Prefontaines, Inc.

: A Case Study and Analysis

Table of Contents Table of Contents.................................................................................................................2 ENVIRONMENT............................................................................................................6 COMPETITION..............................................................................................................7 Minardi.................................................................................................................................8 Sauber..................................................................................................................................8 Lola......................................................................................................................................8 Williams...............................................................................................................................9 Ferrari Town........................................................................................................................9 Mail Order............................................................................................................................9 Department Stores................................................................................................................9 Foot care specialists.............................................................................................................9 Mail Order..........................................................................................................................10 REGULATIONS............................................................................................................10 RESOURCES................................................................................................................10 STRATEGY/MISSION.................................................................................................11 KEY PEOPLE................................................................................................................12 Fred Prefontaine.................................................................................................................12 Fern Prefontaine.................................................................................................................13 Buzz Aldrin........................................................................................................................13 Michael Collins..................................................................................................................14 John Young........................................................................................................................14 Ed White............................................................................................................................14 Deke Slayton......................................................................................................................15 Robert Crippen...................................................................................................................15 FORMAL ORGANIZATION ARRANGEMENTS......................................................15 STRUCTURE................................................................................................................15 PHYSICAL LAYOUT...................................................................................................16 RULES/POLICIES........................................................................................................16 RECRUITMENT/SELECTION....................................................................................18 REWARD SYSTEMS...................................................................................................19 Managers: Managers receive a flat salary plus a commission based on the following formula: 2% of the increase in revenue from the same month last year. When a manager takes a job he is typically paid around $30,000, and makes another $5000 in commission. Some managers have been paid $35,000 and received $15,000 in commission, but that is rare. ...................................................................................................................................21 Assistant Managers: Assistant managers do not make significantly more in wages than salespeople. Typically, they make $12/hour plus commission. The problem is that they have less time to sell, and their spiff totals often plunge to the point where they are paid less to be assistant manager than to be a salesperson. This is frustrating to many, and should be addressed. The advantage to being an assistant manager is that managers are always hired from their ranks. However, because of the low turnover, promotions are rare. Year-end bonuses are usually $250..........................................................................22 GOAL SETTING/MANAGEMENT BY OBJECTIVE................................................22 EVALUATION SYSTEMS..........................................................................................23 TRAINING AND DEVELOPMENT............................................................................23

TASKS/TECHNOLOGY..............................................................................................24 Newman Markoff stores...................................................................................................25 Inventory control................................................................................................................25 JOB CHARACTERISTICS MODEL............................................................................26 VARIETY......................................................................................................................26 IDENTITY.........................................................................................................................27 SIGNIFICANCE............................................................................................................27 AUTONOMY................................................................................................................27 FEEDBACK..................................................................................................................28 INTRINSIC MOTIVATION.........................................................................................28 INTERNAL WORK MOTIVATION............................................................................28 MEANINGFULNESS.......................................................................................................28 RESPONSIBILITY.......................................................................................................29 KNOWLEDGE OF RESULTS......................................................................................29 INFORMAL ORGANIZATION...................................................................................29 WORK GROUP PROPERTIES....................................................................................30 NORMS/SANCTIONS/STATUS HIERARCHY.........................................................30 OUTPUTS......................................................................................................................31 PERFORMANCE..........................................................................................................33 STRENGTHS................................................................................................................34 THE GOAL OF THE COMPANY IS KNOWN AND AGREED UPON........................34 THE CORPORATE CULTURE IS ONE OF EXCELLENCE.........................................34 MARGINS ARE VERY HIGH AND NOT UNDER PRESSURE...................................34 FRED PREFONTAINE IS A CHARISMATIC AND RESPECTED LEADER..............34 STORE MANAGERS GENERALLY PROVIDE STEADY LEADERSHIP..................34 SALESPEOPLE ARE VERY TALENTED......................................................................35 GOOD BUYING...............................................................................................................35 GOOD RELATIONSHIPS WITH SUPPLIERS...............................................................35 THE BUSINESS IS OPEN TO SOME NEW IDEAS......................................................35 THE COMPANY HAS MADE NEWMAN MARKOFF A PARTNER..........................35 LOYAL CUSTOMERS.....................................................................................................35 GOOD LOCATIONS........................................................................................................35 LIQUIDITY AND RESOURCES.....................................................................................36 WEAKNESSES.................................................................................................................36 FERN PREFONTAINE.....................................................................................................36 SUCCESSION ISSUES.....................................................................................................36 POOR UTILIZATION OF INFORMATION TECHNOLOGY.......................................36 A LACK OF FEEDBACK FROM FRED IS DEBILITATING.......................................37 A LACK OF MARKETING .............................................................................................37 NO PLAN EXISTS TO CONTINUOUSLY TRAIN MANAGERS................................37 LEVELS OF COMPENSATION ARE NOT HIGH ........................................................38 THE HIGH MARGINS REDUCE URGENCY OF THE TASK......................................38 FINDING GOOD EMPLOYEES IS DIFFICULT............................................................38 THE NEWMAN MARKOFF STORES ARE HEAVILY DEPENDENT ON NEWMAN MARKOFF........................................................................................................................38 INCONGRUENCES......................................................................................................39

THE SALES COMMISSION SYSTEM CAN BE MISUSED.........................................39 PROGNOSIS.................................................................................................................39 RECOMMENDATIONS...............................................................................................40 SHORT-TERM ACTION PLAN..................................................................................40 LONG TERM ACTION PLAN.....................................................................................41 SHORT TERM RECOMMENDATIONS.....................................................................41 LONG-TERM RECOMMENDATIONS......................................................................44 Congruence Analysis.....................................................................................................47 References......................................................................................................................54 Prefontaine, Inc. is the parent organization that owns and operates four Pre stores in Boston and three affiliated Newman Markoff stores. Pre is a boutique selling primarily to runners. While shoes account for 75% of sales, clothing and accessories are significant contributors as well. The Newman Markoff chain of shoe stores sells exclusively Pre shoes and clothing, at a 90% to 10% ratio, respectively. The Pre chain is wholly owned by a husband and wife team, Fred and Fern Prefontaine. They founded the first Pre in 1977 in Boston. HISTORY OF THE ORGANIZATION Like his famous cousin, Steven Prefontaine, Freds entire life was centered on running. He did not go to college, had no work experience other than the US Army, and was not able to make a living from running. Lacking options, he decided to do what he loved, and looked for a way to make money using the expertise he had gained from years of running. The year was 1975, and the running boom sparked by Frank Shorters win in the 1972 Olympic Marathon in Munich was in full swing. In five years, the Boston Marathon had gone from a casual affair drawing a couple hundred participants to an international gathering with 5,000 entrants. Thousands of people all along the Eastern seaboard were taking up running, but there was very little in the way of retail expertise to serve this growing community. In a situation that might cause most people to sit back and complain, Prefontaine saw opportunity. Using the money he borrowed from numerous sources, Prefontaine bought the cheapest van he could find, filled it with the three or four models of running shoes available at the time and set out to make some money. On weekends, Fred and Fern drove the van to every road race in the area, parked it near the finish line, put out two chairs, and sold shoes. During the week, they went to high school track meets and cross-country races and sold shoes at steep discounts to student-athletes. Business was shockingly good, since there was no competition. Ferrari, Newman, and Basics Jaguar were the only companies who made running shoes, and almost no retail outlets carried them. And no store had any expertise selling the product.

The years selling out of the van became the founding myth of the company, and anyone associated with them was held in great esteem. The principles of the company were forged in those times, and they have not changed. Fred believes that runners need to buy shoes from other runners. He believes in staying close to the sport. He believes in a scrappy, do anything philosophy of business. He sponsors several races on Cape Cod. Most of all, he still believes he is selling to friends, and if a friend has a problem with a pair of shoes, he can bring them back, no questions asked. Remember, Fred saw the same people every weekend at races, and learned to stand behind his product. The running community was small in 1975, and Fred became a well-known figure not only for his retail efforts, but also for his win of the Boston Marathon several years earlier. Business kept growing, and the Prefontaines added a few employees so two or three vans could go to different races. Finally, in 1978, Fred and Fern decided that business was good enough to open a permanent location. They found an empty storefront in downtown Boston, and opened the first Pre. The store was not an immediate hit, but business grew steadily through the late 1970s into the 1980s. During that decade, the business expanded into a chain of several stores, headquartered near the Prefontaines home in Quincy, Massachusetts. While most stores were successful, those stores did not turn a profit and were closed. The Prefontaines were never tempted to pull up the drawbridge and retreat; they always bounced back from failure. In the 1980s, the Prefontaines pulled off a coup that is worth mentioning because it shows the importance of the chain to Boston runners and the business smarts of Fred Prefontaine. The Boston Runners Club, which puts on the Boston Marathon and boasts a membership of approximately 25,000 today, needed a new place. They were perennially cash-strapped, yet they felt a location near Boston Common was necessary in order to serve runners. Property near the park is, of course, enormously expensive. Fred learned of the Clubs plight, and agreed to help them find a good lease, provided they moved into a location on Newbury Street, not two blocks from a Pre. It was agreed to, and to this day, the Club sends many beginning runners to Pre to get fitted correctly. Pre grew steadily through the early and mid 1990s, guided by the principles laid out during the van years. In 1994, Fred was approached by the shoe manufacturer, Newman, to reserve a corner of Pre stores for Newman shoes and clothes. The Prefontaines did not like that idea, so they suggested opening a freestanding Newman store. This came to be in 1995, and opened the latest chapter in the companys history. The store, called Newman Markoff, was an enormous success, and after three years, its revenue outstripped that of the busiest Pre. A second Newman Markoff store opened in 1999, and the third recently opened in 2001. In 2001, the chain finds itself at another crossroads. While competitive running has never been more popular, the athletic shoe business has been losing speed. While all stores are profitable, revenue growth at Pre stores has slowed. On the other hand, the Newman Markoff stores have proved to be more popular than anyone thought, and it is

there that most growth for the company is thought to come from. However, with three stores in Boston and four in neighboring communities, the market may be nearing saturation. If growth at the Newman Markoff stores slows, the Prefontaines may have to find another growth engine. The problem of the Prefontaines age is also posing itself. Fred is in his early 60s, and has a bad back. At some point he will want to retire, and it is not clear if he will sell to an outsider or to someone within the organization. A final problem rests in the Prefontaines ability to manage their empire. They still view the business as a family enterprise, but the higher and higher number of locations limits their presence. Delegating some control over the business will be necessary if the number is to grow any higher. ENVIRONMENT Prefontaine, Inc. is in the business of retail sporting equipment geared to runners. The store also has a limited selection of shoes for tennis, cross training, walking, basketball and hiking. The company also carries runners apparel and accessories such as watches and heart rate monitors for running and other sports. While Boston is a high-risk place for retail due to the high rents and competition, it can offer high returns to a successful business. Boston is particularly well suited to retail for several reasons. The population density of the city is among the highest in the developed world, ensuring high foot-traffic. The wealth of city residents is extremely high, which translates into a lot of shopping dollars. Due to the lack of personal cars and the fact that you have to carry home everything you buy, people generally patronize stores in their neighborhoods and do not seek out stores in other parts of town. Bostonites are also famously competitive; if they learn of an innovation in running shoes, they need to be the first ones to own it. They are accustomed to paying high prices, and doing so makes them feel as if they got their moneys worth. They are more than willing to pay for expertise, because many of them are among the worlds most educated people. Above all, Bostonites want to know that someone is in charge and that everything will be ok. A high-end, full-service store assures them of exactly that environment. Retail sporting goods companies generally go in two directions: full-service or discount. Discount stores try to make up in volume what they lose in margin while cutting service to the minimum. Discounts range from 10% to 30% off suggested retail. Full-price stores generally charge suggested retail price and offer far more services, such as a trained staff, more selective buyers, and a liberal return policy. Prefontaine, Inc. is decidedly on the full-service side of the industry. There are many ways to succeed in sporting goods but only a few ways to fail. Discounters generally do not last long in Boston, because the high rents do not give much of a cushion, and Bostoners are very picky. With so much competition, there is rarely a reason to go back to a store in which you have had a bad experience; there is always another discount store.

