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Part 1 - Introduction
ENTERto Management
MANAGEMENT ENTER
ENTER
ENTER
ENTER
What Is Management?
Management issues are
fundamental to any or- Learning
ganization: How do Outcomes
we plan to get things
done, organize the 1 describe what management is.
company to be effi-
cient and effective, lead
2 explain the four functions of
management.
and motivate employees,
and put in place controls to 3 describe different kinds of
make sure our plans are followed and our goals are managers.
met? Good management is basic to starting a business,
growing a business, and maintaining a business once it 4 explain the major roles and
subroles that managers perform
has achieved some measure of success. in their jobs.
So think about this: Mistake #1. A high-level bank
manager reduces a marketing manager to tears by an- 5 explain what companies look for in
grily criticizing her in front of others for a mistake that managers.
wasnt hers.1 Mistake #2. Guidant waited for three
years, forty-five device failures, and two patient deaths
6 discuss the top mistakes that
managers make in their jobs.
before recalling 50,000 defective heart defibrillators, 77
percent of which were already implanted in patients.2 7 describe the transition that
Ah, bad managers and bad management. Is it any employees go through when they
wonder that companies pay management consultants are promoted to management.
nearly $150 billion a year for advice on basic manage-
ment issues, such as how to lead people effectively, or-
8 explain how and why companies
can create competitive advantage
ganize the company efficiently, and manage large-scale through people.
projects and processes?3 This textbook will help you
understand some of the basic issues that management
consultants help companies resolve (and it wont cost
you billions of dollars).
should be able to
CHAPTER
them can make them right, can make them right the first
Many of todays managers got their start welding on the time, can make them at a competitive cost, and can do
factory floor, clearing dishes off tables, helping custom- so with some sense of responsibility and pride in what
ers fit a suit, or wiping up a spill in aisle 3. Similarly, lots theyre doing. I dont have to know how to make a part
of you will start at the bottom and work your way up. to do any of those things.4
Theres no better way to get to know your competition, Pat Carrigans description of managerial responsibili-
your customers, and your business. But whether you be- ties indicates that managers also have to be concerned with
gin your career at the entry level or as a supervisor, your efficiency and effec-
job is not to do the work, but to help others do theirs. tiveness in the work
Management is getting work done through others. Pat process. Efficiency is Management getting work done
Carrigan, a former elementary school principal who be- getting work done through others
came a manager at a General Motors car parts plant, with a minimum of Efficiency getting work done with a
says, Ive never made a part in my life, and I dont really effort, expense, or minimum of effort, expense, or waste
have any plans to make one. Thats not my job. My job waste. For example,
Chapter 1: Management
United Parcel Service, which delivers over 3.5 billion
packages a year, has started saving 14 million gallons of
Rolling Back Employee Schedules
W
fuel per year by using a completely computerized route
and load planning system that shows truck loaders where al-Marts new computerized scheduling
to put packages on the delivery truck (to maximize the system measures trends in store sales
and customer traffic so it can have more
number of packages per truck), predetermines how many
employees on the job whenever its
packages and stops a UPS driver has and what routes stores are busy. Tests in 39 stores indicated that
should be taken (to minimize travel time, distances, and 70 percent of customers reported improved checkout
fuel costs), and tells UPS drivers exactly where your pack- times and service using this scheduling system. The
age is on the truck when they stop in front of your house computerized system also frees managers to manage
(to minimize search time at each stop).5 instead of calculating schedules. Normally, it takes a
Wal-Mart manager a full day to schedule the weekly
By itself, efficiency is not enough to ensure success.
shifts for a store. By contrast, the computerized
Managers must also strive for effectiveness, which is scheduling system calculates the schedules for Wal-
accomplishing tasks that help fulfill organizational ob- Marts 1.3 million workers in one day.8
jectives, such as customer service and satisfaction.
