions have a specific purpose and exhibit a better understanding of
the organizational vision and mission. A well-formed strategy collects, combines, and distributes the
resources, potential, expertise, and abilities of the organization to attain a match with the environment. 10

Strategic Planning

Strategic planning helps an organization decide on its direction and focus through a review of internal and
external realities. This process provides a roadmap for the future.

Long-term Objectives
Long-term objectives are necessary to the success of an organization in relation to a specific result, and
to the processes of accomplishing the mission, providing a specific direction, and focusing on
coordination. These objectives are also essential to planning, motivating, and controlling.

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Annual Objectives
Generally, annual objectives are short-term targets that organizations aim to achieve as a prerequisite to
fulfilling long-term objectives.
Policies
Policies denote the means to achieve annual objectives.
3. Three Stages of Strategic Management

a. Strategy formulation consists of building up a vision and mission, recognizing the external
opportunity and threat as well as strength and weakness, creating long-term goals and alternative
strategies, and selecting an ideal strategy to follow. In this stage, managers identify new business
opportunities, diversification possibilities, and strategic alliances and determine whether the
business unit is problematic and should be abandoned.

b. Strategy implementation facilitates the execution of the formulated strategy by establishing

annual objectives, policies, procedures, and efficient allocation of resources. In this stage,
advantageous strategic culture, excellent organizational structure, improved marketing efforts,
and effective utilization of information systems are created. Moreover, this is the stage where
employee compensation is linked to the overall organizational performance.

c. Strategy evaluation is the last stage in the strategic management process. In this stage,
procedures are implemented to help the managers identify whether the implemented strategy is
working well according to the preset standards.

THE STRATEGIC MANAGEMENT MODEL

The three stages of strategic management can be explained in detail by the following five steps,
which form a complete and comprehensive model of the strategic management process (Exhibit
9-1).

IDENTIFYING THE VISION, MISSION, GOALS AND STRATEGIES

Step 1
EXTERNAL ANALYSIS – OT
Step 2 INTERNAL ANALYSIS - SW

Step 3 FORMULATION OF STRATEGY

Step 4 IMPLEMENTATION OF STRATEGY
Step 5 EVALUATION OF STRATEGY

Exhibit 9-1 Strategic Management Process

Step 1

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Identify the organizational vision, mission, and goals, as well as the relevant strategies.

Vision

The vision explains what the organization wants to become in the future. It inspires and motivates the
employees. For example, the PepsiCo vision is shown below:

"PepsiCo's responsibility is to continually improve all aspects of the world in which we operate -
environment, social, economic - creating a better tomorrow than today.”

Mission

Every organization needs a mission statement that reflects and explains its purpose. The statement
addresses the organization’s reason for being in business and helps distinguish one business from similar
companies. The mission reflects the priorities, values, and beliefs of the organization. Peter Drucker
believes that asking the question, “What is our business?” is synonymous with asking the question, “What
is our mission?” Some call it a creed statement, statement of purpose, philosophy, or beliefs and
principles. The components of a mission statement are illustrated in Exhibit 9-2.

The mission statement of the PepsiCo Company is the following:

"Our mission is to be the world's premier consumer Products Company focused on convenient
foods and beverages. We seek to produce financial rewards to investors as we provide
opportunities for growth and enrichment to our employees, our business partners, and the
communities in which we operate. And in everything we do, we strive for honesty, fairness, and
integrity."

Organizations should identify their goals and current strategies. PepsiCo has come up with a broad set of
goals to direct the organization’s strategy and operations:

 Performance - for better long-term performance and sustained value for shareholders
 Human - refining the food and beverage choices in accordance with customer needs
 Environmental- conserve global water supplies and provide access to safe water, build
facilities, such as landfills, to address concerns on solid waste, and continue to support
sustainable agriculture by expanding best practices with suppliers
 Talent - create a healthy and safe workplace that reflects global communities 13

Step 2

Conduct an external analysis to identify strategic factors that may require changes. Social, political,
economic, technological, and global factors are included in the external environment. Opportunities are
the positive chances and bright openings seen in the environment, whereas threats are risky and
dangerous trends in the external environment. Considering that organizations differ from one another in
terms of core competencies and resources, the same external environment can be a threat to one
organization and an opportunity to another.

This step is followed by internal analysis. An organization’s values that create skills and resources,
which help the organization gain an edge over competitors, are its core competencies. Strengths are
the activities performed very well and weaknesses are activities the organization does not do well or
traits it does not possess. This process is called SWOT analysis (Exhibit 9-3), which reviews the
organization’s strength, weakness, opportunities, and threats that might affect the organizational

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performance. The process is also called situational analysis and helps managers boost the organization’s
strengths and reduce its weaknesses.

The organization can evaluate its core competencies to enhance its competitive advantage, and core
capabilities to determine the most efficient transformation of inputs into outputs. In internal analysis,
organizational culture is crucial to the promotion or prevention of strategic actions. Internal analysis is
flexible in terms of depth and details. To obtain the best results from the analysis, managers should have
a specific objective in mind. Setting an objective helps decide whether the organization should introduce a
new product or service. Analysis, which is often a part of strategic planning, helps managers understand
the business and the areas that need to be improved. This process also predicts the changes that have to
be addressed to ensure business success. This analysis may point out whether changing the existing
mission or vision or coming up with a new strategy at the corporate, business, or functional level, is
necessary. For global organizations, situational analysis is crucial because such companies are operating
in a diverse environment.

Step 3
Identify and formulate a strategic alternative that is appropriate to the specificities of the organization.
Strategies should be formulated for the corporate, business, and functional levels. These strategies
should match the strengths with the external opportunities, minimize the weaknesses, and guard against
the threats.15

Step 4

Implement the strategy. The execution of the formulated strategy occurs after environmental analysis,
SWOT analysis, and identification of strategic goals. Implementation is an attempt to fit the organizational
structure and activities to the environment. The strategy should match the company’s structure and
emphasize the importance of top management support. Implementation is the most difficult stage. If
conducted well however, it will help in organizing and motivating the employees. The success of
implementation is based on effective interpersonal skills. In this step, the strategies are put into action to
fulfill the objectives. A strategic plan is merely a document if it is not implemented. Implementation
addresses who, when, where, and how of reaching the objectives and delegates tasks and timelines to
individuals to effectively attain the objectives. Generally, a good implementation plan identifies a leader
who can communicate the vision and the actions necessary to achieve the vision. All employees should
be engaged in the plan, and implementation should include a strategic map of finances, operations,
people, environments, markets, and partners, which are directed toward a better performance. Success
comes when the organization has the right people for the right job, skilful employees, and relevant
resources including time and money. Open communication must be achieved, management practices and
technology systems must be in place to support the implementation, and everyone should be comfortable
in the working environment.16

Usually, the strategy fails because the company’s initiatives and processes do not match its strategy. To
be successful, new strategies and priorities should be given prominence and all activities must be
reviewed in terms of their relevance to the new strategy. Some companies create a strategic value
measurement tool for better initiatives. For example, a balance scorecard was developed by Kaplan and
Norton based on strategic benefit, resource demands, and risks. Matching initiatives against a scorecard
helps ensure that the right initiatives are adopted.

Organizational performance should match the strategy, and the measures should be aligned with
strategic goals. Employees should be aware of their roles and influence on strategic performance. The
organizational structure should allow the strategy to cascade across the organization to avoid a deadlock.
Larger teams should be included in the strategic planning process. Employees should be aware about the

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vision and strategic themes, as well as their respective roles and responsibilities. Strategy updates should
be communicated through meetings, newsletters, workshops, and presentations. Employees should know
that they are expected to change, and be aware of their functions within the strategy, the expected
results, and the way these results will be measured. The implemented strategies should be fully reviewed
and checked against both internal and external environments. 17

Step 5

Evaluate the strategy. If deviations are identified in relation to the implemented strategy, corrective action
should be taken. Future modifications are an important component of this step because the present
success of the organization is not a guarantee of future success.

Evaluation is equally significant as the other steps because it focuses on the effectiveness and efficiency of
the strategic plans in attaining the desired results. As the final step, evaluation helps in assessing the
suitability of the implemented strategy against the socio-economic, political and technological changes
around the organization. The tasks performed by the employees can be coordinated well by controlling
their performance. This procedure is extremely important because in this step, inputs for new strategic
plans are produced, feedback is generated, procedures are appraised, rewards are accorded, and the
validity of the strategic choices is judged.

The process (Exhibit 9-4) consists of fixing a benchmark of performance by setting a standard, followed
by the measurement of performance, in which the actual performance is compared with the preset
standards. Evaluation has to be performed at the right time; otherwise, it will not meet its purpose.
Analyzing the variance follows. Variances could be identified when measuring the performance; thus, the
degree of tolerance limits of the variance between actual and standard performance must be discussed by
the strategist. Positive deviation indicates a better performance, whereas negative deviation indicates
underperformance. The cause of deviation must be discovered and corrective action must be taken.
Subsequently, taking corrective action is performed. If the deviation is exceptionally high, the strategist
must carry out an intensive analysis of the factors. If the potential of the organization does not match with
the required performance, the standard has to be lowered.

BENEFITS OF STRATEGIC MANAGEMENT

Strategic management helps organizations come up with better strategies that are rational, systematic,
and logical. Strategic management enhances communication, decentralizes the process, and gives more
autonomy for better performance. The companies that employ strategic management are more profitable
than others; they plan and prepare for a better future, anticipating the changes and fluctuations identified
in the dynamic environment. This procedure results in long-term success. Moreover, strategic
management creates awareness of threats, offers better insight into the strengths of the competitors, and
inculcates discipline. Some of the benefits identified by Greenlay are listed below:

 Helps identify and prioritize the available opportunities

 Achieves better coordination and control

 Facilitates better support to reach objectives

 Allows effective allocation of resources in accordance with the opportunities

 Creates a favorable attitude toward change

 Encourages forward thinking and provides an enthusiastic approach to facing problems

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  Integrates individual behavior with clear-cut responsibilities 18

4. Three Levels of Strategies

Strategies are broadly classified into three levels: corporate level, business level, and functional level
(Exhibit 9-5). Corporate-level strategy is concerned with the entire organization and decisions related to
diversification, acquisition of new businesses, joint ventures, and other strategic alliances. This level of
strategy determines the company’s business and its current status, whether to continue with the business,
and what has to be done with the business.

Corporate-Level Strategies

 Corporate-level strategy is the overall plan of the top management intended for the entire
organization and the organization’s strategic business units. Such strategy helps to determine
what business a company should be in, the path that the organization should follow, and the
roles played by the respective business units in pursuing that direction. There are three types
of corporate strategies.

Growth Strategy

A growth strategy is a corporate strategy, which is usually used when an organization intends to expand
and increase the products it offers or the markets it serves, either through its existing businesses or
through new businesses. The organization will generally increase its sales, number of employees, and
market share. Growth strategies are classified into concentration, vertical integration, horizontal
integration, and diversification.

• Concentration

 Concentration expands a primary line of business by increasing the products or services,

or both. This kind of growth strategy does not include acquisition of other organizations.
Instead, growth is achieved through increased business operations. Companies that use
this strategy often compete within a single industry. For example, Starbucks, McDonald’s,
and Subway rely on concentration strategies to achieve dominance. The three types of
concentration strategies are market penetration, market development, and product
development.

Market Penetration refers to gaining an additional share of existing markets using current products. For
example, McDonald’s has started using Latino themes in some of its advertisements to gain more
customers from the specific population (Exhibit 9-6).19

 Market Development refers to a strategy through which organizations sell the existing
products in new markets. An example is Starbucks selling coffee beans not only in its
stores, but in grocery shops as well (Exhibit 9-7)

 Product
Development emphasizes the creation of new products to serve existing markets. At

13
 present, Disney creates movies that feature real actors apart from cartoon films.
McDonald’s has started offering healthy items to satisfy customers who are keen on
nutrition (Exhibit 9-8).20

• Vertical Integration

Vertical integration is classified into backward and forward vertical integration. Backward
vertical integration helps a company control of its input by becoming a self-supplier. The
organization prefers this kind of integration when the existing supply systems are unreliable and
too costly and when the number of suppliers is small compared with the competitors. Sometimes,
the organization may acquire resources very quickly by using this strategy. For example, an ice-
cream company can buy a dairy farm to ensure a steady supply of milk at an affordable price.
Another example is Amazon.com, which did not stop with bookselling, but also gained
involvement in book publishing, integrating the role of supplier into its business.

 Forward vertical integration refers to a type of integration in which the organization

gains control of output by controlling the distribution channel and eliminating
intermediaries. Franchising is a valuable means of implementing forward integration.
Organizations prefer this type when current distributors are expensive or are limited. A simple
example is a movie studio owning a chain of theatres. Another example is Reliance Industries,
a petrochemical giant in India, which has expanded into polyester fibers from textiles and
further into petrochemicals. At present, numerous telephone companies produce their own
cables and telephone sets.

• Horizontal Integration
 Competitors from the same industry combine their operations to improve their
competitive strengths and lessen the competition among industry rivals. This
integration appeals to many because it is based on the similarity of products, ends
competition between businesses, and maximizes profit by monopolizing. Zenith
merging with Sony is horizontal integration. A car manufacturer acquiring a
competitor that offers the same products and services is also an example of
horizontal integration.

• Diversification

 Related Diversification is a strategy allows the organization to expand by merging or

acquiring organizations in different, but somewhat related industries that are the
“strategic fits” of the organization. Related diversification is used to sell new products
through an existing distribution channel. An example is when a company, which
manufactures summer clothing decides to invest in winter clothing. Another example is
when a computer manufacturing company manufactures scientific calculators. 21

14
  Unrelated Diversification is the expansion of a business by merging or acquiring
organizations in totally unrelated industries for higher financial returns. Some
organizations manufacture diverse products that are not related. An example would be a
toy manufacturer, which also manufactures mobile phones. 22

Stability Strategy

A stability strategy is a corporate strategy that prevents noteworthy and momentous changes of the
organization. The strategy allows the maintenance of the status quo to deal with an uncertain and
dynamic environment. When the organization experiences slow growth or no growth conditions, the
organization may follow this kind of strategy, which in essence, is a corporate-level strategy, but with no
significant change expected. If the organization performs well and the environment is stable, it may prefer
to make no changes. For example, Bata Ltd is satisfied with the same product line; thus, it maintains the
same market share and continues to serve the same group of consumers. The management does not
want to take risks by trying new strategies and has no interest in changing the status quo. Small private
businesses usually pursue this strategy. Some call this strategy a neutral or no-growth strategy because it
maintains the same annual growth with the same objectives and the same level of competitive advantage.

Renewal Strategy

Another type of corporate strategy is renewal strategy, which addresses the organizational weaknesses
that lead to a decline in performance. This strategy redirects the organization into new markets. Renewal
strategies are classified into retrenchment and turnaround strategies.

Retrenchment strategy facilitates the identification and elimination of less critical weaknesses and
reinstating of strengths to overcome existing performance problems. When an organization faces minor
performance issues, a retrenchment strategy will stabilize and balance the operations, invigorate the
resources and capabilities of the organization, and prepare the company to compete in the industry again.
A retrenchment strategy focuses mainly on cost cutting and careful use of resources. Examples are Nokia
carrying out 4000 job cuts and the Fujitsu unit in the UK cutting down 1,200 jobs because of the economic
crisis.

Turnaround strategy is used when the organization’s performance problems are dangerous and critical.
This strategy addresses these serious issues through organizational restructuring and strong cost
elimination. The strategy involves restructuring the problematic unit, a time-consuming procedure that
requires detailed planning. Turnaround may take six months to three years to complete. Accenture is a
good example because when the company failed to grow with the current products, it decided to expand
into another industry through new product development and by using their company image and loyal
customers.

Corporate Portfolio Analysis

Corporate portfolio analysis is usually used when the organization is involved with many
businesses. This strategy was created by Bruce D. Henderson for Boston Consulting Group in
1970. The BCG matrix (Exhibit 9-9) is a strategy tool, which helps companies allocate resources
based on their market share and growth rate of strategic business units (SBUs).

 The BCG matrix classifies firms as:

15
  Cash cows: The term refers to organizations that have low growth rate and high
market share, which generate a huge amount of cash to maintain the business.
Their prospects for future growth are limited.

 Stars: These are units with high growth rate and high market share in a fast
growing market with a prominent market share. Their cash flow contributions
depend on the need for resources.

 Question marks: These are characterized by high growth rate and low market
share. Often termed collectively as problem child, these firms are starting points
for many businesses. These businesses are usually in the lucrative industries,
but do not hold a large market share. Question marks can gain better market
share and become stars and can eventually become cash cows when the market
share slows down.

 Dogs: These are units with low growth rate and low market share in a slow
growing mature industry. These firms do not produce much cash and show no
promise for improved performance.2

Business Level Strategy

Business-level strategies determine how an organization should compete within its SBUs. Some
corporations have different business divisions, called SBUs, which have unique missions, competitors,
product lines, and markets. Executives in charge of the corporate level define a broad strategy and bring
together a portfolio of SBUs to implement the strategy. An example of a company that employs a
business-level strategy is General Electric. The concern within SBUs is how to compete among
themselves.

Competitive Strategies

According to Michael Porter, business-level strategies, also known as competitive strategies, result from
five competitive forces which are seen in the environment, and are focused on how the organization will
compete with each of its businesses. This kind of strategy determines industry attractiveness and
profitability. An organization’s competitive advantage comes from its core competencies. Quality, in
particular, is the best way to gain competitive advantage.

5. Porter’s Competitive Forces Model (Exhibit 9-10).

 Threat of new entrants:

How easy or difficult will it be for new competitors to enter an industry?

Economies of scale and capital requirements are examples of entry barriers to new
competitors.

 Threat of Substitutes:

This refers to the extent to which other industry products act as a substitute for the
existing product. Switching costs and brand loyalty influence the likelihood of customers
to adopt substitute products and services.

 Bargaining Power of Buyers:

16
 This represents the degree to which buyers influence competitors in an industry, which
depends on how much bargaining power the customers have. Customers prefer to buy
products at a very cheap price, a situation at which an industry earns a low rate of return
for its investment.

 Bargaining Power of Suppliers:

What is the bargaining power of the suppliers? Generally, suppliers increase the prices
and reduce the product quantity; and if the organizations are unable to bear the cost hike
by its suppliers through their pricing structure, the organizations’ profit decreases
automatically. The comparative number of buyers to suppliers, as well as the availability
of substitute suppliers and new entrants affects the buyer-supplier relationship, therefore
these serve as crucial factors in determining the supplier power.

 Current Rivalries:

How intense is the competition among rivals? This intensity increases when the demand
and growth rate slow down and the product price comes down. Competition is influenced
by the four forces previously cited.

Porter’s Generic Strategies

According to Porter, organizations should select a strategy that will give them a competitive advantage
based on their strengths, core competencies, and the competitor’s weaknesses. Porter identifies and
suggests four generic business strategies (Exhibit 8).

 Cost Leadership Strategy

 The objective is to become the lowest-cost producer among the competitors.
Organizations produce based on large-scale businesses with less differentiation, which
helps them exploit economies of scale. This strategy requires close cooperation among
all functional units.

 Cost Focus
 Organizations go for the lower cost advantage in a small market segment. This strategy
focuses on a basic product, possibly a product that is similar to higher priced ones, which
can be acceptable to the consumers who are popularly called “me-too’s.”

 Differentiation Focus
 Businesses aim to create a unique and distinctive product or service and to differentiate
themselves within a small number of target market segments by providing products that
are totally different from those of competitors, who may target a broader group of
customers. This strategy caters to the needs of the customers who have different needs
and wants, and is typically a niche market strategy.

 Differentiation Leadership
 The organizations target larger markets across an industry with the objective of
achieving competitive advantage. The companies charge a premium price for the
product, which reflects higher production costs and extra value-added features,
which are provided for the consumers.24

17
Functional level strategy:

 A functional level strategy is an organizational strategy used by various functional

departments to support business and competitive strategies. This strategy is a
functional approach that is employed to achieve the corporate and business unit
objectives and strategies by increasing resource production and nurturing
distinctive competence. Examples of functional strategies are marketing strategies,
R&D strategies, HRM strategies, operations strategies, and financial strategies.
For example, Nike uses an R&D strategy to differentiate its athletic shoes from its
rivals. These strategies are involved in higher-level strategies, and provide input to
business and corporate level strategies. Feedback can either be on customers or
capabilities. Functional units translate the higher-level strategies into action plans
of the respective functional units toward to ensure the success of the strategy.
7. Competitive Advantage
Competitive advantage is an organization’s core competency, which helps it gain an edge over its
competitors. The organization that does something better than others has an advantage, which is gained
by offering better value, lower prices, better service, and greater benefits. If the company continues
exploiting the resources and developing these competencies for a longer period of time, this results in
what is known as sustainable competitive advantage. Organizations adapt to continuous changes in the
external trends and the organizations’ internal capabilities. At present, several organizations are gaining
advantage by making use of Internet selling and communicating directly with customers, clients,
suppliers, creditors, shareholders, and competitors worldwide.

PLANNING

• Planning is one of the four basic functions performed by managers. It is often referred to as a
primary management function because it creates the basis for all functions performed by
managers, namely, organizing, leading, and controlling. Planning gives direction, minimizes
uncertainty, waste, and unwanted activities, and sets standards for controlling. The organization’s
goals are defined along with establishing an overall strategy to achieve such goals. Planning can
be formal or informal. Informal planning is not written down and has a short-term focus. Informal
planning, which is commonly done in small organizations, is specific to an organizational unit and
requires no sharing of goals. Formal plans are written and are more specific, and contain a long-
term focus and commonly shared goals for the organization. Efficient planning and
implementation result in better performance. Planning involves goals and plans. Goals, which are
often called objectives, are the desired outcomes for the organization. Stated goals are official
statements, whereas real goals are those actually pursued by the organization.

Planning Types

Plans can be classified based on their breadth, specificity, time frame, and frequency of use. Based on
breadth, plans are classified as either strategic or operational. Production plans, functional plans,
marketing plans, and human resource plans are examples of typical operational plans. 26

 Strategic plans are usually long-term plans, which are applied to the entire organization by
establishing the overall goals and position of the organization based on the changes in the
environment.

18
  Tactical plans, also called as operational plans, are short-term plans that specify how the
overall goals should be achieved.

 Based on specificity, plans are classified as either specific or directional plans.

 Specific plans have clear-cut objectives, which are specifically defined and require no
interpretation.

 Directional plans are very flexible and only provide general guidelines.

 Based on the length of time, plans are classified into short-time and long-time plans.

 Short-time plans last for one year or less, whereas long-term plans continue beyond three
years.

 Based on use, plans are classified as either a single-use plan, which is a one-time plan used to
handle a unique situation, or a standing plan, which is a continuous plan that gives directions for
activities that are repeatedly done.27

DISCUSSION QUESTIONS

1. What is strategic management? What are the differences among corporate, business, and
functional level strategies?
Definition of strategic management: According to Daft, ‘’Strategic management is the set of decisions
and actions used to formulate and implement strategies that will provide a competitively superior fit
between the organization and its environment so as to achieve organizational goals ‘’1. Fred R.
Davis, defines Strategic Management as an ‘’Art and science of formulating, implementing, and
evaluating, cross-functional decisions that enable an organization to achieve its objectives”.2 Stephen
Robbins defines Strategic Management as ‘’ the set of managerial decisions and actions that
determines the long-run Performance of an organization’’.

Differences between corporate, business, and functional level strategies:

Corporate level strategies: it is the overall plan for the entire organization and its strategic business
units by the top management. It helps to determine what business a company should be in.It
indicates the path in which the organization is going and also indicate the role played by the
respective business unit in pursuing that direction.

Business level strategies: It helps to determine how an organization should compete within its
Strategic Business Unit (SBUs). Some corporations have different business divisions called as
Strategic Business Units (SBUs) which have a unique mission, competitors, product line and markets

19
 when compared to other SBUs. Executives in charge of the corporate level define a broad strategy
and finally bring together a portfolio of SBUs to implement the strategy.

Functional level of strategies:

An organizational strategy used by various functional departments’ supporting business and
competitive strategy. It is a functional approach taken to achieve corporate as well as business unit’s
objectives and strategies by increasing resource production and nurtures distinctive competence.
These strategies are involved in higher level strategies giving inputs to business and corporate level
strategies. Feedback can be on customers or capabilities. Functional units translate the higher level
strategies into action plan of respective functional units to make the strategy successful.

2. Explain the steps involved in the strategic management process.

Step 1
Identify the organizational vision, mission, and goals, as well as the relevant strategies.
Vision
The vision explains what the organization wants to become in the future. It inspires and motivates the
employees.

Mission
Every organization needs a mission statement that reflects and explains its purpose. The statement
addresses the organization’s reason for being in business and helps distinguish one business from
similar companies. The mission reflects the priorities, values, and beliefs of the organization.

Step 2
Conduct an external analysis to identify strategic factors that may require changes. Social, political,
economic, technological, and global factors are included in the external environment. Opportunities
are the positive chances and bright openings seen in the environment, whereas threats are risky and
dangerous trends in the external environment. Considering that organizations differ from one another
in terms of core competencies and resources, the same external environment can be a threat to one
organization and an opportunity to another.
This step is followed by internal analysis. An organization’s values that create skills and resources,
which help the organization gain an edge over competitors, are its core competencies. Strengths are
the activities performed very well and weaknesses are activities the organization does not do well or
traits it does not possess. This process is called SWOT analysis which reviews the organization’s
strength, weakness, opportunities, and threats that might affect the organizational performance. The
process is also called situational analysis and helps managers boost the organization’s strengths and
reduce its weaknesses.

20
Step 3
Identify and formulate a strategic alternative that is appropriate to the specificities of the organization.
Strategies should be formulated for the corporate, business, and functional levels. These strategies
should match the strengths with the external opportunities, minimize the weaknesses, and guard
against the threats.

Step 4
Implement the strategy. The execution of the formulated strategy occurs after environmental analysis,
SWOT analysis, and identification of strategic goals. Implementation is an attempt to fit the
organizational structure and activities to the environment. The strategy should match the company’s
structure and emphasize the importance of top management support. Implementation is the most
difficult stage. If conducted well however, it will help in organizing and motivating the employees. The
success of implementation is based on effective interpersonal skills. In this step, the strategies are
put into action to fulfill the objectives. A strategic plan is merely a document if it is not implemented.
Implementation addresses the who, when, where, and how of reaching the objectives and delegates
tasks and timelines to individuals to effectively attain the objectives. Generally, a good
implementation plan identifies a leader who can communicate the vision and the actions necessary to
achieve the vision. All employees should be engaged in the plan, and implementation should include
a strategic map of finances, operations, people, environments, markets, and partners, which are
directed toward a better performance. Success comes when the organization has the right people for
the right job, skilful employees, and relevant resources including time and money. Open
communication must be achieved, management practices and technology systems must be in place
to support the implementation, and everyone should be comfortable in the working environment.
Step 5
Evaluate the strategy. If deviations are identified in relation to the implemented strategy, corrective
action should be taken. Future modifications are an important component of this step because the
present success of the organization is not a guarantee of future success.

Evaluation is equally significant as the other steps because it focuses on the effectiveness and
efficiency of the strategic plans in attaining the desired results. As the final step, evaluation helps in
assessing the suitability of the implemented strategy against the socio-economic, political and
technological changes around the organization. The tasks performed by the employees can be
coordinated well by controlling their performance. This procedure is extremely important because in this
step, inputs for new strategic plans are produced, feedback is generated, procedures are appraised,
rewards are accorded, and the validity of the strategic choices is judged.

21
 The process consists of fixing a benchmark of performance by setting a standard, followed by the
measurement of performance, in which the actual performance is compared with the preset standards.
Evaluation has to be performed at the right time; otherwise, it will not meet its purpose. Analyzing the
variance follows. Variances could be identified when measuring the performance; thus, the degree of
tolerance limits of the variance between actual and standard performance must be discussed by the
strategist. Positive deviation indicates a better performance, whereas negative deviation indicates
underperformance. The cause of deviation must be discovered and corrective action must be taken.
Subsequently, taking corrective action is performed. If the deviation is exceptionally high, the strategist
must carry out an intensive analysis of the factors. If the potential of the organization does not match
with the required performance, the standard has to be lowered.

3. Explain SWOT analysis.

It is to conduct an external analysis in order to identify strategic factors which may require some
changes. Social, political, economical, technological and global factors are included in the external
environment. Opportunities are the positive chance and a bright opening seen in the environment and
threats are risky and dangerous trends in the external environment. Since each organization differs in
its core competencies and resources, the same external environment can be a threat to one
organization and an opportunity to another.
This is followed by an internal analysis. Any organization’s value creating skills and resources which
help them to gain an edge over their competitors are its core competencies. Strengths are the
activities performed very well and weaknesses are activities the organization does not do well or do
not possess. This is called as SWOT analysis which reviews the organization’s strength, weakness,
opportunities and threat that might affect the organizational performance. It is also called as
situational analysis and helps the managers to increment the strengths and reduce its weaknesses.
The organization can evaluate its core competencies which makes them better than their competitors
and core capabilities which determines how efficiently inputs can be turned into outputs.. In the
internal analysis, organizational culture is crucial to promote or to prevent the strategic actions. It is
very flexible in terms of depth and details. To get best results from the analysis, a specific objective
should be in mind. It helps to decide whether the organization should introduce a new product or
service. It is very often part of strategic planning and helps to understand the business and the areas
which need to be improved. It also predicts the changes that have to be addressed to ensure
business success. This analysis may point out whether there is any necessity to change the existing
mission or vision or to come up with a new strategy at corporate, business or functional level. For
organizations going global, situational analysis is very much essential because they are operating in a
diverse environment.

22
4. Explain the five forces model of industrial analysis formulated by Michael Porter.
Threat of new entrants:
How easily or with difficulty the new competitors can come into an industry? Economies of scale and
capital requirements are examples which act as entry barriers to new competitors.

Threat of Substitutes:
The extent to which other industry products act as a substitute for the existing product. Switching
costs and brand loyalty influences the likelihood of customers to adopt substitute products and
services.

Bargaining Power of Buyers:

The degree to which buyers influence competitors in an industry. It depends on how much bargaining
power do customers have? Customers prefer to buy products at a very cheap price-a situation at
which industry earns the low rate of return for its investment.

Bargaining Power of Suppliers:

What is the bargaining power of the suppliers? Usually suppliers increase the prices and reduce the
product quantity and if the organizations are unable to bear the cost hike by its suppliers through their
pricing structure, its profit decreases automatically. The comparative number of buyers to supplier,
availability of substitute suppliers and new entrants affect the buyer supplier relationship acting as
crucial factors to determine the supplier power.

Current Rivalry:
How intense is the competition among rivals? This intensity increases when the demand and growth
rate slows down and product price comes down. This is influenced by the previous four forces.

5. What are the generic strategies given by Porter?

 Cost Leadership Strategy
Objective is to attain the low cost producer when compared to other competitors.
Organizations produce on large scale business with less differentiation which helps them
to exploit economies of scale. This strategy requires close cooperation between all
functional units.
 Cost Focus
Organizations go for a lower cost advantage in a small market segment. It will be basic
product –possibly a product similar to higher priced ones acceptable to sufficient
consumers popularly called as “me-too’s”.

23
  Differentiation Focus
Business aims to create a unique and distinctive product or service and they aim to
differentiate within a small number of target market segments by providing products
totally different from competitors who may target broader group of customers. This caters
to the needs of the customers who have different needs and wants, typically a niche
market strategy.
 Differentiation Leadership
The organizations target larger markets across whole of an industry with an objective of
achieving competitive advantage. They charge a premium price for the product which
reflects higher production costs and extra value-added features provided for the
consumers.
6. What are vision and mission statements? What are the components of a mission statement?
Vision: Vision of an organization explains what we want to become in future.

Mission: Today, every organization needs a mission statement as it explains the purpose of an
organization. It addresses the reason for being in business and helps to distinguish one business
from other similar organization. It reflects the priorities, values and belief of the organization. “Peter
Drucker says that asking the question, “What is our business?” is synonymous with asking the
question, “What is our mission? ”Some call it as a creed statement, statement of purpose, philosophy,
beliefs and principles.

The components of a mission statement are:

• Customers: Who are the organization’s customers?

• Products or services: What are the organization’s major products or services?
• Markets: Where does the organization compete geographically?
• Technology: How technologically current is the organization?
• Concern for survival growth, and profitability: Is the organization committed to growth and
financial stability?
• Philosophy: What are the organization’s basic beliefs, values, aspirations, and ethical priorities?
• Self-concept: What is the organization’s major competitive advantage and core competency?
• Concern for public image: How responsive is the organization to societal and environmental
concerns?
• Concern for employees: Does the organization consider employees a valuable asset?
7. What are the different types of growth strategies?
Different types of growth strategies are:

24
 i. Concentration: Will expand in a primary line of business by increasing the products or services or
both. They do not acquire other organizations. Growth is through increased business operations.
They compete within a single industry. There are three types of concentration strategies which
are as market penetration, market development and product development.
a) Market Penetration: Gains additional share of existing markets using current products.
b) Market Development: Organizations sells the existing products in new markets.
c) Product Development: Organizations create new products to serve existing markets.
ii. Vertical Integration: This is classified into backward and forward vertical integration.
a) Backward vertical integration: It gains control of inputs by becoming a self-supplier. The
organization prefers this when their existing suppliers are unreliable and too costly and when
the number of suppliers is small compared to the competitors. Sometimes the organization
may acquire resources very quickly by using this strategy. For example an ice-cream
company can buy a dairy farm to ensure a steady supply of milk at an affordable price.
b) Forward vertical integration: It gains control of output by controlling the distribution channel by
eliminating intermediaries.Franchising is a valuable means of implementing forward integration.
Organization prefers this integration when current distributors are expensive or limited. A simple
example is, when movie studio owns a chain of theatres. Another example is, Reliance industries,
a petrochemical giant in India has integrated into polyester fibres from textiles and further into
petrochemicals.
iii. Horizontal Integration: Competitors from the same industry combine their operations to improve
their competitive strengths and to lessen the competition among industry rivals. This integration
will appeal to many, based on the similarity of products and ends competition between
businesses and to maximize profit by monopolizing. An example is, if Zenith merges with Sony it
is horizontal integration.
iv. Related Diversification: They expand by merging or acquiring organizations in different, but
somewhat related industries that are “strategic fits”. It is used to sell new products through an
existing distribution. An example is, when a company which is manufacturing summer clothing
decides to invest in winter clothing.
• Unrelated Diversification: Expand by merging or acquiring organizations in totally unrelated
industries for higher financial returns. Some organizations manufacture diverse products that are
not related. For example if a toy manufacturer is also manufacturing mobile phones it is unrelated
diversification.

8. Explain retrenchment and turnaround strategies.

Retrenchment: They identify and eliminate less critical weaknesses and reinstate strengths in order to
overcome existing performance problems. When an organization faces minor performance issues, a
retrenchment strategy will stabilize and even out the operations, invigorate the resources and

25
capabilities of the organization and prepare to compete in the industry again. They mainly focus on
cost cutting and using resources more carefully. For example Nokia carried out 4000 job cuts. Due to
economic downtown, Fujitsu unit in UK cut down 1,200 jobs.

Turnaround: It is used when the organization’s performance problems are dangerous and critical.
They address these serious issues by organizational restructuring and through the use of strong cost
elimination. It involves restructuring the sick unit, a time consuming strategy requiring detailed
planning. Turnaround may take six months to three years to complete. Accenture is a good example
where they failed to grow with current product and decided to expand into other industry with new
product development using their company image and loyal customers.

26
 CHAPTER 10

DECISION MAKING

I. The Nature of Decision Making

Decision-making is the action of selecting one alternative from a set of several

alternatives. Managers generally make decisions regarding both positive and
negative issues.

The importance of decision-making can be explained as follows:

 Achievement of objectives. Decisions direct the exact flow of activities and
resources which results in the achievement of objectives on time.
 Optimum use of resources. Due to sound decisions, available resources
are allocated properly for productive activities.
 Higher efficiency. Decision making enables higher results at same or lower
costs.
 Innovation. The process of decision making generates new ideas, new
products, new methods etc.
 Motivation. Sound decisions motivate employees to perform better.
 Growth and expansion. Sound decisions lead to better performance,
growth and expansion of the organization.
 Facing new challenges. Decision making facilitates decisions which are
required to solve problems created by constant environmental changes.
 Encouragement of initiative. Modern managers involve all employees in
the decision making process. These employees contribute new ideas and
suggestions, leading to encouragement of initiative.

