In a four- to five-page paper (excluding the title and references pages), discuss the strategic planning process. In your paper: Explain the basic steps in the planning process. Describe the steps in the decision-making process, and predict how the personal attributes of the manager influence decision making. Predict how the steps of the strategic planning process and the environmental factors that influence decision making impact the quality-productivity-profitability link. Your paper must include in-text citations and references from at least three scholarly sources, in addition to the text, and be formatted according to APA style as outlined in the Ashford Writing Center (Links to an external site.)
Ethics and Social
Responsibility
Chapter Outline
• Introduction
• What Is Business Ethics?
• Recognizing Ethical Issues in
Management
• The Ethical Decision-Making
Process
• Ethics and Compliance Programs
• The Nature of Social
Responsibility
• Social Responsibility Issues
• Social Audits
Learning Outcomes
After reading this chapter, you should be able to
• Define business ethics and explain its importance.
• Describe some of the ethical issues that can arise in management.
• Specify how personal moral philosophies, organizational relationships, and opportunity influence
decision making in management.
• Examine how managers can foster ethical behaviors.
• Define social responsibility and discuss its relevance to management.
• Debate an organization’s social responsibilities to owners, investors, employees, and consumers,
as well as to the environment and the community.
• Describe the activities that comprise social audits and discuss their importance.
• Determine the ethical issues confronting a hypothetical business.
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Inside Management: The New Orleans Saints Experience an
Ethics Scandal
Business ethics apply not just to corporations
but to all organizations, including those
involving sports, politics, and nonprofit causes.
The recent “bounty” scandal involving the New
Orleans Saints football organization serves as
an example of ethical misconduct in leadership.
The head coach, assistant coach, defensive
coordinator, and general manager of the Saints
all received suspensions for offering a monetary
award to players who would “cart-off” ($1,000)
or “knockout” ($1,500) their opponents during
games. The cash incentives created serious
opportunities for player misconduct on the
field. These abusive and intimidating behaviors
were not just a way to unethically win games;
they also posed serious threats to the safety
of the players and violated National Football
League (NFL) rules.
According to most NFL players, the bounty
system is commonly used. It is usually
orchestrated on a small scale by players,
without the knowledge of management; but in
the case of the New Orleans Saints, the leadership was involved. Under such leadership,
the players faced an ethical dilemma: injure their opponents and receive money to
increase their chances of winning, or not get involved. The culture that the Saints’
management nurtured did not reflect the code of ethics promoted by the NFL, which
emphasizes player safety and competitive integrity. Some of the players who participated
in the bounty system were suspended, but the penalties were lifted after an appeals panel
decided there was insufficient evidence of wrongdoing. Gregg Williams, the defensive
coordinator for the New Orleans Saints, admitted his role and apologized for being
involved in the bounty system. Williams was caught on tape encouraging players to knock
out and deliberately injure opposing team players. Williams was eventually reinstated and
hired as an assistant coach for the Tennessee Titans.
The New Orleans head coach, general manager, and defensive coordinator were also
suspended, which significantly harmed the team’s ability to play. The team was also fined
$500,000. Even after investigations were concluded, the team’s reputation was damaged,
and its actions will not be forgotten by many; it might take the team years to repair the
damage done (Associated Press, 2012; Freeman, 2012; NFL, 2012; Schefter & Associated
Press, 2012; Clark, 2012; Werder, 2012; Lee, 2013; ESPN, 2012b; King, 2012).
George Bridges/ASSOCIATED PRESS
The New Orleans Saints came under
scrutiny when the NFL discovered they
were offering cash incentives for certain
plays, therefore increasing opportunities
for serious misconduct.
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What Is Business Ethics? Section 4.1
Introduction
Every organization should practice ethical business behaviors. In lieu of acceptable conduct,
a firm loses stakeholder support and may face sanctions from regulatory authorities. Scandals
at corporations such as Enron, Countrywide, JPMorgan Chase, and Diamond Foods are
examples of ethical and social responsibility failures. This chapter addresses ethics and social
responsibility, two of the most important factors for establishing trust and respect.
In the first half of this chapter, we explore the role of ethics in managerial decision making.
First, we define business ethics, explain why it is important, and explore its role in management.
Next, we explore a number of ethics issues to help you identify such issues when they
arise. We also discuss the processes by which individuals make ethical decisions and examine
steps managers can take to improve ethical behaviors in their organizations.
The second half of the chapter focuses on social responsibility. First, we describe the nature of
social responsibility and its evolution. Next, we explore some important social responsibility
issues and the ways companies have responded to them. Finally, we discuss how organizations
can manage their operations to fulfill their social responsibilities, including by conducting
social audits.
4.1 What Is Business Ethics?
Business ethics refers to principles, values, and codes of conduct that define acceptable
behavior in commerce. Stakeholders—including employees, customers, government regulators,
special interest groups, and communities, as well as competitors and an individual’s
personal morals and values—help determine what behaviors are acceptable and unacceptable.
In general, ethical managers strive for success while being fair, just, transparent, and
trustworthy.
This chapter does not prescribe a particular philosophy or process as the best or most ethical;
it does not tell you how to judge the ethics of others. Rather, it helps you detect ethical issues
and see how decisions are made in individual work groups and organizations. Understanding
how and why people make ethical decisions should help you become more ethical yourself.
Learning how to recognize and resolve ethical issues is an important step in evaluating ethical
decisions in management.
The Importance of Ethics
In Chapter 1 we determined that making decisions is an important aspect of management.
Nearly all management decisions feature some ethical consideration. The most basic ethical
concerns have been codified as laws and regulations that encourage conformity to society’s
values and attitudes. Managers and companies are expected to obey these laws and regulations.
Most legal issues arise as a result of incorrect ethical choices.
Ethical issues often come to the forefront when an individual or organization violates the law.
Recent Wall Street Journal or USA Today stories document such legal infractions. Scandals
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What Is Business Ethics? Section 4.1
at Barclays Bank and Peregrine Financial, Ponzi schemes committed by Bernie Madoff and
R. Allen Stanford, large bonuses for executives at firms requiring government bailouts, and
conflicts of interest for former CEO of Chesapeake Energy Aubrey McClendon all provide
examples of illegal activities that were also clearly unethical.
Note, however, that the impact of business ethics goes beyond the law. Every action deemed
unethical by society may not be illegal. Moreover, legal and ethical concerns change over time.
Indeed, there is sometimes a fine line between ethics and legality. An act may be technically
legal but not necessarily ethical.
Making ethical decisions fosters trust among individuals and in business relationships, while
unethical actions destroy trust and make it difficult or even impossible to continue to do business
(Loucks, 1987). If you were to discover that a manager had misled you about company
benefits when you were hired, for example, you would lose trust and confidence in the company.
If you learned that a colleague had lied to you about something, you would probably
not trust or rely on that person in the future. From another perspective, mistakes may be
unintended, or certain changes or events may alter a manager’s intent or commitments. In
some cases there may be miscommunication surrounding specific promises. For all of these
reasons, business ethics involves many gray areas and borderline decisions.
Well-publicized unethical activities have increased the public’s demand for ethical standards
in business. Over the past decade, the risky lending practices of some companies led to the
most recent financial crisis and prompted the U.S. government to enact reforms to the financial
industry, including the passage of the Dodd–Frank Wall Street Reform and Consumer
Protection Act.
In a more generic example, suppose a plant closes in order to save costs; this may make sense
from a business standpoint, but doing so obviously impacts employees. Canadian workers
at a Caterpillar factory faced this issue when the company decided to shut down a plant and
relocate to an American city after a labor dispute resulted in strikes and lockouts (Hagerty,
2012). The workers questioned whether it was ethical to close the plant and threatened legal
action. Often, questions that start as ethical conflicts turn into legal disputes if a cooperative
resolution cannot be reached. On the other hand, companies sometimes take aggressive
action to enforce their own ethical standards. Such examples support the notion that most
decisions can be judged as right or wrong, ethical or unethical.
