This document provides an overview of environmental factors that influence organizations and how organizations can influence their environments. It discusses the macro environment and competitive environment that organizations operate within. Key aspects of the macro environment covered include the economy, technology, demographics, social/natural environment issues, and regulations/laws. The competitive environment includes competitors, new entrants, substitutes/complements, suppliers, and customers. The document also explores how organizations analyze and respond to their environments through environmental scanning, benchmarking, and various strategies to adapt to or influence their external surroundings. Finally, it discusses the role of organizational culture and how culture can impact an organization's response to its environment.

1. The
Environment of
Business
Chapter Two
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. Learning Objectives
LO 1 Describe how environmental forces influence
organizations and how organizations can
influence their environments
LO 2 Distinguish between the macro environment and
the competitive environment
LO 3 Explain why managers and organizations should
attend to economic and social developments.
LO 4 Identify elements of the competitive environment.
2-2

3. Learning Objectives
LO 5 Summarize how organizations respond to
environmental uncertainty
LO 6 Define elements of an organization’s culture
LO 7 Discuss how an organization’s culture affects its
response to its external environment
2-3

4. In-class
Page 27, Read about Green Mountain
Coffee Roasters (GMCR).
 What does GMCR sell?
 What makes their products unique?
 Why did they select their products and
distribution?
2-4

5. “The essence of a business is
outside itself.”
Peter Drucker
What did he mean?
How does this idea relate to the business
decisions of GMCR?
2-5

6. Organization Inputs and Outputs
2-6
Figure 2.1
Remember Systems Theory?
Transformation
Process
Feedback Process – where does feedback come
from? What happens if we ignore feedback?

7. Open Systems
Open systems
 Organizations that are affected by, and that
affect, their environment.
2-7

8. Open Systems
Inputs
 Goods and services organizations take in and use
to create products or services.
Outputs
 The products and services organizations create.
2-8

9. Open Systems
External environment
 All relevant forces outside a firm’s boundaries,
such as competitors, customers, the
government, and the economy.
Competitive environment
 The immediate environment surrounding a firm;
includes suppliers, customers, rivals, and the
like.
2-9

10. Open Systems
Macroenvironment
 The general
environment; includes
governments,
economic conditions,
and other fundamental
factors that generally
affect all organizations.
2-10

11. The External Environment
2-11
Figure 2.2

12. Laws and Regulations
Regulators include agencies such as:
 Occupational Safety and Health Administration
(OSHA)
 Federal Aviation Administration (FAA)
 Equal Employment Opportunity Commission
(EEOC)
 National Labor Relations Board (NLRB)
 WHO ELSE?
2-12

13. The Economy
The economic environment dramatically
affects managers’ ability to function
effectively and influences their strategic
choices.
Interest and inflation rates affect the
availability and cost of capital, growth
opportunities, prices, costs, and consumer
demand for products.
2-13

14. The Economy
In publicly held companies, managers may
feel required to meet Wall Street’s earnings
expectations.
Managers may focus on short-term results
at the expense of long-term success
 Recent examples of this?
Some managers may be tempted to engage
in unethical or unlawful behavior that
misleads investors
2-14

15. Technology
Technological
advances create new
products, advanced
production
techniques, and
better ways of
managing and
communicating.
As technology
evolves, new
industries, markets,
and competitive
niches develop.
Name 1
new technology
that is driving new
products?
2-15

16. Demographics
Demographics
 Measures of various characteristics of the
people who make up groups or other social units
2-16

17. Demographics
Demographic trends
 Growth of the labor force
 Increasing education and skill levels
 Immigration
 Increased numbers of women in the workforce
 Increasingly diverse workforce
 One of the fastest growing home arrangements in the US is
single father households. How could this knowledge provide
opportunities for new products and services? What
products would YOU offer?
2-17

18. Social Issues and the Natural Environment
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.
Family leave, domestic partner benefits
What are other current social issues? How
might these issues impact business?
2-18

19. Social Issues and the Natural Environment
A prominent issue today pertains to natural
resources
The protection of the natural environment
will factor into social concerns and many
types of management decisions.
 Give examples of how business organizations
have adapted/changed practices to
accommodate or take advantage of social
concerns for natural resources?
2-19

20. In –class Exercise
Pages 32-33, read “High Design with a
Conscience”.
 How has McCartney’s organization benefitted
from the shift in societal attitudes?
 Is her business model sustainable?
 Will her business model work in mass retail
settings, such as Walmart? Why or why not?
2-20

21. The Competitive Environment
2-21
Figure 2.3
Porter’s 5
Forces

22. Competitors
Competition is most intense when:
 There are many direct competitors
 Industry growth is slow
 Product/service is not easily differentiated
2-22