A. Types of Decisions
 Programmed decisions are decisions that can be made based on the
policies and procedures laid out by managers in advance. Managers
implement these policies through employee manuals and company policy
charters that enable employees to make standard and routine decisions.
Most of the decisions organizations have to make are programmed decisions
which are repetitive and regular.
 Non-programmed decisions are decisions that usually cannot be pre-
determined. In these situations, the manager needs to use his intuition,
experience, and skills to make the decision. Decisions that have significant
impact on the organization generally cannot be programmed, as managers
want to think through these decisions meticulously to select the best
alternative available.
 Decisions can additionally be categorized into three types based on their
levels in the organizational structure.
 Strategic decisions are decisions made at the top level of the organization,
and generally determine the organization’s overall direction.
 Tactical decisions concern how objectives are put into action and achieved.
These decisions are usually taken by mid-level managers to achieve goals
set by their superiors.
 Operational decisions are day-to-day decisions made to run the
organization. Employees and lower level managers have to make operational
decisions on a daily basis to ensure targets are met and the business is
running smoothly.

27
 B. Decision Making Conditions
 Decision making under certainty. The term certainty alludes to exact and
complete information of the consequence of every decision option. Under this
condition, the decision maker knows his alternatives and their outcomes well
with all relevant data being accessible to him.
 Decision making under risk. This is a condition in which the available
alternatives and their consequences are all known but risky. Decision making
under risk means that the outcomes of a certain decision can be determined
with probability values. The decision alternatives are assessed by calculating
the expected probability value of the outcome of each alternative and its
payoff. The outcome with the maximum payoff is selected.
 Decision making under uncertainty. In this condition, the decision maker is
not aware of the risks or outcomes of the decision alternatives. In this
scenario, decision makers can use MaxiMin or Max-Max criterion. A
pessimistic or cautious decision maker can select the alternative that
maximizes the minimum payoff, called the MaxiMin criterion. An optimistic
decision maker, on the other hand, can choose the alternative that
maximizes the maximum payoff, known as the Max-Max criterion.

II. Rational Perspectives

A. Classical/Rational Model of Decision-Making

The classical view of decision making has constantly incorporated the idea of
rationality and rational decisions into the process of discourse and decisions.
Therefore, the classical model uses rationality to explain decision making.
 Early theorists who adopted this model made assumptions that the rational
manager:
o Had complete information about a situation.
o Could differentiate between a problem and its symptoms perfectly.
o Could accurately recognize all criteria involved in a decision.
o Could identify and assess all alternatives.
o Could precisely weigh and select the best alternative.
o Could, consequently, make optimal decisions that were absent of
irrational thoughts.
 The rational decision making process entails the following steps:
1. Recognize the decision situation - Generally, an event will indicate a
need for a decision to be made.
2. Determine decision criteria - The criteria that the decision must satisfy
represent the baseline requirements and constraints that guide the
decision making process.
3. Identify alternatives - Every possible alternative, whether common or
new, are considered.
4. Evaluate alternatives - Every alternative is analyzed thoroughly to
establish its acceptability, costs, and potential payoffs.
5. Select the best alternative - The alternative that best solves the issue at
hand is selected upon considering all relevant factors.
6. Implement chosen alternative - The selected alternative is applied in
the organization.
7. Follow up and evaluate results - The effects and success of the
alternative that was implemented is ascertained.

28
III. Behavioral Aspects of Decision Making

A. Administrative/Bounded Rationality Model of Decision Making

Herbert Simon noted that despite its usefulness in solving problems, the rational
decision making model does not reflect actual decision making processes in
organizations. Simon posited that the concept of “bounded rationality” was a
better representation of managerial decision making, where the manager is not
the “rational man” but the “administrative man”. Bounded rationality means that
the rationality of decision makers is restricted by the actual information they
have, the cognitive biases of their psyches, and the limited time they have to
decide. Thus, decisions are rational only within the boundaries of the decision
maker’s mental ability, values, perceptions and skills.
Under this concept, administrative managers do not necessarily look for all
available alternatives but instead. Satisficing means to look for alternate
solutions only until a solution that reaches the minimum requirement is found.
Due to the satisficing approach, managers using bounded rationality may be
victims of cognitive biases, as they make quick decisions without considering all
available alternatives.

B. Intuitive Model of Decision Making

Intuition is a cognitive means of decision making that relies on the decision
maker’s instinct, experience, and knowledge. The intuitive model, thus, uses
intuition as a method of decision making. Since managers often face time
constraints, pressure, uncertainty, and changing environments when making
decisions, it is not surprising that they deliberately use the intuitive model to
make decisions.
The reasoning behind the intuitive model is explained by mental patterns. When
making a decision, intuitive managers tend to screen the decision situation to
identify patterns. If they recognize a pattern, they are able to make a decision
based on their previous experience with a similar situation. This mental pattern is
usually a result of knowledge, practice, and familiarity, and allows managers to
know the potential outcomes of their decision. If they don’t find a pattern in a
given situation, however, intuitive managers test new ideas in their mind to find a
suitable decision.
Since this model relies so heavily on prior experience and understanding, it is
more challenging and risky for beginners to make effective decisions. Also,
human nature and traits can easily influence managers’ intuitive decision making.

C. Creative Model of Decision Making

Creativity is the invention of imaginative new ideas. In this era of decentralization
and strong global competition, managers are increasingly urged to make creative
decisions.
 The creative decision making process:
1. Problem identification. A problem arises and there is a necessity for a
decision to be made.
2. Immersion. The manager consciously ponders the issue and collects
necessary information.
3. Incubation. The manager ignores the problem, but the brain works on
the problem subconsciously.
4. Illumination. The moment of insight when the manager finds the solution
to the issue, usually when least expected.
5. Verification and Application. The manager consciously validates the
solution’s practicability and then implements it as a decision.
 Three factors that determine the level of creativity:

29
 o Fluency regards the total sum of ideas a manager can generate. The
more fluent a manager, the more creative he is.
o Flexibility is about how much the ideas differ from one another. High
flexibility is regarded as creative.
o Originality refers to the idea’s uniqueness.
 Techniques managers can use in the creative decision making process:
o Brainstorming. A collaborative effort where members suggest many
ideas together. The goal is to generate as many ideas as possible.
o Wildstorming. An adaptation of brainstorming where a group works on
seemingly impossible ideas and projects how these ideas can be made
possible.
o Pre-mortem. A method of imagining and preventing possible issues that
could arise from a decision before actually implementing that decision.

D. Political Model of Decision Making

Political decision making involves several organizational problems where power
is decentralized. In this model, decision making is a political process
acknowledging the variety of personal interests and goals in the organizational
environment. To reach a decision in this environment requires resolving conflict,
compromising, and building consensus with other actors in the organization.
Therefore, managers in the political model perform decision making by dealing
with coalitions, an unofficial alliance of groups within the organization that seek
to achieve a shared goal. These coalitions bargain and compromise with each
other to produce decisions. Coalitions can have both negative and positive
effects on organizations. They can contribute towards the effectiveness and
profitability of an organization, or they can hinder useful decisions and ideas.

E. Risk Propensity and Decision Making

Risk propensity measures the tendency of decision makers to make risky
decisions. This concept is an important factor in determining a decision maker’s
risk behavior and underlying motives in decision making. Managers with low risk
propensity are more cautious and conservative when making decisions, and so
are likely to avoid mistakes that result in huge losses. On the other hand,
managers with high risk propensity are more aggressive and hasty in their
decision making, relying heavily on intuition to make decisions that may involve
big investments.

F. Ethics and Decision Making

Ethical decision making issues emerge when decision alternatives include
conflicting moral or ethical considerations. In these cases, managers must be
able to thoroughly and sensibly consider the outcomes and ethical ramifications
of an alternative before implementing it as a decision. When in doubt, ethical
decision making frameworks like Kidder’s ethical checkpoints act as guidelines
for managers in making the best decision under the given ethical constraints.
 Kidder’s nine ethical checkpoints:
1. Recognize that there is an ethical problem. This step is the most
crucial for a manager as it forces him to admit and accept that an ethical
issue exists. It also distinguishes ethical dilemmas from other social
issues.
2. Determine the actor. Addressing the responsible party allows the
manager to know if and how he can act on the issue.
3. Gather the relevant facts. Sufficient, correct, and timely information is
essential in making ethical decisions, as it informs the manager on the
context of the ethical issue.

30
 4. Test for right-versus-wrong issues. A manager should test the ethics
of his decision alternatives by answering a set of questions: Would he be
uncomfortable if his decision was made public? Would someone he
cares about reject the decision? If he answers “yes” to any of these, then
he should reconsider his options.
5. Test for right-versus-right values. Most ethical issues involve two or
more conflicting values. Thus, a manager should determine what these
clashing right-vs-right values are before he makes his decision.
6. Apply the ethical standards and perspectives. A manager should
apply any of the relevant ethical principles to the issue, such as utilitarian
ethics, ethics of care, or Kant’s ethics..
7. Look for a third way. Creative managers can go further by developing a
third solution to the ethical issue that creates a win-win situation.
8. Make the decision. At some point, a manager needs to make the
decision. This may be more difficult than it sounds as managers facing
ethical dilemmas tend to be mentally drained.
9. Revisit and reflect on the decision. Once the decision is made, a
manager needs to reflect on his choice and learn from the ethical impact
of his decision.

IV. Challenges in Decision Making

Regardless of what model a manager uses - be it rational, intuitive, creative, or

administrative - he is bound to face various decision making traps. In fact,
individuals are often influenced by cognitive biases that pose as challenges in the
decision making process.

A. Overconfidence Bias
Overconfidence bias happens when decision makers overestimate their
capability to foresee future events. Overconfidence bias in managers can
lead to risky behavior and faulty decision making. To avoid this bias,
managers should always reflect on whether they are being realistic in their
judgments.

B. Hindsight Bias
Hindsight bias is the reverse of overconfidence bias. It occurs when
individuals look back in time and view events as more predictable than they
really are. In other words, after a mistake or surprising event occurs, many
people often think that they had already known it would happen, when in
reality they did not. Hindsight bias is an issue in decision making especially
when evaluating someone else’s decisions, as managers may project this “I
knew it all along” bias onto others when something goes wrong. Therefore, it
is vital for decision makers to consider this bias before making decisions or
passing judgments on other people’s decisions.

C. Anchoring
Anchoring is the tendency for decision makers to rely too much on one piece
of information. This tendency is detrimental to managers who need to
consider several factors and consequences before making a decision.
Focusing on only one aspect, such as the cost of a decision, may result in
lost opportunities or faulty decisions. To avoid this, managers should learn all
information regarding a potential decision to prevent relying too heavily on
any one fact.

D. Framing Bias

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 Framing bias occurs when the way a situation or issue is presented has a
strong influence on decision makers. It is important for decision makers to be
aware of this tendency because they might make disadvantageous decisions
simply based on how a problem is framed. Managers should thus attempt to
identify and remove any framing bias in the presentation of a problem before
making decisions to solve it.

E. Escalation of Commitment
Escalation of commitment occurs when people proceed on a course of action
that is known to be failing. It is also called the sunk cost fallacy as the
persistence on the poor path of action is usually because people have
already invested in it. Escalation of commitment often occurs because of
decision makers’ personal pride or fear of admitting that they were wrong.
Alternatively, decision makers may wrongly hold on to the belief that
investing more time and energy might somehow recover the losses from the
decision. Effective managers should consider having strict turning back
points when a decision is appearing to fail, in addition to promoting an
organizational culture where employees can openly admit the failure of their
decisions without fear or regret.

F. Groupthink
Groupthink is a phenomenon where members of a group put pressure on
each other to conform and reach consensus, thereby increasing the risk of
flawed decisions. This leads to reduced mental efficiency, reality testing, and
moral judgment when making decisions.
Groupthink is exemplified by the following symptoms:
o An illusion of invulnerability that generates excessive optimism and
risk-taking tendencies among members.
o Collective rationalizations through the downplay of negative
information or warnings.
o An unrefuted belief in the group’s innate morality that may lead to a
disregard for ethical or moral consequences.
o Direct pressure on members who argue against any of the group’s
stereotypes, impressions, or commitments.
o Members’ self-censorship through the minimizing their own doubts
and counter-arguments.
o Illusions of unity and harmony based on a lack of dissent
o The development of self-appointed mind guards who protect the
group from alternative information that goes against the group’s
assumptions and actions.
The more frequently a group displays one or more of these symptoms, the
worse the quality of their decisions will be. Therefore, managers should strive
to monitor their own decision making behavior for groupthink tendencies.

DISCUSSION QUESTIONS

1. Why is decision making important in an organization? What are the consequences of poor
decision making?
Decision making is important in organizations for several reasons. First, it allows the achievement of
objectives. Good decisions always facilitate attainment of all objectives in time. Decisions direct the
exact flow of activities and resources which results in the achievement of objectives. It also facilitates
the optimum use of resources. Due to sound decisions, available resources are allocated properly for
productive activities. This facilitates optimum use of resources and minimizes wastage. Next, decision

32
 making leads to higher efficiency. Decision making enables higher results at same or lower costs.
Making decisions facilitates innovation as well, as the process of decision making generates new
ideas, new products, and new methods. In addition, decision making is vital for motivation. Sound
decisions motivate employees to perform better by giving them direction and channelling their efforts
into useful activities. Decision making is important for growth and expansion too, as it promotes better
performance of the organization. Decision making facilitates decisions which are required to solve
problems created by constant environmental changes. Thus organizations can effectively face the
new challenges in their environment through decision making. Finally, decision making encourages
initiative. Modern managers involve all employees in the decision making process. These employees
contribute new ideas and suggestions, leading to the encouragement of employee initiative.
Poor decision making can cause a myriad of problems for organizations. These include wastage of
resources, miscommunication, unmet objectives, failed projects, declining profits, and even corporate
scandals and fraud!

2. Explain the different types of decisions with relevant examples. In your opinion, which type(s)
of decision(s) is most important to the organization?
Programmed decisions are decisions that can be made based on the policies and procedures laid out
by managers in advance. Managers implement these policies through employee manuals and
company policy charters that enable employees to make standard and routine decisions. Most of the
decisions organizations have to make are programmed decisions which are repetitive and regular.
Non-programmed decisions are decisions that usually cannot be pre-determined. In these situations,
the manager needs to use his intuition, experience, and skills to make the decision. Decisions that
have significant impact on the organization generally cannot be programmed, as managers want to
think through these decisions meticulously to select the best alternative available. Decisions can also
be categorized into three types based on their levels in the organizational structure. Strategic
decisions are decisions made at the top level of the organization, and generally determine the
organization’s overall direction. Tactical decisions concern how objectives are put into action and
achieved. These decisions are usually taken by mid-level managers to achieve goals set by their
superiors. Operational decisions are day-to-day decisions made to run the organization. Employees
and lower level managers have to make operational decisions on a daily basis to ensure targets are
met and the business is running smoothly.

3. With examples, illustrate how your decisions would differ under the conditions of certainty
and uncertainty.
Decision making under certainty means that the decision makers has exact and complete information
of the consequence of every decision option. Under this condition, the decision maker knows his
alternatives and their outcomes well with all relevant data being accessible to him. He then simply
has to select the decision with the best outcome. When making decisions under uncertainty, however,
the decision maker is not aware of the risks or outcomes of the decision alternatives. The decision
maker knows the payoffs of an option but does not know the probabilities of the option’s outcomes. In
this scenario, decision makers can use MaxiMin or Max-Max criterion. A pessimistic or cautious
decision maker can select the alternative that maximizes the minimum payoff, called the MaxiMin
criterion. An optimistic decision maker, on the other hand, can choose the alternative that maximizes
the maximum payoff, known as the Max-Max criterion.

4. A new competitor has entered your product market and is offering lower prices to consumers.
As a manager, explain how you would make a rational decision to solve this problem.
To make a rational decision, a manager would have to go through the rational decision making
process. The first step in this process is to recognize the decision situation. Generally, an event will
indicate a need for a decision to be made. In this case, the entrance of the new competitor is the
decision situation that requires attention. Next, a manager must determine the decision criteria. The
criteria that the decision must satisfy represent the baseline requirements and constraints that guide
the decision making process. For this scenario, the decision criteria may include cost constraints,
advertising budgets, target sales, or price limits that are relevant to overcoming the threat posed by
the new competitor. A rational manager should then identify possible alternatives to overcome the

33
 issue at hand. For example, he may consider reducing product prices to compete with the new
entrant, or he may consider a new advertising strategy to gain market share. These alternatives are
then evaluated and analysed thoroughly to establish their acceptability, costs, and potential payoffs.
Upon careful consideration of these evaluations, the rational manager proceeds to select and
implement the best alternative that solves the issue at hand. Finally, the manager follows up with his
decision and evaluates the results to determine if the decision was successful in overcoming the
competitor’s threat.

5. Compare the classical model and the administrative model of decision making. Do you agree
with Herbert Simon that the administrative model is more realistic than the classical model?
Justify your answer.
The classical view of decision making has constantly incorporated the idea of rationality and rational
decisions into the process of discourse and decisions. Therefore, the classical model uses rationality
to explain decision making, where managers methodically follow a step-by-step process in making
decisions with complete information and objectivity. On the other hand, the administrative model of
decision making uses the concept of bounded rationality instead. Bounded rationality means that the
rationality of decision makers is restricted by the actual information they have, the cognitive biases of
their psyches, and the limited time they have to decide. Thus, decisions are rational only within the
boundaries of the decision maker’s mental ability, values, perceptions and skills. Under this concept,
administrative managers do not necessarily look for all available alternatives but instead. Satisficing
means to look for alternate solutions only until a solution that reaches the minimum requirement is
found. Herbert Simon noted that despite its usefulness in solving problems, the rational decision
making model does not reflect actual decision making processes in organizations as it assumes that
managers will evaluate every viable alternative before selecting the best one and are free of
perceptual biases. As such, Simon posited that the concept of “bounded rationality” was a better
representation of managerial decision making. However, due to the satisficing approach, managers
using bounded rationality may be victims of cognitive biases, as they make quick decisions without
considering all available alternatives.

6. When would you use the political model and intuitive model of decision making? Are these
models more effective in guiding managers’ decision making?
In the political model, decision making is a political process acknowledging the variety of personal
interests and goals in the organizational environment. To reach a decision in this environment
requires resolving conflict, compromising, and building consensus with other actors in the
organization. Therefore, managers in the political model perform decision making by dealing with
coalitions, an unofficial alliance of groups within the organization that seek to achieve a shared goal.
These coalitions bargain and compromise with each other to produce decisions. This model of
decision making is best used when there are multiple issues to solve in the organization, and when
the decision requires the cooperation of many conflicting parties. Since dealing and bargaining with
influential coalitions is a key part of this model, it is also useful when a manager does not have
centralized power to implement decisions without the support of multiple parties.
Intuition is a cognitive means of decision making that relies on the decision maker’s instinct,
experience, and knowledge. It involves making choices without cognizant thinking. Managers who
use this model often use mental patterns to make decisions, whereby they refer to their knowledge,
practice, and familiarity with an issue to understand and predict the potential outcomes of their
decision. Since this model relies heavily on the managers’ mental patterns, it is best used by
experienced managers who have developed such patterns from practice. This model is also useful
when managers are unclear of their goals or are pressed for time, as intuition is a fast and flexible
way to make decisions.

7. Provide an example of a creative decision in an actual organization that has led to its success.
What techniques can other organizations use to make successful creative decisions?
Creativity is the invention of imaginative new ideas. There are several techniques managers can use
in the creative decision making process. A well-known method of generating ideas is brainstorming, a
collaborative effort where members suggest many ideas together. During this process, the general

34
 rules are that no criticism of other ideas is allowed, no idea is unacceptable, and it is encouraged to
build on other ideas. The goal is to generate as many ideas as possible, as this increases idea quality
and consequently the effectiveness of brainstorming. Also, more participants in the process will
create better decision ideas due to the various perspectives and backgrounds to draw from. Another
technique, wildstorming, is an adaptation of brainstorming where a group works on seemingly
impossible ideas and projects how these ideas can be made possible. This way, a feasible decision
can be made to make even impossible ideas a reality. Also, a “pre-mortem” is a creative technique of
imagining and preventing possible issues that could arise from a decision before actually
implementing that decision. The pre-mortem method allows managers to analyze “what if” situations,
and so come up with the most creative decisions to avoid any potential problems.

8. What are some of the ethical conflicts faced by managers when making decisions? In your
opinion, how can managers make the right decisions when dealing with these conflicts?
Some examples of ethical conflicts faced by managers include having to choose between personal
relationships and organizational goals or exposing an organization’s wrongdoings. In these situations,
managers often face two or more conflicting values. Some examples of these values are truth-versus-
loyalty and justice-versus-mercy. Managers who are unable to work through these conflicts
themselves should refer to an ethical decision making framework to guide them towards making the
best decision under the given ethical constraints. Kidder’s ethical checkpoints, for instance, is a
framework that outlines nine steps in making ethical decisions. First, the manager should recognize
that there is an ethical problem. This step is the most crucial for a manager as it forces him to admit
and accept that an ethical issue exists. Next, he should determine the accountable parties involved in
the issue. The manager should then gather the relevant facts to understand the context of the issue.
The next step is to test for right-versus-wrong issues. The manager should test the ethics of his
decision alternatives by answering a set of questions: Would he be uncomfortable if his decision was
made public? Would someone he cares about reject the decision? If he answers “yes” to any of
these, then he should reconsider his options. Then, he should test for right-versus-right values, or
conflicting values. In an ethical dilemma, a manager must decide which value is most relevant to the
issue. The sixth step is to apply ethical standards or principles such as utilitarian ethics, ethics of
care, or Kant’s ethics to justify his decision. If this fails, the manager can then look for a third way.
Creative managers can go further by developing a third solution to the ethical issue that creates a
win-win situation. Next, the manager needs to make the decision at some point. Finally, the manager
should revisit and reflect on the decision to understand its impacts and outcomes.

9. Research suggests that over half of the decisions managers make fail. Why does this happen?
How can managers make better decisions?
Managerial decisions fail due to cognitive biases that pose as challenges in the decision making
process. One such bias is overconfidence bias. Overconfidence bias happens when decision makers
overestimate their capability to foresee future events. Overconfidence bias in managers can lead to
risky behavior and faulty decision making. To avoid this bias, managers should always reflect on
whether they are being realistic in their judgments. Hindsight bias, on the other hand, is the reverse of
overconfidence bias. It occurs when individuals look back in time and view events as more
predictable than they really are. Hindsight bias is an issue in decision making especially when
evaluating someone else’s decisions, as managers may project this “I knew it all along” bias onto
others when something goes wrong. Therefore, it is vital for decision makers to consider this bias
before making decisions or passing judgments on other people’s decisions. Another cognitive bias is
anchoring, the tendency for decision makers to rely too much on one piece of information. This
tendency is detrimental to managers who need to consider several factors and consequences before
making a decision. Focusing on only one aspect, such as the cost of a decision, may result in lost
opportunities or faulty decisions. To avoid this, managers should learn all information regarding a
potential decision to prevent relying too heavily on any one fact. Managers also fall victim to framing
bias. Framing bias occurs when the way a situation or issue is presented has a strong influence on
decision makers. It is important for decision makers to be aware of this tendency because they might
make disadvantageous decisions simply based on how a problem is framed. Managers should thus
attempt to identify and remove any framing bias in the presentation of a problem before making

35
 decisions to solve it. Bad decisions are, in addition, caused by escalation of commitment. This
happens when people proceed on a course of action that is known to be failing. It is also called the
sunk cost fallacy as the persistence on the poor path of action is usually because people have
already invested in it. Effective managers should consider having strict turning back points when a
decision is appearing to fail, in addition to promoting an organizational culture where employees can
openly admit the failure of their decisions without fear or regret. A major reason for failed decisions is
groupthink. Groupthink is a phenomenon where members of a group put pressure on each other to
conform and reach consensus, thereby increasing the risk of flawed decisions. This leads to reduced
mental efficiency, reality testing, and moral judgment when making decisions. Therefore, managers
should strive to monitor their own decision making behavior for groupthink tendencies. When making
decisions, they should avoid self-censorship and mind guarding, and refrain from conforming to
pressure or putting pressure on others to conform.

KEY TERMS

States that managers are not completely rational and use satisficing to
Administrative Model
make decisions.

The rationality of decision makers is restricted by the actual information

Bounded Rationality they have, the cognitive biases of their psyches, and the limited time
they have to decide.

Brainstorming A collaborative effort where members suggest many ideas together.

Classical Decision Incorporates the idea of rationality and rational decisions into the
Making process of discourse and decision making.

An unofficial alliance of groups within the organization that seek to

Coalitions
achieve a shared goal.

Creative Decision
Making decisions through the invention of imaginative new ideas.
Making

Decision Making The action of selecting one alternative from a set of several alternatives.

Decision Making Involves identifying a decision situation, generating alternatives, picking

Process the best alternative, implementing it, and checking it.

Escalation of Occurs when people proceed on a course of action that is known to be

Commitment failing.

Being able to thoroughly and sensibly consider the outcomes and

Ethical Decision Making ethical ramifications of a decision before implementing it in an ethical
conflict.

Occurs when the way a situation or issue is presented has a strong

Framing Bias
influence on decision makers.

A phenomenon where members of a group put pressure on each other

Groupthink
to conform and reach consensus.

Intuition A cognitive means of decision making that relies on the decision

36
 maker’s instinct, experience, and knowledge.

Non-Programmed
Decisions that cannot be predetermined and require more thought.
Decisions

Happens when decision makers overestimate their capability to foresee

Overconfidence Bias
future events.

Views decision making as a political process acknowledging the variety

Political Model
of personal interests and goals in the organizational environment.

A method of imagining and preventing possible issues that could arise

Pre-Mortem
from a decision before actually implementing that decision.

Routine decisions that can be made based on the policies and

Programmed Decisions
procedures laid out by managers in advance.

Is equated with scientific reasoning, empiricism and positivism and with

Rationality
the use of decision criteria of evidence, logical argument and reasoning.

Risk Propensity The tendency of decision makers to make risky decisions.

To look for alternate solutions only until a solution that reaches the
Satisficing
minimum requirement is found.

Decisions made at the top level of the organization that generally

Strategic Decisions
determine the organization’s overall direction.

37
 CHAPTER 11

ORGANIZATIONAL STRUCTURE & DESIGN

I. Basic Elements of Organizing

C. Basic elements of organizing are job specialization, departmentalization, reporting relationships,

assigning authority and coordination.
D. Job specialization is the performing of certain tasks which makes a person limited in performing
other activities at work. This was the idea of economist Adam Smith. Specialized jobs are simple,
low variety, and include easy-to-learn steps and high repetition.
E. Departmentalization is one of the steps in creating an organizational structure. It refers to the
process of grouping activities by placing experts together into one department in an organization.
This process improves efficiency in the organization and allows employees to specialize in a
specific area of the business. The departmentalization can be in the form of functional, product,
customer and geographical or location.
F. Authority means the right to give directives, take action and make decisions in order to achieve
the goals of an organization. Delegation, centralization and decentralization are dimensions of the
organizational authority.
G. Organizing the reporting relationships among positions is the third building block. Therefore
defining and making very clear who reports to whom is essential. Normally the reporting
relationship can be in formal departmental arrangements and also informal interactions that take
place every day. There are various reporting relationships in the organization, depending on the
type and size of the business.
H. Coordination is a managerial function in which the activities of various departments in an
organization are properly integrated and adjusted towards achieving common goals. Coordination
within an organization is very important for the success of an organization. Therefore good
coordination techniques that are implemented in the organization can help the flow of information,
help projects run smoothly, improve productivity and improve the company’s financial condition.
The coordination in the organization can be achieved through structural techniques and electronic
coordination.

II. Bureaucratic Model of Organization Design

A. The bureaucratic model of organizations was first described by Max Weber, a German
sociologist. Bureaucracy comes from the French word bureaucratie.
B. According to Weber the bureaucratic model was an ideal approach to structuring organizations
based on a rational set of guidelines and procedures. Furthermore the aim of bureaucracy is not
to protect authority but to achieve an organization’s objectives in the most efficient way possible.
There are seven elements that characterize the bureaucracies, as suggested by Weber.
C. Some advantages of bureaucratic structures for top-level managers are that they provide great
control over organizational strategy decisions. This works best for managers who have a
command-and-control style of managing. Time taken for strategic decision making is fast
because there are fewer people involved in the approval process. Job specialization and best-
practices are normally highlighted in organizations with bureaucratic structures, leading to
economies of scale, as employees’ work is consistently completed with greater efficiency,
proficiency and productivity.
D. Some disadvantages in bureaucratic structures are that it can discourage creativity and
innovation in the organization. Furthermore the changes in procedure must move through the
chain of command for approval, which leads to slow decision making. As a result the organization
will be less able to adapt to changing conditions in the marketplace and the industry, which leads
to a risk of becoming irrelevant within the own industry. Also, employees may receive less

38
 satisfaction from their jobs due to repetitiveness, which can increase the rate of employee
resignations. The employees also may feel discouraged, helpless, passive and even indifferent to
organizational goals, due to the centralized power structure in the organization.

III. Situational Influences on Organizational Design

There are various situational factors that can affect the optimal design for an organization. The following
four factors are the most common ones that play a role in determining how an organization should be
designed:

A. Core technology - Technology used, such as equipment, techniques and systems, in the
organization can greatly affect efficiency and costs. According to research, the correct structure of
organization and technology, used in combination, is very important to the success of the
organization. There are three basic forms of core technology suggested by Woodward that are
required by the organization in the process of transforming inputs (materials and labor) into outputs
(products or services) :

 Small batch or unit technology refers to products that produce or are

manufactured in small quantity to fulfill customer requirements or customization.
Examples of small-batch technology are tailor shops, art work, printing presses
and photography studios.
 Large batch or mass production technology refers to uniform goods that are
produced in high volume using assembly line operations and automated
machines. Examples of mass production are automobiles, consumer electronic
products and computers.
 Continuous-process technology refers to the process of transforming raw
materials into finished products using highly automated system production
processes with minimal involvement of the workforce. Some examples of
continuous process technology are chemical plants, petroleum refineries and
food processors.

B. Environment - The type of design an organization is likely to adopt is influenced by the environment
where the organization is operating. The external environmental factors that influence the
organization are social‐cultural, economic, technological, legal‐political and natural. There is a
relationship between environment and design, and two kinds of organizational design:

 Mechanistic design is a more rigid and bureaucratic form of organizational

design that is most suitable in stable environments. Examples of
organizations that have stable environments include manufacturers of staple
items such as paper, soap, cleaning products and fast food chain
restaurants.

 Organic design is a fluid and flexible design that is most suitable in rapidly
changing and uncertain environments. Examples of organizations that
operate in this environment are manufacturers of electronics and mobile
phones.

C. Organization Size - Organization size refers to how large the organization is, reflected by the
number of full-time employees employed by the organization. The relationship between organization
size and structure is supported by studies carried out by a few researchers. There is considerable
historical evidence that an organizational size of 2000 employees or more significantly affects its
structure. The organization size that affects the design of organizations can be divided into;

39
  Larger organization. Normally with 2000 or more full-time employees. The
basic design of the organization will involve highly specialized tasks with
standard operating procedures and detailed rules and regulations. Large
organizations provide the skills, economies of scale efficiency and suitable
mechanistic systems.

 Small organization. Normally with a very small number of full-time employees

such as in a retail store, consulting firm or restaurant. Small organizations
adopt flexible designs or organic systems and have flat structures. Small
organization size is normally easy to adapt to customer requirement
changes.

D. Life Cycle - The life cycle of an organization, industry, and product can be essential to organizational
design. Organizations will progress in their business or activities through stages that known as life
cycle. Most organizations will pass through four stages of the life cycle, namely birth, youth, midlife
and maturity, as described below:
E.
 Birth. In the birth stage, an organization is just starting out and requires
capital. The young organization does not yet have a formal structure and
there is not much delegation of authority because the owner does everything.

 Youth: In this phase, the organization is trying to grow and needs resources
for expansion. In this phase the emphasis is on becoming larger. During this
stage the organization adopts something of an organic structure, whereby a
formal structure is designed and some delegation of authority occurs.

 Midlife: This phase occurs when the organization has achieved a high level
of success. The organization is enjoying gradual growth followed by stability.
The management level increases and appears in the chain of command, and
the owner has difficulty maintaining control. The owner must learn to
decentralize authority and separate tasks for his organization in order to
survive and thrive during the growth stage. In this phase the organization
becomes more mechanistic in structure because the organization becomes
older

 Maturity: In the maturity phase the organization becomes less innovative,

less interested in expanding and more likely to maintain a stable and secure
environment. The organization emphasizes maximizing efficiency and
profitability and tends to become less innovative. At maturity, firms will
demonstrate significantly more concern for internal efficiency, establish more
control mechanisms and processes and become very bureaucratic.

IV. Basic Organization Forms

There are various basic structural forms adopted by organizations. These organizational forms cannot be
said to be superior to those of other organizations because, different organizations have been successful
using each. The basic forms of organizational design are;

 Functional or U-Form Design - Functional or U-Form design groups similar

or related workers based on expertise, skills and resources, for the same
activities. The advantages of this design are that employees’ specialization in
specific areas increases and critical decision making is centralized to one
person. The disadvantages of functional design are that it sometimes cannot
absorb the complexity of various jobs well, and operational problems can

40
 divert attention from strategic and competitive issues. The coordination and
communication across departments may be limited because various
departments are working separately and this can cause low operating
efficiency in the organization.
 Conglomerate or H-Form Design - Conglomerate or holding form design
consists of a combination of two more corporations engaged in unrelated
businesses that fall under one corporate group with a general manager on
top for each business. The advantage of conglomerate is that the
coordination is based on the allocation of resources across companies in the
portfolio. The organizations can use the advantages of internal capital
markets by allocating capital more effectively. For example, capital required
in one business can be taken from another business entity. The performance
of each business unit, in terms of loss and profit, is the responsibility of each
individual manager. The disadvantage is that extra layers of management
increases costs for the organization. Also, managing, comparing and
integrating activities among unrelated operations is difficult and can result in
a lack of focus.
 Divisional or M-Form Design - Divisional or M form Design normally is used
in larger companies to manage diversification while controlling bureaucratic
costs and control-loss problems. This type of design is based on multiple
businesses in related areas’ operations that group together people who work
on the same product, serve similar customers and are located in the same
area. The advantage of divisional design is that the managers will focus
more on results through performance measures, because they are
responsible for results. Other advantages are that it is more efficient in
coordinating work across different divisions and there is more flexibility to
respond to the changes in market needs. The organizations have a simpler
process in changing the size of the business by either adding or removing
divisions. The disadvantage is that the communication is slow downed
because employees in different divisions are not working together. It is costly
because of its size and scope and requires more qualified managers for each
division. Also, there is normally emphasis on divisional more than
organizational goals, which results in duplication of resources and efforts.
 Matrix Design - Matrix design is a hybrid design of which two or more forms
of departmentalization are used together. The most common matrix
combines the product and functional forms of departmentalization used in
large multinational companies. The main advantage of matrix design is that it
creates a more horizontal structure and the combination of all the other
designs and allows team members to share expertise and information faster
across task boundaries for achieving common goals. It allows for
specialization that can increase depth of knowledge and allows individuals to
be in a specific sector or segment. A disadvantage of the matrix design are
an increase in the complexity of the chain of command, because of the
differentiation between functional managers and product managers, which
can be confusing for employees as they attempt to understand who is next in
the chain of command.
 Hybrid Design - Hybrid design is operational in the public and private
sectors. Some organizations use a design that represents a hybrid of two or
more of the common forms of organizational design based on strategy and
business needs. Organizational formats that organizations can combine
include divisional, functional, geographic and matrix. An advantage of the
hybrid design is that the dual focus, such as combining product and
geographic components, may help organizations better meet customer
needs. It allows various departments to enjoy a greater degree of authority
and responsibility within their individual areas. It emphasizes giving
employees the flexibility of working in areas in which they are experts and

41
 creating a sense of unity among the employees of the organization to ensure
that they deliver good performance for the benefit of the organization. The
managers are responsible for decisions, reporting and goal-setting based on
their areas of expertise, which can lead to more precision and potential
business growth. The disadvantage of the hybrid design is that it creates a
dual reporting system. For example, employees working in accounting will
have to report information to separate managers spread among the different
product lines in the organization.

