BMGT 364 MANAGEMENT AND ORGANIZATION THEORY
Michelle_Michy
PART2ESOURCE.docxEvolution of the Twenty-First Century Manager
Introduction to Management: Current Challenges in Management
PESTEL: A Framework for Considering Challenges
The PESTEL framework highlights six critical factors for management to consider regarding the general business environment.
Key Points
· Politics plays a role in business, as free markets and systems of control interact.
· Economic factors are metrics for measuring and assessing the health of a given economic region or environment.
· Social and demographic factors include the mentality of the individuals and consumers within a given market.
· Recognizing the technologies available to optimize internal efficiency and preventing a product or service from becoming obsolete are significant management challenges.
· Consumers and governments penalize companies that negatively impact the environment and reward those with a positive impact.
· Understanding the laws and regulations within specific regions is critical to avoid unnecessary legal costs.
Key Terms
· antitrust laws—laws to ensure that no company dominates an industry (e.g., by creating a monopoly)
· macro environment—the condition of the economy as a whole, which affects business
· gross domestic product (GDP)—fiscal measure of an entire region’s economic production over a specific time frame
Organizations face a variety of external factors, including both opportunities and threats, that affect short-term and long-term success in a given environment. PESTEL is an acronym for factors that are part of the macro environment. It represents the political, economic, social, technological, environmental, and legal influences a business encounters as it pursues its objectives.
PESTEL Factors
This chart illustrates the PESTEL factors that impact organizations.
Although analyzing the macro environment is a task, understanding the framework of basic influences allows for an organized and strategic approach to isolating each opportunity or threat. It is common to conduct a PESTEL assessment before making significant decisions or undertaking large projects. Understanding PESTEL factors is the first step toward addressing them properly.
Political
Politics plays a role in business, as free markets and systems of control interact. Political factors affecting business specifically revolve around taxes, import and export tariffs, environmental and labor laws, subsidies, and the stability of a given region of operations. As global economics now supersedes domestic economics for many businesses, companies must consider a number of opportunities and threats when expanding into new regions or identifying optimal areas for production, sales, or corporate headquarters.
Economic
Economic factors are metrics for measuring and assessing the health of a given economic microcosm within the entire global economy. These factors include exchange rates, gross domestic product (GDP), consumer purchasing indices, interest rates, inflation, and other indicators of economic health or direction. These indicators can reveal when conditions are positive for borrowing, whether an economy will be friendly to an industry, where businesses fluctuate substantially with GDP, consumer spending power, and other insights.
Social
Social factors could loosely be defined as demographic analysis—looking at the preferences or tendencies of consumers that an organization can leverage or that threaten its plans. For example, in the United States, consumers are becoming more health-conscious. This trend affords the food industry opportunities to create products to satisfy the desire for healthier options by diversifying their product lines or improving the nutritional value of existing products. The “green” movement is another trend that provides a macro-environmental opportunity and poses a potential threat to organizations.
Technological
Technology plays a growing role each year, and will continue to do so as research and development drive new innovations. Recognizing the potential technologies available to optimize internal efficiency is a powerful asset in management. Technology also presents a number of threats, as CD player manufacturers and Blockbuster stores can attest. These companies were hurt by “disruptive innovations” such as the MP3 player and Netflix. Keeping pace with and adapting to technology are important strategies to sidestep threats and embrace opportunities.
Environmental
The impact of business on the environment is a growing concern, and companies must consider both the social and political aspects of PESTEL in conjunction with environmental factors. Both consumers and governments penalize companies that adversely affect the environment: Governments levy fines on companies that don’t meet pollution-reduction mandates, and consumers switch brands when they perceive that a business is ignoring its environmental responsibilities. The environment can also benefit companies, by providing running water for a hydropower plant, for example.
Legal
The final factor in PESTEL concerns legal elements, which can relate to the political framework. Issues such as affirmative action, patent infringement (e.g., Apple v. Samsung), antitrust laws (e.g., United States v. Microsoft), and health and safety regulations can all significantly affect companies. Understanding the legal landscape is important for businesses that want to avoid pitfalls and operate responsibly.
