Management Leading Collaborating in a Competitive World

Chapter 2
THE EXTERNAL ENVIRONMENT
AND ORGANIZATIONAL CULTURE
KEY STUDENT QUESTIONS
The two questions that come up most often for this chapter are:
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1. “Can you explain again the difference between the macroenvironment
and the task environment?” (Or a request to explain a particular
element of either environment.)
2. “As a manager, what should I do to respond to a changing environment?”
Fortunately, the text has tools to help you deal with both of these questions more effectively.
• The first question is best addressed with examples, and students often find it useful to go through an example or two for a specific company. Start by discussing the high tech industry, using the information in the text and the “From the Pages of Business Week” section called “Google Steps into Microsoft’s Office.” Next, ask students to name a company with which they are familiar, and have them identify examples of each of the different environmental factors for that organization. If your students can’t think of an organization, try using something with which they are likely to be familiar, such as Kaiser Permanente (a large national HMO.) A completed example appears below in the instructions for Experiential Exercise 2.1, “External Environment Analysis” in the Class Prework Assignment.
• The second question is best addressed by having students work together to complete the concluding case study “Wild Water Gets Soaked.” The brainstorming activity that students do to complete the third discussion question for that case (“Now, create a plan for Wild Water. In your plan, describe what changes the organization needs to make to its culture to meet the upcoming challenges in the external environment. Then describe steps that Wild Water can take to compete successfully against the new amusement part. How can the Salernos keep their loyal customers happy while attracting new ones?”) also serves as an excellent introduction to Chapter 3 - Decision Making.
CLASS PREWORK ASSIGNMENT
EXERCISE 2.1: EXTERNAL ENVIRONMENT ANALYSIS
Objective
To give students the experience of performing an analysis of a company’s external environment.
Suggested Responses to Student Questions
1. Laws and Regulations. What are some key laws and regulations under which this company and the music industry must operate?
Key laws and regulations in the music industry might include copyright regulations, contracts, royalty practices in both retail sales and radio broadcasting, anti-trust, advertising regulations, foreign-trade practices.
2. Economy. How does the state of the economy influence the sales of this company’s products?
The state of the economy has traditionally had less of an immediate impact on the music industry than on some others. CDs and on-line music sales tend to be low-ticket items, and are less likely to be affected too adversely even by a recession. A key driver of sales is the presence or absence of popular new talent.
3. Technology. What new technologies strongly affect the company you have selected?
New technologies permitting on-line music sales, like iTunes, and recording and playing devices like iPod and upcoming cellphone technologies, increase the easy availability and sale of music products. They also allow music companies to avoid the expense of manufacturing and distributing CDs, and sharing sales revenues with retailers. A major downside is that new technologies permit easy copying of music without payment. Technology that can provide copyright protection (e.g., preventing unauthorized copying) may be one solution to this problem.
4. Demographics. What changes in the population might affect the company’s customer base?
Demographics affecting the company might include changes in the population of young people who are the primary purchasers of pop music (conversely, the gradual decrease in classical music sales as the demographic for that segment ages), and the growing importance of the Hispanic market.
5. Social Issues. What changes in society affect the market for your company’s music products?
Social issues affecting the company include not only the increased tolerance for illegal copying of music, already mentioned, but also the increased fragmentation of public tastes and interests. Objections to obscenity in lyrics, and the rising influence of the religious market, are other social factors influencing the music business.
6. Suppliers. How does your company’s relationship with suppliers affect its profitability?
The lower the cost of supplies, the more profit the company will make. In the music industry, supplies are both tangible (the cost of CDs and jewel cases, for example) and intangible (the money paid to artists.) Companies that introduce new artists take bigger risks, but also have smaller costs than companies that record and distribute the music of established acts.
7. Competitors. What companies compete with the firm you have selected? Do they compete on price, on quality, or on other factors?
Key competitors in the industry include Bertelsmann, EMI, Sony, Universal, and Warner Music. There used to be many more companies, but the industry has experienced considerable consolidation. (There might be even more consolidation but for anti-trust regulations in the U.S. and Europe.) The companies do not compete on price at all, or even on the quality of their products per se; the main sources of competitive advantage are the companies' backlist - the music copyrights they own - and, even more important, the new talent they are able to find and sign. Most music buyers do not know or care which company is selling the music they are buying.
8. New entrants. Are new competitors to the company likely? Possible?
Traditionally, new entrants were extremely unlikely; given the large capital investment the music business requires (millions to launch a new album, for example). That may still be the case, but today potential new entrants include music distributors themselves, like Apple, who can decide to bypass music companies and sign new talent on their own. This is unlikely, as companies like Apple currently do not have the expertise, experience, or perhaps even interest in the business. But it remains a possibility that music companies need to take into account, particularly as on-line distributors become an increasingly important part of the supply chain. In addition, the ability to sell music on line may reduce the need for some well-known artists to rely on the marketing and distribution capabilities of music companies, and to sell directly to consumers on their own.