To succeed, a store must establish a customer base and tend to it carefully. Bostoners tend to find a store they like and keep going back to it until they find a reason not to. Prefontaine, Incs mission has always been not so much to make new customers, but to keep the ones it already has. Discounters, on the other hand, are dependent on making new customers, and they must pay for better locations and advertising in order to find them. Their fixed costs are higher because of the advertising, so in a downturn they will suffer. By offering low prices, they are unlikely to create loyal customers, since those customers will shop elsewhere if they find a lower price, and there is always a lower price. So then the company must find new customers, and the cycle begins again. The problems facing a full-price store like Pre are very different. The store runs 100% margins, and many customers know that they can get the very same shoe down the street for 30% less. Pre must give a strong and clear reason for them to shop there, and keep at it at every contact with the customer. All it takes is one bad encounter to lose a good customer. While this is not the place to spell out Pres strategy in full, it is important to understand that the company is under constant price competition, but it manages to prosper because it offers better service than other stores. Even after prospering for 25 years, Pre is still the only running boutique in the city. While Pre, department stores, discounters, Minardi and Sauber do compete for the same customers, Pre has no direct competition in the full-price, full service running specific space. The environment is brutally competitive in the mass market, but as far as targeting runners directly, Pre has no competition. COMPETITION As we spelled out in the Environment section, Boston sporting goods retail is divided into two worlds: discount and full-price. We will consider them independently, because they offer different challenges to the company. FULL-PRICE STORES Jordan This large, independent sporting goods emporium is Pres most direct competition. Located in South Boston, Jordan is a veteran of the sporting goods wars, and generally does a good job in the running category. They offer a selection equal to Pre, and at comparable prices. They do not discount much if at all, and can offer good service if you go during a slow time. Jordan has several advantages over Pre. They spend a lot of money on marketing, taking out large ads in the Boston Herald, while Pre does almost no advertising at all.

Many beginning runners will not have heard of Pre, but most active people in Boston know of Jordan, because of its advertising and the fact that they have been around for decades. Jordan also has the advantage of selling more than just running equipment. Many of their sales are made by customers visiting the store to buy a tennis racquet or skis, and who remember that their running shoes are worn out, so they pick up a pair. Of course, this works against Jordan as well, since they necessarily lack Pre focus. The larger store has more drawbacks than benefits, however. Its large size makes running just another part of the business rather than its raison detre. The level of service at Jordan is spotty; there are some star salespeople, but as likely as not, customers face the same level of ignorance as at the discounters. Furthermore, the store is far too crowded on the weekends to get good service. Customers are forced to chase down salespeople and make them get a pair of shoes for them. Pre has none of these faults. Minardi The main attractions of Minardi are its marketing, that it has the latest shoes, and its ubiquity. The company is part of a national chain, and millions are spent on advertising. The ads convey a sense of expertise, but it mostly illusory; the salespeople are only one cut above the discounters. Minardi does have the newest products, however, and they get a lot of business for that reason alone. The latest shoes from Ferrari tend to sell out, and Pres limited clout with Ferrari ensures limited delivery. Minardi, on the other hand, can generally get whatever it wants in whatever quantity it wants because of its mammoth size. Pre loses many customers who want the latest shoe styles to Minardi. Sauber A Minardi clone in almost every way. Everything that is said about Minardi also goes for Sauber. Lola Lola serves as a sporting goods supermarket, carrying everything from lacrosse balls to swim fins. Like Minardi, they generally carry fashionable shoes rather than the best performing ones, and have an unskilled sales staff. They do have a pricing advantage; the store has frequent sales that customers have been trained to wait for. The chain buys a lot of advertising, meant to appeal to the mass market. The store poses little competition to Pre, since runners generally dont find the selection of running shoes there to be nearly as good. However, on the low end of athletic shoes meant for everyday use, Lola does well. Their service is generally poor.

Williams Williams is a better-funded and larger Lola. It is a national big box store that has one location in Boston. They have a huge selection of sporting goods, but only a small running section. Only beginners or those attracted by the stores frequent sales will shop there. Neither group is Pres customer. Ferrari Town In the running shoe business, Ferrari is the 800-pound gorilla. Since the 1980s, Ferrari has had the highest market share in the business, and they currently hold about 45% of the running shoe market. More than that, they consistently bring out the latest, most desirable, highest price shoes on the market. Ferrari is the core product in most sporting goods stores. Ferrari Town, a company store in Boston, opened in 1990. As much a store as a museum and showpiece for the company, Ferrari Town has a strong pull on loyal Ferrari customers. Pre loses some customers to Ferrari Town, but probably not too many, since it is located inconveniently and is not known for its service. Mail Order When a customer knows exactly what kind of shoe or clothing he wants, there are only two reasons to come to Pre: convenience and returnability. More likely, he will go to the discounters or purchase it by mail order. Contrary to conventional wisdom, mail order is not usually any cheaper than full retail, especially now that Boston has eliminated its sales tax. It is not clear how much business is lost to mail order firms, but most think it is substantial. Pres great advantage is that when customers buy via mail order, they cannot try on shoes before they make the purchase. Return policies are generally very liberal for mail order, which takes away a Pre advantage. Department Stores The influence of department stores has been waning in recent years. While running shoes used to be widely available at department stores, this is not as true any more. Porsche still has a large following among recreational walkers, suburbanites and the elderly, but those groups are not Pres constituency so little damage is done. Foot care specialists Pres and the Newman Markoff Stores do a substantial amount of business with people who have foot problems. These customers generally cannot go to discounters because they need extra service to get fitted correctly. In Boston, Cosworth is a strong competitor to Pre and Newman Markoff. Cosworth offers largely the same level of service, and they offer a wider selection of walking shoes. It is hard to quantify the

damage done by this store, but it is substantial and Pre/Newman Markoff always has to face the fact that if they are not treated right, many customers will move to Cosworth. DISCOUNTERS Ubiquitous in Boston are mom and pop shops selling athletic shoes at bargainbasement prices. It is an easy business to get into, and if a family is willing to tolerate long hours and low margins, it can be a moneymaker. These stores sell primarily to two groups: people who are interested in fashion rather than function, and those who do not require high levels of service. Generally these stores have no SMEs and do not accept returns. They do not compete for the same customer as Pre/Newman Markoff. Their only effect on the business is that they lower the street price of shoes, and Pre/Newman Markoff has a policy of matching any stores prices. Because the customer has to bring in evidence of the lower price, Pre/Newman Markoff generally only has to match 5 or 6 prices per week. Mail Order Some mail order companies sell at steep discounts. Some serious runners, who need a new pair every two or three months and know what they need, shop via this channel. For the 99% of runners who buy shoes every six months or so, this is not a viable option. REGULATIONS Pre is obliged to follow a myriad of business regulations, including: Collecting payroll taxes Collecting social security tax Collecting unemployment insurance Collecting sales tax Paying into the workers compensation fund Paying Medicare premiums Abiding by work safety regulations Making sure employees are legally able to work Paying corporate income tax Following laws for its profit-sharing plan Administering its health plan

RESOURCES The family-business nature of Pre is both the reason for its success and holds the potential for its downfall. The strategic management team is made up of two people: Fred and Fern Prefontaine. They do not consult others on important decisions, and often inform employees of a future store opening well after construction has begun. While the 10

pair has made good decisions so far, they have not tapped the potential of employees. The company is limited by the imagination and soundness of the pairs decision making, but at the same time, the companys greatest resource is the charisma and decision making of Fred Prefontaine. Many feel the company will disintegrate after his retirement. The company appears to be able to raise as much cash as it needs. The company has been around for 25 years and has established a close relationship with its bank. Its high and steady cash flow ensures liquidity. It has no problems with credit with suppliers, and in fact has built extraordinarily good relations with most shoe manufacturers. Many companies ask Fred for advice on what the customers want in running shoes. A potential problem for the company is finding good employees. The chain has always prospered by finding over-qualified managers willing to be paid less than hey could earn elsewhere in order to work in the running business and have flexible schedules. In boom times, these people are more difficult to find. Runnings decline has also made finding new talent harder. There are simply fewer serious runners who want to live the life in a running store. The result is that some stores have non-runners as managers and many non-running salespeople. This goes directly against the mission of the company, as spelled out below, of runners selling shoes to other runners. That said, the amount of knowledge and experience built up in the company is formidable. Most managers have been with the company for more than seven years, which ensures a high level of expertise. Fred understands the problem, and has instituted many training programs to make sure everyone knows enough about running to be a good salesman. STRATEGY/MISSION A primary reason for the success of Pre Management is that it has been able to set out its strategy out very clearly, create policies in support of the strategy, and gain buy-in from everyone in the organization. As we have seen, the corporate ethos was set in the days of selling out of the van. The stores are places where runners can buy shoes from other highly trained runners, who know the issues and are able to guide them through the purchasing process while giving running tips. It is hard to overestimate the importance of this aspect of the stores mission. The mission of Pre is spelled out in the return policy: satisfaction guaranteed. If anyone buys a pair of shoes in the store and does not like them for any reason, he can return them for a refund or exchange, no questions asked, even if he wore them for a month. The companys goal is to make lifetime customers. If a few $150 pairs of running shoes have to be thrown away, management is willing to do it, in the hope of winning a loyal customer. The point is that the business is committed to customer satisfaction, even if it has to take a temporary loss to gain it.

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The marketing strategy follows the commandment to make money off of loyal customers, not new customers. The company advertises very little, and only in runningspecific publications, like the Boston Road Runners Club magazine, and Track and Field News. The store does not want to go mass-market; it would prefer to grow slowly and controlled and maintain its links to its long-term customer base. The store uses price reductions in a limited manner. Members of the Boston Road Runners Club receive 10% off shoes, as do competitive high school runners. At the end of a shoes production, it will often go on sale to move out the inventory. Every winter, Fred buys deeply discounted boots and sells them for 20-40% off suggested retail. Every February, the store puts its winter clothing on sale at 20-40% off suggested retail. Keeping with the overall strategy of the company, the sales are not meant to draw in new customers. They are used to get rid of merchandise that would take too long to sell at full price. KEY PEOPLE Fred Prefontaine While Fred and his wife, Fern founded the company together, Fred is by far the most important person in the organization. He leads by charisma, unwavering dedication to the mission of the company, and as a subject matter expert. Most people in the company like him very much, and while there is always much complaining about him, it is usually in the manner of people complaining fondly about a loved ones eccentricities. Fred is an example of a particular kind of American success story. He grew up lower middle class in Quincy, Massachusetts, in a small and close family. His tight family experience has made him extremely family conscious, and he is particularly fond of employees with children. This has not caused a problem, since only a few employees have families of their own. Not a good student (Fred would always say that he was the smartest kid in the dumbest class), Fred found success in track and field. He was one of the fastest runners in Worcester in high school (his family moved to Worcester when he was around 12), and in his early twenties won the Boston Marathon, placed highly in New York, and competed in the Olympic Trials. Fred s success as a runner gives him a tremendous amount of credibility. He does not always talk about his past, but all employees know Freds racing history and often tell customers about it. Hearing that Fred won the Boston Marathon is inspirational to the employees, most of whom run competitively but nowhere near the level of Fred at his peak. The customers also like to associate with a winner and a recognizable name. After high school, Fred joined the U.S. Army, and continued to train. In the Army, Fred learned much of the male bonding skills that serve him well in his business. Fred stayed in Army until he finished his enlistment.

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Fred plays a role in the business that is hard to overestimate. He has built the company around his view of what a retail store should do. He instills in his employees the sense that indeed the customer is always right and that employees have it in their power to satisfy every customer; the trick is to figure out how. To him, a good salesperson is more important than a good manager in terms of the long-term success of the company. Fred s greatest strength is the example he sets as a salesman. He is the best salesman in the business, and is good at teaching his people how to sell. Freds ability to train and inspire the sales staff is essentially why the stores do well, and the business can be best understood as a group of talented salespeople. While Fred is universally liked and admired, his management skills have some weaknesses. He is a believer in the If you dont hear from me youre doing fine school of feedback. Managers often are not sure if they are doing a good job, and are always troubled by the unclear role in decision making played by Fern Prefontaine, Fred s wife. Fern Prefontaine Fern also grew up middle class in Quincy, and married Fred when she was around 20. The couple had three children immediately, and until the first Pre opened, her time was spent being a full-time mother and supporter of Freds running career. Fern is in charge of the clothing side of the business, which represents approximately 25% of sales. She is the apparel buyer and merchandiser for the entire chain, and has a large but hard to determine role in human relations and financial decisions. While her skills as a buyer are respected, Fern is not liked by some employees. She has very high standards for how the store looks, which includes having all the clothes perfectly displayed all the time and all racks completely dust-free, and is not good at giving feedback. She does not offer positive feedback, and does not shoot the breeze with employees, so the only contact employees have with her is when she is criticizing them. In addition, she is a terrible salesperson, and in a company culture that canonizes good salesmanship, she loses respect for her weakness. In fact, her presence is considered counter-productive to good salesmanship; instead of selling, a high-performing salesperson could easily find herself refolding shirts for three hours on a busy Saturday if Fern is in the store. Buzz Aldrin Buzz has been with the company for seven years, moving up the ranks from sales to managing the Boylston Street Newman Markoff store. Buzz is probably the strongest of the managers in terms of inventory control and general operations, but less strong in terms of charisma and human resources.

