Assig nm en t:
A nsw er t h ese e ssay q uestio ns:
E ssay # 1: C ase S tu dy: A str o A ir lin es
P art 1
A rth ur B urto n e sta blis h ed A str o A ir lin es in 1 980; tw o y e a rs a fte r th e a ir lin es w ere
d ere gula te d. B urto n’s v is io n fo r th e n ew a ir lin e h as tw o k e y e le m ents . F ir s t, th e a ir lin e
w ould p ro vid e lo w ‐ co st, n o ‐ fr ills s e rv ic e to p eople w ho fo rm erly c o uld n ot a ff o rd to tr a ve l
by a ir . S eco nd, th e a ir lin e w ould h ave a n ove l ty p e o f o rg aniz a tio n th at p ro vid ed a
b ette r w ay fo r p eople to w ork to g eth er, th ere by u nle ash in g th eir c re ativ it y a nd im pro vin g
pro ductiv it y . B urto n w as a d yn am ic , e m otio nally s tir rin g s p e ake r w it h a k in d o f
eva ngelic a l fe rv o r, a nd h e to ok a dva n ta ge o f e ve ry o pportu nit y to te ach a nd a ff ir m h is
v is io n. M any e m plo ye es r e gard ed h im a s a n in sp ir a tio nal le ader w ho m ade y o u b elie ve
th at y o u c o uld d o a nyth in g. T he c lim ate a t A str o A ir lin es in th e in it ia l y e ars w as o ne o f
enth usia sm , e xcit e m ent, a nd o ptim is m .
In ste ad o f th e ty p ic a l b ure aucra tic o rg aniz a tio n, th e n ew c o m pa ny h ad o nly th re e le ve ls
o f m anagem ent a nd fe w s u pport s ta ff . T he e m ph asis w as o n e qualit y , in fo rm alit y ,
p artic ip ativ e le aders h ip , a nd s e lf ‐ man agem en t. E m plo ye e s w ere o rg aniz e d in to te am s
wit h s h are d r e sp onsib ilit y fo r d ete rm in in g h ow to d o th eir w ork . T he te am s e le cte d
m em bers to r e pre se nt th em in a dvis o ry a nd c o o rd in atin g c o u ncils th at m et w it h to p
m anagem ent, th ere by e nablin g th em to p artic ip ate in m akin g im porta nt d ecis io ns.
M anagers w ere e xp ecte d to p ro vid e d ir e ctio n b ut n ot to d ic ta te m eth ods o r p olic e
e ff o rts . E m plo ye es w ere e xp ecte d to p erfo rm m ult ip le jo bs a nd to le arn n ew s kills . E ve n
th e m anagers w ere e xp ecte d to s p e nd s o m e tim e d oin g r e gula r lin e jo bs to k e ep
in fo rm ed a bout p ro ble m s a nd c u sto m er n eeds. T he “ s ta tu s p erk s” fo und in m ost la rg e
org aniz a tio ns w ere e lim in ate d. F or e xa m ple , e xe cu tiv e s a nsw ere d th eir o w n te le phones
and ty p ed th eir o w n le tte rs . N ew e m plo ye e s w ere c a re fu lly s cre ened, b eca use B urto n
so ught to h ir e y o ung, e nth usia stic e m plo ye e s w ho w ere w illin g to le arn n ew jo bs a nd
w ho c o uld fu nctio n a s p art o f a c o o pera tiv e te am . A ll p erm an ent e m plo ye es w ere
re quir e d to s h are in th e o w ners h ip o f th e c o m pa ny, a nd th ey c o u ld p urc h ase s h are s o f
sto ck a t a r e duce d p ric e .
B urto n b elie ve d th at a s tr a te gy o f d is co unt fa re s a nd c o n ve n ie nt s ch edule s w it h
f r e quent flig hts w ould a ttr a ct n ew p asse ngers w ho w ould n orm ally tr a ve l b y c a r, tr a in , o r
bus, o r w ho w ould o th erw is e n ot tr a ve l. B y k e e pin g o pera tin g c o sts lo w , A str o A ir lin es
w as a ble to o ff e r fa re s th at w ere m uch lo w er th an th ose o f c o m petit o rs . T he s a la rie s o f
m anagers a nd e m plo ye es w ere lo w er th an n orm al fo r th e a ir lin e in dustr y , a lt h ough
em plo ye es a ls o r e ce iv e d g enero us fr in ge b enefit s , p ro fit s h a rin g, a nd s to ck d iv id ends.
C osts w ere a ls o r e duce d b y p urc h a sin g s u rp lu s a ir c ra ft a t b arg ain r a te s, r e co nfig urin g
air c ra ft to c a rry m ore p asse nge rs ( e .g ., c o n ve rtin g fir s t c la ss in to c o ach s e ats ), a nd b y
in nova tiv e s ch edulin g th at a llo w ed th e p la nes to fly m ore h ours e ach d ay. C usto m ers
w ere c h arg ed fo r s o m e fr ills s u ch a s m ea ls a nd b aggage h andlin g th at o th er a ir lin es in clu ded in th e p ric e o f th e tic ke t. T o r e duce s p a ce n orm ally n eeded fo r tic ke t c o unte rs
a t te rm in als , th e tic ke tin g fo r flig hts w as d one e it h er in a dva n ce b y tr a ve l a gents o r o n
th e p la ne it s e lf w it h in nova tiv e tic ke tin g m ach in es.