9. Substitutes. Is there a threat of substitutes for the music industry’s existing products?
There are many substitute delivery systems for music, and the music industry is constantly being threatened by non-paying delivery systems. Music itself is more difficult to replace, however time spent on other forms of entertainment may decrease the amount of time and money spent on music.
10. Customers. What characteristics of the company’s customer base influence the company’s competitiveness?
Customers in the industry are characterized mainly by the fickleness, volatility, and unpredictability of their tastes. Only a small fraction of new releases succeed - and these are new releases issued by extremely experienced, knowledgeable companies, in an extremely competitive industry. Even sales of new albums by well-known groups are difficult to predict, and very few stars maintain their longevity. Customers also think there's nothing wrong with making free copies of music for their friends, nor do they have great affection and respect for music companies.
Suggested Responses to Discussion Questions
1. What has the company done to adapt to its environment?
To adapt to the environment, music companies are taking over more of the supply chain, manufacturing their own CDs and managing their own music clubs. They are making deals with on-line music distributors to sell individual songs. They are also increasing their on-line marketing efforts, as in letting AOL offer its customers music video and song samples.
2. How does the company attempt to influence its environment?
To influence the environment, music companies pay slotting fees to retailers to gain shelf space, and pay fees to ensure play time on radio stations. They heavily market new releases. They are aggressively seeking to enforce copyright laws forbidding illegal copying - their success in shutting down Napster is an example of that. They are also enlisting the artists themselves in an effort to educate and influence the public on the illegal copying issue. In the U.S., they are also asking the government to pressure China to reduce the widespread music piracy in that country.
USING THE “UNFOLDING CASE”
CAN INDRA NOOYI KEEP THE FIZZ IN PEPSICO’S PRODUCTS?
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Teaching Tip: This is a case that lends itself to visual aids. Generate interest by walking into class and placing a bottle of Pepsi, a box of Quaker oatmeal (or an oatmeal bar), and a bag of Frito-Lay potato chips on the table at the front of the room. Then ask students what the three products have in common. Few will realize that PepsiCo makes all three of them. After pointing that out, put a picture of Indra Nooyi on the screen (go here to download one) and describe the challenge Ms. Nooyi has ahead of her. As of October, 2007, she seems to be moving the company in the right direction - PepsiCo stock is up over 10% under her leadership.
CLASS ROADMAP
I. OBJECTIVE 1: DESCRIBE HOW ENVIRONMENTAL FORCES INFLUENCE ORGANIZATIONS, AND HOW ORGANIZATIONS CAN INFLUENCE THEIR ENVIRONMENTS
A. Organizations are open systems (Figure 2.1)
1. Receive financial, human, material and information resources from the environment
2. Transform resources into finished goods and services
3. Send outputs back into the environment
B. Organization/Environment Influences
1. When resources change, environment influences the organization
2. When outputs differ, organization influences the environment
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Student Discussion Question 1. This chapter’s opening quote by Peter Drucker said, “The essence of a business is outside itself.” What do you think this means? Do you agree?
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Example: In February, 2001, the last typewriter repair shop closed in New York City. Did it close because its employees didn’t do good work? Because of a poor organizational structure? No, the typewriter repair store simply fell victim to a changing environment - changes in technology decreased demand for services and finally shut the business down.
II. OBJECTIVE 2: DISTINGUISH BETWEEN THE MACROENVIRONMENT AND THE COMPETITIVE ENVIRONMENT. (Figure 2.2)
A. The Macroenvironment
1. Macroenvironment is defined by the most general elements in the external environment that can potentially influence strategic decisions
2. Laws and Regulations
a. U.S. government policies both impose strategic constraints and provide opportunities.
b. Government can affect business opportunities through tax laws, economic policies, and international trade rulings.
c. Regulators are specific government organizations in a firm’s more immediate task environment.
d. Regulatory agencies have the power to investigate company practices and take legal actions to ensure compliance with the laws are:
i. Occupational Safety and Health Administration (OSHA)
ii. Interstate Commerce Commission (ICC)
iii. Federal Aviation Administration (FAA)
iv. Equal Employment Opportunity Commission (EEOC)
v. National Labor Relations Board (NLRB)
vi. Office of Federal Contract Compliance Programs (OFCCP)
vii. Environmental Protection Agency (EPA)
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Example: In The macroenvironment is composed of international, legal and political, economic, technological and social forces that influence strategic decisions. Many of these factors affect a manager’s ability to function effectively and influence their strategic choices – interest and inflation rates, unemployment rates, rising energy costs, rising health care costs and changes in the value of the dollar to name a few. In Malaysia when the cost of doing business is artificially inflated, the customer bears the charge without any real gain in value. One such example was The Private Healthcare Facilities and Services Act 1998 and Regulations (2006). This act stipulate higher charges by private medical practitioners to which must be added the cost of registration.
