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Review trait theory research, and discuss the idea of one best style of leadership using the Ohio State studies and the Leadership Grid as points of reference.
Explain, according to Fiedler’s contingency model, how leadership style interacts with situational control.
Discuss House’s revised path-goal theory and Hersey and Blanchard’s situational leadership theory.
Describe the difference between transactional and transformational leadership and discuss how transformational leadership transforms followers and work groups.
Explain the leader-member exchange (LMX) model of leadership and the concept of shared leadership.
Review the principles of servant leadership and discuss Level 5 leadership
Leadership
Learning Objectives
Chapter Fourteen
Leaders Versus Managers
Leaders Innovate Develop Inspire Long-term view Ask what and why Originate Challenge the Status
Quo Do the right thing
Managers Administer Maintain Control Short-term view Ask how and when Initiate Accept the status quo Do things right
Leader trait: personal characteristics that differentiate leaders from followers.
Leadership prototype: mental representations of the traits and behaviors possessed by leaders.
14-1
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Trait Theory
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Historic Vs. Contemporary Trait Theories of Leadership
Stogdill’s and Mann’s findings
Intelligence Dominance Self-confidence Level of energy and
activity Task-relevant knowledge
Contemporary Trait Research
People tend to perceive that someone is a leader when he or she exhibits traits associated with intelligence, masculinity, and dominance
People want their leaders to be credible
Credible leaders are honest, forward-looking, inspiring and competent
Men and women were seen as displaying more task and social leadership, respectively
Women used a more democratic or participative style than men and men used a more autocratic and directive style than women
Men and women were equally assertive
Women executives, when rated by their peers, managers, and direct reports, scored higher than their male counterparts on a variety of effectiveness criteria
Men displayed more laissez-faire leadership
14-2
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Gender and Leadership
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The Ohio State Studies: identified two critical dimensions of leader behavior. Consideration: creating mutual respect and
trust with followers. Initiating structure: organizing and defining
what group members should be doing.
14-3
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Behavioral Styles Theory
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University of Michigan Studies identified two leadership styles that were similar
to the Ohio State studies--one style was employee centered and the other was job centered
The Leadership Grid © represents five leadership styles found by
crossing concern for production and concern for people
Impoverished management Country club management Authority-compliance Middle-of-the-road management Team management
14-4
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Behavioral Styles Theory (Cont.)
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1. Determine what needs to be done.
2. Determine the right thing to do for the welfare of the entire enterprise or organization.
3. Develop action plans that specify desired results, probably restraints, future revisions, check-in points, and implications for how one should spend his or her time.
4. Take responsibility for decisions.
5. Take responsibility for communicating action plans and give people the information they need to get the job done.
14-5
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Skills & Best Practices: Peter Drucker’s Tips for Improving Leadership Effectiveness
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6. Focus on opportunities rather than problems. Do not sweep problems under the rug, and treat changes as an opportunity rather than a threat.
7. Run productive meetings. Different types of meetings require different forms of preparation and different results. Prepare accordingly.
8. Think and say “we” rather than “I”. Consider the needs and opportunities of the organization before thinking of your own opportunities and needs.
9. Listen first, speak last.
14-6
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Skills & Best Practices: Peter Drucker’s Tips for Improving Leadership Effectiveness (Cont.)
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Situational theories: propose that leader styles should match the situation at hand.
Fiedler’s Contingency Model The performance of a leader depends on
two interrelated factors: The degree to which the situation gives the
leader control and influence The leader’s basic motivation
14-7
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Situational Theories
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14-8 Figure 14-1
Representation of Fiedler’s Contingency Model
McGraw-Hill
SituationalControl
High ControlSituations
Moderate Control Situations
Low Control Situations
Leader-memberrelations
Task Structure
Position Power
Good Good Good
High High High
Strong Weak Strong
Good Poor Poor
Low High High
Weak Strong Strong
Poor Poor
Low Low
Strong Weak
Situation I II III IV V VI VII VIII
Optimal Leadership
Style
Task Motivated Leadership
Relationship Motivated
Leadership
Task Motivated
Leadership
14-11 Figure 14-3
SituationalLeadership Model
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SellingS2
Explain decisions and provide opportunity for
clarification
ParticipatingS3
Share ideas andfacilitate in
decision making
Follower-Directed Leader-DirectedFollower-Directed Leader-Directed
LowLow
LowLow
HighHigh
HighHigh
Leader BehaviorLeader Behavior
Task BehaviorTask Behavior
Follower ReadinessFollower ReadinessHighHigh Moderate Moderate Low Low R4 R4 R3 R3 R2 R2 R1R1
Rel
ati
on
ship
Beh
avio
rR
ela
tio
nsh
ip B
ehav
ior
(su
pp
ort
ive
beh
avi
or)
(su
pp
ort
ive
beh
avi
or)
DelegatingS4
Turn overresponsibility for
decisions andimplementation
TellingS1
Provide specificinstructions and closelysupervise performance
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Transactional leadership: focuses on the clarifying employees’ roles and providing rewards contingent on performance.