2 Management Functions
Henri Fayol, who was a managing director (CEO) of
a large steel company, was one of the founders of the
field of management. Youll learn more about Fayol perform these management functions well are better
and managements other key contributors when you managers. For example, the more time that CEOs spend
read about the history of management in Chapter 2. planning, the more profitable their companies are.9
Based on his 20 years of experience as a CEO, Fayol Over a 25-year period, AT&T found that employees
argued that the success of an enterprise generally de- with better planning and decision-making skills were
pends much more on the administrative ability of its more likely to be promoted into management jobs, to
leaders than on their technical ability.6 In other words, be successful as managers, and to be promoted into up-
eBay, the worlds largest online auction company, suc- per levels of management.10
ceeds because of CEO Meg Whitmans capabilities as a The evidence is clear. Managers serve their compa-
manager and not because of her ability to write com- nies well when they plan, organize, lead, and control.
puter code. (Thats why this book is organized around the func-
According to Fayol, to be successful, managers tions of management.)
need to perform five managerial functions: planning, Now lets take a closer look at each of the management
organizing, coordinating, commanding, and control- functions: 2.1 planning, 2.2 organizing, 2.3 leading, and
ling.7 Today, though, most management textbooks have 2.4 controlling.
dropped the coordinating
function and refer to Fay- 2.1 Planning
Effectiveness accom-
plishing tasks that help fulfill ols commanding function Planning is determining organizational goals and
organizational objectives as leading. Consequently, a means for achieving them. As youll learn in
Planning (manage- Fayols management func- Chapter 5, planning is one of the best ways to improve
ment functions) deter- tions are known today as performance. It encourages people to work harder, to
mining organizational goals
and a means for achieving
planning, organizing, lead- work hard for extended periods, to engage in behaviors
them ing, and controlling. Studies directly related to goal accomplishment, and to think
indicate that managers who of better ways to do their jobs. But most importantly,
sonal websites). How would you organize this vast ar- companys stock price from $64 a share to just $4.43.
ray of topics and activities? Yahoo! does it with two Mulcahy admits that the responsibility of turning the
customer groups, audience and advertiser/publisher, company around
and one technology group. The audience group has frightened her:
responsibility for Yahoo!s products in search, media, Nothing spooked Organizing deciding where decisions
will be made, who will do what jobs and
communities, and communications. The advertising/ me as much as tasks, and who will work for whom
publishing group helps large advertisers and agencies, waking up in the
small- and medium-sized businesses, local advertis- Leading inspiring and motivating
middle of the night workers to work hard to achieve
ers, resellers, and publishers connect with their target and thinking about organizational goals
customers across the Internet. Finally, the technology 96,000 people and
Chapter 1: Management
retirees and what would happen if this thing went
south.14 Still, she took the job. What Do
Mulcahy, who traveled to two and sometimes three
cities a day to talk to Xerox managers and employees,
Managers Do?
implored them to save each dollar as if it were your Not all managerial jobs are the
own. And at each stop, she reminded them, Remem- same. The demands and
ber, by my calculations, there are [she fills in the num- requirements placed on
ber] selling days left in the quarter.15 Mulcahy said, the CEO of Sony are
One of the things I care most about at Xerox is the significantly different
morale and motivation at the company. I think it is ab- from those placed on
solutely critical to being able to deliver results. People the manager of your lo-
have to feel engaged, motivated and feel they are mak- cal Wendys restaurant.
ing a contribution to something that is important. I
spend the vast majority of my time with customers and After reading the next two sections, you
employees, and there is nothing more important for any should be able to
of us to do as leaders than communicate and engage
3 describe different kinds of managers.
with our two most important constituencies.16
Today, as a result of Mulcahys leadership and 4 explain the major roles and subroles that managers perform
the hard work of dedicated Xerox employees, Xerox in their jobs.
is back on its feet, having returned to profitability and
financial stability.17 Youll learn more about leading in
Chapter 13 on motivation, Chapter 14 on leadership, and
Chapter 15 on managing communication. 3 Kinds of Managers
As shown in Exhibit 1.1, there are four kinds of manag-
2.4 Controlling ers, each with different jobs and responsibilities: 3.1 top
The last function of management, controlling, is moni- managers, 3.2 middle managers, 3.3 first-line managers,
toring progress toward goal achievement and then tak- and 3.4 team leaders.
ing corrective action when progress isnt being made.
