1. The Organizational Environment and Culture
Chapter Three
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2. Learning Objectives
LO1 Describe the five elements of an organization’s macroenvironment. LO2 Explain the five components of an organization’s competitive environment. LO3 Understand how managers stay on top of changes in the external environment.

3. Learning Objectives (cont.)
LO4 Summarize how managers respond to changes in the external environment. LO5 Discuss how organization cultures can be leveraged to overcome challenges in the external environment

4. Open Systems Organizations are open systems
Organizations that are affected by, and that affect, their external environment.

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

6. Organizational Environment
A system is a set of interrelated elements or parts that function as a whole. A systems approach encourages managers to look for connections between the different parts of the organization.
5.3

7. Open Systems External environment
All relevant forces outside a firm’s boundaries, such as competitors, customers, the government, and the economy.

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

9. Environments
Exhibit 3.1

10. Components of the General Environment
Laws and Regulations
Economy
Demographics
Social Values
The general environment consists of the economy and the technological, sociocultural, and political/legal trends that indirectly affect all organizations.
More information follows. 2

11. Laws and Regulations
Laws and regulations protect and restrain organizations
U.S. government policies both impose strategic constraints and provide opportunities.
Government can affect business opportunities through tax laws, economic policies, and international trade rulings.
Regulators are specific government organizations in a firm’s more immediate task environment.
Regulatory agencies have the power to investigate company practices and take legal actions to ensure compliance with the laws.

12. 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)

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
Some managers may be tempted to engage in unethical or unlawful behavior that misleads investors
Unemployment rates affect labor availability and the wages the firm must pass, as well as product demand.

15. Technology Technological advances create new products.
As technology evolves, new industries, markets, and competitive niches develop.
New technologies provide new production techniques.
Sophisticated robots perform jobs without suffering fatigue.
New technologies also provide new ways to manage and communicate.
Computerized management information systems (MIS) make information available when needed.

16. Demographics Demographics
statistical characteristics of a group or population such as age, gender, and education level

17. Women are 47% of the U.S. workforce and hold 50.3% of managerial jobs.
Demographics
Women are 47% of the U.S. workforce and hold 50.3% of managerial jobs.
African-Americans are 11.1% of the workforce and hold 5.4% of managerial jobs.
Hispanics are 14.9% of the workforce and hold 5% of managerial jobs.
Women hold 14.7% of board seats at Fortune 500 companies; women of color hold 3.4%.
For each $1 earned by men, women earn 76 cents; African-American women earn 64 cents; Hispanic women earn 52 cents.
The Hispanic number is grossly understated if you include undocumented persons.

21. Demographics Demographic trends Growth of the labor force
Increasing education and skill levels
Immigration
Increased numbers of women in the workforce
Increasingly diverse workforce

22. Social Values
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.
Companies have introduced more supportive policies, including family leave, flexible working hours, and childcare assistance.

23. 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.

24. The Competitive Environment
Rivals can be domestic or global
As a first step in understanding their competitive environment, organizations must identify their competitors, which may include:
small domestic firms
overseas firms
new domestic companies exploring new markets
strong regional competitors
unusual entries, such as Internet shopping
The next step is to analyze how they compete.

25. Porter’s Five Forces
Exhibit 3.2

26. Porter’s Five Industry Forces
Character of the rivalry is a measure of the intensity of competitive behavior between companies in an industry.
Threat of new entrants is a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry.
Threat of substitute products or services is a measure of the ease with which customers can find substitutes for an industry’s products or services.
Bargaining power of suppliers is a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs.
Bargaining power of buyers is a measure of the influence that customers have on the firm’s prices

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

28. New Entrants Barriers to entry
conditions that prevent new companies from entering an industry
Some major barriers to entry are government policy, capital requirements, brand identification, cost disadvantages, and distribution channels.

29. Customers Buyers determine your success
Customers purchase the products or services the organization offers.
Final consumers are those who purchase products in their finished form.
Intermediate consumers are customers who purchase raw materials or wholesale products before selling them to final customers.
Customer service means giving customers what they want or need, the way they want it, the first time.
Actions and attitudes that mean excellent customer service include:
Speed of filling and delivering normal orders.
Willingness to meet emergency needs.
Merchandise delivered in good condition.
Readiness to take back defective goods and re-supply quickly.
Availability of installation and repair services and parts.
Service charges (that is, whether services are “free” or priced separately).

30. Substitutes and Complements
alternative products or services
Complements
products or services that increase purchases of other products

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

32. Suppliers
Suppliers
Suppliers provide the resources needed for production and may come in the form of people, raw materials, information, and financial capital.
Suppliers can raise their prices or provide poor quality goods and services.
Switching costs
fixed costs buyer face if they change suppliers

33. 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
Increased global competition has required managers to pay close attention to their costs; they can no longer afford to hold large inventories, waiting for orders to come in.
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.

