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Chapter

2
The External Environment and Organizational Culture

McGraw-Hill/Irwin Management, 7/e

Copyright 2007 The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives
After Studying Chapter 2, You will know: Understand how environmental forces influence

organizations, as well as how organizations can influence their environments Understand how to make a distinction between macroenvironment and the competitive environment Understand why managers and organizations should attend to economic and social developments Understand how to analyze the competitive environment Understand how organizations respond to environmental uncertainty Understand how an organizations culture affects its response to its environment

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Introduction and Review

Organizations are open systems

Organizations affect and are affected by the

external environment The external environment has two components Macro-Environment Competitive Environment

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The Macroenvironment
The most general elements in the external

environment that potentially can influence strategic decisions Top executives must consider external factors before taking any action

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Components of the Macroenvironment

Laws and Politics

Economy
Technology Demographics Social Values

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The Competitive Environment

A smaller environment

that includes the specific organizations with which the organization interacts Includes:
rivalry among current

competitors threat of new entrants threat of substitutes power of suppliers power of customers

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Customer Service
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

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Customer Service
Your most unhappy customers are your greatest source of learning.
- Bill Gates

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Environmental Analysis
Managers must understand how the

environment affects their organization It is difficult to predict how certain events will affect both the environment and the organization which creates uncertainty

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Environmental Scanning
Searching and sorting through information

about the environment Commonly asked questions Who are our current competitors Are there few or many entry barriers to our industry? What substitutes exist for our product or service? Is the company too dependent on powerful suppliers? Is the company too dependent on powerful customers?

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Environmental Scanning

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Environmental Scanning
Using environmental scanning helps

managers develop competitive intelligence (information that helps managers determine how to compete better) Other tools for environmental scanning
Scenario development Forecasting Benchmarking

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Responding to the Environment

Managers must respond effectively to their

environment Response options can be grouped into three categories Adapting to the environment Influencing the environment Select a new environment

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Adapting to the Environment

Coping with

environmental complexity Organizations tend to adapt by decentralizing decision making Create buffers or utilize smoothing techniques

Coping with

dynamism in the environment Organizations tend to establish more flexible structures Create flexible work processes

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Adapting to the Environment

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Influencing your Environment

Proactive responses aimed at changing the

environment Independent Action Cooperative Action

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Selecting a new environment

This is referred to as strategic maneuvering

An organizations conscious efforts to change

he boundaries of its task environment There are several strategic maneuvers to choose from Domain selection entrance by a company into another suitable market or industry Other options include diversification, merger/acquisition, and divestiture

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Choosing a Response Approach

Organizations should attempt to change appropriate

elements of the environment Organizations should choose responses that focus on pertinent elements of the environment Companies should choose responses that offer the most benefit at the lowest cost

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Culture and the Internal Environment of Organizations

Organizational culture is the set of important

assumptions about the organization and its goals and practices that members of the company chare Maybe difficult to define easily; but it can often be sensed almost immediately Cultures can be weak or strong (strong cultures can have a great influence on how people think and behave

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Diagnosing Culture
Clues to Culture Mission statements and official goals Symbols, Rites, and Ceremonies The stories people tell Types of cultures Group internally oriented and flexible; tends to be based n values and norms Hierarchical Culture internally oriented by more focus on control and stability Rational culture externally oriented and focused on control through productivity, planning, and efficiency Adhocracy externally oriented and flexible; emphasizes change in which growth, resource acquisition and innovation are stressed

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Diagnosing Culture

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Looking Ahead
Chapter 3: Managerial Decision Making The kinds of decisions you will face as a manager How to make rational decisions The pitfalls you should avoid when making

decisions The pros and cons of using a group to make decisions The procedures to use in leading a decisionmaking group How to encourage creative decisions The processes by which decisions are made in organizations How to make decisions in a crisis

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Open Systems

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External Environment

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Laws and Politics

U.S. government policies both impose

strategic constraints and provide opportunities The government can affect business opportunities through tax laws, economic policies, and international trade rulings Regulators are specific government organizations in a firms more immediate task environment
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Economy
The economic

Twelve month comparison of Stock Markets

environment is created by complex interconnections among the economies of different countries Economic conditions change over time and are difficult to predict
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Technology
Technology creates

new products, advance production techniques, and better ways of managing and communicating

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Demographics
The measures of various characteristics of the

people comprising groups or other social units

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Social Values
The Honda FCX, the first Hydrogen powered fuel cell vehicle, was the first car in the world to be certified as a Zero- Emission Vehicle.

Societal trends regarding how people thing and

behave have major implications for management

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Rivalry Among Current Competitors

Step one: Identify the

competition Small domestic firms Strong regional competitors Companies exploring new markets Overseas firms New entries to the market Step two: How do they compete?
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Threat of New Entrants

New entrants into an industry compete with

established companies By creating barriers to entry (conditions that prevent new companies from entering an industry) the threat of new entrants is less serious Barriers to entry include government policy, capital requirements, brand identification, cost disadvantages, and distribution channels

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Threat of Substitute Products

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Power of Suppliers
Suppliers provide the resources needed for

production Organization are at a disadvantage if they become overly dependent on any powerful supplier Switching costs are fixed costs buyers face if they change suppliers Supply chain management is the process of managing the entire network of facilities and people that obtain raw materials from outside the organization, transform them into products, and distribute them to customers
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Power of Customers
Customers purchase the products or services

an organization offers Final consumers are those individuals that purchase products in their finished form Intermediate consumers are individuals who purchase raw materials or wholesale products before selling them to final customers Customers can demand lower prices, higher quality, unique product specifications, or better service Customers are powerful if they make large purchases or if they can easily find alternative places to buy Return

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Environmental Uncertainty
Managers do not

have enough information about the environment to understand or predict the future

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Independent Action

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Cooperative Action

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Strong Cultures

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