T he n ew c o m pany w as a n im media te s u cce ss, a nd p asse nger v o lu m e e xp anded
ra pid ly . In le ss th an th re e y e ars th e c o m pa ny g re w fr o m a fe w h undre d e m plo ye es w it h
t h re e p la nes to m ore th an 3 ,0 00 e m plo ye e s w it h 2 2 p la nes s e rv ic in g 2 0 c it ie s. T his
s u cce ss o ccu rre d d esp it e d is m al c o n dit io ns th at c a u se d w id esp re ad o pera tin g lo sse s in
t h e a ir lin e in dustr y , in clu din g a s e ve re e co n om ic r e ce ssio n, a c rip plin g n atio nal s tr ik e o f
air tr a ff ic c o ntr o lle rs , a nd b ru ta l p ric e w ars . T he fle xib ilit y o f th e c o m pany a nd th e
co m mit m ent a nd c re ativ it y o f it s e m plo ye e s a id ed it s e arly g ro w th a nd fa cilit a te d r a pid
a dapta tio n to c ris e s s u ch a s th e s tr ik e o f a ir tr a ff ic c o n tr o lle rs .
Q uestio ns
1. D escrib e B urto n’s le aders h ip b eha vio r.
2. W as B urto n a c h aris m atic le ader in th e c o m pa ny a t th is tim e? E xp la in y o ur a nsw er.
P art 2
D esp it e th e e arly s u cce sse s, th e r a pid g ro w th o f th e c o m pa ny w as a ls o c re atin g s o m e
se rio us o rg aniz a tio nal p ro ble m s. E m plo ye e s b elie ve d th at a fte r th e in it ia l c h aos o f
sta rtin g u p th e c o m pany, th in gs w ould s e ttle d ow n a nd th e in te nse ly h eavy w ork lo ad
w ould b e a lle via te d. T hey w ere w ro ng; c o m munic a tio n p ro ble m s in cre ase d, th e
w ork lo ad r e m ain ed o ve rw helm in g , d ecis io ns w ere ta kin g to o lo ng to b e m ade, a nd to o
m any d ecis io ns h ad to b e r e so lv e d b y to p m an agem en t. T hese p ro ble m s w ere d ue in
p art to th e in fo rm alit y a nd a bse nce o f s tr u ctu re . A s th e n um be r o f r o ute s, fa cilit ie s, a nd
flig hts in cre ase d, o pera tio nal p ro ble m s b eca m e m ore c o m ple x, b ut fo rm al s tr u ctu re s
w ere n ot d eve lo ped to d eal w it h th em e ff e ctiv e ly . T he n um be r o f m anagers d id n ot
in cre ase n early a s fa st a s th e n u m be r o f n onsu p erv is o ry e m plo ye es. B urto n r e fu se d to
r e cru it e xp erie nce d m anagers f r o m o uts id e th e c o m pa ny, p re fe rrin g to p ro m ote c u rre nt
em plo ye es in to p osit io ns fo r w hic h th ey in it ia lly la cke d s u ff ic ie nt e xp ertis e .
O ve rb urd ened m anagers la cke d a dequate s u p port p ers o n nel to w hic h th ey c o uld
d ele gate r o utin e r e sp onsib ilit ie s. M an agers c o m pla in ed a bout th e p re ssu re a nd s tr e ss.
T hey s p ent to o m uch tim e in m ee tin gs, th ey c o u ld n ot g et is su es r e so lv e d a nd
im ple m ente d, a nd th ey c o uld n ot p ro vid e a dequate tr a in in g fo r th e r a pid ly in cre asin g
num ber o f n ew s e rv ic e e m plo ye e s. T he n ew e m plo ye e s w ere n ot g ettin g th e e xte nsiv e
tr a in in g a nd s o cia liz a tio n n ece ss a ry to p re pare th em to p ro vid e q ualit y s e rv ic e , r o ta te
a m ong d if f e re nt s e rv ic e jo bs, a n d u se te am m an agem en t p ra ctic e s. O pera tin g
pro ble m s ( e .g ., c a nce le d flig hts ) a nd d eclin in g c u sto m er s e rv ic e ( e .g ., r u de a tte ndants )
a lie nate d c u sto m ers a nd e ro ded th e c o m pa ny’s r e puta tio n.
A ddin g to th e c o nfu sio n w as th e w ors e n in g c o n flic t b etw een B urto n, w ho a s C EO w as
re sp onsib le fo r s tr a te gic p la nnin g , a nd th e c o m pa ny p re sid ent w ho w as r e sp onsib le fo r
opera tio nal m anagem ent. In 1 9 82, th e p re sid ent r e sig ned, a nd B urto n a ssu m ed h is
r e sp onsib ilit ie s r a th er th an fin din g a n im media te r e pla ce m en t. A t th is tim e B urto n fin ally
d ecid ed to a ppoin t a ta sk fo rc e c o m po se d o f e xe cu tiv e s to d eve lo p id eas fo r im pro vin g th e o rg aniz a tio n. T he ta sk fo rc e p re se n te d s o m e in it ia l p ro posa ls fo r n ew m anageria l
ro le s a nd s tr u ctu re s. E m plo ye es w ere s u b se q uently p ro m ote d to th ese r o le s, a nd
m anagem ent tr a in in g a ctiv it ie s w ere in it ia te d fo r th em . B urto n w as h eavily in vo lv e d in
t h is tr a in in g; h e c o nducte d s o m e o f it h im se lf , a nd h e fa it h fu lly a tte nded s e ssio ns ta ught
by o th ers , th ere by in dic a tin g th e im po rta nce h e p la ce d o n it . H ow eve r, o th er n ece ssa ry
c h anges in m anagem ent p ro ce sse s w ere n ot im ple m en te d, a nd th e p osit io n o f
pre sid ent w as s till n ot fille d. In s h ort, B urto n s e e m ed u nw illin g to ta ke th e s te ps
nece ssa ry to tr a nsfo rm A str o A ir lin es fr o m a n e ntr e pre neuria l s ta rt ‐ up to a n e sta blis h ed
org aniz a tio n. In deed, h is r e m edy fo r th e fir m ’s p ro ble m s w as to s e t o ut o n a n ew g ro w th
p ath r a th er th an to c o nce ntr a te o n c o n so lid atio n. H e b elie ve d th at w hat th e c o m pany
needed w as a n e ve n b ig ger v is io n to g et p eople e xcit e d a gain . T hus, h e b egan y e t
anoth er p erio d o f r a pid e xp ansio n. T he a ir lin e a dded n ew r o ute s, p urc h ase d n ew a nd
la rg er a ir c ra ft, a nd h ir e d m ore n ew e m plo ye e s.
