Motivation: Case (Google)

One motivational issue that Google pays particular attention to concerns its star performers. Most
organizations treat performance evaluation ratings—and accompanying compensation differences—
much like grades in a college course. Just as a distribution of grades might have a few A’s, more A–’s,
B+’s, B’s, and B–’s, and a few C’s, so too do performance evaluations wind up with a few 5’s, more 4’s,
3’s, and 2’s, and a few 1’s. Thus, scores and rewards have a “bell curve” distribution, with fewer people
in the tails and more in the middle. Moreover, just as an A is only a bit more rewarding than an A–, so
too does a 5 get just a bit more than a 4.

Although there’s a logic to that view of evaluation and compensation, it misses an important insight
from scientific work on performance. That work suggests that the top 1 percent of performers
contribute 10 percent of the firm’s productivity all by themselves. Similarly, the top 5 percent of
performers contribute 25 percent of the productivity all by themselves. Put differently, stars aren’t just a
little bit better than typical employees—they’re worlds better. This is especially true in white collar jobs
where there are no equipment or process constraints on what employees can do. As Bill Gates once
argued, “A great lathe operator commands several times the wage of an average lathe operator, but a
great writer of software code is worth 10,000 times the price of an average software writer.”

Laszlo Bock, the former head of Google’s People Operations group, followed such advice when
rewarding star performers. He argues, “Internal pay systems don’t move quickly enough or offer enough
pay flexibility to pay the best people what they are actually worth. The rational thing for you to do, as an
exceptional performer, is to quit.” Thus, Google practices what he calls “paying unfairly”—where
“unfairly” means a rejection of the notion that 5’s should only get a little more than 4’s or 3’s. “If the
best performer is generating ten times as much impact as an average performer, they shouldn’t
necessarily get ten times the reward,” Bock notes, “but I’d wager they should get at least five times the
reward.” He continues, “The only way to stay within budget is to give smaller rewards to the poorer
performers, or even the average ones. That won’t feel good initially, but take comfort in knowing that
you’ve now given your best people a reason to stay with you, and everyone else a reason to aim higher.”

Questions:

1 Do you agree with Bock that star performers should get a lot more—not just a little more— than
average performers? If someone earning a 3 on Google’s evaluation system gets a 2 percent raise, what
should employees earning 4’s and 5’s get?

2 Given the budget issues created by giving star performers more, should someone earning a 3 get a 2
percent raise—or should they get less? What are the arguments for and against a 2 percent raise level
for average performers?

3 Consider all the things Google’s People Operations group does to motivate its employees. Which
motivation theories do they seem to be leveraging, and how?

Sources: L. Bock, Work Rules! Insights from Inside Google that Will Transform How You Live and Lead.
New York: Twelve,

2015; E. O’Boyle Jr. and H. Aguinis, “The Best and the Rest: Revisiting the Norm of Normality of
Individual Performance.” Personnel Psychology, 65, 79–119.
 EXPLAINING PAY DIFFERENCES

The purpose of this exercise is to demonstrate how compensation can be used to influence motivation.
This exercise uses groups, so your instructor will either assign you to a group or ask you to create your
own group. The exercise has the following steps:

Questions

1 Read the following scenario: Chris Clements and Pat Palmer are both computer programmers working
for the same Fortune 500 company. One day they found out that Chris earns $60,820 per year, while Pat
earns $72,890. Chris was surprised and said, “I can’t think of any reason why we should be paid so
differently.” “I can think of at least 10 reasons,” Pat responded. Can you, like Pat, think of at least 10
reasons that could cause this difference in salary between two people? These reasons can be legal or
illegal, wise or unwise.

2 Going around the group from member to member, generate a list of 10 conceivable reasons why Pat
may be earning more than Chris. Remember, the reasons can be legal or illegal, wise or unwise.

3 Consider whether the theories discussed in the chapter—expectancy theory, goal setting theory,
equity theory, and psychological empowerment—are relevant to the list of reasons you’ve generated.
Maybe one of the theories supports the wisdom of a given reason. For example, maybe Pat’s job is more
difficult than Chris’s job. Equity theory would support the wisdom of that reason because job difficulty is
a relevant input. Maybe one of the theories questions the wisdom of a given reason. For example,
maybe Chris’s boss believes that salary increases are a poor use of limited financial resources.
Expectancy theory would question the wisdom of that reason because that philosophy harms
instrumentality.

4 Elect a group member to write the group’s 10 reasons on the board. Then indicate which theories are
relevant to the various reasons by writing one or more of the following abbreviations next to a given
reason: EX for expectancy theory, GS for goal setting theory, EQ for equity theory, and PE for
psychological empowerment.