23. New Entrants
Barriers to entry
 conditions that prevent new companies from
entering an industry. What causes barriers of
entry to be high?
 Brand loyalty?
 Capital investment? Start-up costs?
 Distribution channels?
 government policy, capital requirements, brand
requirements, cost disadvantages, distribution
channels
2-23

24. Substitutes and Complements
Substitutes
 alternative products
or services
 video games 
watching television
Complements
 products or services
that increase
purchases of other
products
 car insurance 
automobile
purchases
2-24

25. Question
____________ costs are fixed costs buyer face
if they change suppliers.
A.Exchange
B.Lever
C. Switching
D.Transfer
2-25

26. Suppliers
Suppliers
 provide resources or
inputs needed for
production
Switching costs
 fixed costs buyer face
if they change
suppliers
2-26

27. Suppliers
Supply chain management
 managing the network of facilities and people
that obtain materials from outside the
organization, transform them into products, and
distribute them to customers
 Give an example of an organization that is backward
integrated (upstream) to include ownership of raw
material resources.
 Give an example of an organization that is forward
integrated (downstream) to include ownership of
distribution/retail.
2-27

28. Customers
Final customers
 purchase products in
their finished form
Intermediate
customers
 purchase raw
material or
wholesale products
before selling them
to final customers
2-28

29. Environmental Analysis
Environmental uncertainty
 Lack of information needed to understand or
predict the future.
2-29

30. Environmental Uncertainty
Environmental
complexity
 The number of
issues to which a
manager must
attend and the
degree to which
they are connected
Environmental
dynamism
 The degree of
discontinuous
change that occurs
within an industry
2-30

31. Environmental Uncertainty &
Management
High Environmental
Uncertainty – many
factors in
environment and
they are changing.
What style of
management is
needed?
Low Environmental
Uncertainty – few
factors in
environment and
they are not
changing rapidly.
What style of
management is
needed?
2-31

32. Environmental Analysis
Environmental
scanning
 searching out
information that is
unavailable to most
people and sorting
that information to
interpret what is
important and what
is not.
Competitive
intelligence
 Information that
helps managers
determine how to
compete better.
2-32

33. Environmental Analysis
Scenario
development
 A narrative that
describes a particular
set of future
conditions
 Best-case, worst-case
Forecasting
 Method for
predicting how
variables will change
the future
2-33

34. Question
What is the process of comparing an
organization’s practices and technologies
with those of other companies?
A.Comparative technology
B.Benchmarking
C.Process synchronization
D.Process asynchronization
2-34

35. Environmental Analysis
Benchmarking
 The process of comparing an organization’s
practices and technologies with those of other
companies.
2-35

36. Adapting to the Environment
Buffering
 Creating supplies of
excess resources in
case of unpredictable
needs.
Smoothing
 Leveling normal
fluctuations at the
boundaries of the
environment.
2-36

37. Influencing Your Environment
Independent
strategies
 Strategies that an
organization acting
on its own uses to
change some aspect
of its current
environment.
Cooperative
strategies
 Strategies used by
two or more
organizations
working together to
manage the
external
environment.
2-37

38. Independent Action
2-38

39. Cooperative Action
2-39

40. Changing the Environment You are In
Strategic maneuvering
 An organization’s conscious efforts to change the
boundaries of its task environment.
Domain selection
 Entrance to a new market or industry with an
existing expertise
Diversification
 Occurs when a firm invests in a different
product, business, or geographic area
2-40

41. Changing the Environment You are In
Mergers
 One or more companies combine with another
Acquisitions
 One firm buys another
Divestiture
 A firm sells one or more businesses
Prospectors
 Continuously change the boundaries or their task environment by
seeking new products and markets, diversifying and merging, or
acquiring new enterprises
Defenders
 Stay within a stable product domain as a strategic maneuver
2-41

42. Culture and the Internal Environment
of the Organization
Organizational culture
 The set of important assumptions about the
organization and its goals and practices that
members of the company share
 Personality of the firm
 Impacts organizational decision making
In strong cultures, the majority of people within
the organization agree on organizational goals
In weak cultures, the majority of people within the
organization disagree on organizational goals
2-42

43. Competing Values Model of Culture
2-43
Figure 2.5

44. Conclusion
1. What happens when managers &
organizations fail to correctly read their
environment?
2. How can managers keep informed on their
environment?
3. In a dynamic environment, what skills do
managers need to possess, if their organization
is to be successful?
4. The hard truth about management &
the environment – read page 30 on Ethanol
2-44