The Challenge of Globalization
Globalization is the international integration of intercultural ideas, perspectives, culture, technology, and products and services.
Key Points
· Globalization highlights the growing interdependence between countries and the need for managers to address it appropriately within their strategies.
· The speed of modern globalization is often attributed to technological developments in communication and transportation that require managers to appropriately leverage these technologies internally.
· Multinational companies cumulatively employ nearly half of the world’s population, creating a need for managers with a strong international awareness.
· Managers must understand that some processes can be performed universally and internationally, while others must be done in a localized fashion, adhering to specific regions’ tastes and customs.
· Critics of globalization object to the ways it motivates international over domestic culture, and the negative environmental effects of business expansion.
· Seeing the potential opportunities in a global economy, knowing how to localize, and being able to avoid the negative aspects of an international marketplace can capture large value for effective managers.
Key Terms
· localizing—the act of altering a product or service to better fit a local environment
· intercultural—representing many different cultures simultaneously
· multinational enterprise—a business that operates in more than one country.
Globalization is a hot topic in the business world today, garnering enormous attention as imports and exports continue to rise and companies continue to expand across geographic, political, and cultural boundaries. By understanding the basic overview of the global economy, modern managers gain useful insights they can apply to their managerial responsibilities and to their organizations.
In general terms, globalization is the international integration of intercultural ideas, perspectives, products/services, culture, and technology. This has resulted in countries becoming interdependent. Specialization—arguably the root cause of globalization—allows specific regions to leverage their natural resources and abilities to efficiently produce specific products and services that they can trade for goods and services that other countries specialize in producing. Specialization has enabled a higher standard of living across the globe through higher efficiency, lower costs, better quality, and a more innovative and dynamic workforce.
Growth of Globalization
Rapid technological developments in transportation and communication have helped pave the way for modern globalization. They form the central system of international exchange, allowing businesses to create meaningful relationships worldwide with minimal time investment and costs. Management is tasked with ensuring these resources are available to employees and properly leveraged to optimize the geographic reach of a business’s operations. This has led to many multinational enterprises (MNEs) arguing that survival in the newly globalized economy requires international sourcing of raw materials, services, production, and labor.
From a managerial perspective, the global workplace implies an enormous amount of diversity management. Estimates of the world labor pool in 2005 noted that multinational companies employed a stunning 3 billion workers cumulatively, which was nearly half of the world’s population. Diversity management means developing a globally aware perspective that increases understanding of how specific geographic needs, values, and customs influence management decisions and the business. This is a powerful managerial skill.
Challenges of Globalization
Managers should also be aware of how to approach global demographics from a business-to-consumer perspective—taking an international product or service and localizing it successfully. This is a significant challenge that requires considering different tastes and branding strategies during implementation. The Globalization Process flowchart below illustrates a step-by-step path and shows the production elements that can be universally applied, compared to elements that need to be localized.
This flowchart shows that internationalization includes product design, development, and QA, while localization tailors and markets the product to a specific area.
Managers must also be particularly aware of the current criticisms of a globalized society, particularly ethical and environmental considerations. A global economy is, in many ways, enforcing a global culture, which is often criticized for replacing established domestic cultures (and motivating consumerism). Therefore, managers should carefully consider how to best localize products to respect cultural identity. Environmental concerns are important as well: The constant energy usage required for this interchange pollutes the environment and consumes large quantities of resources to create energy. Minimizing the environmental damage and offsetting it to the degree possible through philanthropic giving is not only a wise marketing move but also a critical ethical consideration.
Conclusion
Our globalized society presents enormous opportunity for businesses. Intercultural marketplaces open up more demographics, offer larger market potential, present a more diverse customer base (and therefore require more diverse product offerings), and include a highly valuable human resource potential. On the other end of the bargain, managers are tasked with localizing products and services effectively to minimize the adverse cultural and environmental effects of rapid global expansion to maintain an ethical operation.
The Challenge of Ethics and Governance
Ethics is at the core of corporate governance, and managers must be accountable for their actions within a global community.
Key Points
· Business itself cannot be ethical: Only its managers and corporate strategists can implement ethics within the framework of the business strategy.
