Writing and Citing Sources Effectively in College: Music Edition

Presented by Dr. Candis Bond, Director, Augusta University Writing Center

Courtesy of the Augusta University Writing Center

Workshop Overview

 Transitioning into college writing: Developing a process and letting go of misperceptions

 Taking notes and writing for your music course(s)

 Citing your sources for music assignments: MLA basic overview

Part One: Writing Process and Keys to College Writing

Activity

Take 5 minutes to free-write about your writing process:

What steps do you take when you write? Do you dive right in, or do you spend several days thinking things over? After you get a draft, are you finished, or do you go back? When you do your writing, do you need music? A special pair of fuzzy socks? Overall, what works well with your current process? What is challenging or difficult in your process that you would like to change/improve?

Now, find a partner and share your free-writes for 5 minutes: When discussing, you can learn about new strategies you might steal to try, and you can also offer advice for how to improve areas of process your partner struggles with.

Finally, let’s share our insights as a group:

What are some key steps to writing? What do you struggle with most? How might we improve our process?

Writing is a process

(Oxford Brooks University)

The process can be recursive

(Oxford Brooks University)

Inexperienced: Writing is a one-time performance

Experienced: Writing is an evolving practice

Inexperienced: Revision is rewording

Experienced: Revision is rethinking

Inexperienced: A solitary activity

Experienced: A social process

Inexperienced: Focus on rules, correctness, formula

Experienced: Focus on argument, reader, dissonance

Inexperienced: Prioritize stylistic concerns

Experienced: Prioritize ideas & structure earlier in the revising process and stylistic concerns later

(Sommers)

Let go of misconceptions

I need large blocks of time to write or I can’t write at all.

Writing is just putting to paper what is in my head.

Writing is what I do after I know everything.

Everything needs to be perfect before I can move on.

I have to start with the introduction or first section.

Only ‘bad’ writers seek help or discuss their writing with others..

How do I become an experienced writer?

Writing = thinking! Give yourself the time and opportunity to develop and refine complex ideas.

Begin early & break the task into steps.

Think about the needs of your audience.

See revision as a process, a chance to re-see your argument as a whole.

Be social! Share your writing with others!

Academic Writing: Thinking about Audience Speaker

Subject

Audience

Context

Part Two: Note-taking and Writing for Music

Preparing to write: Identifying Purpose and Audience

Who are you writing to? Someone very familiar with music composition/history? Someone with limited experience?

What is your purpose in writing?  Description/Summary

 You can be technical and use terms from music theory. Example: “The cadential pattern established in the opening 16 bars is changed by a phrasal infix of two bars (mm. 22–24), thus prolonging the dominant harmony in the third phrase.”

 You can try to give a play-by-play description of what’s happening in the music. Example: “The saxophone soloist played a lot of scales in his improvisation, and the pianist added sparse chords to it.”

 Reflection

 You can describe your feelings and personal reactions to the music. Example: “I felt that the chorus of the song was more gripping than the opening.”

 Argument/Analysis

 Why is the description or reflection significant? What argument can you make about the importance of this detail/affect?

(University of North Carolina Chapel Hill Writing Center)

Preparing to Write: Narrowing Focus

When you know you are going to write about a piece of music, there are several components you can attend to, including (but not limited to):

 Lyrics/Content  Content/themes

 Organization/structure

 Diction

 Syntax

 Repetition

 Rhythm

 Rhyme scheme

 Literary techniques, such as enjambment or alliteration

 Musical Composition  Formal structure and/or genre conventions

 Instrumentation

 Motif/movement/melody/theme/tonality

 Tempo/beat/rhythm/time signature

 Key/chords

 Dynamics

 Genre/Historical Context  What genre does the piece fit into, if any? What genres might it appropriate or modify?

 When was the piece first published, and how does it reflect/not reflect historical expectations/trends?

 Who is the artist and why are they important?

 Affect  How does combination of lyrics and composition impact the multisensory experience of the music,

physically, mentally, and/or emotionally?

 Media/Setting  How does the use of media or the setting impact the experience of the music? For instance, why does it

matter if you hear a song on the radio, live in concert, or through a music video on YouTube?

Chosen Categories Relevant Details Significance of Details

Formal Structure

Genre Conventions

Rhythm/Tempo

Content/Themes

Sample Assignment: Why is this song compositionally significant within the genre of Rock ‘n’ Roll? Step one: Listen to the song a few times, jotting down notes on your initial reflections and impressions

Step two: Read the lyrics a few times, jotting down notes on your initial reflections and impressions

Step three: Review your notes. Think about the “academic” terminology that best fits your initial observations and impressions

Step four: Using a heuristic or perhaps a tri-column journal, list what you think to be the most important “academic” components in the far-left column.

Step five: Listen to the song several more times, filling in as much detail as possible in each section you’ve created.

Step six: Read the lyrics several more times, pulling out specific quotations that relate to your categories.

Step seven: Review your heuristic or journal several times. Then, go back and fill in column three.

Step seven: Review your arguments in column three several times. Use these to craft your overarching argument for the paper.

Step eight: Begin pre-writing; draft; seek feedback; revise; edit; proofread

Part Three: Using Evidence and Citing Sources (MLA Style)

Using Evidence: Paraphrasing and Quoting

MLA style requires that authors cite all information that is not original thought or common knowledge.

 Quotations

 Paraphrases

 Summaries

MLA: In-text citations

MLA requires two pieces of information whenever you summarize, quote, or paraphrase material from an outside source:

1. Last name(s) of the author

2. Page or paragraph number

Note 1: If you are using a time-based source, such as a film, podcast, or song, then you also include the time/time range you are citing.

Ex: (Black Sabbath 00: 00:01-00:00:30).

Note 2: If you are using a web-based html source without page or paragraph numbers, then you need not include this component in your in-text citation.

MLA: What do I do if a source has multiple authors?

Number of authors Parenthetical Citation

1 or 2 (Smith and Jones 2)

3+ (Smith et al. 2)

Corporate Author: Just like a human author

(Centers for Disease Control and Prevention 2)

How do I format this information?

You can place information in the text or at the end of a sentence in parentheses. You can also split up components.

Ex. 1: According to Smith, science is fun (2).

Ex. 2: Science is fun (Smith 2).

Ex. 3: According to Smith, “science is fun” (2).

Ex. 4: According to some experts, “science is fun” (Smith 2).

Ex. 5: Timberlake begins the first chorus, “I got that sunshine in my pocket” (0:24-0:26).

Ex. 6: He sings, “I got that sunshine in my pocket” (Timberlake 0:24- 0:26).

What if I’m citing on a Power Point?

Always provide attribution verbally and on the slide.

(Congressional Budget Office)

Example 2: Critics have identified three possible themes for the song : 1. Love (Smith) 2. Friendship (Jones) 3. Trust in “long-term relationships” (Terry 3).

Example 1: Image

Example 3: If entire slide is paraphrased or summary of one source, put citation in bottom right corner of the slide.

Paraphrasing Challenges: Make Sure the Paraphrase is Significantly Different in Wording

Original passage

“The chronically ill are by no means confined to hospitals or other institutions. If you think for a moment about your friends

and acquaintances, you will recognize that many of the chronically ill live in the general community and lead perfectly normal,

happy lives within their limitations” (Anderson 281).

Paraphrase 1: Good or Bad?

By no means are the chronically ill confined to hospitals or other institutions. If you consider your friends and acquaintances,

you will acknowledge that several of the chronically ill live in the general public and lead a normal, ecstatic lifestyle within

their limitations (Anderson 281).

Revised Paraphrase

Despite some restrictions, the chronically ill live an ordinary life. Often they can reside away from a hospital environment

(Anderson, 281).

Write your paraphrases so that they best support or apply to your own purpose and argument. If we wanted to read the

original article, we could; your job is to help readers see how external sources relate to your current project.

(El Paso Community College Writing Center)

Paraphrasing Practice

Tips: Make it shorter Make the words significantly different

“Adult fans nurture their interest in and experience with rock ’n’ roll music for two reasons. On one hand, keeping up with the music and the culture that were so important to them when growing up helps them maintain continuity with the past and, thus, solidify the sense of self security. On the other hand, working hard to keep rock ’n’ roll current and relevant to their lives helps adults grow as parents, as spiritual beings, and as friends” (Kotarba 4).

Take a few minutes to paraphrase this quotation. Be prepared to share your paraphrase with the group.

Possible paraphrase

Kotarba identifies two reasons adults maintain their connection to rock and roll, including a need to remember their past selves and communities and a need to grow into their current adult lives.

Integrating Quotations

Avoid Dropped Quotations: “Elvis transformed the landscape of Rock ‘n Roll” (Smith 23).

Use Integrated Quotations. Ex. of First Use of a Source: According to Jane Smith, a music historian at Yale University, “Elvis transformed the landscape of Rock ‘n’ Roll” (23).

The blue font is called a “signal phrase.” Use signal phrases the first time you use a source. After, you can just use last names or pronouns, such as “she.”

Ex. of Integrated Quotation after First Use: Smith continues, arguing Elvis is “magnetic” in his approach to the genre (23).

Using Quotations Practice

Hint: Joseph Kotarba is a sociologist at the University of Houston

“Adult fans nurture their interest in and experience with rock ’n’ roll music for two reasons. On one hand, keeping up with the music and the culture that were so important to them when growing up helps them maintain continuity with the past and, thus, solidify the sense of self security. On the other hand, working hard to keep rock ’n’ roll current and relevant to their lives helps adults grow as parents, as spiritual beings, and as friends” (Kotarba 4).

How might we integrate this quotation into a sentence when using this source for the first time? What about the second time?

In his peer-reviewed article, “Rock ‘n’ Roll Experiences in Middle Age,” Joseph Kotarba, a sociologist at the University of Houston, identifies two reasons older adults remain interested in rock ‘n’ roll as they age. “On one hand,” he explains, “keeping up with the music and the culture that were so important to them when growing up helps them maintain continuity with the past and, thus, solidify the sense of self security” (Kotarba 4). Kotarba continues, writing, “on the other hand, working hard to keep rock ‘n’ roll current and relevant to their lives helps adults grow as parents, as spiritual beings, and as friends” (4).

Citing on the Works Cited Page

Every MLA-style paper/presentation will include full bibliographic reference entries for every source cited in the paper/presentation on a final page or slide.

Title this page Works Cited, centered at the top

Organize entries alphabetically by author’s last name.

Use a “hanging indent” (lines after first are indented once)

Evenly double-space throughout

Citing Albums and Songs

If you streamed it or got it online:

Artist. “Song Title.” Album Title, Recording Manufacturer, date released, Streaming Service, URL.

The Beatles. “Can’t Buy Me Love.” A Hard Day’s Night, Capitol, 1964, Spotify, https://open.spotify.com/albu m/6wCttLq0ADzkPgtRnUihLV.

In-text:

(The Beatles 00:01:10- oo:01:15).

If you have the CD, cassette, or record:

Artist. “Song Title.” Album Title, Recording Manufacturer, date released.

The Beatles. “Can’t Buy Me Love.” A Hard Day’s Night, EMI, 1964.

In-text:

The song “Can’t Buy Me Love” by the Beatles repeats “no, no, no” as part of the bridge (oo:00:50-00:00:54).

Practice

Additional Details: released 1973

Artist. “Song Title.” Album Title, Recording Manufacturer, date released.

Elvis Presley. Separate Ways, RCA Camden, 1973.

Citing a website

Last name, First name. “Title of Web Page.” Title of Website,

Publication Date, URL. Access date.

Example:

Lundman, Susan. "How to Make Vegetarian Chili." eHow, 5 Jan.

2016,www.ehow.com/how_10727_make-vegetarian-

chili.html. Accessed 6 July 2015.

(Purdue OWL)

How would you cite this web page?

Answer

Russel, Peter. “Diabetes May Be Warning Sign of

Pancreatic Cancer.” WebMD, 31 Jan. 2017,

https://www.webmd.com/diabetes/news/20170131/diabete

s-warning-sign-pancreatic-cancer#1. Accessed 15 Aug.

2018.

How do I cite an article (in a periodical or peer-reviewed journal)?

Author(s). "Title of Article." Title of Journal, Volume, Issue, Year,

pages.

Example:

Bagchi, Alaknanda. "Conflicting Nationalisms: The Voice of the

Subaltern in Mahasweta Devi's Bashai Tudu." Tulsa Studies

in Women's Literature, vol. 15, no. 1, 1996, pp. 41-50.

(Purdue OWL)

Additional resources

Need help?

For assistance with MLA style, visit the Purdue OWL: https://owl.english.purdue.edu/owl/resource/560/01/

Or the MLA Style Center website: https://style.mla.org/

Or review the MLA Handbook, 8th ed. (we have copies in the Writing Center)

For assistance writing about music, visit the Writing Center at the University of Chapel Hill’s webpage on music writing:

https://writingcenter.unc.edu/music/

For assistance writing your assignments or MLA style, make an appointment at the Augusta University Writing Center: http://www.augusta.edu/pamplin/writingcenter/

Works Cited

El Paso Community College Writing Center. “Tips for Paraphrasing.” El Paso Community College, n.d.,

https://www.epcc.edu/RGWritingCenter/Documents/Paraphrasingtips.pdf

Purdue OWL. “MLA Style.” OWL: Purdue Online Writing

Lab, 2018, https://owl.english.purdue.edu/owl/section/2/10/. Accessed 16 Aug. 2018.

Oxford Brooks University. “Week 0: Thinking about Writing as a Process.” Centre for Faculty

Development, 2014, https://radar.brookes.ac.uk/radar/items/a3fd6f82-c367-4963-ba03-

66a37e47fc5f/2/?attachment.uuid=1770e5ea-ba70-488a-98d6-

94faa0a92197&attachment.stream=true

Sommers, Nancy. "Revision Strategies of Student Writers and Experienced Adult Writers." College

Composition and Communication, vol. 31, no. 4, Dec. 1980, pp. 378-88.

Writing Center at University of North Carolina Chapel Hill. “Music.” The Writing Center, UNC Chapel Hill,

2019, https://writingcenter.unc.edu/music/. Accessed 15 August 2019.

Thank you. We hope to see you at the Writing Center

Fall/Spring Hours: M-R, 8-8; F, 8-1

Locations: Allgood Hall, N204 and Greenblatt Library, 2101

The Context of Business Understanding the Canadian

Business Environment

Len Karakowsky York University

Natalie Guriel York University

Toronto

Vice-President, Editorial Director: Gary Bennett Managing Editor: Claudine O’Donnell Acquisitions Editor: Deana Sigut Senior Marketing Manager: Leigh-Anne Graham Program Manager: Karen Townsend Project Manager: Rachel Thompson Developmental Editor: Suzanne Simpson Millar Production Services: Aptara®, Inc. Permissions Project Manager: Joanne Tang Photo Permissions Research: Christina Simpson Text Permissions Research: Khalid Shakhshir Art Director: Zeneth Denchik Cover Designer: Bruce Kenselaar Interior Designer: Anthony Leung Cover Image: © Aslan Alphan/Gettyimages

Credits and acknowledgments for material borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within the text.

If you purchased this book outside the United States or Canada, you should be aware that it has been imported without the approval of the publisher or the author.

Copyright © 2015 Pearson Canada Inc. All rights reserved. Manufactured in the United States of America. This publication is protected by copyright and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Canada Inc., Permissions Department, 26 Prince Andrew Place, Don Mills, Ontario, M3C 2T8, or fax your request to 416-447-3126, or submit a request to Permissions Requests at www.pearsoncanada.ca.

10 9 8 [CKV]

Library and Archives Canada Cataloguing in Publication

Karakowsky, Len, author The context of business: understanding the Canadian business environment/Len Karakowsky, York University, Natalie Guriel, York University.

Includes bibliographical references and index. ISBN 978-0-13-291300-3 (pbk.)

1. Canada–Economic conditions–21st century–Textbooks. 2. Canada–Economic policy–Textbooks. 3. Business enterprises– Canada–Textbooks. 4. International business enterprises– Textbooks. I. Guriel, Natalie, author II. Title.

HC115.K342 2013 338.971 C2013-907169-5

ISBN 978-0-13-291300-3

Brief Contents

Part 1 A Framework for Study 1 Chapter 1 EXPLORING CANADIAN BUSINESS

A CRITICAL APPROACH: What are the Major Challenges Facing Business? 1

Part 2 The Internal Challenges 40 Chapter 2 THE EMPLOYEE–EMPLOYER

RELATIONSHIP: What Responsibilities Do Bosses Have to Their Employees? 40

Chapter 3 MANAGING THE WORKFORCE: How Can Business Leaders Best Manage Their Employees? 77

Chapter 4 ESTABLISHING THE STRUCTURE OF A BUSINESS: What Does Organizational Design Have to Do with Business Success? 116

Chapter 5 BUSINESS STRATEGY: How Do Businesses Generate a Successful Strategy? 159

Part 3 The External Challenges 193 Chapter 6 ECONOMIC FORCES: Oh Canada,

What Is Your Economy Like? 193

Chapter 7 COMPETITIVE AND TECHNOLOGICAL FORCES: How Do Industries Evolve over Time? 234

Chapter 8 GLOBAL FORCES: How Is Canada Faring in the Global Village? 268

Chapter 9 POLITICAL FORCES: Where Would Canadian Business Be without Our Government? 309

Chapter 10 SOCIETAL FORCES: Can Corporations Be Socially Responsible to All Stakeholders? 353

Part 4 Adaptation and Change 404 Chapter 11 THE CHALLENGE OF SUSTAINABILITY:

Why Does Business Need to Focus on Sustainability? 404

Chapter 12 CONFRONTING CHANGE: How Do Businesses Address the Challenge of Change? 448

iii

iv

Contents

Preface xii

Acknowledgements xvii

About the Authors xviii

Part 1 A Framework for Study 1

1 Exploring Canadian Business: A Critical Approach What Are the Major Challenges Facing Business? 1

Learning Objectives 1

THE BUSINESS WORLD: CAN CANADIAN TIRE FLOURISH IN A RAPIDLY CHANGING BUSINESS CONTEXT? 2

The Internal Context of Business 4 The Employment Relationship: Responsibilities Toward Labour 5 Leadership and Effectively Managing People 5 Developing a Suitable Organizational Structure 6

TALKING BUSINESS 1.1 Changing GM’s Organizational Structure 6

Generating a Winning Business Strategy 7

The External Context of Business 7 Specific or Task Environment 7 General Environment 8 Sustainability 11 The Challenge of Change 12

The Canadian Context: How’s Business in Canada, Eh? 12

Economic Forces in Canada 13 Competitive Forces in Canada 16 Technological Forces in Canada 18

TALKING BUSINESS 1.2 Growth in Provincial Labour Productivity: A Problem from Coast to Coast 20

Global Forces in Canada 22 Political Forces in Canada 25

TALKING BUSINESS 1.3 Jobs, Productivity, and Innovation: How Health Care Drives the Economy 25

Societal Forces in Canada 28

CHAPTER SUMMARY 29

CHAPTER LEARNING TOOLS 35 Key Terms 35 Multiple-Choice Questions 35 Discussion Questions 36

CONCEPT APPLICATION: FACEBOOK: WHEN YOUR FRIENDS ARE WORTH A BILLION! 36

Part 2 The Internal Challenges 40

2 The Employee–Employer Relationship What Responsibilities Do Bosses Have to Their Employees? 40

Learning Objectives 40

THE BUSINESS WORLD: IS WORKING FOR FREE ILLEGAL? 41

The Labour Environment and Canadian Society 43 Distinguishing Work and Employment 44

TALKING BUSINESS 2.1 Are Unpaid Interns “Employees”? 45

What Is an Employee? 46 From Standard to Nonstandard Employment Relationships 47 Perspectives on Work and Government Policy 48

The Labour Context in Canada: Where Are We Now? 52

TALKING BUSINESS 2.2 The State of Canadian Unions—Down but Not Out 53

TALKING BUSINESS 2.3 Are Unions Relevant in Canada Today? 55

Dismissing Employees 55 Common Law Rules Requiring Notice of Termination 56

vC o n t e n t s

Statutory Minimum Notice of Termination 57 Unemployment Insurance Programs 58

Current Issues in the Workplace: Managing Workforce Diversity 58

Protecting Diversity and Guarding Against Discrimination in Canadian Law 58

TALKING BUSINESS 2.4 Organizations Seeing the Light about Faith at Work 61

TALKING BUSINESS 2.5 He Says, She Says: Gender Gap Persists in Attitudes Toward Women’s Advancement in the Workplace 63

TALKING BUSINESS 2.6 Aboriginal Workers: Integral to Canada’s Ongoing Competitiveness and Performance 65

TALKING BUSINESS 2.7 Ontario Employers Have a New Tool to Improve Accessibility for People with Disabilities 67

The Model of the Employment Equity Act 68 TALKING BUSINESS 2.8 Employment Equity Resources 70

TALKING BUSINESS 2.9 Immigrants Make Significant Contributions to Innovation 70

CHAPTER SUMMARY 72

CHAPTER LEARNING TOOLS 72 Key Terms 72 Multiple-Choice Questions 72 Discussion Questions 73

CONCEPT APPLICATION: IMMIGRANTS ARE SOMETIMES UNSURE ABOUT THEIR LABOUR RIGHTS 74

3 Managing the Workforce How Can Business Leaders Best Manage their Employees? 77

Learning Objectives 77

THE BUSINESS WORLD: LEARNING HOW TO BE AN EFFECTIVE LEADER: LESSONS FROM THE EXECUTIVE ROUNDTABLE 78

Why Study Management Thought? 80 What Do Managers Do ? 81

The Roles Managers Play in Organizations 81

TALKING BUSINESS 3.1 The Visionary Leader: Steve Jobs 84

TALKING BUSINESS 3.2 Conflict Management: The Toxic Employee 85

Management Philosophies 88 Classical Approaches to Management 88

The Social Context 88 Scientific Management 89 Administrative Management 92 Bureaucratic Management 92

TALKING BUSINESS 3.3 Leading Teams in a New Direction 93

The Classical Approaches in Perspective 96 TALKING BUSINESS 3.4 Is Weber Alive and Well? 96

Behavioural Approaches to Management 98

TALKING BUSINESS 3.5 The High Costs of Workplace Harassment 99

The Human Relations Movement 100 Mary Parker Follett (1868–1933) 100 Chester Barnard (1886–1961) 101 Modern Behavioural Science and Motivation-Based Perspectives 102

The Best Management Philosophy? Contingency Approach 102

TALKING BUSINESS 3.6 The Myths and Realities of Motivation 103

The Critical Importance of Trust in the Workplace 106

TALKING BUSINESS 3.7 How One Canadian Company Earns Trust 107

Trust, Teamwork, and Citizenship 108 TALKING BUSINESS 3.8 How Teams Learn at Teleflex Canada 109

CHAPTER SUMMARY 111

CHAPTER LEARNING TOOLS 111 Key Terms 111 Multiple-Choice Questions 111 Discussion Questions 112

CONCEPT APPLICATION: KICKING HORSE COFFEE 112

vi C o n t e n t s

4 Establishing the Structure of a Business What Does Organizational Design Have to Do with Business Success? 116

Learning Objectives 116

THE BUSINESS WORLD: HOW GOOGLE DESIGNED ITSELF FOR SUCCESS 117

The Changing Nature of Organizations 119 Flat Organizations 120 Fluid Organizations 120 Integrated Organizations 121

TALKING BUSINESS 4.1 Atlantic Canada’s Overseas Playground? 122

Global Organizations 123 Thinking About Organizations 123

What Is an Organization? 123 Using Metaphors to Describe Organizations 124

The Anatomy of an Organization 127 What Constitutes an Organization’s Structure? 127

What Determines Organizational Structure? A Rational Perspective 131

Strategy 131 Organizational Size 132 Technology 132 Environment 132

TALKING BUSINESS 4.2 Canada’s Trade in a Digital World 134

Reengineering 136

TALKING BUSINESS 4.3 The Credit Agency 137

TALKING BUSINESS 4.4 Former Outsourcer Describes How Job Destruction Works 139

Toward a Virtual Organization 140 Outsourcing 140

TALKING BUSINESS 4.5 Out-of-Control Outsourcing Ruined Boeing’s Beautiful Dreamliner 142

Networking 143 Shedding Noncore Functions 143

Downsizing 145

TALKING BUSINESS 4.6 Loblaw Cuts 700 Head Office Jobs 146

Methods of Downsizing 147 Consequences of Downsizing 148

TALKING BUSINESS 4.7 What Every Leader Should Know About Survivor Syndrome 150

Why Has Downsizing Failed to Achieve Anticipated Results? 150 Downsizing as a Nonrational Approach to Organizational Structure 152

CHAPTER SUMMARY 155

CHAPTER LEARNING TOOLS 155 Key Terms 155 Multiple-Choice Questions 155 Discussion Questions 156

CONCEPT APPLICATION: PIXAR: NO MICKEY MOUSE ORGANIZATION! 157

5 Business Strategy How Do Businesses Generate a Successful Strategy? 159

Learning Objectives 159

THE BUSINESS WORLD: TIM HORTONS: IS ITS STRATEGY “ALWAYS FRESH”? 160

What Is Strategic Management? 162 Analyzing the External Environment 163

The Five-Forces Model 163 TALKING BUSINESS 5.1 Changes in Global Food Sector Call for Canadian Food Strategy 165

TALKING BUSINESS 5.2 Foresight and Innovation: Today’s Science Fiction, Tomorrow’s Reality? 169

Analyzing the Internal Environment 169 The VRIO Model 170

TALKING BUSINESS 5.3 Groupon 171

SWOT Analysis 172 Different Levels of Strategies 173

Business-Level Strategy 173 TALKING BUSINESS 5.4 Dollarama Cashing in on Penny-Pinching Canadians 175

TALKING BUSINESS 5.5 FROGBOX: a sustainable franchising success 177

Corporate-Level Strategy 179 TALKING BUSINESS 5.6 American Airlines Merges with US Airways 180

viiC o n t e n t s

TALKING BUSINESS 5.7 Loblaw Gets into the Mobile Phone Market 183

TALKING BUSINESS 5.8 Starbucks Buys Its First Coffee Farm in Costa Rica 184

TALKING BUSINESS 5.9 Understanding the Deal: Shoppers Drug Mart and Loblaw 186

CHAPTER SUMMARY 187

CHAPTER LEARNING TOOLS 188 Key Terms 188 Multiple-Choice Questions 188 Discussion Questions 189

CONCEPT APPLICATION: LULULEMON: FOR THE LOVE OF YOGA 189

Part 3 The External Challenges 193

6 Economic Forces Oh Canada, What Is Your Economy Like? 193

Learning Objectives 193

THE BUSINESS WORLD: CANADIANS ON THE MOVE 194

The Economic Environment 197 Individuals 197 Businesses 197

TALKING BUSINESS 6.1 Canada’s People Advantage 199

Government 200 Analyzing the Economy: Two Approaches 200

TALKING BUSINESS 6.2 Growing Gap of Truck Drivers Will Be Costly to Canadian Economy 201

Types of Economic Systems 201 Market Economy 202 Communism 202 Socialism 203 Mixed Economy 203

Competition and the Economy 204 Types of Competition in Free Markets 204

TALKING BUSINESS 6.3 Better Farm Management Separates the Wheat from the Chaff 205

TALKING BUSINESS 6.4 Don’t Blame Professional Athletes for High Ticket Prices 207

Goals of Canada’s Economic System 210

Economic Growth 210 TALKING BUSINESS 6.5 The US Subprime Mortgage Crisis and Recession 212

TALKING BUSINESS 6.6 Canada’s World-Class Economy 213

TALKING BUSINESS 6.7 Canada’s Productivity Challenge 216

TALKING BUSINESS 6.8 Canada’s Growing but “Invisible” Trade: Services 217

Economic Stability 223 Employment 226

TALKING BUSINESS 6.9 Today’s High Youth Unemployment: A Solution for Skill Shortages? 227

CHAPTER SUMMARY 229

CHAPTER LEARNING TOOLS 229 Key Terms 229 Multiple-Choice Questions 229 Discussion Questions 230

CONCEPT APPLICATION: SASKATOON: CANADA’S FASTEST-GROWING ECONOMY 231

7 Competitive and Technological Forces How Do Industries Evolve Over Time? 234

Learning Objectives 234

THE BUSINESS WORLD: FROM PERSONAL COMPUTERS TO NEWSPAPERS: TECHNOLOGY AND CREATIVE DESTRUCTION 235

The Industry Life-Cycle Model 236 The Introduction Phase: Industry Emergence and Creation 238

TALKING BUSINESS 7.1 The Birth of Biotech 239

TALKING BUSINESS 7.2 The Early Years of the Automobile Industry 240

TALKING BUSINESS 7.3 The Anti-Aging Industry 242

TALKING BUSINESS 7.4 Gray Goo and the Promising Future of the Nanotechnology Industry 243

The Growth Phase: Dominant Designs and Shakeouts 245

viii C o n t e n t s

TALKING BUSINESS 7.5 The Smartphone Industry 246

The Maturity Phase: A Critical Transition 248

TALKING BUSINESS 7.6 The Aging Personal Computer Industry 250

The Decline Phase: Difficult Choices 251

TALKING BUSINESS 7.7 Are Mobile Devices Killing The Video Game Console Industry? 252

Innovation and Technology 254 Types of Innovation 254

TALKING BUSINESS 7.8 Is Canada on the Leading Edge? 255

TALKING BUSINESS 7.9 The Linked World: How ICT Is Transforming Societies, Cultures, and Economies 256

The Evolution of Technology 258

TALKING BUSINESS 7.10 Embracing Disruption: Lessons from Building the First Quantum Computer 258

Technological Forecasting 260 Technology and the Changing Workplace 261

TALKING BUSINESS 7.11 Will Technology Replace Middle-Class Jobs? 262

CHAPTER SUMMARY 263

CHAPTER LEARNING TOOLS 263 Key Terms 263 Multiple-Choice Questions 264 Discussion Questions 264

CONCEPT APPLICATION: HAS SODA LOST ITS FIZZ? 265

8 Global Forces How Is Canada Faring in the Global Village? 268

Learning Objectives 268

THE BUSINESS WORLD: FOREIGN OUTSOURCING AND RBC 269

What Is Globalization? 271 Sources Encouraging Global Business Activity 271

Pull Factors 272 Push Factors 272

TALKING BUSINESS 8.1 Canada’s Dairy Industry Under Pressure 273

Channels of Global Business Activity 274 Exporting and Importing 274

TALKING BUSINESS 8.2 Canada’s Exports to China: Still Hewers of Wood and Drawers of Water 277

TALKING BUSINESS 8.3 What are Canada’s New Export Strengths? 279

Outsourcing/Offshoring 280 Licensing and Franchising Arrangements 280 Direct Investment in Foreign Operations 281

TALKING BUSINESS 8.4 What Helps a Country Obtain Foreign Direct Investment? 282

Joint Ventures and Strategic Alliances 284 Mergers and Acquisitions 284

TALKING BUSINESS 8.5 Is Canada Being “Hollowed Out” by Foreign Takeovers? Putting Mergers and Acquisitions in Historical Perspective 285

Establishment of Subsidiaries 286 The Multinational Corporation 286

The Borderless Corporation 287

TALKING BUSINESS 8.6 What’s the Third World? 287

TALKING BUSINESS 8.7 Think Global, Act Local 288

International Trade 290 The Logic of Trade 290 Mercantilism 290 Trade Protectionism 291

TALKING BUSINESS 8.8 Made in Canada: How Globalization Has Hit the Canadian Apparel Industry 292

TALKING BUSINESS 8.9 The Futility of Protectionism 294

Promoting International Trade 294 Facilitating Global Business: Regional Economic Integration 295

European Union (EU) 296 Asian Trading Bloc 297 North American Trading Bloc and NAFTA 298 Where Is Canada Headed? 303

ixC o n t e n t s

CHAPTER SUMMARY 304

CHAPTER LEARNING TOOLS 304 Key Terms 304 Multiple-Choice Questions 305 Discussion Questions 305

CONCEPT APPLICATION: BEIJING AND THE CALGARY OIL SANDS 306

9 Political Forces Where Would Canadian Business Be Without Our Government? 309

Learning Objectives 309

THE BUSINESS WORLD: JAPAN’S TOYOTA AND CANADA’S SUBSIDIES 310

The Canadian Business Enterprise System: Fundamental Features 312 Canadian Government Structure and Roles 313

Levels of Government 314 Federal Government Structure 316

Government as Guardian of Society 317 The Tax Collector Role 317

TALKING BUSINESS 9.1 Should Pop Drinkers Pay More? 319

The Business Owner Role: Crown Corporations 320

TALKING BUSINESS 9.2 Canada Post Faces Billion–Dollar Operating Loss by 2020 321

TALKING BUSINESS 9.3 Should the LCBO Be Privatized? 324

The Regulator Role 325 Government as Guardian of the Private Business Sector 328

Government Assistance to Private Business 328 TALKING BUSINESS 9.4 Auto Bailouts: Good or Bad Idea? 330

Government as Guardian of Business in the Global Context 332

Why Should Government Play the Role of Guardian of Business in the Global Context? 333

TALKING BUSINESS 9.5 More Cheese, Please 335

Why Government Should Not Play the Role of Guardian of Business 337

Should Government “Mind Its Own Business”? 339 Deregulation 339

TALKING BUSINESS 9.6 The Dangers of Deregulation 343

Privatization 344

CHAPTER SUMMARY 348

CHAPTER LEARNING TOOLS 348 Key Terms 348 Multiple-Choice Questions 349 Discussion Questions 349

CONCEPT APPLICATION: THE WIRELESS SERVICE INDUSTRY IN CANADA 350

10 Societal Forces Can Corporations Be Socially Responsible to All Stakeholders? 353

Learning Objectives 353

THE BUSINESS WORLD: THE NEW BLOOD DIAMOND: CELLPHONES 354

Defining Business Ethics 356

TALKING BUSINESS 10.1 High-Level Barriers to Public Trust in Organizations 357

Ethical Behaviour as a Social Phenomenon 358 Business Ethics as Managing Stakeholder Interests 359

TALKING BUSINESS 10.2 Lac-Mégantic: Disaster in Quebec 359

Models for Judging the Ethics of Decisions 360 End-Point Ethics 361 Rule Ethics 363 Applying the Models: A Scenario 364

TALKING BUSINESS 10.3 The Business of Bribery 366

Do Organizations Make Us Unethical? 367 Unethical Behaviour as a Consequence of Corporate Culture 368 Unethical Behaviour as a Consequence of Decoupling 371 Unethical Behaviour as a Consequence of Work Routinization 372

TALKING BUSINESS 10.4 The Global Pharmaceutical Industry and Human Guinea Pigs 374

Unethical Behaviour as a Consequence of Organizational Identity 375

x C o n t e n t s

Unethical Behaviour as a Consequence of Organizational Roles 377 Judging the Ethics of Organizations 378

Business and Society 380 Managing the Forces of Business and the Stakeholders of Business 381 Managing the Challenges of the Societal Force 383

Corporate Social Responsibility 383 The CSR Debate 385

TALKING BUSINESS 10.5 Dragons’ Den 386

TALKING BUSINESS 10.6 IBM and Nazi Germany 388

TALKING BUSINESS 10.7 Corporate Strategy and Long-Term Well Being: Crime Doesn’t Pay 392

TALKING BUSINESS 10.8 Should These Corporate Behaviours Be Mandated? 394

Is Corporate Social Responsibility on the Rise? 395

TALKING BUSINESS 10.9 Social Media Gives Power to Customers 395

CHAPTER SUMMARY 399

CHAPTER LEARNING TOOLS 399 Key Terms 399 Multiple-Choice Questions 399 Discussion Questions 400

CONCEPT APPLICATION: JOE FRESH AND THE BANGLADESH TRAGEDY 400

Part 4 Adaptation and Change 404

11 The Challenge of Sustainability Why Does Business Need to Focus on Sustainability? 404

Learning Objectives 404

THE BUSINESS WORLD: CAN CANADIAN BUSINESSES AFFORD TO IGNORE CLIMATE CHANGE? 405

What Is Sustainability? 408 Economic Factors 410

TALKING BUSINESS 11.1 Cree Village Eco lodge, a Sustainable Travel Destination 411

Social Factors 411 Environmental Factors 412

TALKING BUSINESS 11.2 How Sustainable Is Canada’s Water? 414

TALKING BUSINESS 11.3 Fracking Fracas: Pros and Cons of Controversial Gas Extraction Process 416

Benefits and Limitations of the Triple Bottom Line Framework 418

Benefits of the TBL Approach 418 Limitations of the TBL Approach 419

Measuring Sustainability 420 Living Planet Index 420 Ecological Footprint 422 Index of Sustainable Economic Welfare 424 Genuine Progress Indicator 425

The Business Case for Implementing Sustainable Practices 426

Reducing Costs 426 Reducing Risk 428 Improving Public Relations 429 Obstacles to Change 430

TALKING BUSINESS 11.4 Canada Isn’t Cleaning Up on Green Technology Exports 431

Implementing Sustainable Practices 433 Raw Materials 433 Manufacturing 434

TALKING BUSINESS 11.5 Leading Change in the Food Sector 435

Distribution 437 Retailing 437 Marketing 438

TALKING BUSINESS 11.6 Convenience versus Sustainability: The Plastic and Paper Bag Debate 439

Consumer Use/Consumption 440 End-of-Life/Disposal 441

CHAPTER SUMMARY 443

CHAPTER LEARNING TOOLS 443 Key Terms 443 Multiple-Choice Questions 443 Discussion Questions 444

CONCEPT APPLICATION: IS LOCAL FOOD SUSTAINABLE? 444

xiC o n t e n t s

12 Confronting Change How Do Businesses Address the Challenge of Change? 448

Learning Objectives 448

THE BUSINESS WORLD: INDIGO: WRITING THE NEXT CHAPTER IN CANADA’S BOOK INDUSTRY 449

Change and the Environment of Business 451 Forces for Change 451

TALKING BUSINESS 12.1 Making Skills Work in Ontario 453

TALKING BUSINESS 12.2 Yes, There Is a Future for Manufacturing in Canada 454

TALKING BUSINESS 12.3 Digital Health: More Than Just Health and Technology 456

TALKING BUSINESS 12.4 Pro Sports and Globalization 457

TALKING BUSINESS 12.5 How Canada Welcomed Bangladeshi Clothing Imports 459

TALKING BUSINESS 12.6 Slow-Motion Demographic Tsunami About to Hit Canada’s Economy 460

Types of Change 461 Developmental Change 461 Transitional Change 462 Transformational Change 462

TALKING BUSINESS 12.7 Transformational Change: Starbucks Risks Core Business for New Unknown Ventures 463

Methods of Change: Theory E and Theory O Change 464

The Process of Transformational Change: An Illustration 467

Understanding the Forces for Change 467 The Change Vision and Implementation 467

Creating a Learning Organization 471

TALKING BUSINESS 12.8 The Learning Manager 473

Double-Loop Learning and Shifting Paradigms 474 Do Organizations Encourage or Discourage Learning and Change? 475

TALKING BUSINESS 12.9 Facebook’s Culture Promotes Learning and Change 476

Implementing Change Through Tipping Point Leadership 479

What Is the Tipping Point? 479 Three Rules of the Tipping Point 479 Applying the Tipping Point to Organizational Change 481

CHAPTER SUMMARY 482

CHAPTER LEARNING TOOLS 483 Key Terms 483 Multiple-Choice Questions 483 Discussion Questions 484

CONCEPT APPLICATION: WHEN GOOD COMPANIES GO BAD: THE CASE OF KODAK 484

Appendix: Answers to Multiple-Choice Questions 487

Glossary 488

Index 503

xii

Preface

There is much to be proud of with regard to the Canadian business sector. According to many observers, Canada is poised to earn a distinguished reputation on the world scene. In fact, Canada has been consistently cited in the media as “one of the best countries to do business in.” Recently Forbes ranked Canada fifth overall in the world for business, based on such factors as low corporate tax rates and one of the most stable banking systems.

Beyond its economic stability, Canada is also reputed for its world-class university system, which is much more affordable than most privately funded colleges in the United States. In turn, Canada is known for its ability to attract and retain a highly educated workforce. Our strong business reputation is also based on having among the highest investment rates in education as a percentage of its GDP. Its enviable status is also based on comparatively low poverty and crime rates.

The positive climate for business has also made this country a popular location for entrepreneurs. Based on a study conducted by management consulting firm Ernst & Young, Canada was ranked among the top five places in the world to start a business, given its strong entrepreneurial culture. The Ernst & Young report considered such factors as small business tax burden, access to financing, and intangibles such as the value placed on research and innovation as well as attitudes toward entrepreneurs in the business community.

There is no doubt that Canada is fast becoming a major player on the global scene. However, at the same time significant challenges exist. The past two decades have witnessed tremendous change and turmoil across our organizational landscape—from numerous bankruptcies of once-great Canadian companies to massive reductions in the workforce of many others to the growth in foreign ownership across corporate Canada. Is all this cause for concern or just the natural evolution of business? Are we headed for the best of times or the worst of times?

Indeed, what lies ahead for Canadian business? To address that question, we need to systematically examine the context of business and the factors that shape our business environment. To do so we must look both “inside” and “outside” of the corporate walls. That is, we need to consider key challenges and opportunities that exist within the bound- aries of the organization, as well in the organization’s external environment.

The aim of this book is to help facilitate the following learning goals for students:

1. To examine the context within which all businesses operate. Specifi cally, we consider the internal context and the external context of business and the range of unique challenges and opportunities each possesses.

2. To obtain a deeper understanding of the nature of the Canadian business environment. What differentiates Canada from other business environments? What are the major strengths and weaknesses of Canada as a place to do business? What does the future hold for Canadian business?

3. To encourage critical thinking regarding the nature of business and its environment. This text presents a range of ideas, perspectives, and conceptual frameworks for identifying and analyzing key issues in the business environment.

xiiiP r e f a c e

4. To gain exposure to major voices and leading thinkers in the fi eld of business and organizational studies. This book draws upon many ideas from a wide range of business scholars, experts, and practitioners.

The study of business is really about the study of society. It is an obvious fact that we are a society of organizations—from our hospitals to our schools to our multinational organizations, it is hard to imagine life without organizations. And, for better or worse, those very institutions and organizations that we have grown up with are continuing to undergo dramatic change. We need to understand where change is coming from and how organization’s can best respond to the changing business context.

The Context of Business takes the reader on a journey that explores the environment within which business operates—both within the Canadian context and within the global context. The reader will be introduced to a variety of perspectives, theories, and concepts that shed light on real business issues. While this text does introduce the reader to many fundamentally important business terms and concepts, our emphasis is on helping students develop analytical thinking skills. Our aim is to present ideas, frameworks for discussion, and concepts that students can use as tools to help analyze “what is going on out there” in the “real” business world.

We hope that The Context of Business takes you on an enriching journey into the environment of business. There is much to learn about Canadian business and, as you will see, there is also much to be proud of. As a current or prospective member of the Canadian workforce, you have every reason to be interested in what the future holds for Canadian business. We hope this book helps you think more critically and thoughtfully about what lies ahead.

Enjoy the journey!

Len Karakowsky

Natalie Guriel

STRENGTHS AND FEATURES OF THIS TEXT This text differs in a number of significant ways from the typical introductory business textbook. There are at least three key areas of emphasis that distinguish this text, as outlined below.

1. Emphasis on Critical Thinking Skills The Context of Business will be the foundation for an introductory course in business that first introduces students to the business environment—both internal and external. The aim of this text is to provide a critical examination of the nature of business organizations and the fundamental challenges that they face within the Canadian context. The central objective is to provide insight into the business environment in Canada while encouraging students to think critically about how organizations are managed and how business leaders confront current challenges. This emphasis on critical thinking skills may be what largely differentiates this book from many other introductory business textbooks.

xiv P r e f a c e

Consequently, while we clearly set out descriptions necessary to understand the “mechanics” of business issues, ranging from the economic context to the political con- text, our aim is to engage students in a way that will stimulate them to think critically about these contexts. Students will be inspired to ask questions about how business operates and how the environment impacts business. We ask questions central to under- standing what is “going on out there” in the Canadian business world, including: What kind of competition exists in Canada in different industries? How has the number of telecommunications companies impacted the consumer? Do government subsidies to business impact competitiveness in Canada? What did the tragedy at Lac-Mégantic teach us about corporate social responsibility? These kinds of questions demand more than simply memorizing business jargon.

We believe that our approach in this text will help students better understand and appreciate the purpose behind their further studies in specific functional areas of business while also nurturing the skills they need to succeed in later courses.

2. Emphasis on Concept Application Each chapter sets out clearly the learning objectives for that chapter. We believe that we have set challenging but achievable learning objectives for each chapter, and we have ensured our chapters provide all the information students require to engage in a thought- ful and informed analysis of each of the topics. Our fundamental aim is to get students to take business ideas, concepts, and frameworks and use them to make sense of business events and challenges.

In writing this book, we endeavoured to make fundamental business concepts “come alive” through the application of these concepts to important, real-world situations. This text includes a wealth of current business cases drawn from the popular press to help clarify ideas presented within each chapter. Specifically, each chapter begins with The Business World case, which reports on important, current, real-life business issues and themes that are explored within the chapter. The chapters are also filled with real-life business illustra- tions summarized within the Talking Business boxes. Interspersed throughout the text, these features often present current business news or situations that further explore the concepts discussed in the chapter in a real, applied way. These are ideal for class discussion and also offer media accounts that may differ from the authors’ perspectives of business happenings. Instructors may wish to use some of these as mini-cases for class discussion on a daily basis when a lengthier, end-of-chapter case is not assigned.

Each chapter also contains an end-of-chapter Case Application with questions . These cases are also drawn from the Canadian popular press and are intended to give stu- dents an opportunity to apply chapter concepts to real business contexts. We have used these kinds of cases in our own classes with much success. The cases are of relatively short length. While the cases are intended to focus on the material in the accompanying chap- ter, many of the cases in this book carry ramifications that spill over into several areas. However, we have found that the ability to integrate different concepts from different chapters takes time. Consequently, our focus was on building this skill by keeping the cases relatively focused, though certainly many of these cases could be revisited from dif- ferent chapter perspectives. The Instructor’s Resource Manual provides suggestions and possible discussions relating to each of these cases.

xvP r e f a c e

3. Emphasis on “Real” Canadian Business Context In addition to offering frameworks and principles central to an understanding of the con- text of business in general, we have endeavoured to provide an interesting and up-to-date presentation of relevant business events and business cases. We have made every effort to infuse this text with “real-life” illustrations. References are made to major business stories from across the globe. However, we are particularly interested in the Canadian context. Consequently, we focus on Canadian stories and give ample attention to current Canadian business policies and practices for the topics covered throughout this book. The end-of- chapter cases are drawn from both Canadian and global contexts. And this text was authored by Canadian scholars—it is not a Canadian adaptation of a US text.

While this text relates ideas and theories drawn from the work of management scholars and management research, we are also concerned with relating ideas and issues voiced by practitioners and communicated through such popular press sources as Canadian Business , Globe and Mail, Fortune , Report on Business, and the Huffington Post .

End-of-Chapter Pedagogical Features We have included discussion questions at the end of every chapter, ranging from short answer to essay-type responses. These questions provide various levels of challenge and will ensure students have understood the issues presented in the chapter. In addition, we have included multiple-choice questions. The Instructor’s Resource Manual provides suggestions and discussions for taking up all of these end-of-chapter questions.

Supplements The following supplements are available for instructors:

Instructor’s Resource Manual. The Instructor’s Resource Manual includes chapter learning objectives, chapter outlines and summaries, discussion questions and answers for in-text features, as well as answers for the discussion and review questions.

Pearson MyTest. MyTest helps instructors easily create and print quizzes and exams with hundreds of questions, including multiple-choice, true/false, short answer, and essay ques- tions. For each question we have provided the correct answer, a reference to the relevant section of the text, a diffi culty rating, and a classifi cation (recall/applied). MyTest software enables instructors to view and edit the existing questions, add questions, generate tests, and distribute tests in a variety of formats. Powerful search and sort functions make it easy to locate questions and arrange them in any order desired. Questions and tests can be authored online, allowing instructors ultimate fl exibility and the ability to effi ciently manage assessments anytime, anywhere, visit www.pearsonmytest.com.

PowerPoint Lecture Slides. Prepared by the authors, the PowerPoint presentations are colourful and varied, designed to hold students’ interest and reinforce each chapter’s main points.

peerScholar. Firmly grounded in published research, peerScholar is a powerful online ped- agogical tool that helps develop students’ critical and creative thinking skills. peerScholar facilitates this through the process of creation, evaluation, and refl ection. Working in stages, students begin by submitting written assignments. peerScholar then circulates their work for others to review, a process that can be anonymous or not, depending on your preference. Students receive peer feedback and evaluations immediately, reinforcing

xvi P r e f a c e

their learning and driving the development of higher-order thinking skills. Students can then resubmit revised work, again depending on your preference. Contact your Pearson Canada representative to learn more about peerScholar and the research behind it.

Innovative Solutions Team. Pearson’s Innovative Solutions Team works with faculty and campus course designers to ensure that Pearson products, assessment tools, and online course materials are tailored to meet your specifi c needs. This highly qualifi ed team is dedicated to helping schools take full advantage of a wide range of educational technology by assisting in the integration of a variety of instructional materials and media formats.

Pearson Custom Library. For enrollments of 25 students or more, you can create your own  textbook by choosing the chapters that best suit your own course needs. To begin building your custom text, visit www.pearsoncustomlibrary.com .

CourseSmart for Instructors. CourseSmart goes beyond traditional expectations— providing instant, online access to textbooks and course materials at a lower cost for students. And even as students save money, you can save time and hassle with a digital eTextbook that allows you to search for the most relevant content at the very moment you need it. Whether it’s evaluating textbooks or creating lecture notes to help students with diffi cult concepts, CourseSmart can make life a little easier. Find out how when you visit www.coursesmart.com/instructors .

The following supplements are available for students:

CourseSmart for Students. CourseSmart goes beyond traditional expectations—providing instant, online access to the textbooks and course materials you need at an average savings of 60%. With instant access from any computer and the ability to search your text, you’ll fi nd the content you need quickly, no matter where you are. And with online tools like highlighting and note-taking, you can save time and study effi ciently. See all the benefi ts at www.coursesmart.com/students .

xvii

Acknowledgements

There are many people to acknowledge for their contributions to and support of this book. First, we would like to express gratitude to those individuals at Pearson Canada who were responsible for making this book a reality. Our gratitude goes to the expertise provided by Deana Sigut, Acquisitions Editor; Suzanne Simpson Millar, Developmental Editor; Leanne Rancourt, Copyeditor; Rachel Thompson, Project Manager; and Rashmi Tickyani, Production Editor. Suzanne merits our deep gratitude for her dedicated attention to and rigorous work on this text.

Thanks also go to those who reviewed our proposals and earlier drafts of this text:

Julius Bankole University of Northern British Columbia Edith Callaghan Acadia University Cuiping Chen University of Ontario Institute of Technology Shawna DePlonty Sault College Susan Graham University of Prince Edward Island Brent Groen Trinity Western University Eytan Lasry York University Anthony Mallette Southern Alberta Institute of Technology Angelo Papadatos Dawson College Raymond Paquin Concordia University Jennifer Percival University of Ontario Institute of Technology Robert Soroka Dawson College Trent Tucker University of Guelph Michael Wade Seneca College Kent Walker University of Windsor Bill Waterman Mount Allison University

We would also like to express gratitude to our colleagues, Professors David Doorey, You-Ta Chuang, and Eytan Lasry for authoring Chapters 2 , 5 , and 7 , respectively. We are grateful as well to our students, who have provided comments on a regular basis.

We wish to thank our colleagues for their insights and suggestions, including Paulette Burgher, Keith Lehrer, Peter Modir, Peter Tsasis, Indira Somwaru, and Vita Lobo. Our thanks also go to textbook contributors Joseph Adubofuor, Amy Bitton, Anya Cyznielewski, Ziv Deutsch, Melanie Gammon, Jason Guriel, Gillian Gurney, Shu-Hui Huang, Imran Kanga, Ezra Karakowsky, Miri Katz, Chris Kirkpatrick, Orlando Lopez, Karen Rabideau, Akiva Stern, Paul Thomson, and Janu Yasotharan. Your input and assistance were much appreciated!

Finally, we wish to express appreciation to our family members for their patience, understanding, and support. We dedicate this book to you.

Len Karakowsky

Natalie Guriel

xviii

About the Authors

Len Karakowsky is a professor of management at York University. He earned his Ph.D. from the Joseph L. Rotman School of Management at the University of Toronto, his MBA from the Schulich School of Business at York University, and his Bachelor of Commerce from the University of Toronto. He has served on the faculty of York University since 1997.

Professor Karakowsky is an award-winning instruc- tor who has been teaching business management courses for almost 20 years. In 2004, he helped launch Canada’s first executive master’s degree program in the School of  Human Resource Management at York University.

Several years later he assisted in the establishment of the doctoral program in human resource management at York University.

Professor Karakowsky’s research and consulting interests include the areas of leadership development, organizational change, demographic diversity, and corporate social responsi- bility. His research has been published extensively in such journals as Leadership Quarterly, Journal of Applied Psychology, Administration and Society, Journal of Management Studies, Group and Organization Management, Journal of Management Development, Small Group Research, Journal of Management Systems, International Business Review, and many others. He has authored award-winning papers and co-authored the text Business and Society: Ethics and Stakeholder Management (Canadian Edition) for Thomson Nelson publishers.

Natalie Guriel is a faculty member in the School of Administrative Studies at York University. She holds a mas- ter’s degree in management and professional accounting from the Joseph L. Rotman School of Management, University of Toronto, and an honours bachelor of arts degree in political science from the University of Toronto. Her professional designations were earned from the Canadian Institute of Management and include Chartered Manager, Certified in Management, and Professional Manager .

Professor Guriel has enjoyed teaching business man- agement courses at York University for over 10 years. She has also taught undergraduate and graduate business courses at several other universities across Canada. Her teaching

interests are varied and range from business management to financial accounting, manage- ment accounting, and taxation. She has received recognition for her teaching excellence and for her contributions to curriculum development.

Professor Guriel began her career as a taxation and accounting specialist for Deloitte. She later worked in a variety of management-related roles in the software, retail, and service industries. She is a member of the Canadian Institute of Management as well as the Academy of Management in the United States.

Chapter 1 Exploring Canadian Business: A Critical Approach What Are the Major Challenges Facing Business?

PART 1 A FRAMEWORK FOR STUDY

Is Canadian business headed for a dismal future, or one

that is bright? How does one make sense of the current

state of Canadian business? Assessing the prospects of

organizations requires a careful examination of the con-

texts within which they operate. This chapter introduces

the framework for this book— a critical examination

of the internal and external forces that can significantly

impact the functioning and fate of business.

Learning Objectives

After studying this chapter, you should be able to 1. Identify the key internal forces that shape any business.

2. Identify the forces that compose the specific and general

environments of organizations.

3. Discuss the nature of the external forces confronting

organizations.

4. Explain the importance of each of the external forces

within the Canadian business context.

1

© Age Fotostock

THE BUSINESS WORLD Can Canadian Tire Flourish in a Rapidly Changing Business Context?

Canadian Tire has certainly become part of the fabric of Canadian society. It’s been around since 1922 and has established itself as a solid Canadian retailer. Like the proverbial “underdog” Canadian hockey team, this Canadian retailer has managed quite well against a growing list of formidable US opponents. Over its 90-plus years, it has established approximately 500 stores across Canada, and with revenues close to $13 billion in 2012, this is no retail slouch.

However, as the expression goes, the times they are a changin’. And the question is, “Can Canadian Tire continue to flourish in these changing times amidst the onslaught of US retailers to Canada?”

US retailers have been invading our retail sector for many years now. It’s an invasion welcomed by most Canadian consumers, but certainly not by Canadian retailers. Home Depot, Walmart, and Target are just a few of Canadian Tire’s adversaries. And the compe- tition continues to heat up. 1

So what’s a good ol’ Canadian business to do? This is the question Canadian Tire is attempting to address. While the company clearly must have done something right to survive this long, some observers are puzzled by its success. In a recent Maclean’s article, writer Chris Sorensen had this to say:

Newer stores, located in towns and cities across the country, are brighter and more airy, but largely house the same eclectic inventory—none of it particularly cheap and none of it terribly aspirational either. Customer service, meanwhile, varies wildly from store to store, the result of the company’s independent—and bureaucratic—dealer owner- ship model. It all seems like a recipe for retail disaster, particularly as an army of well- oiled U.S. big box chains—Wal-Mart, Home Depot and soon Target—continue their relentless march north of the border. Yet somehow, Canadian Tire remains standing, earning profits of $453 million on $10.3 billion in retail sales last year, which was up three percent from a year earlier (Canadian Tire Corporation Ltd. also makes money through a banking operation, Canadian Tire Financial Services). 2

How has Canadian Tire managed to retain its place among the top 20 Canadian brands over the past several years?

Experts believe that a big part of Canadian Tire’s appeal is a combination of familiar- ity and convenience. But that doesn’t tell the whole story. Obviously, Canadian Tire has succeeded by understanding its environment and responding to changing business con- texts. The entrance of Target to the Canadian retail landscape has certainly made com- panies like Canadian Tire more vigilant and aware of the need to constantly evolve to best meet market demands. After feeling increased pressure from competitors, Canadian Tire has recently been revisiting its strategy. While not a direct competitor, Canadian

2 P a r t 1 A F r a m e w o r k f o r S t u d y

1 Hulsman, N. (2013, March 7). Canadian Tire going small in fight against Target, Yahoo Finance. Retrieved from http://ca.finance.yahoo.com/blogs/insight/canadian-tire-going-small-fight-against-target-180021300.html.

2 Sorenson, C. (2011, October 11). Canadian Tire’s baffling strategy to sell you everything. Maclean’s. Retrieved from http://www2.macleans.ca/2011/10/11/so-wrong-that-its-right . Reprinted with permission of MacLean’s Magazine.

Tire competes with Target on a number of product lines, including small appliances, and Canadian Tire’s subsidiary Mark’s Work Wearhouse competes for clothing sales.

In an effort to streamline its decision making, Canadian Tire cut several senior manage- ment positions in 2012. It has taken a systematic approach to analyzing the industry and adopting strategies to keep ahead of the game. For example, among recent changes was Canadian Tire’s decision to spend less of its advertising budget on small, grassroots events and more on mainstream media. The aim is to build more brand awareness of Canadian Tire. The nature of advertising will also change, with a greater emphasis on the Canadian Tire image rather than on specific products. While some have suggested that Canadian Tire should play up its Canadian roots to appeal to loyal Canadians, others feel that a strategy based on national sentiment is a waste of time; they believe that other more tangible actions should be taken. As Susan Krashinsky of the Globe and Mail observed:

Canadian Tire has survived past incursions by U.S. retailers such as Home Depot Inc. and Wal-Mart Stores Inc. The entry of Wal-Mart particularly caused the company to rethink the layout of its stores, change pricing policies and in more recent years, appeal to female shoppers more directly. It’s efforts such as this, not Canadian roots, that proved most effective. 3

In 2013, Canadian Tire announced plans to significantly improve its digital technology practices, including a partnership with Communitech, a technology company based in Kitchener, Ontario. 4 The aim is to develop apps, content, and other digital innovations to improve the shopping experience of Canadian Tire customers, both online and in the store. Canadian Tire also recently relaunched its online store after executives aborted a previous attempt in 2009. Among the items sold online are tires and wheels, which have to be picked up at Canadian Tire stores where many will also be installed. This effort was in response to a growing trend of Canadians buying their tires online through US-based websites and having them shipped directly to local mechanics.

Among other changes has been a renewed focus on its automotive roots. In 2013, Canadian Tire opened a number of automotive concept stores that feature drive-in recep- tion areas, express oil and lube services, and auto detailing. Canadian Tire also owns 87 specialty automotive PartSource stores. This is part of its strategic emphasis on auto parts, tools, home supplies, and sporting goods to combat increased competition.

Another area of change is in the customer services offered by Canadian Tire. For example, it recently began offering home installation services for Canadian Tire garage door openers, followed by central vacuum installations and heating and cooling systems.

Canadian Tire has also ventured more deeply into the world of sports. 5 In 2013, it announced a host of deals with amateur sports organizations to strengthen its ties to a major market: up-and-coming athletes. Among the sponsorships is an eight-year agreement

3C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

3 Krashinsky, S. (2012, September 13). Pumping up the “Canada” in Canadian Tire. Globe and Mail. Retrieved from www.theglobeandmail.com/report-on-business/industry-news/marketing/pumping-up-the-canada-in- canadian-tire/article4543680. 4 Boodoosingh, C. (2013, March 22). Canadian Tire steps up digital strategy, Digital Home. Retrieved from www. digitalhome.ca/2013/03/canadian-tire-steps-up-digital-strategy. 5 McDiarmid, J. (2013, January 23). Canadian Tire digs deeper into amateur sport, Toronto Star . Retrieved from www.thestar.com/business/2013/01/23/canadian_tire_digs_deeper_into_amateur_sport.html.

with the Canadian Olympic Committee and new or expanded deals with other amateur organizations. These arrangements reflect Canadian Tire’s shift to a greater presence in amateur sport following its 2011 acquisition of sports retailer Forzani Group Ltd. for $771 million. This move entrenched Canadian Tire’s status in the sporting goods market as well as provided it with access to a younger demographic of Canadian consumers (who like to shop at malls). Forzani continues to serve as an independent unit, operating Sport Chek, Sport Mart, and Athletes World stores.

Some observers believe that a continuing challenge for Canadian Tire is to make it clear in consumers’ minds that it offers more than automotive parts, tools, or sporting goods. On the other hand, marketing experts believe that Canadian Tire must also be cautious to not deviate far from its core business—that is, offering Canadians “everyday” household items rather than upscale home décor. As the old adage goes, you can’t be all things to all people.

Sorensen sums it up nicely:

Canadian Tire will need to stay on its toes as its territory is further invaded by big U.S. retailers. But despite its sometimes ungainly appearance, there’s no reason to think the inverted orange triangle and green maple leaf will disappear from the Canadian land- scape anytime soon. It may never be a chic proposition. But neither is weatherproofing windows or fixing a clogged toilet. 6

In fact, in 2013 Canadian Tire announced that it would launch smaller stores in city cen- tres, admitting that it needed to adopt a new approach to dealing with existing competi- tors like Walmart as well as combating new entrants like Target. Canadian Tire attempted the small-store concept in previous years. However, when Walmart began opening Super- centres across Canada (each about seven times the size of the new Canadian Tire format), it reconsidered that approach. Given that Walmart has recently begun toying with the “small box” concept (opening smaller, express versions of its big box stores) and with the entrance of Target, Canadian Tire has been open to revisiting just about anything, includ- ing a focus on smaller stores in core city shopping areas and malls. The plan is for these new “express” stores to be about 10,000 square feet.

Big or small, Canadian Tire has a lot to be proud of. It has been an iconic figure in the Canadian marketplace for many years. It has understood well the environmental forces that it must confront and address to survive. And for those patriotic Canadian consumers, let’s hope this good ol’ Canadian retailer sticks around for many more years. Way to go Canadian Tire—may the force(s) be with you, eh!

4 P a r t 1 A F r a m e w o r k f o r S t u d y

6 Sorensen, 2011.

THE INTERNAL CONTEXT OF BUSINESS What goes on within the walls of an organization? That is, what comprises the internal context of organizations? In Part 2 of this book, we will consider more closely t he internal context of organizations, focusing on four fundamental concepts: the employ- ment relationship, leadership, organizational structure, and strategy. Looking inside organizations involves a consideration of how people within organizations are managed.

Objective 1 Identify the key internal forces that shape any

business.

leadership How people are managed within an organization.

strategy The decisions made by business managers about how the company will address political, eco- nomic, global, societal, competitive, and technological forces.

5C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

Chapter 2 explores the employment relationship; we will identify and examine the nature of responsibilities that employers have toward their workforce. Chapter 3 con- siders the notion of leadership and discusses perspectives on managing people, which is particularly important considering that organiza- tions’ fates are intrinsically bound to the quality of decisions that are generated inside the organi- zation. Chapter 4 looks at how organizations are designed and why they sometimes decide to undergo dramatic change. Chapter 5 introduces the notion of business strategy and its relevance to organizational success or failure.

Exhibit 1.1 illustrates the framework we adopt in this book and also identifies the internal envi- ronment of business, which we discuss next.

The Employment Relationship: Responsibilities Toward Labour The ability to attract qualified workers and to extract maximum effort from them can be crucial to business success. However, navigating the labour relationship can be difficult and is fraught with risks. The context in which the labour rela- tionship operates is a highly complex one. Work- ers are usually interested in maximizing the income they receive from the sale of their labour, whereas businesses usually desire to maximize profit. These two objectives can clash, creating conflicts that can have nega- tive effects on productivity and profits, as well as the economy and society more gener- ally. Chapter 2 considers the complexities associated with the legal context of managing labour. Societies and economies are influenced dramatically by how work is organized. We will discuss how d ebates about the best way to organize work are long-standing and influenced by perspectives on markets, power, and the role of the state in capitalist societies. The result is a complex web of rules and forces that businesses must learn and adapt to if they are to operate successfully . The next chapter considers some of these rules more closely , including rules and processes relating to unemployment and the loss of work, and rules that attempt to address Canada’s diverse labour force.

Leadership and Effectively Managing People Chapter 3 considers the nature of the members who comprise an organization and how they manage and are managed. It does not matter whether we are talking about a nonprofit organization,

change A shift in how an organi- zation operates.

labour One of the five factors of production. Includes all workers in an organization who contribute their talents and strengths to cre- ate goods and services.

OU TSID

E THE ORGANIZATION

IN SI

DE TH

E ORGANIZATIO N

Political Forces

Global Forces

Economic Forces

Technological Forces

Competitive Forces

Societal Forces

Labour Leadership Structure Strategy

Exhibit 1.1 Inside and Outside Organizations: The Framework for This Book

Philip Date/Shutterstock

6 P a r t 1 A F r a m e w o r k f o r S t u d y

a small business, or a giant multinational corporation; any type of organization must be managed. Organizations are made up of people and, consequently, this factor is clearly one that we must carefully examine. How do we manage people within the organi- zation? Regardless of your role in organizations, no doubt at some point in your career you will be required to apply some sort of management or leadership skills in the conduct of your job. Simply working in organizations is a reason to be familiar with how organizational life operates and to understand what exactly is involved in the art and science of management. Given the importance of this issue, we will take a closer look at it in more detail in Chapter 3 .

Developing a Suitable Organizational Structure Chapter 4 considers the internal context of the organization with regard to how it is designed and the implications of organizational design and redesign . Organizational structure is a deliberately planned network or pattern of relationships that exists among individuals in various roles or positions. This includes the formal hierarchy of authority, the distribution or grouping of work (for example, into departments) and the rules or procedures that control and coordinate behaviour in the organization.

The structure of many organizations has been radically redesigned in recent years. Organizations in just about every industrialized nation have been undergoing change. (See Talking Business 1.1 .) While some companies have reduced their levels of hierarchy or

TALKING BUSINESS 1.1

Changing GM’s Organizational Structure GM Global Design . . . announced a revised organizational

structure and executive appointments that align it more

closely with the company’s brands across its network of 10

Design Centers around the world.

“This new structure provides a foundation to build and

grow the design language for each of our brands moving

forward,” said Ed Welburn, GM vice-president for Global

Design. “It gives our design teams a greater opportunity

to create products and brands that have an emotional

connection with our customers and that continue to move

our company forward.”

The benefits of a more brand-focused design organiza-

tion include:

• Drive stronger—and common—messaging across a

brand’s portfolio

• Allow designers to better understand—and design

for—customers when they live the brand on a day-to-

day basis

• Provide for greater parts sharing across brands

• Foster more creativity and provide a clear, single pur-

pose for each design team member.

The revised structure also increases the role of GM’s

Advanced Design Centers, which are strategically located

in the United States, Germany, Korea, China and Australia.

“Strengthening our Advanced Design organization will

allow us to help the company develop innovative new tech-

nologies and strategies to meet the future transportation

needs of the global marketplace,” Welburn said. “One thing

is clear: Success will require a variety of mobility solutions

that are striking both in their execution and their efficiency.”

Source: Excerpted from GM press release. (2012, June 18). GM

Design announces changes to its global organization and leader-

ship team; moves strengthen brand focus and advanced design

capabilities. Available at www.autoblog.com/2012/06/18/

general-motors-design-ranks-get-big-overhaul. Reprinted with

permission from General Motors Corporation

structure A deliberately planned network or pattern of relationships that exists among individuals within an organization. It deter- mines such things as division of labour, span of control, level of for- malization, and how centralized decision making is.

© ohmega1982/Fotolia

7C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

laid off employees at all levels, others have undergone a concurrent change in their whole business process, while others have simply closed down. To understand what is happening, and more importantly why it is happening, we need to understand more about the design or structure of organizations. This is the aim of Chapter 4 —to offer insight into the anat- omy of organizations and, ultimately, to explain why organizations are being redesigned.

Generating a Winning Business Strategy Deciding what strategies the organization should pursue is a key task of managers. Man- agers are continually faced with making decisions, both minor and major, on a daily basis. The aim of Chapter 5 is to describe the nature and purpose of strategic manage- ment. The chapter examines issues that are of critical importance to strategic manage- ment. What are the key forces in determining an industry’s structure, and what are the strategic implications? We will consider the roles of organizational resources and capa- bilities in firm performance. Our exploration will also include a discussion of corporate strategy and an identification of three generic strategies as well as how organizations go about implementing strategy. This examination reflects a central internal force that all organizations must contend with—the ability to generate a game plan to succeed.

THE EXTERNAL CONTEXT OF BUSINESS We can refer to the external context of organizations as its environment . Management schol- ars have typically defined the environment of an organization along two dimensions: the organization’s specific or task environment and the organization’s general environment . Each factor in an organization’s external environment can be considered as existing in two spheres: a specific sphere or environment within which the organization directly operates, and a general sphere or environment that would encompass the external environments of all organizations in a society. The specific sphere has been referred to as the environmental domain of the organization. For example, changes in the international environment may be a common factor for all organizations with, say, trade agreements affecting Canadian indus- try in general. However, some industries may be differentially affected by changes in the international environment via trade agreements. Not all organizations within an industry or within different industries are equally affected by changes in the environment. There are changes that affect all or some industries, and there are changes or factors that influence the direct sphere or environment of specific organizations.

Specific or Task Environment Any organization is surrounded by external stakeholders . These are parties or groups that have direct influence on the organization’s ability to obtain resources and generate out- puts. Stakeholders have some kind of stake or interest in the organization and could include such parties as the organization’s customers or suppliers, the labour pool from within which the organization obtains employees, competitors, unions, distributors, credi- tors, the local public, and the government (see Exhibit 1.2 ). While not all of these stake- holders may exist or exert influence on every organization, they are the types of factors that potentially constitute the specific environment of an organization.

Objective 2 Identify the forces that compose the specific

and general environments of

organizations.

specific or task environment The environment within which a particular organiza- tion operates, which is ultimately shaped by the general environment and includes stakeholders, customers, competitors, suppliers, and so on.

general environment The envi- ronment shared by all organiza- tions in a society, such as the economic and political environ- ments, and technological, societal, competitive and global forces.

external stakeholders Individ- uals or groups who bear some kind of risk, whether financial, physical, or other, as a result of a corpora- tion’s actions. They include such parties as suppliers, the govern- ment, and society in general. There are ethical as well as practical reasons to attend to all of their interests, even when they conflict.

8 P a r t 1 A F r a m e w o r k f o r S t u d y

General Environment The sphere surrounding the organization’s specific environment is typically referred to as the general environment . The forces that make up the general environment ultimately shape the specific environment of the orga- nization. Consequently, the general environ- ment will also influence the organization’s ability to obtain resources. General environ- mental factors typically include economic, competitive, technological, global, political, and societal forces. (See Exhibit 1.2 .)

Economic Forces Whether the Cana- dian economy is experiencing a recession or strong economic health, economic forces act as a strong influence on the present and future prospects of any organization. Moreover, given the strong global ties in Canada, we can also consider the international economic environ- ment as exerting an influence on Canadian organizations. Certainly, we understand the strong influence that the United States and its economy exert on Canadian business.

In considering how it will obtain resources from the environment, any organi-

zation must ask the question, “Is the economy healthy or weak?” Organizations are continuously forced to adapt to changing economic conditions. Downsizings are more likely to occur in lean times than in rich. For example, the development of a temporary workforce was partly an outcome of the recession that occurred in the 1990s and the consequent introduction of massive downsizings and layoffs of permanent members of the workforce. Economic changes have also facilitated changes to the nature of the employer– employee relationship. Lifetime employment appears to be a thing of the past. Consider the 1950s or the 1970s—those were times when employment actually meant security. In fact, the dominant model was long-term employment stability. However, a change to these implicit employment promises occurred sometime in the 1980s, when large, secure organizations began to layoff employees and the age of downsizing began. Today, part-time and temporary work arrangements have become much more common than in the past. The economic context of business will be explained in Chapter 6 .

