BUILDING EFFECTIVE RGANIZATIONS B · Blinds to Go is a manufacturer and retailer of customized...

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1 BUILDING EFFECTIVE ORGANIZATIONS 1 B rent Schlender (2004) encouraged readers of Fortune to try the following thought experiment: “What are the most significant innovations of the past 50 years?” Answers that come to mind may include the following: the VCR, the personal computer, genetically engineered medicine, telecommunications satellites, fiber optics, cell phones, the Internet, the ATM, the microwave oven, the cardiac stent, and the bar code. All these innovations have added value to our lives. But Schlender noted that the innova- tion that has brought those “miracles” is the modern corporation—companies such as GE, Intel, Pfizer, Microsoft, IBM, GM, and so forth. He argued that “without them and their proven ability to marshal and allocate resources, organize and harness the ingenuity of people, respond to commercial and social environments, and meet the ever more elaborate challenge of producing and distributing goods and providing services on a global scale, we would have far less innovation—and less wealth” (p. 104). Companies that have become successful and leaders in their respective industries have mastered the art of managing people and resources. And that accomplishment, Schlender argued, makes the corporation “the latest jewel in the crown of human endeavour.” Jay R. Galbraith (1995), among the leading experts on organizational design and now at the Marshall School of Business, noted that organizational design decisions are critical to organizational effectiveness. That is, for companies to be truly effective requires that they be structurally aligned (see Figure 1.1). Misalignment among the building blocks of an organization is an impediment to organizational effectiveness. And designing effective organizations is a key task of the leader. Michael Watkins (2003), a Harvard Business School professor, wrote that “the higher you climb in organizations, the more you take on the role of organizational architect, creating the context within which others can achieve superior performance. No matter how charismatic you are, you cannot hope to do much if the key elements in your unit are fundamentally out of alignment. You will feel like you are pushing a boulder uphill every day” (p. 130). The focus in this module (and the seven cases) is on helping students to appreciate the importance of organizational design and to offer tools and ideas that will help them create effective units or organizations. 01-Seijts 4686.qxd 4/25/2005 11:13 AM Page 1

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1BUILDING EFFECTIVE

ORGANIZATIONS

1

Brent Schlender (2004) encouraged readers of Fortune to try the following thoughtexperiment: “What are the most significant innovations of the past 50 years?”Answers that come to mind may include the following: the VCR, the personal

computer, genetically engineered medicine, telecommunications satellites, fiber optics,cell phones, the Internet, the ATM, the microwave oven, the cardiac stent, and the bar code.All these innovations have added value to our lives. But Schlender noted that the innova-tion that has brought those “miracles” is the modern corporation—companies such as GE,Intel, Pfizer, Microsoft, IBM, GM, and so forth. He argued that “without them and theirproven ability to marshal and allocate resources, organize and harness the ingenuity ofpeople, respond to commercial and social environments, and meet the ever more elaboratechallenge of producing and distributing goods and providing services on a global scale, wewould have far less innovation—and less wealth” (p. 104). Companies that have becomesuccessful and leaders in their respective industries have mastered the art of managingpeople and resources. And that accomplishment, Schlender argued, makes the corporation“the latest jewel in the crown of human endeavour.”

Jay R. Galbraith (1995), among the leading experts on organizational design and nowat the Marshall School of Business, noted that organizational design decisions are criticalto organizational effectiveness. That is, for companies to be truly effective requires thatthey be structurally aligned (see Figure 1.1). Misalignment among the building blocks ofan organization is an impediment to organizational effectiveness. And designing effectiveorganizations is a key task of the leader.

Michael Watkins (2003), a Harvard Business School professor, wrote that “the higher youclimb in organizations, the more you take on the role of organizational architect, creating thecontext within which others can achieve superior performance. No matter how charismaticyou are, you cannot hope to do much if the key elements in your unit are fundamentally outof alignment. You will feel like you are pushing a boulder uphill every day” (p. 130).

The focus in this module (and the seven cases) is on helping students to appreciate theimportance of organizational design and to offer tools and ideas that will help them createeffective units or organizations.

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Leaders should start to think like organizational architects; their task is to createthe context in which individuals can achieve their potential. Figure 1.1 identifies the sixelements of organizational design.

• StrategyStrategy refers to the chosen direction for an organization, or an organization’s

“formula for winning.” Leaders should be concerned with the question, “What is our busi-ness, and how do we compete?” There are a multitude of strategies that organizations canadopt. Two examples include lowest-cost producer and differentiator. Organizationaldesign experts have argued that in thinking about (re)designing organizations, we shouldalways start with strategy. For example, how is our organization positioned vis-à-vis ourcompetitors? How can we add value? What are our goals?

• StructureStructure refers to the (in)formal system of task and reporting relationships that con-

trols, coordinates, and motivates employees so that they cooperate to achieve the organi-zation’s goals. In essence, the organizational structure is the anatomy of the organization;it includes such things as organizational charts, the informal networks that exist, the dif-ferentiation versus the specialization dilemma, organizational forms, and decision rights.

• SystemsSystems are the processes and policies that complement the structure. Examples of

systems include the ways data are shared, communication, human resources (HR) policies,and budgeting. The processes and policies that exist within an organization can be seen asthe physiology of the organization.

• Critical tasksLeaders have to define the jobs and role requirements that will help to achieve the orga-

nization’s goals. Critical tasks also include the technologies and tools that are required foremployees to complete their jobs or tasks.

2 • CASES IN ORGANIZATIONAL BEHAVIOR

People

Tasks Systems

Strategy

Culture Structure

Figure 1.1 Environment

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• PeopleWhat characteristics—or knowledge, skills, and abilities—are required to accomplish

tasks and achieve the organizations goals? This element of the organizational design modulecontains the human resources element—the pool of knowledge, skills, motivation, needs,values, and attitudes on the part of people.

• Organizational cultureCulture refers to the set of core values, norms, and assumptions that controls or guides

the way people and groups in an organization interact with each other and with people out-side the organization. Organizations often have different cultures, even those that operatein the same industries; the airline industry is a good example.

The various components of the organizational design model need to “fit” or be alignedwith one another. There are two kinds of fit:

• External fit (environment—strategy)External fit addresses the question, “To what extent is the strategy that the organization

adopted a reasonable response to environmental demands?” For example, all things con-sidered, does it make sense to enter new markets? The question of external fit is of interestto organizational strategists; it is not the topic of organizational behavior.

• Internal fit (among components of the organization)Internal fit addresses the following three questions: (a) Do the components of the model

of organizational design allow for the effective implementation of the strategy and to per-form the core activities of the organization? (b) Do the components of the model of orga-nizational design allow for the effective use of the organization’s resources? (c) Is therea consistent message? For example, are the components of the model of organizationaldesign reflective of the values underlying the organization?

Misalignment among the components will hurt organizational effectiveness. For example,a lack of fit among the various components can render even the best thought-out organi-zational strategies useless. John Kotter (1996) provided three common mistakes in thedesign of organizations.

There are at least four implications that the model of organizational design suggests. Itis important that leaders understand these implications. First, a change in strategy affectsall other components of the model. As one (or more) element(s) of the model change(s),so too must others to maintain fit or alignment. For example, the result of organizationalchange is more than just a refocus of strategies, business model, or goals. The entire designof the organization needs to be evaluated. Does the design still support the attainment ofthe organization’s goals?

Building Effective Organizations • 3

The vision is to: The organizational structure:

Give more responsibility to Layers of middle-level managers criticize andlower-level employees question employees

Increase productivity to Huge staff groups at corporate headquarters arebecome a low-cost producer expensive and constantly initiate costly programs

Speed everything up Independent, functional silos do not communicate and thus slow everything down

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Second, there is no “one size fits all” organizational design that all organizations shouldimplement. A “good” organizational design for a particular organization is one that hashigh external and internal fit. Companies within the same industries can have differentconfigurations and yet be highly successful.

Third, leaders have a tendency to focus on the “formal” systems to facilitate behavioralchange and make sure that tasks are performed. For example, rewards are often seen as adriver of behavioral change; in reality, they are a reinforcer. All components of the orga-nizational design model should be used as levers of behavioral change or individual per-formance. Too often, however, leaders focus on structure and rewards in isolation ofculture, tasks, coaching, communication, and so forth.

Fourth, culture affects, and is affected by, all components in the model of organizationaldesign. A big impediment to creating organizational change is culture. Culture changesslowly and must be managed in the long term through appropriate changes in strategy,structure, systems, tasks, and people.

The seven cases in this module deal with organizational design issues. For each of thesecases, I urge students to think about the following four challenges or questions:

• Analyze the design of the unit or organization. Is there a fit among the components of theorganizational design model?

• Identify specific areas for improving fit.• Design plans for correcting the lack of fit.• Think about how to best implement those plans.

Some students may feel that issues of organizational design are not relevant to thosewho are not in leadership positions. This is an incorrect assumption. For example, Watkins(2003) noted that even those people who do not have the authority to lead change so thatalignment is achieved should take an active interest in organizational design: “A thoroughunderstanding of organizational alignment can help you build credibility with people higherin the organization—and demonstrate your potential for more senior positions” (p. 131).

A brief description of each case is provided next, and specific assignment questions aresuggested.

TROJAN TECHNOLOGIES INC.: ORGANIZATIONAL

STRUCTURING FOR GROWTH AND CUSTOMER SERVICE

A group of Trojan Technologies Inc. employees grappled with the issue of how to struc-ture the business to effectively interact with their customers and manage the company’sdramatic growth. The London, Ontario, manufacturer of ultraviolet water disinfectingsystems believed that strong customer service was key to its recent and projected growthand had come to the realization that changes would have to be made to continue to achieveboth simultaneously. Recent problems encountered included difficulties being experiencedin training, career development, recruiting, customer service, and planned geographic andproduct line expansions. The group hoped to develop a structure to address these issues.The executive vice president was to lead the development and implementation of the newstructure. The transition to the new structure was to coincide with the new fiscal year.

Assignment Questions

• Consider the organization’s fundamentals in terms of products and customers. Describe theimportance of customer service and support, and consider the implications for the company’s

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functions that directly interact with customers, given the historical and projected growth in thecompany.

• Given the decision to structure the company for growth using business teams, how would youdecide the composition and delineation of the teams to achieve the growth and customerservice objectives of the company?

• What concerns do you have with changing company structure, and how would you addressthem to ensure the new structure was successful?

BLINDS TO GO: STAFFING RETAIL EXPANSION

Blinds to Go is a manufacturer and retailer of customized window coverings. The com-pany has been steadily expanding the number of stores across North America. In the year2000, the company was experiencing tremendous growth, with plans of adding 50 storesper year in Canada and the United States. The vice chairman is concerned with the lack ofstaff in some of these newly expanded stores. With plans of an initial public offering withinthe next 2 years, senior management must determine what changes need to be made to therecruitment strategy and how to develop staff that will help them achieve the company’sgrowth objectives.

Assignment Questions

• Why is Blinds to Go having difficulty attracting and retaining retail staff?• Are the elements of the organizational design at the retail store level “aligned” to facilitate the

retention of new employees? Why?• What recommendations would you give Blinds to Go to improve their staffing practices?

FIVE STAR BEER—PAY FOR PERFORMANCE

In June 1997, Tom McMullen (president of the Alliance Brewing Group) and Zhao HuiShen (general manager of Five Star Brewing Co. Ltd.) met to discuss the “pay for perfor-mance” systems that Zhao had been implementing at Five Star’s two breweries over thepast several months. The president needed to determine whether these systems were prop-erly designed to ensure that they are producing higher quality product at progressivelylower costs. If not, he needed to consider how he might suggest that these and othersystems be changed to achieve cost and quality objectives.

Assignment Questions

• Assess the organizational design of Five Star. In developing your assessment, consider thestrategic, structural, human resource, and task elements at play, particularly as they relate toZhao’s performance-based compensation systems.

• Analyze Zhao’s “bonus” compensation systems in detail. What likely impact will thesesystems have on quality at Five Star? What impact will they have on the sales force?

• As Tom McMullen, what suggestions would you give Mr. Zhao on how to improve thesesystems? What organizational design changes can realistically be made that will enhancequality and promote acceptance of the systems? How would you implement these changes?

• As an outside consultant to McMullen and Zhao, what would you recommend they do tochange Five Star’s culture from a “volume culture” to a “quality and profitability culture”?

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JINJIAN GARMENT FACTORY: MOTIVATING GO-SLOW WORKERS

The case illustrates a typical labor-intensive industry that is characterized by furiouscompetition and low employee loyalty. JinJian Garment Factory is a large clothing manu-facturer based in Shenzhen with distribution to Hong Kong and overseas. AlthoughShenzhen had become one of the most advanced garment manufacturing centers in theworld, managers in this industry still had few effective ways of dealing with the collectiveand deliberate slow pace of work by the employees, motivating workers, and resolvingthe problem between seasonal production requirements and retention of skilled workers.However, the owner and managing director of the company must determine the reasonsbehind the deliberately slow pace of the workers, the pros and cons of the pieceworksystem, and the methods he could adopt to motivate the workers effectively.

Assignment Questions

• Is the piecework system the most suitable wage system for factories in the Shenzhen garmentmanufacturing industry?

• What are the pros and cons of the piecework system?• What industry is most suitable for the piecework system?• How do you solve the dilemma facing the garment industry—that of seasonal production

requirements versus retaining skilled workers?• Do you agree with the severe quality punishment policy prevailing in the Shenzhen garment

industry? If not, is there a better way to deal with the quality problem?• If you were Mr. Lou, what would you do to increase worker productivity?

S-S TECHNOLOGIES INC. (COMPENSATION)

The owners of S-S Technologies Inc. were concerned with the rapid rate of growth fac-ing their company. The company had revenues of $6.3 million and employed 30 highlyskilled workers. These numbers were expected to double or triple in the next couple ofyears. To determine how well the company was structured to achieve its future goals, theyhired a consultant they had worked with successfully in the past. The consultant’s majorrole was to make recommendations as to the appropriate organizational design (culture,people, layers of management and administrative systems) in the event that the companygrew from 30 to 60 or even 120 employees. Among other issues, questions regardingcompensation were surfacing, and the owners wanted to address these questions as soonas possible.

Assignment Questions

• What are the key success factors (things that the company has to do well) for S-S Technologiesto attain high growth, high profits, and high morale?

• Describe S-S Technologies’ compensation plan. Does it contribute to attracting and keepingkey employees? What factors account for the highly skilled and committed workforce at S-STechnologies?

• How long can S-S Technologies continue with its existing compensation plan? Why?• What recommendations would you make to Brock and the consultant regarding (a) base pay,

(b) bonuses, and (c) “equity” for partners?• What process would you recommend to obtain acceptance of the new compensation plan?

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OP4.COM: A DYNAMIC CULTURE

OP4.com, an Internet portal for teenagers, had just celebrated 6 months of existence. Thecofounders of OP4.com knew that the internal culture had to reflect the identity of its Website, so they wanted to cultivate a savvy, hip staff. They used unique methods to evaluatea prospect’s fit into the company and some unorthodox training and feedback systems.With profitability being the next key step, they had to determine how to maintain this cul-ture through the next stage of growth—one that would result in the creation of businessunits and formal reporting structures for staff.

Assignment Questions

• How would you characterize the organizational culture at OP4.com?• How was this culture developed and maintained?• What role, if any, does OP4.com’s culture play in the organization’s effectiveness?• How should Ray Matthews and Stuart Saunders manage the transition to a new organizational

design?

WESTJET AIRLINES (A): THE CULTURE THAT BREEDS A PASSION TO SUCCEED

WestJet Airlines, a regional carrier that provides low-fare flights with exceptional service, hasachieved remarkable success. It has made profits ever since its inception since 1996. Its mar-ket capitalization has surpassed that of Canada’s national airline. The founders believe thatthe company’s culture is the key to continued success and that they cannot afford to misman-age it. “We’re in the hospitality business and our culture is everything to us,” stated Don Bell,cofounder and senior vice president of customer service. However, three potential threats toWestJet’s culture and its success emerged. First, industry watchers voiced concerns aboutWestJet’s future, arguing that an economic downturn could hurt the carrier dependent onleisure travelers. Second, its expansive growth could make it hard, if not impossible, to keepthe “fun” culture alive. In light of the tremendous growth, the founders must determine howWestJet could grow while maintaining its unique and vibrant culture. Third, other airlines hadnoticed the success of WestJet and were in the process of attempting to mimic its service.

Assignment Questions

• What is WestJet’s competitive advantage? What are the sources of that competitive advantage?• Is the culture at WestJet as important to the success of the organization as its management

team believes it to be?• How serious is the threat from conventional airlines that want to imitate the WestJet culture?

What does it take to imitate organizational culture?• What does WestJet need to do to keep its success going as it is expanding its fleet?

REFERENCES

Galbraith, J. R. (1995). Designing organizations: An executive briefing on strategy, structure, andprocess. San Francisco: Jossey-Bass.

Kotter, J. (1996). Leading change. Boston: Harvard Business School Press.Schlender, B. (2004). The new soul of a wealth machine. Fortune, 149(7), 102–110.Watkins, M. (2003). The first 90 days: Critical success strategies for new leaders at all levels.

Boston: Harvard Business School Press.

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TROJAN TECHNOLOGIES INC.: ORGANIZATIONAL

STRUCTURING FOR GROWTH AND CUSTOMER SERVICE

Greg Upton

John EggersCopyright © 1999, Ivey Management Services Version: (A) 1999–08–19

8 • CASES IN ORGANIZATIONAL BEHAVIOR

In March 1998, a group of Trojan TechnologiesInc. (Trojan) employees grappled with the issue ofhow to structure the business to effectively interactwith their customers and to manage the company’sdramatic growth. The London, Ontario manufac-turer of ultraviolet (UV) water disinfection systemsbelieved that strong customer service was key to itsrecent and projected growth, and had come to therealization that changes would have to be madeto continue to achieve both simultaneously. Thegroup hoped to develop a structure to address theseissues. Marvin DeVries, executive vice-president,was to lead the development and implementationof the new structure. The transition to the newstructure was to begin as of September 1998 tocoincide with the new fiscal year.

THE BUSINESS

Technology

Since 1977, the company had specialized in UVlight applications for disinfecting water and waste-water. In essence, Trojan’s products killed micro-organisms using high-intensity UV lamps. Waterwas channeled past the lamps at various speeds,based on the clarity of the water and the strength ofthe lamps, to achieve the required ‘kill’ rate.

Trojan’s UV technology had proven to bean environmentally safe and cost-effective alter-native to chlorination, and was gaining widerrecognition and acceptance. Even so, a significantmarket remained to be tapped, as the company

estimated “ . . . that only five per cent to 10per cent of municipal wastewater sites in NorthAmerica use UV-based technology . . . [and] ofthe approximate 62,000 wastewater treatmentfacilities operating worldwide, only 2,500 cur-rently utilize UV disinfection systems.”1

Trojan Technologies Inc.2

Trojan was established in 1977 with a staffof three with the goal of developing a viable UVwastewater disinfection technology. Followingseveral years of work, the first UV disinfectionsystem (System UV2000TM) was installed inTillsonburg, Ontario, in 1981. It took another twoyears, however, before the regulatory approvalswere in place to market the technology for munic-ipal wastewater treatment in Canada and theUnited States. During this time, the companygenerated revenues through the sale of small res-idential and industrial cleanwater UV systems.

By 1991, the company had sales in excessof $10 million, and had introduced its second-generation technology in the System UV3000TM

wastewater disinfection system. As the company’sgrowth continued, a staff of 50 was in place by1992. The following year, due to capital require-ments created by the company’s strong growth, aninitial public offering on the Toronto StockExchange was completed. Also in 1993, a branchoffice was established in The Hague, Netherlands,expanding Trojan’s reach across the Atlantic.

1994 saw the launch of the System UV4000TM,the construction of a new head office and sales

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exceeding $20 million. In 1995, a branch officewas opened in California to service the enor-mous market for wastewater treatment in thatstate. Two years later, an expansion doubled headoffice capacity to house 190 staff and to meet thedemand for sales of more than $50 million.

Well into 1998, the expectation was that saleswould reach $70 million by year-end and con-tinue to grow by more than 30 per cent per yearover the next five years, reaching $300 millionby 2003. The company was in the processof planning additional capacity expansion inthe form of building and property purchasesadjacent to head office, and expected to quadru-ple its headcount by 2003 to more than 1,000employees.