The basic control process involves setting standards to 3.1 Top Managers
achieve goals, comparing actual performance to those Top managers hold positions like chief executive officer
standards, and then making changes to return perfor- (CEO), chief operating officer (COO), chief financial of-
mance to those standards. ficer (CFO), and chief information officer (CIO), and are
Needing to cut costs (the standard) to restore profit- responsible for the overall direction of the organization.
ability (the goal), Continental Airlines started giving pas- Top managers have the following responsibilities.19 First,
sengers small cups of their soft drinks instead of an entire they are responsible for creating a context for change.
can (one corrective action, among many). Company In fact, the CEOs of Walt Disney, Fannie Mae, Boeing,
spokesperson Rahsaan Johnson defended the move, say- Morgan Stanley, American International Group, Merck,
ing, Flight attendants have been telling us that the trash and Pfizer were all fired within a years time precisely
bags they carry were so heavy because of all the [wasted] because they had not moved fast enough to bring about
liquid. We were pouring almost half away.18 Although significant changes in their companies. Indeed, in both
Continental will still give entire soft drink cans to cus- Europe and the United States, 35 percent of all CEOs
tomers who request them, are eventually fired because of their failure to success-
serving smaller drinks saves fully change their companies.20 Creating a context for
the company $100,000 a change includes forming a long-range vision or mission
Controlling monitor-
ing progress toward goal year in costs. for the company.
achievement and taking Youll learn more about the Once that vision or mission is set, then the second
corrective action when control function in Chapter 16 responsibility of top managers is to develop employees
needed
on control, Chapter 17 on man- commitment to and ownership of the companys perfor-
Top managers executives aging information, and Chap- mance. That is, top managers are responsible for getting
responsible for the overall ter 18 on managing service and employee buy-in. Third, top managers are responsible for
direction of the organization
manufacturing operations. creating a positive organizational culture through lan-
Jobs Responsibilities
Purestock/Getty Images Digital Vision/Getty Images Blend Images/Getty Images PhotoAlto/Getty Images
TOP Managers change
CEO CIO commitment
COO Vice President culture
CFO Corporate Heads environment
guage and action. Top managers impart company values, sponsible for setting objectives consistent with top
strategies, and lessons through what they do and say to managements goals and for planning and implementing
others, both inside and outside the company. Above all, subunit strategies for achieving those objectives.23 One
no matter what they communicate, its critical for CEOs specific middle management responsibility is to plan and
to send and reinforce clear, consistent messages.21 A for- allocate resources to meet objectives. Another major
mer Fortune 500 CEO said, I tried to [use] exactly the responsibility is to coordinate and link groups, depart-
same words every time so that I didnt produce a lot of, ments, and divisions within a company. After a hurri-
Last time you said this, this time you said that. Youve cane destroyed five miles of railroad tracks outside New
got to say the same thing over and over and over.22 Orleans, Jeff McCracken, a chief engineer at Norfolk
Finally, top managers are responsible for monitoring Southern, consulted with
their business environments. This means that top man- three bridge companies,
agers must closely monitor customer needs, competitors and managed a team of
Middle managers man-
moves, and long-term business, economic, and social 100 employees and dozens agers responsible for setting
trends. of engineers who, by sleep- objectives consistent with
ing in campers and working top managements goals and
for planning and implement-
3.2 Middle Managers around the clock, rebuilt the
ing subunit strategies for
Middle managers hold positions like plant manager, tracks in less than a week. achieving these objectives
regional manager, or divisional manager. They are re- McCracken said, It was a
Chapter 1: Management
ing perishable goods more cheaply than Wal-Marts