Although they are usually less publicized, there are many ethical firms out there. Xerox, Whole
Foods Market, Herman Miller, and Adobe have all received high marks for ethical conduct
and social responsibility. Ethisphere Magazine examined the profitability statistics of what it
deemed the “World’s Most Ethical” companies in comparison to the S&P 500. The results of
the analysis indicated that the world’s most ethical companies have outperformed the S&P
500 each year. These firms exhibit a genuine concern for humanity that employees sense
and appreciate. Indeed, most organizations and managers do try to make ethical decisions;
however, it is often the unethical decisions that are publicized and result in public outcry
for change.
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Recognizing Ethical Issues in Management Section 4.2
4.2 Recognizing Ethical Issues in Management
Learning to recognize ethical issues is the most important step in understanding ethics in management.
An ethical issue is an identifiable problem, situation, or opportunity that requires a
person or organization to choose among actions that may be evaluated as ethical or unethical.
The line between an issue and an ethical issue appears at the point at which accepted rules
no longer match the issue facing the decision maker. At that moment, the individual relies
on personal rules to make a choice. In management, such a decision often requires weighing
monetary profit or personal interests against what the individual, work group, or organization
considers to be honest and fair.
One way to judge the ethics of a decision is to look at the situation from multiple viewpoints.
Should a manager pressure employees to lower product quality in ways the customer cannot
detect in order to reduce costs? Should an engineer agree to divulge her former employer’s
trade secrets to ensure she gets a better job with a competitor? Should a personnel manager
omit facts about an employee’s poor safety record to help the employee find a new job? What
if a manager fails to use renewable energy, even if it stands to increase long-term profits for
the company? Such questions require the decision maker to calculate the ethics of the choice.
Figure 4.1 models the manner in which an individual might analyze an ethical dilemma. As
shown, the route to a final decision can be evaluated by thinking about established guidelines
only, personal moral rules or codes only, or both, with one taking precedence over the other.
Figure 4.1: Recognizing ethical issues
The line between an issue and an ethical issue appears at the point at which accepted rules no longer
match the issue facing the decision maker.
Established:
rules,
procedures,
guidelines
Personal
morals
or
standards
Ethical
dilemma
Decision
Many business issues may seem straightforward and easy to resolve. But in reality, a manager
often requires additional guidance to understand what is acceptable or ethical. Many acceptable
behaviors in one’s private life are not acceptable in business. Moreover, many issues
have gray areas that make it tricky to tell when an ethical act becomes unethical. For example,
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Recognizing Ethical Issues in Management Section 4.2
when does offering a gift such as season basketball tickets to a business associate become a
bribe rather than a sales tactic? There are no easy answers to such questions. The size of the
transaction, the history of personal relationships within the particular company, and many
other factors determine whether others will judge an action as right or wrong. Interestingly,
if you give your basketball tickets to a friend with whom there is no business relationship, the
ethical issue vanishes.
To address the dilemmas that confront employees and managers, many organizations develop
codes of ethics that present formalized rules and standards that describe and delineate what
the organization expects of all employees, no matter their organizational rank. Codes of ethics
cover a wide range of issues, including the following:
• Organizational values (positive activities to be pursued)
• Operational principles (what is acceptable; what is not)
• Compliance statements
• Personal responsibility directives
• Management support
Organizational values include providing equal opportunity, promoting sustainability, and
supporting altruistic endeavors. Operational principles apply to more specific company activities—
for example, what is an acceptable sales tactic (puffery) and what is not (lying about
another company’s products). Compliance statements refer to the organization’s system of
rules and disciplinary action for violating them. Personal responsibility directives state the
employee’s obligation to abide by the code. Management support indicates achieving goals of
transparency, fairness, and seeking help when dealing with ethical dilemmas.
Managers directly influence the ethical issues that exist within any organization because they
guide employees, direct the organization’s activities, and at times help develop the organization’s
code of ethics. They should be concerned about ethical issues related to their organization’s
impact on the environment, the firm’s ethical standards, plant closings and layoffs,
employee discipline and benefits, discrimination, health and safety, privacy, drug and alcohol
abuse in the workplace, and the efficient and ethical achievement of organizational objectives.
The national culture in which a business operates also influences what is considered ethical
or unethical. In the United States, for example, it would be inappropriate for a businessperson
to bring an elaborately wrapped gift to a prospective client on their first meeting; the gift
could be viewed as a bribe. In Japan, however, it would be considered impolite not to bring
a gift. In Mexico, a small payment called la mordida (“the bite”) may be considered necessary
for doing business. Experience with the culture in which a business operates is critical
for understanding what is considered ethical or unethical in that situation. Understandably,
there is substantial debate over which nation’s ethical standards should apply to international
business transactions. American managers need to respect other cultures, establish
standards, and avoid violating U.S. or foreign laws when conducting business globally.
To help you understand the ethical issues that perplex managers today, we will explore some
common situations that affect management decisions. It is not possible to discuss every issue
that may arise, but discussing a few can help you recognize the ethical decisions and issues
that managers deal with every day.
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Recognizing Ethical Issues in Management Section 4.2
Ethical Issues in Management
As noted, a decision becomes an ethical issue when accepted rules no longer apply and the
decision maker uses his or her own moral principles and standards to decide what is right or
wrong. Managers have an obligation to ensure that their ethical decisions are consistent with
company values, codes of ethics, and policies, as well as with community and legal standards.
Table 4.1 displays the most common ethical issues facing U.S. organizations. The following
represent some examples of ethical issues from different management areas.
Table 4.1: Specific types of observed misconduct
Behavior
2011
(%)
2013
(%)
Abusive behavior or behavior that creates a hostile work environment 21 18
Lying to employees 20 17
A conflict of interest—that is, behaviors that put an employee’s interests at odds with
the company’s interests
15 12
Violating company policies related to Internet use 16 12
Discriminating against employees 15 12
Violating health or safety regulations 13 10
Lying to customers, vendors, or the public 12 10
Retaliating against someone who has reported misconduct 10
Falsifying time reports or hours worked 12 10
Stealing or theft 12 9
Violating employee wage, overtime, or benefit rules 12 9
Delivering substandard goods or services 10 9
Abusing substances, such as drugs or alcohol at work 11 9
Breaching employee privacy 11 8
Source: National Business Ethics Survey® of the U.S. Workforce (pp. 41–42), by Ethics Resource Center, 2013, Arlington, VA: Ethics
Resource Center, 2014.
Organizational Relationships
Relationships with subordinates, coworkers, and superiors may result in ethical issues, such
as maintaining confidentiality in personal relationships; meeting obligations, responsibilities,
and mutual agreements; and avoiding undue pressure that may force others to behave
unethically. Abusive and intimidating behavior is one of the most common ethical concerns
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Recognizing Ethical Issues in Management Section 4.2
in the workplace reported by the Ethics Resource Center. Ethical issues arise when employees
are asked to lie to customers and other employees about the quality of a product, such
as when a supermarket employee is told to tell customers that the seafood is fresh when in
fact it was previously frozen. A manager may ask employees to do things that conflict with
their personal ethics, or the organization may provide only vague or lax supervision on ethical
issues, providing an opportunity for people to behave unethically. Managers who offer no
ethical direction to employees create opportunities for manipulation, dishonesty, and conflicts
of interest.
Operations and Communications
Many opportunities for unethical activity arise in the area of operations and communications.
At first, an issue might just be a matter of ethics; but when employees cover up and destroy
records, it may turn illegal. The now defunct Arthur Andersen firm faced this problem when
it was accused of asking employees to destroy documents related to its involvement with
Enron. Many companies have encountered legal action when employees covered up safety
defects or were not honest about a product’s true quality. A legal and ethical issue exists when
a company hides the truth about product quality or safety. A few years ago, a number of Chinese
firms were found guilty of selling products that had safety defects. These included toys
that contained lead paint; defective tires and drywall; and health issues associated with the
production of milk and dog food. More recently, an entire batch of air bags made by the Takata
company had defects that could injure and even kill a driver, and it took a great deal of time
before the problem was revealed to the public.