III. OBJECTIVE 3: EXPLAIN WHY MANAGERS AND ORGANIZATIONS SHOULD ATTEND TO ECONOMIC AND SOCIAL DEVELOPMENTS
1. The Economy (Figure 2.3)
a. The economic environment dramatically affects companies’ ability to function effectively and influences their strategic choices.
b. Interest and inflation rates affect the availability and cost of capital, the ability to expand, prices, costs, and consumer demand for products.
c. Unemployment rates affect labor availability and the wages the firm must pass, as well as product demand.
2. Technology
a. Technological advances create new products. As technology evolves, new industries, markets, and competitive niches develop.
b. New technologies provide new production techniques. Sophisticated robots perform jobs without suffering fatigue.
c. New technologies also provide new ways to manage and communicate. Computerized management information systems (MIS) make information available when needed.
3. Demographics
a. Measures of various characteristics of the people comprising groups or other social units.
b. Work groups, organizations, countries, markets, or societies can be described statistically by referring to their members’ age, gender, family size, income, education, occupation, and so forth.
4. Social Issues and the Natural Environment
a. Societal trends regarding how people think and behave have major implications for management of the labor force, corporate social actions, and strategic decisions about products and markets.
b. Companies have introduced more supportive policies, including family leave, flexible working hours, and childcare assistance.
c. Prominent issues in today’s press pertain to natural resources.
d. The protection of the natural environment is important to managerial decisions.
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Student Discussion Question 2. What are the most important forces in the macroenvironment facing companies today?
IV. OBJECTIVE 4: IDENTIFY ELEMENTS OF THE COMPETITIVE ENVIRONMENT
A. The competitive environment (Figure 2.4)
1. Competitors
a. As a first step in understanding their competitive environment, organizations must identify their competitors, which may include:
i. small domestic firms
ii. overseas firms
iii. new domestic companies exploring new markets
iv. strong regional competitors
v. unusual entries, such as Internet shopping
b. The next step is to analyze how they compete.
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Management Close-Up Questions: Coca-Cola is not PepsiCo’s only competitor. What are some other firms with whom PepsiCo might compete for customers? Make a list of possible competitors.
Why is it important for Indra Nooyi and her management team to develop several strategies for competing with rivals?
2. Threat of New Entrants
a. Barriers to entry are conditions that prevent new companies from entering an industry.
b. Some major barriers to entry are government policy, capital requirements, brand identification, cost disadvantages, and distribution channels.
3. Threat of Substitutes (Table 2.1)
a. Technological advances and economic efficiencies are among the ways that firms can develop substitutes for existing products.
4. Suppliers
a. Suppliers provide the resources needed for production and may come in the form of people, raw materials, information, and financial capital.
b. Suppliers can raise their prices or provide poor quality goods and services.
c. Labor unions can go on strike or demand higher wages.
d. Workers may produce defective work.
5. Customers
a. Customers purchase the products or services the organization offers.
b. Final consumers are those who purchase products in their finished form.
c. Intermediate consumers are customers who purchase raw materials or wholesale products before selling them to final customers.
i. Customer service means giving customers what they want or need, the way they want it, the first time.
ii. Actions and attitudes that mean excellent customer service include:
a.) Speed of filling and delivering normal orders.
b.) Willingness to meet emergency needs.
c.) Merchandise delivered in good condition.
d.) Readiness to take back defective goods and re-supply quickly.
e.) Availability of installation and repair services and parts.
f.) Service charges (that is, whether services are “free” or priced separately).
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Student Discussion Question 3. Review the example in the three parts of the “Management Close-Up. What other organizations or industries have faced or are facing similar circumstances in their external environments?
Student Discussion Question 4. What are the main differences between the macroenvironment and the competitive environment?
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Teaching Tip: Have students review and give feedback on each others’ responses to the pre-class assignment (Experiential Exercise 2.1) at this point in the lecture. The best way to do this is in pairs. Each student reads the other’s paper, and then both students talk about environmental factors that have been misclassified, and other environmental factors that could be added. Students should correct their own papers before turning them in, and if possible, students should get feedback from the professor or teaching assistant about both the paper and the corrections.
V. OBJECTIVE 5: SUMMARIZE HOW ORGANIZATIONS RESPOND TO ENVIRONMENTAL UNCERTAINTY
A. Developments outside the organization can have a profound impact on the way managers operate.
1. Example: if little is known about customer likes and dislikes, organizations will have a difficult time designing new products, scheduling production, or developing market plans.
B. Environmental uncertainty
1. Managers do not have enough information about the environment to understand or predict the future.
2. Uncertainty arises from two related factors:
a. Environmental complexity, or the number of issues to which a manager must attend, as well as their interconnectedness.
b. Dynamism, or the degree of discontinuous change that occurs within the industry.
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Example: Recently, more and more Americans are becoming aware of the environment - specifically the air that they breathe. With concerns about global warming and pollution at an all-time high, people want to be sure that they and their companies are acting in environmentally responsible ways. Americans spend 90% of their time indoors and much of that at work. According to the EPA, air pollution is up to five times worse inside than outside. Harsh cleaning chemicals contribute to the problem. Approximately 37 million Americans suffer from chemical sensitivity, leading to increased absenteeism and health costs. Managers who promote the use of eco-cleaners, which do not evaporate harmful materials into the air, can reduce their costs, make the workplace safer for their workers, and improve their reputation as part of the “green movement”.