5 Class discussion (whether in groups or as a class) should center on which theories seem most relevant
to the potential reasons for the pay differences between Chris and Pat. Are there some potential
reasons that don’t seem relevant to any of the four theories? Do those reasons tend to be legal or
illegal, wise or unwise?

Source: Adapted from Renard, M.K. “It’s All about the Money: Chris and Pat Compare Salaries.” Journal
of Management

Education 32 (2008), pp. 248–61.

 Learning and Desicion Making

CASE: BridgeWater Associates

One of the biggest challenges Bridgewater faces is the succession plan for the eventual departure of on-
again, off-again CEO Ray Dalio. In March 2017, the Apple executive that was hired to potentially take
over left after only 10 months on the job with Dalio posting online that “We mutually agree that he is
not a cultural fit for Bridgewater.” It’s clear that Bridgewater’s culture of transparency, decision making,
and fostered conflict and disagreement is not for everyone. Dalio is now halfway through what he has
termed a 10-year succession plan and there appears to be no clear answer as to who is going to carry on
the torch of the company’s “principles” and “radical transparency” (although Dalio has stated that he
plans to remain at the company as a professional investor until he dies).

Dalio’s solution could very well be a form of artificial intelligence—a software system designed to
automate management decisions that has been known within the company as the “Book of the Future”
and most recently by its formal name: PriOS (Principles Operating System). PriOS, once complete, is
designed to automate management within the firm based on its guiding 210 principles. How might this
work? Well, first the software needs data about the decisions made in the firm and the people that
make them, which it will get from numerous sources such as from the battery of personality and
cognitive tests that every employee in the company takes. In addition, employees rate one another’s
performance via an iPad application known as the “Dot Collector” on a daily basis. Information is also
gathered via snap polls taken in meetings and staff take daily multiple-choice quizzes on management
issues that occur within the company (correct and incorrect answers are logged over time).

These inputs are then processed by the operating system against Dalio’s Principles and ideally this
results in direct information on whom to hire, fire, or employ in a specific situation, and even to provide
detailed directions for employees on day-to-day tasks. Recent former employees have felt that working
at Bridgewater has been like a giant experiment in human decision making. All employees have their
own “baseball card” that anyone can see, which identifies their strengths and weaknesses on certain
dimensions. Dalio plans for nearly 75 percent of the management decisions made at Bridgewater to be
determined by PriOS within the next five years. In essence, the software will potentially be the
embodiment of Ray Dalio after he is gone.

1 How would you like to work for a company whose management decisions are primarily made by a
computer (potentially in the image of its founder)?

2 Could a different firm without such detailed, strong “principles” do the same thing as Bridgewater?

3 Do you see the creation of PriOS as a potential competitive advantage for Bridgewater or as something
that won’t survive long term after Dalio is gone?

Sources: K. Burton and S. Kishan, “Behind the Bridgewater Shakeup: Ray Dalio’s Unusual Culture,”
Bloomberg.com, March 1, 2017; J. Cassidy, “Mastering the Machine,” The New Yorker, July 25, 2011;
Bridgewater Company websites: www.bridgewater.com and www.principles.com [accessed March
2017]; R. Copeland and B. Hope, “The World’s Largest Hedge Fund Is Building an Algorithmic Model from
Its Employee’s Brains,” The Wall Street Journal, December 22, 2016; A. Stevenson and M. Goldstein, “At
World’s Largest Hedge Fund, Sex, Fear, and Video Surveillance,” The New York Times, July 27, 2016, p.
A1.

DECISION-MAKING BIAS

The purpose of this exercise is to illustrate how decision making can be influenced by decision heuristics,
availability bias, and escalation of commitment. The exercise has the following steps:

Step 1 Answer each of the following problems.

A. A certain town is served by two hospitals. In the larger hospital, about 45 babies are born each day,
and in the smaller hospital, about 15 babies are born each day. Although the overall proportion of boys
is about 50 percent, the actual proportion at either hospital may be greater or less than 50 percent on
any given day. At the end of a year, which hospital will have the greater number of days on which more
than 60 percent of the babies born were boys?

a. The large hospital

b. The small hospital

c. Neither—the number of days will be about the same (within 5 percent of each other)

B. Linda is 31 years of age, single, outspoken, and very bright. She majored in philosophy in college. As a
student, she was deeply concerned with discrimination and other social issues and participated in
antinuclear demonstrations. Which statement is more likely?

a. Linda is a bank teller.

b. Linda is a bank teller and active in the feminist movement.