B y 1 984, B urto n n o lo nger s e em ed c o n te nt to r u n a s u cce ssfu l r e gio nal a ir lin e. H e
co ntin ued to m ake c h anges d esig ned to tr a nsfo rm A str o in to a n in te rn atio nal a ir lin e th at
w ould c o m pete w it h th e m ajo r c a rrie rs . H e d ecid ed to a cq u ir e s o m e o th er r e gio nal a nd
co m mute r a ir lin es th at w ere fin an cia lly w eak. H is s tr a te gy o f r a pid e xp ansio n w as
ove rly o ptim is tic , a nd it ig nore d s o m e im po rta nt c h a nges th at w ere o ccu rrin g in th e
exte rn al e nvir o nm ent. B urto n fa ile d to a ntic ip ate th e lik e ly r e actio ns o f m ajo r a ir lin es
th at w ere s tr o nger fin ancia lly a nd p re pare d to c o n duct a lo ng p ric e ‐ cu ttin g w ar to
p ro te ct th eir m ark e t p osit io n. N ew p asse nger tr a ff ic d id n ot in cre ase e nough to ju stif y
t h e c o st o f th e a dded flig hts , a nd A str o w as u nsu cce ssfu l in a ttr a ctin g m any b usin ess
tr a ve le rs a ccu sto m ed to fr ills a nd b ette r s e rv ic e . T he c o m pa ny b egan to e xp erie nce
lo sse s in ste ad o f p ro fit s .
In te rn al p ro ble m s a ls o w ors e ne d in 1 985. T here w as a n a tte m pt to u nio niz e th e p ilo ts ,
a nd a s u bsta ntia l n um ber o f p ilo ts q uit , c o m pla in in g th at th ey w ere e xp lo it e d a nd
m is tr e ate d. O th er e m plo ye es b eg an q uestio nin g B urto n’s s in ce rit y a nd a ccu se d h im o f
bein g a m anip ula to r. T he p erc e p tio n a m on g m an y e m plo ye e s w as th at h e w as n ow
actin g lik e a d ic ta to r, a nd n o o ne d are d to c ro ss h im . W hen a ske d a bout th e a bse nce o f
in dependent o uts id ers o n th e b oa rd o f d ir e cto rs , B urto n r e plie d th at h e w as th e fo under
and la rg est s h are hold er, a nd h e c o u ld d ete rm in e w hat w as b est fo r th e c o m pany. H e
fir e d a k e y m anagin g o ff ic e r w ho h ad b een w it h th e c o m pa ny s in ce it w as fo rm ed,
pre su m ably fo r c h alle ngin g h im a nd a skin g q uestio ns h e n o lo nger w ante d to h ear.
A noth er fo undin g e xe cu tiv e w hom B urto n h ad a ppoin te d a s p re sid ent r e sig ned a nd
to ok s e ve ra l o th er e m plo ye es w it h h im to e sta blis h a n ew a ir lin e.
In 1 986, a s fin ancia l p erfo rm ance c o n tin ued to d ete rio ra te , B urto n a bru ptly a bandoned
th e d is tin ctiv e s tr a te gy o f d is co u nt fa re s a nd n o ‐ fr ills s e rv ic e a nd b egan o ff e rin g fu ll
s e rv ic e w it h h ig her fa re s to lu re b usin ess tr a ve le rs . H ow eve r, o pera tin g lo sse s
co ntin ued to m ount, a nd in a la st d esp e ra te m ove , B urto n c h a nged b ack to h is o rig in al
str a te gy. It w as a ll to n o a va il. B y th e s u m mer o f 1 986, th e lo sse s in cre ase d a nd th e
co m pany e nte re d b ankru ptc y p ro ce e din gs.
Q uestio ns 1. What d ysfu nctio nal a sp ects o f c h a ris m atic le aders h ip w ere d is p la ye d b y B urto n?
E ssay # 2: C ase S tu dy: C ostc o
C ostc o is o ne o f th e la rg est r e ta il s a le s c o m pa nie s in th e U nit e d S ta te s, a nd it h as m ore
th an 5 00 s to re s in 3 7 s ta te s a nd e ig ht c o u ntr ie s. D esp it e lo w p ro fit m arg in s in th e
re ta ilin g in dustr y , th e c o m pany is m ore p ro fit a ble th an m ost c o m petit o rs , a nd it is
g ro w in g r a pid ly . In th e U niv e rs it y o f M ic h ig an’s a nnual s u rv e y o f c u sto m er s a tis fa ctio n
w it h U .S . r e ta ile rs , C ostc o h as h a d th e h ig hest r a tin gs in r e ce n t y e ars .
T he c o m pany’s b asic s tr a te gy is to p ro vid e q ualit y p ro ducts a t th e lo w est a va ila ble
p ric e s, a nd th e p ro ducts in clu de c lo th in g, e le ctr o nic s, a nd fo od. C ostc o ’s le adin g
co m petit o r — W al ‐ Mart’s S am ’s C lu b — o ff e rs m ore v a rie ty a nd s o m e lo w er p ric e d
it e m s, b ut C ostc o ’s p ro ducts a re g enera lly o f a h ig her q ualit y . A ro und 2 0% o f th e
pro ducts c o nsis t o f lim it e d ‐ tim e s u p plie s o f d eeply d is co unte d lu xu ry g oods a nd o th er
sp ecia l b arg ain s. E xa m ple s in clu de R ole x a nd M ova d o w atc h e s, g ourm et im porte d
ch oco la te s, W ate rfo rd c ry sta l, p la sm a te le vis io ns, a nd B urb erry a nd C oach h andbags.
