Explain what the external environment is and why its important.

Learning Outcomes

Explain what the external environment is and why its important.

Discuss how the external environment affects managers.

Define what organizational culture is and why its important.

Describe how organizational culture affects managers.

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After studying this chapter, you will be able to:

Explain what the external environment is and why its important.
Discuss how the external environment affects managers.
Define what organizational culture is and explain why its important.
Describe how organizational culture affects managers.
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Explain what the external environment is and why its important.

External Environment
Factors, forces, situations, and events outside the organization that affect its performance.

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One of the biggest mistakes managers make today is failing to adapt to the changing world. No successful organization, or its managers, can operate without understanding and dealing with the dynamic environmentexternal and internalthat surrounds it.

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

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 Motors facility in Japan.

Components of the External Environment

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As shown here in Exhibit 2-1, the external environment includes six components:

The economic component encompasses factors such as interest rates, inflation, changes in disposable income, stock market fluctuations, and business cycle stages.
The demographic component includes trends in population characteristics such as age, race, gender, education level, geographic location, income, and family composition.
The technological component focuses on scientific and industrial innovations.
The sociocultural component is concerned with societal and cultural factors such as values, attitudes, trends, traditions, lifestyles, beliefs, tastes, and patterns of behavior.
The political/legal component looks at federal, state, and local laws, as well as other countries laws and global laws. It also includes a countrys political conditions and stability.
The global component encompasses issues associated with globalization and a world economy.
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The Economic Component

Encompasses factors such as interest rates, inflation, changes in disposable income, stock market fluctuations, and business cycle stages.

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The Demographic Component

Includes trends in population characteristics such as age, race, gender, education level, geographic location, income, and family composition.

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The Technological Component

Focuses on scientific and industrial innovations.

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The Sociocultural Component

Is concerned with societal and cultural factors such as values, attitudes, trends, traditions, lifestyles, beliefs, tastes, and patterns of behavior.

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The Political/Legal Component

Looks at federal, state, and local laws, as well as other countries laws and global laws. It also includes a countrys political conditions and stability.

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The Global Component

Encompasses issues associated with globalization and a world economy.

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What Is the Economy Like Today?

Global productivity still slow

Global trade is sluggish

U.S. employment is up

Is the American dream still a possibility?

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The economic crisis that gripped the United States and other countries in 2008 appears to finally be over, though growth and productivity in Europe is still behind that of the United States. Global trade is also sluggish, prompting some analysts to ask whether the world is becoming less connected.

With an unemployment rate of just 5.5 percent, U.S. employment is up, but much of that is related to low-wage jobs. Further complicating the picture is the fact that some seven million Americans are trapped in part-time jobs, unable to find full-time positions. Moreover, just 64 percent of Americans still believe that the so-called American dream that hard work leads to success and riches is real.

Economic Inequality

Harris Interactive Poll:

Only 10 percent of adults think economic inequality is not a problem at all.

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Most survey respondents believed that it is either a major problem (57 percent) or a minor problem (23 percent). Why has this issue become so sensitive? Those who worked hard and were rewarded because of their hard work or creativity have long been admired. In the United States, that gap between the rich and the rest has been much wider than in other developed nations for decades and was accepted as part of our countrys values and way of doing things.

As economic growth has languished and sputtered, and as peoples belief that anyone could grab hold of an opportunity and have a decent shot at prosperity has wavered, social discontent over growing income gaps has increased. The bottom line is that business leaders need to recognize how societal attitudes in the economic context may also create constraints as they make decisions and manage their businesses.

The Sharing Economy

Asset owners share with other individuals through peer-to-peer service, for a set fee, their underutilized physical assets or their knowledge, expertise, skills, or time.

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Airbnb, Uber, Zipcar, and SnapGoods are just a few examples of a fast-growing phenomenon called the sharing economy, in which asset owners share with other individuals through peer-to-peer service, for a set fee, their underutilized physical assets or their knowledge, expertise, skills, or time.

Demographics

Demography is destiny.

Age Cohorts

Baby Boomers

Gen X

Gen Y

Gen Z

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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.

Age is a particularly important demographic for managers because the workplace often encompasses different age groups.