· Corporate ethics and shareholder desires for profitability are not always aligned, and it is executive management’s responsibility to ensure that ethics supersedes profitability.
· In its simplest form, corporate ethics is a legal matter. Abiding by laws protecting workers’ rights and offering appropriate compensation are management priorities.
· Corporate governance and ethics become more difficult with the indirect implications of particular practices. It is important to assess how certain operations may adversely affect the community at large.
· Managers are the primary decision makers, and therefore must hold themselves accountable for how a business operates and affects stakeholders, shareholders, employees, and the community at large.
Key Terms
· profitability—the capacity to generate capital
· accountability—individuals’ responsibility for their own work and acceptance of the repercussions of their actions
Accountability
First and foremost in corporate governance is the strict adherence to business ethics on a professional level. Accountability is of particular significance. Understanding the rules and regulations in place, along with societal and personal expectations of ethical actions, is an absolutely critical and fundamental concern for all managers. The complexities and responsibilities of running a business and managing employees is the first priority for managers, as it has the highest potential for repercussions—both personal and fiscal.
Economist Milton Friedman stated, “… the only entities who can have responsibilities are individuals … A business cannot have responsibilities.” Although this sounds like common sense, it is often overlooked that the only parties capable of acting ethically are those in charge. Furthermore, ethics often contrasts with the basic premise of capitalism and the demands of shareholders: profitability. Therefore, the most difficult decisions in corporate governance—those at the ethical level—must be made through the more complex assessment of societal, corporate, and personal values.
Legal Foundations
At its most basic, ethical behavior can first be derived from the laws, rules, and regulations of the country in which a business operates. In the United States, workers have very specific rights regarding risks, work hours, breaks, and benefits. Managers are responsible for ensuring that employees receive these equitably and legally. When working more than 40 hours a week, hourly employees are entitled to overtime pay. When working long shifts, they are entitled to breaks. In dangerous conditions, employees are entitled to protective gear and training.
These regulations illustrate the fundamental dissonance between profit-maximizing behavior and noneconomic concerns. It is exacerbated by the global economy, in which businesses operate within communities they may not feel a direct connection to. Asking, “What does this practice mean for the people in the area in which we operate?” is crucial to putting communities first.
The 2008 Financial Collapse
Complexities arise as the the ethical implications within an economic system become more subtle. The 2008 financial collapse exemplifies what can go wrong, and why corporate governance and ethics are so important to business and society. Practices that contributed to the housing bubble and failure of mortgage-backed securities exemplify how businesses prioritized profitability over people. Banks and government regulators eliminated rules and relaxed standards, enabling mortgages that were unlikely to be paid. These risky loans were packaged and sold to investors, who lost value when homeowners couldn’t pay back their loans. This chain of events is one example of how managers at many levels ignored the core responsibility of ensuring ethical standards in lieu of capital gains. Management is at fault for this oversight; it was a failure in corporate governance.
The Great Recession is a powerful reminder for managers that while the primary goal of their shareholders may be to maximize profits, managers also have a responsibility to minimize adverse effects on communities. Managing employees responsibly and putting their well-being first is an important step in this process, as is considering the wider implications of opening a new factory that pollutes or selling harmful products. Managers must be responsible because businesses as a whole cannot be, and this responsibility for integrity lies at the heart of management.
The Challenge of Diversity
Globalization demands a diverse workforce, and assimilating varying cultures, genders, ages, and dispositions is of high value.
Key Points
· In the 1960s, the United States begin identifying trends in workplace diversity and addressing them with legislation. This evolved into a societal change that embraces diversity as both valuable and ethical.
· Diversity poses various challenges in communication, from differences in language to differences in culture. Understanding these cultural differences and what they communicate is critical to improving communication.
· Majority cultures tend to create a homogenous environment, possibly limiting the potential diverse opinions can provide.
· Groupthink is a threat for managers to be aware of, particularly in meetings where dominant opinions steal most of the spotlight. Different perspectives are where the highest value can be captured in diverse environments.
· The ability to manage diversity, and refine actions to communicate accurately and intentionally, are valuable and necessary for effective management.