V. Recent Developments in Organizational Design

Three recent developments in organizational design are the team organization, the virtual organization,
and the learning organization.

A. Team organization - Team organization is one of the newest organizational designs developed in the
20th century, and spreading rapidly. The team organization or work groups can define the entire
organization. A team organization is a design that is made up of teams, and the teams work for a
common objective that requires coordination, interaction, and integration among the members of the
team. The benefits of team organization can assist in recognizing problems in the organization more
precisely and discovering appropriate resolutions to problems, and efficient ways to incorporate staffs in
the management level, to jointly use information and communication in the firm, and to create force and
synergy in the firm and improve creativeness. It enables people to collaborate, improve individual skills,
participate, enjoy their accomplishments, offer constructive feedback, and improve knowledge and
abilities. In team organization the teams have the authority to make decisions quickly, without a chain of
command, and must perform well because they are held accountable for their performance. Therefore,
teams can work in finding the best way to perform their tasks effectively and efficiently. The complexities
of team organization can create problems; for example, team members sometimes have to deal with
conflicting loyalties between their team and functional assignments. Ultimately, in team organizations the
project always takes time and the quality of results depend on how the team was managed and how well
team members work as group.

B. Virtual Organization - The changes in markets, competition, and technology in global business have
contributed to the growth of the virtual organization. The Virtual Organization conducts its business by
using technology to collect and distribute information. It identifies customers’ specific requirements and
needs and delivers products and services through a network of specialists. It uses a combination of
networks in which many organizations share skills, costs, capabilities, markets and customers. For
example the entertainment sector has combined with consumer electronics, information technology,
publishing and communications sectors, to convert movies, books, and software into digital form. This
organization has little or no format structure, with a small number of permanent employees and hired
specialists when a situation requires help, rented facilities, and outsourced basic support services, when
necessary. An advantage of virtual organization is that members of the organizations can quickly combine
their efforts in terms of design, manufacturing and processes to meet customer needs faster. The virtual
organization can benefits from competitive pricing, uninterrupted supplies, group purchasing power that
can lower costs, and shared knowledge that makes it technically stronger. A disadvantage is that once
work has been outsourced, it can be difficult to control the quality of work done by network partners.
Furthermore managerial skills are tremendously important, because managers are required to make
decisions, are accountable for decisions made, and must put together networks of independent
organizations which work well together, which is especially difficult given the temporary relationships
involved. The strong interdependencies can cause organizations' boundaries to be unclear, also, as
customers, suppliers and competitors enter into cooperative agreements, something which obligates
organizations to innovate.

42
C. Learning Organization - Learning organization is among the most widespread and fastest-growing
interventions in organizational design, and has been applied in organizations such as Boeing, Microsoft
and Apple. A learning organization is defined as an organization that has developed the capacity to
continuously learn, adapt, and change. The organization must have knowledgeable employees who are
able to share their knowledge with others and use it in a job environment to improve performance.
Learning organizations require strong organizational cultures, with employees sharing a common goal
and working together through sharing knowledge and information. A learning organization must have a
strong leadership style. Learning organizations that are flexible, innovative and knowledgeable can beat
their competitors and excel in business. Furthermore, when knowledge is transformed into new products
and services, it can become a major source of wealth creation for organizations.

DISCUSSION QUESTIONS

1. Discuss the elements of organizing.

Basic elements of organizing are job specialization, departmentalization, reporting relationships,

assigning authority, and coordination. Discussions of each element are below:

 Job specialization is the performing of a certain task which makes a person limited in performing
other activities. This was the idea of economist Adam Smith. Specialized jobs are simple, low
variety, and involve learning steps easily and high repetition.
 Departmentalization is one of the steps in creating an organizational structure. It refers to the
process of grouping activities by placing experts together into one department in an organization.
This process improves efficiency in organizations and allows employees to specialize in a specific
area of the business. The departmentalization can be in the form of function, product, customer or
location.
 Authority is the right to give directives, take action and make decisions in order to achieve the
goals of an organization. Delegation, centralization and decentralization are dimension of
organizational authority.
 Organizing the reporting relationships among positions is the third building block. It involves
defining and making very clear who reports to whom. Normally the reporting relationships can be
in formal departmental arrangements as well as informal interactions that take place every day.
There are various reporting relationships in the organization, depending on the type and size of
the business.
 Coordination is a managerial function in which the activities of various departments in the
organization are properly integrated and adjusted towards achieving common goals. Coordination
within an organization is very important to the success of the organization. Therefore good
coordination techniques that implemented in the organization can help flow of information and
project run smoother, improve productivity and finally improved the company financial condition.
The coordination in the organization can be achieved through structural techniques and electronic
coordination.

2. Describe the bureaucratic perspective on organizational design.

The bureaucratic model of organizations was first described by Max Weber, a German sociologist.
Bureaucracy comes from the French word bureaucratie. Because Bureau', means desk, or, by extension,
an office, and cratie, or cracy, means to rule, bureaucracy means to rule through a desk or office.
According to Weber the bureaucratic model was an ideal approach to structuring organizations based on
a rational set of guidelines and procedures. Many organizations cannot survive for long with a simple

43
organizational structure. When the number of workers increases, less formal work procedures are
replaced by more formal procedures. Rules are implemented, departmentalization is established, and
managerial levels increase to coordinate tasks in the respective departments. At this stage, bureaucracy
comes into existence. The aim of bureaucracy is not to protect authority but to achieve an organization’s
objective in the most efficient way possible.

There are seven elements that characterize bureaucracies, suggested by Weber. First, the recruiting of
people for the organization to carry the out the jobs well, based on competency, such as technical training
or educational qualifications—not recruiting people because of family or political connections. Second,
promotions are based on ability in demonstrated performance. The manager in charge—not the owners—
decide whether the employees are entitled to promotions. Third, the structure of the organization is a
continuous hierarchy where each level is subject to control by the level above it. Each position in the
hierarchy exists in its own right and job holders have no right to particular positions. High-level employees
have the right to give commands, take action and make decisions regarding their subordinates. Fourth, to
increase the efficiency and effectiveness in the division of labor in terms of tasks, responsibilities and
authority given, which are clearly defined to avoid misunderstandings and conflicts. Fifth, the formal rules
and procedures, such as expected behavior and decision-making in jobs, is applied fairly and uniformly to
all employees regardless of position. Sixth, all the rules, procedures and written guidelines should be
recorded in writing and kept for historical record. The last element of bureaucracy is that the organization
should be managed and supervised by a professional manager instead of the owner of the organization.

One advantage of bureaucratic structures, for top-level managers, is that they have great control over
organizational strategy decisions. This works best for managers who have a command-and-control style
of managing. Time taken for strategic decision making is fast because there are fewer people involved in
the approval process. Job specialization and best-practices are normally highlights in organizations with
bureaucratic structures, which leads to economies of scale, as employees’ work is consistently completed
with higher efficiency, proficiency and productivity.

Some disadvantages with bureaucratic structures are that it can discourage creativity and innovation in
the organization, and that changes in procedure must move through the chain of command for approval,
which leads to slow decisions. As a result, the organization will be less able to adapt to changing
conditions in the marketplace and industry, and that leads to a risk of being irrelevant within the own
industry. Also, employees may receive less satisfaction from their jobs due to repetitiveness, which can
increase the rats of employee resignations. The employees may also feel discouraged, helpless, passive
and even indifferent to organization goals due to the centralized power structure in the organization.

3. Discuss the basic forms of organizational design in your organization.

The basic forms of organizational design vary from organization to organization:

a) Functional or U-Form Design

Functional or U-Form design group is related to expertise, skills and resources for the same activities. It is
the functional approach to departmentalization, adaptable to the whole organization. For example, the
Revlon organization that is involved in cosmetic products has organized the members and units in the
organization according to the functions, such as finance, operations, product research and development
and operations. The advantage of functional design is that employee specialization in an area increases.
Also, critical decision making is centralized with one person. The disadvantage of functional design is that
it often cannot manage the complexity of various jobs well. Also, operational problems can divert attention

44
from strategic and competitive issues. The coordination and communication across departments may be
limited as well, because various departments working separately can cause low operating efficiency in the
organization.

b) Conglomerate or H-Form Design,

Conglomerate or holding form design consists of a combination of two more corporations engaged in
unrelated businesses that fall under one corporate group, with a general manager on top for each
business. The holding-company design is similar to product departmentalization. This organization will
have multiple revenue streams from business activities that are completely from separate business
entities. This design is used by Samsung Electronics Company of Korea, which has separated the
semiconductors, telecommunications, appliances and media businesses, with a chief executive officer on
top.

The advantage of conglomerate design is that coordination is based on the allocation of resources across
companies in the portfolio. The organizations can use the advantages of internal capital markets by
allocating capital more effectively. For example, capital required in one business can be taken from
another business entity. The performance of each business unit, in terms of loss and profit, is the
responsibility of each individual manager. The disadvantage is that extra layers of management increases
costs to the organization. Managing and integrating activities among unrelated operations is difficult to
manage well, and can cause a lack of focus.

c) Divisional or M-Form Design,

Divisional or M form Design normally is used in larger companies to manage diversification while
controlling bureaucratic costs and control-loss problems. This type of design is used when multiple
businesses in related areas group together people who work on the same product, serve similar
customers and are located in the same area. The division design is made up of separate, semi-
autonomous units, or divisions, that have their own goals to achieve. In this structure operating decisions
making are decentralized to the division level, while strategic decision-making responsibility is centralized
at the headquarters. For example, the Malaysia conglomerate Sime Darby Berhad organized its business
into five main divisions: Sime Darby Plantations, property, industrial, motors, energy and utilities. A chief
executive officer oversees his own division and is completely responsible for the success or failure of the
division. The advantage of division design is that the managers will be more focused on results through
performance measures, because they are responsible. The second advantage is it is more efficient in
coordinating work across different divisions, as there is more flexibility to respond to changes in markets.
The organization has a simpler process in changing the size of the business, by either adding or removing
divisions. The disadvantage is that communication is slowed down because employees in different
divisions are not working together. Also, it is costly because of its size and scope, and requires more
qualified managers for each division. Also, there is normally an emphasis on divisional goals over
organizational goals, which results in duplication of resources and efforts.
.
d) Matrix Design
Matrix design is a hybrid design in which two or more forms of departmentalization are used together. The
design is used in organizations involved in manufacturing (aerospace and electronic), services (banking
and retailing), professional fields (accounting and law), and the nonprofit sector (hospitals and
government agencies). The most common matrix combines the product and functional forms of
departmentalization used in large multinational companies. It allows for the benefits of product and
functional departmentalization to exist in one organization. Normally, this results in a subordinate having
to report to two bosses, one from each core part of the matrix.

The main advantages of matrix design is that it creates a more horizontal structure, and thereby combines
all the other designs and allows team members to share expertise and information faster across task
boundaries, to for achieve common goals. It allows for specialization that can increase depth of
knowledge and allows individuals to be in a specific sector or segment. Disadvantages of the matrix
design include an increase in the complexity of the chain of command because of the differentiation
between functional managers and product managers, which can be confusing for employees who struggle
to understand who is next in the chain of command and it can create power struggles, because most

45
areas of the organization will have two managers, such as a functional manager and a product manager,
working at the same level and covering some of the same managerial areas. Furthermore, this design
also requires a high level of coordination to manage the complexity involved in running large, ongoing
projects at various levels of completion. The designs are very costly because they require a whole new
set of managers to lead the cross-functional groups.

e) Hybrid Design

Hybrid design is operational in the public and private sectors. Some organizations use a design that
represents a hybrid of two or more of the common forms of organizational design based on strategy and
business needs9. Organizational formats that organizations can combine include divisional, functional,
geographic and matrix.

The advantage of hybrid design is the dual focus, such as the combination of product and geographic
components. This may help the organization better meet customer needs. It allows various departments
to enjoy a greater degree of authority and responsibility within individual areas. Its emphasis on giving
employees the flexibility of work in which they are experts creates a sense of unity among the employees
of the organization to ensure that they deliver good performance for the benefit of the organization. The
managers are responsible for decisions, reporting and goal setting, based on their areas of expertise,
which can lead to more precision and potential business growth. The disadvantage of hybrid design is
that it causes a dual reporting system. For example, employees working in accounting will have to report
information to separate managers spread among the different product lines in the organization.

4. Discuss the situational factors which can influence an organization’s design.

There are various situational factors that can affect the optimal design of an organization. The following
four factors are the most common ones that determine how an organization should be designed.

A. Core technology - Technology used such as equipment, techniques and systems in the organization
can be very important in terms of efficiency and costs. According to research, the structure of the
organization and technology used is an important combination. There are three basic forms of core
technology suggested by Woodward that are required by organizations in the process of transforming
inputs (materials and labor) to outputs (products or services)

 Small batch or unit technology refers to products that produce or are manufactured in small
quantities to fulfill customer requirements or are made to order. Examples of small batch
technology are tailor shops, art work, printing presses and photography studios. The companies
with small batch technology normally require flexible or organic structure because the workers
require high skill and knowledge.
 Large batch or mass production technology refers to uniform goods that are produced in high
volume using assembly line operations and automated machines. Examples of mass production
are automobiles, consumer electronic products and computers. The companies with mass
production technology normally require mechanistic or formal structure because the workers
perform repetitive jobs and follow detailed instructions for simple tasks.

 Continuous-process technology refers to the process of transformed raw materials into finished
products using highly automated system production processes with minimal involvement of the
workforce. Some examples of continuous process technology are chemical plants, petroleum
refineries and food processors. Normally companies in this category reflect flexible or organic
structure and require more levels of management.

46
B. Environment - The type of design an organization is likely to adopt is influenced by the environment
where the organization is operating. The external environment factors that influence the organization are
social‐cultural, economic, technological, legal‐political and natural environment. There is a relationship
between environment and design, and two kinds of organization design 5:

 Mechanistic design is a more rigid and bureaucratic form of organizational design that is most
suitable in stable environments. Mechanistic design features high formalization and centralization,
clear communication, specific job descriptions, limited autonomy and self- determination, and
narrower span controls. The system provides a better level of efficiency because the customers'
needs are well understood and probably will remain stable for a relatively long time. Examples of
organizations that have stable environments include manufacturers of staple items such as
paper, soap, cleaning products and fast-food chain restaurants.

 Organic design is a fluid and flexible design that is most suitable in rapidly changing and
uncertain environments. The indicators of organic design are decentralization, few rules and
procedures, wider span controls, sharing of tasks, informal and personal approaches to
coordination, and the use of teams and task forces. In uncertain environments, the customers'
needs change continuously due to technological changes. Therefore, the organization needs to
adapt and respond to changes fast, to fulfill the customers’ needs, in order to be competitive.
Examples of organizations that operate in this environment are electronics and mobile phones
companies.

C. Organization Size - Organization size refers to how large the organization is, reflected by the
number of full-time employees employed by the organization. The relationship between organization
size and structure is supported based on studies carried out by a few researchers. There is
considerable historical evidence that an organization with 2000 employees or more significantly
affects its structure. The organization size that affects the design of organization can be divided into:

 Larger organization. Normally with 2000 or more of full-time employees.

Large organizations develop formal structures or mechanistic systems. The
basic design of the organization will call for highly specialized tasks with
standard operating procedures and detailed rules and regulations. The
communication flows from superior to subordinate and the hierarchical
relationship is the basis for decision making, accountability and control.
Large organizations provide economies of scale efficiency, and this is
suitable for mechanistic systems.

 Small organization. Normally it has a very small number of full-time

employees such as retail stores, consulting firms or restaurants. Small
organizations usually adopt flexible design or organic systems and have flat
structures. The employee is more likely to perform duties based on the
specific needs of the organization and his own expertise level. Few rules and
guidelines are established, and there are communication opportunities for
front-line employees to discuss and interact directly with executives. Small
organization size generally makes it easy to adapt to changes in customer
requirements.

D. Life Cycle - The life cycle of an organization, industry, and product can be an essential factor in
organizational design. Organizations will progress in their business or activities through stages known
as life cycle. Most organizations will pass through four stages of life cycle, namely birth, youth,
midlife and maturity, as shown below:
 Birth. In the birth stage, an organization is just starting and requires capital.
The young organization does not yet have a formal structure and there is not
much delegation of authority because the owner does everything.

47
  Youth: In this phase, the organization is trying to grow and needs resources for expansion. The
emphasis in this phase is on becoming larger. The organization moves its concentration from the
desire of the owner to the desire of the customer. During this stage the organization adopts a
more organic structure whereby formal structure is designed and some delegation of authority
occurs.

 Midlife: This phase occurs when the organization has achieved a high level
of success. The organization is in gradual growth followed by stability. An
organization in midlife is larger, more operationally complex, and increasingly
formal in structure, with more specialization in tasks and rules. The
management level increases and appears in the chain of command, and the
owner has difficulty maintaining control. The owner must learn to decentralize
authority and separate tasks for his organization to survive and thrive during
the growth stage. In this phase the organization becomes more mechanistic
in structure because the organization becomes older.

 Maturity: In the maturity phase the organization becomes less innovative,

less interested in expanding and prefers to maintain in a stable and secure
environment. The organization emphasizes maximizing efficiency and
profitability and tends to become less innovative. If the organization is unable
to adapt and find solutions there will be a decline in sales and narrower profit
margins, and finally the organization will be out of business. However,
maturity is not an unavoidable stage. The organization facing the decline of
maturity may introduce the changes necessary to revitalize. At maturity, firms
will demonstrate significantly more concern for internal efficiency, establish
more control mechanisms and processes and become very bureaucratic.

5. Discuss the emerging issues in organizational design faced by the organizations in your
country.

Three recent developments in organizational design are team organization, the virtual organization, and
the learning organization.

A. Team organization - Team organization is one of the newest organizational designs, developed in the
20th century and spreading rapidly. The team organization, or work groups, can define the entire
organization. A team organization is a design made up of teams and everyone works for a common
objective that requires coordination, interaction, and integration among the members of the team. The
benefits of team organization are that it can assist in recognition of problems of the organization more
precisely, and help discover appropriate resolutions to problems. It also provides an efficient way to
incorporate staff at the management level; jointly uses information and communication in the firm; and
also creates force and synergy in the firm and a rise in creativeness. It enables people to collaborate,
improve individual skills, offer greater participation, have feelings of accomplishment, offer constructive
feedback, and improve knowledge and abilities of individuals. In team organization the teams have the
authority to make decisions quickly, without a chain of command, and they must perform well because
they are held accountable for their performances Therefore, teams can work in finding the best ways to
perform their tasks effectively and efficiently. The complexities of team organization can create problems,
for example, team members sometimes have to deal with conflicting loyalties between their teams and
functional assignments. Furthermore, in team organization the project always takes time and the quality of
results depends on how the team was managed and how well team members work as group.

48
B. Virtual Organization - The change in the markets, along with competition and technology in global
business, have contributed to the growth of the Virtual Organization. The virtual organization conducts its
business by using technology to collect and distribute information. It identifies customer specific
requirements and needs and deliver products and services through a network of specialists. It is a
combination of networks in which many organizations share each other’s skills, costs, capabilities,
markets and customers. For example, the entertainment sector has combined with consumer electronics,
information technology, publishing and communications sectors, to convert movies, books, and software
into digital form. This organization has little or no format structure, with a small number of permanent
employees, and hires specialists when a situation requires it, rents facilities, and outsources basic support
services when necessary. An advantage of virtual organization is that members of the organization can
quickly combine their efforts in terms of design, manufacturing and processes, to meet customer needs
faster. The virtual organizations can benefit from competitive pricing, uninterrupted supplies, group
purchasing power that can lower costs, and can share knowledge that will make it stronger. A
disadvantage is that once work been outsourced it can be difficult to control the quality of work done by
network partners. Furthermore, the managerial skills required are tremendous, because those making
decisions are accountable for decisions made in a network of independent organizations which work
together only temporarily on the project or business. The strong interdependencies can cause
organizations' boundaries to be unclear as customers, suppliers and competitors enter into cooperative
agreements that obligate organizations to use innovation.

C. Learning Organization - Learning organization is among the most widespread and fastest growing
interventions in organizational design and has been applied in organizations such as Boeing, Microsoft
and Apple. A learning organization is defined as an organization that has developed the capacity to
continuously learn, adapt, and change. The organization must have knowledgeable employees able to
share their knowledge with others and use it in a job environment to improve performance. A learning
organization requires a strong organizational culture with employees having a common goal and working
together through sharing knowledge and information. A learning organization must have a strong
leadership style. Learning organizations that are flexible, innovative and knowledgeable can beat their
competitors and excel in business. Furthermore, when knowledge is transformed into new products and
services, it can become a main source of wealth creation for organizations.

KEY TERMS

Authority Authority is the right to give directives, take action and make
decisions in order to achieve the goals of an organization.
Chain of command Chain of command is the vertical line of authority that clarifies who
reports to whom throughout the organization.
Coordination Coordination is a managerial function in which the activities of various
departments in the organization are properly integrated and adjusted
towards achieving common goals.
Departmentalization Departmentalization refers to the process of grouping activities by
placing experts together into one department in an organization.
Job specialization Job specialization is the performing of a certain task which makes a
person limited in performing other activities
Mechanistic design Mechanistic design is a more rigid and bureaucratic form of
organizational design.
Organic design Organic design is a fluid and flexible design.
Organization size Organization size refers to how large the organization is, reflected by
the number of full-time employees employed by the organization.

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Life cycle Organizations will progress in their business or activities through four
stages of life cycle, namely birth, youth, midlife and maturity.
Virtual organization The Virtual Organization conducts its business by using technology to
collect and distribute information.
Learning organization Learning organization is defined as an organization that has
developed the capacity to continuously learn, adapt and change.
Span of control Span of control refers to the number of subordinates whom managers
can control effectively.

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 CHAPTER 12

Change and Innovation

I. The Nature of Organizational Change

I. Organizational change is the movement of an organization away from its current situation toward
some desired future condition. Modification in the organization’s structures, policies, procedures
and techniques leads to organizational change. Changes in the organizations happen through
the employees. If the employees are willing to agree to the need and responsibility for
organizational change, the intended changes can be translated into reality. Furthermore,
employees have to learn to adjust attitudes and behavior patterns to the changing environment.
J. Forces for change - Most organizations prefer stability to change because the more predictable
the daily activities, the higher the level of efficiency that can be achieved. However, organizations
are not static, due to continuous change in reaction to a range of forces that come from things
internal and external to the organization. For a manager of the organization the challenge is to
anticipate and direct change processes so that the organization’s performance improves.
Organizational change is influenced by two things, namely internal and external forces.

 External Forces- The organizations do not have any control over factors in
the external environment. Therefore the organization must change to align
with the environment. The external forces for change originate with the
organization in general and the task environment, including things such as
new competition, legislation and rules imposed by the government,
technology and the economy.
 Internal Forces - Internal change forces are the forces coming from inside
the organization in the form of signals indicating that something needs to be
altered. The Internal forces effecting change are employee expectations,
decline of business, crisis, work environment and inter-relationships.

II. Managing Change

The world is changing fast and organizations also must change accordingly. Organizations that handle
change well will be successful while those that do not may struggle to survive. The concept of change
management is well-known in most businesses today. Managing change in the organization varies, and
mostly depends on the type of business, the type of change, and the people involved. The most important
part of this is how far people within it understand the change process.

A. Steps in the Change Process - Various modern change models are based on the Lewin model.
The model features unfreezing, change and refreezing that leads to the three-stage process of
planned change. For example, if one wants to make a cone of ice to from a large cube of ice, he
needs to melt the ice first to make it amenable to change—the unfreeze stage. Secondly, he
moulds the ice water into the shape he wants—the change stage—and lastly solidifies the new
shape, which is the refreeze stage.

B. Resistance to Change - Various researchers offers different definitions about the resistance to
change concept. Ansoff defines resistance to change as a multi-faceted occurrence which
introduces unanticipated delay costs and instabilities into the process of strategic change. Forces
for change are a recurring feature of organizations. It is also to be anticipated that change will be
resisted, at least to some extent, by an organization’s leaders and employees. There is a human
trend to resist change, because it forces people to adopt new method of doing things. In order to

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 deal with this recurring problem, organizational managers must understand why people resist
change. The most powerful obstacles to change include:
 Uncertainty - Uncertainty is a major reason for employee resistance to change.
Employees may resist change because they are worried about their ability to meet
new job demands or because their job security is threatened. Their lives will be
affected by the proposed change. Any change creates some potential uncertainties,
which employees dislike. For example, an organization may have considered giving a
bonus at the end of the year and you have planned to pay down payment for new
purchase car. A change in this plan could have serious financial implications.
 Feeling of Loss - The second reason for resistance is fear of losing something
already in hand. Appropriate change should benefit the organization as a whole, but
for some employees, the cost of change in terms of lost power, prestige, money,
quality of work, friendship, personal facilities or other valuable benefits will not be
sufficient to compensate for the change. Employees may feel that change will reduce
their accessibility to information, authority, power and the inherent characteristics of
the job. For example, employees may resist moving from the Subang international
airport to the Kuala Lumpur International Airport, located in Sepang, due to the
increase in transportation costs and separation from family members who are
unwilling to move.
 Different Perceptions - The third reason for resisting change by employees is their
perceptions about the change. Different perceptions can affect the organizational
changes if there are persons who consider the proposed changes a bad idea that will
only bring losses to the organization. For example, a manager may have to make a
decision and propose a plan for change based on his own judgment about the
situation. The subordinates may resist the proposed change because they have
assessed the conditions differently, and believe that the change will cause damage to
the organization.
 Threatened Self Interest - Changes may threaten the self-interest of some managers
in the organization. The proposed change may reduce their authority and influence
within the organization. For example, in a glove manufacturing plant the production
manager may have proposed a cell managing system to the top management, to
manage all the production lines in order to reduce the role of the dipping manager.
The concerned manager that handles the operation of the production line for dipping
may refuse to accept the change and fight the change. Finally, top management may
cancel the plan due to strong objections from the dipping manager.

C. Overcoming Resistance to Change - The changes in the organization need to be continually done
even though some employees may create resistance to change. Every organization has a different style
of running its business, but to help overcome resistance to new changes there are some common
techniques:
 Participation - Participation is normally the most effective practice to overcome
resistance to change. Employees who have participated in planning and
implementing the change stage are less likely to resist change than those who have
not participated. For example, an organization may want to change the basis for yield
bonus payment to employees end-product quality to permanent yield bonus.
Therefore the management should have strong participation from non-management
employees from various departments, and union representatives, in the planning and
implementing stage, so that they can communicate the process change to their
peers.
 Education and Communication - When change requires mastering new skills,
especially about new technology, resistance to change will occur. Organizations can
prevent this through offering proper education and training to ensure that employees
are confident and competent to handle the new technology. Effective communication
is as essential as the communication itself. An appropriate communication program

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 can help in overcoming resistance to change. This can be achieved through formal
group presentations, face to face discussions, special reports and publications.
 Facilitation and support - Change agents can offer facilitation and supportive efforts
to reduce resistance. Facilitative support means removing physical barriers in
implementing change by providing suitable training, resources and equipment.
Supportive efforts such as listening, providing guidance, allowing time off after a
difficult period and making the work environment more pleasant and enjoyable.
Emotional support is provided by showing personal concern for the employees during
periods of stress and strain. The problem with this method is it is time-consuming and
expensive, and the implementation offers no assurance of success.
 Negotiation and Agreement - Manages can neutralize resistance by providing
incentives for cooperation. For example, in collective agreements between the
organization and employee unions, recognition can be given to employees in
exchange for support of a new program desired by the organization.
 Force Field Analysis - Force Field Analysis can help overcome resistance to change.
Any change situation involving driving forces acting to change the current conditions,
and resisting forces acting to inhibit change, is called force field analysis. These
forces may initiate in the internal or external environment of the organization or in the
behavior of the managers. The manager must play an important role in initiating
change and in attempting to reduce resistance to change. For example, managers
can think of the current condition in their organization as an equilibrium that is the
result of driving forces and resisting forces working against each other. There are
three ways managers can reduce resistance to change: by increasing the driving
forces, considering new driving forces, and lowering the resisting forces.
 Manipulation and Cooptation - Manipulation happens when managers choose to be
selective in providing information to increase the chance that change will be
successful. Cooptation involves giving the manager of a resistance group, for
example a staff member who represent the work group, a main role in the change
decision. The manager’s advice is required not to arrive at a better decision, but to
get their support. Manipulation and cooptation are cheaper ways to influence
potential resisters to accept change, but these techniques are more risky and prone
to negative side effects. The manager’s credibility may suffer drastically once
discovered.
 Coercion - Coercion is the last resort in overcoming resistance to change. Some
changes require immediate implementation, and change originators may have
considerable autonomy. Such instances lend themselves more readily to the use of
coercion to gain compliance to proposed changes. Employees can be threatened
with a variety of undesirable consequences such as job loss, fewer promotional
opportunities, a salary freeze or a job transfer. Coercion causes negative impacts
such as frustration, fear, revenge, and separation, which lead to poorer performance,
dissatisfaction, and high turnover.

III. Areas to Change in the Organization

Change can involve any part, area or component of an organization. The most common areas that can be
used to carry out change in the organizations are as below:

A. Changes in Organizational Structure and Design - Organizational structure, or the organization

overall design, is the basic configuration where organizational change can occur. Organizational design is
the process of constructing and altering an organization's structure to achieve its objectives.
Organizational structure is the relationship between departments and jobs within an organization.
Structural changes consists of things such as the organization's hierarchy, reporting relationships,
management systems, administrative procedures, coordination mechanism, degree of power
centralization and work design. Structural change is required in an organization because of mergers and

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acquisitions, changes in the business environment and process, or strategic changes. Changes in culture
usually involve the structure and design of the organization as well. Cultural changes are the most difficult
compared to other types of change. Culture is a shared set of assumptions, values, and beliefs in the
organization. A typical culture is a very bureaucratic design, with a top-down chain of command in which
stability and normal processes are important. Finally, the human resource management system, including
selection criteria, performance appraisals and compensation packages, is an area of change that
organizations can consider.

C. Technology Changes - Technology impacts organizational change. Technology is simply defined as

the way work is performed by an organization. The scope of technology that an organization can adopt is
vast, ranging from buying a personal computer with a word processor to investing in the latest state of the
art computer-aided manufacturing machinery. Technological change consists of adapting to information
technology, new tools, the work process, the quality control system, and the operation method. The main
focus of technological change is the existence of continuous initiatives, which aim to develop a process
that is more flexible to better support of operational quality. The most important area of change is
information technology that is designed to make employees and organizations more knowledgeable,
efficient and profitable. Information technology can be linked to changes in things such as job design,
physical location, manager relationships and empowerment, internal and external organization
cooperation, and development of teamwork. Therefore training and other learning opportunities are
essential for companies to help their employees accept the change of technology.

C. People, Attitudes and Behavior - The third area where organizational change can happen is with
human resources, or people. People changes can be the most difficult and important part of the overall
change process. Changes in people can be on a large scale, to create a new organizational culture, or
small-scale, such as working to change employee abilities and skills, performance, perceptions,
expectations, attitudes and values. For example, the merger of three plantation groups into one group
with three sets of employees. The necessary changes involved are people-oriented, requiring blending
the three groups together. The organization can organize by holding team-building events, providing
training for new job roles, offering leadership training to the employees given new management positions,
or allowing employees the opportunity to show their areas of expertise to managers and peers.
Perceptions and expectations of employees are central to organizational changes. For example, the
employees may think that the salaries and benefits offered by the organization are not competitive with
other organizations. This could cause high turnover, and affect the operation of the organization. Changes
also can happen with attitudes and beliefs. Changes in terms of strategic change and new technology, or
other changes in the job environment, may affect employees’ attitudes. Attitudes can be difficult to change
because employees are more comfortable with what they have learned, are fearful of taking risks, are
intolerant of uncertainty, and would like to maintain tradition. Every employee attitude has three main
dimensions, namely cognitive, affective and instrumental tendencies. Affective response relates to the
feeling of being linked to satisfaction about change. Cognitive responses are opinions related to
usefulness and necessity, and include knowledge needed to handle change. Instrumental responses refer
to actions already taken or due to be taken to handle the change. Each type of attitude toward change
may induce a person to support or not support changes occurring in an organizational setting. Therefore it
is essential to challenge and clarify employee beliefs and attitudes toward significant and sustainable
change. The management can adopt collaborative relationships to change the attitudes and beliefs of
employees.

D.Changing Business Process - Many organizations have gone through comprehensive change
programs in terms of design, technology and people. These changes are called business process
changes or reengineering, also known as business process redesign and business transformation.

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Business process change is critical for organization survival, providing the capability to respond to rapidly
changing customer expectations in an increasingly regulated and globally competitive business
environment. Business process is a set of logically related activities carried out to create a value-added
output to a customer or to achieve a defined business outcome. The objective of business process
change is to help organizations basically rethink how they do their work in order to improve customer
service, reduce operational costs, increase profits, reduce production time and improve competitive
advantage in the marketplace. It is applicable to all industries regardless of size, type, or location. As
examples, Procter and Gamble and American Airlines used this technique and have achieved
improvements in regaining profits and better financial status. The steps involved in business process
change are as below:

 Develop Goals and Strategy - Business strategy and goals together are the primary driver of
business process change initiatives. The organization needs to know what is the strategic
direction for coming years, any new markets or products to consider, how to improve
customer satisfaction, and how to address financial problems. This will reflect the
organization’s commitment to a new direction and how the objectives will be achieved.
 Top Management Commitment - Top management must direct the reengineering effort. Top
management commitment is shown by recognizing the need for change, understanding
completely what business process change is, and developing a clear plan of review and a
vision for what the results will achieve for a project being implemented.
 Sense of Urgency - Sense of urgency is required for the success of the business process.
The management team should communicate the urgency of introducing major business
process changes to employees. This information provides employees in the organization with
a guideline to predict the outcome of acceptable behavior patterns and appreciate the
importance of the changes. This will help to minimize resistance to change and increase the
chances for success of business process change.
 Recreate the Organization - Normally the business process change efforts start with a new
and clean slate, or a recreated organization. The business process change usually starts by
asking questions about, for example, how to improve customer service, how to improve the
plant’s yield and efficiency, how to improve quality, and how to overcome competitors.
Business process change is created through new approaches and a system which totally
removes the old procedures.
 Top Down and Bottom Up Participation - Business process change requires a mix of top-
down and bottom-up participation, but the challenge is finding the right balance. The change
can be driven solely from major participation by top-down management or by autocratic style-
changes. A bottom-up approach is when the change comes from large numbers of
employees working together, and this can only happen in organizations that have an
organizational culture that encourages employees to participate.

IV. Organizational Innovation

Innovation is considered an essential component of business productivity and competitive survival of an
organization. Innovation efforts impact the company positively in terms of revenue growth, customer
satisfaction, revenue from new products or services, productivity, and earnings/profit margins. There are
various definitions of innovation, but as general term, innovation is the managed effort of an organization
to develop new products or services or new uses for existing products or services.

A. Innovation Process - The innovation process in the organization consists of development, application,
launching, growing, and managing the maturity and decline of innovative designs, as described below:
 Innovation Development - In the innovation development stage evaluation, modification and
improvement of innovative ideas takes place. In this stage a product or service can be
changed slightly, resulting in significant potential for the product or service.

