The
Organizational
Environment
and Culture
Chapter Three
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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.
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Organizational Environment
5.3
6
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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Environments
Exhibit 3.1
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Components of the
General Environment
 Laws and Regulations
 Economy
 Demographics
 Social Values
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10
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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.
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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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18
19
20
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 Forces
Exhibit 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
Characteristics of
Changing External Environments
Environmental Change +
Environmental Complexity +
Resource Scarcity =
Uncertainty
37
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Environmental Complexity and
Resource Scarcity
Environmental Complexity: the number of
external factors in the environment that
affect organizations
Simple environments
Complex environments
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Resource Scarcity
Resource Scarcity
The degree to which an organization’s
external environment has an abundance
or scarcity of critical organizational
resources(LCD factories)
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Uncertainty
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 predictions
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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.
Contracts
Cooptation
Coalition
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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.
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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.
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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.
b.
c.
d.
Corporate mission statements and official goals.
Business practices.
Symbols, rites, and ceremonies.
The stories people tell.
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Creation and Maintenance of
Organizational Cultures
Company Founder
Organizational Stories
Organizational Heroes
5.1
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Levels of Organizational Culture
 Symbolic artifacts 1. Surface
 Behaviors
Level
 What people say
2. Expressed Values
 How decisions
and Beliefs
are made
 Beliefs and
3. Unconsciously
assumptions
Held Assumptions
 Rarely discussed
and Beliefs
SEEN
HEARD
BELIEVED
5.3
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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?
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