1. Chapter 3 Organizational Environments and Cultures
MGMT
Chuck Williams
Designed & Prepared by B-books, Ltd.

2. External Environments
After reading the next four sections, you should be able to:
discuss how changing environments affect organizations.
describe the four components of the general environment.
explain the five components of the specific environment
describe the process that companies use to make sense of their changing environments.

3. Changing Environments
Environmental Change
Environmental Complexity
Resource Scarcity Uncertainty
Characteristics of Changing External Environments
External environments are the forces and events outside a company that have the potential to influence or affect it. 1

4. Environmental Change
Environmental Change is the rate at which a company’s environments change
stable environments
dynamic environments
Punctuated equilibrium theory
Companies cycle through stable and dynamic environments.
The rate of environmental change affects many organizational aspects, particularly decision making.
In stable environments, the rate of environmental change is slow - decision makers can be more deliberate.
In dynamic environments, the rate of environmental change is fast - decision makers must be nimble and quick.
The fast-paced world of EA Sports is a good example of a dynamic environment. EA Sports business environment changes quickly. With development and marketing costs exceeding $25 million for some games, unpopular games could signal ruin for the company.
While it would seem that companies would either be in stable external environments or dynamic external environments, recent research suggests that companies often experience both stable and dynamic external environments. Punctuated equilibrium theory says that companies go through long, simple periods of stability (equilibrium), followed by short, complex periods of dynamic, fundamental change (revolutionary periods), finishing with a return to stability (new equilibrium). Refer to Exhibit 3.1 and relate this theory to the U.S. airline industry.
1.1

5. Environmental Complexity
Environmental Complexity: the number of external factors in the environment that affect organizations
Simple environments Complex environments
The more complex an organization’s environment is, the more difficult it is for its managers to make decisions. Increasing complexity means that managers must track and deal with more environmental factors.
Simple environments include the dairy industry and the liquor distribution industry. The key systems for each have not changes for nearly a century.
The changing nature of Kellogg’s environment is a good example of an organization dealing with an increasingly complex environment. Cereal companies face more competition, have been forced to make price cuts, and have been threatened by cheaper private-label store brands, such as those by Wal-Mart. Furthermore, a larger percentage of consumers eat breakfast on the run instead of cereals.
1.2

6. Resource Scarcity Resource Scarcity
The degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources
The third characteristic of external environments is resource scarcity: the degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources.
For example, flat-screen, LCD televisions are more expensive than regular TVs is because there aren’t enough LCD screen factories to meet demand. Furthermore, the manufacturing process is complex and difficult to manage.
1.3

7. Natural Resources
The scarcity of natural resources is a general concern. Companies like Weyerhauser work extra hard to correct the misperception that they are using up valuable resources. In fact, through careful planning and good management, Weyerhauser is able to both guarantee its lumber resources and be a good environmental steward.
There is general concern over the scarcity of natural resources, so companies like Weyerhauser have to work extra hard to correct the misperception that they are using up valuable resources. In fact, through careful planning and good management, Weyerhauser is able to both guarantee its lumber resources and be a good environmental steward.

8. Uncertainty
Environmental change, environmental complexity, and resource scarcity affect environmental uncertainty, as shown Exhibit 3.1.
At the left side of the figure, environmental uncertainty is lowest when environmental change and complexity are at low levels and resources are plentiful. By contrast, the right side indicates that environmental uncertainty is highest when environmental change and complexity are extensive and resources are scarce.
In these environments, managers may not be at all confident that they can understand and predict the external forces affecting their businesses.
1.4