Products

In 1997, 93 per cent of Trojan’s sales wereof wastewater products (System UV4000TM

and System UV3000TM). These systems weredesigned for use at small to very large wastewatertreatment plants and more complex wastewatertreatment applications with varying degrees ofeffluent treatment. The remaining seven per centof sales were cleanwater products (primarily theSystem UV8000TM and Aqua UVTM) for munici-pal and residential drinking water and industrialprocess applications. Growth in the coming yearwould be driven by increased sales of the waste-water disinfection products in both current andnew geographic markets. In the longer term, newproducts such as the A•I•R• 2000™, which wasto use UV light with an advanced photocatalytictechnology to destroy volatile organic compoundsin the air, were expected to further Trojan’s salesgrowth.

Products were typically assembled fromcomponent parts at Trojan head office. The com-plexity of the product design, manufacture andservice arose from the integration of skills inelectronics, biology, controls programming andmechanical engineering. The company ownedpatents on its products and was prepared todefend them to preserve its intellectual capital.

Customers

Trojan sold its wastewater treatment productsto contractors working on projects for municipal-ities or directly to municipalities. Typically, theprocess involved bidding on a project based onthe Trojan products required to meet the munici-pality’s specifications, and, therefore, engineer-ing expertise was required as part of the sellingprocess. Project sales typically fell in a $100,000to $500,000 range, and given the large value ofeach sale, the sales and marketing function wascritical to the company’s success. However, formarketing to be effective, this new technology hadto be well-supported. Municipalities purchasingthe wastewater disinfection systems requiredrapid response to any problems, and expectedsuperior service given the consequences of break-downs for the quality of water being dischargedfrom their facility. Municipalities also had theability to discuss Trojan and their UV productswith other municipalities before deciding to maketheir purchase, further underlining the importanceof warranty and aftermarket service to customersto ensure positive word-of-mouth advertising.

Trojan’s smaller product line, the cleanwatersegment, focused on a different customer basefrom wastewater, and it was difficult to generalizeabout the nature of this segment’s customers.These customers ranged from municipalities toindustrial companies to individuals.

INTERACTION WITH CUSTOMERS

The Process

The main points of customer interaction in thewastewater product line included:

1. Quote/bid process

2. Configuration of project structure

3. Project shipment and system installation

4. Technical support and warranty claims

5. Parts order processing

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Each of these is described briefly below:The quote/bid process was a major function

of the marketing department, with support fromthe project engineering department. Although themarketing department took the lead role in assem-bling the appropriate bid and pricing, the cus-tomer would on occasion wish to speak directly tothe project engineering department on specifictechnical questions related to the function of theUV unit within the particular wastewater setting.

After winning a bid, the configuration ofproject structure involved working with thecustomer on the detailed specifications for theproject and applying the appropriate Trojansystems in a configuration that would meet thecustomer’s needs. The project engineering depart-ment took the lead role in this work, and eitherworked through the marketing representative intransmitting technical information to and fromthe customer or communicated directly with thecustomer’s technical personnel.

Once the project had been configured, it wasscheduled for manufacture by the operationsdepartment. On completion, and when the cus-tomer was ready to integrate the UV system intotheir wastewater facility, the service departmentcompleted the installation and start-up of theunit. The service department would also beinvolved in demonstrating the proper use of thesystem to the customer.

After the system was in use by the customer,further interaction came in the form of technicalsupport. The service department would deal withphone calls, site visits and warranty claims andwas the primary contact point for the customer.By its nature, most service work at this stage ofthe process was completed on an ‘as-needed’basis by the first available service representative.As a result, it was difficult or impossible to havethe same service representative available torespond to a particular customer on every occa-sion. The service department, therefore, kept adetailed file on each UV installation and allcustomer contact to ensure the most informedresponse on each service call.

The final stage of customer interaction wasthe ordering of replacement parts by the cus-tomer after the warranty period was complete.

This was handled by a call centre at Trojan headoffice in London that was separate from the otherdepartments that had dealt with the customer.The call centre was staffed to receive orders forTrojan replacement parts, but not to providetechnical support as with the service department,and would generally not access customer servicefiles in taking the order.

In summary, customers would deal with asmany as four different departments during theirinteraction with Trojan. During the early daysof Trojan’s growth, the ‘close-knit’ nature ofTrojan’s workforce allowed a seamless transitionbetween ‘departments.’ However, as describedbelow, the company’s continued growth began tocomplicate the transition between departments.

Customer Support in the Early Days

In the 1980s and early 1990s, when Trojanhad less than 50 employees and worked on a lim-ited number of wastewater bids and projects dur-ing the course of the year, customer support wasa collective effort across the entire company. Infact, it was not unusual that virtually everyone inTrojan knew the details of all the major projectsin process at any given time. There was a com-mon knowledge base of customer names andissues, which resulted, in DeVries’ words, in an‘immediate connectivity’ to the job at hand. Attimes, during those early days, there were as fewas two employees in a ‘department.’ Under theseconditions every project received immediate andconstant attention from start to finish, ensuringthe customer was satisfied and potential issueswere addressed in a proactive manner.

Challenges Created by Growth

As the company grew, departments grew. Veryquickly the number of projects multiplied and itbecame impossible for everyone to know all thecustomers and active projects, or even all thepeople in the organization. As departments grewfrom two to five to 10 people, communicationsbecame focused internally within the depart-ments. This made it progressively more difficultto ensure timely and effective communication on

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project status between departments, and the‘immediate connectivity’ described by DeVriesbegan to break down. The situation was describedby many as one where ‘things began to slipbetween the cracks’ in terms of customer serviceexcellence, because it was no longer possible foremployees to shepherd a project through thecompany from start to finish as had been done inthe early days. Once a particular department hadfinished their component of a project, they imme-diately had to turn their attention to the otherprojects they had ongoing, creating the potentialfor a lag before the next department picked upthe customer file.

Project Engineering

Project engineering was one example of adepartment that had begun to experience prob-lems maintaining service levels to the end-customer as a result of growth. By 1997, therewere seven engineers in the department handlingthe regular support to the marketing departmentand acting as ‘specialists’ for the various techni-cal components of the products. When engineerswere hired into this group, there was no formaltraining or apprenticeship program in place. Thenew hire would simply follow along as best he orshe could and attempt to learn the complex prod-uct line through observation and assistance fromothers in the department. This type of trainingwas strained by the demand for project engineer-ing services brought on by Trojan’s growth.

A ‘specialist’ role, in addition to their supportof the marketing department’s project bids, hadevolved within the project engineering group.To handle specific technical requests, this infor-mal addition to the project engineer’s rolehad occurred somewhat spontaneously within thedepartment. For example, if one of the projectengineers had developed a detailed understandingof the electronics included in the System UV4000TM

products, that employee acted as the referencepoint for most detailed queries on this subject andwas considered the ‘electronics specialist.’ Therewas no specific training or support to developthese specialists for their roles in place in 1997,nor was hiring particularly targeted at filling the

specialist roles described above, as it was asecondary role for the department. As a result ofthe dual roles and the company’s rapid growth,project engineers could not take responsibilityto guide a project from bid through customerqueries to production and commissioning of theproject. The demand for assistance on many bids,coupled with the need to respond to queries intheir ‘specialist’ area on active projects preventedproject engineers from acting as a steward on spe-cific projects as they passed through the com-pany. Instead, the department operated more as apooled resource that was accessed as needed bythe marketing department to support bids and bythe service group to assist with product support.

Service

The growth of the company and the establish-ment of new product lines had caused an ampli-fied growth in the service group, because foreach new project installed there was a long-termsource of potential queries and service needs.The service group covered a broad spectrum ofneeds, from the initial setup of UV systems toemergency responses to equipment problems orqueries (which frequently required site visits).A formal training program had been institutedduring early 1998 when the new service managerrecognized the need to quickly develop newemployees to ensure they could contribute astrong technical background and familiarity withthe product. An existing service group membertypically instructed new employees for approxi-mately one week, and new employees learnedthe balance ‘on the job’ through observation anddiscussion of issues with other service employees.Again, company growth had caused some diffi-culty in ensuring that new employees receivedadequate training before they were needed toactively service customer inquiries.

There was a fundamental structuring conflictwithin the service area on how to best serve thecustomer. On one hand, customers appreciatedthe ability to contact one person whenever theyhad a concern or question. Also, customers fre-quently needed quick response times to theirsite for in-person assessments and action by the

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service employee. This appeared to suggest aneed to place service employees physically asclose to the end-customer as possible, especiallygiven the company’s expanded geographic mar-keting area. However, the timing of servicework was very uncertain. Whereas the projectengineering department had some ability toprioritize and schedule their workload, theservice department typically had to respond tocustomer calls immediately, and the geographicdistribution of calls was not predictable. Therefore,if Trojan received significant service requestsin California, the company could be forced torespond by sending all available service employ-ees there. The uncertainty of the timing and geo-graphic distribution of service calls lent itselfmore to the centralized pooling of resources thatTrojan currently used.

As Trojan had a significant geographic distri-bution of sales, service work involved substantialtravel. In fact, the constant travel presented anadditional risk of ‘burnout’ that was unique tothe department. To address this, and to ensure areliable response to calls for assistance fromcustomers, a head office call centre was createdin 1998. The call centre was staffed by servicetechnicians who could respond to many cus-tomer situations over the phone and by usingsophisticated remote monitoring of the UVinstallments in some cases. The call centre alsoprovided a place where experienced servicepersonnel who were at risk of ‘burn out’ fromconstant travel could use their expertise. Also,the call centre provided another opportunity totrain new employees before dispatching themdirectly to customer locations on service calls.

RELATED ISSUES

Career Ladders

In a small company, career progression andsatisfaction typically comes with successesachieved that significantly affect the organiza-tion. There was generally not the expectation orthe possibility of significant promotion or role

development, but this was offset by the potentialfor involvement of everyone in several majorcomponents of company activity. This was cer-tainly the case at Trojan in the early days. Asthe company grew, however, a need to distin-guish between and recognize the various levelsof experience developed. The current departmentstructure did not provide for much differentiationof job requirements within the departments, and,therefore, did not recognize the significant dif-ference in experience levels between new andveteran employees.

Training Issues

As Trojan’s sales continued to grow, the needto increase staffing was accelerating. In the earlydays, the addition of a person to the companywas informal and supportive. The new employeewould be introduced to everyone and wouldeasily be able to approach the appropriate personto ask questions and to learn their role within thecompany. Given the rapid expansion of the com-pany, this informal introduction to the companyand its processes was rapidly becoming insuffi-cient to allow new employees to become effec-tive in their new position. Training, therefore,needed to be addressed in many areas.

DECISIONS

Given the issues developing as Trojan grew, thestructuring issue was becoming steadily moreimportant. The structuring team under DeVriesenvisioned a regional, team-based approach tocustomer interaction that would replicate thestructure used by the company in the early days.One of the difficulties in implementing such astructure, however, would be ensuring that thegroups still operated as though they were onecompany, sharing knowledge and resources asappropriate. Another would be determining whatlevel of centralized support would be appropri-ate, bearing in mind the need to avoid dupli-cating activities at head office that should behandled by the regional teams. Employees were

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now aware that there would be a change in thecompany structure, and there was a need to cometo some conclusions on the new structure quicklyto reduce anxiety about the change within theorganization.

NOTES

1. From Trojan 1998 annual report.2. The information in this section was primarily

gathered from Trojan 1997 annual report.

Building Effective Organizations • 13

BLINDS TO GO: STAFFING A RETAIL EXPANSION

Ken Mark

Fernando Olivera

Ann FrostCopyright © 2001, Ivey Management Services Version: (A) 2001–10–09

INTRODUCTION

“Staffing stores is our most challenging issue aswe plan our expansion across North America,”exclaimed Nkere Udofia, vice-chairman ofMontreal-based Blinds To Go (BTG). “There arelocations now where we’ve got physical storebuildings built that are sitting unstaffed. How arewe going to recruit and develop enough peopleto meet our growth objectives? What changesshould our company make?” It was August 2,2000 and Udofia knew that if Blinds To Go wasto continue to grow 50 per cent in sales and add50 stores per year, the issue of staffing would befront and centre.

THE DEVELOPMENT OF

THE BLINDS TO GO RETAIL CONCEPT

This retail fabricator of window dressings began asa one-man operation. Growing up in the Côte-des-Neiges district in Montreal, Canada, David Shiller,the patriarch of the Shiller family, started in busi-ness in 1954. Stephen Shiller, his son, joined thebusiness in the mid-1970s, convincing his fatherto focus on selling blinds. Called “Au BonMarché,” as it was known in Quebec, the Shillers

began to create the production system thatallowed them to cut the normal six- to eight-weekdelivery time frame for custom blinds to 48 hours.The customer response was overwhelming andthe business took off.

Stephen Shiller exclaimed:

We gave them food, kept them busy while theywaited for their blinds to be ready. The factory wasliterally next to the store and we offered our one-hour delivery guarantee, which kept our customershappy. Our St. Leonard store, the prototype for thecurrent Blinds To Go stores, opened in 1991. Priorto that, people used to drive for up to 100 miles tocome to our stores.

At that point, in early 1994, we realized what ahot concept we had on our hands—our sales werehigher for each consecutive store opened, and noneof our competitors could replicate our model. Theywere either manufacturers or retailers: none wereboth. None could hope to deliver the 48-hour turn-around we promised, had our unique sales model,which is 100 per cent commission-based, or had ourattention to customer needs.

By June 2000, Blinds To Go operated 120corporate-owned stores across North America(80 U.S. stores, 40 Canadian stores), generatingin excess of US$1.0 million in sales per store(having a staff of between six to 20 people per

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store). Blinds To Go expected to add an averageof 50 new stores per year for the next five years,80 per cent of which was targeted to be U.S.expansion stores.

RETAIL OPERATIONS

It was senior management’s belief that qualityof staff was even more important than store loca-tion, the surrounding customer demographics oradvertising. Stephen Shiller, president, tested thisbelief with the East Mississauga, Ontario store.

In 1999, the East Mississauga store hadexperienced declining sales and high employeeturnover. Analysing the demographic data sur-rounding the store left management with theimpression that the store was a victim of poorlocation and cannibalization from another BTGstore 10 miles away. However, Stephen Shiller,suspected that the real problem was in the qualityof the store’s staff. Stephen Shiller commented:

We let the store continue on its downward salestrend as we trained a management team for thisstore. Although I was quite sure that the quality ofpeople was at fault, I was determined to use thisas a lesson to show the rest of the company howimportant it was to have first-class talent. After sixmonths of waiting, we put in an ‘A’ managementteam and trained staff. In one week, we doubledour sales and we tripled our sales in one month.That was a lesson we must never forget.

There were four staff roles in the stores—thesales associate, the selling supervisor, the assistantstore manager and the store manager. The salesassociates were the most junior employees andtheir job was to follow a set plan to help walk-incustomers purchase a set of blinds. If they provedto be consistent sales performers, they would bepromoted to selling supervisors or assistant storemanagers. Selling supervisors were assistant man-agers in training and usually had been one of thebest sales associates. Assistant managers werein charge of the store when the store manager wasnot scheduled to work. The store manager wasdirectly responsible for overall store operations,

including closing sales, motivating and developingstaff, and handling customer service issues such asrepairs and returns.

Generally, a very good sales associate waspromoted to selling supervisor six to ninemonths after hiring date. To become a store man-ager generally took another six to 18 months.However, because of the enormous variation inpersonal potential, these progression targetswere by no means fixed.

The BTG selling process involved a very highlevel of interaction with the customer, whichset a very high level of service expectation. Atthe retail stores, the emphasis on customer satis-faction and sale closure led to a higher volumeof orders relative to their retail competition.Outlined in the Blinds To Go University Manual(training program for new sales staff) were thefollowing four operating guidelines:

• Service and Satisfy every Customer• Never Lose a Sale• Make the Customer Feel Special• Bring the Manager into Every Sale to Give the

Customer “Old Fashion Service”

Salespeople were expected to bond with acustomer through a personal greeting, then askopen-ended questions about their product needs.The purpose of the next few minutes of inter-change between associate and customer was tounderstand the customer’s primary concerns andwork towards a sale by resolving those issues.Next, associates emphasized to the customer thequality of the product, large selection and war-ranties. At this point, the associate would listento any customer objections, and try to addressthem. The associate would price the product(s),then introduce the customer to the store manager.After walking the store manager through theorder, the associate would deduct any relevantcoupons, then attempt to close the sale.

All employees of BTG, even up to thepresident, prided themselves on being able tosell blinds to customers. During store visits, itwas not uncommon to see senior managementhelping out the staff in dealing with an overflowof customers.

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COMPENSATION OF RETAIL STAFF

The commission-based structure fostered ahigh-energy, sales hungry culture at Blinds ToGo. Todd Martin, the director of retail planningand operations explained:

We know people come to us because they needblinds. An example of our culture in action is a man-ager who is unhappy with closing eight of 10 sales,because with the tools at his disposal, he should beable to close all 10. Even if the customer is just look-ing because they want to buy a house in six months,we can take their worries away from them. Heshould be able to sell to 10 out of 10 customers.

Todd Martin also believed there was a healthycompetitive environment among sales associates.He offered:

In the store, there are no rules on grabbingcustomers—in my two years here, I’ve never seena problem with staff fighting for customers.

As BTG grew from a one-store operation,the Shillers kept a commission pay structure forits salesforce, believing that it best motivatedperformance. From experience, they knew that asuitable salesperson could, with the commissionstructure, make more money at BTG than at acomparable retail outlet. The focus had been onhiring energetic, personable people who lovedthe thrill of a sale.

A CHANGE IN COMPENSATION

RESULTS IN SALES DECLINE

In 1996, the Shillers decided to change the com-pensation system from full commission to salary.This change was the result of a recommendationfrom a newly hired vice-president of store oper-ation who had been the vice-president of a majorU.S. clothing retailer. Her intention was to attractmore recruits for Blinds To Go’s expansion phaseby standardizing store operations and compensa-tion. At that time, there were already 15 storesand expansion was underway. Based on her prior

experience at the U.S. retailer, she led the changefrom full commission to paying sales associatesa wage of Cdn$8 per hour. This was intendedto make sales associates less entrepreneurial andmore customer-service focused. Store managercompensation was also revised to reflect a higherbase salary component relative to commis-sions. A more casual uniform was mandated inplace of the business casual attire that was beingworn at stores. In an attempt to differentiate theroles of sales associates and store management,it was decided that the store manager would nolonger be involved in the sale. Though skepticalof this recommendation, the Shillers reluctantlyagreed to proceed as suggested, rolling out thesechanges in 1996.

Sales declined between 10 per cent to30 per cent in both new and existing stores from1996 to 1997. Overall staff turnover increasedto more than 40 per cent from a pre-1995 figureof 15 per cent. This problem was further exacer-bated by the fact that rapid store expansion intoToronto, Philadelphia and Detroit had requiredthe deployment of skilled store staff, thinning theranks of existing stores. The Shillers attributedthis decline in performance primarily to thechange in the compensation structure.

BTG REVERTS TO

COMMISSION-BASED COMPENSATION

Unsatisfied with this turn of events, a change wasmade in the leadership of the stores’ team. A vari-ation of the commission-based compensation planwas brought back in May 1998 (see Exhibit 1).Udofia explained why he believed that commis-sion was key to the sales culture of Blinds To Go:

When we made the 1996 change, the base salaryof $8/hour made it much easier to staff the store,but we were attracting a lower caliber of people—our best commission-based people did not like itand left. Having learned our lesson, we went backto our roots, brought back the old culture and expe-rienced a sales turnaround. But, we’ve never 100per cent recovered from it and are still playingcatch-up today.