Key Terms
· hegemony—the dominance of one social group over another
· groupthink—decision making that is often characterized by a high degree of conformity
The Value of Diversity
Globalization has resulted in enormous cross-cultural relationships, along with high percentages of domestic diversity. As globalization creates higher potential value in approaching diverse markets and demographics, understanding how to manage a diverse community internally is a management priority.
Through creating a more international community and increasing variety among workforces, companies stand to benefit enormously from meaningful diversity in opinions and perspectives. This opportunity, if not properly utilized, becomes a threat as the competition grows more effective at leveraging diversity to create synergy. Therefore, staying competitive requires a diverse and effective workforce.
Ethnic Diversity Across the World
This map illustrates the level of ethnic diversity worldwide. Areas like sub-Saharan Africa tend to be more heterogeneous than European countries.
In the 1960s, the concept of equality and fair distribution of opportunity became a domestic focus in the United States. As the decades passed, the focus shifted from a legal requirement to a social expectation. Finally the idea of equality became a societal norm that recognizes both the importance and the value of diversity. This evolving outlook on a diverse workplace has ultimately resulted in the recognition and implementation of diversity management and intercultural understanding within organizations, creating stronger and more ethical business practices.
Challenges of Diversity
Despite this successful trajectory, challenges to diversity naturally occur as a result of communication (different languages and values), majority hegemony, and groupthink.
Communication
Communication is at the heart of diversity management, but not necessarily for obvious reasons. Linguistic differences, while certainly a challenge, are tangible and straightforward. Learning new languages or translating materials is a reasonably effective approach to addressing these difficulties.
The more difficult challenge than the words used is the cultural expectations embedded in communication. Different cultures not only speak different languages; they adhere to different values, draw different assumptions, and define actions as appropriate or inappropriate. Overlooking these cultural differences can result in miscommunication that may go unrecognized. For example, in China the concept of guanxi, or face, is critical in paying respect to guests or superiors. Overlooking this custom, or others, sends unintentional messages that can do irreversible damage.
Majority Hegemony
Employees strongly influence company culture, and the tendency of majorities to create a homogenous culture in businesses is a substantial threat. This can result in a business creating and promoting a particular culture over others unintentionally, as a result of numbers. This hegemony can create tension between different groups, ultimately resulting in the smaller groups moving towards the culture of the larger ones to close the dissonance, a practice called assimilation. However, assimilation should be a shared responsibility, not one assumed only by those in a minority group.
Groupthink
The most substantial threat these communication barriers and homogenous tendencies create could loosely be defined as groupthink. Groupthink is when many people within the same organization begin to adopt similar perspectives, usually to simplify meetings and minimize discord. On the surface, this consensus sounds like a good thing. However, as the global economy requires businesses to understand varying perspectives, it also requires cultivating these diverse perspectives internally. Groupthink will often result in the assimilation of dissenting perspectives. The opportunity cost is precisely these different viewpoints. Without differences in perspective, companies have little room to expand into new demographics or innovate new solutions.
The Role of Management
Different cultural norms offer an interesting study in diversity management. Etiquette for receiving a business card in China requires accepting it with both hands and taking a full moment to read it. Following this, recipients place the card face up on the table in front of them during a meeting, referring to it when necessary. In the United States, a strong handshake and self-introduction is a polite start to a meeting. Conversely, in Japan, it is appropriate to wait to be introduced and then bow following the greeting.
Managers not only must be aware of diversity in the workplace but also open-minded and empathetic to others’ perspectives. Effective managers in diverse situations have a highly developed degree of cultural competence that empowers them to use careful observation skills to determine what gestures, phrases, customs, and values would be most appropriate in a given circumstance. Adroit managers also work actively against groupthink, empowering everyone not only to speak but to take risks by going against the majority opinion. The goal for management is to ensure everyone is working on assimilation in a balanced and effective manner that harvests differences rather than glossing over them.
Example
Different cultural norms offer an interesting study in diversity management. Etiquette for receiving a business card in China requires accepting it with both hands and taking a full moment to read it. Following this, recipients place the card face up on the table in front of them during the meeting, referring to it when necessary. In the United States, a strong handshake and self-introduction is a polite start to a meeting. Conversely, in Japan, it is appropriate to wait to be introduced and then to bow following the greeting
The Challenge of Technology
Technology management is crucial in offsetting the risks of new technology while acquiring the operational benefits it provides.
