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Chapter 3 Organizational Environments and Culture

MGMT7

3-1 discuss how changing environments affect organizations

3-2 describe the four components of the general environment

3-3 explain the five components of the specific environment

3-4 describe the process that companies use to make sense of their changing environments

3-5 explain how organizational cultures are created and how they can help companies be successful

In this chapter, we examine the internal and external factors that affect a company. This chapter examines the internal and external forces that affect business. We begin by explaining how the changes in external organizational environments affect the decisions and performance of a company. Next, we examine the two types of external organizational environment: the general environment that affects all organizations and the specific environment unique to each company. Then, we learn how managers make sense of their changing general and specific environments. The chapter finishes with a discussion of internal organizational environments by focusing on organizational culture.

Characteristics of External Environments

Environmental change

Environmental complexity

Resource scarcity

Uncertainty

3-1

We begin by examining the characteristics of a changing external environment: environmental change, environmental complexity, resource scarcity, and uncertainty.

Environmental Change

The rate at which a company’s general and specific environments change.

Stable

slow rate of change

Dynamic

fast rate of change

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To some extent, every company faces changes in its environment, whether it’s due to changing consumer tastes, new government regulations, or the presence of competitors. The rate of these changes, however, is different depending on whether the company is in a stable environment or a dynamic environment.

Punctuated Equilibrium Theory

Stability

Dynamic Change

Stability

Dynamic Change

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Although you might think that a company’s external environment would be either stable or dynamic, research suggests that companies often experience both. According to punctuated equilibrium theory, companies go through long, simple periods of stability (equilibrium) during which incremental changes occur, followed by short, complex periods of dynamic, fundamental change (revolutionary periods), which end with a return to stability (new equilibrium)

Environmental Complexity

Simple

few environmental factors that affect organizations

Complex

many environmental factors that affect organizations

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Environmental complexity refers to the number and intensity of factors in the external environment that affect organizations. Simple environments have few environmental factors that affect organizations, whereas complex environments have many environmental factors that affect organizations.

Resource Scarcity

The abundance or shortage of critical resources in an organization’s external environment.

3-1

Uncertainty

The extent to which managers can understand or predict the external changes and trends affecting their business.

3-1

Environmental Change, Environmental Complexity, and Resource Scarcity

3-1

As Exhibit 3-1 shows, environmental change, environmental complexity, and resource scarcity affect environmental uncertainty, which is how well managers can understand or predict the external changes and trends affecting their businesses. Starting at the left side of the figure, environmental uncertainty is lowest when environmental change and environmental complexity are at low levels and resource scarcity is small (i.e., resources are plentiful). In these environments, managers feel confident that they can understand, predict, and react to the external forces that affect their businesses. By contrast, the right side of the figure shows that environmental uncertainty is highest when environmental change and complexity are extensive and resource scarcity is a problem. In these environments, managers may not be confident that they can understand, predict, and handle the external forces affecting their businesses.

General and Specific Environments

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Two kinds of external environments influence organizations: the general environment and the specific environment. The general environment consists of the economy and the technological, sociocultural, and political/legal trends that indirectly affect all organizations. Changes in any sector of the general environment eventually affect most organizations. Each organization also has a specific environment that is unique to that firm’s industry and directly affects the way it conducts day-to-day business.

Economy

A growing economy provides a favorable environment for business growth.

Business confidence indices show how confident managers are about future business growth.

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Technological Component

Technology

an umbrella term for the knowledge, tools, and techniques used to transform inputs into outputs

Changes in technology can help companies provide better products or produce their products more efficiently.

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Sociocultural Component

Demographic characteristics, general behavior, attitudes, and beliefs of people in a particular society

3-2

Political/Legal Component

The legislation, regulations, and court decisions that govern and regulate business behavior

Many managers are unaware of the potential legal risks associated with traditional managerial decisions like recruiting, hiring, and firing employees.

3-2

Specific Environment

Customers

Competitors

Suppliers

Industry regulations

Advocacy groups

3-3

Each organization has a specific environment that is unique to that firm’s industry and which directly affects the way it conducts day-to-day business. The five components of the specific environment are customers, competitors, suppliers, industry regulations, and advocacy groups.

Customer Component

Reactive customer monitoring

Identifying and addressing customer trends and problems after they occur

Proactive customer monitoring

Identifying and addressing customer needs, trends, and issues before they occur

3-3

Customers purchase products and services. Companies cannot exist without customer support. Monitoring customers’ changing wants and needs is therefore critical to business success. There are two basic strategies for monitoring customers: reactive and proactive. Reactive customer monitoring involves identifying and addressing customer trends and problems after they occur. One reactive strategy is to listen closely to customer complaints and respond to customer concerns. Proactive monitoring of customers means identifying and addressing customer needs, trends, and issues before they occur.

