Principles of Management

Dr. Karim KobeissiIslamic University of Lebanon - 2013

8Chapter

The Management Environment

Learning Objectives

• Explain what the external environment is and why it’s important.

• Discuss how the external environment affects managers.

• Define what organizational culture is and explain why it’s important.

• Describe how organizational culture affects managers.

What Is External Environment?

External environment refers to the factors, forces, situations, and events outside the organization that affect its performance.

No successful organization, or its managers, can operate without

understanding and dealing with the dynamic external

environment that surrounds it. For example, a volcanic eruption

in Iceland in 2010 prevented delivery of auto parts that led to a

shutdown at a BMW plant in South Carolina and a Nissan Motor

facility in Japan.

Components of External Environment

The external environment includes six components:

1) The economic component encompasses factors such as interest rates,

inflation, changes in disposable income, stock market fluctuations, and

business cycle stages.

2) The demographic component includes trends in population characteristics

such as age, race, gender, education level, geographic location, income, and

family composition.

3) The technological component focuses on scientific and industrial

innovations.

Components of External Environment (con)

4) The socio-cultural component is concerned with societal

and cultural factors such as values, attitudes, trends,

traditions, lifestyles, beliefs, tastes, and patterns of behavior.

5) The political/legal component looks at federal, state, and

local laws, as well as other countries’ laws and global laws. It

also includes a country’s political conditions and stability.

6) The global component encompasses issues associated with

globalization and a world economy.

Components of External Environment

How Has the Economy Changed?

• Began with disorder in mortgage markets

• Spread to businesses when broader credit markets

collapsed.

• Characterized by foreclosures1, high rates of

unemployment, huge public debt, and widespread

social problems

How Will Business Change?

• The role of the U.S. government in financial markets

and in consumer protection will increase

Managers should stay informed about the additional

regulations and increased enforcement and oversight

of current regulations in the economic component.

What Role Do Demographics Play?

• Demographics refers to the characteristics of a population used for purposes of social studies. It has a significant impact on how managers manage and include such factors as age, income, sex, race, education level, ethnic makeup, employment status, geographic location, and more.

• The size and characteristics of a country’s population can have a significant effect on what it can achieve. For example, experts say that by 2050, small European nations with low birth rates, such as Austria, Belgium, Denmark, Norway, and Sweden, are expected to drop off the list of the 30 biggest economies.

How Does External Environment Affect Managers?

There are three ways that the external environment affects managers and organizational outcomes:

1. Its impact on jobs and employment

2. The amount of environmental

uncertainty

3. The nature of stakeholder

relationships.

The Impact on Jobs & Employment

As external environmental conditions change, managers face the impact of these changes on jobs and employment. Economists predict that about one quarter of the 8.4 million U.S. jobs eliminated during the most recent economic downturn won’t be restored. Such readjustments create challenges for managers who must balance work demands with having enough people with the right skills to do the organization’s work. Changes in external conditions not only affect the types of jobs available but they also affect how the jobs are created and managed. For example, many employers use flexible work arrangements and contract freelancers or temporary workers.

The Amount of Environmental Uncertainty

Environmental uncertainty refers to the degree of change and complexity in an organization’s environment.

• The first dimension of uncertainty is the degree of unpredictable change; that is, a stable environment experiences minimal change and a dynamic environment experiences frequent change. For example, a stable environment might have no new competitors, few technological breakthroughs by current competitors, little pressure from groups trying to influence the organization, and so on.

• The other dimension of uncertainty describes the degree of environmental complexity, which looks at the number of components (economic, demographic, technical, socio-cultural, political/legal, and global) in an organization’s environment and the knowledge that the organization has about those components.

Assessing Environmental Uncertainty

Assessing Environmental Uncertainty

An organization with few competitors, customers, suppliers, or government agencies to deal with, or an organization that needs little information about its environment, has a less complex and more certain, stable environment, as seen in Cell 1.

Each of the four cells of the previous matrix represents different combinations of degree of complexity and degree of change.

• Cell 1 (a stable-simple environment) represents the lowest level of environmental uncertainty and Cell 4 (a dynamic and complex environment) represents the highest level of environmental uncertainty.

• Not surprisingly, managers have the greatest influence on organizational outcomes in Cell 1 and the least influence in Cell 4.

