This Document Contains Chapters 3 to 4 CHAPTER 3 MANAGING IN A GLOBAL ENVIRONMENT CHAPTER OUTLINE New Manager Self-Test: Are You Ready to Work Internationally? I. A Borderless World A. Globalization B. Developing a Global Mindset II. Multinational Corporations A Globalization Backlash Serving the Bottom of the Pyramid III. Getting Started Internationally A. Exporting B. Outsourcing C. Licensing D. Direct Investing IV. The International Business Environment V. The Economic Environment A. Economic Development B. Economic Interdependence VI. The Legal Political Environment VII. The Sociocultural Environment A. Social Values B. Communication Differences New Manager Self-Test: What Are Your Social Values? VIII. The Changing International Landscape A. China, Inc. B. India, the Service Giant C. Brazil’s Growing Clout VIII. International Trade Alliances A. GATT and the WTO B. European Union C. North American Free Trade Agreement (NAFTA) ANNOTATED LEARNING OUTCOMES After studying this chapter, students should be able to: 1. Define globalization and explain how it is creating a borderless world for today’s managers. Answer: Globalization refers to the extent to which trade and investments, information, social and cultural ideas, and political cooperation flow between countries. One result is that countries, businesses, and people become increasingly interdependent. Globalization has been on the rise since the 1970s, and most industrialized nations show a high degree of globalization today. Business is becoming a unified, global field as trade barriers fall, communication becomes faster and cheaper, and consumer tastes in everything from clothing to cellular phones converge. For many companies today, the only potential for significant growth lies overseas. The reality of today’s borderless companies also means consumers can no longer tell from which country they’re buying. 2. Describe a global mindset and why it has become imperative for companies operating internationally. Answer: Succeeding on a global level requires more than a desire to do business globally and a new set of skills and techniques; it requires a global mindset. A global mindset is the ability of managers to appreciate and influence individuals, groups, organizations, and systems that represent different social, cultural, political, institutional, intellectual, and psychological characteristics. A manager with a global mindset can perceive and respond to many different perspectives at the same time rather than being stuck in a domestic mindset that sees everything from one’s own perspective. People who have had exposure to different cultures develop a global mindset easily. One of the best ways managers develop a global mindset is by engaging with people from different cultures. It enables companies to see the world through a different lens. 3. Describe the characteristics of a multinational corporation and explain the “bottom of the pyramid” concept. Answer: A multinational corporation typically receives more than 25 percent of its total sales revenues from operations outside the parent’s home country. MNC’s have the following distinctive managerial characteristics: they are managed as an integrated worldwide business system; they are ultimately controlled by a single management authority that makes key, strategic decisions relating to the parent and all affiliates; and their top managers are presumed to exercise a global perspective. In a few cases, the MNC management philosophies may differ from that just described. Additional generic strategies available are to be an ethnocentric company that places emphasis on their home country, a polycentric company that is oriented toward the markets of individual foreign host countries, or a geocentric company that is truly world oriented and favors no specific country. In general, a multinational corporation can be thought of as a business enterprise that is composed of affiliates located in different countries and whose top managers make decisions primarily on the basis of global business opportunities and objectives. The bottom of the pyramid (BOP) concept proposes that corporations can alleviate poverty and other social ills, as well as make significant profits, by selling to the world’s poorest people. The term bottom of the pyramid refers to the more than four billion people who make up the lowest level of the world’s economic “pyramid”, as defined by per capita income. 4. Define international management and explain how it differs from the management of domestic business operations. Answer: International management is the management of business operations conducted in more than one country. The fundamental tasks of business management, including the financing, production, and distribution of products and services, do not change in any substantial way when a firm is transacting business across international borders. The basic management functions of planning, organizing, leading, and controlling are the same whether a company operates domestically or internationally. The difference between domestic and international operations is that managers will experience greater difficulties and risks when performing these management functions on an international scale. 5. Indicate how dissimilarities in the economic, sociocultural, and legal-political environments throughout the world can affect business operations. Answer: Environmental factors that affect international business are similar to the task and general environmental sectors. However, when comparing one country with another, the economic, legal political, and sociocultural sectors present the greatest difficulties. The economic environment represents the economic conditions in the country where the international organization operates. This part of the environment includes such factors as economic development, infrastructure, resource and product markets, exchange rates, inflation, interest rates, and economic growth. Economic environments in some countries can be quite unstable, presenting a great deal of risk to companies operating within those countries. The sociocultural environment includes a nation’s culture and social values. Culture consists of the shared knowledge, beliefs, and values, as well as the common modes of behavior and ways of thinking, among members of a society. Cultural factors are more perplexing than political-legal and economic factors in foreign countries. Culture is intangible, pervasive, and difficult to learn. It is absolutely imperative that international businesses comprehend the significance of local cultures and deal with them effectively. Businesses must deal with unfamiliar legal political systems when they go international, as well as with more government supervision and regulation. Some of the major legal political concerns affecting international business are political risk, political instability, and laws and restrictions. 