What is the Organizational Environment?

The organizational environment is a set of forces and conditions that can affect the way the organization operates and the way managers engage in planning and organizing

Internal environment :  forces operating within an organization and stemming from structure and climate

External environment :  forces operating beyond boundaries of organization

Stakeholders :  the persons, groups and institutions that are affected by internal and external environments

What is the Organizational Environment?

Set of forces and conditions that affect the way an organization operates and the way managers engage

Forces change over time and are made up of opportunities and threats:

Opportunities :  openings for managers to strengthen their organization by making and selling more products, obtaining more resources and capital or opening markets

Threats :  issues that can devastate an organization if managers are unable to sell products and revenues/profits plunge

Forces in the Organizational Environment

External Organizational Environment

Industry-specific or task environment:

Set of external forces that affects organization’s ability to obtain inputs and dispose of outputs

Immediate and direct impact on managers

General environment:

Political, economic, socio-cultural, technological and international (global) forces

Affecting industry and hence organization

Managers must constantly analyze forces

The Task Environment

Suppliers:

Provide input resources (raw materials, labour, financing)

Managers must ensure reliable suppliers in a global economy

Tasked with finding reliable overseas suppliers offering lowest-prices and highest-quality products

Supply chain management is complicated due to shortages, unions, lack of substitutes and need to coordinate suppliers

Managers often prefer to have many, similar suppliers of each item

The Task Environment

Distributors:

Organizations that help others to sell goods or services to customers

Changing nature of distributors and distribution methods brings threats and opportunities for managers

Large distributors are so powerful they can control customer’s access to an organization’s goods and services.

Power of distributors can be weakened if there are too many options for manufacturers and wholesalers

Selling directly online weakens the power of distributors.

The Task Environment

Customers:

Individuals and groups that buy the goods and services an organization produces

Changing customer types, tastes and needs result in opportunities and threats

Example: Consumer demand for spring fashion difficult to predict one year earlier when purchasing product lines

The Task Environment

Competitors:

Organizations that produce goods or services that are similar to a particular organization’s goods or services

Rivalry between competitors can be most threatening force facing managers

High levels of rivalry often results in price competition

Reduces access to resources and causes profits to decrease

Potential competitors :  organizations not currently in a task environment but with resources to enter

Barriers to Entry

Factors that make it difficult and costly for a company to enter a particular task environment

Three main sources:

Economies of scale :  cost advantages associated with large operations such as buying raw material in bulk

Brand loyalty :  customers’ preference for the products or organizations currently in the task environment

Government regulations :  national and global policies can prevent entry at both industry and country levels

Barriers to Entry and Competition

The General Environment

Consists of broader forces including: political, economic, socio-cultural, technological and international (PESTI)

Managers usually cannot impact or control these

Managers must constantly analyze the forces impacting  the general environment in order to manage effectively

The General Environment

Political forces:

Outcomes of changes in laws and regulations, resulting from political and legal developments within a nation/region/world

Strong trends:

Deregulation :  opening industries previously controlled by the state to free market competition

Privatization :  organizations once controlled by the state are sold to individuals or corporations

Increased emphasis on employee safety, environmental protection and preservation

The General Environment

Political forces (continued):

Competition Act (1986) provides legislation on how companies may operate

Competition Bureau acts to maintain and encourage competition within Canada

Political integration of countries during the last several decades.

Political unions to allow free exchange of resources and capital, e.g., the European Union (EU)

The General Environment

Economic forces:

Affect general health and well-being of a nation or regional economy of an organization

Includes interest rates, inflation, unemployment, economic growth.

The General Environment

Economic forces (continued):

Strong economic conditions:

People have more money to spend, thus organizations have opportunity to sell more goods and services

Resources become easier to acquire

Poor economic conditions:

Limit managers’ ability to gain necessary resources

Fewer customers for goods and services

Creates uncertainty, complexity and risk for managers

The General Environment

Socio-cultural forces:

Pressures coming from the social structure of a country or society or from the national culture

Social structure :  the arrangement of individuals or groups in a society

National culture :  the set of values that a society considers important and the norms of behaviour that are acceptable in society

The General Environment

Socio-cultural forces (continued):

Social structure and national culture differ across societies and also change within societies over time

Effective managers:

Are sensitive to differences in the social structures and national cultures of all countries in which they operate (and adjust their behaviours accordingly)

Respond to changing behavourial and consumer trends within a society

Realize that management practices effective in Canada might not work elsewhere

National culture

Individualism vs collectivism:  Are individual freedoms and self-expression more important than contribution to the group?

Power difference: are inequalities in power due to difference in   capabilities and heritage?

Achievement vs nurturing: Is success or quality of life more important?

Uncertainty avoidance: How much tolerance is there for    individual beliefs and actions.

Orientation: is it long-term or short-term? Is it better to save or     spend?

The General Environment

Socio-cultural forces (continued):

Demographic forces :  outcomes of changes in the characteristics of a population

Such as age, gender, ethnic origin, race, sexual orientation, and social class

Many industrial countries have an aging population

Creates opportunities for organizations catering to older people

Decline in the number of young people joining labour force

The General Environment

Technological forces:

Results from changes in technology that managers use to design, produce and distribute goods and services

Profound implications for managers and organizations:

Can make established products obsolete overnight

Information technology is constantly changing the nature of work itself within the organization and the manager’s job

Managers must move quickly to respond to technological changes

The General Environment

International/global forces:

Result from changes in international relationships, changes in nations’ economic, political, and legal systems, and changes in technology

Increasing economic integration of countries around world

Free-trade agreements (NAFTA, EU) designed to lower barriers to the free flow of goods and services between nations

Managers view the global environment as open – companies are free to buy from, or sell to, whichever companies and countries they choose

The Global Environment

Globalization:

The set of specific and general forces that work together to integrate and connect economic, political, and social systems across countries, cultures, or geographic regions.