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His store has the highest sales of any in the chain, and is also the most dependent on a quality inventory. For this reason, more of his time is spent working on inventory than other managers. All consider him to be a subject matter expert; he has a wide and accurate knowledge of running and walking. His sales skills are satisfactory and he is able to teach salesmanship fairly well. Besides the inventory, his largest contribution is a sense of high standards by which the store must live. Buzzs weaknesses are in the personal relationships he has with others in the business. More than other managers, he keeps to himself and is not considered friendly. This hurts the business, because he could serve as a crucial link between Pre and Newman Markoff. Some in his store do not like him personally; although they would agree that Buzzs skills let them make more money in commission. Michael Collins Michael has been with the company for 11 years, and manages the busy NorthEnd Pre store. Michael is considered the old salt of the company. As the manager with the longest tenure, he has seen everything, and has maintained a high level of respect throughout. He has no enemies, everyone likes him, and is frequently consulted by other managers for advice. He has the best relationship with Fern of all the managers. Michaels weakness is that he is considered a bit lax. He does not strictly enforce company policy, and therefore his store is a bit shabby and the salespeople could be sharper. The flip side is that morale is always good at his store due to the high volume, his steady hand and a relaxed environment. John Young John has managed the East End Pre for five years. Not a runner, John comes to the position from other retail positions. He is considered to be a competent, friendly but not particularly sharp manager. His stores business has been declining for several years, and is now the third busiest after being the busiest for years. His non-runner status has made him an outsider, and he has not presented any other skill to become an SME. Ed White Not a runner, Ed has managed to find a niche in the company by his collegiality and salesmanship. He is a good talker, and knows an enormous amount about sports in general. He is an excellent salesman, and even with managerial responsibilities, he sells a lot of shoes. His weakness is in organizational skills. He is not interested in inventory control; he has sales in his blood. His Newman Markoff store does well because of its esprit de corps among the employees, but it could do better with more organization. Ed is also the most tech-savvy employee; he runs the web site and often fields IT questions from other managers. This is not as great a help as it might be in some companies; the computer system is fairly simple for everyone to use.

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Deke Slayton Dekes official job is accountant, but he also serves as a buffer between the stores and Fern. If there is a financial matter that a manager needs to discuss, he would go to Deke rather than Fern under almost any circumstance. Deke is a universally well-liked SME who always gives answers. Fern implicitly approves of Dekes position as her de facto stand-in. Deke has been with the company 20 years and knows the issues intimately. He is one of the irreplaceable players. Robert Crippen Robert is manager of the third Newman Markoff store. He has been with the company for 5 years and is respected for his quiet competence. He has not earned much respect from his stores sales, since they have been weaker than expected. More a steady worker than star performer, he is not considered an expert and is rarely asked for advice. FORMAL ORGANIZATION ARRANGEMENTS STRUCTURE Prefontaines Inc. is the parent corporation, under which are two divisions: the four Pres and three Newman Markoff stores. The president of the corporation is Fern Prefontaine, and the vice president is Fred Prefontaine. The titles are formalities; in reality Fred runs day-to-day operations and Fern controls the finances. All strategic and financial decision-making are in the hands of Fred and Fern. They alone decide on budgets and are aware of the profitability of each store. Each store has a manager who is responsible for day-to-day operations of the stores. The manager is not a line position; he has no information on profits or cost. The responsibilities of the manager are to: Maximize revenue Hire, train and fire salespeople Keep the physical plant in a good state of repair Handle all customer service issues Advise Fred and Fern of goings on at the store Keep the store clean Write work schedules Maintain the inventory Be a subject matter expert Close out the register and count the money

Each store has one or two assistant managers, depending on the volume of business. The responsibilities of the assistant manager are to do all of the tasks done by the manager 15

when the manager is out of the store. There is little formal distinction between manager and assistant manager in the stores. The assistant is expected to be as capable as the manager in all aspects of store operations. For this reason, it is extremely rare for an outsider to be brought in as a manager. In almost every case, an assistant manager is promoted. There is no position below assistant manager other than salesperson. The number of salespeople varies seasonally and according to the needs of each store. The range is from 5 to 12. PHYSICAL LAYOUT Floor plans of all stores are not available. The layout of the busiest store, the Boylston Street Newman Markoff store, is appended. The typical store has a selling floor approximately 40 feet by 20 feet with a stockroom attached. Each store is divided into two sections: clothes and shoes. The shoe section has benches on which customers sit and movable stools for employees. The shoes are on display shelves on a wall behind the benches, organized by category. For example, all the running shoes are together and separate from the walking shoes, which are also together. The clothes section is made up of freestanding clothes racks divided into a mens section and a womens section. Within the gender division, clothes from each company are hung together in color-coordinated sets. For example, a red singlet will be hung with a matching red pair of shorts. The shoe and clothes stockroom are grouped in a manner mirroring the sales floor. There is no separate employee area in the stores; usually employees claim squatters rights on a corner and set up a table and chairs. RULES/POLICIES Upon hiring, employees are given a handbook and asked to sign a form signifying that they read and understand it. The book details all store policies from vacation time to the health plan to reasons for dismissal. The opening hours for each store vary slightly, however they are always close to the following: Monday: Tuesday: Wednesday: Thursday: Friday: Saturday: Sunday: 10-7 10-7 10-7 10-9 10-7 10-6 12-5

Employees report to work either 30 or 60 minutes before the scheduled opening in order to clean and prepare the store for business.

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The company has a uniform: At Pre employees wear a blue polo shirt with the company logo and either blue jeans or khakis. At Newman Markoff employees wear a black polo shirt with the Newman Markoff insignia and khaki pants. All employees must wear footwear sold in the store. The dress code is strictly enforced; anyone without clean, ironed and appropriate clothes is sent home. Men must be clean-shaven and have combed hair; women must be tidy. The employees must follow some rules in the selling process. A selling system called ANPOCS is legislated in the system, as is a rule that if a salesman feels he is in danger of losing a sale, he must ask another salesperson to assist or take over the sale. ANPOCS is an acronym for: Approach the customer Needs (determine the customers) Present the product Overcome objections Close the sale Suggest other items

The system is meant to teach salespeople how to sell properly, and will be dealt with in the training section below. Another rule is that if a customer asks for a different size, the salesperson must get it without saying a word, even if he thinks it is a mistake. Salespeople must ask customers if they would like to take a test run outside the store. They must measure childrens feet, if requested or not, and give young children a balloon. Employees must stand when a customer is in the store, and if a customer says he would like to purchase a particular pair of shoes, no matter how inappropriate, a salesperson must never argue with him in any way. The floors must be kept dust-free, and the clothes must be straightened up on a continual basis. The stereo must be on to one of four approved radio stations, and the television must be playing a pre-recorded race such as the Boston Marathon. As per Boston law, the sidewalk must be kept clean. The return policy is famously short: Satisfaction Guaranteed. The stores will take back any shoe, provided a customer can prove it was purchased there, and receive a refund or exchange. Salespeople are instructed to accept returns with a smile and a positive attitude. The reason for the rule is to make customers extremely loyal. While the stores do have a very high return rate, the gained loyalty of the customers more than makes up for the cost. Because shoplifting is a problem in Boston, rules have been put into place to help fight theft. If suspicious characters come into the store, they must be followed carefully. No more than two suspicious high school children are allowed in the store at one time.

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Salespeople are instructed not to chase shoplifters out the door. Managers are not allowed to be in the store alone; someone must wait with them while he closes the store. Lateness is officially not tolerated, but in reality is common. While the company does not offer paid sick days, if an employee comes to work and says that he is sick, he may go home and get paid for the rest of the day. After a year, employees are entitled to two weeks paid vacation. After six months employees may go on the health plan. After a years service, contributions begin to be made to a gainsharing profit sharing plan. There are rules around the use of spiffs, or commission. Under no circumstance is a salesperson allowed to present an inappropriate shoe to a customer just because it is currently a commission shoe. Managers look out for this sort of thing, and have prevented it from being a problem. Discipline is rare in the stores. Salespeople generally are only fired for absences, theft or insubordination, all of which are rare. One manager counted firing only 5 people in his five years. In the case of incompetence, the employee generally is pushed out by refused raises and poor scheduling. Two managers have been fired in seven years. One was terminated for alleged financial improprieties and the other for arguing too much with Fred. Three have quit, usually for better jobs. RECRUITMENT/SELECTION While technically managers must clear each new hire with Fred, in practice Fred rarely says no. Stores are perennially short of quality salespeople, and if a promising candidate applies for a job he is almost always made an offer. Hiring is almost exclusively walk-ins. On rare occasion, when a serious employee shortage crops up, the company will place an ad in the Boston Herald, but that is rare. Current employees are constantly asked to refer potential employees, and in times of shortage a bounty is offered. Each store keeps a file of resumes of hirable candidates, and when a store needs to hire someone, the manager calls around asking for candidates. The system generally works well, although a central clearinghouse for all resumes would be more efficient. There are several difficulties in finding employees for the stores. First, finding runners is extremely difficult, and in fact the majority of salespeople in the stores do not run. This lowers the quality of sales in the stores. Second, good salespeople willing to work at retail wages are rare. Third, finding women to hire is very difficult, yet critically important. For these reasons, the stores put enormous importance on training and maintaining the corporate culture.

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The positive outcome of the problem is that management has a great need to keep current employees happy so they do not quit. In fact, turnover is very low at the stores, compared to most retail businesses. The Boylston Street Newman Markoff store lost only two employees out of 15 in a recent year, a remarkable figure. This is generally attributed to quality of life issues such as schedule flexibility, a good work environment, the pride that comes from learning how to be a good salesman, decent money available from a commission system, and the opportunity to work in the running business. Putting hiring into one persons hands can cause problems. Once in a while a manager proves to have poor judgment in the hiring process, and puts poor employees on the payroll. This is a problem, because firing is generally only done for serious rules infractions. Poor employees can stick around for years, frustrating all involved. No good solution has been implemented for this problem. Selection criteria vary among managers, but the following are representative: Good appearance Runner Well-spoken/use of proper English Obvious intelligence Sales experience Friendliness Willing to work weekends

REWARD SYSTEMS All full-time employees are eligible for benefits after being with the company for six months: Free health plan Paid tuition to become a pedorthist

After one year, employees are eligible for: Profit-sharing plan, paid into a retirement plan Two weeks paid vacation per year worked

Salespeople: Salespeople have two sources of compensation: wages and commission, called spiffs. New hires come in at $7-$8 per hour, depending on experience, and top out at $10 per hour after around three years. Raises are negotiated on a person-by-person basis, and entirely on the employees request. Managers are instructed not to raise wages until an employee asks. After an employee asks for a raise, the manager brings up the matter with Fred, who then runs it by Fern. While the raise is usually approved, the process usually takes two months to work its way through the system, which is too long and causes frustration.

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Frequently, a good employee will never ask for a raise, out of timidity or the belief that the company will do the right thing and give him a raise when he deserves it. Of course, that raise will never come on its own, and the good employee gets more and more disenchanted. Cognitive dissonance sets in, and the unpleasant sensation makes the employee unhappy. It is unlikely that many employees leave for this reason, because total compensation is comparable to other retail stores. However, the resentment seems unnecessary, so to resolve the problem, we recommend a regular evaluation schedule involving wage adjustment if warranted. The goal should be to inform employees exactly where they stand and tell them what they need to do in order to get a raise. The arbitrary nature of wages must be reduced. The goal should be to reduce the negative aspects of the equity theory (bad feelings toward other workers and a sense of being wronged), and keep the good ones. Managers should be able to say with surety that Yes, she is paid more than you. But if you do this and this and that, you will be paid the same. The second part of salespeoples compensation is so-called spiffs. There are two kinds of spiffs: those earned for multiple sales, and those earned for selling particular models. Multiple sales are always a spiff because the company profits highly when with just a few more minutes of sales time, a salesperson can sell a second pair. The second form of commission is earning money on designated shoe models. This type of spiff introduces ethical gray areas into the mix. The store takes its responsibility to the customer very seriously, and this kind of spiff can influence a salesperson to sell an inappropriate shoe. There can be several reasons for a model to be put on spiff. The most common is that the warehouse is overstocked in a particular model and needs to move it out. Sometimes a manager feels that a shoe should be selling more, and with a little encouragement, salespeople could satisfy a lot of customers with it. The most expensive shoes are also usually on spiff, to give salespeople an incentive to present the more expensive models. Usually not on spiff are shoes which are inappropriate to many runners, such as lightweight trainers meant for 110-pound Kenyans. Spiffs are a good way to encourage salespeople to perform. Salespeople in every store are highly competitive about how much they make in spiffs, and since they are posted on a board for everyone to see, good-natured competition normally ensues. In a busy store, a poor salesperson will make around $100 in spiffs each month, while the best regularly make over $300/month. The system is also a good way for managers to quantify who are the producers. The system does have problems, however. Salespeople are asked to list spiffs on the board themselves, without approval from a manager. In the past, some employees have cheated the system, by putting up fake sales, and they have been fired. To prevent fraud, managers are supposed to go through the receipts at the end of the month and make sure each sale was real. This can take two hours, and is dreaded by the managers for its tedium and implicit distrust of the workers. Often the check is not made.

