Chapter Three The Organizational Environment and Culture © 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor.

Chapter Three

The Organizational Environment and Culture

© 2013 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any

manner.  This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 

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Open Systems

Organizations are open systems Organizations that are affected by, and that

affect, their external environment.

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Open Systems

Inputs Goods and services

organizations take in and use to create products or services.

Outputs The products and

services organizations create.

Organizational Environment

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5.35.3

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Open Systems

External environment All relevant forces outside a firm’s boundaries,

such as competitors, customers, the government, and the economy.

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Open Systems

Macroenvironment The general

environment; includes governments, economic conditions, and other fundamental factors that generally affect all organizations.

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EnvironmentsExhibit 3.1

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Components of the General Environment

Laws and RegulationsEconomyDemographicsSocial Values

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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. 3-11

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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)

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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.

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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.

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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.

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Demographics

Demographics statistical

characteristics of a group or population such as age, gender, and education level

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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.

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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.

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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.

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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.

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Porter’s Five ForcesExhibit 3.2

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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

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Competitors

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

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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.

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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).

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Substitutes and Complements

Substitutes alternative products

or services

Complements products or services

that increase purchases of other products

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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

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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.

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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

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Environmental Analysis

Environmental uncertainty Lack of information needed to understand or

predict the future.

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Changing Environments

Environmental Change +

Environmental Complexity +

Resource Scarcity =

Uncertainty

Environmental Change +

Environmental Complexity +

Resource Scarcity =

Uncertainty

Characteristics ofChanging External Environments

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Environmental Complexity and Resource Scarcity

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Environmental Complexity: the number of external factors in the environment that affect organizations

Simple environments Complex environments

Resource Scarcity

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Resource Scarcity

The degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources(LCD factories)

Uncertainty

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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.

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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.

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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 predictions3-43

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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.

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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)

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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.

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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.

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Ways that managers can influence their environment

Exhibit 3.5

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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)

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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

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Cooperative Action

Cooperative strategies Strategies used by two

or more organizations working together to manage the external environment.

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Change the Boundariesof 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.

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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. 3-54

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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

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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.

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Creation and Maintenance of Organizational Cultures

Organizational HeroesOrganizational HeroesOrganizational StoriesOrganizational Stories

Company FounderCompany Founder

5.15.1

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Levels of Organizational Culture

Symbolic artifacts Behaviors

Symbolic artifacts Behaviors

1. SurfaceLevel

1. SurfaceLevel SEENSEEN

What people say How decisions

are made

What people say How decisions

are made2. Expressed Values

and Beliefs2. Expressed Values

and Beliefs HEARDHEARD

Beliefs andassumptions

Rarely discussed

Beliefs andassumptions

Rarely discussed

3. Unconsciously Held Assumptionsand Beliefs

3. Unconsciously Held Assumptionsand Beliefs BELIEVEDBELIEVED

5.35.3

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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

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Competing Values Model of Culture

Exhibit 3.7

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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

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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?