9. External Environment 2 Specific Environment
Exhibit 3.2 shows the two kinds of external environments that influence organizations: the general environment and the specific environment.
The general environment consists of the economy and the technological, sociocultural, and political/legal trends that indirectly affect all organizations. Changes in any sector of the general environment eventually affect most organizations. For example, most businesses benefit when the Federal Reserve lowers its prime lending rate, because banks and credit card companies will then lower the interest rates they charge for loans. Consumers, who can then borrow money more cheaply, will borrow more money to buy homes, cars, refrigerators, and large-screen TVs.
By contrast, each organization has a specific environment that is unique to that firm’s industry and directly affects the way it conducts day-to-day business. The specific environment includes customers, competitors, suppliers, industry regulation, and advocacy groups.
Specific Environment 2

10. Components of the General Environment
Economy
Technological trends
Sociocultural trends
Political / Legal trends
The general environment consists of the economy and the technological, sociocultural, and political/legal trends that indirectly affect all organizations.
More information follows. 2

11. Economy Growing vs. shrinking economies
Predicting future economic activity
Business confidence indices
The current state of a country’s economy affects most organizations operating in it. In a growing economy, more people are working and have more money to spend. A growing economy provides an environment favorable to business growth. By contrast, in a shrinking economy, consumers have less money to spend and relatively fewer products, making growth for individual businesses more difficult.
Because economic statistics can be such poor predictors, some managers try to predict future economic activity by keeping track of business confidence. Business confidence indices show how confident actual managers are about future business growth. For example, the Fortune Business Confidence Index is a monthly survey of chief financial offices at large Fortune 1000 firms.
Another widely cited measure is the U.S. Chamber of Commerce Business Confidence Index, which asks 7,000 small business owners to express their optimism (or pessimism) about future business sales and prospects. Managers often prefer business confidence indices to economic statistics, because they know that the level of confidence reported by real managers affects their business decisions. In other words, it’s reasonable to expect managers to make decisions today that are in line with their expectations concerning the economy’s future.
2.1

12. Technological Component
Information
Output
Input
Technology Knowledge
Tools
Techniques
Raw Materials
Services
Products
Technology is the knowledge, tools, and techniques used to transform input into output. For example, the knowledge of authors, editors, and artists (technology) and the use of equipment like computers and printing presses (also technology) transformed paper, ink, and glue (raw material inputs) into this book (the finished product). In the case of a service company such as an airline, the technology would consist of equipment, such as airplanes, repair tools, and computers, and the knowledge of mechanics, ticketers, and flight crews. The output would be the service of transporting people from one place to another.
Companies must embrace new technology and use it to improve products and services or decrease costs. If they don’t, they will lose out to competitors who do. Chapter 7, on Organizational Change and Innovation, provides a more in-depth discussion of how technology affects a company’s competitive advantage.
2.2

13. Impact of Technology
Technology can be a great benefit or a daunting threat. MP3 players have created a tremendous new business
While technological changes can benefit a business, they can also threaten it. For example, the impact of Kazaa.com has affected the sales of music CDs significantly.
opportunity for some, like Apple, Creative, and other manufacturers. But record labels have suffered from the rapid acceptance of digital music and persistent file swapping.
2.2

14. Sociocultural Component
Demographic changes
Changes in behavior, attitudes, and beliefs
The sociocultural component of the general environment refers to the demographic characteristics and general behavior, attitudes, and beliefs of people in a particular society.
First, changing demographic characteristics, such as the number of people with particular skills or the growth or decline in particular population segments (single or married; old or young; men or women; Caucasians, Hispanics, Blacks, or Asians; etc.), affect how companies run their businesses. For example, the next slide shows that married women with children are more likely to work today than four decades ago.
Today, with traffic congestion creating longer commutes and with both parents working longer hours, employees are much more likely to value products and services that allow them to recapture free time with their families. Priscilla La Barbera, a marketing professor at New York University, believes that there’s been a “societal shift” in the way people view their free time. She said, “…people are beginning to realize that their time has real value.” Companies, such as CDW in Vernon, Illinois, provide a service that picks up dry cleaning at employees’ desks. At First Command Financial Planning, Fort Worth, Texas, employees can borrow movies and receive free shoe shining and car washing.
Sociocultural changes in behavior, attitudes, and beliefs also affect the demand for a business’s products and services. Today’s harried worker/parent can find services that have all the supplies you need for kids’ birthday parties. These services are a direct result of the need for more efficient time management, which is a result of the sociocultural changes associated with a much higher percentage of women in the work place.
2.3