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The spiff system has a further ambiguity. The double sale spiff is only valid if the second sale is the idea of the salesperson. If a customer walks into the store and says, I would like two pairs of the Ferrari 333SP, size 12, that is not supposed to be a spiff. The judgment on this is left up to the salespeople, since there is no way for a manager to verify. The more honest salespeople resent the less honest ones, who will get paid for spiffs that should not have been taken. Periodically Fred and Fern poll the salespeople and managers if they want the system reengineered. The answer is always no, because there is a widespread belief that any other system would reduce payouts. Other stores typically have a flat commission system, i.e. sell a pair of shoes, no matter which shoes, and you get a dollar. While these systems are easier to enforce and have no gray areas, they do not reward the ingenuity of salespeople, and they do not allow management to target particular models. Sometimes the spiff totals get very high for a store, averaging $300 per salesperson, or sometimes a particular salesperson will have a good month and make $600 or more. Fred has often said that he measures spiff totals by one yardstick: relative strength. He does not mind large payouts, as long as the better salespeople make more money than the weaker people. Managers take this to mean that large payouts are not a problem in the eyes of Fred and Fern. Salespeople do not receive a year-end bonus, although they are usually given a $100 gift certificate to the store. Managers: Managers receive a flat salary plus a commission based on the following formula: 2% of the increase in revenue from the same month last year. When a manager takes a job he is typically paid around $30,000, and makes another $5000 in commission. Some managers have been paid $35,000 and received $15,000 in commission, but that is rare. The salary and commission are low compared to other retail companies, but there is a lifestyle trade-off. Most store managers in other chains work far more hours than Pre managers, and always have to work the weekend. Pre managers are asked to work only 40 hours and they are allowed to work alternating weekends. They can also write their own schedule, often allowing themselves to fit in a training schedule or other interest. Finally, managerial jobs are not line positions; they have no responsibility to cut costs or write budgets. This takes a great deal of work off the table and allows the manager to focus on sales, which is the fun part of retailing. Also attractive is the sense of proprietorship about their stores that managers feel. Fred encourages them to feel as if the store was their own, and the commission system encourages the sense. Thus, while the dollar figure of compensation is low, managers gain in other ways. The system must work, because managerial turnover is extremely low. It is rare for

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a manager to leave or be fired; the average tenure is around seven years, which is high for Boston retail. Managers may receive spiffs as well, but their time on the sales floor is limited, and few managers make more than $50/month with spiffs. They do receive a year-end bonus, usually around $500. Assistant Managers: Assistant managers do not make significantly more in wages than salespeople. Typically, they make $12/hour plus commission. The problem is that they have less time to sell, and their spiff totals often plunge to the point where they are paid less to be assistant manager than to be a salesperson. This is frustrating to many, and should be addressed. The advantage to being an assistant manager is that managers are always hired from their ranks. However, because of the low turnover, promotions are rare. Year-end bonuses are usually $250. The role of the assistant manager needs to be clarified and compensated better. The position is often a dead-end and the company loses some good people frustrated by the position. In then end, many become de-facto salespeople to make more money, and do not learn how to be a manager. This can only be fixed with more money and clarified job descriptions. GOAL SETTING/MANAGEMENT BY OBJECTIVE Managements stated goal for the company is to satisfy the customer by whatever means necessary. Very little talk is devoted to cost containment or other issues; the corporate belief is that if it does a good job satisfying the customer, everything else will take care of itself. The company reinforces this objective in many ways. Primarily, Fred Prefontaine sets an example by encouraging employees to stay focused on the customer. In clinics and in private conversation he makes it clear that an employee will not be criticized if he acts to satisfy the customer. All store policies are judged by the litmus test of whether or not it improves customer satisfaction. The radio station played, sales techniques and even how often employees sweep the sidewalk are all responses to this mandate. There is a downside to the companys tunnel vision. No one in the company except Fred, Fern, and Deke are privy to cost issues. Neither Fred nor Fern wants managers to actively cut costs in any way other than not hiring an unneeded new salesperson. The commission system is based only on revenue, not profitability. The result is that the stores have no imperative to try to keep inventories in line or keep hours down. The absence of involving managers in cost issues also distances them from the business and is more than a small bit alienating. If managers had line positions, they would feel more proprietary over their stores and work harder.

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Other management objectives are to help salespeople become talented salespeople and subject matter experts. Fred and the managers have clinics on both selling skills and running injuries to keep employees up to date. The company pays tuition for any employee to become a certified pedorthist after a series of podiatric classes. Managers are instructed to work in a kaizen style constant improvement pattern, always trying to improve these areas, if only by a small amount. The result is a trained sales force that takes great pride in its skills. A side benefit is that employees who are not good salespeople become aware of the fact early, and either leave or find other duties in the store, like inventory or cleaning. The management-led esprit de corps in sales is one of the companys most valuable assets. Management also tries to impart Fred Prefontaines entrepreneurial spirit into the stores and employees. Fred encourages employees to try to think outside of the box and come up with new ideas to bring in sales. He often says that he will only be upset with a manager if he does not try something. While many ideas dont work, some do, and employees feel like they have freedom. EVALUATION SYSTEMS The business does not have an organized review and evaluation system. The only time employees get feedback is after one asks for a raise, and the manager must present the case to Fred. Managers normally do not receive feedback from Fred unless they do something wrong or ask for a raise. While there is no rule against managers starting an evaluation system, it would go against the corporate culture, and has never been done. Given the lack of official evaluations, the commission board takes on great importance as a measurer of employee performance. An employee-led discussion of his contribution invariably begins with You know I always make a lot in spiffs... TRAINING AND DEVELOPMENT It should not be surprising that the company takes an active and effective role in training employees, given the centrality of its mission to satisfy the customer. Upon hiring, a new employee is given a list of the shoes and is told to learn their prices, names and which sizes each come in. After two days she is tested on the knowledge, and technically will be let go if she does not show effort. This rarely happens, as the task is not so difficult. From there, it is up to individual managers to get a new employee up to speed quickly. The training pattern is particular to each store and dependent on the characteristics of the employees in each. Often an experienced salesperson will become the de facto trainer. In any case, the new employee is talked to for a few days about the issues involving running shoes until the manager feels she is capable of selling. Employees are also taught sales skills. Most managers ask hires to watch a video spelling out the ANPOCS sales method. The manager is also responsible for explaining the company history, ethos and rules. There is also a handbook that goes into the nuts and bolts of company policy.

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The manager typically monitors a new hires first few days of sales to make sure she is good enough to set loose on the customers. After a week or two of selling, some managers give a written test to new hires on running injuries, store policy and product knowledge. Often the manager will give the employee the test a week in advance to use as a study aid. Since the goal is to gain a specific body of knowledge, having the test itself is the best way to learn. The testing program is not a system-wide program. It is up to each manager to write and give a test. The big test for a new hire is his first day in the store when Fred Prefontaine comes in to observe. Most new hires are terrified of Freds large personality and he criticizes most for poor sales skills. To veterans, Fred s performance seems calculated to put the fear of God into a new hire to get him to work harder at sales skills, and it seems to work. Most veteran employees have a story of being criticized by Fred in their first week. After the initial training, the company continues to develop employees. Twice a year, clinics with required attendance are put on to review all aspects of shoe selling. Usually Fred goes over the latest research on preventing and treating injuries, and talks about the new product line. Sometimes a podiatrist affiliated with the store gives a talk on sports medicine, and once in while a representative from a shoe company will be given ten minutes to promote his brand. Beyond formal training, managers make sure salespeople understand the issues and are able to explain them correctly to customers. When a new shoe comes into the store, usually all gather around it and talk about what kind of customer it would benefit most. Half of the employees are runners, and runners talk about shoes the way brokers talk about stocks. As we have learned, the company will pay tuition for any employee who wishes to become a certified pedorthist. While not many have chosen to do so, there is always one in every store. In addition, a podiatrist works in the Boylston Street Newman Markoff store once a week to personally fit customers. Having a podiatrist in the store is used as a selling point, and encourages other podiatrists to send patients to the store for shoes. It also helps salespeople learn, by listening to the doctor sell.

TASKS/TECHNOLOGY The company has different IT systems for the two divisions. Pre stores

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Each store has a PC with original DOS-based software that is used as a cash register. At the end of the day the computer prints a list of all products sold, used the next day to restock the racks of clothes with merchandise from the in-store stockroom. The list is also sent via modem to the warehouse in Needham, Massachusetts There it is used to fill boxes with the same items sold, which are delivered back to the store on Monday, Wednesday and Friday via company delivery truck. The system works for clothes and accessories as well as shoes. Newman Markoff stores Each store has two computers: a PC used as a cash register with the same original DOS-based software, and one used to send orders to the Newman Markoff warehouses in Massachusetts and California via a web-based ordering system. The cash register PC works the same way as in the Pre stores, but the other PC is different and more complicated. By special arrangement with corporate Newman Markoff, the Newman Markoff store works on a just-in-time inventory basis. Every night, a list of sales is sent to corporate Newman Markoff headquarters in Massachusetts, where it is filled by Newman Markoff workers and shipped via UPS to arrive around a week after it was sold. It is up to the manager to decide on inventory levels and to prod Newman Markoff to find sold-out shoes to send. The system is heavily dependent on the inventory skills of the managers, and this causes problems, which will be dealt with in the analysis section below. The system works only for shoes. Clothes are ordered from the Needham warehouse only. Also exclusive to the Newman Markoff stores is permission to return any unsold shoes to corporate Newman Markoff. It is hard to overestimate the value of this service, because it eliminates the need to mark down merchandise to sell it. Having this opportunity is virtually unheard of in the business and is key to the profitability of the company. The company must preserve this advantage. A word about the cash-register program used in all stores: It was written in the mid 1980s and while it is adequate and reliable, it does not take advantage of modern technology. The only report it can generate is a crude list of how many pairs of each model were sold. It does not perform any inventory control tasks, and it is not capable of tracking customer information for use in database marketing. Considering that the central mission of the business is to stay close to the customer, a more sophisticated register system would probably pay for itself quickly. When asked about such a system, Fred says that the system isnt broken, so it doesnt need to be fixed. Inventory control Both sets of stores use a paper and pencil inventory system. Each store has a list of shoes and clothes it should have in the store. Usually on Tuesday, someone in the store normally the assistant manager does a visual inventory of the shoes in the store and marks on the sheet what shoes the store is missing. The list is faxed to the main

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warehouse and an attempt is made to fill it. The same system works for clothes, except that salespeople fan out and do the clothes. The clothes inventory is probably the most complaint-producing work in the store. It is considered boring, repetitive and it takes workers off the sales floor, which is where they make their money. It is also often conducted quite inaccurately. For example, the worker might not be careful to check each and every pair of red Ferrari shorts in stock. We recommend changing the inventory system, as we will see in the recommendations section below. The main warehouse primarily uses a futures system to order inventory, which is standard in the industry. A representative from each shoe company visits Fred Prefontaine with a bag full of shoes and a sheaf of order forms. Fred must decide which shoes to order, in what quantity and size dispersion and when he would like them to arrive. The task is very difficult because it relies on Fred s intuition of what shoes will be popular and which wont. While he gets it right most of the time, inevitably he is sometimes wrong, and a shortage or surplus appears. When a surplus occurs, a spiff is often put on the shoe to move it out, reducing margins. While the futures system is inevitable in this business, we recommend systematizing it in order to give Fred hard data to supplement his intuition. JOB CHARACTERISTICS MODEL VARIETY Salespeople: While on paper, sales jobs seem repetitive, in practice they are endlessly varied. While many customers fall into rough categories, and have the same needs, every day salespeople must face a new problem, one that has never come up before. The heart of the problem is that there are dozens of bones in the feet, and no two feet are the same. When you add in the variability of mood, bank account, personal ticks and previous experience, salespeople never know what they will find when they start a sale. This is one of the appeals of sales jobs. There are types of customers whom salespeople dread, of course. The most disliked are people with horrible foot problems that no shoe can fix. In these cases the customer just wastes the time of the salesperson. Also resented are people just looking, those unwilling to pay full price, and those with unsanitary feet. Salespeople spend a lot of time complaining that they always get the losers, and wish for easier pickings. Of course, these comments must be out of the hearing of customers. Managers: The case for managers is opposite that of salespeople. What may seem more varied is actually more routine. Being one step away from customers leaves the manager to do the routine tasks that must be done every day, such as counting the money, writing work schedules and doing inventory checks. Managers often spend time on the sales floor, not just to make money, but also to break the routine. Adding line responsibilities to managers job descriptions would introduce more variety, but not tremendously.