C. A cab was involved in a hit-and-run accident. Two cab companies serve the city: the Green, which
operates 85 percent of the cabs, and the Blue, which operates the remaining 15 percent. A witness
identifies the hit-and-run cab as Blue. When the court tests the reliability of the witness under
circumstances similar to those on the night of the accident, he correctly identifies the color of the cab 80
percent of the time and misidentifies it the other 20 percent. What’s the probability that the cab
involved in the accident was Blue, as the witness stated?

D. Imagine that you face this pair of concurrent decisions. Examine these decisions and then indicate
which choices you prefer.

Decision I: Choose between:

a. A sure gain of $240 and

b. A 25 percent chance of winning $1,000 and a 75 percent chance of winning nothing Decision II:
Choose between:

a. A sure loss of $750 and

b. A 75 percent chance of losing $1,000 and a 25 percent chance of losing nothing

Decision III: Choose between:

a. A sure loss of $3,000 and

b. An 80 percent chance of losing $4,000 and a 20 percent chance of losing nothing

E. You’ve decided to see a Broadway play and have bought a $150 ticket. As you enter the theater, you
realize you’ve lost your ticket. You can’t remember the seat number, so you can’t prove to the
management that you bought a ticket. Would you spend $150 for a new ticket?

F. You’ve reserved a seat for a Broadway play, for which the ticket price is $150. As you enter the
theater to buy your ticket, you discover you’ve lost $150 from your pocket. Would you still buy the
ticket? (Assume you have enough cash left to do so.)

G. Imagine you have operable lung cancer and must choose between two treatments: surgery and
radiation. Of 100 people having surgery, 10 die during the operation, 32 (including those original 10) are
dead after 1 year, and 66 are dead after 5 years. Of 100 people having radiation therapy, none dies
during treatment, 23 are dead after 1 year, and 78 after 5 years. Which treatment would you prefer?

Step 2 Your instructor will give you the correct answer to each problem. Class discussion, whether in
groups or as a class, should focus on the following questions: How accurate were the decisions you
reached? What decision-making problems were evident in the decisions you reached? Consider
especially where decision heuristics, availability, and escalation of commitment may have influenced
your decisions. How could you improve your decision making to make it more accurate?
 Case: The Netflix Decision That Could Cost the Company 800,000 Subscribers (Decision Making)

Netflix’s stock price was up 130 percent from the previous year and almost 190 percent over two years.
One can imagine smiling faces and high fives being given at the June 2011 shareholders’ meeting. Netflix
has been credited with redefining the movie rental industry and bringing the previously dominant
player, Blockbuster, to its knees. During the three months that followed the June 2011 shareholders’
meeting, the good times continued and Netflix’s stock price increased another 15 percent peaking at
$305 a share.

Fast-forward to the June 2012 shareholders’ meeting, where the mood was more somber. From its
peak, the stock price plummeted to approximately $69 per share on June 19, 2012, a loss of $236 per
share or 77 percent of its value. Given the concern over the company’s recent stock price performance,
the shareholders passed a successful motion to put management on notice.

In an almost three-to-one vote, shareholders elected to change the structure of the board of directors to
allow all board members to be simultaneously replaced. Additionally, shareholders voted to make it
easier to call emergency meetings. While top management was not replaced, the message sent by the
majority of shareholders could be construed as “get your act together or else you’ll be replaced.” A key
question is: What happened to tarnish the previously stellar performance of this innovative movie rental
company and cause a near mutiny by its shareholders?

There was a time in the not too distant past when renting a movie necessitated driving to a video store
to pick out and pay for in person (and return a couple of days later) a DVD. This method of renting was
not only inconvenient but also expensive with a twice-a-week video habit costing in the neighborhood of
$50 per month. This bricks-and-mortar business model was also expensive for companies like
Blockbuster and Hollywood Video for they had to purchase (or rent), stock, staff, insure, and maintain
several buildings across many cities.

Netflix reinvented video rental by delivering DVDs by mail and allowing unlimited live online streaming
of select content for one monthly fee. For less than $10 a month Netflix subscribers could access
content 24/7. Netflix’s business exploded. Blockbuster, the previous industry leader, was slow to
respond and when they did it was too late. Netflix had redefined entertainment rental and Blockbuster
was on the road to bankruptcy, eventually closing 3000 of its 4000 retail outlets.

Netflix reinvented video rental by delivering DVDs by mail and allowing unlimited live online streaming
of select content for one monthly fee. For less than $10 a month Netflix subscribers could access
content 24/7. Netflix’s business exploded. Blockbuster, the previous industry leader, was slow to
respond and when they did it was too late. Netflix had redefined entertainment rental and Blockbuster
was on the road to bankruptcy, eventually closing 3000 of its 4000 retail outlets.

