Chapter 4 External Environment and Organizational Culture John R. Schermerhorn, Jr. Daniel G. Bachrach Introduction to Management 13th edition 4 Chapter 4 External Environment and Organizational Culture

Planning Ahead — Key Takeaways Identify key elements in the external environment of organizations. Discuss how organizations pursue value creation and competitive advantage in a dynamic environment. Describe how organizations pursue innovation in a dynamic environment. Explain key issues of sustainability as an environmental priority. Copyright ©2015 John Wiley & Sons, Inc.

Chapter 4 Outline The External Environment Economic conditions Legal-political conditions Sociocultural conditions Technological conditions issues Natural environment conditions Environment and Value Creation Value creation and competitive advantage Uncertainty, complexity, and change Copyright ©2015 John Wiley & Sons, Inc.

Chapter 4 Outline Environment and Innovation Types of innovations The innovation process Disruptive innovation and technology Environment and Sustainability Sustainable development Sustainable business Human sustainability Copyright ©2015 John Wiley & Sons, Inc.

The External Environment The general environments of the organization including: Economic health of the economy Legal-political philosophy/objectives of political party running the government Socio-cultural norms, customs, social values Technological development and availability of technology Natural environment nature and conditions of environment Copyright ©2015 John Wiley & Sons, Inc.

Figure 4.1 Sample elements in the general environments of organizations Copyright ©2015 John Wiley & Sons, Inc.

The External Environment Economic conditions overall health of economy in terms of financial markets, inflation, income levels, and job outlook Offshoring – outsourcing of jobs to foreign locations Reshoring – return of jobs from foreign locations Copyright ©2015 John Wiley & Sons, Inc.

The External Environment Legal-political conditions laws and regulations, government policies, and the objectives of political parties vary from one country to the next Internet censorship - deliberate blockage of public access to information posted on the Internet Immigration reform Educational reform Tax reform Health care reform Copyright ©2015 John Wiley & Sons, Inc.

The External Environment Sociocultural conditions diversity issues relating to educational opportunity, access to technology, housing/job options, mentoring, and work opportunities and earinng norms, human rights, demographics, and societal values Generational cohorts -- people born within a few years of one another and who experience somewhat similar life events during their formative years Copyright ©2015 John Wiley & Sons, Inc.

The External Environment Technological conditions social media, features and “apps” on smart phones brings both opportunities and problems Copyright ©2015 John Wiley & Sons, Inc.

The External Environment Natural environment conditions nuclear plant failure, oil spill, hurricane “carbon neutral,” “green”, “sustainability” Sustainable business – meets both the needs of customers and protects the natural environment Copyright ©2015 John Wiley & Sons, Inc.

Environment and Value Creation The specific (task) environment - actual organizations, groups, and persons with whom an organization interacts and conducts business Includes important stakeholders such as: Customers Suppliers Competitors Regulators Owners Copyright ©2015 John Wiley & Sons, Inc.

Environment and Value Creation Multiple stakeholders in the environment of an organization Copyright ©2015 John Wiley & Sons, Inc.

Environment and Value Creation Competitive advantage a core competency that clearly sets an organization apart from competitors and gives it an advantage over them in the marketplace Companies may achieve competitive advantage in many ways, including: Costs quality delivery flexibility Copyright ©2015 John Wiley & Sons, Inc.

Environment and Value Creation Environmental uncertainty a lack of complete information regarding what exists and what developments may occur in the external environment Two dimensions of environmental uncertainty: Degree of complexity Rate of change Copyright ©2015 John Wiley & Sons, Inc.

Figure 4.2 Dimensions of uncertainty Copyright ©2015 John Wiley & Sons, Inc.

Environment and Innovation Innovation - process of putting new ideas into practice Business innovations Product innovation Process innovation Business model innovation Copyright ©2015 John Wiley & Sons, Inc.

Environment and Innovation Social business innovations – find ways to use business models to address important social problems Copyright ©2015 John Wiley & Sons, Inc.

Environment and Innovation The innovation process: Step 1: Imagining Step 2: Designing Step 3: Experimenting Step 4: Assessing Step 5: Scaling Reverse innovation – innovation can come from lower organizational levels in the organization and diverse locations Copyright ©2015 John Wiley & Sons, Inc.