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IDENTITY Salespeople: Salespeople are highly ego-driven, action-oriented and results-based. Their accomplishments are posted every day on the spiff board, and they brag about their score often. They take the instant gratification of a good sale as a right, and they credit themselves for a stores success. They can be considered entrepreneurs or independent contractors in a way; they reap the benefits of their skills directly. Managers: The role of the manager is hard to quantify in the system. A store full of good salespeople will surely do well with or without good management; in fact it happens in the Pre chain itself. A manager never quite knows how much he contributes to the stores sales. Ultimately, the stores increased or decreased sales serve as his scorecard, but all know that he is along for the ride in some ways. Still, managers take pride in their stores if they do well. On the other hand, no one but the manager is responsible for a clean inventory, neat store, and well-trained employees. The problem with that is those things do not add directly to neither the sales total nor his commission. SIGNIFICANCE Salespeople: Contrary to most sales jobs, selling shoes to runners and people with problem feet is a rewarding job. Most salespeople agree that part of the appeal of the job is getting a customer who has gone elsewhere to get help, but could not find anyone who knows how to treat bursitis or plantar fasciitis. Salespeople enjoy being the bearer of good news and helping people out of pain. The job as practiced at Pre and Newman Markoff makes salespeople feel that they are doing good. Managers: Again, being one step away from the customers takes away from the meaningfulness of the job. Managers must do the chores but do not get the payoff: genuinely helping customers. Giving managers more opportunity to sell would remedy this, but would be difficult practically. Someone has to run the store, after all. Some managers do feel that they are helping people stay healthy and pain-free, however. AUTONOMY Salespeople: Workers cite autonomy as one of the best parts of the job. Salespeople are on their own most of time, when they are with customers, and given much freedom to sell as they think most effective. There is no one method of selling at the stores. Of course, managers must make sure a new hire has less freedom than an experienced hand. This is a management challenge. Managers: Managers also feel that the autonomy granted them by Fred is a chief benefit of the job. Fred and Fern are rarely in the stores, and do not micromanage very much. There are very low levels of meddling, and managers feel free to innovate, within the confines of the stores mission.

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FEEDBACK Positive feedback is not in the companys culture. It is extremely rare for a specific piece of positive feedback to come from anyone in the organization. Some managers pass on a nice sale or something like that, but nothing more substantial. This is a weakness of the store, and should be corrected. Fred and especially Fern offer negative feedback, however, and that causes fear and loathing of their visits. As we see elsewhere, behavior cannot be learned by negative reinforcement. INTRINSIC MOTIVATION Salespeople: Most salespeople who succeed and stay with the company are driven by the gratification of a sale and the pride of doing their job well. Many are runners and enjoy helping other runners succeed. Of course, some people do not do well at the store, and they are usually just in it for the next paycheck. These people need to be more aggressively weeded out. There is little firing for general incompetence at the company; instead, poor workers get small raises and bad hours. Managers: Most managers in the system are overqualified and could be doing bigger things. They stay because of the relaxed work setting and because they want to live the life of the sport. That being the case, some managers are not the fieriest characters. They tend to be a bit lazy. However, it is not clear if more motivated but less capable managers would be better for the stores. Having managers with good judgment and the ability to talk to over-educated Bostonites on their own level is an important skill to have in the store. All of the same intrinsic motivation we cited for salespeople also goes for managers, particularly regarding helping other runners being rewarding. INTERNAL WORK MOTIVATION MEANINGFULNESS Salespeople: As we saw in the section on significance, salespeople see their work as doing good. When a runner, desperate to resume running while injured, is able to do so after getting some tips from the store, an absolute good is done. Likewise, when an overweight or in-pain person is able to walk comfortably for the first time because a salesman finally put her in the right pair of shoes, an important good has been done. Managers: Managers, not helping customers directly, are not so able to see the good being done. However, managers do understand it is there, and that it is partly due to their stewardship and support that the job gets done right. Positive feelings about being in the

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fitness business are also cited by managers, as is the satisfaction of being able to run a store correctly. RESPONSIBILITY Salespeople: A salesperson is responsible for a customer 1) getting good information on his needs and 2) closing the sale. Since selling is a one-on-one exercise, selling the wrong shoe or losing a sale falls directly on the salespersons shoulders. This is a positive, for it inspires excellence and does not allow anyone to hide in a cubicle. Any lacunae in knowledge or sales skills is out in the open. Managers: While Fred likes to hold managers responsible for everything that happens in a store, most know that he overestimates their influence. A bad manager can hurt a store all by herself, but the best manager is nothing without effective salespeople and the competitive buzz they provide. As far as credit for sales go, managers feel they deserve some credit for sales gains, but none will accept responsibility for lower sales. For this, bad weather, poor products and animal spirits take the blame. The problem is, they are usually right. There is no control in retail, neither is there a strict win nor lose. Managers do feel responsible for some aspects of store performance. Since they are responsible for hiring and training, they get the credit and blame for their staffs performance. KNOWLEDGE OF RESULTS Salespeople: Direct and instant gratification is the salespersons bread and butter. They know when they made a sale and they know if they are good. Above all, they know exactly how much money is under their name on the spiff board. Managers: Managers usually know pretty much where the store is compared to last year at all times. The year over year figures are considered the managers overall scorecard. The less clear aspects of the business, for example cleanliness and clean inventories, are harder to know how you are doing. Ferns job is get managers to worry more about such things, but she is not an effective manager. Fern is famous for denying credit for successes and giving credit for failures. INFORMAL ORGANIZATION Informal organization is very important to the business because of its small size. The salespeople form a tight-knit group with their own language and rules. Usually they play a competitive yet friendly game of who can make the most spiffs or avoid the worst customers. The situation is not ideal because it rewards some bad behavior like customer avoidance, however the good-natured competition is good for the store and no customers know what is going on.

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Inter-store alliances have sprung up occasionally, usually after employees have switched from one store to another. They are primarily social, however, and have little impact on the work. The congruence model is important to apply here. Each store has different strengths and weaknesses, and even different needs depending on types of customers. Care must be taken to allow each store to develop and maintain its own culture. Too many directives from Fred and Fern would be counterproductive and would reduce the entrepreneurial spirit of each store. WORK GROUP PROPERTIES NORMS/SANCTIONS/STATUS HIERARCHY Each store is set up in a similar manner. The manager is responsible for making sure everything is in place for the salespeople to do their job well. Fayols administrative model describes the managers role, namely: 1. To forecast and plan needed workers and inventory. 2. To organize and plan the deployment of store resources such as staffers and inventory. 3. To command employees in the store. 4. To coordinate the efforts of Fred, Fern and the workers in the store. 5. To control the events in the store so customers benefit. While not forbidden from selling, no manager sells very much. His time is spent on paperwork and inventory control. The salespeople feel subordinate to the manager in the sense that the manager can ask them to perform non-selling tasks such as cleaning and stock work. The dynamic is interesting because the proud salespeople dont like to clean, but they understand the necessity. It can be said that the quality of cleaning is far lower than the quality of sales. LEADERSHIP Leadership in the organization comes from three directions: among the salespeople, from the manager and assistant manager, and from Fred Prefontaine. Salespeople: Usually two or three salespeople emerge as the top performers in the store. They gain prestige and status among the salespeople for being so effective, and new hires are asked to watch them sell in order to learn the business. This is altogether good, as it enforces a culture of excellence within the store. The leaders are by definition good employees and good roll models. From the manager and assistant manager: This form of leadership is not well defined and varies from store to store. Inevitably, the manager sets a tone for the store, and this is

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the largest influence he has on the organization. Some managers are lazy, so in their stores the employees tend to sit around a lot. Some are efficient but cold, and these stores tend to have inter-personal problems. Some managers are terrible salesmen, and this rubs off on the employees as well. Ultimately, the managers must keep a high level of standards in the store, ethically and professionally. This does not always happen, and the stores are hurt because of it. The company should pay more attention to developing managerial leadership skills; usually they are put into leadership roles after having been on the sales staff, and have a difficult time adapting to management. From Fred Prefontaine: As a charismatic entrepreneur and former world-class runner, Fred is without doubt the leader of the organization and often times an inspirational leader. He conveys the sense of mission he has for the store, and is always on point. He has a good way of talking to all kinds of people and inspiring them - partly through fear and partly through idealism to perform highly. His type of leadership is benevolent authoritative, meaning he tells people what to do, but in a nice way and is usually right. Fred identifies with the salespeople more than the managers, so salespeople get the lions share of his attention. Fred is an outstanding salesperson, and can quickly and effectively teach young people how to sell. He is not a great manager, and has little to offer to managers other than a few truisms, that while indeed true, are less than complete. Fred has created the stores in his image, and he is first and foremost a salesman. The managers suffer from his lack of management skills, and follow the same pattern of paying disproportionate attention to salespeople at the expense of management. From Fern Prefontaine: Fern is a classic Type X manager. She acts as if every employee is out to cheat the business by being lazy and unproductive. Whether or not she believes this is irrelevant; this is the impression she leaves on employees. Her body language is aloof and not friendly, ie her meta-communication is very negative. She tries to motivate people by hygiene issues such as rules and regulations. As Herzberg shows, hygiene issues are a poor motivator. OUTPUTS A good output is the service given to a customer that satisfies his needs. Many times a customer will walk in just for some running advice, and even though he does not buy anything, there is still an output: an impressed customer or potential customer who is likely to return when he is ready to buy. The point is that Pre/Newman Markoff is a service provider, not just a seller of shoes. That said, each month the store comes up with a sales figure, and the managers commission is based on it. In some stores the manager shares the figure with the staff, while in others it is secret. The more successful stores tend to publicize the number and that may help motivate the workers.

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BEHAVIOR The characteristic of the business that we have seen throughout this analysis is the pride and autonomy of the salespeople, and we will revisit that theme in this section. The prime difficulty for managers in the stores is to get the prima donna salespeople to get on their knees and scrub a stain off the floor or straighten a rack of running bras. The good salespeople correctly view themselves as being the core of the store and essentially untouchable, so while they cannot be openly insubordinate, they will do the minimum possible of non-sales work. Managers tackle this problem in different ways. Some do the work by themselves. Some pick on the less powerful salespeople to do unpopular tasks. Some make the new employees do more than their share. Most of the time, however, the job does not get done at all. This is the worst outcome of all, because not only does the floor stay dirty, but also the manager falls in the sales staff's estimation. Managers also feel untouchable in many ways. Few are fired, and most have a long tenure, so they can be lazy as well. Many managers neglect to enforce the rules in order not to make waves and stir resentment. The result is that salespeople often sit down when customers are in the store, which is supposed to be forbidden, gum is chewed on the sales floor, and the store is not cleaned regularly. Fern reacts particularly badly to this sort of sloth, and makes Fred criticize the manager. She does not manage employees except when the clothes, which is her area of expertise, are messy and in disorder. Then, she will take a humiliated manager around the store, pointing out the errors in front of the sales staff. The technique does not work because it is trying to dictate behavior through negative reinforcement. Managers simply resent being criticized instead of being inspired to perform as Fern wishes. Because the store does not offer paid sick days, attendance is fairly good. Lateness is a continuing problem, however, and has been stubborn. Lateness is expressly forbidden in the employee handbook. Some managers ignore it, figuring that since salespeople do not get paid for the late time, the store saves money. Others fight it through additional docking of pay, talking to the offending party, and forcing the late employee to work unfavorable hours. The reasons for lateness are usually subway related; few employees live in Boston, and the subways are not always reliable. Family problems are also a cited problem. Fred has made anti-lateness a crusade, and gets visibly angry when he observes salespeople arriving late. He urges managers to simply send latecomers home with no pay, but that is rare. The bad behavior that is most likely to doom an employee is not following the ANPOCS system, or losing a sale without passing it to another salesperson. These are fundamental issues that largely define whether or not a salesperson can make it at the