Many Netflix customers expressed outrage over the new plan to split the services, catching the company
off guard. However, from the company’s perspective, it was a good decision. Management saw the DVD
mail exchange business as underutilized, expensive to support, and close to obsolescence, like the
storefront outlets it had largely replaced. The separation of services would help by allowing online-
streaming-only subscribers to pay less while capturing additional revenue from the continuing DVD mail
exchange business. There were also compelling cost issues that Netflix management was attempting to
address. Content owners, such as movie and TV studios, were growing more aggressive in negotiating
their royalties and were demanding to be paid based upon the potential number of streaming viewers
rather than actual views. All Netflix subscribers, including those that received content exclusively via
mailed DVDs were being counted as potential online streaming customers. Giving customers the option
to be specifically DVD-by-mail-only customers would lower the royalties Netflix was required to pay.

The consumer firestorm in response to the announced change caused management to reconsider their
decision. Reed Hastings, the CEO of Netflix, announced that the company had behaved arrogantly in
their announcement and the company would not be separated. Quikster was never launched but the
separate pricing for DVD by mail and online streaming would continue.

In the third quarter of 2011, Netflix lost 800,000 members, which was the first time the number of
company subscribers ever declined. Amazingly, net revenues increased and earnings per share increased
that same quarter. Interviewed after the fact, the Netflix CEO stated he did not remember if consumer
focus groups were used to gauge the potential impact of their decisions. Did the actions by Netflix
strengthen the company or did they simply send 800,000 customers to competing content providers
such as Hulu, Redbox, or even reemerging Blockbuster?

Questions

1. Faced with the increased costs of delivering DVD by mail and streaming online content, clearly Netflix
had to take some action. Describe the decision-making process you would have advised Netflix
management to follow.

2. What values are reflected in the Netflix decisions presented in the case?

3. Think back to the concept of escalation of commitment. Is Netflix’s continuation with this pricing
action (which is resulting in a large loss of customers) reflective of escalation of commitment or a
rational plan?

Sources: Written by Dr. Michael A. Dutch, Greensboro Co l lege, Greensboro, North Carolina (2012).
Adapted from Daniel Franke , “Netflix Shareholders Vote to Change Board Structure,” CNN Money , June
5, 2012, http://www.money.cnn.com; Mike Flacy , “Dish Network Shutting down a Third of All R e
maining Blockbuster Stores,” Digital Trends , February 23, 2012, http://www.digitaltrends. com; Chip
Cutter, “Behind the Increase: Why Netflix Is Raising Prices,” Yahoo! News , July 14, 2011,
http://www.yahoonews.com; and Nick Wingfield and Brian Stelter , “Netflix Lost 800,000 Members with
Price Rise and Qwikster Plan,” The New York Times , October 24, 2011, http://www.nytimes.com.
 Motivation Case : Comparing Co-Workers against Each Other: Does This Motivate Employees?

Rigid rankings hinder the teamwork and risk-taking necessary for innovation. But what combination of
methods works best?

Holiday shopping, year-end deadlines, and emotional family dramas aren’t the only stresses in
December. ‘Tis the season for companies to embark on that dreaded annual rite, the often bureaucratic
and always time-consuming performance review. The process can be brutal: As many as one-third of
U.S. corporations evaluate employees based on systems that pit them against their colleagues, and
some even lead to the firing of low performers.

Fans say such “forced ranking” systems ensure that managers take a cold look at performance. But the
practice increasingly is coming under fire. Following a string of discrimination lawsuits from employees
who believe they were ranked and yanked based on age and not merely their performance, fewer
companies are adopting the controversial management tool. Critics charge that it unfairly penalizes
groups made up of stars and hinders collaboration and risk-taking, a growing concern for companies
that are trying to innovate their way to growth. And a new study calls into question the long-term value
of forced rankings. “It creates a zero-sum game, and so it tends to discourage cooperation,” says Steve
Kerr, a managing director at Goldman Sachs Group Inc., who heads the firm’s leadership training
program.

Even General Electric Co., the most famous proponent of the practice, is trying to inject more flexibility
into its system. Former Chief Executive Jack Welch required managers to divide talent into three groups
—a top 20 percent, a middle 70 percent, and a bottom 10 percent, many of whom were shown the
door. More than a year ago, GE launched a proactive campaign to remind managers to use more
common sense in assigning rankings. “People in some locations take [distributions] so literally that
judgment comes out of the practice,” says Susan P. Peters, GE’s vice president for executive
development.

Striking that balance between strict yardsticks and managerial judgment is something every company,
from GE to Yahoo! to American Airlines, is grappling with today. But finding a substitute for a rigid
grading system is not an easy task. It drives truth into a process frequently eroded by grade inflation and
helps leaders identify managers who are good at finding top talent.