Employee Relations
Human resources management can be a minefield of ethical issues. The process of acquiring,
developing, and compensating people to fill the organization’s human resources needs
gives way to many situations that are subject to interpretation and debate. For example, testing
procedures used during the hiring process may violate an individual’s rights. While it is
not yet illegal, some states are cracking down on employers for forcing employees to give
them access to their social media profiles. It is unethical to disclose personnel records and the
results of personality tests when doing so violates a worker’s privacy. When tainted by favoritism
and political opportunism, performance appraisals can become another ethical issue.
Decisions regarding promotions, transfers, separations, and financial compensation that are
not based on objective criteria similarly create legal and ethical concerns. Many firms have
been accused of discrimination in hiring and promoting. For example, Walmart, Home Depot,
and Costco have all been defendants in class-action lawsuits regarding gender discrimination
in decisions pertaining to hiring and promoting (Gullo, 2012).
Ethical issues related to discrimination and prejudice affect business activities at many levels.
It is illegal to discriminate based on race, sex, age, or other identifiable characteristics. Doing
so is not only wrong, but costly. For example, the clothing retailer Wet Seal faced a classaction
lawsuit in Pennsylvania when it was accused of denying African American employees
equal pay and promotion opportunities. The company paid $7.5 million to settle the lawsuit
(Kopp, 2013).
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Recognizing Ethical Issues in Management Section 4.2
Management strategies to develop human relations programs can also raise ethical issues.
Employee motivation programs that feature rewards and punishments can lead to unethical
behaviors. For example, if managers reward employees for achieving results without caring
how those results were achieved, they may send the wrong message about what activities are
acceptable. This happened at Countrywide Financial when loan officers were encouraged to
ask borrowers to lie about their incomes to get loans approved. Meanwhile, at Enron, a “rank
and yank” system of evaluation resulted in firing the lowest performing 20% of company
employees, and encouraged employees to do “whatever it took” to keep their jobs. Company
leaders should consider the long-term effects of punishment and reward systems before creating
policies that rely on them.
Business Dilemma
What Would You Do?
Suppose you are a business consultant. In your role, you work with clients to help them
develop strategies, define plans, and solve problems. Consider the following client’s case.
Use your knowledge of this chapter’s core concepts to address the questions presented
at the end of the case. Possible answers to these questions are included at the end of
the chapter.
THE CLIENT: Jon McClanahan, co-owner of Bingo’s Pizza
THE PLACE: Dallas, Texas
Bingo’s Pizza began delivering pizzas in 1969 when Jon McClanahan and his sister
Stephanie thought customers would appreciate having pizza delivered for a small fee.
Bingo’s tested its delivery system and found that consumer response was overwhelming.
Publicity for the company came quickly and easily as people were delighted with and
supportive of the delivery service. The company grew from one small store in Fort Worth
to five, and then an additional nine in the Dallas area, four in Waco, and four in Austin,
with negotiations beginning for units in Houston. However, the success of the delivery
concept encouraged the major pizza manufacturers to try their hand at delivery.
Stephanie was a computer whiz, having majored in computer science in college. She
thought that if Bingo’s developed an information database, it could become more efficient
and gain significant insight into consumer buying behaviors and consumption patterns.
Jon felt their current system and software could be improved and so tested a new
ordering system.
After successfully testing this system, Jon and Stephanie instituted the new order network
in all of their restaurants. After 3 months of success, they wanted to publicize their new
system, just as when they first instituted delivery service. After several days of attempting
to write press releases, Stephanie had an idea. “I know we’ve only been running this
system for a few months,” she said. “But let’s give an award to the family that eats the most
Bingo’s pizza. McDonald’s gave their best customer in Lubbock a card good for free food
and they received publicity across the country. We can use the giveaway as a springboard
to talk about the computer system.” Jon had not thought of that angle, and he liked the
idea. He asked Stephanie to determine the “winner” and get back to him.
(continued)
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The Ethical Decision-Making Process Section 4.3
Business Dilemma (continued)
Stephanie found that the biggest consumer of Bingo’s pizza worked outside Waco; he had
ordered a pizza every weekday for the past 3 months. Stephanie put together a program
to give him a nice prize—Bingo’s gift certificates—and arranged for the newspaper to
accompany her when she delivered the award. You must decide how to proceed with
this plan.
Questions
1. Critique Stephanie’s plan. What are the possible pros and cons?
2. What are the potential ethical issues associated with this plan?
3. How should Bingo’s proceed?
4.3 The Ethical Decision-Making Process
To better understand the significance of ethics in management decisions, it helps to examine
the factors that influence how people make ethical decisions. In this section, we will examine
each of these factors, which include an individual’s personal values; organizational factors;
and opportunity (see Figure 4.2).
Figure 4.2: Factors that influence behaviors
Many factors influence how a person makes ethical decisions.
Ethical or
unethical
decision
Individual
factors
Organizational
factors
Opportunity
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Table 4.2 lists questions to ask when determining whether an action is ethical. While openly
discussing ethical issues does not eliminate them, it does promote both trust and learning
(Cadbury, 1987). Once a person has recognized an ethical issue and can openly discuss it with
others, he or she has begun the ethical decision-making process.
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The Ethical Decision-Making Process Section 4.3
Table 4.2: Questions to determine whether an action is ethical
• Does the conduct comply with your organization’s code of ethics and other policies?
• How do other people in the organization feel about the action? Would they approve of you doing it?
• Are there any industry trade groups that provide guidelines or codes of conduct that address this issue?
• Will your decision or action withstand open discussion with coworkers and managers?
• How does the decision align with your personal beliefs and values?
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The Role of Individual Factors in Ethical Dilemmas
Individual values, also known as moral philosophies, are sets of principles that describe
what someone believes are right and wrong ways to behave. People develop these principles
through interactions with family members and social groups and in formal educational settings.
Individuals may be guided by different values, and each moral philosophy is different.
This, in turn, influences what a person identifies as ethical and how strongly he or she feels
about certain issues. Moral philosophies can generally be broken into two categories: utilitarianism
and deontology.
Utilitarianism seeks the best outcome for the largest number of individuals. Utilitarian
thinkers evaluate the ethics of an action or decision on the basis of its consequences for
all affected persons. When confronted with an ethical issue, the utilitarian manager weighs
the costs and benefits of all possible alternatives and then chooses the one that benefits the
most people. Employees may bend the rules if most stakeholders will benefit. For example,
the CEO of a struggling company might consider publicly saying the firm is doing well. The
CEO might honestly believe that reassuring investors and attracting new ones will help the
company rebound, allowing employees to keep their jobs. On the other hand, a truly utilitarian
thinker would also evaluate the impact this misrepresentation has on investors. If the
company goes out of business, investors will lose money. The CEO should also consider what
might happen if caught by regulatory authorities. In such a case, not only would the company
struggle, but the CEO could face serious legal penalties. A utilitarian CEO would take all of
these possibilities into account and choose the solution he or she believes would benefit the
most stakeholders.
In contrast, deontology focuses on human rights and values along with the intentions associated
with a particular behavior. Deontologists judge an action by whether it infringes on individual
rights or universal principles such as the Golden Rule, equality, or justice. Utilitarian
principles are more concerned with end results, whereas deontology focuses on the means
used to obtain results. In business, deontology is consistent with the idea that there are basic
principles of acceptable conduct. A manager who adopts this philosophy believes he or she
has a moral obligation to safeguard workers’ health and safety and to make decisions that
support individual rights without regard for the cost. A manager’s decision to avoid discrimination
in hiring is based on formalistic principles of equality. The manager’s decision not to
lie would be based on the principle that lying is wrong and unacceptable. It may be possible
for deontology and utilitarianism to influence the same decision.
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The Ethical Decision-Making Process Section 4.3
Organizational Factors
Successful managers achieve their company’s goals and objectives in part by influencing
employee behaviors. The manner in which an employee achieves goals will be shaped by the
organization’s ethical climate, which sets the standards for employee conduct.