14-12
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Transactional Leadership
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Transformational leaders: transforms employees to pursue organizational goals over self-interests.
14-13
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Transformational (Charismatic) Leadership
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14-14 Figure 14-4
A Transformational Model of Leadership
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Individual andOrganizationalCharacteristics
Leaderbehavior
Effects onfollowers andwork groups
Outcomes
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Charismatic leadership is most likely to be effective when The situation offers opportunities for “moral”
involvement Performance goals cannot be easily established or
measured Extrinsic rewards cannot be clearly linked to
individual performance There are few situational cues or constraints to guide
behavior Exceptional effort, behavior, sacrifices, and
performance are required of both leader and follower
1. Leadership development is a key business strategy
2. Leadership excellence is a definable set of standards
3. People are responsible for their own development
4. Johnson & Johnson executives are accountable for developing leaders
5. Leaders are developed primarily on the job
6. People are an asset of the corporation
7. Human resources is vital to the success of leadership development
14-15
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Skills & Best Practices: Johnson & Johnson’s Seven Guiding Principles
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This model is based on the idea that one of two distinct types of leader-member exchange relationships evolve, and these exchanges are related to important work outcomes. in-group exchange: a partnership characterized by
mutual trust, respect and liking out-group exchange: a partnership characterized by
a lack of mutual trust, respect and liking Research supports this model
14-16
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The Leader-Member Exchange (LMX) Model of Leadership
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1. Stay focused on your department’s goals and remain positive about your ability to accomplish your goals.
2. Do not fall prey to feeling powerless and empower yourself to get things done.
3. Exercise the power you have by focusing on circumstances you can control and avoid dwelling on circumstances you cannot control.
4. Work on improving your relationship with your manager.
5. Use an authentic, respectful, and assertive approach to resolve differences with your manager.
14-17
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Tips for Improving the Quality of LMX
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Shared leadership: simultaneous, ongoing, mutual influence process in which people share responsibility for leading.
14-18
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Shared Leadership
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14-19 Table 14-3
Key Questions to Consider WhenDeveloping Shared Leadership
What task characteristics call for shared leadership?
What is the role of the leader in developing shared leadership?
How can organizational systems facilitate the development of shared leadership?
What vertical and shared leadership behaviors are important to team outcomes?
What are the ongoing responsibilities of the vertical leader?
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Describe the four characteristics common to all organizations.
Explain the difference between closed and open systems, and contrast the military/mechanical, biological, and cognitive systems metaphors for organizations.
Describe the four generic organizational effectiveness criteria.
Explain what the contingency approach to organizational design involves.
Discuss Burns and Stalker’s findings regarding mechanistic and organic organizations.
Describe new-style and old-style organizations, and list the keys to managing geographically-dispersed employees in virtual organizations.
Designing Effective Organizations
Learning Objectives
Chapter Fifteen
Organization: system of consciously coordinated activities of two or more people. Coordination of effort Common goal Division of labor Hierarchy of authority
Unity of command principle: each employee should report to a single manager.
Organization chart: boxes-and-lines illustration showing chain of formal authority and division of labor.
15-1
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What is an Organization?