Building Effective Organizations • 15

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16 • CASES IN ORGANIZATIONAL BEHAVIOR

Corporate Formula Original 1995 to 1996 Current

Sales Associate $3 to $5/hr + 3% $8/hr $6 to $8/hr minimum, sales OR 6% sales

(whichever was higher)

Managers/Assistants $10,000 to $25,000 to $10,000 to$20,000/yr + 1.5% − $40,000/yr $20,000/yr3% of overall store + 0.25% − 0.5% of + 1.5% − 2.5% ofsales overall store sales overall store sales

Actual Results Original 1995 to 1996 Current

Sales Associate $620/wk $320/wk $840/wkTop 20% of class ($14,000/sales/week)

Sales Associate $500/wk $320/wk $600/wkAverage Success($10,000/sales/week)

Sales Associate $380/wk $320/wk $360/wkMarginal Performer($6,000/sales/week)

Sales Associate $290/wk $320/wk $240/wkPoor Performer($3,000/sales/week)

Manager $75,000/r $52,500/yr $67,500/yrTop 20%(2.5% of store sales)

Manager $50,000/yr $40,000/yr $50,000/yrAverage Success(1.2% of stores sales)

Manager $35,000/yr $35,000/yr $40,000/yrPoor Performer

Exhibit 1 BTG Pay Structure History

Since the return to commission-based com-pensation in 1998, store sales improved acrossthe board, and within a few months, stores wereposting between 10 per cent to 30 per centincreases in sales from the previous year (seeExhibit 2).

This dramatic turnaround was accomplishedwith the aid of several other initiatives. First, all

U.S. district sales managers (DSMs) werebrought to Toronto to see top-performing stores,thus establishing a performance benchmark. Next,a BTG employee stock option plan for storeemployees (all full-time sales associates weremade partners and given shares in the company)was implemented along with a sales award andrecognition program. Also, weekly development

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conference calls between senior management andthe district sales managers and training managerswere set up for the purpose of constant updatesand to facilitate group learning. Finally, a man-ager/assistant training program was tested in theU.S. in early 1998.1

The 1998 shift back to commission causedanother huge turnover in BTG stores. This wasunfortunate, because, from a staffing perspective,BTG had still not fully recovered from the previ-ous compensation change. The need for addi-tional staff was further aggravated due to BTG’scontinued push for growth and the tight U.S andCanadian labor markets (four per cent unem-ployment) in which it operated.

Another concern was that a commission-based compensation structure would not work inthe U.S. Martin explained:

The U.S. folks seemed uncomfortable with 100per cent commission. They seem to prefer a straightwage or salary. Thus, we have not figured out ourcompensation system, but for now, it’s largelycommission based. We know that for the peoplewho are good, they will figure out what they needand go get it. Commission for us is like an insur-ance policy on our hires—the better you are themore you make. If you don’t like servicing thecustomers, you leave.

Along with the reversion to the proven BTGcompensation structure, Blinds To Go emphasizedthe practice of promoting their managers fromwithin. Senior management believed that sales

managers had to be properly motivated and pro-vided them with a combination of store sales com-mission and opportunities for rapid advancementin the growing organization. However, being a topsalesperson did not necessarily guarantee promo-tion, as Blinds To Go also looked at a matrix ofsales, drive, presence, and people skills. Martinexplained: “So even with the top salespeople, theyhave to be solid in their other attributes to be cho-sen for management. If the person is driven, he orshe will ask for what it takes to be promoted.”

ATTRACTING QUALITY

RETAIL SALES CANDIDATES

BTG was looking for people who possessed cer-tain sales-driven qualities. Martin explained:

We look for people who have the ‘gift of the gab,’ noego, are honest, like sales, are driven and hungry foran opportunity, and have good leadership and goodpeople skills. People have to possess these corevalues. We’re partners—we want other people whowant to be our partners. We pay for performance.You bet on yourself. You get rewarded becauseyou’re performing. Entry-level sales associates get1,000 stock options after 90-days. At another suc-cessful retailer start-up that has since gone public,their people only received 500 options each.

Having recognized that quality of staff wasparamount, BTG devoted resources to ensurethat it hired the right people as it was estimated

Building Effective Organizations • 17

Pre-1994 1995 to 1996 1997 to 2000

New stores/year N/A 25 20

New store $1 million $0.7 million $1.2 millionaverage sales

Versus comparable 3% −20% +15%store sales year ago

Exhibit 2 Sales Turnaround

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that 80 per cent of their expansion needs wouldbe for new U.S. stores. BTG store staff was verydiverse. In terms of gender, it was a 50/50 splitbetween men and women. Among associates,high school was the most common educationlevel, followed by college students, then collegegraduates. In Ontario, Canada, 20 per cent of theassociates were recent immigrants who had col-lege or professional qualifications. The averageage of associates was distributed over a typicalbell curve between the ages of 18 to 50.

Over the last few years, BTG had tried severalrecruiting methods to varying degrees of success.There were several formal and informal pro-grams that worked to entice qualified personnelto apply to BTG.

Employee Referral

Having current staff refer friends and familyto BTG seemed to be the most effective way toattract a candidate already briefed on the BTGconcept. A recent addition to create an incen-tive to refer was the “BMW” contest where staffcould win the use of a BMW car for a year if theyreferred 10 eventual hires that stayed for at leastthree months. Employee referrals alone did notcurrently satisfy BTG’s hiring needs.

Internet Sourcing

BTG used the Internet in two ways: BTG soli-cited résumés at its blindstogo.com site; DSMsand recruiters actively searched online job siteslike Monster.com and other job sites to contactpotential candidates.

DSM Compensation Readjustment

To put more emphasis on staffing in early2000, DSMs’ incentive bonus was changed froma sales target to new staff quota target. Historically,district sales managers had received an incentivebonus based on sales. Thus, a large part of theDSM’s role had evolved to include recruitingresponsibilities—the DSM now had to hire 10 newsales associates a month.

BTG Retail Recruiters

Professional recruiters were hired in earlyFebruary 1998 and had been paid annual salar-ies ranging from $30,000 to $60,000. Recruitersgenerate leads through cold calls (in-person andvia telephone), networking referrals, colleges,job fairs, the Internet, and employment centres.Even though they were given some training andrecruiting objectives, the initial recruiters hadaveraged around four hires per month (againstthe company objective of four hires a week).“Overall, the performance was sub-optimal,”lamented Martin. “By paying them a base salary,we divorced performance from pay and theybecame administrators.” For recruiters, a switchwas made in early 2000 to a mix of salary andcommission. “They will still need to averagefour hires a week—but we’ve increased ourtraining and the ‘per hire’ commission will focusthem on results,” Martin concluded.

Newspaper Advertising

BTG used weekly newspaper advertising fornine months starting in mid-1998. Although thismethod generated a sufficient number of candi-date leads, senior management believed that thismedium did not generate the quality of candi-dates that it needed—newspaper advertisingattracted people who did not possess the skillsand core values that BTG was looking for.

Store Generated Leads

Each BTG had a “help wanted” sign on itswindow, and walk-in traffic, along with customerreferrals, resulted in some sales associatesbecoming hired. Overall, this was very success-ful only in stores located in densely populatedareas with foot traffic.

THE HIRING PROCESS AT BLINDS TO GO

Once potential candidates were persuaded toapply, a store visit was arranged. The purpose of

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this visit was to acquaint the potential candidateswith the BTG environment and for them to getan overview of the job of a sales associate.Subsequently, the DSM administered a tele-phone interview. If the candidates were selectedto proceed beyond this screen, two additionalface-to-face interviews awaited them—one withthe DSM and another with the store manager.BTG hired associates against these six criteria:

1. “Gift for Gab”

2. Outgoing personality

3. Energetic and motivated

4. Honest

5. Likes sales or dealing with people

6. Positive

If the candidate was selected to be a salesassociate, then references were checked andoffers extended.

THE RESULTS OF HIRING PROCEDURES

Before collecting data, it was the impression ofsenior management at BTG that the most effec-tive method of attracting quality candidates wasemployee referral, followed by Internet sourc-ing, and then DSM recruitment. To confirmtheir suspicions, BTG tracked the yield of dif-ferent hiring methods for June and July 2000and as of the end of July, had these results toshow:

Building Effective Organizations • 19

Martin explained that the highest ratio of leadsto hire was in the employee referrals. This waspartially attributed to the fact that referrals gener-ally pursued employment with BTG, excited bythe opportunity that a friend or family memberwho was a BTG employee had recounted. Coldcalling was thought to have the lowest close ratebecause the recruiter had to first educate, thenconvince potential recruits. But cold calling wasthought to be time-efficient if the recruiter wasgood. Recruiters were focused on non-storesources (cold calling, Internet, schools, etc), storesources (store walk-ins and employee referrals)were handled by the DSM. Recruiters were nowpaid $20,000 a year with a bonus of $150 to $500for each successful hire, defined as a hire whostayed at least three months.

STAFF TURNOVER

BTG also began tracking staff turnover and hadcreated a turnover list from existing data. A largepercentage of staff voluntary turnover occurred intheir first four months. The higher turnover aftereight months was partly due to termination becauseof sales underperformance. Also, sales associateswho were not progressing as fast as their peers wouldinevitably be dissatisfied, leaving for other jobs.

BLINDS TO GO FUTURE NEEDS

BTG needed these additional staff to proceedwith its expansion plan of 50 stores per year andto fill current store requirements.

Recruiting Method June July Total (2 mth)

Cold Call (Recruiters) 9 0 9

Walk-ins 31 16 47

Internet 9 3 12

Employee Referral 39 20 59

DSM hires (Direct/Rehires /College) 8 8 16

Total 96 47 143

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Udofia had one more pressing concern on hismind:

We’re planning an initial public offering in the nextone to two years. The key to our success is our abil-ity to recruit and develop enough people to meetour growth objectives.

He wondered what strategy he should followto meet the staffing challenge ahead.

NOTE

1. This program eventually evolved into theLegends Training Program, where the best trainingmanagers at BTG were relocated to new regions tomotivate, train and coach new store employees.

20 • CASES IN ORGANIZATIONAL BEHAVIOR

Length of Stay 1 to 4 months 5 to 8 months 8+ months

Total 29 12 13

Number of staff leaving and length of stay (numbers from June and July 2000)

Extra personnel neededPosition Current complement for expansion (per year)

Sales Associate 1,000 500

Selling Supervisor 150 50

Asst. Store Manager 150 50

Store Manager 150 50

FIVE STAR BEER—PAY FOR PERFORMANCE

Tom Gleave

Brian GoldenCopyright © 1998, Ivey Management Services Version: (A) 1998–10–08

In June 1997, Tom McMullen (President—Alliance Brewing Group) and Zhao Hui Shen(General Manager—Five Star Brewing Co. Ltd)met to discuss the “pay for performance”systems which Zhao had been implementing atFive Star’s two breweries over the past severalmonths. McMullen needed to determine whetheror not these incentive systems were properlydesigned to ensure that the breweries would pro-duce higher quality beer at progressively lower

costs. If not, he needed to consider how he mightsuggest that these and other systems be changedin order to achieve Alliance Brewing’s cost andquality objectives.

FIVE STAR’S ASIMCO CONNECTION

The majority owner of Beijing Asia Shuang HeSheng Five Star Brewing Co. Ltd. (Five Star)

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was the Beijing-based investment group, AsianStrategic Investments Corporation (ASIMCO).The primary shareholders of ASIMCO wereTrust Company West, Morgan Stanley—DeanWitter Reynolds and senior management. Thesenior management team consisted of the fol-lowing people:

Jack Perkowski (Chairman and CEO)—a formerinvestment chief at Paine Webber (New York City)and graduate of both Yale University (cum laude)and the Harvard Business School (Baker Scholar).

Tim Clissold (President)—a physics graduate fromCambridge University who turned accountant withArthur Anderson in the 1980s. Clissold had workedin England, Australia, China and Hong Kong forAnderson before entering London’s School ofOriental and Asian Studies where he became fluentin both spoken and written Mandarin.

Michael Cronin (Chief Investment and FinancialOfficer)—also worked as an accountant for ArthurAnderson throughout the 1980s in Australia, theUK and Hong Kong. Previously, Cronin hadworked for over five years at 3i, Europe’s largestdirect investment organization.

Ai Jian (Managing Director)—a Chinese nativeand graduate from Northwestern PolytechnicalUniversity in Xian, China. Ai’s previous workingexperience included senior posts in the foreign rela-tions department of China’s Ministry of ForeignTrade and Economic Cooperation. He was a nativeMandarin speaker and also fluent in English.

The motivations underlying ASIMCO’sinvestment in the Chinese beer industry weretwofold. First, the industry was experiencing high,sustainable growth rates. This high growth wasspurred by the increasing levels of disposableincomes in China, to the point where it wasexpected that the Chinese beer market wouldbecome the world’s largest (overtaking the U.S.A)within the next several years. Second, the industrywas highly fragmented and was undergoing asignificant restructuring. This high degree of frag-mentation was a consequence of China’s legacyof central planning. Given its increasing adoptionof market-driven mechanisms, China’s central

government was encouraging (or passivelyallowing) the rationalization of certain industries,including the beer industry. The industry con-sensus was that the number of breweries wasexpected to be reduced from over 800 to lessthan 600 nationwide over the next several yearswhile managing to steadily increase overall beervolume. This meant that surviving firms wouldneed to seek economies of scale, maintain highquality production and ensure development ofstrong management teams as the competitionintensified.

ASIMCO’s investment strategy was to iden-tify Chinese companies that had the potentialto be globally competitive and to support thesefirms with capital, western management skillsand leading-edge technologies. The partners theysought were expected to be aggressive, profit-oriented and industry leaders. Whenever a poten-tial opportunity was discovered, ASIMCO wouldmarshal its skills and international resources toperform due diligence, negotiate contracts andobtain necessary approvals. ASIMCO wouldsubsequently provide capital, western manage-ment expertise and technological know-how tothe joint venture and devise an exit strategydesigned to realize the value created.

ASIMCO viewed itself as an agent of changein helping to transform formerly inefficientstate-owned enterprises into market-driven andexport-ready competitive firms. By June 1997,ASIMCO had entered into 13 automotive partsmanufacturing, two automotive parts distributionand two beer manufacturing joint ventures. Thesum total of these investments, all of which weremajority positions, was about U.S. $360 mil-lion. All minority positions were held by variousChinese partners. The Five Star joint venture wasASIMCO’s largest single investment in its port-folio with a total capital outlay of U.S. $70 millionfor a 63 per cent stake in the company. The minor-ity interest partner was the First Light IndustryBureau (FLIB) with a 37 per cent stake. TheFLIB was a division of the Beijing municipalgovernment and had ownership interests in manydiverse business activities. ASMICO’s other jointventure in brewing was a 54 per cent interest inthe Three Ring Beer Company, an investment

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valued at U.S. $23 million. Both of the brewingjoint ventures were formalized in January 1995.(See Exhibit 1—ASIMCO’s Ownership inBrewing Joint Ventures.)

ALLIANCE BREWING GROUP

Alliance Brewing Group (ABG) was a manage-ment services group which was specifically

22 • CASES IN ORGANIZATIONAL BEHAVIOR

US $41million (37%)

US $70million (63%)

US $23million (54%)

US $19.5million (46%)

Share LimitedCompany

Beijing MunicipalGovernment

Alliance Brewing GroupLimited Partnership

ASIMCO

ASIMCO #1

Beijing MunicipalGovernment

First LightIndustryBureau

MotherCompany

Beijing Asia SHSFive Star Beer Co.Ltd.

Beijing Asia Three RingBrewing Company Ltd.

Exhibit 1 ASIMCO’s Ownership in Brewing Joint Ventures

Brewery Owner Annual Capacity

Shuang Sheng Five Star 90,000 tonsHuadu Five Star 180,000 tonsSan Huan Three Ring 130,000 tons

Note: Total production for the three breweries was currently running at about 250,000 tons per year.

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established to provide support to both of ASIMCO’sbrewery joint ventures. This gave ABG the man-date to support three different, yet related, brewingfacilities. These breweries were as follows:

ABG was organized into separate corporatelevel support functions which included market-ing, brewing and quality control, operationsservices, financial control and new businessdevelopment. The President of ABG was TomMcMullen, an American expatriate who for-merly worked in the consumer packaged goodsbusiness in the U.S. after graduating from theWharton School of Business. (See Exhibit 2—ABG Organization Chart.)

The overall goal of ABG was to help bothbrewing companies realize their return oninvested capital targets. With respect to Five Star,this was expected to be accomplished throughthe achievement of five key objectives, whichincluded (in order of priority) the following:

1. improved product and packaging quality.

2. reduced production costs in an effort to gainbetter margins.

3. the development of professional sales, market-ing and distribution systems.

4. the development of a system which rew-arded good performance and punished badperformance.

5. an increased understanding between Five Star’stwo breweries that separate production facili-ties did not mean separate companies. Rather,they were part of the same brewing company.

According to McMullen, one of the moremeaningful signs of progress that ABG was ableto make over the past year was the developmentof rational and integrated financial reportingsystems. These new systems took more than oneyear to develop but eventually allowed both

Building Effective Organizations • 23

PresidentTom McMullen

Project Manager

AdministrativeAssistant

Controllers(2)

Analysts(2)

Accountants (3)

Assistant Assistant Analyst Assistant

TechnicalDirector

William Porter

MarketingServices

Brian Gansert

Brewing andQuality Control

Hans Bilger

OperationsServices

Don Bebout

FinancialServices

Ian Ronayne

New BusinessDevelopment

Cheng Nan Cheng

Regional Directors(2)

Exhibit 2 Alliance Brewing Group—Partial Organization Chart

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24 • CASES IN ORGANIZATIONAL BEHAVIOR

Chinese and expatriate managers to “talk fromthe same page.” As evidence of the importance ofthe need for reliable and timely financial infor-mation, particularly with respect to the need forChinese management to understand the impor-tance of meeting budgeted targets, ABG hadinstalled its own financial personnel at both of itsbeer companies.

FIVE STAR’S RECENT HISTORY

Five Star was one of the oldest brewing compa-nies in China, with its origins dating back to1915. Like most breweries in China, Five Staroriginally served its local markets, the mainone being Beijing and the surrounding Hebeiprovince. This focus on local markets developedas a consequence of competing interests fromlocal governments which, in turn, led to theindustry’s fragmented structure. Over the years,however, Five Star was able to gain some marketshare in areas beyond the immediate region. Thismarket penetration was accomplished throughthe establishment of licensing agreements betweenFive Star and other regional brewers throughoutthe country.

Prior to the early 1990s, the company enjoyeda majority share of the local Beijing market. Thismarket position had developed because FiveStar had a lengthy history in the region and, asa state enterprise which was wholly owned bythe Beijing municipal government, was confer-red special privileges. For example, in 1957,Chinese Premier Zhou Enlai decreed that FiveStar was to be the exclusive beer supplied at allState banquets, thus bringing the company nameto national prominence.

By the early 1990s, Five Star’s market posi-tion began to deteriorate as it found itself com-peting in the same territories in the Beijing areawith one of its largest licensees, Three RingBeer. In 1993, Five Star entered into a licensingagreement which allowed Three Ring to produceand market Five Star beer for sale in specific ter-ritories on the northeastern outskirts of Beijing.

However, Five Star soon found that Three Ringwas “stealing” sales by deliberately encroachingon Five Star’s exclusive territories within thecore areas of the city. Three Ring was successfulin securing significant market share due to itsoffer of lower pricing (for virtually the sameproducts) and the lack of wholesaler and retailerloyalty. ASIMCO acquired a majority stake inboth brewing companies in January 1995. Thisleft ABG with the challenge of ensuring that thetwo companies refrain from directly competingwith each other.

The progressive intrusion by Three Ring wascompounded by the deteriorating quality of FiveStar’s products. It was only after it acquired own-ership control that ASIMCO discovered that FiveStar was experiencing greater quality difficultiesthan originally thought. Perhaps most disturbingof all was the consistently poor performance andapathetic attitude of Mr. Xu, Five Star’s formerGeneral Manager. According to Tom McMullen:

Xu was completely lacking in competence in virtu-ally all respects. He was simply a victim of the oldstate-enterprise culture which encouraged seniormanagers to have a minimum of initiative and inno-vation. He perceived himself to be a king in hiscastle, while ABG in general, and me in particular,were seen as interlopers. Unfortunately for him, hediscovered the hard way that his position was lesssecure than he believed.

Admittedly, McMullen had much less controlthan he originally expected when he signed onwith Five Star. Having worked in the U.S forover 20 years, McMullen was accustomed to theidea that employees could be hired, disciplinedand terminated as deemed necessary. However,in China, such activities were regulated to amuch greater extent and often involved politi-cal considerations. For example, the person incharge of the human resource management andtraining functions at Five Star was Mr. Qi, resi-dent member of the Communist Party of China.(See Exhibit 3—Five Star Organization Chart;See also Appendix: Labour Market Conditionsand Human Resource Management in China.)