6. Discuss how the international landscape is changing, including the growing power of China, India, and Brazil. Answer: Many companies today are going straight to China as a first step into international business. Business is booming and U.S. and European companies are taking advantage of opportunities for all of the various market entry strategies. Although outsourcing is probably the most widespread approach to international involvement in China, the country is moving toward a consumer-driven economy, with the fastest-growing middle class in history. Doing business in China has never been smooth, and new regulations are making it even tougher. Despite the problems, China is a market that can’t be ignored. Competition from domestic companies in China is also growing. Whereas China is strong in manufacturing, India is a rising power in software design, services, and precision engineering. With its large English-speaking population, India has numerous companies offering services such as call-center operations, data processing, computer programming and technical support, accounting, and so forth. Brazil continues to be one of the fastest-growing emerging economies in the world, even though its economy slowed down in 2011. Brazil has large and growing agricultural, mining, manufacturing, and service sectors. The country’s economy, already the 7th largest in the world, is projected to move into fourth place by 2050. Brazil has a young, vibrant population, the largest in Latin America, and a rapidly growing middle class population. The Brazilian government has initiated major investments in the development of infrastructure such as highways, ports, and electricity projects. 7. Describe how regional trading alliances are reshaping the international business environment. Answer: Regional trading alliances have a significant impact on international business through increased trade liberalization, stronger enforcement of rules and regulations, greater power to resolve disputes among member nations, and improved social and economic conditions for alliance members. LECTURE OUTLINE NEW MANAGER SELF-TEST: ARE YOU READY TO WORK INTERNATIONALLY? American managers often display cross-cultural ignorance during business negotiations compared to counterparts in other countries. This exercise helps students determine the extent to which they are ready to participate in international negotiations. I. A BORDERLESS WORLD Exhibit 3.1 A. Globalization Globalization refers to the extent to which trade and investments, information, social and cultural ideas, and political cooperation flow between countries. One result is that countries, businesses, and people become increasingly interdependent. Globalization provides a competitive edge at all stages of developing, manufacturing, and marketing products, and domestic markets are saturated for many firms. The reality of today’s borderless companies means consumers can no longer tell from which country they’re buying (e.g., the U.S. firm IBM gets 65 percent of its tech services revenue overseas, and General Motors (GM) makes the Chevrolet HHR in Mexico with parts that come from all over the world). Globalization has been on the rise since the 1970s, and most industrialized nations show a high degree of globalization today. The KOF Swiss Economic Institute measures economic, political and social aspects of globalization and ranks countries on a globalization index. The most globalized countries are Belgium, Ireland, Austria, the Netherlands, and Singapore. B. Developing a Global Mindset A global mindset is the ability of managers to appreciate and influence individuals, groups, organizations, and systems that represent different social, cultural, political, institutional, intellectual, and psychological characteristics. A manager with a global mindset can perceive and respond to many different perspectives at the same time rather than being stuck in a domestic mindset that sees everything from one’s own perspective. Developing a global mindset requires managers who are genuinely curious and inquisitive about other people and cultures, are open-minded and nonjudgmental, and can deal with ambiguity and complexity without becoming overwhelmed or frustrated. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ II. MULTINATIONAL CORPORATIONS The size and volume of international businesses are so large that they are hard to comprehend. Although the term has no precise definition, a multinational corporation (MNC) typically receives more than 25 percent of its total sales revenues from operations outside the parent’s home country. MNCs also have the following distinctive characteristics: • MNCs are managed as integrated worldwide business systems in which foreign affiliates act in close alliance and cooperation with one another. • MNCs are ultimately controlled by a single management authority that makes key strategic decisions relating to the parent and all affiliates. • MNC top managers are presumed to regard the entire world as one market for strategic decisions, resource acquisition, and location of production, advertising, and marketing efficiency. Ethnocentric companies place emphasis on their home countries. Polycentric companies are oriented toward the markets of individual foreign host countries. Geocentric companies are truly world oriented and favor no specific country. Discussion Question #6: Should a multinational corporation operate as a tightly integrated, worldwide business system, or would it be more effective to let each national subsidiary operate autonomously? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ A. A Globalization Backlash 1. As the world becomes increasingly interconnected, a backlash over globalization is occurring. The loss of jobs as companies export work to countries with lower wages is a primary concern. 2. Activists charge that globalization not only hurts Americans who lose their jobs but also contributes to worldwide environmental destruction and locks people into poverty. In the end, it is not whether globalization is good or bad, but how business and government can work together to ensure that global advantages are shared fairly. B. Serving the Bottom of the Pyramid 1. Although large, multinational organizations are accused of many negative contributions to society, they also have the resources needed to do good things in the world. The bottom of the pyramid (BOP) concept proposes that corporations can alleviate poverty and other social ills, as well as make significant profits, by selling to the world’s poorest people. The term bottom of the pyramid refers to the more than four billion people who make up the lowest level of the world’s economic “pyramid” as defined by per-capita income. 2. Although the BOP concept has gained significant attention recently, the basic idea is nothing new. Unilever (formerly Lever Brothers) has been working for many years to prevent the spread of disease in poor areas of the world by introducing very inexpensive soap products to the people there. In this way, the profit motive goes hand-in-hand with the desire to make a contribution to humankind. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ III. GETTING STARTED INTERNATIONALLY Exhibit 3.2 Organizations can become involved internationally in a couple of different ways. One way is to seek cheaper sources of material or labor offshore, which is called offshoring or global outsourcing. Another way is to implement market entry strategies such as exporting, licensing, and direct investment. These market entry strategies represent alternative ways to sell products and services in foreign markets. A. Exporting 1. Exporting is a strategy in which the corporation maintains its production facilities within the home nation and transfers its products for sale in foreign countries. Exporting enables a company to market its products in other countries at modest resource cost and with limited risk. 2. Exporting does entail numerous problems based on physical distances, government regulations, foreign currencies, and cultural differences, but it is less expensive than committing the firm’s own capital to build plants in host countries. B. Outsourcing 1. Global outsourcing, or offshoring, means engaging in the international division of labor so that work activities can be done in countries with the cheapest sources of labor and supplies. a. The most recent trend is outsourcing core processes such as auditing or chemistry research. C. Licensing 1. Licensing is a strategy in which the corporation (the licensor) in one country makes certain resources available to companies in another country (the licensees). These resources can include technology, managerial skills, and/or patent and trademark rights that enable the licensee(s) to produce and market a product similar to what the licensor has been producing. a. Franchising is a special form of licensing that occurs when the franchisee buys a complete package of materials and services, including equipment, products, product ingredients, trademark and trade name rights, managerial advice, and a standardized operating system. D. Direct Investing 1. Direct investing is a strategy in which the corporation is involved in managing the productive assets, which distinguishes it from other entry strategies that permit less managerial control. The most popular form of direct investment is to engage in strategic alliances and partnerships. a. In a joint venture, a company shares costs and risks with another firm, typically in the host country, to develop new products, build a manufacturing facility, or set up a sales and distribution network. b. A second option for direct investing is to create a wholly owned foreign affiliate, over which the company has complete control. Direct acquisition of an affiliate may provide cost savings over exporting by shortening distribution channels and reducing storage and transportation costs. c. The most costly and risky direct investment is a greenfield venture, which occurs when a company builds a subsidiary from scratch in a foreign country. The advantage is that the subsidiary is exactly what the company wants and has the potential to be highly profitable. The disadvantage is the company has to acquire all market knowledge, materials, people, and know-how in a different culture, and mistakes are possible. Discussion Question #5: Compare the advantages associated with the market entry strategies of exporting, licensing, and wholly owned subsidiaries. What information would you need to collect and what factors would you consider when selecting a strategy? Notes____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ IV. THE INTERNATIONAL BUSINESS ENVIRONMENT Exhibit 3.3 International management is the management of business operations conducted in more than one country. The fundamental tasks of business management do not change in any substantive way when a firm is transacting business across international borders; however, managers will experience greater difficulties and risks when performing these management functions on an international scale. The economic, legal-political, and sociocultural sectors present the greatest difficulties in comparing one country to another. V. THE ECONOMIC ENVIRONMENT A. Economic Development Exhibit 3.4 1. Economic development differs widely among the countries and regions of the world, and countries can be categorized as developing or developed countries. Developing countries are referred to as less-developed countries (LDCs). The criterion traditionally used to classify countries is per capita income. Most international firms are headquartered in economically advanced countries; however, many companies are investing in Asia, Eastern Europe, and Latin America. 2. Infrastructure refers to a country’s physical facilities support economic activities such as transportation, energy producing facilities, and communications. Companies operating in LDCs must contend with lower levels of technology and perplexing logistical, distribution, and communication problems. B. Economic Interdependence Exhibit 3.5 1. The recent financial crisis has made it abundantly clear just how economically interconnected the world is. Although the recent crisis may seem atypical, savvy international managers realize that their companies will probably be buffeted by similar crises fairly regularly. The Asian financial crisis of 1997-1998 affected firms in North America, Europe, and other parts of the world. More recently, Greece’s inability to make payments on its debt sparked a panic that devalued the euro and threatened the stability of financial markets worldwide. VI. THE LEGAL POLITICAL ENVIRONMENT A. Political risk is a company’s risk of loss of assets, earning power, or managerial control due to politically -based events or actions by host governments. It includes government takeovers of property and acts of violence directed against a firm’s properties or employees. B. Political instability refers to events such as riots, revolutions, civil disorders or government upheavals that affect the operations of an international company. A revolutionary wave of protests in the Arab world that began in the late 2010, known as the Arab Spring, has created a tumultuous environment for businesses operating in the region. C. Government laws and regulations differ from country to country and present a challenge for international firms. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ VII. THE SOCIOCULTURAL ENVIRONMENT A. Social Values 1. A nation’s culture includes the shared knowledge, beliefs, and values, as well as the common modes of behavior and ways of thinking among members of a society. One way managers can comprehend local cultures is to understand differences in social values. American managers are regularly accused of an ethnocentric attitude that assumes that the American way is the best way. Ethnocentrism is an attitude, which means that people have a tendency to regard their own culture as superior and to downgrade other cultures. Strong ethnocentric attitudes within a country make it difficult for foreign firms to operate there. There are four dimensions of national social value systems as well as other cultural characteristics that influence organizational and employee working relationships. a. Hofstede’s Value Dimensions Exhibit 3.6 • Power distance. High power distance means people accept inequality in power among institutions, organizations, and people. Countries that value high power distance include Malaysia, and the Philippines. Low power distance means people expect equality in power. Countries that value low power distance include Denmark, and Israel. • Uncertainty avoidance. High uncertainty avoidance means that members of a society feel uncomfortable with uncertainty and ambiguity and thus support beliefs that promise certainty and conformity. Countries that value high uncertainty avoidance include Greece, Portugal, and Uruguay. Low uncertainty avoidance means people have high tolerance for the unstructured and unpredictable. Countries that value low uncertainty avoidance include Singapore and Jamaica. • Individualism and Collectivism. Individualism reflects a value for a loosely knit social framework in which individuals are expected to take care of themselves. Countries