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store. There is a little room for argument managers are less finicky than Fred on sales technique but Fred has been known to fire a new salesperson on the spot if he does not pass a sale. The problem is, given the sales forces pride, it can be hard for them to give up a sale they believe they could make. Desperately wanting to make a sale is not necessarily bad behavior in a salesman, and it can be hard for managers to step in and interrupt a sale. The salesman is being rewarded and punished for the same behavior, which is a mixed consequence system that generates cognitive dissonance. That said, the store is a good place to work for most people. Workers are united by common interests running and selling and most like the way they are urged to behave. The pride and skill of the salespeople is the fuel on which the stores run, and Fred has been successful in keeping sales at the heart of the corporate culture. EFFECTIVENESS: Since Fred and Fern Prefontaine wholly own Pre, they are not required to divulge the financial performance of the company. The pair has always been completely secretive about finances, revealing close to nothing. Judging by the continued vitality of the company and that it pays its bills on time, the company is doing well. The company does well because it is able to sell at very high margins, usually 100%. This margin allows for a lot of mistakes to happen and have the enterprise stay profitable. In a business with thin margins, a major over order can be extremely costly when the company is forced to sell at a loss. Pre never has to sell at a loss. It is vital to the survival of Pre that it maintain these margins so it can provide the services that give the company its competitive advantages. The high levels of cash flow give the business excellent liquidity. About a third of sales are made in cash, so throughout the system, every day, between $10,000 and $20,000 in cash is collected. This steady flow is the blood of the organization. Ultimately, the business must be quite profitable because it has lasted 25 years in Boston retail. For a small family business, this kind of longevity is very rare, and proves that the companys business plan is a good one, and that the company has executed well. PERFORMANCE The company provides probably the highest quality services of any shoe store in the city. This has been the case for many years, and it is likely that it will continue at least until the Prefontaines retire from the business. The company has a high standard of performance of which most in the company are quite proud. There are pockets of underperformance, however. Some stores do not perform at a high enough level, and not enough is being done to improve them. These underperforming stores will likely not improve until the manager is changed. Since Fred is

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unlikely to make major shakeups in management, we feel it is likely that some stores will not reach their potential. The high margins of the company help mask problems at stores. In order to remain profitable, a store need not work at or near its potential. This is a problem, and results from the informal organization of the business. It is not likely to be changed unless the company gains shareholders, or a more powerful board, or competition appears. ANALYSIS OF ORGANIZATION (DIAGNOSIS) STRENGTHS THE GOAL OF THE COMPANY IS KNOWN AND AGREED UPON The companys mission, to satisfy the customer, is well understood and has the troops lined up behind it. Fred has done a good job communicating it to the workers and gaining buy-in. THE CORPORATE CULTURE IS ONE OF EXCELLENCE Employees of the company are proud of their affiliation because they feel Pre is the best in the business. They generally work hard to contribute to the business. MARGINS ARE VERY HIGH AND NOT UNDER PRESSURE A 100% margin masks most problems in the organization. The company does not have to perform at full strength to make a profit, unlike many retail organizations. This is a weakness as well as a strength, of course, since the company loses one incentive to improve itself. If Pre gets too slack, margins will inevitably fall because customers will no longer be willing to pay high prices. FRED PREFONTAINE IS A CHARISMATIC AND RESPECTED LEADER As the companys founder and a former world-class runner, Fred is a subject matter expert. But more than that, he has the ability to inspire employees to improve themselves. He is considered a regular guy and employees less than half his age feel comfortable talking to him. STORE MANAGERS GENERALLY PROVIDE STEADY LEADERSHIP Managers tend to stay in their positions for many years. This provides a solid base of continuous corporate knowledge that serves the stores well. Managers are considered responsible for the tone of their stores, and in general they do a good job at defining and teaching the corporate culture.

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SALESPEOPLE ARE VERY TALENTED The salespeople are the heart of the company, and it is on their backs that the store prospers. The stores have always valued good sales technique above all other traits, and that should continue. Fred Prefontaine deserves the credit for the high quality of salespeople. GOOD BUYING Fred and Fern have 25 years of experience buying merchandise and they are the best among competitors. While they make mistakes, usually they get it right, and customers find what they are looking for. GOOD RELATIONSHIPS WITH SUPPLIERS Fred and Fern have built solid relationships with suppliers through 25 years in business. They pay their bills on time, and frequently are on a first-name basis with company presidents. For a company with comparatively tiny volume, Pre has tremendously out of proportion visibility in the industry and clout with suppliers. THE BUSINESS IS OPEN TO SOME NEW IDEAS While he does not have a perfect record, Fred is often amenable to new ideas. He opened the first Newman Markoff store in the country and profited grandly. He tries guerilla marketing sometimes. He started a web site in 2000. THE COMPANY HAS MADE NEWMAN MARKOFF A PARTNER Newman Markoff has entrusted Fred to be its face to 1 million Bostonites. The stores have the backing of a major manufacturer committed to its success. Newman Markoff has an interest in helping the Newman Markoff stores succeed, so it wholesales its shoes at a large discount, improving margins even more. The Newman Markoff stores have first call on new shoes, and on shoes with limited availability. LOYAL CUSTOMERS Pre customers generally do not shop elsewhere. They come back year after year, and because managers stay for years, close relationships develop. A loyal customer base is crucial to Pres success, and it is likely to remain. Fortunately for Pre, its customers are usually very wealthy and the nature of the sport is that they must make a $100 purchase every 4-6 months. GOOD LOCATIONS

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Fred has put his stores generally in residential neighborhoods with tens of thousands of rich, active people living nearby. This funnels much business into the stores. The best locations are on the North End and Boylston Street. LIQUIDITY AND RESOURCES The company has a lot of money behind it and it provides a large cash flow. THE COMPANY IS LIGHT ON ITS FEET Unlike chain stores like Big Life and Minardi, individual Pre and Newman Markoff stores have the authority and mandate to take matters into their own hands to satisfy customers. If a customer does not like the music played, the salesperson is expected to immediately change it, without checking with the manager or otherwise. In a similar manner, if a manager has an idea to increase sales, he is free to do it without checking with the owners. There is no culture of You have to ask the manager, or Sorry, thats company policy. In this way, the store takes advantage of critical moments to please customers. WEAKNESSES THE FIRM IS A FAMILY BUSINESS AND KEEPS ALMOST ALL OF ITS INFORMATION SECRET. Pre is vertically organized, with managers and salespeople knowing little about the broad governance and performance of the firm. If the company is to grow, information will have to be shared with managers. This may require giving managers line positions and rewarding them for doing more for less money. FERN PREFONTAINE While Fern is a good merchandise buyer, she is a poor manager. She is uncomfortable telling people what to do, and practices behavior modification by negative reinforcement. Ultimately, the stores could perform to her specifications if she were a stronger performer. SUCCESSION ISSUES Fred and Fern are over 60, and Fred has a bad back. They probably will not continue working much more than ten more years, but they have taken no steps to prepare for a succession. The companys post-Prefontaine survival will depend on executives who have been prepared for leadership, but that process has not yet begun. POOR UTILIZATION OF INFORMATION TECHNOLOGY

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While not a Luddite, Fred does not believe in sophisticated computing. The cash register software is 15 years old and cranky, and there is virtually no inventory control software. Technology can be very useful in monitoring sales and inventory, but Pre still uses rules of thumb and judgment to control inventory. Hence, the quality of inventory is dependent on the managers skill and inclination, neither of which is always high. Database marketing is now available at low enough cost for small business, and is a good way to keep customers loyal A LACK OF FEEDBACK FROM FRED IS DEBILITATING As we have seen, Fred and Fern give almost exclusively negative feedback. This is an enormous problem that lowers store morale. More than that, it is a missed opportunity to change behavior. Fred and Fern are unlikely to change, however. To be fair, Fred does give positive feedback, just not directly to an employee. He will tell a manager that a salesperson is doing a good job, or that another manager came up with a good idea. This is almost counterproductive because the hearer of the message is not clear if it is a directive geared to him to improve or just small talk. Along with the lack of feedback is the lack of an evaluation system for employees. No one is quite sure if his performance is good, and all lack the guidance that an evaluation program would provide. A LACK OF MARKETING The Prefontaines do not believe advertising would benefit their company. They believe that it is in the best interest of the company to grow slowly and by word of mouth. They feel that an advertising campaign would bring in the wrong kind of customer, that is to say a price-conscious, non-loyal customer, who would not become a lifetime customer. They are also worried that rapid growth would destabilize the stores and make them lose focus. While it is hard to argue with success, many in the organization would like to see some kind of marketing/advertising campaign. They feel that the people who have heard of Pre and Newman Markoff are laughably small, and increased visibility would not harm the store. The people who believe this are, of course, salespeople whose income depends on volume. They may not have the best interests of the company in mind. More practical would be direct marketing based on keeping in closer touch with existing customers. While the store sends out a quarterly newsletter, it is amateurish and riddled with grammatical errors. A more sophisticated IT system could gather personal information on customers and send personalized messages. We will explore this below. NO PLAN EXISTS TO CONTINUOUSLY TRAIN MANAGERS

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While clinics and informal learning always goes on in the stores, there is no system to help managers improve their skills. They are put into position and expected to figure it out on their own, with minimal guidance. Usually they have been assistant managers for some time, but there is no system to train assistant managers either. The company should work harder to improve the quality of managers. LEVELS OF COMPENSATION ARE NOT HIGH While compensation figures are secret, most believe that managers are underpaid compared to other retail managers. Pre managers unquestionably work far less than most retail managers, so on an hourly basis, Pre managers are probably overpaid. Forty hour, five-day weeks are rare in retail management, and that accounts for much of the appeal of the job. However, by the expectancy theory, low pay may inspire low performance. In any case, the perception among managers is that they should be paid more. Increasing commission rates may be the right way to increase compensation, since both company and manager would benefit. THE HIGH MARGINS REDUCE URGENCY OF THE TASK As we have seen, 100% margins are a curse and a strength. Because the company can profit while not hitting on all cylinders, work quality is not as high as it could be. The lack of competition also lowers quality. This is not to mean that quality is bad, only that there is no continuous urge to improve. FINDING GOOD EMPLOYEES IS DIFFICULT The system is usually short staffed. Finding good salespeople willing to work for retail wages is difficult in Boston, and when the further requirement of a sports background is added, staffing is a major problem. Considering the central mission sales play in the business, finding and retaining sales staff is crucial. THE NEWMAN MARKOFF STORES ARE HEAVILY DEPENDENT ON NEWMAN MARKOFF The Newman Markoff stores do not carry any shoes other than Newman Markoff, so they are held hostage to Newman Markoffs whims. If Newman Markoff begins producing a weak product, the stores will suffer. While Newman Markoff has stayed true for years, it is privately held, and there is no guarantee it will continue as it has. In addition, the just-in-time inventory system used by the Newman Markoff stores is completely dependent on corporate Newman Markoff and UPS. During the UPS strike of the late 1990s the store suffered tremendously. The Newman Markoff warehouse shuts down the last two weeks of December for inventory, and those two weeks cost the stores

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in sales. If supplies of Newman Markoff shoes drops for any reason, the effect will be severe and immediate in the stores. EACH STORE HAS ITS OWN SUBCULTURE AND IS OFTEN HOSTILE IN WAYS TOWARD THE OTHER STORES. Stores generally communicate with other stores only when there is a problem, such as a short-staffing situation. Employees often know one another only by the sound of their voice on the telephone. There should be events to unify the stores. INCONGRUENCES Much of the stores success can be traced back to the simplicity of its mission: satisfy the customer. Given that employees have a broad mandate to do what they can in this regard, there are few instances when company culture or policy comes into conflict with goals. THE SALES COMMISSION SYSTEM CAN BE MISUSED As we have seen, the commission system can influence people to make unethical decisions. The most common is that when a particular show has a spiff on it, salespeople may try to sell it whether or not it is appropriate. While the customer has every right to return a shoe that does not work out, and the salesperson loses the commission earned on that sale, many customers will not return the shoe and may not return as customers. A system with less gray area would be a welcome change, both to salespeople unsure what the right thing to do is, and by managers, who are charged with making sure salespeople sell the right shoes. Cognitive dissonance would be reduces for both parties. THE CULTURE OF THE PROUD SALESMAN CAN CONFLICT WITH THE DESIRE OF MANAGEMENT FOR A RELAXED BUYING EXPERIENCE Salesmen feel terrible when they lose a sale, and are under some internal and external pressure to avoid doing so. If a manager notices a missed sale, he is supposed to immediately ask if the salesperson brought in another salesperson to help. There are few more serious charges than a non-passed sale. The problem is that salespeople only get commission if the sale is made by them. Sometimes the money is shared, but the fact remains that salespeople do not like to pass sales for reasons of pride as well as financial reasons. This can cause overly aggressive salesmanship. PROGNOSIS Given the companys fat margins, slow but steady revenue growth at Pre and explosive growth at Newman Markoff, the company is likely to prosper for the next few years. The problem looming in the future is the Prefontaines retirement. Preparation for the succession is the most important long-term action needed.