Competitive Forces Competitive forces operate at two levels for any organization. As mentioned, an organization will have its own set of competitors, yet the force of competition can be viewed from a more general level as well. For example, globalization (which will be discussed elsewhere in this book) opens the floodgates for competitors in many industries. Clearly, the number of competitors and the nature of competition will dictate changes in organizational strategy. Competition, both domestic and foreign, certainly has demanded an

Objective 3 Discuss the nature of the external forces

confronting organizations.

Political Forces

Global Forces

Economic Forces

Technological Forces

Competitive Forces

Societal Forces

Organization

Specific Environment

Unions

DistributorsCompetitors

Employees Creditors

Local PublicSuppliers

GovernmentCustomers

General Environment

Exhibit 1.2 The External Context of Organizations

economic forces The economic influences on organizations, such as the state of the economy, unemployment, inflation, interest rates, and gross domestic product. For example, high unemployment numbers may indicate lower overall consumer spending, and business sales could be negatively affected. If sales go down significantly, businesses may need to reduce pro- duction, cut costs, or lay off workers.

competitive forces The domes- tic and foreign competitor influ- ences on organizational decisions. Competitors are organizations operating in the same industry and selling similar products and services. However, competitors may compete in different ways.

9C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

acceleration in innovation among firms in many industries. To compete effectively, organiza- tions must continually create new and better methods of serving customers. So while global- ization has opened up larger markets for businesses, it has also facilitated much higher levels of competition. Chapter 7 examines the nature of competitive forces and includes a consider- ation of the different stages of the industry life cycle model. That chapter also identifies the key drivers of industry evolution and how competitive forces change during the life cycle of a business. What are the key success factors for firms at each stage of the life cycle?

Technological Forces Chapter 7 ’s discussion of innovation acknowledge s the impor- tance of technological forces that surround organizations. Technology plays a central role in how an organization functions, how it obtains resources, and, ultimately, how effectively it competes. We will consequently examine different types of innovations and explore the rela- tionship between technological evolution and industry evolution. Furthermore, we will discuss the impact of technology on competitive business practices and technology life-cycle models.

The technological environment exerts influence across industries. For example, in the case of Bell Canada, the increase in the number of competitors in the telecommunica- tions industry was partly a consequence of the ability of smaller businesses to enter the industry. Technological advances led to reduced operating costs, which led to more com- petitors being able to enter the industry; formerly, the costly nature of the sophisticated technology required in this industry created a barrier to entry.

Change in technology is a constant force that permits and demands organizational change. One benefit of technology is increased flexibility in work arrangements. For instance, telework, or telecommuting, essentially means that an employee can work from home thanks to the technology available today. Technology has also facilitated business process redesign or “reengineering ,” an issue examined further in Chapter 4 .

Global Forces Global forces , in many ways, are forces that could be considered part of general economic, political, technological, competitive, or societal forces, but are inter- national in nature. For example, the tragic and devastating events of September 11, 2001, resulted in a chain reaction of international consequences, including changes in economic and political forces acting on organizations. Global events have an increasingly important impact on local organizations, too.

While there is no universally agreed-upon definition of globalization , it is useful to consider this concept as a process—that is, a process involving the integration of world economies. The presence of trade blocs reflects the accelerating pace with which nations are integrating their economies. Globalization also includes the globalization of markets— the notion that consumer preferences are converging around the world. Whether it is for products made by McDonald’s, Sony, Gap, or Nike, organizations are increasingly marketing their goods and services worldwide. On the other side, production is also increasingly becoming a global affair. Businesses will set up operations wherever it is least costly to do so.

Certainly, international trade agreements are global agreements among governments that are changing the nature and functions of many businesses. A Canadian organization may not simply consider consumers within the domestic borders, but may have a significant consumer market overseas; this demands a knowledge of global societies, global competi- tors, and other forces that exist on an international level.

The global forces of the general environment underscore the increasingly tangled web of players in the global business context: domestic and foreign competitors, workers,

technological forces The tech- nological environment that exerts influence across industries, playing a central role in how an organiza- tion functions, obtains resources, and competes. Changes in technol- ogy both permit and demand orga- nizational change.

global forces The global influ- ences on organizations that could be considered as part of the gen- eral economic, political, technologi- cal, competitive, or societal forces, but are international in nature.

globalization Although there is no universally agreed-upon defini- tion, it may be considered as a process involving the integration of national economies and the worldwide convergence of con- sumer preferences; the process of generating a single world economic system.

10 P a r t 1 A F r a m e w o r k f o r S t u d y

industry, government, national cultures, and economies. How business is conducted in light of trade agreements and global arrangements is a key issue for our entire society , and it is a theme we will explore more fully in Chapter 8 .

Political Forces Political forces can exert influence at both the specific and general levels. The government’s push toward deregulating many industries was designed to wel- come more competitors into the Canadian business sector and facilitate freer trade between Canada and the United States. The reduction in trade barriers worldwide has also opened the doors for the increasing presence of foreign competition in many indus- tries. Deregulation and privatization , discussed in Chapter 9 , are clear examples of the importance of considering the effects of governmental changes on business strategy.

Are government regulations facilitating or restricting certain business strategies? The political environment can dictate changes in how a business competes or what services it offers and how they can be offered. As we will discuss in Chapter 9 , t he deregulation of protected industries in the 1980s and 1990s created competition for companies where no real competition had previously existed. Industries such as telecommunications, banking, energy, and aerospace were dramatically affected by these governmental/regulatory changes. As the dominant companies in these industries were forced to compete in an open market, some responded by downsizing their workforce.

In a general sense, the traditional relationship of government with business is clearly undergoing change. The trend toward increased government involvement after World War II seems to have reversed by about 1980. In fact, some observers have suggested that the massive disposal of government-owned assets and the reduction of government controls in the business sector indicate a minor revolution of sorts. We will examine this issue in more detail in Chapter 9 .

Societal Forces Societal forces have an important impact on organizations. The nature of a society certainly is an entrenched part of any organization’s general environment. For example, we have witnessed an increasing concern for individual welfare in the workplace as societies become more cognizant of human rights and how people should be treated. Conse- quently, the workplace increasingly emphasizes organizational justice—that is, how employ- ees are treated. This has translated into more laws governing fairness in the workplace. One such area that has been dramatically affected is compensation. Pay equity has been a key issue examined in redressing inconsistencies in pay treatment between men and women. We have also witnessed an increasing emphasis on merit-based pay and pay for performance, which attempt to more closely link actual effort to performance instead of seniority-based pay, which bases pay solely on the number of years an employee has been with the organization.

Businesses must respond to society. Consumer tastes change, for example, and busi- nesses must adapt to such changes. Similarly, the types of organizations that serve societal demands can change. The aging population in Canada suggests that greater emphasis needs to be placed on industries such as the health care sector. In addition, society has a certain set of ethics or values, and these can influence the type of behaviour that organizations will manifest in that society. From a societal standpoint, it is not difficult to understand the importance of adequately addressing ethical behaviour of business organizations and their constituents. All sectors of society, including organizations themselves, are drastically affected by many forms of unethical behaviour. There is a growing belief that organizations are social actors responsible for the ethical and unethical behaviour of their employees.

political forces Governmental influences on an organization’s decisions through laws, taxes, trade relationships, and other related political factors.

societal forces A wide range of influences in society in general, including, for example, changes in public opinion on ethical issues like organizational justice (how employees are treated), that affect all organizations and to which businesses must respond.

11C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

Critics of business argue that organizational leaders must examine more closely the “moral sense-making” within organizations and responsibilities to external constituents. The tolerance of unethical behaviour in a society would seem to be a precursor to the acceptance of corporate unethical behaviour. This is an issue that we will more fully explore in Chapter 10 , which also emphasizes the requirement for organizations to address stakeholders in the global context.

From the description of the external environment, it can be observed that there is overlap between the general environment and the specific environment. An organization may have a specific market niche or set of consumers, but demographic changes in the general environment, such as an aging society, will certainly translate into changes in consumer tastes at the specific level. Similarly, as noted above, the government’s aim to reduce trade barriers at a national level can translate into regulatory changes or increased competition within an organization’s specific environment. This under- lines the importance of understanding the impact of both the general external environment and the specific environment of the organization.

Sustainability What is the most critical issue in the world today that needs to be solved? The answer will likely depend on whom you ask and where you live. For example, there is less fresh water to drink and less viable farmland to grow food on than there was 100 years ago. Sources of oil continue to be extracted worldwide as the number of cars increase. And the climate is getting steadily warmer across the globe. Preserving the environment for future generations to enjoy and for the economy to prosper is clearly an important issue. What currently threatens the planet? Two key concerns are the depletion of natural resources by overconsumption and the ongoing release of greenhouse gas emissions. As a society, how do we continue to grow and prosper while also ensuring that our way of life is sustainable now and in the future?

Traditionally, growing the economy and protecting the environment were viewed as two separate goals, often conflicting with one another. Why should businesses want to be sustainable? What are the motivating factors for businesses to implement sustainable prac- tices? While the primary goal of a business is to make a profit, sustainable practices can contribute to this goal and help create value on a number of levels. Business leaders now recognize that society, the economy, and the environment are interrelated systems that have an important effect on one another; one system cannot survive without the others.

Today, sustainable development can be viewed as a long-term approach to balancing the needs of people while growing the economy and preserving the environment. In a general sense, sustainability involves the relationship between the three Ps: people, profits, and the planet (also referred to as the three Es: social equity, the economy, and the environment). This accounting framework is known as the triple bottom line . However, since the move- ment toward sustainability is still relatively new, the development of a common standard of global measures is still underway. What measures currently exist and how can businesses

© SerrNovik/Fotolia

triple bottom line An account- ing framework that can be volun- tarily used by organizations to report performance on social, economic, and environmental results for a project or reporting period.

sustainability In business, the relationship between the three Ps: people, profits, and the planet.

12 P a r t 1 A F r a m e w o r k f o r S t u d y

implement more sustainable practices? There are a number of indicators of sustainable devel- opment that measure changes on a national or global basis that can be examined.

Implementing sustainable business practices is a new challenge many managers face. Time, money, and lack of knowledge are a few obstacles. Yet sustainable businesses that achieve their economic, social, and environmental goals can expect to receive many benefits. Sustainable business practices have proven to help businesses in the long term by reducing costs, reducing risks, and improving consumer relations. Clearly, environmental degradation cannot quickly be fixed, and businesses need to continue to consider their impact on the envi- ronment and society now and in the future. All of these issues will be addressed in Chapter 11 .

The Challenge of Change We are a society of organizations—from our hospitals to our schools to our multinational organizations, it is hard to imagine life without organizations. And, for better or worse, those very institutions and organizations that we have grown up with are continuing to undergo dramatic change. In fact, over the years, we witnessed tremendous change and turmoil across our organizational landscape—from bankruptcies of once great Canadian companies like Nortel, to massive reductions in the workforce of many well-known organizations such as GM and Bell Canada, to the rise (and possible fall) of successful Canadian companies like Research In Motion (now known as BlackBerry). What is going on?

While predicting the next big change may be futile, sensible questions that can be addressed include, “What are the sources of change directed at organizations?” “How do these changes affect the nature of organizations and work?” In every chapter in this book, from management through to globalization, we recognize that j ust about every important area of business is under- going some kind of change . Chapter 12 considers how organizations respond (or fail to respond) to these shifts in the environment of business. It’s all about adaption and change.

Organizations that effectively change or adapt to their environment are ones that have first “learned” —they have learned how to recognize the need for change, and they have learned what actions are necessary to adapt. Some management scholars have sug- gested that organizational learning represents the collective experience of individuals within the organization and happens when organizational procedures change as a result of what has been learned. Organizational learning , in this sense, involves a three-stage evo- lution in which the highest stage incorporates three aspects of learning: adapting to the environment, learning from employees, and contributing to the learning of the wider community or context. This idea will be explored more fully in Chapter 12 .

The ability of organizations to adapt to and change with a changing environment is dependent on the ability of their members to change and adapt. The best business leaders are essentially facilitators of change. Such facilitators are individuals with vision who can encour- age others to leap into a new paradigm —a concept we will also examine in Chapter 12 .

THE CANADIAN CONTEXT: HOW’S BUSINESS IN CANADA, EH? How is business doing in Canada? Some economists believe we are doing well; others believe Canada’s economy is slowly contracting and losing its competitive edge in the growing global economy. Some factors that are important to a country’s success in the global marketplace

Objective 4 Explain the importance of each of

the external forces within the

Canadian business context.

organizational learning The detection and correction of error, or the collective experience of indi- viduals within the organization that results in changes in organiza- tional procedure. Three aspects of learning are adapting to the envi- ronment, learning from employees, and contributing to the learning of the wider community or context. Two types of learning are single- loop learning and double-loop learning.

13C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

identified by economists include a country’s need for strong trading partners, low corporate taxes, an educated and skilled workforce, a stable financial and banking system, and a sustain- able competitive advantage. Let’s consider how business is doing in Canada in these terms by revisiting each of the external environmental forces with regard to the Canadian context.

Economic Forces in Canada What are some of the indicators of the current state of health of the Canadian economic scene? One indicator of the health of the economy is gross domestic product (GDP) : the total value of a country’s output of goods and services in a given year. The money that is earned from producing goods and services goes to the employees who produce them, to the people who own businesses, and to the governments in the form of taxes. The general trend of governments worldwide is to reduce their share of GDP. Obviously, it is good for GDP to grow: From 1979–1989 Canada’s GDP grew about 3.2% annually. The compound annual growth of GDP between 2002 and 2011 was 2.6%. Currently, Canada’s economy is expected to see compounded annual growth of 2.5% until 2025. (See Exhibit 1.3 for GDP growth between 2002 and 2011.) Canada experienced solid economic growth between 1993 and 2007. However, it went into a severe recession in 2008–2009, but has since emerged strong after this global financial crisis ended.

The future health of the Canadian economy, as in most economies, is continually the subject of speculation. It appears that economists are not necessarily more accurate in their predictions of economic well-being than are those looking into the proverbial crystal ball. Nonetheless, it is crucial to understand what underlying forces are ultimately shaping the state of our business system in Canada. This amounts to distinguishing between short-term changes in the domestic economy and ongoing trends in the nature of the business enter- prise system. It may be more manageable for us to consider what has been going on around us in recent years and assess what conditions will continue to persist in the coming years.

One important economic factor is the unemployment rate. In Canada, the unemploy- ment rate increased sharply in the early part of the 1990s because of the severe 1991–1992 recession and the steepest drop in economic activity since the Great Depression of the 1930s. While much of the 1990s was not bright for employment, we have witnessed vast

1,420 M

2008 2009 2010 2011

All industries

2012 2013 J M J M J M J M J M

1,440

1,460

1,480

1,500

1,520

1,540

1,560

1,580

B il li o

n s

o f

ch a in

e d

( 2 0 0 7 )

d o

ll a rs

Exhibit 1.3 Gross Domestic Product (GDP) and GDP Growth

Between 2002 and 2011,

GDP for all industries in the

Canadian economy increased

from $1,068 billion to

$1,266 billion. In each year

during this time period, GDP

growth was positive with

the exception of 2009.

The compound annual

growth rate of GDP

between 2002 and 2011

measured 2.6%.

Source: Statistics Canada.

(2013, March 31). Canadian

economic accounts, fi rst quar-

ter 2013 and March 2013. The

Daily. Reproduced and distrib-

uted on an “as is” basis with

the permission of Statistics

Canada. Canadian economic

accounts, fi rst quarter 2013

and March 2013.

gross domestic product (GDP) The total value of a country’s output of goods and services in a given year.

14 P a r t 1 A F r a m e w o r k f o r S t u d y

improvements in recent years. By 1999, the unemployment rate dropped to 7.6%; in 2005 it dropped to 6.7%, which was the lowest level achieved in three decades. This decrease in unemployment continued to drop in 2007, reaching a low of about 6%. (See Exhibit 1.4 .)

The soundness of Canada’s banking system is another important economic factor for Canada’s economy. In 2010, the World Economic Forum ranked Canada’s banking sys- tem as the world’s soundest for the third year in a row. 7 This type of international recognition is good for Canada because it gives businesses, investors, and consumers the confidence that Canada is a safe and stable place to conduct business.

Why are Canadian banks more secure than banks in other countries? The Canadian Bankers Association

attributes this financial stability to three key factors: Canada’s banks are well regulated, well capitalized, and well managed. 8

Canada’s Banks Are Well Regulated Under the federal government, two primary regulatory bodies oversee banking activities in Canada: the Office of the Superintendent of Financial Institutions (OSFI) for prudential regulation, and the Financial Consumer Agency of Canada (FCAC) for consumer issues. The Canadian Bank Act is also reviewed and updated every five years to reflect changes in the industry. In comparison, the United States has a much more complex arrangement of regulators, but with less stringent rules. After the US economic collapse in 2009, the US federal government had to bail out many of its banks with billions of dollars to prevent bankruptcies and a potential economic depression. Similar

7 Canadian Bankers Association. (2010, September 9). Good news for all Canadians: World Economic Forum again ranks Canada’s banks as the world’s soundest. Retrieved from www.cba.ca/en/media-room/65-news-releases/536- good-news-for-all-canadians-world-economic-forum-again-ranks-canadas-banks-as-the-worlds-soundest.

5.5 M

2008 2009 2010 2011 2012 2013 J J J J J M

6.0

6.5

7.0

7.5

8.0

8.5

9.0

P e rc

e n

t

Exhibit 1.4 The Unemployment Rate in Canada, 2008–2013 (percent of labour force)

In 2009, the unemployment

rate was 8.3%. Between

1976 and 2009, the unem-

ployment rate reached its

highest levels in 1983

(12.0%) and 1993 (11.4%),

following two major reces-

sions. In 2007, Canada

recorded its lowest unem-

ployment rate (6.0%) since

the mid-1970s. By May

2013, the unemployment

rate was 7.1%.

Source : Statistics Canada.

(2013, May). Labour Force

Survey, May 2013. The Daily.

Reproduced and distributed

on an “as is” basis with the

permission of Statistics Canada.

8 Canadian Bankers Association. (2010, May 14). Canada’s strong banking system: Benefiting Canadians. Retrieved from http://cba.stage6.industrialmedia.ca/en/media-room/50-backgrounders-on-banking-issues/469- canadas-strong-banking-system-benefiting-canadians.

© Francis Vachon/Alamy

15C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

bank bailouts occurred across Europe. Canadian banks, however, did not require any gov- ernment assistance and kept doing business as usual throughout the crisis.

Some economists blamed the US mortgage lending system for the collapse. There were many high-risk mortgage products in the United States, which Canadian regulators did not allow. Canadian bank mortgages also require at least a 20% down payment for a home or the mortgage would need to be insured; this requirement was not mandatory in the United States. Today, the US government is seeking bank regulation reform and is looking to Canadian models to help improve its system.

Canadian Banks Are Well Capitalized Canada has also been commended for the fact that its banks are well capitalized. This means that banks hold sufficient reserves to cover potential defaults on loans and other losses. According to Erik Heinrich, “the average capital reserves for Canada’s Big Six banks—defined as Tier 1 capital (common shares, retained earn- ings, and non-cumulative preferred shares) to risk-adjusted assets—is 9.8%, several percentage points above the 7% required by Canada’s federal bank regulators.” 9 Canada even exceeds international norms and surpasses the Bank for International Settlement’s requirements. 10

Canadian Banks Are Well Managed Although Canadian banks may not have the same level of competition (as US banks) to motivate them to succeed, they have remained well managed. Canada’s six largest banks (known collectively as the “ Big Six ”) include the Canadian Imperial Bank of Commerce (CIBC), Scotiabank, TD Canada Trust, Bank of Montreal (BMO), Royal Bank of Canada (RBC), and National Bank of Canada. Investment advisers frequently refer to these companies as Canada’s blue-chip stocks. Historically, these companies have proven to be safe and conservative investments that usually profit year after year.

Why can the Big Six banks be relied upon to be consistently profitable? Stringent lending requirements constitute one factor that has proven effective in preventing huge losses. Accord- ing to the Canadian Bankers Association, “in a survey by the Strategic Counsel, 81% of respondents believe that prudent lending is a key reason why Canadian banks have performed better than their international peers.” 11 But are Canadian banks as competitive as they can be? Can they compete on a global scale? Here are three challenges industry analysts point to that Canada’s banking industry needs to overcome in order to become a successful global competitor.

1. Canadian banks are less competitive: Some analysts believe that Canada’s banks pay a cost for being safe. They tend to take fewer risks and, therefore, are not high-growth companies. In Canada, the banking industry is more stable, but it does not have the same competition that other countries do. The Canadian financial market is domi- nated by a few large players—the Big Six. Although consumers have begun to see smaller players enter the market, there have been few so far. President’s Choice Financial (PCF), for example, offers many of the same banking services as the Big Six, but it does not have the same number of in-person branches that many of the traditional banks have. PCF provides mainly phone and online services so it can reduce overhead expenses and offer customers greater benefits. With lower

9 Heinrich, E. (2008, November 10). Why Canada’s banks don’t need help. Time . Retrieved from www.time. com/time/business/article/0,8599,1855317,00.html. 10 Canadian Bankers Association (2010, May 14). 11 Canadian Bankers Association (2010, May 14).

Big Six Canada’s six largest banks, including CIBC, Scotiabank, TD Canada Trust, BMO, RBC, and National Bank.

16 P a r t 1 A F r a m e w o r k f o r S t u d y

administrative costs, this bank has typically offered customers higher interest rates on deposits and lower (sometimes zero) banking fees.

2. Too small to compete globally: Many banks would like to be more competitive but have faced some limitations. Some Canadian banks would need to double in size to compete as international players. A couple of the Big Six banks have attempted to merge in the past, but government approval was denied. Many opponents argue that merged banks would be too powerful, and consumers would have less choice and potentially face higher fees.

3. Too much regulation: In addition, many argue that our banking system is too regulated. For example, stringent bank loan policies can make it difficult for small businesses to gain the funds needed to invest and to expand. This can impact Canada’s economic growth, since the majority of new jobs are created by small businesses. For banks, this means more of the same slow and stable growth and less opportunity for high-growth results. Nonetheless, media attention promoting the fiscal well-being of Canadian banks has helped give them international recognition and, perhaps, a competitive advantage.

Competitive Forces in Canada Imagine a situation where there is only one provider of an important good. If you require this good, then you must be willing to accept whatever price the provider demands. There is also no assurance regarding the quality of the good. There is little incentive for the provider of this good to be efficient in operations—any high costs can simply be passed on to the consumer in the form of higher prices. Similarly, there is little need to innovate or produce higher quality prod- ucts for the consumer, given that there is no risk of losing this captive market. Consequently, competition is considered to be an important element: This entails firms competing with each other to provide better products at lower prices if they want to increase sales and profits.

Our economic system is based on the assumption that sufficient competition exists. Competition is the “invisible hand” that ensures the market works in this manner. How- ever, if an industry is relatively concentrated then businesses can act as price setters, not price takers. Of course, with extreme concentration, as is the case with a monopoly, then businesses can set whatever price they want or collude with other businesses. Observers suggest that Canada has not taken as strict a stance on this issue as the United States, where legislation has been aimed at preventing industry concentration.

Now, when you think “Canadian business,” what picture do you conjure in your mind? Looking back over Canada’s past, it has been argued that we established a certain pattern for ourselves in terms of the types of business activities we emphasized here. During most of our existence, we have developed as a largely open economy, trading internationally primarily in resources. It has been suggested that our emphasis on the export of our natural resources, typically in a relatively unprocessed state, has made us more akin to a simple supplier of raw materials, whether it has been logs and lumber, pulp and newsprint, unrefined minerals, agricultural crops, and so on. But is that resource industry Canada’s competitive advantage?

First of all, what is a competitive advantage? A competitive advantage is achieved when an organization excels in one or more attributes that allow it to outperform its competitors. An attribute might be having a highly skilled staff, a patented technology, a unique marketing strategy, a well-known brand, or something else that makes the company a leader in its field.

In the global economic environment, countries compete through trade and strive for a competitive advantage based on the goods and services they sell. Some countries are

competitive advantage Achieved when an organization excels in one or more attributes that allow it to outperform its competitors.

attribute A business advantage of some kind, which might include having a highly skilled staff, a pat- ented technology, a unique market- ing strategy, a well-known brand, or something else that makes the company a leader in its field.

17C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

recognized for their superior products. The United States, for example, is known for pro- ducing world-class Hollywood movies. Belgium is known for crafting decadent chocolates. And England is recognized for its fine bone china. But what is Canada known for?

When people think of Canada’s economy, they often think of its natural resources. These are Canada’s forests, farms, fisheries, mines, and oil and gas sectors. Traditionally, Canada’s economy was built on extracting and exporting these raw materials. As early as the 1600s, companies began selling Canadian resources abroad. In 1670, for example, the Hudson’s Bay Company was formed and began trading fur with European countries. 12

By the early 1900s, significant industry had developed in Canada. Numerous mining companies began extracting minerals and coal from Alberta’s landscape. Similarly, other companies saw great opportunity to extract and manufacture forestry products. In 1909, for example, a pulp and paper mill was established in Grand Falls, Newfoundland. Simi- larly, the Maritime provinces had flourishing fishing industries with easy access to the Atlantic Ocean and other bodies of water.

Across Canada, individuals moved to places of employment, and towns grew around industry leaders. The resource sector became the foundation of Canada’s economy and eco- nomic growth for the next century, creating jobs and prosperity for many. Today, the resource sector is still an important part of Canada’s economy, but faces a number of challenges:

■ Depleting resources: Over the past century, many renewable and non-renewable resources have been significantly depleted. Mining companies have had to rely on lower-grade ores; in the forestry industry, depletion of high-quality fibre has led companies to exploit second- and third-growth timber in less accessible areas; and in the fishing sec- tor, the Newfoundland cod fishery had been essentially exhausted by the late 1980s. 13

■ New technology and equipment: Costs have increased significantly for improved tech- nology and extraction equipment. New equipment has been required to improve pro- duction efficiency, to extract resources requiring advanced extraction systems, to gain greater value from production inputs, and to sustain Canada’s competitive position in the global commodities marketplace. 14

■ Foreign competition: Foreign competition presents another challenge to Canada’s natural resource industries. The US softwood lumber producers, for example, have been a major competitor to Canada, resulting in several legal battles over unfair competition practices. Inexpensive labour costs have also been a competitive advantage for foreign producers. In 2009, AbitibiBowater Inc. (now known as Resolute Forest Products), closed its Grand Falls pulp and paper mill because of reduced demand for paper and increasing labour costs.

■ Pressure from environmental groups: Similarly, environmental concerns have resulted in new regulations for Canadian companies, to which foreign producers are not sub- ject. The high rate of extraction of natural resources has led environmental groups to lobby governments to protect wilderness areas, reduce yields extracted, and require

12 Canadiana.org . (2001–2002). The Hudson’s Bay Company Is Formed. Retrieved from www.canadiana.ca/hbc/ hist/hist6_e.html.

13 Howlett, M., & Brownsey, K. (2008). Canada’s resource economy in transition (p. 43 ). Toronto, ON: Edmond Montgomery Publications Limited.

14 Howlett & Brownsey, 2008, 44.

18 P a r t 1 A F r a m e w o r k f o r S t u d y

higher standards for extraction processes. Substitute products that are more sustain- able, like bamboo, have also been encouraged. As the fastest growing wood in the world, bamboo has advantages over traditional woods such as cherry, maple, and walnut. Bamboo is highly renewable and, therefore, environmentally friendly. 15

Clean energy consumption presents another environmental concern. Increased demand for cleaner energy sources means lower demand for dirtier energy like coal. Subsequently, many coal mines across Canada have faced closures. Some have even become tourist attractions that serve as historical sites, such as the Bellevue coal mine in Crowsnest Pass, Alberta.

Animal protection organizations have had a similar impact. Today, many consumers opposing cruelty to animals have stopped purchasing fur products and refrain from shopping at stores that sell them. Hudson’s Bay was one of these stores, and after 300 years of selling furs the company finally ended its fur trade business in 1991 because of societal pressures.

Many economists will agree that Canada’s resources sector is in transition. But is the sector still important to the Canadian economy? Some business leaders contend that min- ing and natural resources is still Canada’s competitive advantage. Other business leaders argue that Canada needs to diversify into other areas, so that when our non-renewable resources run out we will still have a thriving economy. In fact, it has been argued that Canadian corporations are much more involved in the extraction and processing of natural resources than most other countries at comparable stages of economic development. This pattern has led critics to suggest that we have not developed the entrepreneurial and tech- nological expertise of other nations—nations that have used our “raw materials” and added value through their own technological resources. However, it would be unfair to suggest that this is the whole picture. The fact is we have witnessed major changes in the nature of our economic sector, and we continue to see a major transformation in our economy and in the types of business competitors we have created. As with any capitalist-based system, Canada views competition as an important part of the business enterprise system.

Technological Forces in Canada Traditionally, Canada’s economy has been resource based. This refers to our emphasis on industries like agriculture, mining, forestry, fisheries, minerals, and energy. Natural resources have constituted the bulk of Canada’s exports. Given the nature of our primary industries, one important implication for businesses in these industries is that prices for the output are very much influenced by the world market. That is, these natural resource industries are highly affected by any fluctuations in the global supply and demand for these commodities, suggesting that many of our industries are highly sensitive to changes in the global or world market. A general criticism that has been levelled at the Canadian business environment is that we need to catch up in the area of technology and innovation rather than relying on our natural resources (which are exported mostly in an unprocessed form).

However, the Canadian economy has been transforming. While much of Canada’s economic strength lies in the diversity of its natural resource industries that supply ore, oil and gas, lumber, and other commodities internationally, our rapidly growing high-tech sec- tors are earning high marks for leading-edge research and development. This includes such

15 Howlett & Brownsey, 2008, 46.

19C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

areas as information and communications technology (ICT), biotechnology, nanotechnol- ogy, advanced manufacturing, electronics, aeronautics, pharmaceuticals, and agri-food.

We have already seen significant changes in the sectoral composition of Canada’s economy throughout the 20th century. At the beginning of the 20th century, there was a balance between employment in the primary sectors of the economy and the industrial and service sectors. The primary sector consists of agriculture, mining, logging, fishing, hunting, and trapping. The industrial sector is akin to the manufacturing or goods-producing sectors, while the service sector can include things like the hotel or restaurant industry. At the beginning of the 20th century, we had an abundance of employment in the primary sector, with most of this coming from the agricultural sector. However, even early in the century Canada witnessed a steady decline in agricultural employment right up until World War II— after which time this decline was more rapid.

Canada’s employment has clearly shifted away from the agricultural sector. Why? A number of reasons have been offered. Perhaps one of the most obvious reasons for the decline in agricultural employment is a reduced need for human capital; that is, techno- logical advances have helped many agricultural practices become increasingly mecha- nized and, consequently, fewer workers are required to achieve the same level of output. Concurrent with this decline has been the increasing urbanization of the Canadian popu- lation. Increasing numbers of Canadians continue to flock to cities from rural areas in search of employment, and it is the cities that attract the largest share of new immigrants.

If there has been a significant shift in employment away from the agriculture sector, the question is, “Where has it shifted to?” What we have seen happening in conjunction with agricultural employment decline in Canada is an increase in the number of Canadians employed in goods-producing and service industries. The manufacturing sector produces tangible goods, such as clothes, oil, food, machines, and automobiles. The service sector includes things like banking, insurance, information, marketing, accounting, hospitality and food services, recreation, and so on.

The shift to the manufacturing and service sectors was particularly striking in the first 15 years following World War II, after which growth in these areas slowed, although it certainly continued throughout the 1960s, 1970s, and 1980s. However, what is particularly striking in the later postwar period is the simultaneous rise in service-sector employment and, at least since the 1950s, the rapid decline in goods-producing industries. We continue to witness this trend, albeit at a reduced rate. Consider this: In 1950, only 42% of Canadians were employed in service-producing industries; by 1993, the figure had risen to over 72%. Whereas at the turn of the 20th century we shifted from an agricultural to an industrial economy, the second shift has been the transition from a goods-producing to a service-oriented economy.

Why are we moving away from the natural resources and the manufacturing sector to the service sector? What is driving this shift? Well, there is not really one accepted reason for this transformation to a service economy. But probably the most oft-cited reason is technology: Just as mechanization of agricultural production decreased the need for human capital, the increasing mechanization of manufacturing facilities has similarly reduced the need for human labour in this sector. We can produce comparable levels of output with far less labour than we did in the past. But productivity still remains a chal- lenge across Canada. (See Talking Business 1.2 and Exhibit 1.5 .)

And as far as productivity is concerned, what we have seen is labour productivity growth in manufacturing outpacing productivity growth in services. Why? Consider the

20 P a r t 1 A F r a m e w o r k f o r S t u d y

TALKING BUSINESS 1.2

Growth in Provincial Labour Productivity: A Problem from Coast to Coast Over the next two decades, Canada and its regions will

have to contend with the challenges of more and more

aging baby boomers leaving the workforce. The result

will be slower growth in our economy while simultane-

ously adding to demand and expenditures for health

care. One part of the solution to slower growth would be

to lift our productivity—a sure fire way to boost income

per capita and help us pay for those public services we

want and need.

While we’re hopeful for the future, our past perfor-

mance on the productivity front has not been strong.

Numerous past studies have highlighted our poor labour

productivity performance relative to the United States but

few have looked at the issue from a regional perspective.

Productivity is not just a federal issue. Here, we look at pro-

ductivity among the provinces and find that with just one

exception, poor productivity growth is a problem that

exists from coast-to-coast. With the baby boomers contrib-

uting to slower economic growth and to rising health care

expenditures across all regions, it’s vital that all provinces

develop an agenda to boost their productivity growth.

Over the 1998 to 2011 time period, the U.S. posted

average annual compound growth in labour productivity of

2.5 percent while Canada posted average growth of 1.3

percent. But it’s no wonder that productivity growth for

Canada as a whole has been so low when its three biggest

provinces are productivity growth laggards. Quebec and

Ontario, for instance, posted gains of 1.1 and 1.2 percent

respectively, and in Alberta, the headline number is even

worse, with growth of just 0.5 percent. (See chart “Busi-

ness Sector Labour Productivity Growth.”)

Only one province posted stronger business sector

labour productivity growth than the United States and

that was Newfoundland and Labrador. While Newfound-

land and Labrador does have programs to promote pro-

ductivity, the primary reason behind its productivity

miracle was a structural shift in its economy where an oil

boom increased the contribution of the highly productive

mineral fuels industry from an estimated 1.5 percent of

real GDP in 1997 to 19.4 percent in 2011. Therefore, its

success cannot be benchmarked by the other provinces.

Moreover, looking only at the headline productivity growth

rates does not tell the whole story. For example, Alberta

has the weakest growth among the provinces, but it also

has the highest level of labour productivity in the country.

Nevertheless, the data clearly shows that labour pro-

ductivity growth is a problem across the country. By

embracing a productivity strategy, provinces would have

the ability to make themselves more competitive, increase

the standard of living for their residents and experience

faster economic growth. So how can provinces boost their

productivity growth?

There are three main factors that drive labour productiv-

ity growth: the composition of labour, capital intensity and

multifactor productivity (MFP) growth. Labour composition

basically refers to the skill set of the working population, and

all provinces perform fairly well on this metric. This is not to

suggest that there is no room for improving the quality of

the labour force, but it is not

the driving force behind weak

productivity growth.

When it comes to capital

intensity (the amount of capi-

tal per worker), the provincial

performance has been mixed.

Half the provinces experi-

enced larger increases in cap-

ital intensity over the 1998 to

2010 period than the U.S.,

led by the resource intensive

economies of Saskatchewan

0

1

2

3

4

AB QC

A ve

ra g

e a

n n

u a l co

m p

o u

n d

g ro

w th

, %

*

ON PEI CAN BC *Canadian data are based on 2002 $; US data are based on 2005 $. Sources: Statistics Canada; U.S Bureau of Labor Statistics; The Conference Board of Canada.

NS MB SK NB US NL

21C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

and Alberta. But that leaves half the provinces still trail-

ing in capital investment. Policies such as adopting a

harmonized sales tax (where it is not already in place),

investment tax credits and reducing corporate tax rates

and regulatory burdens are steps provinces can take to

boost investment and, subsequently, productivity.

MFP, the final component, captures increases in labour

productivity not attributable to increases in capital or labour

composition. MFP is essentially the efficiency with which

capital and labour mix to create output. This captures a

wide range of factors from the industrial structure of an

economy to its innovation performance. With the exception

of Newfoundland and Labrador (which as noted above

benefited from a structural economic shift), all provinces

posted sub-par MFP growth relative to the U.S. That is the

main reason why labour productivity growth in the prov-

inces (and for Canada as a whole) is so much weaker than

in the U.S. While there is no easy answer to improving MFP

growth, research has shown that initiatives such as credits

and programs that encourage business spending on

research and development; investments in public infrastruc-

ture; and a reduction in barriers to interprovincial trade and

labour mobility can help provinces boost their MFP growth.

Governments at a variety of levels have understood for

years the need to address lagging productivity perfor-

mance, but the data show that we have not made nearly

enough progress. With every province facing an aging

population and budget challenges, the time is now to

develop and implement productivity strategies with a

focus on improving MFP growth.

Source: Excerpted from Macdonald, A. (2013, February 20).

Growth in provincial labour productivity: A problem from coast

to coast. Reprinted with permission from The Conference Board

of Canada. Retrieved from www.conferenceboard.ca/economics/

hot_eco_topics/default/13-02-20/growth_in_provincial_labour_

productivity_a_problem_from_coast_to_coast.aspx.

nature of many service-oriented jobs: Social workers who counsel youths, waiters who serve customers, and medical caregivers who treat patients are not easily replaced by machinery. Productivity growth in this sector is thus much slower than in the manufacturing sector. The result of this difference in productivity growth rates is that more Canadians need to be employed in services to maintain the relative levels of service and manufacturing output.

Whatever the source, there is little question that services are playing a much greater role in our economy than they have in the past. However, one final question that we can ask related to all this has to do with whether this shift is a good thing. Let’s consider sev- eral implications of this transition.

On an individual level, anyone planning on entering the job market or remaining employable must consider his or her skill set. Obviously, our workforce must be better educated and capable of attaining the relatively higher skill levels required in the well- paying service-sector jobs (in comparison to the manufacturing sector). The notion of the knowledge worker , a relatively recent buzzword, underscores the increasing importance of higher education and the value of transferable skills.

But in broader terms, is the service sector better for our economy? Or is manufacturing still a critical element? A number of observers suggest that we should say “good riddance” to the old, outdated manufacturing sector and welcome the growing service sector with open arms. For example, economist Nuala Beck, in her popular book Shifting Gears: Thriv- ing in the New Economy, referred to a “new knowledge economy” that is quickly replacing the old mass-manufacturing economy. Beck observed that these “knowledge workers” now make up 30% of North America’s workforce, while only 10% are actually involved in pro- duction. Further, it is the more knowledge-intensive industries (like the high-tech indus- tries) that are creating most of the jobs and driving the economy.

knowledge workers People employed in knowledge-intensive industries, such as the high-tech industries, where specialized and frequently changing knowledge is required. Knowledge work is thus harder to routinize than, for instance, service work.

22 P a r t 1 A F r a m e w o r k f o r S t u d y

2008 2009 2010 2011 2012

Total, all industries 17,087.4 16,813.1 17,041.0 17,306.2 17,507.7

Goods-producing sector 4,013.4 3,724.3 3,740.0 3,804.9 3,872.0

Agriculture 323.6 316.1 300.7 305.6 309.2

Forestry, fishing, mining, quarrying, oil and gas 344.6 317.9 329.4 337.2 369.1

Forestry and logging with support activities 54.4 46.2 51.4 46.5 51.8

Fishing, hunting, and trapping 21.6 20.7 20.6 19.4 18.4

Mining, quarrying, and oil and gas 268.6 251.1 257.5 271.3 298.8

Utilities 151.5 147.6 148.3 139.8 140.7

Construction 1,231.0 1,160.8 1,217.2 1,262.2 1,267.5

Manufacturing 1,962.7 1,781.8 1,744.3 1,760.2 1,785.5

Durables 1,168.4 1,037.0 1,019.4 1,042.9 1,083.4

Nondurables 794.3 744.8 724.9 717.3 702.1

Services-producing sector 13,074.0 13,088.8 13,301.0 13,501.3 13,635.7

Trade 2,684.9 2,652.2 2,677.8 2,669.9 2,643.8

Wholesale trade 632.0 631.8 628.9 632.8 611.9

Retail trade 2,052.9 2,020.4 2,048.9 2,037.1 2,031.9

Transportation and warehousing 848.9 816.2 805.7 843.4 849.4

Finance, insurance, real estate, and leasing 1,073.6 1,092.1 1,095.7 1,083.4 1,093.2

Finance and insurance 776.4 769.9 783.5 758.0 783.2

Real estate and leasing 297.2 322.3 312.2 325.4 309.9

Professional, scientific, and technical services 1,189.3 1,191.9 1,266.7 1,309.2 1,299.3

Business, building and other support services 685.0 654.9 672.2 677.0 690.5

Educational services 1,186.3 1,188.8 1,217.8 1,219.4 1,287.7

Health care and social assistance 1,893.0 1,949.2 2,030.7 2,091.5 2,128.0

Information, culture, and recreation 758.4 769.6 766.0 784.2 790.4

Accommodation and food services 1,080.6 1,056.6 1,058.4 1,093.4 1,102.4

Other services 748.3 787.0 753.5 758.7 795.3

Public administration 925.7 930.3 956.4 971.2 955.9

Source: Statistics Canada, CANSIM Table 282-0008. Reproduced and distributed on an “as is” basis with the permission of Statistics Canada.

Exhibit 1.5 Canadian Employment by Industry (in thousands)

Global Forces in Canada Clearly, our proximity to the United States is an element that influences the nature of our business environment. Keep in mind that the United States has a population that is approximately 10 times that of Canada. And though we possess one of the largest coun- tries in terms of land mass, the bulk of our population lives within 200 kilometres of the Canada–US border. In fact, the US presence in the Canadian business sector is a defining characteristic of our environment. Moreover, the trade agreements we have entered into with the United States have critical implications for our business sector (an issue we will deal with later in this book) .

23C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

18 Mandal-Campbell, 2007, 19.

19 Government of Canada. (2011). NAFTA Advantage. Retrieved from http://investincanada.gc.ca/eng/ advantage-canada/nafta-advantage.aspx.

20 Prime Minister of Canada. (2011, February 4). Canada/U.S. trade and investment. Retrieved from http:// pm.gc.ca/eng/media.asp?id=3935.

21 Statistics Canada. (2010). Gross domestic product, expenditure-based. Retrieved from http://www40.statcan. gc.ca/l01/cst01/econ04-eng.htm.

16 Lam, E. (2011, October 3). Canada weaning itself off exports to U.S. Financial Post. Retrieved from http:// business.financialpost.com/2011/10/03/is-canada-weaning-itself-off-the-u-s.

17 Mandal-Campbell, A. (2007). Why Mexicans don’t drink Molson , p. 25 . Toronto, ON: Douglas and McIntyre.

It is hard to imagine Canada’s economy without the United States. With a market of over 300 million people, the United States has always been a significant player when Canada’s economy grows or contracts. After all, 75% of Canadian exports go to the United States, 16 and of those exports 85% of the goods are Canadian. 17 These numbers make sense, though, when you consider the contributing factors. Canada and the United States share an adjacent border, a similar culture, and a common language. The United States also makes an efficient and effec- tive trading partner. The Canada–US trade relationship is supported by accessible railways, trucking, air services, and oceans linking the two nations to shipped goods.

Although trade had existed for many years, in 1988 the partnership became formal- ized under the Canada–US Free Trade Agreement (FTA). By 1994, the countries expanded their trading relationship to include Mexico. Subsequently, the agreement became known as the North American Free Trade Agreement (NAFTA).

Today, the Canada–US trade relationship remains unique. It represents the largest cross-border trading relationship between any two countries globally. 18 But what does this really mean? According to the Government of Canada, goods and services traded between the two countries totalled $740 billion in 2008—that’s about $1.4 million in trade per minute. 19 Canada’s exports to the United States make up about $306.6 billion, 20 an important part of our GDP, which was approximately $1.5 trillion in 2009. 21

But what does Canada trade with the United States, and what are the dominant industries? Over half of Canada’s food exports go to the United States, making our south- ern neighbour Canada’s leading agricultural export market. In recent years, Canada’s main exports to the United States were automobiles, machinery, mineral fuels, and oils. Accord- ing to the Government of Canada, “Canadians and Americans share the closest energy relationship in the world. Energy infrastructure—including oil and gas pipeline networks and electricity grids—is tightly integrated. Canada is the United States’ largest and most secure supplier of oil, natural gas, electricity, and uranium.” 22

Currently, Canada exports over 40% of its total annual production (GDP), compared to 25% a decade ago. This underscores the fact that Canada is considered to be a major trading nation. A key concern regarding our international business activity is whether we are selling more to other countries (exporting) than we are importing (buying from other countries).

A number of issues regarding our trade status have received much attention in the past decade or so: the FTA and NAFTA and the consequent increase in the degree of openness to international trade. As mentioned earlier, Canada’s traditional reliance on trade in unprocessed natural resources has received much criticism, and its reliance on US trade has been scrutinized.

22 Prime Minister of Canada, 2011.

24 P a r t 1 A F r a m e w o r k f o r S t u d y

So how “Canadian” is Canadian business? In other words, what proportion of the cor- porations doing business in Canada are actually controlled by Canadian sources? While the level of foreign ownership varies among different industries (for example, about 67% of chemical product and textile manufacturers are foreign owned, while only about 9% of communications companies are), the average level of foreign ownership is relatively high by world standards. Annual foreign investment in Canadian companies refers to ownership of assets like factories, land, buildings, machinery, equipment, and companies themselves.

So we have a pretty high level of foreign ownership, largely US-based, in Canadian corporations—but what difference does that make to the nature of business in Canada? That is, what are the implications of foreign investment? There is much debate about this topic. In fact, Canadians have traditionally been ambivalent when it comes to the issue of foreign investment. For some, interest in the Canadian economy is a good thing. We want to attract investors to our country to generate more business and more jobs. The source of ownership shouldn’t make a difference when the results are the same—more jobs for Canadians and more money invested in the Canadian economy.

What impact does foreign ownership have on the personality of our corporate sector? Keep in mind that these foreign-owned corporations are largely subsidiaries of US-based “par- ent” companies. One important consideration are the activities the corporation carries out to conduct its business—that is, strategic planning, research and development, marketing, and so on. Many foreign-owned firms, like the car manufacturers or the multinational oil compa- nies, operate Canadian subsidiaries largely to produce or simply market the product. These products are typically designed outside Canada, usually using imported components. These Canadian subsidiaries, then, do not perform the complete range of functions necessary to offer a product in the marketplace. These are the traditional so-called branch plants .

Some observers believe that we will continue to see the rapid spread of branch plants in Canada, with progressively less important activities being allocated to the Canadian subsidiary. This has led many critics to suggest that these subsidiaries are nothing more than “sales offices” for the US parent company. Mel Hurtig made the following critical observation regarding the significance of foreign ownership in Canada:

branch plants Subsidiaries (of companies in another country) that do not perform the complete range of functions necessary to offer a product in the marketplace. Typi- cally, subsidiaries defer responsibil- ity of higher-level strategic functions to the parent company.

In . . . just over 20 years, there were 11,380 companies in Canada taken over by non- resident controlled corporations . . . 569 companies a year on average. Or you can think of it as 3 companies every two days, and an average of 47 a month, EVERY month for the last 20 years! 23

23 US Energy Information Administration.

Some critics argue that we have built up a dependence on foreign capital to supply us with the funds for business development. While this financial assistance was welcome, it brought a major cost with it—the establishment of these branch plants and an economy that is approximately 30% foreign owned. It has been suggested that this branch-plant economy has impeded the development of an innovative or entrepreneurial spirit in Canadian business. In other words, there is a sense that, historically, Canadian managers have not been challenged to do the strategic planning, to engage in the research and

25C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

development, and to develop the technological expertise to add value to the present supply of products or services. However, we are witnessing the increasing presence of Canadian-owned and global competitors, and it is expected that Canada will continue to move beyond its history and carve a bigger niche in the global environment.

Political Forces in Canada The Canadian economic system has been described as a mixed system . This refers to the notion that while we possess a capitalist economy, government nonetheless plays an important role. In fact, government has historically played a critical role in the Canadian economy. (See Talking Business 1.3 .) In Canada, we have a long history of government involvement in business in the sense of promoting and protecting our industries. Tariffs

mixed system An economic system that involves a capitalist economy with an important govern- ment role. Most economies today are considered mixed systems.

TALKING BUSINESS 1.3

Jobs, Productivity, and Innovation: How Health Care Drives the Economy As one of the biggest recipients of public revenues, health

care plays a major role within Canada’s economic perfor-

mance. While most people are generally aware of the sector’s

high costs (over $200 billion, or about 11.7 percent of gross

domestic product in 2011), there is less understanding of its

economic benefits. The health care sector delivers economic

benefits on three levels: jobs, productivity and innovation.

First, the health care sector is a major employer. The sector

directly employs about 1.4 million physicians, nurses, and other

health care providers and clerical and administrative staff,

which represent about nine percent of total jobs in Canada.

Indirectly, the sector also supports thousands of additional jobs

through its supply chain: the purchase of medical supplies,

clinical equipment, and professional services. About 45,000

Canadians are employed in pharmaceutical, medicine, medical

equipment, and medical supplies manufacturing in Canada.

Therefore, directly or indirectly, the sector has a major influ-

ence on the careers of thousands of Canadians, many of

whom are highly qualified professionals who pay taxes and

purchase goods and services from all sectors of the economy.

Second, the health care sector contributes to a more

productive and engaged workforce. Productivity, how effi-

ciently goods and services are produced, is the single most

important determinant of a country’s per capita income

over the longer term. Countries with high productivity have

a superior standard of living. Unfortunately, this is an area

where Canada has faced challenges. In 2012, Canada’s

level of labour productivity (that is, the dollar value of out-

put per hour worked) was US$42, much lower than that of

the United States, at US$52. More worrisome is that despite

a broad and growing consensus that Canadian productivity

needs to be improved, the gap with the U.S. is widening,

not narrowing. Canada’s productivity level has fallen to 80

percent of the U.S. level from a high of 90 percent in the

mid-1980s. Efforts to improve labour productivity are

needed to sustain or improve Canada’s standard of living.

How does this relate to Canada’s health care systems?

According to Statistics Canada, Canadian workers lost an

average of 7.7 days from work in 2011 due to illness or

disability. Direct and indirect costs of disease and injury in

2000 were estimated at around $188 billion, a figure

that is likely to be higher now. Disease outbreaks are very

costly too. The Severe Acute Respiratory Syndrome

(SARS) drained billions of dollars from Canada’s economy

in 2003. Because health care services touch the life of

every Canadian, the sector plays a key role in decreasing

employee absence due to illness, stress, and disability,

which bring significant economic burden to Canada. Put

simply, healthier workers are more productive workers.

Third, the health care sector is a major pillar of science and

technology research. It also is a leader in putting the result of

research to work. Advancements in life sciences have resulted

in additional economic output of trillions of dollars that

exceeds health research and health care costs over the same

(continued)

26 P a r t 1 A F r a m e w o r k f o r S t u d y

period by orders of magnitude. For example, at the turn of

the 20th century, an individual had a life expectancy of 50

years. In 1961, the average Canadian could expect to live to

age 71, and in 2006, the estimated average life expectancy in

Canada was 80 years. This represents an impressive gain of 30

years of life over one century. These health gains represent

the benefits of improvements in determinants of health (e.g.,

education, income) but also health advancements which were

the product of research and innovation that was properly

translated into health care services. In the United States,

1970–2000 life expectancy gains have been estimated to be

worth US$95 trillion (US$3.2 trillion per year). Further improve-

ments in the treatment of cancer and cardiovascular diseases

are estimated to bring additional value in the magnitude

of billions of dollars to the United States. (See below Table 1.)

Table 1: Current Value of a 10 Percent Reduction in Mortality from Major Diseases (2004 US$ billions)

Major Cause of Death Males Females Total

All causes $10,651 $7,885 $18,536

Cardiovascular diseases $3,254 $2,471 $5,725

Cancer $2,415 $2,261 $2,676

Diabetes $237 $249 $486

Infectious diseases $500 $148 $648

Accidents and adverse

effects

$977 $421 $1,398

A 2008 report from the United Kingdom also highlighted

the value of advancements resulting from medical research.

It found that public investments in cardiovascular research

in the U.K.—conducted from 1975 to 1992—yielded

returns of about 39 percent. In other words, for each £1

invested in public cardiovascular research, the U.K. earned

£0.39 per year in perpetuity. This demonstrates that when

health research and development leads to health innova-

tions that are appropriately and timely integrated into

health and health care systems, it results in healthier and

longer lives, which creates more value than the investments

they require. Combined with the shift over the past century

from physical labour to knowledge work, this means that

Canadians have the ability to remain in the labour force for

longer and hence make a greater contribution to wealth

creation as well as consumption. The returns on research,

therefore, also contribute to productivity growth.

Despite its escalating costs, the health care sector may

be creating more value than it consumes. It is no exag-

geration to say that the Canadian health care system lies

at the heart of Canada’s national economy and innovation

system, both as a contributor of inputs and as an attractor

or demander of its outputs.

Source: Prada. G. (2013, April 2). Jobs, productivity and innova-

tion: How health care drives the economy. Reprinted with

permission from The Conference Board of Canada. Retrieved

from www.conferenceboard.ca/commentaries/healthinnovation/

default/13-04-02/jobs_productivity_and_innovation_how_

health_care_drives_the_economy.aspx.

TALKING BUSINESS 1.3 (continued)

on imported goods were designed to protect our domestic business by making the cost of foreign goods more expensive relative to those of Canadian goods. It can be argued that a large portion of Canada’s industrial development is due to protectionism through tariffs first imposed in 1879 by Sir John A. Macdonald’s National Policy.

Eventually, the government also offered direct incentives for industrial and resource development. Incentive programs were established to encourage managers to conduct business in a manner desired by the government. Managers may decide to, say, invest in new product development, engage in greater export activities, or locate in an underdeveloped region. Gov- ernment incentives will be offered to engage in such activities. Receiving government finan- cial support or reward for such activities would influence decisions to engage in these activities.

In Canada, an ongoing concern is the degree to which government can or should help businesses compete—whether in the form of direct subsidies, tax incentives, or some other form of protectionism. For example, one recurring controversy in recent years is the level of government subsidies to businesses operating in the global marketplace and government sup- port for research and development programs. For example, one controversy involved a dispute

27C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

regarding government subsidies to Canada’s aerospace giant Bombardier and its main com- petitor in the jet market, Embraer SA (Empresa Brasileira de Aeronáutica S.A.) of Brazil.

Taxation The government’s ability to levy taxes on corporations is another aspect of political forces acting on businesses. All profits earned by a Canadian resident corporation are subject to Canadian corporate income taxes, which are calculated on the basis of the company’s net profits. But how much tax should corporations pay?

Canada is often admired by other countries for its low corporate tax rate. Over the past five years, Canada has gone from having the highest tax rate to the lowest of the G7 countries. In 2012, the federal tax rate was further reduced to 15%, which is closer to Ireland’s 12.5%, one of the lowest tax rates in the world. When provincial tax rates are added, the combined corporate tax rate jumps to between 26 and 32%.

What are the benefits of low corporate income taxes? Clearly, businesses benefit by keep- ing more of their profits, but what are the benefits to the economy and the rest of society?

■ Long-term economic growth: Many economists and business leaders agree: Reduce the expenses of companies and the economy will grow. According to Jeff Brownlee, vice- president of public affairs and partnerships for Canadian Manufacturers and Export- ers, “to increase after-tax cash flow, leave more money in the hands of business to invest.” 24 In other words, if you give businesses money by reducing taxes, they will be able to purchase efficient machinery or expand a product line. Either way, it is a step in the right direction toward higher productivity and a better economy.

In 2008, the Organisation for Economic Co-operation and Development (OECD) researched the relationship between different types of taxes and economic growth. The OECD study concluded that corporate income tax was the most harmful tax out of personal income taxes, sales taxes, and property taxes because of the impact it has on long-term economic growth. One finding, for example, was that corporate income taxes had a negative impact on GDP per capita. 25

■ Improved competitiveness: Another benefit of low corporate taxes is improved com- petitiveness. Lower corporate tax rates generally mean lower costs for businesses. In turn, lower costs turn into lower prices for consumers. Lower costs also help busi- nesses be more competitive not only domestically but globally as well.

■ Increased wages and improved living standards: Economists today recognize that the cor- porate tax burden is ultimately passed on to other stakeholders in society. In a February 2011 paper, the Canadian Chamber of Commerce stated, “Business taxes are borne directly or indirectly by people—workers through lower wages, consumers in the form of higher prices for goods and services, and shareholders through lower returns.” 26 In one research study, the Oxford University Centre for Business Taxation examined over 55,000 European companies in nine countries and found that for every $1 increase in corporate taxes, a reduction in real wages occurred by 75%. 27

24 CBC News . (2011, April 15). Canada’s corporate income tax fight. Retrieved from www.cbc.ca/news/business/ story/2011/04/14/f-corporate-tax-cuts-for-against.html.

25 Hodge, S. (2011, May). Special report: Ten benefits of cutting the U.S. corporate tax rate. Tax Foundation, 192 , 2. www.taxfoundation.org/files/sr192.pdf.

26 CBC News , 2011.

27 Hodge, 2011.

28 P a r t 1 A F r a m e w o r k f o r S t u d y

But who actually pays the tax? Opponents of lower corporate taxes argue that if cor- porations pay less taxes then individuals will have to pay more. When individuals pay more tax, they have less disposable income to spend on goods and services; businesses will therefore profit less. Clearly, the debate on who should pay the tax is far from over.

Societal Forces in Canada There is much to be proud of with regard to Canadian society. In an OECD study, Canada ranked second out of 17 peer countries in education and skills (see Exhibit 1.6 ). What does this mean? Canada has a good public education system that provides the basic skills necessary for adults to enter the workplace. With one of the highest high school and college completion rates in the world, Canada is a leader in education.

Given our strengths in educating our population, Canadian society has the potential to create a productive and innovative business environment. Recent studies suggest that countries with more educated and skilled workers have a higher chance of economy pros- perity. According to the OECD Secretary-General, Angel Gurria, “better educational outcomes are a stronger predictor for future economic growth.” 28 Why? Generally, earn- ings will increase with each level of education achieved, giving individuals more income to spend on goods and services. Individuals are also better equipped as employees to con- tribute more knowledge to their organizations. In comparing education to earnings, Americans with a university degree earned $180 for every $100 earned by Americans with a high school diploma. Similarly, a worker with a college degree earned $114, whereas non–high school graduates earned only $65 for every $100 earned by high school gradu- ates. 29 Indeed, Canada is poised to earn a distinguished reputation on the world scene.

At the same time, it is important to consider how we can maintain and strengthen such a reputation. Perhaps central among the factors to consider is the manner in which we conduct business in this country—that is, the integrity of our business environment. Unfortunately, we have witnessed that Canada, like any other country, is not immune to scandal and corruption. In recent years, both the private and public sectors have been forced to confront a host of misdeeds that speak to the issue of corporate governance, social responsibility, and business ethics. The challenge for Canadian business leaders is to ensure that along with our industrial development comes an equally well-developed sense of corporate ethics and social responsibility.

In a recent article for the Ottawa Citizen , journalist Derek Abma 30 observed that Canadian business is at risk of losing its “clean cut” image if scandals continue to accumu- late. Abma cites a number of recent scandals, including a Vancouver-based mining com- pany. Bear Creek Mining sought to open a silver mine in Peru, which sparked a violent protest by local citizens who were concerned that the company’s activities would pollute

28 OECD. (2010, July 12). Education: Korea and Finland top OECD’s latest PISA survey of educational perfor- mance. Retrieved from www.oecd.org/newsroom/koreaandfinlandtopoecdslatestpisasurveyofeducationperfor- mance.htm. 29 The Conference Board of Canada. (2013). Education and skills. How Canada performs: A report card on Canada. Retrieved from www.conferenceboard.ca/hcp/details/education.aspx.

Education and Skills A A B B B B B B B C C C C C C C

Note: Data for the most recent year available were used.

D

Finland1 Canada2 Japan3 Switzerland4 Sweden5 Australia6 Germany7 Netherlands8 Belgium9 United Kingdom10 Denmark11 Austria12 Ireland13 France14 Norway15 United States16 Italy17

REPORT CARD

Exhibit 1.6 Country Comparison of Education and Skills

Source: The Conference Board of

Canada. (2013). Education and

skills. How Canada performs: A

report card on Canada. Retrieved

from www.conferenceboard.

ca/hcp/details/education.aspx.

Reprinted with permission

from The Conference Board of 

Canada.

30 Abma, D. (2011, July 2). Scandals pile up in world of Canadian business. Ottawa Citizen.

29C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

local water sources while providing few economic benefits. Five people died and about a dozen were wounded in clashes in 2011.

Sadly, Canadian companies have increasingly been appearing in the news in a less than flattering light. Calgary-based Niko Resources was found guilty in 2011 of bribing a government official in Bangladesh. The RCMP had been investigating the case against Niko for six years, along with at least 22 other ongoing investigations involving Cana- dian companies suspected of bribery. Elsewhere, an engineering firm based in Montreal (SNC-Lavalin Group) was recently exposed in the media as playing a role in building prisons for the Lybian regime of Muammar Gaddafi. In 2009, Toronto-based Barrick Gold (among the work’s largest gold miners) faced public embarrassment after Norway’s government pension fund sold off about $230 million worth of Barrick stock because of what it saw as irresponsible environmental practices of the mining company in Papua New Guinea.

Other socially irresponsible practices have been occurring in a host of industries and for many years in Canada. The Canadian oil sands industry in general has been criticized globally for its production of “dirty oil.” In terms of criticism, Canada has also been pointed out by the anti-corruption group Transparency International for being the only G7 country that continually provides “little or no enforcement” of the OECD’s Anti- Bribery Convention. 31

All those scandals may be “exceptions to the rule,” in that business in Canada nor- mally operates with integrity and with a social conscience. These scandals do not detract from the fact that we do have a lot to be proud of in terms of our Canadian business prac- tices. However, it would be foolish to ignore these events and to assume that they will never reappear. We need to better recognize that the societal context within which busi- ness operates must be fully addressed to ensure continued prosperity and success in our business sector.

CHAPTER SUMMARY Understanding the environment of business is the only way to get a sense of where we are headed in terms of future economic prospects. Whether you are currently a full-time stu- dent or are already in the workforce, an understanding of the context of organizations is a critical part of any intelligent person’s portfolio. The aim of the upcoming chapters is to shed more light on the environment of organizations and to consider the implications for the future of organizations. What are the prospects for business, and what are the chal- lenges we must confront? No organization operates in a vacuum, so the real world sur- rounding the organization must be addressed.

Indeed, within each external and internal force there are many factors that can posi- tively or negatively impact business, as seen in Exhibits 1.7 and 1.8 .

31 Norton Rose Group. (2012, March). Global anti-corruption developments: Annual review 2011, p. 18 . Retrieved from www.nortonrosefulbright.com/files/download-the-anti-corruption-annual-review-2011-65076.pdf.

30 P a r t 1 A F r a m e w o r k f o r S t u d y

Exhibit 1.7 The External Forces Framework: Considerations for Analysis

External Force Examples

Economic

a. State of the

economy

• Is the economy growing or slowing down?

• What stage of the business cycle is the economy in?

∘ expansionary (slow, moderate, high growth) ∘ peak ∘ contractionary (recession) ∘ trough • How is the economy affecting business? Are businesses expanding operations or downsizing?

b. Interest rates • What are the lending interest rates?

∘ Are they low, moderate, or high? • How are interest rates affecting business?

∘ low interest rates = lower financing costs ∘ high interest rates = higher financing costs

c. Currency rate • What is the domestic currency rate compared to other countries?

• Is the currency rate appreciating or depreciating?

• How is the currency rate affecting business?

∘ If the domestic currency is appreciating, ■ = more expensive for foreign countries to buy Canadian goods (exports)

■ = less expensive for Canadians to buy foreign goods (imports)

∘ If the foreign currency is appreciating, ■ = more expensive for Canadians to buy foreign goods (imports)

■ = less expensive for foreign countries to buy Canadian goods (exports)

d. Unemployment rate • What is the unemployment rate?

• How is the unemployment rate affecting business?

∘ low unemployment = more people working = increased spending power ∘ high unemployment = less people working = decreased spending power

e. Inflation rate • What is the inflation rate?

• How is inflation affecting business?

∘ low inflation = price level increasing at a slow pace ∘ high inflation = price level increasing at a rapid pace

f. National debt • What is the national debt?

• Is a country’s debt so high that it is creating economic instability in the country?

Competitive

a. Type of competition • What type of competition exists in your industry?

∘ perfect competition ∘ monopoly ∘ oligopoly ∘ monopolistic competition

b. Phase of the indus-

try in industry

life-cycle model

• What phase of the industry life-cycle model is your industry in?

∘ introduction ∘ growth ∘ mature ∘ decline

31C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

External Force Examples

c. Intra-industry

competition

• How competitive is your industry? (Low, moderate, or high?)

• How large is your company compared to your

competitors?

• Does your company dominate the industry?

• Did your company create an industry standard?

• Who are your competitors?

• How many competitors do you have?

• Do you have domestic and foreign competition?

• What opportunities and threats exist in your industry that can affect your company being more

competitive or less competitive?

Technological

a. Type of technology • What types of technology are used in your company’s industry?

• How is technology impacting or changing business?

∘ Work approaches ■ Videoconferencing versus in-person meetings

■ Tablets versus desktop computers

∘ Equipment ■ Manufacturing assembly line

■ Special computer-aided tools

∘ Electronics ■ Smartphones, tablets, robotics, etc.

∘ Telecommunications ■ Internet, phone service, etc.

∘ Processing systems ■ Computers, data processing systems, etc.

Political/Legal

a. Country stability • Are there wars, natural disasters, national debt, civil unrest, or other issues that threaten the

government and businesses being able to function?

b. Laws and

regulations

• How do municipal, provincial, federal, or international laws and regulations affect business

operations, projects, and activities?

c. Taxes • What taxes does your organization have to pay? For example, corporate tax, property tax, sales

tax, land transfer tax, tariffs on imported goods, etc.

d. Trade relationships • How is a country’s trade relationship with another country affecting business?

• Is there a free trade agreement (e.g., NAFTA) or trade

barriers (e.g., quotas and tariffs)?

• Does the relationship protect domestic business or open up the market to foreign competition?

(continued)

32 P a r t 1 A F r a m e w o r k f o r S t u d y

External Force Examples

e. Environmental fees • Are there environment fees that businesses need to collect and remit? For example, are there recy-

cling fees on designated electronic products or garbage collection fees?

f. Business incentives • What incentives does the government give businesses to encourage them to operate in a partic-

ular region, create jobs, increase profitability, or increase competitiveness?

• For example, in Canada, the Scientific Research and Experimental Development (SR&ED) tax credit for

eligible companies encourages research and innovation; subsidies (e.g., free cash or loans by govern-

ment) also support certain industries.

g. Crown corporations • Are there certain industries the government has control over that affect how your business

operates and competes? (For example, the Liquor Control Board of Ontario (LCBO), Canada

Post, etc.)

h. Deregulation/

privatization

• Are there certain industries the government is releasing control over that may affect how your

business operates and competes?

Societal

a. Societal customs,

attitudes, values,

ethics

• What does society think about certain issues (the environment, foreign-made goods, workers’

rights, health and safety issues, etc.)?

• What demands are consumers requiring businesses to adhere to that are driven by values, cus-

toms, attitudes, and ethics? (Corporate social responsibility, fair reporting, sustainability, etc.)

b. Demographics • Is the majority of the population young or old?

• How is the age of the population affecting consumer spending and demand for certain products

and services?

• How are demographics affecting or changing business?

c. Consumer

preferences

• What products and services are customers preferring and willing to pay for?

• Are consumer preferences changing? If so, why?

• How are consumers’ changing tastes affecting business?

Global

Includes all of the forces described above in an international context.

a. Political • Are political issues and events in foreign countries affecting how domestic companies do busi-

ness? (Country stability, laws, taxes, trade relationships, etc.)

b. Economic • How are foreign economic conditions affecting domestic businesses? (e.g., Will the debt prob-

lems of Europe affect the economy in Canada and the global economy?)

c. Technological • How do foreign technological innovations affect competition for Canadian firms? (e.g., iPhone

technology versus BlackBerry technology?)

d. Societal • How do Canadian societal values, attitudes, and expectations affect business operations in

other countries?

• How do foreign societal values, attitudes, and expectations affect businesses in Canada?

e. Competitive • How do foreign companies impact how domestic firms operate and compete?

Exhibit 1.7 The External Forces Framework: Considerations for Analysis (continued)

33C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

Exhibit 1.8 The Internal Forces Framework: Considerations for Analysis

Internal Forces Examples

1. People

a. Employment relationship (responsibilities toward labour)

i. Labour relationship

• employee or contractor

• Are you hiring employees or

contractors?

ii. Legal compliance

• Canadian Charter of Rights and Freedoms

• human rights laws

• employment equity legislation

• Are you abiding by all employment-related laws?

iii. Work perspective

• neoclassical perspective

• managerial perspective

• industrial pluralist perspective

• critical perspective

• What is your perspective on the governance of

work?

b. Leadership and managing people

i. Classical

• Frederick Taylor

• Henri Foyal

• Max Weber

ii. Behavioural

• Elton Mayo

• Mary Parker Follet

• Chester Barnard

• modern behavioural science

iii. Contingency theory

• size

• technology

• environmental uncertainty

• individual differences

iv. Modern behavioural science

• What management approach is best suited to

manage people in your organization and in your

industry?

2. Strategy

a. Business-level strategies

i. Cost leadership

• efficient-scale facilities

• cost reduction on overhead, marginal customer accounts, R&D,

marketing, general administration, etc.

ii. Product differentiation

• product features

• links functions

• location

• How should a company compete in a given market?

(continued)

34 P a r t 1 A F r a m e w o r k f o r S t u d y

Internal Forces Examples

• product mix

• links with other firms

• service

iii. Focus

• a particular buyer group

• a segment of the product line

• a narrow geographic market

b. Corporate-level strategies

Types of diversification

• related

• unrelated

• vertical integration

• backward integration

• forward integration

• What businesses or markets should a firm compete

in?

• How should these businesses or markets be man-

aged so they create synergies?

Michael Porter’s Five Forces Model

i. Threat of new entrants

• economies of scale

• capital requirements

• switching costs

• access to distribution channels

• cost disadvantages independent of scale

ii. Bargaining power of suppliers

iii. Bargaining power of customers

• switching costs

• undifferentiated products

• importance of incumbents’ products to buyers

• the number of incumbents relative to the number of buyers

iv. Threat of substitutes

v. Threat of existing rivalry

• lack of differentiation or switching costs

• numerous or equally balanced competitors

• high exit barriers

• What is the state of the industry?

• How competitive is the industry?

• How easy or difficult is it going to be to compete

and be successful?

The VRIO Model

• value

• rareness

• imitability

• organization

• How strong is the company compared to its

competitors?

• Are your company’s resources, products, and ser-

vices more valuable, rare, difficult to imitate, or bet-

ter managed?

SWOT Analysis

• strengths

• weaknesses

• opportunities

• threats

• What are the internal and external forces affecting

the company?

• What are the company’s strengths, weaknesses,

opportunities, and threats?

Exhibit 1.8 The Internal Forces Framework: Considerations for Analysis (continued)

35C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

Internal Forces Examples

3. Structure

a. Mechanistic

• narrow division of labour

• centralized decision making

• narrow span of control

• high formalization

b. Organic

• wide division of labour

• decentralized decision making

• wide span of control

• low formalization

c. Contingency theory

• strategy

• size

• technology

• environment

• What structure will best suit your organization?

• Do you need to be cost efficient or innovative?

• Is your company in a new industry or a mature one?

CHAPTER LEARNING TOOLS

Key Terms

attribute 16

Big Six 15

branch plant 24

change 5

competitive advantage 16

competitive forces 8

economic forces 8

external stakeholders 7

general environment 7

global forces 9

globalization 9

gross domestic product (GDP) 13

labour 5

leadership 4

knowledge workers 21

mixed system 25

organizational learning 12

political forces 10

societal forces 10

specific or task environment 7

strategy 4

structure 6

sustainability 11

technological forces 9

triple bottom line 11

Multiple-Choice Questions Select the best answer for each of the following questions.

Solutions are located in the back of your textbook.