C. Environmental scanning
1. A process that involves searching out information that is unavailable to most people and sorting through that information in order to interpret what is important and what is not.
2. Competitive intelligence is the information necessary to decide how best to manage in the competitive environment they have identified. (Table 2.2)
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Example: Faced with declining customer-service ratings and prices higher than competitors, Michael Dell recently resumed the role of chief executive at the company he founded. His initial steps to be more competitive focused on eliminating redundancies throughout the business. He began by eliminating eight senior executives, suspending bonuses and providing limited discretionary awards to exceptional performers. Dell urged employees to work quickly to turnaround the company. He said “There is no luxury of time. The competitors are fierce.”
D. Scenario Development
1. Scenario is a narrative that describes a particular set of future conditions.
2. Best-case scenario--events occur that are favorable to the firm.
3. Worst-case scenario--events are all unfavorable.
4. Scenario development helps managers develop contingency plans for what they might do given different outcomes.
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Teaching Tip: Ask students to image different scenarios that might impact your school, and to develop contingency plans that might address those scenarios. This can either be done as a discussion question with the entire class, or students can work in groups to answer the question, and report back. For example, a possible scenario might center around a population boom or bust. In a population boom, universities might respond by setting up satellite campuses, whereas in a bust, universities might look for additional students by setting up international programs and/or programs targeted to meet the needs of working professionals.
E. Forecasting
1. Used to predict exactly how some variable or variables will change in the future.
2. The best advice for using forecasts might include the following:
a. Use multiple forecasts
b. Accuracy decreases the farther into the future you are trying to predict.
c. Forecasts are no better than the data used to construct them
d. Use simple forecasts
e. Important events often are surprises and represent a departure from predictions
F. Benchmarking
1. Benchmarking is the process of comparing the organization’s practices and technologies with those of other companies.
2. Benchmarking means identifying the best-in-class performance by a company in a given area.
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Student Discussion Question 6. What kinds of changes do companies make in response to environmental uncertainty?
VI. RESPONDING TO THE ENVIRONMENT
A. Adapting to the environment: changing yourself
1. Empowerment is the process of sharing power with employees, thereby enhancing their confidence in their ability to perform their jobs and their belief that they are influential contributors to the organization.
2. Four different approaches that organizations can take in adapting to environmental uncertainty are: (Table 2.3)
a. Decentralized bureaucratic (stable, complex environment)
b. Centralized bureaucratic (stable, simple environment)
c. Decentralized organic (dynamic, complex environment)
d. Centralized organic (dynamic, simple environment)
3. Adapting at the boundaries.
a. Buffering is creating supplies of excess resources in case of unpredictable needs.
b. Smoothing is leveling normal fluctuations at the boundaries of the environment.
4. Adapting at the core.
a. Flexible process allows for adaptation in the technical core to meet the varied and changing demands of customers.
B. Influencing your environment
1. Independent strategies are strategies that an organization acting on its own uses to change some aspect of its current environment. (Table 2.4)
2. Cooperative strategies are strategies used by two or more organizations working together to manage the external environment. (Table 2.5)
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Example: As global warming is threatening the viability of Aspen’s famed ski resort, companies there are responding by becoming pioneers in corporate environmentalism. Aspen uses biodiesel fuel in its bulldozer-sized snowcats, uses a speck of dust to seed artificial snowflake which consumes less water and energy, vehicle shop is partly heated with used motor oil, Coke machines run on motion sensors, toilets have two different flush settings—half flush and full flush, and resorts add $2 a day to the bill of every hotel guest donating it to the Aspen Valley Land Trust to preserve open space. Aspen managers must complete an environmental impact assessment for each request for capital spending. Auden Schendler, Aspen’s director of environmental affairs, wants “Aspen to be a thought leader – not just to be doing it, but talking about how we do it.”
This is a good example of both the public relations and voluntary action approaches to changing the environment. (Table 2.4)
C. Changing the environment you are in
1. Strategic maneuvering is the organization’s conscious efforts to change the boundaries of its task environment. It can take four basic forms:
a. Domain selection is the entrance by a company into another suitable market or industry.
b. Diversification occurs when a firm invests in different types of businesses or products, or when it expands geographically to reduce its dependence on a single market or technology.
c. A merger or acquisition takes place when two or more firms combine, or one firm buys another, to form a single company.
d. Divestiture occurs when a company sells one or more businesses.
2. Prospectors are companies that continuously change the boundaries of their task environments by seeking new products and markets, diversifying and merging, or acquiring new enterprises.
3. Defenders are companies that stay within a more limited, stable product domain.
D. Choosing a response approach
1. Three general considerations help guide management’s response to the environment.
a. Change appropriate elements of the environment.
b. Choose responses that focus on pertinent elements of the environment.
c. Choose responses that offer the most benefit at the lowest cost.
