Organizational EnvironmentsExternal environment – everything outside an organization’s boundaries that might affect it.

General environmentTask environment

Internal environment – the conditions and forces within an organization.Not all parts of the environment are equally important to all organizations. [small organizations do not have BoDs, but corporations are required to; private schools worry less about economic conditions as do schools supported by the government, etc]

See Figure 3.1, page 75.

Figure 3.1

Organization and Its Environment

The External EnvironmentGeneral environment is the set of broad dimensions and forces in an organization’s surroundings that create its overall context.

International dimension Technological dimensionPolitical-legal dimensionSocio-cultural dimensionEconomic dimension

The External Environment. . .(continued)

Task environment consists of specific organizations or groups that influence an organization.

CompetitorsCustomersSuppliersStrategic partnersRegulators

The General EnvironmentEconomic Dimension

Overall health and vitality of the economic system in which the organization operates.Usually influenced by economic growth, inflation interest rates and unemployment.

The General Environment. . .(continued)

Technological Dimension

Methods available for converting resources into products or services.Examples include:

CAD (computer-assisted design) techniquesAssembly-line techniques for car manufacturing and hamburger assembly at McDonald’sUse of internet in all areas of businessIntegrated business software systems

The General Environment. . .(continued)

Socio-cultural DimensionCustoms, values and demographic characteristics of the society in which the organization functions.Socio-cultural processes determine the products, services and standards of conduct that society is likely to value.Consumer tastes change over time – preferences for color, style, taste, etc change from season to season. [McDonald’s response to healthier food selections]

Socio-cultural factors influence how workers feel about their jobs and organizations.Appropriate business conduct varies from culture to culture.

The General Environment. . .(continued)

Political-Legal DimensionRefers to government regulation of business and the relationship between business and government.

The legal system partially defines what an organization can and cannot do.In western countries, periods of ‘pro-business’ and ‘anti-business’ climates can affect how businesses operate. [mergers and acquisitions may not be possible due to worry about organizations becoming too large and running small businesses out of business.]

Political stability with other countries can affect businesses willingness to trade with those countries.

The General Environment. . .(continued)

International DimensionThe extent to which an organizations is involved in or affected by business in other countries.Multinational firms are clearly affected by businesses in other countries. [car and aircraft manufacturers, restaurants, electronics firms, etc]Advances in transportation and information technology have linked all parts of the world, no matter how remote.Virtually every organization is affected by the international dimension of its general environment.

See Figure 3.2, page 77.

Figure 3.2

McDonald’s General Environment

The Task Environment

Provides useful information more readily than does the General Environment because the manager can identify environmental factors of specific interest to the organization.

Public pressuregroups Suppliers Customers

Government Labor unions

Competitors

The Organizational Environment

TheOrganization

The Task Environment. . . (continued)

Competitors

Other organizations that compete with our organization for resources.Most obvious resource is customer dollars.Organizations compete for bank loans, property, quality labor, technological breakthroughs, patents, scarce raw materials.

The Task Environment. . . (continued)

CustomersWhoever pays money to acquire an organization’s products or services.Customers of major organizations may include: schools, hospitals, government agencies, wholesalers, retailers and manufacturers.Customers have more discriminating tastes and new products’ and services’ expectations.Companies who expand internationally face critical differences [no beef served in India, alcohol served in Germany and France as a part of the menu].

The Task Environment. . . (continued)

Suppliers

Organizations that provide resources for other organizations.McDonald’s depends on Heinz for its ketchup packets and Coca-Cola for its soft drinks.

The Task Environment. . . (continued)

Strategic Partners (Allies)

Two or more companies that work together in joint ventures or similar arrangement.McDonald’s with Wal-Mart and Disney.Strategic partnerships allow companies to share expertise they lack, spread risk and open new market opportunities.Usually occurs with international firms. [Ford shares a distribution and service center in South America with Volkswagen and builds minivans in the US with Nissan]

The Task Environment. . . (continued)

RegulatorsA unit that has the potential to control, legislate or otherwise influence the organization's policies and practices.

Regulatory agencies – created by the government to protect the public from certain business practices or to protect organizations from one another. [EPA, SEC, FDA, EEOC]

Interest groups – organized by their members to attempt to influence organizations. No official power, but use the media to call attention to their positions. [NOW, MADD, NRA, the Sierra Club, Ralph Nader’s Center for the Study of Responsive Law, Consumers Union, Better Business Bureau, etc].