34. Keeping up with Changes in the Environment
Developments outside the organization can have a profound impact on the way managers operate.
Example: if little is known about customer likes and dislikes, organizations will have a difficult time designing new products, scheduling production, or developing market plans.
Environmental uncertainty means that managers do not have enough information about the environment to understand or predict the future.
Uncertainty arises from two related factors:
Environmental complexity, or the number of issues to which a manager must attend, as well as their interconnectedness.
Dynamism, or the degree of discontinuous change that occurs within the industry

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

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

37. Changing Environments
Environmental Change +
Environmental Complexity +
Resource Scarcity = Uncertainty
Characteristics of Changing External Environments
External environments are the forces and events outside a company that have the potential to influence or affect it.

38. Environmental Complexity and Resource Scarcity
Environmental Complexity: the number of external factors in the environment that affect organizations
Simple environments Complex environments
The more complex an organization’s environment is, the more difficult it is for its managers to make decisions. Increasing complexity means that managers must track and deal with more environmental factors.
Simple environments are the dairy industry and the liquor distribution industry. The key systems for each have not changes for nearly a century.
The changing nature of Kellogg’s environment is a good example of an organization dealing with an increasingly complex environment. Cereal companies face more competition, have been forced to make price cuts, and have been threatened by cheaper private-label store brands, such as those by Wal-Mart. Furthermore, a smaller percentage of consumers eat breakfast on the run instead of cereals.

39. Resource Scarcity Resource Scarcity
The degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources(LCD factories)
The third characteristic of external environments is resource scarcity: the degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources.
For example, flat-screen, LCD televisions are more expensive than regular TVs is because there aren’t enough LCD screen factories to meet demand. Furthermore, the manufacturing process is complex and difficult to manage.

40. Uncertainty
Environmental change, environmental complexity, and resource scarcity affect environmental uncertainty, as shown Exhibit 3.1.
At the left side of the figure, environmental uncertainty is lowest when environmental change and complexity are at low levels and resources are plentiful. By contrast, the right side indicates that environmental uncertainty is highest when environmental change and complexity are extensive and resources are scarce.
In these environments, managers may not be at all confident that they can understand and predict the external forces affecting their businesses.

41. Environmental Analysis
Environmental scanning keeps you aware
A process that involves searching out information that is unavailable to most people and sorting through that information in order to interpret what is important and what is not.
Competitive intelligence is the information necessary to decide how best to manage in the competitive environment they have identified.

42. Environmental Analysis
Scenario development helps you analyze the environment
Scenario is a narrative that describes a particular set of future conditions.
Best-case scenario--events occur that are favorable to the firm.
Worst-case scenario--events are all unfavorable.
Scenario development helps managers develop contingency plans for what they might do given different outcomes.

43. Environmental Analysis
Forecasting predicts your future environment
Used to predict exactly how some variable or variables will change in the future.
The best advice for using forecasts might include the following:
Use multiple forecasts
Accuracy decreases the farther into the future you are trying to predict.
Forecasts are no better than the data used to construct them
Use simple forecasts
Important events often are surprises and represent a departure from predictions

44. 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.

45. Environmental Analysis
Benchmarking
The process of comparing an organization’s practices and technologies with those of other companies.
Benchmarking means
identifying the best-in-class
performance by a company in
a given area.

46. Adapting to the Environment
Four different approaches that organizations can take in adapting to environmental uncertainty are
a. Decentralized bureaucratic (stable, complex environment)
b. Centralized bureaucratic (stable, simple environment)
c. Decentralized organic (dynamic, complex environment)
d. Centralized organic (dynamic, simple environment)

47. Adapting to the Environment
Adapting at the boundaries.
a. Buffering is creating supplies of excess resources in case of unpredictable needs.
b. Smoothing is leveling normal fluctuations at the boundaries of the environment.
Adapting at the core.
a. Flexible process allows for adaptation in the technical core to meet the varied and changing demands of customers.

48. Influencing Your Environment
Managers and organizations can develop proactive responses aimed at changing the environment
Independent strategies are strategies that an organization acting on its own uses to change some aspect of its current environment.
Cooperative strategies are strategies used by two or more organizations working together to manage the external environment.

49. Ways that managers can influence their environment
Exhibit 3.5

50. Ways that managers can influence their environment
Competitive aggression-exploiting a distinctive competence or improving internal efficiency for competitive advantage(aggressive pricing, comparative advertising)
Competitive pacification-independent action to improve relations with competitors
Public relations-establishing and maintaining favorable images in the minds of those making up the environment(e.g. Sponsoring sporting events)

51. Voluntary action-voluntary commitment to various interest groups, causes, and social problems
Legal action-engaging the company in a private legal battle
Political action-efforts to influence elected officials

52. Cooperative Action Contracts Cooptation Coalition
Cooperative strategies
Strategies used by two or more organizations working together to manage the external environment.
Contracts
Cooptation
Coalition

53. Change the Boundaries of the Environment
Strategic maneuvering is the organization’s conscious efforts to change the boundaries of its task environment. It can take four basic forms:
a. Domain selection is the entrance by a company into another suitable market or industry.
b. Diversification occurs when a firm invests in different types of businesses or products, or when it expands geographically to reduce its dependence on a single market or technology.
c. A merger or acquisition takes place when two or more firms combine, or one firm buys another, to form a single company.
d. Divestiture occurs when a company sells one or more businesses.