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26 • CASES IN ORGANIZATIONAL BEHAVIOR

THE IMPERATIVE FOR QUALITY

The high degree of industry consolidation,coupled with increasing Sino-foreign joint ven-ture activity involving numerous world famousbeer companies (such as Heineken, Beck’s andBudweiser), meant that Five Star was begin-ning to experience greater competition fromvery capable rivals. This created a critical needfor Five Star to provide higher quality beer andpackaging. The common criteria by which prod-uct quality was evaluated included consistencyin taste, clarity, carbonation, fill levels and label-ling. The challenge of achieving consistencyacross all of these quality dimensions was great.Numerous documented incidences of foreignmatter inside bottles, as well as unfilled or short-filled bottles and cans had been documented.Many packaging issues had also been identi-fied and typically included poorly labelled orpoorly sealed bottles and cans. One particularlypoignant incident occurred shortly after the jointventure was formed and signalled to ASIMCOand ABG the need for drastically improving FiveStar’s quality. In this instance, a customer founda bottle which was half-full that had beenreleased with a ripped label that was glued onsideways, despite having passed at least fourinspection workers. Upon hearing the news ofthis episode, Tim Clissold (ASIMCO President)declared:

It is beyond rational thought how our workersallowed this bottle to be sent out for public con-sumption. And when inquiries were made as tohow this type of thing could happen, the line man-ager simply laughed with embarrassment. This isthe result of the old central planning mentality inwhich there was no connection between rewardand effort. These workers had no proper incentiveor disincentive to ensure full product quality.The workers could not be fined or punished, norwere they entitled to extra wages for extra workcompleted.

The bottle in question was permanently dis-played in ASIMCO and ABG’s combined officesas a reminder of the need for ensuring diligence

at every stage of the production and marketingprocess.

After realizing that quality issues facingFive Star were considerable, ASIMCO and ABGmoved quickly to resolve the problems. ABG’sprofessional staff was to focus on reducing costs,but a priority emphasis was placed on quality.Three key brewing professionals, the only non-Chinese to take an active role at any of the brew-eries, led the effort. They were:

Don Bebout (VP—Operations Services), anAmerican with over 19 years of experience work-ing for Miller Brewing. He was particularly skilledin the areas of packaging and labelling.

Hans Bilger (Master Brewer & ABG’s QualityManager) had a lifetime of brewing experience.In his native Germany, he grew up helping hisfather run a family-owned brewery before embark-ing for the U.S. where he spent nearly thirty yearsinvolved in a variety of positions, both with U.S.brewing giants and microbreweries.

William Porter (Technical Director) was also anindustry veteran from the U.S. where he workedfor over 20 years at such breweries as Miller, LoneStar and Pabst. Although Porter’s “home” brewerywas with the Three Ring brewing joint venture, hewas often called upon to offer technical advice toFive Star.

These three ex-pats were each provided withdedicated assistants, all of whom were fluentlybilingual. This assistance was essential sincenone of the three ex-pats spoke Mandarin.Among the three assistants, Zhou Yue reporteddirectly to Don Bebout and held a graduatedegree in fermentology. She had previouslyworked for several years at China’s NationalInstitute for Food and Fermentology. Similarly,Bi Hong, assistant to Bilger, was a genetics tech-nologist and had also worked for the NationalInstitute for Food and Fermentalogy. She alsoreceived 13 months of brewery training whilestudying in France.

A major concern of ABG’s operations andquality staff was the need to achieve higher qualitytargets while “milking” the existing equipment.

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When ASIMCO took its majority stake in FiveStar, the company was believed to possess someof the best equipment of any brewery in China,although some of it required refurbishing dueto lack of regular maintenance. Given the recentinflux of well-funded foreign brewers, Five Starappeared to be at a technological disadvantagewhen it came to ensuring product and packagingquality.

The Need for Management Control and Motivation

Regarding the level of management controland commitment that is necessary for ensuringconsistent quality, Hans Bilger (Master Brewer)offered the following remarks:

The skills needed to produce quality beer on aconsistent basis are minimal. What you need are themonitoring procedures, the discipline to adhere tothose procedures and the clear reporting of infor-mation to the appropriate people. The tasks ofmonitoring operations, recording data and commu-nicating results on a regular basis are not sophisti-cated. The problems arise when management doesnot take control by ensuring that procedures are fol-lowed or that information is shared. For example,line workers are expected to regularly record thetemperatures in the brewing vats. This is done oftenenough, but the results are frequently not commu-nicated to the people who use this information. Thisis a symptom of the silo mentality around here.There really is no cross-functional coordination.And in the event that any results are communicated,you end up getting what you want to hear and notthe real story, even when there is a problem. Thisshows that our quality problems are management-related and that the senior managers at the breweryneed to become committed to quality.

Quality is a way of life. It is a mindset. The seniormanagers at the brewery have yet to fully under-stand these concepts. Part of the problem could bethat they are rewarded on volume output, not qualityoutput. This is because brewing in China is a lowmargin business and, therefore, breweries need topump out the volume in order to make any profits.This means that some managers are reluctant to take

any measures which will impede their ability toproduce as much as they can.

Ideally, I would like to see Five Star have anindependent quality department reporting directlyto the General Manager, not to the Deputy GM andChief Engineer as is now the case–despite whatthe formal organization chart suggests. Both the‘Number 1’ and ‘Number 2’ breweries would havetheir own divisional labs which would feed theirresults to Five Star’s quality assurance office ona regular basis. This quality assurance departmentwould also be given policeman-like powers.Someone has to be able to say “this is not goodenough,” and then have the authority to take correc-tive action. Unfortunately, this type of arrangementgoes against the strong tradition of hierarchicalreporting in China.

Hiring Mr. Zhao

In response to the need to replace Mr. Xu,and after a thorough recruiting process, ASIMCOand ABG agreed to hire Zhao Hui Shen. Mr. Zhao,formerly a factory manager at a piano manu-facturing plant where he had worked for over20 years, came highly recommended by the FLIB.Clissold was skeptical about hiring Zhao due tohis obvious lack of brewing industry experience.However, Zhao won Clissold’s confidence whenconfronted about this apparent liability by statingthat, “you will not hire me to make the beer, youwill hire me to manage the people who makethe beer.”

Zhao was expected to work impartially forthe Five Star joint venture company. He was alsoexpected to draw upon the resources of ABGin an effort to improve the overall quality andproductivity of Five Star’s brewing operations.Within the joint venture company, Zhao reportedto the Board of Directors. The Board’s member-ship consisted of Jack Perkowski, Ai Jian, TomMcMullen, Mr. Zhao and a representative fromthe FLIB.

Zhao was viewed by many others at ABG andFive Star as representing a new generation ofChinese manager. This was because he had takena very aggressive and hands-on approach to

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managing the business, a style which was adistinct departure from the state-owned enter-prise culture of the past. Zhao commented:

You have to change the way of thinking fromtraditional enterprise methods. Nowadays we mustthink of management by objective. I want peopleto think about how they can achieve their goals,not how to waste time thinking of excuses for notachieving them and then relying on the governmentfor money.

Zhao’s Performance-Related Pay Systems

One of ABG’s key objectives was to help thebreweries adopt a “pay for performance” culture.ABG believed that it must try to get people tocare about their work and about themselves, par-ticularly since jobs were taking on an entirelynew role in Chinese life. ABG was seeking toinstill a culture which would see employees takegreater control over their destinies.

When it came time (in January 1997) to beginthe development of specific pay for performancesystems, Zhao requested the assistance of ABG.However, ABG was unable to offer extensivesupport at that time due to limited resources andits other priorities. In March 1997, ABG offeredto assist Zhao in developing the systems, butZhao then declined the offer because he did notwant ABG to change what he had already initi-ated. He did, however, offer to reveal his keyobjectives to ABG. This led McMullen toacknowledge that the issue of establishing a payfor performance system may have been a higherpriority for Zhao than it was for himself.

In developing the compensation systems, Zhaobelieved that monetary punishment could be usedas a strong incentive for better performance,something McMullen referred to as “using morestick than carrot.” One such example of thisapproach involved the bottle-filling line, whereone of the key measures of quality was to ensurethat all bottles were filled to the proper level.To ensure that properly filled bottles were dis-tributed from the brewery, each filling line wasassigned two people to manually check for

empty bottles, while four additional people wereused to manually check for short-fills. When thebottles were filled they were date-stamped andcoded so that the product could be traced to itsoriginal filling and labelling lines. In the eventthat a empty or short-filled product was found inthe marketplace (whether it be by Five Star’ssales people, distributors or final customers), allsix people on the originating filling line would befined a total of 500 renminbi, or about 83 Rmbeach.1 This fine would be deducted from theirsalaries in which each line worker received anaverage compensation of about 1000 Rmb permonth, an amount which was almost double thatof similar positions in Chinese wholly ownedbreweries.

There was some debate in the plant as towhether or not this was an effective system. HansBilger (Master Brewer) felt that this approachwas too harsh. He believed that, at a filling rateof 12,000 bottles per hour over a six-hour shift,the employees would become too tired to iden-tify all empty bottles or shortfills. On the otherhand, Yang Xiang, a bilingual technician work-ing for the Operations Service group, felt thatthis type of system was “to some extent fair.” Hefelt that somebody must take responsibility forthese types of errors and that it might be moreeffective if the line supervisors were fined, notjust the line workers.

Another example of a disincentive for poorperformance involved a fine levied on the brewhouse for poor sanitation in the rice mill underits responsibility. The beer that Five Star brewedtypically consisted of 30 per cent rice grain and70 per cent malt. A rice mill was utilized on-siteto provide the appropriate supplies. A commonproblem in the mill was the high level of dusti-ness, due primarily to the lack of care in clean-ing, as well as an occasionally malfunctioningdust collection system. This presented a dangerof insect infestation which, apart from affectingbeer quality, also posed a threat of flammableexplosion. In the spring of 1997, after Bilgersubmitted one of his periodic inspection reportswhich gave the mill a failing grade, seven lineworkers in the mill and associated brew housewere deducted 100 Rmb each from their next pay

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cheque. As was the case in the previous example,the affected employees also earned 1000 Rmbper month.

One of Zhao’s more widely discussed systemsinvolved the sales force. Given that Five Starwas seeking to re-establish its market positionwithin the greater Beijing area, a strong emphasiswas placed on boosting sales and thus increasingmarket share. Although sales people began byearning a starting salary of only 600 Rmbper month, they could earn up to 10 times thisamount depending upon their sales performance.Unfortunately, Mr. Zhao had encountered somedifficulty recruiting people who were preparedto receive compensation based largely upontheir own efforts. Additionally, there werewidely held suspicions among some of the ABGoperations and quality staff that this particularsystem had invited abuse in the proper record-ing of sales. Although these staffers had “heardrumors” of this type activity, they had no concreteevidence. Any inquiries about the company’slatest sales performance were met with “stonysilence.”

The implementation of Zhao’s various perfor-mance-related pay schemes had given rise to ageneral debate among ABG’s operations staff.The nature of the debate centered around whichdirection or approach would best motivate employ-ees to strive for quality. The divergent viewsexpressed by the operations staff were high-lighted by the contrasting opinions betweenWilliam Porter and Hans Bilger. Porter con-tended that cash payouts were a more effectiveincentive for improving performance than therecognition for a job well done. He believed thatthe employees would “far sooner have more ren-minbi in their jeans than a pat on the back.”Bilger, on the other hand, suggested that pride ofworkmanship and the recognition of a job welldone were more powerful motivators than cashrewards. His reasoning was that China was astatus-conscious society where a high value wasplaced on securing the favorable opinion of one’speers and superiors. Despite a significant amountof spirited discussion, no clear consensus hademerged among ABG’s operations staff as towhose view was more compelling.

DECISION

The next Board meeting was scheduled formid-July 1997, at which time McMullen wishedto offer the members an update on the design andimplementation of the pay for performancesystems at Five Star. Therefore, as McMullencontemplated how he might suggest to Zhaodifferent ways for improving these systems, heneeded to consider several important factors. Firstand foremost, he needed to consider the cultural,historical, social and business contexts in whichFive Star and ABG found themselves. McMullenwas keenly aware that the receptivity to pay forperformance systems was only beginning to beslowly accepted in China. Moreover, he neededto recognize the far greater knowledge that Zhaopossessed about Chinese behavioral habits andculture. Therefore, he could not presume thatwhat would be effective in North America wouldbe effective in China. McMullen was also intriguedby the debates which had surfaced among hisown operations staff. Did the notion of “punish-ments” have some merit in China? Would workersrespond most to cash rewards or were they morelikely to be motivated by some form of recogni-tion? The only thing which seemed clear toMcMullen was that the motivation and qualityproblems had no easy solutions.

NOTE

1. The June 1997 exchange rate was about 8.28Rmb = U.S. $1.00.

APPENDIX: LABOR MARKET

CONDITIONS AND HUMAN RESOURCE

DEVELOPMENT PRACTICES IN CHINA

China’s labor market in 1997 was experiencingsignificant structural changes as market-orientedreforms took hold. State policy efforts to estab-lish a new social welfare system and to imple-ment state-owned enterprise (SOE) reform havehad a profound effect on labor market conditions

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and human resource management practices inboth domestic and foreign-funded enterprises.The first national labor law came into effect in1995 and brought with it a lower level of gov-ernment intervention in human resource manage-ment (HRM) at the enterprise level and moreequal treatment for domestic and foreign enter-prises. It is expected that this law will eventuallyallow all types of firms to acquire greater controlover wage setting as well as the power to hire,discipline and dismiss workers, areas which havetraditionally been highly regulated by govern-ment. In the meantime, China’s labor marketremains under-developed: labor mobility isrestricted, and HRM is a new concept. Therefore,both domestic and foreign enterprises are nowoperating in a highly uncertain environmentwhich reflects a combination of the old plannedeconomy practices with those of newer westernapproaches to HRM.

In 1994, China’s labor force totalled 615 mil-lion, or approximately 51 per cent of the country’stotal population of 1.2 billion. This labor forceis expected to grow by an average of 20.9 mil-lion persons per year between 1995 and 2006.Importantly, no national social welfare system hasbeen established in China. Social welfare has tra-ditionally been the responsibility of the SOEs, thedominant form of industrial organization in theChinese economy since the “liberation” of 1949.

However, as market forces take greater hold inChina, the SOEs will find it increasingly difficultto maintain these responsibilities for delivering awide range of social services including subsidizedhousing, education and health care.

Until recently, HRM in China has beendefined by the tenure employment structure ofthe planned economy. In the old SOE system,labor was regarded as a passive input in the pro-duction process rather than a productive factor.As a result, traditional human resource man-agement included only personnel administrationactivities, such as registering the recruited work-ers, recording increases in wages and promotions(by seniority), filing job changes, and maintain-ing workers’ files. Although training was pro-vided, most of it involved indoctrinating workerswith the Communist Party’s prevailing policies.The focus was on the use of workers rather thantheir career development. Compensation was notdirectly linked to performance and served aslittle incentive for better performance. From anenterprise’s overall performance perspective, it isclear that these practices were not aligned witha strategy to be productive and competitive in amarket-oriented economy.

Source: The Conference Board of Canada,Opportunities and Risks for Canadian Businessin China. 1996.

30 • CASES IN ORGANIZATIONAL BEHAVIOR

JINJIAN GARMENT FACTORY: MOTIVATING GO-SLOW WORKERS

Tieying Huang

Junping Liang

Paul W. BeamishCopyright © 2004, Peking University Version: (A) 2004–05–21

On December 15, 1999, at 11 p.m., Mr. LouBaijin, the owner and managing director ofJinjian Garment Factory, was still in hisShenzhen office in deep thought and red-eyed

from lack of sleep. In the adjacent workshopwere more than 200 of his factory workers. LikeMr. Lou, they had been working 12 hours aday for seven days, non-stop, in order to finish

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in time a large Christmas order for an impor-tant European customer. From his experience,Mr. Lou could tell from the speed and sound ofthe sewing machines in the workshop that theworkers had slowed their pace. Although theymight be tired because of the long hours of over-time they had worked the last week, it was morelikely that their slowness was deliberate. As ageneral practice in this industry, the workers hada tendency to slow their working pace in order toforce management to increase the price of theirpiecework. If the orders were not delivered ontime, Mr. Lou would have to ship the order byair freight at extra expense or risk losing valu-able customers. The question of how to motivateworkers, which had haunted Mr. Lou for a longtime, became more urgent now. When he glancedat the entrepreneurship book, which had been onhis desk for more than a month and which he hadread several times, Mr. Lou forced a smile andpainfully realized that the book had not provideda solution.

LOU BAIJIN AND HIS GARMENT FACTORY

Mr. Lou was born in the town of Louta inZhejiang province in 1956. He graduated fromjunior high school in 1973 and was expected tomake his living as a farmer. In 1976, he becamea mineworker in a neighboring province. Then,in the early 1980s, Mr. Lou returned to hishome town and became a salesman. He travelledextensively in China to promote the use of rawchemical materials for the enterprise sponsoredby his village.

In 1991, Mr. Lou came to Shenzhen (the mostprominent special economic zone of China) andsearched for jobs there. He wasn’t very lucky atfirst. In order to save on living expenses, he livedon two boxes of fast food each day for half ayear. Mr. Lou finally became a commission-basedsalesman for an electronic factory.

By 1996, manufacturing costs in Shenzhenfor garments were very high; consequently, manyfactories migrated to the hinterland of MainlandChina. Unlike those factories’ owners, Mr. Lousaw an opportunity. He took his life savings and

bought 30 secondhand sewing machines at a verylow price and established his first factory inShenzhen.

In the beginning, the factory employed about50 workers. The main business came from takingsmall orders, as a subcontractor, from largerfactories that had direct access to Hong Kongand overseas garment buyers. Mr. Lou’s businessgrew very fast from that point forward. By 1999,Mr. Lou’s factory had 150 sewing machines andmore than 250 workers and had begun to com-pete directly with surrounding factories for theorders of Hong Kong and overseas customers.

THE GARMENT MANUFACTURING

INDUSTRY IN SHENZHEN

Shenzhen was one of the most advanced garmentmanufacturing centres in the world. Garmentsproduced there were sold at department stores inmany upscale locales, including Bloomingdale’sand Nordstrom in the United States. The garmentmanufacturing industry had prospered alongwith the development of the Shenzhen specialeconomic zone during China’s broad economicreforms that began in 1980. Hong Kong wasthe centre of the world garment-manufactur-ing industry during the 1980s and 1990s. WhenChina opened its economic door to foreign invest-ment, Shenzhen was the first place in China forHong Kong garment manufacturers to transferthis labor-intensive industry. Hong Kong hadbeen gradually losing its competitive advantagesto other Southeast Asian countries because of theincreased production costs there.

Shenzhen was inexpensive in terms of land andlabor but also manageable since it was a neighborof Hong Kong, and people spoke the same lan-guage. Hong Kong business people could go towork in Shenzhen as commuters because of thelocation and convenient transportation.

In less then a decade, more than a thousandgarment factories were established in Shenzhen.The majority of the garment factories were eitherowned or managed by Hong Kong residents. TheShenzhen garment industry was literally a directextension of the Hong Kong garment industry.

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WORKING ENVIRONMENT

Hong Kong was a capitalist society known inMainland China for its minimal social welfare andlabor protection laws. Because Hong Kong wasthe model of the Shenzhen garment industry, themanagement system of the garment industry inShenzhen copied the factory environment foundin Hong Kong in the 1970s. These were known as“sweatshops” by economists and sociologists.

Workers in the Shenzhen garment industrywere willing to work overtime during the peakseason, and the average workday was more than12 hours. The workers rested for only one or twodays each month during the six-month peak sea-son because they were able to work only four tofive hours per day, if at all, during the slow sea-son. Over 90 per cent of the wages were basedon piecework performance, which closely linkedindividual effort and reward. Because the other10 per cent of wages given by the employers,(such as food subsidy, holiday allowance andspecial bonus for overtime) barely covered theliving expenses for workers themselves, thepiecework wage fostered strong motivation forworkers to work long and fast. The laws for min-imum wage and labor protection in China hadbeen established for less than a decade and hadnot been strictly adhered to because of the diffi-culty of enforcement, especially in private sec-tors such as the garment industry. In particular,95 per cent of the garment workers in Shenzhenwere peasants who did not have permanent resi-dency status in the city. (China was one of thefew countries in the world with a resident permitsystem among its citizens.) If a person was not apermanent resident, it was virtually impossibleto get social welfare or labor protection from thelocal government.