See Figure 3.3, page 79.

Figure 3.3

McDonald’s Task Environment

The Internal EnvironmentInternal Environment consists of:

OwnersBoard of DirectorsEmployeesPhysical Work EnvironmentOrganizational Culture

The Internal Environment. . . (continued)

OwnersPeople who can claim property rights to an organization.

Single individual who establishes and runs a small business.Partners who jointly own a business.Shareholders who own shares of stock in a corporation or other organization.Companies who own other companies which are run as wholly owned subsidiaries by the parent companies. [McDonald’s owns bakeries that supply it with buns and have partial ownership in other chains.]

The Internal Environment. . . (continued)

Board of Directors

Governing body elected by a corporation's stockholders and charged with overseeing the general management of the firm to ensure that it is being run in a way that best serves the stockholders’ interests.

The Internal Environment. . .(continued)

EmployeesThe nature of the workforce is changing in terms of gender, ethnicity, age, etc.Workers are also demanding more job ownership – partial ownership in the company or more say in how they perform their jobs.Companies are relying on ‘temps’ more – less salary and benefits cost – but no company loyalty.Labor unions are presenting management with another layer with which to deal – some companies deal with more than one union.

The Internal Environment. . .(continued)

Physical Work EnvironmentAn important consideration for many businesses.Construction supervisors may rely on wireless communication equipment to keep in touch with various work crews.Facilities may be spread out among various buildings in the city, in rural or suburban areas, or in campus-like facilities.Some facilities have traditional offices on each side of a hall, some modular cubicles with partial walls, or an even more open arrangement.

The Internal Environment. . .(continued)

Culture

A set of values, beliefs, behaviors, customs and attitudes that helps the members of the organization to understand what it stands for, how it does things and what it considers important.Plays an important part in shaping management behavior.

Organization-Environment Relationships

Three basic perspectives can be used to describe how environments affect organizations:

1. Environmental change and complexity2. Competitive forces3. Environmental turbulence

1. Environmental Change and Complexity

James D Thompson theorized that organizational environment can be described along two dimensions:

Degree of change – the extent to which the environment is relatively stable or relatively dynamic.Degree of homogeneity – the extent to which the environment is relatively simple (few elements, little segmentation) or relatively complex (many elements, much segmentation).

These two dimensions interact to determine the level of uncertainty faced by the organization.

Environmental Change and Complexity. . . (continued)

Uncertainty – unpredictability created by environmental change and complexity.

Least environmental uncertainty is faced by organizations with ‘stable’ and ‘simple’ environments. [Subway and Taco Bell focus on certain segments of the consumer market, produce a limited product line, have a constant source of suppliers and face relatively consistent competition]

Organizations with ‘dynamic’ but ‘simple’ environments generally face a moderate degree of uncertainty [clothing manufacturers and certain CD producers who target a certain kind of clothing or CD buyer but are alert to changing tastes]

Environmental Change and Complexity. . . (continued)

Moderate amount of uncertainty results in

organizations with stability and complexity. [automobile manufacturers must interact with many suppliers, regulators, consumer groups and competitors, yet change occurs quite slowly in this industry despite changes in the styles of cars]

Very dynamic and complex environmental

conditions create a high degree of uncertainty. occurs in the technology area due to rapid rate of innovation and change in consumer markets which affect the industry, their suppliers and their competitors. Intel, Sony, Compaq, IBM, Apple and internet-based firms like eBay and Amazon.com face high levels of uncertainty]

See Figure 3.4, page 90.

Figure 3.4: Environmental Change, Complexity, and Uncertainty

2. Competitive ForcesMichael E Porter proposes that managers should view the organizational environments in terms of five competitive forces:

The threat of new entrantsCompetitive rivalryThe threat of substitute productsThe power of buyersThe power of suppliers

Competitive Forces. . .(continued)

The threat of new entrantsThe extent to which new competitors can easily enter a market or market segment.Entrance is easier for market requiring a small amount of capital to open. [dry cleaner, pizza, hamburger or sandwich shop, etc.]

More difficult when it takes a tremendous investment in plant, equipment and distribution systems [automobile market, etc.]The internet has reduced the costs and other barriers of entry into many market segments so the threat has increased for many firms.

Competitive Forces. . .(continued)

Competitive rivalryThe nature of the competitive relationship between firms in the industry.Large firms, dominant in the field, engage in price wars, comparative advertising and new-product introductions.