The greater a person’s exposure to unethical behavior, the more likely he or she is to act
accordingly. Moreover, employee perceptions of their coworkers’ and managers’ ethics are
often a stronger predictor of behavior than what employees personally believe to be right or
wrong (Ferrell & Gresham, 1985). For example, an employee who sees her coworkers regularly
take home company supplies for personal use may engage in the same behavior even
when she personally believes it is wrong.
Consequently, it should not be surprising
that work groups within an organization
exert a strong impact on ethical and unethical
activities. In fact, work groups, or the
perceived ethicalness of work groups, may
represent the most important factor affecting
daily ethical decisions.
A manager’s authority and conduct also significantly
affect ethics. When managers act
unethically, employees may feel that such
activities are acceptable. A manager who
asks an employee to do something unethical
makes the individual feel pressured to
perform the activity even though he or she thinks it is wrong. This happened to accountant
Betty Vinson of WorldCom, who was pressured by her superiors to manipulate numbers to
hide the company’s financial difficulties. Although it went against her personal beliefs, Vinson
was persuaded that doing so was the only way to save the company. Consequently, the role of
management is extremely important in fostering an organization’s ethical climate.
Managers who do not view ethics as important may encourage employees to violate their personal
morals and beliefs. Some employees succumb to organizational pressures rather than
following their own values; they rationalize their decisions by maintaining they are simply
following orders. Doing so has several weaknesses, however:
1. People who work in organizations can never fully abdicate their personal ethical
responsibility when making business decisions. Claiming to be an agent of the corporation
is not accepted as a legal excuse and is even less defensible from an ethical
perspective.
2. It is difficult to determine what is in the organization’s best interest. Short-term
profits earned via unethical behavior may not serve the long-term interests of the
company.
3. A person in a business is responsible to parties other than the organization;
stakeholders must also be considered when making ethical decisions (Laczniak &
Murphy, 1983).
For all of these reasons, the “following orders” rationalization does not usually hold up in a
court of law.
PABLO MARTINEZ MONSIVAIS/ASSOCIATED PRESS
Pressure to conform to a superior’s unethical
behavior can have grave consequences for
organizations.
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Ethics and Compliance Programs Section 4.4
The Role of Opportunity
Opportunity refers to conditions that limit unfavorable behaviors and/or reward favorable
ones. Various conditions could create the opportunity for an employee to act ethically or
unethically. A person who is rewarded or not punished for acting unethically is more likely
to repeat the behavior. Likewise, a person who is not rewarded and is punished for behaving
unethically will probably be less likely to repeat the action. A large reward or small punishment
for an unethical behavior increases the probability it will recur. The opportunity to
engage in an unethical behavior has been identified as a better predictor of unethical actions
than one’s personal beliefs or the beliefs of one’s peers (Ferrell & Gresham, 1985).
As an example, if an employee violates the company’s ethical standards as spelled out in its
code of ethics, the employee may be reprimanded, placed on probation, suspended, or even
fired. These disciplinary procedures send a message to the company’s employees that unethical
or illegal behavior will not be tolerated and reduce the likelihood that others in the company
will repeat an action that resulted in a punishment.
Companies can mitigate the negative effects of unethical behavior by adopting one of two
control systems: a values orientation or compliance orientation. A values orientation relies
on values that are shared by both the company and its employees. These tend to be ideals
and can bring cohesion to the organization when all members subscribe to them. While this
system imposes consequences for unethical behavior, the opportunity for unethical behavior
may exist to varying degrees, as ideals can be interpreted differently among employees.
A compliance orientation requires employees to learn and pledge to adopt a specific type of
conduct. It uses language that clearly identifies the rules and consequences for noncompliance.
Setting clear boundaries for acceptable and unacceptable behavior and assigning consequences
to both helps employees make their decisions. When employees know their behaviors
will be met with consequences, either good or bad, there is little room to ambiguously
interpret how they should act. Reducing employees’ need to interpret a situation limits the
opportunity for unethical behavior and strengthens the opportunity for ethical behavior.
Both control systems serve the same purpose: to reduce the opportunity for unethical behavior.
Which orientation a firm adopts depends on its leadership, culture, and employees. Note
that a values orientation sharpens an employee’s ability to reason ethically, helping the individual
become aware of ethical situations and make better decisions. The compliance orientation,
while effective, focuses the employee’s attention more on the consequences of not
behaving ethically. This focus is not as likely to change an organization’s ethical culture (Ferrell,
Fraedrich, & Ferrell, 2013).
4.4 Ethics and Compliance Programs
Ethics and compliance programs support ethical decision making and build an ethical culture.
They normally focus on values that provide more abstract core ideals such as accountability
and teamwork. Compliance programs identify ethical issues and develop rules that require
employees to adhere to mandatory conduct. For example, a company may have a rule that
an employee cannot accept a gift or promotional item from a supplier that is worth more
than $25.
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Ethics and Compliance Programs Section 4.4
Most organizations have accepted some standard components of an effective ethics and compliance
program. These steps are based on best practices and the recommendation of the
Federal Sentencing Guidelines for Organizations that use these requirements to assess a company’s
due diligence in the event of misconduct. Table 4.3 highlights seven minimum requirements
for successful ethics and compliance programs. Establishing and enforcing ethical
standards and policies can help reduce unethical behavior by prescribing which activities are
acceptable and unacceptable and by removing opportunities to act unethically.
Table 4.3: Seven requirements for effective ethics and compliance programs
1. Standards and procedures, such as codes of ethics, that are reasonably capable of detecting and preventing
misconduct.
2. High-level personnel who are responsible for ethics and compliance programs.
3. No substantial discretionary authority given to individuals with a propensity for misconduct.
4. Standards and procedures communicated effectively via ethics training programs.
5. Systems to monitor, audit, and report misconduct.
6. Consistent enforcement of standards, codes, and punishment.
7. Continuous improvement of the ethics and compliance program.
Source: Adapted from Federal Sentencing Guidelines Manual (effective November 1, 2004), by U.S. Sentencing Commission, 2008,
St. Paul, MN: West.
It becomes more difficult for employees to determine what behavior is acceptable when a
company lacks uniform policies and standards. Consequently, standards should be based on
the assessment of risk and the identification of key ethical issues. Without such policies and
standards, employees are likely to base decisions on the behaviors of peers and supervisors.
Professional codes of ethics present formalized rules and standards that describe and delineate
what the organization expects of its employees and other stakeholders. For example,
Nike has formal ethics codes for both its employees and its suppliers. Establishing codes of
ethics is the first step in developing an effective ethics and compliance program. Enforcing
such codes and policies via rewards and punishments increases employees’ compliance with
ethical standards. In order for codes of ethics to be effective, top managers—including the
board of directors, CEO, and chief ethics officer—should proactively support them.
An ethics officer often manages the organization’s ethical concerns and compliance program.
Among his or her duties is to oversee ethics training, assess ethical risks within the organization,
monitor the firm’s ethical conduct, establish confidential reporting mechanisms, ensure
compliance with all laws and regulations, discipline those caught violating ethical rules and
policies, and update the code or revise the program when needed.
Top managers and the board of directors must make sure that those in charge of the ethics
program do not have a propensity for misconduct. Someone who has had problems with
wrongdoing in the past should not be chosen to lead such a program. Best practices as well
as recommendations from government agencies claim that the ethics officer should report
directly to the board of directors.
While codes of ethics communicate a firm’s ethical standards, they are not sufficient on their
own. Too often companies believe having an ethics code is enough to familiarize employees
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Ethics and Compliance Programs Section 4.4
with ethical decision making. This may not be the case. Ethics training programs familiarize
employees with the types of situations they might encounter. A strong training program alerts
employees to the company’s commitment to ethical conduct and allows them to ask more
detailed questions about ethical dilemmas. Training programs include a wide range of teaching
methods such as case studies, behavioral simulations, instructional videos, computerbased
instruction, and games.
Systems are needed to monitor the ethical training program’s effectiveness and report misconduct.