with individualist values include the United States, Canada, and Great Britain. Collectivism is a preference for a tightly knit social framework in which individuals look after one another and organizations protect their members’ interests. Countries with collectivist values are Guatemala, Ecuador, and Panama. • Masculinity and Femininity. Masculinity stands for preference for achievement, heroism, assertiveness, work centrality (with resultant high stress), and material success. Societies with strong masculine values are Japan, Italy, Mexico, and Germany. Femininity reflects the values of relationships, modesty, caring for the weak, and quality of life. Countries with feminine values include Sweden, Norway, Costa Rica and France. Both men and women subscribe to the dominant value in masculine and feminine cultures. • A fifth dimension, long-term orientation and short-term orientation, was developed later. Long-term orientation includes a greater concern for the future and highly values thrift and perseverance. Short-term orientation is more concerned with the past and the present and places a high value on tradition and meeting social obligations. 2. GLOBE Project Value Dimensions Exhibit 3.7 a. Research by the GLOBE Project (Global Leadership and Organizational Behavior Effectiveness) used data collected from 18,000 managers in 62 countries. They collected data on nine dimensions. • Assertiveness is the extent to which a society encourages toughness, assertiveness, and competitiveness. • Future orientation refers to the extent to which a society encourages planning for the future over short-term results. • Gender differentiation refers to the extent to which a society maximizes gender role differences. • Performance orientation is the extent to which a society places emphasis on performance and rewards people for improvement. • Humane orientation refers to the degree to which a society encourages and rewards people for being fair, altruistic, generous, and caring. b. GLOBE research provides a more comprehensive view of cultural similarities and differences than Hofstede’s. 3. Social values have great influence on organizational functioning and management styles. Discussion Question #10: How might the social value of low versus high power distance influence how you would lead and motivate employees? What about the value of low versus high performance orientation? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ NEW MANAGER SELF-TEST: WHAT ARE YOUR SOCIAL VALUES? The job of a manager includes situations that will test the manager’s knowledge and capacity for dealing with people from other national cultures. This exercise helps students determine their levels of readiness for these situations. B. Communication Differences Exhibit 3.8 1. People from some cultures tend to pay more attention to the social context (social setting, nonverbal behavior, social status) of their verbal communication than Americans do. a. In a high-context culture, people are sensitive to circumstances surrounding social exchanges. People use communication primarily to build personal social relationships; meaning is derived from context–setting, status, and nonverbal behavior–more than from explicit words. High-context cultures include Asian and Arab countries. b. In a low-context culture, people use communication primarily to exchange facts and information; meaning is derived primarily from words. Low-context cultures tend to be American and Northern European. Discussion Question #4: What steps could a company take to avoid making product design and marketing mistakes when introducing new consumer products into Brazil? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ THE CHANGING INTERNATIONAL LANDSCAPE A. China Inc. 1. Many companies today are going straight to China as a first step into international business. Business is booming and U.S. and European companies are taking advantage of opportunities for all of the strategies discussed above. Outsourcing is probably the most widespread approach to international involvement in China, but the country is moving toward a consumer-driven economy, with the fastest-growing middle class population. 2. Doing business in China has never been smooth, and new regulations are making it tougher. Despite the problems, China is a market that foreign managers can’t afford to ignore. Competition from domestic companies in China is also growing fast. B. India, the Service Giant 1. Whereas China is strong in manufacturing, India is a rising power in software design, services, and precision engineering. One index lists more than 900 business services companies in India, which employ around 575,000 people. With its large English-speaking population, India has numerous companies offering services such as call-center operations, data processing, computer programming and technical support, accounting, and so forth. C. Brazil’s Growing Clout 1. Brazil is another country that is gaining increasing attention of managers. Although Brazil’s economic growth slowed in 2011, it is still one of the fastest-growing emerging economies in the world, with large and growing agricultural, mining, manufacturing, and service sectors. The country’s economy, already the seventh largest in the world, is projected to move into fourth place by 2050. The Brazilian government has initiated major investments in the development of infrastructure such as highways, ports, and electricity projects. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ VIII. INTERNATIONAL TRADE ALLIANCES A. GATT and the World Trade Organization 1. The General Agreement on Trade and Tariffs (GATT), signed by 23 nations in 1947, started as a set of rules to ensure nondiscrimination, provide clear procedures, settle disputes, and encourage participation of LDCs in international trade. GATT and its successor, the World Trade Organization (WTO), primarily use tariff concessions as a tool to increase trade. Members agree to limit the level of tariffs they will impose on imports from other members. 2. The World Trade Organization (WTO) was established by the 1986 to 1994 Uruguay round. As of July 2008, 153 countries were members of the WTO. As a permanent membership organization, the WTO is bringing greater trade liberalization in goods, information, technological developments, and services. The WTO is also, however, partly responsible for a growing backlash against global trade. B. European Union Exhibit 3.9 1. European Economic Community, now called the European Union (EU), was formed in 1957 to improve economic and social conditions among its members, and has since expanded to a 27-nation alliance. The biggest expansion came in 2004 when ten new members from southern and eastern Europe joined. Turkey has opened negotiations. The goal of EU is to create a single-market system for Europe’s millions of consumers, allowing people, goods, and services to move freely. The most significant aspect is the EU’s monetary revolution and the introduction of the euro, the single European currency that could eventually replace 27 European currencies. 2. The economic crisis has revived national loyalties and cross-border resentments, slowing the move toward a unified and cohesive “European identity.” However, some analysts think that a broad breakup of the eurozone is unlikely. C. North American Free Trade Agreement (NAFTA) 1. NAFTA went into effect on January 1, 1994, and merged the U.S., Canada, and Mexico into a single mega market. The agreement broke down tariffs and trade restrictions on most agricultural and manufactured products over a 15-year period. 