The External Environment

and Organizational Culture

Chapter 2

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
2-2
Learning Objectives

 Describe how environmental forces influence

organizations and how organizations can influence
these environments

 Distinguish between the macroenvironment and the

competitive environment

 Explain why managers and organizations should

attend to economic and social developments

 Identify elements of the competitive environment

2-3
Learning Objectives

 Summarize how organizations respond to

environmental uncertainty

 Define elements of an organization’s culture

 Discuss how an organization’s culture affects its

response to its external environment

2-4
The External Environment

The external environment refers to all relevant forces outside a firm’s

boundaries such as competitors, customers, the government, and the
economy
Open systems Organizations that are affected by, and that affect, their
environment

Inputs Goods and services

Outputs The products and services organizations create

2-5
The External Environment

2-6
The External Environment

The competitive environment and the macroenvironment are components of

the external environment

Competitive The firm and its rivals, suppliers, customers

environment (buyers), new entrants, and substitute or
complementary products

Macroenvironment The general environment; includes governments,

economic conditions, and other fundamental factors
that generally affect all organizations

2-7
The Macroenvironment

Laws &
The Economy
Regulations

Social Issues/
Technology Demographics Natural
Environment

2-8
The Competitive Environment

2-9
The Competitive Environment

Competitors New Entrants

Substitutes/
Suppliers Customers
Complements

2-10
Environmental Analysis

 Managers must understand their environment

to identify opportunities and threats

 Environmental analysis is important when:

 Designing new products
 Scheduling production
 Developing marketing plans

2-11
Environmental Analysis

 Information not always easily available

 When the environment is relatively unpredictable,
managers face environmental uncertainty
 Uncertainty arises from complexity and dynamism

2-12
Environmental Scanning

 Environmental scanning means searching for

and sorting through information about the
environment

 Competitiveintelligence is information that

helps managers determine how to compete
better

2-13
Scenario Development

 Scenarios
 Narratives that describe a particular set of future
outcomes

 Effective
managers regard scenarios as living
documents, not prepared once then put aside

2-14
Forecasting

 Forecastingis used to predict exactly how

some variable or variables will change in the
future

 For example, firms may forecast

 How interest rates might change
 Demand for goods and services
 Labor supply and demand

2-15
Benchmarking

 Benchmarking
 The process of comparing an organization’s
practices and technologies with those of other
companies

 In other words, benchmarking attempts to

identify the best-in-class performance and
compare your organization to the best-in-class
organization

2-16
Responding to the Environment

 Threecategories of options in responding to

the environment
 Adapting to the environment
 Influencing the environment
 Selecting a new environment

2-17
Responding to Environmental
Uncertainty
 When uncertainty arises from environmental
complexity, organizations tend to adapt by
decentralizing decision making

 Decentralization requires empowerment

 Sharing power with employees, thereby enhancing
their confidence to perform their jobs and their
belief that they are influential contributors to the
organization

2-18
Responding to Environmental Dynamism

 Change from bureaucratic to organic

organizational structures

 Bureaucratic structures tend to be less flexible;

organic structures tend to be more flexible

2-19
Adapting at the Boundaries

 Bufferingcreates supplies of excess resources

to meet unpredictable needs

 Smoothing levels out normal fluctuations at the

boundaries of the environment

2-20
Adapting at the Core

 Flexibleprocesses allow for adaptation in

organizations’ technical core

 Firms sometimes will customize their goods

and services to meet the varied and changing
demands of customers.

2-21
Independent Action

 Independent strategies
 Strategies that an organization acting on its own
uses to change some aspect of its current
environment

A company uses independent strategies when

it acts on its own to change some aspect of its
current environment

2-22
Cooperative Action

 Cooperative action is opposite independent

action.

 Cooperativestrategies are strategies used by

two or more organizations working together to
manage the external environment

2-23
Changing the Environment You are In

2-24
Changing the Environment You are In

 Strategic maneuvering
 Anorganization’s conscious efforts to change the
boundaries of its task environment.