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Student Discussion Question 6. We outlined several proactive responses that organizations can make to the environment. What examples have you seen recently of an organization’s responding effectively to its environment? Did the effectiveness of the response depend on whether the organization was facing a threat or an opportunity?
VII. OBJECTIVE 6: DEFINE ELEMENTS OF AN ORGANIZATION’S CULTURE
A. Organizational culture is the set of important assumptions about the organization and its goals and practices that members of the company share.
1. Strong cultures
a. Everyone understands and believes in firm’s goals, priorities, and practices.
b. An advantage if appropriate behaviors are supported.
2. Weak cultures
a. Different people hold different values
b. Confusion about corporate goals
c. Not clear what principles should guide decisions
3. Culture can be diagnosed through:
a. Corporate mission statements and official goals. (Figure 2.5)
b. Business practices.
c. Symbols, rites, and ceremonies.
d. The stories people tell.
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Example: Jeff Bezos, the founder of Amazon.com, is adamant about his company’s culture. In a recent interview with the Harvard Business Review, he says, “First, we are willing to plant seeds and wait a long time for them to turn into trees.” He also says that he pays as much attention to what’s NOT going to change in the next five to ten years, as he does to what’s going to change. In this way, he believes he can create a stable, long-lasting strategy, rather than a strategy that has to be constantly reinvented. At the same time, he is totally customer-focused. He says that when a decision is “too hard”, the way to answer it is to say “Well, what’s better for the consumer?” One of the business practices that best defines Amazon.com’s corporate culture is that every person in the organization, no matter what their job title, has to spend two days doing customer service in a call center every two years.
4. Four types of organizational culture (Figure 2.6)
a. Group culture - flexible, internal focus
b. Hierarchical structure - controlling, internal focus
c. Rational culture - controlling, external focus
d. Adhocracy - flexible, external focus
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Student Discussion Question 7. Select two organizations that you are interested in. Research information about the firms or talk with an employee, if possible. What types of cultures do they have? Write a paragraph that describes each culture.
Student Discussion Question 8. When you visited colleges to select one to attend, were there cultural differences in the campuses that made a difference in your choice? Did these help you decide which college to attend?
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EXPERIENTIAL EXERCISE 2.2 - CORPORATE CULTURE PREFERENCE SCALE
Objectives
• To expose students to different types of corporate cultures.
• To help students identify the kind of organization in which they would most like to work.
• To help students see how classroom cultures can differ along the same lines as corporate cultures.
Case Discussion Questions:
1. Review the four types of corporate cultures outlined in the exercise. Working in small groups, give examples of classes you’ve taken that correspond to each of the different types of corporate culture dimensions.
Student responses will vary, but in general, you can expect to see the following differences across different types of classrooms:
Control Culture - These classes have professors that are firmly in charge of the class, and let students know it. Typically, professors in a control culture will take roll, have large amounts of homework (which may or may not be meaningful to the students), and will give difficult tests that may or may not be related to the work done previously in class. Control culture classes often place a lot of emphasis on memorization as a learning tool.
Performance Culture - These classes have professors that are interested in learning, and who foster a learning environment with their students. Class assignments are typically relevant and give students new skills, and although tests may be difficult, they are clearly related to what has been presented in class. Students often describe these classes as challenging, but fair and interesting. In a performance culture, the primary emphasis is on learning and growth.
Relationship Culture - These classes have professors that become ‘friends’ with students. Students feel that their opinions count, that their voices are heard, and that they contribute to learning, along with the professor.
Responsive Culture - This class is constantly changing to keep up with the latest changes in the field. It may be taught online, or it may evolve as students bring in additional information.
2. How do you know what kind of culture a class has? What do you look for that tells you how the class is going to be?
Again, student responses will vary, but students are likely to talk about professor behavior (business practices), the class syllabus (corporate mission statement and official goals), ritualized behaviors such as distributing paperwork and taking roll (symbol, rites, and ceremonies), and student reviews of the class (the stories people tell.)
VIII. OBJECTIVE 7: DISCUSS HOW AN ORGANIZATION’S CULTURE AFFECTS ITS RESPONSE TO ITS EXTERNAL ENVIRONMENT.
A. Managing Culture
1. Top managers should espouse lofty goals.
2. Executives must communicate regularly.
3. Managers must make hard choices based on values.
4. Managers should celebrate and reward those who exemplify new values.
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Management Close-Up Questions. Describe PepsiCo’s organization culture. Would you like to work there? Why or why not?
How does PepsiCo’s culture contribute to its overall strategy to compete in its environment? What factors in its macro-environment must the company consider as it expands its global reach? List those factors and some strategies that might help it succeed.
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CONCLUDING CASE - WILD WATER GETS SOAKED
Case Summary:
This case reveals how important it is to organizations of all sizes to be prepared and ready to implement changes in business scope and even product mix in order to combat the effects of external forces. As the case depicts, external environmental changes – changes in competition and consumers’ preference, to name a few - often strongly impact upon companies. Changes such as these often necessitate that an organization, desiring to remain profitable, must be willing to modify operations to better accommodate its changing consumers’ needs.