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15-2 Figure 15-1
Sample Organization Chart
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15-2 Figure 15-1
Sample Organization Chart for a Hospital
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Board of Directors
Chief ExecutiveOfficer
StrategicPlanningAdvisor
LegalCounsel
PresidentCost-
ContainmentStaff
ExecutiveAdministrative
Director
ExecutiveMedicalDirector
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15-3 Figure 15-1
Sample Organization Chart for a Hospital (Cont.)
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ExecutiveAdministrative
Staff
ExecutiveMedicalDirector
Dir.Of
HumanResources
Dir.Of
Admissions
Dir.Of
Accounting
Dir.Of
Nutrition& Food
Services
Dir.Of
Patient& PublicRelations
Dir.X-Ray &
LabServices
Dir.Of
Surgery
Dir.Of
Pharmacy
ChiefPhysician
Dir.Of
Out-Patient
Services
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Span of control: the number of people reporting directly to a given manager.
Staff personnel: provide research, advice, and recommendations to line managers.
Line Managers: have authority to make organizational decisions.
15-4
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Span of Control
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15-5
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Needed: Open-System Thinking
Open system: “Depends on constant interaction with the surrounding environment for survival.” (For example, the human body.)
Closed System: “A self-sufficient entity, closed to the surrounding environment.” (For example, a battery-powered clock.)
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Bureaucracy: Max Weber’s idea of the most rationally efficient form of organization.
Weber’s Bureaucracy: four factors should make bureaucracies the epitome of efficiency Division of labor A hierarchy of authority A framework of rules Administrative personality
15-6
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Organizations as Military/Mechanical Bureaucracies
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15-7 Figure 15-2
The Organization as an Open System: The Biological Metaphor
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Goals and Values Subsystem
Technical Subsystems
Psychological Subsystem
Structural Subsystem
Managerial Subsystem
Feedback
Inputs Outputs
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“No single approach to the evaluation of effectiveness is appropriate to all circumstances or for all organization types.” Goal accomplishment Resource acquisition Internal processes Strategic constituencies satisfaction
Strategic constituency: any group of people with a stake in the organization’s operation or success.
15-8
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Generic Effectiveness Criteria
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15-9 Figure 15-3
Four Dimensions of Organizational Effectiveness
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Goal Accomplishment
Resource Acquisition
Strategic Constituencies
Satisfaction
Internal Processes
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Contingency approach to organization design: creating an effective organization-environment fit.
15-10
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The Contingency Approach to DesigningOrganizations
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15-11
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Mechanistic versus Organic Organizations
Mechanistic organizations: “Rigid bureaucracies with strict rules, narrowly defined tasks, and top-down communication.” (Tend toward centralized decision-making.)
Organic organizations: “Flexible networks of multitalented individuals who perform a variety of tasks.” (Tend toward decentralized decision making.)
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15-12 Table 15-1
New-Style versus Old-Style Organizations
Job requirements oriented
Hierarchical
Command/control oriented
Individual oriented
Job oriented
Functional
Large
Local
Information is scarce
Stable
Old
Customer oriented
Lateral/networked
Involvement oriented
Team oriented
Skills oriented
Product/customer oriented
Small and large
Global
Information rich
Dynamics learning
New
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Discuss the external and internal forces that can create the need for organizational change.
Describe Lewin’s change model and the systems model of change.
Explain Kotter’s eight steps for leading organizational change.
Review the 10 reasons employees resist change. Identify alternative strategies for overcoming
resistance to change. Discuss the process organizations use to build their
learning capabilities.
Managing Change and Organizational Learning
Learning Objectives
Chapter Sixteen
External forces for change: originate outside the organization.
16-1
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External Forces of Change
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Demographic characteristics: The workforce is more diverse there is a business imperative to effectively manage
diversity Technological advancements:
organizations are increasingly using technology as a means to improve productivity and market competitiveness
Market changes: the emergence of a global economy is forcing companies to
be more competitive and to do business differently organizations are forging new partnerships and alliances
aimed at creating new products and services Social and political pressures:
society and its legislative bodies can put pressure onorganizations to change the way they do business--thetobacco industry is a good example
16-2
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External Forces of Change (Cont.)
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Internal forces for change: originate inside the organization.