15. Demographics Example
2.3

16. Political / Legal Component
Legislation
Regulations
Court decisions
Managers must be educated about the laws, regulations, and potential lawsuits that could affect business
The political/legal component includes the legislation, regulations, and court decisions that govern and regulate business behavior. In recent years, new laws and regulations have imposed additional responsibilities on companies. Unfortunately, many managers are unaware of these new responsibilities.
Another area in which companies face potential legal risks these days is from customer-initiated lawsuits. For example, under product liability law, manufacturers can be liable for products made decades ago. Also, the law, as it is now written, does not consider whether manufactured products have been properly maintained and used.
From a managerial perspective, the best medicine against legal risk is prevention. As a manager, it is your responsibility to educate yourself about the laws and regulations and potential lawsuits that could affect your business. Failure to do so may put you and your company at risk of sizable penalties, fines, or legal charges.
Web Link
2.4

17. Specific Environment Customer Competitor Supplier Industry Regulation
Advocacy Group
In contrast to general environments that indirectly influence organizations, changes in an organization’s specific environment directly affect the way a company conducts its business. If customers decide to use another product, or a competitor cuts prices 10 percent, or a supplier can’t deliver raw materials, or federal regulators specify that industry pollutants must be reduced, or environmental groups accuse your company of selling unsafe products, the impact on your business is immediate. 3

18. Monitoring customer wants and needs is critical for business success
Customer Component
Monitoring customer wants and needs is critical for business success
Reactive customer monitoring
responding to problems, trends, and events
Proactive customer monitoring
anticipating problems, trends, and events
Customers purchase products and services, and companies cannot exist without customer support. Therefore, monitoring customers’ changing wants and needs is critical to business success.
There are two basic strategies for monitoring customers: reactive and proactive. Reactive customer monitoring is identifying and addressing customer trends and problems after they occur. One reactive strategy is to identify customer concerns by listening closely to customer complaints. Not only does listening to complaints help identify problems, but the way in which companies respond to complaints indicates how closely they are attending to customer concerns. For example, companies that respond quickly to customer letters of complaint are viewed much more favorably than companies that are slow to respond or never respond. In particular, studies have shown that when a company’s follow-up letter thanks customers for writing, offers a sincere, specific response to the customer’s complaint, and contains a small gift, coupons, or a refund to make up for the problem, customers will be much more likely to purchase products or services again from that company.
Proactive monitoring of customers means trying to sense events, trends, and problems before they occur (or before customers complain).
3.1

19. Competitor Component Competitive Analysis
Deciding who your competitors are
Anticipating competitors’ moves
Determining competitors’ strengths and weaknesses
Often, the differences between business success and failure comes down to whether your company is doing a better job of satisfying customer wants and needs than is the competition. Consequently, companies need to keep close track of what their competitors are doing. This is called competitive analysis.
Managers tend to make two mistakes when they do their competitive analysis:
They tend to focus on only two or three well-known competitors with similar goals and resources.
They underestimate potential competitors’ capabilities. When this happens, managers don’t take the steps they should to continue to improve their products or services. The result can be significant decreases in both market share and profits.
3.2

20. Opportunistic Behavior Relationship Behavior
Supplier Component
Opportunistic Behavior
Suppliers
Buyer Dependence
Supplier Dependence
Relationship Behavior
Suppliers are companies that provide material, human, financial, and informational resources to other companies.
A key factor influencing the relationship between companies and their suppliers is how dependent they are on each other.
Supplier dependence is the degree to which a company relies on a supplier because of the importance of the supplier’s product to the company and the difficulty of finding other sources of that product.
Buyer dependence is degree to which a supplier relies on a buyer because of the importance of that buyer to the supplier and the difficulty of selling its products to other buyers.
A higher degree of buyer or seller dependence can lead to opportunistic behavior, in which one party benefits at the expense of the other. Opportunistic behavior between buyers and suppliers will never be completely eliminated. However, many companies believe that both buyers and suppliers can benefit by improving the buyer-supplier relationship.
Relationship behavior focuses on establishing a mutually beneficial, long-term relationship between buyers and suppliers.
3.3