The average monthly income for a skilled gar-ment worker in Shenzhen was US$150 during thepeak season. The average living accommodationfor each person was three to four square metres,with usually eight or more people sharing oneroom. In spite of such conditions, the promise ofa job in the industry still attracted many peasantsto Shenzhen. In fact, some workers even gave

monetary deposits to their factory just to retainthe opportunity to work. Once they found a job inShenzhen, most did not choose to raise a familythere since they could not afford the high livingcost. Instead, they went back to their homeprovince after eight to 10 years of hard work inShenzhen, and their savings enabled them tobuild a new house and live a relatively easy life.

GARMENT MANUFACTURING

Shenzhen garment manufacturing was a labor-intensive industry with a relatively low capitalinvestment required for entry. About 90 per centof the garment-making equipment in Shenzhenwas imported from Japan, but even with the mostadvanced garment manufacturing equipment, thework still involved a lot of manual labor (sewing,ironing and button tacking, etc), that could notbe automated, especially with ladies’ clothing,which required more dedication than men’sclothing. In most garment-making procedures,workers had to operate the machine by hand.Usually the work was divided into more than 10procedures to efficiently produce even a simpleshirt. Hence, a garment factory needed manyworkers.

The capital requirement of garment manu-facturing was very low compared to the laborrequirement. “You can be a boss for onlyUS$5,000,” said Mr. Lou. Setting up required asmall amount of capital to buy several sewingmachines, rent a house (even an apartment) andhire several workers. The industry continued toattract numerous new entrepreneurs.

SEASONALITY AND

HIGH WORKFORCE TURNOVER

Although the supply of garment workerswas unlimited, some of the workers were unskil-led as they were peasants coming straight fromthe farm. Skilled workers were a valuable andscarce resource during peak time, September toFebruary.

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The need for work in the factories wasseasonal. During peak time, garment factories inShenzhen usually work 12 hours a day, 28 daysper month to produce clothing for Christmas andspring seasons when consumers purchased mostof their wardrobes. During other times of a year,even skilled workers did not have sufficientwork.

During the peak season, proficient workerswere so scarce that factories would do almostanything to keep them. The factories knew thathaving more skilled workers would make themmore competitive. Therefore, retaining skilledworkers was one of the most pressing prob-lems the factories faced. Because of insufficientorders and furious competition in the slow sea-son, factories were usually unprofitable, evenwhen paying minimum wage to workers and thisusually meant a bottom-line loss for the com-pany. Large factories with long-term views usu-ally could keep a minimum stable work forceduring the slow season, while small factoriesusually closed in order to save costs. The trickypart was that no one could tell for sure whetherthe losses in the slow season would be recoveredduring the coming peak season since 90 per centof the garments produced in Shenzhen wereexported to foreign markets, and garment facto-ries in Shenzhen had little knowledge or controlover demand.

Many workers had a long holiday during theslow season when they usually went back to theirhome town. When they came back at the begin-ning of the peak season, some might find a newjob in a different factory if they were not satisfiedwith the existing one. The turnover rate of theworkers was very high because of the unstablenature of the garment industry.

EFFECTIVE MANAGEMENT OF WORKERS

Production costs, which were derived from cut-ting, manufacturing and trimming a garment,were known in the trade as CMT. Because ofcompetition within the industry in Shenzhen, the

CMT of Shenzhen had decreased almost by halfin the past 10 years. Foreign garment buyers usu-ally imported the fabric and provided design pat-terns for the factories to produce apparel for aparticular foreign market. The cost of the fabricwas usually higher than the CMT. This put thegarment manufacturers in Shenzhen at riskbecause the expensive fabric could sometimes bedestroyed in the process of making a garment,and CMT received from the order was usuallynot enough to recoup such losses.

Because of the labor-intensive nature of theindustry, normally the wage of the workers wasabout 60 per cent of CMT of a garment, whichmeant that 60 per cent of the revenue of a gar-ment factory went to workers as wages. Mistakessuch as destroying fabric in the garment makingprocess or late shipments meant the owners didnot make a profit, since they had to bear the costof the fabric and high air transportation costswhen a job was not completed on time for seashipment. Therefore, effective management ofworkers, who not only accounted for 60 per centof the revenue but who also decided the fate ofan order, had become central to survival in thegarment-making business.

Because of the nature of the export-orientedgarment business in Shenzhen, the normal ordersize was relatively small, while the number oforders was large. The typical size of a Shenzhengarment factory ranged from 100 to 200 employ-ees, and a typical factory could produce about200 orders per year. In order to satisfy the mostcurrent fashion, most designers liked to altertheir patterns at the last minute, which gavethe manufacturers very short production lead-times. This meant that the garment factories inShenzhen had to be able to produce a new styleof clothing on an average of every three to fourdays.

In spite of such a short production time, thefactory had to achieve two aims: (1) produce thegarment according to a quality standard accept-able to customers, and (2) ship the product ontime. (Late fashion is no fashion!) These two fac-tors were also essential for a garment factory tosurvive.

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THE PIECEWORK SYSTEM

The piecework system employed by the facto-ries in Shenzhen was well suited to the natureof the work. For example, the retail price of alady’s dress might be US$30, and the cost ofCMT (cutting, making and trimming) for it inShenzhen might be US$3 (the fabric, acces-sories and patterns were supplied by the cus-tomer). The manufacturing process of this dresshad more than 15 procedures, and the threedollars was distributed to the workers first. Theprice of sewing the collar might be five cents,the price of fitting on a sleeve might be threecents, the ironing of the dress might cost fourcents, etc. Each worker was assigned to a spe-cific job and earned an exact amount derivedfrom the number of finished pieces times theprice of that particular job to finish the proce-dure (piecework). One’s pay was strictly linkedwith one’s performance. Normally, more skilledand more industrious workers earned more thanaverage workers did.

Due to the nature of division of garment-making processes, a garment factory was madeup of several self-contained work units, calledproduction teams, which usually contained 10 to15 sewing workers and were able to produce agarment independently. A team leader, appointedby management, had absolute authority to assignthe different working procedures of making agarment among the team members. Besides theunit price of piecework and the efficiency of aworker, production team leaders might also havesome influence on the income of workers, asthey could assign good jobs, more often, to theirfavored team members at the cost of jeopardizingthe morale of the teams. This situation was moresevere in Shenzhen’s garment factories than inother cities because Shenzhen was a migrant cityand many factory workers might come from thesame village town or may even be related to eachother.

After the deductions of the workers’ cost, thebalance of the US$3 CMT was distributed tothe overhead of the factory. What was left wasthe profit for the factory owner.

DETERMINING THE PRICE OF PIECEWORK

Because each procedure for making a particularstyle was unique, the price of the same proce-dure when making a garment could vary. Forexample, the work required to make a round-shaped collar was different from that of a square-shaped collar so the prices for these two jobswere different. The same worker might earn$0.03 for making one round collar and $0.02 fora square one, although the two jobs belonged tothe same production procedure.

Even for the same style of garment, if the ordersize was different, the price of making the garmentmight also vary. Generally speaking, productivitywas increased when workers became more famil-iar with a particular garment. Larger orders wereeasier to produce than smaller ones owing to thelearning curve associated with each order. Thus,owners and management (customers also requiredlower CMT price for larger orders) would lowerthe piecework price for each production procedureof a larger order and increase the prices when theorder was small. The prices might also be differ-ent based on different fabrics for the same orders.For example, silk garments were normally moredifficult to make than polyester ones.

In theory, if garment factories had enoughtime and resources, it was possible to accuratelypredetermine the piecework price of every pro-cedure for every style based on the complexity,average daily salary of workers and the manu-facturing efficiency of average workers. This wassimilar to what Frederick Taylor did in the early1900s in the United States when he objectivelymeasured the actions necessary for each worktask. In reality, until the production of a garmentorder was finished, it was impossible for a gar-ment factory to make an accurate and fair deter-mination on the piecework price for a proceduredue to the nature of the fashion business. Thiswas because the quantity of most of the garmentorders was relatively small (which was uneco-nomical to measure accurately), the short pro-duction lead-time of garment manufacturersoffered no time for accurate measurement, andnon-standard products for each fashion season

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had too many different styles, which were toodifficult to measure reliably.

Therefore, it was a general practice for gar-ment factories in Hong Kong and Shenzhen todecide the piecework price after the completionof an order. Usually at the end of the month,when workers received their salary, they knewthe exact price of the piecework for a particularorder they had finished.

Though it was difficult to know the exact priceof piecework for an order before production, bothmanagement and workers, owing to past experi-ence, would have a rough idea of the range for theprices before they began. Thus, how to divide theslim CMT fee of a garment among them was aprime focus of workers and owners, and each sidetried to get a larger share because a few centsdifference on a piecework price would make abig difference, both to owners and workers.

Because of the norm of “work first; pay later”in this trade, disputes over piecework pricesbetween workers and factory owners happenedquite often. Workers always believed manage-ment would take advantage of them by loweringthe price of their piecework if they worked toofast since no owner was willing to pay more toworkers than their market salary.

Yet, the piecework system still did not neces-sarily favor the factory owners. Workers knew theymight offer more work for less pay if they workedtoo fast. They were too smart to be cheated.Sometimes the workers deliberately and collec-tively slowed their working pace in order to getmanagement to increase the piecework pricebecause of their low productivity. Therefore, fac-tory owners often found themselves in the dilemmaof either being late for sea shipment, which led toan expensive airfreight fee, or paying more toworkers by increasing the price of piecework.

SEVERE PUNISHMENT POLICY

OF QUALITY ASSURANCE SYSTEM

Stern punishment policies prevailed in Shenzhento control for quality problems arising fromthe process of garment manufacture. Because

the income of the workers mainly came frompiecework, to increase their income, they had towork longer hours at a faster pace. But increasesin production efficiency, could to some extent,decrease quality because it tended to increasethe occurrence of errors. So, to assure the qualityof the garments, factories in Shenzhen adoptedsevere punishment systems (such as deductionof a worker’s own salary) to compensate forthe damage induced by the worker. This policyplayed a crucial role in assuring quality, on-timedelivery and low waste rates.

To avoid punishment for errors, workers usu-ally tried to cover their mistakes and avoid respon-sibility. Whenever a mistake was discovered, theparties involved blamed each other. When theworkers were caught, the factory could then deductthe wages to compensate the loss to the company.

Quality problems could not always be easilytraced to the responsible parties. In fact, the man-agement of a factory usually caused more mistakesdue to mismanagement. Workers, owing to thepiecework salary system, had no way of receivingcompensation for the loss of their working timedue to management mistakes. That was one of themajor reasons the job satisfaction among garmentworkers was among the lowest and turnover ratethe highest of all industries in Shenzhen.

WHAT CAN MR. LOU DO TO MOTIVATE

HIS WORKERS TO WORK FASTER?

Mr. Lou’s factory was a typical Shenzhen garmentfactory. He had the same agonizing experiences inmanaging workers as others in the industry. As helistened painfully to the slow pace of the sewingmachines, Mr. Lou knew that he would be respon-sible for a US$15,000 air freight cost to this cus-tomer because there was no way for his factory tocatch up to meet tomorrow’s deadline for thisorder. What a waste! US$15,000 was one-fifth ofhis total profit last year. Mr. Lou had to do some-thing to change the deliberate slowing down ofhis workers. Otherwise he would have to con-sider selling the factory and changing to anotherprofession. What could he do about this?

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S-S TECHNOLOGIES INC. (COMPENSATION)

Al MikalachkiCopyright © 1997, Ivey Management Services Version: (A) 2002–10–11

36 • CASES IN ORGANIZATIONAL BEHAVIOR

Technical

Rick BrockOwner

Keith PritchardPresident

Products Group

Integrated SystemsGroup

Marketing(Ian Suttie)

Systems Analyst(Mark Schwarz)

Project Manager(Vivienne Ojala)

Exhibit 1 S-S Technologies Organization Chart

In January 1994, Rick Brock and Keith Pritchard,owners of S-S Technologies Inc. (SST) wereconcerned with the rapid rate of growth facingtheir company. SST had revenues of $6.3 millionin 1993 and employed 30 highly skilled workers.These numbers were expected to double or triplein the next couple of years. To determine howwell SST was structured to achieve its futuregoals, Brock hired a consultant he had workedwith successfully in the past. The consultant’smajor role was to make recommendations as tothe appropriate organizational design (culture,people, layers of management and administrativesystems) in the event that SST grew from 30 to60 or even 120 employees. Among other issues,questions regarding compensation were surfac-ing, and the owners wanted to address thesequestions as soon as possible.

COMPANY INFORMATION

S-S Technologies Inc., incorporated in 1992,was a 100 per cent Canadian-owned company,which focused on industrial software and hard-ware development. Previously, the same busi-ness had operated for 12 years as a division ofSutherland-Schultz Limited, a large integratedengineering and construction company. WhenSutherland-Schultz changed ownership, the newowner sold the SST portion of the company toBrock. Ultimately, SST was owned by its CEORick Brock, former president of Sutherland-Schultz, and by Keith Pritchard,1 president ofSST. A brief organization chart is provided asExhibit 1.

SST had considerable expertise in the factoryautomation market. The company brought together

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engineers and technicians with different butsynergistic expertise to focus on projects thatother systems integrators were unable or unwill-ing to handle. Out of these efforts, several uniquecommunication and simulation products evolved.The company recognized the opportunities theseproducts represented, and expanded its capabili-ties to successfully bring these products to theglobal automation market. Over the last threeyears, SST had grown an average of 33 per centper year (the Products Group had grown an aver-age of 64 per cent, and the Integrated SystemsGroup an average of 30 per cent), as shown inExhibit 2.

OPERATING GROUPS

As Exhibit 1 indicates, SST was divided into twodistinct operating groups: the Products Group(PG), and the Integrated Systems Group (ISG),each with its own characteristics.

Products Group

PG was involved in the development and mar-keting of the company’s hardware and softwareproducts. The products were sold around the worldthrough licensed representatives, distributors

and direct sales. There were two key types ofproducts:

• Direct-Link Interface Cards were totallyprogrammable interfaces designed to make iteasier and quicker to exchange data betweenpersonal computers and industrial computers/programmable controllers. In layman’s terms,the product allowed office computers to com-municate with factory floor computers (com-monly termed PLCs, or Programmable LogicControllers). SST designed and manufacturedthe interfaces for both the factory floor comput-ers and desktop computers, as well as comple-mentary diagnostic software to ensure thecomputer networks were performing optimally.The Direct-Link cards received the CanadaAward for Business Excellence in Innovationfrom Industry, Science and Technology Canadain 1991.

• PICS (Programmable Industrial ControlSimulator) was a hardware and softwarepackage that allowed a personal computer (PC)to simulate, in real-time, an automated factoryfloor environment. To use PICS, a PC (runningthe PICS software) is connected directly to aPLC via a Direct-Link card. An experiencedsoftware developer then programs, under thePICS environment, a set of routines that sendinput to and receive output from the PLC,allowing the PC to act as if it were one ormore automated factory machines. The PLCis, in essence, “tricked” into thinking it is

Building Effective Organizations • 37

Year Integrated Products Systems Total*

1990 $931,000 $1,100,000 $2,685,202

1991 $1,638,000 $1,200,000 $3,570,797

1992 $2,763,000 $1,300,000 $4,521,987

1993 $4,036,000 $2,270,000 $6,306,000

1994** $5,200,000 $3,500,000 $8,700,000

Exhibit 2 S-S Technologies Revenue*Includes other sources of income and expenses

**Projection

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actually running the automated factory floor,allowing the user to ensure that the PLC soft-ware is performing properly. The system canbe used for debugging new industrial software,retooling, and employee training, all of whichresult in substantial time and cost savings forthe user.

These products, developed by SST, wereoften the result of a solution to a technicalproblem no other company could solve. PGalso had a number of other products and ideasunder consideration for possible launch in 1994or 1995.

PG’s key success factors were appliedresearch, product service and marketing. Newproducts were needed to maintain pace with arapidly changing plant electronic environment.In case of faulty products, a replacement had tobe provided quickly. Also, product awareness bysystem integration engineers, complemented byan efficient and effective distribution network,was vital for PG’s growth.

Integrated Systems Group

ISG was involved in three distinct, yet ofteninterrelated areas of services: consulting, sys-tem engineering and customer support. ISGemployed computer professionals and engi-neers who were assigned to the development ofsoftware and hardware solutions for complexfactory floor systems. Clients were providedwith tested, reliable and sophisticated solutionsfor data collection, custom control software,batching systems, diagnostic systems and pro-grammable controller simulation. ISG also imple-mented and commissioned packaged controlsoftware, and provided project management forlarge and technically complex projects. ISG cus-tomers included industrial manufacturers andinstitutional organizations.

ISG’s key success factors were to completeprojects on time, on budget and of high quality.To date, ISG had received excellent feedbackfrom clients. ISG’s performance dependedhighly on the quality of its employees. Its goals

were for manageable growth, focusing on projectswithin the company’s scope and skills.

ENVIRONMENT

In early 1990, the North American economy wasin a recession. Although recovery was widelypredicted, some results of the recession werepermanent. Companies sought to maintain mar-gins during this recession through downsizingand reducing production costs. SST’s ProductsGroup benefited from this trend because PICSand Direct-Link cards offered ways of reducingthe cost of automating a plant, a move whichoften reduced production costs. The market forPG grew despite the recession. The recessionalso meant that many companies eliminated ordrastically reduced their in-house engineeringcapabilities and sought to subcontract this work,a trend that benefited ISG.

SST’S TOP MANAGEMENT

AND HUMAN RESOURCES

SST was directed by its two owners:

• Richard R. Brock, P.Eng., was the CEO ofSST. During his eight years as president ofSutherland-Schultz Limited, Brock recognizedand nurtured the potential of the ProductsGroup (PG) and Information Systems Group(ISG), which eventually formed S-S Techno-logies Inc. He continued to be involved in allaspects of the new company, and brought toit his extensive knowledge of business manage-ment and development.

• Keith Pritchard was the president of SST.Pritchard had risen through the company ranks,starting as a systems analyst, becoming projectmanager, then group manager, and finally,president in 1992. Pritchard also developed thePICS product that accounted for $500,000 ofcompany sales. His unique set of skills in bothmanagement and technical areas made him anexcellent leader for the company.

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SST had a flat organizational structure thatallowed it to respond quickly to technical andmarket changes. Anyone who had a door left itopen; employees felt free to take their concernsto whomever they believed could help. Decisionswere often made using a consultative approachthat empowered those involved, which led to“ownership” of problems and their solutions.

Projects were assigned to individuals orteams, depending on the size. The individualsand teams were self-managed. Responsibilityfor project scheduling, budgeting and executionwas left largely in team members’ hands. Suchresponsibility created commitment to the projectfor those who worked on it and led to the highmotivation evident within the company.

Overhead resources, such as marketing andadministration, were kept to a minimum. Forexample, there were only four people on the mar-keting team, which managed over $4 million inrevenues. Administrative support was providedby two or, at times, three people. Even the con-troller (Doug Winger) shared his time with twoother related organizations (SAF and WilsonGas). SST was truly a lean organization.

Resources—PG

PG had highly competent, highly motivatedtechnical teams. The technical people wereleaders in their respective fields, with extensiveand varied educations and backgrounds. Theyworked well together to meet Research andDevelopment (R&D) challenges, and to respondquickly and effectively to customers’ inquiries.Many team members were involved in the origi-nal product development and expressed a per-sonal commitment to PG’s continued marketsuccess.

• Linda Oliver, B.Math., the lead programmer forthe PICS product, had worked on the project asa designer and programmer since its inception.

• Bruce Andrews, Ph.D., was involved in the on-going development of the PICS product, espe-cially the communications tasks and testing;he also wrote the manuals.

• Lorne Diebel, C.E.T., developed a reputation asa communications “guru.” Lorne often travelledto far-off sites, on a moment’s notice, to debuga customer’s application problem.

• Jonathan Malton, B.Sc., a talented hardwaredesigner, had been instrumental in advancingthe Direct-Link cards from the old “throughhole” format to the new “surface mount”technology.

Newer members were added to PG as the paceof R&D increased and customer support becamemore demanding. Newcomers brought theirown areas of expertise, and worked alongside themore senior team members, whose enthusiasmfor their work was infectious.

