McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. The External Environment and Organizational Culture Chapter 2

2-2

2-3 Learning Objectives  Describe how environmental forces influence organizations and how organizations can influence these environments  Distinguish between the macroenvironment and the competitive environment  Explain why managers and organizations should attend to economic and social developments  Identify elements of the competitive environment

2-4 Learning Objectives  Summarize how organizations respond to environmental uncertainty  Define elements of an organization’s culture  Discuss how an organization’s culture affects its response to its external environment

2-5 The External Environment The external environment refers to all relevant forces outside a firm’s boundaries such as competitors, customers, the government, and the economy Open systemsOrganizations that are affected by, and that affect, their environment InputsGoods and services OutputsThe products and services organizations create

2-6 The External Environment

2-7 The External Environment The competitive environment and the macroenvironment are components of the external environment Competitive environment The firm and its rivals, suppliers, customers (buyers), new entrants, and substitute or complementary products MacroenvironmentThe general environment; includes governments, economic conditions, and other fundamental factors that generally affect all organizations

2-8 The Macroenvironment Demographics Laws & Regulations Social Issues/ Natural Environment Technology The Economy

2-9 The Competitive Environment

2-10 The Competitive Environment Suppliers Competitors Customers Substitutes/ Complements New Entrants

2-11 Environmental Analysis  Managers must understand their environment to identify opportunities and threats  Environmental analysis is important when:  Designing new products  Scheduling production  Developing marketing plans

2-12 Environmental Analysis  Information not always easily available  When the environment is relatively unpredictable, managers face environmental uncertaintyenvironmental uncertainty  Uncertainty arises from complexity and dynamism

2-13 Environmental Scanning  Environmental scanning means searching for and sorting through information about the environment  Competitive intelligence is information that helps managers determine how to compete better Competitive intelligence

2-14 Scenario Development  Scenarios  Narratives that describe a particular set of future outcomes  Effective managers regard scenarios as living documents, not prepared once then put aside

2-15 Forecasting  Forecasting is used to predict exactly how some variable or variables will change in the future Forecasting  For example, firms may forecast  How interest rates might change  Demand for goods and services  Labor supply and demand

2-16 Benchmarking  Benchmarking  The process of comparing an organization’s practices and technologies with those of other companies  In other words, benchmarking attempts to identify the best-in-class performance and compare your organization to the best-in-class organization

2-17 Responding to the Environment  Three categories of options in responding to the environment  Adapting to the environment  Influencing the environment  Selecting a new environment

2-18 Responding to Environmental Uncertainty  When uncertainty arises from environmental complexity, organizations tend to adapt by decentralizing decision making  Decentralization requires empowerment  Sharing power with employees, thereby enhancing their confidence to perform their jobs and their belief that they are influential contributors to the organization

2-19 Responding to Environmental Dynamism  Change from bureaucratic to organic organizational structures  Bureaucratic structures tend to be less flexible; organic structures tend to be more flexible

2-20 Adapting at the Boundaries  Buffering creates supplies of excess resources to meet unpredictable needs  Smoothing levels out normal fluctuations at the boundaries of the environment

2-21 Adapting at the Core  Flexible processes allow for adaptation in organizations’ technical core  Firms sometimes will customize their goods and services to meet the varied and changing demands of customers.

2-22 Independent Action  Independent strategies  Strategies that an organization acting on its own uses to change some aspect of its current environment  A company uses independent strategies when it acts on its own to change some aspect of its current environment

2-23 Cooperative Action  Cooperative action is opposite independent action.  Cooperative strategies are strategies used by two or more organizations working together to manage the external environment

2-24 Changing the Environment You are In

2-25 Changing the Environment You are In  Strategic maneuvering  An organization’s conscious efforts to change the boundaries of its task environment.  Domain selection  Entrance to a new market or industry with an existing expertise  Diversification  Occurs when a firm invests in a different product, business, or geographic area