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  Innovation application - In the innovation application stage the organization will use the ideas
or designs developed in the manufacturing, design or delivery of the product, service or
process. The innovation starts from laboratory and is converted into goods or services during
this stage. This stage might be short or it might be long. The products or services might never
enter the next stage of the innovation process.
 Application Launch – The organization will launch the new product or service into the market.
In contrast to invention during the development process, the launching application is the
process of innovation—the product or service made available for use. Only the most
innovative product or service is one for which the organization is willing to take risks to market
during this stage. But this does not guarantee success. For example, ‘New’ Coke was
introduced by the Coca Cola Company into the market, and it failed, even though during
development and application it appeared promising.
 Application Growth - If the product was successfully launched, the next stage will be
application growth. The innovation in design is also rapid, as new customer applications and
the product or service features emerge. Competitors continue to be integrated since product
or service standards are still changing. During this stage the organization enjoys good
economic performance because the product or service demand is higher than supply.
Therefore the organization needs to predict the demands properly in order to achieve better
growth. If the organization fails to estimate the demand for the unsold product, stock will pile
up in the warehouse and impact profitability.
 Innovation Maturity - Innovation maturity is the stage at which most organizations in an
industry widely access and use innovation in nearly the same way. The technological
application of innovation during this stage can be very advanced. . The product or service
design has changed so that it satisfies most customer requirements .However there is only
marginal gain from technology application that enhances product service design. Therefore
the innovation does not provide competitive advantage to the organization. If the product or
service innovation involves the use of advanced skills, moving from growth stage to maturity
will take a longer period of time. Furthermore, the skills required to implement the innovation
are limited and difficult, the copying strategy will be delayed, and the organization can enjoy a
longer period of competitive advantage.
 Innovation Decline - Since the organization does not gain competitive advantage from an
innovation at maturity stage, it must encourage its members to start looking for new and
better innovation ideas for products or services. Continuously seeking competitive advantage
often will result in the new product or service moving from the innovation process through
innovation maturity to innovation decline. During this stage the demand for innovation is
decreased and might result in removal from the market. Therefore the organization needs to
set a new goal to start the new innovation process again by developing and applying new
innovation products or services to substitute for the old innovation product or service.

B. Types of Innovation -Each innovative idea developed by an organization creates different challenges
for the innovation process. Innovation can be in the form of:
 Radical and Incremental Innovation - The Incremental & Radical innovation techniques are
most commonly used across the world for innovation. Radical innovations are also called
disruptive, transformational, or nonlinear. It refers to innovations that bring a significant
improvement in the products, services, technologies and markets while completely replacing
the existing items in the market. The important benefit of radical innovation is the fact that it
can potentially and significantly change the basis of competition in favor of the innovator. The
disadvantages of radical innovation are that it is high-risk, requires more time for
development, and is expensive to obtain. Some examples of radical innovation are when
manual typewriters were replaced by electronic typewriters, video cassette recorders were
replaced by digital video disk and supplanted by online downloading, high definition television
was replaced by regular television technology, and Walkmans were replaced by iPods.
Incremental innovations are also called sustaining innovations or evolutionary techniques.
They modify by providing enhancements or small improvements in existing products,
services, processes, systems or technologies. Incremental innovations are lower in risk,

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 cheaper, have shorter time frames to develop and are based on a proven product or process.
Examples of incremental innovations are the Pentium chips I to IV developed by Intel. The
chips are of similar patterns but every new version brought to market added new technologies
& innovations.
 Product and process innovation - Product innovation is the introduction of new types of goods
or services that that are new or significantly improve the properties and performance of
finished products. The goal of product innovation may be to develop new products, improve
technical specifications, components and materials, or improve product properties and
quality. Product innovation work is mainly driven by market needs and external customers.
Therefore it is mainly based on effectiveness. Process innovation changes the way a given
good or service is produced, created or distributed within the firm or across a supply chain.
The objectives of process innovation are to reduce the cost of production, achieve higher
yields, increase the quantity of production, improve product recoveries, and provide a better
environment for the production of equipment and software. Process innovation work is mainly
based on internal production requirements and focuses on efficiency. The process is required
to deliver a product or service to customers without added charges and to manage the
relationships with the various stakeholders.
 Technical versus Managerial Innovation - Technical innovations produce changes in the
physical appearance or performance of a product, service or physical process involved in the
way the product or service is manufactured. Examples are the technical innovations involving
the vacuum tube being replaced by the transistor and the integrated circuit being replaced by
the microchip. The end products have helped to improve the power and operation speed of
various electronic goods and simplified usage. Managerial innovations are changes in the
way a product or service is conceived, manufactured and delivered to customers. It involves
the implementation of a new organizational procedure in the organization business method or
workplace organization, improving employee productivity and reducing the cost of the
product. Managerial innovation does not necessary involve changes in make-up of or the
performance of a product or service. Examples of managerial innovation include outsourcing
and business process changes. Outsourcing is an allocation of specific business processes
to external service provider experts. There are various things the organization can outsource,
for example, information technology, logistics, manufacturing, customer support, and
recruitment. Outsourcing can benefit the organization in terms of faster work completion,
better quality output, a shift of certain responsibilities or risk-sharing, and a reduction in
operational and recruitment costs.

C. Why Organizations Fail to Innovate - Technology changes fast and the most obvious effects this
change are observed in the business environment. Organizations that market and sell products or
services should be very innovative, get used to new conditions, and follow the latest trends demanded by
customers. If these developments not followed by the organization, it will cause business losses to rivals.
Organizations are not innovative due to these reasons:
 Lack of Resources - Innovation requires an organization to invest heavily in terms of
money, time and energy. Therefore the organization requires sufficient funds and
employees who are innovative to continue to survive in the competitive marketplace.
For example, in pharmaceutical products 19 out of 20 medicines fail during the
experimental development phase. Furthermore, a company like Pfizer that launches
a new drug will spend about $4.2 billion, and it might take up to 15 years to develop.
Or Hewlett Packard’s investment in personal computers of Apple computers, due to
commitments in the electronics and computer industry. If the organizations have very
strong financial resources, time, management and technical expertise, they can
penetrate the markets and become leaders.
 Failure to Recognize Opportunities - Since the innovations are very expensive, the
organizations cannot pursue all innovative ideas. Therefore the organization must
develop a process of screening in order to evaluate carefully and select the best
opportunities that have the greatest potential. These will help the company to invest
in innovations that help to obtain competitive advantage and better financial

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 positions. For example, Xerox innovated with the graphical-user interface, but failed
to see the opportunities associated with it. Another company, Apple Computer,
realized the remarkable potential of this innovation and incorporated it into their
product Apple Macintosh, and enjoyed the growth of its business as a result.
 Resistance to Change - Many organizations resist change to innovation due to
commitment to the old method of doing things, even with new products or services.
The employees and managers might have difficulty accepting the changes and cause
slowdowns in the innovation process. For example, QWERTY keyboard was
innovated for the typewriter, and subsequently the Dvorak keyboard made typing
faster and less stressful on the hands. The typewriter companies, keyboard
manufacturers and typing teachers resisted accepting the changes.

D. Promoting Innovation in Organizations - There are various ways organizations can promote
innovation. The main ways to promote innovation are discussed below:

 Organizational culture - Hewlett-Packard, Kimberly-Clark, PepsiCo, Microsoft, Yahoo

and Visa companies have one thing in common: strong organizational culture.
Organizational culture seems to be a contributing factor in the success of any
organization. Successful organizations have the ability to absorb innovation into the
organizational culture and management processes. Organizational culture is the set
of shared beliefs, norms, knowledge and values that shape individual and group
behavior. A strong organizational culture can support innovation. This can be done
through support mechanisms such as rewards and recognition and with the
availability of resources (time, information technology and creative people). For
example, the information technology in an organization can help employees use
computer technology, such as the Internet and Intranet, to communicate and
exchange ideas, and the chances of innovation taking place are improved. Also,
acknowledge failures can create opportunities to openly discuss the ideas and learn
from mistakes. Third, open and transparent communication between employees,
groups and sections, to gain new perspectives based on trust, can help employees to
act innovatively.
 Reward Systems – A reward system is an essential function in managing innovation
in a company. Rewards are received as an exchange for product or service
innovation between employee and employer. Rewards are categorized into intrinsic
and extrinsic. Intrinsic rewards are appreciation, job autonomy, job participation and
job significance. Extrinsic rewards are the social rewards resulting from interaction
with others on the job and organizational rewards that are tangible, such as wages,
promotions, bonuses and job security. Rewards can be given in many different forms.
Profit-sharing, employee ownership and stock help to improve the innovation culture
and employees’ ability and willingness to be involved in innovative activities. The
problem is that many organizations hope that employees will think more innovatively
and take risks, but reward them for well-organized, trusted processes and error-free
work. Employees should also be rewarded for risk-taking, experimenting, and
generating innovative ideas. The reward systems introduced by management should
encourage innovative behavior and inspire employees to be more innovative. The
organization also should not punish employees for innovation failure, as such a thing
discourages innovative behavior in the future. For example, Sheryl Sandberg made a
mistake that brought losses to Goggle, but co-founder Larry Page’s response was to
say he was so glad that she made the mistake!
 Intrapreneurship in Larger Organizations - Among the factors that can provide an
intrapreneurial environment in an organization are:
 The support from ownership and top management in terms of
approval of innovative projects, support for budget required to
develop the idea, discretionary resources over a sufficiently long
duration of time, overcoming problems for the project, and full

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 access to company-wide interaction. These supports will foster an
intrapreneurial spirit, resulting in better ideas and a better chance for
success.
 Intrapreneurials who think of a new approach or process deserve to
be allowed to maintain their involvement and commitment on the
project, rather than having it handed off to another person or team.
This will add intrapreneurial creativity and emotional investment to
the project, and help in further developing the process for future use.
Also, the originator possesses the most experience and
understanding of the various issues under consideration.
 Organizations that depend on intrapreneurial initiatives for growth
should be reward and compensate contributions. For example,
rewarding intrapreneurials responsible for sponsoring and
implementing technological change with new career paths can help
to improve the innovative environment. Small businesses that are
unable or unwilling to provide sufficient rewards can expect
intrapreneurials to run to other organizations that will satisfy their
professional development.
 Tolerance of risk, failure, mistakes, and false starts should be seen
as opportunities for learning. Companies like 3M tend to have a
much higher tolerance for innovative failure tha most companies.
The intrapreneur road to success will be accompanied by many
mistakes, but innovative companies realize that those mistakes can
lead to great successes. Indeed, Google allows its employees to
spend up to twenty percent of their time pursuing projects of their
choice.

DISCUSSION QUESTIONS

1. Describe the internal and external forces of change happening in your organization.

The internal and external forces of change generally are as follows:

 External Forces- The organizations do not have any control over factors in the external
environment. Therefore an organization must change to align with the environment. The external
forces for change originate from the general environment, and include such things as new
competition, legislation and rules imposed by the government, technology and the changes in the
economy.
 Internal Forces - Internal change forces are the forces compelled from inside the organization in
the form of signals indicating that something needs to be altered. The internal forces affecting
change are employee expectations, decline of business, crises, the work environment and inter-
relationships.

2. Explain the steps in the change process.

The steps in the change process are as follows:

(a) Unfreezing

The unfreezing stage is probably one of the most important stages. The goal here is to get employees to
understand that the existing status quo or existing way of doing things cannot be continued. They need to

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accept the fact that change is necessary in solving problems and taking advantage of opportunities. The
manager needs to provide the employees with facts and information that communicates the need for
change, such as declining sales performance, poor financial results, poor product quality or a delay in
handling customer problems. The manager will experience conflict or crisis in changing the beliefs,
values, attitudes, and behaviors of the employees. Once the employees understand the meaningfunessl
of change, a strong motivation will be built towards doing things in new ways.

(b) Change

The second stage is normally the most difficult, as employees are unsure or even fearful. In this stage
employees make the changes that are needed to resolve their ambiguity and develop new behaviors,
values and attitudes that support the new direction of work. The changes cannot happen overnight
because employees need time to understand changes and they also need to feel highly connected to the
organization throughout the change period. Therefore during this stage the support from management in
communicating the benefits of change, training and expecting mistakes as part of the process is very
important in achieving the success of the change process.

(c) Refreezing
This is last stage in Lewin’s model for establishing stability once the changes have been made. The
changes such as new methods, new relationships and consistent job descriptions are accepted and
constitute the new pattern of behavior. The aim here is to make sure that the new pattern of behavior is
permanent. To enable the employees and the organization to maintain the new condition, the new
condition must be internalized or institutionalized. This means making sure that the new condition or new
pattern of behavior is used all the time and incorporated into the routine. The employees will feel
confident and comfortable with the new ways of working, with a new sense of stability. The organization
can reinforce the new pattern of behavior through mechanisms such as reward systems, organizational
culture, norms, policies, structures and processes.

3. Based on your experience, discuss how managers handle resistance to change among staff.

Managers handle resistance to change among staff various ways, depending on many factors. The
following are common ways to handle resistance to change:

 Participation - Participation is normally the most effective practice to overcome

resistance to change. Employees who have participated in planning and
implementing the change stage are less likely to resist change.
 Education and Communication - When change requires mastering new skills,
especially about new technology, resistance to change will occur. Managers can
prevent this through offering proper education and training to ensure that employees
are confident and competent to handle the new technology. Effective communication
is as essential as the communication itself. An appropriate communication program
can help in overcoming resistance to change. This can be achieved through formal
group presentations, face to face discussions, special reports and publications.
 Facilitation and support - Change agents can offer facilitation and supportive efforts
to reduce resistance. Facilitative support means removing physical barriers in
implementing change by providing suitable training, resources and equipment.
Supportive efforts include listening, providing guidance, allowing time off after a
difficult period and making the work environment more pleasant and enjoyable.
Emotional support is provided by showing personal concern for the employees during
periods of stress and strain.

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  Negotiation and Agreement - Managers can neutralize resistance by providing
incentives for cooperation. For example, in collective agreements between the
organization and employee union, certain recognitions can be given to employees in
exchange for support of a new program desired by the organization.
 Force Field Analysis - Force Field Analysis can help overcome resistance to change.
Any change situation in terms of driving forces acting to change the current condition
and resisting forces acting to inhibit change is called force field analysis. These
forces may initiate in the internal or external environment of the organization or in the
behavior of the managers. The manager must play an important role in initiating
change and in attempting to reduce resistance to change. For example, managers
can think of the current condition in their organization as an equilibrium that is the
result of driving forces and resisting forces working against each other. There are
three ways managers can reduce resistance to change: by increasing the driving
forces, considering new driving forces, and lowering the resisting forces.
 Manipulation and Cooptation - Manipulation happens when managers choose to be
selective in providing information to increase the chance that change will be
successful. Cooptation involves giving the leader of a resistance group, for example
staff members who represent their work group, a main role in the change decision.
 Coercion - Coercion is the last resort in overcoming resistance to change. Some
changes require immediate implementation and change originators may have
considerable autonomy. Such instances lend themselves more readily to the use of
coercion to gain compliance to proposed changes. Employees can be threatened
with a variety of undesirable consequences such as job loss, fewer promotional
opportunities, a salary freeze or a job transfer.

4. State the major areas of organizational change.

Major areas of organization change are as follows:

A. Changes in Organizational Structure and Design - Organizational structure, and organizational

design, include basic configurations in the organization. Organizational design is the process of
constructing and altering an organization's structure to achieve its objectives. Organizational structure is
the relationship between departments and jobs within an organization. Structural changes consist of
things such as the organization's hierarchy, reporting relationships, management systems, administrative
procedures, coordination mechanism, degree of power centralization and work design. Structural changes
may be required in the organization due to mergers and acquisitions, changes in the business
environment and processes or for strategic reasons. Changes in culture usually involve the structure and
design of the organization as well. Cultural changes are the most difficult compared to other types of
change. Culture is a shared set of assumptions, values, and beliefs in the organization. A typical culture is
of very bureaucratic design, with a top-down chain of command in which stability and normal processes
are important. Finally, the human resource management system, involving such things as selection
criteria, performance appraisal and compensation package, is where changes can be done.

B. Technology Changes - Technology impacts organizational change. Technology is simply defined as

the work performed by an organization. The scope of technology that an organization can adopt is vast
ranging from buying a personal computer with a word processor to invest in the latest state of the art
computer aided manufacturing machinery. Technological change comprises adapting to information
technology, tools used, work process, quality control system and operation method. The main focus of
technological change is continuous initiatives which aim to develop a process that is more flexible to
better support operational quality. The most important area of change is information technology that is
designed to make employee and organizations more knowledgeable, efficient and profitable. Information

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technology can be linked to changes in factors such as job design, physical location, manager
relationships and empowerment, internal and external organization cooperation, and development of
team works. Therefore training and other learning opportunities are essential for companies to help their
employees accept the change of technology.

C. People, Attitudes and Behavior - The third area where organizational change can happen is with
human resources, or people. People changes can be the most difficult and important part of the overall
change process. Changes in people can be very big, to create a new organizational culture, or small-
scale, such as working to change employee abilities and skills, performance, perceptions, expectation,
attitudes and values. For example, the merger of three plantations groups into one group with three sets
of employees. The necessary changes are people-oriented, requiring a blending of the three groups
together. The organization can organize by holding team-building events, providing training for new job
roles, offering leadership training to the employees who are given new management positions, and
providing employees the opportunity to show off their areas of expertise to managers and peers.
Perceptions and expectations of employees are another normal focus of organizational changes. For
example, employees may think that the salary and benefits offered by the organization are not
competitive with other organizations. This will cause high turnover that affects the operation of the
organization. Changes also can be with attitudes and beliefs, which affects their effectiveness. Strategic
change and changes in technology, as well as other changes in the job environment, may affect
employees’ attitudes. Attitudes can be difficult to change because employees are most comfortable with
what they have learned or already know, and fear of taking risks, are intolerant of uncertainty, and are
required to maintain tradition. Every employee attitude has three main dimensions, namely cognitive,
affective and instrumental tendencies. Affective responses relate to the feeling of being linked to
satisfaction about change. Cognitive responses are opinions referring to usefulness and necessity and
involve knowledge needed to handle change. Instrumental responses refer to actions already taken or
due to be taken to handle the change. Each type of attitude toward change may induce a person to
support or not support changes occurring in an organizational setting. Therefore it is essential to
challenge and clarify employee beliefs and attitudes about significant and sustainable change. The
management can adopt collaborative relationships to change the attitudes and beliefs of employees.

D. Changing the Business Process - Many organizations have gone through comprehensive change
programs in terms of design, technology and people. These changes are called business process
changes or reengineering, and are also known as business process redesign or business transformation.
Business process change is important for organizational survival, providing the capability to respond to
rapidly to changing customer expectations in an increasingly regulated and globally competitive business
environment. The business process is a set of logically related activities carried out to create a value
added output to a customer or to achieve a defined business outcome. The objective of business process
change is to help organizations basically rethink how they do their work in order to improve customer
service, reduce operational costs, increase profits, reduce production time and improve competitive
advantage in the marketplace. It is applicable to all industries regardless of size, type, or location.

5. Describe Innovation and the forms of innovation in your country.

Innovation and the forms of innovation will vary from country to country. Below
are some innovation descriptions and forms of innovation:

Innovation is considered an essential component of business productivity and competitive survival of an

organization. Innovation efforts impact the company positively in terms of revenue growth, customer

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satisfaction, revenue from new products or services, productivity and earnings/profit margins. There are
various definitions of innovation, but in general the term innovation means the managed effort of an
organization to develop new product or services, or new uses, for existing products or services.

Innovation can be in the form of:

 Radical and Incremental Innovation - The Incremental & Radical innovation techniques are
most commonly used across the world for innovation. Radical innovations also called
disruptive, transformational, or nonlinear. This refers to innovations that bring a significant
improvement in the products, services, technologies and markets, while completely replacing
the existing items in the market. Incremental innovations are also called sustaining
innovation or evolutionary techniques. It involves modifications by enhancements or small
improvements in existing products, services, processes, systems or technologies.
Incremental innovation is lower in risk, cheaper, involves a shorter time-frame to develop, and
is based on a proven product or process.
 Product and process innovation - Product innovation is the introduction of of goods or
services that are new or significantly improved in the properties and performance of finished
products. Process innovation changes the way a given good or service is produced, created
or distributed within the firm or across a supply chain. The objectives of process innovation
are to reduce the cost of production, achieve higher yields, improve the quantity of production
and product recoveries, and create a better environment for producing equipment or
software.
 Technical versus Managerial Innovation - Technical innovations produce changes in the
physical appearance or performance of a product, service or physical process. It involves the
way the product or service is manufactured. Managerial innovations are changes in the way a
product or service is conceived, manufactured and delivered to customers. It involves the
implementation of a new organizational procedure in the organizational business method, and
workplace organization, improving employee productivity and reducing costs of the product.

6. Discuss the reason for failure to innovate in some organizations in your country.

Generally organizations fail to innovative for the following reasons:

 Lack of Resources - Innovation is required in the organization before investing
heavily in terms of money, time and energy. Therefore the organization requires
sufficient funds and employees who are innovative, to continue to survive in a
competitive marketplace.
 Failure to Recognize Opportunities - Since the innovations are very expensive the
organizations cannot pursue all innovative ideas. Therefore the organization must
develop a process of screening in order to evaluate carefully and select the best
opportunities that offer the greatest potential. These will help the company to invest in
innovations that help to obtain competitive advantage and better financial position.
 Resistance to Change - Many organizations resist change in innovation due to
changing the old method of doing things to a new method for new products or
services. The employees and managers might have difficulty accepting the changes,
which will cause a slowdown in the innovation process.

7. Discuss ways to promote innovation in your workplace.

Generally the main ways to promote innovation in the workplace are described below:

 Organizational culture - Organizational culture seems to be a contributing factor in

the success of any organization. Successful organizations have the ability to absorb
innovation into the organizational culture and management processes. Organizational

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 culture is the set of shared beliefs, norms, knowledge, and values that shape
individual and group behavior. A strong organizational culture can support
innovation. This can be done through support mechanisms such as rewards and
recognition and of the availability of resources (time, information technology and
creative people). For example, the information technology in an organization can help
employees use computer technology, such as the Internet and Intranet, to
communicate and exchange ideas, and such a thing improves the chances that
innovation will occur.
 Reward Systems - Reward systems are essential in managing innovation in a
company. Rewards are received as an exchange for product or service innovation
between employee and employer. Rewards are categorized into intrinsic and
extrinsic. Intrinsic rewards are appreciation, job autonomy, job participation and job
significance. Employees should also be rewarded for risk-taking, experimenting and
generating innovate ideas. The reward system introduced by management should
pay for innovative behavior and inspire employees to be more innovative. The
organization should not punish employees for innovation failure, as this negatively
impacts innovative behavior in the future. For example, Sheryl Sandberg made a
mistake that caused losses to Goggle, but co-founder Larry Page’s response was
that he was so glad that she made the mistake!
 Intrapreneurship in Larger Organizations - Among the factors that can provide an
intrapreneurial environment in an organization are:
 The support from ownership and top management in terms of
approval of innovative projects, support for budget required to
develop ideas, discretionary resources over a sufficiently long
duration, overcoming problems with projects and full access to
companywide interaction. This support will help the intrapreneurials
come up with better ideas and thereby offer a better chance of
success.
 Intrapreneurials who think of a new approach or process deserve to
be allowed to maintain their involvement and commitment to the
project, rather than have it handed off to another person or team.
This will help foster intrapreneurial creativity and emotional
investment in the project, and help in further developing the process
for future use. And these are the people who possess the most
experience and understanding of the various issues under
consideration.
 Organizations that depend on intrapreneurial initiatives for growth
should reward and compensate workers for their contributions. For
example, rewarding an intrapreneurial who is responsible for
sponsoring and implementing technological change with a new
career path can help to improve the innovative environment. Small
businesses that unable or unwilling to provide sufficient rewards can
expect intrapreneurials to run to other organizations that can satisfy
their professional development.
 Tolerance of risk, failure, mistakes, and false starts should be viewed
as opportunities for learning. Companies such as 3M tend to have
very high tolerance for innovative failure. The intrapreneurial road to
success will be accompanied by many mistakes, but innovative
companies realize that these mistakes can lead to great successes.
Google allows its employees to spend up to twenty percent of their
time pursuing projects of their choice.

KEY TERMS

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Business process Comprehensive change programs in term of design, technology and
change people to improve an organization’s competitive advantage.
Intrapreneurs Employees who take the initiative in organizations to undertake
something new, without being asked to do so.
Innovation Managed effort of an organization to develop new products or
services or new uses for existing products or services.
Incremental innovation Modification by enhancements or small improvements in existing
products, services, process, systems or technologies.
Managerial innovations Changes in the way products or services are conceived,
manufactured and delivered to customers.
Process innovation The way a given good or service is produced, created or distributed.
Product innovation Introduction of new types of goods or services which are significantly
improved, in their properties and performance, as seen in finished
products.
Radical innovation Improvement in the products, services, technologies and markets
through completely replacing the existing items in the market.
Technical innovations Changes in the physical appearance or performance of a product,
service or physical process involving the way the product, service or
process is manufactured or presented.
Enterprise resource Integrates various organizational systems and facilitates with error-
planning free transactions and production.
Organizational structure The relationship between departments and jobs within an
organization.
Organizational design The process of constructing and altering an organization's structure
to achieve its objective.
Organizational change The movement of an organization away from its current situation
toward some desired future condition.

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 CHAPTER 13
HUMAN RESOURCES MANAGEMENT HRM

I. Human Resource Management

Human resource management is the function of attracting, developing, and
retaining employees who can perform the activities necessary to accomplish
organizational objectives. This key function is concerned with achieving the
business’ strategic goals and objectives. Building and maintaining a sustainable
competitive advantage is what allows a business to be successful in the long run.

This is particularly so in organizations that embrace high-performance work

practices. Such organizations are focused on not only improving the knowledge,
skills and abilities of their employees, but also on increasing their motivation and
enhancing the retention of quality employees.

Appropriately designed policies attract and retain high performing employees.

They create an organizational climate in which the workforce is highly motivated
and committed to achieving those business objectives, while the policies in the
employment relationship allow responses to changes in the increasingly
competitive global marketplace, where globalization has had a tremendous
impact on how organizations manage their business activities. When compared
to managing processes, machines, finance and technology, it can be argued that
managing employees is the most difficult, yet most important, task for any
manager, for it involves human behavior, which is inherently complex and
potentially conflictual.

However, it is important to note that whether an organization does or does not

have an HR department, every manager is involved with human resource
decisions. This is because managers not only work with processes and
technology, but also with people. They are involved in activities which may
include reviewing application forms, interviewing applicants, orienting new
employees, evaluating employee performance, making decisions about
remuneration and employee training, and providing career advice to
subordinates.

2. The role of the Human Resource Manager

Ulrich proposes that human resource management should select four key areas
of activity that, when executed well as a whole, will support human resource’s
position and ability to deliver, whatever the challenges that come along (see
Exhibit 13.1)

Strategic partner requires the HR manager to develop business acumen, a

customer orientation, and awareness of the competition.

Administrative expert requires the HR manager to re-engineer HR activities in all

organizational processes, see HR as creating value, and measure HR results in
terms of efficiency and effectiveness.

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 Employee champion: requires the HR Manager to be able to relate to and meet
the needs of employees, be the employee’s “voice” in management decisions, be
fair and principled, and assure employees that their concerns are being heard.

Change agent requires the HR Manager to know how to manage change, lead
change in the HR function by developing problem-solving communication,
influence skills, and value knowledge creation, sharing and dissemination.

3. External factors that affect the human resource management function

The HRM process is influenced by the external environment and those factors
most directly influencing it, including the economy, trade unions, governmental
laws and regulations, and demographic trends. Organizational re-structuring
activities, for example, downsizing, reductions in working time, lay-offs,
concession bargaining and related changes in reward systems and working
conditions, fall within the scope of the human resource function.

Examples of contemporary economic crises and their impact on HR practices

would be useful. For example, the global economic crisis of 2007-2009 affected
all major HRM functions across different industries, but had the weakest impact
on performance management. While retrenchment played an important role in
cost reduction, organizational downsizing and workforce casualization are likely
to have had a negative impact on long-term competitiveness and sustainability.

Managing human resources is increasingly challenging, with a range of

legislation, regulations, policies and procedures to be adhered to. The principal
laws on employment in Malaysia are the Employment Act 1955, the Sabah
Labour Ordinance 1949 and the Sarawak Labour Ordinance 1952. Malaysian
labor laws are not static. Legislation is often amended and new ones are
introduced to manage the issues that arise in a rapidly changing and complex
environment. Recent additions to the legal environment in Malaysia include the
Minimum Retirement Age Act 2012 and the Minimum Wages Order 2012. An
important amendment was the inclusion of Section 81 on Sexual Harassment in
the Employment Act 1955, in 2012. Other areas of importance in HRM are
affirmative action and diversity.

4. The HRM Process

Highly competitive companies use high performance work practices. However,

even if an organization does not use such practices, it must ensure that it has
competent human resources to complete specific HRM activities that comprise
the HRM process. Exhibit 13.3 shows the eight activities in this process. The first
three activities ensure that competent employees are identified and selected; the
next two involve providing employees with up-to-date skills and knowledge; and
the final three ensure that the organization retains competent and high-
performing employees.

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 The role of human resources is crucial at every stage of the process, from
planning for the welcoming of human resources to the point where the
employees exit the organization. It’s an important task that involves having the
right number of the right people in the right place at the right time. A major HRM
challenge for managers is ensuring that their company has a high-quality
workforce. Getting and keeping competent and talented employees is critical to
the success of every organization, whether an organization is just starting or has
been in business for years.

The organizational structure is important because it provides guidance and

clarity on specific human resources issues, such as managerial authority, the
lines of communication. It is a company's skeleton—defining the roles and
departments that make up a company's functioning, and showing how everything
fits together into a whole. Once the structure has been established, the
organization has to commence the hiring process - to fill the jobs created.
Sometimes, the need to terminate people from their jobs may arise if
circumstances require.

5. Attracting Human Resources

Human resource planning

Human resource planning is a strategic, long-term approach to a comprehensive

staffing plan, covering all human resource activities from recruitment through
training, development and career management, to the separation of employees
by retirement. It is a continuing process of analyzing an organization’s human
resource needs under changing conditions, both within and external to the
organization, and developing policies to meet those needs (Exhibit 13.3). 
Analyzing the internal labor market, corporate capability and corporate strategy
are required in order to forecast and plan effectively. It is important that
organizations plan in order to prepare for changes in the external environment,
too. Examples of changes in the external environment may be legislation,
government policy, the labor market, or economic fluctuations. Having an
adequate supply of the right numbers and the right type of employees, with the
appropriate knowledge, skills and abilities, at the right price, is crucial to the
organization’s success. An example would be the concerns of the Malaysian
textile and garment industry on the serious shortage of workers due to the
increasing difficulty in hiring foreign workers to work in the factories.

One of the key problems with the human resource planning activity in a dynamic
and uncertain environment is related to the difficulties of developing accurate
forecasts. Useful here would be Mintzberg’s arguments on challenges in
predicting or forecasting the human resource environment. However, human
resource planning is too important to be ignored. For example, without human
resource planning, the organization may not be able to take advantage of
opportunities, and not prepared for possible threats, with no alternative courses
of action and no focus or guide for the organization’s members.

Recruitment

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Beyond filling vacant positions, recruitment and selection are important levers of
organizational change, sustaining employee commitment and achieving high
organizational performance. The desire for a multi-skilled, flexible workforce and
an increased emphasis on teamwork has meant that recruitment and selection
decisions are more concerned with behavior and attitudes than with matching
individuals to immediate job requirements.

Applicants who will “fit in” with the culture of the organization may come from the
internal and external job markets (Exhibit 13.4). Organizations may use different
means to locate qualified applicants from an internal search within the
organization, or from the external job market. However, there are limitations to
both the internal and external sources of recruitment.

The methods used in recruiting should be evaluated periodically to warrant

continued use. One of the most important reasons to evaluate recruiting methods
is to determine the costs versus the benefits of various methods. Whether
managers choose internal or external methods depends upon the degree to
which the organization’s strategy encourages promotions and transfers from
within the organization, which can lead to job satisfaction and motivation if
employees can see new career opportunities available.

Selection

The main goal of selection, which is the process of choosing the right person for
the job from a group of applicants, is to make accurate predictions about people.
Choosing the right person for the job is critical to the organization, as appointing
the wrong person for the job can be costly to the organization and demotivating
for the employee concerned.

Selection methods must be practical within the timeframe, budget and

circumstances prevailing. They must also provide a means of distinguishing
between candidates on the basis of suitability - and, perhaps, potential and
trainability. An important aspect of selection is the validity and reliability of
selection methods. The selection method chosen therefore must be both valid
and reliable.

Selection techniques for assessing job applicants include:

1. Interviews
2. Biodata/Application form
3. Assessment Center
4. Personality test
5. Work samples
6. Reference checking

There is no perfect selection method. Students can be asked to identify how

each of these is used and each one’s strengths and weaknesses.

Downsizing

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 Another approach to controlling labor supply is downsizing, which is the process
by which an organization reduces its workforce.  Although employees can be
retrenched arising from a business necessity, other choices should be
considered first. Downsizing is a way to meet the demands of a dynamic
environment. Disruptions in the workplace and in employees’ personal lives
should be expected. Stress, frustration, anxiety, and anger are typical reactions
of both individuals being laid off and the job survivors. The various downsizing
options available to an organization are as follows (Exhibit 13.5). Students
should be allowed to explore the impact of downsizing on leavers (victims) and
stayers (survivors) of organizational downsizing.

6. Human Resource Development

As the economic environment becomes increasingly more competitive, and

organizations struggle for survival, the role of human resource development has
grown in importance. Human resource development includes training and
development, career planning and performance appraisal. Its focus is on the
acquisition of the required attitudes, skills and knowledge to facilitate the
achievement of employee career goals and organizational strategic business
objectives. Training represents activities that teach employees how to better
perform their present jobs and typically emphasizes immediate improvement in
job performance—for example, skills in using upgraded accounting software.
Development involves those activities that prepare an employee for future
responsibilities through the acquisition of new experiences, knowledge, skills and
attitudes.

An interesting question is whether organizations invest in training and

development even if they already have effective selection procedures. Selection
is about choosing the right person for the job. While there are various selection
methods which can be undertaken to select the appropriate person for the job,
there is, however, no best method of selection. Each method has its own
particular problems in implementation, predictability and validity. Selection is
based on specific criteria, essentially based on organizations’ current needs. It
must be emphasized that the operating environment of many organizations is
highly dynamic—for example, technological, socio-cultural, political-legal or
economic. Employees must continually update their skills.

The need for Human Resource Development

The need for HRD is driven by changes in the environment. These can be
classified as: 1) Business and economic change, 2) Technological change, 3)
Organizational change, and 4) Social, legal and other changes.

Today’s dynamic and sometimes volatile business and economic environment

requires that organizations need to improve the quality of goods manufactured
and services rendered, keep their operating costs low, and improve their cycle
time. Technological change creates requirements for human resource
development. Workforce skilling and reskilling becomes crucial in order to keep
up with the changes in technology and the introduction of new technology.

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Furthermore, as new and more complex technology is introduced, the possibility
of employee obsolescence arises.

The increasing focus on competitive advantage in a highly competitive global

environment puts pressures for improved work force productivity, and
organizations are increasingly pushing for greater flexibility, for example,
numerical flexibility, functional flexibility, wage flexibility and time flexibility.
Training and development can be a powerful tool in implementing a new policy,
implementing a strategy, effecting organizational change, changing an
organization’s culture, meeting a major change in the external environment and
solving particular problems. It has been argued that the human resource goals of
quality, flexibility and commitment are, to a degree, dependent upon training and
development. Changes in legislation, social attitudes and industrial relations
provide strong reasons for training. Other issues include smoking and substance
use, equal employment opportunities and affirmative action policies.

By providing training and development the organization is also demonstrating

trust and confidence in the employee and his future contribution to the
organization. Employees appreciate feeling that management cares about them
and their futures as well as the business needs of the organization.

Within the Malaysian context, it is important that students be exposed to key

legislation, policies and schemes that are related to training and skills upgrading.
The role of the government and employers is essential in meeting economic
growth objectives. Trade unions and workers, too, play critical roles by seeking
re-training and skills upgrading to increase knowledge and skill intensity.
Lectures could also focus on an examination of some shortcomings in HRD in
Malaysia

Management Development

Management development is essential for managers. Otherwise they may lack

the capabilities to manage organizational resources and achieve strategic
business objectives. While training is used more often at lower levels of the firm,
development is common with managers. Management can take the form of
formal education or varied work experiences. Some organizations sponsor their
managers to attend MBA or related programs, or provide tuition reimbursement.
An alternative approach is using varied work experiences. Since senior
managers must build expertise in many areas, they are identified as possible top
managers and given a range of different tasks.

Training

The purpose of training is to teach organizational members how to perform

current jobs and to assist employees in acquiring skills to perform effectively.
Training programs provide opportunities for employees to build their skills and
knowledge, and prepare them for new job opportunities within the company.
Training formats can be classified into 3 categories: on-the-job, on-site but not
on-the-job, and off-the-job (Exhibit 13.6).

