Environment of Business

1. McGraw-Hill/Irwin 2-1
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
 L01: How do environmental forces influence
organizations influence their environments?
 L02: Can you distinguish between the macro
environment and the competitive environment?
 L03: Why should managers and organizations attend
to economic and social developments?
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3. Learning Objectives
 L04: Can you identify elements of the competitive
environment?
 L05: Summarize how organization respond to
environmental uncertainty.
 L06: Define elements of an organization’s culture.
 L07: Discuss how an organization’s culture affects its
response to its external environment
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4. 2-4

5. How organizations interact with their
environment
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6. The Macroenvironment
 General elements in the external environment that
potentially can influence strategic decisions.
 Laws and regulations
 Economy
 Technology
 Demographics
 Social Values
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7. The External Environment
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8. Managing the Macroenvironment
 The economy affects a company’s value
 Technology is changing every business function
 Demographics describe employees and customers
 Social issues shape attitudes toward your company and
its products
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9. The Competitive Environment
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10. Who is the Competition?
 Worldwide Competition
 New Entrants
 Barriers to entry low
 Substitutes and Complements
 Resources from Suppliers
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11. Barriers to Entry
 Barriers to entry – conditions that prevent new
companies from entering an industry
 Government policy (e.g., patent laws)
 Capital requirements (start-up costs)
 Brand identification (consumer brand loyalty)
 Cost disadvantages (Established economies of scale)
 Distribution channels (e.g., supermarket shelf space)
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12. Resources from Suppliers
 People – from schools, colleges and universities
 Raw materials – from producers, wholesalers, and
distributors
 Information – from researchers and consulting firms
 Financial capital – from banks and other sources
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13. Suppliers are important because…
 They can:
 Raise their prices
 Provide poor quality goods and services
 Fail to provide human resources
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14. Supply Chain Management
 The managing of the network of facilities and people
that obtain materials from outside the
organization, transform them into products and
distribute them to customers.
“The right product in the right quantity
available at the right place at the right time”
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15. Without customers, a company won’t
survive…
 Final consumers – those who purchase products in
their finished form.
 Intermediate consumers – those who purchase raw
materials or wholesale products before selling them to
final customers.
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16. Environmental Analysis
 Managers must identify organizational opportunities
and threats.
 Managers must use environmental analysis to make
decisions
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17. Environmental Scanning
 Searching for and sorting through information about
the environment that is unavailable to most people to
determine what is important.
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18. Questions managers can ask about the
environment
 Who are our current competitors?
 Are there few or many entry barriers to our industry?
 What substitutes exist for our product or service?
 Is the company too dependent on powerful suppliers?
 Is the company too dependent on powerful customers?
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19. Competitive Intelligence
 The information necessary to decide how best to
manage in the competitive environment they have
identified.
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20. Identifying Your Environment
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21. Scenario Development
Scenarios – alternative combinations of different factors
into a total picture of the environment and the firm.
Best-case scenario: occurrence of events that are
favorable to the firm
Worst-case scenario: occurrence of events that are
unfavorable to the firm
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22. Forecasting
 Predicts exactly how some variable or variables will
change the future.
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23. Successful forecasting involves
 Using multiple forecasts, and perhaps average their
predictions
 Remembering that accuracy decreases as you go further
into the future
 Collecting data carefully
 Using simple forecasts where possible
 Remembering that important events are often surprises
that depart from predictions
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24. Benchmarking
 Identifying the best-in-class performance by a
company in a given area and then comparing your
processes with theirs.
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25. Adapting at the boundaries
 Buffering – creating supplies of excess resources in
case of unpredictable needs
 Internal (Contingent workers)
 External (ending inventories)
 Smoothing – leveling normal fluctuations at the
boundaries of the environment
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26. Adapting at the core
 Flexible processes – methods for adapting the
technical core to changes in the environment.
 Mass customization – use of a network of independent
operating in which each performs a specific process or
task
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27. Influence your environment
Two proactive responses to changing the environment
 Independent action – when a company acts on its own
to change some aspect of its current environment.
 Cooperative action – two or more organizations work
together to change some aspect of the current
environment.