1. The internal challenges of business consist of all of the following except

a. labour b. unions

c. leadership d. structure

2. An organizational structure involves a. a pattern of relationships between individuals in var-

ious roles or positions

b. a formal hierarchy of authority

c. rules and procedures

d. all of the above

3. Outside the organization, challenges that exist include all of the following except

a. political forces

b. strategic forces

c. competitive forces

d. societal forces

4. The general environment involves a. strategic forces b. labour forces

c. economic forces d. structure forces

5. An example of an external stakeholder is a(n) a. creditor b. employee union

c. customer d. all of the above

36 P a r t 1 A F r a m e w o r k f o r S t u d y

6. The availability of telework is primarily the result of a. societal forces

b. political forces

c. competitive forces

d. technological forces

7. All of the following belong to the specific environment except a

a. customer b. city government

c. newly formed union d. political force

8. An example of a component of the general environment is the

a. political force b. economic force

c. environmental force d. both a and b

9. Globalization can be defined as a. the integration of world economies

b. the process of creating and negotiating trade agree-

ments

c. the globalization of markets

d. both a and c

10. Changing consumer tastes is an example of the a. technological force b. societal force

c. economic force d. competitive force

11. The “invisible hand” to ensure the market works effec- tively is also known as

a. competition

b. economic forces

c. government policies and regulations

d. all of the above

12. Organizational learning involves a. adapting to the environment

b. learning from the organization’s people

c. contributing to the learning of the wider community

d. all of the above

13. A worker with specialized education, skills, and training is sometimes called a

a. high school graduate b. knowledge worker

c. professional d. both b and c

14. Canada’s exports to the United States make up approxi- mately ____ of its total exports.

a. 30% b. 50%

c. 75% d. 10%

15. Canada’s economic system has been described as a a. free market system b. mixed system

c. socialist system d. communist system

Discussion Questions 1. Identify and explain four internal challenges for business.

2. Describe the difference between the general environ- ment and the specific environment.

3. Identify and describe the six external challenges for business.

4. Provide five examples of an external stakeholder.

5. How can the political force influence business?

6. How can the societal force influence business?

7. Compare and contrast competitive force and technologi- cal force. How do they relate to one another?

8. Why is organizational learning important to a company’s success?

9. How is the resource industry impacting Canada’s economy?

10. Does Canada have a competitive advantage?

CONCEPT APPLICATION FACEBOOK: WHEN YOUR FRIENDS ARE WORTH A BILLION!

By September 2012, Facebook had accomplished a major milestone: It had reached 1 billion users worldwide. Put another way, one seventh of the world’s population has a Facebook account. Since Facebook was first launched in 2004, critics have doubted whether Mark Zuckerberg, a 21-year-old Harvard dropout, could make any money by providing a free networking service on the Internet. After all, Facebook began in a Harvard dorm room and became successful because of the exclusivity it offered. It was a network built for just college students; therefore, a certain amount of privacy was already built in.

37C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

Case Continued >

Although Facebook has typically earned only a frac- tion of its principal rival, Google, the company took in an impressive $5 billion in revenue in 2012 (one tenth of what Google earned). How did Facebook get to be so rich?

The vast majority of Facebook’s revenues comes from advertising. What is so appealing to advertisers? It’s sim- ple—they can tailor ads for each user based on all the per- sonal information a user is willing to share. In addition, Facebook allows advertisers to target users’ friends, who are more likely to respond favourably to an ad when they know that their friend has endorsed that brand or simply “checked in” at a store.

If you’ve used Facebook you’ll know that advertise- ments appear on the border of the screen. Information is gathered about you from your “likes” and your activity on the site. This information is used to tailor advertisements for you whenever you visit the site. The obvious question is, “So what?” How effective are these tailored ads for the advertiser? There is something called a click-through rate, or CTR, which is the number of times a user clicks on an ad for every 1 million times it’s seen. What is the CTR rate for Facebook? It is about 400—that is, about 400 users are clicking ads for every 1 million page views. This is much lower than many other websites, so why bother paying to adver- tise on Facebook? The answer is because Facebook generates high traffic and offers a pow- erful venue for ads. Even if most users don’t click on the ads, brand awareness will be built.

Another source of revenue for Facebook is through online games supplied by compa- nies like Zynga. These games have attracted millions of users who pay real money for in- game items. Supplier companies like Zynga earn their revenue though these in-game purchases, and Facebook gets a percentage of the profits.

Today, some observers call Zuckerberg a genius with a little bit of luck, but many crit- ics argue that Facebook is simply a virtual space that doesn’t have anything to sell except information about its customers.

Facebook’s leadership team, however, sees things differently. The average age of its executives is under 45, and Facebook recently increased its global workforce to over 4,600—still a lean company for its revenue size.

Since the company went public in May 2012, the share price dropped from US$38 to less than US$20, 32 leading shareholders to question whether the company can continue to grow. Some disgruntled shareholders have even filed lawsuits against Facebook, ques- tioning the validity of its initial public offering (IPO) valuation. But how do you grow a company that already has a billion customers?

Keeping members interested and coming back is critical to maintaining market share. Certainly, clicking “like” or “poke” was interesting at the beginning, but like all technol- ogy features, these, too, get outdated fast.

32 Vance, A. (2012, October 4). Facebook: The making of 1 billion users. Businessweek . Retrieved from www. businessweek.com/articles/2012-10-04/facebook-the-making-of-1-billion-users ; Lee, D. (2012, October 5). Face- book surpasses one billion users as it tempts new markets. BBC News . Retrieved from www.bbc.co.uk/news/ technology-19816709

AP Photo/Paul Sakuma

38 P a r t 1 A F r a m e w o r k f o r S t u d y

Unlike other tech companies, Facebook doesn’t do controlled testing of its technolo- gies. According to a Businessweek article,

engineers race to put up new features, see if they work, and make tweeks to fix them if they don’t. Even trainees who haven’t finished their six-week indoctrination program are asked to work on the live site . . . [however], the learn on-the-go philosophy regularly blows up in Zuckerberg’s face. He and his team periodically revamp Facebook’s privacy policy, triggering a predictable chain reaction: consumer outrage, company walkback, adjusted policy, re-release, lessened outrage, and so forth until the furor dies down. . . . [But], these iterations are apt to leave lasting damage to Facebook’s reputation. 33

So far, Facebook has tried to minimize this. In fact, Facebook has slowly started charg- ing customers for one service (sending messages to new people, or “nonfriends”), but the social networking site doesn’t want to lose customers to similar companies such as Google+, Twitter, and LinkedIn. 34

In addition, gaining new regular members is no easy task. Privacy concerns are still a big issue for many users. Many parents of young teens are either monitoring or limiting their children’s social media usage because of cyberbullying, privacy, and other safety and security concerns. And corporations are using Facebook to do background checks on potential new employees. Certainly, there have been numerous newspaper stories of peo- ple being fired for their inappropriate photos, status updates, and other public activity on Facebook. 35

So where do Facebook’s next 1 billion members come from? Indeed, growth in North America and Europe has started to level off. According to CNN Money, “less than 20% of Facebook’s users live in the U.S. and Canada, but those users account for 48% of advertis- ing revenue that Facebook took in last quarter.” 36 Zuckerberg is hoping this will change, but there are still challenges ahead. Facebook has been unable to prosper in one of the world’s largest markets, China, because of government censor restrictions. Instead, China’s 1.3 billion citizens use local social media sites such as Sina Weibo, Renren, and Tencent. 37

Russia is another market where local sites are still the choice for its users. VKontakte is one Russian network with over 100 million users, compared to Facebook’s mere 7 million users in the same region. 38

33 Vance, 2012.

34 Shaughnessy, H. (2013, April 8). Facebook extends charging for messages. Great move! Forbes. Retrieved from www.forbes.com/sites/haydnshaughnessy/2013/04/08/facebook-extends-charging-and-that-is-good . 35 Ramirez, A. (2010, May 28). What Facebook learned from Apple and what we can learn from Facebook. Executive Street. Retrieved from http://blog.vistage.com/business-innovation/what-facebook-learned-from- apple-and-what-we-can-learn-from-facebook 36 Smith, A., Segall, L., & Cowley, S. (2012, October 4). Facebook reaches one billion users. CNN Money. Retrieved from http://money.cnn.com/2012/10/04/technology/facebook-billion-users/index.html 37 Smith, Segall, & Cowley, 2012.

38 Lee, 2012.

39C h a p t e r 1 E x p l o r i n g C a n a d i a n B u s i n e s s : A C r i t i c a l A p p r o a c h

Given these challenges, how is Facebook trying to change? In 2013, Facebook sig- nificantly increased its mobile ad presence, which earned close to $1 billion in mobile ad revenue. The company also recently entered the mobile phone market itself by introduc- ing its first smartphone, the HTC First. While Zuckerberg was attempting to build a better mobile experience, he recognized that an increasing number of Facebook users access the site from their mobile phones and tablets, where ads need to be targeted. 39 “We’re picking these big investments because I think these are important areas for us to focus on,” said Zuckerberg. 40

David Ebersman, Facebook’s chief financial officer, explained, “We’re pleased with our progress in product development and with our financial results as well. Mobile has the opportunity to be huge for Facebook if we execute well and continue to attract mobile users and develop valuable mobile monetization products.” 41

What else is Facebook doing right? It is still the top choice among business users as well. According to one survey, Facebook is still the preferred platform among 85% of social media professionals. 42

Since social networking is a relatively new industry, many organizations are still learning how Facebook and other social media sites can best achieve their goals. Clearly, Facebook is also being used to advertise products, organize protests, and provide awareness on social issues—and now it is selling products, too. Academics of different disciplines are closely watching how social media is beginning to change life in North America as we know it. “It’s really humbling to get a billion people to do anything,” Zuckerberg says. 43

Questions

1. What elements of the external and internal environment do you think contributed to Facebook’s success?

2. Which elements of the external and internal environment are beginning to create challenges for Facebook?

3. Which force must Facebook work the hardest to address to continue to prosper? Why?

39 Metz, R. (2013, April 10). The first Facebook phone: A little too much information. MIT Technology Review . April 10, 2013. Retrieved from www.technologyreview.com/news/513566/the-first-facebook-phone-a-little-too- much-information 40 Womack, B. (2013, May 2). Facebook revenue exceeds estimates on mobile advertising. Bloomberg . www.bloomberg.com/news/print/2013-05-01/facebook-revenue-exceeds-estimates-on-mobile-advertising.html 41 Womack, 2013.

42 Shaughnessy, H. (2012, October 4). Facebook’s 1 Billion Users: Why the Sky is Still the Limit. Forbes . Retrieved from www.forbes.com/sites/haydnshaughnessy/2012/10/04/facebooks-1-billion-users-why-the-sky-is- still-the-limit 43 Vance, 2012.

Chapter 2 The Employee–Employer Relationship What Responsibilities Do Bosses Have to Their Employees?

PART 2 THE INTERNAL CHALLENGES

Canada’s society and its economy can be significantly influ-

enced by how work and employment are organized. This

chapter examines the nature of work, employment and the

labour-management relationship. Workers are interested in

maximizing the income they receive from the sale of their

labour, whereas businesses usually desire to maximize

profit. These two objectives can clash, creating conflicts

that can have negative effects on productivity and profits. In

our examination of the labour relationship, we will consider

perspectives that shape debates about how that relation-

ship should be governed. Should businesses and workers be

free to negotiate conditions of work, or should the govern-

ment closely monitor and influence those conditions? We

will also identify the obligations that organizations have to

diverse members of the labour force.

Learning Objectives

After studying this chapter, you should be able to 1. Discuss the meaning and significance of employment and

explain how it differs from other forms of work arrangements.

2. Explain the difference between the standard employment

and the nonstandard employment relationship.

3. Identify and explain the main perspectives that shape

debates about the appropriate role of markets, manage-

ment, unions, and legislation.

4. Explain how we balance the interests of employers and

employees when employment relationships are terminated.

5. Identify and explain the business responsibilities and oppor-

tunities within Canada’s diverse labour force environment.

40

Konstantin Chagin/Shutterstock

THE BUSINESS WORLD Is Working for Free Illegal?

Would you work for free to gain work experience? Many Canadian students who are trying to secure a job in their chosen career would answer “yes.” Anya Oberdorf is one graduate who took two unpaid internships with different employers in the hopes of getting a full- time job in the publishing industry. While she gained valuable experience, she wasn’t offered a permanent role. “My experience has been really frustrating,” said the Toronto graduate. “I can’t afford a third internship, but I don’t want to sit around at home either.”1 Certainly, students have bills to pay such as rent, groceries, and student loan payments. But how do you pay your bills when you can’t find a job?

A group of University of Toronto students have gone to Ontario’s Minister of Labour to end a growing practice of unpaid internships in Ontario and across the coun- try. While the legal interpretation is more complex, an internship is generally referred to as on-the-job training with an employer to provide an individual with practical work experience. The University of Toronto Students’ Union (UTSU) argues that approxi- mately 300,000 entry-level positions are being illegally misclassified as internships, trainee positions, or nonemployee work so that employers can avoid paying recent grad- uates for their hard work.

Indeed, very little is known about internships. The Ministry of Labour doesn’t regulate or keep statistics about interns or internship programs. “You won’t find the word ‘intern’ in our employment laws at all. It’s an industry term,” said David Doorey, employ- ment law professor at York University.2 Many observers, however, agree that students working for free is nothing new. While volunteer work in nonprofit organizations has helped students gain experience, many lawyers argue internships are different.

While providing students with work experience is clearly beneficial, the increasing number of unpaid internships can have a negative effect on the economy. Unpaid work can drive wages down and lead to higher unemployment levels. Currently, graduates face an 18% unemployment rate—more than double the national average. Unpaid work also means interns cannot pay down their student debt, collect unemployment insurance, or contribute to the Canada Pension Plan. With an estimated 300,000 unpaid interns work- ing in Canada, this also means less consumer spending. The problem is that students need work experience, but employers don’t always have the resources to hire them.

Proponents of internships argue that a bridge is needed between textbook knowledge and real-life experience, and internships help meet this missing component. While charitable institutions offer volunteer opportunities, this does not necessarily help stu- dents gain meaningful experience in their field of study.

Lauren Friese, founder of TalentEgg, a website that helps students find jobs, believes that students should be careful when accusing an employer of illegal activity, especially since students benefit from these programs: “Without internships—whether they’re paid

1 Oved, M. (2013, March 5). Unpaid internships: The most precarious work of all. Toronto Star. Retrieved from www.thestar.com/news/gta/2013/03/05/unpaid_internships_the_most_precarious_work_of_all.html. 2 Oved, 2013.

41C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

42 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

or unpaid . . . there is absolutely no way for those young people to get the experience they need to find that first meaningful career.”3

Provincial labour laws vary across the country, making the issue even more com- plex. Moreover, internships are not well-defined or regulated, leading to legal loopholes that allow employers to take advantage of students who are desperate to find meaning- ful work.

HootSuite, a Vancouver social media company, was recently criticized over its intern- ship practices because it did not comply with British Columbia’s Employment Standards Act. In British Columbia, the law defines internship and practicum differently. An intern- ship is “on-the-job training offered by an employer to provide a person with practical experience.” A practicum, on the other hand, involves a formal education process and does not have to be paid.4

Ryan Holmes, Hootsuite’s CEO, quickly responded to the growing online complaints: “Recently, I learned about some concerns that a few of our internship job postings may not be in compliance with the local laws,” Holmes wrote. “I appreciate those who have taken the time to bring this to our attention and we will immediately review this inter- nally . . . When we created the internship program, I believed we were doing the right thing by offering the opportunity for young people to add experience to their résumé and join a Vancouver success story.”5

Certainly, the practice of internships is growing at a time when many employers are also increasingly hiring temporary and contract workers in Canada because of increasing costs and other competitive pressures. A report by the Law Commission of Ontario indi- cated that existing laws do not adequately protect unpaid workers.

The U of T student group contends that the province’s Employment Standards Act (ESA) “disfranchises students, trainees, interns, and young workers by either par- tially or completely exempting them from employment standard protections.”6 Under Ontario labour law, many workers who are classified as people in an apprenticeship, a training program, or a co-op are not legally “employees.” Other provinces have simi- lar issues.

“It may be time for governments to consider introducing a permit system,” says Doorey. “This would allow the government to verify that internships are not being used as a method to obtain free labour.” Nav Bhandal, a labour and employment lawyer, says it is difficult to interpret what the law means since there are few cases of student interns suing for wages. Furthermore, students who need work experience and a job reference for future employment don’t want to file complaints.7

3 Freeman, S. (2013, April 18). Unpaid internships: U of T students’ group calls for ban, says 300,000 illegal interns working in Canada. Huffington Post. Retrieved from www.huffingtonpost.ca/2013/04/18/unpaid-intern- ships-ban-canada_n_3103664.html. 4 Hager, M. (2013, April 8). HootSuite faces online backlash over unpaid internships. Vancouver Sun. Retrieved from www.vancouversun.com/HootSuite+faces+online+backlash+over+unpaid+internships/8209279/story.html. Reprinted by permission. 5 Hager, 2013. 6 Freeman, 2013. 7 Oved, 2013.

43C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

So what are the current laws? While there are no specific laws regulating “interns,” the following from the employment standards of three of Canada’s largest provinces may help current and future interns become more aware of their rights to compensation:8

In British Columbia, the Employment Standards Act defines employee broadly, as “a person an employer allows, directly or indirectly, to perform work normally performed by an employee” and “a person being trained by an employer for the employer’s business.” Many unpaid interns would fit one or both of these definitions. The Employment Stan- dards Branch has also produced an Interpretation Guidelines Manual which explains that an internship is on-the-job training by an employer to provide a person with practical training, and that if an intern falls within the definition of employee and performs services for an employer, then the intern must receive at least minimum wage.9

In Alberta, under the Employment Standards Code, an employee is “an individual employed to do work who receives or is entitled to wages.” In this case, the intern must be paid at least minimum wage unless one of the three following exceptions apply: The work is part of a formal training program approved by Employment Standards, part of a program approved by the Minister of Enterprise and Advanced Education or the Minister of Human Services, or part of an off-campus program that falls under the School Act.10

In Ontario, according to the Employment Standards Act, 2000, there are multiple definitions of what an employee is. Perhaps the ones that most describe interns are these two: “a person who receives training from a person who is an employer” and “a person who supplies services to an employer for wages.” If an individual is performing work in Ontario for another person and is not in business for themselves, then that individual is an employee, and should be paid at least minimum wage.11

THE LABOUR ENVIRONMENT AND CANADIAN SOCIETY In modern industrial societies, most people depend on income from the sale of their labour to survive. As demonstrated in the discussion of internships in The Business World vignette, work is also a central means by which wealth is distributed in a capitalist economy. It is also an important aspect of personal self-identity and self-worth in many societies—our jobs

Objective 1 Discuss the meaning and significance of employment and explain how it differs from other forms of work arrangements.

8 Based on Gowling WLG. (2014). Are unpaid internships legal in Canada? Retrieved from https://gowlingwlg.com/ en/canada/insights-resources/are-unpaid-internships-legal-in-canada- 9 These materials contain information that has been derived from information originally made available by the Prov- ince of British Columbia at: http://www.bclaws.ca/ and this information is being used in accordance with the Queen’s Printer License – British Columbia available at: http://www.bclaws.ca/standards/2014/QPLicense_1.0.html. They have not, however, been produced in affiliation with, or with the endorsement of, the Province of British Columbia and THESE MATERIALS ARE NOT AN OFFICIAL VERSION. 10 From Alberta Employment Standards Code. © Alberta Queen’s Printer, 2014. Retrieved from http://www.qp. alberta.ca/documents/Acts/E09.pdf 11 From Ontario Employment Standards Act, 2000. © Queen’s Printer for Ontario, 2012. Retrieved from www. ontario.ca/laws/statute/00e41. These materials are not an official version.

44 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

help define who we are and how others perceive us. For these reasons, the way in which a society manages the labour relationship tells us a lot about that society’s values and beliefs.

The nature of work varies over time and space. The labour environment in Canada differs from those in many economically developing countries and from those that existed a generation ago. For example, as we will discuss later in this chapter, Canada’s labour force is substantially more diverse than in the past. This creates both challenges and opportuni- ties for Canadian businesses and also for Canadian policymakers, whose job it is to develop policies that will promote efficient business and job growth while also protecting workers and promoting the sustainable distribution of wealth necessary for a healthy society and economy. The range of options policymakers perceive as sensible to create or maintain this complex balance is influenced by their perspective on work and the role of markets and government regulation of business. We will discuss these various perspectives below.

First, we need to understand what we mean by work and employment in the Canadian context.

Distinguishing Work and Employment Since the 20th century, the dominant model of organizing work has been employment. Employment is a form of work in which a person (an employee ) is dependent on and mostly subservient to an employer . In an employment relationship, the employer is assumed to have control over the methods of production, the unilateral authority to decide what and how much to produce, and the right to direct when, where, and how the employee is required to perform his or her job. The employment relationship is governed by an employ- ment contract , which may set out specific rules, obligations, and rights applicable to the employer and employee and is usually enforceable in a court of law, just like other con- tracts are. At the core of the employment relationship is a basic exchange: Employees sell their labour in exchange for compensation, usually in the form of wages and perhaps ben- efits of some sort. Employment can be full-time or part-time and indefinite in duration or for a fixed period of time—for example, it can last 50 years, or a few hours.

The Employment Contract However, employment is just one of many ways that work can be organized. There are many people who work but who are not employed. For example, independent contractors or the self-employed are not “employees.” They still provide labour services in exchange for compensation, but they are running their own business rather than serving as an employee for another business or person. Some people are partners in a business rather than employees. Partners also sell their labour, but they are part owners of the business and not its employees. Partners and independent contrac- tors earn revenues , not wages. Others obtain work through temporary placement organi- zations , which assign them to work for some other business. Whether these “temp” workers are employees, and if they are who employs them, can be complex questions to answer. Others are categorized as unpaid volunteers or interns to distinguish their situa- tion from employment. See the discussion in Talking Business 2.1 .

Whether a work arrangement is characterized as employment or as some other form of business arrangement has significant implications in Canada. That is because many legal rights and entitlements are tied to the existence of an employment relationship. For example, Canadian governments have enacted a considerable amount of legislation to regulate employment based on the theory that employees require government protection

employment A relationship between an employer and an employee involving an exchange of labour power (work) for something of value, such as wages or benefits.

employment contract A contract that defines the terms and conditions of a contractual relationship between an employer and an employee. The contract may include reference to services to be performed, working hours, compensation, and other work-related obligations of the employer and the employee.

employee A person hired by an employer to perform work accord- ing to the terms of an employment contract.

independent contractors Independent contractors or the self- employed provide labour services in exchange for compensation. They run their own businesses rather than serving as an employee for another organization or person.

partners Individuals who share part ownership in a business. There can be two or more partners in a partnership.

temporary placement organization A business that helps match workers looking for jobs with businesses that require temporary help. Also called an employment agency.

volunteer An unpaid individual who performs services for an orga- nization voluntarily. A volunteer is not an employee under the law.

intern A worker who receives on- the-job training at a workplace. The internship may or may not be a for- mal requirement of an educational program and can be paid or unpaid. Whether an intern is considered an “employee” and is therefore enti- tled to legal entitlements available to employees in Canada, such as a minimum wage, depends on how a province’s employment standards laws define an employee. Some unpaid internships are unlawful, while others are not.

45C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

Are unpaid interns illegal in Canada? The answer is sur-

prisingly complicated, because governments are trying to

balance a variety of competing policy interests.

On the one hand, employers could easily exploit a law

that permitted them to simply call people interns and thereby

avoid employment standards laws. Also, unpaid interns

could replace real jobs, which is not good for the economy.

On the other hand, the state wants young people to gain

work experience, and some employers who would not oth-

erwise provide workers with experience to develop skills

might allow interns to gain some experience by hanging

around the workplace if they don’t have to pay them. There-

fore, the state is trying to write a law that protects against

the first two “bad” aspects of internships while permitting

the third “good” aspect. Try writing a law that does that!

You have to start with the question of whether the interns

are “employees” under the employment standards legisla-

tion, since only “employees” are covered by the Employment

Standards Act (ESA). Section 3(5) of the Ontario ESA excludes

from the Act, “an individual who performs work under a pro-

gram approved by a college of applied arts and technology or

a university.” So that’s easy: If the internship is part of a higher

education co-op program, then the Act does not apply.

Then things get more complicated. The Ontario ESA

defines an “employee” (in section 1(1)) as follows:

“employee” includes,

a. a person . . . who performs work for an employer for wages,

b. a person who supplies services to an employer for wages,

c. a person who receives training from a person who is an employer, as set out in subsection (2) . . .

Subsection (2) then says (with my comments added):

(2) For the purposes of clause (c) of the definition of

“employee” in subsection (1), an individual receiving

training from a person who is an employer is an

employee of that person if the skill in which the indi-

vidual is being trained is a skill used by the person’s

employees, unless all of the following conditions are

met (note that all of these conditions must be met):

1. The training is similar to that which is given in a vocational school.

TALKING BUSINESS 2.1

Are Unpaid Interns “Employees”? [What do you think a “vocational” school means?

Well, it almost certainly does NOT include getting

coffee, answering phones, and running errands

for some idiot who thinks an “intern” means

“personal slave.” Do you know any colleges that

teach “coffee making” or “errand running”?]

2. The training is for the benefit of the individual.

3. The person providing the training derives little, if any, benefit from the activity of the individual

while he or she is being trained.

[So, numbers 2 and 3 together mean that the

purpose of the internship/training is to provide a

benefit for the intern, but not the person/entity

providing the training. Thus, if the person does

“real” work, that the employer would need to

have hired people [to] do, then the intern begins

to look a lot like an “employee.”]

4. The individual does not displace employees of the person providing the training.

[This clearly catches an employer who lays-off an

employee and gives their work to an “intern.” If

that is done, the intern is an “employee.” Does

“displace” also cover an employer who uses an

intern instead of a hiring a new “employee”?]

5. The individual is not accorded a right to become an employee of the person providing the training.

[This creates an incentive for employers to tell

employees that they will NEVER get hired into a

real job. Is that a good policy? It also means that

when the possibility exists for the intern to be

hired at the end of the intern period, the person

is an “employee.”]

6. The individual is advised that he or she will receive no remuneration for the time that he or

she spends in training.

[This seems to mean that if an intern is paid any-

thing, then she is an “employee” under the ESA. An

intern is someone who is paid “no remuneration.”]

As you can see, whether or not an “intern” is an

“employee” under the Ontario ESA depends on all of the

circumstances as applied to these criteria. The rules would

(continued)

46 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

certainly make someone an “employee” if they are

retained to do valuable work for the employer that but for

the “intern” would have to be done by either an employee

or some other paid independent contractor. The law is

intended to exclude from ESA protection only real, legiti-

mate training programs designed to educate the intern.

The employer is supposed to be doing a social service by

exposing the worker to the “real” workplace. It is not

supposed to be a system in which employers can get

cheap or free labour.

I suspect there are a lot of employees in Canada being

improperly called “interns” by their employers. Are you

one of them?

Source : Excerpted from Doorey. D. (2010, September 27). Law of

Work [Web log]. Retrieved from http://lawofwork.ca/?p=2169 .

because of their vulnerability to the employer. Employment standards legislation is one example. It entitles employees to a minimum wage, overtime pay, mandatory time off and holiday pay, and notice of termination among other benefits. None of these entitlements apply unless the arrangement is characterized as employment. Similarly, human rights laws prohibit discrimination in employment relationships, and access to unemployment insurance, public pension schemes, and workers’ compensation benefits are often contin- gent upon a worker having been employed for a period of time prior to making their claim for benefits. Tax systems also treat employees and nonemployees differently—nonemployees can deduct business expenses from their taxable income, whereas employees cannot.

From a business perspective, there may be advantages to using workers who are not employees of the business. A business that uses independent contractors or temporary placement workers may avoid employment standards laws or the requirement to pay insur- ance premiums to workers’ compensation systems, for instance. An employer must usually provide their employees with notice of termination in Canada before they can end an employment relationship. By not employing workers, businesses can avoid this potentially costly requirement and adjust more quickly and with less cost to economic downturns.

On the other hand, there may be business benefits associated with the employment relationship as well. According to human resource management literature, employers can maximize worker effectiveness by designing workplace reward systems that recognize and promote loyalty and commitment. One way to do this is to promise workers job security while granting them good pay and benefits. Employers can benefit from having long-service employees who acquire knowledge and skills in the performance of their jobs. The employ- ment relationship may be more likely to foster worker commitment than a model in which workers answer to another employer or work for themselves. Businesses need to weigh these factors when deciding whether to arrange their labour force needs by using employ- ees or retaining independent contractors or businesses to perform the work needed.

What Is an Employee? What distinguishes an employee from an independent contractor? This is a legal question, and it is answered by courts and administrative tribunals tasked with interpreting employment- related statutes. Factors that are considered in deciding whether someone is an employee or an independent contractor include the following:

■ Degree of control: Independent contractors can usually determine the hours they work and the manner in which the work is performed, and can usually hire other people to

TALKING BUSINESS 2.1 (continued)

47C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

perform the work. An employee, on the other hand, is usually told when and how to do the work and is subject to supervision of some sort.

■ Degree of economic risk: An independent contractor assumes the risk of nonpayment of bills by customers, loss of customers, as well as the potential benefit of profits. An employee is usually paid their wages even if a customer does not pay their bills (the risk of nonpayment is the employers’), but they also do not usually share directly in profits.

■ Degree to which the worker performs an essential service for an organization: A person who performs an integral task for an organization is more likely to be perceived as an employee than someone who performs a task that is peripheral to the organization’s business. For example, a chemist is more likely to be perceived as an employee of a chemical company than a person retained to mow the company’s grass once a month.

■ Degree to which the organization provides the necessary tools: Independent contractors are more likely to own their own tools, whereas employees are more likely to have the tools provided to them by their employer.

A court or tribunal may consider one or more of these factors in determining whether someone is an employee or not. At its core is a basic question: Does the worker look more like a person who is in business for herself or for someone else?

The fact that a contract might say that a person is “not an employee” will not be bind- ing on a court or tribunal. Courts look past that contract language and consider the above factors. Why do you think this is so? The answer is that courts are concerned about workers being taken advantage of by employers. Courts know that employers most often write work contracts, and workers often just sign on the dotted line. If employers could just include a sentence in every contract saying that the worker is “not an employee,” then it would be very easy to avoid all of the rules and laws that are designed to protect employees because of their economic vulnerability. Whether these laws are actually necessary to protect employees, and whether they help or harm businesses, the economy, and society, are issues that have been debated for as long as people have been paid to perform work.

From Standard to Nonstandard Employment Relationships The period from approximately the 1930s to the 1980s was the golden age for the employment relationship in Canada. During that period, the standard employment relationship (SER) dominated the economic landscape. The SER is characterized by regular, full-time hours at a single employer, often spanning an entire working career. Employees working under an SER receive periodic pay raises and their employers usually provide health benefits and pension plans. The SER functions in the shadow of an extensive array of government regulation that guides the relationship and is underpinned by a strong social security net that provides protec- tion to employees whose employment ends for one reason or another. For example, an employee who is laid off due to lack of work is entitled to unemployment insurance benefits, and an employee injured at work is entitled to workers’ compensation benefits. Unemploy- ment and workers’ compensation benefits are funded by mandatory employer contributions.

Since the 1980s, however, the SER has been disintegrating as the dominant form of work. Large segments of the working population in Canada today work under arrangements that are frequently described as nonstandard employment (NSE) . NSE is less stable and is character- ized by part time, temporary, or variable working hours; lower pay; fewer employer-provided benefits; shorter job tenure; and no access to collective bargaining. A 2009 study of Canadian

Objective 2 Explain the difference between the standard

employment and the nonstandard

employment relationship.

standard employment relationship (SER) A form of employment relationship character- ized by regular, full-time hours at a single employer, often spanning an entire working career. Employees working under an SER usually receive periodic pay raises, and their employers usually provide health benefits and pension plans.

nonstandard employment (NSE) A less stable form of employment than the SER that is characterized by part-time, tempo- rary, or variable working hours; lower pay; fewer employer- provided benefits; shorter job tenure; and is usually non-unionized.

48 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

labour standards found that NSE accounts for about 32% of the Canadian workforce. Many of these workers are young, recent entrants into the labour force. This trend toward NSE means that young people graduating from university today are far less likely to experience the sort of stable, predictable employment patterns that were the norm for earlier generations.

Many other workers are being characterized as independent contractors, sometimes at their own request, but often at the behest of businesses seeking to benefit from the finan- cial savings and legal flexibility associated with eliminating “employees.” The shift from standard employment to “self-employment” is a major contributor to growing income inequality in Canada, since self-employed workers tend to be lower paid, have fewer employer-paid benefits, have less job security, and are not entitled to the many social protections (unemployment insurance, workers’ compensation) or guarantees (minimum wage, overtime pay, paid holidays) available only to people who are or were “employees.”

Workers employed under NSE arrangements and low-income workers who are treated as independent contractors are often described as vulnerable or precarious workers . They live on the cusp of poverty and are unable to save or plan for the future because their source of income is always on the verge of disappearing.

Perspectives on Work and Government Policy Whether this shift toward NSE and “self-employment” is cause for concern is a matter of substantial debate. Certainly businesses can benefit in terms of lower labour costs and greater managerial flexibility. That can help profitability, which in turn could make Canada an attractive place for corporations to invest. However, the OECD has noted that the growth in NSE and self-employment is also a significant cause of growing income inequality in Canada. 9 Some workers benefit from this shift, but it appears that many more do not.

This points to a familiar problem in labour policy debates. Practices and policies that may benefit employers and businesses are not always good for workers, the economy, or soci-

ety more generally. High profits and dividends are almost always treated as positives in business literature. But if they are derived from poor treatment of workers, including low wages, few health benefits, and danger- ous working conditions, then are high profits and divi- dends benefiting society?

Consider an example involving Walmart, the world’s most profitable corporation. According to the Fortune 500 rank of American corporations, Walmart’s 2010 profits were US$14.3 billion. However, Walmart has also found itself on the losing end of numerous legal actions alleging illegal treatment of employees, such as stealing wages from workers and denying legally mandated breaks and rests. In Canada, Walmart has been found in violation of labour laws in its attempt to stop employees from exercising their legal right to join unions.

income inequality The unequal distribution of wealth to individuals or households in an economy.

vulnerable or precarious workers Individuals who perform work in a nonstandard employ- ment relationship. They are always at risk of unemployment since their jobs are insecure, and because their pay is low they live on the cusp of poverty.

9 OECD. (2011). An overview of growing income inequalities in OECD countries: Main findings. Retrieved from www. oecd.org/els/soc/49499779.pdf .

AP Photo/J Pat Carter

Objective 3 Identify and explain the main perspectives

that shape debates about the

appropriate role of markets,

management, unions, and

legislation.

49C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

Do the illegal actions by Walmart against its employees taint its impressive record of big profits? Should governments impose more or less rules on business to influence how workers are treated? If they impose more rules, will this make the climate less friendly for businesses, causing them to hire fewer workers?

How to balance the interests of business in maximizing profits and shareholder divi- dends, on the one hand, with the interests of workers in securing a decent level of income and security, on the other hand, has been a subject of debate since the beginning of large- scale economic activity. These debates have been informed by a variety of perspectives that vary on such fundamental issues as

■ the role and effectiveness of markets

■ the role of bargaining power in the employment relationship

■ the role of management, and the human resources function in particular

■ the role of unions and collective bargaining

The range of responses to work-related issues that is deemed prudent depends on which of these perspectives dominates in a society at any particular moment in time. Four perspectives in particular have shaped debates about the governance of work in Canada: the neoclassical, managerial, industrial pluralist, and critical perspectives.

Neoclassical Perspective The neoclassical perspective argues that competitive markets are the best means of organizing complex economies and societies. The forces of supply and demand, if left to operate freely with limited state interference, will ensure optimal assignment of skills and expertise throughout the economy as well as the fairest distribution of wealth. This is because people and businesses are motivated by self-interest. Therefore, they will make decisions that maximize their personal interests and avoid situa- tions that do not. Provided people have adequate information to recognize what is in their best interests and are free to make choices, the invisible hand of the market will guide actors toward economic and social prosperity. Neoclassicists assume that labour markets are perfectly competitive, or close to it, and therefore believe that if they left undisturbed by government intervention and unions they will produce the optimal market outcomes.

Adam Smith used the “invisible hand” metaphor in his book The Wealth of Nations, published in 1776. Smith argued that, by pursuing their own self-interest, individuals “are led by an invisible hand” to promote the greater public interest, even if that is not their intention. Modern-day adherents to the neoclassical perspective share Smith’s recipe for governments: The state should focus on ensuring a legal system is in place to protect prop- erty rights, enforce contracts, and prohibit anti-competitive practices, but otherwise should keep taxes low and government administration and regulation to a minimum.

Neoclassicists perceive the labour relationship as simply another form of free exchange between informed and free actors. Therefore, Canadian governments—indeed, govern- ments around the world—are misguided in their attempts to “protect workers” through regulation such as minimum wages, overtime pay, human rights laws, health and safety rules, and laws that permit or even encourage unionization and collective bargaining. Neoclassicists argue that none of these laws are necessary to protect workers, and in fact they do more harm than good.

To see why, consider the example of the minimum wage . Imagine that an employer offers an employee $4 per hour and that the employee is prepared to accept that wage rate.

neoclassical perspective One view of how the economy should function. It contends that competi- tive markets are the best means of organizing complex economies and societies. The forces of supply and demand, if left to operate freely with limited government interfer- ence, will ensure optimal assign- ment of skills and expertise throughout the economy as well as the fairest distribution of wealth.

competitive markets Markets in which there are a sufficient num- ber of participants competing for the same goods, services, and cus- tomers. Market forces tend to fix prices at a point where the supply of a good or service equals the demand for that good or service.

invisible hand of the market Adam Smith used the “invisible hand” metaphor in his book The Wealth of Nations, published in 1776. Smith argued that, by pursu- ing their own self-interest, individu- als “are led by an invisible hand” to promote the greater public interest, even if that is not their intention.

minimum wage An employment standards law that mandates the minimum hourly wage that must be paid to an employee. Each prov- ince sets its own minimum wage.

50 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

However, the government passes a minimum wage law prohibiting employers from paying less than the minimum wage. The Neoclassicist position is that this law will have negative effects on the economy that will ultimately harm low-wage workers. By artificially raising the wage rate above the “market rate” ($4 per hour in our example), the minimum wage law will cause employers to hire fewer workers, to replace workers with machinery, or to pack up and move the work to another location that does not have a minimum wage. If none of these options is available, the employer will pass on the additional costs to con- sumers in higher product prices, and if that is not possible the company may be forced into bankruptcy or close down altogether. In any case, the economy suffers, and the harm will be felt most by the low-wage workers who the minimum wage laws were intended to help.

Neoclassicists are also not concerned about working conditions being too low in the absence of worker protection legislation. They believe that the invisible hand of the mar- ket will ensure this does not happen. A business that offers less than the market wage rate will be unable to attract or retain qualified workers, and therefore will either have to raise their offer to attract workers or will be driven out of business. Since workers are assumed by neoclassicists to be knowledgeable about other job possibilities and to be free and mobile—able to move from job to job as better opportunities arise—market forces will ensure that wages and working conditions remain close to that point at which labour sup- ply equals labour demand (the equilibrium market rate). Any attempt by governments to intervene in this process of free bargaining by employers and workers will disturb these market-clearing processes, producing harmful effects.

Managerial Perspective The managerial perspective is closely related to modern human resource management. It shares a belief with the neoclassical perspective that gov- ernment intervention in the governance of work and employment should be minimal. However, managerialists put their faith in enlightened management practices rather than in the “invisible hand” of the marketplace. They argue that employers and employees, businesses and workers, share a common interest: They both want the business to be suc- cessful. Managerialists argue that workers who are treated decently and with respect will be the most productive workers, and that the most successful businesses will be those that provide good wages, benefits, and good working conditions. Therefore, businesses will look out for employees’ concerns because it is in their economic interests to do so.

In the managerialist perspective, employment standards and employment regulation should be kept to a minimum since these laws inject rigidity into the work relationship and impose unnecessary costs on employers. If laws are necessary to deal with the worst types of employers—those who do not perceive the wisdom in treating workers decently—the legal standards should be set at a low level and be flexible enough to not punish “good” employ- ers. Unions and collective bargaining are an unnecessary impediment to managerial pre- rogative and flexibility in the managerialist perspective, and should not be promoted by governments. Since it is in the interest of management to treat workers fairly, there is no need for workers to look to unions for protection. Indeed, mangerialists argue that the deci- sion of workers to support unionization reflects a failure of management to address employee needs through progressive human resource management policies (see Exhibit 2.1 ).

Industrial Pluralist Perspective The industrial pluralist perspective views the work relationship very differently than both neoclassicists and managerialists. They emphasize the imbalance of power between workers and employers and the value to society and economies of striking a reasonable balance between the efficiency concerns of employers and the equity

managerial perspective A perspective associated with the human resource management school. Managerialists believe that employees and employers share a common goal of maximizing pro- ductivity and profits, so there need not be conflict between them. As long as employers treat employees decently, the employees will work hard in the employer’s interests.

industrial pluralist perspective A perspective that emphasizes the imbalance of power between workers and employers and the value to soci- ety and economies of striking a rea- sonable balance between the efficiency concerns of employers and the equity concerns of workers. Plural- ists believe that unions and collective bargaining are beneficial to society and the economy because they give workers “voice” and ensure a fairer distribution of wealth throughout society than a system in which work- ers bargain employment contracts with employers on their own.

51C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

concerns of workers. For the pluralist, the relationship between a business/employer and a worker/employee involves the bearer of power on the one hand, and subordination on the other hand. In most cases, workers lack the necessary bargaining power to engage in meaningful bargaining about conditions of employment, with the result being that the busi- ness purchasing their labour can set the working terms unilaterally. This is problematic because workers, unlike bricks and staples, are human beings, and society has an interest in promoting environments in which humans do not feel disenfranchised or exploited.

In contrast with neoclassicists and managerialists, pluralists support an activist government that intervenes in the work relationship to promote decent working condi- tions and worker “voice” in the determination of those conditions. Pluralists support min- imum employment standards to ensure decent working conditions because they reject the neoclassical belief that market forces alone will produce a fair balance between equity and efficiency concerns.

Most importantly, pluralists believe that the most effective way to ensure worker voice and to promote a healthy distribution of wealth throughout the economy is to pro- mote collective bargaining and unionization. Collective bargaining , including a legal right to withhold labour (a strike), empowers workers by putting them on a more equal footing as they bargain for the sale of their labour. This ensures that workers receive a reasonable share of the economic pie produced by their labour, a result that benefits the economy (by fuelling consumption) and society (by producing a decent standard of liv- ing). Therefore, pluralists support laws that protect the right of workers to join unions, to engage in collective bargaining, and to strike if necessary to apply pressure on their employers to agree to better working conditions (see Exhibit 2.2 ).

Pluralists reject the neoclassical claim that labour markets are perfectly competitive, or even nearly so. For example, they argue that in the real world, workers usually lack informa- tion about new jobs, so they are ill equipped to assess the true value of their labour during the initial bargaining process. Workers also lack information about alternative job opportu- nities, contrary to the assumptions of the neoclassical model. Even if they have that information, in practice people do not move from job to job with the mobility and ease that the neoclassical model assumes. Workers will often remain at a workplace for years, even if there are better job opportunities elsewhere. Behavioural economists describe this effect as bounded rationality —the recognition that humans often do not make decisions that would maximize their personal utility because they either lack the necessary information to assess the various options or lack the capacity to assess the information they have.

bargaining power The amount of power workers have to deter- mine their conditions of employ- ment with their employer, such as wages, hours, training, vacation time, health and safety measures, and other factors.

activist government A government that intervenes in the employment relationship by passing laws that restrict freedom of contract, such as employment standards, human rights, health and safety, and employment equity laws.

collective bargaining A process of negotiation measures between a group of employees (through a union) and an employer (or group of employers) leading to a collec- tive agreement that applies to the entire group of employees.

bounded rationality The idea that humans often do not make decisions that would maximize their personal utility because they either lack the necessary informa- tion to assess the various options or lack the capacity to assess the information they have.

Exhibit 2.1 Would you like a union with that coffee?

In recent years there has been increasing interest in unionization among coffee shops such as Starbucks and others. Like most

businesses, Starbucks would prefer to avoid unionization of its employees. In the United States controversy erupted over the firing

of a New York Starbucks employee in 2011 allegedly because she had attempted to join a union (Industrial Workers of the

World). In Canada, workers at several Starbucks outlets were represented by the Canadian Auto Workers for a period of time.

However, the union’s drive to organize the chain stalled and by 2007, all of the unionized stores had become “decertified.”

Traditionally, the restaurant and food services industry has been among the most challenging sectors to unionize. The low

level of union penetration of the food-service sector is due to a number of factors including the fact that this is a highly competi-

tive industry, and employers believe unionization will pose a threat to their profits. In addition, the labour force is typically part-

time, with high turnover, and so many of these workers don’t have enough commitment to the job to tolerate any tensions that

arise over efforts to start a union. As workers stay in their jobs longer it will become increasingly important for  businesses like

Starbucks to ensure these employees are feeling satisfied with their working conditions or run the risk of facing unionization.

52 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

In short, people are far more complex and unpredictable than their depiction in the neoclassical model. Pluralists argue that since the assumptions on which that model is based do not hold true in the real world, it is inappropriate to base real-life public policies on neoclassical ideas. Pluralists also reject the managerialist claim that progressive human resource management policies and the supposed economic benefits derived from them will protect the interests of workers. For example, pluralists argue that the shift toward NSE, discussed earlier, which is contributing to the growth in economic inequality and fall in workers’ real wages in Canada, is a trend being pushed and implemented by human resource management professionals. Unions, not management, are the institution that fights against these trends in favour of more secure, higher-paying jobs (see Talking Business 2.2 ).

Critical Perspective The focus of the critical perspective is the inherently exploi- tive nature of the capitalist system. This perspective draws its inspiration from Marxist theory. It argues that the interests of labour (workers) and capital (the owners and manag- ers of economic organizations) are irreconcilably in conflict. The objective of capital is to extract from labour maximum effort and control at minimal cost. Since workers depend on capital for their basic needs in a capitalist system, and there are almost always more workers than jobs, labour is inherently disadvantaged and subject to exploitation at the hands of the more powerful capitalists.

The critical perspective posits that employment regulation and collective bargaining are at best only marginally useful in protecting workers from this exploitation. In fact, these measures can actually be harmful to worker interests insofar as they can blind work- ers to their exploitation and distract them from the more important objective of building class consciousness, which will be necessary to challenge the capitalist model and replace it with a more egalitarian model. From the critical perspective, the managerialist perspec- tive glorifies the manipulation of labour by capital in an attempt to mask the inherent conflict between labour and capital. The neoclassical model is dismissed as a faulty theory based on nonsensical assumptions that have no basis in reality. Moreover, neoclassicists ignore the central fact that the “market” itself is a construct developed by capitalists and supportive politicians to serve the interests of capital.

THE LABOUR CONTEXT IN CANADA: WHERE ARE WE NOW? Which of these perspectives dominates public policy in Canada today? The best answer is probably that all of them play some role in shaping the debates about how best to organize and structure the labour relationship. Certainly, in the period running from the end of World War II until about the 1980s, the industrial pluralist perspective was highly influ- ential. Governments across the country, from all of the major political parties, supported

critical perspective A perspective that believes the interests of labour (workers) and capital (the owners and managers of economic organiza- tions) are irreconcilably in conflict. The objective of capital is to extract from labour maximum effort and control at minimal cost. Since workers depend on capital for their basic needs in a capitalist system, and there are almost always more workers than jobs, labour is inher- ently disadvantaged and subject to exploitation at the hands of the more powerful capitalists.

Exhibit 2.2 The Benefits of Collective Bargaining

Pluralists argue that collective bargaining is valuable because it promotes two important outcomes:

Democracy and voice: It introduces a form of democracy into the workplace by giving workers the tools and power to par-

ticipate directly in the development and enforcement of workplace rules and practices.

Distributive Fairness: It empowers workers to bargain for a larger share of the economic pie than is possible in the alterna-

tive system in which individual employees bargain for the sale of their labour. This encourages a stronger middle class and

lesser income inequality, which according to the pluralists facilitates a healthier economy and more stable society.

53C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

Employees who are covered by a collective agreement or a

union contract earn higher wages than employees who are

not. In 2012, the average hourly wage for unionized employ-

ees was $27.36, compared to $22.25 for non-unionized

employees. However, after adjusting for variances by occupa-

tion, education, and experience, the union wage premium

has declined in recent decades to less than 8 per cent—

nonetheless, a clear benefit still flows to unionized workers.

Despite this advantage, the proportion of workers covered

by a collective agreement has been slowly trending downward

in Canada over the last twenty years. Union coverage now sits

at 31 percent, down from close to 34 percent in 1997.

In order for union membership to grow, the labour

movement must find a way to make strides in organizing

some industries that have traditionally remained elusive—

such as the services, agriculture, and financial sectors. And,

as business continues to boom in the resources sector,

companies in the mining and oil and gas sector may pres-

ent opportunities to expand.

The first bold step taken by the labour movement has been

the merger of the Canadian Auto Workers (CAW) and the

TALKING BUSINESS 2.2

The State of Canadian Unions—Down but Not Out Communications, Energy and Paperworkers Union of Canada

(CEP). The merged entity will be Canada’s largest private-

sector union, representing roughly 300,000 workers right out

of the gate. The new conglomerate will not only have more

clout thanks to its larger size, but will be better able to focus

its resources to support organizing efforts. The union leader-

ship plans to grow the union—to about double its current

membership—in relatively short order and will devote 10 per

cent of its revenue to these activities. Membership may be

expanded to include students, retirees, and the unemployed,

demonstrating its commitment to move beyond the limits of

the traditional union model. The impact could be significant.

Unions know they need to adapt to the new realities of

the Canadian landscape—the economy will grow only slowly

over the medium term, technological change will continue

at a rapid pace and international competition will intensify.

This will make gains at the bargaining table increasingly

difficult. In the public sector, concessions are likely as govern-

ments grapple with budget deficits and growing levels of

debt. In response, unions will need to be creative in growing

their membership base to secure their social and political

power but also their finan-

cial future. So, while unions

may be down, don’t count

them out quite yet.

Source: Excerpted from

Thorpe, K. (2013, January

31). The state of Canadian

Unions—down but not out.

The Conference Board of

Canada. Retrieved from

www. conferenceboard.ca/

topics/humanresource/

commentaries/13-01-31/

the_state_of_ canadian_

unions%E2%80%94down_

but_not_out.aspx. Reprinted

with permission.

30 1997 1999 2001 2003 2005 2007 2009 2011

31

32

33

34

35

P e

r ce

n t

Union Coverage in Canada, 1997–2011

strong labour laws that facilitated and encouraged workers to join unions and engage in collective bargaining.

These laws remain in place. For example, Canadian employers are prohibited by labour relations statutes , such as the Ontario Labour Relations Act, from discriminating against employees who try to organize a union or who support unions. These statutes also require

labour relations statutes Laws that govern labour issues in a particular province. In Canada, each province has the power to enact its own labour laws.

54 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

union density A measure of the percentage of employees who are members of a union out of the total employees in the labour market.

union wage premium The addi- tional amount of wages paid to union- ized over non-unionized workers.

employers to engage in collective bargaining with unions that have been certified by the gov- ernment as the representative of a group of the employer’s employees. Unions get certified

when they can demonstrate that a majority of the employees want union representation. Once this happens, the government orders the employer to bargain “in good faith” with the union toward reaching a collective agree- ment. If no agreement is reached, labour relations laws permit employees to go on strike to put pressure on the employer to improve its offer and prohibit employers from firing the employees for doing so. The law also permits employers to lockout the employees, thereby denying them their pay.

For much of the 20th century, the Canadian economy was dominated by large manufacturing workplaces (steel, automakers) and the extractive (mining, oil and gas) and forestry industries. The SER dominated in these industries, which were staffed primarily by men. Canadian governments dur- ing the postwar period sought to encourage an economy in which working men were able to earn a “ family income ” sufficient to support their spouses and children. This was the ideal Canadian family around which public poli- cies were designed. Promoting collective bargaining in heavy industry was considered a sensible way to protect the ideal: Working men were encour- aged to join unions, and through collective bargaining they would bargain for stable, long-term employment and wages and benefits sufficient to sup- port a family and fuel a consumer economy. Women, who worked primarily either in the home or in service-sector jobs, were considered secondary income earners and less important from a public policy perspective.

As demonstrated in Exhibit 2.3 , with government support union density reached nearly one quarter of the (nonagricultural) workforce during the mid-1980s, most of which was in the manufacturing and natu- ral resources sectors. The union wage premium —the additional amount of wages paid to non-unionized over non-unionized workers—was mea- sured at close to 25% in the 1970s. However, both union density and the union wage premium have experienced a decline since the 1980s, which is most apparent when we look at the private sector. In 2010, private- sector union density was only 17.5% of the nonagricultural Canadian workforce. The union wage premium, according to some recent studies, has fallen to close to 10%.

This decline in the prevalence and impact of collective bargaining coincided with, and was in part caused by, a shift in the dominant perspectives away from industrial pluralism and toward the neoclassical and managerialist perspectives. Since the 1990s, governments in Ontario, British Columbia, Saskatchewan, and Alberta have revised labour laws to weaken unions and discourage collective bargaining, arguing that collective bargaining discourages businesses from investing in Canada. Recently, the federal government has been prohibiting workers from going on strike. This turn against unions and collective bargaining is closely aligned with the neoclassical perspective and the belief that markets operate most efficiently without collective bargaining and with little employment regulation.

Economic globalization has also influenced the debate about how best to organize work in Canada. Greater mobility of capital and industry has contributed to a shift in the composition of the Canadian economy. Many manufacturing workplaces have moved to lower-wage countries, and many of the new jobs being created are in the service sector.

family income A historical term used to describe the amount of money working men were able to bring home to support their spouses and children. Today, house- hold income is used to describe the total amount of income brought in by all members of a household or place of residence.

Year Union Density (percentage of nonagricultural workers who are union members)

1921 16

1930 13.1

1940 16.3

1945 24.2

1951 28.4

1958 34.2

1960 32.3

1965 29.7

1970 33.6

1975 35.6

1980 35.7

1985 36.4

1990 36.2

1995 34.3

2000 31.9

2005 30.7

2009 29.9

2010 29.6

Source: Godard, J. (2010). Industrial relations, the

economy, and society (4th ed.), pp. 77 – 78 .

Concord, ON: Captus Press; Human Resources

and Skills Development Canada. (2010). Union

membership in Canada. Retrieved from www4.

hrsdc.gc.ca/[email protected]?iid=17.

Exhibit 2.3 Union Density in Canada, 1921–2010

55C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

The past decade has seen organized labour decline as a share

of the Canadian workforce. Between 1997 and 2011, union

density in Canada fell approximately 1.7 per cent from 30.9

per cent to about 29.2 per cent. The overall decline in union

density would have been greater but for the fact that the

highly-unionized public sector continued to represent a large

share of total employment. More than 70 per cent of the

broader public sector is unionized—which includes govern-

ment departments, agencies, and Crown corporations, along

with publicly funded schools, hospitals, and other institutions.

In contrast, union density in the private sector now sits at an all time low of 15.9 per cent. This decline is due, in

part, to legislative changes restricting union certification

processes but also changes in the economy including the

“hollowing-out” of the manufacturing sector.

Union density is not a flawless measure of labour’s

influence in terms of bargaining power and wage setting.

Collectively-bargained agreements can serve as a standard

against which other non-unionized organizations set

wages and benefits in order to remain competitive. As

union density declines, however, the degree to which it

serves as the benchmark also diminishes.

The changing demographic profile of the population is

also undermining the role and importance of unions. Baby

boomers, who are beginning to exit the workforce, can more

easily relate to the success of the labour movement in achiev-

TALKING BUSINESS 2.3

Are Unions Relevant in Canada Today? ing gains around pay equity for women, racial equality, and

improved working conditions. Many members of the younger

generation—call them Millennials or Generation Y—hold

negative views about the relevance of labour unions. This

generation has grown up in a society where many of these

battles were already won. Therefore, many younger workers

fail to see the benefits of belonging to a union. In fact, senior-

ity rules can be impediments to younger workers getting cov-

eted day shifts and vacation time during summer months.

Unions have historically played an active role lobbying

on issues affecting working Canadians. Labour’s influence

has produced public policy improvements in workplace

health and safety in the workplace, pension benefits, well-

ness, and literacy, to name just a few areas. However,

labour’s ability to exert pressure on behalf of workers will

undoubtedly be impacted by a declining base of members

and the resulting loss of union dues. Even though union

density is on the wane, organized labour can continue to

have a positive impact on government policy—particularly

if they focus on issues that have broader public appeal.

Source: Excerpted from Thorpe, K. (2011, November 9). Are

unions relevant in Canada today? The Conference Board of Canada.

Retrieved from www.conferenceboard.ca/topics/humanresource/

commentaries/11-11-09/are_unions_relevant_in_canada_today.

aspx . Reprinted with permission.

Governments must wrestle with how to balance their desire to create a “business-friendly” climate while also ensuring that good jobs are created. This challenge has been rendered more difficult by the increased ability for businesses to move from one jurisdiction to another. The fear is that if labour costs rise too high, or laws make control of labour to rigid, businesses will avoid Canada or leave. In this way, globalization can be said to create downward pressure on employment-related laws and practices (see Talking Business 2.3 ).

DISMISSING EMPLOYEES Unemployment rates measure the percentage of adults in the labour market who are actively seeking employment. Exhibit 2.4 shows how those rates have varied over a 35-year period. In 2012, the unemployment rate was between 7% and 7.5%. Avoiding high rates of unemployment is one of the great challenges of governments. High, sus- tained unemployment imposes high costs on economies and societies.

For example, workers who lose their job often need to access public resources, such as unemployment insurance or welfare benefits. People who are not earning money are not paying taxes, so government revenues used to fund essential public services decrease. The

unemployment rate The percentage of adults in the labour market without employment who are actively seeking employment.

Objective 4 Explain how we balance the interests of employ-

ers and employees when

employment relationships are

terminated.

56 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

unemployed also have less money to spend in the economy, and our economy depends in large measure on Canadians buying things. Unemployment also imposes other social costs, including higher incidence of depression, alcohol and drug dependency, and poor child nutrition. When a community suffers large numbers of job losses at one time, such as when a factory closes, there are negative spillover effects throughout the entire community.

Therefore, governments have an interest in discouraging unemployment and job losses. On the other hand, employers sometimes need to respond to changes in their eco- nomic situation by downsizing the labour force. If the survival of the business requires shedding labour costs, then employers should be permitted to do this with as little compli- cation and cost as possible. An important challenge for business and government alike is to find an appropriate balance between permitting flexibility in work practices while also protecting the welfare of workers. The most obvious point when these interests come into conflict is at the end of the employment relationship.

Rules and programs have emerged over time that attempt to balance the interests of business in being able to downsize and the interests of workers and the community in avoiding unemployment. These rules come in a variety of forms. Here we will briefly dis- cuss three of them: (1) court-made common law rules; (2) employment standards notice requirements; and (3) unemployment insurance benefits.

Common Law Rules Requiring Notice of Termination All non-union employees in Canada have an employment contract with their employer. Some- times the contract is written, but if it is not then the parties have a verbal contract. Disputes about what an employment contract says or how it should apply in a given situation are resolved by judges in courts of laws. Over time, a large body of decisions by judges interpreting employ- ment contracts have been released and recorded in law books and, more recently, on electronic websites. This body of case law is known as the common law of the employment contract .

One rule that judges created and that forms part of the common law of the employment contract is a requirement for employers to provide employees with reasonable notice of the termination of the employment contract. How much notice is “reasonable” is decided by judges and depends on a number of factors, including the length of the employee’s service, the employee’s age, and the type of work the employee performed. For long-service employees, the notice period required can be as much as one to two years. The notice can be working notice,

common law of the employment contract All of the rules of interpretation of employment contracts applied by judges over the years, as recorded in legal decisions.

reasonable notice The amount of time in advance that employers must inform employees that their services are no longer necessary and their employment contract is ending. How much notice is “rea- sonable” is decided by judges and depends on a number of factors, including the length of the employ- ee’s service, the employee’s age, and the type of work the employee performed.

0 1976 1979 1983 1987

P e r

ce n

t o

f la

b o

u r

fo rc

e

1991 1995 1999 2003 2007 2011

2

4

6

8

10

12

14 Exhibit 2.4 Unemployment Rates in Canada

Source: Statistics Canada.

(2012). Labour force survey

estimates (LFS), supplementary

unemployment rates by sex

and age group, annual, CAN-

SIM Table 282-0086. Ottawa,

ON: Statistics Canada.

57C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

or pay in lieu of notice, meaning that the employer can just pay the employee their wages for the period of notice without requiring the employee to actually work. This requirement for employers to give reasonable notice helps employees transition from one job to the next.

Statutory Minimum Notice of Termination If an employer fails to provide the employee with reasonable notice, the employee can sue the employer in court to recover it. However, this is costly and takes a lot of time, so most workers do not bother. To provide a less expensive, quicker, and more informal means of ensuring employees receive some notice of their termination, governments have imposed notice requirements. Employment standards statutes in Canada include mandatory minimum statutory notice provisions. For example, in Ontario the Employment Standards Act requires employers to provide the following minimum periods of notice of termination:

1. At least one week before the termination if the employee’s period of employment is less than one year

2. At least two weeks before the termination if the employee’s period of employment is one year or more and fewer than three years

3. At least three weeks before the termination if the employee’s period of employment is three years or more and fewer than four years

4. At least four weeks before the termination if the employee’s period of employment is four years or more and fewer than five years

5. At least five weeks before the termination if the employee’s period of employment is five years or more and fewer than six years

6. At least six weeks before the termination if the employee’s period of employment is six years or more and fewer than seven years

7. At least seven weeks before the termination if the employee’s period of employment is seven years or more and fewer than eight years

8. At least eight weeks before the termination if the employee’s period of employment is eight years or more 10

The amount of notice is higher if 50 or more employees are terminated in a four-week period. While the statutory minimum notice is usually less than the common law period of reasonable notice assessed by judges, the employee does not need to sue the employer in court to recover it. An employment standards complaint to recover statutory minimum notice can be filed by completing a form online, at which point the government will investigate and order the employer to comply with the statute.

Both reasonable notice and statutory minimum notice are intended to provide employees with a cushion—a period of time to plan for their job loss and to look for another job. These requirements impose costs on employers. However, they are justified on the basis that job losses impose costs on society and employees, some of which should be borne by employers. This is a different approach than that used in the United States, where employment contracts can be terminated at any time with no notice. That model is known as “at will” employment and is highly influenced by the neoclassical perspective. The US approach assumes that if employees

mandatory minimum statutory notice The minimum job termination notice employers must give their employees. It is found in employment standards statutes and varies from province to province.

“at will” employment A concept used in US labour law that allows employers to terminate employees without any notice for any reason. At-will employment does not exist in Canada.

10 Ontario Ministry of Labour. (2013). Your guide to the Employment Standards Act, 2000, p. 81 . Retrieved from www.labour.gov.on.ca/english/es/pdf/es_guide.pdf .

58 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Objective 5 Identify and explain the business responsi-

bilities and opportunities within

Canada’s diverse labour force

environment.

value notice of termination, they will bargain a contract term requiring it. In Canada, our courts and governments have imposed a notice requirement, recognizing that most employees will not know that they should bargain for one or will lack the bargaining power to do so.

Unemployment Insurance Programs Another way that we attempt to reduce the cost to workers and society associated with job losses in Canada is through unemployment insurance programs . The unemployment insurance program operated by the federal government first appeared in 1940. Today, the program is administered under the Employment Insurance Act. The model requires employ- ers and employees to make contributions into an unemployment insurance fund. To access benefits, unemployed individuals must satisfy a series of conditions, including having paid into the fund for a specified period of time and actively searching for employment. The amount of benefits payable are based on a percentage of the employee’s prior earnings up to a maximum amount, and benefits last for only a fixed period of time (usually several weeks).

The unemployment insurance program provides a measure of security to some Canadian workers who lose their jobs. However, the model has been criticized on a number of fronts. Supporters of a strong insurance program point out that less than 50% of unemployed people in Canada qualify for benefits because of the strict qualifying criteria; they want the criteria to be loosened so that more people can receive the benefits they contribute to. Others are critical of unemployment insurance plans because they believe that they discourage people from working. These critics call for the elimination of unemployment benefits altogether, or at least for lower benefit levels and even more stringent eligibility requirements.

CURRENT ISSUES IN THE WORKPLACE: MANAGING WORKFORCE DIVERSITY Canadian businesses operate within a diverse society. The Canadian population reflects a multitude of cultures and demographic backgrounds. For example, recent census figures provided by Statistics Canada show that over 5 million Canadian citizens were foreign- born, comprising nearly 20% of the total population. This diversity is increasingly reflected in the Canadian labour pool. Immigrants who came to Canada in the 1990s have accounted for approximately 70% of the total growth of the labour force in recent years. Women also comprise a significant component of the Canadian labour force and account for about half of both the employed workforce and all union members. Visible minorities and people with disabilities, together with women, make up over 60% of Canada’s labour force.

Diversity in our workforce is also reflected in the growing presence of older workers. At the start of the 21st century, Canadians between the ages of 37 and 55 made up about 47% of the labour force, but by 2011 half of these workers were 55 or over. Consequently, it is clear that organizations must attend to the rights of a diverse group of individuals.

Protecting Diversity and Guarding against Discrimination in Canadian Law If the Canadian economy is to flourish, businesses must be encouraged to tap the consider- able potential of Canada’s diverse population. However, how best to achieve this is the source of much debate.

unemployment insurance program A federal government program that requires employers and employees to make contribu- tions into an unemployment insur- ance fund. To access benefits, unemployed individuals must sat- isfy a series of conditions, including having paid into the fund for a specified period of time and actively searching for employment. The amount of benefits payable are based on a percentage of the employee’s prior earnings up to a maximum amount, and benefits last for only a fixed period of time (usually several weeks) and vary according to the level of unemploy- ment in the region where the worker lives.

59C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

For politicians, the question arises as to whether it is appropriate to use legislation to address these challenges, and if so, what sorts of laws to deploy for this purpose. Neoclassi- cists reject the need for legal intervention to address discrimination in the labour market. They argue that market forces will punish employers who select employees based on factors unrelated to productivity (such as skin colour, sex, disability, or ethnic origin) and reward employers who ignore those irrelevant factors. In the “long run” these market forces will drive discriminatory employers to alter their behaviour or else put them out of business.

However, that is not a position that Canadian governments have accepted. In fact, there is extensive regulation intended to break down barriers to employment that con- front Canada’s diverse labour force. In this section, we will consider three types of laws that address discrimination in the labour relationship: (1) the Charter of Rights and Free- doms; (2) human rights legislation; and (3) employment equity legislation.

Canadian Charter of Rights and Freedoms The Charter of Rights and Freedoms forms part of Canada’s Constitution. It governs the relationship between gov- ernments and citizens by protecting fundamental rights and freedoms of Canadians against state interference, including the following:

■ fundamental freedoms of speech, press, assembly, association, and religion

■ democratic rights

■ mobility rights regarding the right to move freely from province to province for the purposes of residence or employment

■ legal rights, which provide standard procedural rights in criminal proceedings

■ equality rights, which guarantee no discrimination by law on grounds of race, ethnic origin, colour, religion, sex, age, or mental and physical ability

■ language rights

The Charter applies only to government action. Governments can act in two ways: as an employer and as lawmakers. Therefore, in the labour context, the Charter is applicable directly to governments as employers and to all laws passed by governments.

For example, if the Government of Ontario paid its female employees less than its male employees for the same work, that would be in violation of the Charter’s protection of equal- ity rights based on sex. However, if it were a private corporation that was paying its female employees less than its male employees, such as McDonald’s, the Charter would not apply because McDonald’s is not the government. Employees of McDonald’s could still file a com- plaint under a human rights statute (see the discussion that follows). All laws passed by a government must be consistent with the rights and freedoms guaranteed in the Charter. For example, if a government passed a law that granted special privileges to Christian workers, that law would violate Section 15 of the Charter, which protects Canadians from discrimina- tion by the government on the basis of religion.

Equality rights are not the only part of the Charter that can affect the employment relationship. There has been a consider- able number of Charter cases in recent years exploring the

Charter of Rights and Freedoms A part of the Canadian Constitution that governs the rela- tionship between governments and citizens by protecting fundamental rights and freedoms of Canadians against state interference.

© GoodMood Photo/Fotolia

60 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

meaning of “freedom of association,” which is protected by Section 2(d) of the Charter. Courts have ruled that freedom of association guarantees workers the right to form and join unions and to engage in collective bargaining. That means laws that restrict the right of workers to engage in these activities could be, and sometimes have been, struck down as illegal. In 2012, unions launched Charter complaints challenging laws that prohibited Air Canada and Canada Post employees from going on strike. If the unions are successful in those complaints, the ability of governments to pass laws that ban strikes would be curtailed.

A law that violates a right or freedom found in the Charter might nevertheless be “saved” if a court finds that the violation is justified “in a free and democratic society” because the harm caused by the limitation on rights and freedoms is outweighed by the benefits produced by the challenged law. This exception appears in Section 1 of the Char- ter. For example, in 1990 the Supreme Court of Canada ruled that laws permitting forced or “mandatory retirement” of workers who reach the age of 65 violated the Section 15 guarantee of protection against age discrimination. However, the court then ruled that the laws were “saved” by Section 1, because retiring people at age 65 created necessary job opportunities for young people, among other reasons, and the retired workers had access to pension plans.

If a law violates the Charter and is not “saved” by Section 1, then a court can order that the law is no longer in effect. That is because the Charter supercedes all other laws.

Human Rights Laws While the Charter does not apply to private-sector businesses, human rights laws do. Those laws typically prohibit discrimination in employment based on certain prohibited grounds . For example, in the Canadian Human Rights Act, which applies to businesses governed by federal laws (about 10% of Canadian employees are governed by laws made in Ottawa), prohibits discrimination in employment on the following grounds:

■ race

■ colour

■ national or ethnic origin

■ religion

■ age

■ sex (including pregnancy and childbearing)

■ marital status

■ family status

■ physical or mental disability (including dependence on alcohol or drugs)

■ pardoned criminal conviction

■ sexual orientation

The Canadian Human Rights Act and each of the provincial human rights codes govern human rights issues and provide detailed procedures for investigation and resolu- tion. An employee who feels they employer has discriminated against them on a prohib- ited ground may file a complaint with the appropriate human rights tribunal and seek a remedy, including lost wages and reinstatement if they have been dismissed for discrimi- natory reasons. The prohibitions on discrimination in employment apply throughout the life of the employment relationship, including hiring, terms of employment, and dismissal.

Provincial human rights legislation, which governs most Canadian businesses, include similar though not identical prohibited grounds. For example, in Manitoba it is unlawful for an employer to discriminate on the basis of political belief, but that prohibited ground is not included in either the Ontario Human Rights Code or the Canadian Human Rights Act. Recently, Ontario added the new ground of gender identity and gender expression to

prohibited grounds Those grounds listed in human rights statutes. Discrimination is prohib- ited in employment on the prohib- ited grounds only. Prohibited grounds vary from province to province, but all include common grounds such as race, colour, eth- nicity, religion, age, disability, sex, and sexual orientation.

61C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

the list of prohibited grounds, making it the first province to do so. Which grounds to protect, and how to apply those grounds to employment situations, can be controversial.

Indeed, employers who are proactive in understanding the law and its application can benefit from diversity, as seen in Talking Business 2.4 .

Religion may still be an off-limits topic for some people,

but organizations can’t afford to ignore the subject. . . .

First, religious accommodation is a legal requirement; it

is not about endorsing a specific belief system: Deb Volberg

Pagnotta, a legal human rights expert, told the CIWE

[Council on Inclusive Work Environments] that federal and

provincial human rights laws prohibit discrimination in the

workplace based on religion. For example, under the

Ontario Human Rights Code, employers are required to

accommodate employees who are unable to work certain

days for religious reasons, unless the employer can demon-

strate that it would cause it undue hardship to do so. In

addition to religious leave, employers may be asked to

consider requests related to issues such as dress code flex-

ibility and breaks for religious observance or prayer.

However, Nouman Ashraf, Director of the Anti-Racism and

Cultural Diversity Office at the University of Toronto, empha-

sized that “accommodating and celebrating spiritual traditions

and holidays does not constitute an endorsement of a specific

belief system, just as supporting women or those with differ-

ent levels of ability and sexual preferences does not translate

into a corporate statement of preferential treatment.”

Second, faith is not too personal for the workplace:

Some organizations are hesitant to visibly support religious

diversity because faith is “too private.” Consequently, they

respond reactively to religious requests rather than proac-

tively supporting faith at work. Yet organizations have

grown to support diversity related to grounds such as sexual

orientation that were once also considered private or per-

sonal. Today, leading organizations recognize that, for many

employees, faith is an essential aspect of their identities and

an integral part of who they are. Respectfully acknowledg-

ing their faith is fundamental to engaging the whole person.

Third, culture and faith are not one and the same: Many

organizations assume that religious diversity is addressed

under cultural diversity policies and training. Nadir Shirazi,

President of Multifacet Diversity Solutions, stressed that reli-

gious affiliation is not synonymous with culture; therefore,

training in religious diversity is required, particularly as the

TALKING BUSINESS 2.4

Organizations Seeing the Light about Faith at Work workplace becomes increasingly multicultural and global. In

addition, some workers choose religions or belief systems

outside of their cultural and family traditions. Nadir noted

that organizations also need to be aware that even people

who share the same faith will practice it in different ways.