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We expect cost control to become a more important issue. Most of the stores leases were negotiated in less prosperous times, and as they come up for renegotiation, the rent is likely to rise, reducing profitability. There is no formal cost-control organization in the company, and managers have no information on productivity. When rents rise, the company will have to reexamine its costs. We can safely say that the Prefontaines management styles will not change. They have stayed the same for decades, and will not suddenly become one-minute managers. The company will continue to suffer from Fred s lack of feedback and Ferns negativity. The managers, given no help on improving, will run their stores as their personality dictates, for better or worse. The quality of workers, upon which so much depends, is an important variable. The quality of workers tends to move in inverse relation to the health of the economy; in recessionary times the level of workers is much higher than in boom times. Perhaps just as important is the amount of immigration into Boston. The stores are heavily staffed with immigrants from Russia, Latin America and the Caribbean, and if immigration slows for any reason workers will become more difficult to find. The quality of managers will probably go down. The current crop has been with the company for many years and provides the main preservators of corporate culture. There are few people lining up behind them to be managers, partly because of the healthy economy and partly because turnover is so slow. The company may have to hire outsiders, which could change the stores character. The future of the Newman Markoff Stores is also unsure. Right now, they are filling an important niche, and are uniformally successful. But until recently, there was only one Newman Markoff store, now there are three. Whether they will cannibalize each others sales is unclear. The stores also depend directly on the continued viability of Newman Markoff. Newman Markoff is privately held company, so it could change on one mans whim. The company could scale back in less profitable categories such as tennis and dress shoes, which would hurt the Newman Markoff stores because they cannot bring in another line to fill any holes. We think it is unlikely that a significant competitor will emerge. Many shoe stores have come and gone while Pre has continued to prosper. Herman's went out of business, as did Big Town Sports. Jordan is not going anywhere, but Boston is big enough for both since they do not compete on price. RECOMMENDATIONS SHORT-TERM ACTION PLAN 1. Improve the quality of management through a systematic training program.

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2. Have regular, mandatory, round table meetings between the Prefontaines and managers to work on management skills and discuss company issues. Ask them to read The One Minute Manager. 3. Change the spiff system to a conventional dollar per pair system. 4. Provide bounties to employees who bring in good new hires. 5. Establish a regular performance review system for all employees, and tie pay rates to it. 6. Give specific responsibilities to assistant managers to programmatize the management-training program. 7. Mandate regular store meetings. 8. Cut out the dead wood, i.e. underperforming employees. 9. Implement a secret shopper plan to find out how the stores perform. 10. Pay assistant managers more and spell out their duties. LONG TERM ACTION PLAN 1. Begin training managers to learn more about company-wide issues in order to begin preparation for the succession. 2. Use information technology to improve ordering and inventory. 3. Create a database of customers to use in direct marketing. 4. As succession comes closer, make managers a line position. 5. Establish a Newman Markoff - specific warehouse to lessen dependency on Newman Markoffs inventory, shipping department and UPS. 6. Regularize an employee-training plan with milestones and expected achievements with raises tied to them. 7. Use scientific management to analyze some store functions in order to improve all stores. 8. Use Cube One analysis to uncover the effectiveness of the corporation. 9. Fred should make an effort to teach management skills to Fern, or she should keep away from employees. 10. Use human resource accounting to keep track and retain talent. 11. Institute a program of kaizen type constant improvement. SHORT TERM RECOMMENDATIONS 1. Improve quality of management through a systematic training plan. The managers are smart people, but because there is no formal management training, they have to learn on their own how to manage people. A little time and effort by Fred could create a program to teach what he has learned about management, and what has worked at other stores. Most managers would benefit tremendously from GMFAC or especially the OneMinute Manager video. We believe the benefits to the company would be immediate and substantial.

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2. Have regular, mandatory, round table meetings between the Prefontaines and managers. Managers feel disconnected from the other stores and from the company as a whole. They dont even know one another in some cases, despite both working for the same small company for years. They also dont have any means to suggest ideas to each other and get ideas. Sometimes messages from Fred do not make it around to all the stores at the same time. They also need help learning to be good personnel managers. A copy of The One Minute Manager should be given to each manager and assistant. Regular meetings would be boon to the company for all the reasons listed above. An advantage of small businesses is that the employees can work as a team and understand what is going on across the company. That is, they can see the forest and the trees. Fred would also get a better sense of what is going in the stores. 3. Change the spiff system to a conventional dollar per pair system. The commission system is not in league with the mission of the company. The current system is popular with the salespeople, but it provides motivation for unethical sales behavior. While all commission systems do so to some extent, the Pre system is particularly hard to defend because of the high standards of the company. Changing the system would provide several benefits. First, salespeople would have a better, more clear-cut understanding of ethics. Second, the manager would not have to always question the salespeoples spiffs. Third, managers would have a simpler system to administer, leaving more time to do other tasks. A dollar per pair system would take away the incentive to sell the wrong pair of shoes. A salesman would get the same money for a $40 pair as she would for a $170 pair. The system is extremely simple and easy to understand. Salespeople would not be happy about the change, however, and honest, straight talk would be needed from Fred and the managers. The sales staffs only real concern is making less money, so that should be the main concern of Fred. A study of spiff amounts over the past year should be made, and the amount awarded per pair should be aligned to keep the average amount paid off equal. The point should be emphasized that the goal is not to save money; Fred has made it clear that he does not mind paying out money in spiffs. The point is to take away the temptation to sell an inappropriate pair of shoes. This will increase the amount of return customers, and reduce the amount of returned shoes. 4. Provide bounties to employees who bring in good new hires. Recruiting good salespeople should be a high priority, given retails high turnover rates and the tight job market. By making employees headhunters, the store would gain in

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many ways: Applicants would come recommended rather than as walk-ins, there would be more candidates, and if structured correctly (iethe bounty is paid if the employee lasts three months), the nominator would have an interest in helping the new hire. 5. Establish a regular performance review system for all employees, and tie pay rates to it. A good dose of feedback would go a long way to improving the sales force. At present, no one is told that he is doing well unless a raise is on the table. No one knows for sure if a particular action is good, or if it should be stopped. By the expectancy theory, employees should know that if they perform at specified levels, they will be paid more. New employees should be reviewed every two weeks, and every six months after that. A standardized form should be used to spell out as clearly as possible what is expected and what the manager sees as being delivered. The more specific and appropriately high, the better, per the goal setting theory. Fred should meet with the managers and devise a specific list of what is expected from employees and make that list available to all employees. Studies have shown that if employers set up a path for employees to follow with specific guidelines to reach high performance levels, performance will rise. Raises should rise directly from these evaluations. Every six months an employee should be eligible for a raise, and know exactly what she has to do to get it. While we understand denying raises would be rare, we see this as good news, not bad. Employees would sharpen up their game prior to evaluation time, and welcome it as a likely raise. Managers should receive reviews from Fred every six months as well. They have the same need to hear how they are doing as salespeople. Fred should conduct interviews with salespeople beforehand to gather information on the stores operation before, and present any relevant data. 6. Give specific responsibilities to assistant managers to programmatize the management-training program. Just as managers receive no training, neither do assistant managers. A further problem with the assistant manager position is that its duties are not formally defined. While this is not all bad, and encourages the assistant and manager to exploit each others particular talents, it often leaves the assistant wondering why he took the job instead of staying a salesperson. The goal of the assistant manager program should be to prepare the assistant to take over the store if the manager quits or is fired. The assistant should gain experience in all aspects of store management, from counting the money to giving evaluations, to hiring and firing.

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7. Mandate regular store meetings Currently, the only time a store meeting occurs is if there is a problem or briefly during or after a product knowledge clinic. A message should come directly from Fred that he expects monthly store meetings to discuss store and company-wide issues. This would be a way to disseminate information and get feedback from employees. It would also help build a better sense of teamwork. 8. Cut out the dead wood, i.e. underperforming employees. Since firing is rare and finding good employees is difficult, there are some poor employees who do not contribute to the company. They also serve as bad examples to new employees and are frustrating to managers. These people should be let go. 9. Implement a secret shopper plan to find out how the stores perform. As is true in every retail store, performance picks up dramatically when the boss is present. This is related to the Hawthorne experiments, in which workers raised performance because they knew they were being observed. This makes it hard for Fred to evaluate the every-day performance of the stores. He should use secret shoppers to find out how each store is doing. 10. Pay assistant managers more and spell out their duties. As we have seen, assistant managers sometimes take a pay cut when they are promoted, because they have less time to sell and make less in commission. This decreases the appeal of management positions, lowers morale, and since assistant managers must try to sell rather than manage, is an example of a mixed consequence system. Assistant managers should be paid more and given specific responsibilities toward learning how to run the store. Attention should be given to job enlargement to encourage growth. LONG-TERM RECOMMENDATIONS 1. Begin training managers to learn more about company-wide issues in order to begin preparation for the succession. The Chinese wall between the budget and the managers will have to be broached if the succession is to take place smoothly as a transfer of power from the Prefontaines to the existing management staff. Of course, if they plan to sell to outsiders who have their own management team, this is void. The Prefontaines should talk to the managers they feel would be most capable of running the entire business and tell them as up front as possible that they do not know when they plan to retire, but when they do, he is one of the people they would like to be

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prepared to run the business. He should be introduced to suppliers, bankers and contractors, and start being instructed on all that the Prefontaines know about the business, from how to deal with city agencies to where you can get polyurethane cheap. 2. Use information technology to improve ordering and inventory. The improvements technology has provided to inventory control are staggering and can make a big difference. The Pre stores are operating with mid-1980s computing on average, and depending on hunches and intuition when hard data could be used to great profit. The Prefontaines should bite the bullet and put the inventory under some level of computer control. A good inventory control system can show selling patterns throughout the day, week, month and year, to better prepare. It can serve as a good predictor of sales for a new model. It can tell you which sizes in which shoes are popular and which are not. It can give an alarm when a model is low in stock. There is no end to the quality of software on the market, and the store would benefit from it. 3. Create a database of customers to use in direct marketing. Pres continued success depends on the loyalty of its customers. While direct marketing has a bad name, when done right, it strengthens customer loyalty. A modern system can record what each customer buys and generate targeted, almost personalized mailings derived from the data. For example, if a customer bought regularly every six months for two years, but hasnt been in for a year, a postcard with a coupon could be sent to her. If a customer buys a particular shoe every time and it is either being discontinued or on sale, a mailing could be sent. The point is that such a system would serve in support of Pre mission by increasing sales and customer loyalty. In order to get customers to agree to give their addresses and permission, cashiers could be instructed to ask Whats your address Ill send you a coupon, and for each name gathered, the cashier could be paid 50 cents. 4. As succession comes closer, make managers a line position. While most retail managers have authority to set and enforce budgets, those at Pre do not. The stated purpose is to keep managers focused on the sales floor and out of the back office, but the result is that the manager never really knows how the store is doing. Revenue is only one side of the puzzle. By telling the managers more about the performance of her store, they would be inspired to improve it. A new commission system could be implemented to reward managers for cost savings as well as revenue increases. 5. Establish a Newman Markoff - specific warehouse to lessen dependency on Newman Markoffs inventory, shipping department and UPS

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While Newman Markoff is a good partner now, they may not be in the future. Too much of the Newman Markoff stores fate is dependent on the continued good performance and good will of corporate Newman Markoff. A warehouse specifically for Newman Markoff shoes would provide a cushion against changes in supply. The cost would be high, however, and the risk of corporate Newman Markoff hurting the stores might be small enough to eliminate this step. 6. Regularize an employee-training plan with milestones and expected achievements with raises tied to them. The success of Pre is largely due to a well-trained staff. Salespeople who have been on the job for over a year are extraordinarily effective. New employees, however, are not as effective because they simply dont know exactly what to do. Pre should capitalize on the strength of the veteran staff, and use it to establish a formalized training schedule, run cooperatively by the veterans and management. This way the message would have the imprimatur of management, but with the up-to-theminute substance of the salespeople. To avoid hurting the feelings of people who believe they would be good teachers but management feels otherwise, effort should be taken to include everyone in some way. Managers should use Maslows theory of motivation to figure out what each employee needs and use it to encourage good behavior. For example, if an employee is concerned about going home late to her unsafe neighborhood, make sure she does not work late hours. If a persons self-esteem requires some managerial duties, find something for her to do, such as making her responsible for a section of the store. 7. Use scientific management to analyze some store functions in order to improve all stores. While the congruence model is crucial to the corporate culture, some tasks can be standardized and improved across the system. Some stores have devised better ways to manage inventory, and others may have found a better way to piece together work schedules. These ideas should be promulgated across the system by Fred and Fern at the regular store meetings. 8. Use Cube One analysis to uncover the effectiveness of the organization. For it to succeed, Pre must stay on target and make sure its employees and customers are doing well. Cube One will help Fred and Fern track organizational effectiveness and tell them where the system is breaking down.

