1. The Environment of Business
Chapter Two
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
LO 1 Describe how environmental forces influence organizations and how organizations can influence their environments LO 2 Distinguish between the macro environment and the competitive environment LO 3 Explain why managers and organizations should attend to economic and social developments. LO 4 Identify elements of the competitive environment.

3. Learning Objectives
LO 5 Summarize how organizations respond to environmental uncertainty LO 6 Define elements of an organization’s culture LO 7 Discuss how an organization’s culture affects its response to its external environment

4. In-class Page 27, Read about Green Mountain Coffee Roasters (GMCR).
What does GMCR sell?
What makes their products unique?
Why did they select their products and distribution?

5. “The essence of a business is outside itself.”
Peter Drucker
What did he mean?
How does this idea relate to the business decisions of GMCR?

6. Organization Inputs and Outputs
Remember Systems Theory?
Transformation Process
Feedback Process – where does feedback come from? What happens if we ignore feedback?
Figure 2.1

7. Open Systems Open systems
Organizations that are affected by, and that affect, their environment.

8. Open Systems Inputs Outputs
Goods and services organizations take in and use to create products or services.
Outputs
The products and services organizations create.

9. Open Systems External environment Competitive environment
All relevant forces outside a firm’s boundaries, such as competitors, customers, the government, and the economy.
Competitive environment
The immediate environment surrounding a firm; includes suppliers, customers, rivals, and the like.

10. Open Systems Macroenvironment
The general environment; includes governments, economic conditions, and other fundamental factors that generally affect all organizations.

11. The External Environment
Figure 2.2

12. Laws and Regulations Regulators include agencies such as:
Occupational Safety and Health Administration (OSHA)
Federal Aviation Administration (FAA)
Equal Employment Opportunity Commission (EEOC)
National Labor Relations Board (NLRB)
WHO ELSE?

13. The Economy
The economic environment dramatically affects managers’ ability to function effectively and influences their strategic choices.
Interest and inflation rates affect the availability and cost of capital, growth opportunities, prices, costs, and consumer demand for products.

14. The Economy
In publicly held companies, managers may feel required to meet Wall Street’s earnings expectations.
Managers may focus on short-term results at the expense of long-term success
Recent examples of this?
Some managers may be tempted to engage in unethical or unlawful behavior that misleads investors

15. Technology
Technological advances create new products, advanced production techniques, and better ways of managing and communicating.
As technology evolves, new industries, markets, and competitive niches develop. Name 1 new technology that is driving new products?

16. Demographics Demographics
Measures of various characteristics of the people who make up groups or other social units

17. Demographics Demographic trends Growth of the labor force
Increasing education and skill levels
Immigration
Increased numbers of women in the workforce
Increasingly diverse workforce
One of the fastest growing home arrangements in the US is single father households. How could this knowledge provide opportunities for new products and services? What products would YOU offer?

18. Social Issues and the Natural Environment
Societal trends regarding how people think and behave have major implications for management of the labor force, corporate social actions, and strategic decisions about products and markets.
Family leave, domestic partner benefits
What are other current social issues? How might these issues impact business?

19. Social Issues and the Natural Environment
A prominent issue today pertains to natural resources
The protection of the natural environment will factor into social concerns and many types of management decisions.
Give examples of how business organizations have adapted/changed practices to accommodate or take advantage of social concerns for natural resources?

20. In –class Exercise Pages 32-33, read “High Design with a Conscience”.
How has McCartney’s organization benefitted from the shift in societal attitudes?
Is her business model sustainable?
Will her business model work in mass retail settings, such as Walmart? Why or why not?

21. The Competitive Environment
Porter’s 5 Forces
Figure 2.3

22. Competitors Competition is most intense when:
There are many direct competitors
Industry growth is slow
Product/service is not easily differentiated

23. New Entrants Barriers to entry
conditions that prevent new companies from entering an industry. What causes barriers of entry to be high?
Brand loyalty?
Capital investment? Start-up costs?
Distribution channels?
government policy, capital requirements, brand requirements, cost disadvantages, distribution channels

24. Substitutes and Complements
alternative products or services
video games  watching television
Complements
products or services that increase purchases of other products
car insurance  automobile purchases

25. Question
____________ costs are fixed costs buyer face if they change suppliers.
Exchange
Lever
Switching
Transfer
The correct answer is C – switching.

26. Suppliers Suppliers Switching costs
provide resources or inputs needed for production
Switching costs
fixed costs buyer face if they change suppliers

27. Suppliers Supply chain management
managing the network of facilities and people that obtain materials from outside the organization, transform them into products, and distribute them to customers
Give an example of an organization that is backward integrated (upstream) to include ownership of raw material resources.
Give an example of an organization that is forward integrated (downstream) to include ownership of distribution/retail.
The goal of effective supply chain management is to have the right product in the right quantity available at the right place at the right cost.

28. Customers Intermediate customers Final customers
purchase raw material or wholesale products before selling them to final customers
Final customers
purchase products in their finished form

29. Environmental Analysis
Environmental uncertainty
Lack of information needed to understand or predict the future.

30. Environmental Uncertainty
Environmental complexity
The number of issues to which a manager must attend and the degree to which they are connected
Environmental dynamism
The degree of discontinuous change that occurs within an industry

31. Environmental Uncertainty & Management
High Environmental Uncertainty – many factors in environment and they are changing.
What style of management is needed?
Low Environmental Uncertainty – few factors in environment and they are not changing rapidly.
What style of management is needed?

32. Environmental Analysis
Environmental scanning
searching out information that is unavailable to most people and sorting that information to interpret what is important and what is not.
Competitive intelligence
Information that helps managers determine how to compete better.

33. Environmental Analysis
Scenario development
A narrative that describes a particular set of future conditions
Best-case, worst-case
Forecasting
Method for predicting how variables will change the future

34. Question
What is the process of comparing an organization’s practices and technologies with those of other companies?
Comparative technology
Benchmarking
Process synchronization
Process asynchronization
The correct answer is B – benchmarking.

35. Environmental Analysis
Benchmarking
The process of comparing an organization’s practices and technologies with those of other companies.

36. Adapting to the Environment
Buffering
Creating supplies of excess resources in case of unpredictable needs.
Smoothing
Leveling normal fluctuations at the boundaries of the environment.

37. Influencing Your Environment
Independent strategies
Strategies that an organization acting on its own uses to change some aspect of its current environment.
Cooperative strategies
Strategies used by two or more organizations working together to manage the external environment.

38. Independent Action

39. Cooperative Action

40. 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

41. 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

42. 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
Personality of the firm
Impacts organizational decision making
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

43. Competing Values Model of Culture
Figure 2.5

44. Conclusion 1. What happens when managers & organizations fail to correctly read their environment? 2. How can managers keep informed on their environment? 3. In a dynamic environment, what skills do managers need to possess, if their organization is to be successful? 4. The hard truth about management & the environment – read page 30 on Ethanol