Orientation

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Employee orientation or induction, the systematic introduction of the new
employees to their jobs, co-workers and the organization, is a key part of the
training and development process. New employees need to learn about the
organization’s culture. Formal induction can achieve significant cost savings by
reducing the anxieties of new employees and by fostering positive attitudes, job
satisfaction and a sense of commitment at the start of the employment
relationship. Induction thus reduces the likelihood of new employees quitting
before they feel bonded to the organization.

Career development

Career can be defined as a sequence of jobs and work pursuits that constitute
what a person does for a living. But in a changing environment, employees must
begin to think of their careers as a sequence of jobs that may or may not be in
the same organization. Signs that point to changing patterns of individuals’ work
include more freelancing, working from home, more frequent job changes, but
less job security.

Today’s ever-changing work environment means employees are vulnerable to

career disruption or stagnation, so career-planning is critical. This is because job
security today centers not on having a job but on being employable. Thus,
employees must continue to develop their skills to ensure that they possess the
competencies that the market needs.

Career problems that younger employees face are generational issues, such as
how often the employees will change careers, employee loyalty, what motivates
each employee, and the rapid advancement of technology, which is changing
workplaces and work design. Organizations need to understand these issues
and their employees, and use job design, training and development, career
planning and development and motivation strategies to attempt to attract and
retain key employees.

Individual career planning means that the employee must critically examine his
or her personal and vocational interests, personal and career goals and present
skill and ability levels. The human resource department and the employee’s
superior both can help with this process. The employee has the ultimate
responsibility for developing an action plan to achieve a particular career
objective. Effective career planning takes into consideration both organizational
and individual perspectives, as summarized in Exhibit 13.7.

Performance Appraisals

Performance management, defined as a systematic process for improving

organizational performance by developing the performance of individuals and
teams, ensures that the following are developed and effectively carried out:
 setting of corporate, department, team and individual objectives;
 performance appraisal system;
 reward strategies and schemes;

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  training and development strategies and plans;
 feedback, communication and coaching;
 individual career planning;
 mechanisms for monitoring the effectiveness of performance system and
interventions.

Students need to understand the reasons for appraisals and the appraisal
methods, as well as who may perform the appraisals. The issue that needs to be
addressed is whether rewards are attached to the appraisal. Linking pay to
performance requires a robust performance appraisal process and the active
support of line managers. Various problems and biases associated with
appraisers and the inherent subjectivity of the performance appraisal process
may lead to claims of favoritism and arbitrariness. Properly designed, the
performance appraisal should be able to identify low performing and high
performing employees. Arising from this feedback, employees should be
rewarded for their performance, and training and development needs identified.

7.0 Maintaining/Retaining Human Resources

Remuneration and Motivation

Remuneration, one of the most important human resource management

functions, is central to the employment relationship. It can be used to increase
employee effort and output towards achieving the strategic business objectives.
The organization is constantly looking for ways to gain “added value” from its
employees. In today’s competitive environment this is undertaken by
encouraging employees to increase effort and to be more productive. Therefore
motivation theories which underlie remuneration strategies, both financial and
non-financial, are important considerations for managers (Exhibit 13.8).

Various factors may influence pay determination, and these include beliefs about
the worth of the job, individual characteristics, the labor demand and supply in
the local labor market, the strength of bargaining groups, and government
intervention and regulatory pressures. Remuneration packages should be
designed in light of certain key objectives for the organization and for the
employees (Exhibit13.9). While employees require remuneration for the services
they render to an organization, organizations compensate their employees for
their personal time expended working and the effort the employees must put in to
carry out tasks and duties to the levels expected of them.

Pay systems

The three most commonly used pay systems are seniority-based pay, the skill-
based pay and performance-based pay. Students should be clear on the
purpose of each of these. In addition, each of these has its own pros and cons.
In the contemporary environment, organizations seek to develop a productive,
efficient, effective organization that enhances employee motivation and
performance. The PRP, which rewards employees based upon an assessment
of their performance against operating objectives, appears to be the much

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favored reward system. This is because such a system seeks to attain strategic
goals, reinforce organizational norms, motivate higher performance and
recognize differential contributions. Exhibit 13.10 lists some reasons why
management may choose to introduce a PRP system within the organization.

Developing the link between performance and pay

PRP, if structured appropriately, can provide a source of motivation to the

organization’s workforce. Difficulties arise with the linking of performance to pay.
Considerations to be made are the assumption that pay will motivate the
employee to perform better, that employees may concentrate their efforts
towards the achievement of performance objectives and neglect other elements
of their job, whether the individualistic nature of PRP systems will undermine the
team-working ethos and flexibility often desired within organizations, and
whether the pay rewards under the PRP system will be ineffective and
demotivating if the reward is perceived to be low.

Pay and motivation

The key ingredients for effective performance, Ability (A), motivation (M) and
opportunity (O) must be present. The absence of any one of these in the
equation, P = ƒ (A x M x O), would mean poor or no performance.

where
P - Performance
A - Ability to perform
M - Motivation (willingness to perform)
O - Opportunity to perform

Providing rewards to employees is often used as a motivation technique. Some

of the more commonly used methods include one-time monetary rewards, pay
raises, appreciation awards, stock options and promotions. Because each
person is different, what motivates one employee may not be an effective carrot
to dangle in front of another.
Some non-monetary motivators used by managers during lean times include
more flexibility and responsibility, greater freedom and recognition, and
increased input in decision making. Assigning employees challenging projects
can keep them from getting bored and also increase their intrinsic motivation for
the job. In addition, non-monetary rewards offered by managers are a sense of
pride and feeling of accomplishment when a job is done well, pleasure received
from doing a task that is interesting and challenging, participation and
involvement in decision-making, and opportunity for personal and professional
growth.

Minimum wage

Certain laws, including minimum wage, must be taken into account in a pay
system. Minimum wage provides consistency in wages, and provides some form

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 of security in the take-home wage, particularly in sectors such as agriculture and
mining (which are subjected to sharp fluctuations in commodity prices). Besides
benefitting working families and disadvantaged workers, it is part of a broad
strategy to end poverty. The concerns are that minimum wage legislation will
push up wages in the entire labor market, and higher labor costs inevitably get
passed along to consumers in the form of higher prices.

8.0 Managing Labor Relations

Industrial relations or labor relations involves employees and their trade unions,
employers and their trade unions (known as associations), and governments and
the industrial courts, in a tripartite relationship.

A trade union, a formal organization that represents workers in a trade,

occupation, industry or enterprise and seeks to protect their interests through
collective bargaining, has traditionally been regarded as an important instrument
for protecting workers’ interests. It represents one of the few institutions capable
of achieving some measure of equity and social justice for workers. There are
peculiarities in the Malaysian context, in terms of classification of trade unions.
Some understanding of the influence of the government and relevant legislation
would be useful.

The main services trade unions provide for members are negotiation and
representation. They protect and improve pay and conditions of service, and
offer legal representation if their members have problems at work. Unions may
also consider and decide upon strikes, lockouts and similar industrial actions
affecting the members. They protect workers’ basic rights through negotiations
with employers (once every three years in Malaysia). Trade unions also offer
advice on labor disputes, protect members against unfair labor practices such as
unlawful dismissals, provide advice and training for laid-off workers, and promote
the social and educational welfare of members.

Students could offer some discussion on the reasons for the decline in trade
unionism in Malaysia and elsewhere, and its possible impact on workers.

Collective Bargaining

The main services that unions provide for members are bargaining and
representation. Collective bargaining, the process of negotiation with the
intended conclusion of a collective agreement, can take place between a single
employer and a trade union or between a group of employers and a union. It
provides a means for unions to defend and improve members’ welfare through
better, safer and healthier working conditions.

Competitive tactics of unions and management and conflict resolution process

The three main tactics used by trade unions to win support for their demands are
strikes (walkouts), picketing, and boycotts. Employers and unions have a variety
of means available to them in dealing with the tensions which are manifested

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 between employers and workers. The decisions involved in dispute resolution
are summarized in Exhibit 13.11.

DISCUSSION QUESTIONS

1. Visit the website of the Malaysian Ministry of Human Resources, at

http:///www.mohr.gov.my/. Explain the roles of the various departments.

Students should be encouraged to discuss the roles of the various departments, with the support of
on organizational structure of the ministry.

2. Why is human resource management important and what external factors influence
the human resource management process?

HRM is important for three reasons. First, it can be a significant source of competitive advantage.
Second, it’s an important part of organizational strategies. Finally, the way organizations treat their
people has been found to significantly impact organizational performance. The external factors that
most directly affect the HRM process are the economy, labour unions, legal environment, and
demographic trends.

3. What are some potential benefits and drawbacks to working under a collective
agreement?

Potential Benefits Potential Drawbacks

 Can lead to high-performance workplace where  Management’s authority and freedom are more
labor and management jointly engage in restricted by negotiated rules.
problem-solving, addressing issues on an equal  Creates significant potential for polarization
standing. between employees and managers (the them-
 Provides a legally-based bilateral relationship. versus-us mentality).
 Management’s rights are clearly spelled out.  Increases bureaucratization and requires longer
 Employers’ and employees’ rights are protected time needed for decision making.
by a binding collective bargaining agreement.  Increases involvement by external entities (e.g.,
 Multi-year contracts may provide budgetary Department of Industrial Relations, Industrial
predictability on salary and other compensation Court, etc).
issues.  Protects the status quo, thereby inhibiting
 Unions may offer some protection to workers innovation and change. This is particularly the
from the effects of an economic slowdown. case when the change involves privatization.
 Promotes fairness and consistency in  Higher management costs associated with
employment policies and personnel decisions negotiating and administering the agreements.
within and across institutions.  Eliminates ability of management to make
 Employees may choose whether they want union unilateral changes in wages, hours, and other
representation. terms and conditions of employment.
 May restrict management’s ability to deal directly
with individual employees.

4. What are the advantages and disadvantages of each type of remuneration?

The list on advantages and disadvantages below is not exhaustive. They include:

Advantages Disadvantages
Seniority-based pay

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  Main factor is length of service – more stability of  Rewards perceived loyalty and experience,
all staff members. which have no connection to performance.
 Most effective in keeping employees within the  May reduce labor turnover too heavily, resulting
organization. in poorly motivated and poor performing
 Unions believe that it provides objective criteria employees staying on until retirement.
to measure the employee’s loyalty, skills  Does not lead to improved employee productivity
competency and seniority that comes with – employees may do the minimum necessary to
experience. stay in the organization.
 Unions view it as the most important measure of
job security for employees.
 Avoids the problem of biased managers.
 Provides a quick, easy and painless way of
making pay increase decisions.
Skill-based pay
 Pays employees on the basis of the job-related  Can lead to increased pay and training costs
skills, competencies and knowledge that they  Employees with newly acquired skills may
possess - adds value to the organization. become restless and want to move prematurely
 Participative culture and high commitment to to another job.
training and development.  Some employees may not have the ability or the
 Gives employees additional job security, job desire to acquire new skills or knowledge and so
mobility and the opportunity to increase earnings may resist skill-based pay.
without being moved permanently to a higher-
level job.
 Allows for multiskilling, results in a better trained
workforce.
Performance-based pay
 Considers performance as the primary basis for  Unions believe that performance appraisal and
pay increases. merit pay are subjective and open to bias and
 Performance is the impetus in determining pay permit managers to play favorites.
raises. PBP-based pay systems can lead to a  PBP does not reward performance when the size
climate in which all employees are working hard of the merit increase has little effect on
to achieve maximum performance. performance, or when employees fail to make
the connection between pay and performance.

5. Discuss whether organizations should invest in training and development even if

they have excellent recruitment and selection procedures.

Selection is about choosing the right person for the job. It is based on specific criteria, essentially
considering organizations’ current needs. The operating environment of many organizations is highly
dynamic—for example, technological, socio-cultural, political-legal and economic. Employees must
continually update their skills.

Organizations see potential outcomes from training, and view a failure to train as particularly costly.
Viewed strategically, training and development can be a platform for organizational transformation, a
mechanism for continuous organizational and individual development and a vehicle for global
knowledge-transfer. Specifically, training and development can be a powerful tool in implementing a
new policy, implementing a strategy, effecting organizational change, changing an organization’s
culture, meeting a major change in the external environment and solving particular problems.

Ongoing training and development is an important part of the commitment-building process. Different
types of training may be needed to fulfill different objectives, and selecting employees with the right
skills does not eliminate the need for training. Therefore, it is sensible to argue that training is indeed
a central part of HRM even if an organization has excellent recruitment and selection procedures.

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6. With increasing flexibility in the workplace come new challenges in managing
people. Discuss.

Various forms of flexibility in organizations - wage flexibility (performance-based pay), distancing

flexibility (outsourcing), numerical flexibility of labor (flexibility in number of employees made up of
full-time employees having little prospect of secure, continuous employment; workers employed on
“non-standard” contracts of employment, such as temporary, part-time and casual workers),
functional flexibility of highly multiskilled labor, and working time flexibility (or flextime).

The rationale for contemporary organizations to adopt greater flexibility is to remain agile so as to be
able to respond to external and internal labor markets as well as organizational demand for labor.
Flexibility gives the organization a competitive advantage.

Some of the challenges with increasing flexible operations arise in the different and unequal
treatment between the core (permanent) employees and the workers employed on “non-standard”
contracts of employment. Differences arise in terms of pay and benefits, limited career development
opportunities, limited training opportunities, increased job insecurity and increased stress.

7. Explain the key problems or biases that an appraiser should be aware of when
conducting a performance appraisal.

Appraisals are frequently problematic in nature, given that they are attempting to assess a range of
subjective behaviors and outcomes and containing the potential for considerable bias (problems
relating to strictness/leniency errors, favoritism, halo effect, recency effect, central tendency error,
etc.). As such, individual workers are frequently unhappy with the ratings they have been given. If
workers perceive that even if they raise their work performance, it will not be reflected in a higher
performance rating, the motivating effect of the scheme will be lost.

8. Examine why the selection interview remains popular despite findings that, as a
selection tool, it is flawed.

Anderson and Shackleton (1993), for example, state the predictive validity of structured interviews to
be 0.62 as opposed to 0.31 for unstructured interviews. The reasons why unstructured interviews are
problematic include, for example, problems relating to the expectancy effect, the primacy effect, the
contrast effect, the quota effect, and personal bias.

Even though interviews have been the most widely used method of employee selection, they have
been perceived negatively for reasons such as being overly subjective and prone to interviewer bias
—and therefore unreliable predictors of future performance. Such criticism is aimed mainly at
unstructured interviews. Interviewing problems include interviewers being unfamiliar with the job,
making premature decisions, emphasis on negative information and the similar-to-me error. An
applicant who performs poorly in the job interview is likely to be eliminated from the applicant pool
regardless of test results, work experience or letters of recommendation because of the unequal
amount of influence the interview process has on the selection decision.

Since an interview is a two-way process, the candidate will also be evaluating the organization. It is the
applicants who should do most of the talking, and this may require the development of active listening
skills in managers. Also, techniques and skills in areas such as recording information during and at the
end of each interview, and being aware of legal and ethical issues surrounding interviews, are required.

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 Since accuracy is not the key factor influencing the type of selection method used, because of
relatively low validity, the reasons for choosing this method include:
i. Level of vacancy - the use of sophisticated selection techniques is often reserved for managerial
or graduate positions.
ii. Cost - it is cheaper to conduct selection interviews than to use many other selection methods,
particularly for lower-level positions.
iii. Fast – it is relatively quick to use.
iv. Custom and practice - it is expected that every shortlisted applicat would go through an
interview. It provides both the interviewer and interviewee the opportunity to meet each other, to
know more about each other, etc.

The continued popularity of interviews also lies in the fact that people are familiar with them. At a
practical level many interviewers feel that they are good judges of people and can make effective
selection decisions, and most people would probably feel unhappy starting a job without undergoing
some form of face-to-face meeting with the prospective employer.

Developments in interviewing have focused on more formally structuring the interview or

supplementing the interview with less subjective selection tools, such as psychometric tests or work
sampling.

9. Trade unions have been viewed by some as being superfluous. Do you agree or
disagree? State your reasons.

Why do trade unions exist and what functions do they serve in the workplace? This requires
knowledge of the principles of trade unionism. For instance, the idea that rights and improvements
are negotiated collectively for the whole group. Reasons why employees join trade unions include:

Compulsion: To get a job in a “closed shop”, the employee must join the union
Protection: Arbitrary and unfair management pushes the employee to join a union as a
form of protection
Social pressure: Pressure from fellow workers may force the employee to become a union
member
Political beliefs: Employees may join because of their political and social beliefs in the
desirability of unionism
Solidarity: A belief in “strength in unity” may foster union membership
Tradition: Membership in a union is traditional in the employee's family or social group
Pay and conditions: Dissatisfaction with low-wage rates, poor conditions at work and lack of job
security motivate employees to join a union
Communication: The union can provide a communication link to management which allows
employees to express their dissatisfaction without the fear of punishment by
management
Health and safety: A safe and healthy workplace is important to employees. Where the union is
seen to be active in improving the health and safety conditions at work, union
membership becomes attractive

Reasons for the decline in trade unions include the following:

• Decrease in manufacturing
• Growth of service industries
• Increase in women and part-timers in the work force
• Changing social attitudes towards unions
• Demise of compulsory unionism
• Conscious and significant effort by employers (with government support) to decollectivize
industrial relations.

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 • Proliferation of non-regular forms of employment - particularly part-time, casual and self-
employment - difficult to recruit and retain members due to high rate of job mobility.
• Changes in gender composition: female unionization rates have been considerably lower than for
men.

Despite the decline in trade union density, trade unions continue to play an important role, acting to
balance the power relationship when negotiating with employers.

KEY TERMS

Benefits Benefit programs vary among firms, but most companies offer
healthcare programs, insurance, retirement plans, paid time off, and
sick leave. A growing number of companies are offering flexible
benefit plans and flexible work plans, such as flextime, compressed
workweeks, job sharing, and home-based work.
Collective bargaining Collective bargaining, the process of negotiation with the intended
conclusion of a collective agreement, can take place between a
single employer and a trade union or between a group of employers
and a union.
Conflict resolution
Diversity
Flexibility
HR Development Human resource development includes training and development,
career planning and performance appraisal. Its focus is on the
acquisition of the required attitudes, skills and knowledge to
facilitate the achievement of employee career goals and
organizational strategic business objectives.
HR Management Involves the productive use of people in achieving the strategic
business objectives and the satisfaction of individual employee
needs.
HR Planning Human resource planning is a strategic, long-term approach to a
comprehensive staffing plan, covering all human resource activities
from recruitment through training, development and career
management, to the separation of employees by retirement.
Motivation The desire and willingness of a person to expand his effort to reach
a particular goal or outcome.
Orientation Employee orientation or induction; the systematic introduction of the
new employees to their jobs, co-workers and the organization, is a
key part of the training and development process.
Performance appraisal Performance management is defined “as a systematic process for
improving organizational performance by developing the
performance of individuals and teams.”
Personality test Personality tests measure basic aspects of a person’s personality,
that is, the unique blend of characteristics that define an individual
and determine his or her pattern of interactions with the
environment.
Recruitment Recruitment is the process of seeking and attracting a pool of
qualified applicants from which candidates for job vacancies can be
selected.
Remuneration Organizations reward or compensate employees with wages,
salaries, incentive pay systems, and benefits. Various terms have
been used to describe payment systems, including “remuneration”,

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 “compensation”, “reward”, “payment”, “wages” and “salary”.
Selection Selection is the process of choosing the the right person for the job
from a group of applicants.
Talent management
Trade union A trade union is a formal organization that represents workers in a
trade, occupation, industry or enterprise and seeks to protect their
interests through collective bargaining.

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 CHAPTER 14

ELEMENTS OF BEHAVIOR IN ORGANIZATIONS

1.0 Introduction

For any manager to be successful, it is crucial that he or she is able to handle people
effectively and therefore understand people’s behavior in organizations. Also known as
organizational behavior, behavior in organizations refers to the actions of people at the
workplace. Organizational behavior is an interdisciplinary field, which is devoted to the
study of “human attitudes, behavior, and performance in organizations.” It is critical for
managers to understand and explain why employees engage in specific behaviors and not
others, and to be able to influence how they behave. Successful organizations have
cultures that assist their employees in understanding how to work together at both the
level of the individual and the group.

2.0 Understanding Individuals

Effective managers rely on the performance of their business units, which is ultimately
dependent on the performance of individual employees. This chapter explores the
importance of the individual’s contribution to the performance of work organizations. The
equation for job performance is Attributes x Work x Organizational effort support. This
equation views performance as a function of individual or group attributes (capacity to
perform), work effort made (willingness to perform) and organizational support received
(opportunity to perform) (Exhibit 14.1).

Personality, which is at the heart of individual differences, has been defined as “a

relatively stable set of characteristics that influences an individual’s behavior”, and as “the
relatively enduring combination of traits which makes an individual unique and at the same
time produces consistencies in his or her thought and behavior.” Students should not only
be appreciative of the growing use of psychological tests in the field of personality
assessment, but also some of the controversies and sensitivities surrounding the use of
tests.

3.0 Holland’s RIASEC model

John Holland’s model to describe personality, the RIASEC model or personality-job fit
model, proposes that job satisfaction and the likelihood of leaving that job depend on the
degree to which individuals successfully match their personalities to the job environment.
It is used to represent the inter-relations among the six personality types and job
environments (Exhibit 14.2). The hexagonal structural model suggests that interests,
which reflect stable and lasting likes and dislikes, can be categorized into realistic,
investigative, artistic, social, enterprising and conventional. The closer the two personality
types are in the hexagonal model, the more compatible they are, whereas those
personality types which are diagonally opposite are highly dissimilar.

These interests can explain why people are drawn toward some careers and away from
others. Employees’ job satisfaction is highest and turnover lowest when sufficient
consideration is given to matching personalities with the job, resulting in higher-performing

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 employees. Exhibit 14.3 describes the six types, their personality characteristics, and
examples of suitable occupations for each.

Students may want to know what their occupational personality type(s) is or are. To
discover the work environments suited to their interests, abilities and personality, they
could complete the following career exploration exercise. Instructions to them are as
follows:

Pretend that you have enrolled in a class that requires several group projects. For the newest
assignment, the instructor wants you to complete this form so that she can place the most similar
people together. Think about the things you like and are interested in. Where do you best fit?
Select the three groups out of the six which most closely describe you. 1 = Most closely describes
you. 2 = Frequently describes you. 3 = Sometimes describes you.

Choice #1 _______________ Choice #2 _______________ Choice #3 _______________ _

Essentially, the theory proposes that people choose jobs that match their own
personalities. As such social individuals should be in compatible social-type jobs such as
social workers or teachers. Likewise, conventional individuals should be in conventional-
type jobs such as accountants and bank tellers. Realistic individuals should be happier as
mechanics or mechanical engineers than as writers. Although personality is a major
influence on the preference of a job (or “occupational”), it is not the only influence. Other
influences include social class, parents’ occupations, economic conditions and
geographical location.

4.0 Personality and Individual Behavior

The Personality-Organization Fit  

Besides matching personality to job, consideration has expanded to include matching

people to organizations. As organizations increasingly face a dynamic business
environment which demands great flexibility in their operations, they require employees,
who are able to readily handle varied and changing tasks, work effectively in teams and
move fluidly between teams. As such, it may be more important that employees'
personalities fit with the overall organization's culture than with the characteristics of any
specific job. 

Big Five Taxonomy (OCEAN)

The Big Five is viewed as an important unifying framework for just five personality super
traits, namely Openness to experience, Conscientiousness, Extraversion, Agreeableness
and Neuroticism (with the mnemonic OCEAN). These capture most of the differences that
can be observed between each other’s personality (Exhibit 14.4).

Using this OCEAN taxonomy, it would be expected that employees high on extraversion,
which predicts performance in politics, managerial and sales positions, fit better with
aggressive and team-oriented cultures. Employees high on agreeableness are warm,
positive, and straightforward and will match up better with a supportive and encouraging
organizational climate than one that focuses on aggressiveness. Employees high on

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 neuroticism or “negative emotionality” express traits such as anxiousness, impulsiveness
and vulnerability. While such traits would be useful for social scientists and academics,
employees low on neuroticism (resilient) would have traits useful for air traffic controllers,
airline pilots, finance managers and engineers.

Employees with traits associated with openness to experience fit better into organizations
that emphasize innovation rather than standardization. They are curious, imaginative,
creative and complex, yet the trait is not related to job performance across all jobs. It is
difficult to imagine a job where the traits associated with conscientiousness, such as
hardworking, persevering, organized and dependable, will not be useful. Such employees
strive for accomplishment. When hiring, organizations which make use of their
understanding of the Big Five taxonomy should lead to selecting new employees who fit
better with the culture of the organization, which should lead to higher employee
satisfaction and reduced turnover.

Students could be exposed to an interactive version of the Big Five, developed by

Goldberg (1992) (see http://personality-testing.info/tests/BIG5.php).

The Myers-Briggs Type Indicator (MBTI)

The MBTI, a personality assessment instrument based on the theory of psychological

types described by Carl Jung, asks people how they usually act or feel in different
situations. It is a popular approach to classifying personality traits. Based on their
responses, the individuals are classified as exhibiting a preference in four dimensions
(Exhibit 14.5).

a. Social interaction: extrovert (E) or introvert (I)

b. Preference for gathering data: sensing (S) or intuitive (N)
c. Preference for decision making: feeling (F) or thinking (T)
d. Style of making decisions: perceptive (P) or judgmental (J)

Combining these preferences provides descriptions of 16 different personality types.

Students could be exposed to the MBTI by completing the test and having a follow-up
discussion with an MBTI professional. This will help them gain a better understanding of
their best-fit types and deeper insight into uses of their preferences. This website, which
requires a payment in order to complete the test, is:

http://www.myersbriggs.org/my-mbti-personality-type/take-the-mbti-instrument/

Another test, based on the Work of Myers, Briggs, and Jung, is available free of charge. It
allows the user to obtain a four-letter type code according to Jung's typology as developed
by Myers, Briggs, von Franz, and van der Hoop. This test is one of several ways to
quantify interpretations of Jung's typology, similar but not identical, to the MBTI test (the
Myers-Briggs Type Indicator® MBTI), the Jung Type Indicator, and other such
instruments. The website is:

http://www.celebritytypes.com/test.php

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 The goal of the MBTI is to allow employees to explore and understand their own
personalities including their likes, dislikes, strengths and weaknesses, and compatibility
with other people For example, the manager is an intuitive type and prefers gut feelings,
whereas the subordinate is a sensing type and prefers routine details. The manager, to
work effectively, would require the subordinate to present more than just facts about a
problem or situation. In addition, the MBTI, when used to identify possible career
preferences, can assist managers in better matching employees to certain types of jobs.

Other dimensions of personality are:

 Locus of control (Internal locus of control versus External locus of control)
 Machiavellianism (High Mach versus Low Mach)
 Narcissism
 Type A versus Type B personalities

5.0 Attitudes and Individual Behavior

An attitude is a predisposition to respond in a positive or negative way to someone or

something in the environment, and it results from the individual person’s background,
personality and experiences in life. Attitudes are learned throughout life and are embodied
within our socialization process. As such, attitudes are relatively long lasting beliefs,
feelings and behavioral tendencies held by individuals about specific objects, groups,
events, issues or people, which may not necessarily be factual or completely consistent
with objective reality.

There are no limits to the attitudes people hold. Some attitudes may be highly resistant to
any change, as they are central to one's being, whereas others may change with new
information or personal experience. The three components of attitudes are cognitive (the
beliefs, opinions, knowledge, or information held by a person), affective (the emotional or
feeling segment of an attitude) and behavioral (an intention to behave in a certain way
toward someone or something).

The most commonly studied work attitude is job satisfaction, which is the degree to which
individuals feel positively or negatively about their jobs. It is an emotional response to
one’s tasks as well as to the physical and social conditions of the workplace. Students
should be exposed to Frederick Herzberg’s hygiene-motivator theory, Hackman and
Oldham’s Job Characteristics Model and Locke’s definition of job satisfaction.

The reasons for job satisfaction will be discussed. Job satisfaction can influence employee
productivity, absenteeism, turnover, and customer satisfaction. An issue for discussion is
whether productivity leads to job satisfaction or whether job satisfaction leads to
productivity.

6.0 Perception and Individual Behavior

Perception is a cognitive process that individuals use to make sense of their experience,
in order to give meaning to their environment. They are unique, for they see things in

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 different ways, and they have their own way of looking at and understanding their
environment and the people within it. However, what individuals perceive can be poles
apart from reality, as such perceptions differ. People do not all view events in the world
with the same “lens”. Their behavior is based on their perception of what reality is, not on
reality itself. The perceptual differences among them may be minor, but their differences
can also be deep-seated. It is important to understand how and why there are individual
differences in perception.

Factors That Influence Perception

The factors that operate to shape and occasionally distort an individual’s sensory
impressions can reside in the perceiver; in the object, or target, being perceived; or in the
context of the situation in which the perception is made (see Exhibit 14.10).

Attribution Theory

Attribution theory is concerned with the question of whether one’s behavior has been
internally or externally caused. Internal causes are believed to be under an individual’s
control, whereas external causes are seen as outside a person’s control. When people
speak about themselves, they tend to attribute success to their personal factors but failure
to external factors. However, when speaking about other people, people tend to attribute
their success and failure to personality features. The determination of the cause of the
behavior (to what do we attribute this behavior?) depends on three factors, i.e.,
distinctiveness, consensus and consistency (Exhibit 14.11).

Concepts such as fundamental attribution error and self-serving bias, and common kinds
of distortions or errors or shortcuts in judging others that can make the perceptual process
inaccurate, will be discussed, with examples. Examples include stereotyping, halo effect,
selective perception, contrast effects, projection, assumed similarity and self-fulfilling
prophecy.

7.0 Stress and Individual Behavior

Stress can be defined as a state of mental or emotional strain or tension resulting from
adverse or very demanding circumstances. Stress at work is one of the major adverse
influences on job satisfaction, work performance and productivity. Stress, which can arise
through a number of interrelated influences on behavior including work, home and
organizational issues, is a source of tension and frustration.

Stress and performance

While, stress cannot be totally removed from a person’s life, not all stress is dysfunctional.
Exhibit 14.12 shows the relationship between stress and performance. Undoubtedly,
stress is a factor that can strongly impact workplace performance. Increased stress results
in increased performance (eustress), but only up to a point. Any further increase in stress
will lead to increasingly reduced performance (distress).
 
Potential sources of stress

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 As the model in Exhibit 14.14 shows, there are three categories of potential stressors:
environmental, organizational, and personal.

Consequences of Stress

Stress at the workplace places a heavy burden on organizations. This is evident from
dysfunctional work behaviours such as absenteeism, tardiness and reduced levels of work
performed. Stress reveals itself in a number of ways, and the symptoms fit into three
general categories: physiological, psychological, and behavioral.

Managing Stress

Individual Approaches: An employee can take personal responsibility for reducing stress
levels. Individual strategies that have proven effective include time-management
techniques, increased physical exercise, relaxation training, and expanded social support
networks.

Several organizational factors that cause stress are controlled by management and thus
can be modified or changed. Strategies to consider include improved employee selection
and job placement, training, realistic goal-setting, redesign of jobs, increased employee
involvement, improved organizational communication, employee sabbaticals, and
corporate wellness programs.

To measure stress according to the Holmes and Rahe Stress Scale, the number of "Life
Change Units" that apply to events in the past year of an individual's life are added and
the final score will give a rough estimate of how stress affects health. Students could be
asked to identify their stress levels by completing the Holmes-Rahe Life Stress Inventory
at the following website:
http://www.stress.org/holmes-rahe-stress-inventory/

The higher the score, the higher the risk of stress, in the future.
11-150 You have only a low to moderate chance of becoming ill in the near future.
150-299 You have a moderate to high chance of becoming ill in the near future.
300-600 You have a high or very high risk of becoming ill in the near future.

DISCUSSION QUESTIONS

1. Why is it useful to study organizational behavior?

Organizational behavior is the study of individuals and groups in organizations. It involves

a study of the external and internal environments, functioning and performance of
organizations and the actions of people at work, either as individuals or as part of broader
work groups. The goal of organizational behavior is to explain, predict and influence the
behavior of people at work. Dramatic changes signal the emergence of a new workplace
with high-technology, global competition, demanding customers, high-performance
systems, and concerns for ethical behavior and social responsibility. In that context, it is

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 also concerned with reconciling the needs of the organization and the contribution of
maximum productivity with the needs of individuals and the realization of their potential.

The concepts and principles of organizational behavior are important to managers,

because in every organization people ultimately make the decisions that control how the
organization will acquire and use resources. They may cooperate with, compete with,
support or undermine one another. Their beliefs and feelings about themselves, their co-
workers and the organization shape what they do and how they will do it. By
understanding what causes people to behave as they do, managers can exercise
leadership to achieve positive outcomes. Key employee behaviors that managers are
concerned about include employee productivity, absenteeism, turnover, organizational
citizenship behavior, and job satisfaction.

2. How can understanding the concept of personality improve our organizational

lives?

Personality captures the overall profile or combination of characteristics that represent the
unique nature of a person as that person reacts and interacts with others. Understanding
personality can help managers predict how an individual might act in a particular situation.
Managers who appreciate the ways their employees’ personalities differ have insight into
what kinds of leadership behavior will be most influential.

3. Discuss the impact of stress on workplace performance. How can stress be

managed?

Stress can be defined as the tension and frustration which tends to arise when an
individual feels that a certain situation should not exist, or a state of tension experienced
by individuals facing extraordinary demands, constraints or opportunities.

There are two faces of stress: Constructive stress (or eustress) acts in a positive way for
the individual and/or the organization, and destructive stress (or distress) which is
dysfunctional for the individual and/or the organization.

Causes of stress include work factors (task demands, role dynamics, interpersonal
relationships, and career progress), non-work factors (family, economics and personal
affairs) and individual factors (needs, capabilities and personality).

There are legal, ethical, and productivity reasons for managers to be concerned about
overwork and stress. Tiredness and stress increase the chances of occupational health
and safety breaches which attract significant legal penalties for organizations and
individual managers and workers. Tired and stressed workers are less motivated to work
effectively or efficiently, which leads to productivity problems for the organization. Issues
of management style and workplace relations are also important. A manager who insists
on pushing staff to emotional and physical limits is more likely to be distrusted, be the
target of cynicism, and generally lower the morale of the workplace. Increased turnover
and absenteeism are the likely outcomes.

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 Potential consequences for the individual include behavioral, psychological and medical
problems, while for the organization; it might include decreased performance, morale and
motivation, and increased turnover and absenteeism.

4. Explain the components of an attitude, with a suitable example.

Attitudes are made up of three components: cognitive, affective, and behavioural. The
cognitive component of an attitude includes the beliefs, opinions, knowledge, or
information held by a person. The affective component of an attitude is the emotional
feeling segment of an attitude. The behavioural component of an attitude is an intention to
behave in a certain way towards someone or something.

5. Contrast the MBTI and the Big Five model. Describe five other personality traits that
help explain individual behavior in organizations.

The Myers-Briggs Type Indicator (MBTI) asks people how they usually act or feel in
different situations and places them in one category in each of four dimensions (extrovert
or introvert in social interaction, sensing or intuitive in data gathering, feeling or thinking in
decision making, and perceptive or judgmental in decision making). The Big Five Model is
supported by research showing that important relationships exist between job
performance and five personality dimensions (extroversion, agreeableness,
conscientiousness, emotional stability, and openness to experience).

Five specific personality traits that are the most powerful in explaining behavior are locus
of control (the belief that we control our own destiny), Machiavellianism (pragmatism,
emotional distance, and the belief that ends justify means), self-esteem (the degree to
which we like or dislike ourselves), self-monitoring (an individual’s ability to adjust his or
her behavior to situational factors), and risk taking (our willingness to take chances).

6. Explain how an understanding of perception can help managers better understand

individual behavior. Name three shortcuts used in judging others.

Perception is a process by which individuals organize and interpret their sensory

impressions in order to give meaning to their environment. Individuals may look at the
same thing, yet perceive it differently. Because of this, different individuals interpret what
they see and then behave according to their perceptions. The fact that different people
perceive the same thing differently is influenced by a number of factors that act to shape
and sometimes distort perception. These factors are the perceiver, the object or target
being perceived, and the context of the situation in which the perception occurs.