21. Industry Regulation Component
Regulations and rules that govern the business practices and procedures of specific industries, businesses, and professions
The industry regulation component consists of regulations and rules that govern the practices and procedures of specific industries, businesses, and professions.
Regulatory agencies affect businesses by creating and enforcing rules and regulations to protect consumers, workers, or society as a whole.
Overall, the number and cost of federal regulations has nearly tripled in the last 25 years. However, businesses are not just subject to federal regulations. For every $1 the federal government spends creating regulations, businesses spend $45 to comply with them. They must also meet state, county, and city regulations, too. Surveys indicate that managers rank government regulation as one of the most demanding and frustrating parts of their jobs.
3.4

22. Federal Regulation Agencies
Consumer Product Safety Commission
Department of Labor
Environmental Protection Agency
Equal Employment Opportunity Commission
Federal Communications Commission
Federal Reserve System
Federal Trade Commission
Food and Drug Administration
National Labor Relations Board
nlrb.gov
Occupational Safety and Health Administration
Securities and Exchange Commission
3.4

23. And that’s just for manufacturing.
Cost of Compliance
Researchers studied U.S. manufacturers and the costs they incur complying with the 25 major federal regulations. They found:
There are about 300,000 manufacturing companies in the U.S.
Each company spends roughly $2.2 million
So, the aggregate cost of complying with federal regulations is roughly
$660 billion
And that’s just for manufacturing.
S. Kovitch, “A Second Look at Regulation’s Cost,” Regulation, Summer 2004, 2-4.
W. M. Crain and J. M. Johnson, “Determining Workplace Regulation's Cost,” Regulation, Fall 2004, 2-4.

24. Advocacy Groups Advocacy Groups
Groups of concerned citizens who band together to try to influence the business practices of specific industries, businesses, and professions
Techniques to try to influence companies
public communications
media advocacy
product boycotts
Advocacy groups are groups of concerned citizens who band together to try to influence the business practices of specific industries.
Unlike the industry regulation component of the specific environment, advocacy groups cannot force organizations to change their practices. However, they can use a number of techniques to try to influence companies: public communications, media advocacy, and product boycotts.
The public communications approach relies on voluntary participation by the news media and the advertising industry to get an advocacy group’s message out. An example would be the public service announcements for World No Tobacco Day.
A media advocacy approach typically involves framing issues as public issues (i.e., affecting everyone); exposing questionable, exploitative, or unethical practices; and obtaining media coverage by buying media time or creating controversy that is likely to receive extensive news coverage. PETA’s actions are a good example of this approach.
A product boycott is a tactic in which an advocacy group actively tries to convince consumers to not purchase a company’s product or service. Such groups are now using the web to get the word out on boycotts as evidenced by Ecopledge.com.
3.5

25. Advocacy Groups
PETA is a well-known advocacy group that attempts to influence consumers and companies to pursue animal-friendly practices.

26. Making Sense of Changing Environments
Environmental Scanning
Evaluating
External
Environments
Interpreting Environmental Factors
Acting on Threats and Opportunities
In Chapter 1, you learned that managers are responsible for making sense of their business environments. However, our discussions of the general and specific environments indicate that making sense of business environments is not an easy task.
Because external environments can be dynamic, confusing, and complex, managers use a three-step process to make sense of the changes in their external environments: 4.1 environmental scanning, 4.2 interpreting environmental factors, and 4.3 acting on threats and opportunities. 4