Baby Boomers are those individuals born between 1946 and 1964. The sheer number of people in that cohort means theyve had a significant impact on every aspect of the external environment (from the educational system to entertainment/lifestyle choices to the Social Security system and so forth) as theyve gone through various life cycle stages.
Gen X is used to describe those individuals born between 1965 and 1977. It followed the baby boom and is one of the smaller age cohorts.
Gen Y (or the Millennials) encompasses those individuals born between 1978 and 1994. From technology to clothing styles to work attitudes, Gen Y is impacting organizational workplaces.
Then, there is Gen Zthe youngest identified age group, basically teens and middle-schoolers. This group has always been digitally connected their primary means of social interaction is online.

Demographic age cohorts are important to our study of management because large numbers of people at certain stages in the life cycle can constrain decisions and actions taken by businesses, governments, educational institutions, and other organizations.

Studying demographics involves looking at current statistics and future trends. For instance, recent analysis of birth rates shows that more than 80 percent of babies being born worldwide are from Africa and Asia. And heres an interesting fact: India has one of the worlds youngest populations by 2020, the median age will be 29. And by 2050, its predicted that China will have more people age 65 and older than the rest of the world combined.

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Discuss how the external environment affects managers.

How Does External Environment Affect Managers?

Jobs and employment

Assessing environmental uncertainty

Managing stakeholder relationships

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There are three ways that the external environment affects managers:

Its impact on jobs and employment.
The amount of environmental uncertainty.
The nature of stakeholder relationships.
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 wont be reinstated.

Such readjustments create challenges for managers who must balance work demands with having enough people with the right skills to do the organizations 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.

Assessing Environmental Uncertainty

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Another constraint posed by external environments is the amount of uncertainty that exists, which can affect organizational outcomes. Environmental uncertainty refers to the degree of change and complexity in an organizations environment. This matrix shows these two aspects.

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 in an organizations environment and the knowledge that the organization has about those components.
Therefore, 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.
So how does the concept of environmental uncertainty influence managers? As illustrated here, each of the four cells 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 organizations effectiveness, managers try to minimize it.
Most industries today face more dynamic change, and consequently, their environments are more uncertain.
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Managing Stakeholder Relationships

Stakeholders:

any constituencies in an organizations environment that are affected by that organizations decisions and actions.

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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.

Stakeholders are any constituencies in an organizations environment that are affected by that organizations 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.

For example, think of the groups that might be affected by the decisions and actions of Starbuckscoffee bean farmers, employees, specialty coffee competitors, local communities, and so forth. Some of these stakeholders also, in turn, may impact decisions and actions of Starbucks managers.

Organizational Stakeholders

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Here in Exhibit 2-3, we see the most common stakeholders in an organization.

Note that these stakeholders include both internal and external groups because both groups can affect what an organization does and how it operates.

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.

Who are Starbucks key stakholders?

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Good Stakeholder Relationships:

Can lead to desirable organizational outcomes

Can affect organizational performance

Demonstrate doing the right thing

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Good stakeholder relationships can lead to desirable organizational outcomes such as improved predictability of environmental changes, more successful innovations, greater degree of trust among stakeholders, and greater organizational flexibility to reduce the impact of change.

Stakeholder management can affect organizational performance. Management researchers who have looked at this issue are finding that managers of high performing companies tend to consider the interests of all major stakeholder groups as they make decisions.

Another reason for managing external stakeholder relationships is that its the right thing to do. Because an organization depends on these external groups as sources of inputs (resources) and as outlets for outputs (goods and services), managers should consider the interests of stakeholders as they make decisions. Well address this issue in more detail in the next chapter when we look at corporate social responsibility.

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Define what organizational culture is and explain why its important.

What is Organizational Culture?

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Each of us has a unique personality that influences the way we act and interact. An organization has a personality toowe call it CULTURE.

Google has created a creative and innovative culture at their headquarters in California with an android googleplex, bikes, and bringing your dog to work.

Organizational Culture

Shared values, principles, traditions, and ways of doing things that influence the way an organizations members act.

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Organizational culture has been described as the shared values, principles, traditions, and ways of doing things that influence the way organizational members act.

Culture is:

Perceived

Descriptive

Shared

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1. Culture is perceived. Its not something that can be physically touched or seen, but employees perceive it on the basis of what they experience within the organization.

2. Culture is descriptive. Its concerned with how members perceive or describe the culture, not with whether they like it.

3. Culture is shared. Even though individuals may have different backgrounds or work at different organizational levels, they tend to describe the organizations culture in similar terms.

Dimensions of Culture

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These seven dimensions shown in Exhibit 2-4:

Range from low (not typical of the culture) to high (especially typical of the culture).

Provide a composite picture of the organizations culture.