Fourth, acknowledging religious diversity can benefit the

company: The Ford Motor Company, viewed by many as a

leader in supporting faith diversity, connects its faith-based

efforts to its business goals. Dan Dunnigan, Chair of Ford’s

Interfaith Network, told the council how Ford’s faith-friendly

initiatives have helped the company attract and retain val-

ued employees. He noted how one Ford employee summed

up the benefits: “My faith is the foundation of who I am as

a human being. It is deeply important to me and guides how

I choose to live my life, the quality of my work, [and] every-

thing I do, and the company honours and embraces that.”

There are also opportunities for organizations to encour-

age employee faith groups to get involved in community

activities, such as food drives, violence prevention programs,

and green initiatives. Supporting their efforts can further an

organization’s corporate social responsibility goals.

Senior management support and a strong diversity

policy that is aligned with business values and goals are pre-

requisites for creating a faith-inclusive environment. Effec-

tive faith diversity strategies are proactive and go beyond the

requirements of compliance; they are designed to help the

organization value, strengthen, and respect religious differ-

ences. A study by the Society for Human Resource Manage-

ment found that employee morale, retention, and loyalty are

the factors most positively affected when companies grant

religious accommodations to workers. By embracing reli-

gious diversity, employers can leverage the unique talents,

knowledge, and backgrounds of their workers to gain a

competitive advantage during this turbulent economic time.

Source: Excerpted from Zettel, K. (Winter 2009). Organizations

seeing the light about faith at work. InsideEdge. Retrieved from

www.conferenceboard.ca/insideedge/q12009/q109-organizations-

seeing-the-light.aspx . Reprinted with permission from The Confer-

ence Board of Canada.

62 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Exhibit 2.5 Representation of Designated Groups in the Labour Force

Representation in the Canadian Population

Representation in the Workforce

Women 50.85% 44.8%

Aboriginal peoples 3.3 1.6

People with disabilities 12.4 2.3

Members of visible minorities 13.4 11.7

Source: Courtesy of Statistics Canada, Table 282-0002. Retrieved from www.statcan.ca/english/Pgdb/

labor20a.htm .

undue hardship The meaning of undue hardship can vary across provinces, but is generally consid- ered to occur when the accommo- dation necessary to enable a worker to perform a job requirement is too onerous for an employer to imple- ment. It is a very high standard for employers to meet.

duty to accommodate A legal obligation required by human rights statutes requiring employers to accommodate employees who oth- erwise would not be able to perform the requirements of a job because of a reason related to a prohibited ground, such as religion or disability.

All Canadian human rights legislation prohibits employers from discriminating on the basis of physical and mental disability. When a disabled worker is unable to perform all of the essential duties of a job, these laws impose on employers a duty to accommodate the employ- ee’s disability with the aim of enabling the worker to perform the job. This might mean providing the employee with special tools to help with lifting, to build ramps or elevators, or to change schedules to give disabled workers more frequent breaks, among other changes. Changes need to be made up to the point that they would cause undue hardship , which is an onerous standard for employers to meet. The duty to accommodate applies to other pro- hibited grounds too, including religion. For example, employers have been ordered to give employees time off work to observe religious holidays that fall on regular work days.

Employment Equity Legislation A significant portion of our valued labour pool is derived from members of designated groups whose participation in the workplace contributes to the success of an organization. With regard to past discrimination, there are four groups in particular that traditionally have not received equitable treatment in employment: women, Aboriginal peoples, visible minorities, and people with disabilities. Exhibit 2.5 identifies their relative presence in the population and the labour pool. These groups represent approximately 60% of the total workforce. They have faced significant obstacles related to their status in the labour force, including high unemployment, occu- pational segregation, pay inequities, and limited opportunities for career advancement.

The federal government introduced the Employment Equity Act in 1986 to break down barriers for these four designated groups. Before looking at how that legislation works, consider the following background on the designated groups.

Women Traditionally, women have been segregated in occupations that are accorded both lower status and lower pay. According to a 2003 report by Statistics Canada (based on 2001 census data), while women represented 44.8% of the total workforce, they were clearly not equally represented across occupations. For example, women have been underrepresented in such areas as semiprofessional occupations, management and board positions, supervi- sors in crafts and trades, and sales and service personnel. The failure of women to achieve higher-level corporate positions has been attributed to a variety of sources, including lack of mentoring opportunities, lack of female role models, stereotyping and preconceptions of women’s roles and abilities, exclusion from informal networks of communication, and failure of senior leaders to assume accountability for women’s advancement.

In a report commissioned by the Women’s Executive Network (WXN) in Canada, the majority of women executives surveyed believe they have to work twice as hard as men to achieve success. Respondents also indicated that they continuously find themselves hitting

designated groups The four designated groups under Canada’s Employment Equity Act: women, Aboriginal peoples, persons with disabilities, and members of visible minorities.

63C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

the “glass ceiling” and are not accepted into the executive-level culture, which includes participation in “the boys club.” The findings also revealed a concern that women con- tinue to face more barriers to career advancement than men with the same qualifications and are often presented with fewer opportunities. Among the greatest career barriers iden- tified was the “the lack of comfort on the part of men in dealing with women on a profes- sional level.” Gender-based stereotyping was also indicated as a career barrier. In addition, many respondents felt that they are paid less than men with similar qualifications and they receive less credit and recognition for accomplishments (see Talking Business 2.5 ).

TALKING BUSINESS 2.5

He Says, She Says: Gender Gap Persists in Attitudes toward Women’s Advancement in the Workplace Attitudes about advancing women into senior management

roles are still polarized along gender lines. Men in senior execu-

tive positions appear to be the least concerned about increas-

ing the number of women in the top ranks of organizations.

Yet the stagnating advancement of women to senior

positions in recent decades may be due to more than the

attitudes of men. Women in Leadership: Perceptions and

Priorities for Change finds that a gap in opportunities

between women and men emerges early in their respec-

tive careers—at the first level of management. Compared

to men, women are less likely to feel they can obtain line

management responsibilities, creating an experience gap

at the earliest stages of their management careers.

Further, both women and men were of the view that lead-

ership development and human resource management pro-

grams were not serving their intended purposes—identifying

and developing the next generation of leadership candidates.

“Gender diversity in senior management is a strategic

and cultural issue within organizations. Our research

shows that barriers to women’s advancement exist

throughout organizations, but the responsibility starts at

the very top—with the board of directors and the existing

senior management,” said Ian Cullwick, Vice-President,

Leadership and Human Resources.

“It will take more than neutrality on the part of senior

male executives to bring about significant improvement in

the advancement of women within organizations.”

Numerous studies have shown that organizations

improve their bottom lines when they have more women

in senior management positions.

Leadership opportunities, motivations and abilities are

three factors that are crucial to women’s advancement. In the

research, a fourth factor has emerged as even more crucial—

attitudes. These attitudes can have a huge influence on the

other factors. Eighty-six (86) per cent of women believe there

is still a glass ceiling. While 68 per cent of women managers

think that the organizations are still run by an “old-boys

club”, only 43 per cent of men agree.

This finding shows in the survey results when upper-level

female managers indicated that they have the same aspira-

tions as their male counterparts to reach senior management.

Women in first-level management, however, appeared less

ambitious to reach senior levels of the organization than men.

“Paradoxically, we may need more female leaders

before we can increase the number of women in senior

management,” said Donna Burnett-Vachon, Associate

Director, Leadership and Human Resources.

Most women (and men, for that matter) ranked formal

Talent Management programs at the bottom of the list in

terms of having an impact on their careers. Further, men-

tors for women were more likely [to] have a lower organi-

zational rank than men, and women were more likely than

men to look outside their organizations for mentors.

“To advance, women need not just mentors, but

sponsors—senior leaders who can advocate for them and help

to open up career opportunities, often in an informal way.

However, women are less likely than men to have sponsors as

they work their way up the ranks,” said Burnett-Vachon.

Based on a core focus on changing philosophies and

values, recommendations for change fall into three cate-

gories, which together make up an integrated approach to

promoting the advancement of women in organizations:

• Governance: Make women’s advancement a formal gov-

ernance and performance priority for the board; ensure

that policies, practices and measures are both in place

(continued)

64 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

TALKING BUSINESS 2.5 (continued)

and consistently applied; communicate the business case

for advancing women throughout the organization.

• Leadership development: Engage senior leaders to identify

emerging women leaders; ensure there are senior women

role models in the organization; provide high-potential

and emerging women leaders with strategic assignments.

• Human Resources Management: Identify actual or per-

ceived barriers to career development; seek out

high-potential women from the earliest career stages and

provide meaningful support; regularly review talent

management practices and educate supervisors and man-

agers on such processes; provide more family-friendly

policies and encourage all employees (men and women)

to take advantage of them.

Some Canadian organizations do follow best prac-

tices and get exceptional results, but they are not the

norm. Without the involvement of top leaders who

champion, monitor, and measure organizational prog-

ress, the number of women in the senior leadership

ranks will not increase dramatically any time soon.

The report is based on a national survey of 876

women and men, along with in-depth interviews with

29 women (15 who have reached C-suite levels and

14 emerging leaders). Overall, 43 per cent of male

managers and 68 per cent of female managers agree

that organizations should try to increase the number

of women in senior management. Male senior execu-

tives were the least likely of all management groups to

agree that there is a need to increase the number of

women in leadership roles. The vast majority of female

senior executives (90 per cent) agreed or strongly agreed

that organizations should try to increase the number of

women in their senior ranks. But only 42 per cent of men

agreed with that sentiment.

Source: Brent Dowdall, (2013, May 15). He Says, She Says:

Gender Gap Persists in Attitudes Toward Women’s Advancement

in the Workplace. Reprinted with permission from The Confer-

ence Board of Canada. Retrieved from www.conferenceboard.ca/

press/ newsrelease/13-05-15/he_says_she_says_gender_gap_

persists_in_attitudes_toward_women_s_advancement_in_the_

workplace.aspx.

0

20

40

60

80

42

90

77

44

65

45

64

53

100

Senior executive

Executive

Women Men

Middle manager

First-level managers

Support for Increasing the Number of Women in Senior Management, by Gender and Level

Note: Data represent the percentage of respondents who strongly

agree/agree with the statement “Organizations should try to increase

the numbers of women in their senior ranks,” n = 430.

A major difficulty in achieving this goal is that most of this large cohort of Native Canadians coming of working age will have insufficient education and limited job experience, restricting their ability to compete for jobs. . . . Native communities and the private and public sectors will have to implement creative solutions to narrow the education and employment gaps. 11

11 Loizides, S. (2003, December 15). Aboriginal baby boom a challenge for employment prospects. Canadian HR Reporter, 16 (22), 10.

Aboriginal Peoples Aboriginals make up about 3.3% of the population. They represent one of the fastest growing populations in Canada but remain vastly underrepresented in the workforce, with their unemployment rate hovering at the 20% range. Researchers have estimated that the Aboriginal population “baby boom” will result in 350,000 Aboriginal people reaching working age by the next few years, and this underscores the growing need for Canada to absorb more Aboriginal people into its workforce. However, as researcher Stelios Loizedes of The Conference Board of Canada observed:

65C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

The educational challenge has proven to be a significant barrier, with Aboriginal populations experiencing a high school dropout rate of 70%. In addition, the lack of job experience and language and cultural barriers have made the plight of this group often appear bleak.

Another barrier to improved employment is the geographical distribution of the Aboriginal community. Employment opportunities on or near Aboriginal reserves are lim- ited. In addition, while over half of the Aboriginal population live in the four Western provinces, these provinces account for a relatively small percentage of the total jobs in Canada, compared to Quebec and Ontario. Sadly, in many urban contexts, Aboriginal workers have typically been largely segregated in low-wage, unstable employment.

Among the biggest barriers faced by the Aboriginal community may be perception— with many Aboriginal Canadians feeling that they do not “fit” with the corporate envi- ronment. As David Brown observed:

That’s a problem for both the First Nations community and corporate Canada to address. Aboriginal Canadians have been prevented from playing a part in the modern corporate world for so long that many now feel that exclusion is normal. 12

Aboriginal Canadians, however, have the potential ability to meet Canada’s labour shortages, as seen in Talking Business 2.6 .

12 Brown, D. (2003, December 15). Overcoming sense of exclusion is key to making inroads in mainstream jobs. Canadian HR Reporter, 16 (22). 9.

TALKING BUSINESS 2.6

Aboriginal Workers: Integral to Canada’s Ongoing Competitiveness and Performance In the coming years, Canada’s economy is unlikely to have

enough workers with the right skills to meet its labour market

needs. Our workforce is aging at an accelerating rate, and the

fertility levels of the Canadian population are below replace-

ment levels. Canada’s Aboriginal population—including Métis,

Inuit, and First Nations—can play an important role in helping

meet Canada’s current and future labour market needs.

The Aboriginal population is the fastest growing popu-

lation in Canada, and is also much younger than the non-

Aboriginal population. Between 1996 and 2006, Canada’s

Aboriginal population grew by 45 per cent while Canada’s

non-Aboriginal population grew by just 8 per cent. In 2006,

39.8 per cent of Aboriginals were under the age of twenty,

compared to only 24.1 per cent of non-Aboriginals.

Yet, Canada’s Aboriginal population continues to be unde-

rutilized within the workforce. In 2006, the unemployment

rate for non-Aboriginals was 5.2 per cent, compared with

unemployment rates of 19 per cent for Inuit, 16.3 per cent for

First Nations, and 8.4 per cent for Métis. Why do Aboriginal

employment levels lag behind those of Canada’s non-Aborig-

inal population? . . .

One reason for the lagging employment levels of [the]

Aboriginal population is lower educational attainment.

Some Aboriginal workers lack the educational qualifications

they need to succeed in the labour force—such as post-

secondary education, or skills such as literacy and numer-

acy. The educational shortfall compared to the Canadian

average is striking. The 2006 Census notes that just 8 per

cent of Aboriginals have a university degree compared to

23 per cent of non-Aboriginals. And 34 per cent of Aborig-

inals aged 25 to 64 have not completed high school com-

pared to 15 percent of non-Aboriginals in Canada.

However, Aboriginals are also more likely to be unemployed

than non-Aboriginals with the same level of education.

What else might explain the underutilization of Canada’s

Métis, Inuit, and First Nations within the labour force?

(continued)

66 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Our initial findings suggest that Aboriginal workers

often lack much-needed work experience, or formal doc-

umentation of their work experiences and skills, required

to gain entry to good jobs. As well, some Aboriginals, par-

ticularly those in remote areas, lack access to transporta-

tion to get to work. Others are reluctant to leave their

communities for a job for an extended period, contribut-

ing further to their underutilization. Negative stereotypes

may also make it difficult for Aboriginals to gain employ-

ment, and may make it difficult for them to succeed in

some work environments.

The challenges facing Aboriginal people will need to be

overcome in order to reduce Canada’s labour shortages.

The solutions will not be easy or quick: engaging Métis,

Inuit, and First Nations people more fully in Canadian

workplaces will take some time.

Source: Excerpted from Edge, J. (2012, February 1). Aboriginal

workers: Integral to Canada’s ongoing competitiveness and per-

formance. Reprinted with permission from The Conference Board

of Canada. Retrieved from www.conferenceboard.ca/topics/

education/commentaries/12-02-01/aboriginal_workers_integral_

to_canada_s_ongoing_competitiveness_and_performance.aspx .

TALKING BUSINESS 2.6 (continued)

In the coming decades, people with a disability will comprise a larger percentage of the population in Canada than ever before. The math is pretty straightforward. As the baby boom generation grows older, the overall age of the population will increase. And because the incidence of disabilities is strongly correlated to age, these numbers will rise together. The degree of accessibility available to this aging population will play a key role in deter- mining their level of health or of hardship, just as it plays a critical role in the daily lives of the more than four million people currently living with a disability in Canada. 13

Individuals with Disabilities Individuals with disabilities have faced a variety of employment obstacles. Typically, this group has experienced a higher unemployment rate compared to the national average. Among the challenges faced are attitudinal barriers in the workplace, physical demands unrelated to the job requirements, and inadequate access to technical and human support systems.

The Canadian Healthcare Network, a national nonprofit web-based health informa- tion service, clearly notes the importance of acknowledging this segment of the population and of the labour pool:

13 Canadian Health Network. Retrieved from www.canadian-health-network.ca/servlet/ContentServer?cid=104 5848110489&pagename=CHN-RCS%2FPage%2FGTPageTemplate&c=Page&lang=En .

14 Canadian Labour and Business Centre (n.d.). CLBC Handbook: Immigration and skill shortages. Retrieved from www.clbc.ca/files/reports/immigration_handbook.pdf .

A major challenge faced by people with disabilities is the issue of accessibility. This can entail a variety of obstacles. While physical barriers may be the most visible obstacle to full accessibility, economic barriers, social discrimination, and obstacles to communica- tion can all prevent someone from having equal access to a building, a service, or a job (see Talking Business 2.7 ).

Visible Minorities Visible minorities make up a growing segment of the population. In the past decade, almost 70% of the growth in the labour force was accounted for by newcomers who arrived in the 1990s. 14 In addition, as the baby boom generation

67C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

15 Kustec, S. (2012). Appendix A: The importance of immigration to labour force growth. The role of migrant labour supply in the Canadian labour market. Citizenship and Immigration Canada. Retrieved from www.cic.gc.ca/ english/resources/research/2012-migrant/appa.asp .

The Conference Board of Canada in partnership with the

Government of Ontario’s EnAbling Change program have

released a new free resource to help employers make their

workplaces more inclusive.

This free resource, Employers’ Toolkit: Making Ontario

Workplaces Accessible to People With Disabilities , is

intended to help employers to understand and implement

the Employment Standard related to the Accessibility for

Ontarians with Disabilities Act (AODA).

“Employers across Ontario will have to implement the

Employment Standard over the next five years. This tool-

kit will help organizations make their workplaces more

inclusive. A strong business case exists for creating acces-

sible and inclusive work environments for employees

with disabilities,” said Ruth Wright, Director, Human

Resources Management Research, The Conference Board

of Canada.

“The full inclusion of people with disabilities in all

aspects of community life and the workplace opens the

door to their full participation in the economy as custom-

ers, entrepreneurs, and employees. An inclusive work

environment is one where everyone is treated with respect

and all employees are valued for their contributions.”

Labour shortages are looming in Ontario. A 2007 Con-

ference Board report indicated that vacancies in Ontario

could reach 190,000 in 2020, and rise to 364,000 by

2025 and to 564,000 by 2030.

TALKING BUSINESS 2.7

Ontario Employers Have a New Tool to Improve Accessibility for People with Disabilities

According to Statistics Canada, approximately 15.5 per

cent of Ontarians had a disability in 2006. And Ontario

government data reveal that in 2009, people with disabili-

ties were three times more likely than people without dis-

abilities to be unemployed or out of the labour force.

This toolkit helps employers of all sizes to implement

the Employment Standard. It includes:

• Special text boxes that introduce each of the individual

sections of the Employment Standard requirements;

• Tips and good practices to promote inclusive practices

at all stages of employment;

• Case studies to help employers to see how others have suc-

cessfully implemented accessible strategies and policies;

• Tips for small businesses that frame the requirements

of the Employment Standard according [to] their spe-

cific circumstances; and

• Tools and templates that employers can tailor to their

own organizations.

Source: Brent Dowdall, (2013, January 23). Ontario employers

have a new tool to improve accessibility for people with disabili-

ties. Reprinted with permission from The Conference Board

of Canada. Retrieved from www.conferenceboard.ca/press/

newsrelease/13-01-23/ontario_employers_have_a_new_

tool_to_improve_accessibility_for_people_with_

disabilities.aspx .

retires, immigrant workers will play a greater role in the labour pool. It is estimated that sometime between 2011 and 2016, new immigrants will account for 100% of the labour force growth. 15

Workplace obstacles faced by visible minorities include culturally biased aptitude tests, lack of recognition of foreign credentials, and excessively high language require- ments. Recent statistics indicate that while visible minorities are well educated, they experience the highest unemployment rates, with recent estimates at roughly twice as high as that for the Canadian-born population.

A study released by the Canadian Race Relations Foundation indicated that desirable jobs and promotions elude many visible minorities and Aboriginal people who believe

68 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

16 Kunz, J.L., Milan, A., & Schetagne, S. (2000). Unequal access: A Canadian profile of racial differences in educa- tion, employment and income. Canadian Race Relations Foundation. Retrieved from http://atwork.settlement. org/downloads/unequal_access.pdf .

that subtle forms of racism permeate the workplace. 16 The report, prepared by Jean Lock Kunz, Anne Milan, and Sylvain Schetagne from the Canadian Council on Social Devel- opment (CCSD), examined the experiences of visible minorities and Aboriginal peoples in cities across Canada. Among the findings were the following:

■ Aboriginal peoples, visible minorities, and immigrants to Canada encounter more challenges in finding employment in all regions in Canada.

■ Foreign-born visible minorities experience the greatest difficulty finding desirable work, and only half of those with a university education have high-skilled jobs.

■ Compared to White Canadians, visible minorities and Aboriginals who possess a uni- versity education are less likely to hold managerial and professional positions. Among those visible minorities who do hold managerial positions, over 50% are self- employed, compared with only 30% of White Canadians.

■ Higher education appears to yield fewer benefits for minorities and Aboriginals in terms of employment and income. Given the same level of education, White Canadi- ans (both foreign-born and Canadian-born) are three times as likely as Aboriginals and about twice as likely as foreign-born visible minorities to rank among the top 20% of income earners.

The Model of the Employment Equity Act The Department of Justice defines equity as focusing on treating people fairly by recog- nizing that different individuals and groups require different measures to ensure fair and comparable results. Employment equity was a term developed by Justice Rosalie Abella, commissioner of the Royal Commission on Equality in Employment (1984), to reflect a distinct Canadian process for achieving equality in all areas of employment. In addition, the term was intended to distinguish the process from the US notion of “affirmative action” as well as to move beyond the “equal opportunity” measures that were available in Canada at that time.

According to the commission, “systemic discrimination” was responsible for most of the inequality found in employment. Systemic discrimination refers to internal policies, prac- tices, patterns, or biases that tend to disadvantage some groups and favour others. It might not be deliberate, but it has the effect of excluding certain classes of people. For example, if managers of a business hold management meetings and make important business decisions on golf courses or in “men’s clubs,” they might envision managers as people who like to go to those places. This perception would tend to work against women seeking management posi- tions. If managers believe people educated in Canada are “smarter” than people educated in other countries, then they will tend to give preference to Canadian-educated applicants and employees. Systemic discrimination maintains historical preferences and creates barriers to diversity in workplaces.

employment equity A term that was developed by Justice Rosalie Abella, commissioner of the Royal Commission on Equality in Employment (1984), to describe a model designed to remove sys- temic barriers that have historically led to underrepresentation in Canada’s labour market of people from the four designated groups.

systemic discrimination Internal policies, practices, patterns, or biases that tend to disadvantage some groups and favour others. It might not be deliberate, but it has the effect of excluding certain classes of people.

69C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

To address systemic discrimination, the Employment Equity Act (EEA) was designed as an ongoing planning process used by an employer to accomplish a number of objectives:

■ eliminating employment barriers for the four designated groups identified in the Employment Equity Act—women, people with disabilities, Aboriginal people, and members of visible minorities

■ redressing past discrimination in employment opportunities and preventing future barriers

■ improving access for the designated groups and increasing their distribution through- out all occupations and at all levels

■ fostering a climate of equity in the organization

■ implementing positive policies and practices to ensure the effects of systemic barriers are eliminated.

Note that the EEA only applies to private-sector employers under federal jurisdiction as well as almost all employees of the federal government. This means that it does not apply to the vast majority of private-sector businesses in Canada, which are governed by provincial laws.

The EEA requires employers that have 100 employees or more to implement employ- ment equity and to report on their results. Under the act, the employer must do the following:

■ Distribute to employees a questionnaire that allows them to indicate whether they belong to one of the four designated groups.

■ Identify jobs in which the percentage of members of designated groups is below their relative representation in the labour market.

■ Disseminate information on employment equity to employees, and consult with employee representatives.

■ Scrutinize the current employment system to assess whether any barriers exist that may limit the employment opportunities of members of designated groups.

■ Generate an employment equity plan directed at promoting an equitable workplace.

■ Endeavour to implement the employment equity plan.

■ Monitor, assess, and revise the plan in a timely fashion.

■ Complete an annual report on the company’s employment equity status and activities.

The objective of the EEA is to slowly break down systemic discrimination and thereby build up the composition within the workforce that reflects the diversity of the labour force as a whole. A number of resources are available to employers to help in this endeav- our, as outlined in Talking Business 2.8 .

More and more businesses have begun to recognize that employment equity is good for business, and Canada continues to strengthen its programs to capitalize on the strength of an increasingly diverse workforce, including immigrants (see Talking Business 2.9 ). Among the numerous organizations that focus on employee equity is BMO Financial Group. BMO recently received accolades from The Conference Board of Canada for its employment equity and diversity initiatives, including its employee-led diversity action teams, its internal employee assistance program, and its recently launched project to help identify workplace barriers among individuals with disabilities.

70 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

1. Government of Canada Labour Program: The Govern- ment of Canada’s Labour Program website ( www.

labour.gc.ca/eng/standards_equity/eq/index.shtml ) is

a national clearinghouse of employment equity tech-

nical expertise. Through the site, you can obtain gen-

eral information on employment equity or access

tools and resources for the implementation of

employment equity as well as information on legisla-

tion and programs.

2. Employment and Social Development Canada: This department is mandated with breaking down barriers

to equality of opportunity for Canadians. Responsibili-

ties include helping families with children, supporting

people with disabilities, and ensuring that seniors can

fully participate in their communities. The department

provides policies, services, and programs for Canadians

TALKING BUSINESS 2.8

Employment Equity Resources who need assistance in overcoming challenges they

encounter in their lives and their communities. These

resources can be accessed at its website ( www.hrsdc.

gc.ca/eng/home.shtml ).

3. Human Resources and Skills Development Canada (HRSDC): HRSDC supports human capital development

and labour market development. Among its clients

are  employees, employers, individuals receiving

employment insurance benefits, students, and those

who need focused support to participate in the work-

force. HRSDC provides federal-level management of

labour and homelessness issues and supports students

and communities through the Canada Student Loans

Program and community economic development ini-

tiatives. Visit the website at www.hrsdc.gc.ca/eng/

home.shtml .

Immigrants can help boost Canada’s innovation performance,

which has been lagging behind many other developed coun-

tries, according to a The Conference Board of Canada report . . .

“Immigrants tend to be motivated individuals willing to

take risks in search of greater opportunities, which should

predispose them to be innovative,” said Diana MacKay, Direc-

tor, Education and Health. “At every level we examined—

individual, organizational, national and global—immigrants

were associated with increased innovation in Canada.”

Canada is a consistent below-average performer in its

capacity to innovate. Canada ranks 14th out of 17 indus-

trialized countries in the Conference Board’s How Canada

Performs innovation report card.

The report, Immigrants as Innovators: Boosting Cana-

da’s Global Competitiveness , uses a number of measures

to show that countries benefit from welcoming immi-

grants. For example, in Canada:

• At least 35 per cent of Canada Research Chairs are

foreign-born, even though immigrants are just one-

fifth of the Canadian population;

• Immigrants to Canada win proportionally more presti-

gious literary and performing arts awards (immigrants

TALKING BUSINESS 2.9

Immigrants Make Significant Contributions to Innovation comprise 23 per cent of Giller Prize finalists and 29 per

cent of winners; 23 per cent of Governor Generals Per-

forming Arts Award recipients are immigrants);

• Immigration rates affect trade levels between Canada

and immigrants’ countries of origin. Based on the Con-

ference Board’s model of known factors influencing

trade, a one percentage point increase in the number

of immigrants to Canada can increase the value of

imports into Canada by 0.21 per cent, and raise the

value of exports by 0.11 per cent;

• Immigrants are a source of diverse knowledge and

experience that can increase innovation in Canadian

businesses, based on a survey undertaken for this study

and a literature review; and,

• Foreign direct investment into Canada is greater from

countries that are well represented in Canada through

immigration, based on data from the census and from

Foreign Affairs and International Trade Canada.

Despite the innovation skills that immigrants bring to

Canada, they face obstacles that limit their ability to

maximize their contribution as innovators. These include

71C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

inadequate recognition of international experience and

qualifications, failure of employers to tap foreign lan-

guage skills which could be employed in international

markets, and lack of opportunities for newcomers to

fully utilize their skills.

Employers can make hiring, integrating, and retaining

immigrants effective innovation strategies. Policies and

practices available to employers to help immigrants con-

tribute in the labour market include:

• Hiring immigrants at every level of the organization,

including leadership roles—Employees tend to be more

dedicated to an organization and motivated in their

work if they see that the organization is committed to

their advancement.

• Matching the organization’s workforce to its clientele—

Employers who match the diversity of their staff to that

of their markets may be better positioned to meet their

client’s needs.

• Providing encouragement for immigrants to share their

views—Managers who actively invite feedback from

immigrant employees reap the benefits of hearing

diverse points of view, which is essential for innovation.

The research was jointly conducted as part of the Can-

Compete project and the Leaders’ Roundtable on Immi-

gration. CanCompete is a three-year Conference Board

program of research and dialogue [that] is designed to

help leading decision makers advance Canada on a path

of national competitiveness. The Leaders’ Roundtable on

Immigration brings together key stakeholder groups to

address common issues relating to immigration.

Source: Brent Dowdall, (2010, October 15). Immigrants make

significant contributions to innovation. Reprinted with

permission from The Conference Board of Canada.

Retrieved from www.conferenceboard.ca/press/

newsrelease/10-10-15/immigrants_make_significant_

contributions_to_innovation.aspx .

Many businesses have also stepped up their efforts to assist the Aboriginal community in gaining greater self-sufficiency and participation in the workforce. There are a number of companies that have been actively involved in boosting the presence of Aboriginals in the workplace. Many businesses have proven that they can work with Aboriginal com- munities, educational institutions, and government to enhance employment prospects for Aboriginals. A typical recruitment method for companies is to offer support for educa- tional institutions, training initiatives, and scholarships for Aboriginal students. For example, 3M Canada contributes to bursaries given through Aboriginal Affairs and Northern Development Canada for Aboriginal students who are pursuing careers in fields related to health care. In addition, recruitment strategies that reach out to Aboriginal communities and organizations are also employed.

Dating back to 1990, the federal government formally recognizes federally regulated companies for achievements in implementing employment equity and addressing the needs of a diverse workforce. Employment equity awards have been given to those organizations deemed to be models in the establishment and implementation of equity practices. The Vision Award is presented to those organizations that exhibit outstanding approaches to the implementation of equity, diversity, and inclusiveness in the workplace. The Certifi- cate of Merit is presented to organizations for their sustained efforts toward attaining a representative workforce.

Recent awards have been presented to such high achievers in equity and diversity as Pelmorex Media Inc., the company that runs the Weather Network. Employee surveys conducted at Pelmorex indicated that more than 90% of employees feel the company highly values equity. This company also offers training on nondiscriminatory interviewing techniques, integrating new employees into the workplace, and accommodation strate- gies. Interestingly, the company rewards managers for their support of the company’s efforts—annual bonuses for managers are linked to promoting equity.

CHAPTER LEARNING TOOLS Key Terms

activist government 51

“at will” employment 57

bargaining power 51

bounded rationality 51

Charter of Rights and Freedoms 59

collective bargaining 51

common law of the employment contract 56

competitive markets 49

critical perspective 52

designated groups 62

duty to accommodate 62

employee 44

employment 44

employment contract 44

employment equity 68

family income 54

income inequality 48

independent contractors 44

industrial pluralist perspective 50

intern 44

invisible hand of the market 49

labour relations statutes 53

managerial perspective 50

mandatory minimum statutory notice 57

minimum wage 49

neoclassical perspective 49

nonstandard employment (NSE) 47

partners 44

prohibited grounds 60

reasonable notice 56

standard employment relationship (SER) 47

systemic discrimination 68

temporary placement organizations 44

undue hardship 62

unemployment insurance programs 58

unemployment rate 55

union density 54

union wage premium 54

volunteer 44

vulnerable or precarious workers 48

Multiple-Choice Questions

CHAPTER SUMMARY This chapter has considered the complexities associated with the labour context of busi- ness. Societies and economies are influenced dramatically by how work is organized. We discussed how debates about the best way to organize work are long-standing and influ- enced by perspectives on markets, power, and the role of the state in capitalist societies. The result is a complex web of rules and forces that businesses must learn and adapt to if they are to operate successfully. We looked more closely at some of these rules, including rules and processes relating to unemployment and the loss of work and rules that attempt to address Canada’s diverse labour force.

72 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Select the best answer for each of the following multiple

choice questions. Solutions are located in the back of your

textbook.

1. Which of the following factors are important consider- ations in deciding whether a worker is an employee or

an independent contractor?

a. Who controls the manner in which work is performed

b. Who owns the tools used in performing the work

c. Who assumes the economic risks

d. All of the above

2. “A legal minimum wage harms businesses and workers alike.” This statement is most consistent with which

perspective?

a. Managerial b. Neoclassical

c. Industrial pluralist d. Critical

3. The belief that employers, through enlightened manage- rial practices, will protect the interests of workers is most

consistent with which perspective?

a. Managerial b. Industrial pluralist

c. Neoclassical d. Critical

4. “Collective bargaining through unions is the best way to address income inequality.” This statement is most con-

sistent with which perspective?

a. Managerial b. Industrial pluralist

c. Neoclassical d. Critical

5. The Canadian Charter of Rights and Freedoms governs a. the behaviour of workers

b. the behaviour of private corporations

c. the behaviour of governments

d. both B and C

73C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

6. The Canada Human Rights Act prohibits employers from discriminating against employees on the basis of

a. political opinion b. weight

c. physical appearance d. none of the above

7. An employer in Canada is prohibited from firing an employee because

a. of the employee’s religion

b. the employee is a union supporter

c. the employee participated in a legal strike

d. all the above

8. A union certification a. gives a union the legal right to represent employees

b. requires a union to demonstrate that a majority of

employees support the union

c. requires the employer’s approval

d. all of the above

9. An example of a common law rule applicable to employ- ment contracts is

a. the requirement for employers to comply with the

Employment Standards Act

b. the requirement for employers to provide employees

with reasonable notice of termination

c. the requirement for employers to collectively bargain

in good faith with unions

d. the requirement for employers to make contributions to

the unemployment insurance fund

10. Human rights statutes in Canada a. prohibit all forms of discrimination

b. prohibit some forms of discrimination

c. impose a duty on employers to accommodate

employee disabilities

d. B and C only

11. An “unpaid intern” under Canadian law is considered to be

a. an employee

b. a volunteer

c. a student

d. It depends on the unique circumstances of the situ-

ation and the provincial law where the intern

works.

12. The managerial perspective is closely related to the a. human resource management perspective

b. neoclassical perspective

c. industrial pluralist perspective

d. both A and B

13. Industrial pluralists acknowledge that a. an imbalance of power exists between employers

and workers

b. strikes are not an effective way for workers to

bargain

c. the market will correct labour issues

d. none of the above

14. Non-union employees in Canada can have a/an _________ with their employer.

a. written employment contract

b. oral employment contract

c. either A or B

d. none of the above

15. The Canadian Charter of Rights and Freedoms is a. part of Canada’s Constitution

b. a legal document that protects mobility rights

c. a trade document

d. both A and B

Discussion Questions

1. Why does the distinction between employment and other forms of work arrangements matter to businesses

in Canada?

2. What are some potential benefits and disadvantages to businesses of hiring employees rather than retaining

independent contractors?

3. Explain the difference between standard and nonstan- dard employment.

4. Which of the various perspectives on work and govern- ment policy do you most agree with, and why?

5. Identify and describe three approaches used in Canada to protecting employees when their employment is ter-

minated. How do they affect business?

6. Identify and explain three types of laws used in Canada to address worker diversity.

7. What are the four designated groups that are protected in the Employment Equity Act?

8. What factors are affecting union density in Canada?

9. Provide arguments both in favour of and against a strong and generous unemployment insurance program.

10. In what ways has economic globalization affected the labour market and debates over how best to regulate

globalization in Canada?

74 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

CONCEPT APPLICATION IMMIGRANTS ARE SOMETIMES UNSURE ABOUT THEIR LABOUR RIGHTS

Sue Zheng, 40, immigrated to Canada from Fuzhou, China, in 2006. Like most immi- grants, Zheng was happy to come to Canada, start working, and begin a new life for her and her family. But Zheng’s experience was not what she expected. To get a job at a manicure salon, Zheng had to pay a $400 deposit. Eager to gain work experience and earn money, Zheng paid the deposit and took the job.

Once she began working, she worked seven days a week, 10 hours a day, for just $25 a day. Zheng decided to quit the job after only two months because of extreme exhaustion. She had no idea about her labour rights until she agreed to participate in a street survey.

“I don’t know any English and had no idea what my rights were,” she explained in Mandarin during an interview. “Workers don’t have a lot of rights where I came from.” 17 Since that time, Zheng has been referred to a legal clinic to try to get back her $400 from her former employer and other possible compensation.

According to the Chinese Interagency Network of Greater Toronto, who conducted the survey, Zheng’s story of immigrant abuse and exploitation is all too common. “Many of the workers have worked in those kinds of conditions for years and they just don’t care about their rights. They just do whatever their bosses order them to do and accept what they pay them. They never challenge,” said Wei Sun, a volunteer who conducted the survey. 18

Indeed, the survey revealed some surprising facts. Of the 119 respondents who agreed to be interviewed, most could only answer about 5 out of the 10 questions correctly. Most people were not familiar with the Employment Standards Act and did not know the cur- rent provincial minimum wage. Moreover, 66% of participants were not aware of overtime pay and 64% were not familiar with holiday pay. Only 55% of respondents knew about severance pay as well as proper notice after a probationary period. And most surprising was that only 18% of those interviewed knew the maximum work hours allowed each week. 19

According to Daniel Yau of the Metro Toronto Chinese and Southeast Asian Legal Clinic, “the problem is newcomers are not familiar with their rights in Canada. They also face the language barrier and don’t know the social infrastructure and supports available to them.” 20

“It’s shocking in Canada that these people are working 70 hours a week, with an aver- age hourly wage of $4,” said Andy Mark of the Chinese Canadian National Council. “It is difficult to find jobs in the mainstream job market. They want to keep their jobs. It’s sim- ply about survival.” 21

In 2008, a Chinese-operated automobile parts facility laid off its employees and moved to Mexico. Hui-min Li, a Shanghai immigrant and employee of eight years, was left without $8,000 in severance pay. Li filed a complaint with the Ontario Labour Relations Board and won his case.

17 Keung, N. (2010 July 23). Few aware of labour rights in Toronto’s Chinatown. Toronto Star . July 23, 2010. Retrieved from www.thestar.com/news/investigations/2010/07/23/few_aware_of_labour_rights_in_torontos_chinatown.html . Reprinted with permission. 18 Keung, 2010. 19 Chinese Canadian National Council Toronto Chapter. (2010, July). Chinese workers are not protected by ESA. Retrieved from www.ccnctoronto.ca/?q=zh-hans/node/343 . 20 Keung, 2010. 21 Keung, 2010.

75C h a p t e r 2 T h e E m p l o y e e – E m p l o y e r R e l a t i o n s h i p

“It was not unusual for us to work 70 hours a week. We worked from 8 a.m. to 1 a.m. and the boss wouldn’t let you go until you finished the work,” said Li. “Most people don’t have knowledge of their rights. Even if they do, they don’t dare to fight for their rights because they are not the type to rock the boat.” 22

Chinese workers are not the only workers affected by employer abuse. Migrant workers across Canada face similar issues but are not Canadian residents. Migrant workers are workers who come to Canada to gain temporary employment and then return to their home coun- tries. These workers often fill low-skilled jobs such as seasonal farm workers or live-in caregivers. According to one study, these workers are particularly vulnerable to exploitation since they are not permanent residents and there is little oversight by the government. The report explains “the depths of the violations are degrading. There is a deepening concern that Canada’s temporary labour migra- tion programs are entrenching and normalizing a low-wage, low-rights ‘guest’ workforce.” 23

Former Bank of Canada Governor Mark Carney has recently acknowledged the problem. “One doesn’t want an over-reliance on temporary foreign workers for lower-skilled jobs,” said Carney. “Relying too much on temporary employees from abroad distorts wage adjustments that lead to Canadians getting better pay and delays changes that make companies more efficient.” 24

Currently, the federal government is looking at changing the Temporary Foreign Worker Program to reduce abuses by businesses. Under the new rules, companies will need to attempt to hire Canadian workers first before hiring temporary, lower-paid foreign workers. 25

Worker Rights in Ontario

Minimum hourly wage: $10.25

Maximum work hours per week: 48 hours without written consent

Overtime pay eligibility: Over 44 hours

Overtime pay rate: 1.5 times base pay

Paid holidays per year: Two weeks

Percentage of vacation pay: 4% of annual salary

Note: In certain circumstances, there are some exceptions to the above.

22 Keung, 2010.

23 Keung, N. (2012, September 17). Abuse of migrant workers endemic in Canada, new study says. Toronto Star. Retrieved from www.thestar.com/news/gta/2012/09/17/abuse_of_migrant_workers_endemic_in_canada_new_ study_says.html .

24 Whittington, L. (2013, April 23). Don’t let temporary foreign workers drive down wages: Carney. Toronto Star. Retrieved from www.thestar.com/business/economy/2013/04/23/foreign_worker_program_must_be_tem- porary_carney.html .

25 Whittington, 2013. Case Continued >

Why does exploitation continue to exist? Clearly, full-time work is not as easy to come by as it was a couple of decades ago. According to a McMaster University and United Way study, approximately half of Greater Toronto and Hamilton-area workers belong to precarious employment. What is precarious employment? Typically, it consists

© Robert Estall photo agency/Alamy

76 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

of temporary, contract, part-time, or on-call positions without benefits. While these types of positions are legal, the reduction in permanent, stable, full-time jobs is a potential threat to the economic prosperity of the region and the social health of communities. 26

According to the university study, it is now more common for many people to work multiple jobs to achieve full-time hours. Every demographic, industry sector, and income level is being affected. With union membership on the decline, so is the protection of workers. The study also found working conditions to be more uncertain and opportunities for job training and development on the decline as well. 27

Susan McIsaac, president and CEO of the United Way, a researcher in the study, explained that job insecurity is not just about reducing poverty. Employment concerns affect our society in a widespread manner from how we contribute to the economy, care for our children, and socialize with family and friends. Certainly, instability in the work- force creates stress and pressure that have an effect on our self-confidence and level of anxiety. While the study was limited to the Toronto and Hamilton regions, many observ- ers contend a similar pattern may also exist across other parts of Canada.

How can workers be protected from unethical employers? According to Charlotte Yates, dean at the Faculty of Social Sciences at McMaster University, “Raising incomes is an obvious and critical area of focus, but it is not enough. The reality that workers in pre- carious employment tend to exit and re-enter the labour market much more often than those in permanent employment requires a renewed look at the basic employment stan- dards and protections as well as revamped income security programs.” 28

Clearly the labour market has changed, and labour laws need to catch up to protect workers. It is a time for labour organizations, community groups, businesses, and the gov- ernment to address how to reduce the negative effects of an unstable labour market. Indeed, uncertainty about employment can become a barrier to deciding on a career, start- ing a family, or beginning other life plans.

According to the Chinese Canadian National Council, “stopping worker exploitation goes beyond educating the public. It is also the employers’ responsibility to treat workers fairly and with respect. A law without reinforcement is futile . . . the Ministry of Labour needs to reinforce the regulations . . . and harsh penalties should be dealt out to offenders.” 29

To enjoy a prosperous future, the university study recommends a renewed public pol- icy framework to support those in precarious employment and to respond to changes in the labour market for the benefit of all workers.

Questions

1. What factors are identified as contributing to the low (and illegal) pay of the workers in this story?

2. How do you think this story would be explained through the lens of each of the four perspectives discussed in this chapter?

3. What, if anything, should be done to improve the working conditions for these workers?

26 McIsaac, S., & Yates, C. (2013, February 23). Half of Toronto-area workers have fallen into precarious employ- ment: study. Globe and Mail . Retrieved from www.theglobeandmail.com/commentary/columnists/half-of- toronto-area-workers-have-fallen-into-precarious-employment-study/article9003680 .

27 McIsaac & Yates, 2013.

28 McIsaac & Yates, 2013.

29 Chinese Workers are not protected by ESA. Chinese Canadian National Council. Toronto Chapter. July 2010.

Chapter 3 Managing the Workforce How Can Business Leaders Best Manage Their Employees?

Organizations that succeed can only do so with the sup-

port of their organizational members. In this chapter we

will examine the roles of managers and the fundamental

philosophies underlying different management styles.

You will become familiar with the classical approaches

and the behavioural approaches to management. As

well, we will consider the significance of building trust in

the workplace.

Learning Objectives

After studying this chapter, you should be able to 1. Describe the types of roles managers play within

organizations.

2. Identify the underlying philosophies of management

within the classical school of thought.

3. Discuss the underlying philosophies of the behavioural

school of thought in relation to management.

4. Consider the importance and role of trust in the

workplace.

77

Edhar/Shutterstock

THE BUSINESS WORLD Learning How to Be an Effective Leader: Lessons from the Executive Roundtable

Leadership skills are widely considered critical to organizational success, and companies that manage to effectively develop leadership capabilities tend to outperform their com- petitors. Ironically, while the popularity of leadership development programs continues to escalate, organizations still struggle to find programs that deliver solid results—the magic bullet, it seems, has yet to be found.

According to The Conference Board of Canada, the majority of Canadian organiza- tions regard their leadership development practices as “relatively ineffective” and express only “lukewarm support” for them. There are indeed serious questions about whether Canadian organizations have the leadership development systems in place to effectively support their future leadership requirements. 1

Given the leadership talent gap, it is time to look beyond traditional approaches to leadership development. In this regard, the efforts of such forward-thinking organizations as The Executive Roundtable appear to be moving leadership development forward.

The Executive Roundtable ( www.theexecutiveroundtable.ca ) is a successful Canadian consulting firm that offers a uniquely different and powerful approach to nurturing and developing leadership talent. Glain Roberts-McCabe, founder and CEO of The Executive Roundtable, developed “The Roundtable for Leaders” program after she noticed that up-and-coming corporate leaders enjoyed expanding their leadership capability through interactions with other leaders of the same level and ambition.

In 2010, Roberts-McCabe launched a 10-month program that featured peer mentoring, and today the program is used by an impressive list of corporate clients, including PepsiCo Canada, RBC, Torstar, Maple Leaf Foods, and the Canadian Automobile Association (CAA).

What makes The Executive Roundtable’s program different? A third of Canadian organizations already provide mentoring and coaching programs for their managerial-level employees, but such programs are based on the belief that knowledge is best transferred down from more seasoned, or even soon-to-be-retiring, managers to less-experienced employees. In contrast, “The Roundtable for Leaders” has been designed in large part around the concept of having “high potential” managers work in small exclusive groups, led by an executive facilitator, to share and exchange ideas, perspectives, and actionable advice.

Participants meet regularly to discuss key issues and topics relevant to their jobs and stage of career and to provide each other with advice and feedback. The sessions are struc- tured and led by an expert facilitator, who brings additional skills and experiences to the group and to the learning process. The program is offered to large corporate clients as well as to the public, in which case managers from different organizations gather around the table.

The program combines peer mentoring with more traditional one-on-one coaching. It is striking how the program participants perceive the value of peer mentoring differ- ently than that of coaching. The coaching process helped them establish and clarify their short- and long-term goals through challenging questions and personal reflections. In contrast, peer mentoring helped them generate concrete ideas for dealing with specific

1 Kotlyar, I., & Karakowsky, L. (2013). Leading edge leadership development: A lesson from The Executive Roundtable. HR Edge. Retrieved from www.theexecutiveroundtable.ca/wp-content/uploads/2013/08/HR-Edge- Article1.pdf .

78 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

79C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e 79C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

2 Kotlyar & Karakowsky, 2013.

3 Kotlyar & Karakowsky, 2013.

work challenges, exposed them to different ways of thinking, and provided a sounding board as well as an opportunity for vicarious learning. While some individuals saw more value in peer mentoring and others in coaching, depending on their personal develop- mental needs, most liked the blended approach of “The Roundtable for Leaders,” where peer mentoring and coaching were combined into one program. 2

Can leadership skills really be acquired effectively from one’s peers rather than from those higher up the hierarchy? According to participants in this program, the answer is a resounding “yes!” Participants in “The Roundtable for Leaders” program include every- one from senior managers to directors and vice-presidents at companies from different industries. And these executives are very enthusiastic about their experience. According to one executive, “We liked it so much we convinced Glain to set up an Alumni program and so we stuck together for another year and continued a similar approach.”

Based on their accounts, the program facilitates two types of learning outcomes: work related and career related. The former includes enhanced abilities to address vari- ous strategic and tactical challenges, deal with subordinates, and make better decisions. Participants describe the value they obtain from being able to receive critical feedback in a supportive, nonthreatening and noncompetitive context—which is a unique opportu- nity since traditional performance appraisals are notoriously poor at juggling the mentor- ing function and the performance evaluative function. They also report how much they benefited from the rare opportunity to practise providing coaching advice to others.

The second type of learning outcome can be called career-related learning. Partici- pants describe how their participation in the program elevated their level of aspiration and created a different outlook on their careers. These two types of personal learning appear to be related and mutually reinforcing. As one participant explained, “It’s a great opportunity to really make sure that you understand who you are as a leader and as a manager, and how you want to envision yourself and grow.” 3

It appears there are a couple of key elements that make peer mentoring successful. First, the diverse composition of roundtables appears to be critical to the effectiveness of the program. Participants in the program generally represent a range of functional back- grounds—finance, marketing, sales, operations, human resources—thereby contributing a rich variety of expertise and perspectives to group discussions. A common sentiment among participants was the appreciation for being exposed to such diversity of views and experiences, which enhanced their capacity to apply different lenses when analyzing their own situations and expanded the mindset they needed for success in their senior leader- ship roles. As one participant, a vice-president of a large advertising firm, commented:

I like that it brings people from different roles together, and we share problems that we all have. [While] the exact problem might not be identical, there are similarities that we face in our various roles, and we explore those together, and what I think is very interesting is that we all tend to have a different approach to how we might solve a different problem, the questions we might ask, and it’s very interesting to hear how others provided their objective counsel on what they might do or might not do, and we learn from that. It’s very interesting to hear other people’s points of view and at the end of the day it causes you to be more thoughtful about how you might approach a similar challenge if you were to face it. 4

4 Kotlyar & Karakowsky, 2013.

80 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Similarly, a director at a large media company commented that “The perspective the peo- ple brought to the table was great, because someone from HR is going to have a different perspective than someone from finance or someone from marketing or operations. It was great to see that cross-section and from different industries.” 5

Second, the quality of the facilitator seems to be another essential ingredient. The role of the facilitator is to establish a sense of trust and confidentiality, which in turn facilitates openness and sharing, and without which the effectiveness of peer mentoring as a leadership development tool would be greatly diminished. The Executive Roundtable employs former senior-level executives who bring their first-hand leadership experiences along with facilitation skills to guide the discussion.

Overall, peer mentoring appears to represent an effective approach to leadership development. Although it is often assumed that “leadership” is best learned from the top, it appears that organizations can acquire unique benefits by having up-and- coming leaders learn from each other. Peer mentoring may become a best practice for more and more organizations seeking to expand their repertoire of leadership development initiatives.

WHY STUDY MANAGEMENT THOUGHT? Leading and managing people is clearly central to an organization’s success in today’s context. However, what is the best way to manage people? Are there philosophies of managing?

Regardless of whether we are looking at a small business or a giant corporation, any type of organization must be managed. When we refer to the notion of a manager , who are we referring to? A manager can be an individual at any level of the organization. For example, top management could include the chief executive officer (CEO) or president along with vice-presidents; middle managers could include such figures as departmental or division heads, plant or branch managers, or deans; supervisors, or first-line managers, might include department heads, forepersons, or supervisors.

Individuals can take on formal or informal managerial roles. For example, a team leader may or may not be formally assigned a managerial role, though that person may have much of the responsibilities of a manager. Regardless of your profession or your role in an organization, no doubt at some point in your career you will be required to apply some sort of management or leadership skills.

The field of management can indeed be systematically studied, and a consider- ation of it is of benefit to anyone who wishes to understand the philosophies that have guided managers for the past century. In this chapter we will consider the body of knowledge that attempts to identify principles employed by managers in their daily practice. However, before we embark, we need to ask a simple question: What do managers do?

5 Kotlyar & Karakowsky, 2013.

81C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

To be a little more systematic, management has also been described as

WHAT DO MANAGERS DO ? What exactly does it mean to manage? What are the functions or roles of a manager? Management has been defined in many ways, including the following:

management The process of administering and coordinating resources effectively and efficiently in an effort to achieve the organization’s goals.

“The art of getting things done through people.” (Mary Parker Follett)

“Managers give direction to their organizations, provide leadership and decide how to use organizational resources.” (Peter Drucker)

The process of administering and coordinating resources effectively and efficiently in an effort to achieve the organization’s goals.

Managing includes the process of planning, organizing, leading, and controlling orga- nizational resources in the effort to achieve organizational goals.

This last definition needs a little more explanation. The term efficiency refers to using the fewest inputs to produce a given level of output. The term effectiveness refers to the pursuit and achievement of goals that are appropriate for the organization.

We need to be a little more specific about what exactly it is that managers do. Here’s a somewhat more detailed definition:

efficiency Using the fewest inputs to produce a given level of output.

effectiveness The pursuit and achievement of goals that are appropriate for an organization.

Exhibit 3.1 outlines each element of this definition—or what have commonly been considered the four central functions of management: planning, organizing, leading, and controlling.

The Roles Managers Play in Organizations Henry Mintzberg, a management scholar, conducted an in-depth study of managers in the 1960s. His observations have stuck with us today and seem to present a useful account of the many roles that managers can potentially play. Among the interesting results of his study is the fact that Mintzberg’s work contradicted the then-dominant view of the role of managers.

The traditional view of the role of managers was that managers were able to reflect systematically on information before making decisions and that their job was relatively clear and narrow. Mintzberg’s study of managers found that managers engaged in a variety of unpatterned short-duration activities, and the constant interruptions suggested that there was little time for systematic reflection. Most important, Mintzberg offered a classi- fication of the various roles that managers play (see Exhibit 3.2 ). Let’s briefly consider each of the roles that Mintzberg identified.

Mintzberg presented 10 roles classified within three broad categories: interpersonal roles, informational roles, and decisional roles. Essentially, these reflect three key areas of managing: developing and managing interpersonal relationships; dealing with the transfer of information; and making decisions.

Objective 1 Describe the types of roles managers play

within organizations.

82 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Interpersonal Roles Interpersonal roles include those managerial tasks that arise from the manager’s formal authority base and involve relationships with either other organizational members or external parties. Figurehead roles are typically ceremonial or symbolic in nature. For example, in the role of a figurehead, a supervisor might hand out “employee of the month” awards at a company banquet. In the leader role, the manager may serve as a motivator, a communicator, and a coordinator of her subordinates’ activities. This might include conduct- ing performance appraisals, offering training to a new recruit, and so on. A final role within the interpersonal grouping is that of liaison , which includes those managerial activities that involve developing relationships with members of the organization outside the manager’s area of authority. This could include anything from a sales manager’s relationship with the produc- tion department to a university dean’s networking relationship with the city council.

Informational Roles Mintzberg’s second broad category of managerial roles, referred to as informational roles , reflects the importance of managers as communication

Designing work activities: ORGANIZING

How the work tasks will be grouped to make best use of resources How the tasks will be assigned, including the issue of staffing How authority will be allocated to carry out the work

FUNCTIONS OF MANAGEMENT

PLANNING Assessing what the organization’s goals should be Generating strategies to achieve the organization’s goals

CONTROLLING Assessing whether the organization is progressing toward its goals Taking steps to ensure problems are dealt with

Establishing standards of performance

LEADING Guiding and motivating all members toward the achievement of the organization’s goals

Communicating ideas and directions effectively

Exhibit 3.1 What Managers Do

Interpersonal Roles Informational Roles

1. Figurehead

2. Leader

3. Liaison

1. Monitor

2. Disseminator

3. Spokesperson

1. Entrepreneur

2. Disturbance Handler

3. Resource Allocator

4. Negotiator

Decisional Roles Exhibit 3.2 Roles of Managers

interpersonal roles One of Mint- zberg’s three broad categories of roles that managers play. Those tasks that arise from the manager’s formal authority base and involve relation- ships with either other organizational members or external parties. Include figurehead, leader, and liaison roles.

figurehead One of the interper- sonal roles that managers play (the others being leader and liaison). Typically ceremonial or symbolic in nature, such as handing out “employee of the month” awards.

leader One of the three interper- sonal roles that managers play (the others being figurehead and liai- son), wherein the manager may serve as a motivator, communica- tor, and coordinator of subordi- nates’ activities, such as by conducting performance appraisals.

liaison One of the three interper- sonal roles that managers play (the others being figurehead and leader), including developing relationships with members of the organization outside the manager’s area of author- ity, such as with other departments.

informational roles One of Mint- zberg’s three broad categories of roles that managers play, where man- agers are communication sources for the organization, whether between parties in the organization or to par- ties outside it. Includes monitor, dis- seminator, and spokesperson roles.

83C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

sources for the organization—whether this involves gathering or giving out important information to other organizational members or to parties outside the organization.

First, we can consider the manager as a monitor of sorts. That is, managers must constantly monitor the internal and external environments of their organization to gather information that is useful for organizational decision making. For example, the marketing manager may be responsible for assessing consumer demand for a newly proposed product.

Second, managers are also disseminators of information. That is, they may share or distribute the information that they have gained in their role as monitors. Obviously, managers must ensure that subordinates have all the information they require to perform their job effectively. This might include offering clear information regarding company expectations of performance standards and performance appraisal criteria.

Third, the manager may act as a spokesperson . Managers can also transmit informa- tion to individuals outside their area of authority. For example, a marketing manager might provide the engineering department with the latest report of consumer preferences regarding product design. Or the company president may report to a government regula- tory board regarding the company’s environmental policy.

Decisional Roles Mintzberg’s final category is referred to as decisional roles , and high- lights the fact that managers must process information and act as decision makers. There are four classes of roles described here. First is the notion of the manager as entrepreneur . That is, the manager may, for example, develop and initiate new projects. This might include the personnel manager developing a new performance appraisal system, the marketing manager developing a new product, and so on. Generating new projects and new ventures is a highly valued trait among today’s managers. Perhaps one of the greatest entrepreneurial leaders in recent times was the late Apple leader, Steve Jobs. For a discussion of his leadership contri- butions, see Talking Business 3.1 .

Managers might also play the role of disturbance handler . Dealing with and attempting to resolve conflict can include things such as resolving a dispute between two employees, dealing with a difficult or uncooperative supplier, and so on. The ability to manage conflict effectively can often be a critical role of a manager (see Talking Business 3.2 ).

A third role that managers can play is that of resource allocator , which involves deciding how resources (money, equipment, personnel, time) will be allocated. For example, a department head might decide how to allocate a limited financial budget among the different areas. Deciding how much time the division should invest in a new project is also a decision about resources.

The final decisional role identified by Mintzberg is the manager as negotiator . Indeed, numerous research studies have underscored the degree to which managers are engaged in some form of negotiation throughout their activities. Whether this involves negotiating with customers, employees, or other departments, a manager often bargains over issues that affect the operation of his or her department, unit, or organization. For  example, the production purchasing manager might negotiate with the supplier in  an effort to speed up the supply of raw materials for the company’s production department. A personnel manager might negotiate with a representative of the union to resolve a conflict.

spokesperson One of the three informational roles that managers play (the others being monitor and disseminator), where information is transmitted to individuals outside the manager’s area of authority.

disseminator One of the three informational roles that managers play (the others being monitor and spokesperson), where the informa- tion obtained through monitoring is shared and distributed.

monitor One of the three informa- tional roles that managers play (the others being disseminator and spokes- person), where the internal and exter- nal environments of the organization are constantly monitored for informa- tion useful in decision making.

decisional roles One of Mintzberg’s three broad categories of roles that managers play, where information is processed and deci- sions made. Includes entrepreneur, disturbance handler, resource allo- cator, and negotiator.

entrepreneur One of the four decisional roles that managers play (the others being disturbance handler, resource allocator, and negotiator), where the manager develops and initiates new projects.

disturbance handler One of the four decisional roles that managers play (the others being entrepreneur, resource allocator, and negotiator), where the manager deals with and attempts to resolve conflicts, such as dealing with a difficult or unco- operative supplier.

resource allocator One of the four decisional roles that managers play (the others being entrepreneur, disturbance handler, and negotiator), where it is decided how resources such as money, equipment, person- nel, and time will be allocated.

negotiator One of the four deci- sional roles that managers play (the others being entrepreneur, distur- bance handler, and resource alloca- tor) involving negotiation in all its forms, whether with customers, employees, or other departments.

84 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Steve Jobs was an innovative visionary who, at the young

age of 56, died of cancer on October 5, 2011, leaving

behind a technological giant known as Apple Inc. as well as

two other companies that he cofounded, Pixar and NeXT

Inc. During his reign, Jobs was considered to be Apple’s

anchor, driving it to be one of the most valuable companies

in the world. His strategy toward his employees, as unortho-

dox as it was, was the reason why Apple was so successful.

Born on February 24, 1955, Jobs was always a deter-

mined individual. Since high school he was distracted by

technology and was soon attending lectures at Hewlett-

Packard. This quickly got him a job working with Steve

Wozniak, his future business partner. Jobs attended Reed

College in Portland, Oregon, but dropped out after only a

year and began working for Atari as a technician. Jobs

received his first shot at strategic leadership upon his return

from India. His initial strategy came more out of necessity

than forethought when driven by his desire to build Apple.

Together with Steve Wozniak and Ronald Wayne, they

created their first Apple computer, along with the initial

formation of the company, in the garage of Jobs’s par-

ents’ house. Shortly after the company went public, gen-

erating a value of $1.79 billion. In 1983, Jobs lured John

Sculley away from Pepsi-Cola to serve as Apple’s CEO, but

their different attitudes led to an antagonistic working

relationship. As persuasive and charismatic as he was

about his goals, Jobs butted heads with a person he previ-

ously claimed to be the best thing for Apple. Not only was

TALKING BUSINESS 3.1

The Visionary Leader: Steve Jobs Jobs having issues with management, but his task-driven

attitude left employees a bit frazzled. Jobs was known for

ignoring the feelings of his employees in the workplace,

focusing only on getting the best product out quickly.

While Jobs reigned there was approximately a 75% turn-

over rate at Apple. Over time the partners did not see eye

to eye, and Sculley held a board meeting to remove Jobs

from Apple on May 24, 1985.

At this point in his life, Jobs fully believed getting fired

was the best thing for him. Being a strong-willed individ-

ual he was determined to keep the momentum of his

innovative ideas flowing. Jobs was a religiously task-

oriented individual, so without waiting long he developed

another computer company called NeXT Inc. in 1985. One

of the company’s claims to fame was creating a software

program called WebObjects, which was later used to cre-

ate the Apple store and iTunes Store. By the time Jobs had

built up NeXT he was considered a leading egomaniac

with an aggressive and demanding personality who

quickly made Fortune ’s list of America’s Toughest Bosses.

Only one year later, in 1986, Jobs bought The Graphics

Group (later renamed Pixar) from Lucasfilm’s computer graph-

ics division for the price of $10 million, $5 million of which

was given to the company as capital. Pixar became widely

popular and to this day is still a very successful company.

A short while after, Jobs became reunited with his

brain child when Apple decided to buy NeXT for $429 mil-

lion, so that by 1997 Jobs was back in his role as CEO of

Apple. While settling in, Jobs viewed Apple’s new chapter

as an opportunity to create large profit margins and turn

the company around. He started by cutting many projects

and jobs to the point where people were scared of pass-

ing him in the hallway. Slowly, through the integration of

NeXT’s technology into Apple products, the company was

able to improve sales significantly. Although considered

an irregular practice, as CEO Jobs had over 100 employees

reporting to him, regardless of his harsh task-driven ide-

als. His authoritarian model ensured that he was involved

in every step of product design. Jobs even instituted a

product-recycling program that greatly appealed to

Apple’s customers. Since then, Apple has produced many

lines of products including the iPod and iMac—products

that have found their way into homes and offices around

the world.

Reuters/Toshiyuki Aizawa TA/LA

85C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

In October 2003, Jobs was diagnosed with pancreatic

cancer. Being the determined individual he was, however,

Jobs never slowed down and continued to push new and

innovative ideas while convincing his audience that his

health was of no concern. In fact, Jobs delayed informing

anyone at Apple about his condition, including the board

of directors and its shareholders, for as long as he could.

However, Jobs never retired his high-involvement tactics,

and soon enough employees began to appreciate his state

of mind. Debi Coleman, a manufacturing manager for

Apple, considered herself lucky to have worked for him

(Taggart, 2011). Jobs’s leadership strategy was able to

“infuse employees with an abiding passion to create

groundbreaking products and a belief that they could

accomplish what seemed impossible” (Isaacson, 2011).

Granted, Jobs’s relational tactics seemed questionable, but

Jobs was successful in taking an almost bankrupt com-

pany and converting it into one of the most valuable in the

world. It was not long before Jobs’s health caught up with

him in August 2011, when he decided to resign as CEO of

Apple. Ultimately, his battle ended that October when he

passed away.

It would appear that Apple employees over the years

began to develop an appreciation for Jobs’s leadership

style and strategy for product output within the company.

When Apple first opened, its leaders and subordinates

questioned Jobs’s tactics, which ultimately led to his termi-

nation. When he returned to Apple, its employees started

to see the value in a visionary who could only describe

reality as malleable. Albeit he had moments of bullying,

Jobs was able to motivate and instill an ideology in his

workers that anything was possible, including achieving

true perfection. As one individual who worked with Jobs

observed: “Over a million people from all over the world

have shared their memories, thoughts, and feelings about

Steve. One thing they all have in common . . . is how

they’ve been touched by his passion and creativity”

(Apple, n.d.).

Sources: Griggs, B., & CNN. (2011, October 5). Steve Jobs,

Apple founder, dies - CNN. Featured Articles from CNN.

Retrieved January 29, 2012, from http://articles.cnn.com/2011-

10-05/us/us_obit-steve-jobs_1_jobs-and-wozniak-iphone-

apple-founder?_s=PM:US; Isaacson, W. (2011). Steve Jobs.

New York: Simon & Schuster.; Moisescot, R. (n.d.). Long Bio. all

about Steve Jobs. Retrieved February 20, 2012, from http://

allaboutstevejobs.com/bio/long/12.html#; Steve Jobs: The Man

Who Saved Apple. (2011, November 1). MacWorld, 28,; 14.

Retrieved February 29, 2012, from the ProQuest database.;

Taggart, J. (2011, November 21). Steve Jobs’ Reality Distortion

Field: Leadership or Bullying? ChangingWinds. R .

An interview with Dr. Mitchell Kusy and Dr. Elizabeth Holloway

Dr. Mitchell Kusy and Dr. Elizabeth Holloway are man-

agement scholars and practitioners who recently coau-

thored a book, Toxic Workplace! This is the first book to

tackle the underlying systems issues that enable a toxic

person to create a path of destruction in an organiza-

tion, pervading others’ thoughts and energies, even

undermining their sense of well-being. Dr. Kusy and Dr.

Holloway’s research reveals the warning signs that indi-

cate a serious behavioral problem and identifies how this

toxicity spreads with long-term effects on organizational

climate.

Dr. Kusy has had over 25 years experience in leader-

ship and organization development. He is a full professor

in the Ph.D. program in leadership and change at Antioch

University and has written several books on leadership.

Dr. Elizabeth Holloway is a full professor and psycholo-

gist with over 25 years experience as a practitioner,

trainer, and consultant in relational practice with leaders

worldwide. She has held faculty appointments at the

Universities of California, Utah, Oregon, Wisconsin, and

currently at Antioch University. She has written several

books, numerous research articles, and consults interna-

tionally on topics ranging from mentoring to organiza-

tional learning.

Question: In your extremely insightful book, you expose the dynamics of the toxic workplace and provide practitioners

with clear guidance on how to deal with this serious prob-

lem. The book’s rich observations stem from the exhaustive

TALKING BUSINESS 3.2

Conflict Management: The Toxic Employee

(continued)

86 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

research you conducted with over 400 business leaders,

many from the Fortune 500 List. I am curious as to how you

managed to get so many business leaders to “open up” to

you about the “dark side” of their workplaces?

Dr. Holloway: Interestingly, these leaders were more than willing and prepared to share their stories. Many had never

talked about it before. For most, I think the interviews we

conducted were cathartic. Leaders also are genuinely inter-

ested in understanding how to better deal with these

kinds of individuals. We know that toxic individuals can

cost the company substantially in both human and finan-

cial terms. Leaders understandably want solutions.

Dr. Kusy: It came as a complete surprise to us that 94 percent of the respondents in our research reported

they had worked with or were currently working with a

toxic person. So far, most solutions have been short-

sighted—simply firing the person without attention to

the effect the toxicity has had on the team, the culture,

and the leaders. The fact is, a toxic personality can infect

a whole team and potentially bring down a company.

Question: In your experience, how well does the “average” person cope with a toxic colleague or a toxic boss at work?

Dr. Kusy: Although much has been written about the more serious types of personal impairment, such as

alcoholism, mental illness, physical aggression, and

sexual harassment, the toxic effects of incivility in the

workplace are only now being unveiled. People can’t

sleep, they get sick, their relationships suffer, and they

lose the enjoyment of going to work.

Dr. Holloway: The additional danger is that a toxic per- sonality spreads like a virus. Once you have one person

who is toxic, other people start to behave badly because

they are in survival mode. And once you have a culture

of nastiness, then it isn’t automatically going to revert

back to everyone feeling good. Incivility—backstabbing,

gossip, angry outbursts, condescension, and sabotage—

can quickly become the norm of operations and with

that come costly losses in reputation and productivity.

Question: It’s a potentially devastating issue—both to the organization and to the individual—and yet we all know

that toxic workplaces persist. For organizations seeking to

take action, how difficult is it to identify toxic behavior?

It seems like a very broad concept. Does it include things

like harassment and bullying?

Dr. Holloway: In general, toxic individuals are those who exhibit counterproductive work behaviors that can debili-

tate individuals, teams, and even entire organizations.

Our research indicates that toxic behaviors can fall below

the threshold of bullying or harassing. Toxic behaviors are

actually harder for an employer to address formally

through a disciplinary process. In fact, one of the key

challenges of dealing with toxic behavior is that, ironically,

it can slip under the “radar” even though it often exacts

a huge toll on employees and corporate profits.

Dr. Kusy: In our research, we discovered three primary categories of toxic behaviors that often fall outside of any

written corporate policy. The first is what we refer to as

“shaming.” This includes the use of humiliation, sarcasm,

potshots, or mistake-pointing with the intent of reducing

another’s self-worth. The second kind of toxic behavior is

“passive hostility” which involves the use of passive

aggressive behavior with the intent of directing one’s

anger inappropriately. The third kind is “team sabotage”

or meddling with the intent of either establishing a nega-

tive power base or making the team less productive.

Dr. Holloway: Surprisingly, while these three behaviors can make work life intolerable, only about 1 percent to

6 percent of victims ever report these behaviors. Toxic

employees can gnaw away at their colleagues on an

ongoing basis. Yet the target(s) can rarely point a finger

to exactly what happened in any particular instance.

And when bad behavior stems from the boss, finger

pointing may be even less likely. The reality is that toxic

people have a predilection toward behaving badly, and

when you have people in authority, who work in a team,

and they are allowed to be condescending—and they

get away with it—their colleagues often feel silenced.

Question: Your research points out that most organiza- tions have gone about battling toxic behavior in the

“wrong way”? How so?

Dr. Kusy: In our research, we were interested in how leaders and their teams reacted to the presence of toxic

behaviors. Often leaders try to minimize team interactions

with the toxic individual, restructure the environment, or

remove responsibilities from the toxic individual. In the

cases we examined, none of these strategies proved very

effective; each was time-consuming, reactive, and left a

fragmented team in its wake.

TALKING BUSINESS 3.2 (continued)

87C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

Dr. Holloway: Yes, the typical organizational responses were short-sighted and ineffective. In most situations,

we found that everything was directed toward avoiding

the influence of the toxic individual. Much of the team’s

energies may be drained in efforts to manage this per-

son. You can see the damaging effects such reactions

have on a fully functioning and efficient team. Not only

are good team members leaving but the functional com-

munication or decision-making path also breaks down.

Question: Your book was among the first to identify the underlying systems issues that enable toxic individuals to

persist. You identify important supporters of the toxic

individual—can you tell us about them?

Dr. Kusy: Toxic systems are particularly resistant to change and are often tolerated for years. In our

research, we discovered two roles that create such a

toxic system: the “toxic protector” and the “toxic buf-

fer.” The toxic protector is the person who unwittingly

permits the toxic behavior to continue. Toxic protectors

feel compelled to protect the toxic person from nega-

tive reviews or termination because they have a special

interest in keeping them as a part of their team, often

because the toxic person is highly productive or has a

special expertise. Toxic protectors typically don’t realize

that they are putting the team in jeopardy.