16-3
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Internal Forces of Change
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16-4
Lewin’s Change Model
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Unfreezing Creates the motivation to change Encourages the replacement of old behaviors and attitudes with
those desired by management Entails devising ways to reduce barriers to change Creates psychological safety
Changing Provides new information, new behavioral models, or new ways of
looking at things Helps employees learn new concepts or points of view Role models, mentors, experts, benchmarking results, and
training are useful mechanisms to facilitate change
Refreezing Helps employees integrate the changed behavior or attitude into their
normal way of doing things Positive reinforcement is used to reinforce the desired change Coaching and modeling help reinforce the stability of change
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16-5 Figure 16-1
A Systems Model of Change
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Target Elements of Change
OrganizingArrangements
GoalsSocial Factors
Methods
People
Internal* Strengths
* WeaknessesExternal
* Opportunities* Threats
* OrganizationalLevel
* Department/group level* Individual
level
Inputs Outputs
Str
ate
gy
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16-6 Table 16-1
Steps to Leading Organizational Change
Create and implement a communication strategy that consistently communicates the new vision and strategic plan.
Communicate the change vision
Create a vision and strategic plan to guide the change process.
Develop a vision and strategy
Create a cross-functional cross-level group of people with enough power to lead the change.
Create the guiding coalition
Unfreeze the organization by creating a compelling reason for why change is needed.
Establish a sense of urgency
DescriptionStep
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16-7 Table 16-1
Steps to Leading Organizational Change (Cont.)
Plan for and create short-term “wins” or improvements. Recognize and reward people who contribute to the wins.
Generate short-term wins
Eliminate barriers to change and use target elements of change to transform the organization. Encourage risk taking and creative problem solving.
Empower broad based action
DescriptionStep
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16-8 Table 16-1
Steps to Leading Organizational Change (Cont.)
The guiding coalition uses credibility from short-term wins to create more change. Additional people are brought into the change process as change cascades throughout the organization. Attempts are made to reinvigorate the change process.
Consolidate gains and produce more change
Reinforce the changes by highlighting connections between new behaviors and processes and organizational success. Develop methods to ensure leadership development and succession.
Anchor new approaches in the culture
DescriptionStep
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Organization Development: a set of techniques or tools that are used to implement organizational change. OD Involves Profound Change
Not just a Band-Aid OD is Value Loaded
i.e. cooperation over conflict Customer centered
OD is a Diagnosis/Prescription Cycle OD is Process-Oriented
Form and not content
16-9
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Characteristics of Organization Development
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Survey feedback Process consultation Team building Intergroup development Technostructural activities
16-10 Table 16-2
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Some OD Interventions for Implementing Change
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A meta-analysis of 18 studies indicated that employee satisfaction with change was higher when top management was highly committed to the change effort.
A meta-analysis of 52 studies provided support for the systems model of organizational change.
A meta-analysis of 126 studies demonstrated that multifaceted interventions using more than one OD technique were more effective in changing job attitudes and work attitudes than interventions that relied on only one human-process or technostructural approach.
A survey of 1,700 firms from China, Japan, the United States, and Europe revealed that 1) US and European firms used OD interventions more frequently than firms from China and Japan and 2) some OD interventions are culture free and some are not.
1. An individual’s predisposition toward change
2. Surprise and fear of the unknown
3. Climate of mistrust
4. Fear of failure
5. Loss of status and/or job security
16-11
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Why People Resist Change in the Workplace
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6. Peer pressure
7. Disruption of cultural traditions and/or group relationships
8. Personality conflicts
9. Lack of tact and/or poor timing
10. Nonreinforcing reward systems
16-12
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Why People Resist Change in the Workplace (Cont.)
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16-13 Table 16-3
Six Strategies for OvercomingResistance to Change
Can be very time consuming if lots of people are involved
Once persuaded people will often help with the implementation of change
Where there is a lack of information or inaccurate information and analysis
Education
Drawbacks
Advantages
Commonly used in situations
Can be very time consuming if participators design an inappropriate change
People who participate will be committed to implementing change, and any relevant information they have will be integrated into the change plan
Where the initiators do not have all the information they need and where others have considerable power to resist
Participation & Involvement
Approach
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16-14 Table 16-3
Six Strategies for OvercomingResistance to Change (Cont.)