T his s tr a te gy o f te m pora ry s p ecia l b arg ain s c re ate s c u sto m er e xcit e m ent a nd in cre ase s
purc h ase s o f it e m s th at s h oppers h ad n ot in te nded to b uy w hen th ey v is it e d th e s to re .
C harg in g c u sto m ers fo r th e p riv ile ge o f s h o ppin g a t C ostc o p ro vid es a s te ady s o urc e o f
re ve nue fo r th e c o m pany a nd in cre ase s c u sto m er lo ya lt y . C ostc o h as tw o ty p es o f
m em bers : b usin esse s a nd in div id uals . E ve n th ough th e c o st o f m em bers h ip is a lit tle
h ig her th an fo r c o m petit o rs , C ostc o ’s c a rd r e new al r a te w as o ve r 8 6% in 2 006, a nd
m em bers h ip in cre ase d b y 1 4% . T o in cre ase th e v a lu e o f th e m em bers h ip s a nd a ttr a ct
a ddit io nal c u sto m ers , C ostc o a ls o o ff e rs s e rv ic e s s u ch a s tr a ve l p la ns, h ealt h a nd h om e
in su ra nce , b ankin g, a nd fin ancia l p la nnin g. In div id ual s h o ppers a ve ra ge tw o C ostc o
v is it s p er m onth , a nd m any tr a ve l g re at d is ta nce s to s to ck u p o n s u pplie s. U nlik e m ost
d is co unt s to re s, C ostc o h as m an y a ff lu ent c u sto m ers w ho a re “ tr e asu re h untin g” fo r th e
sp ecia l b arg ain s o n lu xu ry g oods r a th er th an m ere ly lo okin g fo r lo w p ric e s o n b asic
c o m modit ie s. C ostc o ’s m erc h and is e b uye rs h ave to e xp e rim en t a nd ta ke b ig r is ks w it h
lu xu ry it e m s, b eca use a lo t o f m oney is tie d u p in in ve n to ry if th e it e m s d o n ot s e ll
q uic kly . T he b uye rs n eed to r e ly o n th eir in tu it io n a nd c re ativ it y to fin d it e m s th at w ill b e
popula r a nd p ro fit a ble . In nova tio n in d esig n a nd p acka gin g is a ls o im porta nt fo r m akin g
so m e ty p es o f p ro ducts s u ch a s fo od it e m s m ore a ppealin g to c u sto m ers . R ece nt
in it ia tiv e s, fo r in sta nce , in clu de t h e e lim in atio n o f S ty ro fo am tr a ys fr o m m eat p acka ges
and th e u se o f in div id ually s e ale d p acke ts . T he d esig n is m ore e nvir o nm enta lly s o und
and e nable s c o nsu m ers to fr e eze u nuse d p ortio ns w it h out r e packa gin g o r r e w ra ppin g
pro ducts .
C ostc o h as g enero us p ay, e xce lle nt h ealt h b enefit s , a nd a g ood 4 01(k ) p la n fo r it s m ore
th an 1 20,0 00 h ourly e m plo ye es in th e U nit e s S ta te s. T he a ve ra ge w age fo r a fu ll ‐ tim e
work e r a t C ostc o is a ro und 4 0% h ig her th an a t S am ’s C lu b. A ro und 8 2% o f C ostc o
e m plo ye es h ave h ealt h ‐ in su ra nce c o ve ra ge, a s c o m pa re d w it h le ss th an h alf o f th e
em plo ye es a t W al ‐ Mart, a nd C ostc o e m plo ye e s p ay m uch le ss o f th eir h ealt h
p re m iu m s. A ro und 9 1% o f C ostc o ’s e m plo ye e s a re c o ve re d b y r e tir e m ent p la ns, a s co m pare d to 6 4% o f e m plo ye es a t S am ’s C lu b, a nd c o m pa ny c o ntr ib utio ns to th e p la n
are n early tw ic e a s h ig h p er e m plo ye e a t C ostc o . T he c o m pa ny p olic y is to p ro m ote
f r o m w it h in th e r a nks, a nd w ork e rs a t a ll le ve ls h ave g ood o pportu nit ie s fo r
adva nce m ent.
T he c o m pany h as o ne o f th e m ost lo ya l a nd p ro ductiv e w ork fo rc e s in th e r e ta ilin g
in dustr y . T he h ig h le ve l o f o rg an iz a tio nal c o m mit m en t is r e fle cte d in th e tu rn ove r r a te
( a ro und 6 % fo r w ork e rs o n th e jo b fo r m ore th an o ne y e a r), w hic h is w ell b elo w th e
ave ra ge r a te o f 4 4% fo r th e in dustr y . T he c o st fr o m tu rn ove r ( lo st p ro ductiv it y , r e cru it in g
and tr a in in g n ew e m plo ye es) is 4 0% lo w er a t C ostc o th an a t S am ’s C lu b. E m plo ye e
th eft a t C ostc o is th e lo w est in th e in dustr y . T he s a vin gs fr o m lo w er tu rn ove r c o sts ,
lo w er e m plo ye e th eft, a nd h ig her e m plo ye e p ro ductiv it y m ore th an o ff s e ts th e h ig her
co st o f c o m pensa tio n a t C ostc o . T he o pera tin g p ro fit p er h ourly e m plo ye e in th e U nit e d
S ta te s is n early tw ic e a s h ig h a t C ostc o a s a t S am ’s C lu b. T he h ig h le ve l o f e m plo ye e
m otiv a tio n a nd c o m mit m ent is n ot o nly b eca u se th ey a re w ell c o m pensa te d, b ut th ere is
a ls o a h ig h le ve l o f in tr in sic m otiv a tio n a m on g C ostc o e m plo ye e s. T hey a re e nco ura ged
to s u ggest w ays to im pro ve th e s to re s a nd p ro duct m ix , a nd c re ativ it y is v a lu ed. E ach
m orn in g b efo re th e s to re o pens th ere is a c o n ve rs a tio n a bout w ays to b e m ore e ff ic ie nt
and to p ro vid e b ette r c u sto m er s e rv ic e . A ll e m plo ye e s a re tr a in ed to b e fr ie ndly a nd
help fu l w hen c u sto m ers n eed a ssis ta nce . W hen s h o ppers n eed a ssis ta nce in lo ca tin g
an it e m , e m plo ye es a re e xp ecte d to s h o w th em w here it is r a th er th an m ere ly p oin tin g
to a d is ta nt s p ot o r p ro vid in g v a g ue d ir e ctio ns.
