Chapter 4: External Environment and Organizational Culture Learning Goals After completing this chapter, you will be able

to: List key elements in the general and specific environments of organizations. Define sustainable business. Describe how a business can create value for four key stakeholders. Give examples of potential conflicting interests among stakeholders for a business in your community. Explain customer relationship management and supply chain management. Define competitive advantage and give examples of how a business might achieve it. Analyze the uncertainty of an organizations external environment using degree of complexity and rate of change. Describe the systems resource, internal process, goal, and strategic constituencies approaches to organizational effectiveness. Explain the triple bottom line and 3 Ps of organizational performance. Explain the link between business activities and sustainability goals. Define the terms sustainable development and environmental capital. Give examples of sustainability issues today. Explain and give examples of green management. Discuss human sustainability as a management concern. Define innovation. Discuss the differences between process, product, business model, and social business innovations. List the five steps in Hamels wheel of innovation. Explain how innovations get commercialized. List and explain the characteristics of innovative organizations. 1.0 Environments of Organizations 1.1 The General or Macroenvironment 1. The general environment consists of all the background conditions in the external environment of an organization that set the context for managerial decision making. 2. The components of the general environment include: Economic conditions: general state the health of the economy in terms of inflation, income levels, gross domestic product, unemployment, and job out-look. Social-cultural conditions: general state of prevailing social values on such matters as human rights and environment, trends in education and related social institutions, as well as demographic patterns. Legal-political conditions: general state of the prevailing philosophy and objectives of the political party or parties running the government, as well as laws and government. Technological conditions: general state of the development and availability of technology in the environment, including scientific advancements. Natural environment conditions: general state of nature and conditions of the natural or physical environment, including levels of environmentalism.

Management 04 1.2 Natural Environment Conditions 1. With organizations going green, a firm becomes a sustainable business that meets the needs of its customers while advancing the well-being of the natural environment, is a management concern. 2. The public will judge a business on how it operates to protect and preserve this natural environment. 3. The strategic goals engaged by environmental social responsibility (ESR) practices are listed as below; Increase market share advertise and publicize ESR activities to gain reputation; innovate in ESR to other green products Increase productivity innovate in ESR to gain operating efficiencies through green processes; raise worker morale by valuing and engaging in ESR activities. Increase human capital use ESR commitments as well as activities to recruit and retain employees, as well as to attract managers and executives with sustainability values. Increase competitiveness use ESR activities to attract investors, gain market reputation, and raise costs for competitors within the industry. 1.3 The Specific or Task Environment The specific environment (or task environment) consists of all the actual organizations, groups, and persons within whom an organization must interact in order to survive and prosper. (a) Organizational Stakeholders 1. The specific environment is often described in terms of stake holders the persons, groups, and institutions who are affected by the organizations performance. 2. Important elements in an organizations specific environment, include employees, customers, suppliers, owners, competitors, regulators, and employees 3. Typical business firm work as an open system, with the interests of several stakeholders linked with stages in the input transformation-output process.

Figure 4.1: Stakeholder Value Creation

Management 04 4. The analysis helps focus management attention on value creation, the extend to which the organization is creating value for and satisfying the needs of important constituencies.

(b) Customers and Suppliers as Stakeholders 1. Customers are always key stakeholders; they sit at the top when an organization is viewed as the upside-down pyramid described in Chapter 1. 2. They primarily want four things in the goods and services they buy: high quality low price on-time delivery great service 3. Progressive managers use the principles of customer relationship management (CRM) to establish and maintain high standards of customer service. 4. CRM is rapidly evolving with the support of information technology to communicate with customers and gather data by tracking their needs and desires. 5. The concept of supply chain management (SCM) involves strategic management of all operations involving an organizations suppliers, including the use of information technologies to improve purchasing, manufacturing, transportation, and distribution. 6. The goals of SCM are straightforward: achieve efficiency in all aspects of the supply chain while ensuring on-time availability of quality resources for customer-driven operations. 2.0 Organization-Environment Relationships 2.1 Competitive Advantages 1. Competitive advantage involves the utilization of a core competency that clearly sets an organization apart from competitors and gives it an advantage over them in a marketplace. 2. An organization may achieve competitive advantages in many ways, including through its products, pricing, customer service, cost efficiency and quality among other aspect of operating excellence. Cost operating with lower costs than ones competitors and thus earning profits with prices that competitors have difficulty matching. Quality creating products and services that are consistently higher quality for customers than what is being offered by the competition. Delivery outperforming competitors by delivering products and services to customers faster and on-time, while continuing to develop timely new products. Flexibility adjusting and tailoring products and services to fit customer needs in ways that are difficult for competitors to match. 2.2 Environmental Uncertainty, Complexity and Change 1. Environmental uncertainty means that there is a lack of complete information regarding what developments will occur in the external environment; this make it difficult to predict future states of affairs and to understand their potential implications for the organization.