As a result of its progressive and appliedR&D program, the technical team members wereadvanced on the learning curve. This allowedSST to keep ahead of the competition. As aresult, large PLC vendors often came to SST tosolve their communication and simulation prob-lems, rather than investing in the learning curvethemselves.

The marketing team had grown over the pastfew years as PG revenues grew. People fromboth a marketing and a technical backgroundcombined to create a well-rounded, effectivemarketing department:

• Ian Suttie, P.Eng., a leader in the market group,was involved in design review, marketing, dis-tribution and sales of all products. His mainfunction was to set up a network of distributorsand representatives to reach all major marketsin the United States, Europe and beyond.

• Colleen Richmond had experience in marketingwith other high-tech firms. She handled all thetrade shows, promotional material and advertis-ing activities.

• Steve Blakely was the inside salesperson, andcame to SST with a technical background. Heresponded to enquiries for information, and wasthe first contact within SST for customers hav-ing technical difficulties.

• Colleen Dietrich was recently hired by SST todetermine the extent to which leads generatedthrough the various advertising media used byPG eventually resulted in sales.

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The marketing team worked well together,buoyed by PG’s success. However, they werestretched to the limit, and team members admit-ted they were unable to do everything they wishedto do because of personnel constraints. All knownproduct complaints were acted upon; however,there was no formal audit of customer satisfaction.

Resources—ISG

ISG’s most important resource was its people.The engineers and technicians were not onlytechnically competent, but were highly moti-vated and loyal. The following is a brief sum-mary of ISG people and the skills they brought tothe company:

• Mark Schwarz, P.Eng., an accomplishedsystems analyst and leader in the group, wrotesales proposals, estimated projects, and didmost of the marketing for ISG. He was verygood at business development, seeking outlarge, extremely complicated projects, and oftenhelping the customer define the scope andapproach to the project. Convincing a customerthat you could handle their large, technicallycomplex job was tricky business, but Schwarzexhibited a talent for it. Schwarz also had a talentfor scheduling personnel and was interested inensuring that everyone had something interest-ing to do.

• Vivienne Ojala, P.Eng., an experienced and tal-ented project manager, designer and program-mer, as well as leader in the group, was morethan capable of handling all aspects of designand project management for the $2 million-plus projects ISG hoped to attract. She wasexcellent with customers who preferred her“straight” talk to the “techno-babble” othersgave them. Ojala made the customer confidentthat the project was in good hands, which isvery important when you have asked a manu-facturer to give you a production system thatcould determine business success or failure.Ojala was also good at training those whoworked on her projects, as well as developingpeople in general.

• Peter Roeser, P.Eng., was a systems analystwith special skills in the area of communica-tions and various operating systems.

• Brian Thomson, P.Eng., was an expert in thearea of real-time software development. He alsomanaged projects.

• Ted Hannah, P.Eng., was a project managerand systems analyst with extensive skills andexperience.

• Bruce Travers, who marketed ISG capabilitiesin Ontario and provided technical directionfor projects, had over 20 years’ experience withindustrial applications of information systems.

Due to the diverse skills of its people, ISGwas able to tackle large, complex systems inte-gration projects that most of the competitorscould not. ISG had in-house expertise coveringnearly every technology that would be applied toa project. Also, because ISG was not tied to a sin-gle supplier of PLCs or PCs (as many competi-tors were), it was able to be more flexible andinnovative in the solutions that were presented tocustomers.

Another important ISG resource was itsexcellent reputation and relationship with a largeCanadian manufacturer, which had given ISGsubstantial repeat business. As well, ISG hadcompleted many projects for several large NorthAmerican companies and had never failed todeliver on its promises.

ISG was advanced on the learning curve.New customers benefited from the fact thatISG had faced many challenges before, and solvedthem successfully. ISGs experience was morerounded, and, hence more innovative and currentthan an in-house engineering department thathad only worked in one type of factory.

CONSULTANTS’ INTERVIEWS

The consultant interviewed all SST employees.Some of the observations, which resulted fromhis interviews, are grouped below by issues:

i. Hierarchical Structure

Pritchard viewed Suttie, Schwarz and Ojala asgroup leaders. However, PG members generallysaw themselves as reporting to Pritchard and saw

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Suttie as performing the marketing function.When apprised of this situation by the consul-tant, Pritchard said it would take time for Suttieto establish his position.

The ISG situation also proved somewhat con-fusing. A number of ISG members saw Schwarzas a leader. However, there was some confu-sion as to his position vis-à-vis Ojala, who hadrecently returned to SST after leaving to work fora much larger technology company in Montreal.Ojala tells the story of Pritchard begging her toreturn to SST, a story that Pritchard confirms.Ojala saw herself as reporting to Pritchard (andso did Pritchard). Her “formal” relationship toSchwarz had to be worked out.

Before Ojala left SST (she was away forfive months), both she and Schwarz reported toPritchard directly. When Ojala left, many of herresponsibilities, such as some of the proposalwriting and personnel scheduling, were given toSchwarz. Now that Ojala was back, to everyone’srelief, there was the question of how to structureher role, particularly in relation to Pritchard andSchwarz. Ojala would not report to Schwarz, andSchwarz would not report to Ojala.

In a short period of time, Schwarz and Ojalatook on leadership positions in ISG. Informally,they divided the tasks of scheduling, hiring,training and managing customers. They workedin different industrial sectors and tended to dealwith different groups of ISG engineers. However,they jointly made management decisions thataffected ISG goals and maintained a free flow ofpeople and ideas between the ISG groups relatedto each of them.

ii. Commitment and Motivation

The consultant was overwhelmed by the highcommitment to SST and the task motivationexpressed by employees. The people loved thework environment, the lack of politics, the quickresponse to their technical needs (equipmentand/or information), and the lack of talk-for-talk’s-sake meetings. They were confident intheir future and happy to come to work. For theconsultant, this was a refreshing contrast to the

downsizing gloom and doom that permeatedmany other companies he worked with in the1990s.

The employees set their own working hours.They had to put in 40 hours per week, but coulddo this at any time. The flexible working hoursallowed them to engage in other activities thatoccurred between 9:00 a.m. and 5:00 p.m., suchas their children’s school events. Employeeskept track of their overtime and were paid eitherstraight time or took the equivalent in extraholidays. Each employee recorded his/her over-time weekly, and passed on the information toPritchard. Previously, employees had noted theovertime information mentally. Pritchard hadthem write it out and report it weekly, because heobserved that their mental calculations erred onthe side of the company (they remembered fewerhours than they worked overtime).

iii. Personnel Functionand Communications

New employees were generally assigned toa project manager, who informally took on theinduction and training role. In that way, newemployees immediately tied into a task, and itwas left to them to learn the culture and expecta-tions of SST by osmosis. Should the employeesnot perform well, or fit into the culture, theiremployment was terminated.

Periodically, Pritchard would have a meet-ing of all employees to inform them of SST’sprogress, success and direction. Given these meet-ings, Pritchard was surprised to learn that only afew employees were aware of SST’s goals andstrategy.

One issue mentioned by a couple of employ-ees dealt with performance appraisal and com-pany benefits. Performance appraisal wasconducted by Pritchard; however, he did notkeep a record of the meeting, and it was not doneat regular intervals. Also, anyone interested inlearning about benefits or salary ranges forvarious jobs did not know whom to contact. Incontrast, all employees knew whom to contactfor technical information. In fact, performance

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appraisal, compensation and benefits weremanaged in an ad hoc manner.

iv. Compensation

Compensation, base pay and bonuses, wasthe most contentious issue that arose from theinterviews. Base pay tended to be at the low endof the spectrum for engineers. New engineersjoining SST compared their salaries to those ofother graduates and, also, to statistics providedby engineering associations, which publishedcomparative data. They believed that the com-parison showed them as significantly underpaid.

Bonus payments also generated concern.Historically, when SST was part of Sutherland-Schultz, the company had a few good years andgenerous bonuses were paid. However, whenthe recession hit, the construction side ofSutherland-Schultz slumped considerably and,although PG and ISG held their profitability, thecompany as a whole could not afford to paybonuses. In fact, SST people were laid off, andsome of those who remained felt cheated. Nowthat SST was on its own, there was an opportu-nity to tie bonuses directly to the company’sperformance. Management wanted the bonussystem to achieve the following goals:

• To develop a cooperative team spirit.• To foster cooperation between ISG and PG, and

to limit interpersonal competition.• To provide extra reward for unique contributions.• To not reward weak performance.

v. Partnering

Given the experience of losing Ojala toanother firm (albeit temporarily), Brock wasanxious to develop a “partnering” system inwhich those crucial to the company’s successcould participate. He wanted to make people likeSuttie, Schwarz and Ojala feel like owners orpartners committed to the company, so theywould not be lured away by the promise ofgreener pastures; after all, the job market forpeople of this calibre was extremely promising.This was true not only of those in managementpositions, but also of the best systems analystsand programmers: people like Linda Oliver andLorne Diebel.

Brock contemplated having part of the part-ners’ bonus to consist of stock in the company.The problem was that these people were allyoung, with growing families, and could notafford to have their money tied up in stock whenthey had mortgage payments and day-care coststo worry about. Generally, their immediateconcern was cash flow, as they knew their long-term earning potential was excellent. Brock’sconcern was how to structure the partners’ com-pensation to keep key people on-side, whileallowing room for more partners to be broughtin as the company grew. The company hadrecently hired a half-dozen talented engineeringand computer science students, all of whom hadthe potential to become the next Schwarz, Suttieor Ojala. On top of all this, Brock still had hisown return on equity to consider.

42 • CASES IN ORGANIZATIONAL BEHAVIOR

Culture

• Open communications at all levels• Flexible working hours• Few policies• Profit-sharing at all levels• Quick decision-making• Encourage initiative, not

bureaucracy

People

• Highly motivated• Highly skilled (Tech)• Entrepreneurial• Team players• High performers• Committed to SST

Exhibit 3 S-S Technologies’ Desired Culture and People

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WHERE DO WE GO FROM HERE?

Brock, Pritchard and the consultant wanted todesign a compensation system that would con-template an expansion to double or triple SST’sexisting size. They knew the existing SST cul-ture attracted and nurtured highly motivatedand committed employees who expanded thecompany successfully and rapidly. The trio’stask was to design a compensation system that

would support the existing SST culture and thekind of people they wanted to attract (Exhibit3). They also wanted to develop an action planthat would ensure buy-in to the new compensa-tion system.

NOTE

1. Pritchard had a minority share in SST.

Building Effective Organizations • 43

OP4.COM: A DYNAMIC CULTURE

Ken Mark

Fernando Olivera

Copyright © 2000, Ivey Management Services Version: (A) 2001–01–23

INTRODUCTION

Feeling full of energy after having a produc-tive company meeting that focused on updat-ing OP4.com’s vision statement, Ray Matthews,co-founder and Internet chief executive officer(iCEO) of OP4.com paused to reflect on thegrowth that his company had achieved. It wasMay 30, 2000 and Vancouver-based OP4.com,an internet portal for teenagers, had just cele-brated six months of existence. With the goalof creating the Internet’s leading portal forteenagers, Matthews knew that OP4.com’s inter-nal culture had to reflect the identity of its Website: hip, cool, spontaneous, witty.

Now that OP4.com’s Web site activities weregaining momentum and media attention, Matthewswanted to maintain this unique culture throughthe next few crucial months of rapid growth andchange. Tom Pressello, co-founder and businesschief executive officer (bCEO) explained theimpetus for change:

Content sites in general are becoming more closelyscrutinized by investors. To facilitate a drive

towards profitability, we have recently divided thecompany into four divisions, each responsible forgenerating revenue. In addition, we’ve got to startthinking about revenue streams on content—wire-less, syndicated content, models for sustaining ourbusiness. I’m sure that because of this change, ourculture has to adapt to this reality.

THE INTERNET AND THE DEVELOPMENT

OF TEEN-ORIENTED WEB SITES

With the advent of instant messaging tools,communities of Internet interest groups beganforming around the world. Web companies likeTheGlobe.com, iVillage and Lycos began devel-oping virtual communities where like-mindedindividuals could congregate. Communicationbetween people became even more advancedwith the development of chat capabilities—amini-industry comprised of companies like iChatand ICQ began facilitating real-time conversationtransmitted electronically. Aside from sheer nov-elty, a significant driver of this change was cost—these services were often provided free of charge

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to anyone with an Internet connection, oftenas a means to develop loyalty amongst users.Because many of the early pioneers and adoptersof Internet technology were teenagers, companiesfocusing on the teenaged demographic began totarget this niche market. The goal of communitysites was, in general, to gather a particular targetgroup in large numbers such that the collectionas a whole became attractive to advertisers.Relative to other media such as television, printor radio, it was inexpensive to set up a Web siteand as a consequence, large numbers of commu-nity sites sprang up in the mid 1990s, attemptingto develop into full-fledged business entities bycatering to the consumption needs of their audi-ences and or by selling advertising.

The percentage of U.S. teenagers online aged12 to 19 would jump from 11.5 million to 20.9million between 2000 and 2002.1 During thatsame period, conservative estimates indicatedthat the percentage of children and teenagersonline (more than once a week) as a segmentof the teenaged population, would jump from26 per cent to 47 per cent.

Without a doubt, the teenaged North Americanpopulation was more Internet-enabled than anyother demographic group. This demographicgroup had virtually grown up with the Internetand was very at ease with its technology. Theyhad gained a powerful communication tool withe-mail, and could be in constant, real-time com-munication with their friends anywhere in theworld.

THE CREATION OF THE YOUTH PORTAL

OP4.COM: OUR PLACE 4 EVERYTHING

OP4.com was the brainchild of Stuart Saundersand Ray Matthews, both in their early thirties.Saunders, a full-time motivational speaker, hadworked directly with thousands of teens acrossCanada and the United States. Based in London,Ontario, Saunders was the co-founder in 1990of Leadership Innovations, a leadership companythat provided leadership training and motivationalspeakers to the North American high school

market. Vancouver-based Matthews was a formerschool teacher, award-winning educator, authorand entrepreneur.

Wanting to attract the attention of teenagersand provide them with a place to voice theiropinion, OP4.com’s objective was to build itselfto be a portal, an Internet site that would attractand retain a large percentage of its visitors byproviding multiple communication and informa-tion functions and products (see Exhibit 1).OP4.com allowed teenagers to discuss topicswith each other through electronic chat rooms,use e-mail and bulletin boards and submit arti-cles. The OP4.com concept would need to haveimmediate appeal to this demographic group inorder for its business model to work. OP4.comwanted to position itself as the premier youth-oriented site in North America, with proprietarycontent as a cornerstone.

Saunders commented: “I started this to havea positive Web community for kids. I had the visionbut not the dollars and cents—I was thinkingstrictly of the kids.” Saunders’vision for the site ledto the creation of three content sections: expres-sion, entertainment and empowerment. Saundersfelt that these sections represented all facets ofteenaged life and the issues that teenagers faced.

Expression—This section allowed users to voicetheir opinion and for others to read and critiquethem by submitting responses. Spontaneity wasencouraged and there was a relatively short spanof time between article submission and postingon the site. This was a forum where youth couldwrite off-the-cuff but personal pieces on spiritual-ity, coping, activism and more. These pieces werelimited to 300 words or less and OP4.com’s con-tent editors reviewed these pieces, checking formajor spelling or grammatical errors. This editingprocess allowed OP4.com to screen out hate post-ings and overtly vulgar, undesirable articles.

Entertainment—This section contained reviewsof movies, music, books, sports, television andInternet sites of interest to teenagers. Aimed atkeeping visitors updated on the North Americanentertainment scene, reviews were both writtenby OP4.com staffers and submitted by members.

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Also included were interviews of music bandsconducted by OP4.com staff.

Empowerment—This section included self-help,motivational pieces—articles which were meant,in the words of OP4.com staffers, to change theirworld. For example, there were articles titled ACall to Action, People Doing Good, AIDS andTeams Doing Wonderful Things. The content ofthis section was generated internally by inter-viewing selected role models in the youth com-munity. In some cases, articles were solicited fromfeatured youth leaders.

According to Saunders and Matthews, twokey factors differentiated OP4.com from otherteen sites. The first was the fact that their con-sumer aggregation model was unique: it reliedon Leadership Innovations’ speakers to marketto its audience. Since Saunders’ other company,Leadership Innovations, reached hundreds of

thousands of students each year through acombination of motivational speeches, summerleadership camps and weekend leadership confer-ences, there existed the opportunity to promoteOP4.com via speech mentions and bookmarksthat were handed out at the end of every speech orevent. Saunders felt that Leadership Innovations’endorsement of the site would encourage hisaudience to visit it.

The second point of differentiation was thequality of its written content: it published itsown staff articles and monitored the quality ofsolicited content on its site with the goal of devel-oping a consistent, wholesome brand image.

The business viability of content sites hadbeen called into question in mid 2000, withbusiness analysts declaring that content siteswere unlikely to survive as business entitiesunless these sites showed investors a tangiblepath towards profitability.

Building Effective Organizations • 45

Exhibit 1 OP4.Com Site Screen CaptureSource: www.op4.com; November, 2000

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THE SENIOR STAFF AT OP4.COM

The three founders of OP4.com complementedeach other’s personalities. Between Saunders,Matthews and Pressello, there was a mix ofvision and attention to detail and a range ofdifferent skills that each brought to the com-pany, including financial management, peoplemanagement, idea development and projectexecution.

Stuart Saunders, iPresident,Co-Founder and Director of Aggregation

Beginning as a high school motivationalspeaker in the late 1980s, Saunders had builtthe largest youth-oriented leadership companyin North America (in terms of youths reached).Currently managing a speakers’ bureau of moti-vational speakers, leadership summer camps,running seminars and workshops, Saunders andhis London, Ontario-based team estimated thatthey reached over 10 million students per year inCanada and the United States.

“Although I am currently the president ofOP4.com,” Saunders offered, “I know that some-time soon, OP4.com will have to bring on some-one more experienced to help run this company.Currently, I spend about 30 to 40 hours a weekon this project, aside from the time I spend pro-moting the site during my speeches.”

Ray Matthews, Co-Founder and iCEO

Forming Balance Fashions Inc. in 1986,Matthews grew the small company into a multi-million dollar direct sales fashion company thathad since expanded to include more than 1,000sales representatives across Canada.

The concept of direct sales with BalanceFashions took off and by January 1990,Matthews had his Balance National Programcounting over 140 sales representatives nation-wide. Matthews wrote “The Dirt on Success,” astrategic entrepreneurial seminar series that waspresented to more than 250,000 individuals in

North America. Most recently, Matthews was thefounder of villagenetwork.com a virtual commu-nity site for artists that was sold to Art VisionInternational.

Matthews commented:

In my position as iCEO, I aim to be the visionary,always encouraging my team and multi-tasking.I’m not strong at linear patterns and minutedetails—that’s why we have Tom Pressello, thebCEO, who handles the corporate financing, chieffinancial officer-type decisions. He starts at ‘no, itcan’t be done,’ then works to ‘yes.’ I’m the oppo-site, starting at ‘yes, it can be done’ then workingto ‘no.’

Tom Pressello, Co-Founder,bCEO and Chief Financial Officer

Prior to joining OP4.com’s Vancouver headoffice, Pressello, aged 31, was a consultant inthe strategic planning and corporate financeareas for technology start-ups and turn-arounds.A graduate of the Business Administration pro-gram from a prestigious Canadian businessschool, Pressello had also been the vice-presidentof finance for a generic pharmaceutical companyand had worked in merchant and corporatebanking.

As bCEO, I’m like the stereotypical ‘Dad’ in thefamily, keeping a tight control over business andfinances, and Ray is the stereotypical ‘Mom’—motivating, nurturing, cheerleading. We butt heads,but that tension keeps us working well with eachother. At OP4.com, my job is to lead the companyfrom a financial viewpoint—I challenge all oursuppliers on their costs to us. They know that theycannot squeeze me for extra profits and I think theyrespect me for that.

STAFFERS AT OP4.COM

Saunders ran OP4.com’s office in London,Ontario and oversaw a staff of six “seeders,” whowere hired as facilitators in OP4.com’s chat

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rooms. Consisting entirely of part-time, highschool-aged staff, the seeders would be presentat all chat room discussions, mediating any dis-ruptions, answering questions, bridging conver-sation gaps. Since London was located severalthousand kilometres away from Vancouver,Saunders wondered if he would continue to runthe seeders from his London office. OP4.comhad been split in this fashion at the beginningdue to the fact that Matthews was located inVancouver and Saunders had his company locatedin London.