competitors. When small produce suppliers had trouble
meeting Wal-Marts needs, Wilson worked closely with
them and connected them to RetailLink, Wal-Marts
Courtesy of Whirlpool Corporation
T
rusting that his 61,000 employees could
dramatically increase product innovation at 3.3 First-Line Managers
Whirlpool appliances, CEO David Whitman
First-line managers hold positions like office manager,
told them to come up with new ideas, tell
their bosses about their ideas, and, if their bosses shift supervisor, or department manager. The primary
wouldnt listen, bring their new product ideas di- responsibility of first-line managers is to manage the
rectly to him. Employees flocked to an in-house web performance of entry-level employees, who are directly
site featuring a course on innovation and a list of all responsible for producing a companys goods and ser-
the new suggestions and ideas, racking up 300,000
vices. Thus, first-line managers are the only managers
hits on the site each month. Today, revenue from
innovative products has quadrupled. And instead of who dont supervise other managers. First-line manag-
cutting prices to maintain sales, Whirlpools prices are ers have the following responsibilities.
now rising 5 percent per year because customers are First-line managers encourage, monitor, and reward
willing to pay more for its innovative products, such the performance of their workers. They also teach entry-
as the Duet washer and dryer.24 level employees how to do their jobs. Damian Mogave-
ros company, Avero LLC, helps restaurants analyze sales
data for each member of a restaurants wait staff. Res-
colossal job that took more than 400 moves with heavy taurant managers who use these data, says Mogavero,
equipment. But, McCracken was happiest about work- will often take their top-selling server to lunch each week
ing with people from all parts of the companyand get- as a reward. The best managers, however, will also take
ting the job done without anyone getting hurt.25 their poorest-selling servers out to lunch to talk about
A third responsibility of middle management is to what they can do to improve their performance.29
monitor and manage the performance of the subunits First-line managers also make detailed schedules and
and individual managers who report to them. Graeme operating plans based on middle managements intermedi-
Betts is the manager of the Southwest region for Lloyds ate-range plans. In fact, in contrast to the long-term plans
Pharmacy in England. While Betts works with people at of top managers (three to five years out) and the intermedi-
all levels, from healthcare assistants to board directors, ate plans of middle managers (6 to 18 months out), first-
he spends most of his time with the nine area manag- line managers engage in plans and actions that typically
ers who report to him. He monitors and manages the produce results within two weeks.30 For example, consider
performance of his area managers and, in turn, the store the typical convenience store manager (e.g., 7-Eleven) who
managers who report to them.26 starts the day by driving past competitors stores to inspect
Finally, middle managers are also responsible for their gasoline prices and then checks the outside of his or
implementing the changes or strategies generated by her store for anything that might need maintenance, such
top managers. Wal-Marts as burned-out lights or signs, or restocking, like windshield
strategy reflects its adver- washer fluid and paper towels. Then comes an inside
tising slogan, always the check, where the manager determines what needs to be
First-line managers
managers who train and su- low price. When Wal-Mart done for that day (Will there be enough coffee and donuts
pervise the performance of began selling groceries in for breakfast or enough sandwiches for lunch?). Once the
nonmanagerial employees its new 200,000-square- day is planned, the manager turns to weekend orders. Af-
who are directly responsible
for producing the compa-
foot supercenters, it made ter accounting for the weather (hot or cold) and the sales
nys products or services purchasing manager Brian trends at the same time last year, the manager makes sure
Wilson responsible for buy- the store will have enough beer, soft drinks, and Sunday
Chapter 1: Management
More than anything else, management jobs are people-intensive.