Environment and Innovation Disruptive innovation – creates products/services that become so widely used that they largely replace prior practices and competitors Copyright ©2015 John Wiley & Sons, Inc.

Environment and Sustainability Sustainability – commitment to protect the rights of present and future generations as co-stakeholders of present-day natural resources Copyright ©2015 John Wiley & Sons, Inc.

Environment and Sustainability Sustainable development makes use of environmental resources to support societal needs today while also preserving and protecting them for future generations Copyright ©2015 John Wiley & Sons, Inc.

Environment and Sustainability Environmental capital – natural resources used to sustain life and produce goods and services for society Land atmosphere Water Minerals Copyright ©2015 John Wiley & Sons, Inc.

Environment and Sustainability Triple Bottom Line: Three P’s of organizational performance Profit People Planet Copyright ©2015 John Wiley & Sons, Inc.

Environment and Sustainability Sustainable business – operates in ways that meets the needs of consumers while protecting the environment Sustainable/green innovations – help reduce an organization’s negative impact; enhance positive impact on the natural environment Copyright ©2015 John Wiley & Sons, Inc.

Environment and Sustainability Human sustainability – concern for the effect of management practices on employee physical and psychological well- being Health and wellness programs Stress management Minimizing work-family conflict Control over work Fair wages and opportunities Copyright ©2015 John Wiley & Sons, Inc.

What Is Organizational Culture? Organizational Culture - The shared values, principles, traditions, and ways of doing things that influence the way organizational members act. Strong Cultures - Organizational cultures in which key values are intensely held and widely shared. Organizational culture has been described as the shared values, principles, traditions, and ways of doing things that influence the way organizational members act and that distinguish the organization from other organizations. In most organizations, these shared values and practices have evolved over time and determine, to a large extent, how “things are done around here.” First, culture is a perception. It’s not something that can be physically touched or seen, but employees perceive it on the basis of what they experience within the organization. Second, organizational culture is descriptive. It’s concerned with how members perceive the culture and describe it, not with whether they like it. Finally, even though individuals may have different backgrounds or work at different organizational levels, they tend to describe the organization’s culture in similar terms. That’s the shared aspect of culture. Strong cultures—those in which the key values are deeply held and widely shared—have a greater influence on employees than weaker cultures. The stronger a culture becomes, the more it affects the way managers plan, organize, lead, and control.

Exhibit 2-5 Dimensions of Organizational Culture Research suggests seven dimensions that seem to capture the essence of an organization’s culture. These dimensions (shown in Exhibit 2-5) range from low to high, meaning it’s not very typical of the culture (low) or is very typical of the culture (high). Describing an organization using these seven dimensions gives a composite picture of the organization’s culture. In many organizations, one cultural dimension often is emphasized more than the others and essentially shapes the organization’s personality and the way organizational members work.

Exhibit 2-6 Contrasting Organizational Cultures In many organizations, one cultural dimension often is emphasized more than the others and essentially shapes the organization’s personality and the way organizational members work. For instance, at Sony Corporation, the focus is product innovation (innovation and risk taking). The company “lives and breathes” new product development and employees’ work behaviors support that goal. In contrast, Southwest Airlines has made its employees a central part of its culture (people orientation). Exhibit 2-6 describes how the dimensions can create significantly different cultures. Exhibit 2-6 describes how the dimensions can create significantly different cultures.

Exhibit 2-7 Strong Versus Weak Cultures (Exhibit 2-7 contrasts strong and weak cultures.) The more employees accept the organization’s key values and the greater their commitment to those values, the stronger the culture. Most organizations have moderate to strong cultures, that is, there is relatively high agreement on what’s important, what defines “good” employee behavior, what it takes to get ahead, and so forth. The stronger a culture becomes, the more it affects the way managers plan, organize, lead, and control.

Where Does Culture Come From? Organization founder Vision and mission Past practices Top management behavior Socialization - The process that helps employees adapt to the organization’s culture. The original source of the culture usually reflects the vision of the founders. Once the culture is in place, however, certain organizational practices help maintain it. For instance, during the employee selection process, managers typically judge job candidates not only on the job requirements, but also on how well they might fit into the organization. The actions of top managers also have a major impact on the organization’s culture. Through what they say and how they behave, top managers establish norms that filter down through the organization and can have a positive effect on employees’ behaviors. Finally, organizations help employees adapt to the culture through socialization, a process that helps new employees learn the organization’s way of doing things. For instance, new employees at Starbucks stores go through 24 hours of intensive training that helps turn them into brewing consultants (baristas).