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9. Use human resource accounting to identify and reward talent. Fred and Fern should formalize their efforts to evaluate and reward strong employees. They always have an idea of who is important and who is not, but the process is not exact and has no regular impact. The company should evaluate who is worth keeping and use the information to retain good employees with whatever extrinsic reward the employee wishes and is practical. 10. Institute a program of kaizen style constant improvement. While Fred and Fern originated the systems by which the company runs, they do not participate in the systems on a day-to-day basis. The sales staff and managers run the operations, and they should be asked to submit ideas and recommendations for improving the stores. The point of such a system is to keep improving processes gradually, and over time small advancements will add up to large benefits. Congruence Analysis
Individual/The Organization The key people of the organization have different needs and goals that are only partially met by the formal organizational arrangements. The Director has set the goal for herself of closing the gap between the formal organizational arrangements of DRB and the informal arrangements that tend to dominate the actual practices. Whether she has the power to do this remains to be seen. She has no mechanism within the formal organizational arrangements that fully empowers her to make such changes. She has very little formal power to control her staff. If they choose not to follow her directions, she cannot fire them nor transfer them to another bureau without the consent of HR. this type. The Deputy has been with DRB for many years and has learned to jettison the formal arrangements in favor of using informal arrangements to serve his own needs. Primarily, he relies on his informal alliances with people both inside and outside of the Bureau to accomplish his agenda. For instance, because he has a strong need for affiliation, he blurs the line between his goal to serve the organization to the best of his ability with promoting the welfare of his friends. Therefore, he uses the informal arrangements he has with HR to facilitate the selection of allies for positions rather than someone who may be more technically qualified. Although all candidates selected meet the minimum requirements for assignment. This selection process often leads to internal dissention within the Bureau but the Deputy is firmly entrenched within his position and is capable of relying on his power base to obviate conflict. Fortunately, the overall Likewise, she has no ability to formally reward a staff member who is performing particularly well. NPDC and HR centrally control reward systems of

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insistence on formal work plans and basic technical requirements on the part of personnel assignments limit the damage that may result from his favoritism. The head of Country Operations would like to see the formal organizational arrangements within DRB and NPDC change. He prefers a less centralized decision making structure so that his team can have more latitude in both designing and immediately implementing countryspecific strategies for addressing emergencies without suffering through delays created by the decision making hierarchy. While he recognizes the need for careful long-term strategic planning for recovery and prevention at the headquarter level, he feels the formal structures hinder the Bureaus ability to provide immediate relief in crisis situations. In addition, his high n Ach personality causes him to set challenging goals for himself and his department. He would like to get more formal and frequent feedback on his and his departments performance. Feedback would enable him to achieve even better results in both his departments service to the Bureau and his own desire to excel. The current system of providing official feedback once a year in the form of a monolithic number, lacking specific feedback on particular aspects of performance disables his efforts towards constant improvement. The head of the Technical Division would also like more feedback. She too has a high n Ach personality and needs to feel that she is constantly developing her skills and growing as a person. Therefore, she feels that the annual formal organizational feedback given to her is insufficient. Additionally, she feels that the lack of extrinsic rewards for doing a good job actually removes motivation. She is considering other career possibilities. Because the technical aspects of her tasks necessitate that she operate autonomously, her defection would cause destabilization in the Bureau. Unlike the more administrative departments such as finance or even operations, which perform general strategy planning, the technical expertise office is responsible for the actual engineering required to implement programs. While all professional staff members of DRB are highly skilled, the technical experts have the most specific skills. The Director cannot easily appoint someone to her position. To replace her would require a long search process. Individual/Task For individuals in any organization to perform well, they need to feel that the tasks for which they are responsible match their individual needs. The head of Country Operations experiences meaningfulness in his job and is challenged by the need to use a myriad of skills. His tasks, however, are generally intertwined with the work of NPDC country representatives and technical experts, and he therefore does not feel a great responsibility for the outcomes. Thus,

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although his job requires a high degree of knowledge and skill, and he feels his role in the organization is significant, his sense of satisfaction is somewhat diminished by his perceived lack of autonomy. Fortunately, his dissatisfaction is mitigated by the generally positive yet informal feedback he receives from both the Deputy Director and Director. In the long run however, the inefficiencies of the formal feedback system create motivational problems for him. Given his high n Ach personality, the lack of formal feedback causes him frustration. The head of the technical expertise also experiences a high degree of meaningfulness from her job. Since the tasks she supervises require a high degree of knowledge, vast variety of skills, she has considerable autonomy vis--vis the deputy and the director, both of which lack the technical expertise to micro-manage her output. Thus, in addition to the significance she experiences due to the life saving aspects of her work, she experiences a sense of tremendous task identity as well as autonomy. She is frustrated, however, that she is not able to properly supervise her staff since she in turn lacks some of the technical skills required to do so. Her sense of satisfaction is somewhat diminished, however, by the lack of specific, formal feedback from the deputy. Working for DRB affords the support staff slightly more meaningfulness in their jobs in comparison to support staff in commercial operations. Since their efforts support operations that have a significant positive impact on distressed people, they typically experience higher task identity than their counterparts in for-profit settings. In addition, since their bosses are often in the field, they experience slightly more autonomy than the average office support worker. Their satisfaction is diminished by the fact that they use a few rudimentary skills, and it is difficult to isolate specific outcomes of their work beyond the fact that the office is functioning properly from an administrative standpoint. The managers of the Bureau have been good at making the support staff feel that what they do is important and their experienced responsibility is somewhat augmented from constant, specific feedback based on measurable performance standards. Individual/Informal Organization The Director uses her political clout to push for decisions she believes are right and that she believes will help her realize her goals and the goals of DRB. Thus, the informal organization helps her achieve goals that would be impossible if the formal organizational arrangements had to be followed. On the other hand, she often loses power struggles with the deputy because of his strong informal network and high status among his colleagues that help him deliver (or not deliver) on dimensions such as new employees, the release of funds for a project

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and travel arrangements. The Director often has to let the Deputy make the final decision in important situations because he is the only one that can make things happen. The deputy operates primarily within informal arrangements. He only uses the formal channels as a courtesy to the system. The organizational culture of loyalty and connections makes it possible for him to effectively pursue both his professional agenda of service to DRB and personal agenda of elevating his friends and loyalists. At the same time, he uses his extensive network to get information on the actual status of projects, to get new projects started and to get feedback on the results of DRB projects once DRB has left the area. The head of Country Operations and the head of Technical Expertise also benefit from the informal arrangements. The informal organization helps them circumscribe the lengthy approval processes that the formal arrangements dictate for funding and executing projects. It would not be possible for each to meet the objectives of their individual work plans as well as their action plans for their departments if they could not expedite the processes through the use of the informal organization. As for the support staff, most of their needs are met in the informal organization. In the formal organization they have little status and are often not able to pursue their goals and satisfy their needs. In the informal organization they get feedback and attention from their superiors, they can provide small services that are returned as favors in other situations, and they can strive for the status that comes from proximity to the boss and knowledge of his or her whereabouts and even his thoughts. The informal organization provides them with a good feeling of importance. Task/Organization DRBs success is based upon its people, financial structure and global presence. DRBs structure enables the bureau to dispatch the right people at the right moment, secure fast disbursement of funds and provide operatives with knowledge on the conditions and factors in the country that needs assistance, as well as information on the proven tools and methodologies used in the past during similar situations. Thus far, DRB has been able to recruit and retain a pool of well-educated, technically proficient talent. In the long run, however, DRB may have problems retaining its most qualified staff members because it lacks a merit based reward system. The highest performers receive raises on the same time schedule as the average performers. Further, there is a salary cap for each service category, which means that unless promoted, the highest performers accept a ceiling or leave. While it is true that DRB employees experience intrinsic rewards and internal satisfaction from performing significant service to humanity, these benefits need to be combined with merit

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based financial rewards and promotion and continuous, measurable feedback to ensure extrinsic motivation to remain with the bureau. There are no formal structures in place to facilitate fast disbursements of funds to emergency areas. The Director, however, has some informal leverage (which is higher than the leverage of other directors) to release funds up to a certain limit. This limit is not very high and often DRB projects are put on a temporary hold due to a lack of funds. The organization must decentralize day-to-day operations such as project specific budgeting so that the operatives in the field and at DRB headquarters can conduct their missions with minimal fetters. The Director, in conjunction with the Financial Affairs Office should be given a larger operational budget to facilitate day-to-day decision making for project funding. When an emergency occurs DRB needs to know what activities NPDC has in the area, their status and NPDCs experience in the area. DRB also needs to have access to experience gathered from other similar situations. The current communication structure is solely based on the central NPDC data management system. There is, however, no formal collection of best practices to capture data. Instead, while best efforts are made to enter data, there is no formal mechanism to ensure that it happens. Instead, program officers and financial agents act on good faith in their effort to continuously update the system. They are, however, imperfect and dont always succeed in this effort. In addition, current systems dont compile data in an empirical fashion that can qualitatively describe and delineate best practices, nor describe in detail methods used to address similar crises in from the past. DRB, therefore, cannot make the most efficient use of its informational resources, historical knowledge and technical expertise. Upon recruitment, the organizational arrangements contribute little to the motivation of DRB employees. The organization has made an effort to provide a flexible working environment with flexible hours and working arrangements to accommodate individual needs. These benefits do little to motivate the employees however, since they quickly become entitlements to all employees. Task/Informal Organization While the formal organizational arrangements hinder task performance by its top-heavycentralized control mechanisms, the informal organization facilitates task performance. In situations where the formal organizational structure does not allow for fast disbursements or fast decision making the informal structure supplies catalysts such as special dispensations by the Director. In addition, the Deputy is capable of relying on friends within NPDC to expedite the processing of requests when necessary.

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Organization/Informal Organization The formal organizational arrangements are based on a hierarchical structure, as demonstrated by the physical layout of the DRB offices. The hierarchical structure enforces a clear line of central command throughout the system. People use the informal organization to circumvent this structure when it serves to facilitate either personal or organizational goal attainment. HR is responsible for the formal recruitment of DRB personnel. Under this formal arrangement, the Director, the deputy nor the heads of division have substantive input in the hiring process for vacancies in their offices. recruitment process. This system was put in place to depoliticize the In practice, this is not conducive to effective execution of high-level

development work. Thus, through personal friendships with HR officers and Byzantine personal networks within NPDC management, the Director and the Deputy are able to influence the selection process for high-level professional personnel. The formal system for recruitment takes priority only in a situation of conflicting interests, for instance when HR believes a candidate proffered by the Director to be unqualified or when a high-ranking member of NPDC insists on an appointment. In such cases, HR has the final dicta. The formal organizational arrangements dictate financial remuneration for employees. Central management has devised elaborate pay scales that govern the salary increases for professional staff based on seniority. Performance is never a consideration and supervisors have no input as to who should get a raise and how much. As long as a person is not fired, he or she will receive the prescribed raise according to the schedule. The promotion system, however, is the result of a mix of formal and informal structures. Formal arrangements mandate that to be promoted a candidate must have received good scores on his or her appraisals during service to the bureau. In addition, the candidate must possess the relevant qualifications needed to fill the position. The alliances within the informal organization, however, often overrule the formal requirements. Job descriptions are changed so they match a particular candidate and exceptions are made so that a bad appraisal is ignored. In addition, political contacts inside and outside the organization often elevate individuals to positions they would normally not win based on the formal requirements. For instance, if a candidate has the backing of a powerful donor or powerful allies within NPDC or DRB, that candidate is typically promoted, even if at the expense of more qualified rivals. The informal organization supplies extrinsic motivation where the formal organization fails to do so. Since the formal organization fails to deliver on timely and specific feedback and

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praise, informal networks of friends and colleagues are often the sole source of encouragement and positive appraisal for excellent performance. This respect and affiliation amongst colleagues is often critical to the maintenance of morale when bureau operatives return from arduous, exhausting and dangerous missions. Acknowledgment by and acceptance from peers is especially important to many operatives because the organizational culture mistrusts new recruits until they have demonstrated their valor and commitment. Since affiliation is earned rather than entitled, being a part of the family is of pre-eminent importance. In conclusion the individuals in the organization find compensation for the imperfections in the formal organizational arrangements in the informal organization. Only in one particular case is there an apparent conflict: in the promotion system. irrelevant in important cases. It seems to be directly counterproductive for the organization to have a formal promotion system that is close to

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References
Nina Gupta and Atul Mitra, The Value of Financial Incentives, Myths and Empirical Realities. Richard E. Kopelman, A Point of View: Accountability With an Emphasis on Count David McClelland, That Urge to Achieve. David A. Nadler and Michael L. Tushman, A model for diagnosing organizational behavior: Applying a congruence perspective. David A. Nadler and Michael L. Tushman, Formal Organization Arrangements: Structure and Systems. One-Minute Management Video Organizations WebPages Schwartz, The Snakepit John A. Wagner and John R. Hollenbeck, Organizational Behavior, ch. 1, 3, 5, 9, 11, 15

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