Chapter Topics Related to the Case:
• Discuss how environmental forces impact organizations
• Describe the purpose of an environmental analysis
• Discuss how organizations like the Salernos operation can conduct environmental analyses
• Identify how an organization can better adapt to the demands of its external environment
• Identify how an organization can influence its external environment
• Differentiate between an organization’s external and competitive environments
Case Discussion Questions:
1. Imagine that you are a management consultant hired by the Salernos to help them navigate the choppy waters ahead. First, describe the elements of the macroenvironment and competitive environment that affect Wild Water now. Then describe elements that you anticipate will affect the water park in the next few years.
The elements of the macroenvironment that are going to be affecting Wild Water are demographics (the changing clientele attracted by the new condos), technology (the upscale chain park), the economy (the price of tickets, along with the costs of running the park), laws and politics (the new state safety law). Wild Water will also be affected by the competitive environment in the form of rivals (the chain park), substitutes (golf, deep-sea fishing trips), and a customer base that is potentially changing.
2. Next, describe the organization’s culture. Discuss how the current culture affects the way it responds to the organization’s external environment.
Wild Water has a strong group culture. Despite the “hierarchy”, employees at Wild Water are considered “family”, and there is a sense of cohesiveness, participation, and teamwork. Having a group culture means that the staff at Wild Water are probably going to care more about loyalty, tradition, and developing employees than they will about gaining a competitive advantage or market superiority. And having a strong culture means that if Wild Water can identify and support appropriate behaviors for moving the company forward.
3. Now, create a plan for Wild Water. In your plan, describe what changes the organization needs to make in its culture to meet upcoming challenges in the external environment. Then describe steps that Wild Water can take to compete successfully against the new amusement park. How can the Salernos keep their loyal customers happy while attracting new ones?
The first thing Wild Water managers will need to do is to understand the changes to their environmental and competitive environments. As noted in the text, there are three considerations that guide the choice of a response approach to the environment: 1) changing the appropriate elements of the environment; 2) choosing responses that focus on pertinent elements of the environment; and 3) choosing responses that offer the most benefit at the lowest cost. In this case, independent action may be the best way for Wild Water to change the environment. If they started working right away, they would be able to bring their park up to the new safety standard laws. The next thing they need to do is embark on a public relations campaign - making sure that their best features are highlighted in advertising, and that the advertising reaches the right people. They may not be able to compete head-to-head with the new chain park, but they may still be able to engage in competitive aggression through the use of aggressive pricing.
SUGGESTED RESPONSES TO THE END OF CHAPTER DISCUSSION QUESTIONS
1. This chapter’s opening quote by Peter Drucker said, “The essence of a business is outside itself.” What do you think this means? Do you agree?
Students may ask: What is meant by the word “essence?” It has a number of meanings. However, according the dictionary, it means “that which makes something what it is.” And, using this definition, the statement can be interpreted to mean that it is the outside environments that determine the nature of business.
This can be illustrated through the use of an example. A new automobile manufacturer entering the U.S. market is faced with three large domestic companies and a number of well-established foreign firms. The newcomer’s strategy has to take this external environment into consideration. This can be contrasted with a new company entering a business in which the competition is limited to three or four small firms.
However, one can argue that even though the external environments can have a dramatic impact on a business, it is still management’s responsibility to develop a unique strategy to enable the firm to grow and prosper given constraints of the external environment.
2. What are the most important forces in the macroenvironment facing companies today?
In order to answer this question, the student probably needs to recognize that different companies operate in different industries and a critical macroenvironment force facing one company may be a minor factor for another. Three examples are given below:
 Economy. The economy is always a factor. A booming economy may allow a new business to grow and prosper while a depressed economy would cause it to fail. Some businesses do very well in booming economies whereas others (notably the entertainment industry) seem to flourish during times when the economy is weak.
 Technology. Consider the impact of rapidly changing technology on the computer industry. Most of the early innovators are no longer in business, and many of the current leaders might not survive another dramatic change in technology. And yet, in other industries (such as candy making), the technology has been unchanged for many years.
 Political/legal. This factor is having a major impact on the television/telephone/computer interface. Political efforts to increase competition in the cable television industry will probably be a major factor for many years to come.
Students should be able to identify industries in which each of the forces in the macroenvironment is playing a major role or, at least, have done so in the past.
3. Review the example in the three parts of the “Management Close-Up. What other organizations have faced or are facing similar circumstances in their external environments?
PepsiCo faces an extraordinarily strong competitor - the rivalry between Pepsi and Coke is legendary. But Pepsi also faces competition from other snack food companies such as Nabisco and even breakfast food companies such as Kellogg’s or Sara Lee. Many industries are seeing greater competition these days - even the once stable world of banking. Mergers such as the Bank of America/Wachovia merger echo Pepsi’s approach to gaining market share.
4. What are the main differences between the macroenvironment and the competitive environment?
The macroenvironment consists of the major forces (international, economic, social and natural, demographic, technological, and political/legal) which affect all businesses to some degree.