Matthews knew that, in order to cater to theinterest of teenagers, it was critical that someoneclose to that age group managed the site’s content.OP4.com wanted to display through its Web sitea young, dynamic image of itself. Matthews’ firsthire was Sam Reynolds, 24, as content director,or as she was commonly called, “Content Queen.”He then hired the three members of the contentteam—Dana Starritt, Libby Shumka, JessicaCowley and next the marketing staff. Last, hehired Web administrator, Ian Hayashi, and SpringMunsel, the senior designer to support the site forFlash, HTML and Java (these were the program-ming languages that enabled Web site creation).

Matthews located his employees by usinghis network of contacts, preferring to seek outpeople he already knew and trusted. One issuehe faced was finding good Web talent who hadexperience in programming languages, were flu-ent in Internet-style communication and had aproven track record. Also needed were peoplewith contacts who would be able to solicit adver-tising and business.

Reynolds commented:

There’s lots of recruitment at this stage of ourcompany. It’s who you know, personal contacts andreferrals. Personal contacts are great—everyoneknows at least someone and you know that if some-one comes recommended, there will be no problem.

By offering university internships, OP4.comfound many of its younger writers. This was notonly due to the fact that OP4.com as a start-uphad limited cash resources, but also because the

interns were close to the age demographic it wastrying to reach. Two interns were aged 19 and 20.

Matthews knew it was critical to bring peoplein who fit into the dynamic culture he was tryingto build. By asking them a series of questionsduring their interview, such as what was theirfavorite movie and why, he was able to deter-mine their fit. Matthews also looked for peoplewho would thrive in a changing environment.Dana Starritt was the senior editor. Her firstinterview with Matthews was supposed to be atthe office but, due to unforeseen circumstances,the venue changed twice more from a downtownbookstore to the Cactus Club (a downtownVancouver bar). Through his observation of hercool reaction to these changes, Matthews wasable to determine that Starritt would be a goodfit for his company since she felt comfortablewith spontaneity and change.

In Matthew’s search for staff for OP4.com’sVancouver office, he was specific on the mix ofpeople he would hire. “There are four ‘styles’that we look for,” said Matthews, “and wewanted to build OP4.com with a balanced staff.”Using popular American icons to describe thesestyles, he continued, “There is the Analyzer,much like Mr. Spock (Star Trek), the Driver,embodied by Donald Trump (businessman),Socializer, for example Meg Ryan and RobinWilliams (actors), and Relators, like OprahWinfrey (talk show host).”

Over time, it became clear that any new hireswould need to fit with the young dynamic culturethat was developing and that this culture wascritical for the success of OP4.com

Sam Reynolds observed:

It’s an uncomfy oxymoron if we’re pitching a siteto youth from a stuffy, stagnant corporate culture.Here, there is no break between the culture ofyouth in general and the culture of our team. In theInternet industry, it’s an employees market and onecan’t assume that people will come begging forjobs. On the other hand, these people will spendlong hours at work—you will not be invited toplay on our team unless your vision is synchronouswith ours. We want to make people as comfy asthey can be.

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DEVELOPING A YOUTH-ORIENTED

CULTURE AT OP4.COM

With his first few hires, Matthews knew that hehad created a solid foundation upon which tobuild a company. Reynolds and Starritt embod-ied the youth culture he was seeking to build andMatthews knew that he could count on them totrain his next hires.

“We want to ensure that everybody is accessi-ble to the team and vice versa,” Matthews stated.“We share our musings constantly, have weeklystrategic action plan discussions and celebratethe results achieved that week. I want to keep myteam well-informed.” Given that OP4.com hadramped up very quickly, Matthews felt that it wasimperative the vision statement was revisitedevery six months in order for the staff to feel thattheir involvement and ideas were important.

Matthews’ approach to managing was one of“managing by walking around.” He wanted to beinvolved with his people at the ground level, tofind out what they were working on, to get asense of the whole operation by being in the“trenches,” so to speak. To make new employeesfeel that they were part of the team, OP4.comhad a welcome letter when the employee firstarrived, appreciation cards, flowers and beerwere sent, and weekly meetings were held tomake sure the employee adjusted well.

A ritual that had been instilled from thebeginning was the “robust discussion,” used towelcome team members to OP4.com. JessicaCowley, staff writer, was “honored,” along withtwo other new members, with a team-bondingsession where each team member shared theirpersonal thoughts. No topic was taboo and thisexercise was aimed at creating a sense of trustamongst team members. The objective of thesession was to develop emotional relationshipsbetween team members and foster the feeling oftrust within the team. “There’s a real sense ofsafety, security and acceptance of differences atOP4.com,” Cowley stated. “You can feel the cul-ture through the variety of ways in which wetreat each other, approach each other, supporteach other. It’s all very forward-looking—from

the rituals we have, weekly meetings, runningjokes, socializing outside of work time, we reallyenjoy each other’s company.”

To provide examples of leadership ideals,incidences of successes were passed down tonew members. The valiant efforts of the com-pany secretary who drove to the airport to ensurethat the courier package would be submitted intime had become a company legend. Matthewsbelieved that the lack of a formal employee train-ing program was, in part, made up by theseanecdotes which served the purpose of culturebuilding at OP4.com.

“We’re also empathic as a company and this isdefinitely reflected through our Web site as ourusers see us as an anonymous and safe forumfor ‘coming out of the closet,’ for example,”remarked Reynolds. “No one needs to use his orher real name on the site. To help our staffersappreciate this aspect, we had our team write asecret on a postcard—their deep and darkestsecret—and drop it, addressed to ‘The Postman,’in the mailbox.”

OP4.COM’S UNORTHODOX

TRAINING AND FEEDBACK SYSTEMS

As in most other start-ups, OP4.com’s manage-ment team worked long hours to develop the site,often trouble-shooting minor problems whicharose on a constant basis. The many demandson everyone’s time meant that very few formalmeetings could be set and it was up to newemployees to learn from observation, by makingmistakes or from a combination of both.

When asked about formal training Reynoldslaughed (hard) and replied:

Training? It’s been off the cuff. Just jump offthe deep end and we’ll see you in two weeks! No,seriously, there’s tons of support. Personally, I sitpeople down and go through priorities and long-term goals. Here is something interesting. Therewere four people who started on May 1. I wantedto teach them that the Web site needs to be caredfor on a permanent basis and to illustrate that point,

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we went on a field trip to a home furnishing store.Each person picked out plants and we let themknow that they had to care for the plants, just asthey would for the Web site.

On another occasion, we got the staffers buyingpostcards, writing five personal goals on them,addressing and sending the postcards to them-selves. When we wanted them to get used to think-ing quickly—in this business, you have to be quickon your feet—as a second assignment, we gavethem three words, hammer, velvet, emancipation,and told them to write a creative piece in oneminute, then send it to a team member. Along withcreative writing, this exercise also served to culti-vate their peer editing skills.

Public recognition was used as a mechanismto provide feedback to OP4.com employees. Atthe end of team meetings, Matthews would takethe time to publicly recognize someone worthyof praise. Matthews felt that “dramatizing whatsuccess looks like” was far more powerful thanmonetary rewards. It was his belief that this affir-mation of good work performed meant more tohis employees because they were publicly recog-nized for it.

REWARDING INITIATIVE

WITH RESPONSIBILITY

Matthews knew that in a start-up situation,opportunities for new business partnerships ornew online ventures could arise at any time.Because of his preference for spontaneity, he wasopen to employee suggestions about new projectideas. Thus, Matthews allowed his employees toapproach him with ideas for projects and if theideas were deemed feasible, it was likely thatMatthews would hand over to that employeedirect ownership of the project.

When an employee suggested exploring co-marketing initiatives with a wireless company,Matthews endorsed her proposal and re-arrangedher duties to reflect this new focus. On anotheroccasion, Reynolds allowed an intern to assume

content production and publishing duties whenhe sought to assume this responsibility.

MATTHEW’S REACTION IN

THE FACE OF EMPLOYEE MISTAKES

Matthews realized that not all ventures wouldwork out and that employees would be prone tomaking mistakes of various magnitudes. He wascomfortable with this risk and made it clear tohis staff that he trusted them to make the rightdecisions. However, when pressed about how hewould deal with staffers if serious mistakes weremade, Matthews responded:

Here is a story I read in a newspaper once. Thingshad gone wrong at a large software corporationand an engineer, through his mistakes, had just costthe corporation $5 million. Being also the headof the research and development department, theengineer paid a visit to the president and tenderedhis resignation. The president listened to the engi-neer’s announcement, thought about it for a fewmoments and replied; ‘Why would I fire you if itjust cost me $5 million to train you?’ That, in anutshell, explains how I would handle potentialmistakes by my fellow staff members.

REWARDING STAFFERS AT OP4.COM

OP4.com, like most Internet start-ups, had a poolof stock options for their employees, believing thatproviding the potential for rich rewards was a keymotivating factor for employees. Options allowedan employee to purchase company stock at a verylow price, often less than 10 cents per share. Thewhole notion behind stock options was that at theinitial public offering or in the event the companywas purchased, the vested options would be worthhundreds if not thousands of times of the amountinitially paid for them. Because of this potentialpayout, stock options were intended to encourageemployees to put in more effort. Ideally, they wouldfeel a bigger sense of ownership and, along withthe rest of their co-workers, work hard to increasethe value of their company.

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OP4.com was still a small company withunder 20 people and no formal promotionprocesses were in place. Promotion was an adhoc process—people who took the initiative anddeveloped a new program were rewarded for itwith more responsibility, but not necessarily atitle which conferred more seniority (thoughanother perk of working at this start-up wasthe option of choosing your own work title—examples of which were “Code Samurai” (IanHayashi), “Community Hactivist” (Dana Starritt)and the aforementioned “Content Queen” (SamReynolds)).

Reynolds observed, “If there is somethingnew, do it, then find someone to replace what youwere previously doing. We’re taut and stretchedand at this stage of growth, we need to bringpeople on.”

MAINTAINING THE CULTURE

THROUGH THE NEXT STAGE OF GROWTH

From meetings with OP4.com’s investors, Pres-sello knew that their next major goal had to be

profitability. To achieve this, the founders beganto draft formal reporting structures to managetheir staff and prepared to divide the companyinto business units that would be responsiblefor generating their own revenue streams—content/wireless, OP4 media projects, OP4 mar-keting, OP4 Web site and education program/community programs. OP4.com anticipated thatit would start to hire more people as their pro-grams developed.

Steve Goodman, vice-president of corporateaffairs offered:

We may put together a magazine, or explore otherprojects in television, radio or wireless. At thisstage, it’s like having a bank account with no job—the advertising revenues we have will not sustainus long-term. This restructuring into business unitsis our first step towards generating self-sufficientrevenues.

What was also very important to Matthewswas that the unique culture he had built up atOP4.com remain intact as the company grew.Matthews had just finished his Tuesday morningsession on building culture where the team had

Building Effective Organizations • 51

Business Unit (all Vancouver)

Content/Wireless

OP4 Media Projects

OP4 Marketing

OP4 Web site

Education Program/CommunityPrograms

Purpose

Produce content for site andseek out/manage wirelesspartnerships.

Develop new concepts in mediato generate excitement amongsttarget audience with the objectiveof youth aggregation.

Market OP4.com to youthmarket.

Manage the ‘look and feel’of the OP4.com Web siteand chat.

Working with high schools to solicitcontent.

Staff Members

1 director (Sam Reynolds),4 editors, 1 designer

3 staffers

2 staffers to Toronto

Matthews, Saunders,Pressello and 6 staffers

2 staffers

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revisited the vision statement. The upcomingweeks would be crucial because Matthew won-dered if the still-nascent state of OP4.com’s cul-ture at its Vancouver head office would survivethis restructuring.

NOTE

1. Source: Jupiter Communications, 2000.

52 • CASES IN ORGANIZATIONAL BEHAVIOR

WESTJET AIRLINES (A): THE CULTURE

THAT BREEDS A PASSION TO SUCCEED

Ken Mark

Gerard Seijts

Copyright © 2001, Ivey Management Services Version: (A) 2004–07–09

INTRODUCTION

It was April 17, 2001, and WestJet’s marketcapitalization had just surpassed that of AirCanada’s, the country’s leading airline. “We’rein the hospitality business and our culture iseverything to us,” stated Don Bell, co-founderand senior vice-president of customer serviceof Calgary-based WestJet Airlines. Bell wasadamant on maintaining WestJet’s culture inthe face of increased company growth and com-petition. All of WestJet’s founders believed thatculture was the key to their airline’s continuedsuccess and that they could not afford to mis-manage it. However, Bell knew that the tremen-dous growth at WestJet would put pressureson its unique culture. He wondered how WestJetcould grow and maintain its vibrant culture.

THE HISTORY OF WESTJET AIRLINES1

The roots of WestJet Airlines go back to 1994,when entrepreneur Clive Beddoe (president ofthe Hanover Group of Companies) discoveredthat it was cost-effective to purchase an aircraftfor his weekly business travels between Calgaryand Vancouver. During the time his company

was not using this aircraft, Beddoe made it avail-able for charter to other cost-conscious businesspeople through Morgan Air, owned and operatedby Tim Morgan. The response to this venturecaused Morgan—along with Calgary business-men Don Bell and Mark Hill—to realize thatthere was an opportunity to satisfy the need inWestern Canada for affordable air travel coupledwith good service by starting an airline.

Beddoe, Bell, Hill and Morgan believed thatthere was not only a market for a low-fare carrierin Canada, but that they could succeed at bring-ing this service to the country. Through research-ing other successful airlines in North America,the team examined low-cost carriers throughoutthe continent, including the primary examplesof Southwest Airlines and Morris Air (whichlater became part of Southwest Airlines), bothoperating in the United States. David Neeleman,president of Morris Air, was contacted for assis-tance on writing a business plan, and along withMorgan, Hill, Bell and Beddoe, became the found-ing team of the concept that became WestJetAirlines.

Over the next months, the team worked withNeeleman to develop a comprehensive businessplan and financial model. This information wasthe blueprint for the start-up of a three-aircraft,

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Building Effective Organizations • 53

low-cost, low-fare, short-haul, point-to-pointairline to serve markets in Western Canada. Withthe business plan in hand, a number of localbusiness people were approached, and within30 days, the needed capital (Cdn$8.5 million)was raised.

After this, developments moved quickly inbringing WestJet to life. In July 1995, WestJet’sfirst staff members moved into the company’sfirst office in downtown Calgary. In Novemberof that year, the team purchased two Boeing737–200 aircraft and added a third to the fleetin January 1996. In late January of 1996, theteam completed a second offering to retail andinstitutional investors and raised over Cdn$20million to commence operations on February29, 1996.

The airline started operations flying to thecities of Vancouver, Kelowna, Calgary, Edmontonand Winnipeg. Since then, the company hascontinued to expand, bringing more WesternCanadian cities into WestJet’s world. In March of1996, WestJet added Victoria to its route network.

WestJet was started in an “ideal” environ-ment—Western Canada—where the main com-petition came from Canadian Airlines, whichhad experienced financial troubles. AlthoughCanadian initially tried to match WestJet’s rock-bottom fares (and attempted to compete in vari-ous other ways), it could not afford to competeagainst the upstart’s low-cost structure (e.g.,WestJet provides no meals, offers no frequentflier programs and has incredible turnaroundtimes at the gates).

In June 1996, the airline purchased its fourthBoeing 737 aircraft and added service to the newmarket of Regina. In August that year, Saskatoonwas added. In June 1997, Abbotsford-FraserValley was added, making WestJet the only sched-uled carrier to operate at that airport. March 1999saw the addition of the two new destinations ofThunder Bay and Prince George, and in September1999, WestJet added Grande Prairie to its servicearea.

WestJet met a major business goal when, inJuly 1999, it completed its initial public offeringof 2.5 million common shares. The share price

at closing was Cdn$10. It was an exciting dayfor all WestJetters, representing the achievementof a major goal and raising the necessary capitalfor expansion of the company in the comingyears. The capital raised from the offering,Cdn$25 million before post-closing adjust-ments, would be used for the purchase of addi-tional aircraft, as well as the building of newhead office and hangar facilities in Calgary, inorder to meet the needs of the company’s expand-ing workforce.

In 1999, unprecedented changes and restruc-turing were seen in the airline industry in Canada(e.g., plans for a merger between Canadian Airlinesand Air Canada, small carriers that discoveredviable market niches, and carriers that failedwithin a short time-span), offering a window ofopportunity for WestJet to expand its servicebeyond its existing route structure. In December1999, WestJet announced that it would be extend-ing its successful low-fare strategy across Canada.Steve Smith, WestJet’s president and chief exec-utive officer in 1999, justified the expansion bystating:

Our success over the past four years has proventhat the travelling public will embrace any expan-sions to our airline’s route network and schedule,while continuing to maintain the low-fare structureand exceptional customer service that has becomesynonymous with the WestJet name.

In March 2000, WestJet added services toHamilton and began to build the John C. MunroHamilton International Airport as it’s easternhub. In April 2000, WestJet added Moncton toits network and in June 2000, Ottawa was alsoadded. Bill Lamberton, WestJet’s vice-presidentof marketing and sales, noted that these scheduleenhancements included services added as a resultof the addition of the third-generation aircraft for2001. He stated:

This new aircraft will allow us to enhance our longhaul schedule to provide greater connectionsbetween our Western hub in Calgary and ourEastern hub in Hamilton. As we continue to expandour airline, we will look for new cities to add to our

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network, new niche routings, as well as betterconnections, so that more and more Canadians willbe able to benefit from our low-fare, high-volumeservice.

Hamilton was chosen as the Eastern hub forseveral reasons. First, it was a niche route, mean-ing no other airline operated from the airport,hence making WestJet the airline of choice forpeople who lived in this Southern Ontario area.Second, costs were an issue. For example, land-ing fees for Toronto were steep. Third, efficien-cies were a consideration. For example, WestJetcould land an aircraft in Hamilton, deplane andboard guests, refuel, restock and load and unloadbags within 20 minutes. At Pearson InternationalAirport in Toronto, it would be hard to taxi tothe gate in this time! The more time in the air,the more efficient and profitable airlines can be.Moncton was also a niche market. Halifax hadsignificant competition, whereas Moncton hadlittle.

THE FOUNDERS

Clive Beddoe, Don Bell, Mark Hill and TimMorgan founded WestJet and, in April 2001,remained part of the executive team. Beddoe wasthe president and chief executive officer as wellas chairman of the board of directors. Bell andMorgan were senior vice-presidents, and Hillwas vice-president. Bell was responsible for theairlines’ customer service areas including reser-vations, information technology (IT), customerservice, and frontline services including flightattendants and airports. Bell and Beddoe werecredited with creating the carrier’s bottom-upmanagement structure and energizing the staff.Morgan, a former pilot with Canadian RegionalAirlines, was responsible for maintenance andflight operations. Hill was in charge of strategicplanning.

All four entrepreneurs were substantial share-holders in the company—2000 data indicatedthat, combined, they owned nine per cent of theairline, a stake worth Cdn$85 million.

COMPANY PERFORMANCE

Since the beginning, WestJet had been consis-tently ranked among the most profitable airlinesin North America. WestJet had been profitablesince its inception in 1996. In an industry where90 per cent of startups fail financially, WestJetgrew from two planes in 1996 to 21 in 2000.Revenues in 2000 were Cdn$332.5 million, andexpected revenues in 2001 were Cdn$460 mil-lion. Despite more competition, higher fuel costsand a slowing of the North American economy,the airline’s earnings per share for the first quar-ter of 2001 increased to 13 cents from 10 centsduring the same period in 2000.

All employees shared in company profits.WestJet’s generous profit sharing plan allocatedbonuses based on profit margins: if the airline’sprofit margin was 10 per cent, then 10 percent of the net income would be spread amongemployees, prorated to salary. This profitsharing plan had a ceiling of 20 per cent of netincome, and cheques were handed out twicea year.

In November 2000, more than Cdn$8 millionwas handed out to employees, with the aver-age cheque amount being Cdn$9,000. One man-ager quipped, “That’s why we have motivatedpeople.” But Beddoe insisted it was not justabout money, saying, “They know their contribu-tions have gone above and beyond anything we’veasked of them, and that’s what generated theprofits.”