27. Environmental Scanning
Searching the environment
for events or issues that
might affect an organization
keeps companies current on industry factors
reduces uncertainty
alters organizational strategies
contributes to organizational performance
Environmental scanning is searching the environment for important events or issues that might affect an organization.
Managers scan the environment to stay up-to-date on important factors in their industry.
Managers scan the environments to reduce uncertainty
Organizational strategies also affect environmental scanning. Managers pay close attention to trends and events that are directly related to the company’s ability to compete, and may come across information by accident.
Environmental scanning contributes to organizational performance and helps managers detect environmental changes and problems before they become organizational crises. Furthermore, companies whose CEOs do more environmental scanning have higher profits. CEOs in better-performing firms scan their firm’s environments more frequently and scan more key factors in their environments in more depth and detail than do CEOs in poorer-performing firms.
4.1

28. Interpreting Environmental Factors
Environmental Scan
Opportunities?
Threats?
After scanning the environment for information, managers must make sense of the data they have gathered.
Threats mean potential harm to an organization and managers take steps to protect the company from further damage.
By contrast, when managers interpret environmental events as opportunities, they will consider strategic alternatives for taking advantage of the event to improve company performance.
4.2

29. Acting on Threats and Opportunities
Cognitive Maps
simplified models of external environments
depicts how managers believe environmental factors relate to possible organizational actions
After scanning for information on environmental events and issues and interpreting them as threats or opportunities, managers have to decide how to respond to these environmental factors. But deciding what to do under conditions of uncertainty is difficult. Managers are never completely confident that they have all the information they need or that they correctly understand the information they have.
Because it is impossible to comprehend all the factors and changes, managers rely on simplified models of external environments called cognitive maps. Cognitive maps summarize the perceived relationships between environmental factors and possible organizational actions.
In the end, managers must complete all three steps—environmental scanning, interpreting environmental factors, and acting on threats and opportunities—to make sense of changing external environments. Environmental scanning helps managers more accurately interpret their environments and take actions that improve company performance. Through scanning, managers keep tabs on what competitors are doing, identify market trends, and stay alert to current events that affect their company’s operations. Armed with the environmental information they have gathered, managers can then take action to minimize the impact of threats and turn opportunities into increased profits.
4.3

30. Cognitive Maps
Because it is impossible to comprehend all the factors and changes, managers rely on simplified models of external environments called cognitive maps. Cognitive maps summarize the perceived relationships between environmental factors and possible organizational actions.
For example, the cognitive map shown in Exhibit 3.4 represents a small clothing store owner’s interpretation of her business environment. The map shows three kinds of variables. The first, shown as purple rectangles, are environmental factors such as Wal-Mart or a large mall 20 minutes away. The second, shown in green ovals, are potential actions that the store owner might take, such as a low-cost strategy; a good value, good service strategy; or a large selection of the latest fashions strategy. The third, shown as orange trapezoids, are company strengths, such as low employee turnover, and weaknesses, such as small size.
The arrows on the map indicate whether the manager believes there is a positive or negative relationship between variables. For example, the manager believes that a low-cost strategy wouldn’t work, because Wal-Mart and Kmart are nearby. Offering a large selection of the latest fashions would not work either, not with the small size of the store and that large nearby mall. However, this manager believes that a good value and a good service strategy would lead to success and profits, because of low employee turnover, knowing customers well, a reasonable selection of clothes at reasonable prices, and a good location.
4.3

31. Internal Environments
After reading this section, you should be able to:
explain how organizational cultures are created and how they can help companies be successful.