2. Opinions remained divided over the benefits of NAFTA; some call it a success and others refer to it as a dismal failure. Advocates say that it has increased trade, investment, and income and continues to enable all three countries to compete more effectively with rival Asian and European firms. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ CHAPTER 4 MANAGING ETHICS AND SOCIAL RESPONSIBILITY CHAPTER OUTLINE New Manager Self-Test: Will You Be A Courageous Manager? I. What Is Managerial Ethics? II. Ethical Management Today III. Ethical Dilemmas: What Would You Do? IV. Criteria for Ethical Decision Making V. The Individual Manager and Ethical Choices New Manager Self-Test: Servant Leadership VI. What Is Corporate Social Responsibility? A. Organizational Stakeholders B. The Green Movement C. Sustainability and the Triple Bottom Line VII. Evaluating Corporate Social Responsibility VIII. Managing Company Ethics and Social Responsibility A. Code of Ethics B. Ethical Structures C. Whistle-Blowing IX. The Business Case for Ethics and Social Responsibility ANNOTATED LEARNING OUTCOMES After studying this chapter, students should be able to: 1. Define ethics and explain how ethical behavior relates to behavior governed by law and free choice. Answer: Ethics is difficult to define in a precise way. In a general sense, ethics is the code of moral principles and values that govern the behaviors of a person or group with respect to what is right or wrong. Ethics sets standards as to what is good or bad in conduct and decision making. Human behavior falls into three categories. The first is codified law, in which values and standards are written into the legal system and enforceable in the courts. The domain of free choice is at the opposite end of the scale and pertains to behavior about which law has no say and for which an individual or organization enjoys complete freedom. Between these domains lies the area of ethics. This domain has no specific laws, yet it does have standards of conduct based on shared principles and values about moral conduct that guide an individual or company. 2. Discuss why ethics is important for managers and identify recent events that call for a renewed commitment to ethical management. Answer: The pervasiveness of ethical lapses during the first decade of this century has been astounding. Although public confidence in business managers in particular is at an all-time low, politics, sports, and non-profit organizations have also been affected. In the business world, the names of once-revered corporations have become synonymous with greed, deceit, irresponsibility, and lack of moral conscience. Managers carry a tremendous responsibility for setting the ethical climate in an organization and can act as role models for others. The widespread ethical lapses of the past decade have put managers under increasing scrutiny. Some of these ethical lapses include the failures that occurred at AIG, Lehman Brothers, Enron, Bear Sterns, Countrywide, and Worldcom. Unethical decisions made by managers at these and other companies, resulted in losses of huge sums of money by stockholders, employees, and investors. In some cases, the company itself was destroyed. 3. Explain the utilitarian, individualism, moral rights, justice, virtue, and practical approaches for making ethical decisions. Answer: The utilitarian approach holds that moral behaviors produce the greatest good for the greatest number. In this approach, a decision maker is expected to consider the effect of each decision alternative on all parties and select the one that optimizes satisfaction for the greatest number of people. The individualism approach contends that acts are moral when they promote the individual’s best long term interests. Individuals calculate the best long term advantage to themselves as a measure of a decision’s goodness. The action that is intended to produce a greater ratio of good too bad for the individual compared with other alternatives is the right one to perform. The moral rights approach asserts that people have fundamental rights and liberties that cannot be taken away by an individual’s decision. Thus, an ethically correct decision is one that best maintains the rights of those affected by it. These rights include the right of free consent, the right to privacy, the right of freedom of conscience, the right of free speech, the right to due process, and the right to life and safety. The justice approach holds that moral decisions must be based on standards of equity, fairness, and impartiality. Three types of justice are of concern to managers. Distributive justice requires that different treatment of people not be based on arbitrary characteristics. Procedural justice requires that rules be administered fairly. Rules should be clearly stated and be consistently and impartially enforced. Compensatory justice argues that individuals should be compensated for the cost of their injuries by the party responsible. Individuals should not be held responsible for matters over which they have no control. The practical approach sidesteps debates about what is right, good, or just and bases decisions on prevailing standards of the profession and the larger society, taking the interests of all stakeholders into account. A decision would be considered ethical if it is one that would be considered acceptable by the professional community, one the manager would not hesitate to publish on the evening news, and one that a person would typically feel comfortable explaining to family and friends. 4. Describe the factors that shape a manager’s ethical decision making, including levels of moral development. Answer: Individual managers bring specific personality and behavioral traits to the job. Personal needs, family influence, and religious background all shape a manager’s value system. Specific personality characteristics, such as ego strength, self confidence, and a strong sense of independence may enable managers to make ethical decisions. Organizational values are vitally important and corporate culture can exert a powerful influence on behavior in organizations. Organizational culture provides ethical signals to employees. Heroes provide role models that can support ethical decision making. High ethical standards are affirmed through public awards and ceremonies. Myths and stories can reinforce heroic ethical behavior. Other aspects of the organization such as rules and policies, the reward system, the extent to which the company cares for its people, the selection system, emphasis on legal and professional standards, and leadership and decision processes also impact on ethical decision making. At the preconventional level, a manager is concerned with external rewards and punishment and obeys authority to avoid detrimental personal consequences. These managers are likely to be autocratic or coercive. At the conventional level, managers learn to conform to expectations of good behavior as defined by colleagues, friends, family, and society. These managers are interested in interpersonal relationships and cooperation. At the postconventional level (also called principled level), individuals develop an internal set of standards and values and will disobey rules or laws that violate these principles. Internal values are more important than expectations of significant others. These managers typically use a transformative or servant leadership style. 