That’s one reason GE isn’t abandoning its system. But it has removed all references to the 20/70/10 split
from its online performance management tool and now presents the curve as a set of guidelines. The
company’s 200,000 professional employees tend to fall into Welch’s categories anyway, but individual
groups are freer to have a somewhat higher number of “A” players or even, says Peters, no “bottom
10s.” Even those low achievers are getting kinder treatment, from a new appellation—the “less
effectives”—to more specific coaching and intervention than in the past.

The changes are key for a company trying to evolve its culture from a Six Sigma powerhouse to one that
also values innovation. Tempering such rigid performance metrics, says Peters, “enables individuals and
organizations to be more comfortable with risk-taking and with failure.” To drive that point home, the
company’s top 5,000 managers were evaluated for the first time this year on five traits, such as
imagination and external focus, that represent the company’s strategic goals.
Separating stars from slackers remains a longstanding part of GE’s performance-driven culture. But for
most companies, especially those without such cultures, the benefits of adopting a forced ranking
system are likely to dissipate over the long term.

A recent study lends hard data to that theory. Steve Scullen, an associate professor of management at
Drake University in Des Moines, Iowa, found that forced ranking, including the firing of the bottom 5
percent or 10 percent, results in an impressive 16 percent productivity improvement—but only over the
first couple of years. After that, Scullen says, the gains drop off, from 6 percent climbs in the third and
fourth years to basically zero by year 10. “It’s a terrific idea for companies in trouble, done over one or
two years, but to do it as a long-term solution is not going to work,” says Dave Ulrich, a business
professor at the University of Michigan at Ann Arbor. “Over time it gets people focused on competing
with each other rather than collaborating.”

Yahoo!, too, was looking for better dialogue and less demoralizing labels when it substantially changed
its rating system, which compared employees’ performance to an absolute standard rather than to each
other. Libby Sartain, Yahoo!’s senior vice president for human resources, knew that review discussions
at the Sunnyvale, California, tech leader frequently included the wink-wink “I wanted to put you here,
but I was forced by human resources to do something different” comment that discredits so many
appraisals. Yahoo! stripped away its performance labels, partly in hopes that reviews would center more
on substance and less on explaining away a grade.

But that doesn’t mean Yahoo! went all Pollyanna on its employees. To do a better job of finding and
showering top performers with the rewards necessary to keep them from jumping ship in talent-tight
Silicon Valley, the company also instituted a “stackranking” system to determine how compensation
increases are distributed. It asks managers to rank employees within each unit—a group of 20 people
would be ranked 1 through 20, for example—with raises and bonuses distributed accordingly. During
reviews, employees are told how their increases generally compare to those of others.

Some Yahoo! managers are livid about the new system. “It’s going to kill morale,” laments one senior
engineering manager who says he’s getting a stronger message to cull his bottom performers. Yahoo!
says its new program doesn’t automatically weed out a bottom group and was designed specifically to
reward its stars.

Indeed, what Yahoo! has introduced in place of its old system shows how hard it is for companies to find
ways to foster merit-driven cultures that coddle standouts while staying tough on low performers.
Whether a company calls it stack ranking, forced ranking, or differentiation, “there’s no magic process,”
says Sartain. “We just want to make sure we’re making our bets and that we’re investing in the people
we most want to keep. That’s what this is all about.”
Best-Practice Ideas

Review season is here, with all the time-consuming bureaucracy and stress that come with it. Here are
five ideas to help put performance back into the process:

Meet More Often

Time-strapped managers may sound a collective groan, but year-end reviews on their own are hardly
enough. The best managers meet at least three times a year, if not four—once to set goals, once or
twice for an update, and finally, to review—with many informal check-ins in between. In this quickly
shifting economy, goals may change, and fewer surprises will surface at year-end.

Make Room for Risk

As innovation trumps efficiency, some companies— including GE—are putting some wiggle room into
their rankings and ratings. But more flexible guidelines have to have teeth, too: Low-performing units
shouldn’t get more than their share of top grades, for example. Exceptions should go to people who set
aggressive goals and come close to achieving them.

Adjust Goals along with Grades

While many companies use “calibration” sessions to check that performance assessments level out
among different managers, less than 10 percent fine-tune up-front goals across groups, according to
Hewitt Associates.

Choose Words Wisely

Whether or not you strip the labels off your performance reviews entirely, as Yahoo! has, faint-praise
terms such as “fully satisfies” make essential B-players feel like also-rans. Try “strong” or “successful” to
drive home their value.

Build Trust

With so much focus on the tools and tricks of performance management, it’s easy to lose sight of what
really matters: the conversation. The University of Michigan’s Dave Ulrich suggests putting three simple
words—”help me understand”—in front of difficult feedback.