54. Three criteria to help you choose the best approach
Prospectors are companies that continuously change the boundaries of their task environments by seeking new products and markets, diversifying and merging, or acquiring new enterprises.
Defenders are companies that stay within a more limited, stable product domain.
Three criteria to help you choose the best approach
1. Managers need to change what can be changed.
2. Managers should use the appropriate response.
3. Managers should use responses that offer the most benefit at the lowest cost.

55. Change the Boundaries of the Environment
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 of 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

56. Three Criteria Help You Choose the Best Approach
Managers need to change what can be changed
Managers should use the appropriate response
Managers should choose responses that offer the most benefit at the lowest cost

57. Organization Culture What is an organizational culture?
Internal environment refers to all relevant forces inside a firm’s boundaries, such as its managers, employees, resources, and organizational culture.
Organizational culture is the set of important assumptions about the organization and its goals and practices that members of the company share.
1. Strong cultures
a. Everyone understands and believes in firm’s goals, priorities, and practices.
b. An advantage if appropriate behaviors are supported.
2. Weak cultures
a. Different people hold different values
b. Confusion about corporate goals
c. Not clear what principles should guide decisions

58. Organization Cultures
Companies give many clues about their culture
1. Culture can be diagnosed through the following:
a. Corporate mission statements and official goals.
b. Business practices.
c. Symbols, rites, and ceremonies.
d. The stories people tell.

59. Creation and Maintenance of Organizational Cultures
Organizational Heroes
Organizational Stories
Company Founder
A primary source of organizational culture is the company founder. For example, Thomas J. Watson (IBM, Sam Walton (Wal-Mart), Bill Gates (Microsoft), and Frederick Maytag (Maytag) create organizations in their images that they imprint with their beliefs, attitudes, and values.
When the founders are gone, the organizational culture is sustained through stories and heroes.
Organizational stories make sense of organizational events and changes and emphasize culturally consistent assumptions, decisions, and actions. For example, at Wal-Mart, stories abound about the thriftiness of Sam Walton.
Second, organizational culture is sustained by recognizing and celebration heroes, admired for their qualities and achievements.
5.1

60. Levels of Organizational Culture
Symbolic artifacts
Behaviors
1. Surface Level
SEEN
What people say
How decisions are made
2. Expressed Values and Beliefs
HEARD
Beliefs and assumptions
Rarely discussed
3. Unconsciously Held Assumptions and Beliefs
BELIEVED
As shown in exhibit 3.4, organizational culture exists on three levels:
At surface level, the reflections of an organization’s culture can be seen, heard, or observed.
Next are the values and beliefs expressed by the company. By listening to what people say and how decisions are made, those values and beliefs become clear.
Finally, unconsciously held assumptions and beliefs are buried below the surface. These are the unwritten views and rules that are strongly held and widely shared, but are not discussed or thought about unless someone attempt to change them or violates them.
5.3

61. Organization Cultures
Four types of organizational culture
a. Group culture - flexible, internal focus
b. Hierarchical structure - controlling, internal focus
c. Rational culture - controlling, external focus
d. Adhocracy - flexible, external focus

62. Competing Values Model of Culture
Exhibit 3.7

63. Organization Cultures
Cultures can be leveraged to meet challenges in the external environment
1. Managing a company’s culture is one of the most important tools for implementing internal change.
2. Espouse lofty ideals and visions for the company
3. Give constant attention to mundane, daily details
4. CEO’s need to embody the vision of the company

64. Video: Pike Place Fish Market
What does it mean at Pike Place Fish to be world famous? Why does it take some new employees months to understand this concept?
What role does organizational culture play in Pike Place Fish’s quest to be world famous? Why are other firms such as Coffee Bean & Tea Leaf adopting the “fish” philosophy?
How does Pike Place Fish create the context for workers to reach their maximum potential? What role does socialization and mentoring play in creating and nurturing this atmosphere?
At Pike Place Fish Market, being world famous means making a difference in the lives of their customers. Providing this experience takes total commitment on the part of employees.
A hands-off management style allows each employee the opportunity to contribute to his or her fullest potential. Other companies are adopting the “fish” philosophy because it has proven so successful at Pike Place. Socialization and mentoring play a significant role in the atmosphere at Pike Place. Anyone can be a coach/mentor and everyone is allowed to coach others. When coaching is needed, everyone has the responsibility to step up and contribute their talents.