Organizational leaders should also continually review and monitor the firm’s ethical
culture. One way to do so is to conduct an ethics audit, which is a comprehensive evaluation
of a firm’s ethics and compliance program. Ethics audits help determine a program’s effectiveness,
help managers uncover hidden ethical risks, and identify areas for improvement.
Managers might also want to use questionnaires to better understand employee perceptions
of the firm’s ethical culture. Often, employees have a better idea of the inner workings of the
organization than do managers, so it is imperative to get them involved in the ethics program.
Employees are also more likely to witness misconduct at different levels of the organization.
To discover and address ethical issues, managers should provide mechanisms that employees
can use to report misconduct or concerns. Whistle-blowing occurs when an employee
exposes an employer’s wrongdoing. This might occur internally or externally. Internal reporting
is when an employee reports questionable behavior directly to a manager or through
another organizational reporting mechanism. Many employees fear repercussions for reporting
unethical behavior. As a result, many firms have established ethics hotlines that employees
can call to discuss ethics issues anonymously. The Sarbanes–Oxley Act made it mandatory
for public companies to have a whistle-blower system in place (Society for Human Resource
Management, 2012). Research suggests that the more ethical the company’s culture, the more
likely employees are to internally report concerns to managers or use a hotline (Kaptein,
2011). Consequently, open communication and trust nurture ethical decisions.
External reporting is when whistle-blowers report wrongdoing to outsiders, such as the media
or government regulatory agencies. The resulting negative publicity could be seriously damaging
to the company but still helps uncover
misconduct. Whistle-blowers involved with
Enron, Lehman Brothers, and Bernard L.
Madoff Investment Securities attempted to
warn authorities that misconduct was occurring.
Failure to listen to whistle-blowers can
result in serious misconduct that can
threaten many stakeholders. Recognizing
that whistle-blowers are important in stopping
misconduct, the government created a
bounty program for whistle-blowers whose
allegations result in a penalty of more than
$1 million. Under this program, whistleblowers
can receive between 10% and 30%
of the money (Rubenfeld, 2012).
Ethics and compliance programs should
not be static; such programs should be
Sneksy/iStock/Thinkstock
Many companies put their employees through
ethics training to make them more aware of
the ethical issues they may face on the job as
well as how the company would like them to
respond in the face of uncertainty.
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The Nature of Social Responsibility Section 4.5
continuously improved. There is always room for improvement, particularly as new issues
arise. Implementing an ethics program provides a plan for action in operational terms and
establishes the means by which the organization’s ethical performance will be monitored,
controlled, and improved. As the program is implemented, its standards, structures, and
resources can be continuously improved to align the company’s values and codes of ethics
with its employees.
4.5 The Nature of Social Responsibility
Many consumers and social advocates believe that businesses should not just make a profit;
they should also consider the social implications of their activities. Social responsibility is
a business’s obligation to maximize its positive impact and minimize its negative impact on
society. Although many people use the terms social responsibility and ethics interchangeably,
they are not the same thing. Ethics relates to an individual’s or business’s values, principles,
and standards and the resulting decisions made. Social responsibility, on the other hand, is
a broader concept that concerns an organization’s impact on society. From an ethical perspective,
we may be concerned about a particular savings and loan officer’s conflict of interest
concerning specific properties or businesses; from a social responsibility perspective, we
might be concerned about the impact a bank’s operation has on a community’s well-being.
Thus, ethics is a component of social responsibility because having a positive impact on society
involves making ethical decisions.
There are four pillars of social responsibility: financial viability; compliance with legal and
regulatory requirements; ethics, principles, and values; and corporate citizenship (see Table
4.4; Carroll, 1991). A business whose sole objective is to maximize profits may not be as likely
to consider its social responsibility, especially when its activities are legal. Financial viability
(profit) is an essential first stage, and compliance with legal and regulatory responsibilities
constitute the next stage. A business that makes no profit or conducts itself illegally will
probably not be around long enough to get to the other stages of social responsibility. We
discussed the third stage, ethical conduct, earlier in the chapter. The fourth stage, corporate
citizenship, involves additional activities (such as contributing to philanthropic causes)
that may not be necessary but that promote human welfare or goodwill. Although the first
two stages have long been acknowledged, ethical issues and corporate citizenship are more
recent concerns.
Table 4.4: Social responsibility pillars
Stage Requirement
1 Financial viability
2 Compliance with legal and regulatory requirements
3 Ethics, principles, and values
4 Corporate citizenship
© 2015 Academic Media Solutions
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The Nature of Social Responsibility Section 4.5
A business that is concerned about society in addition to profits is more likely to voluntarily
invest in socially responsible activities. Outdoor clothing and gear company Patagonia, for
instance, donates 1% of its profits to environmental causes. Many organizations, including
Deloitte, NuStar Energy, and Stryker, encourage employees to engage in community service,
often granting paid leave time to do so. Businesses that implement socially responsible programs
win the trust and respect of their employees, customers, and society and, in the long
run, increase profits. Companies that fail to act responsibly risk losing consumers and may
encourage the government to restrict their activities. Most companies today consider being
socially responsible a necessary part of conducting business.
The Evolution of Social Responsibility
Before the 20th century, businesses were largely responsible for defining how they would
interact with society; for many, the sole motivation was profit. Consumers could sue businesses
that engaged in unscrupulous activities, but doing so was expensive and the chances
of winning slim. There were no consumer advocates or government agencies to protect consumers
and society from deceptive advertising, defective products, or practices that harmed
people and the environment. The rule for consumers was caveat emptor, or “let the buyer
beware.” Generally, consumers were so eager for new products that they did not want the
government to intervene. As more and more businesses entered the marketplace, however,
competition grew fierce and abuses continued until the government had to intervene to protect
consumers and workers.
Congress passed laws to reduce the monopolistic tendencies of big business and force companies
to provide safer products and work environments. Federal agencies such as the FTC
and the Securities and Exchange Commission were set up to protect consumers and police
industries. Businesses gradually began to develop a sense of social responsibility when they
realized that promotion, sales, and efficient production alone would not increase profits. By
the 1950s, after finding that the key to increasing sales is to produce things that people want
and need, businesses began to ask customers what they needed and to develop products to
directly meet those needs. At the same time, employees were demanding better working conditions,
and management and owners began to listen. Company leaders also began to seriously
address the public outcry for product safety and reliability.
The 1960s was a decade of change on nearly every front. Civil rights abuses, environmental
deterioration, concerns about product safety, and the Vietnam War led Americans to reexamine
their values and priorities. People began to recognize that manufacturing processes and
waste-disposal methods were harming the environment and that women and minorities had
been denied their full rights in the workplace. The public began to demand that everyone—
individuals, government, and businesses—take greater responsibility for their actions. IBM,
Starbucks, American Express, and other companies saw that the way to build a positive image
with the public and ensure future sales was to act in a socially responsible manner.
Scandals during the past 15 years—including those involving Enron and WorldCom and the
more recent financial crisis brought on by subprime mortgages and risky financial products—
have increased calls for ethical behavior and corporate social responsibility. Contemporary
businesses are expected not only to earn profits for shareholders but to take into account
additional stakeholders, including communities and the environment (see Figure 4.3). This
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The Nature of Social Responsibility Section 4.5
trend has resulted in green product offerings and supply chain practices, community service,
volunteerism, and other socially responsible initiatives. More and more businesses view the
adoption of socially responsible management techniques, manufacturing processes, charitable
donation policies, and similar activities as necessary for meeting the demands of society.
This has in turn led firms such as Whole Foods, Starbucks, Waste Management, and the Container
Store to view socially responsible activities as a way to gain a competitive advantage.
Most recently, a new social responsibility issue has emerged: Internet security. In 2015 President
Barack Obama stated that private companies should be more transparent with customers
when data breaches occur and should work to protect the privacy of students using the
Internet in classrooms. He noted that personal financial information theft “is a direct threat to
the economic security of American families and we’ve got to stop it” (Zezima, 2015, para. 4).