Questions

1. What’s your opinion regarding forced ranking performance appraisals? Do they motivate employees?
Explain.

2. How would equity theory explain some employees’ negative reactions to forced rankings? Explain.

3. Based on Chapter 5, if you decided not to use forced rankings at your company, how would you
motivate employees?
Source: Adapted from Sarah Boehle, “Keep Forced Ranking Out of Court,” Training 45, no. 5 (June 2008),
pp. 44–46; Paul Falcone, “Big- Picture Performance Appraisal,” HR Magazine 52, no. 8 (August 2007), pp.
99–100; and Jena McGregor, “The Struggle to Measure Performance,” BusinessWeek, January 9, 2006,
pp. 26–27.

CASE : Electrolux Cleans Up

Boosting R&D and Getting All Units on the Same Page Delivers a Rebound

You will never meet Catherine, Anna, Maria, or Monica. But the future success of Sweden’s Electrolux d
e pends on what these four women think. Catherine, for instance, a Type A career woman who is a
perfectionist at home, loves the idea of simply sliding her laundry basket into a washing machine,
instead of having to lift the clothes from the basket and into the washer. That product idea has been
moved onto the fast track for consideration.

So, just who are Catherine and the other women? Well, they don’t actually exist. They are composites
based on in-depth interviews with some 160,000 consumers from around the globe. To divine the needs
of these mythical customers, 53 Electrolux employees, including d e signers, engineers, and marketers
hailing from various divisions, gathered in Stockholm for a weeklong brainstorming session. The
Catherine team began by ripping photographs out of a pile of magazines and sticking them onto poster
boards. Next to a picture of a woman wea ring a sharply tailored suit, they scribbled some of Catherine’s
attributes: driven, busy, and a bit overwhelmed.

With the help of these characters, Electrolux designers and engineers are searching for the insights
they’ll need to dream up the next batch of hot products. It’s a new way of doing things for Electrolux,
but then again, a lot is new at the company. When Chief Executive Hans Stråberg took the helm in 2002,
the world’s No. 2 maker of home appliances after Whirlpool Corp. faced spiraling costs while its middle-
market products were grad u ally losing out to cheaper goods from Asia and Eastern Europe.
Competition in the United States, where Electrolux gets 40 percent of its sales, was ferocious. The
company’s stock was treading water.

Stråberg had no choice but to do something radical. He began shuttering plants in Wes t ern Europe and
the United States and shifting work to lower-cost locales in Asia and East ern Europe. He also is spinning
off the outdoor products division. But this is no ordinary corporate makeover. Stråberg is also breaking
down barriers between departments and forcing his designers, engineers, and marketers to work
together to come up with new products. To speed the transition, he recruited executives from
companies with strong track records in innovation, including Procter & Gamble and PepsiCo.

At the Stockholm brainstorming session, for example, the group leader, Kim Scott, was a recent P&G
defector. She urged everyone “to think of yourselves as Catherine.” The room buzzed with discussion.
Ideas were refined, sketches drawn up. The group settled on three concepts: Breeze, a clothes steamer
that also removes stains; an Ironing Center, similar to a pants press but for shirts; and Ease, the washing
machine that holds a laundry basket inside its drum.

Half the group raced off to the machine shop to turn out a prototype for Breeze, while the rest stayed
upstairs to bang out a marketing plan. Over the next hour, designer Lennart Johansson carved and
sandpapered a block of peach-colored polyurethane until a contraption that resembled a cross between
an electric screwdriver and a handheld vacuum began to emerge. The designers in the group wanted the
Breeze to be smaller, but engineer Giuseppe Frucco pointed out that would leave too little space for a
charging station for the 1,500-watt unit.

For company veterans such as Frucco , who works at Electrolux’s fabric care research and development
center in Porcia , Italy, this dynamic groupthink is a refreshing change: “We never used to create new
products together,” he says. “The designers would come up with something and then tell us to build it.”
The new way saves time and money by avoiding the technical glitches that crop up as a new design
moves from the drafting table to the factory floor.

To support the innovation drive, Stråberg has bumped up spending on R&D from 0.8 percent of sales to
1.2 percent and is aiming for 2 percent eventually. What he’s gunning for are products that consumers
will gladly pay a premium for: gadgets with drop-dead good looks and clever features that ordinary
people can under stand without having to pore through a thick users’ manual. “Consumers are prepared
to pay for good design and good performance,” he says.