Dr. Holloway: Unlike toxic protectors, the “toxic buffer” seems to have a different motivation. Buffers actually rec-

ognize that the toxic employee’s behavior is detrimental

to team functioning. However, they feel that the solution

is to serve as a shield or buffer between the toxic person

and team members. Unfortunately, despite their good

intentions, the buffer is actually enabling the toxic

employee to get away with bad behavior. While trying to

absorb the toxicity, the buffer will often become emo-

tionally damaged in the process and unwittingly assists in

a downward team spiral—a dysfunctional pattern of

communication and authority in the team. In this way,

both toxic protectors and toxic buffers actually facilitate

the enactment of a culture of incivility.

Question: You identify three levels of strategy to combat toxic behavior. Can you briefly tell us about the aim of this

approach and how it succeeds where traditional

approaches have failed?

Dr. Kusy: Our view is that to effectively address this prob- lem, actions need to occur on three levels: the organiza-

tion, the team, and the individual. We refer to this as the

Toxic Organization Change System (TOCS). For example, at

the organizational level we need to understand what val-

ues exist and are being practiced. Most organizations have

stated values. But how pronounced are they in your organi-

zation? Is one of these values about respect? If not, you

have some work to do. First, you’ll need to make sure the

value of respect (or however you term this value) gets incor-

porated into a code of professional conduct. Ultimately,

this code gets rolled into an organizational policy. It

becomes your mantra in creating a culture of respectful

engagement. It’s not just a nice-to-do; it turns out to have

important impacts on the human and financial bottom line.

Dr. Holloway: Part of the large-scale design of the pro- fessional conduct code is the establishment of a zero

tolerance policy. This policy is important because it pro-

vides the context not only for how we live by these val-

ues but also for what happens when they are breached.

Certainly, due process procedures must be followed

when the situation is serious enough to warrant dismissal.

However, there are many intermediary actions that can be

taken by leaders to turn a culture of disrespect around.

Question: In your experience, how common is it for organizations to integrate a values-based approach with

management processes?

Dr. Kusy: What we have found is that most organiza- tions do not have values integrated into their manage-

ment process. So that is another reason why toxic

cultures won’t get better quickly. For example, we

favor a situation where there is a 60–40 split when it

comes to performance reviews. This means 60 percent

of the reward is based on task work, and 40 percent on

the values work. But in most organizations, it is 90 to

100 percent based on task work. If the values really

mean so much within an organization then they need

to put their money where their mouths are.

Dr. Holloway: If you change the culture by changing the criteria for the performance appraisal to include things

such as interpersonal behavior, then you can start to

change some of those unwanted behaviors. Performance

management processes are not simply a mandate to mon-

itor and reprimand but a real opportunity to reward inter-

personally effective behaviors that uphold your values.

Source: Excerpted from Karakowsky, L. (2011). Workplace detox:

Dr. Mitch Kusy and Dr. Elizabeth Holloway shed some light on the

dark-side of your workplace. HR Edge (Fall), 14–17. Available at

www.yorku.ca/laps/shrm/hredge/HR-Edge_issue3.pdf .

88 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Now that we have outlined the notion of managing and the roles managers play, in the next section we will take a more systematic look at how the role of manager is chang- ing. We’ll start with the oldest approach, then consider more recent philosophies of managing people in organizations.

MANAGEMENT PHILOSOPHIES If you have ever taken a trip to Disneyland, you will notice the great level of care and pro- fessionalism with which Disney employees (referred to as “cast members”) conduct their jobs. In fact, Disney even offers management training programs through its “university” for countless other organizations. What is so special about Disney’s management approach that has helped it achieve worldwide fame and success? The answer might surprise you: nothing. However, what is rare is its ability to make sure the management philosophies employed are suitable for the nature of their organization. While a lot of what Disney is doing may be common sense, common sense alone won’t get you very far  when it comes to

selecting and implementing a system of managerial practices that is suitable for today’s organization.

Clearly, not all organizations are created equal—from the McDonald’s of the fast-food industry to the Microsoft of the high-tech world, what works for one organization with regard to management philosophy may be deadly if applied in another environment. So the question is, what are the ranges of management philosophies that exist, and upon what principles are they based? Let’s answer these questions as we consider the ele- ments of two fundamentally different schools of management thought: the classical and the behav- ioural approaches. (See Exhibit 3.3 for a compari- son of the two approaches.)

CLASSICAL APPROACHES TO MANAGEMENT The oldest of the formalized perspectives of management has come to be known as the classical approaches to management , and it arose during the late 19th and early 20th centuries. This view originated during a time of rapid industrialization in the United States and European business sectors. Three streams that are central components of this school are (1) scientific management, (2) administrative management, and (3) bureau- cratic management. We will look at each of these perspectives and attempt to understand the contributions they have made to the field of managing, but first we must consider the environment surrounding the evolution of management thought.

The Social Context Understanding the social context of late 19th and early 20th centuries sheds light on the logic of the management approaches that were generated during that time.

Objective 2 Identify the underlying philosophies of man-

agement within the classical

school of thought.

classical approaches to management The oldest of the formalized perspectives of manage- ment, which arose in the late 19th and early 20th centuries dur- ing a period of rapid industrializa- tion in the US and European business sectors. Includes scientific, administrative, and bureaucratic management.

II. Behavioural Approaches to Managing

1. The Human Relations Movement

2. Mary Parker Follett and Chester Barnard

3. Modern Behavioural Science and Motivation-Based Perspectives

I. Classical Approaches to Managing

1. Scientific Management

2. Administrative Management

3. Bureaucratic Management

Exhibit 3.3 Management Philosophies

89C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

One of the major driving forces behind the formalization of management thought was the Industrial Revolution . While management concepts have been around practically since the dawn of civilization, it was not until the 18th century, as a consequence of the intellectual and scientific accomplishments of the Renaissance period, that the systematic development of management principles and practices began.

The Industrial Revolution, as the name implies, was a major transformation in work processes that began in the 18th century with the replacement of hand production by machine and factory production. For example, a new energy source, the coal-driven steam engine, was created to run the machines. The introduction of new work processes and machinery culminated in the factory system of production that eventually led to mass production processes. Certainly, the factory system brought with it many benefits, includ- ing a higher standard of living. It also brought with it extensive changes in management, given that work was no longer conducted in workers’ homes, but in factories.

The philosophy that fuelled the Industrial Revolution was the notion of “ laissez faire ,” a term used by the economist Adam Smith in his book The Wealth of Nations. This term essentially meant that businesses or manufacturers should be free to make and sell what they please and, consequently, reflected the notion that government should not interfere with the economic affairs of business. Businesses should be allowed to pursue their own self-interest. The economic view of labour was a straightforward one—the employer buys the labour, and the employee provides the labour. There was no long-term obligation on either side, which reinforced the notion that employees were not valued. With a great supply of labour and jobs involving little skill, it became clear that all power rested with the employer. It was in such an environment that philosophies like scientific management eventually arose.

Scientific Management Frederick Taylor (1856–1915) was an American engineer who sought to help American industry deal with the challenges of improving productivity. Keep in mind that in Taylor’s time there were no clear concepts of management and worker responsibilities. Taylor thought the problem was a simple one to solve: Improve management practices and you’ll improve productivity. So Taylor sought a way to better manage workers.

For most of his working life, Taylor was employed in steel mills, first as a labourer, eventually as a foreman, and ultimately as chief engineer. While working as a foreman at Midvale Steel Company in Philadelphia, and later as a consulting engineer at Pittsburgh’s Bethlehem Steel, Taylor observed what he thought were significant inefficiencies in the conduct of work. The results of his observations and studies were eventually reported in a series of papers, The Principles of Scientific Management, published in 1911.

What was Taylor’s philosophy? Taylor stated the fundamental objective of management as follows: “Securing the maximum prosperity for the employer coupled with the maximum prosperity for each employee.” 6 This sounds reasonable; but what, specifically, does it mean and how do you go about achieving that apparently admirable objective? To answer the second question, Taylor believed that the way to improve worker–manager relations was through scientific management , which involves at least three central features: compartmen- talizing and standardizing the work, supervising the workers, and motivating the workers.

Industrial Revolution A period of time when manufacturing prac- tices developed, between 1760 to 1840, changing the nature of work from manual hand production methods to machine use and mass production.

laissez faire A term meaning that businesses or manufacturers should be free to make and sell what they please and, consequently, reflects the notion that government should not interfere with the economic affairs of business.

scientific management Frederick Taylor’s philosophy that the fundamental objective of man- agement is “securing the maximum prosperity for the employer coupled with the maximum prosperity for each employee” by standardizing and compartmentalizing work practices. This is one of the three central classical approaches to management, the others being the administrative and the bureaucratic.

6 Taylor, F.W. (1911). The principles of scientific management. New York, NY: Harper & Brothers.

90 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

standardizing In scientific man- agement, the establishment of clear rules regarding how to per- form a job, leaving little or no room for individual discretion, thus assur- ing consistent performance.

time and motion studies In scientific management, the sci- entific analysis of work, often using a movie camera and a stopwatch to closely scrutinize the elements of performing a task.

Compartmentalizing and Standardizing the Work During Taylor’s days with Midvale Steel in Philadelphia, he made some interesting observations of workers whose task it was to shovel coal and iron during the manufacture of pig iron. After carefully analyzing the range of motions involved in shovelling, he decided to experiment with different sizes of shovels and varied the size of the load scooped to minimize fatigue. He also arranged for the workers to have varying work and rest intervals so that he could experiment with recovery rate. Based on his observations and recommendations, the average daily output of workers was tripled, and the number of shovellers required for the job was reduced from 600 to 140! 7 The science of shovelling was indeed

born, and scientific management was a hit! Scientific management, or Taylorism, was based on careful observation and measure-

ment to determine the most efficient methods for performing a task. This essentially involves the scientific and systematic study of how work is done to improve the work process. Work can be studied objectively, and tasks can be broken down into their sim- plest steps. The scientific analysis of jobs required time and motion studies , which involved using a movie camera and a stopwatch to closely scrutinize the elements of per- forming a task. For example, bricklayers could be observed and timed to assess precisely which movements were most efficient for laying bricks.

All this was based on Taylor’s belief that there is one best method for performing the job—and the job of management is to discover that method, train workers, and ensure that they use the method. This resulted in specializing, or compartmentalizing , the job into its basic parts—that is, breaking the job down into its most fundamental steps and, where feasible, allowing workers to perform the most basic tasks. This kept the job simple, made it easy and inexpensive to train workers, and ensured a cheap and ready supply of labour to perform the job. Standardizing the work meant that there were clear rules regarding how to perform it, which left little or no room for individual discretion. There is no better way of ensuring consis- tent performance than through the creation of strict guidelines.

According to Taylor, then, the purpose of managers is to help set proper standards for work performance. Managers must also train the workers in these standards and direct their performance to achieve the most efficient and least fatiguing manner of working. Other responsibilities of management include selecting workers with the abilities that make them the most suitable for the job.

Supervising the Workers Taylor believed that a manager can’t be an expert in everything. He therefore suggested that managers take charge only of their area of exper- tise. As a first-level supervisor, you should be responsible for workers who perform a com- mon function with which you are familiar. Of course, it is the supervisor or foreman who would do the planning, time motion studies, scheduling, and so on. More generally, what Taylor did was make clear the separation of the mental work of managers from the physical

7 Taylor, 1911.

compartmentalizing In scien- tific management, the result of Frederick Taylor’s pursuit of the one best method of performing a job, which involves breaking the job down into its most fundamental steps or components. Also called specializing.

U. Baumgarten via Getty Images

91C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

work of the labourers. The managers directed workers to do the work in the standardized manner. Keep in mind that Taylor’s views arose at a time when American industry had at its disposal a vast supply of labour with a huge segment of new immigrants who, it was felt, were not fully capable of managing themselves.

Taylor’s views have been criticized as denigrating employees and treating them as machines. However, Taylor did contribute to the creation of management as a “profes- sion.” Think about it: Managers’ skills became specific not to the manufacture of the product, but rather to managing —that is, coordinating the activities of large numbers of people regardless of the organizational context.

Motivating the Workers Taylor’s philosophy about motivating the workers was quite simple: Money motivates! While that may seem obvious to most of us, Taylor’s views were interestingly consistent with the rest of his philosophy. In a sense, Taylor advocated a system that has recently been revisited by many different types of organizations. Taylor believed that compensation must be closely tied to performance. A paycheque for simply “walking through the door” is not motivating. It must be clear in workers’ minds that they only get a “good day’s pay” for a “good day’s work.” So a piece-rate system was desirable, whereby workers’ pay was directly tied to their output. If you produced at a standard level of production, you received a standard rate of pay; if you produced above average, you were paid at a higher rate.

How far-reaching are Taylor’s views, and does Taylorism exist today? Scientific man- agement continues to influence the management of work. From the manufacturing sector to the service industry, in many ways this philosophy has guided organizations for much of the past century. For example, consider the teaching profession. Believe it or not, Taylor and the principles of scientific management had a profound impact on the education sys- tem. The industrial expansion of the early 20th century demanded a system of mass educa- tion that would educate huge numbers of formerly rural people as well as new immigrants. The system required a rapid increase in the number of able and inexpensive teachers. Tay- lorism facilitated such a transition in the education system. Managers, who were typically male, became the supervisors or principals of the teachers, who were mostly women and less powerful and less well paid. The nature of teaching, too, became subject to the princi- ples of scientific management. Remember the need to break the job down into its simplest components? Teachers were now specialized by grade and by subject; just as manufacturing work became specialized or compartmentalized, the task of teaching became standard- ized—what you taught and how you taught it were all part of a common plan. Clearly, then,  Taylorism was adopted widely in industrial as well as nonindustrial settings. Taylor’s ideas also spread beyond North America to Russia, Japan, Germany, and elsewhere.

Taylorism certainly remains alive and well across many different industries. You can probably think of some real-life organizations that are managed according to the prin- ciples of scientific management. For example, UPS (United Parcel Service) built its success in the delivery business on the principles of Taylorism. This company designed time and motion studies to ensure that the work of its delivery team is based on maxi- mum efficiency and performed under strict standardized guidelines.

However, there is likely no better example of the modern application of scientific management than McDonald’s. The success of McDonald’s is obvious and is largely based on the duplication of its services across diverse areas. Their management system has been adopted not only by other fast-food chains but has spread to retail and other industries.

piece-rate system In scientific management, motivating workers by tying compensation to perfor- mance according to output, so that a standard level of output produces a standard level of pay, and above-average output produces above-average pay.

92 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

McDonald’s achieved fame by making the dining experience reliable and predicable for consumers through the application of the principles of scientific management. Standard- ization guaranteed that customers continually received what they expected—both in the  design of the store and in the system. Employee jobs are compartmentalized and standardized: Cooking and customer service are broken down into a series of simple, standardized tasks performed according to strict procedures.

Administrative Management A second subschool of the classical perspective of management is closely associated with the work of Henri Fayol (1841–1925). As the name implies, administrative management focuses specifically on management and the functions that managers should perform. Fayol, like Taylor, had some compelling views on how organizations should be managed. An engineer for a mining company in France, Fayol applied his principles with much suc- cess—and revitalizing an ailing company certainly helped Fayol’s management approach gain attention. However, whereas Taylor’s work was largely aimed at guiding managers at the lower levels, Fayol’s work focused on upper levels of administration. Fayol developed a number of principles of management that he believed could serve as universal principles that could be taught to managers regardless of their specific organizational environment.

Like Taylor, Fayol supported the notion of division of work: By breaking work down into its simplest components and assigning these separate elements to workers, the work can be con- ducted more efficiently and productively. Similarly, Fayol believed that a manager’s role is to give orders and to discipline employees. Fayol also advocated the notion of unity of command — each employee should report to only one boss to avoid confusion and conflicting instructions. In addition, this authority should be concentrated at the upper levels of the organization.

Fayol believed that employees should subordinate their individual interests to the com- mon good or general interest of the organization. In other words, the goals of the overall organization must take precedence over any individual interests of employees. Finally, among Fayol’s stated principles was the concept of esprit de corps —that is, team spirit and harmony should be encouraged among workers to generate organizational cohesiveness and unity.

Are Fayol’s views still with us? Some of Fayol’s assertions have gone out of vogue. For example, in today’s environment many organizations do not view centralized decision- making authority as being as efficient as allowing authority to reside at lower levels of the organization. In addition, the rights of workers certainly are no longer subordinated to organizational goals, and considerable attention is placed on satisfying individual interests and needs at work. However, some of Fayol’s principles are quite compatible with contem- porary management views. For example, Fayol’s notion of team spirit is important in many workplaces that are attempting to facilitate team work (see Talking Business 3.3 ).

Bureaucratic Management Max Weber (1864–1920) was a German sociologist whose work became most closely affil- iated with the school of thought eventually known as bureaucratic management . This perspective is broader in its focus than scientific and administrative management in that Weber’s focus is on the nature of the organization as a whole. As was the case with Taylor and Fayol, Weber’s beliefs came from observations of his environment.

administrative management Henri Fayol’s philosophy of man- agement, one of the three major classical approaches (the others being scientific and bureaucratic management). It focuses on the principles of division of work, unity of command, subordination of employees’ individual interests to the common good, and esprit de corps.

unity of command In adminis- trative management, avoiding con- fusion and conflicting instructions by having each employee report to only one boss, preferably in the upper levels of the organization.

esprit de corps In administrative management, generating organiza- tional cohesiveness and unity by encouraging team spirit and har- mony among workers.

bureaucratic management One of the classical approaches to management (the others being sci- entific and administrative manage- ment) that focuses more broadly on the organization as a whole and incorporates the ideas of rules and procedures, hierarchy of authority, division of labour, impersonality, and selection and promotion. Asso- ciated with Max Weber.

93C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

TALKING BUSINESS 3.3

Leading Teams in a New Direction An Interview with Harvard Business School Professor Todd Pittinsky

Todd L. Pittinsky is a professor of public policy and a core

faculty member of Harvard University’s Center for Public

Leadership at the John F. Kennedy School of Govern-

ment. He also serves as research director of the Kennedy

School’s Center for Public Leadership. Dr. Pittinsky

earned his B.A. in psychology from Yale University, his

M.A. in psychology from Harvard, and his Ph.D. in organi-

zational behaviour from the Harvard Graduate School of

Arts and Sciences. Recently profiled in The Economist

magazine, his research explores positive intergroup atti-

tudes (allophilia) and how leaders can use them to bring

groups together.

Question: You have asserted that team leaders often spend too much time on “leading by dividing.” What do

you mean by that?

Dr. Pittinsky : One of the most common approaches taken by team leaders in many contexts is leading by

dividing. History shows us that there is often an

ingroup/outgroup leadership trade-off: Leaders solidify

their own standing within their groups by stirring up

hostility or rivalry with other groups. It’s common

because it can work: An atmosphere of “us versus

them” often can give a leader a boost in status and

power. This trade-off occurs in settings as diverse as

sports, business, and international relations. (How

much team spirit has been stoked up by getting every-

one to hate the Yankees, or Microsoft?)

Question: Is the notion of a “common enemy” (“us ver- sus them”) necessarily a bad thing for leaders to empha-

size? Can’t it create greater cohesiveness among team

members?

Dr. Pittinsky: The ingroup/outgroup leadership trade-off isn’t always intended to cause conflict. In

fact, it isn’t always intended at all. Intergroup rela-

tions may be harmed as a natural consequence of

basic leadership techniques. Strong leadership is nat-

urally associated with feelings of group connected-

ness, which is normally a good thing for a leader to

develop. But the more intensely a group feels its own

solidarity, the more “other” everyone else may seem

and the easier it can be to end up in conflict with

them. It’s no accident that revving up a team effort is

often called “rallying the troops”—and in the end,

what are troops for but to fight? Certainly, intra-

group cohesiveness can be achieved by less destruc-

tive and more creative means.

Let’s consider a real example. We know that the vast

majority of corporate merger efforts fail. Why? Culture

clash—the leaders fail to effectively integrate members

of diverse groups from their respective organizations.

Now, I’ll bet these groups had great cohesiveness

among their own members. However, this intragroup

cohesiveness doesn’t help bridge the divide across

these two solitudes. The new organization fails to gel

because the leaders can’t wrap their heads around the

concept of intergroup leadership. This can apply to any

number of diverse contexts: cliques in a school, an

acquisition of a smaller company, various ethnic groups

living in the same neighborhood, members of a multi-

disciplinary research team trying to work together, or

even countries trying to forge economic partnerships.

Question: What is the alternative to leading by dividing?

Dr. Pittinsky: While it is common for leaders to promote their own leadership at the expense of inter-

group relations, it is not universal. There is an alterna-

tive style of leadership that resolves the ingroup/

outgroup trade-off in a way that lessens the ill will

between groups and sometimes even creates good will

among groups. I call this intergroup leadership . It is

leading by uniting . It can require that a leader consider

the well-being of people outside his or her formal

group and formal responsibility.

Question: What is involved in adopting the intergroup leadership style?

Dr. Pittinsky : In situations ranging from ethnic gang rivalries to corporate turf battles to wars between

nations, leaders face the challenge of changing how

different groups think and feel about each other. Bring-

ing groups together is important as an end-goal of

(continued)

94 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

leadership, but also as a means: leaders require follow-

ers, and creating a followership requires bringing

together diverse individuals but also diverse subgroups

of individuals. This is the general aim of intergroup

leadership.

Question: Based on your research, what are some of the specific approaches team leaders employ to demonstrate

intergroup leadership?

Dr. Pittinsky: In my research, I have found that there are at least five recurring tactics used by leaders who

aim to bring differing groups together. Probably the

most fundamental one is promoting personal contact.

Often the members of groups in conflict have little to

no direct contact with each other. It seems common

sense that personal contact between members of differ-

ent groups could help give each group a better feeling

about the other. An example would be to pair the mem-

bers of two rival gangs to sit together in a classroom

with shared desks. Research by social scientists confirms

that this is helpful, but with a caveat that is not so obvi-

ous. Contact has a much more beneficial effect when it

is encouraged and sanctioned by the groups’ leaders.

The Peace Corps may have had an even greater effect

due to John F. Kennedy’s stirring public endorsement of

it than it would have had as a private project.

Question: Does simply ensuring more contact bring groups closer together?

Dr. Pittinsky: Encouraging contact is one of the tactics a leader can use to encourage good will between

groups. But the leader needs to take into account the

classic research done by Gordon Allport who argued

that fulfilling certain conditions increased the positive

effects of contact, including the members of the

groups who have contact with each other need to be

of equal status; they need to have common goals; they

should be cooperating; they need the support of some

acknowledged authority. Leaders also need to remem-

ber that, while contact is necessary for improving rela-

tions between groups, it is far from sufficient. For

instance, a famous study took place at a boys’ summer

camp where two cabins of boys, the “Rattlers” and the

“Eagles,” had to compete. Even though both groups

were in daily contact with one another, the conflict

between them actually increased rather than decreased.

Whatever good was being done by the contact was

being undone by the intense competition.

Question: So how does a leader diffuse the conflict that can arise through competition?

Dr. Pittinsky: Two other measures that would combat such conflict involve promoting common goals and pro-

moting a common identity. First, introducing a common

goal to members of different groups can be an incredibly

powerful tool for bringing them together. In the situation

of the boy’s camp mentioned above, the researchers miti-

gated the competition between the two groups of boys by

giving both teams goals they had to work on together. For

example, the researchers pretended that the bus carrying

the boys back to camp had broken down; both teams had

to work together to push the bus back to camp. This tactic

led to a complete change in the boys’ attitudes toward

each other. A real-life example can be found in the former

Yugoslavia. During the Cold War, Yugoslavia’s multiple eth-

nic groups held together to achieve a common goal—to

remain as free as possible from the influence of both

superpowers [the USSR and the United States].

Common goals are particularly effective when groups

must negotiate with each other over a limited resource,

for example funding or water. In such cases, a common

goal helps to foster cooperation between the two

groups. Cooperating with members of another group

helps people revise their prejudices and—if the coopera-

tion is managed carefully—gives people in different

groups a chance to develop trust in each other. When it

comes to common goals, more may be better. While

one common goal can help reduce negative attitudes

and relations, a more permanent reduction can result

from a series of goals that require cooperation.

Question: How does promoting a common identity fur- ther mitigate conflict?

Dr. Pittinsky: Promoting a common identity among the groups turns “us” and “them” into “we.” For instance, a

governor might emphasize that both Democrats and

Republicans in his or her state are, after all, U.S. citizens.

Companies with geographically dispersed offices,

possibly including various merged or bought-out divi-

sions, often try to promote a single corporate identity.

This tactic works when the leaders can clearly and

TALKING BUSINESS 3.3 (continued)

95C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

Weber observed that many 19th-century European organizations were, in a number of ways, very poorly managed. One critical observation was that numerous organizations were managed on a personal basis, with employees guided more by personal loyalties to other individuals’ agendas than by professional loyalties to organizational goals. This often resulted in the misuse of resources for personal means.

Weber believed that an alternative organizational structure was required, and this structure would improve the operations of the organization in a number of ways; this was the origin of the notion of the bureaucratic organization. Weber identified several funda- mental elements of such an organization, including those in Exhibit 3.4 .

What was behind Weber’s principles? Consider what is potentially accomplished through these elements. Weber believed that an organization possessing these characteristics could best maintain consistent, dependable, and reliable performance by its members. By having rigid rules and procedures and insisting on conformity to these guidelines, organizations ensure that the goals of the organization are perpetuated and are not dependent on the individuals who populate the organization at any one time.

The impersonality of a bureaucracy was also intended to avoid arbitrary and biased decisions of individuals that might be based on favouritism or personal agendas. Weber wanted to see an organization with a clear administrative structure so that employees

convincingly point out what the two groups have in com-

mon so that people can easily see members of the other

group as part of their own group. (For example,

because U.S. Americans often think of voting as a quint-

essentially U.S. American act, the sight of Iraqis voting in

2005 tended to make them seem a little more like “one

of us.”) One can promote a common identity either by (a)

emphasizing an identity that is already shared (as in unit-

ing various ethnic groups who all live in the same neigh-

borhood) or by (b) creating a new identity that would

include both groups (as Flemings and Walloons were

encouraged to become something new—”Belgians”).

Question: The final tactic you advocate, promoting allophilia , seems to go beyond the traditional notion of

just breaking down group stereotypes and prejudices.

What is allophilia?

Dr. Pittinsky: It has long been obvious that leaders need to reduce prejudices and negative attitudes

toward those who are different in order to improve

relations between different groups—ethnic, reli-

gious, national, organizational, professional, genera-

tional, and so on. Negative attitudes toward others

can lead to discrimination, hostility, and even vio-

lence. But recent research has shown that reducing

negative attitudes is only half the challenge. Leaders

also have to create or beef up the positive feelings

that members of one group have toward another

group. (Such positive feelings are called allophilia .) It

is these positive attitudes—not the mere absence of

negative attitudes—that will motivate acts of good

will toward members of other groups. Mere toler-

ance is not enough. To transform an overgrown lot

into a garden, you need to pull the weeds, but you

also need to plant flowers. Reducing negative atti-

tudes is picking weeds; promoting allophilia is plant-

ing flower seeds.

Promoting positive attitudes and relations among

distinct groups—appreciating and liking their differ-

ences, not merely tolerating or discounting them—is a

valuable tactic when it isn’t possible to bring groups

together under the umbrella of a shared identity. Allo-

philia promotion, as  an intergroup leadership tactic,

becomes important too because even when a “we” is

successfully forged from an “us” and “them,” over time

“us” and “them” often reemerge. Instead of making “us”

and “them” into “we,” promoting allophilia suggests that

it is possible to encourage groups to feel appreciation,

affection, kinship, comfort, and interest toward others, as

others.

Source: Excerpted from Karakowsky, L. (2009). Leading teams in

a new direction. HR Edge (Fall), 23–26. Available at www.yorku.

ca/laps/shrm/hredge/HR-Edge_issue2.pdf .

96 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

TALKING BUSINESS 3.4

Is Weber Alive and Well? Ironically, while Weber’s work was based on observations

of European organizations, his views (translated into

English in the 1940s) had a profound impact on North

American organizations. Certainly, we have witnessed the

growth of bureaucracies over a good part of the past

century. In fact, it is only more recently that we have come

to question the utility of the bureaucratic organization

with its emphasis on rules and regulations.

Rigid bureaucratic rules work well when the environ-

ment is stable—that is, where consumer needs are

unchanging, where technology is fixed, and where other

environmental factors such as political and social forces

are relatively constant. In that type of environment, the

need to have comprehensive rules and regulations govern-

ing organizational activity and to ensure that authority

rests with well-trained managers makes sense. However,

business environments have increasingly undergone rapid

change and, consequently, organizations have been mov-

ing away from bureaucratic structures and the traditional

rules and regulations that might now be outdated.

On the other hand, some of the features of bureaucra-

cies remain as strengths for almost any organization. For

example, the notion of applying rules and procedures

equally to all individuals across the organization would

appear to support fairness and dependable behaviour in

organizations.

would conform to these rules and regulations and understand that they must answer to their boss for their actions. Without these characteristics, Weber believed that organiza- tional behaviour could be neither reliable nor predictable, and decisions might become arbitrary or biased. The impact of Weber’s philosophy is discussed in Talking Business 3.4 .

The Classical Approaches in Perspective The three classical approaches to management (scientific, administrative, and bureau- cratic) share a basic philosophy regarding what is required to manage effectively: The job of managers is to plan, control, and direct the actions of their subordinates to obtain the

Exhibit 3.4 Characteristics of Bureaucratic Organizations

1. Rules and procedures: Organizations require stable, comprehensive, and usually documented rules for administration as well as for just about any organizational activity. All employees are expected to strictly obey these rules and procedures.

2. Hierarchy of authority: To ensure accountability among organizational members, fixed positions that are essentially ranked according to the level of power or authority held in the position need to be created so that members with higher positions

will supervise those in lower positions. Typically, this means that the organizational chart looks like a pyramid, with the

masses of workers at the lower levels while the number of organizational members in higher-level positions are fewer.

3. Division of labour: Like Taylor’s notion of specialization, Weber acknowledged the usefulness of simplifying the job to achieve greater efficiencies.

4. Impersonality: Rules and procedures, not personal agendas, need to govern behaviour so that relationships between organizational members or between the individual and the organization are professional rather than personal. This

attempts to avoid such dysfunctional behaviour as favouritism.

5. Selection and promotion: Those hired to fill positions will have specialized training and will be hired based on ability rather than on friendship or family ties. Similarly, promotion will be based on job performance rather than on favouritism.

97C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

Exhibit 3.5 Classical Approaches to Management

Theorist/Approach Perspectives on Effective Management

Frederick Taylor (1856–1915)

Scientific Management

Standardizing the work

• Observation and measurement were used to determine the most efficient method (e.g.,

time and motion studies)

• Belief that there is one best method for performing a job

• Jobs are compartmentalized (broken down into small, simple steps)

• Benefits:

∘ easy and inexpensive to train workers ∘ cheap and readily available pool of labour ∘ clear rules in how to perform the job ∘ little to no room for individual discretion ∘ consistent job performance

Supervising the workers

• Managers can only take charge of their area of expertise

• Managers’ mental work should be separated from labourers’ physical work

• Workers are not capable of managing themselves

Motivating the workers

• Money is the only factor in motivating workers

• Compensation must be closely tied to performance

• Piece-rate pay was desirable

Henri Fayol (1841–1925)

Administrative Management

Division of work

• Breaking work down into its simplest components and assigning separate tasks to workers

• Manager’s role is to give orders and discipline workers

Unity of command

• Each employee reports to only one boss to avoid confusion and conflicting instructions

Esprit de corps

• Team spirit and harmony should be encouraged amongst workers to generate organi-

zational cohesiveness and unity

Goals of the company

• Company goals should take precedence over individual interests (continued)

greatest efficiency from their workers. Scientific management advocated the construc- tion of tasks in a way that minimizes their complexity and emphasized a machine-like approach to managing workers. The administrative management perspective highlighted the view that fundamental principles should guide the role of the manager, regardless of the context. Finally, the belief in the benefits of bureaucracy reflects the view that orga- nizations must be run according to a strict set of rules with a clear hierarchy of authority to ensure accountability and adherence to the rules. Exhibit 3.5 summarizes the classical approaches.

98 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Objective 3 Discuss the underlying philosophies of the

behavioural school of thought in

relation to management.

Theorist/Approach Perspectives on Effective Management

Max Weber (1864–1920)

Bureaucratic Management

Rules and procedures

• Organizations require stable and documented rules

Hierarchy of authority

• Organizations should have fixed positions that are ranked according to their level of power

Division of labour

• Simplifying the job will achieve greater efficiencies

Impersonality

• Rules and procedures, not personal agendas, govern behaviour; the individual and

organization are professional, not personal

Selection and promotion

• Hiring will be based on ability, not friendship or family ties; promotion will be based on

job performance, not favouritism

But is this the best way to manage? Let’s reconsider the context within which this perspective was born. As mentioned, these approaches arose at a time when industry was rapidly expanding and relatively unskilled labour was in abundant supply. These approaches, in fact, all worked quite well from the time of their conception through the Great Depression of the 1930s. But times do change. And over time, the weaknesses of the classical approaches became more and more apparent in some organizations. One major element absent in these approaches is the role of human behaviour—the employee. These approaches assume that the worker will respond passively to his or her designated role in the workplace, and increasingly managers found that this assumption can break down in practice. If management practices are too unreasonable or employees feel mis- treated, employees may have a basis to complain. Talking Business 3.5 clearly illustrates that employees’ concerns cannot be ignored.

BEHAVIOURAL APPROACHES TO MANAGEMENT What we observed during the early part of the 20th century was that employees were managed pretty much the same way as the company managed their physical or financial resources: as another piece of capital to serve the organization’s objectives. Over the course of the 20th century, approaches to managing people changed dramatically. What caused us to change our philosophy of management? The impetus for change arose through a variety of sources. Some of the initiatives came from business itself, some from government, some through union action, and some through broad social changes. What- ever the source, what we witnessed in the second and third decades of the 20th century was the beginning of a more humane way of managing—a recognition of employees not simply as another resource to be managed but as individuals with certain needs that must be addressed.

The behavioural approaches to management focus on the nature of the employee and on what factors encourage employees to maximize their effort. Consequently, the

Exhibit 3.5 Classical Approaches to Management (continued)

behavioural approaches to management Managerial per- spectives that consider the social or human side of organizations and address the challenges of manag- ing people. Assume that achieving maximum productivity requires understanding the human factor of organizations and creating an envi- ronment that permits employees to fulfill social, not only economic, needs.

99C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

TALKING BUSINESS 3.5

The High Costs of Workplace Harassment Workplace harassment has been defined as a “course of

vexatious comment or conduct that is known, or ought

reasonably to be known to be, unwelcome.” This may

include “hostile or unwanted conduct” and/or “verbal

comments, actions or gestures” that affect an employee’s

“dignity” or “psychological integrity.” Four Canadian

provinces—Quebec, Saskatchewan, Manitoba, and most

recently Ontario—now legally distinguish workplace

harassment . . .

For employers the costs associated with harassment

include not only the human costs of victimization, but the

financial fallouts that result from lost productivity and

health costs associated with helping employees recover.

This is in addition to the adverse reputational effects that

our federal government is currently experiencing as a

result of recent media reports of workplace harassment.

There are also operational implications for employers,

some of which are, in many regions, reinforced by legisla-

tion. These include:

• Periodic assessment of the risks associated with psy-

chologically harmful workplace behaviours

• Heightened awareness of the early warning signs and

the actions necessary to curb escalation

• The provision of professional assistance service options

• Clear communication of behavioural expectations

• Action plans for prevention, effective intervention,

leadership, and response

For both employers and employees alike, an increasing

awareness of the working environments in which the risk of

harassment is greater is paramount, because both victims

and perpetrators are oftentimes otherwise highly perform-

ing individuals. Research shows that high-risk working con-

ditions include environments characterized by the following:

• Interpersonal conflicts or incompatible relationships

between two or more individuals

• Frequent labour–management disputes

• The perception of mistreatment among individuals

• Abusive supervisory leadership behaviours

Such working conditions are not only acknowledged—

as media reports pertaining to the federal public service

show—but are oftentimes condoned by organizations.

The rise in employee assistance plan (EAP) referrals, third

party mediations and interventions, and the increasing use

of counseling services in recent years all bear testament to

this workplace reality.

Has harassment cost you, as an employee, team mem-

ber, manager, or employer? The now tarnished sheen coat-

ing the federal public service shows the corrosive power

and high costs workplace harassment imposes on us all.

Source: Excerpted from Hughes, L. (2011, May 16). The high costs of

workplace harassment. The Conference Board of Canada. Retrieved

from www.conferenceboard.ca/topics/humanresource/commentar-

ies/11-05-16/the_high_costs_of_workplace_harassment.aspx .

Reprinted by permission.

behavioural school ultimately has led to a consideration of what lies beneath the surface. That is, what is the driving force behind our decisions to put effort into our jobs or careers? What factors determine how much “blood, sweat, and tears” employees are willing to expend in work performance?

The behavioural approach to management refers to managerial perspectives that consider the social or human side of organizations and address the challenges of managing human beings. This approach assumes that to achieve maximum productivity requires an understanding of the human factor of organizations and an ability to create an environment that permits employees to fulfill social, as opposed to only economic, needs. The ongoing conflicts observed between management and employees are not necessarily a consequence of purely financial interests. Salary is obviously an important factor in employer–employee relationships. However, employees also require treatment that respects their dignity and work efforts.

100 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

As with the classical approach, the school of thought that has come to be known as the behavioural approach is actually composed of a number of different perspectives. In sum, this school of thought calls on managers to consider at least two critical features of organizations:

1. Organizations are designed to produce a good or service efficiently and effectively (a view shared by the classical school).

2. However, unlike the classical school, consideration must also be given to the fact that organizations are social systems through which individuals attempt to satisfy their personal and social needs, as well as their economic needs.

We can consider four broad perspectives that make up the behavioural approach: the work of Elton Mayo and the human relations perspective, the assertions of Mary Parker Follett, the observations of Chester Barnard, and finally another subschool that has been referred to as modern behavioural science.

The Human Relations Movement Elton Mayo (1880–1949) conducted studies at Western Electric, in Hawthorne, Illinois, around 1924 that drew great attention to the importance of the social dimension of work. Among Mayo’s studies was an investigation of the effects of lighting on worker productiv- ity. To test the effects of lighting, Mayo chose one group of workers to be the experimental group—the “guinea pigs,” so to speak. A variety of lighting conditions were manipulated. A control group was also used where this group of workers worked under constant lighting conditions. If better lighting improved productivity, then the group of workers working under better lighting conditions should outperform the control group. The results were puzzling, however: The productivity of both the control and the experimental group increased. In fact, even when lighting was worsened for the experimental group, their productivity nonetheless increased. How could these results be explained?

Mayo had inadvertently discovered what came to be known as the Hawthorne effect . The experimental results (productivity increases) were not, in fact, caused by the intended experimental manipulation (better lighting), but by other factors—here, by “human nature.” Specifically, Mayo uncovered that the true source of the productivity increase was the fact that the employees were receiving special attention. That is, all subjects real- ized that they were the focus of attention for the study, and that in itself increased their motivation to do a good job. Thus, social factors had a greater impact on productivity than actual working conditions did.

The Hawthorne effect had a major impact on management thinking; in fact, it has been viewed as marking the transition from scientific management to the human relations movement . This approach focuses on organizations as social systems, not simply as formal structures. It stresses the need for managers to recognize that managing involves social interaction—that “employees are people, too!”

Mary Parker Follett (1868–1933) Mary Parker Follett was a social philosopher who made a number of significant contribu- tions to the field of management in the first decades of the 20th century. Based on Follett’s observations of real-life managers, she identified a number of elements necessary for

Mary Parker Follett A social philosopher who made a number of significant contributions to the field of management in the first decades of the 20th century. She focused on coordination, self- management, and collaboration.

Chester Barnard An organiza- tional practitioner who served as president of the New Jersey Bell Telephone company; he was inter- ested in organizational structure, but he considered organizations to be social systems. He focused on communication and authority in management practices.

human relations movement One of the schools of behavioural management developed by Elton Mayo, who emphasized that social factors had a greater impact on productivity than actual working conditions. Focuses on organiza- tions as social systems.

Hawthorne effect The discovery that productivity can be enhanced by giving employees special atten- tion rather than by simply improv- ing their physical working conditions.

101C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

effective management. Among the factors she emphasized as critical were coordination, self-management, and collaboration.

First, Follett argued that coordination was central to a manager’s function. That is, Follett suggested that the manager’s job of encouraging workers to maximize their produc- tivity should come about not through force or coercion, but through involvement in coor- dinating and harmonizing group efforts. This requires managers to be closely involved with subordinates in the daily conduct of their work, rather than simply being people who make and enforce rules.

Second, Follett stressed the importance of self-management and collaboration . Follett felt that decisions regarding how work is done can often be made by those perform- ing the work, rather than by managers who may not be as familiar with the task. Conse- quently, subordinates should be involved in the decision-making process in matters that affect their work and how they should perform their work. Moreover, she felt that indi- viduals would much prefer managing themselves than being led by a boss. Managers and workers should view themselves as collaborators or partners.

Follett advocated her views at a time when Taylor was considered the leading man- agement scholar, so Follett’s views were largely ignored and have only gained acceptance in more recent times. Some observers suggest that the practice of management for the past 100 years might have looked very different had Follett been given more attention than Taylor.

Chester Barnard (1886–1961) Chester Barnard was a practitioner who served as president of New Jersey Bell Telephone Company. Like Weber, he was interested in organizational structure; but unlike Weber, with his impersonal idea of organizations, Barnard considered organizations as social systems. Among Barnard’s contributions were his notions of communication and authority. He felt that the two most critical functions of managers were as follows:

1. To establish and maintain a communication system with employees. Barnard felt that organizations, as social systems, required continual communication and cooperation among all members to be effective.

2. To clearly establish the organizational objectives and ensure that all employees are motivated to help attain these objectives.

In terms of the notion of authority, Barnard contradicted the then-popular view of traditional authority , which reflected the notion that those in power have an absolute right to receive compliance from those at lower levels in the hierarchy. Barnard felt that authority of management over subordinates must be earned—that is, workers will only follow orders to the extent that the following conditions are met:

■ They understand what is required.

■ They see how their work relates to organizational goals.

■ They believe that they will gain some benefit from accomplishing these goals.

Fundamentally, Barnard, like Follett, believed that a collaborative approach to man- agement would be most effective for organizations.

coordination In behavioural approaches to management, the harmonizing of workers and activi- ties to maximize productivity. Mary Parker Follett argued that manage- ment needed to be closely involved with subordinates in the daily con- duct of their work, rather than sim- ply being people who made and enforced rules.

collaboration In behavioural approaches to management, the consequence of managers and workers viewing themselves as collaborators or partners.

self-management In behavioural approaches to management, the action of workers, who perform the work, managing themselves by making decisions regarding how the work is done, rather than by managers who may not be as familiar with the task.

102 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Modern Behavioural Science and Motivation-Based Perspectives Look around your workplace and you will see some individuals who are completely com- mitted to fulfilling the expectations and responsibilities of their employer. Continue look- ing, and you may also find someone asleep at his or her desk, or maybe surfing the web for interesting vacation sites while the boss’s back is turned. What distinguishes these two workers? Is it a personality difference? Is it a difference in work ethic? Is it pay? Is it the boss? Is it the work environment? What variables play a critical role in determining the level of effort or motivation that employees bring to the job? Clearly, this question is critical for any organization aiming to maximize the potential of its workforce.

Another category of management theories that should be considered as an important part of the behavioural approach can be referred to as modern behavioural science . This school of thought arose largely in the 1950s and continued the systematic study of the human element of organizations. Researchers came from academic backgrounds in sociology, psychology, and anthropology and became known as behavioural scientists and industrial psychologists. One underlying theme of this work is the issue of motivation. That is, rather than considering the primary role of management to be one of control (the classical approach), these theories con- sider the role of management as one that must foster a motivated workforce. Consequently, the underlying aim of much of this school of thought is to consider factors that influence the moti- vation of employees—a key issue for many of today’s organizations (see Talking Business 3.6 ). Exhibit 3.6 (on page 105) summarizes the behavioural approaches to management.

THE BEST MANAGEMENT PHILOSOPHY? CONTINGENCY APPROACH Now that we have considered two very popular schools of management thought, the ques- tion is, “Where are we today?” What approaches are guiding leaders in management of organizations today? The approaches described above have both strengths and weaknesses.

Experts agree that there is simply no one best way to manage. Instead, what has been advocated is referred to as the contingency approach to management . As the name implies, this approach assumes that the best style of management depends on many con- tingencies: Different conditions and situations require the application of different approaches or techniques. Essentially, this approach argues that there are few, if any, uni- versal truths governing management techniques. Consequently, contingency management theories continue to examine different factors that dictate different requirements for man- aging people. For example, how to manage at UPS will differ from managing at Microsoft, which will differ from managing at a local hospital, and so on. This is a central challenge for any manager—fitting their management philosophy to suit the organizational context. Think about the nature of different organizations and the type of work performed and you will begin to see the importance of understanding the contingencies of management.

Here are some of the contingencies that should be taken into account when imple- menting a management philosophy (see also Exhibit 3.7 on page 106 ):

1. Organizational size: Large organizations with hundreds of employees cannot be managed in the same manner as small organizations with few employees. The need for control and the challenge to achieve it in massive organizations may tend to encourage an

modern behavioural science The school of thought that consists of sociological, psychological, and anthropological perspectives based on the premise that motivating workers is preferable to controlling them. It has produced an enormous number of theories, including need- based and cognitive-based theories of motivation.

contingency approach to management The acknowledge- ment that there is no one best way to manage and that different con- ditions and situations require the application of different approaches or techniques. Includes consider- ation of organization size, environ- mental uncertainty, routineness of task technology, and individual differences.

103C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

TALKING BUSINESS 3.6

The Myths and Realities of Motivation

An Interview with New York Times Best-Selling Author Daniel Pink

Daniel H. Pink is the author of several provocative, best-

selling books about the changing world of work. One of

his recent books, Drive: The Surprising Truth about What

Motivates Us, explores 50 years of behavioral science to

challenge the conventional wisdom about human motiva-

tion. Drive was a New York Times, Wall Street Journal,

Washington Post, and Publishers Weekly bestseller.

Question: Why did you write Drive ?

Daniel Pink: After I wrote A Whole New Mind —about the shift from “left-brain” abilities to “right-brain”

ones—lots of people asked me about how to motivate

people to do this sort of work. I didn’t have a clue. So

I began looking at what turned out to be an absolute

treasure trove of research on human motivation. And

the answers I found were surprising. Very surprising.

Question: Drive has been on the New York Times Bestsell- ers List for close to a year. What do you think has contributed

to this book’s enormous and enduring popularity?

Daniel Pink: First, thanks for the kind acknowledgment. I’m still surprised—and delighted—that anybody reads

what I write! In a sense, timing worked to the book’s

advantage. After the financial crisis, there was a sense

that the old verities were failing us—and people were

searching for some new rules, especially those that ran

with the grain of human nature rather than against it.

Question: You cover a lot of ground in Drive , making accessible an abundance of academic research. As your

title indicates, this book does indeed reveal a lot of surpris-

ing truths about what motivates us. What was the biggest

surprise to you in terms of the research findings?

Daniel Pink: I was surprised by how vast the research was—and by how much of it overturned orthodoxies

I didn’t even realize were orthodoxies.

Question: What are the biggest mistakes that organiza- tional leaders make in their attempt to generate a highly

motivated workforce?

Daniel Pink: They’re too simplistic. They believe that getting people to do great work requires simply reward-

ing the behavior you want and punishing the behavior

you don’t. But it’s far more complicated than that. And

most leaders know that even they themselves are moti-

vated by forces beyond carrots and sticks.

Question: When an employee isn’t motivated, how much is the organization to blame? How much of the onus

should be on the individual? For example, if all of us could

successfully match ourselves with our “perfect-fit” job,

wouldn’t we be intrinsically motivated?

Daniel Pink: That’s a tough one. It’s obviously a mix between individual attributes and the context in

which one is operating. But I think in many ways

we’ve undersold both aspects of the equation. We

haven’t demanded that individuals go through the

sometimes painful process of figuring out what

they’re good at, what they enjoy doing, and what

gives them meaning. Yet, we still take a mostly

one-size-fits all approach to managing people—which

creates cultures that can be alienating at a human

level and inefficient at an economic one.

Question: It would be great to “enrich” every job but it  can’t always be done. Perhaps many employees, for

better or worse, need extrinsic motivation because they

© Andres Rodriguez/Fotolia

(continued)

104 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

are desperately lacking in intrinsic motivation and we can’t

necessarily provide that. Do you think that is true?

Daniel Pink: Maybe. But I think the calculus works slightly differently. Everybody needs baseline rewards—

a decent salary, benefits, etc.—so they’re not desper-

ate and insecure. Without that, enduring motivation is

tough. But once you cross that threshold, these other

forces matter more. Of course, there are some people

who don’t deliver or who don’t have good habits.

IMHO, that’s learned behavior rather than their natural

state. But even so, I’m not against firing people who

don’t perform. I just don’t think you’ll get them to

perform any better by deploying an endless arsenal of

carrots.

Question: We seem to learn in our childhood education the same approach to motivation that most organizations

use—a focus on achievement or results (grades/pay) rather

than on genuine effort or learning. Isn’t that what we

keep trying to do as adults—”make the grade”? It’s not

about learning or improving, it’s about achievement. How

can we ever change that, particularly in  today’s highly

competitive and volatile business environment?

Daniel Pink: That’s another tough one. In some ways, schools are even more rooted in an outdated approach

to motivation. Especially here in the US, they’re doubling

down on external motivators and renewing their empha-

sis on routines, right answers, and standardization. In a

sense, they risk becoming compliance factories. The solu-

tions are difficult, but they begin with understanding.

That’s why I encourage every parent and policy maker to

read the work of (Stanford University psychologist) Carol

Dweck. Her work brilliantly shows the difference

between performance goals (example: getting a good

grade) and learning goals (example: mastering the mate-

rial). We mistakenly believe that hitting performance

goals means students have learned something—but

that’s just not true. It’s why a nominally “good” student

like me could have taken French for 6 years and gotten

straight A’s—and still not be able to speak French. We

ought to be emphasizing—and measuring—learning

goals, though that’s far less convenient for the adults in

charge of education.

Question: One of the many insightful observations you make in Drive is that, “Most twenty-first century notions of

management presume that, in the end, people are pawns

rather than players” (p. 91 ). Can you speak to that notion

a bit? Do you think that belief will ever really change?

Daniel Pink: A lot of the decisions we make in business are rooted in our belief about human nature. Some folks

believe that people are fundamentally passive and

inert—that their natural state is to not do anything

worthwhile and that we need sweet or bitter external

rewards to get us to move. The other belief is different—

that our nature is to be active and engaged. I side—

strongly—with the second view. That’s not because I’m

a dewy-eyed optimist. It’s because I have three chil-

dren—and I’ve seen hundreds more. I defy you to find

me a two-year-old who’s passive and inert—or a four-

year-old who’s “not” active and engaged. That’s our

natural state. If people are passive and inert—and, of

course, millions and millions are—that’s learned behav-

ior, which means it might be susceptible to change.

Question: Drive explores a number of “best practices” organizations, in terms of motivation. Which company

stood out most in your mind as a role model? Do you

think these “best practices” will ever spread across

industries?

Daniel Pink: I’m a big fan of Atlassian, the Australian software company—and of one of their practices in

particular. Once a quarter, on a Thursday afternoon,

the company says to its software developers: “Go

work on anything you want—so long as it’s part of

your regular job.” The only thing the company asks is

that people show what they’ve created to the rest of

the company in a fun, freewheeling meeting on Friday

afternoon. Altlassian calls these FedEx Days (because

people have to deliver something overnight.) It turns

out that this one day of intense, undiluted autonomy

has led to a whole array of fixes for existing software

and lots of ideas for new products that had otherwise

never emerged. Now these FedEx Days are spreading

to lots of other companies, large and small. Atlassian is

also doing some cool things to rethink traditional per-

formance reviews and make them useful exercises in

feedback rather than the painful kabuki-theater-style

encounters they typically are.

Source: Excerpted from Karakowsky, L. (2011). What drives us.

HR Edge (Fall), 6–9. Available at www.yorku.ca/laps/shrm/

hredge/HR-Edge_issue3.pdf .

TALKING BUSINESS 3.6 (continued)

105C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

Exhibit 3.6 Behavioural School of Management

Theorist/Approach Perspectives on effective management

Elton Mayo (1880–1949)

Human Relations Movement

“Hawthorne effect ”

• Special attention paid to employees increased productivity

• Social factors had a greater impact on productivity than actual working conditions

• Managing involves social interaction

Mary Parker Follet (1868–1933)

Coordination

• Managers must coordinate and harmonize group efforts

∘ Managers must be closely involved with subordinates in the daily conduct of their work

Self-management

• Workers should self-manage themselves by making decisions about how they per-

form their work tasks

Collaboration

• Managers and workers should view themselves as collaborators or partners

Chester Barnard (1886–1961)

Social systems

• Organizations are social systems requiring continuous communication and coopera-

tion among all members

Communication system

• Managers must establish and maintain a communication system with employees

Organizational objectives

• Managers must establish organizational objectives and ensure employees are moti-

vated to help attain those objectives

Authority of management

• Authority over subordinates must be earned, since workers will only follow orders when

∘ they understand what is required ∘ they see how their work relates to organizational goals ∘ they believe they will gain some benefit from accomplishing these goals

Modern Behavioural Science and Motivation-Based Perspectives (1950s–present)

• Management should be more about motivating employees than controlling them

• Developed from various disciplines such as sociology, psychology, and anthropology

approach that relies on elements of the classical school, such as the need for rules and regulations and the importance of an administrative hierarchy to ensure control. On the other hand, small, entrepreneurial organizations might function more effectively with a minimal number of rules and regulations.

2. Routineness of task technology: Some organizations may require employees to work in an assembly-line fashion, while their work is governed by machinery. Other jobs may not involve any significant level of technology: retail sales or being a bank teller are jobs that do not necessarily require technological expertise. These jobs are more easily subjected

106 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

to routinization, as advocated by Taylor, and there should be strict rules on which such workers can rely. On the other hand, jobs that must continually adapt to chang- ing technology require employees who are equally adaptive. High-tech organizations

that employ “knowledge workers” are keenly aware that it is difficult to standardize the jobs of these workers, given the high rate of change within the present technology environment.

3. Environmental uncertainty: An organization that exists within a volatile environment must be pre- pared for continuous change. Change is the antith- esis of the classical approaches, which emphasize stability and order. Consequently, organizations functioning in rapidly changing environments are less likely to find extensive application of the clas- sical school useful in managing their workforce.

4. Individual differences: In any organization, employees differ with regard to their ability and motivation. Some people function better when given clear guid ance—rules and regulations regarding how their job should be performed. Others perform better when

the rules governing their performance are minimal. These differences suggest that a blanket application of either the classical or behavioural schools may risk ignoring the fact that the labour force is not homogeneous in terms of responses to the nature of work and management style.

THE CRITICAL IMPORTANCE OF TRUST IN THE WORKPLACE Globalization has created many new tests for organizations while they are simultaneously dealing with the usual challenges, such as achieving profit and growth targets, creating value, maintaining security, protecting privacy, managing diversity, and managing change. All of these factors have led to organizations today facing a fundamental crisis: Many com- panies are failing to uphold basic business principles such as leadership and trust. Combine this with the fact that the labour force is rapidly declining while the demise of employee loyalty is rapidly increasing and you can see that there’s a problem. Organizations are faced with figuring out how to improve elements that contribute to organizational success. The search for the next successful model to guide managers continues, and in searching for guidance it may be necessary to look in some familiar but largely ignored places.

Many books have been written on successful business models to achieve organiza- tional effectiveness. Traditional management research has largely condemned the military model of leadership and culture as outdated and old-fashioned. The military model con- jures up words such as dictatorship , command and control , chain of command , hierarchy, and regimentation , which are often words associated with the manner in which the military runs its business. However, arguably, the military is the ultimate model for achieving orga- nizational effectiveness based on the importance of trust.

Objective 4 Consider the importance and role of trust in

the workplace.

MANAGEMENT PHILOSOPHIES MIX

Classical

Behavioural

2. Routineness of

Task and Technology

3. Environmental

Uncertainty

4. Individual

Differences

1. Organizational Size

Exhibit 3.7 Contingencies of Management Philosophies

107C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

While military leaders might disagree on how to lead, one theme is consistently repeated in discussions with successful military leaders—the central value of trust. Trust is a major component of the successful military ethos or character. Likewise, organizational trust is crucial. Organizations must focus on creating a culture of trust to maximize effectiveness. Most important, trust can provide an organization with a com- petitive advantage that cannot be easily duplicated. Trust is an integral aspect of the psychological contract that exists between the employee and the employer.

Trust refers to one’s perception of the integrity and openness of others, one’s comfort with the expected actions of others, one’s faith in how others will react, and one’s willing- ness to become vulnerable to the actions of others. 8 Employees want to feel that the organi- zation has their best interests in mind. Although it is now rare to find a worker who remains with one company for his or her entire career, companies are rediscovering the value of loyalty. Organizations cannot build loyalty in the absence of trust (see Talking Business 3.7 ).

8 Sashittal, H.C., Berman, J., & Ilter, S. (1998). Impact of trust on performance evaluations. Mid-Atlantic Journal of Business, 34 (2), 163.

trust One’s perception of the integrity and openness of others, one’s comfort with the expected actions of others, one’s faith in how others will react, and one’s willing- ness to become vulnerable to the actions of others.

At a time when the decline of trust in business is accelerat-

ing, one Canadian company has made earning the trust of

its stakeholders the cornerstone of its business. A The Con-

ference Board of Canada case study, The Dalton Company

Ltd.: Building on a Foundation of Trust , describes how this

professional building services firm has created a culture of

trust and implemented systems to ensure that its values are

translated into actions for its stakeholders.

“Trust is not an intangible, ’soft’ concept, but a key

issue in business today,” says Andrew Dalton, CEO of The

Dalton Company Ltd. “In a challenging economy, a cor-

porate culture of earning, predicting, and measuring trust

will prove critical to any organization’s sustainability. If

you don’t have clear standards, you can’t hold people

accountable.”

Dalton’s systems and processes have made it a leader in

restoring trust in the construction industry as a whole. Its

trust model is based on accountability and leadership.

Through this approach, Dalton seeks to understand each

customer’s purpose, vision, objectives, and limitations

early in a project, and monitors how it is meeting these

needs throughout the building process.

One key factor for Dalton in building trust is its issue reso-

lution mechanism, which identifies potential solutions to

problems as they arise in each project. The process begins

with the responsible lead for the project. Known as the

“Yellow,” this person reports on the project to the leadership

team at Dalton each week. In this process, there is no finger

pointing; instead, the team works together to find solutions.

In its Alternative Approach to Building, Dalton positions

clients as the priority and focuses on their needs—in Dal-

ton’s words, their Definition of Success (DOS). Developing

the DOS at the start of a project is an important trust-

building exercise, as it creates accountability between

clients and employees. While a client typically defines suc-

cess as a project that is delivered well, on time, and on

budget, Dalton delves deeper to understand all of the

client’s underlying motivations. Once the DOS is estab-

lished, Dalton measures the performance of its project

team based on the client’s feedback in relation to the DOS.

While cultivating trust externally is vital, the company

also believes strongly in showing and rewarding trust inter-

nally: Trust is integrated into hiring practices and Dalton’s

bonus system. The organization’s recruiting process focuses

on whether potential employees will fit into the firm’s

culture, and employees are rewarded for demonstrating

trustworthy behaviour.

“You can train skills; I don’t think you can train trust,”

says Andrew Dalton.

Source: Michael Bassett, “Case Study: How One Canadian

Company Earns Trust,” InsideEdge, The Conference Board of

Canada. Reprinted with permission.

TALKING BUSINESS 3.7

How One Canadian Company Earns Trust

108 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Research consistently supports the idea that organizational trust has an impact on organizational effectiveness. For example, numerous studies have linked trust with a vari- ety of desirable work behaviours such as organizational citizenship behaviour, perfor- mance, intention to turnover, problem solving, level of openness within a top management team, support for authorities, satisfaction, and organizational commitment. 9 Similarly, trust has been linked with better task performance, openness in communication, informa- tion sharing, reduced conflict between partners in interorganizational relationships, and better acceptance of organizational decisions and goals. 10

Equally, the absence of organizational trust can create serious challenges for an organi- zation. Where there is a lack of trust, there will be failings in communication, delegation, empowerment, and quality. 11 A corporate culture of mistrust causes employees to focus on survival and self-preservation by pursuing defensive values such as control, power, expedi- ency, and manipulation, which have a negative effect on productivity and morale. 12 Orga- nizations must strive to create a culture of trust. As the military model illustrates, the critical factors needed to create a culture of trust are effective communication, leadership, and human resources practices and programs that establish and reinforce the value of trust.

Organizational trust is of paramount importance in the military setting. There can be no greater context than war where individuals must expose their vulnerability and trust the person beside them. Trust is reinforced through several mechanisms: an open culture, social structures, effective communication mechanisms, leadership, teamwork, and human resource policies and practices. The military reinforces trust through a shared purpose, vision, mission, and ethos. The military believes that trust is formed when people get to know each other on a personal level as well as on a professional basis. Military messes and institutes provide a social structure where common experiences can be shared and where storytelling occurs. Members of the military at all levels of rank and structure interact in this social setting, where members can get to know each other on a personal level. A senior officer (a colonel) commented, “We tend to deal with people that we trust in preference over those who we don’t know.” Thus, the military provides and supports this social structure for its members.

Trust, Teamwork, and Citizenship Although the research supports the positive effects of the use of teams, the existence of high-performance teams is considered to be rare. High-performance teams “frequently outperform the teams that produce similar products and services under similar conditions and constraints.” 13

9 Tzafrir, S.S., Harel, G.H., Baruch, B., & Dolan, S.L. (2004). The consequences of emerging HRM practices for employees’ trust in their managers. Personnel Review, 33 (5/6), 628–647; Ferres, N., Connell, J., & Travaglione, A. (2004). Co-worker trust as a social catalyst for constructive employee attitudes. Journal of Managerial Psychology, 19 (6), 608–622.

10 Lines, R., Selart, M., Espedal, B., Johansen, S.T. (2005). The production of trust during organizational change. Journal of Change Management, 5 (2), 221–245.

11 Erdem, F., Ozen, J., & Atsan, N. (2003). The relationship between trust and team performance. Work Study, 52 (6/7), 337–340.

12 Hultman, K. (2004). Let’s wipe out systemic mistrust. Organization Development Journal, 22 (1), 102–106.

13 Castka, P., Bamber, C.J., Sharp, J.M., & Belohoubek, P. (2001). Factors affecting successful implementation of high performance teams. Team Performance Management, 7 (7/8), 123–134.

109C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

There appears to be a common theme among the research with respect to the effective- ness of teams. The key factors for effective teams include a shared vision, empowerment, and trust among team members. Teamwork creates a community because everyone must accept ownership and responsibility for a project’s success or failure. 14 In order for team-based struc- tures to be effective, the organization must provide a culture that supports collaboration and a highly involved workforce. The culture should be based on empowerment, creativity, shared vision, participation, learning ability, trust, and a shared consensus (see Talking Business 3.8 ).

Teamwork is of paramount importance in the military. Teams are built to succeed in the mission. The mission cannot be accomplished individually, and thus teamwork is a critical part of the military ethos. Teamwork is required to foster the cohesion necessary to

14 Scarnati, J.T. (2001). On becoming a team player. Team Performance Management, 7 (1/2), 5–10.

Teleflex Canada Ltd. is a Richmond, British Columbia-

based company with a reputation as a world leader in the

design and manufacture of hydraulic and thermal technol-

ogy products for industrial and marine use. A recent focus

on developing cost effective solutions has resulted in a

dramatic expansion of their customer base to include most

North American boat and bus manufacturers; many truck-

accessory, engine and marine distributors; as well as the

United States and Canadian military forces. The Teleflex

Canada workforce is over 300 strong and represents

diverse cultural backgrounds and ages. Employees must

bring together the right mix of skills, experience and tech-

nological know-how to cost-effectively design and manu-

facture products that meet customers’ needs.

Learning has always been part of the corporate cul-

ture at Teleflex—senior management recognizes the ben-

efits of a well-trained and skilled workforce. Initial

training programs included English as a second language

(ESL) classes, academic upgrading, and the basic skills of

reading, writing and numeracy. However, management

soon realized that although employees were participating

in training, they were not using their new-found skills in

their jobs. Concerned, senior management turned to

workplace education consultants for advice. The results

led to the complete transformation of training at Teleflex

into “Team Time,” a model based on the full participa-

tion of manufacturing teams working together on real

challenges and changing understandings of their work.

The Team Time training model evolved into a series of

topic-specific modules for learning “lean manufactur-

ing,” teamwork and related skills.…

At Teleflex, the focus of training is to help production

teams solve their respective work challenges. Team Time

training modules addressing specific machine or data source

issues allow production teams to solve problems using actual

workplace tools. These hands-on, real-life activities are well

suited for the production team work model at Teleflex.

Training is organized into regular production team

meetings, which usually last 60 minutes. Team leaders are

responsible for facilitating each module and covering the

material. Team leaders must also assemble the required

learning materials. There are 15 modules, with new mod-

ules being developed continually. Modules cover topics

such as the purpose of Team Time training, how Team

Time learning works, customer needs, how to add value,

and information systems….

Through the Team Time training initiative, the reading,

writing and numeracy skills of employees have improved sig-

nificantly. Specific outcomes of training include the following:

• The training program has influenced the company to pres-

ent its newsletter and corporate data in “plain language.”

• On-time delivery of finished products has increased

from 65 to 90 per cent.

• Inventory turnover in a given time period has increased

from four times to more than seven times.

• Parts shortages have been significantly reduced.

TALKING BUSINESS 3.8

How Teams Learn at Teleflex Canada

(continued)

110 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

One of the greatest accomplishments of the program

has been the number of people involved in its develop-

ment, piloting and maintenance. More than one-third of

the workforce at Teleflex had a role in developing Team

Time—many more than had been anticipated.

Specific impacts and benefits include the following:

• More effective change management—employees,

managers, engineers and production leaders are

becoming change agents within the organization.

• Employees are better able to adapt to new products

and manufacturing processes.

• Cross-functional communication has improved on the

shop floor.

• Smoother job transitions are facilitated through the

training.

• Communication skills and problem-solving skills have

improved within work teams; and

• The training program scores helped Teleflex Canada

achieve a designation as a “Lean Manufacturer” in

2002.

Source: Excerpted from Campbell, A. (2005). Developing a com-

munity of employees through team time at Teleflex Canada. The

Conference Board of Canada. Retrieved from www.conference-

board.ca/temp/23808387-1455-45f7-b817-

6f5aea9ade89/129-06_cs_teleflex.pdf.

achieve the organizational mission. The military stresses the importance of the team over the individual, and teamwork is reinforced through doctrine, training, and exercises.

The concept of teamwork can be found throughout military doctrine. Teamwork is one of the main principles of the military ethos. The importance of the mission is under- stood, and completion of the mission depends on teamwork. The fact that all members share and understand this mission is a key enabler of teamwork. As previously discussed, teamwork is a fundamental component of basic training. Members are placed in small groups and given tasks to execute as a team. Members must work together to achieve the goals established for them. Individual strengths and weaknesses are identified, and mem- bers work together to overcome the weaknesses of the individual and capitalize on the strength of the collective team. These types of exercises continue well past basic training and reinforce values such as trust, selflessness, and conscientiousness. These exercises in teamwork build trust through adversity and humility and reinforce selflessness, a sense of belonging and respect for peers. Team-building exercises like the ruck march are a com- mon organizational practice used to reinforce the importance of teams and trust.

Many nonmilitary companies use job descriptions to outline the expected tasks and responsibilities of an employee’s position. In essence, each job description is linked to the specific output necessary to accomplish organizational goals and remain effective and competitive. However, it is the actions of employees performed outside of these standard- ized job descriptions that can have a profound impact on organizational effectiveness. Successful organizations need employees who will do more than what is stated in the job description and extend themselves beyond normal requirements and expectations. Orga- nizational citizenship behaviour describes the actions taken by employees that demon- strate a willingness to go “above and beyond” the duties outlined in their job description.

The fact is, a business that fosters a climate of trust can more effectively reinforce a shared purpose and values. This in turn will encourage members to go above and beyond simply fulfilling their minimal job requirements and instead also become accountable for building and fostering organizational citizenship behaviours.

TALKING BUSINESS 3.8 (continued)

111C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

administrative management 92

behavioural approaches to management 98

bureaucratic management 92

Chester Barnard 100

classical approaches to management 88

collaboration 101

compartmentalizing 90

contingency approach to management 102

coordination 101

decisional roles 83

disseminator 83

disturbance handler 83

effectiveness 81

efficiency 81

entrepreneur 83

esprit de corps 92

figurehead 82

Hawthorne effect 100

human relations movement 100

Industrial Revolution 89

informational roles 82

interpersonal roles 82

laissez faire 89

leader 82

liaison 82

management 81

Mary Parker Follett 100

modern behavioural science 102

monitor 83

negotiator 83

piece-rate system 91

resource allocator 83

scientific management 89

self-management 101

spokesperson 83

standardizing 90

time and motion studies 90

trust 107

unity of command 92

Multiple-Choice Questions

CHAPTER SUMMARY We have discussed the nature of managerial roles and considered what the job of a man- ager entails. This chapter also identified the central schools of management thought that have guided our thinking for over a century. We also considered the elements of manag- ing that contribute to success and how the successful use of these elements depends largely on the presence of trust in the organization.

111C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

CHAPTER LEARNING TOOLS

Key Terms

Select the best answer for each of the following questions.

Solutions are located in the back of your textbook.

1. What category of management is a department or divi- sion head?

a. Top management

b. Middle management

c. Supervisor or lower-level management

d. Executive management

2. Efficiency often refers to a. delegating tasks to reduce time

b. using the fewest inputs to produce an output

c. organizing resources effectively

d. planning and controlling resources effectively

3. All of the following are central functions of management except

a. changing b. planning

c. organizing d. leading

4. A leader role can be categorized as a. an informational role

b. a decisional role

c. an interpersonal role

d. a delegating role

5. A resource allocator is considered to be a. an informational role b. an interpersonal role

c. a delegating role d. a decisional role

6. An informational role can include all of the following roles except

a. liaison b. monitor

c. disseminator d. spokesperson

7. In Taylor’s perspective on standardizing work, a job should be a. broken down into simple parts

b. easy and inexpensive to train workers

c. designed with room for individual discretion

d. both A and B

112 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

For many years, Kicking Horse Coffee was one of Canada’s best kept secrets. However, the word is out, as writer Chris Ryan noted in July of 2013:

The town of Invermere isn’t exactly a specialty-coffee powerhouse. Though its location in eastern British Columbia between the Canadian Rockies and the Purcell Mountains provides plenty of picturesque backdrops . . . [it] boasts only a handful of coffee shops. But one of those is a behemoth. The flagship café for Kicking Horse Coffee serves as home base for the well-established roaster that distributes throughout Canada and much of the Western United States. 15

8. Taylor believed workers were best motivated by a. social interaction

b. a piece-rate system

c. managers and workers collaborating as partners

d. fair employment practices

9. The classical school of management is sometimes referred to as an approach that

a. is machine-like

b. promotes a clear role for managers

c. has a clear hierarchy of authority to ensure account-

ability

d. all of the above

10. Esprit de corps is often referred to as a. a military model of management

b. team spirit and harmony

c. both A and B

d. none of the above

11. The Hawthorne effect involves all of the following except a. employees receiving special attention

b. the human side of motivating workers

c. how to decrease productivity

d. productivity factors on working conditions

12. Mary Parker Follett argued that all of the following were critical to a manager’s function except

a. collaboration

b. coordination

c. collective negotiation

d. harmonizing group efforts

13. The contingency approach can involve factors like a. organizational size

b. environmental uncertainty

c. individual differences

d. all of the above

14. Chester Barnard believed the most critical functions of managers involved

a. communication

b. authority

c. cooperation

d. all of the above

15. The behavioural school of management promotes a. a piece-rate system

b. standardization of job tasks

c. human and social factors to managing people

d. a hierarchical structure for management

112 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Discussion Questions 1. Define management and explain what it means to manage.

2. Discuss the four main functions of management.

3. Compare three roles of management: interpersonal, informational, and decisional roles.

4. Explain and discuss three classical management philosophies.

5. Compare the differences between Taylor’s and Fayol’s views on management.

6. Explain and discuss three behavioural management philosophies.

7. Compare the differences between Follett’s and Barnard’s views on managers’ key functions.

8. Discuss the military model of management.

9. Discuss the importance of the contingency approach to management.

10. Select a business or organization and explain what style of management you think would work best at that orga-

nization and why.