The competitive environment. While this is also part of the external environment, it is viewed separately from the macroenvironment in that it focuses on the competitive forces that are specific to each business.
5. What kinds of changes do companies make in response to environmental uncertainty?
Organizations may adapt to the environment by altering their work structures and work processes in order to reduce uncertainty. When uncertainty arises due to environmental complexity, many organizations adopt more decentralized decision-making structures. This allows people with the most direct knowledge of a particular product or operation to make important decisions rather than a centralized unit that may be more removed from the daily business activities. When uncertainty arises due to changes in the environment, many organizations adopt more flexible structures. When technologies, customers, and competitors change rapidly, a highly rigid, bureaucratized organization is less able to respond effectively. Organizations can adapt to uncertainty by buffering at both the input and output sides of their boundaries. They may do this by hiring temporary workers during rush periods on the input side, and by maintaining an inventory in order to manage a rush of orders on the output side. Organizations may also adapt at their core by establishing flexible processes such as mass customization which allows an organization to produce in large quantities at low cost, yet still offer individual customization.
6. We outlined several proactive responses organization can make to the environment. What examples have you seen recently of an organization responding effectively to its environment? Did the effectiveness of the response depend upon whether the organization was facing a threat or an opportunity?
A number of proactive responses to the environment are identified in the text:
Independent strategies The firm acts on its own to change some aspect of the current environment through competitive aggression, competitive pacification, public relations, voluntary action, legal action, or political action.
Cooperative strategies The firm works with another organization to either reduce their costs and risks or increase their power relative to the environment.
Strategic maneuvering The firm attempts to change the boundaries of its competitive environment through domain selection (entering new markets with limited competition or regulation), diversification (investing in different types of business), mergers and acquisitions, and divestiture.
Students should try to identify firms that are adopting each of these strategies and whether or not they are doing so in response to a threat or an opportunity.
7. Select two organizations that you are interested in. Research information about the firms or talk with an employee if possible. What types of cultures do they have? Write a paragraph that describes each culture.
Student response will vary, but a sample paragraph might look something like this. “Company X seems to really care about their new employees. The employee I spoke to told me that the company actively encourages employees to move from job to job within the organization - that sounded great to me. In addition, I found out that people have a lot of flexibility to work on their terms - for example, being in the office at 9am doesn’t matter as much as whether or not you get the job done. To me, this company looks like it has a group culture.” (By the way, the company mentioned in the paragraph is Deloitte, which actively reaches out to “Gen Y” employees.)
8. When you visited colleges to select one to attend, were there cultural differences in the campuses that made a difference in your choice? Did these differences help you decide which college to attend?
Student responses to this question will differ widely, but if they are understanding the concept of culture, they should talk about the “feeling” a place has - organized, productive, friendly, etc. If students have visited several college campuses, they should definitely be able to talk about difference in culture for each campus. For example, 30 years ago, when the author of this instructors manual visited difference colleges in California, she perceived USC as being very sports-oriented (“Go Tommy Trojan!”), Occidental as being very arts-oriented and exclusive, UCSD as a school that produced “renaissance people”, CalTech as being a place for brains and geeks, and San Diego State as a party school. Note that all of these perceptions of culture have value judgments attached to them, and they may or may not be accurate. They did, however, influence the author’s choice of college!
LECTURETTE 2.1 – “EXTERNAL RISK ANALYSIS FOR THE MULTINATIONAL”
INTRODUCTION
1. One of the most critical dimensions of today’s international business environment is the complex and dynamic nature of political risk analysis. The impact of political events in the international arena has significant repercussions for the multinational corporations, the host country, and the home country as well.
2. Certainly, the entire scope of international business exposes the firm to unusually greater amounts of risk and uncertainty than traditionally found in the domestic market, but the most provocative risks are those of an international nature.
3. Despite the political risks involved, multinational firms continue to invest overseas for a number of reasons including:
 Capturing new markets
 Gaining access to raw materials.
 Reducing tax burdens.
 Lowering production costs.
THE NATURE OF POLITICAL RISK
1. Political risk has been defined as the uncertainty that comes from both anticipated and unexpected acts by governments and other organizations, which may have adverse effects on businesses.
2. The multinational corporation typically analyzes political risk from seven major perspectives:
 Leadership succession.
 Historical tendency to nationalize.
 Labor agitation and worker participation in management.
 Civil disorder, violence, and terrorism.
 Military unrest.
 External territorial disputes
 Economic policies concerning foreign investments.
3. Overall, the whole complex issue of political risk can be viewed under two contrasting perspectives:
 Political risk in terms of host government interventions into foreign business operations.
 Political risk in terms of host government instability.
HOST GOVERNMENT INTERVENTION
1. Political risk resulting from potential government intervention deals with corporate losses that are attributable to some overt action by the host government.
2. The most commonly identified forms of risk arising from government intervention are:
 Trade restrictions.
 External exchange restrictions.
 Limitations on the repatriation of profits.
 Default or government repudiation of external debt.
 Production/sale restrictions.
 Expropriation.
 Confiscation, with or without compensation.