Shortcuts in judging others include assumed similarity (in which we are incorrectly
influenced by our own characteristics rather than by those of the person observed),
stereotyping (in which we judge someone on the basis of our perception of a group he or
she is part of), and the halo effect (in which we form a general impression about a person
based on a single characteristic).

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7. Describe the key elements of attribution theory. Discuss the fundamental attribution
error and self-serving bias.

Attribution theory has been developed to explain how we judge or perceive people
differently depending on what meaning we attribute to a given behavior we observe.
Basically, the theory suggests that when we observe an individual’s behavior we attempt
to determine whether it was internally or externally caused. Internally caused behaviors
are those that are believed to be under the personal control of the individual. Externally
caused behavior results from outside factors. That is, the person is forced into the
behavior by the situation. The determination of the cause of the behavior (to what we
attribute this behavior) depends on three factors. Firstly, distinctiveness refers to whether
an individual displays a behavior in many situations or whether it is particular to one
situation. Secondly, consensus refers to whether everyone who is faced with a similar
situation responds in the same way with the same behavior. Finally, consistency refers to
the congruency in a person’s actions.

The fundamental attribution error refers to the tendency to underestimate the influence of
external factors and overestimate the influence of internal factors when making judgments
about the behavior of others. Self-serving bias is the tendency for individuals to attribute
their own success to internal factors while putting the blame for failures on external
factors.

8. Celtex Chemical Industries is expected to complete construction of a new

production plant soon. Its owners and executives want to begin recruitment of new
employees. The employees will have a high degree of autonomy, because the plant
uses self-directed work teams. The work also requires employees who are careful,
because the materials are sensitive to mishandling. Identify one personality trait
from the Big Five that may be appropriate for selecting people in these jobs, and
explain why.

There are many aspects of personality. Five traits, however, have emerged as particularly
important in the workplace. These are:
 extroversion: outgoing, talkative, sociable and assertive.
 conscientiousness: careful, dependable, self-disciplined and with the will to achieve.
 agreeableness: being courteous, good-natured, emphatic and caring.
 emotional stability: poised, secure and calm.
 openness to experience: refers to the extent that people are sensitive, flexible, creative
and curious.

It may be argued that either extroversion or agreeableness may be an important

personality trait required among the new employees. It may be argued that employees
would need to have such a personality trait if they are given a high degree of autonomy
and would work within self-directed work teams. On the other hand, it may also be argued
that the employees would need to have either a conscientiousness or emotional stability
personality trait if being careful, calm, etc. is important.

KEY TERMS

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Attitude A predisposition to respond in a positive or negative way to someone
or something in one’s environment.
Attribution A theory used to develop explanations of how we judge people
differently depending on the meaning we attribute to a given behavior.
Big 5 A five-factor model of personality that includes extraversion,
agreeableness, conscientiousness, emotional stability, and openness
to experience.
Locus of control The degree to which people believe they are the masters of their own
fate. It can be either external or internal.
Machiavellianism The degree to which people people view and manipulate others for
purely personal gains, and believe that ends justify means.
MBTI A commonly used psychometric questionnaire designed to
measure psychological preferences in how people perceive the world
and make decisions
Narcissism Characterizing a personality type – an excessive preoccupation with or
a craving for admiration.
OCEAN The acronyms commonly used to refer to the Big Five personality traits.
Perception A cognitive process that individuals use to make sense of their
experience, in order to give meaning to their environment.
Personality A relatively stable set or combination of characteristics that represent
the unique nature of a person.
Stress A state of mental or emotional strain or tension resulting from adverse
or very demanding circumstances.
Stereotype Refers to judging an individual on the basis of the characteristics
commonly associated with the group to which the individual belongs.
RIASEC A theory of personality that focuses on career and vocational choice.
Grouping people on the basis of their suitability for six different
categories of occupations, the six types yield the RIASEC acronym.
Type A/Type B While Type A people are characterized by impatience, desire for
achievement, and perfectionism, Type B people are characterized as
relatively easier going and less competitive than Type A individuals.

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 CHAPTER 15

MOTIVATION
I. Nature of Motivation

K. Typology of the Interrelation between Forces and Locus. Extrinsic motivation has
the characteristics of external locus of causality and internal locus of
consequence. The person with extrinsic motivation will engage in activities that
allow them to acquire material or social rewards that they desire. Intrinsic
motivation has the characteristics of internal locus of causality and internal locus
of consequence. This intrinsic motivated behavior comes from their own source
of motivation and they perform from their own sake and action itself. Contributive
motivation has the characteristics of internal locus of causality and external locus
of consequence. Person with contributive motivation will engage in activities that
have potential impact on other person, organizations or society. Relational
motivation has the characteristics of external locus of causality and external
locus of consequence. People with relational motivation will engage in activities
that could strengthen the relationship with the consequence. See Exhibit 15.1.

L. Importance of motivation in workplace.

 Motivated employees will perform efficiency in organization.
 Motivation contributes to stable workforce.
 Motivated employees are willing to accept change
 Motivated employees see their interests as parallel to organization interest.

II. Content Perspectives

A. Needs Hierarchy Approach

 According to Abraham Maslow, physiological, safety, social, and esteem
needs categorized as D- needs or deficiency needs which mean that these
needs arise due to deprivation. A person will satisfy these lower-level needs
first to avoid unpleasant feelings or consequences. The highest-level of the
pyramid which is self-actualization needs categorized as B-needs or being
needs. This need will arise when someone has the desire to grow as a
person unlike deficiency needs that stem due to lack of something.
 Maslow explained that everyone start from physiological needs. Without food
or water, no one would think about achieving higher level of needs. Besides,
every human being requires one need at one time. For instance, imagine
when you are hungry, what is the needs that most important to you at this
time? Of course, is to fulfill your physiological need which is food and water.
While you are walking to university, there is suspicious motorcyclist following
you, what is the need that you want to satisfy at this moment? Of course, it is
your safety needs. You certainly would not think about your social need that
this moment. Imagine when you are in the cinema and saw someone with
couple of friends to accompany them, however, you are watching the movies
alone, therefore, at this moment you would like to acquire your social needs.
In addition, Maslow explained generally all normal human being would like to
seek higher level of needs once they met their lower level of needs.
However, if they could not able to get the higher level of needs, this will
reduce their motivation level.

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 B. Alderfer’s ERG Theory. Clayton Alderfer’s ERG theory drew upon Maslow’s
hierarchy of needs by identifying three components of needs. Exhibit 15.3 shows
Alderfer’s theory of need. He reduced Maslow’s levels from five to three needs
which are existence, relatedness and growth. Alderfer does not agree that a
person will start to fulfil their lowest needs as claimed by Maslow. He claimed
that needs are not arrange in any order. This means that lower level needs need
not be satisfied first before moving on to higher level need. Imagine that you are
graduating soon, what is the need that you most prefer? Referring to Maslow’s
theory, you would want to fulfil your physiological need which is to find job that
allow you to pay for food, water and shelter. However based on Alderfer’s theory,
every person could prefer different needs. Some would prefer to have more
friends (relatedness), some would like to have more achievement and status
(growth).

C. Herzberg’s Two Factor Theory. In the early 1960s, Frederick Herzberg proposed
two-factor theory by dividing into two areas of needs: hygiene and motivator.
When a person is unable to fulfill hygiene needs, he or she will be dissatisfied.
Although this person is able to fulfill his or her hygiene needs, it does not result in
high level of motivation or satisfaction. This person will have no dissatisfaction
but does not mean that he or she is satisfied. In order to satisfy and motivate
person, motivator needs must be fulfilled.

D. McClelland’s Acquired Needs Theory. A person is not born with the

characteristics that cause this person to acquire that specific need. This person
will learn to acquire the specific needs not during childhood development but
adult stage.10 If the motives are learned or developed as a result of one’s life
experiences during adult stage, this will influence the person to acquire the
needs. For instance, imagine that you studied accountancy program in your
university, and once graduate, your first career is an executive in one of the
establish accountancy firm. From your working experience, you saw most of the
employees promoted were due to good interpersonal relationship with
management, therefore, this would influence you to acquire social needs as your
priority. Therefore, acquired needs theory is also known as learned needs theory.

III. Process Perspectives

A. Expectancy Theory - Expectancy theory developed by Victor H. Vroom is

categorized as process perspectives of motivation. Process perspectives
describe motivation as a combination of different variables that influence the
amount of posits that workers will expend much effort to achieve something when
workers believe that their high levels of effort will lead to high performance and
subsequently their high performance will lead to the attainment of their desired
outcomes. Expectancy theory identifies three major relationships or components.
As shown in Exhibit 15.5, this theory includes expectancy, instrumentality, and
valence. Vroom explained that a person will have strong motivation level when
levels of expectancy, instrumentality and valence are high. If any of these
components is low, the person motivation level is likely to be low.

B. Equity Theory - Developed by psychologist J. Stacy Adams is a theory of

motivation that proposes person’s perception of fairness on the treatment that
they received as compared to others. This person usually compare their own
ratio with the others referent ratio. Referent means someone that the person
used to compare with and perceived to be similar to one's self.
 Ratio in equity theory is calculated by dividing outcomes or output by inputs.
Outcomes received from the workplace include salary, benefits, reward or
recognition. Meanwhile, inputs contribute to the workplace include effort,

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 time, knowledge, experience, qualification or skills. J. Stacy Adams explained
that motivation is determined by relative rather than absolute level of ratio.
For example, assume that you have just graduated from university with a
degree. As a fresh graduate, you are able to get a job as executive earning
RM3000 per month. Referring to ratio earlier, your outcomes received is
RM3000 per month and your inputs is your qualification. Aren’t you
motivated? Do you think that you treated fairly in the company? You probably
do not have the answer for this by just referring to your own ratio. Therefore,
absolute level of ratio alone would not influence the amount of effort
employees exert.

 If you make the relative comparison with other referents i.e. your university
friends or your colleagues, you will have the answer for your motivation and
perceived fairness. Let say, your friends or colleagues manage to obtain
RM3000 per month with the same education qualification as executive. If an
employee perceives his or her ratio to be equitable in comparison to those of
referent, there is no issue arises. When equity perceives to be existed,
employees are motivated to perform their current levels of inputs in order to
obtain their current levels of outcomes.

C. Goal-Setting Theory – Edwin Locke and Gary Latham developed the goal setting
theory, suggested that level of performance influence by human’s conscious
goals and the conscious process of achieving desired goals. In order to achieve
their desired goals, they will increase effort or change their strategy when they
find that their current strategy or way unable to lead them to their goals. There
are several conditions to set a successful goal.
 The conditions are goal acceptance and commitment, goal specificity, goal
difficulty, and feedback. Later, it extended in SMART goal which stand for
specific, measurable, assignable, realistic and time-based. Using the
conditions of goal-setting theory, SMART goals developed by Blanchard
were denoted as Specific and Measurable, Motivating, Attainable, Relevant
and Track-able. Later, SMART acronym has evolved and Kenneth Blanchard
together with Spencer Johnson have redefined it into Specific, Measurable,
Assignable, Realistic and Time-based.15 For instance, the goal of the
student should be set as “My goal is to score grade A in Principles of
Management course in this semester examination”. This goal shows specific
elements which is score grade A in Principles of Management course.
Besides, grade A is measurable as normally 80 marks and above is
considered as A. Examination is generally tested on individual, therefore
assignable is met. To score an A is challenging but it can be attainable and
possible. Based on the goal given, it includes time-based which shows that
the person’s aggressive to achieve the goal in current semester examination.
 Goal-setting theory has received substantial research and practitioner
support and found to be applicable to individuals, groups, organizational units
and entire organizations. However, goal setting is not without its critics.
Criticism includes results in unethical behavior due to highly motivated
individuals to fulfill their specific and challenging goals. In an effort to score
grade A, the student could act in dishonest way during the examination.
Therefore, overstressed goal create an unethical culture and could harm an
organization.

IV. Reinforcement Perspectives

A. The content and process perspectives explained that motivation is derived using cognitive
explanations of behavior. These perspectives focus on needs, inequities, expectancies and
goal that could cause individual behavior. Reinforcement theory, which was pioneered by

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 Edward L. Thorndike and B.F. Skinner, however, views on the relationship between behavior
and its consequences derived from external environment. Psychologist B.F. Skinner
developed operant conditioning theory or known as organizational behavior modification (OB
mod) in management use the process of applying law of effect to control behavior by
manipulating its consequences. The basic concepts of the theory are rest on Edward L.
Thorndike’s law of effect. Individuals will repeat the same behavior if they receive a pleasant
outcome or desired outcome; in contrast, individual will not likely to repeat the behavior if they
receive an unpleasant or undesired outcome.
 According to Skinner, managers could use OB mod to reinforce and discourage
specific behaviors that favorable or unfavorable to work environment. There are
four strategies of reinforcement in operant conditioning

V. Motivation and Remuneration

Nowadays, managers use various activities or program to motivate their employees.

Earlier, we have introduced you to several motivation perspectives or theories. Now,
we discuss a more practical way to enhance employee motivation. These are divided
into financial and nonfinancial motivation strategies.

Financial motivation strategies.

Pay for performance: Merit pay is also known as pay for performance where salary
will be increased based on performance contribution. Thus, employees with similar
job grade could have different level of pay because their pay raise and other benefits
are depending on their overall job performance. In this way, managers able recognize
and positively reinforce high performers.
• Pay for knowledge. This concepts also known as skills-based pay where
employees are rewarded based on the number of job-relevant skills that they
acquired. Northern Telecom, product supplier of telecommunications industry use
skills-based pay plan to improve customer service. In order to motivate their
employees to acquire new skills and keep abreast of new changes or technology in
marketplace, this company implemented skills-based pay plan called Fast Forward.
• Bonus Pay. This plan is the cash awards or lump-sum payments given to
employees based on the accomplishment of specific performance objectives.
• Profit sharing. This plan distributes a percentage of the company’s profit to some
or all employees. The amount given is typically varies according the level of
company’s profit and usually pay annually.
• Gain Sharing. Instead of sharing the distribution of company’s profit, this plan
distributes of saving or ‘gains’ to group of employees who contribute in order to
reduce costs and increase productivity for the company.
• Employee stock ownership plans. This plan gives rights to certain employees to
purchase stock at a future date for a discounted rate. Employee who own company
shares is expected to work hard for the benefits of the company.

Nonfinancial motivation strategies.

 Providing a respectable status
 Creating a healthy organizational climate
 Providing career advancement opportunity
 Create a suitable job design
 Provide employee recognition programs
 Provide a job security
 Provide empowerment to employees

DISCUSSION QUESTIONS

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1. Define motivation. According to Oxford Advanced Learner’s Dictionary, motivate means “to be
reason why somebody does something or behaves in a particular way” and motivation is defined as
“A reason or reasons for acting or behaving in a particular way.” Thus, motivation is the set of internal
and external forces that initiate person behavior, and determine its form, direction, intensity and
duration. This definition suggests that motivation is a multi-focal phenomenon that cannot be directly
measured by a single variable. Rather, motivation is the end result of a combination of individual and
work-setting characteristics that interact in various ways to elicit individual action.

2. Discuss how locus of causality and perceived locus of consequence influence the motivation.

The internal and external forces of motivation are influenced by two criteria: the perceived locus of
causality and the perceived locus of consequence. Locus of causality is defines as the origin of the
motivation while locus of consequence is defined as who receives the consequences of the
individual’s action. Exhibit 15.1 shows four typology of the interrelation between forces and locus.
Extrinsic motivation has the characteristics of external locus of causality and internal locus of
consequence. The person with extrinsic motivation will engage in activities that allow them to acquire
material or social rewards that they desire. For example, employee willing to perform more than their
job requires or having organizational citizenship behavior when this behavior could lead them to
receive extrinsic rewards such as salary increment, status and perks. Intrinsic motivation has the
characteristics of internal locus of causality and internal locus of consequence. This intrinsic
motivated behavior comes from their own source of motivation and they perform from their own sake
and action itself. For example, employee willing to perform more than job requires because they have
a sense of accomplishment when performing this behavior. The intrinsic reward includes pride,
learning, development and achievement. Contributive motivation has the characteristics of internal
locus of causality and external locus of consequence. Person with contributive motivation will engage
in activities that have potential impact on other person, organizations or society. For example,
employee will perform more that job requires when they perceived that their action could benefits
organization or help organization to achieve goals. Relational motivation has the characteristics of
external locus of causality and external locus of consequence. People with relational motivation will
engage in activities that could strengthen the relationship with the consequence. For example,
employee will perform more than job requires otherwise their job will be at stake. They perceived that
contribute more of this behavior their job life in organization could be longer and secure

3. Discuss the importance of motivation in workplace. Support your answers with appropriate
examples?
Motivation in workplace is important due to several reasons. 4 First, motivated employees will perform
efficiency in organization, thus improve productivity and reduce cost of operations. This is because
these employees will put more effort in complete their task or more oriented on their jobs rather than
laid back while working. Secondly, motivation contributes to stable workforce. Motivated employees
are loyal and willing to exert more effort for the benefits of the organization because they feel
themselves as members of the organization. As a result, low turnover or intent to leave in
organization will create a stability workforce. This leads to improve reputation and goodwill of the
company. Thirdly, motivated employees are willing to accept change. Resistant to change among
employees are low if they are motivated as they will see change as challenges rather than
boundaries. If the organization change is beneficial to future growth, implementation of any
organization policy will be smoother without negative attitudes and behavior exhibited by employees.
Fourthly, motivated employees see their interests as parallel to organization interest. When
employees are able to gain attractive compensation and benefits, they will participate in fulfilling
organization interest as they believe their efforts exchange with rewards. Therefore, organization
interest is equivalent as own personal interest. This interdependent relationship will make a pleasant
and friendly relationship between organization and employees.
.
4. Briefly describe the Maslow’s five needs of motivation. Using Maslow’s concept of motivation,
which of the need is the most important for a fresh graduate? Why?

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 There are five different levels in Maslow’s hierarchy of needs:

Physiological Needs. These needs are located at the lowest level of pyramid. It is often describe as
basic needs or survival needs. The examples of physiological needs are water, air, food, and shelter.
Without these needs, a person would not be able to survive. Maslow described it as the most
compelling needs. Unless a person is able to fulfil his or her physiological need, otherwise all other
needs are less important.

Safety Needs. These needs are one of the lower level needs. Although safety needs are important for
person survival, this need is not as important as the physiological needs. The examples of safety
needs are needs for security needs, stability and freedom from fear.

Social Needs. These needs located between lowest and highest level of needs. It includes needs for
social interaction, belonging, love, and affection. Maslow described these needs as less basic
compare to physiological and security needs. The examples of social needs are fulfilling attachment
with families, romantic and friendships as well as community.

Esteem Needs. These needs located at the second highest of the pyramid. When the first three basic
needs have been satisfied, this need becomes gradually important. The examples of these needs
include fulfilling oneself worth, recognition by others, and personal accomplishment.

Self-Actualization Needs. These needs located at the peak of pyramid representing the highest level
of Maslow’s hierarchy of needs. The examples of these needs include personal growth, realizing their
potential and self-fulfilment.

Student answer will vary based on chosen needs.

5. Discuss the difference of concepts between Maslow and Alderfer’s needs theory. Support
your answers with examples?
Clayton Alderfer’s ERG theory drew upon Maslow’s hierarchy of needs by identifying three
components of needs. Exhibit 15.3 shows Alderfer’s theory of need. He reduced Maslow’s levels from
five to three needs which are existence, relatedness and growth. ERG is one of the content
perspectives that explained a person is motivated due to intrinsic factors. 5 Existence need is the
combination of Maslow’s basic two needs which is physiological and safety need. Relatedness is
similar with social need while growth is the combination of esteem and self-actualization of Maslow.
Alderfer does not agree that a person will start to fulfil their lowest needs as claimed by Maslow. He
claimed that needs are not arrange in any order. This means that lower level needs need not be
satisfied first before moving on to higher level need. Imagine that you are graduating soon, what is
the need that you most prefer? Referring to Maslow’s theory, you would want to fulfil your
physiological need which is to find job that allow you to pay for food, water and shelter. However
based on Alderfer’s theory, every person could prefer different needs. Some would prefer to have
more friends (relatedness), some would like to have more achievement and status (growth).
Besides, Alderfer claimed that a person could want to have more than one need at one time. What is
your need when you are hungry? Based on Maslow’s theory, this person would like to fulfil their
physiological need which is food. However, Alderfer claimed that in this situation, probably a person
would like to consume a safe food that will not harm their life and at the same time would like to enjoy
the food with company from their love ones. This shows that a person would like to have existence
and relatedness needs at one time.
Another concept of Alderfer which is different from Maslow is frustration-regression principles.
Alderfer agreed that normal human being would like to acquire higher level needs once they are able
to fulfil their lower-level needs. However, Alderfer claimed that if the person unable to fulfil the higher
level needs, this person will not have any motivation claimed by Maslow. When the person aware that
he or she is unable to fulfil higher level need, they will be frustrated in the beginning. In order to
motivate themselves, they will regress or return to their previous need and request for more. For

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 instance, when the person already fulfilled the existence needs, he or she will have abundance
money to purchase food, water or shelter, this person would like to seek relatedness need. They
would like to have more friends or families members to share their happiness. If they could not able to
acquire their relatedness need, they would be annoyed (frustrated) in the beginning. Afterwards, they
will motivate themselves by fulfilling their previous needs (existence) by acquiring more money.

6. Explain how two-factor theory motivates employees at workplace.

Hygiene need. This need is related to the physical and psychological context in which the work is
performed. Examples of hygiene need are supervision, compensation, relations with co-workers,
working conditions and benefits. This need is also known as dissatisfiers.
Motivators need. This need is related to the challenging and nature of the work itself. Examples of
motivator needs include recognition, achievement, responsibility, growth and interesting work. This
need is also known as satisfiers. When a person is unable to fulfill hygiene needs, he or she will be
dissatisfied. Although this person is able to fulfill his or her hygiene needs, it does not result in high
level of motivation or satisfaction. This person will have no dissatisfaction but does not mean that he
or she is satisfied. In order to satisfy and motivate person, motivator needs must be fulfilled

7. Describe the McClelland’s acquired needs. Which is the need is the most important to you
currently? Explain your reasoning.

This theory consists of three types of needs:

Need for achievement. This need emphasizes a person who has a strong desire for success. This
person is willing to perform challenging and mastering tasks well in order to meet their own personal
standards of excellence or their goals.
Need for affiliation. This need emphasizes a person who has strong desire for building harmonious
and good relationships with others. This person is concerned with making good interpersonal
relations, and being friendly and being popular among others.
Need for power. This need emphasizes a person who has strong desire to control or influence
others. This person wants to acquire responsibility which allows them to show authority and in-charge
of others. A person with need for power does not expect recognition or approval from other in term of
work or social. They expect the surrounding people to have total compliance on their demand and
decisions.
Student answer will vary based on chosen needs.

8. Using the concepts of expectancy theory, discuss the implications of these concepts for
managers to motivate their subordinates in workplace.
Managers should ensure their employees are highly motivated by striving for high levels of
expectancy, instrumentality, and valence among employees. To increase expectancy, managers
should properly train their employees. Before their employees have all the necessary expertise,
managers should set learning goal rather than performance goal. For example, a manager should not
set a challenging performance goal i.e., achieving 1 million units of output when employees do not
even know how to use the machine for the production. Besides, managers should increase
instrumentality. Managers are responsible to influence employees that their performance or
achievement will be appreciated and receive recognition from organization. Finally, managers should
increase valence by providing the rewards that desired by employees. Not all employees love
financial rewards. Some might prefer on nonfinancial rewards or quality of work life. Regardless of
type of rewards, managers are responsible to design an appropriate package of reward that could
motivate their employees to perform at high level.

9. Illustrate how expectancy, instrumentality and valence affect motivation.

Vroom explained that a person will have strong motivation level when levels of expectancy,
instrumentality and valence are high. If any of these components is low, the person motivation level is
likely to be low. For instance, given the scenario that you are now studying a course named Principles
of Management and preparing to sit for this written examination soon. Will you be motivated to study

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 this course? Yes or no? You will have the motivation to study this course when your expectancy,
instrumentality and valence are in high level. This explanation might sound complicated but let us
relate these concepts with the scenario given earlier. You will have high level of expectancy when you
perceived that putting more effort into your studies (for example, attending lecture and tutorial class,
active participating in class discussion, completing all assignments given, doing revisions, etc.), your
effort will bring you to the high level of performance, which is score grade A in your test. When you
perceived that when you score grade A in your test, you know that your parent will reward you a new
car. This shows high instrumentality as your high level of performance will lead you to a given
outcomes. Do you want a new car? If you answer yes, then it shows that valence is high because
you love or desire the outcomes. In this example, what do you think of your motivation level to study
Principles of Management course? Definitely, your motivation level is high.

10. State examples of outcome received and inputs contributed of a student in university.
Ratio in equity theory is calculated by dividing outcomes or output by inputs. Outcomes received from
the workplace include salary, benefits, reward or recognition. Meanwhile, inputs contribute to the
workplace include effort, time, knowledge, experience, qualification or skills. In university, outcome
received include grade, marks, praise, awards, certificate and etc. Inputs include effort, time,
persistent, and etc.

11. Discuss why a manager should ensure perceived equity among their subordinates
When under-reward or underpayment inequity exists, there are some ways that this person will do to
reduce their inequities. First, this person will increase own outcome or output. He or she will demand
for more salary, reward or benefits. Alternatively, this person will reduce own inputs by exerting less
effort to workplace. He or she will not contribute much knowledge, skills or ideas to organization. This
person would not perform more than require. Another way is to change own perception toward
inequities. In that case, you will perceive that there is no inequity as your salary is lower than others
because you are probably lacking of some important skill needed by the company. Your friends or
colleagues perhaps equip with this skill, therefore, they deserved higher pay. This is the positive
perception. In addition, some person might use negative perception on high salary. They perceive
that receiving higher salary could end up more stress to them as they need to perform at higher level.
They will try to make themselves better by downgrading the importance of high salary to them. The
other ways is to resign from the company and seek their career elsewhere which will appreciate their
contributions.

What happens if you are experiencing over-reward or overpayment inequity? This person initially will
feel guilty because of overpayment of their outcomes. Later, in order to reduce their perceived
inequity, this person will change their perception on own and referent ratios. They will think that they
deserved higher pay because of their creativity or particular skills which is important to organization.
They will also perceive that referent’s pay is lower because others do not have the valuable skills as
compared to them.

As explained earlier, persons have a tendency to use subjective judgment to balance the outcomes
and inputs in the relationships for comparisons between different individuals. When rewards are not
equitable which is lesser than referents, these employees will have no motivation, reduction in quality
and quantity of production and likely leave the organization. Meanwhile, rewards that not equitable
due to greater than referents bring negative effect on employees motivation. These employees will be
demotivated due to feeling of guilty. Managers have to ensure a fair and equitable workplace as
motivation is highest when employees perceive that they are being treated equitably.
12. Setting a goal is as easy as a pie. Do you agree with this statement? Explain your reasoning.
Using the conditions of goal-setting theory, SMART goals developed by Blanchard were denoted as
Specific and Measurable, Motivating, Attainable, Relevant and Track-able. Later, SMART acronym
has evolved and Kenneth Blanchard together with Spencer Johnson have redefined it into Specific,
Measurable, Assignable, Realistic and Time-based.
Student answer will vary based on the agreement with the statement.

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13. Imagine you are the lecturer in one of the universities. Some of your students have the
habitual lateness to your lecture class. There are also a few students who also absent from
your class. Using reinforcement theory, explain your strategies to curb these problems.
.
 Positive Reinforcement

This strategy implies providing positive outcomes that employee desire when they perform behaviors
which are favorable to organization. For example, pay increment, promotion, verbal or nonverbal
praise are some of the outcomes received by employee when positive reinforcement strategy is
reinforced. Generally, reward can be used as positive reinforce, however, it only can be categorized
as positive reinforce when the employee’s behavior improves. The more spontaneous a manager
giving the reward, reinforcement value is even greater

 Negative Reinforcement

This strategy implies that employee will learn to do the right thing or behavior in order to avoid
negative or unfavorable outcomes. The negative outcomes that could be used by managers include
complaints, criticism, nagging, threat and others. Managers should try to reduce using negative
reinforcement as this reinforce can create an unpleasant work environment and negative culture in
the organization.

 Punishment

This strategy implies applying unfavorable outcome for showing unfavorable behaviors. When
employees are performing unethical or illegal behaviors, these employees can be punished by
organization such as pay cuts, demotion, suspension and even job termination. Punishment should
be used at the last resort as this strategy could create unintended side effects such as anger,
revenge or loss of pride. Manager who uses this strategy must use it professionally. They should take
the immediate action when unfavorable behavior occur, concentrate on work performance rather
emotional aspects and avoid punish employee wrongdoing in front of others.

 Extinction

This strategy implies the absence of reinforcements. Managers who use extinction will avoid using
any positive consequences as the result of that behavior. In punishment strategy, managers impose
outcomes that is unfavorable which could hurt more severely on employee emotional or physiological.
Compared to extinction, manager will act by doing nothing or completely ignored the behavior or
action performed by the employees. Managers need to be cautious when using extinction as this
strategy may unintentionally lower desirable behavior.

Student answer will vary.

14. Apart from salary, discuss relevant financial strategies that could be used to motivate an
individualistic employee. What about employees that prefer to work collectively?

 Pay for performance: Merit pay is also known as pay for performance where salary will be
increased based on performance contribution. Thus, employees with similar job grade
could have different level of pay because their pay raise and other benefits are
depending on their overall job performance. In this way, managers able recognize and
positively reinforce high performers. (Individualistic employee)
 Pay for knowledge. This concepts also known as skills-based pay where employees are
rewarded based on the number of job-relevant skills that they acquired. Northern
Telecom, product supplier of telecommunications industry use skills-based pay plan to
improve customer service. In order to motivate their employees to acquire new skills and

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 keep abreast of new changes or technology in marketplace, this company implemented
skills-based pay plan called Fast Forward. (Individualistic employee)
 Bonus Pay. This plan is the cash awards or lump-sum payments given to employees
based on the accomplishment of specific performance objectives. (Collectivism
employee)
 Profit sharing. This plan distributes a percentage of the company’s profit to some or all
employees. The amount given is typically varies according the level of company’s profit
and usually pay annually. (Collectivism employee)
 Gain Sharing. Instead of sharing the distribution of company’s profit, this plan distributes
of saving or ‘gains’ to group of employees who contribute in order to reduce costs and
increase productivity for the company. (Collectivism employee)
 Employee stock ownership plans. This plan given rights to certain employees to purchase
stock at a future date for a discounted rate. Employee who own company shares is
expected to work hard for the benefits of the company. (Individualism employee)

15. Non-financial motivators are more effective than financial motivators. To what extent that you
agree with this statement? Explain your reasoning.

Numerous studies found nonfinancial motivators are more effective than financial in order to build
loyalty among employees in most sectors and job functions. Financial motivator is useful in short term
to increase performance. However, during economic crisis, combination of financial and non-financial
motivators is needed to reduce costs and to balance short- and long-term performance effectively.
According to survey conducted by McKinsey & Company in 2009, non-financial incentives such as
praise from immediate manager, attention from leaders and opportunities to because projects or task
forces leader were more powerful motivators than financial incentives such as performance-based
cash bonuses, increase in base pay, and stock or stock options. Students’ answer will vary based on
their agreement with the statement.

KEY TERMS

Intrinsic motivation Comes from one’s own sources of motivation and he performs and
acts for his own sake.

Extrinsic motivation Engage in activities that allow them to acquire material or social
rewards that they desire.

Contributive Engage in activities that have potential impact on other persons,

motivation organizations or society.

Relational motivation Engage in activities that could strengthen a relationship with the
consequence.

Needs hierarchy Postulates that a person’s actions are motivated by a desrie to meet
certain needs.

ERG theory Drew upon Maslow’s hierarchy of needs by identifying three

components of needs.
.
Two-factor theory Herzberg proposed two-factor theory by dividing into two areas of
needs: hygiene and motivator.

Acquired needs This person will learn to acquire the specific needs not during
theory childhood development but in the adult stage.

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Expectancy theory Workers will expend much effort to achieve something when they
believe that their high levels of effort will lead to high performance and
subsequently their high performance will lead to the attainment of
their desired outcomes.

Equity theory Proposes that a person’s perception of fairness of treatment received

is based on a comparison of the treatment of others.

Goal setting theory Suggested that level of performance is influenced by a human’s

conscious goals and the conscious process of achieving desired
goals.

Reinforcement theory Holds that the relationship between behavior and its consequences
are derived from the external environment.

Financial strategies Salary is one of the main financial motivation strategies. Research
shows that inequitable insufficient compensation does cause de-
motivation.
Non-financial Numerous studies found that nonfinancial motivators are more
strategies effective than financial ones in building loyalty among employees in
most sectors and job functions

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 CHAPTER 16

LEADERSHIP

I. Nature of Leadership

M. Leadership versus Management. These two words have been used

interchangeably over time. In Mintzberg’s management roles, managers need to
play the role as leader. Ideally, all managers should be leaders and all leaders
should be managers. However, as one leadership expert has said, “leaders
manage and managers lead, but the two activities are not synonymous.” Achieve
Global’s research team illustrates the difference between a manager and a
leader is very much like the difference between a raisin and a grape. Refer to
Exhibit 16.1. Field Marsha Lord Slim has summed the difference between
leadership and management: “Leadership is of the spirit, compounded by
personality and vision. Its practice is an art. Management is of the mind, more a
matter of accurate calculation of statistics”.

N. Leadership and Power. In the early 1960’s, John French and Bertram Raven
had conducted the study on leadership power and they had managed to identify
five sources of powers.
 Coercive power is the position power available for leaders to administer or
recommend punishments to their followers. The followers comply with the
orders or instruction given by leader to avoid punishment.
 Reward power is the position powers available for leaders. With this power,
leader has the authority to give positive reward to individuals for complying
with leader or organization wishes.
 Legitimate power is the position power available for leaders to exercise their
designated right. Followers believe that they have the obligation to comply
with leader as their leader has the right to make the request. Leader could
use this power either verbal or in written form.
 Expert power is the personal power of a leader. It comes when the person
have the experiences, skills or knowledge that are needed by the followers.
Followers will comply because they believe that the leader has the expertise
on that related field that able to advise them to perform something even
better.
 Referent power is another personal power of a leader. It comes from
leader’s personal characteristics that command followers’ identification,
respect, and admiration, so they wish to emulate that leader. Followers will
not question their leaders but commit to the leader’s request.

II. Generic Leadership

E. Leadership Traits –One of the oldest theories of leadership is the trait approach.
This approach focuses on traits or characteristics such as physical and
personality. Trait studies explain that physical factors as height, weight, and
appearance could differentiate between effective and ineffective leader.

F. Ralph Stogdill reviewed a total of 124 studies of leadership traits in 1948. He

found that generally leaders were sociable, initiator, persistent, knowledgeable,
confident, cooperative, and adapt¬ability, and excellent verbal communication
skills. Today, there are many popular books on leadership suggested lists of
leadership traits. These leadership books still hold the same basic concept of

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 traits approach which claims that a leader will be successful if they possess such
traits.

G. In 1989, John W. Gardner concluded his study with the personality

characteristics of successful leader. These traits included the following:
 Physical vitality and stamina
 Intelligence and action-oriented judgment
 Eagerness to accept responsibility
 Task competence
 Understanding of followers and their needs
 Skill in dealing with people
 Need for achievement
 Capacity to motivate people
 Courage and resolution
 Trustworthiness
 Decisiveness
 Self-confidence
 Assertiveness
 Adaptability/flexibility

H. Frank T. Gallo explains there is one leadership trait that rarely heard in the West
but popular in China is ‘wu,’ meaning ‘very deep insight’7. Explaining that wu
refers to a holistic view, the author cites the interpretation by Fang Yulan, an
authority in Chinese culture, that for a person with a high level of wu, ‘personal
appearance will be decorous; speech should be orderly; vision should be clear;
hearing, distinct; and thought, profound.’

III. Leadership Behaviors

D. Ohio State Studies - The leadership research started in 1945 at Ohio State
University under Ralph Stogdill. More than 1000 behavioral dimensions studied
and eventually resulting to just two major dimensions: initiating structure and
people-oriented style. A leader who used both styles tended to lead their teams
successfully. A leader who never specifies work expectation to employee and
lacks of direction can lead to frustration among workers and finally affect their
productivity. On the other hand, leader without consideration behaviors may
cause employee to be dissatisfied because they feel that leaders do not care,
recognize or support them.