CONCEPT APPLICATION KICKING HORSE COFFEE

15 Ryan, C. (2013, June). Spotlight: Kicking Horse Coffee. Fresh Cup Magazine. Retrieved from http:// www.kickinghorsecoffee.com/files/2013_06_FreshCup.pdf

113C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

If you are not quite convinced of the power of Kicking Horse, consider that by 2012 AC Nielsen ranked Kicking Horse among the top 10 commercial brands in Canada, along with such brands as Folgers, Nabob, and Tim Hortons. 16 And by that time, Kicking Horse was selling 2 million pounds of coffee a year and was carried in many retail stores across the country, from Loblaw to Sobeys to Shoppers Drug Mart, while also making inroads into the United States.

Those of you following the Canadian business press in recent years will have noted the rapid rise of this company. It has been identified in the press as a top organic fair- trade coffee company in Canada. And its reputation is strong. It is known as a company whose brand has been built around quality and consistent character. The CEO, Elana Rosenfeld, was recently ranked among Canada’s top female entrepreneurs in PROFIT Magazine . 17

Located in Invermere, British Columbia, Kicking Horse boasts 17 coffee varieties, sells its products worldwide, roasts 4 million pounds of coffee annually, and has achieved about $25 million in annual sales with expected growth each coming year. Rather than opening cafés (like Starbucks), the company focuses on roasting and wholesaling. It is based out of a 60,000-square-foot facility in Invermere, and it operates one flagship café for its local residents.

So how did this coffee powerhouse get started? In 1996, Rosenfeld and her husband, Leo Johnson, decided to buy a local café. From its early days, customer response to Kick- ing Horse Coffee was strong. Initially, Johnson’s contributions were mostly in design and operations, and Rosenfeld focused on sales, marketing, and finance. While competing against much larger businesses, they decided to price their coffee as a premium product and attempted to build a loyal following. 18

For years, Rosenfeld and Johnson would leave Kicking Horse in the capable hands of their employees as they travelled for up to a month at a time to Mexico, Peru, and elsewhere. The aim was to build relation- ships with farmer co-ops in those countries that have been central to the success of the company. 19 The fact that the heads of Kicking Horse felt comfortable turning over leadership roles to their employees says a lot. It reflects the kind of relationship that Rosenfeld and Johnson established with their employees based on employee autonomy and shared goals.

If you could study the management style of Rosenfeld and Johnson, you might be surprised by their informal and accessible approach. With approximately 40 employees, 20

Case Continued >

16 Lee, J. (2012, November 28). B.C. entrepreneur celebrates the sweet smell of (Kicking Horse Coffee) success. Vancouver Sun. Retrieved from www.vancouversun.com/business/smallbusiness/Vancouver+entrepreneur+celeb rates+sweet+smell/7617938/story.html#Comments#ixzz2YaZi9OTh .

17 Amos, G. (2012, November 30). Kicking Horse Coffee geared to grow. Columbia Valley Pioneer. Retrieved from www.columbiavalleypioneer.com/?p=7753 .

18 Lee, J. (2012, November 28).

19 BDC Consulting. (2011, February 15). How to get the best from your employees. Retrieved from www.bdc.ca/ en/advice_centre/articles/Pages/successful_management_tips.aspx . 20 Kicking Horse Coffee website, www.kickinghorsecoffee.com/en/media/presskit .

© Spofi -Fotolia.com

114 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

these two business leaders who manage a multimillion dollar business in a relatively “fun” way. They make great efforts to do more than simply manage an efficient workforce.

Management at Kicking Horse considers their employees as key to their success and treats them in a manner that reflects that belief. For example, a major focus is on timely and consistent communication with employees. But these communication efforts are not simply to disseminate information from the “top,” but also to gather information from those who work closest with the product.

Rosenfeld and Johnson understand that, given the specialized nature of the roasting work, these employees must maintain a certain level of autonomy. However, like any busi- ness, efficiency of production is critical and so measures of performance must also be applied to gauge how the group is performing.

The work is exacting and can be demanding given Kicking Horse’s high standards. Consequently, Rosenfeld and Johnson have made every effort to make the culture “fun” and as stress free as possible. Therefore, for example, work practices include things like flexible hours, daily stretch breaks for line workers, and catered monthly meetings as well as official fun days for kayaking, skiing, and holiday celebrations.

Specialized work can easily become tedious and machine like. However, “tedious” is the polar opposite of the culture at Kicking Horse. The culture is much more “laid back” than might be expected for this kind of business, and observers would likely be surprised by the “fun” atmosphere that might seem more suitable to a summer camp than a multi- million-dollar business. Does it work at Kicking Horse, though? It sure does.

In one interview, Rosenfeld commented, “Doing it from the heart is paying off for us . . . Our employees are highly motivated, very productive and usually stay with us a long time.” 21

Over the past 10 years, the company’s efforts have paid off. Kicking Horse Coffee has won numerous awards in a variety of categories, including Canada’s Top Female Entrepre- neurs, Canada’s Fastest-Growing Companies, and Biggest BC Businesses Owned by Women to name a few:

2012 Business in Vancouver: Biggest BC businesses Owned by Women

2011 Profit W100: Canada’s Top Female Entrepreneurs

2011 Kootenay Business: Top 50 Kootenay Companies

2011 Business in Vancouver: Top 100 Fastest-Growing Companies

2009 Kootenay Business: Top 50 Kootenay Companies

2009 Profit 100: Canada’s Fastest-Growing Companies

2008 Profit W100: Canada’s Top Female Entrepreneurs

2007 Profit W100: Canada’s Top Female Entrepreneurs

2007 Kootenay Business: Top 50 Kootenay Companies

2007 Profit 100: Canada’s Fastest-Growing Companies

2006 Profit W100: Canada’s Top Female Entrepreneurs

2005 BDC: Ongoing Achievement Elana & Leo

2004 Business in Vancouver: 40 under 40 Elana & Leo

2003 BDC: Young Entrepreneur Award for British Columbia 22

21 BDC Consulting, 2011.

22 Kicking Horse Coffee website, www.kickinghorsecoffee.com/en/media/awards .

115C h a p t e r 3 M a n a g i n g t h e W o r k f o r c e

The ability to nurture an engaged, high-performance workforce is more likely to be found in Kicking Horse’s leadership style than in the more traditional “command-and- control” management approaches. Certainly, the performance of Kicking Horse is evidence that they are doing something right. According to a report by BDC Consulting, the company’s revenue doubled annually for the first few years and more recently increased by  about 15–20% a year. This also allowed for the expansion of plant facilities to 60,000 square feet, along with a café for local residents. 23

Many management experts embrace the leadership style of Kicking Horse and would advocate the spread of this approach to other organizations. In their discussion of Kicking Horse Coffee, BDC Consulting noted that to attract the best people, the company offers an above-average benefit package that includes competitive wages compared to other cof- fee retailers. To ensure consistent quality standards, the company monitors performance on a regular basis. According to BDC senior consulting manager Bonnie Elliot, the cul- ture for the company is created at the top. “When you walk into the facilities at Kicking Horse, the way people interact makes it evident that the place is different from a company that is run bureaucratically and autocratically,” Elliot says. “The commitment to staff well-being and community is not just talk, but something that the partners live and breathe.” 24

Questions

1. Discuss in detail which elements of the behavioural school are being applied at the Kicking Horse Coffee Company.

2. How might the classical school of management also be applied effectively here?

3. What contingencies might influence the suitability of the management style for Kicking Horse Coffee?

24 BDC Consulting, 2011.

23 BDC Consulting, 2011.

Chapter 4 Establishing the Structure of a Business What Does Organizational Design Have to do With Business Success?

Learning Objectives

After studying this chapter, you should be able to 1. Identify four broad trends in the changing nature of

organizational design.

2. Discuss the relevance of metaphors used to describe

organizations.

3. Identify the elements of organizational structure.

4. Explain the concept of reengineering.

5. Describe the notion of the virtual organization.

6. Discuss the phenomenon of downsizing and its rationale,

methods, and objectives.

Organizations in just about every industrialized nation

have been undergoing change. Many companies have

reduced the number of levels in their hierarchy, others

have undergone a change in their whole business pro-

cess, while others have simply closed down. The aim of

this chapter is to examine some of the approaches that

organizations have adopted with regard to structure and

design, including reengineering, downsizing, and going

virtual. We will also examine the reasons behind these

changes and consider more generally the question,

“What determines how an organization is designed?”

116

© William Perlman/Star Ledger/Corbis

117C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

THE BUSINESS WORLD How Google Designed Itself for Success

Google has done more than any other business in terms of changing how people find information and conduct business. Traditionally, Google has been associated solely with Internet search. In fact, it still generates most (85%) of its revenue from search-related advertising. However, it has increasingly focused on diverse projects, including Gmail and the Android operating system. Google has shaken up several industries, including smart- phones, television, and advertising. In 2013, it reached profits of about US$13 billion and it became the third most valuable corporation in the United States after Apple Inc. and Exxon Mobil Corp. Google continues to take on new and innovative ventures that will likely redefine its core competancies as it continues to evolve.

Google started out as a very modest business launched by two Stanford University gradu- ates, Larry Page and Sergey Brin, who had the simple idea of the Google search engine. They started out with 10 employees working in a garage in Palo Alto, California. However, over a 10-year period, this little company became hugely successful. Google’s success was built entirely on innovation. Brand new products, new services, and news ways of conducting busi- ness were the means through which Google rose to fame. All this required a strong company culture of innovation. Its most fundamental challenge has always been to generate an envi- ronment where new ideas can flourish. Therefore a critical requirement for its organizational structure is to ensure that the network of relationships, the rules governing work, and the administrative framework all support and encourage innovation. Undoubtedly, Google’s organizational design has played a central role in the company’s culture of innovation.

Larry Page and Sergey Brin knew that their company had to be highly efficient at meet- ing changing market demands and needed to be continually innovating. So how exactly did Page and Brin decide to design their organizational structure in order to promote innova- tion? They knew that how they organized the pattern of relationships and authority in their company would have a critical impact on these goals. Consequently, they needed a structure that encouraged the kind of fast and flexible decision making and creativity that Google would need to compete in this industry. They organized their company in a very unconven- tional way compared to other companies in the industry.

Brin and Page implemented a very flat level of hierarchy whereby top level management was only one level up from lower level employees. Why? Because in traditional, hierarchical structures, authority systems and reporting levels would slow down the decision-making pro- cess and any unnecessary delays in bringing new ideas to the market could mean losing out to competitors. So, instead of hierarchal levels, Google was divided up into small teams that worked on individual projects. Team members rotate to take on the role of team leaders with every new project. This is in contrast to other organizations that often establish one team leader who is always in that role. At Google, the role of the manager or team is to help build consensus among team members rather than to “control” or “manage” them in the traditional sense. In this kind of structure, the role of a manager or leader is analogous to that of an editor who relies on a team of journalists to generate decisions based on the team’s input.

Another element of the structure of the teams is the actual composition. Google employees are extremely diverse. Consequently, teams might be composed of members with backgrounds that could range from former neurosurgeons to CEOs to marines. The intent of this diversity is to nurture innovation by exposing members to others with

118 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

diverse backgrounds and perspectives. These teams range from five to ten people depend- ing on the project. The relative small team size also gives the teams more flexibility and speed for decision making. In addition to dividing into these small teams, every six months, a mutual peer evaluation questionnaire is completed by all team members and this leads to a public ranking where natural leaders are identified.

Of course, while teams are central to Google’s successful innovation, all this is not to say that there are no other elements of structure or departments at Google. Given the fact that this company has grown so large, it needs a certain degree of departmentation. Google is overseen by a board of directors that directs the company via an executive management group. This group oversees the Engineering, Products, Legal, Finance, and Sales depart- ments. In turn, these departments are each divided into smaller units. For example, the Sales department has branches focused on the Americas, Asia Pacific, Europe, the Middle East, and Africa. However, beyond this traditional-looking structure, Google’s organiza- tion minimizes power differences and formal authority.

One element central to nurturing innovation is the access to social networks in Google. Brainstorming and collaborating with other employees stimulates a wealth of diverse ideas and information sharing. The ability of people to communicate easily within a larger, diverse group allows continual access to novel information and potential collaborators. How does Google actually implement a network perspective? In his study of Google, Professor David Dubois of Insead found that Google expends a lot of organizational effort to empower col- laborators and give them more freedom to start projects that matter to them.

Google has always minimized its levels of administrators and over the years as it has grown, it has endeavoured to flatten its organizational hierarchy as much as possible. The fact is, the fewer the levels of hierarchy, the greater becomes the opportunity for employ- ees to interact freely, collaborate, and make their own decisions. This also has the effect of encouraging leaders or experts to arise naturally rather than being held to a specific job title. The other benefit of creating this relatively flat structure is the ability of employees to readily communicate with the operational leadership, which affords the company a tremendous amount of flexibility. As Google grew in size, it became more difficult to man- age the flow of new ideas and projects. Consequently, it implemented a schedule of meet- ings between employees and the company’s founders and chief executives where employees can “pitch” new ideas or projects directly to the top executives.

The organizational structure is designed to offer employees extensive freedom in mak- ing decisions and trying new ideas. This requires a structure that is not managed by “com- mand and control.” The aim is to de-emphasize job titles and power and instead focus on teamwork. Employees need to know that they can take on much decision authority and power over their work. This, too, means that job standardization is a foreign notion to this company. After all, you can’t standardize the process of innovation. The decentralized manner of decision making is also reflected across the organization in such functions as hiring decisions, where at least four Google collaborators co-decide on a new hire. In addi- tion to reinforcing the empowered culture, such participative decision- making helps to ensure that new recruits will “fit” within the organizational culture.

Employees are given the autonomy to make changes to a current project or to start their own. Google employees follow something called the 70/20/10 rule. This requires that each employee devotes 70% of every work day to whatever projects are assigned by management, 20% to new projects or ideas related to their core projects, and 10% to any new ideas they

119C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

THE CHANGING NATURE OF ORGANIZATIONS Everywhere you look, it is obvious that we are a society of organizations. From our hospitals to our schools to our multinational organizations, it is hard to imagine life without organi- zations. And, for better or worse, those very institutions and organizations that we have grown up with are continuing to undergo dramatic change. To understand what is going on out there, we need to first consider several things. What exactly are organizations? What constitutes the structure or anatomy of an organization? Why do different organizations have different structures? These are among the key questions addressed in this chapter.

We have witnessed tremendous change and turmoil over the past two decades across the organizational landscape. From the massive reductions in the workforces of many well-known organizations like GM and Bell Canada to changes in how organizations are designed and operated, there has been a fundamental rethinking of how organizations should be designed. Organizational theory has been trying to make sense of the revolution we have observed in the organizational world.

Some observers have suggested that what is going on is a shift away from the classical, traditional, bureaucratic model. Recall our discussion in Chapter 3 of perspectives of man- agement and Weber’s notion of the bureaucratic organization, which is a central theme in classical management thought . This philosophy of organization design guided many of our organizations for most of the 20th century. The traditional, bureaucratic organizational structure emphasizes factors such as job specialization, a formal hierarchy of authority, a clear system of control, and rules and regulations to guide behaviour.

Why do we need the bureaucratic design? Because it achieves the fundamental goals of organizations: predictability and reliability (rules and standardized jobs ensure workers are

want to pursue. Many believe that this rule has driven the development of Google’s innova- tive products and services. This rule is not restricted to one set of employees. A broad range of programmers, salespeople, and even executives are provided with enough “down time” to be creative. While critics might argue that allowing employees the opportunity to work on whatever they want is a waste of time, that is precisely one of the reasons for Google’s suc- cess. It encourages employees to create innovative products by surrounding them with an open environment. Given the fast-paced environment that Google must compete in, its organizational structure is designed to meet market demands efficiently.

Sources: From: Google, the Network Company: From Theory to Practice, David Dubois, INSEAD Assistant Pro-

fessor of Marketing | September 11, 2013, INSEAD KNOWLEDGE, 2013, http://knowledge.insead.edu/

leadership-management/organisational-behaviour/google-the-network-company-from-theory-to- practice-2602

Thompson, Scott. (n.d.). Google’s Business Leadership and Organizational Culture. CHRON. Retrieved from

http://smallbusiness.chron.com/googles-business-leadership-organizational-culture-58108.html.

Thomas, Owen. (2013, March 14). There’s a Pretty Big Tension in How Larry Page is Running Google. Busi-

ness Insider. Retrieved from http://www.businessinsider.com/how-larry-page-is-running-google-2013-3.

El Akkad, Omar. (2013, October 26). What’s next for Google, the most successful Internet company in the

world? The Globe and Mail. Retrieved from http://www.theglobeandmail.com/report-on-business/international-

business/us-business/growing-plans-inside-googles-expanding-world/article15096740/?page=3.

Objective 1 Identify four broad trends in the changing

nature of organizational design.

120 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

doing what the boss wants) and control (the formal hier- archy ensures that how the work is conducted is clearly controlled). Ironically, these very strengths of the bureaucratic structure can also become weaknesses when the environment changes. For example, increasing com- petition and demands for better products and services, improved customer service, and more sophisticated pro- cesses all suggest that the stability of bureaucracies impedes any chance for innovation. The philosophy of

organizational structure that emphasized job specialization, the narrow division of labour, standardization, rules, and the like is simply not suitable to a changing environment.

Believe it or not, the traditional or classical approach to organizational structure, which arose in the time of the Industrial Revolution, dominated our thinking about the nature of organizational design right up until the 1980s. It was not until then that organizations began to realize that the bureaucratic structure needed to be replaced. Most of the shifts in organi- zational design essentially aimed to move away from the bureaucratic paradigm. The adjec- tives identified in Exhibit 4.1 best describe the new approaches and the shift away from the bureaucratic design.

Flat Organizations If there is any consistent pattern in the sweeping changes to corporate architecture, it has been the delayering of organizational hierarchies. Tall organizations have narrow spans of control, and flat organizations have wider spans of control. The shift we have observed in organizational redesign has been from the former to the latter. Certainly, one of the most pervasive phenomena to hit the organizational landscape since the 1980s has been downsiz- ing, which often involves flattening the organizational hierarchy (we will address this issue in more detail later in the chapter). It is difficult to read the newspaper without reading some report about an organization flattening its hierarchy through downsizing. For example, Toyota eliminated three of its seven layers of management, and IBM Canada cut its levels from ten to about four in the 1990s, and these trends continue today among many organizations.

Flattening the hierarchy accomplishes a number of things. Among the benefits are increased speed of decision making, since decisions and information take much less time to travel across levels of bureaucracy. This allows organizations to react much faster to the demands of a changing environment. In addition, the delayering of management means that much more responsibility and self-management is coming from the lower levels of the organization, so that employees and those who are closest to serving customers or producing the product are now more involved in the decision-making process.

Fluid Organizations The bureaucratic organization is obsessed with control, largely through strict adherence to rules and standards for how work is done. Again, think back to our discussion of the pur- poses of organizational structure. When organizations exist in dynamic environments, being able to adapt to change is critical. Bureaucratic rules tend to impede such adaptive- ness, given that rules must be changed to fit new circumstances. The organic organization

Traditional Bureaucracy Modern Organizations

• Tall/hierarchical

• Rigid, rule-oriented

• Buffered from the environment

• Narrow market

• Flat

• Fluid

• Integrated

• Global

Exhibit 4.1 Goodbye Bureaucracy

delayering Flattening organiza- tional hierarchies so that they have a wider span of control; the elimi- nation of hierarchical layers, often involving downsizing.

121C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

derives some of its strength from its ability to avoid being bogged down in rules that gov- ern how work must be performed. Later in this chapter we will examine a very fluid or organic form of organization—the virtual organization.

Fluidity or flexibility in the functioning of an organization has been reflected in other ways, such as the notion of just-in-time inventory , which emphasizes the ability to generate inventory as needed through flexible manufacturing/supplier relationships and, conse- quently, to minimize costs. These just-in-time inventory principles have also been applied to the work relationship, where we now have a just-in-time labour pool, so to speak. That is, organizations have recognized that they no longer need to maintain a fixed supply of labour. If revenues at any time are diminishing, the labour pool can also be diminished via downsizing, or built back up when revenues increase. Consequently, in the 1980s and throughout the 1990s we witnessed growth in temporary or contract-based employment. This adds immensely to the fluidity of an organization, since a temporary workforce can be easily adjusted to meet the upswings and downturns of a less predictable environment. This fluidity has, of course, profound implications for individuals within organizations, because it also underscores attitudes toward the permanence or lack of permanence of jobs within the “new” workplace.

Integrated Organizations The traditional bureaucratic organization advocates clear lines of authority and control. However, the newer organizational designs are less focused on the need for unity of com- mand and clear lines of authority—it is unimportant to maintain distinct boundaries between levels in the hierarchy, between individuals and departments, and between organizational members and individuals external to the organization. In fact, just the opposite is now emphasized, where integrated organizations aim to create more integration among formerly disparate units. For example, the new approaches to organizational design typically focus on teams of workers rather than on individuals. Cross-functional teams , work groups that bring together members from various parts of the organization, are becoming increasingly popular.

Typically, work teams are given the power to manage themselves and make decisions without the approval of formal management—hence the name self-managing work teams. Thus, GM’s Saturn plant brought individuals from the legal department to marketing and to engineering so that they could be involved in the production of the Saturn car. Shell Canada has achieved much success with its use of self-managed teams, as have numerous other companies. Information sharing is a big part of the team-based approach—that is, having management give over information that once was solely their domain. This is much more common in today’s organization than in the traditional bureaucratic model, where those in power held the information and did not share it with the lower levels.

The integration of units or members within the organization is one major trend. Another trend includes integration of the organization with players outside its boundaries. Organiza- tions are increasingly building closer connections with their external environment. For example, an organization may attempt to establish close relationships with suppliers, inte- grating them into the manufacturing process and generally creating an interdependent rela- tionship. Other organizations are even creating alliances with other companies to develop new products or services. There are even cross-functional teams that include participants from outside the organization, such as suppliers, distributors, or even competitors.

cross-functional teams Work groups that bring together mem- bers from various parts of the organization.

self-managing work teams Teams that are given the power to manage themselves and make decisions without the approval of formal management.

information sharing Workers sharing knowledge with other workers in the organization to help better meet the organization’s goals and needs. Information sharing is an important component of the team-based approach.

122 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Atlantic Canadian companies can be global players in inter-

national trade and supply chains. But they need to find

their niches to succeed in this new global economic order.

In response to demand—largely from fast-growing

emerging economies—what Atlantic Canada sells, and to

whom companies sell, has already begun to change.

But not enough companies are taking full advantage of

the range of opportunities these fast-growth markets pres-

ent. For example, a The Conference Board of Canada study

of Nova Scotia’s economy showed that although the prov-

ince is participating in global supply chains, few companies

are using other methods—such as selling through foreign

affiliates—to enter and succeed in international markets.

While global trade exploded over the past decade,

Canada’s export volumes flatlined. This is bad news for a

region like Atlantic Canada and for Canada as a whole.

With small domestic markets, we depend on global oppor-

tunities to help bolster our citizens’ living standards.

To a large extent, this weak performance reflects with

whom we do business. Traditional areas of trade growth

have plateaued. Most of our exports are aimed at slow-

growth markets, such as the United States.

Meanwhile, we are underexposed to the faster-growing

developing markets, notably China, India and Brazil. And

fast-growth countries such as China now actively compete

with our companies in both the U.S. and Canadian markets.

What we trade has also changed in response to growth

in developing markets. Developing-country demand for

raw materials has led to a resource boom.

Resources Now Lead Atlantic Canada’s Goods Exports

The trend is poised to accelerate. The U.S. will remain

Canada’s largest export market for the foreseeable future.

But Canada’s exports to the U.S., currently about three-

quarters of our total, will slip to just over two-thirds in 2025.

In contrast, Canada’s share of goods trade with China

could expand from 3.6 to almost 7 per cent by 2025. The

same goes for other fast-growing markets. We forecast

that the share of Canada’s exports to India and Brazil will

more than double by 2025. Trade with Brazil is also likely

to double by 2025.

McCain and Clearwater are two food product companies

that have adapted and sold their offerings into fast-growth

markets. And companies of all sizes can tap into these oppor-

tunities. Small companies, for example, are leading Canada’s

export growth to markets such as India and Thailand.

To seize more of these opportunities, Atlantic Canada’s

companies should:

• Find the “sweet spots.” Atlantic Canada’s compa- nies need to tap into pockets of growth and open-

ness within fast-growth markets that align with their

areas of strength and expertise. One example is India’s

demand for and openness towards environmentally-

friendly technologies and products.

• Look beyond the obvious markets . There are tre- mendous opportunities in China, India, and Brazil, but

a new Conference Board study of Canada’s next top

markets identifies a list of 24 non-traditional markets

that offer both growth potential and are likely to rep-

resent important commercial possibilities for Canadian

companies. These markets—in Asia, Latin America, the

Middle East, Africa, and Eastern Europe—represent far

greater growth potential than our traditional markets.

• Look beyond selling goods . Atlantic Canada has expertise in financial services, communications services,

education services, and a range of other services that

fast-growth markets need.

Fast-growth markets have dramatically changed the

world economy over the past decade. Companies that

find the global “sweet spots” for their products and ser-

vices will prosper.

Source: Excerpted from Goldfarb, D. (2013, June 17). Atlantic

Canada’s overseas playground? The Conference Board of Canada.

Retrieved from www.conferenceboard.ca/press/speech_oped/

13-06-17/atlantic_canada_s_overseas_playground.aspx.

Reprinted with permission.

TALKING BUSINESS 4.1

Atlantic Canada’s Overseas Playground?

Gary Corbett/age fotostock/SuperStock

123C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

keiretsu The Japanese term for networking of major enterprises— creating loosely affiliated collec- tions of companies. These are quite common in Japanese industry and banking.

Objective 2 Discuss the relevance of metaphors used

to describe organizations.

The Japanese term for networking of major enterprises is keiretsu . These are loosely affiliated collections of companies and are quite common in industry and bank- ing in Japan.

Of course, not all integration of organizations has been of such a loosely coupled nature. We have also witnessed the trend toward building collections of organizations through merg- ers and acquisitions, which began in the 1990s and seems to be continuing unabated.

Global Organizations Perhaps the most profound recent trend in the changing nature of organizations is the drive to “go global ,” which is an issue that will be discussed in detail in a later chapter. Globalization can be considered one of the leading forces behind organizational change since the 1980s and 1990s. Globalization has brought with it many implications, includ- ing an increase in competition and greater access to more markets. Industries that were traditionally “protected” by tariffs, such as auto manufacturing, faced intense competition from foreign companies for the first time, and with serious consequences.

Just about every sector of business is no longer insulated from competitors, customers, or suppliers outside of their home country. Consequently, the notion of integration or networking can include relationships with suppliers or even competitors outside local boundaries—even in other countries. An organization may have networks of members across the world. For example, Canadian Company X might be selling a product it had designed in Sweden, engineered in the United States, and manufactured in Japan. In the global marketplace, businesses are also selling to customers all over the world. Consider, for example, Google, whose head office is in Mountain View, California. This is a com- pany that has approximately 70 offices in about 40 different countries. Consequently, it employs a geographic form of departmentalization, with independent divisions operating in Europe, Africa, South America, and the Far East. Just think about the challenges this company faces in terms of responding to the variety of consumer preferences within these different locations. For Google, decentralized decision-making authority is required to permit these divisions to focus on and quickly respond to local market needs. Certainly, for Canadian companies to better compete in  the global marketplace, more Canadian companies will need to do the same (see Talking Business 4.1 ).

THINKING ABOUT ORGANIZATIONS What Is an Organization? What do you think of when you think of an “organization”? We can identify three broad categories of organizations:

1. public/governmental organizations , which provide goods and services without necessar- ily generating a profit

2. private/nongovernmental organizations , including voluntary organizations, which offer goods or services without necessarily generating a profit

3. private organizations , which produce goods or services with the intent of making a profit for the benefit of their owners or shareholders

124 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Though we can easily observe organizations that operate in these different sectors, we can also identify underlying characteristics that are common to all organizations. In fact, it is useful to consider a fundamental question as a starting point for our examination of the nature of organizations: What is an organization? How do we define it? Nortel, GM, Microsoft, your high school, St. John Ambulance—what do all these entities have in common? Organizations may be large corporations or small nonprofit organizations; they might be housed within a large skyscraper or they could simply be composed of members who are spread across a wide location. What makes them all organizations?

So What Is an Organization? Given the implications of the systems approach to organization, we can generate the following definition of organizations:

1. Organizations are social entities: Clearly, all the examples cited above have at least one common element—they are made up of people! They are entities that have been gen- erated and are maintained by people. They involve some level of human interaction.

2. Organizations interact with the environment: Can you think of any organization that is not somehow linked to its external environment? Think about it. An organization obtains inputs from its environment, whether in the form of people, raw materials, technology, or financial capital. All these inputs are transformed by the organization and become outputs: the goods, services, or knowledge that the organization generates.

3. Organizations are created to achieve goals: That is, they are goal-directed. Whether it is a profit-making organization or a nonprofit organization, all organizations have some kind of goal or objective that they were designed to achieve.

4. Organizations possess some sort of structure: All organizations need some kind of structure to ensure the work is properly allocated and coordinated. Of course, this is not as straight- forward as it may at first appear. What do we mean when we say that organizations pos- sess a structure? How are organizations structured? We will address these questions below.

Using Metaphors to Describe Organizations One helpful method of understanding the nature of organizations is through the use of meta- phors. According to Gareth Morgan, a management scholar and author of Images of Organiza- tion, we can consider the notion of an organization as, essentially, a social construction. That is, we are giving a tangible name to something that we take for granted. Words, names, con- cepts, ideas, facts, observations, and so on do not so much denote external “things” as concep- tions of things activated in the mind. They are not representations of a reality “out there,” but as tools for capturing and dealing with what is perceived to be “out there.” 1 Hence, we under- stand the usefulness of metaphors. A metaphor is often regarded as no more than a literary and descriptive device for embellishment, but more fundamentally it is a creative form that pro- duces its effect through a crossing of images. A metaphor proceeds through assertions that “subject A is like B and . . . .” Through the processes of comparison between the images of A and B we generate new meaning. The use of metaphors serves to generate an image for study- ing a subject. Different images of a subject guide and ultimately shape what is seen.

In more practical terms, what are the common features of these things that we call organizations? Why does this label fit a variety of entities, from nonprofit to for-profit

1 Morgan, G. (1986). Images of organization. Newbury Park, CA: Sage.

125C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

contexts? Metaphors are useful to help us describe and ultimately understand these social constructions. Consider dictionary definitions of the term organization. The Oxford English Dictionary has defined it as a term used primarily to describe the action of orga- nizing or the state of being organized, particularly in a biological sense. Also, the term has been considered as referring to an organized body, system, or society. The state of being organized in a biological sense was the basis of the metaphor of arranging or coordinating.

The term organization as a depiction of a social institution is relatively new and cre- ates a new meaning through metaphorical extension of older meanings. Ultimately, the importance of the metaphors we use to describe our hospitals, businesses, places of worship, and so on are important because they lead our thinking about the nature of these places, how they should be designed, and how they should function. Let’s consider an example of how metaphors guide our thinking in the area of management philosophy.

The Machine or Mechanistic Organizational Structure In many ways, the different schools of thought with regard to organizational theories arise from insights asso- ciated with different metaphors for the study of organizations. Consider, for example, the theories of management discussed in Chapter 3 . The classical schools of management thought, including scientific management, administrative management, and bureaucratic management, can be viewed as arising from a specific conceptualization or metaphor of what organizations represent. Arguably, the classical school of management thought is based implicitly on a conception of organizations that employs a machine metaphor . Machines are perceived as entities that function in a prescribed, rational manner. They are devised to perform work that leads toward specific goals, structure, and technology. Consequently, some organizational scholars, implicitly drawing on such a conception or metaphor of organizations as machines, emphasize an analysis and design of the formal structure of an organization and its technology. These scholars have explained the purpose of organizations as they would a machine—to function in an orderly, prescribed, and con- trolled manner. The aim, then, is to design organizations as if they were machines.

Taylor’s notion of the “economic man” and Weber’s notion of the “faceless bureau- crat” are natural extensions of the principles of the machine metaphor. Scientific man- agement encompasses the notions of control and efficiency—objectives well fitted to a machine metaphor of organizations. Of course, managers or management scholars whose philosophy is based on a machine metaphor will be led by such a metaphor. Conse- quently, the classical schools focused only on those issues pertinent to this metaphor: rules, regulations, a bureaucratic structure, and so on. Human needs had no relevance in such a metaphor or model.

The Organic Organizational Structure Of course, management thought has also been affected by other metaphors. For example, the organism metaphor encompasses a con- ception of organizations as systems of mutually connected and dependent parts that share a common life. This metaphor suggests that we can conceive of organizations as living organ- isms that contain a combination of elements that are differentiated yet integrated, attempt- ing to survive within the context of a wider environment. The open-systems approach of organizations, discussed next, is based on this metaphor. And with regard to management philosophies (see Chapter 3 ) , the behavioural school of management thought is, in fact, based on this metaphor. Consequently, these schools are concerned with sustaining human motivation and treating organizations as social systems.

machine metaphor (of an organization) A metaphor used to describe organizations that function like a machine—that is, in an orderly, prescribed, rational, and controlled manner. The classi- cal school of management viewed organizations as entities devised to perform work that led toward specific goals, structure, and technology.

organism metaphor (of an organization) A metaphor used to describe organizations as sys- tems of mutually connected and dependent parts that share a common life. This metaphor suggests that we can conceive of organizations as living organisms that contain a combination of elements that are differentiated yet integrated, attempting to survive within the context of a wider environment.

126 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Certainly, we can apply myriad metaphors to try to advance our understand- ing of what organizations really represent. The important point is that the meta- phor used implicitly underlies and ultimately guides thinking of how organizations should be designed and managed. Among some of the more popular conceptions of organizations in terms of metaphors are organizations as political systems, 2 organizations as loosely coupled systems, 3 organizations as theatres, 4 or organiza- tions as a collection of cultures 5 (see Exhibit 4.2 ). No one metaphor can capture the total nature of organizational life. New metaphors can be created for viewing and understanding organizations. Indeed, the very nature of the study of organi- zations and the field of organizational theory is metaphorical—that is, it is sub- jective in many ways.

Organizations as Systems Scholars who have studied organizations have generated countless perspectives on the nature of these entities. One useful perspective involves the view of organizations as systems. How might the metaphor of an organization as a “system” guide our understanding with regard to how organizations operate and sustain themselves?

A system can de defined as interdependent elements working together to achieve a goal or goals. The interdependence of the elements creates an entity that is more than just the sum of its parts—something is achieved beyond the mere putting together of these separate components. The notion of organizations as systems is intended to guide our understanding of what organizations are all about and how they function and survive. 6 Specifically, the notion of an open system asserts that organizations are entities that are embedded in and dependent on exchanges with the environment they operate within. In addition, organiza- tions can be viewed as social systems, with people constituting the basic elements.

Interestingly, there have been times when organizations have been viewed as closed systems, with the belief that how organizations function and survive depends on their ability to remain divorced from their environment. Closed systems have been defined as fully self- sufficient entities requiring no interaction with the environment, and this clearly makes this metaphor difficult to find in practice. This guiding metaphor led much organizational think- ing to focus on the organization’s internal environment with regard to dealing with organi- zational functioning and survival. At the same time, this approach failed to recognize the role that the external environment can have on the organization’s operations.

It was only when the environment became sufficiently volatile and complex that theorists recognized the futility of viewing organizations as closed systems. It became necessary to embrace the open-systems metaphor and further acknowledge the critical importance of the notion that organizations are embedded in their environment (see Exhibit 4.3 ). This also underscored the importance of further understanding the nature of the organization’s external environment.

An organization’s environment represents all elements that exist outside the organi- zation and that potentially influence or affect the organization in some way. Clearly,

5 Pondy, L. et al. (Eds.). (1983). Organizational symbolism. Greenwich, CT: JAI Press.

4 Goffman, E. (1967). Interaction ritual. Garden City, NY: Doubleday.

3 Weick, K. (1976). Educational organizations as loosely coupled systems. Administrative Science Quarterly, 21 , 1–19.

2 Pfeffer, J., & Salancik, G.R. (1978). The external control of organizations. New York, NY: Harper & Row.

Exhibit 4.2 What Does Organization Mean to You?

• Organization as a machine

• Organization as a living organism

• Organization as a political system

• Organization as a theatre

• Organization as a sports team

• Organization as a family

closed systems Entities viewed as being fully self-sufficient and thus requiring no interaction with the environment, which is difficult to find in practice.

open systems Entities that are embedded in and dependent on exchanges with the environment within which they operate. The interdependence of elements means that the entity (the organization) is more than the sum of its parts; it interacts with its environment.

6 Thompson, J.D. (1967). Organizations in action. New York, NY: McGraw-Hill; Katz, D., & Kahn, R.L. (1978). The social psychology of organization (2nd ed.). New York, NY: Wiley.

127C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

organizations are dependent on the environment for their survival and success. Without obtaining the necessary environmental inputs, whether they are suitable employees or the raw materials for production, organizations cannot function effectively. Similarly, if organizations fail to generate the types of products or services sought by the environment then these organizations will cease to exist. As suggested earlier, organizations are created in response to societal or environmental needs—and ultimately, it is the environment that will determine the organization’s fate.

THE ANATOMY OF AN ORGANIZATION What is organizational structure? The image of an organizational chart might come to mind for some of you. And in fact, the organizational chart is a reflection of the underly- ing structure of an organization. However, there is a more specific notion of organizational structure that we will review in this section: a deliberately planned network or pattern of relationships that exists among individuals in various roles or positions. This includes the formal hierarchy of authority, the distribution or grouping of work (into departments, for  example), and the rules or procedures that control and coordinate behaviour in the organization. However, we can also move beyond this definition and attempt to examine more systematically the dimensions along which organizational structure can be described (see Exhibit 4.4 ).

What Constitutes an Organization’s Structure? Work Specialization One fundamental question that must be addressed in design- ing organizational structure is how an organization is going to divide up the work that must be done to achieve organizational goals.

Horizontal differentiation represents the degree of differentiation between hori- zontal (as opposed to vertical) units of the organization, based on things like the orien- tation of the members, the nature of their jobs, and their education or training. The greater the number of occupations in an organization that require specialized knowl- edge and skills, the more complex the organization. One obvious dimension of

Objective 3 Identify the ele- ments of organizational structure.

organizational structure A deliberately planned network or pattern of relationships that exists among individuals in various roles or positions.

Environment

Transformation to goods or services generated by the organization (e.g., the manufacturing process)

Goods or services generated

Inputs Process Outputs

Human resources

Technology

Physical resources plant capital materials

people knowledge

Feedback

Exhibit 4.3 Organizations as Open Systems

1. Work specialization

2. Centralization

3. Span of control

4. Formalization

Exhibit 4.4 Four Defining Elements of Organizational Structure

horizontal differentiation The degree of differentiation between horizontal (as opposed to vertical) units of the organization, based on things such as the orien- tation of the members, the nature of their jobs, and their education or training. Includes job specialization, which is divided into functional and social specialization.

128 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

horizontal differentiation is job specialization. The term specialization , or division of labour, refers to the degree to which organizational tasks are subdivided into separate jobs. There are fundamentally two different kinds of specialization: functional and social specialization (see Exhibit 4.5 ).

Functional specialization refers to the division of jobs into simple, repetitive tasks. Frederick Taylor’s philosophy of scientific management advocated a high degree of job specialization; that is, Taylor argued that to maximize worker efficiency, jobs should be divided up into their smallest components so that workers perform simple, specific, and repetitive tasks. More recently, there has been a dramatic shift in belief regarding the degree of job specialization that should be implemented at work. Approaches to job rede- sign, like job enrichment, essentially advocate a low degree of job specialization; that is, rather than performing one narrow task, employees in some organizations perform a wide range of tasks. Job enrichment involves providing employees with more challenging and meaningful work largely by allowing them to increase the variety of work they perform and the level of autonomy or freedom they have in performing the work.

Social specialization refers to the specialization of individuals rather than the special- ization of jobs. Social specialization is accomplished through the employment of profes- sionals whose skills cannot be easily routinized. For example, an accountant who performs an audit does so through the application of specialized, trained skills. Similarly, engineers, nurses, doctors, and professors are specialized professionals whose skills have been devel- oped in a specific area or specialty.

Centralization Where does authority rest within the organization? That is, what level in the organizational hierarchy has decision-making authority? This raises the ques- tion of centralization and decentralization.

Decision-making power can rest at the top of the organizational hierarchy. For example, if top management makes all the important decisions with little or no input from lower levels of the organization, this would be considered a highly centralized decision-making structure and is known as centralization . On the other hand, if decision-making authority is not concentrated at the top level, but rather is spread to the lower levels, this is referred to as decentralization .

As with the other elements we have discussed to this point, the 20th century also witnessed great changes in the relative concentration of decision-making authority, Essentially, many organizations chose to move from centralized to more decentralized structures. Largely, this move was intended to make organizations more efficient and faster in their decision-making ability. Centralized organizations typically require longer time frames for decisions to be made. For example, it takes much longer for the head office of a geographically diverse operation to make decisions about its operations in another corner of the world than it would if that operation had authority to make its own decisions.

The notion of worker empowerment is a move toward shifting much greater levels of responsibility back to employees, so that in a sense they are at least partly their own bosses. One popular example of the trend toward less emphasis on one boss is the use of self-managing work teams, which we discussed earlier. These are essentially collections of

specialization Also called divi- sion of labour, refers to the degree to which organizational tasks are subdivided into separate jobs. There are fundamentally two different kinds of specialization: functional and social specialization.

functional specialization The dividing up of jobs into their smallest components so that workers perform simple, specific, and repetitive tasks.

social specialization The specialization of individuals rather than jobs, which is accomplished through employment of profes- sionals whose skills cannot be easily routinized.

centralization The degree to which decision-making authority in an organization is concentrated at the top level.

decentralization The degree to which decision-making authority in an organization is spread to the lower levels.

FUNCTIONAL SOCIAL

Division of jobs into simple tasks Level of professionalism among employees

Exhibit 4.5 Job Specialization

worker empowerment A move toward shifting greater levels of responsibility back to employees, so that in a sense they are at least partly their own bosses. One popular example of the trend toward less emphasis on one boss is the use of self- managing work teams.

129C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

workers who work together on a project or task and largely manage themselves. Some organizations that have employed self-managing teams include GM’s Saturn division, Motorola, Frito Lay, Shell, and Microsoft, to name but a few. The need to have one all- powerful boss is no longer considered the best way of designing organizations.

Span of Control How many levels of management does an organization have? To address this question, we can consider the notion of hierarchy of authority. The hierarchy is very much connected to something called the span of control , which refers to the number of employees reporting to a supervisor. Obviously, it can vary from organization to organization, depending on how many subordinates an organization feels a manager can effectively direct.

The span of control is important because it really determines the number of managers and levels there are in the organizational hierarchy, which is referred to as vertical differentiation . How does the span of control determine the number of managers and levels? Consider the following examples (and review Exhibit 4.6 ).

Imagine two organizations with the same total number of seven members, but with differ- ent spans of control. In Organization X, there is an average span of control of two employees with three levels of hierarchy (the president, two managers, and four subordinates). In Organi- zation Y, which also has a total of seven members, the span of control is six and there are only two levels in the hierarchy. (This organization might be considered as having one central leader with all employees as one self-managing team who only report to one boss, the president.)

We can describe Organization X as having

■ a relatively narrower span of control (two) compared to Organization Y, which has a wider span of control (six).

■ a taller hierarchical structure (three levels of hierarchy) compared to Organization Y, which is relatively flatter (two levels of hierarchy). That is, the span of control clearly determines how “flat” or how “tall” an organization is.

In general terms, a narrow span of control tends to reflect a tall organization, while a wide span of control tends to reflect a flat organization. What difference does it make how

span of control The number of employees reporting to a supervisor.

vertical differentiation The number of managers and levels in the organizational hierarchy.

President

Team Members

Team Members

Team Members

Team Members

Team Members

Team Members

President

Manager

Subordinates Subordinates

Manager

Subordinates Subordinates

Organization X: Taller, Narrower Span of Control

Organization Y: Flatter, Wider Span of Control Exhibit 4.6 Span of Control

130 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

many subordinates a supervisor oversees? Or how many levels of hierarchy exist within an organization? First, it has been argued that maintaining small or narrow spans of control improves a manager’s ability to manage. Think about it—a manager who oversees, say, a handful of employees is much more capable of maintaining close supervision than a man- ager with a wide span of control who is responsible for a large number of employees. How- ever, there are also downsides to the narrow span of control: It is costly! Why? Quite simply, because it adds layers of management, and more management means more expenses to cover. Second, a narrow span of control (or tall structures) makes vertical communication more time consuming. To see why, again consider what a narrow span of control creates—more levels in the hierarchy, which means that any information that must be transmitted from the top of the hierarchy to the bottom takes longer than it would to communicate if there were fewer levels. One other potential disadvantage of narrow spans of control, or tall structures, is that the close supervision such a system encourages also tends to discourage employee autonomy and self-management.

We have seen changes in the span of control in organizations over the past century. Certainly, the trend in recent years is to widen the span of control or, in other words, flatten the organizational hierarchy. From IBM to Toyota, we have seen significant delayering of organizational hierarchies. Why? This has occurred for most of the reasons cited above: cutting costs and speeding up the communication or decision-making pro- cess. Typically, widening the span of control, or flattening the hierarchy, includes spread- ing decision-making authority down to the lower levels of the organization.

Formalization To what degree will rules or procedures be used to guide organizational members? The answer to that question is addressed in the notion of formalization. The level of formalization in an organization refers to the degree to which rules, regulations, procedures, and the like govern how work is performed. In other words, formalization reflects the degree to which jobs within the organization are standardized. A high level of  formalization means highly standardized work—that is, clear rules regarding how the work should be performed. Highly standardized work, or work that is very much rule- directed, suggests that there is little individual discretion in how that work can be per- formed. In this regard, high formalization is what scientific management advocated in its assertion of standardizing work, which was intended to ensure that performance was con- sistent and reliable—workers know what is expected of them and how, exactly, they should be performing their jobs. In addition, the greater the degree of formalization, the less reliance there is on individual discretion.

Can you think of any organizations that are highly formalized? Wherever you have an organization that has explicit job descriptions and numerous rules or procedures gov- erning the work process, you’ve got a highly formalized organization. Like the other elements of structure, attitudes toward formalization in organizations changed dramati- cally throughout the 20th century. Essentially, what we have witnessed in many organi- zations is a shift from high formalization and standardization of work practices to less formality. Why? Given the need to adapt to the rapidly changing external environment, organizations have found they must be willing to scrap the old way of doing things in favour of methods that better accommodate the changing demands of their environ- ment, whether the sources of change come from competitors, consumers, technological changes, and so on.

formalization The degree to which rules, regulations, proce- dures, and so on govern how work is performed; the degree of the standardization of jobs in the organization. The greater the degree of formalization, the lower the reliance on individual discre- tion and the greater the assurance of consistent and reliable performance.

131C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

WHAT DETERMINES ORGANIZATIONAL STRUCTURE? A RATIONAL PERSPECTIVE In broad terms, we can consider why organizations take on different structures, and we can consider sources of influence on organizational design. To simplify our discussion, we can consider the two extreme opposites in terms of the organizational configuration iden- tified previously: the mechanistic organization and the organic organization. Each can be assessed using the four elements of structure (see Exhibit 4.7 ).

Exhibit 4.7 Mechanistic vs. Organic Organizations

Mechanistic Organic

1. Division of labour/work specialization

2. Centralization

3. Span of control

4. Formalization

Narrow

Centralized

Narrow

High

Wide

Decentralized

Wide

Low

Exhibit 4.8 Strategy and Structure

Types of Organizational Strategies

Elements of Structure Focus on Innovation Focus on Cost and Efficiency

1. Division of labour

2. Centralization

3. Span of control

4. Formalization

Wide

Decentralized

Wide

Low

Narrow

Centralized

Narrow

High

Organic organizations and mechanistic organizations are polar opposites in struc- ture. Machine bureaucracies, or mechanistic organizations, maintain jobs that are narrow in scope; decision making is centralized at the top of the organizational hierarchy and work is conducted within highly formalized rules and procedures. On the other hand, organic organizations tend to have jobs that are enriched with more variety and task responsibilities; typically, there is a team-based approach rather than a “top-down” approach to authority and decision making is decentralized throughout the organization. The worker is less restricted with fewer rules and regulations. While there are a variety of influences on the design of organizations, perhaps among the most significant sources are strategy, size, technology, and the environment.

Strategy Clearly, an organization’s structure is intended to help achieve its organizational objec- tives or strategy. In other words, structure should follow strategy. For example, if an orga- nization’s central mission is to be innovative, to pursue new product designs or services, then its structure should help achieve that goal. From what we have discussed earlier, the characteristics associated with the organic organization would best suit that objective. Few rules and decentralized decision making encourage flexibility and adaptiveness to environmental demands. And these are, consequently, useful for encouraging innovation. If, on the other hand, efficiency or cost minimization is a central strategy, then the mech- anistic organization is the better-suited structure (see Exhibit 4.8 ).

organic organizations The extreme opposite from mechanistic organizations in organizational design. Organic organizations tend to have jobs that are enriched with more variety and task responsibili- ties (wide work specialization); typically, there is a team-based approach rather than a “top-down” approach to authority, and decision making is decentralized throughout the organization. There is a wide span of control. The worker is also less restricted with fewer rules and regulations. These organizations tend to be innovative and flexible.

mechanistic organizations The extreme opposite from organic organizations in organizational design. These organizations are exemplified by the machine bureau- cracy. Machine bureaucracies, or mechanistic organizations, maintain jobs that are narrow in scope, decision making is centralized at the top of the organizational hierarchy, there is a narrow span of control, and work is conducted within highly formalized rules and procedures.

132 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Organizational Size If you observe the organizational landscape, it is hard not to see some kind of connection between the size of an organization and its structure. In terms of our organic–mechanistic clas- sification, there is a tendency for larger organizations to shift toward a more mechanistic struc- ture—largely because of the need to control and coordinate many employees. When you have masses of employees whose performance must be directed, it would seem beneficial to stan- dardize or routinize the work and ensure there are clear rules and regulations to guide perfor- mance. It is difficult to maintain the informality of the organic structure when organizations grow. However, that is not to say that many large organizations do not try to retain an organic structure, even in the face of significant growth. For example, although Microsoft is a large organization, it prides itself on innovation and has attempted to divide itself into manageable units that use team-based approaches and where informality frees up the entrepreneurial spirit. Similarly, Johnson & Johnson prides itself on being a decentralized empire. The top managers are given much decision-making power for their units, and there is a great effort to maintain a flat organizational structure, even though the company itself is quite large (see Exhibit 4.9 ).

Elements of Structure Small Organization Large Organization

1. Division of labour Wide Narrow

2. Centralization Centralized Decentralized

3. Span of control Wide Narrow

4. Formalization Low High

Exhibit 4.9 Organizational Size and Structure

Technology Technology essentially refers to how an organization transforms its inputs, such as financial capital and physical and human resources, into services or products. For example, the assembly-line approach has been used to produce output in the car manufacturing industry.

Among classifications within technology is how routine or nonroutine that technol- ogy is. Routine technology refers to automated and standardized operations typical of mass production operations, while nonroutine technology is not standardized and might include anything from conducting genetic research to making custom-made furniture. As you might have guessed, standardized, mass production technologies are more compatible with mechanistic structures where such standardization or routinization of work is part of the main objective. Nonroutine technologies, on the other hand, are better suited to innovative, organic structures that do not allow formality and rules to govern activity.

Environment Among the main elements we might consider as composing an organization’s environ- ment are suppliers, customers, competitors, the government, and the general public. When might an organization’s structure be affected by its environment? Again, if we can use a broad classification, you can think of an organization’s environment in two broad classes: dynamic or static. Static environments , as the name suggests, exhibit little if any change—no new competitors, no new technologies, no government regulatory changes, and so on. In such an environment of certainty, the mechanistic structure would be quite

routine technology Automated and standardized technology and operations typical of mass production operations.

nonroutine technology Nonstandardized technology. Might include anything from conducting genetic research to making custom furniture.

static environment One of the two broad classifications of environments of organizations (the other being dynamic). The static environment exhibits little if any change.

133C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

suitable: It generates rules and methods of performance based on environmental needs and, once established, does not change. A dynamic environment , on the other hand, contains much uncertainty and undergoes a lot of change. Clearly, an organic structure is better suited in this situation, given its higher adaptiveness to change. Competition alone has accounted for many of the changes in the environment of a business.

Contingency Theory and the Importance of the Environment In order to understand why organizations are designed in a certain way, it makes sense to consider the environment within which they operate. There are numerous theories and models that have attempted to identify those factors that determine the structure of organizations. For example, contingency theory is a natural outgrowth of systems theory , 7 which recognizes that all organizations are open systems that can only survive through continuous and successful interaction with their environment.

What factors influence whether a tall bureaucratic organization or a simple flat structure is suitable? In what contexts does a centralized decision-making structure, as opposed to a decentralized structure, make sense? Contingency theory focuses on the contextual factors that can influence the structure and management of organizations, with a particular emphasis on organizational design. For example, contingency theories seek to answer questions such as, why do some organizations benefit from centralized decision making? Why do some organiza- tions require a high level of formalization with regard to employee job responsibilities?

A central philosophy underlying contingency theory is that there is no one ideal way to organize. That is, there are no universal principles of what constitutes the best form of organization. The optimal organizational structure is dependent on (or contingent on) the nature of its operating environment. Consequently, this implies that managers should seek to achieve a fit or alignment among the major elements of their organization’s environ- ment and its internal organizational design. Therefore, while contingency theory suggests that there is no one best way to organize universally, it does assert that there is one best way to organize given a specific type of operating environment or organizational context.

Contingency theory is based on the assumption that organizations are able to adapt to changing environmental conditions. Given the need for organizations to design their struc- ture in reference to their environment, successful organizations must adapt to any changes in that environment via structural change. This also assumes that organizations behave as ratio- nal entities that are able and willing to make internal structural changes to achieve compat- ibility with their environment as a means for survival and success. According to contingency theory, there are a number of specific contingency factors that can influence organizational design. One of the most widely studied factors is the notion of environmental uncertainty.

Environmental uncertainty has been defined as the rate at which market conditions and production technologies change. There is no doubt that environmental uncertainty is an important dimension that varies widely among organizations and industries. For exam- ple, some organizations and industries operate within relatively static environments. Other organizations may exist in very dynamic environments, where there are constantly new competitors, rapidly changing technology, new governmental regulations, and so on. Indeed, one example is the digital technology industry, which operates in an uncertain and evolving environment, as seen in Talking Business 4.2 .

dynamic environment One of the two broad classifications of environments of organizations (the other being static). The dynamic environment contains much uncertainty and change.

systems theory A theory that recognizes that all organizations are open systems that can only sur- vive through continuous and suc- cessful interaction with their environment.

contingency theory A natural outgrowth of systems theory, which recognizes that all organiza- tions are open systems that can only survive through continuous and successful interaction with their environment. A central phi- losophy underlying contingency theory is that there is no one ideal way to organize.

environmental uncertainty The rate at which market condi- tions and production technologies change, producing dynamic or static environments.

7 Hall, A.D., & Fagen, R.E. (1956). Definition of system. In General Systems: The Yearbook of the Society for the Advancement of General Systems Theory: Vol. 1 , 18–28.

134 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

The digital economy can be defined to include all economic

activities that the digitization of information permits. This

broad definition includes not just digital media-related

activities and not just the Internet, but all digital technolo-

gies, including mobile technologies. . . .

When we think about this country’s global strengths in

the digital economy, we typically think about digital activi-

ties. But digitization allows us to benefit across all eco-

nomic activities, rather than just specifically “digital

producing” activities. What are Canada’s areas of poten-

tial strength in using digital technologies to open up

global trade opportunities in other areas, including

resources, services, and manufacturing?

These “digital-using” areas of potential strength may

not be as obvious as, say, digital-producing activities such as

creating video games. So a good place to start might be

Canada’s traditional areas of relative strength. To take what

many would consider a “non digital” example, let us start

with Canada’s relative strength in resource extraction. As

previously discussed, digitization now makes it easier to sell

services globally and provides the tools to more effectively

coordinate global supply chains. This means Canadian busi-

nesses can use digital tools to be more effective in global

markets in activities such as mining, as well as to more eas-

ily sell their resource-related services in global markets.

To build on Canada’s existing strengths in the digital

economy, Canadian businesses must invest more heavily

in digital technologies and Canadian policy-makers must

address a wider range of trade barriers.

Canada’s banking sector is another area of relative

global strength. UNCTAD consistently ranks Canadian

banks among the most globalized financial services compa-

nies in the world. During the recent global financial crisis,

Canadian banks also proved to be among the most resil-

ient. The small number of players in the sector is a benefit.

It allows Canadian banks to invest heavily in technologies—

such as those for online and mobile banking—and to test

these technologies extensively on a large group of custom-

ers. (Canadians are relatively heavy users of online banking—

they are, in fact, more likely than Americans to adopt it.)

Canadian banks can leverage this experience in new mar-

kets, where they are already expanding. Similarly, Canada

can build on its professional services strengths in other areas

in which it has global expertise—such as engineering and

waste management services—now that the cost of coordi-

nating such projects globally has fallen dramatically thanks

to digital technologies.

A third example is Canada’s traditional expertise in

making cross-border value chains work, as we have done

for decades across the Canada–U.S. border. Canada could

become a leader in cross-border logistics, adopting tech-

nologies and developing leading-edge practices that allow

for better coordination of global value chains.

A final example of a relative strength—one that we do

not often view as a strength—is the pre-eminent role

smaller businesses play in the Canadian economy. Digitiza-

tion makes it easier to break down production into smaller

tasks and to coordinate these tasks globally. This means

that many more opportunities are now available for smaller

companies to link themselves into global value chains—

even though competition is fiercer. Smaller companies that

offer a world-leading product or service may not have been

able to tap into global markets before. Now, companies

that identify and fill a niche can use digitization to go global

more easily. This strength cuts across a range of economic

activities. (An upcoming Conference Board report will iden-

tify best practices and provide more insight into how smaller

businesses are using digital technologies to go global.)

These ideas are only the tip of the iceberg. In other

words, Canada has a lot to offer. But to seize on these

and myriad other promising opportunities, Canadian busi-

nesses will need to invest more heavily in digital technolo-

gies and related skills than they do now. And for Canadian

TALKING BUSINESS 4.2

Canada’s Trade in a Digital World

Shutter_M/Shutterstock

135C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

businesses to ensure the secure and wide- ranging access

to global markets they need to capitalize on their relative

strengths, policy-makers will need to address a wider

range of trade barriers than they have in the past.

Trade Barriers in a Digital World

India, the United Arab Emirates, Turkey, and other coun-

tries have threatened to ban service for Canadian based

Research In Motion’s (RIM’s) BlackBerry devices within

their borders. This is an example of the new types of barri-

ers Canadian and global companies face when buying or

selling their products or services in a world that increas-

ingly relies on digital information flows.

A ban—or simply the threat of one—would obviously

create a barrier to selling BlackBerry products and services in

those coveted, rapidly growing markets. But the repercus-

sions would be much broader. Businesses and individuals

have come to rely on access to smart phones, search

engines, and other communications tools to conduct their

businesses and enter new markets. Threats to ban such

tools lead to self-censorship and uncertainty, both of which

undermine global trade and investment (not to mention

human rights). Banning such tools outright is likely to have

an even stronger negative impact on the scope, efficiency,

and stability of legitimate global business activities.

To be sure, there can be legitimate privacy or security

reasons for countries to filter some types of cross-border

data flows. Often, however, barriers to digital data flows

are aimed at protecting domestic companies (“digital pro-

tectionism”) or at clamping down on dissent.

Digital Information Barriers Are Trade Barriers

Yet, typically, neither policy-makers nor members of the

public think of barriers to digital information flows as barriers

to trade and investment. Historically, Canadian and global

trade policy-makers have focused on eliminating tariffs on

goods trade, and almost all academic work on trade barriers

has related to these tariffs.

Though tariffs have fallen considerably in recent

decades, Canadian companies still face them in a number

of global markets. And even relatively low tariffs can have

significant effects. When each production task is done in a

separate country, products cross multiple borders, poten-

tially encountering tariffs at each one.

Canada must work with other countries to address the

many non-tariff barriers that Canadian companies face,

such as restrictions on foreign investment, barriers to the

flow of information and people, and the threat of com-

promised cybersecurity.

But the ability to digitize information and send it any-

where means we also need to think beyond tariff barriers

in our trade and related public policies. The use of digital

technologies underpins all global trade and investment

today. It has opened up new trade possibilities for digital

products, such as music and video games, that are made

using digital tools and that “travel” electronically. It has

made it possible to trade virtual items, such as clothing

and accessories, in virtual worlds. But it has also revolu-

tionized the way physical goods are made and how they

are tracked on their way to their customers. It has

increased the ability to trade services globally, and it has

made it easier to coordinate trade, investment, and infor-

mation flows across global value chains.

Source: Excerpted from Goldfarb, D. (2011, April). Canada’s

trade in a digital world. The Conference Board of Canada.

Retrieved from www.conferenceboard.ca/reports/briefings/

tradingdigitally/pg2.aspx . Reprinted with permission.

8 Burns, T., & Stalker, G.M. (1961). The management of innovation . London, UK: Tavistock.

Researchers by the names of Burns and Stalker were among the first, back in the 1960s, to systematically study the influence of the environment on organizational struc- ture. 8 Among their studies was a comparison of organizations existing in two fundamen- tally different environments: one set of firms operated within a dynamic, changing industry; another set operated in a stable, established industry. The researchers found that there were a number of significant structural differences in these two sets of organizations (see Exhibit 4.10 ). In essence, the results of this research suggested that an organization’s struc- ture is contingent on the type of environment within which the organization operates.

Lessons for Managers The contingency approach presents some important lessons for man- agers. Among these is the need for managers to take great caution in the way they interpret

136 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

the organization’s environment. Managers must accurately defi ne those environmental fac- tors that have a signifi cant impact on their organizations to generate a suitable organizational structure—one capable of responding to environmental demands and the characteristics for which it was designed. By the mid-1980s, managers found that their assumptions about the environment largely no longer held. Organizational characteristics regarding the different kinds of hierarchies, organizational practices, and strategies developed in the past were sud- denly incapable of dealing with changes in the organizational environment.

REENGINEERING A management consultant by the name of James Champy was asked to observe the opera- tions of an insurance company in an effort to improve its efficiency. 9 Among his observa- tions, Champy discovered that it took 24 days to obtain a policy after the client purchased it. Champy was curious to understand what work was done on these insurance policies during the 24 days it took to reach the purchaser. After following the trail of these poli- cies, Champy found that only about 10 minutes of work was actually performed on these policies during that 24-day period. The additional time arose because the policies were transferred through 14 different departments. Was this necessary? Champy discovered that while there was no real need for policies to travel through this long and winding road, it nevertheless had become a tradition: “This is how we do things here.” There had been no assessment, however, of whether this method was still necessary.

James Champy and one of his colleagues, Michael Hammer, engaged in many more observations of different types of organizations. They advocated a rethinking of organiza- tional design, detailed in their best-selling book Reengineering the Corporation. Reengineering became one of the hottest business buzzwords of the 1990s, but what exactly is it? Fundamentally, reengineering asks the question, if I were creating this com- pany today—if I could start over given what I know and current technology—what would it look like? A more systematic definition includes the following elements:

Organizational Characteristics Static Industry Dynamic Industry

Rules and procedures • Reliance on formal rules and pro-

cedures to carry out most orga-

nizational activities

• Relatively fewer rules

Decision making • Highly centralized • More decentralized

Levels of administration

or supervisory control

• Greater number of levels • Fewer levels

Exhibit 4.10 Dynamic vs. Static Industry

9 Hammer, M., & Champy, J. (1993). Reengineering the corporation: A manifesto for business revolution. New York, NY: HarperCollins.

Objective 4 Explain the concept of reengineering.

reengineering The fundamental rethinking and radical redesign of business processes to achieve dra- matic improvements in measures of performance. It often advocates the collection of individual tasks into a greater number of whole jobs.

The fundamental rethinking and radical redesigning of business processes to achieve dramatic improvements in measures of performance (cost, quality, service, speed). 10

10 Hammer & Champy, 1993.

137C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

In examining the definition of reengineering, we can understand its essence and its basic contributions to organizational design. Let’s consider each element of this definition:

1. Fundamental rethinking of the organization’s structure and functions: Reengineering involves a critical examination of the traditional method of structuring work. An organization will examine how it performs its functions to assess whether this method does indeed make the most sense. This examination of work processes is done with a focus on how to best serve customer needs. Two fundamental questions that any reengineering effort must ask are “How do we improve quality of our product/service?” and “How can we reduce costs?” One central aim is to eliminate any company practice that is not adding value to the process of generating a product or service for the customer. The notion of focusing on the company’s “core competencies” implies that the aim is to concentrate on what the company does best and eliminate unnecessary functions or practices.

2. Radical redesign of organization processes and structure: The thrust of reengineering is to “reinvent” the organization according to the current objectives. Hammer and Champy suggested that a lot of organizations that claim they are making changes to become more efficient are really just trying to do “worthless tasks” more efficiently. What reengineering advocates is a “quantum leap.” However, it is important to note that while the radical redesign of an organization is the fundamental rationale behind reengineering, it is difficult to achieve in practice.

Accomplishing the goal of redesign typically involves organizing around process rather than around functions. For much of the 20th century, beliefs about organizing focused on work specialization—compartmentalizing jobs into the simplest elements—therefore ensur- ing work was standardized (as advocated by scientific management and Weber’s notion of bureaucracy). Reengineering advocates the collection of individual tasks into more whole jobs. This relates to the distinction between process and functions. It is reflected in the notion of moving away from a focus on specialized tasks to a focus on process. Consider an example offered by Hammer and Champy, the case of a credit agency, in Talking Business 4.3 .

An organization found that the task of processing a credit

application was extremely slow and inefficient, taking any-

where from six days to two weeks to complete. After a

credit request was received by phone it was recorded on a

piece of paper. This paper was then passed along to credit

checkers, pricers (who determined what interest rate to

charge), and many other individuals who performed single,

compartmentalized tasks. Credit applications typically were

bounced around to different areas before they were prop-

erly completed. After much scrutiny, it was discovered that

the time actually required to complete such an application

TALKING BUSINESS 4.3

The Credit Agency shouldn’t take more than 90 minutes! Consequently, it

was time to reengineer—to “scrap” the traditional method

organized around specialized, compartmentalized tasks

and redesign the work around the process of completing a

credit application. This did not require numerous special-

ists, but simply a few generalists. That is, one person could

process an entire application without passing it on to oth-

ers. So this work was reengineered, resulting in a decrease

in the application time, an enormous increase in the num-

ber of applications processed, and fewer employees

required to do the job. 11

11 Hammer & Champy, 1993.

138 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Perhaps the biggest challenge associated with the success of the reengineering phenomenon may be that of selling such a major change to the employees of the organiza- tion and getting them to “buy into” the strategic changes that must be undertaken for the firm to survive and prosper. [See Talking Business 4.4 .] For example, outsourcing activities that don’t contribute to core competencies or technology to other firms that can perform them better may be a legitimate outcome of a good reengineering effort. It would lead to work-force reduction, but only with the purpose of making the firm leaner and more responsive. Time-based competition and the creation of “agile” corporations may not even be possible without such changes in work-force size and composition. As companies emphasize the notion of capturing and leveraging “knowledge” as a source of value, a broader focus on process change management may perhaps be the only way to avoid skill obsolescence of employees and encourage horizontal career paths. The extent to which top-level management can sell such a vision of change and its impact on the employees will determine whether the reengineering phenomenon fulfills its true potential. 13

This illustration reflects the notion of organizing around process—in other words, designing the organization in a way that considers the actual jobs that need to be performed. This is in contrast to a blanket approach to organizational design that would simply advo- cate the creation of different departments that jobs will be organized in. Often the bureau- cratic structure becomes preoccupied with administrative levels of hierarchy, rules, and regulations. What reengineering advocates is to move away from a preoccupation with orga- nizing work based on tasks, jobs, departments, and administrative levels of hierarchy, and instead to focus on processes—the activities required to transform inputs into outputs.

With regard to the nature of the job, reengineering also advocates combining several jobs into one. This, too, was reflected in the credit agency example in Talking Business 4.3 . This is akin to the notion of job enrichment—that is, enriching the responsibility and challenge of jobs by allowing workers to do more of the task rather than one narrow, highly specialized piece of the work. Certainly technology has helped facilitate the inte- gration of jobs and the ability of fewer people to perform a greater variety of tasks. In fact, it has been observed that among the leading factors contributing to the proliferation of reengineering activity in the early 1990s were advances in information technology. Tech- nologies, including shared databases, client-server architecture, and imaging, could be efficiently applied to facilitate processes that cross different functional departments. 12

The above suggests that reengineering may result in the view that work can be per- formed efficiently with fewer employees. Typically, reengineering means cutting the size of the workforce and often involves flattening the organizational hierarchy. Examples abound, including organizations like PepsiCo North America, which cut seven layers of its hierarchy to four in order to focus on designing itself around serving customers rather than simply maintaining a hierarchical bureaucracy. This also presents a major challenge for organizations attempting to reengineer, though: the threat of job loss for many employees. Management scholar Varun Grover recently observed the following:

12 Grover, V., Kettinger, W.J., & Teng, J.T.C. (2000). Business process change in the 21st century. Business and Economic Review, 46 (2), 14–18.

13 Grover, V. (1999). From business reengineering to business process change management: A longitudinal study of trends and practices. IEEE Transactions on Engineering Management, 46 (1), 45.

139C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

These are the confessions of an outsourcer. She has spent

more than a decade helping some of Canada’s biggest

financial institutions shed workers and replace them with

low-wage help.

She has made a good living doing this. But she now

thinks that contracting out middle-class jobs—the very

practice she aided—is short-sighted and morally wrong.

“What kind of world do we want?” she asks. “We are

not building a future for kids.”

She doesn’t want her name used, so I shall call her

Arlene. Her story jibes with others I have heard since the

furor over the Royal Bank’s decision to outsource high-

tech workers to India broke.

A highly trained, university-educated professional,

Arlene has been at the centre of the action. She is frus-

trated by the media coverage of the RBC affair. She says

those who focus on Ottawa’s foreign temporary worker

program miss the point.

The big banks she has worked for under contract don’t

bring in temporary foreign workers to take Canadian jobs.

Rather they send those jobs abroad through what they call

“preferred vendors,” such as the India-based outsourcing

firm iGate.

True, these preferred vendors may temporarily import

foreign managers to organize the job drain. But typically,

such managers do not stay long.

More to the point, the lower-paid foreigners who will even-

tually do the actual work rarely, if ever, set foot in Canada.

TALKING BUSINESS 4.4

Former Outsourcer Describes How Job Destruction Works Arlene says any outsourcing scheme begins with the

institution’s senior management. Usually, she says, the

aim is to transfer about 60 percent of the affected jobs—

often in back-shop areas like information technology—

to India where wages are a fraction of those paid in

Canada.

The remaining 40 percent, which generally require

more local support, are outsourced to third-party firms in

Canada. They in turn, subcontract the jobs to individual

Canadians.

The aim here, Arlene says, is to not only to save the bank

money but ensure that it is legally insulated from those who

work for it.

Technically, those Canadians doing outsourced work

are viewed as self-employed. That means that the bank no

longer has to pay statutory benefits such as Canada Pen-

sion Plan premiums.

In most cases, subcontracts with Canadian workers are

renewed for up to two years. Then, in order to maintain

the fiction that they are not real bank employees, they are

let go. After a few weeks, they are rehired on another set

of short-term contracts.

“It’s sad,” says Arlene. “Really and truly sad. If you’re on

contract you have no security. You do exactly what you’re

told or you’re gone. You look the wrong way at someone

and you’re gone. If you even question someone, you’re

gone.”

Foreign outsourcing works slightly differently.

In this case, the financial institution will hire not

only someone like Arlene but a foreign preferred ven-

dor like iGate. “We work side by side in the bank,” she

says.

Her job might involve bundling the tasks to be out-

sourced. Her foreign counterpart then arranges with his

home office in, say, India to have its low-wage employees

do the tasks.

The foreign outsourcer might use Canadians from its

Toronto office to manage what corporations euphemisti-

cally call “the transition.” Or it might bring in employees

from abroad under one of several visa arrangements per-

mitted by Ottawa.

© 06photo/Fotolia

(continued)

140 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

TOWARD A VIRTUAL ORGANIZATION If downsizing has become one of the most feared business buzzwords in recent years, a much more benevolent yet popular buzzword is the virtual organization . How does an organization become virtual? And equally important, why would an organization want to become virtual? The virtual organization underscores how far we have come from the traditional notion of organizations. According to our old philosophy, the bureaucratic structure is typically large. The virtual organization, on the other hand, is not dependent on size for its functions. In fact, the virtual organization attempts to maximize its fluidity, flatness, and integratedness with the environment—that is, building on many of the structural trends we identified earlier. Let’s consider the ways a virtual organization attempts to achieve these characteristics.

Outsourcing Outsourcing (or contracting out) involves hiring external organizations to conduct work in certain functions of the company. For example, payroll, accounting, and legal work can be assigned to outsourced staff. The organization typically will retain its core functions or competencies—that is, those areas that it is in business to conduct. In other words, it sticks to what it does best and outsources functions that it doesn’t wish to focus on. Outsourcing can also be useful for small businesses or startups that do not have time to devote to admin- istrative tasks but rather need to focus on their core activities and to grow their business.