In addition, right from the start, many ofWestJet’s employees owned equity in the com-pany. WestJet matched every dollar their employ-ees invest in company stock. For example, in2001, 83 per cent of the airline’s staff memberswere shareholders. Many of the original employ-ees invested prior to WestJet’s initial public offer-ing and have more than Cdn$400,000 in stockvalue. The first 20 pilots at WestJet becamemillionaires.

In exchange for profit sharing and the stockpurchase program, WestJet’s employees workedfor 95 per cent of the industry’s median salary intheir job category.

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WestJet took pride in the customer serviceit provided to its guests. Since the Air TravelComplaints Commission began tracking passen-ger complaints in 2000, it had received only twofrom WestJet guests. In the same time period, theCommission logged 769 complaints from AirCanada passengers. This translates into 24,000guests flown per complaint for Air Canada ver-sus one million guests flown per complaint forWestJet (all data pertain to domestic flights).

Satisfaction with the job and colleaguesamong the 1,700 people working for WestJetwas high. Bell explained:

As for reality versus expectations, I found that, ingeneral, an employee’s actual experience on thejob is better than what he or she had anticipated.For example, call centre customer service associ-ates said that they found their job experience betterthan expected, and their colleagues warmer, kinderand more willing to help than expected. Most ofthem rate eight or nine out of 10 for pride in theorganization. That shows me that we have toremind people how good we are. It’s the one or twoper cent that causes a cancerous environment. Theday we find that employees’ on-the-job experienceis worse than what we believe it is, we’re finished.

CULTURE

Beddoe insisted that WestJet’s corporate culturewas the primary reason for the airline’s superbperformance. “The entire environment is con-ducive to bringing out the best in people,” statedBeddoe. “It’s the culture that creates the passionto succeed.”

Siobhan Vinish, director of public relations andcommunications, described the culture as a veryrelaxed, fun, youthful environment in which cre-ativity and innovation are rewarded. For example,in the call centre where people take bookings(called the “Sales Super Centre”), the representa-tives had the authority to override fares, makedecisions not to charge fees for cancellationsand bookings, and waive fees for unaccompaniedminors, on a case-by-case basis. People weretrained to understand the ramifications of the

decisions that they made. Senior managementtrusted the representatives in looking out for theinterests of the company, customers and share-holders. Nevertheless, overrides were trackedand monitored each month. Additional train-ing and coaching were provided if patternsemerged (e.g., overriding change fees on a con-sistent basis).

Pilots were considered to be “managers,” andwere encouraged to think with the executiveteam. One example of WestJet implementing asuggestion from its pilots came from significantfuel savings as a result of taxiing with one engineinstead of two.

Prior to launching WestJet, Beddoe and hiscolleagues had no experience running a sched-uled airline. One of the industry’s biggest problemswas dealing with a largely absentee workforce,spread all over the country, working at airports,hangars or in the air. Beddoe stated, “Whatoccurred to me is we had to overcome the inher-ent difficulty of trying to manage people and tohone the process into one where people wantedto manage themselves.”

Thus, the founders set out to create a com-pany that was managed from the bottom up.WestJet gave workers a high degree of latitudeto perform their jobs without interference fromsupervisors. Beddoe continued, “I don’t directthings—I just try to persuade. We set some stan-dards and expectations, but don’t interfere inhow our people do their jobs.”

Vinish explained:

The flight attendants are asked to serve customersin a caring, positive and cheerful manner; how theydo that, however, is left up to them. Resourcebooks are provided for them to refer to, and thereis a team of people who continually updates thesebooks.

In addition, Bell offered:

A lot of the stuff is intuitively obvious—we don’tfocus on culture. We believe that culture isdefined by the actions of executives. I may focuson empowerment and trust, Clive on profit shar-ing, and another one focuses on fun. This forms

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the circle of influence. It’s very fragile—all ourcombined actions contribute and form part of ourbrand—whenever we start to do things offside,it affects the culture. We think of our customersas guests. We have agreements and partners, asopposed to contracts and employees. Profit shar-ing and stock purchase plans are important, butthat’s the icing on the cake. They’re critical com-ponents of our company, but they don’t define theculture.

People with a great attitude always see the glassas half full. We’re an opportunity culture versusan entitlement culture. We create opportunities forpeople. For example, lots of people have made alot of money but have given WestJet a lot in return.In contrast, at Air Canada, a lot of money is paidto get a little work done. This is because unionsstripout opportunity. We’re creating wealth andsharing that wealth.

In a feature article in Canadian Business,December 25, 2000, it was noted that:

Some executives entertain lavishly on the companydime. If Clive Beddoe tried to, he would probablyget lynched. Consider what happened when thepresident and CEO of WestJet Airlines Ltd. threw acatered barbecue one weekend for the company’ssenior and middle managers at his private fishinglodge on the Bow River, downstream from Calgary.News of the party spread quickly through thecompany, and when Beddoe returned to work thefollowing Monday, a WestJet maintenance workerstormed into his office. Pounding on Beddoe’sdesk, the employee demanded to know why theboss was blowing company profits on hamburgersand beer for the folks at head office. WestJet has agenerous profit-sharing plan, and the maintenanceguy figured his cut was being squandered on asoiree he wasn’t even invited to. Beddoe told himnot to worry. “I pointed out that I paid for the partyout of my own pocket,” says Beddoe, grinning.“He was a little humbled, but I congratulated himon his attitude. He’s like a watchdog, and he hatesinequities. That’s the spirit of WestJet.”

The company’s accountants (located inWestJet’s head office under the sign “Bean-land”) said that profit-sharing plan was front andcentre and transformed each employee into a

“cost-cop,” constantly scouting for waste andpossible savings.

Derek Payne, treasury director, boasted, “Weare one of the few companies that has to justifyto employees its Christmas party every year.”

All employees had a sense of humor andplayed practical jokes on one another. Morgan,vice-president of operations, was also a pilot forWestJet. For new people who had never worked atan airport, Morgan would send them to “run andget the keys for the airplane.” Of course, an air-plane does not need keys, but the attendant wouldrush into the office, pick up the key with a hugetag that said “airplane” and rush back through theaisles to loud applause from passengers.

Another quality that set WestJet apart from itscompetition was the team spirit of its manage-ment and staff. On a visit to the night shift in themaintenance department, CEO Beddoe, dressedin coveralls, offered to go outside in sub-zero tem-peratures to change an airplane tire. He had topush the toolbox across the tarmac in–30-degreeweather, check the tire pressure and change thetire. Eventually, Beddoe succeeded at the task.WestJet’s people tended to give for the collectivewell-being of each and all, and there was an egal-itarian spirit. It also showed that work at WestJetis a team effort. These values began at the topand trickled downward.

Bell, who oversees customer service atWestJet, routinely helped out the representativesin the Super Sales Centre when there was highcall volume.

Sandy Campbell, the chief financial officerstated, “There’s peer pressure among the employ-ees. They recognize who buys into this programand who doesn’t, and peer pressure is an amazingthing.”

The culture is so customer-centred and sowell defined that, at WestJet, employees some-times joked that WestJet is more “Southwest”than even Southwest.

Beddoe concluded:

We have a philosophy of trust here. Sometimes youget burned when you trust people, but most timesyou don’t. Workers have pride in what they dobecause they are the ones making the decision

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about what they’re doing and how they’re doing it.They are not just functionaries. They actually takeownership of their jobs.

OVERALL PRODUCTIVITY

The benefits of creating WestJet’s type of envi-ronment appeared substantial. WestJet avoidedthe cost of a significant layer of supervisorypeople. Next, it achieved a higher level of pro-ductivity per person. WestJet operated with about59 people per Boeing 737 aircraft, comparedwith more than 140 at a typical full-service airlinesuch as Air Canada.

The airline’s focus on controlling costs andits specific cost-cutting measures had been wellpublicized. It flew only one type of aircraft, the125-seat Boeing 737, offered a single class ofservice, utilized the Internet as much as possibleto sell tickets, operated without paper tickets,offered no frequent flyer programs, provided nomeals and minimal in-flight service, had no air-port lounges or link-ups with other airlines, andaggressively hedged against rising fuel costs.This can be contrasted, for example, with AirCanada and its 16 different planes from nine dif-ferent manufacturers, which resulted in muchhigher maintenance and training costs. WestJet’scost-cutting measures resulted in operation costsbeing almost half those of Air Canada’s.

To reinforce its cost-cutting strategies, thecompany stressed teamwork. With no unions toinsist on job descriptions, all employees had widediscretion in their day-to-day duties. WestJet’spilots often went into the cabin and tidied upbetween flights. Even Beddoe would help outwhen he was aboard. Job behaviors such as thesemeant annual savings of up to Cdn$2.5 million incleaning costs and facilitated quick turnarounds,often within a half-hour. The record was anincredible six minutes.

Striving towards savings, Bell added:

Once, I created a ‘report card’ for the companywith two or three colors in the design. Employeesasked me why it was not in newsprint.

Most important of all are the actions of theexecutive team. People trust the executive in doinga good job. I need to link the impact of savingsonto profit sharing. Cdn$8 million in savings doesnot mean anything to employees until you link it totheir pocket book.

Because of these strong cost-cutting mea-sures, WestJet could make money with ticketprices 50 per cent below the industry average.In an interview with the Financial Times,November 21, 2000, WestJet officials stated thatits low costs meant it could break even when itsplanes were just 63.3 per cent full. In the secondquarter of 2000, WestJet averaged 76.2 per centcapacity.

WestJet increased fares three per cent at thestart of 2001, but resisted the temptation to raiseprices even further or reduce the number of itscheapest seats, even though it flew at near capac-ity. Rather than fight for market share with largercarriers, WestJet’s strategy was to use low pricesand unrestricted tickets to lure people who wouldotherwise drive, take the bus or train or stayhome. “To move our pricing higher quickly justmeans our whole philosophy of market stimula-tion doesn’t work,” said Bill Lamberton. It wouldalso mean that there would be more room for anew competitor such as CanJet Airlines or RoyalAirlines Inc. to enter the market with lowerprices in an effort to capture the market segmentthat WestJet is pursuing.

HIRING

WestJet received between 3,000 and 4,000resumes every week. Most of the new hires werenew to the airline industry. “We prefer it thatway,” stated Beddoe. “This is a new culture, anew vision. It’s better to start with a clean slate.”

WestJet looked for two character traits—enthusiasm and a sense of humor. This was atheme borrowed from Southwest Airlines, whichwas known for its practical jokes and free spirit.It was common aboard WestJet’s Boeing 737sfor the flight attendants to crack jokes, hold con-tests (e.g., singing contests and aisle bowling

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games) with the passengers. Most passengersdid not seem to mind the jokes and, in fact, mostcame to expect it.

The specific hiring process varied fromdepartment to department. Behavioral interviewswere used to assess a fit between the person andthe WestJet culture. WestJet made a consciouseffort to provide realistic job previews to jobapplicants. Job simulations were also part of thehiring process. For example, WestJet held groupinterviews for flight attendants, in which itexplained what WestJet was about, what WestJetstood for and what in particular WestJet waslooking for. One interview session included mak-ing a lighthearted, creative presentation to thegroup, describing what the person would bring toWestJet.

Vinish and Bell stressed that the hiring andorientation period is of critical importance toWestJet. Bell offered:

People by nature are negative, but there are somewho are criminally enthusiastic. I do things calledfireside chats. I talk to new hires about culture andwhat makes us tick. This is their orientation intoour culture, our mission and our values. I want tofind out what company people want to work for.

MAINTAINING

A UNION-FREE WORKFORCE

WestJet did not have a union. Instead, WestJet’ssenior management team created the Pro-ActiveCommunication Team (PACT), an employee asso-ciation that allowed management to keep intouch with it’s employees, addressing their con-cerns before they became a problem. PACT pro-vided WestJet employees with the services theymight want to receive through a union, withoutthe hassles, rules and adversarial environmentthat a union typically brings.

PACT covered the entire company with anumber of chapters representing the differentwork groups. Each chapter had at least onerepresentatives who sat on a council. Besides

dealing with personnel issues, PACT aided insetting salary scales. Said Beddoe, “It takes awaythe opportunity for conflict because the employ-ees are part of the solution, not the problem.”

If an employee group, such as the flightattendants, wanted to leave PACT, it has toget approval from 75 per cent of its members.Beddoe added:

It ensures we have a successful relationshipwith our people on a long-term basis. It took metwo years to convince our people to embrace theconcept of PACT because everyone here is soanti-union. But the staff voted 92 per cent in favorof it. We have since had some extremely success-ful resolution to issues that have cropped up.

COMMITMENT TO

MAINTAINING THE CULTURE

A vibrant corporate culture was so central toWestJet’s success that preserving it was Bell’sand Beddoe’s main obsession. Not fitting in withthe WestJet culture could have dramatic conse-quences. The sudden resignation of Steve Smithin September 2000 was a case in point. Smithwas hired in early 1999 to take over Beddoe’s jobas CEO. Beddoe stayed on as chairman of theboard, but wanted someone to take over the day-to-day operations and represent the carrier asit evolved from a private concern into a publiccompany. Smith was running Air Canada’sregional airline, Air Ontario, at the time, andWestJet’s board of directors liked his amiable,energetic personality.

But it became apparent almost immediatelythat Smith did not fit with WestJet’s culture. Forexample, Smith would override decisions madeby WestJet employees who were “empowered”for over four years. Company sources said thatSmith had a top-down management style andwas accustomed to dealing with hostile unions.Beddoe stated:

Steve got off on the wrong footing with PACT. Hetreated PACT like a union and they resented that

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immediately. He came from a background whereyou weren’t open and straightforward, where youdon’t play all your cards at once. Well, we don’t dothat. We tell it like it is. We tell the employees whatour issues are, and we try to work to a solution. Wedon’t hold back half the deck.

Beddoe maintained that Smith’s interactionwith PACT improved over time, but the badfeelings lingered. There were other issues.According to one source, Smith locked hornswith Beddoe and the board over how quickly theairline should grow. In his first business plan forWestJet, Smith called for revenue and earnings togrow at 27 per cent per year. The board orderedhim to maintain the airline’s current growth rate,in the 45-per-cent to 50-per-cent range. A sourcefrom WestJet stated, “When he first arrived,Steve had no sense of how much momentum thecompany had and how aggressively to grow it.You’d have to dismantle the thing to grow at only27 per cent.”

Employees became agitated, morale sufferedand the culture that built the airline was at risk.

Vinish had spoken to Beddoe about how hewould communicate the sudden resignation toWestJetters and the public. Beddoe did not wantto announce that Smith was “moving on tobetter things.” If he had said that, and if he hadnot mentioned anything about culture, Beddoebelieved he would lose credibility with hisemployees. After all, he was the one who wasthe foremost proponent of open communication,and candid communication is what the execu-tive team expected from its employees. Thus,Beddoe decided to talk candidly about thedifferences between Smith and the WestJetculture. Beddoe believed that this would showthat management had credibility to “say it likeit is.” He explained:

There is no question in my mind that if I had left itthree or four months or even six, it would havebeen a precipitous event, because then we wouldhave lost the core of the executive team, and bythat I mean the senior management team of thecompany.

Beddoe was greeted with high-fives, hugs andhurrays from everybody once he walked backinto the executive office to take over Smith’sresponsibilities.

Steve Smith denied that a cultural rift led tohis departure and “vehemently disagrees” withWestJet’s assessment.

COMPETITION AND EXPANSION

As recently as 1999, Beddoe was content to be inWestern Canada. But the merger of Air Canadaand Canadian Airlines changed the situationfor him. WestJet’s board decided to expand east-ward before new carriers, such as Halifax-basedCanJet, cornered the low-fare market. WestJetstarted flying out of Hamilton, Ontario, in thespring of 2000, and served Ottawa and Monctonand had plans to enter Montreal.

By using Hamilton as a hub, WestJet avoidedhead-to-head route competition with Air Canadaas it tried to establish itself in the East. CanJet,in comparison, was fighting Air Canada on itshome turf at Toronto’s Pearson InternationalAirport, and it admitted in late 2000 that it wasstruggling. One industry insider predicted thatCanJet would not even be around in 2002.

Other airlines noticed the success of WestJetand were in the process of attempting to mimicWestJet, that is, its culture and operations.Canada 3000 merged with Royal and CanJet inApril 2001. Air Canada intended to enter the dis-count market through forming a strategic part-nership with Toronto-based Skyservice to fendoff competition from WestJet and Canada 3000.Skyservice owned 80 per cent of Roots Air.However, WestJet appeared not to be too worriedabout other airlines introducing no-frills versions.Vinish explained:

Air Canada would have to reduce their costs inorder to be successful. This game is all aboutcosts—Air Canada has operated for many years intheir current state—for them to go into the low-costmarket is difficult. Air Canada has many operational

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requirements. For example, we don’t hire cleaners.If I decide to fly to Saskatoon, my promise to myfellow employees is that I help to clean the plane.We don’t have a mentality that says, “That’s not myjob, I’m not prepared to do that.” Air Canada has aunion—an employee would not be able to get upand serve coffee to passengers even if he or shewanted to. Such behaviors are not encouraged at AirCanada because serving coffee is somebody else’sjob. Low fares need low costs. Low costs need con-cessions from people in order to do that.

Historical data indicated that setting up acompetitive, profitable low-fare subsidiary hadproven to be a problematic endeavor for the con-ventional airlines. Several of these airlines hadtried and failed.

Beddoe was more blunt, stating that AirCanada’s plan “is another disaster in the making.”

CONTINUED GROWTH

Beddoe continued, “We fly only five per cent ofthe available seat miles in Canada. We’ve onlyjust started. Look at Southwest Airlines. It’s stillgrowing, and its stock today is the highest it hasever been.”

Amid the vast changes taking place in theairlines landscape in Canada, WestJet had bigexpansion plans. In August 2000, it ordered 36of the next-generation Boeing 737–700 seriesaircraft, with an option to pick up 58 more. Thatwould give the carrier a fleet of 94 aircraft. Withthe new planes, WestJet intended to start flyingnon-stop from Calgary to Hamilton. This planwould enable WestJet to add frequency and non-stop flights to its schedule, further enhancingcustomer service.

Other possibilities included a future alliancewith JetBlue, the discount airline launched in2000 by Neeleman, who built and then soldanother successful Southwest clone, Salt LakeCity-based Morris Air, before becoming one ofWestJet’s founding shareholders. Neeleman’s lat-est venture, JetBlue, is active in the northeastern

United States. WestJet co-founder Hill observed,“They’re in New York, and we’re in southernOntario. We operate off the same reservationsystem. We know each other well. Anything ispossible down there. I wouldn’t discount it.”

CONCERNS

Industry watchers voiced concerns aboutWestJet’s future, arguing that an economicdownturn could hurt a carrier dependent onleisure travellers, and its expansive growthwould make it hard, if not impossible, to keep the“fun” culture alive. Beddoe countered by sayingthat WestJet was prudent as well as ambitious. Ithad protected itself against rising fuel prices withhedging contracts. He also noted that BritishColumbia had been one of the fastest-growingmarkets, even though the province had been in arecession.

Moreover, because 58 of its 94 new jets areoptional orders, the growth rate can be slowed toa rate equal to two new jets a year once its olderjets are retired. The management team at WestJetbelieved that, in a depressed economy, it couldmanage performance expectations by communi-cating openly with its people, by being honestwith them.

As for the corporate culture, Beddoe offeredthat Southwest, on which WestJet was based,has kept its culture alive 25 years even as itsworkforce swelled to 30,000. He agreed thatprotecting the culture is essential. “It’s focusNo. 1. Our risk, in my view, is internal, notexternal, and that’s why we put so much empha-sis on it.”

Vinish added:

What is the impact on our culture as we continue togrow? We all could fly into Calgary and find theWestJet culture. How can we perpetuate the culturein Moncton? We’ve thought about that. We need tosend WestJetters to go and spread the feeling outthere.

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Bell concluded by saying that culture wasparamount at WestJet, that as it grew, it wasessential it kept its unorthodox, irreverent feel.He was concerned about not overextendingWestJet so that its success would come to ahalt. It would be unfortunate, he thought, ifWestJet developed into a big and bureaucratic

organization, unable to sustain its culture becauseof its success.

NOTE

1. Taken from www.westjet.com, April 15, 2001.

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