Electrolux isn’t the only appliance maker on an innovation kick. In 1999, Whirlpool Corp. launched a
program that allows all of its 68,000 employees to contribute design ideas, yielding a flood of new
products.
 Eye-catching Design

But few have pulled off the range of hot new offerings that Electrolux has. One clear hit is a cordless
stick-and-hand vacuum, called Pronto in the United States. Available in an array of metallic hues with a
rounded, erg o nomic design, this is the Cinderella of va c uums. Too attractive to be locked up in the
broom closet, it calls out to be displayed in your kitchen. In Europe, it now commands 50 percent of the
market for stick vacs , a coup for a product with fewer than two years on the market. The Pronto is
cleaning up in the United States, too. Stacy Silk, a buyer at retail chain Best Buy Co., says it is one of her
hottest sellers, even though it retails for around $100, double the price of compar a ble models. “The
biggest thing is the aesthetics,” Silk says. “That gets people to walk over and look.”

Stråberg , who spent decades running Electrolux operations in the United States, is craf t ing these new
products even while moving away from many traditional tools of customer r e search. The company
relies less heavily on focus groups and now prefers to interview people in their homes where they can
be videotaped pushing a vacuum or shoving laundry into the washer. “Consumers think they know what
they want, but they often have trouble articulating it,” says Henrik Otto, senior vice president for global
design, whom Stråberg lured away from carmaker Volvo. “But when we watch them, we can ask, ‘why
do you do that?’ We can change the product and solve their problems.”

The new approach yielded strong results. After dropping for two straight years, annual sales rose 8
percent, to $16.5 billion, in 2005. Operating income jumped 42 percent in the fourth quarter, compared
with the year before, though it rose by less than 2 percent, to $881 million, for the year as a whole.
Johan Hjertonsson , director of the consumer innovation program, says product launches have almost
doubled in quantity. And the number of launches that result in outsized unit sales is now running at 50
percent of all introductions, from around 25 percent previously. Though the recent economic downturn
has dampened sales for most companies in this and other retail product areas, Electrolux still maintains
a 5 percent market share of the profitable household appliance market in North America in 2008.
Catherine would be pleased.

Questions

1. How did Electrolux Chief Executive Stråberg break down barriers (and increase communication)
between departments? Why did he do this? Explain.

2. What are the advantages for Electrolux of having individuals from different departments and
functional areas work together on product design? Describe.
3. In an era with intense competition and several low-cost products on the market, how can Electrolux
use teamwork and groups to succeed? Describe.

Source: Excerpted from Ariane Sains, Stanley Reed, and Michael Arndt, “Electrolux Cleans Up,”
BusinessWeek, February 27, 2006, pp. 42–43. Used with permission of Bloomberg Businessweek.com.
Copyright © 2006 All rights reserved.

CASE Foxconn: The Human Cost Associated with Our Electronic Gadgets

The June 14 headline read: “New Foxconn Worker Commits Suicide, First in 2012.” While the
proclamation of a worker suicide is tragic in its own right, the “First in 2012” may be even more
troubling. The headline implies that suicides at Taiwan-based Foxconn Technology Group are, or at least
were, typical and expected.

It was a rash of suicides that brought Foxconn into the public light. It was reported that between 2008
and 2010, 19 Foxconn employees “attempted suicide or fell from buildings in manners that suggested
suicide attempts.” The electronics supplier has been accused of forcing its employees to work long hours
under challenging working conditions for low pay. Though wages have been raised on more than one
occasion and working hours curtailed, problems at Foxconn have continued. In January 2012,
approximately 150 Foxconn employees occupied the roof of their factory and threatened mass suicide
over working conditions and wages. Local police and fire representatives talked down these employees
after two days. All but 45 of the protestors returned to work. In June 2012, Foxconn was again in the
news for an employee uprising. Employees rioted following an argument with a local restaurateur.
Several new employees involved in a restaurant altercation raced back to their worker dorms shouting
“they are beating us,” inciting 100 of their coworkers to rush to their defense and throw bottles at the
police and company security. Four employees were arrested as a result of the incident.

Foxconn ’ s responses to its unwanted notoriety have also brought it adverse press coverage. Pictures of
the suicide nets the company installed around many of its buildings to dissuade (or save) potential
jumpers are taken as evidence of a continuing problem. The company ’ s requirement that employees
sign an anti-suicide pledge was the subject of late-night TV jokes in the United States. Foxconn ’ s
cancelation of death benefits for suicides, in response to an employee suicide note stating that he
jumped to help his family financially, was largely viewed as cruel.