Examples include: Coke and Pepsi; American Express and Visa; Kodak and Fuji; US and foreign auto makers.

Small establishments, in contrast, do not generally engage in such practices.

Competitive Forces. . .(continued)

The threat of substitute products

The extent to which alternative products or services may take the place of or diminish the need for existing products and/or services.Personal computers (PCs) have virtually eliminated the need for calculators, typewriters and large mainframe computers.Sugar and salt substitutes are used more often.DVD players will render VCRs obsolete in the next few years.

Competitive Forces. . .(continued)

The power of buyers

The extent to which buyers of the products or services in an industry have the ability to influence the suppliers.Relatively few potential buyers for aircraft. Therefore, buyers have considerable influence over the price they are willing to pay, the delivery date of the order, etc.Buyers have virtually no power with products that have very many willing buyers.

Competitive Forces. . .(continued)

The power of suppliers

The extent to which suppliers have the ability to influence potential buyers.The power of the supplier depends on the product being offered. The more restricted the service or product, the more power to the supplier. [electricity providers, telephone/internet access]

Small wholesaler of vegetables has little power, since if people do not like the product, they can easily find an alternative supplier.

3. Environmental TurbulenceEnvironmental change or turbulence which occurs with no warning at all.

Most common is an organizational crisis of some sort.9/11 affected travel, international and domestic businesses.Workplace violence – unhappy or dismissed workers assault other workers.Spread of computer viruses that can shut down businesses around the world. [Love Bug virus in 2000] Far too few organizations have developed crisis plans and special teams to deal with such events.

How Organizations Adapt to Their Environment

Basic Techniques for Adapting

• Information Technology• Strategic Response• Mergers, Acquisitions and Alliances• Organization Design and Flexibility• Direct Influence• Social Responsibility

Adapting – Information Technology

Important when forming an initial understanding of the environment and watching for signs of change.Boundary Scanner is an employee [sales rep or purchasing agent] who spends much time in contact with others outside the organization. Can keep up with what is going on in other organizations.

Adapting – Information Technology

Environmental Scanning – managers monitor the environments through observation and reading.Management Information Systems [MIS] within the organization must gather and organize information valuable to all managers or specialists.

Adapting – Strategic Response

Strategic Options may include:

• Maintaining the present course• Expanding the business [going international]• Shrinking the business or shutting down

certain areas

Adapting – Mergers, Acquisitions and Alliances

Merger – two or more firms come together under one name. [Banoco and Bapco]

Acquisition – one firm buys another firm out. [Starbucks and Seattle Coffee Company]

Hostile Takeover – a firm takes another firm over by force.

Alliance – two or more firms undertake a venture together, but each keeps its own identity. [British Airways and American Airlines; McDonald’s with Disney and Wal-Mart]

Adapting – Organization Design and Flexibility

Mechanistic Organization Design:Firms operating in low levels of uncertainty who operate under rigid rules, regulations and standard operating procedures [SOPs].Managers have little flexibility with decision making.

Organic Organization Design:Firms operating in high levels of uncertainly who operate with relatively few SOPs.Managers have great flexibility with decision making and can react quickly to environmental changes.

Adapting – Direct Influence

Suppliers may be influenced to sign long-term contracts with fixed prices.Companies may become their own suppliers. [McDonald’s owns bakeries; Campbell’s makes its own soup cans, etc.]

Certain activity may affect an organization’s competitors. [car manufacturer discounts and upgrades in warranties, electronic products warranty and price changes, etc]

Advertising to show people new uses for products, finding new customers, taking customers from competitors, etc.Lobbying and bargaining with government and other regulating agencies to influence decisions that might affect the organization/industry.

Adapting – Social Responsibility

Social Responsibility is the set of obligations an organization has to protect and enhance the societal context in which it functions.

Organizational stakeholders include:Person or organization directly affected by the practices of an organization and has a stake in its performance – suppliers, employees, customers, creditors, interest groups, trade associations, local community.Natural environment – air, water, noise pollution, recycling, waste control, etc.General social welfare – charities, supporting events, boycotting products from certain countries.

See Figure, 3.5, page 93.

How Organizations Adapt to Their Environments:

Informationmanagement

Socialresponsibility

Strategicresponses

TheOrganization

Directinfluence

Organizationdesign andflexibility

Task environment

General environment

Mergers,takeoversacquisitions,alliances