May emphasize one cultural dimension more than the others, essentially shaping the organizations personality and the way organizational members work.

Apples focus is product innovation (innovation and risk taking). The company lives and breathes new product development and employees work behaviors support that goal.

Southwest Airlines has made its employees a central part of its culture (people orientation) and shows this through the way it treats them.

Learning Organizational Culture

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An organizations culture generally reflects the vision or mission of its founders, who establish the early culture by projecting an image of what the organization should be and what its values are.

Employees most commonly learn an organizations culture through its stories, rituals, material symbols, and language.

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Describe how organizational culture affects managers.

How Does Organizational Culture Affect Managers

Effect on what employees do and how they behave

Effect on what managers do

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Organizational culture affects managers in two primary ways:

Through its effect on what employees do and how they behave, and
Through its effect on what managers do as they plan, organize, lead, and control.
Ambrosia Humphrey, vice-president of talent at Hootsunite, describes how the power of organizational culture affects her as a manager. She says that a top priority for her is to nurture and nourish the companys culture by continually creating employee experiences that reflect transparency, one of the companys important values.

How Does Culture Affect What Employees Do?

Strong cultures:

cultures in which the key values are deeply held and widely shared.

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The more employees accept the organizations key values and the greater their commitment to those values, the stronger the culture is. Most organizations have moderate to strong cultures; that is, there is relatively high agreement on whats important, what defines good employee behavior, what it takes to get ahead, and so forth. The stronger a culture becomes, the more it affects what employees do and the way managers plan, organize, lead, and control.

Strong Cultures Can:

Substitute for formal rules and regulations

Create predictability, orderliness, and consistency

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The stronger an organizations culture, the less managers need to be concerned with developing formal rules and regulations. Instead, those guides will be internalized in employees when they accept the organizations culture.

If, on the other hand, an organizations culture is weakif no dominant shared values are present its effect on employee behavior is less clear.

How Does Culture Affect What Managers Do?

Say What?

Ten percent of executives say they have not identified or communicated an organizational culture.

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Because an organizations culture constrains what they can and cannot do and how they manage, its particularly relevant to managers. Such constraints are rarely explicit. Theyre not written down. Its unlikely theyll even be spoken. But theyre there, and all managers quickly learn what to do and not do in their organization. For instance, you wont find the following values written down, but each comes from a real organization:

Look busy even if youre not.
If you take risks and fail around here, youll pay dearly for it.

Before you make a decision, run it by your boss so that he or she is never surprised.

We make our product only as good as the competition forces us to.

What made us successful in the past will make us successful in the future.

If you want to get to the top here, you have to be a team player.

Company Values Affect Managers Behavior

Ready-aim-fire versus Ready-fire-aim

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The link between values such as these and managerial behavior is fairly straightforward. Take, for example, a so-called ready-aim-fire culture. In such an organization, managers will study and analyze proposed projects endlessly before committing to them. However, in a ready-fire-aim culture, managers take action and then analyze what has been done.

If an organizations culture supports the belief that profits can be increased by cost cutting and that the companys best interests are served by achieving slow but steady increases in quarterly earnings, managers are unlikely to pursue programs that are innovative, risky, long-term, or expansionary.

In an organization whose culture conveys a basic distrust of employees, managers are more likely to use an authoritarian leadership style than a democratic one.

The culture establishes for managers appropriate and expected behavior.

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Managerial Decisions Influenced by Culture

As shown here in Exhibit 2-5, a managers decisions are influenced by the culture in which he or she operates. An organizations culture, especially a strong one, influences and constrains the way managers plan, organize, lead, and control.

For example, the culture influences managerial planning about the degree of risk that plans should contain, whether plans should be developed by individuals or teams, or the amount of environmental scanning in which management will engage.

With organizing activities, culture influences how much autonomy should be designed into employees jobs, whether tasks should be done by individuals or in teams, and the degree to which department managers interact with each other.

When it comes to leading, organization culture helps determine the degree to which managers try to increase employee job satisfaction, appropriate leadership styles, and whether all disagreementseven constructive onesshould be eliminated.

Finally, the culture influences managers controlling activities: for example, whether they impose external controls or to allow employees to control their own actions, which criteria should be emphasized in employee performance evaluations, and the repercussions for exceeding ones budget.

Thank you!

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After studying this chapter, you will be able to:

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

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 Motors facility in Japan.

As shown here in Exhibit 2-1, the external environment includes six components:

Age is a particularly important demographic for managers because the workplace often encompasses different age groups.

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