Typically, any foreigners brought in are tasked not with

doing the work being outsourced but with learning how

to train others who are already abroad to do that work.

In that sense, they are not replacing qualified Canadian

workers. They are merely executing a job-killing decision

already made by the bank.

The corporate world has invented various phrases to

describe this drive to cheap labour. Some versions are

referred to as “organizational redevelopment.” Others are

called “process reengineering.”

In most cases, employees about to be fired are com-

pelled to explain how their jobs work so that cheaper

workers can take over. Arlene recalls one instance where

senior directors broke down in tears as they spelled out

how best they could be replaced.

“One was a single mother,” she recalls. “Another had

two kids . . . usually they get rid of the directors first before

outsourcing the entire unit.”

Typically, she says, employees are instructed to explain

their work processes before they receive their pink slips.

This causes less fuss.

In the Royal Bank case, information technology profession-

als were given notice before being required to detail their jobs

to RBC’s Indian partner. That led some to complain publicly.

“Perhaps bad planning,” says Arlene.

The former outsourcer says she now thinks outsourcing

is monstrous. She says she left the field because she

couldn’t bear it any more. She says she has seen too much

damage up close.

She says outsourcing, either domestically or abroad, is

destroying the dreams of young Canadians. She has a child

of her own. She wants government to crack down on

companies that, just to make a buck, deliberately kill good

jobs. Her words spill out. “This isn’t my Canada,” she says.

“It’s not fair. It’s like that television show Survivor .”

Source: Excerpted from Walkom, T. (2013, April 12). Former

outsourcer describes how job destruction works. Toronto Star .

Retrieved from www.thestar.com/news/canada/2013/04/12/

former_outsourcer_describes_how_rbcstyle_job_destruction_

works_walkom.html . Reprinted with permission from the

Toronto Star.

Objective 5 Describe the notion of the virtual organization.

virtual organization An orga- nization that attempts to maximize its fluidity, flatness, and integrat- edness with the environment. Outsourcing, networking, and shedding noncore functions are three ways organizations can become more virtual.

TALKING BUSINESS 4.4 (continued)

outsourcing Hiring external organizations to perform certain noncore activities of the company. May be employed by corporations engaged in downsizing.

141C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

You likely have never heard of HTC, Flextronics or Cellon. However, these companies design some very famous products. They represent the new trend in outsourcing—out- sourcing innovation! Companies such as Dell, Motorola, and Philips are purchasing com- plete designs from Asian developers, making minor adjustments to their own specifications, and putting their own brand names on the label. This type of outsourcing may also involve “off shoring”—relying on different regions of the world to provide this expertise.

Why is this trend occurring? Companies gain tremendous cost savings from this type of outsourcing. The outsourcing of manufacturing, technological support, and back-office work is not the only way to cut costs. Now, even outsourcing core compe- tencies such as innovation can make financial sense! However, it also raises some risks. Who “owns” the final innovation? That’s one reason why Apple Computer, for exam- ple, insists on developing its major products “in-house.” On the other hand, companies such as Nokia no longer insist on developing everything itself. Because of the com- plexities of changing technologies, outsourcing may permit Nokia to focus on other areas while deferring to innovators for assistance on some projects. 15

While the buzzword outsourcing may seem relatively recent, the practice of outsourc- ing has, in fact, been with us for many years. Consider the extensive list of “suppliers” of expertise to industry—lawyers, public accountants, independent insurance adjusters, con- tractors, appraisers, health care professionals, and independent medical specialists. Per- haps what is more recent is the trend toward building businesses with a consideration of which activities are required “in-house” and which functions can simply be outsourced. For example, CIBC outsourced a major portion of its human resource administrative func- tions to Electronic Data Systems (EDS). The move is consistent with the philosophy of outsourcing: shedding business activities that do not reflect the organization’s core com- petencies. Obviously, managing human resource functions, such as payroll or pension plans, are not part of CIBC’s core competencies. These functions can be outsourced to a company whose core competency is in such areas, like EDS. CIBC gains by having an expert company deal with these functions, and at the same time the company has cut costs through the elimination of almost half of its human resources department. 14

A good example of the potential benefits and, often, the necessity of outsourcing is found in the popular trend of outsourcing the payroll function. There are a variety of rea- sons for choosing to outsource the payroll function, including dealing with increased human resource demands that may be caused by employee population growth, mergers, acquisitions, spinoffs, consolidations, and downsizing.

In general, the power of outsourcing has been embraced across many diverse industries. A Businessweek article underscored this growing phenomenon:

14 Brown, D. (2001, June 4). CIBC HR department halved as non-strategic roles outsources. Canadian HR Reporter, 14 (11), 1.

15 Based on Engardlo, P., & Elnhorn, B . , with Kripaiani, M. in Bangalore, Reinhardt, A. in Cannes, Nussbaum, B. in Somers, N.Y., and Burrows, P. in San Mateo, California, (2005, March 21). Outsourcing innovation. Busi- nessweek [New York]. Retrieved from www.businessweek.com/stories/2005-03-20/outsourcing-innovation .

However, if outsourced products, services, and processes do not provide the quality expected by consumers, then the company’s reputation may suffer as a result, as seen in Talking Business 4.5 .

142 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

The latest Boeing 787 Dreamliner problem—the planes were

grounded after a battery fire on two Japanese airline flights—

is just another blow to the airline industry but it is the one

I and other potential passengers take most personally.

Air travel has become little more than a series of affronts

to one’s dignity, so the idea of a fuel-conserving lighter

plane that could fly longer distances with better interior air

and bigger windows, look, it was a dream, get over it.

It does seem as though Boeing, which launched its

dream scheme in 2004, hedged its bets, outsourcing the

design, engineering and manufacture of the plane, as is

the modern way. James Surowiecki, the New Yorker ’s

sturdy reliable economics reporter—no dreamer he—has

traced Boeing’s disastrous decision to outsource most of

the work to 50 different companies—yes, 50—to the bad

marriage Boeing made with McDonnell Douglas in 1997.

Essentially, he wrote, Boeing was the wild-eyed

dreamer and McDonnell Douglas was Mr. Cautious, which

meant that they compromised on a queen-sized bed, so to

speak. They outsourced to such a degree that it was more

trouble to keep track of the sub- and sub-sub-contractors

than just to have done the thing in-house in the first place.

The timeline of the Dreamliner’s problems reads like a

thriller plot—you may well say I am easily entertained—

but it’s perhaps more of a Greek tragedy. Christopher

Tang and Joshua Zimmerman’s crisply written UCLA

study, Managing New Product Development and Supply

Chain Risks: The Boeing 787 Case , reveals Boeing’s crush

on outsourcing.

Normally firms gather parts from suppliers and build a

product. Boeing devised a three-tier system of suppliers

before the bits even reached it for assembly, the study

says. The jigsaw map of the plane looks like something

devised by the UN, the wing sections alone coming from

six companies in four nations.

The initial rationale for planetwide sourcing sounded

plausible. So did preventing delays by refusing to pay

suppliers until the first 787 reached customers. But

there were technical problems with things like the com-

posite materials that replaced the aluminum normally

used for planes. They made the plane wonderfully light

but lightning strikes were initially a worry, the study

reported.

Then came Boeing’s risk. Just-in-time delivery, that gift to

the trucking industry and to Walmart, doesn’t work perfectly.

Why would it? Humans don’t meet deadlines. Almost no

managers were sufficiently gifted to track and discipline the

vast supply chain, the study said. Boeing’s workforce, terrified

of layoffs, went on strike. Customers began backing out.

I won’t recount what the study reported Boeing did to

even out the risk because it starts to read like a history of

the doomed 1910 Scott expedition to the South Pole.

Boeing was calm and brave, buying up the weakest sup-

pliers, hiring a new manager and CEO, giving staff a raise

and edgy customers interim airplanes.

But discovering that lithium-ion batteries tend to over-

heat? That’s like Scott’s fatal decision to go with ponies

instead of sled dogs.

There is a splendid 20/20 clarity in the study’s sad little

sentence, “Boeing should have chosen the right people

for the job at the outset.” Sometimes I think the secret of

hiring is that people are either intelligent or they’re not,

whatever the job is.

Surowiecki says exciting new products always have

flaws and we should have expected trouble. He is wrong.

It’s not that we have no tolerance for mistakes in airplanes,

but that we have no tolerance for ending up in a fireball

catapulting to earth.

Outsourcing the outsourced has a cost: it overstretches

the link between parts and the final product. It’s a risk

British consumers took when they bought cheap burgers

made from meat outsourced all over Europe, which turned

out to be horse, not beef. And now they’re retching.

Consumers paid a price in quality when they demanded

cheap airfares. They worshipped the god of cheap and

Boeing tried to please them.

The 787 delays, plus the new merger between American

and US Airways, will mean higher U.S. domestic airfares

and rightly so. We’ll fly less often but more happily.

Source: Excerpted from Mallick, H. (2013, February 25). Out-of-

control outsourcing ruined Boeing’s beautiful Dreamliner:

Mallick. Toronto Star . Retrieved from www.thestar.com/opinion/

editorialopinion/2013/02/25/outofcontrol_outsourcing_ruined_

boeings_beautiful_dreamliner_mallick.html . Reprinted with

permission from the Toronto Star.

TALKING BUSINESS 4.5

Out-of-Control Outsourcing Ruined Boeing’s Beautiful Dreamliner

143C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

Networking We have increasingly been observing organizations limiting themselves to fewer activities in which they have expertise and assigning specialists to handle all other functions. This is also associated with the notion of integrated or networked organizations that we identi- fied earlier. Through networking , organizations can engage in cooperative relationships with suppliers, distributors, or competitors. The aim is to improve their efficiency and flexibility in meeting new consumer needs. For example, a close relationship with a dis- tributor might offer the supplier company more information about the changing needs of customers. The Japanese version of networked organizations called keiretsu could, in fact, really be considered the first form of the virtual organization.

Typically, a keiretsu involves a large bank or financial institution, a large industrial organization, and a number of smaller firms, where the integrated network of relationships allows the large industrial organization to produce the product with financial assistance from the bank. The role of the smaller firms may be to supply parts to the manufacturer, conduct research, or perhaps distribute the final product. What we observe in virtual orga- nizations are only those activities that are central—they are kept in-house, so to speak, and all other functions are outsourced to separate companies or individuals who are typically coordinated by a small head office. Or, each company is simply involved in some kind of network where each brings its own expertise to the collection of companies.

Shedding Noncore Functions The outsourcing aspect, again, is a central feature of the virtual organization. Clearly, organizations can become more “virtual” by shedding some of their noncore functions and outsourcing these to affiliated organizations. Companies that use information technology (IT) need to become as flexible as the virtual organizations, given the rapidly changing face of technology and its applications. For organizations whose core competency is not IT or all its elements, there is much to be gained from partnering with other organizations in the virtual sense. A growing number of IT departments are considering outsourcing models to address all or part of their needs. “Small component” or discrete outsourcing service providers include such specialized offerings as storage and web hosting. Applica- tion management has become a high-growth area in outsourcing service markets in Canada. Those seeking such services have a range to choose from for outsourcing, includ- ing desktop or infrastructure services to various business functions. Network management can be outsourced, along with backup and recovery as well as data centre services.

A virtual organization might be composed of simply a small group of business executives who form the core of the organization. Their responsibility is to oversee and coordinate the activities that might be done in-house as well as those functions that are outsourced—which might involve coordinating relationships among the companies that develop, manufacture, market, and sell their products. Many more companies have found that they can become quite profitable without actually having to own their entire operation. Certainly, the tradi- tional bureaucracy is structured so that production occurs in company-owned plants, research and development are conducted by in-house experts, and sales and marketing are performed by the company’s own sales and marketing department. This is not the case for the virtual organization, which doesn’t believe you need to own everything. For example, Dell Computer owns no plants and simply assembles computers from parts whose

networking Organizations engaging in cooperative relation- ships with suppliers, distributors, or competitors with the aim of improving efficiency and flexibility in meeting consumer needs. The Japanese version is called keiretsu.

144 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

manufacture has been outsourced. Similarly, Apple Computer subcontracted the manufac- ture of its first Notebook to Sony as a means to speed up entry into the market. Companies like Nike and Reebok have achieved success by focusing on what they do best—designing and marketing their products. They outsource almost all their footwear manufacturing to outside suppliers. Obviously, the virtual organization doesn’t just outsource the peripheral function of the company; it outsources whatever costs less to outsource than to do in-house.

There are a number of gains potentially achieved by going virtual:

1. The cost savings are significant: A virtual organization does not need to own its own plants, nor employ its own research and development teams, nor hire its own sales staff. This means the virtual organization also doesn’t need to hire the extra staff to support all these functions—such as personnel specialists, company lawyers, accountants, and so on. The virtual organization can outsource most of these functions and focus on what it does best. So there is little if any administrative overhead, so to speak, because work activities are largely contracted. Cost savings arise in areas such as training, purchasing of work-related tools, benefits, downtime, and educational requirements. All these requirements are typically obtained with the arrival of the external or “outsourced” experts.

2. The virtual organization is a great alternative for entrepreneurs: Individuals seeking to start up a new business or venture may face huge startup costs. The network of arrangements within a virtual organization can exploit the expertise of different companies while not requiring the initiator of the business to buy everything and start a business from scratch.

3. For a mature company, going virtual can be a fast way to develop and market new products: Relying on the expertise of partners means that no huge investment is required to enter a new product or service territory.

4. Virtual organizations are fast and flexible: For example, the flexible arrangements of those parties involved can be of a temporary nature to produce a good or service; resources can be quickly arranged and rearranged to meet changing demands and best serve customers; management isn’t getting bogged down in peripheral functions, but is simply focusing on central functions.

Among the risks and challenges of becoming virtual are the following:

1. Giving up the notion of control: Control has traditionally been a key goal of any organiza- tion. The structure of the bureaucratic organization is fundamentally based on the notion of control—control through standardization of work, control through hierarchy of authority, control through rules and regulations, control through clear division of labour. However, the virtual organization doesn’t provide such control. Think of it—how can you monitor all activity when it may not even be occurring within the walls of one build- ing? Among the fears of going virtual and outsourcing is that we are “hollowing out” the organization and making it extremely dependent on external sources. The employees are not all yours; outsourcing to independent contractors doesn’t carry with it the same level of control as staffing your own employees to do the work. Difficulties in control can occur particularly when a variety of subcontractors are involved in the work. This lack of control may also generate a lack of control over costs—once a company becomes depen- dent on a supplier, it may be unable to refuse an increase in the supplier’s prices.

2. Lack of employee loyalty: If your organization is largely composed of temporary workers and subcontractors, who is really committed to perpetuating the goals of the company?

145C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

Can a virtual organization really develop a sense of identity or culture that is the “glue” that binds everyone to a common purpose? This is an issue that virtual organi- zations must deal with. In fact, turnover in many virtual organizations tends to be high because employees are committed only to the task for which they are hired. In addition, employees may be working under temporary contractual arrangements and could be dismissed in favour of another contractor.

3. Potential to sacrifice competitive learning opportunities: Outsourcing involves the strate- gic decision to “let go” of some aspect of the organization—the decision could be to permit the manufacture of the footwear to occur elsewhere, as in the case of Nike, while retaining the core competencies (such as the marketing function). The ques- tion is whether there is a danger in “letting go” of functions that may currently appear peripheral, but could become important functions of the organization should the strategy change in the future. Clearly, if a function is outsourced, the experience or learning of this function as a skill is lost to the internal organization. Is there an inherent danger in such a situation? That is, is there a danger in outsourcing, given the risk of losing key skills that could be needed for future competitiveness?

DOWNSIZING In terms of business buzzwords, probably the most dreaded buzzword of the 1990s was the term downsizing. While the 1990s have been referred to as the “lean, mean 90s,” the trend toward leanness via downsizing has not gone away in the new millennium. In recent years, thousands of workers across Canada have been losing their jobs.

In broad terms, downsizing refers to the planned reduction in the breadth of an orga- nization’s operations. Typically, it entails terminating relatively large numbers of employ- ees or decreasing the number of products or services the organization provides. It seems that if you think of just about any large corporation, it has likely experienced some kind of downsizing: from AT&T to Bell Canada to Air Canada to IBM to General Motors to Nortel—all have experienced massive cuts in their workforce.

Consequently, most of us associate downsizing with the reduction of the workforce. However, we can be more specific, given that organizations can downsize in a variety of ways. For example, does reducing an organization’s ownership of assets amount to down- sizing? Does a reduction in the number of employees constitute downsizing?

downsizing The planned reduc- tion in breadth of an organization’s operations, typically involving ter- minating relatively large numbers of employees or decreasing the number of products or services the organization provides.

Objective 6 Discuss the phenomenon of downsizing

and its rationale, methods, and

objectives.

workforce reduction A short- term strategy that is aimed at reducing the number of employees through attrition, early retirement, voluntary severance package, layoffs, or terminations.

16 Cameron, K. (1994). Strategies for successful organizational downsizing. Human Resource Management, 33 (2), 192.

One definition of downsizing that has been offered is “downsizing is a set of activities undertaken on the part of management and designed to improve organizational effi- ciency, productivity, and/or competitiveness. It represents a strategy implemented by managers that affects the size of the firm’s work force and its work processes.” 16

Based on this definition, there are three fundamental types of strategies for downsiz- ing: workforce reduction, work redesign, and systematic change. Workforce reduction

146 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

17 Cameron, 1994, 189–211.

typically involves a short-term strategy that is aimed at reducing the number of employ- ees through such programs as attrition, early retirement, voluntary severance packages, layoffs, or terminations. Downsizing approaches have largely been directed at workforce reduction rather than the more detailed and longer-term strategies of job redesign and systematic change. 17 For a recent example of downsizing, see Talking Business 4.6 .

TALKING BUSINESS 4.6

Loblaw Cuts 700 Head Office Jobs The decision by Loblaw Companies Limited to chop 700

jobs from the payroll in administration and at head office

in Brampton . . . was met with mixed reviews from ana-

lysts and investors.

After the announcement, shares rose 84 cents and

closed at $34.72.

Loblaw has been upgrading its supply chain technology

and infrastructure and while the job cuts may reflect

greater efficiencies, Perry Caicco, managing director, CIBC

World Markets, warned investors against applying the sav-

ings directly to the company’s bottom line.

“Notwithstanding that these job cuts probably reflect a

demand from the parent company to generate some return

on the outsized capital spending on systems, it is highly

unlikely that these actions will directly boost earnings,”

wrote Caicco in a note to investors on Tuesday.

“The recent history of the company suggests that some

of these job cuts will be replaced by equally expensive out-

sourcing, and that the company will struggle to re-assign

eliminated roles in a productive fashion. In other words,

we believe the risk of poor head office execution and ser-

vice to stores will be high for at least 12 months.”

Caicco said some portion of the cuts will likely reduce

expenses, a necessity in light of the surge in growth in the

grocery sector in Canada.

Walmart is in the midst of adding 4.6-million square

feet of retail space to operations in Canada. More than

half of the projects will involve supercentres providing a

full range of groceries.

The family-owned Longo’s is also expanding in carefully

selected prime locations in the GTA.

Loblaw Companies Limited is Canada’s largest food

retailer, with more than 1,000 corporate and franchised

stores, including Loblaws, Zehrs, T&T, Fortinos, Provigo,

No Frills and the Real Canadian Superstore. The company

employs about 138,000 full- and part-time workers.

In the past 12 months, Loblaw has opened 14 new

stores across Canada, creating 2,000 new jobs.

The investment in infrastructure at Loblaw—trimming

250 separate systems down to something manageable—

began in 2009.

“It’s a huge job, particularly when you’ve got to keep

the old systems running to keep doing business. It’s like

changing the engine on a car while the engine is still run-

ning,” said retail analyst Ed Strapagiel.

“This year, 2012, is when most of their system conversion

takes place. There will likely be teething pains, so add a few

months to work the bugs out. I think most professional stock

analysts understand this. I think they think Loblaw is doing

the right thing, but they would prefer to see it go faster.”

Kenric Tyghe, an analyst with Raymond James Securi-

ties told Bloomberg news he viewed the move positively.

“With their new systems capabilities, certain HR require-

ments are now redundant and hence the job cuts,” he said.

Vicente Trius, president, Loblaw Companies Ltd., broke

the news to employees this morning, according to Loblaw

spokesperson Julija Hunter.

© Helen Sessions/Alamy

147C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

The changes will take effect starting Tuesday and

should be complete within three weeks. The company

expects to take a one-time estimated $60 million charge

in the fourth quarter as a result.

“We feel really confident in our direction,” Hunter

said, adding that the job reductions will make the com-

pany more competitive, eliminate duplications and allow

the firm to focus more on the customer experience.

“We’re managing costs where it makes sense.”

The transition will not be fully in place until the end of

2014.

Loblaw is a subsidiary of George Weston Ltd., which is

sitting on $3.6-billion in cash. A spokesman for George

Weston Ltd. said in September that the cash will be used

in part to refresh its North American bakeries and Cana-

dian Loblaw stores.

It’s also looking to make acquisitions.

Loblaw saw its profit drop 22 per cent in the first quar-

ter of 2012. Second quarter net earnings per common

share were 57 cents, down almost 19 per cent compared

to the same period in 2011.

Source: Excerpted from Kopun, F. (2012, October 16). Loblaw

cuts 700 Toronto head office jobs. Toronto Star . www.thestar.

com/business/2012/10/16/loblaw_cuts_700_toronto_head_office_

jobs.html . Reprinted with permission from the Toronto Star.

Now that we’ve looked at definitions of downsizing, we can more clearly identify the common approaches to downsizing. That is, we can be more specific about what exactly an organizational downsizing may entail. This will allow us to briefly identify the poten- tial benefits as well as pitfalls of an organizational downsizing.

Methods of Downsizing Management scholar Martin Evans has provided a summary of the forms of downsizing where he also identified the potential benefits and consequences of the different approaches to it. 18 The most common forms of downsizing include any one or a combi- nation of the following strategies (the pros and cons of each of these approaches are shown in Exhibit 4.11 on next page):

1. Across-the-board cutbacks: Cutting a fixed percentage of the workforce across all departments or units.

2. Early retirement and voluntary severance: Asking those nearing retirement to take early retirement voluntarily as opposed to being forced to leave. Typically, this is the first stage in a downsizing process.

3. Delayering by cutting a level or levels of the organization: Terminating or reassigning middle managers who are not being replaced, thereby flattening the organizational hierarchy by removing horizontal slices.

4. Contracting out work (or outsourcing): Laying off staff in areas that perform specialized functions and contracting out this work to agencies that can staff those areas with temporary workers. Types of activities that are typically contracted out include pay- roll, data entry, public relations, and clerical work as opposed to the core activities of the organization.

5. Dropping product lines: Discontinuing some programs or product lines provided by the organization.

18 Evans, M.G., Gunz, H.P., & Jalland, R.M. (1997). Implications of organizational downsizing for managerial careers. Canadian Journal of Administrative Sciences, 14, 359–371.

148 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Exhibit 4.11 Potential Benefits and Risks of Downsizing

Potential Benefits

1. Across-the-board

cuts

“Shares the pain,” spreading it across the organization—all levels are equally affected.

2. Early retirement and

voluntary severance

Concentrates the terminations among those who are willing to leave.

May help achieve the reduced cost objective by encouraging the more senior and more highly

paid staff to leave.

3. Delayering Because the organization is cut horizontally, all areas are equally affected and the “pain” is

shared across all departments.

To the extent that decentralized decision making is desired, this approach allows the shift of

responsibility to the lower and perhaps more-appropriate levels in the organization.

4. Contracting out Immediate costs savings.

5. Dropping

product lines

Decide what areas may not be productive to continue to maintain.

A closer connection to long-term strategic planning compared to other approaches.

Concentrates the disruption in one or a few business units as opposed to the entire organization.

Potential Risks

1. Across-the-board

cuts

Efficient parts of the organization are hurt. This form of downsizing ignores how well or how

poorly the units are managed.

Typically conducted when there is no strategic plan—it simply cuts staff throughout the organization.

2. Early retirement and

voluntary severance

Not necessarily guided by a strategic plan.

Encourages voluntary exits from all parts of the organization.

“Loss of corporate memory”—that is, a company may lose highly experienced, valued members

who have been an intrinsic part of what the organization is all about.

3. Delayering A loss of corporate memory with the removal of middle managers. There may also be an over-

load of responsibility to top management, who may now need to fill the role of some middle

management as well.

There may be significant costs attached to the transition from a taller organization to a flatter one

because lower-level employees must be trained to take on additional roles and responsibilities.

4. Contracting out Difficulties of dealing with the new suppliers and avoiding future cost increases.

The general loss of control over these temporary workers.

5. Dropping product

lines

Pain is concentrated and not shared across the entire organization—a few people will carry the

burden of this type of downsizing.

Consequences of Downsizing The strategy of downsizing that started in the mid-1980s has now become commonplace. In the early stages, downsizing strategies were viewed as a panacea for the ills of organiza- tions, providing organizations with a method of cost reduction, productivity, and profit- ability improvement and, consequently, a higher competitive ability. Unfortunately, there is vast evidence that the anticipated benefits of corporate downsizing have largely failed to materialize. It is of interest to reconsider the anticipated benefits of downsizing and in what way these benefits have not been realized.

As the Wyatt report and numerous other studies have indicated, there are a host of ben- efits that organizations feel they can achieve through downsizing, including reduced

149C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

19 Wyatt Group. (1993). Best practices in corporate restructuring. Washington, DC: The Wyatt Company.

bureaucracy, lower overhead costs, improved decision making, improvements in productivity, and a stronger ability to innovate. 19 But does downsizing contribute to a better “bottom line”? That is, does this activity enhance the organization’s financial performance? There is research evidence that suggests that a downsizing or layoff announcement often leads to a drop in the organization’s share price, particularly if that announcement was related to financial concerns or a massive and permanent cutback of employees. 20 There is also evidence to suggest that investors respond negatively to layoff announcements. 21

Does downsizing improve organizational performance as measured by return on assets and common shares? There is research evidence indicating that organizations that engaged in an employee downsizing (that is, terminated at least 5% of the workforce combined with little change in plant and equipment costs) did not outperform other organizations in their industry. 22 Similarly, a CSC Index survey found that less than 33% of all downsiz- ing initiatives had achieved their anticipated productivity or profitability goals.

In a large-scale study conducted in Canada, data were collected from 1,907 Canadian organizations with at least 75 employees. This study examined how a permanent workforce reduction affects employer efficiency, employee satisfaction, and employee–employer rela- tions. The findings indicated that a permanent workforce reduction was associated with negative consequences. This echoes the findings in the United States and elsewhere and underscores the consistent failure of downsizing to live up to its expectations. 23

Added to the lacklustre results of downsizing is the wealth of evidence of the costs of downsizing in terms of human consequences. Needless to say, those individuals who are victims of a downsizing can be subjected to intense psychological trauma. However, there is ample research evidence to indicate that the survivors of a downsizing may also experi- ence trauma. According to numerous studies, survivors of a downsizing typically report greater levels of stress, burnout, reduced self-confidence and self-esteem, and lower job satisfaction. 24 Studies have also found that a downsizing can have adverse effects on employee commitment to the organization, their performance, their ability to serve cus- tomer and client needs, and reduced morale and trust. 25 See Talking Business 4.7 .

21 Lee, P. (1997). A comparative analysis of layoff announcements and stock price reactions in the United States and Japan. Strategic Management Journal, 18 , 879–894.

20 Worrell, D., Davidson, W., & Sharma, V. (1991). Layoff announcements and stockholder wealth. Academy of Management Journal, 34 , 662–678.

25 Tomasko, J.A. (1990). Downsizing: Reshaping the corporation of the future. New York, NY: AMACON; Cascio, 1993; Brockner, J. (1988). The effects of work layoff on survivors: Research, theory, and practice. Research in Organizational Behaviour, 10 (1), 213–256; Brockner, J., et al. (1994). Interactive effects of procedural justice and outcome negativity on victims and survivors of job loss. Academy of Management Journal, 37 , 397–409; Sutton, R.I., & D’Aunno, T. (1989). Decreasing organizational size: Untangling the effects of money and people. Acad- emy of Management Review, 14 , 194–212; McLellan, K., & Marcolin, B. (1994). Information technology out- sourcing. Business Quarterly, 59 , 95–104.

24 Mone, M. (2006). Relationships between self-concepts, aspirations, emotional responses, and intent to leave a downsizing organization. Human Resource Management, 33 , 281–298; Ryan, L., & Macky, K. (1998) Downsiz- ing organizations: Uses, outcomes and strategies. Asia Pacific Journal of Human Resources, 36 , 29–45.

23 Wagar, T.H. (1998). Exploring the consequences of workforce reduction. Canadian Journal of Administrative Sciences, 15 (4), 300–309.

22 Cascio, W. (1993). Downsizing? What do we know? What have we learned? Academy of Management Executive, 7 , 95–100.

150 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

While restructuring and downsizing are often critical

components of business strategy for the short-term,

these actions can lead to longer-term engagement chal-

lenges. Studies have indicated that downsizing has a sig-

nificantly negative impact on work attitudes, and that the

impact varies over time. Downsizing and layoffs are fre-

quently viewed by employees as a break in the presumed

employer–employee contract, and those remaining

employed at downsized companies often suffer from low

morale, reduced commitment, and lack of trust and loy-

alty. These behaviors are indicative of a phenomenon

called “survivor syndrome.” . . .

What Is “Survivor Syndrome”?

Survivor syndrome refers to a marked decrease in motiva-

tion, engagement, and productivity of employees that

remain at the company as a result of downsizing and

workforce reductions.

• Motivation This is the combination of forces that ener- gizes individuals to perform and behave in certain ways.

“Intrinsic motivation” refers to the internal forces (e.g.,

personal satisfaction) that drive an employee to per-

form an action; while “extrinsic motivation” refers to

the external forces (e.g., salary) that drive an employee

to perform an action.

• Employee Engagement A heightened emotional and intellectual connection that an employee has for his/

her job, organization, manager, or co-workers that, in

turn, influences him/her to apply additional discretion-

ary effort to his/her work.

• Productivity At the individual level, productivity is mea- sured by actual output divided by potential output over

a period of time. More simply stated, individual produc-

tivity is the amount of work completed relative to the

amount of time engaged in a task and the total time an

employee has devoted to completing the task. . . .

To survive corporate downsizing, companies can leverage

existing “people strategies” and provide tools to support

motivation, productivity, engagement, and the performance

of the business over the longer-term. In particular:

• Internal communication Provide employees with infor- mation related to the company’s status, progress, and stra-

tegic direction; and solicit employee ideas and opinions via

open forums and one-to-one settings (e.g., staff meetings,

blogs, brown bag lunches, strategy planning groups, etc.).

Encourage line-managers to reinforce communication

messages coming from [the] top of the company.

• Learning opportunities Provide additional training to employees who have assumed new or added responsi-

bilities so that they can be more effective in their roles.

Train line-managers in ways to communicate effectively

with employees under times of uncertainty, crisis, and

change. Motivate employees to seek out opportunities

to improve their skills and contribute to the organization.

• Staff development initiatives Offer one-to-one career counseling to those employees whose roles/positions

are at risk for becoming obsolete or employees who are

seeking advancement opportunities in the future. Pro-

vide employees with (and encourage them to use) mul-

tiple outlets for stress management, e.g., social/wellness

breaks, yoga classes, flexible work schedules, vacation

time, etc.

Ultimately, the ability to survive a downsizing will depend

not only on the processes that are used to execute the

downsizing, but also on the level of commitment the man-

agement team has to reengaging employees at all levels.

Source: Excerpted from Creary, S.J., & Rosner, L. (2009). What

every leader should know about survivor syndrome. The

Conference Board of Canada. Reprinted with permission.

Retrieved from www.conferenceboard.ca/temp/ac8225af-

e12d-4087-acc3-b51e4933e59d/a-0307-09-ea.pdf .

TALKING BUSINESS 4.7

What Every Leader Should Know about Survivor Syndrome

Why Has Downsizing Failed to Achieve Anticipated Results? If the cost reduction results are inconsistent and there is no evidence that productivity, profitability, and competitiveness improve as a result of downsizing, what is going wrong? There are at least three fundamental issues that have been repeatedly linked with the

151C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

failure of downsizing. These issues reflect shortcomings in the planning for and execution of organizational downsizings rather than an outright condemnation of the practice itself.

1. Lack of strategic planning: Many downsizings have not been guided by a long-range strategic plan, but rather have been a short-term response to environmental pres- sures. The poor performance of downsizing has been associated with the tendency of downsizing programs to be hastily formulated and not linked with the organization’s strategic plans. 26 While downsizing is by no means going away, by the end of the 1990s organizations were looking more critically at downsizing as a method of organi- zational change, and many reconsidered its role without the broader framework of organizational planning. Moreover, there has been a growing sentiment that downsiz- ing by itself provides no answers for organizational ills without a strategic plan.

2. Lack of concern for, and involvement with, employees: Many downsizings do not involve those who are affected in the planning stages. That is, those in charge of the downsizing do not expect to get objective feedback or advice from those who will potentially be terminated, and so many employees are cut off from the actual planning of the organi- zational downsizing. It is important to note that the adverse effects of a downsizing may be mitigated through suitable communication of the downsizing to employees, 27 employee participation in the planning of the downsizing, a thorough analysis of tasks and perceived employee support from the organization, 28 as well as advanced planning and coordination of outplacement services. 29 Attention needs to be given to both the terminated employees and those remaining. However, research evidence has suggested that insufficient attention has been given to the survivors of a downsizing.

3. Careless removal of corporate memory: Downsizings can eliminate individuals who are a central part of the organization’s knowledge base—the notion of corporate memory . While intangible, the cost of corporate memory loss to an organization can be significant. This can go beyond simply losing the expertise of a valued, experienced employee. This significance has been expressed by many observers:

26 Cascio, 1993; Cameron, 1994.

29 Havlovic, S., Bouthillette, F., van der Wal, R. (2009). Coping with downsizing and job loss: Lessons from the Shaughnessy Hospital closure. Canadian Journal of Administrative Sciences, 15, 322–332.

28 Armstrong-Stassen, M. (2008). Downsizing the federal government: A longitudinal study of managers’ reac- tions. Canadian Journal of Administrative Sciences, 15 , 310–321.

27 Wanberg, C., Bunce, L., & Gavin, M. (1999). Perceived fairness of layoffs among individuals who have been laid off: A longitudinal study. Personnel Psychology, 52 , 59–84.

30 Baker, W.E. (1996). Bloodletting and downsizing executive excellence. Provo, 13 (5), 20.

corporate memory The knowl- edge of individuals who are a central part of an organization’s knowledge base. If they are elimi- nated by downsizing there is a sig- nificant loss of informal bridges, business relationships, customer ties, friendship ties, and so on that bond people together in the workplace.

Downsizing devastates social networks. When a person is laid off, an entire personal network of internal and external relationships is lost as well. Downsizing destroys informal bridges between departments, disrupts the information grapevine, severs ties with customers, and eliminates the friendships that bond people to the workplace. 30

It has also been suggested that the loss of corporate memory can be particularly devastating to the organization’s ability to innovate.

152 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

For better or worse, downsizings continue to reshape the corporate landscape; and, given that they are unlikely to disappear in the near future, one can only hope that they will be planned carefully to bring about some of the improvements for which they are intended. To this point, the results of downsizing do not appear to be largely positive for many organizations, and yet we have witnessed the pervasive acceptance of downsizing as a legitimate organizational practice.

The question naturally arises: Why have so many organizations agreed to adopt a practice that is not proven to be effective? If there is no significant proof that downsizing offers the results organizations are struggling to achieve, why do companies continue to downsize? In order to make sense of why organizations engage in restructuring themselves, it is useful to consider why organizations adopt such trends as downsizing. In terms of a rational explanation, the evidence is weak. Consequently, researchers have also consid- ered nonrational approaches to explaining the phenomenon of downsizing. This requires an understanding of how nonrationality can influence organizational structure.

Downsizing as a Nonrational Approach to Organizational Structure How can organizational structure be nonrational? A perspective of organizations called institutionalization theory argues that organizations are driven to incorporate practices and procedures defined by current concepts of work and those accepted or institutional- ized in society. Institutional acts, or the rules that govern organizational activity, are sim- ply taken-for-granted means of “getting things done.” They represent shared norms or expectations within or across industries. These rules dominate thinking about how orga- nizations should be designed. The implications are that accepted norms or rules, rather than a set of rational reasons based on clearly identifiable and measurable objectives, can encourage the creation or maintenance of organizational structures and processes. Institu- tional rules have little to do with efficiency, but they give organizations that conform to them a sense of legitimacy. That is, organizations can have elements embedded in their structure that are simply taken-for-granted ways of doing things—which may not, in fact, be accomplishing any specific organizational goals.

According to institutional theory, organizations may conform to institutionalized beliefs as a means to achieve legitimacy, resources, and survival capabilities. The shared beliefs provide order through their institutionalization into organizational procedures and their direct influence on the behaviour of individuals. Consider such diverse organizations as IBM, Ben & Jerry’s, McDonald’s, Procter & Gamble, and Bell Canada. All these orga- nizations have risen within society. They have gained success and longevity through their ability to adapt their operations to the needs of society. Specifically, the organization becomes filled with various cultural forces: for example, political rules, occupational groups, and professional knowledge. In other words, as these organizations have grown, they have instituted acceptable ways of conducting business.

The ideas generated from institutional theory draw attention to the notion of the forces that act on an organization and encourage the adoption and maintenance of those activities that are viewed as legitimate. This perspective suggests that organizational structures and processes can arise not simply because of rational objectives for control and coordination, but because of adherence to nonrational (but institutional or socially

institutionalization theory The theory that organizations are driven to incorporate practices and procedures defined by current con- cepts of work and those accepted or institutionalized by society. Taken-for-granted means of “get- ting things done” and, as such, not necessarily rational.

153C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

31 Meyer, J.W., & Scott, R. (1983). Organizational environments: Ritual and rationality. Beverly Hills, CA: Sage Publications.

accepted) rules. Meyer and Scott described a “continuum”—from organizations domi- nated by technical criteria (manufacturing organizations) to those dominated by institu- tional criteria (schools). 31 What we have seen since the mid-1980s is a questioning of many of the fundamental institutional rules governing how organizations should be designed. In other words, at one time the machine bureaucracy was the socially accepted structure for most organizations. Recently, this rule has been called into question, and increasingly the phenomena of reengineering, downsizing, and going virtual seem to be the established trend in organizational design.

The continued use of downsizing by organizations, even though it has not lived up to its reputation, appears to be nonrational. Organizations do not, in fact, always act purely rationally. Institutional theory asserts that organizational structures and policies can become institutionalized and persist even when they are no longer efficient. 32 This theory emphasizes the fact that an organization’s functions can become established or embedded in social networks. These functions, whether they are how organizations are designed or simply how they behave, are affected by the pressures of conformity and legitimacy, which arise from the organization’s environment. 33 Meyer and Rowan defined institutionalization as “the processes by which social processes, obligations, or actualities come to take on a rule-like status in social thought and action.” 34

The notion of downsizing has come to represent more than a reduction in an orga- nization’s workforce. It has come to reflect a longer-term organizational evolution. Numerous organizations by the 1990s felt obligated to downsize given the intrinsic con- nection between being “lean and mean” and being highly competitive. Institutional theorists offer some insight, suggesting that the spread of corporate downsizing has been facilitated through conforming to institutional rules that define legitimate structures and management practices, copying the actions of industry leaders, and responding to the legitimization of downsizing practices as accepted management practices via the media and popular press. 35

But why do organizations persist in conforming to the “rules” of downsizing? Address- ing this question can be accomplished through addressing the question of why organiza- tions conform to institutional rules. At least three social factors have been cited: constraining, cloning, and learning. We will briefly consider each factor to get a better understanding of how they influence adherence to the institutional rule of downsizing. In this regard, we can understand how these factors can make organizations follow rules or ideas that are not necessarily rational.

Constraining Forces Constraining forces represent those practices that come to define what are perceived as legitimate management structures and activities and that

35 DiMaggio & Powell, 1983; McKinley, W., Sanchez, C., & Schick, A. (1995). Organizational downsizing: Constraining, cloning, and learning. Academy of Management Executive, 9 (3), 32–41.

34 Meyer & Rowan, 1977.

33 DiMaggio & Powell, 1983.

32 DiMaggio, P., & Powell, W. (1983). The iron cage revisited: Institutional isomorphism and collective rational- ity in organizational fields. American Sociological Review, 48 (2), 147–160; Meyer, J., & Rowan, B. (1977). Institu- tionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83 (2) , 440–463.

constraining forces Practices that come to define what are per- ceived as legitimate management structures and activities and that, consequently, place pressure on organizations to conform to these institutional roles.

154 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

cloning forces Pressure on orga- nizations to imitate the behaviour of industry leaders. “Jumping on the bandwagon,” or “keeping up with the corporate Joneses.”

consequently place pressure on organizations to conform to these institutional rules. An example given involves the relationship between large US corporations and the stock market. 36 Interestingly, studies have found that layoff announcements made by large corporations that were undergoing restructuring and consolidation were followed by increases in share prices. In other words, we have seen the tendency for public reac- tions to downsizings to be favourable—the notion of becoming “leaner and meaner” has become an accepted business strategy, and one that is apparently favoured by shareholders. Consequently, since the markets respond positively to such news, organi- zations have become constrained to perceive downsizing as a positive strategy and one that should be sought. Of more interest is the finding that this constraining force was found to be even stronger when executives’ compensation packages and bonuses were linked to share values.

Cloning Forces Cloning forces are pressure for organizations to imitate the behaviours of industry leaders. Revisiting the downsizing example, some observers have suggested that organizations have been “jumping on the bandwagon.” That is, many organizations downsize to demonstrate they are in tune with modern business trends, and consequently downsizing has been viewed as a way of “keeping up with the corporate Joneses.” 37 This action represents a clear reduction in rationality—that is, a move away from objectively defined criteria for downsizing and toward strict adher- ence to institutional rules. It has also been found that downsizing among industry members is more likely to occur when industry leaders downsize. The risks of failure are obvious given that this approach lacks a careful evaluation of the costs and benefits of this strategy.

Learning Forces Learning forces are the result of institutionalized management practices. The lessons we teach future managers and businesses leaders are embedded in the courses taught in universities and professional associations. As an example of the biases generated in business schools, researchers like McKinley and his colleagues point out the case of cost accounting techniques used in business strategy education. 38 From a purely cost accounting perspective, the practice of outsourcing appears infi- nitely superior to maintaining a full-time workforce. Specifically, the method of allo- cating overhead costs clearly draws attention to the cost efficiencies gained by outsourcing; and by definition, those units remaining as a permanent fixture for the organization appear more costly. According to McKinley, this perceived cost reduction gained from outsourcing increases the preference to outsource and can consequently become the driving force for a series of outsourcings and downsizings. This, then, is an example of how an emphasis on certain approaches toward business strategy that are spread through business education can come to play a role in rationalizing downsizing as a legitimate activity.

37 Evans, M.G., Gunz, H.P., & Jalland, R.M. (1997). Implications of organizational downsizing for managerial careers. Canadian Journal of Administrative Sciences, 14, 359–371.

learning forces Lessons that result from institutionalized man- agement practices and that are taught to future managers and business leaders in the course of their formal education.

38 McKinley, Sanchez, & Schick, 1995.

36 McKinley, Sanchez, & Schick, 1995.

155C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

CHAPTER SUMMARY You will remember that contingency theory asserts that organizations continually adapt to “fit” the environment. This implies that organizations will respond to changes in eco- nomic and environmental conditions by looking for alternatives to the traditional hierar- chical organizational structure. Recent years have been marked by increasing threats to the survival of many organizations stemming from sources such as technological change, global competition, and the emergence of a knowledge-based economy. And in response to these threats, many organizations have attempted to redesign and initiate fundamental changes in their organizational forms and management practices. According to many observers, the accumulation of changes in the organizational environment has demanded a shift in thinking with regard to organizational design. This shift has involved the move- ment away from the traditional, large, rigid, bureaucratic structure. Current practices now include reengineering, outsourcing, going virtual, and downsizing.

centralization 128

cloning forces 154

closed systems 126

constraining forces 153

contingency theory 133

corporate memory 151

cross-functional teams 121

decentralization 128

delayering 120

downsizing 145

dynamic environment 133

environmental uncertainty 133

formalization 130

functional specialization 128

horizontal differentiation 127

information sharing 121

institutionalization theory 152

keiretsu 123

learning forces 154

machine metaphor (of an organization) 125

mechanistic organizations 131

networking 143

nonroutine technology 132

open systems 126

organic organizations 131

organism metaphor (of an organization) 125

organizational structure 127

outsourcing 140

reengineering 136

routine technology 132

self-managing work teams 121

social specialization 128

span of control 129

specialization 128

static environment 132

systems theory 133

vertical differentiation 129

virtual organization 140

worker empowerment 128

workforce reduction 145

CHAPTER LEARNING TOOLS

Key Terms

Multiple-Choice Questions Select the best answer for each of the following questions.

Solutions are located in the back of your textbook.

1. A traditional bureaucracy is often a. rule-oriented

b. tall/hierarchical

c. buffered from the environment

d. all of the above

2. Keiretsu means a. networking of major enterprises

b. globalization

c. modern bureaucracy

d. self-managing work teams

3. An organization is a. a social entity b. goal-directed

c. both A and B d. none of the above

156 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

4. The “machine metaphor” refers to a. organizations that function in a rational manner

b. the behavioural school of thought

c. both A and B

d. none of the above

5. Closed systems require a. ongoing interaction with their environment

b. no interaction with their environment

c. dependence on exchanges with the environment

d. some interaction with their environment

6. Division of labour refers to a. the degree of which tasks are divided into separate jobs

b. diversity within organizations

c. both A and B

d. none of the above

7. Social specialization is a. the specialization of individuals

b. the specialization of jobs

c. when jobs are routinized

d. both A and B

8. Two levels of job specialization are a. top and bottom

b. manager and staff level

c. professional and blue-collar

d. functional and social

9. When decision making rests at the top of the organiza- tion, it is said to be

a. compromised b. decentralized

c. centralized d. both A and C

10. A wide span of control reflects a a. flat organization

b. tall organization

c. wide organization

d. narrow organization

11. A high level of formalization means work a. is highly standardized

b. has clear rules on how it is to be performed

c. is flexible and not standardized

d. both A and B

12. Google’s flexible work arrangements and push for cre- ativity make Google’s structure more likely to be

a. mechanistic

b. organic

c. highly formalized

d. centralized

13. Custom-made furniture or genetic research is work that typically uses

a. nonroutine technology

b. routine technology

c. assembly-line technology

d. formalized technology

14. An environment that undergoes much change or uncer- tainty is said to be a(n)

a. dynamic environment

b. static environment

c. adaptive environment

d. resistant environment

15. Reengineering often involves a. a rethinking of the organization’s structure and

functions

b. a radical redesign of the organization’s processes

and structure

c. the goal to achieve dramatic improvements

d. all of the above

Discussion Questions 1. Explain the differences between a traditional bureau-

cracy and a modern organization.

2. Describe three broad categories of organizations.

3. Provide a definition of an organization and explain four characteristics of what an organization is.

4. Compare and contrast mechanistic and organic organizations.

5. Compare and contrast open systems and closed systems.

6. What are four defining elements of organizational structure?

7. What characteristics determine organizational structure?

8. Why is contingency theory important in studying organizations?

9. What are the benefits and challenges of having a virtual organization?

10. Discuss the potential benefits and risks of downsizing.

157C h a p t e r 4 E s t a b l i s h i n g t h e S t r u c t u r e o f a B u s i n e s s

CONCEPT APPLICATION PIXAR: NO MICKEY MOUSE ORGANIZATION!

In 1995, a little company called Pixar presented the world with the very first fully computer-animated movie. It was called Toy Story and it received both critical acclaim and $29 million in box-office receipts. Since that time Pixar has become one of the most successful animation studios in movie history.

Behind every amazing creation there is an even greater creator: Dr. Ed Catmull. Ed Catmull, with a vast education in the field of computer sciences and a passion for animation, revolutionized the way films are made. Not only has Pixar broken ground in the field of com- puter graphics and animation but it has also proven itself to be an exemplary organization.

Step by step Catmull built his empire. In the beginning there were the commercials and short films that would eventually get the attention of the former head of Disney’s animation unit, Peter Schneider. Taken with the creative ability and talent seen in the ads and short films by John Lasseter, a ground-breaking animator, Disney sponsored a full- length feature by Pixar, including expenses and even some production people. Schneider saw this as a worthwhile and low-risk investment. The hard work obviously paid off because, just as Schneider predicted, the backing of a full-length feature proved to be a wise choice as Toy Story and its followup, A Bug’s Life, went above and beyond what any- one could have hoped for. And these were just a preview of the blockbusters that Pixar would produce shortly after, such as Finding Nemo and The Incredibles.

Ed Catmull’s vast array of talents was responsible for the creation of such a strong animation studio. Making animated films, particularly the 3-D computer-generated kind, is more like software design than it is live-action filmmaking. Cartoon editing takes place simultaneously with the storyboard process. As the script is mapped out into scenes that are then drawn and animated, the cartoons and individual scenes are fine tuned. For example, Nemo, the loveable clownfish, may have stripes added or removed from his scaly orange skin. This collaborative editing is comparable to the way programmers optimize features in a piece of software. Differences between live-action films and animated ones lie in their procedural organization.

An animated film benefits from having the same team work together many times, and collaboration is a must. By way of collaboration and the freedom to be flexible, computer animation studios already possess inherent qualities necessary for a successful corporation. According to Catmull, it is important to allow risk taking to unleash creativity:

Well, the first thing to note is that we’re supposed to be taking risks, so we don’t think of risk management as trying to minimize risk. That’s actually the way to prevent cre- ativity. Rather, it’s to do risky things, and then when they go in some unpredicted path, to be able to respond to it. So our job as managers is to create not only a community but a way that that community works together, so they can solve the problems that are coming up that are unforeseen. If you’ve got the good community, they will solve these problems. So for us, it’s clear, it’s building the community and putting elements in place so that community is vibrant and healthy. 39

39 HBR IdeaCast. (2008, August 28). Pixar and collective creativity. HBR Blog Network, Pixar and Collective Creativity. Retrieved from http://blogs.hbr.org/ideacast/2008/08/harvard-business-ideacast-109.html .

Case Continued >

158 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Catmull’s Pixar creation consists largely of just three equal groups that are consis- tently working together to achieve the organization’s impressive goals. To begin with, there is the technology development group, which is generally responsible for the supply of computer-graphics tools. The creative development group conceives of and animates the stories and characters. And the production group coordinates the entire filmmaking process. Aside from the crucial aspect of communication and collaboration, the freedom given to each group to work directly with one another and avoid going through higher-ups was almost ground-breaking at the time. This, in effect, attracted organizations such as the US Navy to send their organizational experts into Pixar and take notes on how to improve their own organizations.

Animated films have always used technology, even in Disney’s earlier days. Today, art- ists’ easels have been replaced by computers, and Pixar has a small army of employees whose jobs consist of ambitiously inventing and innovating technology to improve the appeal and increase efficiency throughout the company. In its consistent efforts to develop, Pixar has created a motivational flow and balance between art and technology, where creativity in art provokes advances in technology, and advances in technology inspire the art. 40

Questions

1. Do you think that Pixar most closely resembles an organic or a mechanistic structure? Why?

2. Describe the nature of Pixar’s “contingencies” and explain how they influence the suitability of Pixar’s structure.

3. How could Pixar be redesigned as a virtual organization?

40 Based on Schlender, B. (2004, November 15). The man who built Pixar’s incredible innovation machine. Fortune, 150 (10), 206–210.

Chapter 5 Business Strategy How Do Businesses Generate a Successful Strategy?

The ability to respond effectively to the business environ-

ment is the fundamental challenge of strategic manage-

ment. How does a business create and sustain its

competitive advantage? One of the fundamental inter-

nal forces that organizations must address is the issue of

strategy. This chapter examines the nature and role of

strategic management and the challenges it presents.

We will also explore the importance of understanding

the nature of an organization’s specific industry.

Learning Objectives

After studying this chapter, you should be able to 1. Describe the nature of strategic management.

2. Identify key forces in determining an industry’s structure.

3. Describe how organizational resources and capabilities

affect firm performance.

4. Describe three generic business strategies.

5. Explain the nature of corporate strategy.

159

Bloomberg via Getty Images

THE BUSINESS WORLD Tim Hortons: Is Its Strategy “Always Fresh”?

Did you know that coffee is the second most consumed beverage in Canada, next to water, for individuals 25 years of age or older? Clearly that is a fact that Tim Hortons is very well aware of.

As of 2013, Tim Hortons was the largest publicly traded restaurant chain in Canada and among the largest in North America. From 2007 through 2011, total revenues rose at an annual rate of 8.7%, and earnings per share grew by 13.2%. 1 It has also commanded about 80% of the $3 billion “away-from-home” coffee market in Canada. 2 That is a lot of coffee!

Tim Hortons certainly has a heavy presence in Canada. There are more than 3,000 Tim Hortons restaurants across the country. Among areas for potential expansion are Quebec and Western Canada, which may well permit Tim Hortons to soon reach its goal of 4,000 restaurants. It also has over 700 locations in the United States, and in recent years it has attempted to initiate overseas markets, including the Middle East. 3

According to marketing experts, Tim Hortons’s success is based on the ability of its restaurants to be efficient, dependable (that is, always open), places for community-based conversations (particularly in small towns), friendly, and of course value conscious. 4 In addition to regular restaurants, Tim Hortons locations can also be found in shopping malls, highway outlets, universities, and hospitals. And in some locations there is also a 24-hour drive-thru service. In 1995, Tim Hortons merged with Wendy’s International, Inc., giving momentum to the expansion of Tim Hortons in the United States. The Canadian operations are 95% franchise owned, and the company is working toward implementing that strategy in the United States as expansion progresses.

The Tim Hortons chain was first established in 1964 in Hamilton, Ontario. With its humble beginnings of offering only two products (coffee and donuts), the menu has expanded considerably over the years. Way back in 1976, Tim Hortons unveiled its big- gest change in the chain’s product focus—the hugely successful Timbit (a bite-sized donut hole). Growth through the 1980s brought about more new product introductions, includ- ing muffins (1981), cakes (1981), pies (1982), croissants (1983), cookies (1984), and soups and chili (1985). Yet more variety followed in the 1990s with the introduction of  sandwiches, flavoured cappuccino (1997), café mocha (1999), and iced cappuccino (1999). While the 2000s saw yet more menu expansion, the company’s biggest attraction

160 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

1 Heinzl, J. (2013, January 11). Why I’ll buy Tim Hortons as other investors bail. Globe and Mail. Retrieved from www.theglobeandmail.com/globe-investor/investor-community/trading-shots/why-ill-buy-tim-hortons-as-other- investors-bail/article7177472 .

2 Tedesco, T. (2013, February 25). Rivals’ attack on Tim Hortons in morning market forces menu shakeup. Financial Post. Retrieved from http://business.financialpost.com/2013/02/25/rivals-attack-of-tim-hortons-in-morning- market-forces-shakeup/.

3 Keith, D. (2013, January 8). Falling out of love with Tim Hortons. Globe and Mail. Retrieved from www. theglobeandmail.com/globe-investor/investor-community/trading-shots/falling-out-of-love-with-tim-hortons/ article7001460 .

4 Blackshaw, P. (2008, July 14). What Starbucks can learn from a Canadian competitor. Ad Age Digital. Retrieved from http://adage.com/article/digital-columns/starbucks-learn-a-canadian-competitor/129607.

continues to be its coffee. And Tim Hortons also continues to grow its sales and profits by expanding into such premium offerings as lattes and panini sandwiches. 5

Tim Hortons has been a Canadian icon for years (ranking right up there with hockey and maple syrup). However, while its brand resonates strongly among Canadian consum- ers, skeptics still question its future prosperity. As Theresa Tedesco bluntly stated in the Financial Post :

For the first time in its history, Tim Hortons is facing stiff competition from rivals— mostly Americans accustomed to grinding ground wars in the quick-serve restaurant business—with deep pockets who are aggressively contending for a slice of the profit- able morning market. 6

Clearly, the coffee industry has never been so fierce. McDonald’s, the US fast-food giant, has been spending $1 billion in recent years to

establish and renovate 1,400 McCafés in Canada. For the past few years, McDonald’s has been moving steadily into Tim Hortons’s domain since it began offering free cups of coffee at selected times in its newly renovated stores, which are beginning to resemble a neigh- bourhood café. 7

Similarly, Starbucks has added over 100 cafés recently. In fact, in 2012 Starbucks announced plans to open its first coffee shop in a rather unlikely location—a South Carolina funeral home. While there are significantly more Tim Hortons locations in Canada compared to Starbucks, almost all of Canada’s major cities have a few neigh- bourhoods with more Starbucks than Tim Hortons. However, once you move outside of the urban core, Tim Hortons still tends to be the favourite.

Tim Hortons remains a formidable force in this industry. Its iconic “Roll Up the Rim to Win” contest continues to resonate with Canadians every year. As competition further intensifies, it will be interesting to see how Tim Hortons responds. And competitors in the coffee industry are everywhere, it seems. While, Starbucks, Second Cup, and Timothy’s are coffeehouses that directly compete with Tim Hortons, other less direct competitors also exist. There are the basic convenience stores such as 7-Eleven or gas station outlets such as On the Run, which also conveniently sell you coffee when you are on the go.

According to Financial Post writer Theresa Tedesco:

Feeling the squeeze from rivals, and facing a new breed of consumer demanding value-for-money products but willing to pay more for small luxuries, Tim Hortons is  at a crossroad . . . The challenge will be to entice a new, younger generation of customers . . . Thus, the menu additions: grilled panini, breakfast sandwiches, healthy wraps, espresso-based specialty coffees (café lattes and cappuccinos), blended bever- ages and smoothies . . . Preferably, the 18 to 24 age crowd who are more inclined to pay for expensive non-coffee blended beverages and healthier food choices, and are less likely to nurse the same cup of brewed coffee for hours. 8

5 Tim Hortons. (n.d.). The history of Tim Hortons. Retrieved from www.timhortons.com/us/en/about/ media-history.html .

6 Tedesco, 2013.

7 Tedesco, 2013.

8 Tedesco, 2013.

161C h a p t e r 5 B u s i n e s s S t r a t e g y

162 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

So if you are Tim Hortons, what do you do to retain your customers and attract more? Some Tim Hortons restaurants instituted wireless services to attract more customers. The company also super-sized its coffee cups, appealing to those who need that extra caffeine fix. Some drive-thrus have been renovated to process more vehicles in less time. In a typical Tim Hortons restaurant, you can now can buy its fresh ground coffee in tins or purchase other items like specially branded mugs. Indeed, there is more required in this industry then just selling a cup of coffee.

The increasing pressure from rivals is forcing Tim Hortons to revisit its traditional strategy that helped it generate profits for decades. For example, it recently shook up its corporate ranks with dozens of its 2,000 corporate staff being terminated. It also recently began decentralizing functions to prepare for international growth. Given that McDonald’s spent $1 billion renovating its Canadian restaurants, Tim Hortons followed suit by increas- ing its renovation efforts and doubling the number of stores being remodelled.

In Canada, Tim Hortons can surely build upon its brand recognition. According to James Cowan of Maclean’s magazine,

It took 27 years for Tim Hortons to open its first 500 outlets. Over that time, the brand built an emotional connection with Canadians, supporting charities, backing amateur hockey teams and serving as the default community centre for many small towns. Perhaps most importantly, the brand was unabashedly patriotic, from its hockey rink-laden advertising to its support of Canadian troops in Afghanistan. Underneath the folksy, homespun image is a finely calibrated brand identity, one that’s earned notice from both Ad Age magazine and the Reputation Institute. 9

But this Canadian identity is meaningless in the United States and other interna- tional markets. Tim Hortons’s expansion into the United States has not been as successful as it hoped. The company needs help in developing an effective strategy to expand further to gain new customers in other markets.

In 2010, Tim Hortons was forced to close 36 stores in the New England region. And in 2012, only 22 new coffee shops were opened in the United States. Can Tim Hortons remain a low-cost coffee shop, or is differentiating its product further the way to go? The coffee industry is still a hot market in Canada. Will consumers keep “rolling up the rim”? If Tim Hortons can keep its strategy as fresh as its coffee, then the answer is a resounding yes!

WHAT IS STRATEGIC MANAGEMENT? Strategic management consists of the analysis, decisions, implementations, and evalua- tions a firm undertakes to create and sustain its competitive advantages. As such, strategic management can be an ongoing process where managers of a firm constantly analyze their external and internal environments, make decisions about what kinds of strategies they should pursue, implement the strategies, and evaluate the outcomes to make any changes if necessary. The ongoing process of strategic management is critical to firm performance and survival in that an effective process of strategic management can allow a firm to sustain its competitive advantage, which in turn enhances its performance and chances of survival.

9 Cowan, J. (2013, February 20). Why Tim Hortons can’t rroll into the United States. Maclean’s Magazine . Reprinted with permission from Maclean’s Magazine.

strategic management An ongoing process that requires managers of a firm to constantly analyze their external and internal environments, make decisions about what kinds of strategies they should pursue, implement the strat- egies, and evaluate the outcomes to make any changes, if necessary, in order to create and sustain its competitive advantages.

Objective 1 Describe the nature of strategic management.

163C h a p t e r 5 B u s i n e s s S t r a t e g y

But what is strategy? Most can agree that much of the success of Walmart, Canadian Tire, or other highly profitable corporations can be attributed in part to the strategies these firms have pursued. However, there is no consensus on how to actually define the concept of a firm’s strategy. Some definitions are long and complex; others are deceptively simple. Throughout this chapter, strategy is defined as the plans made or the actions taken in an effort to help an organization obtain its intended purposes. Such a definition corre- sponds with our definition of strategic management, where managers assess their external and internal environments to plan and take actions to pursue organizational goals, either short term or long term. Putting both strategy and strategic management together, a firm can be viewed as a goal-directed entity. By and large, the goals of most publicly traded firms are normally to maximize shareholder returns through various means.

Although strategy is goal-directed, it can sometimes unintentionally evolve with either the internal or external environment. Henry Mintzberg argues that, due to the unpredictabil- ity of environments, managers in organizations cannot thoroughly plan out any strategy that would achieve the long-term goals of their firms. As such, some strategies would never be carried out, and managers would pursue strategies that they had not planned at the beginning of the strategic management process. For example, a number of years ago, the SARS outbreak in Canada led firms in the hospitality industry to pursue many different strategies to win back tourists, including cutting prices and seeking financial and nonfinancial supports from pro- vincial governments. The unexpected outbreak forced managers in these firms to change their strategies in response to a decline in their performance. Another example is Microsoft’s entry to the Internet browser market (with Internet Explorer), which was not planned by its top management team—it was an idea forwarded by one of its software engineers.

In the next two sections we will survey different approaches to strategy analysis, which is often the first stage of strategic management. Throughout this chapter, we will discuss different types of strategies and how to implement the strategies that are identified in the early stages of the strategic management process.

ANALYZING THE EXTERNAL ENVIRONMENT In this section, we will be focusing on five major groups associated with an industry’s exter- nal environment. Before we look at each group in depth, however, we first need to define industry. Although industry has been defined in many different ways, the definition used throughout this chapter is a group of organizations that share similar resource requirements. The resource requirements range from raw materials to labour to technology to customers. For example, Air Canada, WestJet, Porter Airlines, and Air Transat operate in the airline industry, where the four airline carriers share similar technology (aircrafts), labour (flight attendants), and customers (people who prefer air transportation). FedEx and UPS, however, are not in the airline industry because the customers those two companies serve are different from those of Air Canada, WestJet, Porter Airlines, and Air Transat, even though all of them share similar technology (aircrafts).

The Five-Forces Model How can we systematically analyze the industry environment? Michael Porter drew upon research from industrial organization economics to propose a powerful, prescriptive model

industry A group of organiza- tions that share similar resource requirements, including raw materials, labour, technology, and  customers.

Objective 2 Identify key forces in determining an

industry’s structure.

164 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

known as the five-forces model , 10 which allows us to systematically assess the industry envi- ronment. The thrust of the model is that the relationships between these five forces and the

incumbent firms (those already in the market) deter- mine the attractiveness of the industry environment, which in turn helps us make strategic decisions about how to achieve organizational goals or to find a posi- tion in the industry where we can best defend our- selves against competition. The five forces include threats of new entrants, bargaining power of suppli- ers, bargaining power of customers, threats of substi- tute products or services, and rivalry among existing firms (see Exhibit 5.1 ). These forces can either inde- pendently or jointly affect the attractiveness of the industry. Let’s examine each force in more detail.

Threats of New Entrants New entrants can take two basic forms: new startups and diversifica- tion of existing firms in other industries. Regardless, the entrants bring new capacities, desire to gain market share, and substantial resources and capa-

bilities. Prices can be bid down or incumbents’ costs inflated as a result, reducing profitabil- ity. As such, the new entrants may impose significant threats to incumbents. Thus, incumbents need to consider how to create entry barriers to deter potential new entrants. There are five major sources of entry barriers from the potential new entrants’ point of view.

Economies of Scale Economies of scale refer to spreading the costs of production over the number of units produced. The cost of a product per unit declines as the number of units per period increases. From the new entrants’ point of view, the entry barrier is increased (and the threat of new entrants is reduced) when incumbents enjoy the benefits of economies of scale. Economies of scale can provide the incumbents with cost advan- tages to compete with new entrants on the price, if necessary. Global companies, for example, that sell their goods in various countries often achieve economies of scale because of the high volume of products they produce. The food industry is one example that is becoming increasingly global, as seen in Talking Business 5.1 .

Capital Requirements For some industries, such as the airline and mining industries, the required capital to establish a new firm is significant. Accordingly, the level of required capital for entering certain industries creates barriers for potential new entrants. Thus, the threat of new entrants is reduced as the level of required capital increases.

Switching Costs Switching costs refer to the costs (monetary or psychological) associ- ated with changing from one supplier to another from the buyer’s perspective. When the switching costs are minimal, customers can easily switch buying products from one firm to another. This creates an opportunity for potential new entrants because they can easily acquire customers from incumbents. Thus, the threat of new entrants increases (or the barrier to new entrants decreases) as the switching costs decrease.

five-forces model A prescriptive model developed by Michael Porter (1980) that allows for the systematic assessment of the industry environ- ment. The five forces include the threats of new entrants, the bar- gaining power of suppliers, the bar- gaining power of the buyers, the threats of substitutes, and rivalry among existing firms.

economies of scale Spreading the costs of production over the number of units produced, which can provide incumbent firms with cost advantages that create a bar- rier to entry for new entrants.

switching costs The costs, both monetary and psychological, asso- ciated with changing from one sup- plier to another from a buyer’s perspective.

10 Porter, M.E. (1980). Competitive Strategy . New York, NY: Free Press.

Industry Competitors

Rivalry among Existing Firms

Potential Entrants

Suppliers Buyers

Substitutes

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threats of Substitute Products or Services

Threats of New Entrants

Exhibit 5.1 Forces Driving Competition within an Industry

165C h a p t e r 5 B u s i n e s s S t r a t e g y

TALKING BUSINESS 5.1

Changes in Global Food Sector Call for Canadian Food Strategy Food is in demand like never before—and today much of

the world can afford what Canada produces.

The food sector is facing a dramatic shift in its cus-

tomer base as globalization, population patterns, and

demographics reshape where food companies will find

growth opportunities in the coming decades.

All of the features of globalization—integration, com-

petition, innovation, specialization and economies of

scale—affect the food sector. But the food sector is not

uniformly or equally integrated into the global economy.

With rising international trade in food, nations face com-

peting pressures to open their markets and go global

themselves, or protect their domestic markets.

Canada’s Good Fortune

Human history has often been driven by food and famine.

Fortunately, Canada is a food-rich country—it has almost

always been able to produce more food than it needs, and

famine has been virtually unknown. Moreover, the food

Canadians eat is relatively inexpensive. The share of income

Canadians allocate to food has steadily declined: today it

is among the lowest in the developed world.

Dramatic increases in commodity prices in 2007–08,

and again in 2010, illustrate Canada’s good fortune. Anal-

ysis by UBS has found that Canada is among the countries

likely to suffer the least from higher food prices. Over the

course of 2008, food prices in Canada increased by an

average of 3.9 per cent versus the previous year. Europeans

saw food prices rise 7.1 per cent, while Americans paid

5.9  per cent more and China’s food prices rose a full

22 per cent.

Food Companies Are Global Players

The past 10 years have seen an increased consolidation

across the food sector. Today, some of the largest compa-

nies in the world are involved in the food business. The

activities of these globally active companies affect interna-

tional supply chains and the operation of food economies

around the world.

The Canadian food sector is also increasingly global.

Globally oriented food companies from Canada are

increasing their global reach in three key ways:

• investing in or buying facilities around the world,

• investing in their domestic facilities to capture global

economies of scale, and

• extending their supply chains to allow them to source

products and resources around the world.

However, our relatively small, slow-growing population

means that the potential for domestic growth is limited.

Companies seeking to expand must either seize domestic

market share or focus on growing their businesses through

exports. The latter presents the greatest opportunity.

Canada’s food sector exports are worth over $38 billion

annually—with the potential to go much higher as global

demand continues to surge. Over half go to the United

States, with Japan, China, Europe, and Mexico rounding

out the top five food export destinations.

Apart from protected supply-managed industries,

Canada’s food sector is highly integrated into the global

market. Between 1999 and 2008, Canada’s export share

of world food trade was consistently around 5.5 per cent.

During these years, Canada was the fourth-largest food

exporter in the world after the U.S., the European Union,

and Brazil.

Significant growth in the food sector of emerging econ-

omies, including China and Brazil—along with major

reforms in food exporting countries such as Australia and

New Zealand—are creating competitive advantages in

these countries. The ability and willingness of the Canadian

food sector to invest in global integration will significantly

determine whether Canadian firms can compete on a

global scale.

The canola industry provides a good example of an agri-

food industry scaled to service both domestic and global

markets. According to the Canola Council of Canada, the

canola industry in Canada includes over 50,000 canola

growers and 13 processing plants in five provinces. The

canola industry was created through the effective commer-

cialization and adoption of a new crop developed through

scientific research carried out in Canada. The lesson from

canola is that there is room in the other parts of the food

sector for profitable corporate innovation, scale, and

(continued)

166 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Access to Distribution Channels Accessibility to distribution channels can be an entry barrier for potential new entrants. In the situation where incumbents control most of the distribution channels, potential entrants would find it difficult to distribute their products or services, which in turn defers new entry. Accordingly, the threat of new entrants decreases (or the barrier to new entrants increases) as accessibility to distribution channels decreases.

Cost Disadvantages Independent of Scale The prior four sources are primarily associ- ated with economic factors. However, sometimes advantages that some incumbents hold over potential entrants are independent of economic factors. Such advantages include governmental policies, legal protection (patents and trademarks), and proprietary prod- ucts. These advantages create barriers for potential new entrants, which defer their entries.

Bargaining Power of Suppliers When considering the bargaining power of suppliers , our focus is on the firms, organizations, and individuals that provide raw mate- rials, technologies, or skills to incumbents in an industry. Suppliers can exert bargaining power over incumbents by demanding better prices or threatening to reduce the quality of purchased goods or services. Therefore, the power suppliers hold directly impacts industry profitability as well as the incumbents’ performance.

There are two major factors contributing to suppliers’ power in relation to incumbents in an industry. The first one is how critical the resources are to the incumbents that the sup- plier holds. Quite often, when the raw materials suppliers provide are critical to incumbents in an industry, the suppliers are in a good position to demand better prices. The second fac- tor is the number of suppliers available relative to the number of incumbents in an industry. Specifically, when the number of suppliers relative to the number of incumbents is low, the incumbents compete against each other for the relatively small number of suppliers. As such, this gives suppliers power in that they have opportunities to negotiate better prices among incumbents. These two factors can independently contribute to supplier powers— and suppliers will have the highest power when these factors couple together.

Looking at the personal computer manufacturing industry, for example, there are many incumbents, like Dell, Hewlett-Packard, IBM, and others. However, there are only

growth. If they set out to target global markets, Canadian

industries can successfully compete in global markets by

creating efficient and profitable businesses: Canadian food

firms can be world leaders.

Beyond entering markets, however, Canada does not

appear to have a strategic overall goal for its food sector.

In contrast to countries like the United Kingdom, Brazil,

and Australia, there have been limited efforts to craft a

national plan for the food sector. Rather, Canada’s food

sector operates in crop- or sector-specific silos.

The food sector is in a unique position. On the one

hand, aspects of food are highly integrated and involve

complex relationships and supply chains around the world.

On the other, aspects of the sector are intensely rooted in

local communities.

If well managed, Canada’s agricultural land will continue

to keep it a food-rich country through food grown and pro-

cessed in the country. What is needed to grow the sector is

a Canadian Food Strategy that places a premium on

enhancing opportunities for trade created through our food

exports and the diversity of foods imported to Canada.