E. Michigan Studies - Similar research program on leadership behaviors were

conducted by University of Michigan. They identified two dimensions: production-
centered and employee-centered behavior, which were similar to the Ohio State
studies. The Michigan studies claimed that both behaviors found to be
independent. A leader with high production-centered behavior does not mean
that they will be low in employee-centered behavior. The assumption that leaders
will focused on either production or employees is inaccurate. These studies
indicated that leaders can be high in both production- and employee-centered
behaviors.

F. Managerial Grid – This grid plots the different degrees of task-oriented versus
people-oriented and identifies five combinations of distinct leadership styles. A
nine-point scale which represents the horizontal dimension is used to measure
the concern for tasks, or the production dimension. Another nine-point scale on
vertical dimension measures an individual’s concern for people. The scale shows

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 1-point indicating a low level of concern, to 9-point indicating a high level of
concern. To identify the leadership style, individuals are required to respond to a
questionnaire developed by Blake and Mouton. The completion of the
questionnaire will lead them to one of the eighty-one cells (9x9) on the
managerial grid. Each of the grid positions describes five different patterns of
leadership behavior. Refer to Exhibit 16.2

IV. Situational Approaches.

B. The Fiedler Model. Fiedler’s model of leadership suggested that leadership style
was inborn. A leader is born either task- or relations-oriented by nature. He
proposed that there were three situational factors will determine whether task or
relations oriented leadership was more appropriate. The important situational
factors are leader-member relations, task structures and a leader’s position
power influencing leader style. Refer to Exhibit 16.3 and Exhibit 16.4. According
to Fiedler, leader style is innate.13 This suggests that managers need to perform
two ways to improve their leadership effectiveness. First, fit the right leader style
with the situation. For instance, if the group situation was highly favorable but
was led by a relationship-oriented leader, the performance of the group could be
improved by replacing that person with a task-oriented leader. Emphasizing the
goals, efficiency and effectiveness of work can increase organization
performance as well as shareholders’ value. The second way was to alter the
situation to fit the leader. For instance, if the group situation was highly
unfavorable, this could be done by increasing the position power that the leader
has over factors such as demotion and disciplinary actions; by improving the
leader-member relationship; or redesigning the task to make it clearer and
structured.

C. Path Goal Theory. Another situational approach of leadership is path-goal theory

developed by Robert House. This theory used the key elements from Victor
Vroom’s expectancy theory of motivation. House focused on the relationship
between a leader’s behavior and situational variables. The path-goal model
explains that effective leaders remove the obstacles or boundaries so that
followers have clearer paths for them to achieve their work goals. Leaders should
facilitate their subordinates by providing clear instructions of task and how the
completion of tasks could lead them to their desired rewards. In expectancy
theory, motivation of the individual is influenced by the relationship between
efforts, performance and attractiveness of the outcome. Subordinates perceive
that if they see a strong relationship between their effort and performance, they
will be motivated to perform as they believe that this performance could help
them to get their desired rewards. With this concept of motivation, the path-goal
theory suggests that an effective leader should facilitate subordinates so that
they will be on the right path or direction to receive value rewards. Refer to
Exhibit 16.4.

D. Vroom-Yetton-Jago’s Normative Decision Model. 15 This model wasformulated

by Victor Vroom, Philip Yetton and Arthur Jago. Although it is not a model of
leadership, it addresses a major issue faced by a leader, which is to what degree
that leader should allow subordinates to be involved in decision-making. Leaders
must develop different leadership styles to suit different situations when making
decisions. Several considerations need to be considered before allowing others
to be involved in the decision making process, or to make decision all by
themselves. Generally, an effective leader should know when he should use an
autocratic method, or to use a consultative method. His model identifies seven
diagnostic questions which can assist a leader to choose any of the five basic

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 decision-making styles and are arranged orderly in the form of a decision tree.
The five basic decision-making styles include: two types of autocratic decision
making (AL and Aft), two types of consultative decision making (CI and CII), and
a group decision making style (GIL). The five styles are defined in Exhibit 16.6.

E. Leader-member exchange (LMX) approach. Leader-member exchange (LMX)

theory of leadership illustrates the two-way or dyadic relationship involving
supervisors and subordinates. The quality of the relationship and the way they
relate to one another have significant effects on organizational performance.
LMX assumed that this relationship is within the continuum of low to high quality
of negotiating latitude. Their subordinates with high quality latitude are
categorized as “in-group” while those with low quality latitude categorized as
“out-group”. Leaders use a directive leadership style with out-group members.
They will use more consultative and participatory practices when dealing with in-
group members.

V. Alternative Approaches to Leadership

A. Substitutes for Leadership. Substitute for leadership is not a leadership theory.

However, it is an alternative approach of leadership that, under certain
circumstances, can make leadership unnecessary. The theory explains that
different situational factors can enhance, neutralize, or substitute for leader
behaviors. Substitute theory received early advocate supports as they found that
an organization that is extremely rigid will neutralize a leader’s effort to change the
group’s behavior. This theory helps to explain why the some studies on other
leadership theories have produced inconsistent results. It shows that
organizational context could affect or moderate the value of leadership.

B. Charismatic Leadership. Max Weber defines charismatic leadership in the quality

of an individual personality, by virtue of which he is set apart from ordinary men
and treated as endowed with supernatural, superhuman, or at least specifically
exceptional powers or qualities. Researchers often considered various social-
political leaders like Mahatma Gandhi of India, Mao Ze Dong of China and
Sukarno of Indonesia as charismatic leaders. These leaders contain exceptional
qualities which made the followers follow behind these leaders without questioning
them. Research show that psychological bondage between leader and followers
makes the charismatic leadership succeed

C. Transformational Leadership. Burns defined transformational leadership as a

process of transforming the status quo. Transformational leaders exert strong
influence on followers and stimulate individuals to discuss possibilities in the
future. Such a leader would transform his followers to perform beyond
organizational expectations to achieve extraordinary outcomes. Also, this leader
focuses on the moral development of followers and encourages them to be
ethical. He encourages subordinates to think creatively, challenge the status quo
and support himto meet their needs.

1. Strategic Leadership. The strategic leadership model requires equal attention to

path-finding and culture-building. Generally, strategy formulation comes before
strategy implementation and both are performed by different persons. However,
leaders in the strategic leadership approach are required to perform both of these
complementary strategies. An organization will not assign a specific executive to
be in charge of strategy formulation and a different executive to be responsible
for strategic implementation. All executives need skills and tools for both strategy

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 formulation and implementation. The most important priority of the organization is
to bring customers to the heart of the organization. As can be seen in Exhibit
16.8, delivering customer values lies at the heart of the star. The first 3 points of
the star show the tools and techniques which are related to strategy formulation.
These points are defining your purpose, facing the customer, and focusing on
essentials. The remaining 2 points emphasize strategy implementation, which is
creating a challenge and triggering enthusiasm.

2. Cross-Cultural Leadership. Robert J. House is the Principal Investigator of

GLOBE (the Global Leadership and Organizational Behavior Effectiveness
Research Project), and, along with several co-Principal Investigators and a
multinational Coordinating Team, he leads a group of over 180 researchers from
around the world in a study of the interacting effects of leadership, societal
culture, and organizational culture. 23 Data have been collected from over 60
countries, using surveys, unobtrusive measures, interviews, media analysis, and
archival data (often from the United Nations).This ongoing research program
extended the work of Hofstede for assessing cultures. Based on the findings from
Project GLOBE, some aspects of leadership can be generalized about; however,
there are many other aspects which are varied systematically across societal
cultures. They have identified nine culture dimensions together with a summary
definitions of each dimension, provided in Exhibit 16.9. With regard to leadership
behaviors, a total of 21 leadership dimensions were identified, which were found
to contain six factors: Team-oriented leadership, charismatic/value-based
leadership, autonomous leadership, humane leadership, participative leadership
and self-protective leadership.

3. Ethical Leadership. Leaders who are truly ethical take into account consideration
of their key stakeholders, situations, a leader’s processes and skills, and the
result outcomes. Ethical leaders use ethical concepts to incorporate the purpose,
vision, and values of the organization with their stakeholders. These leaders
create open, two-way communication so that they will have an understanding of
different views, values, and constituents’ opinions on how to help people in need.
They accept opinions and ideas from others to create more opportunities to
improve the organizations.

DISCUSSION QUESTIONS

16. Explain the difference between manager and leader. Managers are individuals responsible for
designing and executing plans, organizing and distributing resources, and directing resources toward
predicted results. The research team claimed that leaders demonstrate five zones, which are
reflection, society, diversity, ingenuity, and people. Field Marsha Lord Slim has summed up the
difference between leadership and management: “Leadership is of the spirit, compounded by
personality and vision. Its practice is an art. Management is of the mind, more a matter of accurate
calculation of statistics”.

17. Describe the important zones in the leadership model developed by the AchieveGlobal
research team.

Exhibit 16.1 Description of Six Zones of Leadership Model

Zones Description
Reflection Leaders examine their own their motives, beliefs, attitudes, and actions.

Society Leaders apply principles such as fairness, respect, and “the greater good”

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 to balance individual and group well-being.
Diversity Leaders respect and leverage such basic differences as gender, ethnicity,
age, nationality, and beliefs.
Ingenuity Leaders offer and execute practical ideas – and help others do the same –
to create a climate in which innovation can thrive.
People Leaders connect with others on the human level shared by all to earn
commitment, inspire effort, and improve communication
Business Leaders develop strategies, make and execute plans and decisions,
organize the work of others, and guide effort toward predicted results.
Source: Perrin, C 2010, Leader vs Manager, What’s the Distinction? www.achieveglobal.com

18. Explain the five sources of power for a leader. In your opinion, which of the sources of power
is the most important in this competitive world?
Coercive power is the position power available for leaders to administer or recommend punishments
to their followers. The followers comply with the orders or instruction given by leader to avoid
punishment. Followers fear losing jobs, being demoted, receiving poor performance reviews,
suspensions, promotion freezes and so forth. Reward power is also the position power available for
leaders. With this power, the leader has the authority to give positive reward to individuals for
complying with the leader’s or organization’s wishes. The followers comply with orders or instructions
by leaders when they believe that their leaders have authority to give bonuses, raises, promotions,
extra time off from work and so forth. Legitimate power is the position power available for leaders to
exercise their designated right. Followers believe that they have the obligation to comply with leader
as their leader has the right to make the request. Leaders can use this power either verbally or in
written form. Expert power is the personal power of a leader. It comes when the person has the
experiences, skills or knowledge needed by the followers. Followers will comply because they believe
that the leader has the expertise in that related field and is to advise them to perform something even
better. This expertise or knowledge does not have to be real. Whether the leader is truly equipped
with this power depends on the followers’ perception. Another personal power of a leader is referent
power. It comes from a leader’s personal characteristics that command followers’ identification,
respect, and admiration so they wish to emulate that leader. Followers will not question their leaders
but commit to a leader’s request. The leader could have personal characteristic such as friendliness,
charisma, self-confidence, integrity and others that make the followers admire him. Political leaders
and celebrities normally have this type of power.

19. Recommend physical and personal traits that you think would be useful for a leader today.
Discuss to what extent these traits could be generalized to different situations.
This approach focuses on physical and personality traits and qualities. Trait studies explain that
physical factors as height, weight, and appearance could differentiate between effective and
ineffective leaders. Leaders are slightly higher on traits such as height, intelligence, extraversion,
adjustment, dominance, and self-confidence than nonleaders. 6 Height is found to have an effect on
leadership. In addition, researchers claim that a majority of their studies found that leaders tend to be
taller. Generally, proponents of the traits approach explain that leaders tend to be slightly taller and
heavier, have better health, are energetic and more attractive in appearance. Focus shifted in the
1920s and 1930s to a search for personality characteristics that related to leadership effectiveness.
Empirical research in the early stage focused on the differences between leaders and followers. They
found that all leaders have the same personality traits and assumed that higher-level positions of
employees have such leadership traits more so than those in lower-level positions. There were many
studies at that time to check the reliability and validity of leadership traits. Student answers will vary
based on physical and personal traits chosen.

20. Discuss the difference between the Ohio State and Michigan studies of behavioral leadership.
The leadership research started in 1945 at Ohio State University under Ralph Stogdill. 8 More than
1000 behavioral dimensions studied and eventually resulted in just two major dimensions. One of the
dimensions is called initiating structure. This dimension represents a task-oriented leadership style

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 where this leader concentrates more on the work of the employees. This leader gives clear
instructions, defines roles of employees and ensures that they perform their daily activities to
accomplish the organization’s goals. The other dimension is consideration. This dimension
emphasizes a people-oriented style, where the leader concentrates more on subordinates’ well-being.
The consideration leader shows concern and respect for followers, appreciates their hard work and
needs their support. Subordinates assumed to be higher in satisfaction when the leader cares for
them and thus they will maximize their productivity. The Ohio State studies found that leaders who
used both styles tended to lead their teams successfully. A leader who never specifies work
expectation to employee and lacks of direction can lead to frustration among workers and finally
affects their productivity.  On the other hand, leaders lacking consideration behavior may cause
employee to be dissatisfied because they feel that leaders do not care, recognize or support them.
Similar research programs on leadership behaviors were conducted by the University of Michigan.
They identified two dimensions which were similar to the Ohio State studies. Production-centered
behavior shared the same concepts with initiating structure in which leaders established goals, gave
instructions, checked on performance, and structured the work of the group. Employee-centered
behavior is similar with consideration in which the leader is supportive of subordinates, develops
informal relationships and avoids giving punishment to subordinates when they fail to achieve
performance. Michigan studies claimed that both behaviors were found to be independent. A leader
with high production-centered behavior does not lead to low employee-centered behavior. The
assumption that leaders will focus on either production or employees is inaccurate. These studies
indicated that leaders can be high in both production- and employee-centered behaviors.

21. Based on the managerial grid, which of the patterns is the most effective for leaders? To what
extent do you agree with the suggestions made by Blake and Mouton?
The Ohio State and Michigan studies introduced the notion that the ideal leader was both task-
oriented and people-oriented. In the early 1960s, Robert Blake and Jane Mouton developed a
leadership model using task versus person orientation. This model was called the Managerial Grid,
the Leadership Grid, or simply the Blake Mouton Managerial Grid. Team Management 9,9(High
Production / High People). A 9,9 leader required employees to perform and also cared about
employee feelings and interests. To satisfy both concerns, this leader encouraged employees to work
as a team and be committed as team members. When they are working as a team, their work will be
interdependent, thereby making employees feel like part of the company-family, and involved with
organizational goals to increase production needs. If the employees believe the leader genuinely
involves them as a team, this will lead to high satisfaction and motivation as well as high production.
Blake and Mouton suggested leader should adopt a team management style as it provides the most
effective leadership. An effective style is the one that is high in both concern for production and
people. Blake and Mouton’ assumption that 9,9 style is the best has failed to be supported in
empirical research. Research showed that this team management style did not show generally
greater results than others, as demands of the situation, group member expectations, and the nature
of the work could influence the leadership styles. Basically, the model does not explain on internal
and external constraints that could affect the styles. Nonetheless, this model does contribute
information about the importance of a leader within a group. Student answers will vary based on their
argument for or against team management style.

22. Discuss the Fiedler model of leadership. Support your answer with leadership style and
situational factors.
Fiedler used two leadership styles in the behavioral studies, relationship or task-oriented.11
Relationship-oriented leader is more considerate, sensitive to the feelings of subordinates and
human-oriented. This leader will develop a good and close relationship with subordinates as a
requirement for accomplishing the task. Task-oriented leaders, however, have as their main concern
ensuring that subordinates complete tasks at peak performance. Therefore, leaders focus on goal
and provide direction to ensure that the task is completed effectively within schedule. Fiedler’s model
suggested that leadership styles, whether either task- or relationship-oriented, will be effective when
used in a situations favorable to one or the other. As mentioned earlier, the favorability of the situation
is determined by three important factors: leader-member relationship, task structure and leader

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 position power. Each of the three situational variables were classified into eight possible situations,
which ranged from extremely favorable situations to extremely unfavorable situations for the leader. A
situation is highly favorable for leaders when the relations with members are good, tasks performed
by members are highly structured, and their own position powers as leaders are strong. However,
situations will be unfavorable when relationships between leaders and members are poor, employees
have low task structures, and their position powers are weak. Fiedler studied the relationship between
the leader style and the situations. After extensive research, the results indicated that a leader with a
high LPC score, which is relationship-oriented, is most effective in moderately favorable situations.
When the situation is extremely favorable or unfavorable, it was suggested by Fiedler to use task-
oriented leaders (low LPC score).

23. According to path-goal theory, describe the situational factors that would be appropriate for a
leader with directive style.
Directive leadership: This leadership style shares the same concepts as task-oriented. The leader will
provide guidance and instruction for subordinates regarding the way to complete tasks. Also, this
leader ensures that subordinates follow the standards and schedule of works as determined by the
organization. Path goal theory proposes two types of situational or contingency factors—the char-
acteristics of the employees and environmental factors. Employee characteristics that have been
identified as important variables to determine the appropriate leadership style:
Locus of control: It refers to the individual’s belief to what extent that he can control the events that
affect him. The event that House refers to in his theory concerned the determinants of reward. High
internal of locus means that individuals believe that they can manage and control the events that
affect them. Subordinates with high externals prefer a directive leadership style. This subordinate is
aware that reward received is determined by the leader. Authoritarianism: It refers to an individual’s
willingness to accept a leader whois highly influential and controls all activities. High authoritarian
subordinates are comfortable accepting a leader’s instructions. Therefore, directive leadership is
useful in this situation. Perceived Abilities: It refers to subordinates’ abilities and experiences. If
subordinates believe that they have their own abilities to complete tasks successfully, an effective
leader should be engaged in achievement-oriented styles where they prefer a leader to set
challenging goals and trust their capabilities in achieving the goals. Directive leadership styles are not
suitable in this case as subordinates perceive it as redundant because they are equipped with
necessary abilities and experiences.

The nature of the task. This refers to whether the tasks that subordinates perform daily are clear,
structured and unambiguous. If the tasks are ambiguous and change frequently, directive leadership
styles should be adopted by giving clear guidelines and instructions to reduce the subordinates’
uncertainties.

The formal authority system within the organization. An organization is said to be high in formal
authority system if the organization is rigidly structured and follows a strict chain of command. An
effective leader should adopt supportive style by showing concern for the needs of subordinates and
being friendly.
Work group dynamics. If the relationship among members in a work group is good and cohesive, this
shows that their work group dynamics are high. If the relationship among the work group is poor,
directive leadership style should be used to provide strict direction and guidelines to align the
scattered subordinates onto the right path.

24. Illustrate how the Vroom-Yetton-Jago model is used for selecting the appropriate leadership
decision style.
This model identifies seven diagnostic questions which can assist leaders to choose any of the five
basic decision-making styles and are arranged orderly in the form of a decision tree. The five basic
decision-making styles include: two types of autocratic decision making (AL and Aft), two types of
consultative decision making (CI and CII), and a group decision making style (GIL). Leadership style
in decisions and the degree of participation from subordinates are influenced by three key variables:
decision quality, subordinate commitment and time constraints. The quality of the decision refers to

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 the extent that leaders require the “best” solution. If they require a high quality of decision, then they
should involve more of their subordinates. Decision without quality could decrease profitability,
productivity, sales and increase turnover and cost. Subordinate commitment refers to the extent that
subordinates agree and are willing to implement a leader’s decisions. Leaders should increase
participation level when decisions accepted by subordinates are crucial for a successful outcome.
Time constraints refer to availability of time to make decision. If a leader has more time to make
decision, then he should be allowed more participation from subordinates to gather their input and
suggestions. In order to determine which of the styles and processes of decision making is the most
appropriate, leaders need to address seven diagnostic situations or questions. There is a series of
yes/no questions that leader have to ask themselves for each of the situations and the model builds a
decision tree based on the responses. For example, before making any decision, leaders should ask
the first diagnostic question: “Is the quality of the decision important?” If the leader answers no,
because a poor decision made will not cause a significantly negative effect on the organization’s
performance, then the leader needs to continue answering the second diagnostic question, which is:
“Is the team commitment important to the decisions?” When the leader answers no, then the leader
should adopt A1 which is the autocratic style, where leader will make all the decisions alone.

25. What are the implications of being “in-group” or “out-group” employees?

LMX assumed that this relationship is within the continuum of low to high quality of negotiating
latitude. Their subordinates with high quality latitude are categorized as “in-group’ while those with
low quality latitude categorized as “out-group”. Leaders use a directive leadership style with out-group
members. They will use more consultative and participatory practices when dealing with in-group
members. Subordinates who have high quality working relationships with their superiors normally
share identical personality traits, attitudes, demographics and they have a higher level of competency
than out-group members. On the other hand, leader-members in low quality working relationships
focus more on contractual relations. An “Out-group” receives less of leader’s time, information and
emotional support.

26. Describe the rise and the fall of a charismatic leader.

The first step is identification. When followers are in distress and look for someone to help them, this
is the stage where the aspiring leader is on the social horizon. The second step is activity arousal. In
this stage, the leader will actively influence followers to change according to his view. Step 3 is the
commitment stage where charismatic leadership is at its peak. During this stage, the leader often
shows sacrifice and danger. This creates an image in the eyes of followers. However, this step is also
the phase where the followers start suspecting their leader is a hypocrite and this could cause the
charismatic leader to start losing his charisma. Step 4 is the disenchantment phase where followers
are disappointed with the leader when he establishes a routine in his leadership. Step 5 is the
depersonalization phase where more and more followers are dissatisfied due to similar routine tasks
and the creation of bureaucratic leadership. Step 6 is alienation. Due to formalization and
bureaucratic leadership, the followers feel that the charismatic leader has become increasingly
redundant. This is the downfall of the charismatic leader.

27. What are the distinct factors of transformational leaders? Who among the leaders you know of
are transformational leaders? Why?
In 1994, Bernard M. Bass further discovered that transformational leaders consistently demonstrate
the four distinct factors. These factors are:

 Individualized consideration. Such leaders make their followers feel important by giving them
specialized attention individually, communicating personal respect to followers and recognizing each
one’s different type of needs to help them bring about their best efforts and foster a sense of intrinsic
motivation. This leader normally acts as coach and advisor to subordinates to help them reach goals,
which benefit subordinates and the organization.

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 Intellectual stimulation. Such leaders are risk takers, and stimulate followers to be creative. They
will rethink their conventional practice and idea and transform into new ways. This leader emphasizes
problem-solving and critical thinking skills.
 Inspirational motivation. Such a leader communicates a vision that is appealing, hopeful and
inspiring, instilling others with a deep sense of purpose and meaning. He encourages empowerment
of subordinates and prefers that they accept and pursue challenging goals. This leader encourages
team spirit to increase revenue and performance of the organization.
 Idealized influence. Such a leader acts as excellent an role model of integrity, with solid, trustworthy
and ethical leadership. This instills pride and faith in followers that their leader will make good
decisions for their organization.

28. Discuss the five star-point of strategic leadership.

A leader role is to gather all the five points together and provide a framework for action around the
core that is the customer. Each of these star-points is associated with a principal activity or objective
move from point 1 to point 5 in an anticlockwise direction.
Star-point 1: Define your purpose
Mission statement is the starting point for the star. An effective mission statement serves the purpose
of the organization’s existence and encapsulates the vision that energises the firm.
Star-point 2: Face the customer
This point emphasizes viewing the organization as a set of process streams by delivering value to the
customer. A leader needs to identify the process stream so that it enhances the meaning of activities,
breaks down barriers and encourages cooperation in the service of customers.

Star-point 3: Focus on essentials

In order to fulfil the mission via the process streams, a leader must identify key competences and
capabilities of their organization. In other words, he must understand the company’s core competence
and strategic strengths.

Star-point 4: Create a challenge

The fourth point of the star explains the benchmarking and standards. To know whether the mission
is achieved, an organization should establish a measurement standard.

Star-point 5: Trigger enthusiasm.

The four points discussed earlier emphasize turning an organization inside-out, which means
understanding the organization’s mission, strengths and process stream, in order to deliver value
to customers. The fifth point explains turning an organization upside-down. A leader should act as
a transformational leader and lead by vision. Using hierarchy to control employees is not helpful
to create value in work or creating value for the customer. The structure of the hierarchy should
be flatter and flexible where the top management is committed, and support of the
implementation of value initiatives is vital.

29. What are the differences in cultural dimensions between Confucian Asia and Anglo culture
cluster?
In the research, China, Taiwan, and Hong Kong were grouped in a Confucian Asia culture cluster that
also includes Japan, Singapore, and South Korea. GLOBE researchers assigned Ireland and the U.S.
to an Anglo culture cluster also containing Australia, Canada, England, New Zealand, and White
South Africa. For instance, in China, Hong Kong and Taiwan, managers endorsed
charismatic/values-based, team-oriented, and humane-oriented leader-ship which is consistent with
the Chinese emphasis on cultural dimensions such as In-Group Collectivism, Institutional
Collectivism, Power Distance, and Humane Orientation. There is an emphasis on building
interpersonal ties. A preference exists for leaders to use indirect communication to avoid damaging
group harmony, to maintain positive relationships, and to be viewed as supporters of their employees.
24
Conversely, leaders who focus on their own interests and damage group harmony are viewed less
favourably. However, managers from Hong Kong also have strong beliefs about assertiveness,
autonomous and autocratic leadership styles. Leaders in Hong Kong solve problems by themselves

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 without asking for help from others. As compared to Hong Kong, important attributes for Taiwanese
managers are integrity and face-saving leadership attributes rather than autonomous and autocratic
leadership attributes.

30. Discuss the ten qualities of ethical leaders. Support each quality with relevant examples.
The ten qualities are:
 Articulate and embody the purpose and values of the organization.
 Focus on organizational success rather than on personal ego.
 Find the best people and develop them.
 Create a living conversation about ethics, values and the creation of value for stakeholders.
 Create mechanisms of dissent.
 Take a charitable understanding of others’ values.
 Make tough calls while being imaginative.
 Know the limits of the values and ethical principles by which they live.
 Frame actions in ethical terms.
 Connect the basic value proposition to stakeholder support and societal legitimacy.

KEY TERMS

Charismatic Ascertain the quality of an individual personality, by virtue of which he

leadership is set apart from ordinary men and treated as endowed with
supernatural, superhuman, or at least specifically exceptional powers
or qualities.

Cross-cultural Leaders need to be highly adaptable to different environments and

leadership cultures. A leader who is successful in one country will not
necessarily be successful in another country due to cultural
differences.

Ethical leadership A leader having the right values, good character and who is a good
example to others, and who sticks to his principles whenever any
temptations occur along the way.

Leader-member Illustrates the two-way or dyadic relationship involving supervisors

exchange and subordinates.
(LMX) approach

Least preferred LPC scale is an instrument used to measure the types of leadership
coworkers orientation.
(LPC) scale

Managerial grid This grid plots the different degree of task-oriented versus people-
oriented leadership and identifies five combinations of distinct
leadership styles.
.
Normative decision Leaders must develop different leadership styles to suit different
model situations when making decisions.

Path-goal theory Focuses on the relationship between a leader’s behavior and

situational variables. The path-goal model explains that effective
leaders remove the obstacles or boundaries so that followers have
clearer paths for them to achieve their work goals.

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Situational leadership Leadership style will depend on the situation.
Model

Substitutes for It can make leadership unnecessary. The theory explains that
leadership different situational factors can enhance, neutralize, or substitute for
leaders’ behaviors.

Strategic leadership Strategic leadership requires equal attention to path-finding and

culture-building.

Transformational Transformational leadership exerts strong influence on followers and

leadership stimulates individuals to discuss possibilities for the future.

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 CHAPTER 17
COMMUNICATION
DISCUSSION QUESTIONS
1. Most managers are comfortable speaking in front of individuals or small groups. However, quite a
number of managers are not comfortable speaking in front of a large audience. Why do you think this
is the case? What can a manager do to overcome his fear of public speaking?

Public speaking would rank among the top of the human race's greatest fears. It could simply be fear
of forgetting your lines or not being able to engage your audience effectively. Ultimately, fear of
public speaking really comes down to fear of being embarrassed, rejected or publicly humiliated.

There are a few tips which every public speaker needs to have up his sleeve if he is to get his message
effectively across to an enthusiastic audience.

Find out what makes successful public speakers so successful. Study their delivery and grooming
styles and keep them in mind as good examples. As you speak more often in public, you may develop
your own unique style.
A lot of people are going to be looking at you -- make sure you dress appropriately for the occasion.
Check out the place where you'll be speaking. Is it a football stadium or a large conference room? If
you'll be using a microphone, it's a good idea to test it out beforehand. The more familiar you are with
your environment, the more comfortable you'll be at the podium.
Do your research. Know your topic and what you're going to say about it and how you'd like to say it.
The more you know, the more confident you'll be up there.
After you have prepared, go through the speech. Then read it again and again. And then once more.
Practice in front of a mirror. Ask a friend or family member for help and practice in front of a real
human being.
If your audience is academics or your peers, they probably want to learn something from you. Know
who your audience is and tailor your speech and delivery to it. Give the people what they want!
Relax; even if you forget to read a sentence off your notes, it's doubtful anyone will know.
Pace yourself and remember to speak at a normal (or even slightly slower) pace when you're speaking
publicly. You want them to be able to understand you as clearly as possible.
Look your audience in the eye when you're speaking. Don't look at the floor. People trust people who
look them in the eye and you are more likely to get their attention. Don't look solely at your notes,
otherwise the audience will think you are not well prepared.
Know what's expected of you and deliver that -- and no more. Do not torture your listeners by droning
on and on ignoring the audience's interest or comfort level. Don't be one of those atrocious speakers;
always leave the audience wanting more.
2. What are the characteristics of valuable information? Why is valuable information important in
communication? Give some examples of relevant as well as irrelevant information.

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 The four most important characteristics of valuable information are accuracy, timeliness, completeness
and relevance.
Valuable information is important in business communication because it enables business activities to
be completed quickly, effectively and without errors. Valuable information also enables decision
makers to make better and timely decisions.
Take, for example, inventory levels. These are valuable and relevant information for a salesperson if
he is to commit to a delivery of a certain number of items to a customer within a specified time period.
Inventory levels are also relevant to the production manager (process) if production targets are to be
met.
The weather condition in Sydney harbor will be irrelevant information if you decide to invest in a
gaming stock such as Berjaya Sports Toto. Whether the ladies in New York will be dressed in
miniskirts or overcoats is also not relevant to the arrival or departure of airplanes from Kuala Lumpur
International Airport.
The number of poor people in the Klang Valley will also be irrelevant if a manager is deciding
whether to build a factory in the Klang Valley to produce electronic components. However, the
number of rich people in the Klang Valley who can afford to purchase residential properties above RM
1 million is relevant information to a property developer who wishes to build and sell such high-end
property in the Klang Valley—assuming his customers are mainly locals with very few foreigners.
3. Explain the communication process with relevant examples. How can noise disrupt this process?
Communication involves a sender transmitting a message to a recipient, who then decodes and
interprets that message. This means there are many points in the communication process where
misinterpretation and distraction (disruption) are possible.

There are certain barriers to effective communication that every organization faces. These potential
interruptions of the flow of information are referred to as "noise".

Communicative problems (i.e., noise) can be categorized into three groups: technical, semantic, or
efficacy-related.
Examples of noise include environmental noise, physiological-impairment noise, semantic noise,
syntactical noise, organizational noise, cultural noise, and psychological noise.

Distractions—i.e., noise—can disrupt the flow of information between any of these eight stages.
Distraction (disruption) could affect the sender, the message itself, the channel it is being sent through,
or the recipient of that message.
Communicative Interference
Every organization faces certain barriers to communication. Shannon and Weaver argue there are three
particular layers of communication problems:
1. Technical: How accurately can the message be transmitted?
2. Semantic: How precisely can the meaning be conveyed?
3. Efficacy-related: How effectively does the received meaning affect behavior?
These layers refer to the types of noise that can interfere with communication.

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 Environmental Noise
Noise that physically disrupts communication, such as very loud speakers at a party or the sounds from
a construction site next to a classroom.
Physiological-Impairment Noise
Physical conditions such as deafness or blindness can impede effective communication and interfere
with messages being clearly and accurately received.
Semantic Noise
Semantic noise refers to when a speaker and a listener have different interpretations of the meanings of
certain words. For example, the word "weed" can be interpreted as an undesirable plant in a yard or as
a euphemism for marijuana.
Syntactical Noise
Communication can be disrupted by mistakes in grammar, such as an abrupt change in verb tense
during a sentence.
Organizational Noise
Poorly structured messages can also be a barrier. For example, a receiver who is given unclear, badly
worded directions may be unable to figure out how to reach his destination.

Cultural Noise
Making stereotypical assumptions, such as unwittingly offending a non-Christian person by wishing
him a "Merry Christmas," can also detract from communication. Because of this, it is important that
each speaker in a conversation understands the culture of the other party.

Psychological Noise

Certain attitudes can also make communication difficult. For instance, significant anger or sadness
may cause someone to lose focus on the present moment.
By acknowledging and adjusting to noise, a communicator can make it more likely that his message
will be received as intended.

4. Compare oral and written communication. If you were a manager, when and why would you
choose one communication type over the other?
In a staff meeting (conference room) to discuss weekly or monthly work-related issues, oral
communication or the spoken word is the preferred means. This is because interactive communication
among managers, their peers or colleagues provides much needed information exchange in a timely
manner. This aids solving problems or brainstorming new ideas. Questions and answers can be
immediate.
In situations where immediate feedback is required, oral communication is used, such as a phone call
to confirm whether additional hotel room facilities for this Saturday’s annual delegates meeting is
available.

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 Business memos (written) still have a place in the office, even though, for the most part, informal emails have
replaced the interoffice memo.
Business memos follow strict guidelines in terms of format, with a header, opening, summary and closing. The
business memo is formal, and managers may send the formal document to employees via email. Memos are used
in the following situations.

When management changes a company policy that affects all employees in an organization, a business memo is
an appropriate method to disseminate the information. The business memo provides the formality and authority a
company-wide policy change requires.

A business memo is an appropriate type of communication to use when making company announcements such
as an employee promotion. Management can also send out a business memo to announce that the business has
achieved a certain target. Other announcements may include holiday parties, new benefit programs, or stock
information.

Business memos are appropriate when management makes a request of all employees. For example, during an
open-enrollment period for health insurance, the human resource manager can use a business memo to inform
and request that workers turn in policy changes by a specific date.

Employees and management can also distribute a business memo to remind workers about a task that workers
must complete. A reminder memo can relate to office behavior, such as cleaning up the company break room.

5. Why is it necessary to have a contract in written form? Can you identify two cases in which it is
necessary to keep a written copy of the communication?

In common law legal systems, a contract (informally known as an agreement in some jurisdictions) is an
agreement having a lawful object entered into voluntarily by two or more parties, each of whom intends to create
one or more legal obligations between them. The elements of a contract are "offer" and "acceptance" by
"competent persons" having legal capacity who exchange "consideration" to create "mutuality of obligation."
Proof of some or all of these elements may be done in writing, though contracts may be made entirely orally or
by conduct. The remedy for breach of contract can be "damages" in the form of compensation of money or
specific performance, enforced through an injunction. Both of these remedies award the party at loss the "benefit
of the bargain" or expectation damages, which are greater than mere reliance damages, as in promissory
estoppel. The parties may be natural persons or juristic persons.

A contract is a legally enforceable promise or undertaking that something will or will not occur. The word
promise can be used as a legal synonym for contract, although care is required as a promise may not have the full
standing of a contract, as when it is an agreement without consideration.

In summary, a contract in written form is proof that an agreement has been entered into voluntarily,
and certain obligations are incumbent upon the parties stated therein, and failure to do so can result in
foreseeable penalties or court action by aggrieved parties.

A memorandum of understanding (MOU) is, concisely, a written agreement. An MOU is

sometimes confused with other, similar jargon, such as letter of intent or memorandum of
agreement. For most legal purposes, however, all three of these terms amount to basically the same
thing.

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 MOUs are very common and are used for domestic purposes and agreements between nations. Some
are general and concise. Others are long-winded and extremely detailed.