Third, team leaders are responsible for internal team pain, then you may not be cut out for management
relationships. Getting along with others is much more work. In fulfilling the interpersonal role of management,
important in team structures because team members managers perform three subroles: figurehead, leader, and
cant get work done without the help of their teammates. liaison.
You will learn more about teams in Chapter 10. In the figurehead role, managers perform ceremo-
nial duties like greeting company visitors, speaking
at the opening of a new facility, or representing the
4 Managerial Roles company at a community luncheon to
support local charities. In the leader
So far, we have described managerial work by focusing on
role, managers motivate and en-
the functions of management and by examining the four
courage workers to accomplish
kinds of managerial jobs. Although those are valid and ac-
organizational objectives. At J.M.
curate ways of categorizing managerial work, if you fol-
Stock Food Creative/Getty Images
Chapter 1: Management 11
system. Doctors, nurses, staffers, and administrators met and how much of each resource they will get. For in-
regularly to review possible improvements. After a VA stance, E-Trade Financial, which is known for its online
nurse noticed that rental car companies used hand-held stock trading accounts, increased its marketing budget
barcode scanners to check in returned cars, she suggested by $46 million to make potential customers more aware
using barcodes on patients ID bracelets and their bottled of its additional banking, loan, and mortgage services.47
medicines. Today, the VAs barcode scanners are tied to At E-Trade, top managers acted as resource allocators
an electronic records system that prevents nurses from by changing budgets.
handing out the wrong medicines and automatically In the negotiator role, managers negotiate sched-
alerts the hospital pharmacy to possibly harmful drug ules, projects, goals, outcomes, resources, and employee
interactions or dangerous patient allergies.45 raises. When Sprint bought Nextel (another cell phone
By contrast, in the disturbance handler role, man- company), the Federal Communications Commission
agers respond to pressures and problems so severe that required it to buy new radios for police and firefighters
they demand immediate attention and action. Manag- because its cell phone tower transmissions were inter-
ers often play the role of disturbance handler when the fering with emergency service communications in hun-
board of a failing company hires a new CEO, who is dreds of locations. Sprint, which will spend $2.8 billion
charged with turning the company around. After Ford to fix the problem, has, for instance, been negotiating
Motor Companys market share shrank from 25 to 16 with law-enforcement agencies in Maryland and Wash-
percent and the company lost $7 billion in nine months, ington to replace 35,000 radios. It took Sprint a year
Alan Mulally came from Boeing to become Fords new to negotiate a $609,000 deal with the city of Fairfax,
5 explain what companies look for in managers. Middle Managers Team Leaders
Chapter 1: Management 13
people, but that percentage increases to 63 percent for
middle managers and 78 percent for top managers.52
Conceptual skills are the ability to see the organiza-
tion as a whole, to understand how the different parts of
the company affect each other, and to recognize how the
company fits into or is affected by its external environ-
ment, such as the local community, social and economic
forces, customers, and the competition. Good managers
have to be able to recognize, understand, and reconcile
multiple complex problems and perspectives. In other
words, managers have to be smart! In fact, intelligence
makes so much difference for managerial performance
that managers with above-average intelligence typically
outperform managers of average intelligence by ap-
proximately 48 percent.53 Clearly, companies need to
be careful to promote smart workers into management.
Creatas/Jupiter Images
Human skills can be summarized as the ability to good behavior and punish poor behavior, perform actions
work well with others. Managers with people skills that are highly visible to others, and handle and organize
work effectively within groups, encourage others to ex- administrative tasks. Managers typically have a stronger
press their thoughts and feelings, are sensitive to others motivation to manage than their subordinates, and man-
needs and viewpoints, and agers at higher levels usually have a stronger motivation to
Human skills the ability are good listeners and com- manage than managers at lower levels. Furthermore, man-
to work well with others municators. Human skills agers with a stronger motivation to manage are promoted
are equally important at faster, are rated as better managers by their employees, and
Conceptual skills the
ability to see the organiza- all levels of management, earn more money than managers with a weak motivation
tion as a whole, understand from first-line supervisors to manage.54
how the different parts to CEOs. However, because
affect each other, and
recognize how the company
fits into or is affected by its
lower-level managers spend
much of their time solving
6 Mistakes Managers Make
environment technical problems, upper- Another way to understand what it takes to be a man-
Motivation to man- level managers may actually ager is to look at the mistakes managers make. In other
age an assessment of how spend more time dealing di- words, we can learn just as much from what managers
enthusiastic employees are
about managing the work rectly with people. On aver- shouldnt do as from what they should do.