Can be time consuming, expensive, and still fail
No other approach works as well with adjustment problems
Where people are resisting because of adjustment problems
Facilitation & Support
Drawbacks
Advantages
Commonly used in situations
Can be too expensive in many cases if alerts others to negotiate for compliance
Sometimes it is a relatively easy way to avoid major resistance
No other approach works as well with adjustment problems
Negotiation & AgreementApproach
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16-15 Table 16-3
Six Strategies for OvercomingResistance to Change (Cont.)
Can lead to future problems if people feel manipulated
It can be a relatively quick and inexpensive solution to resistance problems
Where other tactics will not work or are too expensive
Manipulation & Cooperation
Drawbacks
Advantages
Commonly used in situations
Can be risky if it leaves people mad at the initiators
It is speedy and can overcome any kind of resistance
Where speed is essential and where the change initiators possess considerable power
Explicit & Implicit Coercion
Approach
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16-16 Figure 16-2
Building an Organization’s LearningCapability
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Facilitatingfactors
Learningmode
Culture and experience
Internalstructure and
processes
An organization’slearning capability
Customersatisfaction
Organizationalperformance
Salesgrowth
Profitability
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16-17 Table 16-4
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Factors that Facilitate OrganizationalLearning
1. Scanning imperative
2. Performance gap
3. Concern for measurement
4. Experimental mindset
5. Climate of openness
6. Continuous education
7. Operational variety
8. Multiple advocates
9. Involved leadership
10. Systems perspective
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16-18
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Six Dominant Modes of Learning
1. Analytical learning
2. Synthetic learning
3. Experimental learning
4. Interactive learning
5. Structural learning
6. Institutional learning
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16-19
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Skills & Best Practices: Characteristics of Teacher-Learners
1. Become actively involved in teaching and learning.
2. Demonstrate that you care about your coworkers’ well-being.
3. Develop relationships with as many people from different backgrounds, experience, and organizational positions as possible.
4. Reflect on what you have learned from a given situation.
5. Listen to others and try to learn something from social interactions with others.
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Implement continuous improvement programs Increase employee competence through training,
or buy talent from outside the organization Experiment with new ideas, processes, and
structural arrangements Go outside the organization to identify world-
class ideas and processes Instill systems thinking throughout the
organization
16-20
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Working to Generate Ideas with Impact
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Measuring and rewarding learning Increasing open and honest dialog among organizational
members Reducing conflict Increasing horizontal and vertical communications Promoting teamwork Rewarding risk taking and innovation Reducing the fear of failure Increasing the sharing of successes, failures, and best
practices across organizational members Reducing stressors and frustration Reducing internal competition Increasing cooperation and collaboration Creating a psychologically safe and comforting
environment
16-21
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Working to Generalize Ideas with Impact
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Part EightPricing Decisions
21. Pricing Concepts
22. Setting Prices
Chapter 21Pricing Decisions
1. THE NATURE OF PRICE
The value exchanged for products in a marketing exchange
Barter
www.barter.net
Terms Used To Describe Price
Tuition Premium Fine Fee Fare Toll Rent
Commission Dues Deposit Tips Interest Taxes
Pricing at New Balance
2. PRICE AND NONPRICE COMPETITION
• Price Competition Emphasizes price as an issue and matches or
beats competitors’ price To compete effectively- firm should be the low-
cost seller Standardized products Frequent price changes Provides flexibility
Competitor Pricing
Nonprice Competition
Emphasizes distinctive product:• Features• Quality• Promotion• Packaging• Other
Distinction must be effective
Demand CurveSection Home
A graph of the quantity expected to be sold at various prices if other factorsremain constant
Demand Curve, Price-Quantity Relationship and Increase in Demand
Figure 21.1
Demand Curve, Relationship Between Price and Quantity for Prestige Products
Figure 21.2
Demand FluctuationsSection Home
Changes in buyers’ needs
Variations in effectiveness of other marketing mix variables
Presence of substitutes
Environment factors
Spending Habits WomenFind Hardest To Break
0% 10% 20% 30% 40% 50%
USA Today Snapshots, “Spending Habits Women Find Hardest to Break,” Feb. 6. 2006, p. B1
Assessing Price Elasticity of DemandSection Home
A measure of the sensitivity of demand to changes in pricePrice Elasticity
Price Elasticity of
Demand= (% Change In Quantity Demanded)
% Change in Price
Elasticity Of DemandFigure 21.3
Price/Demand Elasticity
Elastic- change in price causes opposite change in total revenue• Price = Total Revenue • Price = Total Revenue
Inelastic- change in price causes same change in total revenue• Price = Total Revenue • Price = Total Revenue
Factors AffectingElasticity Of Demand
1) Availability of substitutes- for example, can consumers replace coffee with tea for caffeine?