32. Internal Environments
The trends and events within an organization that affect the management, employees, and organizational culture
important because it affects what people think, feel, and do at work
organizational culture is the set of key values, beliefs, and attitudes shared by organizational members
External environments are external trends and events that have the potential to affect companies. The internal environment consists of the trends and events within an organization that affect the management, employees, and organizational culture.
Internal environments affect what people think, feel, and do at work. As the text’s discussion on SAS indicates, culture is the most important part of an organization’s internal environment and a reason that SAS employees rarely quit. Organizational culture is the set of key values, beliefs, and attitudes shared by organizational members. 5

33. Creation and Maintenance of Organizational Cultures
Organizational Heroes
Organizational Stories
Company Founder
A primary source of organizational culture is the company founder. For example, Thomas J. Watson (IBM), Sam Walton (Wal-Mart), Bill Gates (Microsoft), and Frederick Maytag (Maytag) created organizations in their images that they imprint with their beliefs, attitudes, and values.
When the founders are gone, the organizational culture is sustained through stories and heroes.
Organizational stories make sense of organizational events and changes and emphasize culturally consistent assumptions, decisions, and actions. For example stories abound at Wal-Mart about the thriftiness of Sam Walton.
Second, organizational culture is sustained by recognizing and celebration heroes, admired for their qualities and achievements.
5.1

34. Successful Organizational Cultures
Employee
Satisfaction
Quality
Consistency
Adaptability
Involvement
Clear Vision
Sales
Growth
Return on
Assets
Profits
Preliminary research shows that organizational culture is related to organizational success. Cultures based on adaptability, involvement, a clear mission, and consistency can help companies achieve higher sales growth, return on assets, profits, quality, and employee satisfaction.
Adaptability is the ability to notice and respond to changes in the organization’s environment.
In cultures that promote higher levels of employee involvement in decision making, employees feel a greater sense of ownership and responsibility.
A company’s vision is its purpose or reason for existing. In organizational cultures in which there is a clear organizational vision, the organization’s strategic purpose and direction are apparent to everyone in the company. And, when managers are uncertain about their business environments, the vision helps guide the discussions, decisions, and behavior of the people in the company.
Finally, in consistent organizational cultures, the company actively defines and teaches organizational values, beliefs, and attitudes. Consistent organizational cultures are also called strong cultures, because the core beliefs are widely shared and strongly held.
5.2
Source: D.R. Denison and A.K. Mishra, Organization Science 6 (1995):

35. Levels of Organizational Culture
Behaviors
Symbolic artifacts
1. Surface Level
SEEN
What people say
How decisions are made
2. Expressed Values and Beliefs
HEARD
Beliefs and assumptions
Rarely discussed
3. Unconsciously Held Assumptions and Beliefs
BELIEVED
As shown in exhibit 3.6, organizational culture exists on three levels:
At surface level, the reflections of an organization’s culture can be seen, heard, or observed.
Next are the values and beliefs expressed by the company. By listening to what people say and how decisions are made, those values and beliefs become clear.
Finally, unconsciously held assumptions and beliefs are buried below the surface. These are the unwritten views and rules that are strongly held and widely shared but are not discussed or thought about unless someone attempt to change them or violates them.
5.3

36. Changing Organizational Cultures
Behavioral addition
is the process of having managers and employees perform a new behavior.
Behavioral substitution
is having managers and employees perform a new behavior in place of another behavior.
Change visible artifacts
such as the office design and layout, company dress codes, etc.
One way of changing a corporate culture is to use behavioral addition or behavioral substitution to establish new patterns of behavior among managers and employees.
Behavioral addition is the process of having managers and employees perform a new behavior, while behavioral substitution is having managers and employees perform a new behavior in place of another behavior. The key in both instances is to choose behaviors that are central to and symbolic of the old culture you’re changing and the new culture that you want to create.
The second way in which managers can begin to change corporate culture is to change visible artifacts of their old culture such as the office design and layout, company dress codes, and who benefits (or doesn’t) from company benefits and perks like stock options, personal parking spaces, or the private company dining room.
Corporate cultures are very difficult to change. Consequently, there is no guarantee that behavioral substitution, behavioral addition, or changing visible cultural artifacts will change a company’s organizational culture. However, these methods are some of the best tools that managers have for changing culture because they send the clear message to managers and employees that the accepted way of doing things has changed.
5.3