of others age, first-line managers spend Several studies of U.S. and British managers have
57 percent of their time with compared arrivers, or managers who made it all the
The second
mistake was that
derailers were of-
ten cold, aloof, or
arrogant. Although
Chapter 1: Management 15
Managers who always have their eye on their next job rarely establish
more than superficial relationships with peers and coworkers.
would do when you said you would do it. That mistake, cording to Richard Kilburg of Johns Hopkins University,
in itself, is not fatal because managers and their work- when managers interfere with workers decisions, You
ers arent machines. Tasks go undone in every company . . . have a tendency to lose your most creative people.
every single business day. Theres always too much to Theyre able to say, Screw this. Im not staying here.59
do and not enough time, people, money, or resources to Second, because they are trying to do their subordinates
do it. The fatal betrayal of trust is failing to inform oth- jobs in addition to their own, managers who fail to del-
ers when things will not be done on time. This failure to egate will not have enough time to do anything well.
admit mistakes, quickly inform others of the mistakes,
take responsibility for the mistakes, and then fix them
without blaming others distinguished the behavior of 7 The Transition to
derailers from arrivers.
The fourth mistake, as mentioned above, was being
Management: The First Year
overly political and ambitious. Managers who always In her book Becoming a Manager: Mastery of a New
have their eye on their next job rarely establish more Identity, Harvard Business School professor Linda Hill
than superficial relationships with peers and coworkers. followed the development of 19 people in their first
In their haste to gain credit for successes that would be year as managers. Her study found that becoming a
noticed by upper management, they make the fatal mis- manager produced a profound psychological transition
take of treating people as though they dont matter. An that changed the way these managers viewed themselves
employee with an overly ambitious boss described him and others. As shown in Exhibit 1.4, the evolution of
this way: He gave me a new definition of shared risk: the managers thoughts, expectations, and realities over
If something I did was successful, he took the credit. If the course of their first year in management reveals the
it wasnt, I got the blame.58 magnitude of the changes they experienced.
The fatal mistakes of being unable to delegate, build Initially, the managers in Hills study believed that
a team, and staff effectively indicate that many derailed their job was to exercise formal authority and to manage
managers were unable to make the most basic transi- tasksbasically being the boss, telling others what to do,
tion to managerial work: to quit being hands-on doers making decisions, and getting things done. In fact, most
and start getting work done through others. Two things of the new managers were attracted to management posi-
go wrong when managers make these mistakes. First, tions because they wanted to be in charge. Surprisingly,
when managers meddle in decisions that their subor- the new managers did not believe that their job was to
dinates should be makingwhen they cant stop being manage people. The only aspects of people management
doersthey alienate the people who work for them. Ac- mentioned by the new managers were hiring and firing.