Nations and peoples, as well as world’s markets and businesses become increasingly interdependent

Shaped by the ebb and flow of capital, seeking investments which can earn the greatest returns

Capital flow among countries

Four principal forms of capital flow between countries:

Human capital

Financial capital

Resource capital

Political capital

Declining Barriers to
Trade and Investment

Historically (1920s – 1930s): high tariffs :  tax that government imposes on goods imported into one country from another

Results in series of retaliatory moves as countries raise tariff barriers against each other

Example: 2017 NAFTA negotiations

COVID increased protectionism, e.g. the manufacture of PPE

GATT and The Rise of Free Trade

After WWII countries committed to removing trade barriers

Free-trade doctrine :  if each country specializes in the production of goods and services that it can produce most efficiently, this will make best use of global resources

International treaty:

General Agreement on Tariffs and Trade (GATT)

Declining Barriers of Distance and Culture

Historically, managers were focused on domestic markets due to barriers of distance and culture

Barriers being reduced by:

Advances in communications, including satellites, digital technology, the Internet, global computer networks, video teleconferencing, etc..

Innovations in transportation technology, including commercial jet travel

Development of global communication networks and media

Regional Trade Agreements

Growth of regional trade agreements:

European Free Trade Agreement (EFTA)

North American Free Trade Agreement (NAFTA)

Canada-US-Mexico Agreement (CUSMA)

Free-trade areas creates opportunities for manufacturing organizations to reduce costs

Can expose organization based in one member country to increased competition from companies based in the other member countries

Recent trade wars

Protectionism: tariffs or quotas on imported goods to bolster domestic production of manufactured goods

Often leads to retaliatory actions

Consequences unknown

Managing the External Environment

Managers must analyze threats and opportunities by measuring:

Level of complexity in the environment

Rate at which the environment is changing

Environmental complexity:

Depends on the number and potential impact of the forces

Managers must pay closer attention to forces with larger impact

Generally, the larger the organization, the greater the number of environmental forces managers must respond to

Uncertainty in the Environment and Managerial Action

Managing the External Environment

Environmental change:

Refers to the degree to which forces in the task and general environments change and evolve over time

Managers must anticipate future and decide on actions to ensure continued organizational success

Example: MacDonald’s

Managing the External Environment

All managers must find ways to reduce the number and impact of forces in external environment

CEO and top-management :  devise strategies

Middle managers :  collect relevant information:

Future intentions of competitors

Identity of new customers

Identity of new suppliers

First-line managers :  use resources more efficiently and customer service

Responsibilities for Managing the Forces in the Organization’s Environment

Managers as Agents of Change

Change in the environment is a two-way process:

Environmental change direct consequence of actions taken by managers

Organization is an open system

Ability to predict events is determined by rate of change and complexity of the environment

Managers make decisions under conditions of:

Uncertainty :  state of environmental forces that is so dynamic managers cannot predict the probable outcomes of actions

Certainty :  state of environmental forces that is stable enough to predict possible outcomes of decisions

Tips for managers to reduce uncertainty

Scenario planning to imagine multiple different futures.

Adaptable strategies

Identifying societal needs, benefits, and harms that are or could be embodied in the firm’s products.

Analyzing underserved markets

Exploring societal needs to discover new opportunities

Adopting technology to enhance resource utilization, process efficiency, and quality.

Uncertainty Matrix

Challenges for Management in a Global Environment

Building a competitive advantage while maintaining ethical standards;

Utilizing new kinds of technologies based on artificial intelligence and machine learning; and

Embracing and overcoming differences in national cultures to curb racism and discrimination.

Creating shared value

Movement away from “shareholder capitalism” toward “stakeholder capitalism.”

“Policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates.

Identifying and expanding the connections between societal and economic progress”

Building Blocks of Competitive Advantage

Increasing Efficiency

Reduce the quantity of resources (such as people and raw materials) they use to produce goods or services

Training workers in new skills and techniques

New technological solutions to project management

Creating alliances and partnerships

Increasing Quality

Global competition has increased pressure on companies to improve the quality of goods and services delivered.

Techniques known as total quality management (TQM).

Employees supported to find new and better ways to perform their jobs

Reducing their environmental footprint

Monitoring and evaluating the quality of the goods they produce.

Increasing Innovation

The process of creating new goods and services that customers want or need, or developing better ways to produce or provide goods and services

Creating an organizational culture to support innovation

Rewarding risk-taking

Among the most difficult managerial tasks.

Increasing Responsiveness

Adapting to changing customers needs and interests

Re-evaluating traditional markets

Identifying underserved markets

Training employees

Maintaining Ethical Standards

Pressure to improve performance can be healthy vs. harmful:

Healthy - encourages managers to question operations and to find new and better ways to plan, organize, lead and control

Harmful - may induce managers to behave unethically

Important that all members of an organization behave ethically as they pursue organizational goals

Incudes environmental, social, and governance (ESG) goals and diversity, equity, and inclusion (DEI) goals

Utilizing Artificial Intelligence and New Information Technologies

Using machines to automate functions usually performed by people

Information processing is at the heart of the next transformation of work and managing organizations

Changing how managers get and utilize resources to achieve organizational goals.

The Importance of National Culture

Differences in values, norms, and attitudes

Shapes individual behaviour by specifying appropriate and inappropriate behaviour and interaction with others

Management practices must be tailored to the cultural contexts within which an organization operates

Diversity adds value

Cultural intelligence—an appreciation of how national cultures differ