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28. Cooperative strategies make sense when…
1. Taking joint action will reduce the organizations’
costs and risks
2. Cooperation will increase their power (their ability
to successfully accomplish the changes they desire).
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29. Ways to change the boundaries of your
environment
 Strategic maneuvering – organizations can
redefine or change which environment they are in
 Domain selection – the entrance by a company
into another suitable market or industry.
 Diversification – when a firm invests in different
types of business or products or when it expands
geographically to reduce its dependence on a
single market or technology
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30. Ways to change the boundaries of your
environment (cont’d)
 Merger – when one or more companies combine
with another.
 Acquisition – when one firm buys another.
 Divestiture – when a firm sells or more
businesses.
 Prospectors – companies that continuously change the
boundaries for their task environments by seeking new
products and markets, diversifying and merging, or
acquiring new enterprises.
 Defenders – companies that stay within a stable product
domain as a strategic maneuver.
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31. Culture and the Internal Environment
 Culture – the set of important assumptions about the
organization and its goals and practices that members
of the company share.
 System of shared values about what is important and
beliefs about how the world works.
 Provides a framework that organizes and directs
people’s behavior on the job.
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32. Culture clues
 Corporate mission statements and official goals
 Business practices (how a company responds to
problems, makes strategic decisions, and treats
employees and customers)
 Symbols, rites, and ceremonies
 Stories (myths, legends, and true stories)
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33. The Ritz Carlton Service Values
“I Am Proud To Be Ritz-Carlton”
 I build strong relationships and create Ritz-Carlton guests for life.
 I am always responsive to the expressed and unexpressed wishes and needs of our guests.
 I am empowered to create unique, memorable and personal experiences for our guests.
 I understand my role in achieving the Key Success Factors and creating The Ritz-Carlton
Mystique.
 I continuously seek opportunities to innovate and improve The Ritz-Carlton experience.
 I own and immediately resolve guest problems.
 I create a work environment of teamwork and lateral service so that the needs of our guests
and each other are met.
 I have the opportunity to continuously learn and grow.
 I am involved in the planning of the work that affects me.
 I am proud of my professional appearance, language and behavior.
 I protect the privacy and security of our guests, my fellow employees and the company's
confidential information and assets.
 I am responsible for uncompromising levels of cleanliness and creating a safe and accident-
free environment.
Excerpt from www.corporate.ritzcarlton.com
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34. Types of Organizational Culture
Group culture Hierarchical culture
-internally oriented and - Internally oriented
flexible - Focused on control and
-based on value and stability
norms associated with - Values and norms
affiliation associated with a
-compliance stems from bureaucracy
trust, tradition, and long- - Values stability
term commitment - Assumes compliance will
-emphasizes member occur through formalized
development roles
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35. Types of Organizational Culture
Rational culture Adhocracy
- Externally oriented - Externally oriented
- Focused on control - Flexible
- Productivity, planning - Emphasizes change
and efficiency are (growth, resource
primary objectives acquisition, and
innovation)
- Members motivated by the
belief that performance - Members motivated by the
leads to rewards importance or idealogical
appeal
- Leaders are
entrepreneurial and risk
takers
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36. Managing cultures
 Make sure that underlying values align with the
desired culuture
 Managers should espouse lofty ideals and visions
for the company that will inspire organization
members
 Managers must give constant attention to the
mundane details of daily affairs and set examples
 Routinely celebrate and reward those who
exemplify the values
 Hire, socialize newcomers, and promote
employees based on the values
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37. What kind of culture do you want to work
in?
To determine the type of culture best fits you visit:
http://career-advice.monster.com/at-the-
interview/Assess-Company-Culture-to-Find-the-
/home.aspx
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39. You should be able to
 L01: Describe how do environmental forces influence
organizations influence their environments
 L02: Distinguish between the macroenvironment and
the competitive environment.
 L03: Explain why managers and organizations should
attend to economic and social developments.
2-39

40. You should be able to
 L04: Identify elements of the competitive
environment.
 L05: Summarize how organization respond to
environmental uncertainty.
 L06: Define elements of an organization’s culture.
 L07: Discuss how an organization’s culture affects its
response to its external environment.
2-40

41. Test Your Knowledge
An open system organization:
Inputs
___________, goods and services organizations
take in and use
Outputs
and ______________, products and services
organizations create.
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42. Test Your Knowledge
 Identify elements of the competitive
environment
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43. Test Your Knowledge
Describe the three ways that organizations can
respond to their environments.
1. Adapt to the environment
2. Influence the environment
3. Select a new environment
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44. Test Your Knowledge
The Ritz Carlton service values are an example of
which aspect of culture?
1. corporate mission statement
2. business practices
3. ceremony
4. myth
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