His plan to address these concerns would require companies to notify customers within 30
days of discovering that personal information had been stolen. The goal would be to streamline
state mandates and regulations into one clear federal standard. Obama said:
The more we do to protect consumer information and privacy, the harder it is
for hackers to damage our businesses and hurt our economy. The more companies
strengthen their cybersecurity, the harder it is for hackers to steal consumer
information and hurt American families. (Zezima, 2015, para. 6)
Indeed, taking care of employees and customers constitutes a new aspect of socially responsible
behavior in a changing world (Zezima, 2015). Social responsibility is a dynamic area,
and issues change constantly in response to society’s desires.
Figure 4.3: The nature of social responsibility
Social responsibility requires balancing the interests and concerns of various stakeholders.
Justice,
Equality,
Sustainability,
Legality
Short-term profits,
Employee interests,
Stakeholder preferences,
© 2016
Planning and Strategic
Management
Chapter Outline
• Introduction
• The Nature of Planning
• Steps in Planning
• Strategic Management
• The Strategic Management Process
• Effective Planning and Strategic
Management
• The Benefits of Planning
Learning Outcomes
After reading this chapter, you should be able to
• Describe the three time horizons for which planning takes place in organizations.
• List the steps of planning.
• Define strategic management.
• Differentiate among the major corporate strategies and tools that managers use to develop and
implement them.
• Describe the steps involved in the strategic management process, including the importance of
strategy evaluation, choice, and implementation.
• Formulate actions that managers can take to make planning more effective.
• Discuss the benefits of planning.
• Evaluate a business’s goals and plans.
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Introduction
Inside Management: Ford Develops a Strategy for Survival and
Future Success
Ford Motor Company was founded and
incorporated by Henry Ford in 1903.
Headquartered in Dearborn, Michigan,
Ford today comprises many global brands.
Traditionally, the automaker has been one of
the world’s top corporations by revenue and
ranked as one of the world’s most profitable
corporations. However, the automobile industry
did not fare well during the most recent
recession. Unlike top competitors General
Motors and Chrysler, Ford avoided bankruptcy.
At the same time, the company faced declining
sales and profits as well as increasing
competition from automakers overseas.
In 2006 Bill Ford resigned as CEO (but
remained chair), and Alan Mulally, a former
executive vice president of Boeing, took the reins with a new corporate strategy. Mulally
was credited with turning around Boeing’s commercial airlines unit after the terrorist
attacks of September 11, 2001, and it was hoped he could do the same for Ford. After he
became CEO, Mulally developed a strategy known as One Ford that began to dramatically
turn things around at the company.
At its core, the One Ford strategy represents the rather straightforward proposition of
reining in Ford’s vast global operations and getting them all working on the same agenda.
Prior to Mulally becoming CEO, Ford’s overseas subsidiaries in many ways operated as
semi-independent fiefdoms, often duplicating efforts. For example, separate versions
of the Ford Focus compact car were produced on different engineering platforms with
almost no common components. Sales of the Focus also had not achieved their full
potential, especially in North America. The implementation of Mulally’s One Ford strategy
included manufacturing the Focus on a global platform using mostly common parts and
components. By 2012 the new version had sold more than 2 million units worldwide.
The Internet and other technologies allow Ford and Mulally to coordinate the global
One Ford approach even with respect to its faraway operations in China. Today the
strategically unified Ford Motor Company operates on all cylinders (Goldman, 2009;
Arvizu, 2009; Ferrell & Pride, 2009; Kilye, 2008; Thomas, 2008; Bradsher & Baja, 2010).
Emily Varisco/Associated Press
Ford Motor Company CEO and president
Alan Mulally, right, reflects on his many
accomplishments during his time spent
with the company, as Chair Bill Ford Jr.
listens.
Introduction
As Mulally’s One Ford concept demonstrates, planning and strategic management are essential
elements for successful management. Planning requires the organization to articulate where
it wishes to go in the future and specify how to get there. Strategic management involves the
management processes of planning, organizing, leading, and controlling, which are necessary
to achieve the strategic goals and carry out the plan.
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The Nature of Planning Section 6.1
In presenting this important topic, we will discuss the general steps of planning, the nature of
goals, and the various types of plans that organizations use. We will emphasize that the various
types of plans should be related and that implementation plays a critical role in achieving
success. We will also take a close look at strategic planning as part of strategic management.
6.1 The Nature of Planning
A plan outlines a set of activities that are intended to achieve goals, whether for an entire
organization, a department, or an individual. For example, Panasonic’s management team
recently developed its Green Plan 2018 to become one of the world’s top green electronics
producers (Aston, 2012). Planning involves determining what the organization will specifically
accomplish; deciding how to accomplish it; and developing methods to reach the goals.
At the most basic level, a plan provides a road map that answers the fundamental question,
“How do we get there from here?” Almost everybody agrees that a map is important; however,
organizations differ greatly in how they create them. Processes range from formalized,
detailed steps that produce a set of written procedures to be followed to informal discussions
that result in general verbal agreements.
Unfortunately, planning does not necessarily guarantee success. Even with planning, a major
economic or societal crisis can change the environment and thwart success. For example, in
the 21st century, many financial institutions bought debt obligations, sometimes unknowingly,
based on subprime loans. The collapse of this market caused many banks to fail, which
was not part of the plan. However, managers and companies that develop specific plans have
a distinct advantage over those that do not.
Planning Time Horizons
Implicit in our definition is that planning features an orientation toward the future. All managers
are concerned with some aspect of the future, but different levels or types of managers
will be more concerned with different time frames. Managers prepare plans in three time
horizons. Plans that affect overall company or organizational operations in a time horizon of 3
years or more are called long-term plans or strategies. Strategies are prepared and carried
out by the top management team. Typically, an organization’s top management team, led by
the CEO, will consider the long-term future. The CEO for Honda Motor Company, for example,
must think about how to expand the company’s manufacturing systems into different countries,
gain a long-term competitive edge, market its environmentally friendly cars, and pursue
the best ways to develop new green technologies such as hydrogen fuel cells.
Medium-range plans (or tactics) are generated to facilitate activities in a time horizon ranging
from 1 to 3 years. Tactics are developed and implemented by functional area managers
and cover activities such as production, quality control, sales, accounting, finance, and so
forth. Tactics represent key elements in supporting company strategies.
Finally, short-term plans are those that will be enacted to cover operations in a time horizon
of 1 year or less. For the most part, short-term plans are created and carried out by first-line
supervisors, who focus on daily, weekly, and monthly planning at the operational level. For
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Steps in Planning Section 6.2
example, a foreman at a local automobile manufacturing facility will be concerned with how
the next quarter’s demands affect the current manufacturing processes. A primary management
role is to make sure that the plans made in the three time horizons and the three levels
of operation are carefully coordinated.
6.2 Steps in Planning
Figure 6.1 presents the steps in planning. Note that all planning processes take place in light
of the company’s mission and vision. This section focuses primarily on the tactical/functional
and operational levels. An in-depth analysis of the company’s mission and the steps of planning
at the strategic level will follow in the second half of this chapter.
Figure 6.1: The steps of planning
All planning processes take place in light of the company’s mission and vision.
Company
Mission
and
Vision
Assess the current situation
Specify assumptions about the future
State goals
Create the plan
Implement the plan
Assess the Current Situation
Before members of a company’s leadership team can make plans, they must first be aware of
the present situation. This process begins by evaluating the internal organization’s current
status and the factors present in the external environment.
A strategic analysis studies how well various parts of the company, including operating divisions,
profit centers, subsidiary companies, and other elements, work together. Each activity
is analyzed to see how well it performs individually along with how it contributes to the organization’s
overall success. One division may not make a great deal of money but contribute by
providing low-cost supplies or services to the other operations. The strategic level of analysis
receives greater attention later in the chapter.
Tactical/functional analysis helps the management team identify company strengths and
weaknesses. For example, the FedEx tracking system gives consumers confidence that items
will arrive on time. The Southwest Airlines website is easy to navigate and makes purchasing
tickets less complicated. Table 6.1 provides examples of tactical or functional levels of
analysis.