Exhibit 1.4
Stages in the Transition to Management
MANAGERS INITIAL EXPECTATIONS AFTER SIX MONTHS AS A MANAGER AFTER A YEAR AS A MANAGER
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
ended, a job you couldnt get your ordinates. I wasnt good at manag-
hands around. ing . . . , so I was bossy like a first-grade
Informal descriptions like this are teacher. Now I see that I started out
consistent with studies indicating that as a drill sergeant. I was inflexible,
the average first-line manager spends Top managers spend an average of 9 minutes just a lot of how-tos. By the end
no more than two minutes on a task on a given task before having to switch to of the year, most of the managers
before being interrupted by a request another. had abandoned their authoritarian
from a subordinate, a phone call, approach for one based on commu-
or an email. The pace is somewhat less hurried for top nication, listening, and positive reinforcement.
managers, who spend an average of approximately nine Finally, after beginning their year as managers in
minutes on a task before having to switch to another. In frustration, the managers came to feel comfortable
practice, this means that supervisors may perform 30 dif- with their subordinates, with the demands of their jobs,
ferent tasks per hour, while top managers perform seven and with their emerging managerial styles. While being
different tasks per hour, with each task typically different
from the one that preceded it. A manager described this
frenetic level of activity by saying, The only time you are
in control is when you shut your door, and then I feel I
MGMT
am not doing the job Im supposed to be doing, which is y
being with the people.
The other major surprise after six months on the Boss
job was that the managers expectations about what
they should do as managers were very different from
their subordinates expectations. Initially, the manag-
ers defined their jobs as helping their subordinates per-
form their jobs well. For the managers, who still defined
themselves as doers rather than managers, assisting their
subordinates meant going out on sales calls or handling
customer complaints. But when the managers assisted
in this way, their subordinates were resentful and viewed
Riser/Getty Images
Chapter 1: Management 17
One thing that hasnt
changed, though, is the importance of good people and
good management.
managers had made them acutely aware of their limita- way they treat their work forcesin other words, their
tions and their need to develop as people, it also pro- management.60
vided them with an unexpected reward of coaching Pfeffer found that managers in top performing com-
and developing the people who worked for them. One panies used ideas like employment security, selective hir-
manager said, I realize now that when I accepted the ing, self-managed teams and decentralization, high pay
position of branch manager that it is truly an exciting contingent on company performance, extensive training,
vocation. It is truly awesome, even at this level; it can be reduced status distinctions (between managers and em-
terribly challenging and terribly exciting. ployees), and extensive sharing of financial information
to achieve financial performance that, on average, was
40 percent higher than that of other companies. These
Why Management ideas, which are explained in detail in Exhibit 1.5, help
organizations develop workforces that are smarter, bet-
Matters ter trained, more motivated, and more committed than
their competitors workforces. And, as indicated by the
If you walk down the aisle phenomenal growth and return on investment earned by
of the business section in these companies, smarter, better trained, and more com-
your local bookstore, mitted workforces provide superior products and service
youll find hundreds to customers, who keep buying and, by telling others
of books that explain about their positive experiences, bring in new customers.
precisely what com- Pfeffer also argues that companies that invest in
panies need to do to their people will create long-lasting competitive ad-
be successful. Unfortu- vantages that are difficult for other companies to du-
nately, the best-selling busi- plicate. Indeed, other studies clearly demonstrate that
ness books tend to be faddish, changing dramatically sound management practices can produce substantial
every few years. One thing that hasnt changed, though, advantages in four critical areas of organizational per-
is the importance of good people and good management: formance: sales revenues, profits, stock market returns,
Companies cant succeed for long without them. and customer satisfaction.
In terms of sales revenues and profits, a study of
After reading this section, you should be able nearly 1,000 U.S. firms found that companies that use
to
just some of the ideas shown in Exhibit 1.5 had $27,044
8 explain how and why companies can create competitive more sales per employee and $3,814 more profit per
advantage through people. employee than companies that didnt use any.61 For a
100-person company, these differences amount to $2.7
million more in sales and nearly $400,000 more in an-
8 Competitive Advantage nual profit! For a 1,000-person company, the difference
grows to $27 million more in sales and $4 million more
through People in annual profit!