Exhibit 2-8 Establishing and Maintaining Culture Exhibit 2-8 illustrates how an organization’s culture is established and maintained.

How Do Employees Learn Culture? Stories - Narratives of significant events or people, e.g. organization founders, rule breaking, reaction to past mistakes etc. Rituals - Sequences of activities that express and reinforce the important values and goals of the organization Employees “learn” an organization’s culture in a number of ways. The most common are stories, rituals, material symbols, and language. Organizational “stories” typically contain a narrative of significant events or people, including such things as the organization’s founders, rule breaking, reactions to past mistakes, and so forth. Managers at Southwest Airlines tell stories celebrating employees who perform heroically for customers. Corporate rituals are repetitive sequences of activities that express and reinforce the important values and goals of the organization. One of the best-known corporate rituals is Mary Kay Cosmetics’ annual awards ceremony for its sales representatives. The company spends more than $50 million annually on rewards and prize incentives

How Employees Learn Culture (cont.) Material Artifacts and Symbols - Convey the kinds of behavior that are expected, e.g. risk taking, participation, authority, etc. Language - Acts as a common denominator that bonds members When you walk into different businesses, do you get a “feel” for what type of work environment it is—formal, casual, fun, serious, and so forth? These reactions demonstrate the power of material symbols or artifacts in creating an organization’s personality. . Material symbols convey to employees who is important and the kinds of behavior (for example, risk taking, conservative, authoritarian, participative, individualistic, and so forth) that are expected and appropriate. Over time, organizations often develop unique terms to describe equipment, key personnel, suppliers, customers, processes, or products related to its business. New employees are frequently overwhelmed with acronyms and jargon that, after a short period of time, become a natural part of their language. Once learned, this language acts as a common denominator that bonds members.

How Does Culture Affect Managers? Cultural Constraints on Managers Whatever managerial actions the organization recognizes as proper or improper on its behalf Whatever organizational activities the organization values and encourages The overall strength or weakness of the organizational culture Because an organization’s culture constrains what they can and cannot do and how they manage, it’s particularly relevant to managers. Such constraints are rarely explicit. They’re not written down. It’s unlikely they’ll even be spoken. But they’re there, and all managers quickly learn what to do and not do in their organization.

Exhibit 2-9 Managerial Decisions Affected by Culture As shown in Exhibit 2-9, a manager’s decisions are influenced by the culture in which he or she operates. An organization’s culture, especially a strong one, influences and constrains the way managers plan, organize, lead, and control.

Creating an Innovative Culture What does an innovative culture look like? Challenge and involvement Freedom Trust and openness Idea time Playfulness/humor Conflict resolution Debates Risk-taking In a recent survey of senior executives, over half said that the most important driver of innovation for companies was a supportive corporate culture. What does an innovative culture look like? According to Swedish researcher Goran Ekvall, it would be characterized by the following: Challenge and involvement—Are employees involved in, motivated by, and committed to long-term goals and success of the organization? Freedom—Can employees independently define their work, exercise discretion, and take initiative in their day-to-day activities? Trust and openness—Are employees supportive and respectful to each other? Idea time—Do individuals have time to elaborate on new ideas before taking action? Playfulness/humor—Is the workplace spontaneous and fun? Conflict resolution—Do individuals make decisions and resolve issues based on the good of the organization versus personal interest? Debates—Are employees allowed to express opinions and put forth ideas for consideration and review? Risk-taking—Do managers tolerate uncertainty and ambiguity, and are employees rewarded for taking risks

Exhibit 2-10 Creating a Customer-Responsive Culture How Do You Create a Customer Responsive Culture? Hire the right type of employees (those with a strong interest in serving customers) Have few rigid rules, procedures, and regulations Use widespread empowerment of employees Have good listening skills in relating to customers’ messages What does a customer-responsive culture look like? Exhibit 2-10 describes five characteristics of customer-responsive cultures and offers suggestions as to what managers can do to create that type of culture.