While Foxconn has been in the news, few in the United States know about this global supplier of
electronics. Founded in 1974 by billionaire Terry Gou, Foxconn is a low-cost manufacturer of computer,
communication, and consumer electronics products. Foxconn controls its costs by providing low pay
(from a United States perspective) to large numbers of low-skilled workers. Foxconn is the largest single
private employer in mainland China with a staff of over 1.2 million working on multiple company
“campuses.” The number of employees at the company flagship plant in Longhua roughly equals the
population of Kansas City, MO. Though Foxconn may be best known for producing products for Apple,
they in fact manufacture merchandise for all of the major United States electronics firms, including Dell,
Hewlett-Packard, IBM, and Motorola, and their output accounts for approximately 40 percent (or $60
billion) of the world ’ s consumer-electronics revenue. While Foxconn builds high-tech items, its
processes are notably low tech with much of its production being completed by hand.
Foxconn facilities are set in compounds that the company compares to college campuses. These facilities
contain not only factory space, but also dormitories, cafeterias, restaurants, malls, medical care
providers, entertainment and sports venues. Dormitory rooms typically house seven to eight workers.
Like a college, Foxconn charges their employees for their housing and meals. The company ’ s
compounds are enclosed, separated from their surroundings by fences and walls. Once on campus,
employees never really need to leave.

The life of a Foxconn worker is hard to compare to what one would expect in the United States.
Thoughts of a work compound may bring up images of a company mining town, exploiting or at least
restricting the freedoms of workers. Foxconn compounds were in fact built to help the plight of the
Chinese worker. Company founder Terry Gou saw workers in Shenzhen factories living in shanties or
even sleeping under their workstation. Gou was determined to improve conditions for his employees.
His compounds were intended to give workers a better place to live than they could afford on their own,
ensure they were well fed, and protect them from city crime.

Foxconn, by Chinese standards, is a good place to work and its positions are highly coveted. Factory
work, in general, is seen as a way to escape the poverty of rural China. Young workers seeking a way into
the middle class are leaving their family farms and moving to the cities for these jobs. Foxconn wages
are among the best in China, and Foxconn continues to address mandatory overtime and child labor
abuses.

When one hears of 19 employee suicides since 2008, shock over the poor treatment of employees may
be the appropriate emotion, but could further examination of the data show a different side of the
story? The suicide rate at Foxconn is less than one tenth of the national suicide rate in China. In the
United States, workplace suicides are labeled as such only if they occur at work or during work time. As
Foxconn employees live on campuses, any suicide is naturally related to the company, potentially
inflating their numbers. It is also worth noting that the suicide headline reported at the beginning of this
case involved a new employee. Also, the riot that took place on a Foxconn campus was sparked by new
employees. At the Longhua complex alone, typically 5 percent of the workforce or 24,000 employees
quit each month, all requiring replacement. Consequently, there is a steady stream of new employees
emigrating from rural China to Foxconn’s factory cities. These workers are leaving their families, friends,
and lives behind, entering, perhaps friendless, what is presumably a new and unfamiliar setting. Workers
have died at Foxconn, but to what degree are these deaths due only to the working conditions and
pressures of the job? Are other factors like the isolation, distance from family and friends, cultural
factors, or even individual mental illnesses also contributing to this complicated and tragic situation?

Questions

1. Think of the initial impressions you formed of Foxconn as you read the case. To what degree did
stereotyping influence your thoughts? How much did additional information about the firm change your
initial impressions?

2. While the manual labor of assembling electronics is challenging for Foxconn employees, the workers
may also face the emotional burden of being away from family and isolation from the outside world.
How might management recognize and help employees constructively cope with these challenges and
emotions?
3. How has Foxconn engaged in impression management? Have their efforts been successful?

Sources: Written by Dr. Michael Dutch, Greensboro College, Greensboro, North Carolina (2012).
Adapted from company website, http://www.foxconn.com; “Foxconn Technology,” The New York
Times , March 29, 2012, http://www.nytimes.com; Peter Cohan, “23 Died Building Your iWorld: Time to
Boycott Apple?” Forbes Magazine , January 26, 2012, http://www.forbes.com; Charles Duhigg and David
Barboza, “In China, Human Costs Are Built Into an iPad,” The New York Times , January 25, 2012,
http://www.nytimes.com; CIA, “The World Factbook,” n.d.,
https://www.cia.gov/library/publications/the-world-factbook/ rankorder/2119rank.html; Joel Johnson,
“1 Million Workers; 90 Million iPhones; 17 Suicides; Who ’ s to Blame?” Wired Magazine , February 11,
2011, http://www.wired.com; Malcolm Moore, “ ‘Mass Suicide ’ Protest at Apple Manufacturer Foxconn
Factory,” Telegraph, January 11, 2012, http://www.telegraph.co.uk; Angela Moscaritolo, “Foxconn
Employees Threaten Mass Suicide,” PC Magazine, January 10, 2012, http://www. pcmag.com; “New
Foxconn Worker Commits Suicide, First in 2012,” Electronista, June 14, 2012,
http://www.electronista.com. friendless, what is presumably a new and unfamiliar.