The surroundings or conditions in which an organization operates "survival in an often hostile environment"

1. PRINCIPLES OF MANAGEMENT
Chapter # 2
The Organizational Environment

2. The Organization’s Environments
External environment:
everything outside an
organization’s boundaries
that might affect it. The
uncontrollable
environment.
Internal environment:
the conditions and forces
within an organization.
The controllable
environment.

3. The Organization and Its Environments

4. The General Environment
Economic dimensions: the
overall health and vitality of
the economic system in which
the organization operates.
Technical dimensions: the
methods available for
converting resources into
products or services.
Socio-cultural dimensions: the
customs, values, and
demographics of the society in
which the organization
functions.

5. McDonald’s General Environment

6. The Task Environment
Competitors: an organization
that competes with other
organizations.
Customer: whoever pays
money to acquire an
organization’s products or
services.
Supplier: an organization that
provides resources for other
organizations.
Regulator: a unit that has the
potential to control, legislate,
or influence an organization’s
policies and practices.

7. McDonald’s Task Environment

8. Task Environments Continued
Interest group: a group
organized by its
members to attempt to
influence organizations.
Strategic partner: an
organization working
together with one or
more organizations in a
joint venture or other
partnership.

9. Additional Dimensions
Political-Legal dimension:
the government regulation
of business and the general
relationship between
business and government.
International dimension:
the extent to which an
organization is involved in
or effected by business in
other countries.

10. The Internal Environment
Owner: someone who has legal property
rights to a business.
Board of directors: governing body elected
by a corporation’s stockholders and
charged with overseeing the general
management of the firm.
Employees: those employed by the
organization.
Physical work environment: the firm’s
facilities.

11. Environmental Change, Complexity, &Uncertainty

12. Organizational Culture
The set of values, beliefs, behaviors,
customs, and attitudes that helps the
members of the organization to
understand what it stands for, how it
does things, and what it considers
important.
Organizational culture is important to
determine the “feel” of the organization.
Its starting point is often the founder.

13. Managing Organizational Culture
The manager must understand the
current culture and then decide if it
should be maintained or changed.
Managers must walk a fine line between
maintaining a culture that still works
effectively versus changing a culture
that has become dysfunctional.

14. Organizational Environment Relationships
Uncertainty: a driving force that influences
many organizational decisions

15. Threat of New Entrants
Fundamental question: how easy is it
for another company to enter the
industry?
Factors making easy entry to industry
Low economies of scale
Low product differentiation
Low capital requirements
No switching costs for buyer
Easy access to distribution channels
Little government regulation

16. Supplier Power
Fundamental question: how badly does a
supplier need your business?
Factors giving power to supplier:
◦ Supplier industry dominated by few firms
◦ Buyer is not important to customer
◦ Supplier’s product is important input to buyer’s
product
◦ Supplier’s products have high switching costs
◦ Supplier can “integrate forward” and become
competitor of buyer

17. Threat of Substitutes
Fundamental question: what other
products or services could perform the
same function as your products or services?
Factors indicating high threat of
substitutes:
Few switching costs for buyer
Price of substitute lower or quality higher than
for your products
Firms offering substitutes have high profitability

18. Buyer Power
Fundamental questions: How badly does a
buyer need your products or services?
Factors contributing to high buyer power:
Few buyers compared to the number of sellers
Buyers purchases high relative to seller’s sales
Products are undifferentiated
Buyer has low switching costs
Buyer has low profits
Buyer can “integrate backward” and supply the
product to itself

19. Competitive Rivalry
Fundamental question: how intense is
competition in the industry?
Factors leading to high competitive rivalry:
Numerous or equally balanced competitors
High fixed costs
Slow industry growth
Lack of differentiation or switching costs
High strategic stakes
High exit barriers

20. Porter’s Five Forces Model of Competition
Substitute Products
(of firms in
other industries)
Suppliers of
Key Inputs
Buyers
Potential
New
Entrants
Rivalry
Among
Competing
Sellers

21. How Organizations Adapt to Their Environments
Each organization must asses its own
unique situation then adapt according to
the good judgment of senior
management, for example:
Information systems.
Strategic responses.
Mergers, acquisitions, and alliances.
Organizational design and flexibility.
Direct influence of the environment.

22. Environmental Threat and Opportunity Profile
An environmental threat and
opportunity profile is a description of
the structure of external factors.
Multiple Reasons for an ETOP
1. It helps the organization to identify
opportunities and threats
2. Consolidates and strengthens an
organization’s position
3. Provides strategists information on
which sectors have a favorable
impact on the organization
4. The organization gains knowledge
of its standing with respect to its
environment
5. Helps formulate strategies.

23. Steps in an ETOP
Identify major Environmental factors such
as: economic, political, social, technological,
competitive, geographical, etc.
Environmental factors are then sub-divided
into subsectors of each factor.
These factors are then analyzed to
determine major weaknesses and strengths
in each of the subsectors.
The impact of each factor is then accessed
as being either favorable, unfavorable, or
neutral.

24. A Model of Organizational Effectiveness

25. Thank You!