T he m eth ods C ostc o u se s to m in im iz e c o sts in clu de a n o ‐ fr ills a ppro ach to th eir s to re s,
w hic h a ls o fu nctio n a s th eir w are h ouse s. T he b uild in gs h ave m eta l e xte rio rs a nd s te el
ra cks. In ste ad o f in div id ual p ro ducts o n s h e lv e s, th ere a re p alle ts o n s te el fr a m es th at
so ar to th e c e ilin gs. A bove e ve ry p alle t is a c a rd w it h a s im ple p ro duct d escrip tio n, a nd
th ey k e ep e ve ry th in g a s s im ple a s p ossib le fo r th e p ro duct d is p la ys. M ark e tin g c o sts
a re lo w b eca use C ostc o d oes n ot d o a ny a dve rtis in g; th ere is n o p ublic r e la tio ns
m anager o r e xp ensiv e a dve rtis in g a gency. In ste ad, C ostc o d epends e ntir e ly o n h appy
cu sto m ers w ho te ll th eir fr ie nds a bout th e fa nta stic b arg ain s a va ila ble a t C ostc o s to re s.
T he c o m pany k e eps la yo uts s ta ndard in it s s to re s to r e duce c o sts a nd g iv e s h oppers a
f e elin g o f fa m ilia rit y a t e ve ry lo ca tio n. T he p ro ducts s o ld in e ach s to re a re s im ila r,
e xce pt fo r fo ods, w hic h v a ry a cco rd in g to lo ca l ta ste s. In ve n to ry c o sts a re r e duce d b y
havin g o nly a lim it e d v a rie ty o f p ro duct s iz e s, a nd b y p acka gin g m any p ro ducts fo r b ulk
s a le s. P ro ducts m ove r ig ht fr o m th e d eliv e ry tr u ck to th e s a le s flo or, a nd th e s ig nage
lo oks lik e it w as m ade w it h a c h e ap la se r p rin te r. T here a re n ot e ve n a ny s h oppin g b ags
fo r c u sto m ers . A c o m pute r s yste m th at tr a cks s a le s in th e s to re s m ake s it p ossib le to
d ete rm in e w hen m ore fr e sh fo od s a re n eeded in th e d is p la y c a se s a nd r e duce s c o sts
f r o m w aste a nd o ve rp ro ductio n. J im S in egal, th e C EO o f C ostc o , is v e ry m odest a bout
his c o ntr ib utio n to th e s u cce ss o f th e c o m pa ny a nd q uic k to s h a re c re dit w it h o th ers . H e
unders ta nds h ow im porta nt it is to h ave ta le nte d p eople w ork in g fo r a c o m pany, a nd h e
does m any th in gs to a ttr a ct a nd r e ta in th em . A t th e c o m pa ny h eadquarte rs in a S eattle
s u burb , h is o ff ic e is a n o pen s p a ce w it h n o d oor. H is d esk is p ush ed u p a gain st th e w all so th at, a t fir s t g la nce , h e a ppears to b e s o m eo ne e ls e ’s s e cre ta ry . S in egal u su ally
a nsw ers h is o w n p hone, u se s a n am eta g lik e o th er e m plo ye e s, a nd u su ally w ears o ne
of th e lo w ‐ pric e d d re ss s h ir ts s o ld in h is s to re s. A s th e c o fo under o f C ostc o , S in egal is a
m ajo r s h are hold er, b ut h is a nnua l c o m pe nsa tio n is o nly 1 0% o f th e a ve ra ge a m ount fo r
C EO s. H e tr ie s to lim it h is s a la ry a nd b onus to n o m ore th an tw ic e w hat a C ostc o s to re
m anager e arn s, a nd h e d eclin ed h is b onus fo r th e la st th re e y e a rs in o rd er to a ch ie ve
th at o bje ctiv e .
A t th e a nnual M anagers ’ C onfe re nce , S in egal m ee ts w it h m ore th an 1 ,0 00 C ostc o
m anagers a nd p ro duct b uye rs to r e vie w th e p ast, d is cu ss th e p re se nt, a nd p la n th e
fu tu re . H e a ls o h as m onth ly b udg et m ee tin gs w it h g ro ups o f a ro und 7 0 s to re m anagers
to ta lk a bout th e im porta nce o f e xe rc is in g tig ht c o st c o n tr o ls , g ettin g th e d eta ils r ig ht,
a nd a dherin g to th e C ostc o c re do . Im po rta nt v a lu es a t C ostc o in clu de h ard w ork ,
re sp ect fo r c u sto m ers , a nd h ig h e th ic a l s ta ndard s. S in egal c o m munic a te s a s tr o ng
co nce rn fo r h ig h p erfo rm ance , b u t h e is n ot c o e rc iv e o r o ve rly c rit ic a l. H e is c a re fu l n ot
to d is co ura ge h is p ro duct b uye rs w hen th ey ta ke r is ks o n n ew p ro ducts . E m plo ye es a re
e m pow ere d a nd e nco ura ged to “ th in k o uts id e th e b ox.” S in egal s till a tte nds e ve ry n ew
sto re o penin g, a nd h e tr ie s to v is it e ve ry C ostc o s to re tw ic e a y e ar. H e s p ends n early
h alf o f h is tim e o n th e r o ad c h eckin g o ut h is s to re s a s w ell a s th e c o m petit io n to m ake
s u re th ey a re n ot u nderc u ttin g C ostc o ’s p ric e s.