Key Points
· Managing new technology requires a thorough understanding of business technology management, which consists of four general parts.
· Managers must understand how to achieve internal efficiency by applying new technology to operational processes.
· Businesses should create strategic business units focused solely on managing a company’s technological strategy.
· Keeping pace technologically requires extensive research and strategic analysis of the potential value of acquiring innovations.
· Implementing new technology requires retraining staff and eliminating the natural friction that results from making operational changes.
· Managers should be aware of the value in research, development, and forecasting future technological innovations to keep ahead of the competition.
Key Terms
· evolve—constantly change and develop
· synergy—a concept that the whole is more valuable than the sum of its parts
· competitive advantage—something that places a company or a person ahead of a competitor
Technology and Management
Managing technology is an intrinsic part of managing a business, and effectively balancing resources to optimize efficiency is an important operational objective for all managers. There are various perspectives and strategies in technology management, but all revolve around a few simple needs being filled to move a business toward gaining a competitive advantage. The reason behind the prioritization of technology management is that new disruptive technology constantly threatens to give competitors an advantage. On the other hand, effectively managed technology affords businesses the opportunity to outpace the competition (see graph below).
Disruptive Technology and Competitive Advantage
Technology advancement is both a constant opportunity and a constant threat.
Business Technology Management
Generally, business technology management (BTM) focuses on understanding how technology fits into an organization‘s processes and structure. It provides the opportunity to streamline operations and produce more quality information. BTM can be divided into four elements:
· Process. Businesses, whether they provide products or services, always have a set of processes that define how deliverables are generated. These processes need to be assessed for efficiency and effectiveness, particularly how they enable the optimal potential of modern technology.
· Organization. Businesses are constructed under the assumption of synergy. Each strategic business unit (SBU), or facet of the organization, complements the others to create a greater ability than any SBU could accomplish on its own. Establishing an information technology (IT) department that functions with upper management and throughout the ranks allows for proper BTM.
· Information. Technology evolves exponentially, often changing faster than businesses can easily monitor. Research and analysis of the current technological environment generates the highest return on the (often expensive) investments demanded to keep pace technologically.
· Implementation. After a business organization has a mature IT department that understands its company processes, IT can work to upgrade technology and implement these innovations. Implementation includes training employees, monitoring the return on investment, maintaining new technology, and eliminating friction created by operational changes. Change is always complicated, and businesses benefit greatly by adopting change-management techniques when integrating new technology.
Keeping up with Technological Progress
While managers focus on these four aspects of BTM, they must also keep future growth and technology scaling in mind. As innovation continues to demand a central role in businesses, research and development will continue to be critical for organizational health. Appropriately funding research initiatives that not only keep track of innovation but actively seek out strategic solutions creatively is a survival tool in the global marketplace.
Managers must also realize the importance of acquiring technology talent that keeps pace with the environment. This is important for two reasons:
· the potential to uncover new competitive advantages through internal development
· the capacity to forecast up-and-coming technologies to construct an investment road map that always keeps the competition a technological step behind
Developing new technologies in-house is particularly relevant to industries on the cutting edge (e.g., semiconductors, green energy, TV), while forecasting is critical in considering the user or consumer.
Combining BTM with research and development will ensure managers are properly equipped to tackle the challenges of modern-day innovations, leverage these capabilities as a differentiator from the competition, and derive stronger margins. Managers across the board must be aware of the importance of these technological developments, as well as the operational challenges in researching and implementing them.
The Challenge of Competition
Managers must understand a company’s competitive advantage and build a strategy that takes into account the competitive landscape.
Key Points
· Managers must know their business’s strengths and integrate them into the appropriate strategy to remain competitive.
· Using a low-cost strategy is selling a product or service at the lowest possible price point to stay competitive.
· Differentiation is an alternative strategy to low cost in which companies fill a specific need that is not being filled or generate a brand image that increases their value-added proposition.
· High quality is the antithesis of low cost; instead of efficiency, the strategy focuses on effectiveness, creating the best possible product to capture market share.