2-26 Changing the Environment You are In  Mergers  One or more companies combine with another  Acquisitions  One firm buys another  Divestiture  A firm sells one or more businesses  Prospectors  Continuously change the boundaries or their task environment by seeking new products and markets, diversifying and merging, or acquiring new enterprises  Defenders  Stay within a stable product domain as a strategic maneuver

2-27 Culture and the Internal Environment of the Organization  Organizational culture  The set of important assumptions about the organization and its goals and practices that members of the company share  In strong cultures, the majority of people within the organization agree on organizational goals  In weak cultures, the majority of people within the organization disagree on organizational goals

2-28 Managing Culture  Top managers should espouse lofty ideas  Give constant attention to new initiatives

2-29 Diagnosing Culture  Corporate mission statements and official goals  Business practices  Symbols, rites, and ceremonies  The stories people tell

2-30 Types of Culture CultureDefinition Group cultureInternally oriented and flexible; values stability Hierarchical cultureInternally oriented; values and norms associated with bureaucracy Rational cultureExternally oriented and focused on control Adhocracy Externally oriented and flexible

2-31 Laws and Regulations  Regulators include agencies such as  Occupational Safety and Health Administration (OSHA)  Interstate Commerce Commission (ICC)  Federal Aviation Administration (FAA)  Equal Employment Opportunity Commission (EEOC)  National Labor Relations Board (NLRB)  And many others Return to original slide

2-32 The Economy  Complex interconnections among economies of different countries  External pressure of stock markets  Periods of growth and recession Return to original slide

2-33 Technology  Strategies developed around new technologies can create a competitive advantage  Strategies that ignore or lag competitors technology can lead to obsolescence and extinction Return to original slide

2-34 Demographics  Measures of characteristics of the people who make up groups or other social units  Demographic trends  Growth of the labor force  Increasing education and skill levels  Immigration  Increased numbers of women in the workforce  Increasingly diverse workforce Return to original slide

2-35 Social Issues and the Natural Environment  Social trends include  Delaying having children to focus on careers  Domestic partners covered under employee benefit programs  Natural environmental issues affect organizations reputations; reputations in turn can affect competitiveness Return to original slide

2-36 Competitors  Who is the competition?  How do they compete? For example:  Price  New products  Advertising campaigns  Competition is most intense when  There are many direct competitors  Industry growth is slow  Product/service is not easily differentiated Return to original slide

2-37 New Entrants  New entrants compete with established companies  Barriers to entry are conditions that prevent new companies from entering an industry  Barriers to entry make the threat of new entrants less serious Return to original slide

2-38 Substitutes and Complements  Substitutes are alternative products or services  For example, video games are substitutes for watching television  Complements are products or services that increase purchases of other products  For example, car insurance is a complement to automobile purchases Return to original slide

2-39 Suppliers  Suppliers provide resources or inputs needed for production  Switching costs are fixed costs buyer face if they change suppliers  Supply chain management is managing the network of facilities and people that  Obtain materials from outside the organization  Transform them into products  Distribute them to customers Return to original slide

2-40 Customers  Customers purchase the goods or services and organization offers.  Final customers purchase products in their finished form  Intermediate customers purchase raw material or wholesale products before selling them to final customers Return to original slide

2-41 Environmental Uncertainty  Environmental complexity  The number of issues to which a manager must attend as well as the interconnectedness of these issues  Environmental dynamism  The degree of discontinuous change that occurs within an industry Return to original slide

2-42 Competitive Intelligence  Managers can begin developing competitive intelligence by asking five questions 1) Who are our current competitors? 2) Are there few or many entry barriers to our industry? 3) What substitutes exist for our product or service? 4) Is the company too dependent on powerful suppliers? 5) Is the company too dependent on powerful customers? Return to original slide

2-43 Using Forecasting  Use multiple forecasts and perhaps average their predictions  Remember that accuracy decreases the further into the future you area trying to predict  Forecasts are no better than the data used to construct them  Use simple forecasts (rather than complicated ones) where possible  Keep in mind that the important events often are surprises and represent a departure from predictions Return to original slide