S in egal h as a s tr o ng c o nce rn fo r h is e m plo ye e s, a nd h e is p erc e iv e d a s d edic a te d,
ca rin g, a nd h ard ‐ work in g. H e is a ble to r e m em be r th e n am es o f m ost o f h is m anagers ,
a nd th ey k n ow h im b y s ig ht. A t a r e ce n t a nnual m ee tin g w hen h e a nsw ere d a q uestio n
by s ta tin g th at h e h ad n o p la ns to r e tir e s o o n, th e a udie nce g ave h im a s p onta neous
sta ndin g o va tio n. In 2 003, th e r is in g c o st o f h ealt h c a re m ad e it n ece ssa ry to in cre ase
th e e m plo ye e c o ntr ib utio n to th eir h ealt h in su ra nce . S in egal s e n t a le tte r to e m plo ye es
exp la in in g w hy th e in cre ase w as n ece ssa ry , a nd th e le tte r g enera te d m ore th an 1 00
re sp onse s, n early a ll o f w hic h w ere s u p portiv e .
S in egal tr ie s to d o w hat is r ig ht fo r e m plo ye e s, c u sto m ers , v e n dors , a nd s to ckh old ers .
R ece ntly a m ajo r d ecis io n w as m ade to p ut a 9 0 ‐ day lim it o n c u sto m er r e tu rn s o f
ele ctr o nic s p ro ducts . T he o ld p olic y w as u niq ue in A m eric a n r e ta ilin g, b ut it w as
beco m in g to o c o stly . T he n ew p o lic y c o u ld s a ve th e c o m pa ny m ore th an $ 100 m illio n a
y e ar, b ut S in egal d id n ot w ant to c h a nge it w it h out a v ia ble a lt e rn ativ e . T hus, a s p art o f
th e n ew p olic y, h e d ecid ed to e xte nd th e m an ufa ctu re r w arra nty b y a y e ar.
Q uestio ns
1. E xp la in th e s u cce ss o f C ostc o in te rm s o f th e th re e p erfo rm an ce d ete rm in ants in
f le xib le le aders h ip th eory ( e ff ic ie ncy, a dapta tio n, a nd h um an c a p it a l) .
2. E xp la in h ow C ostc o c a n p ro vid e h ig her c o m pe nsa tio n to it s e m plo ye es a nd s till b e
su cce ssfu l in th e u se o f a lo w p ric e c o m pe tit iv e s tr a te gy.
3. U se r e le va nt le aders h ip th eorie s to a naly ze th e b ehavio r o f th e C EO a nd d escrib e
his in flu ence o n th e c o m pany.
E ssay # 3: C ase S tu dy: T urn aro und a t N is sa n In 1 999, N is sa n w as in a s ta te o f s e rio us d eclin e a nd h ad lo st m oney in a ll b ut o ne o f
th e p re vio us e ig ht y e ars . O nly R enault ’s w illin gness to a ssu m e p art o f N is sa n’s d ebt
sa ve d th e J a panese c o m pany fr o m g oin g b ankru pt. A s p art o f th e d eal, th e F re nch
a uto m ake r a ppoin te d C arlo s G ho sn to b eco m e N is sa n’s c h ie f o pera tin g o ff ic e r.
H ow eve r, th ere w as w id esp re ad s ke ptic is m th at th e a llia nce b etw een R enault a nd
N is sa n c o uld s u cce ed, o r th at s o m eo ne w ho w as n ot J a p anese c o uld p ro vid e e ff e ctiv e
le aders h ip a t N is sa n.
D urin g th e th re e m onth s p rio r to a ssu m in g th e p osit io n o f C O O a t N is sa n, G hosn m et
w it h h undre ds o f p eople , in clu din g e m plo ye e s, u nio n o ff ic ia ls , s u pplie rs , a nd c u sto m ers ,
to le arn m ore a bout th e c o m pany a nd it s s tr e ngth s a nd w eakn e sse s. F ro m th ese
m eetin gs a nd e arlie r e xp erie nce s w it h tu rn aro und a ssig nm en ts , G hosn u nders to od th at
m ajo r c h anges w ould n ot b e s u cce ssfu l if th ey w ere d ic ta te d b y h im a nd th e e xp erts h e
bro ught w it h h im fr o m R enault . S oon a fte r a ssu m in g h is n ew p osit io n a t N is sa n in J u ne
1999, G hosn c re ate d n in e c ro ss ‐ fu nctio nal te am s a nd g ave th em r e sp onsib ilit y fo r
dete rm in in g w hat n eeded to b e d one to r e viv e th e c o m pa ny. S uch te am s h ad n eve r
been u se d b efo re a t N is sa n, a nd it w as u nusu a l in a J a p anese c o m pany to in vo lv e a
b ro ad c ro ss ‐ se ctio n o f m anagers in d ete rm in in g m ajo r c h a nges.
T he c ro ss ‐ fu nctio nal te am s e xa m in ed d if f e re nt a sp e cts o f c o m pany o pera tio ns to
id entif y p ro ble m s a nd r e co m men d s o lu tio ns to G hosn a nd th e e xe cu tiv e c o m mit te e.