3. Experts agree that the assessment of political risk according to the above interventionist possibilities does not provide an adequate evaluation of the total risk situation for the multinational corporation. It is also necessary to assess the political risk with respect to the degree of instability in the national environment of the host country.
HOST GOVERNMENT INSTABILITY
1. Analysts who study political risk must address the potential loss resulting from instability or discontinuity within the national environment of the host government.
2. Commonly identified risks that fall into this category include:
 Wars—arising from within or outside the country.
 Ethnic/class/religious conflict.
 Revolution.
 Coup d’état.
 New international alliances.
 Changes in ideology and business policy.
LECTURETTE 2.2 – “ENVIRONMENTAL SCANNING AND AWARENESS:
THE CHANGING BUSINESS ENVIRONMENT
1. In today’s dynamic business environment, no manager can succeed without the ability to scan the environment to determine what is happening or about to happen that is of importance to the firm and then to take appropriate action in order to stay ahead of those changing conditions.
2. Environmental scanning can be defined as a methodology for coping with the external issues (economic, political, social, cultural, technological, international, and so on) that may be difficult to detect or predict but that can’t be ignored and will not go away.
3. Environmental scanning deals with issues that do not lend themselves to self-centered or unilateral definition or solution, but that inexorably may influence the organization’s growth, performance, and survival.
4. The successful manager must learn to scan and analyze the external environment, identifying opportunities and threats and taking action to take advantage of the opportunities and to defend against threats.
5. When engaging in this specialized task of environmental scanning, the manager must constantly be reminded of the two following critical issues.
A. The manager’s organization does not exist in a state of isolation, but is inherently interrelated with a myriad of other environmental elements.
 Furthermore, this complexity of interacting relationships is under a constant state of change, which is often surprisingly sudden and, at other times, is so slow as to be deceivingly insidious.
 The opportunities and threats that exist explain many of the shifts in the so-called ”Fortune 500.” Not all companies just keep growing bigger and bigger. Many become smaller, and small firms grow to replace them.
 A study reported in Fortune found that only about half of the original “Fortune 500” companies are still in that high ranking today. The missing firms either went out of business or were the victims of mergers or takeovers. Thirty percent of the 1980 listing on the “Fortune 500” were too small for that honor in 1955.
B. Managers must appreciate the extreme complexity of the many environmental elements.
 Each of these external factors may have uniquely different impacts on the separate units within the organization.
6. The one thing that is certain about the external business environment is that it is changing more rapidly and less predictably than at any time in history.
7. Furthermore, too many managers fail to comprehend the massive impact of this change, and they fail to employ the proper tools for appropriate strategic management.
THE SUCCESSFUL ENVIRONMENTAL SCANNER
1. If environmental scanning is defined as that management philosophy/skill necessary for analyzing and predicting the firm’s external conditions, then effective environmental scanning must be proactive, with emphasis on the future—future events, future issues, future decisions, and future data.
2. The modern manager must be able to act quickly and be able to:
 Translate abstractions into detailed aspects of business operations.
 Visualize what major industry trends will mean to the recruitment and selection of a work force over the next decade.
 Recognize what major industry trends will mean to the maintenance of an adequate supply of raw materials and components over the next decade.
 Appreciate what major industry trends will mean to the procurement and/or development of machinery and technology for the next decade.
 Understand broad trends that are impacting society and translate them into specific managerial decisions about new products, new services, new sales developments, and other operational details.
 Realize the important strategic implications of a current event that may seem to be commonplace and routine.
3. In order to translate environmental scanning information, a manager must:
 Develop a way of thinking about management that takes into account the almost overwhelming amount of management information that is now available.
 Operate from within a framework that allows one task specialty to relate to another.
 Rise above the routine of day-to-day operations in order to appreciate how the company relates to its total environment.
VIDEO SUPPLEMENTS
Principles of Management Video DVD
• Show the segment New Belgium Brewery: Organizational Culture (11:00). Video cases and quizzes for students can be found at www.mhhe.com/bateman8e. Instructor notes are located on the website as well.
• Or show the segment Not Just a Game: The Battle Over Playstation (3:12). Video cases and quizzes for students can be found at www.mhhe.com/bateman8e. Instructor notes are located on the website as well.
Management in the Movies DVD
• The movie clip from Hoosiers called “Warm Welcome” is appropriate for this chapter. Instructor notes can be found on the Instructor side at www.mhhe.com/bateman8e. Students can also find shorter notes on the student side of the website.
Destination CEO Clips (Online/Premium Content)
• Instruct students to watch any of the following clips at the website (they will have to have access to the premium content on the website). After viewing the clips, they will be able to answer a few multiple choice and essay questions and submit their responses in print form, or email them to the instructor. Instructor teaching notes and suggested answer responses can be found at www.mhhe.com/bateman8e.
 Darden Restaurants
 Motorola
 Southwest Airlines (also on the Principles of Management Video DVD)
Manager’s Hot Seat (Online/Premium Content)
• There is not a Hot Seat segment that is particularly useful for this chapter.

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