Welcome to AB140 The Foundations of Management(the Environment of Business)

Michael B. McKenna.

Unit 2 Outcomes

• Describe the business organization as an open system

• Identify the role of internal and external environmental factors in business

• Identify significant past and current management theories

Businesses are Open Systems

“The essence of a business is outside itself.” – Peter Drucker

Organization Inputs and Outputs Businesses are Open Systems

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Open Systems

• Open systems

-Organizations that are affected by, and that affect, their environment.

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What are Inputs and Outputs

Inputs: Goods and services that organizations take in and use to

create products or services.

Outputs: The products and services that organizations create.

Open Systems

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

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The External Environment

Bateman/Snell: Management

Laws and RegulationsRegulators 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

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Managing the Macro Environment

The economy affects a company’s valueTechnology is changing every business functionDemographics describe employees and customersSocial issues shape attitudes toward your company and its productsLaws and regulations

•Government Agencies

Competitive Environment

Who is the competition?How do they compete?What are competitors doing?

New Entrants

New entrants arise when barriers to entry are low

Barriers to entry – conditions that prevent new companies from entering an industry

Government policy (e.g., patent laws)Capital requirements (start-up costs)Brand identification (consumer brand loyalty)Cost disadvantages (Established economies of scale)Distribution channels (e.g., supermarket shelf space)

Substitutes and Compliments

SubstitutePotential threat Customers use it as an alternative, buying less of one kind of product but more of another.

Complement: Potential opportunityCustomers buy a product because it is used in conjunction with another product

Substitutes and Compliments

Substitute Movie Theater vs Redbox Blockbuster,

Netflix, video streamingcola vs bottled water

Complement: Printers and ink cartridges.New homes and appliances.

Managing Substitutes

Technological advances and economic efficiencies allow for rapid development of substitutes

Potential substitutes require management attention

Resources from SuppliersPeople – from schools, colleges and

universitiesRaw materials – from producers,

wholesalers, and distributorsInformation – from researchers and

consulting firmsFinancial capital – from banks and

other sources

Suppliers are important because…

They can:Raise their pricesProvide poor quality goods and servicesFail to provide human resources

Management Theories

Scientific

Behavioral

Systems

Contingency

Scientific/Classical Approach• Late 1800’s• Engineering approach• “One best way”

• Task definition• Dividing and simplifying tasks

• Frederick Taylor, Fayol, etc.• Our current POLC is derived from Henri Fayol’s Theory

circa 1917!Introduced task definition and specific measurement of the work process. Around between 1900 until 1940. Taylor believed that productivity problems of the day were due to the lack of management attention to workers.

In general is this theory applicable today?

Behavioral Approach• Early 1900’s• Social Sciences approach (employees want good

social relationships in the workplace leading to producing more output).

• Need to understand people attitudes and behaviors. The Behavioral or Systems approach views management organizations as sets of interrelated parts to be managed as a whole with the purpose of achieving a common goal.

• Hawthorne ExperimentDo you believe this is more how companies

operate?

Systems Approach• 1930-1940• Organization is a set of interrelated parts that

can be managed as a whole (each person has a job to do but no one job is more important than another). Orchestra analogy – everyone is needed to “play beautiful music”.

• Inputs, transformation, output, feedback• W. Edward Deming

• Continuous improvement and process control

Is this theory applicable in business today?

Contingency Approach

• 1960’s• “It depends”• Identify key variables in each situation.• Understanding the relationship among the

variables• Recognizing the causal effects of management

decisions.Organizations respond to differing environments

Unit 2 Assignments

• Reading, pgs 26-35• Discussion Question – Substitutes and compliments

• Assignment

For this assignment, you must watch the video presentation on the Evolution of Management. You will find the video on page 2 of the Assignments page in your course.

Explain how the theories presented are different from one another State which management theory you think is more important and why.

Respond in a paper consisting of 100 words and submit your paper to the Dropbox.

• Review