S eve ra l in te rre la te d p ro ble m s w ere id entif ie d, a nd th ey w ere m ostly c o nsis te nt w it h
G hosn ’s in it ia l im pre ssio ns. T he p oor fin ancia l p erfo rm an ce a t N is sa n w as a jo in t r e su lt
o f d eclin in g s a le s a nd e xce ssiv e c o sts , a nd w eak m an agem en t w as th e p rim ary r e aso n
fo r th e fa ilu re to r e so lv e th ese p ro ble m s. M an agem en t la cke d a c o here nt s tr a te gy, a
s tr o ng p ro fit o rie nta tio n, a nd a c le ar fo cu s o n c u sto m ers . T here w as lit tle c o opera tio n
acro ss fu nctio ns, a nd th ere w as n o u rg ency a bout th e n eed fo r m ajo r c h ange.
O ne r e aso n fo r e xce ssiv e c o sts a t N is sa n w as th at o nly h alf o f th e a va ila ble c a pacit y in
t h e c o m pany’s fa cto rie s w as b ein g u se d ; p ro ductio n c a p acit y w as s u ff ic ie nt to b uild
a lm ost a m illio n m ore c a rs a y e ar th an th e c o m pa ny c o u ld s e ll. T o r e duce c o sts , G hosn
d ecid ed to c lo se fiv e fa cto rie s in J a p an a nd e lim in ate m ore th an 2 1,0 00 jo bs, w hic h w as
14 p erc e nt o f N is sa n’s g lo bal w ork fo rc e . T o s im plif y p ro ductio n o pera tio ns a t th e
re m ain in g fa cto rie s a nd m ake th e m m ore e ff ic ie nt, G hosn p la nned to r e duce th e
num ber o f c a r p la tfo rm s b y h alf a nd th e n um be r o f p ow er tr a in c o m bin atio ns b y a th ir d .
P la nt c lo sin gs c a n u nderm in e r e la tio ns w it h e m plo ye e s, a nd G hosn to ok s te ps to
e nsu re th at e m plo ye es k n ew w hy th ey w ere n ece ssa ry a nd w ho w ould b e a ff e cte d. In
g enera l, h e u nders to od th at m ost e m plo ye e s p re fe r to le arn w hat w ould h appen to
t h em a nd p re pare fo r it , r a th er th an r e m ain in g in a s ta te o f u nce rta in ty a nd a nxie ty .
G hosn a tte m pte d to m in im iz e a d ve rs e e ff e cts o n e m plo ye e s b y s e llin g s u bsid ia rie s a nd
usin g n atu ra l a ttr it io n, e arly r e tir e m en ts , a nd o pportu nit ie s fo r p art ‐ tim e w ork a t o th er
co m pany fa cilit ie s.
P urc h asin g c o sts r e pre se nt 6 0 p erc e n t o f th e o pera tin g c o sts fo r a n a uto m ake r, a nd
N is sa n w as p ayin g m uch m ore th an n ece ssa ry fo r th e p arts a nd s u pplie s u se d to b uild
i t s c a rs . A fte r c o m parin g e xp ense s a t N is sa n a nd R enault , G hosn d is co ve re d th at Nis sa n’s p urc h asin g c o sts w ere 2 5 p erc e n t h ig her. O ne r e aso n w as th e p ra ctic e o f
purc h asin g s m all o rd ers fr o m m any s u p plie rs in ste ad o f la rg er o rd ers fr o m a s m alle r
num ber o f g lo bal s o urc e s. It w ou ld b e n ece ssa ry to r e duce th e n um ber o f s u pplie rs ,
e ve n th ough th is a ctio n w as u n pre ce d ente d in a c o u ntr y w here s u pplie r r e la tio nsh ip s
w ere c o nsid ere d s a cro sa nct. H ig her p urc h a sin g c o sts w ere a ls o a r e su lt o f o ve rly
e xa ctin g s p ecif ic a tio ns im pose d o n s u p plie rs b y N is sa n e ngin eers . T he e ngin eers w ho
w ork e d w it h th e c ro ss ‐ fu nctio nal te am o n p urc h a sin g in it ia lly d efe nded th eir
s p ecif ic a tio ns, b ut w hen th ey fin ally r e aliz e d th at th ey w ere w ro ng, th e te am w as a ble to
a ch ie ve g re ate r s a vin gs th an e xp ecte d. E xce ssiv e p urc h a sin g c o sts a re n ot th e ty p e o f
pro ble m th at c a n b e s o lv e d q uic kly , b ut a fte r th re e y e a rs o f p ers is te nt e ff o rt it w as
possib le to a ch ie ve G hosn ’s g oa l o f a 2 0 p erc e n t r e ductio n.
Y ears o f d eclin in g s a le s a t N is sa n w ere c a u se d b y a la ck o f c u sto m er a ppeal fo r m ost
o f th e c o m pany’s c a rs . Wh en G hosn m ad e a d eta ile d a naly sis o f s a le s d ata , h e
dis co ve re d th at o nly 4 o f th e 4 3 d if f e re nt N is sa n m od els h ad s u ff ic ie nt s a le s to b e
pro fit a ble . T he h ead o f e ngin eerin g m ad e fin al d ecis io ns a bout th e d esig n o f n ew
m odels . D esig ners w ere ta kin g o rd ers fr o m e ngin eers w ho fo cu se d c o m ple te ly o n
perfo rm ance , a nd th ere w as lit tle e ff o rt to d ete rm in e w hat ty p e s o f c a rs c u sto m ers r e ally
w ante d. T o in cre ase th e c u sto m er a ppeal o f N is sa n v e h ic le s, G hosn h ir e d th e
in nova tiv e d esig ner S hir o N aka m ura , w ho b eca m e a noth er k e y le ader in th e tu rn aro und
eff o rt. T he d esig ners w ould n ow h ave m ore a uth orit y o ve r d esig n d ecis io ns, a nd G hosn
e nco ura ged th em to b e in nova tiv e r a th er th an m ere ly c o p yin g c o m petit o rs . F or th e fir s t
tim e in o ve r a d eca de, N is sa n b egan c o m in g u p w it h c a rs th at e xcit e d c u sto m ers b oth
in J a pan a nd a bro ad. G hosn p la n ned to in tr o duce 1 2 n ew m od els o ve r a th re e ‐ ye ar
perio d, b ut th e tim e n ece ssa ry t o b rin g a n ew m od el in to p ro ductio n m eant th at fe w
w ould b e a va ila ble u ntil 2 002.