2) Amount of income available to spend on good- with an increase in price but on a fixed consumer income will the consumer be forced to buy less?
3) Time- over time will a consumer cutback/quit smoking if price of cigarettes goes up?
Investopedia, “Economics Basics: Elasticity”, 2006, http://www.investopedia.com/university/economics/economics4.asp
4. DEMAND, COST, AND PROFIT RELATIONSHIPS
Marginal Analysis Fixed costs Average fixed cost Variable costs Average variable cost Total cost Average total cost Marginal cost (MC) Marginal revenue (MR)
Airlines, hotels, rental cars are dominated by which type of costs?
A) Fixed Costs
B) Variable Costs
Demand, Cost, and Profit Relationships Break-Even Analysis
Break-even point – point at which the costs of producing a product equal the revenue made from selling the product
Breakeven Point =
Fixed CostsPer-Unit Contribution to Fixed Costs
(Price – Variable Costs)
Determining TheBreak-Even Point
Figure 21.7
5. FACTORS THATAFFECT PRICING DECISIONS
Figure 21.8
Organizational AndMarketing Objectives Set prices consistent with organization’s
goals and mission Pricing decisions should be compatible with
firm’s marketing objectives
Costs
Why price below cost?
Match competition
Generate cash flow
Increase market share
Focus on cost reduction
Costs shared with others in product line
Pricing Decisions Influence Other Mix Variables
Demand
Distribution Intensive
Selective
Exclusive
Promotion Premium = little advertising, personal selling
Complex = potential buyer confusion
Customers
Interpretation - what price means or communicates
Response - closer to purchase and enhances satisfaction
Assessment of value
Reference Prices
Internal- developed in buyer’s mind through experience with product
External- comparison price provided by others
Duracell compare its quality to its direct competitors and justifies its
price. (Page 590)
Factors Affecting Consumer Acceptance Of Price Changes
1) Level of knowledge
2) Frequency of purchase
3) Brand loyalty
4) Perceptions of quality
Abstracts for the 1999 Leisure Research Symposium: Research Pathways in Leisure, Recreation and Tourism, “Generalizations Regarding
Participant Reaction To Reaction”, C. Bee, 1999, http://www.ahs.uwaterloo.ca/~garls/99abstracts/colleen.htm
Context Of Price-Buyers Characterized
Value-conscious - concerned about price and quality
Price-conscious - want to pay low prices
Prestige-sensitive - purchase products that signify prominence and status
Prestige Products (Page 592)
Advertisements that emphasize both quality and price are aimed at value-conscious customers
Reprinted with permission of Xerox Corporation
6. PRICING FOR BUSINESS MARKETS
Trade (Functional) Discount
A reduction off the list price by a producer to an intermediary for performing certain functions
Quantity Discount
Deduction from list price that reflect(s) the economies of purchasing in large quantities
Cumulative Non-Cumulative
Other Discounts
Cash Discounts Seasonal Discounts Allowance
Seasonal discounts allow sellers to maintain steadier results during the year
Reprinted with permission of Endless Fun Resorts
Geographic Pricing
F.O.B. Factory Destination
Uniform geographic (Postage-Stamp) Zone Base-point Freight Absorption
Stages For Establishing Prices
Figure 22.1
Pricing Objectives And Typical Actions To Achieve Them
High-quality products are usually priced to reflect the quality level
© 2005 BMW of North America, LLC, used with permission. The BMW name and logo are registered trademarks.