Competitor Component

Competitors

companies in the same industry that sell similar products or services

Competitive analysis

a process of monitoring the competition that involves identifying competition, anticipating their moves, and determining their strengths and weaknesses

3-3

Surprisingly, managers often do a poor job of identifying potential competitors because they tend to focus on only two or three well-known competitors with similar goals and resources. Another mistake managers may make when analyzing the competition is to underestimate potential competitors’ capabilities. When this happens, managers don’t take the steps they should to continue to improve their products or services.

Supplier Component

Suppliers

companies that provide material, human, financial, and informational resources to other companies

Supplier dependence

vs.

Buyer dependence

3-3

Suppliers are companies that provide material, human, financial, and informational resources to other companies. A key factor influencing the impact and quality of the relationship between companies and their suppliers is how dependent they are on each other.33 Supplier dependence is the degree to which a company relies on that supplier because of the importance of the supplier’s product to the company and the difficulty of finding other sources for that product. Buyer dependence is the degree to which a supplier relies on a buyer because of the importance of that buyer to the supplier’s sales and the difficulty of finding other buyers of its products.

Behaviors

Opportunistic behavior

when one party benefits at the expense of another

Relationship behavior

focuses on establishing a mutually beneficial, long-term relationship between buyers and sellers

3-3

How important is relationship behavior? Researchers examined the relationships between auto suppliers and eight major automakers in Japan, Korea, and the United States and found that, in cases where a lack of trust existed between suppliers and buyers, procurement costs could be as much as five times higher than when parties trusted one another. Furthermore, the least-trusted companies were often the least profitable.

Industry Regulation Component

Regulations and rules that govern the practices and procedures of specific industries, businesses, and professions

3-3

Whereas the political/legal component of the general environment affects all businesses, the industry regulation component consists of regulations and rules that govern the practices and procedures of specific industries, businesses, and professions.

Federal Regulatory Agencies and Commissions

Consumer Product Safety Commission

Department of Labor

Environmental Protection Agency

Equal Employment Opportunity Commission

Federal Communications Commission

Federal Reserve System

Federal Trade Commission

Food and Drug Administration

National Labor Relations Board

Occupational Safety and Health Administration

Securities and Exchange Commission

3-3

Consumer Product Safety Commission Reduces risk of injuries and deaths associated with consumer products, sets product safety standards, enforces product recalls, and provides consumer education

http://www.cpsc.gov

Department of Labor Collects employment statistics and administers labor laws concerning safe working conditions, minimum hourly wages and overtime pay, employment discrimination, and unemployment insurance

http://www.dol.gov

Environmental Protection Agency Reduces and controls pollution through research, monitoring, standard setting, and enforcement activities

http://www.epa.gov

Equal Employment Opportunity Commission Promotes fair hiring and promotion practices

http://www.eeoc.gov

Federal Communications Commission Regulates interstate and international communications by radio, television, wire, satellite, and cable

http://www.fcc.gov

Federal Reserve System As nation’s central bank, controls interest rates and money supply and monitors the U.S. banking system to produce a growing economy with stable prices

http://www.federalreserve.gov

Federal Trade Commission Restricts unfair methods of business competition and misleading advertising; enforces consumer protection

laws http://www.ftc.gov

Food and Drug Administration Protects nation’s health by making sure food, drugs, and cosmetics are safe

http://www.fda.gov

National Labor Relations Board Monitors union elections and stops companies from engaging in unfair labor practices

http://www.nlrb.gov

Occupational Safety and Health Administration Saves lives, prevents injuries, and protects the health of workers

http://www.osha.gov

Securities and Exchange Commission Protects investors in the bond and stock markets, guarantees access to information on publicly traded securities, and regulates firms that sell securities or give investment advice

http://www.sec.gov

Advocacy Groups

Concerned citizens who band together to try to influence the business practices of specific industries, businesses, and professions

Public communication

Media advocacy

Product boycott

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Advocacy groups are groups of concerned citizens who band together to try to influence the business practices of specific industries, businesses, and professions. The members of a group generally share the same point of view on a particular issue. These groups use a number of approaches to try to influence companies.

The public communications approach relies on voluntary participation by the news media and the advertising industry to send out an advocacy group’s message.

Media advocacy is much more aggressive than the public communications approach. A media advocacy approach typically involves framing the group’s concerns as public issues (affecting everyone); exposing questionable, exploitative, or unethical practices; and forcing media coverage by buying media time or creating controversy that is likely to receive extensive news coverage.

A product boycott is a tactic in which an advocacy group actively tries to persuade consumers not to purchase a company’s product or service.

Making Sense of Changing Environments

Environmental scanning

Interpreting environmental factors

Acting on threats and opportunities

3-4

As our discussions of the general and specific environments have indicated making sense of business environments is not an easy task. Because external environments can be dynamic, confusing, and complex, managers use a three-step process to make sense of the changes in their external environments: environmental scanning, interpreting environmental factors, and acting on threats and opportunities.