A noth er r e aso n fo r d eclin in g s a le s w as N is sa n’s w eak d is tr ib utio n n etw ork . In J a pan
str o ng b ra nd lo ya lt y is r e in fo rc e d b y e ff o rts to m ain ta in c lo se r e la tio nsh ip s w it h
c u sto m ers , a nd it is e sse ntia l fo r th e d eale rs h ip s to b e m an aged b y p eople w ho c a n
build c u sto m er lo ya lt y a nd c o nve rt it in to r e peat s a le s. In 1 999, m any N is sa n
deale rs h ip s in J a pan w ere s u bsid ia rie s m an aged b y N is sa n e xe cu tiv e s n earin g
re tir e m ent, a nd th ey v ie w ed th eir r o le m ore in s o cia l te rm s th an a s a n e ntr e pre neur
re sp onsib le fo r h elp in g th e c o m pany to in cre ase m ark e t s h a re a nd p ro fit s . G hosn
re duce d th e n um ber o f c o m pany ‐ ow ned d eale rs h ip s ( 1 0 p erc e n t w ere c lo se d o r s o ld ),
a nd h e to ok s te ps to im pro ve m anagem en t a t th e r e m ain in g d eale rs h ip s. S avin g N is sa n
w ould a ls o r e quir e m ajo r c h ange s in h um an r e so u rc e p ra ctic e s, s u ch a s g uara nte ed
lif e tim e e m plo ym ent a nd p ay a n d p ro m otio n b ase d o n s e n io rit y . T ra nsfo rm in g th ese
s tr o ngly e m bedded a sp ects o f th e c o m pa ny c u lt u re w it h out e ngenderin g r e se ntm ent
and d em ora liz in g e m plo ye es w as p erh aps th e m ost d if f ic u lt c h a lle nge. T he c h anges
w ould p rim arily a ff e ct n onunio n iz e d e m plo ye e s a t N is sa n, in clu din g th e m anagers . A
m erit p ay p la n w as e sta blis h ed, a nd in ste ad o f b ein g r e w ard ed fo r s e nio rit y , e m plo ye es
w ere n ow e xp ecte d to e arn th eir p ro m otio ns a nd s a la ry in cre ase s th ro ugh e ff e ctiv e
p erfo rm ance . A re as o f a cco unta b ilit y w ere s h a rp ly d efin ed s o th at p erfo rm ance c o uld
b e m easu re d in r e la tio n to s p ecif ic g oals . N ew b onuse s p ro vid ed e m plo ye es a n opportu nit y to e arn u p to a th ir d o f th eir a nnual s a la ry fo r e ff e ctiv e p erfo rm ance , a nd
hundre ds o f u pper ‐ le ve l m anage rs c o u ld a ls o e arn s to ck o ptio ns. T hese a nd o th er
ch anges in h um an r e so urc e p ra ctic e s w ould m ake it p ossib le fo r G hosn to g ra dually
r e pla ce w eak m id dle ‐ a nd u ppe r ‐ le ve l m an agers w it h m ore c o m pete nt s u cce sso rs .
In O cto ber 1 999, G hosn a nnounce d th e p la n fo r r e vit a liz in g N is sa n. H e h ad b een
ca re fu l to a vo id a ny e arlie r le aks a bout in div id ual c h a nges th at w ould b e c rit ic iz e d
w it h out u nders ta ndin g w hy th ey w ere n ece ssa ry a nd h ow th ey fit in to th e o ve ra ll p la n.
T he a nnounce m ent in clu ded a p le dge th at G hosn a nd th e e xe cu tiv e c o m mit te e w ould
r e sig n if N is sa n fa ile d to s h ow a p ro fit b y th e e nd o f 2 000. It w as a n im pre ssiv e
d em onstr a tio n o f h is s in ce rit y a nd c o m mit m en t, a nd it m ad e w hat h e w as a skin g o f
oth ers s e em m ore a cce pta ble . F ortu nate ly , th e p rim ary o bje ctiv e s o f th e c h ange w ere
a ll a ch ie ve d o n s ch edule , a nd b y 2 001 e arn in gs w ere a t a r e co rd h ig h fo r th e c o m pany.
T hat y e ar G hosn w as a ppoin te d a s th e c h ie f e xe cu tiv e o ff ic e r a t N is sa n, a nd in 2 005,
he w ould b eco m e th e C EO o f R en ault a s w ell.
Q uestio ns
1. Wh at w as d one to im pro ve e ff ic ie ncy, a dapta tio n, a nd h um an r e la tio ns, a nd h ow
w ere th e p ote ntia l tr a de ‐ off s a m ong th ese p erfo rm an ce d ete rm in ants h andle d?
2. Wh at e ff e ctiv e c h ange m anagem en t p ra ctic e s w ere u se d a t N is sa n?
3. Wh at tr a it s a nd s kills c a n h elp to e xp la in th e s u cce ssfu l s tr a te gic le aders h ip b y
G hosn ?
E ssay # 4: Wh at a re s o m e g uid elin es fo r s tr a te gy fo rm ula tio n? W hy is e xte rn al
m onit o rin g im porta nt fo r s tr a te gic le aders h ip ? G iv e a n in sta nce o f s u cce ssfu l o r fa ile d
str a te gy in th e m obile s p ace . Wh y d o y o u th in k th ey s u cce eded/fa ile d a nd w hat le sso ns
ca n b e le arn t?
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