5. Identify important stakeholders for an organization and discuss how managers balance the interests of various stakeholders. Answer: A stakeholder is any group within or outside the organization that has a stake in the organization’s performance. Each stakeholder has a different criterion of responsiveness because it has a different interest in the organization. Important stakeholders include investors, employees, customers, owners, creditors, suppliers, and investors. When any primary stakeholder group becomes seriously dissatisfied, the organization’s viability is threatened. 6. Explain the philosophy of sustainability and why organizations are embracing it. Answer: Sustainability refers to economic development that generates wealth and meets the needs of the current generation while saving the environment so future generations can meet their needs as well. With a philosophy of sustainability, managers weave environmental and social concerns into every strategic decision, revise policies and procedures to support sustainability efforts, and measure their progress toward sustainability goals. Organizations are embracing the philosophy of sustainability because they are finding that they can create wealth at the same time they are preserving natural resources. A good example of this is when companies develop innovative ways to sell waste from production processes that they once paid to have hauled away. 7. Describe what is meant by “the triple bottom line.” Answer: The triple bottom line refers to measuring an organization’s social performance, its environmental performance, and its financial performance. This is sometimes called the three Ps: People, Planet, and Profit. The People part of the triple bottom line looks at how socially responsible the organization is in terms of fair labor practices, diversity, supplier relationships, treatment of employees, contributions to the community, and so forth. The Planet aspect measures the organization’s commitment to environmental sustainability. The third P looks at the organization’s profit, the financial bottom line. Based on the principle that what you measure is what you strive for and achieve, using a triple bottom line approach to measuring performance ensures that managers take social and environmental factors into account rather than blindly pursuing profit, no matter the cost to society and the natural environment. 8. Define corporate social responsibility and how to evaluate it along economic, legal, ethical, and discretionary criteria. Answer: Social responsibility is management’s obligation to make choices and take actions that will contribute to the welfare and interests of society as well as to the welfare and interests of the organization. It means being a good corporate citizen. Social responsibility can be evaluated along four criteria. Economic. The economic responsibility of a business is to produce the goods and services that society wants and to maximize profits for its owners and shareholders. The purely profit maximizing view is no longer considered an adequate criterion of performance in Canada, the United States, and Europe. Legal. Legal responsibility defines what society deems acceptable with respect to appropriate corporate behavior. Businesses are expected to fulfill their economic goals within the legal framework. Ethical. Ethical responsibility includes behaviors that are not necessarily codified into law and may not serve the corporation’s direct economic interests. Unethical behavior occurs when decisions enable an individual, group, or company to gain at the expense of society. Discretionary. Discretionary responsibility is purely voluntary and guided by a company’s desire to make social contributions not mandated by economics, law, or ethics. Discretionary activities include philanthropic contributions that offer no direct financial payback to the company and are not expected. 9. Discuss how ethical organizations are created through ethical leadership and organizational structures and systems. Answer: Management is responsible for creating and sustaining conditions in which people are likely to behave themselves. Managers must take active steps to ensure that the company stays on an ethical footing. Management methods for helping organizations be more responsive include leadership by example, codes of ethics, ethical structures, and supporting whistle blowers. LECTURE OUTLINE NEW MANAGER SELF-TEST: WILL YOU BE A COURAGEOUS MANAGER? Many managers slide into unethical or illegal behavior simply because they don’t have the courage to stand up and do the right thing. It probably won’t happen right away, but soon enough students will be confronted with situations that will test the strength of their moral beliefs or sense of justice. This exercise helps students gauge the extent of their courage in group situations, which often reflects a person’s level of moral development. I. WHAT IS MANAGERIAL ETHICS? Exhibit 4.1 Ethics is the code of moral principles and values that govern the behaviors of a person or group with respect to what is right or wrong. Ethics sets standards as to what is good or bad in conduct and decision making. Ethics deals with internal values that are a part of corporate culture and shape decisions concerning social responsibility with respect to the external environment. Human behavior falls into three categories. • Codified law. Values and standards are written into the legal system and are enforceable in the courts. Lawmakers have ruled that people and corporations must behave in a certain way such as obtaining licenses for cars or paying taxes. • Free choice. Free choice pertains to behavior about which law has no say and for which an individual or organization enjoys complete freedom. • Ethics. Ethics lies between the domains of codified law and free choice. It has no specific laws, but does have standards of conduct that are based on shared principles and values about moral conduct that guide an individual or company. Because ethical standards are not codified, disagreements and dilemmas about proper behavior often occur. II. ETHICAL MANAGEMENT TODAY Exhibit 4.2 The pervasiveness of ethical lapses during the first decade of this century has been astounding. Although public confidence in business managers in particular is at an all-time low, politics, sports, and non-profit organizations have also been affected. In the business world, the names of once-revered corporations have become synonymous with greed, deceit, irresponsibility, and lack of moral conscience. Managers carry a tremendous responsibility for setting the ethical climate in an organization and can act as role models for others. The widespread ethical lapses of the past decade have put managers under increasing scrutiny. One hot-button ethical issue concerns excessive executive compensation. III. ETHICAL DILEMMAS: WHAT WOULD YOU DO? An ethical dilemma arises in a situation concerning right or wrong when values are in conflict and right and wrong cannot be clearly defined. The individual who must make an ethical choice in an organization is the moral agent. Discussion Question #1: Is it reasonable to expect that managers can measure their social and environmental performance on the same level as they measure their financial performance with a triple bottom line? Discuss. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ IV. CRITERIA FOR ETHICAL DECISION MAKING Managers faced with tough ethical choices often benefit from a normative strategy based on norms and values to guide their decision making. Normative ethics is based on norms and values. Five approaches are relevant for managers in making ethical decisions. A. Utilitarian Approach 1. The utilitarian approach holds that moral behavior produces the greatest good for the greatest number. The decision maker is expected to consider the effect of each decision alternative on all parties and select the one that will optimize satisfaction for the greatest number of people. B. Individualism Approach 1. The individualism approach contends that acts are moral when they promote the individual’s best long term interests. Individualism is believed to lead to honesty and integrity because that works best in the long run. Because individualism is easily misinterpreted to support immediate self-gain, it is not popular in the highly organized and group-oriented society of today. C. Moral Rights Approach 1. The moral rights approach asserts that human beings have fundamental rights that cannot be taken away by an individual’s decision. An ethically correct decision is one that best maintains the rights of those people affected by it. To make ethical decisions, managers need to avoid interfering with the fundamental rights of others, such as the right to privacy, the right of free consent, or the right to freedom of speech. D. Justice Approach 1. The justice approach holds that moral decisions must be based on standards of equity, fairness, and impartiality. Three types of justice are of concern to managers. a. Distributive justice requires that different treatment of people not be based on arbitrary characteristics. Men and women should not receive different salaries if they are performing the same job; however, people who differ in a substantive way can be treated differently. b. Procedural justice requires that rules be administered fairly. Rules should be clearly stated and be consistently and impartially enforced. c. Compensatory justice argues that the party responsible should compensate individuals for the cost of their injuries. Individuals should not be held responsible for matters over which they have no control. E. Practical Approach 1. The practical approach sidesteps debates about what is right, good, or just and bases decisions on prevailing standards of the profession and the larger society, taking the interests of all stakeholders into account. A decision would be considered ethical if it is one that would be considered acceptable by the professional community, one the manager would not hesitate to publish on the evening news, and one that a person would typically feel comfortable explaining to family and friends. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ THE INDIVIDUAL MANAGER AND ETHICAL CHOICES Ethical or unethical business practices usually reflect the values, attitudes, beliefs, and behavior patterns of the organizational culture. Ethics is as much an organizational issue as a personal issue. A. The Manager Exhibit 4.3 1. The manager brings specific personality and behavioral traits to the job. Personal needs, family influence, and religious background all shape a manager’s value system. 2. Personality characteristics, such as ego strength, self-confidence, and a strong sense of independence may enable managers to make ethical decisions. The manager’s level or stage of moral development is an important personal trait in making ethical decisions. a. Preconventional level. At this level a manager is concerned with external rewards and punishment and obeys authority to avoid detrimental personal consequences. These managers are likely to be autocratic or coercive. b. Conventional level. At this level managers learn to conform to expectations of good behavior as defined by colleagues, friends, family, and society. These managers are interested in interpersonal relationships and cooperation. c. Postconventional level (also called principled level). At this level individuals develop an internal set of standards and values and will disobey rules or laws that violate these principles. Internal values are more important than expectations of significant others. These managers typically use a transformative or servant leadership style. 3. The great majority of managers operate at the conventional level. A few managers have not advanced beyond the preconventional level. Only about 20 percent of American adults reach the principled level of moral development. Discussion Question #3: Imagine yourself in a situation of being encouraged by colleagues to inflate your expense account. What factors do you think would influence your choice? Explain. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ NEW MANAGER SELF-TEST: SERVANT LEADERSHIP Leaders differ in how they view human nature and the tactics they use to get things done through others. This exercise helps students understand their orientation toward self-versus others. High scores suggest self-orientation; low scores suggest other-orientation. VI. WHAT IS CORPORATE SOCIAL RESPONSIBILITY? Social responsibility means distinguishing right from wrong. It means being a good corporate citizen. Corporate social responsibility (CSR) is management’s obligation to make choices and take actions that will contribute to the welfare and interests of society as well as the organization. Social responsibility can be a difficult concept to grasp because people have different beliefs as to which actions improve society’s welfare. Social responsibility covers a wide range of issues that are ambiguous with regard to what is right or wrong. A. Organizational Stakeholders Exhibit 4.4 1. Enlightened organizations view the internal and external environment as having a variety of stakeholders. A stakeholder is any group within or outside the organization that has a stake in the organization’s performance. Each stakeholder has a different criterion of responsiveness because it has a different interest in the organization. 2. There is a growing interest in stakeholder mapping, a technique that provides a systematic way to identify the expectations, needs, importance, and relative power of various stakeholders. 3. The organization’s performance affects stakeholders. Socially responsible organizations try to pay attention to all stakeholders who are affected by their actions. 4. Stakeholders can also have a tremendous effect on the organization’s performance and success. Today, special interest groups continue to be one of the largest stakeholder concerns that companies face. Environmental responsibility has become a primary issue as both business and the public acknowledge the damage that has been done to our natural environment. Discussion Question #2: What various stakeholder groups did oil giant BP have to respond to in regard to the massive 2010 oil spill in the Gulf of Mexico? From what you know about the BP oil spill, how would you evaluate BP executives’ behavior in terms of corporate social responsibility? Discussion Question #4: Is it socially responsible for organizations to undertake political activity or join with others in a trade association to influence the government? Discuss. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ B. The Green Movement 1. Going green has become a new business imperative, driven by shifting social attitudes, new governmental policies, climate changes, and the information technology that quickly spreads news of a corporation’s negative impact on the environment. Energy is an area of ongoing concern for the green movement. C. Sustainability and the Triple Bottom Line 1. Many corporations are embracing an idea called sustainability or sustainable development. Sustainability refers to economic development that generates wealth and meets the needs of the current generation while saving the environment so future generations can meet their needs as well. With a philosophy of sustainability, managers weave environmental and social concerns into every strategic decision, revise policies and procedures to support sustainability efforts, and measure their progress toward sustainability goals. 2. The triple bottom line refers to measuring an organization’s social performance, its environmental performance, and its financial performance. This is sometimes called the three Ps: People, Planet, and Profit. a. The first P, People, looks at socially responsible aspects including fair labor practices, diversity, supplier relations, treatment of employees, and contributions to community. b. The second P, Planet, measures aspects such as the organization’s commitment to environmental sustainability. c. The third P, Profit, looks at the organization’s success in making sustainable profits, the financial bottom line. Based on the principles that what you measure is what you strive for and achieve, using a triple bottom line approach to measuring performance ensures that managers take social and environmental factors into account rather than blindly pursuing profit, no matter the cost to society and the natural environment. VII. EVALUATING CORPORATE SOCIAL RESPONSIBILITY Exhibit 4.5 A. Economic Responsibility 1. The first criterion of social responsibility is economic responsibility. The business institution is the basic economic unit of society. Its responsibility is to produce the goods and services that society wants and to maximize profits for its owners and shareholders. 2. Economic responsibility carried to extreme is called the profit-maximizing view, advocated by Nobel economist Milton Friedman. This view argues that the corporation’s sole mission is to increase its profits so long as it stays within the rules. This approach means that economic benefit is the only social responsibility and can lead companies into trouble. B. Legal Responsibility 1. Legal responsibility defines what society deems important with respect to appropriate corporate behavior. Businesses are expected to fulfill their economic goals within the law. Legal requirements are imposed by local governments, state legislators, and federal regulatory agencies. C. Ethical Responsibility 1. Ethical responsibility includes behaviors that are not necessarily codified into law and may not serve the firm’s direct economic interests. To be ethical, decision makers should act with equity, fairness, and impartiality, respect the rights of individuals, and treat individuals differently only when relevant to the organization’s goals. Unethical behavior occurs when decisions enable an individual or company to gain at the expense of society. Discussion Question #7: Do you believe it is ethical for organizational managers to try to get access to and scrutinize the Facebook pages of employees or job applicants? Discuss. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ D. Discretionary Responsibility 1. Discretionary responsibility is voluntary and guided by a company’s desire to make social contributions not mandated by economics, law, or ethics. Discretionary activities include philanthropic contributions that offer no direct financial payback to the company and are not expected. Discretionary responsibility is the highest criterion of social responsibility. Discussion Question #9: The technique of stakeholder mapping lets managers classify which stakeholders they will consider more important and will invest more time to satisfy. Is it appropriate for management to define some stakeholders as more important than others? Should all stakeholders be considered equal? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ VIII. MANAGING COMPANY ETHICS AND SOCIAL RESPONSIBILITY Exhibit 4.6 A. Code of Ethics 1. A code of ethics is a formal statement of the company’s values concerning ethics and social issues. It communicates to employees what the company stands for. Codes of ethics tend to exist in two types. a. Principle based statements are designed to affect corporate culture. They define fundamental values, company responsibilities, quality of products, and treatment of employees. b. Policy based statements outline the procedures to be used in specific ethical situations such as marketing, conflicts of interest, observance of laws, proprietary information, political gifts, and equal opportunities. Discussion Question #8: Which do you think would be more effective for shaping long-term ethical behavior in an organization: a written code of ethics combined with ethics training or strong ethical leadership? Which would have more impact on you? Why? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ B. Ethical Structures 1. Ethical structures represent the various systems, positions, and programs a company can undertake to implement ethical behavior. a. An ethics committee is a group of executives appointed to oversee the organization’s ethics by ruling on questionable issues and disciplining violators. b. A chief ethics officer is a company executive who oversees all aspects of ethics and legal compliance, including establishing and broadly communicating standards, ethical training, dealing with exceptions or problems, and advising senior managers in the ethical and compliance aspects of decisions. C. Whistle Blowing a. Whistle-blowing is the disclosure by an employee of illegal, immoral, or illegitimate practices by the organization. Some firms have instituted innovative programs and confidential hotlines to encourage and support internal whistle-blowing. Whistle-blowers are often considered as disgruntled employees, but companies must view whistle blowing as a benefit to the company and make dedicated efforts to protect whistle-blowers for this practice to be an effective ethical safeguard. IX. The Business Case for Ethics and Social Responsibility 1. Most managers now realize that paying attention to ethics and social responsibility is as much of a business issue as paying attention to costs, profits, and growth. In today’s information age, bad behavior is increasingly hard to hide, and “out behaving the competition” can provide a competitive advantage. 2. Numerous studies have found a positive relationship between ethical and socially responsible behavior and firm financial performance. 3. Social responsibility efforts can be targeted in ways that also benefit the business. Doing so makes good business sense at the same time it builds the image of the company as a good corporate citizen. Instructor Manual for Understanding Management Dorothy Marcic, Richard L. Daft 9781285421230, 9781305313347
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