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Steps in Planning Section 6.2
Table 6.1: Tactical/functional analyses
Function Examples of factors to analyze
Production Costs, on-time delivery rates, consumer views of quality
Quality control Rates of defects/returns
Marketing Market share, brand loyalty, or power
Sales Total volume, product lines, individual products
Accounting Errors noted by auditors
Finance Cost of capital, liquidity, leverage (debt ratio)
Information technology Quality of website, online ordering systems, support of
internal operations
Research and development Number of innovations adopted
Human resources Rates of absenteeism, tardiness, turnover
Source: The Five Functions of Effective Management, by D. Baack, M. Reilly, and C. Minnick, 2014, San Diego, CA: Bridgepoint
Education.
Finally, the company’s day-to-day activities are examined in greater deal at the operational
level. Generally, the goal of internal assessments is to provide as complete a picture as possible
for managers to commence with planning decisions.
Specifying Assumptions About the Future
After assessing the current situation, planning moves into making assumptions about the
future of the organization and the external environment. Generally, if the company can reliably
assume that the organization and the external environment will remain relatively stable
and similar to that of the recent past, planning is much easier because factors that may affect
the appropriateness and implementation of the plans can be accurately anticipated.
When the present status of the organization or its external environment is expected to change
in an unpredictable fashion, planning becomes more difficult and complex. Many key assumptions
about the future will be derived from various types of forecasts. Managers examine
three types of forecasts as part of the planning process: economic forecasts, sales forecasts,
and technological forecasts.
Economic Forecasts
Economic forecasts attempt to assess future economic conditions. Economic conditions
directly influence what companies can or cannot do, especially those firms that are recession
sensitive. In those organizations, sales respond to economic conditions. When economic conditions
improve, sales rise; when the economy goes sour, sales fall off. For example, housing,
airline travel, and automobile companies are all examples of recession-sensitive industries in
which the following are affected:
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Steps in Planning Section 6.2
• Orders of raw materials
• Inventory levels
• Sales force expenditures, including travel and entertainment
• Workforce size
• Company lending and borrowing
• Advertising expenditures
• Creating or delaying the development and release of new products
In a stagnant economy, managers cut back on orders for raw materials, reduce inventories,
limit sales force travel, lower advertising expenditures, maintain or decrease the size of the
workforce, and delay the release of new products. When an economy grows, the opposite
occurs: inventories are built up, purchases of raw materials rise, the sales force travels and
looks for new customers, the workforce grows, advertising expenditures may increase, and
new products can be brought to market and sold.
Other firms known as reverse-recession-sensitive industries experience this phenomenon in
reverse. Home gardening equipment, auto parts stores, and lower end fast-food restaurants
often experience rising sales in bad economies. Lower cost fast-food outlets often experience
increases in sales during poor economic times, as people look for ways to cut back but still go
out to eat.
Sales Forecasts
Sales forecasts are used to project anticipated revenues. They can be based on numbers
(quantitative) and management opinion (qualitative). The forecasts identify the amount of
funds that will be available for individual departments and activities. Table 6.2 introduces a
series of methods used to forecast annual sales. The majority are used to predict annual sales
for the coming year. The others predict sales of new products that may be or will be introduced
to the marketplace.
Table 6.2: Types of sales forecasts
Based on opinions Purpose
Survey of buyer intentions To discover whether consumers are interested in or would purchase a new
product
Executive survey So company executives can estimate next year’s sales
Consultant survey So consultants (experts) can estimate next year’s sales
Sales force survey So sales force members can collectively estimate next year’s sales
Based on present sales Purpose
Test market To test the impact of price change on sales, test the impact of advertising on
sales, and test the impact of new product on total sales
Time series sales forecast To predict future sales based on past sales
Statistical demand analysis To predict future sales based on some other factor than past sales (for example,
how a change in interest rates impacts housing sales)
Source: The Five Functions of Effective Management, by D. Baack, M. Reilly, and C. Minnick, 2014, San Diego, CA: Bridgepoint
Education.
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Steps in Planning Section 6.2
Technological Forecasts
Technological forecasts predict changes and trends that affect a firm’s long-term operations.
For example, companies that predicted the growth of cell phone technologies moved
aggressively to sell mobile phones and other services. Then, firms that were able to predict
the move into apps and Internet access gained a major advantage.
One common method for predicting changes in technology as well as other future events is
the Delphi technique. It consists of a panel of experts who are placed in separate locations
and do not know the identities of others in the group. The panel’s coordinator poses a question
regarding changes in technology to each expert. Each panel member responds in writing,
and the coordinator collects the answers. The entire set of responses is sent to every
panel member, who then can reconsider his or her initial response. A second iteration of
answers is then circulated among members. The system continues until the group reaches
a consensus. Maintaining anonymity helps ensure that a panel member will not be influenced
by another member’s reputation, but rather by the quality of his or her arguments.
The Delphi technique seeks to understand what kinds of technological breakthroughs will
occur and when.
Technological forecasting is not as precise as other methods; however, its value should not
be underestimated. Managers looking at the long-term, strategic time horizon will consider
when an industry or business might be changed by a technological breakthrough so the company
can respond effectively.
Stating Goals
The next step in planning is to set goals. A
goal is the result that a firm’s management
team or a specific employee wishes to
achieve. For example, under CEO Howard
Schultz, Starbucks set a goal of expanding
into the consumer packaged food industry.
Although coffee would remain a main staple
of the firm, Starbucks aimed to reposition
its brand as more of a consumer packaged
goods firm. One way Starbucks signaled this
change was by enlarging the mermaid on its
logo and removing the phrase “Starbucks
Coffee” from packaging. In a different example
of a goal, FedEx announced a plan to
increase its profits by $1.7 billion over a
3-year period. One step it took toward
achieving this goal was to purchase more
efficient aircraft to save on fuel costs. During one year, the firm replaced 21 Boeing 727s with
more fuel-efficient Boeing 757s and 767s (Schlangenstein, 2012).
imageBROKER/Superstock
Upgrading its planes to ones that were more
fuel efficient was an important step in FedEx
reaching its goal to increase profits.
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Steps in Planning Section 6.2
A company almost always pursues several goals simultaneously, which reflects the complex
nature of business. To be stated correctly, a goal must contain several components:
• The attribute sought: The topic being addressed, such as profits, customer satisfaction,
or product quality
• The target to be achieved: The specific amount or level, such as the volume of sales or
the extent of management training, to be achieved
• An index to measure progress: The unit that will be used to measure the target, such
as dollars for sales volume or the number of individual managers for training
• A time frame: The time period in which the goal is to be achieved, frequently a specific
date (Hofer & Schendel, 1978)
Simply put, it is necessary to know what is to be achieved, how much, when, and how it will
be determined whether the goal was reached or not.
Types of Goals
Organizations develop three types of goals: strategic, tactical, and operational. Although these
are interrelated, they differ in terms of their content and the business operations they address.
The firm’s highest level managers set strategic goals, which identify general outcomes such
as the firm’s growth over time. Strategic goals apply to the 3-year or longer time horizon.
These goals are central to all of the organization’s planning and activities. All other organizational
plans and activities focus on contributing to achieving strategic goals.
As an example of strategic goals, many companies, such as Walmart and New Belgium Brewing,
are integrating environmental sustainability objectives into their businesses. Some of
these goals, such as New Belgium’s goal of being 100% powered by renewable energy, have
been achieved. Walmart has the same goal but has a long way to go to reach that mark. Ambitious
strategic goals generally take several years to fully achieve.
Organizations set strategic goals for a variety of activities that management thinks are essential
for overall performance. Management scholar Peter Drucker suggests that the following
areas should be considered:
• Market standing: Refers to the percentage of the market that the firm wishes to
secure; for example, what percentage of consumers buys Nokia cameras as opposed
to its competitors’ cameras?
• Innovation: Usually refers to the nature and amount of research and development
the firm is committed to carrying out. This is often measured as a percentage of
research and development or sales.
• Productivity: Usually expressed in terms of the total output—such as number of
units—of the firm or of a major part of the firm (such as a division or a plant).