· Companies also compete internally, either developing naturally competitive products or battling for funding based on unit success.
· Managers must understand all of these competitive strategies and align them with their perceived strategic advantage to stay competitive.
Key Terms
· competitive advantage—an asset that places a company or a person ahead of competing businesses
· differentiation—a strategy focused on creating a distinct product for a specific population
· branding—a business’s ability to communicate a specific image, generally one that will entice consumers or add value
Competitive Strategies
From a managerial perspective, competition generally falls into the external environment, although it can also take shape in the internal environment through rivalry between strategic business units (SBUs). For managers, understanding the external competitive landscape is a critical factor in assessing company strategies and benchmarking appropriately to ensure the competitiveness of the firm. Businesses that fail to keep pace with their rivals eventually will be overpowered and often forced to develop an exit strategy.
Avoiding the risks of competitive factors demands a strong understanding of operational efficiency (low cost), quality production, differentiation, and competitive advantage—or who you target and whether or not you have a cost or quality advantage (see Cost vs. Quality figure below).
Cost vs. Quality
Companies generally achieve either a cost or a quality advantage or, very rarely, both. In panel A, both companies’ products have the same cost, but Company I’s product has higher value. In panel B, both companies’ products have the same value, but Company I’s product has lower cost. In panel C, Company I’s product has both higher value and lower cost (the rarest situation).
Low Cost and Branding
The simplest perspective on competition is in industries where products are homogeneous (or very similar). In these situations, companies compete directly. For example, bottled-water producers adopt either low cost or branding as their strategy.
Low-cost suppliers find ways to optimize their production and distribution to offer consumers the lowest possible price for a bottle of water. Low-cost suppliers often benefit largely from economies of scale. Branding, on the other hand, aims to convince the consumer that a higher price point is worth paying for based upon the company’s name, reputation, or other distinguishing characteristic. For example, Dasani brand water costs more than generic store-brand water, despite being essentially the same product. Commercials, aesthetic presentation, goodwill, and factors other than price may influence a consumer’s purchasing decision.
Differentiation
Most products and services are not homogenous, however, so companies can use various competitive strategies. Differentiation is a competitive tactic wherein companies approach certain niche needs within an industry to capture a segment of market share.
Cereals provide examples of differentiation. There are hundreds of kinds. The need being filled is sustenance: People have to eat. Cereal producers use differentiation to capture a share of the cereal market: Some brands focus on being organic, others on their sugary appeal, and others on being “cool.” Branding plays an important role here as well, though assessing niche consumer needs and filling them is the principal focus.
Quality
Finally, there is the potential to compete externally based on quality. Toyota makes both the Corolla and Lexus, thereby targeting consumers at both ends of the income spectrum. Quality competitive strategies, while related to branding, provide a particular level of quality to capture a specific income or interest demographic. The opportunity cost of efficiency is associated with quality, which generally sees higher price points. Quality is therefore a strong antithesis to the low-cost strategy.
Internal Competition
Businesses also compete internally, which is intrinsically complex. On the surface, internal competition involves either direct product substitutes or funding competition (among different business units). An example of internal competition is PepsiCo. Pepsi makes both colas and sports drinks, which sit adjacent on store shelves. When a customer sees the sports drink and chooses it over the cola, the cola has lost a sale to an internal competitor. Pepsi, however, did not lose a sale; it merely lost one segment of the business while gaining another.
With these points in mind, managers must thoroughly understand the products they are pitching and which strategy will help them avoid going toe-to-toe with other businesses they cannot compete against. Starting up a car manufacturing business to compete with Hyundai in the low-cost market is extremely difficult, as Hyundai has economies of scale that will almost always beat smaller competition on a low-cost strategy. This example illustrates an extremely important point in business: to rely on your strengths. Managers must understand their own competitive advantage (what they do better than the competition) so they can adopt the appropriate competitive strategy to gain market share and remain profitable.
Licenses and Attributions
Current Challenges in Management from Boundless Management by Lumen Learning, originally published by Boundless.com, is available under a Creative Commons Attribution-ShareAlike 4.0 International license. UMUC has modified this work and it is available under the original license.
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