 Domain selection
 Entrance to a new market or industry with an
existing expertise

 Diversification
 Occurswhen a firm invests in a different product,
business, or geographic area

2-25
Changing the Environment You are In

 Mergers
 One or more companies combine with another
 Acquisitions
 One firm buys another
 Divestiture
 A firm sells one or more businesses
 Prospectors
 Continuously change the boundaries or their task
environment by seeking new products and markets,
diversifying and merging, or acquiring new enterprises
 Defenders
 Stay within a stable product domain as a strategic maneuver

2-26
Culture and the Internal Environment of
the Organization
 Organizational culture
 The set of important assumptions about the organization and
its goals and practices that members of the company share

 In strong cultures, the majority of people within the

organization agree on organizational goals

 In weak cultures, the majority of people within the

organization disagree on organizational goals

2-27
Managing Culture

 Top managers should espouse lofty ideas

 Give constant attention to new initiatives

2-28
Diagnosing Culture

 Corporate mission statements and official

goals

 Business practices

 Symbols, rites, and ceremonies

 The stories people tell

2-29
Types of Culture

Culture Definition

Group culture Internally oriented and flexible; values stability

Hierarchical culture Internally oriented; values and norms associated

with bureaucracy

Rational culture Externally oriented and focused on control

Externally oriented and flexible

Adhocracy

2-30
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)
 And many others

Return to
original slide 2-31
The Economy

 Complex interconnections among economies

of different countries

 External pressure of stock markets

 Periods of growth and recession

Return to
original slide 2-32
Technology

 Strategiesdeveloped around new

technologies can create a competitive
advantage

 Strategies that ignore or lag competitors

technology can lead to obsolescence and
extinction

Return to
original slide 2-33
Demographics

 Measuresof characteristics of the people who

make up groups or other social units

 Demographic trends
 Growth of the labor force
 Increasing education and skill levels
 Immigration
 Increased numbers of women in the workforce
 Increasingly diverse workforce

Return to
original slide 2-34
 Social Issues and the Natural
Environment

 Social trends include

 Delayinghaving children to focus on careers
 Domestic partners covered under employee benefit
programs

 Natural environmental issues affect

organizations reputations; reputations in turn
can affect competitiveness

Return to
original slide 2-35
Competitors

 Who is the competition?

 How do they compete? For example:

 Price
 New products
 Advertising campaigns

 Competition is most intense when

 There are many direct competitors
 Industry growth is slow
 Product/service is not easily differentiated

Return to
original slide 2-36
New Entrants

 New entrants compete with established

companies

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

 Barriers to entry make the threat of new

entrants less serious

Return to
original slide 2-37
Substitutes and Complements

 Substitutes are alternative products or

services
 Forexample, video games are substitutes for
watching television

 Complements are products or services that

increase purchases of other products
 For example, car insurance is a complement to
automobile purchases

Return to
original slide 2-38
Suppliers
 Suppliers provide resources or inputs needed
for production

 Switchingcosts are fixed costs buyer face if

they change suppliers

 Supply chain management is managing the

network of facilities and people that
 Obtain materials from outside the organization
 Transform them into products
 Distribute them to customers

Return to
original slide 2-39
Customers

 Customers purchase the goods or services

and organization offers.

 Final customers purchase products in their

finished form

 Intermediate customers purchase raw material

or wholesale products before selling them to
final customers

Return to
original slide 2-40
Environmental Uncertainty

 Environmental complexity
 The number of issues to which a manager must
attend as well as the interconnectedness of these
issues

 Environmental dynamism
 The degree of discontinuous change that occurs
within an industry

Return to
original slide 2-41
Competitive Intelligence

 Managers can begin developing competitive

intelligence by asking five questions

1) Who are our current competitors?

2) Are there few or many entry barriers to our industry?
3) What substitutes exist for our product or service?
4) Is the company too dependent on powerful
suppliers?
5) Is the company too dependent on powerful
customers?

Return to
original slide 2-42
Using Forecasting

 Use multiple forecasts and perhaps average their

predictions
 Remember that accuracy decreases the further into
the future you area trying to predict
 Forecasts are no better than the data used to
construct them
 Use simple forecasts (rather than complicated ones)
where possible
 Keep in mind that the important events often are
surprises and represent a departure from predictions

Return to
original slide 2-43