• Physical or financial resources: Refers to the amount of dollars and other assets, such
as stocks, land, or buildings, that the firm is committed to possessing. For example,
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Steps in Planning Section 6.2
in its quest to make China its second largest market, Starbucks announced that in
early 2016 the company plans to open 500 stores in the country each year for the
next 5 years (Zhang, 2016).
• Profitability: The amount of money remaining after the expenses of operating the
business have been paid.
• Manager performance and development: Performance refers to the level of productivity
of individual managers or work groups; development refers to the additional
skills a manager learns through either formal training or work experience.
• Worker performance: Level of productivity and the quality of activities of nonmanagerial
employees.
• Public responsibility: Activities such as complying with laws in areas such as employment,
product safety, and advertising; also includes areas that are not legislated—for
example, work with civic groups and nonprofit organizations (Drucker, 1954).
Tactical goals are the firm’s intermediate goals. They are designed to stimulate actions necessary
to achieve the strategic goals. As such, these goals are much more specific than are
strategic goals. Tactical goals are usually developed by and directed to middle-level managers.
They are stated for shorter time periods, usually 1 to 3 years (Horovitz, 2013). Tactical goals
become the basis for medium-range functional planning, such as how to carry out production,
financial, or marketing activities.
As an example, a manufacturing firm’s tactical goals to reduce costs may include closing two
plants and introducing robots and computer systems to its other four plants within 5 years.
In such a case, the human resources department would create tactical goals to implement
the strategy. Among these might be to assess the technical and computer skills of the firm’s
employees within the next 12 months. Furthermore, training programs in computer programming
and operations must be developed within 2 years. The training itself must be completed
for all appropriate employees within 4 years. To close the two plants, it would be necessary
to determine, within 1 year, a system for identifying those individuals who would be offered
positions at another plant and to set up an outplacement service for those employees who
will be laid off.
Operational goals are more specific and address detailed activities. These short-term goals
are addressed by first-line managers and apply to short-term work operations. Returning to
the previous example, two of the operational goals of the human resources department would
be to identify, within 2 weeks, the test battery that will be used to assess employees’ skills and
to design the skill assessment program within 7 weeks.
One way to visualize an organization’s goal structure is to use a framework such as the
one depicted in Figure 6.2. This framework starts with a broad view of the organization’s
strategy and works its way to a much narrower perspective. Each succeeding set of goals
is related to the preceding ones, as are the plans that are developed and implemented to
reach these goals.
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Steps in Planning Section 6.2
Figure 6.2: An organization’s goal structure
Strategic, tactical, and operational goals are created in light of the organization’s overall mission.
Company Mission
Strategic goals
Tactical goals
Operational goals
Creating the Plan
Following the intense scrutiny involved in assessing a company’s current situation, analyzing
potential changes, and creating goals, the next step is to prepare plans. In this section, we
discuss medium-term tactical plans and short-term plans. We discuss high-level, long-term
strategic plans in the second half of this chapter.
Tactical Plans
Whereas strategic plans address general business actions, tactical plans are concerned
with specific departments, people, activities, and resources. For example, when an information
systems manager decides how many technicians to assign in developing an executive
information system, he or she is implementing a tactical plan.
Tactical plans apply to the various functional areas of a business. That is, the planning has to
do with the activities and resources of areas such as marketing, operations, finance, research
and development, and human resources. For example, in the area of marketing, tactical plans
would include decisions about advertising, selling techniques, promotions, packaging and
labeling changes, pricing and discounts, and other marketing activities such as sponsorships
and cooperative agreements with other companies. In production, a tactical plan would be to
build a more efficient method of producing products or managing inventory levels.
Tactical plans are also designed to be executed in a shorter time period than strategic plans.
Note that tactical plans should be carefully integrated with strategic plans, as tactical plans
provide stepping-stones to strategic plans.
Finally, tactical plans are usually designed and implemented by middle-level managers. In
creating tactical plans, middle-level managers translate strategic plans into shorter term
plans that their team can follow.
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Steps in Planning Section 6.2
Operational Plans
Operational plans guide daily, weekly,
monthly, and annual activities. They include
items such as coordinating work schedules,
ordering inventory, and generating systems
for routinely updating websites. Operational
plans help ensure that first-line supervisors
and company employees are clear about
their everyday responsibilities. Three types
of short-term plans include budgets, projects,
and programs.
A budget is an annual financial plan. Budgets
are normally derived from sales forecasts,
which provide information about the
expected amount of revenue for the coming
year. That money will be allocated to various departments and activities. Each department
manager then knows how much he or she can spend during the year on personnel, supplies,
and other expenses. Note that one “department” in a budget should be labeled “profit.” A budget
sets important standards for the company’s controlling function.
A project is a plan for a single-time activity. When the activity is complete, the plan no longer
applies. Projects are also known as single-use plans. Examples of projects include a plan to
redesign the interior of a retail store; a plan to build and pave a parking lot for customers; or
a plan to hold a special event, such as a company’s 50th anniversary celebration.
A program consists of a set of projects that changes a company’s direction. For example,
many companies have developed projects to add e-commerce websites to brick-and-mortar
retail operations. Developing and marketing a new product is a program. Projects that make
up the program include designing or redesigning the product; creating packaging and labeling;
test marketing the product, and moving the item to the marketplace.
Budgets, projects, and programs are carefully integrated into functional area tactics and strategic
plans. They provide the building blocks that move from the smallest level activity to
sweeping company-wide operations and objectives.
Implementing the Plan
Implementation involves carrying out the steps specified in the plan. It is the point at which
the organization goes from the “thinking” mode to the “doing” mode. This stage requires the
coordination of people, resources, and activities. Typically, the plan describes what steps are
to be carried out but not how to carry them out, especially in terms of what decisions are to
be made at each step and what information is needed to make the decision. For example, at
a clothing store, implementation calls for purchasing the items of clothing to be sold. How
many? What specific items? What quality and style? Decision making is a major managerial
task that requires technical and interpersonal skills, among others. It also requires the management
activities of organizing, leading, and controlling.
iStock/Thinkstock
What are three important factors a café owner
must consider before creating a new business
plan?
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Steps in Planning Section 6.2
As an example of an implementation failure, Lululemon faced problems in 2013 when it sold
yoga pants that were too sheer. The company recalled the pants and initially blamed its suppliers
for defective shipments. In this case the plan was good, but the implementation—the
manufacturing, shipping, and selling of the pants—was problematic (Poon & Talley, 2013).
In contrast, effective implementation involves a series of W and H processes:
• Who is in charge?
• What is to be done?
• When will each step be implemented?
• Where will the plan take place?
• How will it be carried out?
The first step is to assign responsibility to a specific manager to make sure the plan is fully
implemented. Some organizations call this creating a “champion” for the plan. Second, managers
carefully state what will and will not be a part of the process. Third, a timeline is established
to create benchmarks. This enables management to see whether various activities are
being completed in a timely fashion. The “where” of implementation identifies the parts of the
company that are included or affected by the plan. Is it a single department, several departments,
or a company-wide plan? Finally, the “how” element specifies the smaller tasks and
goals that should be included in making sure the plan is fully implemented.
Business Dilemma
What Would You Do?
Suppose you are a business consultant. In your role, you work with clients to help them
develop strategies, define plans, and solve problems. Consider the following client’s case.
Use your knowledge of this chapter’s core concepts to address the questions presented
at the end of the case. Possible answers to these questions are included at the end of the
chapter.
THE CLIENT: Marcy Johnston, the new CEO of Flanagan Corporation
THE PLACE: Memphis, Tennessee
Flanagan Corporation is a national manufacturer of ready-to-eat southern-style food.
The business was originally family run and operated, but it grew so quickly that family
members sold their interests more than 20 years ago. At that time, the company sought
to diversify and purchased a national bakery and a canned vegetable manufacturer.
Flanagan’s food products now dominate the market. The company’s reputation is based
on using the highest quality ingredients and unique seasonings.
(continued)
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