No matter their length or complexity, MOUs specify mutually-accepted expectations between two or
more people or organizations as they labor together toward a common objective. And here are two
other touchstones of MOUs -- generally they're not legally binding, in part because neither party wants
to deal with the ramifications of a binding agreement, and they don't involve the exchange of money.

You might think that memoranda of understanding sound suspiciously similar to contracts, but there
are actually significant differences between the two. A contract is a written, private agreement
between two parties that is legally binding and can be enforced by a judge.

Contracts spell out the nitty-gritty obligations of each party which, if breached, can spell dire
consequences for the entity that breaks it. Contracts are necessary when there is any sort of exchange
of money because they help to protect the interests of both parties and ensure trust.

MOUs are less formal than contracts, and typically include fewer details and complexities, but they are
more formal than handshake agreements, sometimes called gentlemen's agreements. All sorts of
entities use MOUs to create guidelines for each party as they contribute their efforts and resources
toward important projects. But ultimately, the reason that parties opt for MOUs is because they are
simpler and more flexible than contracts.

Well-written MOUs reflect diplomatic savvy and creative analytical thinking. They also provide a
mutually beneficial framework that both entities can work within to achieve shared goals. On the next
page, you'll see why memoranda of understanding are virtual celebrities in the legal world.

Source: http://people.howstuffworks.com/memorandum-of-understanding.htm
See also business memos in Question 5.
6. Discuss the advantages and disadvantages of vertical and horizontal communication in an
organization.
Benefits of horizontal communication are:
1. Saves time
Horizontal channel of communication saves time. Many urgent decisions in the organization may
be taken on the spot.
2. Co-ordination and co-operation
Horizontal channel of communication is of great help to bring better co-ordination and greater co-
operation between staff members.
3. Efficiency
Horizontal communication ensures greater efficiency and better results.
4. Increases productivity
Horizontal channel of communication succeeds in increasing productivity and efficiency of the
staff.
5. Immediate feedback

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 Horizontal communication is generally oral and personally; the chances of misunderstanding are
much less as the feedback is immediate.
6. Removes jealousy
Horizontal channel removes jealousy, misunderstanding, etc. among persons of equal status in the
organization.
7. Checks grapevine
Horizontal channel brings employees closer. It enables them to discuss matters directly and
personally. This checks the growth of informal communication / grapevine (rumors).
Disadvantages of Horizontal Communication are:
1. Jealousy among those of equal rank
In horizontal communication, if there is jealousy or misunderstanding between any two persons of
equal status, it will not allow the smooth functioning of the organization.
2. Disruption if used in excess
If there is too much horizontal communication, both the employees at the junior level and seniors at
the higher level are never consulted or even informed. Thus, it is likely to disrupt the organizational
hierarchy.
3. Feeling of frustration
Horizontal communication is the feeling of frustration and inadequacy that the department heads
get when they meet.
4. Waste of time in gossiping
Horizontal communication may make employees too friendly with each other and there is a
possibility that they will waste their time gossiping.
5. Interdepartmental Rivalry
In horizontal communication there may be unhealthy competition among various departments in an
organization. Conflicts or rivalries may disrupt the work of the organization. Therefore, an
organization prefers vertical communication so that there is an effective line of authority.
In spite of this, there is always a tendency toward more horizontal communication.

Advantages of vertical communication:

1. Discipline: In vertical communication official channels are used, thus strict discipline can be
maintained.
2. Record: As it follows the formal media it provides documentary evidence which can be used in the
future.
3. Provide direction: Instructions or directions for proper implementation of official functions can be
transmitted through vertical communication.
4. Feedback: Both downward and upward communications are allowed in vertical communication,
which ensures proper feedback.
5. Recognition: Vertical communication is one of the recognized media forms of internal
communication.
6. Co-ordination: Communications under a vertical system ensures coordination among the
employees.

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 7. Dependable: Information transmitted through vertical communication is authentic and dependable.
Disadvantages of vertical communication:
1. Time consuming: As it follows the official channels it is a time-consuming process.
2. Lack of flexibility: Vertical communication is not flexible, and thus fails to cope with changed
situations.
3. Lack of creativity: In vertical communication employees become mechanized and want to go by
the book. As a result they become less creative.
7. Grapevines in the workplace can have both positive and negative effects. Are grapevines beneficial in
the Malaysian workplace? Why or why not?
Informal communication occurs through the grapevine, which is generally word-of-mouth
communication. Internal business communication that moves through the grapevine spreads
throughout the organization in a random, undocumented manner and is open to constant change with
individual interpretation. Although unstable, the grapevine carries some importance to internal
business communication.
The grapevine exists because of a natural desire to know things and brings a sense of belonging to
employees and managerial staff alike. It can create corporate identity and build teamwork.
Information flows from upper management through the grapevine to lower-level employees and
allows them to see, and relate to, the struggles that management is facing. When employees have a
sense of these challenges, they can rise up and make suggestions or work to improve a situation. The
grapevine allows feelings to be expressed, not bottled up. People need to talk about what is affecting
them, and the grapevine allows this kind of expression. Employees and staff can communicate about
important topics using their own language, instead of the technical jargon used in formal
communication channels. Managers can learn a substantial amount about the issues and problems of
their employees by tapping into the grapevine. It is a reliable indicator of health, morale and
productivity in the company

A large part of the communication that travels the grapevine is true; quite often, it is difficult for one
to discern fact from non-fact through the grapevine. Management must effectively monitor the
grapevine and move in to correct inaccuracies or falsehoods. The grapevine is unstable and unreliable;
it can fuel anxiety, conflict and misunderstanding in small or large group situations.
If properly managed, a grapevine can be another valuable informal communication channel in an
organization and in the Malaysian workplace.
8. Explain the concept of Management by Wandering Around (MBWA). Provide two real world
examples of MBWA in action, one in the Malaysian context. Provide examples of when this
concept can be successful or unsuccessful.
Datuk Carl Bek-Nielsen, chief executive of United Plantations, is a people person. He connects easily
to his workers, such as the Indonesian oil palm plantation harvester, making small talk like inquiring
about his family and getting a smile in return.
(1) There are five things that set United Plantations apart from other oil palm plantations or companies
in Malaysia. He and his brother grew up in the plantation and have worked as cadet planters. They

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 are able to speak several languages including Tamil and Bahasa Malaysia. The brothers took over
the reins from their father Tan Sri Borge Bek-Nielsen.
(2) The strong family bonds are what differentiate United Plantations from any other plantation
companies in Malaysia today. They know their estate like the backs of their hands and having a
sense of place makes them care for everything they do.
(3) Their sense of stewardship is what sets UP apart from others in the industry. The company takes
care of the different religious beliefs, health and schooling of its employees by having temples,
mosques, churches, temples, hospitals and primary schools within its 12 estates in Perak. The
company also builds new houses for staff. The company spends RM40 million annually in human
capital development and provides scholarships to universities for employees’ children.
(4) When you push people to their highest potential, you are able to hit the sweet spot in innovation.
The company has the highest oil extraction rate and yield per acre and has found that size or speed
isn’t always better. The company sets its sights on being the most efficient palm oil producer in the
world.
Carl revealed three factors that lead to high yield. (a) high-quality seeds, (b) excellent agronomic
setup with research and milling and (c) disciplined managers who spend time in the field.
(5) The focus on spending time on the ground has been drilled in their heads by their father from
young ages, and this helps the brothers relate better to their sense of history.
Even though United Plantation is a mid-sized plantation company, it is a highly profitable and well-
regarded company. This is because the Nielsen brothers understand their business and their
employees better than their rivals.
Source:
http://www.businesscircle.com.my/givingbackthesecrettogettingthemostoutofpeopleinoneoftheworl
dsbestplantations/?

There are many examples of Management by Wandering Around in texbooks, beyond those
reported in the press.
Starbucks founder Howard Schultz is surrounded by very smart assistants and executives, yet he
religiously visits at least 25 stores a week. A second strategy is making end runs around your own
hierarchy.
Andy Pearson, President of PepsiCo, will visit an operation such as Frito-Lay, and after an
obligatory nod to the CEO, he will head directly to the bullpen where the junior sub-brand
managers live. He'll pick a manager at random, sit down with her for an hour and discuss what is
going on in her neck of the woods (a certain region). Not only will he be judging Frito's bench
strength, he will also be zeroing in on un-masticated data.
Read the article below and research other articles about Steve Jobs. There are a number of less-
than-hallowed articles about Jobs and employees reluctance to meet him, whether in the lift or
cafeteria, since he makes them feel small and uncomfortable even when inquiring about work-
related issues.
Source:http://www.zdnet.com/article/how-steve-jobs-earned-his-mbwa-degree-management-by-
walking-around/

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 If carried out half-heartedly, insincerely and without people focus, then MBWA is not going to
work for any manager or company. Managers who practice MBWA are genuinely concerned and
interested in finding out what is going on at every level in the organization; are good listeners; are
friendly; and do not criticize employees in the open.
9. How can a manager use non-verbal communication to effectively influence his subordinates?
A manager can influence his subordinates positively or negatively using a number of non-verbal
methods in a formal or an informal setting. Body language, body positioning, eyes and facial
expression, hand gestures, and tone of voice (such as pitch, volume, quality and speed) convey a lot of
meaning. Managers want to earn the respect and trust of their subordinates so that organizational goals
can be more readily achieved.

A manager should make eye contact during conversations and take care that his facial expression is
alert and caring. Although not an actual "facial" expression, head movements such as nodding are also
important visual cues that let people know you are listening, processing the information and care about
what is being said.
A manager may or may not use hand gestures. Not everyone "talks" with their hands, but using hand
gestures to communicate is a good way to get your point across. Some don’ts would be pointing at the
listener, as this is confrontational, or making wild hand gestures that take away from what you are
saying. A manager (speaker) often uses hand gestures to help solidify a point he is making, with a
subtle downward hand movement for an emphatic point or expansive gestures when making a large
point.
A manager has to ensure that his body language is proper, otherwise the communication or
conversation with his subordinates will not end well. Crossing your arms over your chest signifies to a
listener that you disagree with him. Fidgeting while listening also imparts cues that you are not
interested in what is being said. Keeping still while listening may not be easy, but it lets the speaker
know that you care about what he is saying.
Body positioning is subtly different from actual body movements. For example, sitting perfectly still
but leaning backwards may leave the impression of disinterest or disagreement. However, inclining
towards the speaker gives him the impression that you are engaged in the conversation. When people
don't get along, they may give off subtle cues in their body positioning by turning slightly away,
giving the impression that they want to leave the conversation. Proper body positioning is important to
keep a conversation going.
Vocalics is the study of the nonverbal uses of the voice that indicate emotion and provide cues as to
how the message should be interpreted. Nonverbal cues can take many forms, including pitch, tone,
rate, volume, and accent pattern, and will influence how the message is received and interpreted
(DeFleur, 2005). A subordinate is more likely to respect his boss and take his advice seriously if he
speaks in a normal, even tone, at normal speed Raising his voice in an accusing manner is advisable,
as this may antagonize the subordinate.
Haptics -Touch is also a way to communicate with others. A pat on the back to indicate a job well
done or a firm handshake to congratulate a colleague or subordinate are means of showing
appreciation, other than saying so in words.

10. What are some barriers to effective communication in an organization? What are some
measures or recommendations you would provide to a manager to overcome these barriers?

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 Refer to exhibit 17.6 Barriers to communication on page 392 of textbook.

Physical and environmental barriers that interfere with communication can easily be avoided.
Requesting participants in a conference to turn their smartphones to silent mode, or choosing a
meeting place that is free from noise, such an ongoing construction, can easily be arranged.

Cultural barriers to communication exist when people from different parts of the world meet. One
cannot assume that behavior that is the norm for us is also the norm for the other party. Diplomats
to other countries are usually briefed and well-versed in the do’s and dont’s of the country to which
they are attached. So too should businessman be briefed if they are meeting their international
counterparts, in order to be understand what is acceptable and what is not.

11. How does stereotyping affect communication at work? Give some examples.
Stereotypes are ideals and conventional notions created about people. They can be positive or
negative in connotation and are used to group people together. It is assumed that all individuals of a
particular group behave in a similar way. By classifying people based on oversimplified notions,
conceptions or beliefs can create barriers in the workplace and disrupt creative thinking and
teamwork among employees.
Stereotyping at work causes employees to make assumptions about others based on the stereotypical
role of the other person. For example, a worker in a subordinate position may be deemed to have
little education and therefore little to offer. This may not be entirely true, and employers can lose out
on valuable opportunities by not communicating with those in lower level positions.
Gender roles typically portray men to be more authoritative and of greater self-control, while women
are viewed as the weaker sex and more emotional. This stereotype can adversely affect a woman’s
role in the workplace, such as in senior management positions. Gender stereotypes may prevent those
with leadership qualities and capabilities from moving ahead.
Stereotypes based on race or ethnicity is morally and legally wrong. If employees are not
communicating based on preconceived notions of race or ethnicity, they are not working toward the
same goals for the company, and this will result in an underperforming company.

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 CHAPTER 18
TEAMWORK AND GROUPS

1. Discuss the types of groups found in an organization.

Three basic types of groups exist in an organization, i.e., functional groups, informal or
interest groups, and task groups and teams.
A functional group is a permanent group created by an organization to accomplish a number
of organizational purposes with an unspecified time horizon.
A functional group is permanent in the sense that it will maintain its current form and major
objectives even after the current cycle of functional activities have been completed. They will
be replaced with a new cycle of activities within the specification of its functions.
An informal or interest group is created by its own members for purposes that may or may not
be aligned with organizational goals. For example, a group of employees who lunch together
every day may discuss work-related matters, the effects of company merger on their positions
within the company, local news, world news, or sports.
A task group is a group created by the organization to accomplish a narrow range of goals
within a stipulated time limit. The organization identifies the group members, assigns them to
a committee or task force and sets them a narrow and specific goal to be completed within a
limited time frame.
Teams are a type of task group that are very popular in use today.

2. What are the stages of team development? Do all teams go through all the stages discussed in
this chapter? Why or why not?
There are four stages in team development. Forming is the initial stage of the team
development process.
Team development moves to the second stage which is storming. Tension will increase and
incidents of conflict are highly likely.
The project team then proceeds to the norming stage of development. Relationships are more
settled and most interpersonal conflicts would have been resolved. The project team would
have adapted well to its operating environment.
The fourth and final stage is the performing stage. The team is highly committed and eager to
achieve the project objective. The level of work performance is high. Communication is open
and members frequently collaborate. The team feels fully empowered.
If the members of a team have worked together on past projects, then the storming stage may
be bypassed or shortened as most of the team members know each other’s personality and
work attitude reasonably well. The norming stage is when they come to grips with the details

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 and complexity of the new project. Most professional teams should adjust to this quite quickly.
The last stage, the performing stage, is when they support each other in the achievement of
project goals.

3. Discuss the essential characteristics of groups and teams.

Groups and teams take on four important characteristics, i.e., role structure, norms,
cohesiveness and informal leadership as they pass through the stages of development.

(1) Role structure

Every person in a team has a role to perform in order to help the group achieve its goals. A
task specialist role focuses on getting the group task accomplished in the most effective way.
A social, emotional role provides social and emotional support to members in the team,
especially when things are not going smoothly and tension is running high.
Ambiguity
Role ambiguity arises when the sent role is unclear. Role ambiguity can be due to inadequate
job description, vague instructions from your superior, or incomplete information from your
teammate
Conflict
Role conflict arises when the messages and cues are clear but contradictory or mutually
exclusive. Four common forms of role conflict are recognized in management literature, i.e.,
interrole conflict, intrarole conflict, intrasender conflict and person-role conflict.
Overload

An undesirable consequence of a weak role structure is role overload, where a person is

expected to perform beyond his normal capabilities. If a boss gives his worker three different
important assignments at once, the worker will be faced with a role overload.
(2) Behavior Norms
The psychological definition emphasizes that the social norms' behavioral component are of
two dimensions: how much behavior is exhibited, and how much the group approves of that
behavior. Norms are also affected by culture.
(3) Cohesiveness
Cohesiveness is the extent to which members are loyal and committed to the group. When
cohesiveness is high, members work closely together, collaborate and trust one another and
are able to be highly effective at achieving goals.
(4) Formal/Informal Leadership

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 A formal leader heads a functional group or team. Formal leadership is the process of
influencing relevant others to pursue official organizational objectives. Even after a formal
leader has been designated, the team may also look to others for leadership. Informal
leadership is the process of influencing others to pursue unofficial objectives that may or may
not serve the organization’s interest
4. What are the benefits to an individual who conforms to the group’s norm? Are there any
benefits of not conforming to the group’s norms? What benefits accrue to an organization of
conformity? What benefits accrue to an organization of non-conformity?
By conforming to the group’s norm, an individual will not be treated as an outcast or treated
with disdain. By not rocking the boat, the status quo (unity) is maintained and things will
carry on as usual. However this may not always be beneficial if conditions change drastically
and new ideas or thinking is needed. An example is to avoid groupthink.
Groupthink is a phenomenon when a group of people get together and start to think
collectively with one mind. The group is more concerned with maintaining unity than with
objectively evaluating its situation, alternatives and options. The group, as a whole, tends to
take irrational actions or overestimate its positions or moral rightness. 
Groupthink tends to occur in isolated groups, especially in groups with no clear rules for
decision making and in groups where all of the people involved have similar backgrounds. It
is destructive to effective thinking.
Many great ideas or innovations have come out of creative thinking (nonconformity) and
marching to one’s own drummer. Organizations have created special units called skunkworks
to jumpstart the creativity element in an organization. Everett Rogers defines skunkworks as
follows: "It is an especially enriched environment that is intended to help a small group of
individuals design a new idea by escaping routine organizational procedures. The research
and development (R&D) workers in a skunkworks are usually specially selected, given
special resources, and work on a crash basis to create an innovation."

5. What can be done to improve cohesiveness in a team?

Cohesiveness is the extent to which members are loyal and committed to the group.
Exhibit 18.1 Factors that Influence Group Cohesiveness (page 403)

Factors that increase cohesiveness Factors that reduce cohesiveness

Intergroup competition Group size
Personal attraction Disagreement on goals
Favorable evaluation Intragroup competition
Agreement on goals Domination

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 Interaction Unpleasant experiences
Source: Griffin, R. W. (2014). Fundamentals of Management, South-Western
Removing or avoiding the factors in the second column of table will increase cohesiveness.
Also refer to page 402-403 of textbook for details.
6. Every individual has his personal reasons for joining a group. Group members may join the
group for vastly different reasons. What is the likely effect on a group in which members join
for different reasons? Will there be a higher likelihood of conflict in a group where members
have substantially different reasons for joining?
Take a church group for instance. Some may join for purely religious reasons, i.e., to have
fellowship with believers, strengthen their faith and to spread the faith to the unsaved. Others
may join more for social reasons, to meet people with similar interests in sports or music, or
to share activities together. If the interests are mostly aligned, the group will continue to meet
and the likelihood of open conflict is minimal. However, slight differences in opinion may
occur from time to time, but these are mostly tolerated by group members. Others still may
join because they want to sell something to this church-going crowd.
A study group formed in a college class for exchanging ideas, encouraging and helping each
other with homework (assignments) and to discuss study topics will function well if all
members are equally committed and willing to participate. The existence of members who
just tag along or just want to have a good time will distract the group from its original
purpose.
If the majority of the members of a group have vastly different reasons for joining a group,
then the group is likely to exist for a short time only. Sooner or later, the individuals with
different reasons will start expressing them and this may cause discord (conflict) in the group.
Without a common reason (bond) to exist, the group will implode sooner than later.

7. Describe the causes of conflict in an organization. What steps can a manager take to control
conflict?
1. Ambiguous or overlapping jurisdictions. If authority or responsibility overlaps because
of unclear job scopes, competition for control of resources will inevitably occur.
Redesigning the organization to clarify job boundaries will help solve this problem.

2. Personality Conflicts. Personality conflicts are not uncommon in an organization. Since it

is not easy to change a person’s personality, the best way to avoid this conflict is to
reassign one or both of the antagonistic parties to a new job.

3. Competition for Scarce Resources. Resources include funds, personnel, use of facilities
and equipment, power and valuable information. People may fight over “anything valuable
in an organization,” which is viewed as a scarce resource. Allocation of funds and
assignment of personnel can cause deep rifts and, if not properly addressed, can cause
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 serious long-term harm to an organization. A way to avoid this is to enlarge the resource
base, such as by hiring more personnel or increasing each department’s budget.

4. Behavioral Styles. People have different styles. Your thinking style or communication
style might conflict with somebody else’s thinking style or communication style. One
method for handling conflicts in styles is by using the Thomas Kilmann model, which is
described later.

5. Unrealized Expectations. Dissatisfaction increases when expectations are unmet and may
eventually lead to conflict. To avoid destructive conflict, management have to take the time
to find out what their employees expect from their employment.

6. Unreasonable standards, rules, policies, procedures. These triggers may give rise to
dysfunctional conflict between managers and the people they manage. A workaround may
be to appeal to an employee’s perception of fair play, but a more permanent solution may
be to re-examine the standards and to correct or modify them if deemed necessary.

10. Discuss the Thomas Kilmann Conflict Mode Instrument in an organization.

The TKI has been used by Human Resources (HR) and Organizational Development (OD)
consultants as a starting point to resolve differences and to facilitate learning about how
conflict-handling modes apply to personal, group, and organizational dynamics.
These two basic dimensions of behavior define five different modes for responding to
conflict situations:

1. Competing is assertive and uncooperative—an individual pursues his own concerns at the
other person's expense. This is a power-oriented mode in which you use whatever power
seems appropriate to win your own position—your ability to argue, your rank, or economic
sanctions. Competing means "standing up for your rights," defending a position which you
believe is correct, or simply trying to win.

2. Accommodating is unassertive and cooperative—the complete opposite of competing.

When accommodating, the individual neglects his own concerns to satisfy the concerns of
the other person; there is an element of self-sacrifice in this mode. Accommodating might
take the form of selfless generosity or charity, obeying another person's order when you
would prefer not to, or yielding to another's point of view.

3. Avoiding is unassertive and uncooperative—the person neither pursues his own concerns
nor those of the other individual. Thus he does not deal with the conflict. Avoiding might
take the form of diplomatically sidestepping an issue, postponing an issue until a better time,
or simply withdrawing from a threatening situation.

4. Collaborating is both assertive and cooperative—the complete opposite of avoiding.

Collaborating involves an attempt to work with others to find some solution that fully
satisfies their concerns. It means digging into an issue to pinpoint the underlying needs and
wants of the two individuals. Collaborating between two persons might take the form of

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 exploring a disagreement to learn from each other's insights or trying to find a creative
solution to an interpersonal problem.

5. Compromising is moderate in both assertiveness and cooperativeness. The objective is

to find some expedient, mutually acceptable solution that partially satisfies both parties. It
falls intermediate between competing and accommodating. Compromising gives up more
than competing but less than accommodating. Likewise, it addresses an issue more directly
than avoiding, but does not explore it in as much depth as collaborating. In some situations,
compromising might mean splitting the difference between the two positions, exchanging
concessions, or seeking a quick middle-ground solution.

Each of us is capable of using all five conflict-handling modes. Only a handful of

individuals use a single style of dealing with conflict. However, some people use some
modes better than others and, therefore, tend to rely on those modes more heavily than
others.

Your personal predispositions and the requirements of the situation in which you find yourself
will influence your conflict behavior. The TKI is designed to measure this mix of conflict-
handling modes.

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 CHAPTER 19
QUALITY AND PRODUCTIVITY
ANSWERS TO DISCUSSION QUESTIONS
1. What is a budget? What are the advantages and disadvantages of using a budget?
A budget is a financial plan showing how the organization will acquire resources and use
them in operations during a specified time period, usually one year. A budget takes the form
of a pro forma set of financial statements and supporting schedules. Pro forma means that
figures are expected amounts as opposed to actual historical amounts. The budget is typically
compiled on a monthly basis. Budgets contain detailed descriptions of what managers expect
to do in the short run.
2. Discuss the different types of budgets and each type’s purpose.
The following are the types of budgets typically used and prepared in most companies.
(a) Sales budget involves a realistic sales forecast. This is prepared in units of each product
and also in sales value. Sales forecasting methods include (i) sales force opinions, (ii)
market research, (iii) statistical methods, and (iv) mathematical models.
(b) Production budget is expressed in quantitative terms and is geared to the sales budget. If
requirements exceed capacity, the manager may subcontract, plan for overtime, and
introduce shift duty.
(c) Raw materials and purchasing budget. The materials usage budget is in quantities. The
materials purchases budget is both quantitative and financial.
(d) Labor budget is both quantitative and financial. Some factors influencing it are
production requirements, man-hours available, grades of labour required and wage rates.

(e) Cash budget is a cash plan for a defined period of time. It is a summary of monthly cash
receipts and payments. It highlights monthly surpluses and deficits of actual cash and is
mainly used:
1. To maintain control over a firm’s cash requirements.
2. To enable a company to take the required measures such as loan facilities if deficits
arise or to make investments if cash surpluses arise.
3. To show the feasibility of management’s plans in cash terms.

A company may receive cash from sales, payments by debtors or from the sales of
fixed assets. Cash payments are made for stocks purchase, “payments of wages or
other expenses” or “payments of interest, dividends or taxation”.
3. What is the meaning of quality? Why is quality important to a business?

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 Quality is defined as “the ability of a product or service to consistently meet or exceed
customer expectations.
Quality makes a satisfied customer. Happy customers will continue to use the products or
services.
Poor Quality reduces productivity and increases costs. The competitive position of the firm
will be adversely affected.
Quality is no longer an order winner; it is just an order qualifier.
High technology and sophisticated products make quality a necessity. Computerization and
automation increases standardization and quality levels.
4. What is TQM? Discuss the five key principles of TQM? What are some obstacles to
implementing TQM? Explain.
Total Quality is a description of the culture, attitude and organization of a company that
strives to provide customers with products and services that satisfy their needs. Many of
today’s companies have embraced total quality either in manufacturing products or providing
services.
Principles of TQM
TQM is a philosophy which involves everyone in an organization in a continual effort to
improve quality and achieve customer satisfaction. The key principles of TQM are briefly
discussed below.

Management Commitment
 Plan (drive, direct)
 Do (deploy, support, participate)
 Check (review)
 Act (recognize, communicate, revise)
Employee Empowerment
 Training
 Suggestion scheme
 Measurement and recognition
 Excellence teams
Fact Based Decision Making
 SPC (statistical process control)
 DOE (Design of Experiments), FMEA(Failure Mode Effects Analysis)
 The 7 statistical tools
 TOPS (Ford 8D– team-oriented problem solving)
Continuous Improvement
 Systematic measurement and focus on CONQ
 Excellence teams
 Cross-functional process management

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  Attain, maintain, improve standards
Customer Focus
 Supplier partnership
 Service relationship with internal customers
 Never compromise quality
 Customer driven standards

Some obstacles to implementing TQM are “There is a lack of”:

1. Company-wide definition of quality
2. Strategic plan for change
3. Customer focus
4. Real employee empowerment
5. Strong motivation
6. Leadership

5. Discuss some of the major criticisms of TQM.

The main criticisms of TQM are:

i. Blindly pursuing TQM programs.
ii. TQM programs may not be linked to strategies.
iii. Quality are not tied to market performance or profitability
iv. The failure to properly plan a program.

6. What is Six Sigma? Why do companies practise Six Sigma? Give some real world
applications of Six Sigma.
Six Sigma is a business process for improving quality, reducing cost and increasing customer
satisfaction. Statistically, it means having no more than 3.4 defects per million. From a
conceptual viewpoint, the program is designed to reduce defects and requires the use of
certain tools and techniques. Companies already practising Six Sigma are Motorola, GE, TI
and Kodak. Companies as varied as drug giant Merck (MRK), British confectioner Cadbury,
(CBY) and doughnut maker Dunkin' Brands are increasingly turning to Six Sigma to lift their
bottom lines. Pfizer (PFE) also embarked on 85 Six Sigma projects to lower the cost of
delivering medicines to patients in its pharmaceutical sciences division.14
The Six Sigma programs are designed to improve quality, save time and cut costs. Typically,
the programs are employed in design, production, service, inventory management and
delivery.
An excellent article of applications of “Six Sigma for manufacturing and non-manufacturing
processes.” http://www.bxlnc.com/download/SIX-SIGMA-FOR-MANUFACTURING-AND-
NON-MANUFACTURING.pdf

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An excerpt from the first two pages is as shown below.

SIX SIGMA FOR MANUFACTURING AND NON-MANUFACTURING PROCESSES

Six Sigma is a quality improvement and business strategy that began in the 1980’s at
Motorola. Emphasis is on reducing defects to fewer than 4 per million, reducing cycle time
with aggressive goals such as 30-50% reduction per year, and reducing costs to dramatically
impact the bottom line. The statistical and problem solving tools are similar to other modern
day quality improvement strategies. However, Six Sigma stresses the application of these
tools in a methodical and systematic fashion to gain knowledge that leads to breakthrough
improvements with dramatic, measurable impact on the bottom line. The secret ingredient that
really makes Six Sigma work is the infrastructure that is built within the organization. It is this
infrastructure that motivates and produces a Six Sigma culture or “thought process”
throughout the entire organization. The power of a Six Sigma approach is best described by
proven return-on-investment (ROI) as shown next from Motorola, AlliedSignal, and General
Electric (GE).

Based on the number of articles written the last two years about GE and its CEO, Jack Welch,
GE has now become the standard bearer for how Six Sigma is implemented to successfully
drive positive bottom line impact along with recognized “World Class” status. Other highly
respected and successful companies such as SONY are benchmarking off of GE and
implementing a similar strategy. The companies mentioned thus far are certainly well known
for their engineering and manufacturing excellence.

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 What is not as well-known is their view of the importance of Six Sigma in non-manufacturing
or transactional areas. Bob Galvin, former President and CEO of Motorola, has stated that the
lack of initial Six Sigma emphasis in the non-manufacturing areas was a mistake that cost
Motorola at least $5 Billion over a 4-year period. It is common these days to hear comments
like, “Yes, Company X has a great product, but they sure are a pain to do business with!”
Consequently, Jack Welch is mandating Six Sigma in all aspects of his business, most
recently in sales and other transactional (non-manufacturing) processes. Unfortunately, the
typical response from non-manufacturing employees has been, “We’re different. Six Sigma
makes sense for manufacturing but does not apply to us!” This is simply an excuse in order to
avoid being held to the same accountability standards as manufacturing.

7. What is benchmarking? Describe the types of benchmarking? What are the advantages and
disadvantages of benchmarking?

A benchmark is a reference point against which things are measured. These reference points
can be measured by asking questions about some aspects of the product or service, such as
quantity produced, time taken to complete a process, how reliable, how much money is spent,
etc. By collecting these data, we will be able to compare the performance of the company
against other companies. Benchmarking can be defined as a systematic method by which an
organization can continuously measure themselves against the best industry practices (world
class or best-in-class) and improve accordingly. In other words, it seeks to adopt the
industry’s best practices in order to attain superior performance.

Types of benchmarking
The seven types of benchmarking are discussed below.

1. Performance or operational benchmarking

Pricing, technical quality, specification are compared.
It is performed by reverse engineering whereby a competitor’s products are taken apart and
analysed.
It is also known as competitive benchmarking.
2. Process or Functional Benchmarking
It focuses on work processes such as order entry or employee training.
It identifies the best practices in companies that perform similar functions.
3. Strategic Benchmarking
Studies how companies seek winning strategies that lead to competitive advantage.
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 Determine how well a company is prepared to compete in a segment and to help define a
best-in-class competitor by using a key success factor matrix.
4. Functional Benchmarking or Generic Benchmarking
An organization seeks to benchmark against others from different business sectors to find
ways of improving similar functions or work processes. This type of benchmarking can
lead to innovation and dramatic improvements.
5. Internal Benchmarking
It involves seeking partners from the same organization. Advantages of internal
benchmarking are that access to sensitive data and information is easier to obtain and
standard data is often readily available.
6. External Benchmarking
External benchmarking seeks outside organizations which are known to be best in class. It
provides an opportunity for learning from those leaders in the field. External benchmarking
will take up more time and resources to ensure comparability of data and information,
credibility of findings and development of sound recommendations.
7. International Benchmarking
It is used where partners are sought from other countries because the best practitioners are
located outside the country. Opportunities for international cooperation are increasingly
available due to globalization and advances in information technology. This can be more
time consuming and resource intensive to implement and results will need more careful
analysis due to national differences.
Some advantages of benchmarking are below.
 Benchmarking is a systematic method by which organizations can measure themselves
against the best industry practices.
 It promotes superior performance by providing an organized framework through
which the organization can learn how the “best in class” do things.
 It helps for continuous improvement.
 Benchmarking can inspire managers (an organization) to compete.
 Through benchmarking, organizations can borrow ideas, adopt and adapt them to gain
competitive advantage.

Some disadvantages of benchmarking are below.

 The most vocal criticism is that benchmarking comes from the idea of copying others
and therefore is not a substitute for innovation.
 Benchmarking is not a panacea.
 It is not a strategy nor is it intended to be a business philosophy.
 It is a time consuming technique.
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8. What is productivity?

Productivity is defined as an index that measures output (goods and services) relative to
input (labor, materials, energy, etc.) used to produce the output.

9. Explain the following terms: partial factor productivity, multifactor productivity and total
factor productivity.

Partial factor productivity

The standard definition of productivity is known as partial factor productivity because it
considers a single input. The formula then is the ratio of total output to a single input.
Managers use partial productivity measures because the data is readily available and also
because it is easier to relate to specific processes. Labor-based hours are often used as an
input variable. It would appear that productivity could be increased by replacing labor with
machinery. Misinterpretation may occur because labor-based measures do not include
mechanization and automation in the input. Other partial factor measures are output/labor,
output/machine, output/capital, or output/energy.

Multifactor productivity
A multifactor productivity measure uses more than a single factor, e.g. labor and capital or
labor and materials. Therefore multifactor productivity is the ratio of output to a subset of
inputs. The different factors must be measured in the same units, such as dollars or standard
hours.

Total Factor Productivity

Total factor productivity is measured by combining the effects of all the resources used in the
production of goods and services (labor, raw materials, capital, energy, etc.) as divisor in the
productivity formula.

An example is the ratio obtained by adding standard hours of labor actually produced plus the
standard machine hours actually produced in a given time period divided by the actual hours
available for both labor and machines in the time period.
Total output must be expressed in the same unit of measure and total input must be expressed
in the same unit of measure. Resources are converted to dollars or standard hours so a single
number can be used as an aggregate measure of total input or output. An example is total
output expressed as the number of units produced, and total input expressed as dollars, such as
tonnes of cement per dollar input. Other measures could be the dollar value of goods or
services produced per dollar of input, or the standard hours of output per actual hours of input.

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 Total productivity ratios provide the most inclusive type of index for measuring productivity
and may be preferred when making comparisons of productivity. However, this measure is
too broad to be used for improving specific areas, since it does not show the interaction
between each input and output separately.

10. Discuss some ways to improve productivity for (a) a manufacturer and (b) a service
provider.
(a) Productivity for a manufacturer is easier to quantify. If a manufacturer could produce more
defect-free units given the same amount of resources (raw materials, machinery, manpower)
in a given time period compared to an earlier time period, then we know that productivity
has increased. Using better production processes, newer machinery, or selecting pre-
qualified suppliers of raw materials or components would be some ways to improve
productivity.
(b) Consider the case of a health care industry. Increasing productivity in the service sector is
difficult because raising the number of inputs (customers/patients) served doesn’t
necessarily increase the quality of service they have received. Patients who feel they have
been rushed through or given generic service are unlikely to return. Nurses for example are
judged not just based on the number of patients they helped but on the quality of service
provided as well.
Measuring productivity in the service sector is difficult because the quality aspect is hard to
quantify. Is a retail salesperson who spends three hours helping a customer select a new
spring wardrobe less productive than another who serves five customers over the same time
period when the first customer (former) spends 3,000 dollars while the five customers
(latter) spend only 100 each? How do you then determine productivity of each employee? Is
the metric total dollars sold, total items moved, or total number of satisfied customers
The way to improve productivity is dependent on the metric adopted. If it is total dollars
sold, then one way might be to identify returning shoppers who are our highly valued
customers (perhaps through loyalty card) and give them more attention. Boutiques might go
for this metric, while the usual department store might chose to move more items of lower
value on any single day.

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