Source: Excerpted from Bloom, M. (2012, June 20). Changes in

global food sector call for Canadian food strategy. Reprinted with

permission from The Conference Board of Canada. Retrieved from

www.conferenceboard.ca/press/speech_oped/12-06-20/changes_

in_global_food_sector_call_for_canadian_food_strategy.aspx.

TALKING BUSINESS 5.1 (continued)

bargaining power of suppliers The power held by firms, organiza- tions, and individuals that provide raw materials, technologies, or skills to incumbents in an industry. Suppliers can exert power by demanding better prices or threat- ening to reduce the quality of purchase goods or services.

167C h a p t e r 5 B u s i n e s s S t r a t e g y

two major firms, Intel and AMD, that supply the processor chips. Thus, the suppliers hold significant bargaining power over computer manufacturers because the processor chips are critical components of personal computers, and there are only two firms that supply this key component.

Bargaining Power of Buyers When we consider the bargaining power of buyers , our attention focuses on the power held by individuals or organizations that purchase incum- bents’ products or services. Buyers can affect industry performance by demanding lower prices, demanding better quality or services, or playing incumbents against one another. These actions can erode industry profitability as well as firm performance. There are many factors contribut- ing to buyer power in relation to incumbents in an industry, some of which are outlined here.

Switching Costs Similar to the role of switching costs in the threat of new entrants, the bargaining power of buyers increases as switching costs decrease. Specifically, when buyers can easily switch incumbents with little cost in terms of products or services, the incum- bents would have little power over the buyers to enhance their performance.

Undifferentiated Products Relatedly, when incumbents provide similar products or services to buyers, they would not be in a good position to negotiate with the buyers. Undifferentiated products allow buyers to find alternatives from other incumbents. This situation can also provide an opportunity for buyers to play incumbents against each other to get a better price, quality, or service.

Importance of Incumbents’ Products to Buyers Similar to our discussion on bargain- ing power of suppliers, when products or services that incumbents offer are important or critical to buyers, the power of buyers would be diminished.

The Number of Incumbents Relative to the Number of Buyers The bargaining power of buyers could be diminished when there are relatively few incumbents offering the products or services that the buyers need, since the buyers do not have many alterna- tives to choose from.

Looking at grocery retailers in Canada, for instance, Loblaw, Metro, Sobey’s, and others are the key players in the industry. They are the buyers in relation to the grocery producers. The grocery producers do not hold significant bargaining power over these retailers because the number of producers is relatively high compared to the number of retailers, the switching costs for retailers are minimal, and the degree of differentiation among producers is relatively low. As such, the retailers enjoy significant bargaining power over the grocery producers.

Threats of Substitutes All firms in an industry often compete with other firms in different industries, where the firms provide substitute products or services with sim- ilar purposes. For example, the traditional form of newspapers faces substitutes that include the Internet, radio stations, television stations, and so on. Such substitutes would gain newspaper subscribers and advertising revenues that might have belonged to the newspaper industry. As such, they threaten the profitability of the newspaper industry as a whole.

Rivalry among Existing Firms The final force that affects industry structure is rivalry. The rivalry among incumbents in an industry can take many different forms.

bargaining power of buyers The power held by individuals or organizations that purchase incum- bents’ products or services. Buyers can exert power by demanding lower prices, demanding better quality or services, or playing incumbents against one another.

168 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

For example, Canadian insurance providers compete against each other by using different strategic actions, including cutting prices, providing new insurance prod- ucts, improving operational efficiency, advertising, and through mergers and acquisi- tions. More broadly, rivalry can be intensified by several interacting factors.

Lack of Differentiation or Switching Costs When products are not significantly differ- entiated or switching costs are minimal, customer choices are often based on price and service. Under this situation, incumbents may experience pressure to launch more strate- gic actions in an attempt to attract more customers or keep existing customers by enhanc- ing the company’s short-term performance. Accordingly, the rivalry among incumbents is intensified.

Numerous or Equally Balanced Competitors When there are many incumbents in an industry, the likelihood of mavericks is great. Some firms may believe that they can initi- ate strategic action without being noticed. As such, their strategic action intensifies the rivalry among incumbents. In addition, the rivalry between firms tends to be highest when the firms are similar in size and resources because they often target similar market niches and share similar resource requirements.

High Exit Barriers Exit barriers refer to economic, strategic, and emotional factors that keep firms competing even though they may be earning low or negative returns on their investments. Examples of exit barriers include visible fixed costs, specialized assets, esca- lating commitment of management, and government and social pressures.

Overall, the five-forces model provides managers with an assessment of the industry structure to help get some sense of industry attractiveness. Specifically, from the potential entrant’s point of view, the five-forces model helps it understand the potential competi- tive environment of the industry and to make the entry decision. From the incumbent’s point of view, the model helps managers assess their position in the industry relative to their rivals. Sometimes, it also provides an overall picture of industry attractiveness to allow managers to make any exit decisions.

Limitations of the Five-Forces Model Each model has its limitations, however. Although the five-forces model offers a powerful tool for managers to examine an indus- try’s attractiveness, it exhibits some shortcomings. First, the model does not explicitly take the roles of technological change and governmental regulations and how these affect the power relationships between forces into consideration.

Second, the focus of this model is primarily on the power relationships between each force at a given point in time. As such, it may have limited implications for future strate- gic decision making.

Finally, the model assumes that all incumbents experience the same power rela- tionship with each force. However, incumbents differ in terms of their resources and firm size, which can give them more or less power in influencing their suppliers or customers.

Given the above limitations, to gain a precise assessment of an industry, managers need to use the model with great caution. Specifically, they need to anticipate the effects of technological change, governmental regulations, and industry trends on industry struc- ture and their firm’s position in the industry (see Talking Business 5.2 ).

exit barriers The economic, stra- tegic, and emotional factors that keep firms competing even though they may be earning low or nega- tive returns on their investments.

169C h a p t e r 5 B u s i n e s s S t r a t e g y

TALKING BUSINESS 5.2

Foresight and Innovation: Today’s Science Fiction, Tomorrow’s Reality? Inspiration and creativity are key ingredients in the innova-

tion process. In many ways, you need to be able to envision

what your future customer is going to need if you want to

create a successful innovation. To understand the needs of

future customers, many organizations are turning to fore-

sight and other futures-related techniques.

Foresight does not aim to predict the future. It utilizes a

combination of emerging trends and drivers, as well as

some creativity in visualising how these trends and drivers

interact, to create plausible alternate futures. The resulting

process can generate insights into future needs and

demands, creating a competitive advantage for innovative

organizations.

There are a variety of ways of presenting these alternate

futures, with scenarios being one of the most popular

choices. The power of the narrative around a scenario is

that it makes it easier for us to visualise the future and the

potential customer needs in a given scenario. It is this power

of the future narrative that Intel is using to drive innovation.

Intel is the sponsor of the Tomorrow Project, which

aims to “explore our possible futures through fact-

based, science-based fiction”. They have published a

series of short stories about the future, looking at poten-

tial futures we want as  well as those we may wish to

avoid. The project has engaged science fiction authors as

well as engineers amongst others, to provide their visions

of the future. They have also partnered with Arc, New

Scientist magazine’s futures publication, “so that we can

have a conversation about the future and these conver-

sations make dramatic changes”. These products are

generating rich pictures about the future and what it

could look and feel like.

Intel employs a resident Futurist, Brian David Johnson,

whose role is to help it understand the future and the prod-

ucts it will need for tomorrow’s consumer. As part of this

effort, Intel also stumbled onto another insight about technol-

ogy innovation—the need to understand what people will

want from technology in the future. Competition from com-

panies like ARM has brought on the realization that simply

having a faster or technically superior chip is not enough.

Success for future products will be dependent on making sure

that they meet future customer needs. Intel uses highly trained

cultural anthropologists and ethnographers to build an under-

standing of the future state of culture in addition to techno-

logical trends. They are building pictures of how people use

technology in the future to understand how their marketplace

could evolve. In combination, the science fiction narratives

and cultural understanding are being used to provide action-

able technical innovation strategies for the company.

Intel is one of a growing number of organizations har-

nessing the power of foresight to envision the future and

use it as a platform for driving innovation. This approach

has even been used by a number of governments across

the world, such as the United Kingdom and Singapore.

This combination of foresight and cultural awareness pro-

vides some very useful tools for understanding the needs

of the customer of the future and generating competitive

advantage through successful innovation.

Source: Excerpted from Kabilan, S. (2013, April 15). Foresight and

innovation: Today’s science fiction, tomorrow’s reality? Reprinted

with permission from The Conference Board of Canada.

Retrieved from www.conferenceboard.ca/commentaries/

technologyinnovation/default/13-04-15/foresight_and_innovation_

today_s_science_fiction_tomorrow_s_reality.aspx .

Objective 3 Describe how organizational resources

and capabilities affect firm

performance.

ANALYZING THE INTERNAL ENVIRONMENT After discussing how to analyze the industry environment, let’s look at strategy analysis from another viewpoint—the internal environment. Indeed, research shows that the effects of the industry environment on firm performance are smaller than those of a firm’s internal environ- ment. Furthermore, if we look at all firms in an industry, we will see that some firms are doing much better than others. This implies that how managers organize firm resources and capa- bilities plays a critical role in firm performance and survival. In order for managers to effec- tively do this, they need to know what kinds of resources and capabilities the firm has in the

VRIO model A model that exam- ines an individual firm’s value, rare- ness, imitability, and organization to determine its relative strengths in comparison to its competitors in the industry.

170 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

first place. Jay Barney provides a prescriptive VRIO model (value, rareness, imitability, orga- nization) that can help managers examine the resources and capabilities in a systematic way. 11 Before we discuss the model, we will first talk about what resources and capabilities are.

A firm’s resources and capabilities include all of the financial, physical, human, and organizational assets used by the firm to develop, manufacture, and deliver products or services to its customers. Financial resources include debt, equity, retained earnings, and so forth. Physical resources include the machines, production facilities, and buildings firms use in their operations. Human resources include all the experience, knowledge, judgment, risk-taking propensity, and wisdom of individuals associated with a firm. Organizational resources include the history, relationships, trust, and organizational culture that permeates a firm, along with a firm’s formal reporting structure, manage- ment control systems, and compensation policies.

The VRIO Model Jay Barney suggests that managers need to look inside their firms for competitive advantage. That is, for a firm to achieve high performance, managers need to look at their resources and capabilities and examine four important questions: (1) the question of value (V); (2) the ques- tion of rareness (R); (3) the question of imitability (1); and (4) the question of organization (0).

The Question of Value Managers need to ask if their firm’s resources and capabili- ties add any value to the market that would allow them to capture market share or enhance profitability, either through exploiting emerging opportunities or neutralizing threats. Some firms do have such resources and capabilities. For example, Starbucks, a global cof- fee chain, attracts customers by providing high-quality coffee in a relaxing coffeehouse atmosphere. Its capability in customizing coffee to a customer’s specific tastes allows the firm to charge higher prices and to keep customers coming back. How much customization is there? For starters, Starbucks offers customers various types of milk: whole milk, 2%, and skim. There are caffeinated and decaffeinated coffees—and you can add a shot of vanilla to your coffee or top it off with whip cream, caramel, cocoa, or cinnamon. Whether you take your coffee “to go” or have it “to stay,” Starbucks prides itself on a consistent customer experience no matter which location you visit.

The Question of Rareness Although valuable resources and capabilities help firms survive, those resources and capabilities need to be rare. In other words, they will have to be controlled by only a small number of firms for the firms to obtain competitive advantage. Thus, managers need to assess if their valuable resources and capabilities are unique among their competitors. For example, for many years Walmart’s skills in develop- ing and using point-of-purchase data collection to control inventory gave it a competitive advantage over its competitors, like Kmart, a firm that has not had access to this timely information technology. Thus, during those years, Walmart’s capability to control inven- tory gave the company its competitive edge over its major competitor, Kmart.

The Question of Imitability Valuable and rare resources and capabilities can provide firms with competitive advantage; however, how long the advantage lasts depends on how quickly imitation could occur. When imitation occurs, it diminishes the

11 Barney, J.B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 19, 99–120.

financial resources Resources used by a firm that include debt, equity, retained earnings, and so on.

physical resources The machines, production facilities, and buildings that firms use in their operations.

human resources The experience, knowledge, judgment, risk- taking propensity, and wisdom of the indi- viduals associated with a firm.

organizational resources The history, relationships, trust, and organizational culture that perme- ates a firm, along with the firm’s formal reporting structure, man- agement control systems, and compensation policies.

resources and capabilities All of the financial, physical, human, and organizational assets used by the firm to develop, manufacture, and deliver products or services to its customers.

171C h a p t e r 5 B u s i n e s s S t r a t e g y

degree of rareness, which may further erode the value of the resources and capabilities. Thus, managers need to ask themselves if their resources and capabilities are difficult to imitate, and then determine how to create barriers for imitation. For example, a pharma- ceutical company that invents a new drug can obtain a patent and create a temporary barrier to prevent other firms from imitating its product. In many other industries, this is not possible. Groupon is an Internet company that has had many competitors imitate its model, as seen in Talking Business 5.3 .

The Question of Organization The last question managers have to consider is whether their firms can be organized in effective and efficient ways to exploit their valu- able, rare, and difficult-to-imitate resources and capabilities to maximize their potentials. How a firm is organized is critical to firm success. Quite often, firms with valuable resources and capabilities experience a decline in performance because they do not have appropri- ate organizational structure and design, compensation policies, or organizational culture to exploit their resources and capabilities. In our discussion of organizational structure ( Chapter 4 ) , we observed that different organizations will be affected by different factors or forces. These factors are essentially contingencies to which their structure must adopt.

TALKING BUSINESS 5.3

Groupon Established in 2008, Groupon is now one of the fastest

growing Internet firms in the United States with a pres-

ence in more than 160 North American cities and in

48 countries around the world.

Based in Chicago, Groupon began with a simple and

unique business model. The company sends daily mes-

sages by email to its 142 million subscribers offering dis-

counts on products and services ranging from 50% to

90% off regular prices. Deals include restaurants, spa

treatments, haircuts, fitness classes, and much more. The

deals are called “groupons” because when a business

offers a product or service at a deep discount, after a cer-

tain number of customers agree to buy the product “the

group is on.” In other words, the deal is activated when a

minimum volume of orders is achieved. Subscribers can

also refer a friend by email to help encourage purchases

and achieve the minimum order. Afterward, customers

make a secured, online payment and print out a coupon

that they take to the store to redeem their product or ser-

vice. There is usually a time limit to make the purchase, or

the offer expires and you lose the deal.

The business model is unique in that it allows local,

small businesses like Utopia Café in Toronto to get expo-

sure to a large market quickly. Since Groupon usually

takes a 50% cut of each deal, the offer is not always

profitable to the promoter, but companies benefit from

the increase in new customers.

The founder, a laid-back 29-year-old music major from

Northwestern University, is said to be the next Mark

Zuckerberg, tapping into the billion-dollar online advertis-

ing market. This Groupon mania began during an economic

recession when people were eager to save money and were

looking for coupons. As customers signed up for email noti-

fications, Groupon’s customer base grew larger and larger.

The one problem with the Groupon business model is

that anyone can replicate it—it isn’t difficult to create a

website, after all. There are already 200 copycat sites in the

United States, with LivingSocial being its main competitor.

Overseas, there are also over 500 competitors, including

100 in China alone. In Canada, the websites RedFlagDeals.

com and Koopon.ca are also trying to cash in on the profits.

Another problem with the model is that promoters can

sometimes make too many sales too quickly, and the demand

for the product (or service) can exceed the supply. This has

frustrated customers who had to wait long periods of time for

their goods after making their payment well in advance.

How successful the company will be is the question

everyone is asking. As hundreds of businesses compete,

Groupon will need to adapt to market changes rapidly,

both domestically and internationally.

172 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

These four questions provide managers with important guidelines to assess their competi- tive advantage relative to their competitors. If the answers to these questions are all in their firm’s favour, then the firm will have sustainable competitive advantage over competitors (see Exhibit 5.2 ). If any of the answers to these questions are not in their firm’s favour, then the firm would only have a temporary advantage over competitors. In this situation, the firm’s perfor- mance may be threatened by the competitors at any time in the near future. Managers will have to act quickly to develop or acquire new resources or capabilities that help them create sustainable competitive advantage.

SWOT Analysis At this point, we have discussed two basic and important models that managers can apply to assess their firm’s position in the competitive environment: the five-forces model and the VRIO model. To some extent, these two models complement and supplement each other to tell us about where opportunities and threats are situated in the external environment and how good or bad we are in terms of the resources and capabilities we have. In other words, the conclusions of analyses from these two models can be summarized by SWOT analysis (strengths, weaknesses, opportunities, and threats). The logic behind SWOT analysis (see Exhibit 5.3 ) is that firms that strategically use their internal strengths to exploit environmental opportunities and neutralize environmental threats while avoiding internal weaknesses are more likely to increase market share, sales, and profitability than other firms.

Specifically, managers could use the VRIO analysis to identify what kinds of resources and capabilities their firm currently has that provide sustainable competitive advantage and where the firm’s weaknesses are. Managers could also examine the trends of general environments and analyze industry structure (by using the five-forces model)

to assess opportunities and threats in the external environment. As such, the conclu- sion from the SWOT analysis can provide insights for managers into strategy formula- tion for the future.

For example, Starbucks realized that high- quality coffee beans are sensitive to environ- mental conditions (the weather, for example) and that the coffee-bean suppliers have great

Exhibit 5.2 VRIO Model

Question of Value

Question of Rareness

Question of Imitability

Question of Organization

Competitive Advantage

A particular set of

resources and capabilities

In favour of

the firm

In favour of

the firm

In favour of

the firm

In favour of

the firm

Sustainable

competitive advantage

A particular set of

resources and capabilities

In favour of

the firm

In favour of

the firm

Not in favour

of the firm

In favour of

the firm

Temporary

competitive advantage

A particular set of

resources and capabilities

In favour of

the firm

Not in favour

of the firm

In favour of

the firm

In favour of

the firm

Temporary

competitive advantage

Strengths

Weaknesses

VRIO analysis

VRIO analysis

General environmental trend

Five-forces model (industry analysis)

General environmental trend

Five-forces model (industry analysis)

Opportunities

Threats

Exhibit 5.3 SWOT Analysis

SWOT analysis An analysis of the strengths and weaknesses of an organization and of external opportunities and threats it is exposed to. The strategic planning team can use this information to reexamine the organization’s mission statement to capitalize on opportunities and reduce threats.

173C h a p t e r 5 B u s i n e s s S t r a t e g y

power over specialty coffee retailers because the coffee beans are critical inputs for the retailers. Starbucks used its capability in effective supply chain management to neutralize the threats imposed by specialty coffee-bean suppliers by diversifying its suppliers and through precise inventory control. At one point, the number of Starbucks’s suppliers reached over 1,500 worldwide. In addition, Starbucks understood that its brand reputation and image are valu- able, rare, and costly to imitate in the industry. It quickly harvested its brand reputation and image through entering international markets and selling its coffee in grocery stores. As such, Starbucks has enjoyed enormous success for quite a long period of time.

The recent Google mania is another example. Google used its strengths in search engines and operating systems design to compete in the highly competitive computer industry. It iden- tified the opportunities situated in the Internet search engine market and the personal com- puter operating systems market by analyzing the weaknesses of incumbents’ products. Google then used its capabilities in product design to capture the opportunities, which in turn gave it great success and challenged Microsoft’s market positions in these two markets.

Both Starbucks and Google clearly understood how to use their sustainable competi- tive advantage (that is, their strengths) to capture opportunities in the marketplace or to neutralize the threats embedded in the industry environment. As such, both firms cap- tured a significant portion of market share in their respective industries.

DIFFERENT LEVELS OF STRATEGIES To this point, we have discussed how managers can perform strategic analysis to identify opportunities and threats situated in their industry environment and strengths and weak- nesses embedded within their firms. In addition, managers need to know whether or not their strengths are sustainable for long-term performance. In this section, we will discuss what kinds of strategies managers can pursue given the opportunities, threats, strengths, and weaknesses they have identified.

Conceptually, we can categorize strategies into two levels: business and corporate levels. Business-level strategy is the strategy a firm uses to compete in a given market. As such, which market a firm intends to operate in is a given. Corporate-level strategy is about how a firm allocates its resources in different markets to create synergy to achieve its organizational goals.

Business-Level Strategy There are three business-level strategies that have been widely discussed in the literature and have sometimes been called generic business strategies . These are cost leadership, product differentiation, and focus (see Exhibit 5.4 ).

Cost Leadership The purpose of a cost leadership strategy is to gain competitive advan- tages by reducing economic costs below that of all competitors. It often requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales, mar- keting and adverting, general administration, and so on. Accordingly, a great deal of managerial attention to cost control is necessary to achieve this leadership position.

Objective 4 Describe three generic business strategies.

business-level strategy A strategy a firm uses to compete in a given market. Three business- level strategies are cost leadership, product differentiation, and focus.

Target Markets Generic Strategies

Industry wide Cost leadership

Industry wide Differentiation

Particular market segment/buyer group Focus

Exhibit 5.4 Three Generic Strategies

cost leadership strategy A business-level strategy that aims to reduce economic costs below that of all competitors to gain a com- petitive advantage. The strategy often requires aggressive construc- tion of efficient-scale facilities, vig- orous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales, marketing and adver- tising, and general administration.

174 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

There are three sources of cost leadership: (1) economies of scale, where firms can increase their production volume to reduce marginal costs; (2) learning curve economies, where firms can reduce marginal costs by experience, such as learning by doing and decreasing defects of products or services; and (3) access to low-cost factors of produc- tions, such as raw materials, labour, location, and so on. Although each of these sources could be relatively easily imitated by competitors, a combination of these three can make imitation difficult, which in turn gives firms competitive advantages.

There are two major advantages associated with cost leadership. First, being a cost leader gives a firm the highest profit margins in the industry, which allows it to obtain abnormal returns, at least for the short term. The second advantage is that it gives firms flexibility in response to pressures coming from the five forces in the industry environment. This is particularly critical in situations where an industry becomes less attractive to com- petitors. More specifically, when competition among firms moves toward price competi- tion, like what happens in mature industries, a firm with a cost leadership strategy would likely survive the competition because the firm can reduce its price and still obtain posi- tive profit margins. Such a firm can also absorb increases in costs of raw materials when suppliers charge higher prices; its competitors might not be able to absorb the higher prices, so they may have to transfer the costs to customers. As such, the firm would be able to win its competitors’ customers over by charging lower prices. Furthermore, in a situa- tion where buyers demand lower prices, the cost-leader firm could more flexibly respond to customers’ demands by reducing its price to maintain or even expand its customer base. Finally, the threat of new entrants would be lower for the cost-leader firm. Since the firm has advantages of economies of scale, learning-curve economies, and access to low-cost production factors, the new entrants are unlikely to be able to charge the same price as the firm does. Accordingly, the new entrants are not likely to pose an immediate threat to the firm in terms of its short-term performance.

Numerous firms have pursued cost-leadership strategies. For example, Walmart, a retail giant, is famous for having the lowest prices in the marketplace. If you look at Walmart closely, you will find that it not only has the lowest prices in the marketplace, but is also the cost leader in the retail industry. Walmart obtains economies of scale by purchasing a high volume of products and services. It also locates its stores in areas where the rent is not expensive. Furthermore, Walmart uses state-of-the-art information technology to monitor its inventory, thereby reducing inventory costs. Although these are small activities by them- selves, the cumulative cost savings are huge. Most important, the organization of these small activities makes it difficult for competitors to imitate Walmart’s operation.

Recently in Canada, Dollarama has been successful in competing with a cost-leadership strategy, as seen in Talking Business 5.4 .

Product Differentiation A product differentiation strategy is about a firm’s attempt to gain competitive advantages by increasing the perceived value of its products or services relative to that of other firms’ products or services. The other firms can be either competitors in the same industry or firms from other industries. For example, Starbucks provides high-quality specialty coffees as well as high-quality store design to differentiate itself from Tim Hortons and Country Style. As such, Starbucks is able to charge high-price premiums to customers given the value created.

Firms can create value for their products or services to differentiate themselves from other firms in many ways, including product features, links between functions, location,

product differentiation strategy A business-level strat- egy whereby a firm attempts to gain a competitive advantage by increasing the perceived value of its products or services relative to that of other firms’ products or services.

175C h a p t e r 5 B u s i n e s s S t r a t e g y

TALKING BUSINESS 5.4

Dollarama Cashing in on Penny-Pinching Canadians In the fourth quarter this year, the company said sales

were $561.9 million, increasing 19.9 per cent compared to

the same quarter last year, when there was an extra week.

Canadians’ appetite for bargains has grown in the past

year, Linsdell said. He noted there’s less of a stigma

attached to discount shopping than in the past.

“For Dollarama and for Target and everybody like that,

it really seems to be a function of the economy, every-

body’s much more concerned,” said Linsdell.

“People are concerned about their jobs, consumer con-

fidence is lower.”

Linsdell said Dollarama has found a “sweet spot” in

the discount world, offering items for as much as $3 but

keeping prices low enough that consumers see them in a

different category to stores like U.S. discount retailer

Target, which expanded into Canada this year.

Although it’s “too premature” to really know, he said the

results are “so far so good.” When Wal-Mart has taken over

Zellers locations near Dollarama locations, it has improved

traffic for Rossy’s company, he said.

As well as expanding its locations, Dollarama has been

modernizing its stores in recent years, introducing point-

of-sale scanning and use of UPC codes, as well as accept-

ing debit transactions.

Keeping better track of its sales as well as its expansion

has helped increase profits, said Canaccord Genuity con-

sumer products analyst Derek Dley.

He said he doesn’t expect Canadians to stop looking

for discounts at dollar and discount stores, even in pros-

perous times.

“I can’t imagine the economy turns and people are will-

ing to go back to paying $4 for wrapping paper instead of a

dollar,” Dley said. “It’s a very good business model.”

Source: Excerpted from Mills, C. (2013, April 12). Dollarama

cashing in on penny-pinching Canadians. Toronto Star. Retrieved

from www.thestar.com/business/2013/04/12/dollarama_cashing_

in_on_pennypinching_canadians.print.html . Reprinted by per-

mission of the Toronto Star.

Dollarama reported record results Friday capping a year in

which analysts say Canada’s largest dollar-store operator

expan ded smartly and cashed in on penny-pinching customers.

For the quarter ending Feb. 3, the Montreal-based com-

pany reported a profit of $77.1 million, beating expecta-

tions. The company earned a profit of $63.6 [million] in the

same quarter a year earlier.

During the past year, 81 new stores were opened and

Dollarama Inc. CEO Larry Rossy said Friday the company

isn’t finished growing yet.

“Dollarama completed a very successful fiscal year,”

Rossy told analysts in a conference call in which the com-

pany said it will up its quarterly dividend by 27 per cent.

The chain now has 785 stores but Rossy wants to

expand further, including in the GTA and downtown

Toronto, Vancouver and Montreal.

“Based on our current real estate pipeline, 75 to 80

new store openings seem to be a realistic objective for

fiscal 2014,” Rossy said, later adding the company “may

want” some shuttered Bargain Shop locations.

Analyst Neil Linsdell, a special situations analyst with

Industrial Alliance Securities, said Dollarama is a

“machine” that’s dominating the dollar-store market

in Canada.

Dollarama Gets Rolling on (Slightly) Higher Prices WWD reported in April that credit card data shows

luxury consumers are very comfortable shopping the

other end of the price scale. In the U.S., 25 per cent of

Nordstrom shoppers also shop at the Dollar Tree, Leon

Nicholas, director of retail insights at Kantar Retail,

told WWD.

Toronto Star via Getty Images

(continued)

176 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

Ways to Create Value Examples

Product features Apple’s Mac vs. PC

Links between functions Traditional televisions vs. televisions with DVD players

Location Pusateri’s (a high-end grocery chain) locates its stores in

expensive neighbourhoods

Product mix McDonald’s combo, including burger, soft drink, and fries

Links with other firms American Express credit card links with Air Miles

Services Staples’s next-business-day delivery service

Exhibit 5.5 Examples of Product Differentiation

TALKING BUSINESS 5.4 (continued)

Consumer psychologist Kit Yarrow has described it as

“an anticachet around being wealthy.”

“In Canada, Dollarama is a destination retailer for sea-

sonal items, party items, kitchenware and stationary,

regardless of income,” says [Dollarama CFO Michael] Ross.

In February 2009 the company began rolling out items

priced $1.25–$2. The move boosted traffic and sales. Accord-

ing to the financial results released Wednesday, about 51 per

cent of the company’s sales were from items costing more

than a dollar, compared with 44 per cent a year before.

Ross says Dollarama has no plans to expand into the

U.S., where Dollar Tree Inc. reported record first quarter

earnings in March.

Dollar Tree operates about 4,350 stores in the U.S. Dollar

Tree Canada operates 99 stores primarily in the west and

Ontario after purchasing 86 stores from Vancouver-based

Dollar Giant last year.

“Dollar Tree is a far larger operation overall, but Dollarama

should continue to dominate in Canada for some time. Dol-

larama has 7.5 times the number of locations in this country,

and is still growing, as compared to Dollar Tree. It will take

years for Dollar Tree to catch up,” said Ed Strapagiel, execu-

tive vice-president of Kubas Primedia.

“There isn’t anything sacred about the $1 price point at

a dollar store. The early concept was ‘everything for a dollar,’

but this was an obvious gimmick and has since been aban-

doned. What a dollar store stands for now is the cheapest

practical solution for very basic products. This concept can

be maintained even when the price is sometimes $3.”

Competition from other retailers—Walmart announced

this year it would be bulking up on dollar items—doesn’t

worry Ross. Dollaramas located near Walmart stores do

better business.

“Customers don’t have to walk 100,000 square feet to

find those low-priced items. They go into the store and it’s

wall-to-wall, but the race track is only 10,000 square feet.”

Source: Excerpted from Kopun, F. (2012, June 14). Dollarama

gets rolling on (slightly) higher prices. Toronto Star . Retrieved

from www.thestar.com/business/2012/06/14/dollarama_gets_

rolling_on_slightly_higher_prices.print.html .

product mix, links with other firms, and service (see Exhibit 5.5 for examples). However, managers need to keep in mind that the existence of product differentiation, in the end, is always a matter of customer perception. Sometimes, products sold by two different firms may be very similar, but if customers believe the first is more valuable than the second, then the first product has a differentiation advantage. Therefore, the firm with that prod- uct may be able to charge a higher price than the other firm.

For firms that obtain competitive advantages by pursuing product differentiation, they are often in good positions to defend themselves against the pressures from the five forces. More specifically, the threats of new entrants and substitutes for the firms would be lower than for others since the firms have imposed switching costs for their customers. In a situation where suppliers apply pressure to increase the prices of raw materials, the firms could transfer the increased costs to the customers as long as the new prices do not exceed the value the firms create. When rivalry among firms becomes fierce, the firms would be unlikely to get trapped in a price competition since the value they provide could protect them from the price wars.

177C h a p t e r 5 B u s i n e s s S t r a t e g y

In 2008, FROGBOX began with one truck, one employee,

and one mission: to rent reusable moving boxes as a green

alternative to cardboard ones. Today, FROGBOX has 22

locations and expects to expand to 150 cities across North

America in the next couple of years.

According to Forbes magazine, FROGBOX is one of the

most innovative, sustainable, and promising franchise

opportunities. In 2011, Forbes ranked FROGBOX on its list

of America‘s Most Promising Companies.

Founder and president Doug Burgoyne originally set

up FROGBOX in the Vancouver area as a small company,

but now Burgoyne has opened franchise opportunities

and hopes to expand his business in the next five years.

Less than 10 years old, the company has found a unique

niche, serving movers with rentable bins instead of throw

away cardboard boxes. FROGBOX’s business model is

simple. According to Burgoyne, the company has expanded

as the result of three reasons: “Happy customers, happy

employees and a positive bottomline.”12 While the com-

pany doesn’t provide moving services, it will drop off

green plastic containers at your home or office and pick

them up when you are done. The convenience makes

sense for a lot of consumers and the environmental

impact is reduced too. According to Burgoyne, “Pitching

in to protect the environment is a big part of what we do

and beyond that, we’re actually achieving our goal of

changing consumers’ minds in terms of what they think

about the moving industry. We’re making a difference in

the market and on planet Earth. In my mind, it doesn’t get

much greater than that.” 13

Of course, customer service has to be exceptional in

order to get referrals and grow the business. “It’s really

about wanting our customers to have a great experience,”

Burgoyne explains. “Great service can be as simple as a

delivery person calling to let a client know that he is stuck

in traffic and will be arriving a little later than expected.” 14

TALKING BUSINESS 5.5

FROGBOX: a sustainable franchising success

(continued)

12 On the path to greatness. October 2010. http://www.makeitbusiness.com/frogbox-on-the-path-to-greatness/. 13 On the path to greatness. October 2010. http://www.makeitbusiness.com/frogbox-on-the-path-to-greatness/. 14 On the path to greatness. October 2010. http://www.makeitbusiness.com/frogbox-on-the-path-to-greatness/.

That being said, managers who intend to pursue a strategy of product differentiation need to consider if the value they are going to create is sustainable, at least for a certain period of time. For example, as you’ll see in Talking Business 5.5 , FROGBOX is a Vancouver company that believes its service is differentiated from the rest.

As we discussed in the previous section, to achieve abnormal returns firms need to obtain sustainable competitive advantages. Therefore, managers need to think about how to create value that is rare and difficult to imitate or substitute. For example, Apple suc- cessfully created an MP3 player, the iPod, and then sold nearly 2 million of them in a relatively short period of time. Although Apple’s success invited imitation from Creative, Sony, iRiver, Samsung, and others, Apple has built up its brand loyalty through its prod- uct differentiation (unique product designs). Even though these competitors offered MP3 players with different functions and lower prices, the differences in price and functionality did not significantly attract customers’ attention. As a result, Apple could continue to harvest its iPod’s success.

Focus While cost leadership and product differentiation are oriented to broad markets, a focus strategy targets a particular buyer group, a segment of the product line, or a geographic market. Specifically, the focus strategy rests on the premise that a firm is able to compete

focus strategy A business-level strategy that targets a particular buyer group, a segment of the product line, or a geographic mar- ket. Specifically, the focus strategy rests on the premise that a firm is able to compete efficiently or effectively by targeting a particular narrow market. The firm can thus achieve either differentiation by better meeting the needs of a particular buyer group or lower costs in serving this group or both. Accordingly, the firm may poten- tially earn above-normal returns by adopting either a focused low-cost strategy or a focused differentia- tion strategy.

178 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

The company now has over 12 employees, a proven

business model, and ongoing growth potential. Burgoyne

is hoping to change people’s view on the moving industry,

which in the past has not had the greatest reputation.

According to Burgoyne, for most people moving is often a

difficult and unpleasant event. From packing to hiring the

right mover, moving can be a real nightmare.

How did Burgoyne get into the rentable moving bin

business? According to Burgoyne, at the time, he was at a

crossroads in his career. He could have accepted a promo-

tion in the telecommunications industry or take a risk on a

business idea he had thought of, and listen to his gut.

While he had some business experience, he knew starting

a business from the ground up would require a lot of work

and a bit of luck. “My professional background ranges

from physiotherapy to high-tech sales. I earned an MBA

from the University of Western Ontario . . . but starting a

business from scratch was something new to me,” he

explains. “I knew I needed to team up with someone who

had those types of skills.”15

Burgoyne eventually did find that person, but prefers

to keep his partner silent. His partner has been instrumen-

tal in the company’s strategy and expansion. “We spent

eight months researching the idea and talking about the

brand,” Burgoyne remembers. “Before we went full throt-

tle, we wanted to make sure we were crystal clear on

what value the business was, how we were going to grow

it, and that it would be scalable from the ground up.” 16

Marketing the business name, logo, and mission was

important too. Currently, FROGBOX provides customers

with reusable totes and wardrobes as well as recycled pack-

aging material. And of course, the company donates a por-

tion of its sales to special wildlife programs. In B.C., they

include the Vancouver Aquarium’s Oregon Spotted Frog

Recovery and BC Frog programs. The company has also part-

nered with Climate Smart to help other businesses imple-

ment sustainable practices such as reducing, reusing, and

recycling to control or counteract greenhouse gas emissions.

According to Ottawa Life, “the success of FROGBOX

reflects an increasingly environmentally conscious society.

Put simply, Canadian consumers are thinking outside the

box and demanding alternatives to wasteful practices.” 17

While most cardboard boxes can only be used twice,

“frog boxes” can be used and reused about 400 times

before they need to be recycled.

Ottawa Life explains, “Even if cardboard boxes are

recycled, they will have to be reprocessed before being

used again, making the carbon footprint that much larger

than simply reusing.” 18

“We want to run the company in every way we can with

the lowest environmental footprint,” says Burgoyne. “We

believe that we can be a successful business and do what is

right for the environment—both at the same time.” 19

By 2010, Burgoyne appeared on CBC’s television pro-

gram Dragon’s Den, pitching his idea to a panel of inves-

tors for further capital. He won their approval and

obtained two new partners: Jim Treliving of Boston Pizza

and Brett Wilson of Canoe Financial. Together they

invested $200,000 cash for 25% equity in the business.

According to the Globe and Mail, “to help manage the

growth, the company has designed a computer system

that can be expanded as new franchises come on board.

For a monthly fee, franchises share online systems for

ordering, scheduling and billing, as well as a website that

can be customized for each market.” 20

Clearly, the business model is working. Recently,

FROGBOX achieved the BC Green Business Award and is

on its way to expanding in further markets.

TALKING BUSINESS 5.5 (continued)

15 On the path to greatness. October 2010. http://www.makeitbusiness.com/frogbox-on-the-path-to-greatness/. 16 On the path to greatness. October 2010. http://www.makeitbusiness.com/frogbox-on-the-path-to-greatness/. 17 Frogbox: an Alternative to the Traditional Cardboard Moving Box. Ottawa Life. November 16, 2011. http:// www.ottawalife.com/2011/11/frogbox-an-alternative-to-the-traditional-cardboard-moving-box/. 18 Frogbox: an Alternative to the Traditional Cardboard Moving Box. Ottawa Life. November 16, 2011. http:// www.ottawalife.com/2011/11/frogbox-an-alternative-to-the-traditional-cardboard-moving-box/. 19 On the path to greatness. October 2010. http://www.makeitbusiness.com/frogbox-on-the-path-to-greatness/. 20 Frogbox springs to franchising success with a green idea. September 6, 2012. The Globe and Mail. http://www. theglobeandmail.com/report-on-business/small-business/sb-tools/sb-how-to/start-or-buy-a-business/frogbox- springs-to-franchising-success-with-a-green-idea/article642006/.

179C h a p t e r 5 B u s i n e s s S t r a t e g y

efficiently or effectively by targeting a particular narrow market. The firm thus can achieve either differentiation by better meeting the needs of a particular buyer group or lower costs in serving this group or both. Accordingly, the firm may potentially earn above-normal returns by adopting either a focused low-cost strategy or a focused differentiation strategy.

For example, before 2003, WestJet’s strategy was an example of a focused low-cost strategy. WestJet primarily served the markets in Western Canada, such as British Columbia and Alberta. The company also focused on achieving cost advantages in which it empha- sized reducing costs through all value chain activities. IKEA is another example of a focused low-cost strategy adopter, where it targets the buyers, including young families and frequent movers, and it is able to sell knockdown furniture with low pricing through its efficient value chain management. Companies like Godiva chocolates, Häagen-Dazs, and Hugo Boss employ differentiation-based focused strategies targeted at upscale buyers wanting products and services with world-class attributes. These firms focus on the high- income buyers and differentiate their products from other firms in terms of quality. As such, they are able to achieve high performance.

Corporate-Level Strategy In contrast to the business-level strategy that describes how to compete in a given market, corporate-level strategy addresses two related challenges: (1) what businesses or markets a firm should compete in; and (2) how these businesses or markets can be managed to create synergy. In other words, the issues managers deal with concern determining which markets their firms should diversify into in an attempt to create maximum synergies that will allow them to achieve high performance (see Talking Business 5.6) . These are critical issues for managers, because continu- ing to grow in a single market has become very difficult in today’s business world, and the global- ization trend also presents new market opportunities. Successfully managing diversification can give a firm enormous profitability and competitive advantage. In this section, we will discuss motives of diversification, types of diversification, and the means of diversifying.

First we need to define diversification. Diversification refers to a situation where a firm operates in more than one market simultaneously. The market can take many different forms. For example, Rogers operates in three major markets: the cable television provider, cellular phone service provider, and Internet service provider markets. RBC, CIBC, Scotiabank, BMO, and TD Canada Trust have all diversified into international markets. Most large Canadian insurance companies are highly diversified in terms of their insurance products and where they sell their products. In fact, if we look at the top 300 corporations in the Financial Post 1000, we will find that the majority of the 300 corporations are highly diversified.

Motives for Diversification Why are the majority of the top Canadian corpora- tions highly diversified? More generally, why do firms pursue diversification? There are many motives driving managers to pursue diversification. We can group these motives into two major categories: intrafirm and interfirm dynamics.

The motives derived from intrafirm dynamics include growth and managerial self- interests. At some point, firms operating in single markets will face difficulties to grow beyond a certain point even if they have a sustainable competitive advantage. The dif- ficulties may come from market saturation or intense competition within the markets they operate in. Accordingly, diversifying to new markets provides them with opportuni- ties to sustain growth and increase revenue. By diversifying into new markets, firms have

corporate-level strategy A strategy a firm uses to determine what businesses or markets it should compete in, and how these businesses or markets can be man- aged to create synergy.

diversification A corporate- level strategy where a firm oper- ates in more than one market simultaneously.

Objective 5 Explain the nature of corporate strategy.

intrafirm dynamics A motive for diversification that can include growth and managerial self-interests.

180 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

In March 2013, American Airlines won approval in bank-

ruptcy court to merge with US Airways. The merger cre-

ated the world’s biggest airline, with a combined 6,700

daily flights and approximately $40 billion in annual sales.

Doug Parker, CEO of US Airways, will lead the new com-

pany into the future.

The new company, which will keep the American Air-

lines name, is hoping to create $1 billion in annual syner-

gies of which 90% will come from additional revenues.

The two companies currently employ about 94,000

employees; however, some positions will be cut.

The airline industry has faced numerous challenges over

the past two decades, such as the 9/11 terrorist attacks, the

2008 financial crisis, the ongoing recession, and increasing

security and fuel costs—all of which have forced airlines to

increase fares and reduce expenses to stay afloat.

The merger means that the number of major US

airlines will be reduced to four. These include the new

American, United, Delta, and Southwest Airlines. With

fewer competitors in the marketplace, many analysts pre-

dict customers will eventually pay more.

“For consumers, in general, any merger in any industry

is not great news, because it reduces the number of

options,” said Ambarish Chandra, Rotman School of Man-

agement economics professor (Lu, 2013).

“The problem is because there have been so many merg-

ers, we are losing whatever little competition we have left in

this industry . . . It is true that airlines were losing money,

but now we’re seeing almost the complete reversal—we’re

seeing much higher fares, and airlines balance sheets are

generally quite solid now,” Chandra said (Lu, 2013).

In Canada, a similar trend is occurring. In 2012, WestJet

earned a profit of $242.4 million and Air Canada earned a

profit of $131 million.

Clearly, mergers are creating synergies that help with

profits.

According to York University business professor Fred

Lazar, the US airline merger partly represents three global

alliances where frequent flyers place their loyalties. “This

was inevitable,” he said. “As long as you have three major

global alliances, you were going to end up with three

major carriers in the U.S.” (Lu, 2013).

“They will have to make a choice. Are the points more

important than price?” Lazar said (Lu, 2013). According to

Vanessa Lu of the Toronto Star :

Air Canada is part of the Star Alliance program

that includes United, Lufthansa and Singapore

Airlines. Delta belongs to the SkyTeam that

includes KLM, Air France and Areomexico. US

Airways is part of the Star Alliance, but after the

merger would join the oneworld program that

includes American Airlines, British Airways, Qan-

tas and Japan Airlines. The incentive to fly on US

Airways for Air Canada’s Aeroplan members to

collect points would be eliminated, and those

frequent flyers may choose United instead.

The merged company will have other challenges ahead

before synergies can be achieved. Operations will need to

be combined, IT systems configured, and lots of negotia-

tions with unions to agree on seniority of its employees.

All of this takes time. But in the long run shareholders

hope synergies will help profits and a stronger, more effi-

cient company will emerge.

Sources: Associated Press. (2013, February 14). World’s biggest

airline: US Airways, American announce $11 billion merger.

Retrieved from http://profit.ndtv.com/news/international-

business/article-worlds-biggest-airline-us-airways-american-

announce-11-bn-merger-317923 ; Cousineau, S. (2013,

February 15). Why newly merged airlines rarely avoid heavy

turbulence. Globe and Mail . Retrieved from http://www.the-

globeandmail.com/globe-investor/why-newly-merged-airlines-

rarely-avoid-heavy-turbulence/article8758328 ; Lu, V. (2013,

February 12). American, US Airways merger to bring higher

fares. Toronto Star. Retrieved from www.thestar.com/business/

2013/02/12/american_us_airways_merger_to_bring_higher_

fares.html. Reprinted with permission. ; Mayerowitz, S. (2013,

March 27). Bankruptcy judge signs off on American–US Air-

ways deal. USA Today. Retrieved from http://www.usatoday.

com/story/travel/flights/2013/03/27/judge-indicates-support-

for- american-us-airways-deal/2025303 .

TALKING BUSINESS 5.6

American Airlines Merges with US Airways

181C h a p t e r 5 B u s i n e s s S t r a t e g y

opportunities to share related activities, which in turn achieve economies of scope and increase profitability and revenue. Economies of scope refer to situations where the total costs for serving two markets or producing products for two markets are less than the costs for serving or producing them alone. Such cost savings may derive from sharing production facilities, personnel, or marketing activities. In addition to benefits from economies of scope through sharing activities, diversification allows firms to leverage their core resources and capabilities to explore growth opportunities in new markets.

For example, Bell Canada, competing in the cellular phone and Internet service pro- vider markets, provides retailing services through its retail stores, where customers can purchase both cellular phone products and Internet bundles. By combining both its prod- ucts in a single store, Bell Canada saves the costs associated with physical facilities and duplicated personnel. Second Cup diversified into different markets in the specialty coffee industry by using its core capability—producing high-quality flavoured coffee—to sell its coffee both through its coffeehouses and other distribution channels (such as selling it in Harvey’s and Swiss Chalet restaurants).

The motive of growth rests on the assumption that CEOs and top executives are rational human beings—that is, they act in the best interests of shareholders to maximize long-term shareholder value. In the real business world, however, that assumption is tenu- ous. Quite often, CEOs and top executives act in their own self-interest. Specifically, there are huge incentives for executives to increase the size of their firm, and many of these are hardly consistent with increasing shareholder wealth. In particular, when execu- tive compensation is based on the firm’s short-term performance, executives are likely to pursue diversification in an attempt to boost their compensation at the cost of putting the firm in a vulnerable position in the long term.

The motives driven from interfirm dynamics include market power enhancement, response to competition, and imitation. When a firm pursues diversification and related diversification (which is discussed in the next section), the firm can increase its market power within the industry it operates in. In this case, market power can come from increases in market share or revenue. As such, the firm can be in a better position to nego- tiate better prices or higher quality with its suppliers due to higher volume of purchases. The firm therefore has more leverage to compete against its competitors.

Similarly, diversifying into different markets can be due to the intense competition a firm experiences. When competition within an industry intensifies, a firm can either diversify into related markets or pursue vertical integration (which will be discussed shortly). Diversifying into related markets allows the firm to sustain growth or enhance revenue. Pursuing vertical integration provides a means for the firm to secure and control its raw materials or distribution channels.

Finally, diversification can be driven by interfirm imitation that can be independent of economic motives (for example, growth, profitability, securing supply). Research has shown that firms are likely to adopt the diversification strategy when highly successful firms, large firms, or comparable firms have adopted the strategy; even if the other firms pursuing diver- sification have experienced poor performance. Such imitation can lead to dangerous posi- tions in that diversification may not be consistent with either short-term or long-term objectives. Eventually, it could destroy the firm in the marketplace.

Types of Diversification There are three major types of diversification: related, unre- lated, and vertical integration. Related diversification refers to situations where a firm

interfirm dynamics A motive for diversification that includes market power enhancement, a response to competition, and imitation.

related diversification A type of diversification that refers to situations where a firm expands its core businesses or markets into related businesses or markets. Such an expansion usually involves horizontal integration across differ- ent business or market domains. It enables a firm to benefit from economies of scope and enjoy greater revenues if the businesses attain higher levels of sales growth combined than either firm could attain independently.

economies of scope The situa- tion where the total costs for serving two markets or producing products for two markets are less than the costs for serving them or producing them alone.

182 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

expands its core businesses or markets into related busi- nesses or markets. Such an expansion usually involves horizontal integration across different business or mar- ket domains. It enables a firm to benefit from economies of scope and enjoy greater revenues if these businesses attain higher levels of sales growth combined than either firm could attain independently. By diversifying into related markets, a firm can create synergies through sharing activities (for example, production facilities, distribution channels, sales representatives) and lever- age its resources and capabilities. Related diversification also potentially gives a firm greater market power to compete against its competitors and greater bargaining power over its suppliers and customers.

The recent announcement of Lowe’s entry to Canada is an example of related diversifica- tion. Lowe’s is a home renovation components retailer. It is a market leader in the US home renovation market and has a reputation of excellent service and product quality. By entering the Canadian market, Lowe’s creates synergies for its own firm through leveraging its resources and capabilities. Its bargaining power over suppliers is also enhanced in that its potential high volume of purchases would enable it to demand lower prices or higher quality from its suppli- ers. Similarly, one of the core capabilities embedded in Procter & Gamble (P&G) is marketing competence. Many times, P&G has successfully used its marketing competence to promote different but related products to increase customer loyalty and also increase customers’ psycho- logical switching costs, which in turn give P&G more bargaining power with customers and helps increase its revenues. Rogers Communications Inc., which has traditionally operated in the telecommunications industry, uses a similar approach and continues to diversify into new businesses, such as its efforts to start a bank and focus on credit and payment services.

The second type of diversification is unrelated diversification , where a firm diversi- fies into a new market that is not similar to its current market(s). This kind of diversifica- tion tends to provide little synergies for a firm, given that there are few opportunities for sharing activities or leveraging resources and capabilities. An extreme example of such diversification is holding companies. Onex Corporation, one of the biggest holding com- panies in Canada, is involved in different industries, ranging from electronics manufactur- ing to health care insurance to consumer care products to transportation and logistics. Why do firms pursue unrelated diversification? Firms pursuing this strategy tend to have the synergies created (or believe that the synergies will be created) through corporate office’s management skills. Loblaw is one example. Recently, the Canadian grocery chain diversified into the mobile phone business to penetrate a new market unrelated to its food business (see Talking Business 5.7 ).

Specifically, management skills in restructuring and financial controls allow a corporation to potentially maximize financial returns of each business unit and the corporation as a whole. When a particular business unit no longer provides financial returns to the corporation, it would be divested by the corporation to ensure the corporation maintains its overall profitability.

The final type of diversification is vertical integration . Vertical integration refers to an extension or expansion of firm value chain activities by integrating preceding or successive productive processes (see Exhibit 5.6 ). That is, the firm incorporates more processes toward

unrelated diversification A type of diversification where a firm diversifies into a new market that is not similar to its current market(s). This kind of diversifica- tion tends to provide little syner- gies for a firm, given that there are few opportunities for sharing activ- ities or leveraging resources and capabilities. Firms pursuing this strategy tend to have the synergies created (or believe that the syner- gies will be created) through cor- porate office’s management skills.

vertical integration A type of diversification that refers to an extension or expansion of firm value chain activities by integrating preceding or successive productive processes.

Mmaxer/Shutterstock

183C h a p t e r 5 B u s i n e s s S t r a t e g y

In the past couple of years, Loblaw announced it would

enter the mobile phone market by setting up 200 full ser-

vice phone stores within its grocery store businesses across

Canada. The 80-square-foot shops would carry both smart-

phones and tablets to appeal to its existing customers. 21

Currently, many Loblaw stores already have self-serve

mobile phone kiosks with 27 mobile models, mainly offer-

ing prepaid plans. 22

According to Maria Forlini, senior vice-president of PC

Services, The Mobile Shop [would] ease the way Canadi-

ans shop for mobile devices. “By offering our customers

great choice, convenience and trusted objective advice

we’re confident The Mobile Shop will provide consumers

with the best wireless shopping experience in Canada,”

said Forlini. 23

While some phone stores may try to push a certain

brand name, the Loblaw representative will serve as an

advisor to pick out the right phone and plan for the cus-

tomer. The stores will also offer monthly, subscription-

based plans from selected carriers such as Rogers and

Bell. 24

Loblaw is not the first nonphone company to enter this

growing market. Some Shoppers Drug Mart and Canadian

Tire stores have already entered this business too. By

2013, Loblaw took the next step and decided to offer its

own mobile phone contracts as well. 25

Loblaw hopes to leverage its phone market growth

based on the 14 million customers who pass through its

1,000 stores every week. 26

In 2013, comScore, a research firm, released a report on

the Canadian digital industry and its promising future. The

report indicated that only 62% of Canadians owned a smart-

phone, which means there is still a lot of market potential.

Since last year, wireless subscribers also increased by 10% to

just over 22 million Canadians. According to the report, users

are relying on their smartphones for a variety of activities. For

example, users are requiring more data for mobile TV, videos,

social networking, mobile banking, and shopping online. 27

Clearly, Loblaw has experience outside the grocery busi-

ness already. Many Loblaw stores offer pharmacy services,

home kitchen products, a photo lab, and a clothing line for

adults and children called Joe Fresh. Loblaw also owns and

manages PC Financial, the online banking service with

selected kiosks inside many of its stores. The question is, can

Loblaw provide another retail service that many of us have

come to rely on? Since Loblaw has faced increasing competi-

tion in the grocery business by bigger global players such as

Walmart and more recently Target, it hopes its diversification

strategy will make it a larger, more competitive business.

Certainly, the smartphone market continues to be profitable

for many different types of retailers across Canada, and will

likely remain profitable for some time in the future.

TALKING BUSINESS 5.7

Loblaw Gets into the Mobile Phone Market

21 http://www.canadiangrocer.com/top-stories/loblaw-gets-into-mobile-phone-market-10015. 22 http://www.canadiangrocer.com/top-stories/loblaw-gets-into-mobile-phone-market-10015. 23 http://www.canadiangrocer.com/top-stories/loblaw-gets-into-mobile-phone-market-10015. 24 http://www.canadiangrocer.com/top-stories/loblaw-gets-into-mobile-phone-market-10015. 25 http://www.thestar.com/business/personal_finance/spending_saving/2013/06/19/loblaws_pc_mobile_unveils_ mobile_phone_contracts.print.html. 26 http://www.canadiangrocer.com/top-stories/loblaw-gets-into-mobile-phone-market-10015. 27 http://mobilesyrup.com/2013/03/04/comscore-android-now-has-40-smartphone-market-share-in-canada/.

Raw materials Manufacturing of final products Distribution

Backward integration Forward integration

Exhibit 5.6 Two Types of Vertical Integration

184 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

the source of raw materials ( backward integration ) or toward the ultimate customers ( forward integration ). For example, instead of selling its products through grocery stores, M&M Meat Shops has its own retail stores to serve its customers. Ben & Jerry’s sells its ice cream products both through its own retail stores and through Loblaw, Sobeys, and other supermarkets.

Clearly, vertical integration can be a viable strategy for many firms. It provides firms with benefits that include securing raw materials or distribution channels, protecting and controlling valuable assets, and reducing dependence on suppliers or distributors. By absorbing preceding or successive processes into a firm, the firm has better control over prices and quality. Sometimes it can also increase the firm’s profit margins, especially when suppliers’ or distributors’ markets are highly profitable. Most important, the firm would have control in terms of its overall strategic direction. Apple has certainly achieved this in opening its own retail stores.

Since 2005, when Apple opened its first retail store in Canada at Yorkdale Mall (Toronto), customers have been able to receive a complete Apple experience. Such a forward integration enables Apple to have better control over its customer service and to secure and enhance its market position in the highly competitive personal computer mar- ket. Similarly, in 2013 Starbucks bought its first coffee farm—an example of backward integration—as seen in Talking Business 5.8 .

That said, there are risks associated with vertical integration. One of the major risks is increasing administrative costs associated with managing a more complex set of activi- ties. As a firm absorbing new activities into its internal structure, the complexity of administration further increases. The increases in complexity can come from additional

forward integration A type of diversification that refers to an extension or expansion of firm value chain activities by integrating processes (forward) toward the ultimate customers.

Starbucks has always been known for its friendly, relaxing

atmosphere and great coffee, but now Starbucks is broad-

ening its business into something different—farming. In

2013, the Seattle-based coffee chain announced its pur-

chase of a 600-acre plot in Costa Rica, where it plans to

grow its own coffee beans, cultivate new varieties, and

test crops against plant-related diseases.

While Starbucks is well-known for promoting Fair-Trade

coffee and supporting farmers in the coffee industry, the move

for Starbucks to own its own raw materials (instead of buying

them) may signal a new direction for the company. In the past

40 years, Starbucks has spent approximately $70 million

to support coffee farmers in places such as Cameroon and

Nicaragua as part of its corporate social responsibility efforts.

Its new farm is located on the slopes of the Poás

Volcano, which has a broad range of altitudes and tem-

peratures. The company hopes to develop hybrid coffees

without any genetic modification techniques. In a press

release, company CEO Howard Schultz stated:

This investment, and the cumulative impact it will

have when combined with programs we have

put into place over the last forty years, will sup-

port the resiliency of coffee farmers and their

families as well as the one million people that

represent our collective coffee supply chain.

Starbucks also hopes to improve coffee crops to make

them more resilient against coffee rust, a disease caused

by a fungus called Hemileia vastatrix . Currently, a record

outbreak threatens more than half of the crops across

Central America and may reduce the expected harvest

by half.

Sources: Quotes and information from Tepper, R. (2013, March 21).

Starbucks to start first farm in Costa Rica to cultivate new types of

coffee beans. Huffington Post. Retrieved from www.huffingtonpost.

com/2013/03/21/starbucks-farm-costa-rica_n_2924436.

html?view=print&comm_ref=false; http://news.starbucks.com/

article_display.cfm?article_id=762.

TALKING BUSINESS 5.8

Starbucks Buys Its First Coffee Farm in Costa Rica

backward integration A type of diversification that refers to an extension or expansion of firm value chain activities by integrating productive processes (backward) toward the source of raw materials.

185C h a p t e r 5 B u s i n e s s S t r a t e g y

physical facilities; coordination between units, departments, or divisions; monitoring employees; and so on. Accordingly, carefully managing vertical integration is needed.

Means to Diversify There are many ways to achieve diversification, either related or unrelated. Each way has its own advantages and disadvantages. The first is diversifica- tion through internal development. For example, Microsoft entered the video game mar- ket through its internal development of the Xbox, while Sony and Apple opened their own retail stores to compete in the retailing sectors. Through internal development, firms have full control over the process of diversification and solely capture the potential reve- nue and profitability.

That said, internal development has two major disadvantages. First, quite often diver- sifying into new markets requires significant resource commitment. If firms do not have slack resources, then they might find it difficult to pursue internal development for diver- sification. Furthermore, internal development also requires time to develop the capability unique to the new markets. When the time window for the new market opportunity is narrow, firms might miss the opportunity (after already developing the capability) to com- pete in the new market. The second disadvantage is the risk associated with diversifica- tion. While internal development allows firms to solely absorb the potential returns, it also implies that the firms have to bear all of the risk associated with diversification.

The second way to achieve diversification is through mergers and acquisitions. In gen- eral, mergers refer to two firms coming together to create a new firm with a new identity. Acquisitions refer to a firm acquiring the majority of shares in another firm. In some cases, the acquired firm will become a division of the acquiring firm. In other cases, the acquired firm still operates independently or retains their brand or firm identity. For example, John- son & Johnson, one of the leading pharmaceutical and consumer care companies, has pur- sued many acquisitions in the past decade (including ALZA Corporation, Tibotec-Virco, 3-Dimensional Pharmaceuticals, and Egea Biosciences). One of its acquisitions was Neutro- gena, which retained its brand identity. In fact, acquisition has been viewed as one of John- son & Johnson’s capabilities. Through its acquisition experience, Johnson & Johnson has developed specific capabilities to handle issues associated with acquisitions.

Mergers and acquisitions have been one of the most popular ways to diversify into new markets or to enhance market power. In addition to providing means for firms to increase market power and acquire new capabilities, they can also help two merged firms save enor- mous costs, thus increasing their profit margins, like what Swiss commodities trader Glencore expected in its merger with mining company Xstrata. The number of mergers and acquisi- tions in Canada has typically been over 1,000 in each year since 2000. According to a recent survey, Canadian CEOs still prefer this method to allow their companies to grow.

Mergers and acquisitions certainly provide firms with quick access to new resources and capabilities to compete in the new markets. They also allow the firms to increase market power or market share in a relatively short period of time. However, mergers and acquisitions share the same disadvantages as internal development—risk in the new market. Moreover, mergers and acquisitions have their own unique disadvantages or challenges. In 2013, this was true of the Loblaws–Shoppers Drug Mart merger, as seen in Talking Business 5.9 . Quite often, managers face significant challenges in bringing two firms together into one in terms of administrative issues and organizational culture. Failure in managing the processes of mergers and acquisitions can create significant employee turnover and can erode firm performance.

merger A way to achieve diversification, when two firms come together to create a new firm with a new identity.

acquisition A way to achieve diversification, when a firm acquires the majority of shares in another firm.

186 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

It’s a deal that would join two of Canada’s biggest retailers:

Canadian supermarket chain Loblaw Companies Ltd. wants

to acquire Shoppers Drug Mart for $12.4 billion in cash

and stock.

U of T News asked marketing professor David Soberman

from the University of Toronto’s Rotman School of Manage-

ment to reflect on the deal and what it could mean for the

Canadian retail landscape.

We recently saw Sobeys acquire Safeway; and now Loblaw with Shoppers. Are these transactions more beneficial to the acquiring or acquired companies? The real point here is that the acquired company and the

acquirer still exist; that is Shoppers Drug Mart and Loblaw will

continue to exist as a stand-alone organization that has a lot

of brand equity and notoriety with Canadian consumers. But

often times a merger—at least from the perception of the

buyer and the seller—can unlock new value that wasn’t pos-

sible before when the organizations operated independently.

So is it a win-win for both sides? It’s hard to tell if it’s a win-win for both sides. Clearly the

argument of Loblaw and people from Shoppers Drug Mart

is that it will be, because it will unlock efficiencies that will

not be there if the firms do not merge. As you know,

many Shoppers Drug Marts have substantial grocery/

convenience sections in their stores where people can go

after-hours to buy various things they need. So there’s a

real opportunity there for Loblaw to gain added distribu-

tion for its President’s Choice products.

How does this change the retail landscape in Canada? One of the things it does do is create a greater degree of

concentration. The only caveat I would suggest—to con-

trast with the Sobeys–Safeway deal—is that these are deals

between firms that operate in quite different sectors (gro-

ceries vs. pharmaceuticals). While we sometimes worry

about excessive market power, generally when organiza-

tions are operating in different sectors, the degree to which

a merger can create less competition is much more limited.

What does this mean for consumers? Shoppers Drug Mart will continue to operate in very much

the way it has before, in the sense that their Optimum

program and Life brand will continue. Similarly in Loblaw,

they will continue pursuing their strategies with quality

prevalent private label products under the President’s

Choice brand.

What we’re seeing now is that the things we eat and

the way we eat them can actually have a big effect on your

health. In that regard, both brands have a similar objective.

And there you may see some opportunities for synergy

between Shoppers Drug Mart and Loblaw because these

were always perceived as very different sectors. This might

offer opportunities for the combined organizations to do

something in the future that is quite creative.

What will regulators (the Competition Bureau) need to look at before this deal goes through? One of the things they’ll need to look at is the degree to

which these firms compete with each other. If you have a

merger between two firms, but they don’t compete with

each other, then it really doesn’t affect or reduce competition

in any significant way. For the most part people go to Shop-

pers Drug Mart or Loblaw with different shopping experi-

ences in mind, so the degree to which there’s overlap would

seem to need to be quite limited. This would then suggest

that the Competition Bureau would have little concern.

Why is Loblaw paying such a significant premium (27 per cent) for Shoppers? One reason is that Shoppers is a very well respected brand.

It’s got a very strong equity with Canadian consumers, and

for that reason it’s very attractive.

Secondly, Shoppers Drug Mart has actually demon-

strated the ability to be very innovative with the sorts of

things that it does. They are very real pioneers in terms of

developing higher quality private label products that you

see in the healthcare and beauty and household catego-

ries. Furthermore, their Optimum Program has gained real

traction with Canadian consumers and people wait for the

days when they can get double or triple points.

That sort of loyalty and commitment is something

which is worth money—it may not be reflected in the

stock price, but it’s reflected in the acquisition price.

Are we seeing a general trend towards stores which don’t just sell one product? Absolutely, what you see is the traditional categories

breaking down. Traditionally people went to Loblaw for

groceries. But the first thing we saw was the addition of

TALKING BUSINESS 5.9

Understanding the Deal: Shoppers Drug Mart and Loblaw

187C h a p t e r 5 B u s i n e s s S t r a t e g y

pharmacies in the store where you can get prescriptions

filled and buy healthcare products. And now they’ve gone

even one step further, when you start thinking about

them as major retailers of clothing, with Joe Fresh.

The biggest challenge for the retailer is trying to get a

shopper in your store, and once the shopper is in the store

they may have multiple needs. If you can figure out what

those needs are, you have the opportunity to increase the

size of the shopping basket and this could generate a lot

of value for the retailer in question.

Source: Au-Yeung, G. (2013, July 16). Understanding the deal:

Shoppers Drug Mart and Loblaw. U of T News . Retrieved from

http://news.utoronto.ca/understanding-deal-shoppers-drug-

mart-and-loblaw .

The third way to achieve diversification is through strategic alliances. Strategic alliances refer to two or more firms or organizations working together to achieve cer- tain common goals. Strategic alliances can take various forms and serve various pur- poses. The three major forms of strategic alliances are nonequity alliances, equity alliances, and joint ventures. Nonequity alliances refer to the participating firms working together based on contractual agreements. Equity alliances refer to one firm having partial ownership in the other firm and the two firms working together to pur- sue common goals. Finally, joint ventures refer to two or more firms contributing certain resources to form an independent entity. The purposes of strategic alliances can range from marketing activities, to manufacturing production, to distribution arrangements, to research and development.

Generally, strategic alliances provide firms with quick access to new resources and capabilities contributed by alliance partners. As such, strategic alliances can be less costly and less of a resource commitment. Firms also share risks associated with diversification with alliance partners. On the other hand, firms will have to share potential revenue or profits with alliance partners. Furthermore, there are some specific risks associated with strategic alliances, especially surrounding partner selection. Since alliance partners play a key role in the success of strategic alliances, firms need to carefully select the partners to achieve their purposes in pursuit of diversification. Quite often, firms choose the wrong partners because of the following: (1) the firms misperceive the partners’ resources and capabilities; (2) the partners misrepresent their resources and capabilities; and (3) the partners behave solely based on their own interests. Altogether, these could significantly impair the strategic alliance, which ultimately fails to achieve the common purposes.

strategic alliance A way to achieve diversification by two or more organizations working together to achieve certain common goals. Strategic alliances can take various forms and serve various pur- poses. Three major forms of strategic alliances are nonequity alliances, equity alliances, and joint ventures.

nonequity alliance A form of strategic alliance that involves an arrangement between two or more companies that work together based on contractual agreements.

equity alliance A form of strategic alliance that involves an arrangement between two or more firms where one firm has partial ownership in the other firm and the two firms work together to pursue common goals.

joint venture A form of strategic alliance that involves an arrange- ment between two or more compa- nies joining to produce a product or service together, or to collaborate in the research, development, or mar- keting of that product or service.

CHAPTER SUMMARY How to develop strategy is a critical task that managers face. Managers need to constantly assess both the internal and external environments to formulate appropriate strategy to sustain their firm performance and survival. In this chapter, we discussed two models that help managers effectively assess the environment—Michael Porter’s five-forces model and Jay Barney’s VRIO model. In using these models, managers can identify opportunities and threats in the external environment as well as strengths and weaknesses embedded within their firms. Business-level strategy focuses on how to compete in a given market, includ- ing a cost leadership strategy, product differentiation, and a focus strategy. Corporate-level strategy emphasizes creating synergies through diversification, such as related and unre- lated diversifications and vertical integration.

188 P a r t 2 T h e I n t e r n a l C h a l l e n g e s

CHAPTER LEARNING TOOLS

Key Terms

Multiple-Choice Questions Select the best answer for each of the following questions.

Solutions are located in the back of your textbook.

1. An industry can share similar resource requirements, such as

a. raw materials b. labour

c. technology d. all of the above

2. Michael Porter designed the following model: a. VRIO model

b. Five-forces model

c. Seven external forces

d. SWOT analysis

3. Spreading production costs over the number of units produced is called

a. economies of scale b. economies of scope

c. an internal strategy d. none of the above

4. A threat of a new entrant is high when a. capital costs are low

b. switching costs are minimal

c. capital costs are high

d. both A and B

5. The bargaining power of customers is high when a. products are differentiated

b. switching costs are high

c. the brand is important to the buyer

d. products are undifferentiated

6. A substitute product of coffee is a. tea b. bread

c. a muffin d. candy

7. An exit barrier can be a. visible fixed costs b. specialized assets

c. employees d. both A and B

8. A limitation of the five-forces model is that the model a. does not consider the role of technological change

b. does not consider government regulations

c. does not consider the different sizes of companies

within the industry

d. all of the above

9. The VRIO model is based on an analysis of several fac- tors, including

a. value b. rareness

c. innovation d. both A and B

10. Which of the following encompasses both the VRIO model and the five-forces model?

a. Seven external forces b. SWOT analysis

c. Michael Porter model d. None of the above

11. A focus strategy is an example of a a. corporate-level strategy

b. broad-market strategy

c. business-level strategy

d. diversification strategy

acquisition 185

backward integration 184

bargaining power of buyers 167

bargaining power of suppliers 166

business-level strategy 173

corporate-level strategy 179

cost leadership strategy 173

diversification 179

economies of scale 164

economies of scope 181

equity alliance 187

exit barriers 168

financial resources 170

five-forces model 164

focus strategy 177

forward integration 184

human resources 170

industry 163

interfirm dynamics 181

intrafirm dynamics 179

joint venture 187

merger 185

nonequity alliance 187

organizational resources 170

physical resources 170

product differentiation strategy 174

related diversification 181

resources and capabilities 170

strategic alliance 187

strategic management 162

switching costs 164

SWOT analysis 172

unrelated diversification 182

vertical integration 182

VRIO model 169

189C h a p t e r 5 B u s i n e s s S t r a t e g y

CONCEPT APPLICATION LULULEMON: FOR THE LOVE OF YOGA

If you invested in Lululemon in 2007 at $2 share, your investment would have more than quadrupled. The shares have since risen to as high as $81, and investors are still optimistic about the company’s future. The Canadian athletic clothing retailer has a lot to be proud of. What started off as a humble Vancouver company in 1998 has risen to a billion-dollar multinational with over 200 stores across North America, Europe, and Asia. 28

Lululemon athletica has been called the “Nike for Women.” 29 In an already competi- tive sports retail market, how did this small yoga company rise to such greatness?

Two Canadian marketing academics agree that Lululemon offers something unique: a high-quality product for yoga enthusiasts.

“Lots of people can make a good product, but this is [a] product really specially designed for stretch, fabric, and the age of people who do yoga,” explained Alan Middleton, marketing professor at York University’s Schulich School of Business. 30

28 Alini, E. (2011, January 27). Lululemon love affair. Maclean’s . Retrieved from http://www2.macleans.ca/ 2011/01/27/lululemon-love-affair .

29 The Week staff. (2012, March 26). How did Lululemon become a $10 billion yoga empire? The Week . Retrieved from http://theweek.com/article/index/226020/how-did-lululemon-become-a-10-billion-yoga-empire .

30 Tucker, E. (2012, December 6). Why is Lululemon so successful? Global News . Retrieved from http://globalnews. ca/news/316659/why-is-lululemon-so-successful .

Discussion Questions 1. Explain Michael Porter’s five-forces model.

2. What are the limitations of the five-forces model?

3. Identify four key elements of the VRIO model and explain their importance.

4. Describe the components of a SWOT analysis.

5. What is the difference between a business-level strategy and a corporate-level strategy?

6. Provide six ways a product can be differentiated.

7. Identify and explain the two major motives for diversifi- cation.

8. Compare and contrast three major types of diversifica- tion.

9. Explain three ways a company can achieve diversifica- tion.

10. Explain the difference between economies of scale and economies of scope.

12. Manager self-interest and growth can be called a. a growth strategy

b. interfirm dynamics

c. intrafirm dynamics

d. economies of scope

13. A company uses corporate office management skills when it pursues

a. related diversification

b. vertical integration

c. unrelated diversification

d. none of the above

14. A benefit of backward integration is a. a company can secure raw materials

b. there is less reliance on suppliers