In his books Competitive Advantage through People Another study investigating the effect on company
and The Human Equation: Building Profits by Putting sales found that poorly performing companies that
People First, Stanford University business professor adopted management techniques as simple as setting
Jeffrey Pfeffer contends that what separates top- performance expectations and coaching, reviewing,
performing companies from their competitors is the and rewarding employee performance were able to im-
Iconica/Getty Images
1. Employment SecurityEmployment security is the ultimate form of commitment that companies can make to their
workers. Employees can innovate and increase company productivity without fearing the loss of their jobs.
2. Selective HiringIf employees are the basis for a companys competitive advantage, and those employees have
employment security, then the company needs to aggressively recruit and selectively screen applicants in order to hire the
most talented employees available.
3. Self-Managed Teams and DecentralizationSelf-managed teams are responsible for their own hiring, purchasing, job
assignments, and production. Self-managed teams can often produce enormous increases in productivity through increased
employee commitment and creativity. Decentralization allows employees who are closest to (and most knowledgeable
about) problems, production, and customers to make timely decisions. Decentralization increases employee satisfaction and
commitment.
4. High Wages Contingent on Organizational PerformanceHigh wages are needed to attract and retain talented
workers and to indicate that the organization values its workers. Employees, like company founders, shareholders, and
managers, need to share in the financial rewards when the company is successful. Why? Because employees who have a
financial stake in their companies are more likely to take a long-run view of the business and think like business owners.
5. Training and Skill DevelopmentLike a high-tech company that spends millions of dollars to upgrade computers or
research and development labs, a company whose competitive advantage is based on its people must invest in the training
and skill development of its people.
6. Reduction of Status DifferencesThese are fancy words that indicate that the company treats everyone, no matter what
the job, as equal. There are no reserved parking spaces. Everyone eats in the same cafeteria and has similar benefits. The
result: Much improved communication as employees focus on problems and solutions rather than on how they are less
valued than managers.
7. Sharing InformationIf employees are to make decisions that are good for the long-run health and success of the
company, they need to be given information about costs, finances, productivity, development times, and strategies that
was previously known only by company managers.
Source: J. Pfeffer, The Human Equation: Building Profits by Putting People First (Boston: Harvard Business School Press, 1996).
prove their average return on investment from 5.1 per- to Work for would have resulted in an 82 percent cu-
cent to 19.7 percent and increase sales by $94,000 per mulative stock return compared to just 37 percent for the
employee!62 So, in addition to significantly improving matched companies.63 This difference is remarkable given
the profitability of healthy companies, sound manage- that both sets of companies were equally good perform-
ment practices can turn around failing companies. ers at the beginning of the period.
To determine the effect on stock market performance, Finally, research also indicates that managers have
researchers matched companies on Fortune magazines an important effect on customer satisfaction. Many
list of 100 Best Companies to Work for in America with people find this surprising. They dont understand how
companies that were similar in industry, size, andthis is managers, who are largely responsible for what goes
keyoperating performance. In other words, both sets of on inside the company, can affect what goes on out-
companies were equally good performers; the key differ- side the company. They wonder how managers, who
ence was how well they treated their employees. For both often interact with customers under negative conditions
sets of companies, the researchers found that employee (when customers are angry or dissatisfied), can actu-
attitudes such as job satisfaction changed little from year ally improve customer satisfaction. It turns out that
to year. The people who worked for the 100 Best com- managers influence customer satisfaction through em-
panies were consistently much more satisfied with their ployee satisfaction. When employees are satisfied with
jobs and employers year after year than were employees their jobs, their bosses, and the companies they work
in the matched companies. More importantly, those stable for, they provide much better service to customers.64 In
differences in employee attitudes were strongly related to turn, customers are more satisfied, too. You will learn
differences in stock market performance. Over a three- more about the service-profit chain in Chapter 18 on
year period, an investment in the 100 Best Companies managing service and manufacturing operations.
Chapter 1: Management 19
In 2007, Fortune ranked Google as
Americas Best Company to Work for. One
of the perks at the Goggleplex: Freeand
goodfood at the cafeteria. And that
includes a company sushi chef.