• Because uncertainty is a threat to an organization’s effectiveness, managers try to minimize it.

• Most industries today face more dynamic change, and consequently, their environments are more uncertain.

The Nature of Stakeholder Relationships

Stakeholders are any constituencies in an organization’s environment that

are affected by that organization’s decisions and actions. These groups

have a stake in, or are significantly influenced by, what the organization

does. In turn, these groups can influence the organization.

The nature of stakeholder relationships is another way in which the

environment influences managers. The more obvious and secure these

relationships, the more influence managers will have over organizational

outcomes.

Organizational Stakeholders

Why Manage Stakeholder Relationships?

Managers benefit from good management of stakeholder

relationships because stronger relationships can

improve the predictability of environmental changes,

lead to more successful innovations, foster a greater

degree of trust among stakeholders, and increase

organizational flexibility to reduce the impact of change.

What Is Organizational Culture?

Now that we’ve looked at the external environment of an

organization, let’s focus on the internal aspects of the

organization, specifically its culture.

Organizational culture is the shared values, principles, traditions,

and ways of doing things that influence the way organizational

members act. Organizational culture is important because of the

impact it has on decisions, behaviors, and actions of

organizational employees and managers.

Defining Culture and Its Impact

The definition of “culture” implies three things:1) Culture is a perception that cannot be physically touched

or seen, but is perceived based on what employees experience within the organization.

2) Organizational culture is concerned with how members perceive or describe the culture based on high agreement on what’s important, what defines good employee behavior, what it takes to get ahead, and so on, not with whether they like it.

3) Employees tend to describe the organization’s culture in similar terms regardless of their backgrounds or their work at different organizational levels.

How Can Culture Be Assessed?

An organization’s culture can be described using the seven dimensions shown in the next slide: Attention to Detail, Outcome Orientation, People Orientation, Team Orientation, Aggressiveness, Stability, and Innovation and Risk Taking. In many organizations, one cultural dimension is emphasized more than the others and essentially shapes both the organization’s personality and the way organizational members work.

• For instance, Sony Corporation focuses on product innovation, identified in this graphic as “innovation and risk taking.”

• In contrast, Southwest Airlines has made its employees a central part of its culture, illustrated in this graphic as “people orientation,” which the company shows by how it treats its employees.

The Culture’s Impact

Since introducing online sales in 1999, Zappos1 has put “extraordinary effort into building a desirable organizational culture” that espouses ten corporate values, headed by this value: “Deliver WOW through Service.”

• These values are literally paying off because, despite recent economic challenges, Zappos continues to thrive.

How Do Employees Learn the Culture?

Employees most commonly learn an organization’s culture through its:

• Stories• Rituals• Material symbols• Language

Where Does an Organization’s Culture Come From?

• Organizational culture derives from:– The founder’s biases and assumptions about what

the organization and its values should be.– What the first employees learned from their own

experiences.

How Does Organizational Culture Affect Managers?Organizational culture affects managers in two

primary ways:

•Through its effect on what employees do and how they behave.

•Through its effect on what managers do as they plan, organize, lead, and control.

How Does Culture Affect What Employees Do?The more employees accept and commit to the

organization’s key values, the stronger the culture is.

• A strong culture reflects employee acceptance of, and commitment to, the organization’s key values.

• The stronger the culture, the more it affects employee and manager actions.

• A strong culture prevent the need for formal rules and regulations.

How Does Culture Affect What Managers Do?

An organization’s culture, especially a strong one, influences and

constrains the way managers plan, organize, lead, and control.

Such constraints are rarely explicit and all managers must

quickly learn how to respond in their organization.

Managerial Decisions Affected by Culture

Case Study: Honest Tea Company

The strong culture of Honest Tea Company is, as the name implies, all about honesty. Seth Goldman, cofounder and “TeaEO” of Honest Tea, started the company with a mission to create truly healthy, organic beverages. In growing his company, Goldman used the same authenticity, integrity, and purity in crafting his products as he conducted business and his relationships with employees, suppliers, and customers.

Key values of Honest Tea include: • Communicating with openness and trust, and• Engaging employees in all aspects of the business, focusing on

corporate social responsibility, and committing to high environmental standards.