2. ASSESSMENT OF THE TARGET MARKET’S EVALUATION OF PRICE
Price depends on: Type of product Type of target market Purchase situation (e.g: price of concessions at
movies)
Examples Of PerceptionsOf Product Value
3. EVALUATION OF COMPETITORS’ PRICES
Regular function of marketing research Importance of customer view of pricing and
marketing mix variables Pricing above competition – creates an
exclusive image Pricing below competition – gains market share
Some prices are set higher than the competition to create an exclusive image
FIJI ® and all other trademarks, copyrights and intellectual property used herein are the property of FIJI Water Company LLC or its affiliates." Used by permission
4. Selection of a Basis of Pricing
Cost Demand Competition
Other
Cost Based Pricing
Cost-based pricing – a dollar amount to the cost of the product
Cost-plus pricing – adding a specified dollar amount to the seller’s costs
Markup – Adding to the cost of the product a predetermined percentage of that cost
Markup as % of Cost = Markup
Cost= 15 45
= 33.3 %
Markup as %
of Selling Price= Markup
Selling Price= 15 60
= 25.0 %
Demand-Based Pricing
Customers pay a higher price when demand for the product is strong and a lower price when demand is weak
Non-Price FactorsAffecting Demand
Product
Quality
Range
Nature- essential/luxury
Substitutes
Support
Service at point of sale & after
Advertising/promotion
Distribution Methods
Market
Degree of competition
Competitor action/reaction
General economic conditions
“Demand based pricing”, N. Coulthurst, 4/3/02, http://www.accaglobal.com/publications/studentaccountant/404831
Point-of-sale service affects demand
Reprinted with permission of Lowe's Companies
5. SELECTION OF A PRICING STRATEGY
A few years ago Coca Cola was experimenting with a vending machine in Australia that had a mechanism for charging different prices for soda depending on demand and temperature. As it got hotter and as more people purchased soda, the price went up. Do you think this is a good idea for Coca Cola?
Differential Pricing Techniques
Negotiated – final price established through buyer/seller bargaining Secondary-market – one price for primary target market and
different price for another Periodic discounting – systematic temporary price reduction Random discounting – unsystematic temporary
price reduction
Poll and comments on differential pricing at Amazon.com.
New-Product Pricing
Price skimming – charging the highest possible price that buyers who most desire the product will pay
Penetration pricing – prices set below competing brands to penetrate market and gain market share quickly
Product-Line Pricing Strategies
Captive – basic product in a product line low while related items higher
Premium – pricing highest-quality product higher than other models
Bait – low pricing on one item in line with intention of selling higher-priced item in the line
Price Lining – limited number of prices for selected lines of merchandise
For Premium Pricing,Engage The Emotions
1) Taking Care of Me - overstressed people want to pamper selves
2) Connect with Friends & Family - serious money to nurture family, romantic getaways, cosmetic surgery, etc.
3) Questing - consumers appreciate adventure
4) Individual Style - personal taste, differentiate self from others
iBizResources, “For Premium Pricing, engage the Emotions”, 2006,
http://www.familybusinessstrategies.com/articles4/041404f.html
Psychological Pricing Techniques (1)
Reference pricing – moderate pricing positioned next to a more expensive brand
Bundles pricing – packaging multiple products to be sold at a single price
Multiple-unit pricing – packaging together two or more identical products to be sold at a single price
Everyday low prices (EDLP) – pricing products low on a consistent basis
Psychological Pricing Techniques (2)
Odd-even pricing – ending the price with a certain number to influences buyers’ perceptions
Customary pricing – on the basis of tradition
Prestige pricing – setting prices at a high level to convey prestige
Consumers associate higher prices with higher quality
Reprinted with permission of Mannington Mills, Inc.
Sample Prestige Product Prices
Concept of Professional Pricing
Professional pricing carries the idea that professional have an ethical responsibility not to overcharge customers
Aetna Physician Pricing Transparency
Types OfPromotional Pricing
Price Leader- firm prices a few products below the usual markup, near cost, or below cost
Special-Event- advertised sales or price-cutting linked to a holiday, a season, or an event
Comparison Discounting- price is set at a specific level and simultaneously compares it with a high price
Special events are often seasonal and employ special-event pricing
Reprinted with permission of Montage, Inc.
6. DETERMINATION OF PRICE: PRICING STRATEGY
Yields a certain price- may need refining
Helps in setting final price
In absence of government price controls, remains flexible and convenient to adjust the marketing mix
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