Organizational Environments
External environment – everything outside
an organization’s boundaries that might
affect it.
General environment
Task 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 Environment
General environment is the set of broad
dimensions
and
forces
in
an
organization’s surroundings that create
its overall context.
International dimension
Technological dimension
Political-legal dimension
Socio-cultural dimension
Economic dimension
The External Environment. . .
(continued)
Task environment consists of specific
organizations or groups that influence
an organization.
Competitors
Customers
Suppliers
Strategic partners
Regulators
The General Environment
Economic 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) techniques
Assembly-line techniques for car manufacturing and
hamburger assembly at McDonald’s
Use of internet in all areas of business
Integrated business software systems
The General Environment. . .
(continued)
Socio-cultural Dimension
Customs, 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 Dimension
Refers 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 Dimension
The 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.
The Organizational Environment
Public pressure
groups
Government
Suppliers
The
Organization
Competitors
Customers
Labor unions
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)
Customers
Whoever 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)
Regulators
A 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 Environment
Internal Environment consists of:
Owners
Board of Directors
Employees
Physical Work Environment
Organizational Culture
The Internal Environment.
. . (continued)
Owners
People 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)
Employees
The 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 Environment
An 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 complexity
2. Competitive forces
3. 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. . .
Moderate
amount
organizations
of
with
uncertainty
stability
and
(continued)
results
in
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 Forces
Michael E Porter proposes that
managers
should
view
the
organizational environments in terms
of five competitive forces:
The threat of new entrants
Competitive rivalry
The threat of substitute products
The power of buyers
The power of suppliers
Competitive Forces. . .
(continued)
The threat of new entrants
The 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 rivalry
The nature of the competitive relationship
between firms in the industry.
Large firms, dominant in the field, engage in
price wars, comparative advertising and newproduct 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 Turbulence
Environmental 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:
General environment
Task environment
Information
management
Social
responsibility
The
Organization
Mergers,
takeovers
acquisitions,
alliances
Direct
influence
Strategic
responses
Organization
design and
flexibility