Environmental Scanning

Searching the environment for important events or issues that might affect an organization.

Managers scan the environment to reduce uncertainty.

Organizational strategies affect environmental scanning.

Environmental scanning contributes to organizational performance.

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Interpreting Environmental Factors

Threat or opportunity?

Threat

managers typically take steps to protect the company from further harm

Opportunity

managers consider strategic alternatives for taking advantage of those events to improve performance

3-4

After scanning, managers determine what environmental events and issues mean to the organization. Typically, managers view environmental events and issues as either threats or opportunities. When managers interpret environmental events as threats, they take steps to protect the company from further harm. By contrast, when managers interpret environmental events as opportunities, they consider strategic alternatives for taking advantage of those events to improve company performance.

Cognitive Maps

3-4

Because it is impossible to comprehend all the factors and changes, managers often rely on simplified models of external environments called cognitive maps. Cognitive maps summarize the perceived relationships between environmental factors and possible organizational actions. For example, the cognitive map shown in Exhibit 3-4 represents a small clothing store owner’s interpretation of her business environment. The map shows three kinds of variables. The first set of variables, shown in blue rectangles, are environmental factors, such as a Wal-Mart or a large mall 20 minutes away. The second set of variables, shown in green ovals, are actions that the store owner might take: follow a low-cost strategy; a good value, good service strategy; or a large selection of the latest fashions strategy. The third set of variables, shown in gold trapezoids, are company strengths (low employee turn-over) and weaknesses (small size). The plus and minus signs on the map indicate whether the manager believes there is a positive or negative relationship between variables. For example, the manager believes that a low-cost strategy won’t work because Wal-Mart and Target are nearby. Offering a large selection of the latest fashions won’t work either—not with the small size of the store and that large mall nearby. However, the manager believes that a good value, good service strategy can lead to success and profits because of the store’s low employee turnover, good knowledge of customers, and reasonable selection of clothes at reasonable prices.

Creation and Maintenance of Organizational Cultures

Primary source of organizational culture is the company founder.

Organizational culture is sustained by…

organizational stories

organizational heroes

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Keys to an Organizational Culture

3-5

Adaptability is the ability to notice and respond to changes in the organization’s environment.

Company mission is the business’s purpose or reason for existing. In an organizational culture that includes a clear company mission, the organization’s strategic purpose and direction are apparent to everyone in the company.

Finally, in a consistent organizational culture, the company actively defines and teaches organizational values, beliefs, and attitudes. Consistent organizational cultures are also called strong cultures because the core beliefs are widely shared and strongly held.

Three Levels of Organizational Culture

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As shown in Exhibit 3-6, organizational cultures exist on three levels. On the first, or surface, level are the elements of an organization’s culture that can be seen and observed, such as symbolic artifacts (e.g., dress codes and office layouts) and workers’ and managers’ behaviors. Next, just below the surface, are the values and beliefs expressed by people in the company. You can’t see these values and beliefs, but they become clear if you carefully listen to what people say and observe how decisions are made or explained. Finally, unconsciously held assumptions and beliefs about the company are buried deep below the surface. These are the unwritten views and rules that are so strongly held and so widely shared that they are rarely discussed or even thought about unless someone attempts to change them or unknowingly violates them. Changing such assumptions and beliefs can be very difficult. Instead, managers should focus on the parts of the organizational culture they can control. These include observable surface-level items, such as workers’ behaviors and symbolic artifacts, and expressed values and beliefs, which can be influenced through employee selection.

Changing Organizational Cultures

Behavioral addition

Behavioral substitution

Change visible artifacts

Hiring people with values and beliefs consistent with desired culture

3-5

Corporate cultures are very difficult to change. Consequently, there is no guarantee that any one approach—changing visible cultural artifacts, using behavioral substitution, or hiring people with values consistent with a company’s desired culture—will change a company’s organizational culture. The best results are obtained by combining these methods. Together, these are some of the best tools managers have for changing culture because they send the clear message to managers and employees that “the accepted way of doing things” has changed.

Camp Bow Wow

What aspects of Camp Bow Wow’s corporate culture reflect the surface level of the organizational culture? What aspects reflect the values and beliefs? What aspects reflect the unconsciously held assumptions and beliefs.

Why did Camp Bow Wow have to change its culture when it became a national franchise?

What impact does Heidi Ganahl’s personal story have on employees at Camp Bow Wow?

In ten years, Camp Bow Wow has grown from a single kennel in Denver, Colorado to a $40 million dollar business, with more than 150 locations. The transition from a small family business to a national chain, however, required a shift from a family-based culture to a business- and performance-based culture. A key element of of Camp Bow Wow’s culture is the staff’s deep emotional connection with animals. The connection is immediately apparent at corporate headquarters, where offices are bustling with employees and pets alike. According to founder Heidi Ganahal, “What we do is focus on what’s important to us, and that’s the animals.”