Management 04 2. The figure 4.2 describes environmental uncertainty along two dimensions: complexity and the rate of changes in these factors. 3. In general, the greater the environmental uncertainty: - the more attention management must direct to the external environment. - the more need there is for flexible and adaptable organizational designs and work practices.

Figure 4.2: Dimension of uncertainty in organizational environments

2.3 Organizational Effectiveness 1. Organizational effectiveness is a measure of how well an organization performs while using resources to accomplish its mission and objectives. 2. Theorists view organizational effectiveness from four different approaches: Goals looks at the output side and defines organizational effectiveness in terms of achievement of key operating objectives, such as profits and market share. Systems resource looks at the input side and defines organizational effectiveness in terms of success in acquiring needed resources from the organizations environment. Internal Process looks at the transformation process and defines organizational effectiveness in terms of how efficiently resources are used to produce goods and services. Strategic Constituencies looks at the external environment and defines organizational effectiveness in terms of the organizations impact on key stakeholders and their interests. 3. All of these approaches should be accessed together in order to determine the organizations performance. 4. Organizational effectiveness needs to be evaluated over a period of time, rather than one moment in time. 3.0 Environment and Sustainability 3.1 Sustainability Goals 1. Costs to society are a part of the triple bottom line of organizational responsibility. 2. The triple bottom line assesses the economic, social, and environmental performance of an organization. 3. It focuses on the 3 Ps (profit, people, and planet) of organizational performance, which are highlighted by ISO 14001, a global quality standard that requires certified organizations to:

Management 04 set environmental objectives and targets. account for the environmental impact of their activities, products or services. continuously improve environmental performance.

3.2 Sustainable Development 1. Sustainable development makes use of environmental resources to support societal needs today, while also preserving and protecting them for future generations. 2. Sustainable development often refers to environment capital or natural capital. 3. Environmental or natural capital represents the storehouse of natural resources that exist in the form of atmosphere, land, water, and minerals that we use to sustain life and produce goods and services for society. 3.3 Green Management 1. Green management is defined as a way of managing people and organizations that shows responsible stewardship of the natural environment. 2. Organizations with green projects use new technologies to reduce energy consumption to change practices to avoid or to minimize adverse environmental impact. 3. Green management is also being reflected in an increasing variety of green products. An example of this is the electric car. 4. Also green marketing, which is pursued by companies to educate a full range of stakeholders about the importance of sustainability, and to behave in a more responsible way from an environment perspective. 3.4 Human Sustainability 1. According to scholar Jeffrey Pfeffer, businesses need to be mindful of the impact of management practices not only to issue of ecological and environmental sustainability, but also to social and human sustainability. 2. Pfeffers concerns for human sustainability link back to the importance of employees as stakeholders, and to managerial concerns for their job satisfaction and quality of work life. 3. In short, managers should respect and value people in organizations. 4.0 Environment and Innovation The goals of sustainability and competitive advantage rely on innovation. Innovation is the process of creating new ideas and putting them into practice, and it must be nurtured, championed, and supported as a core organizational value. Some innovation barriers are: Lengthy development times Poor coordination Risk-averse cultures Avoidance of customer feedback 4.1 Types of Innovations (a) Business Innovations 1. Innovation in and by organizations has traditionally been addressed in three broad forms: Product innovations which result in the creation of new or improved goods and services. Process innovations which result in better ways of doing things. 5

Management 04 Business model innovations which result in new ways of making money for the firm.

(b) Sustainable Innovations 1. Sustainable innovation or green innovation creates new products and processes that have lower environmental impacts than the available alternatives. 2. It helps to reduce the carbon footprints and environmental impacts of organizations, their practices and products. 3. The goal is to have minimal negative impact on the natural environment or, even better, that is to improve it. (c) Social Business Innovations 1. Social business innovation finds ways to use business models to address important social problems such as poverty, famine, literacy, and diseases. 2. A social and global issue can be a business opportunity in disguise, as stated by Peter Drunker, a management consultant. 4.2 The Innovation Process 1. Process and product innovations require active encouragement and support of invention and application. 2. Invention is the act of discovery, while application is the act of use. 3. The innovation process can be described as the wheel of innovation. 4. The five steps in this process are as follows: (a) Imagining thinking about new possibilities. (b) Designing building initial models, prototypes, or samples. (c) Experimenting examining practicality and financial value through experiments and feasibility studies. (d) Assessing identifying strengths and weaknesses, potential costs and benefits, and potential markets or applications. (e) Scaling implementing what has been learned and commercializing new products or services. 5. One of the newer developments in the innovation process is reverse innovation or trickle-up innovation, which recognizes the potential for valuable innovations to be launched from lower organizational levels and diverse locations, including emerging markets. 4.3 Commercializing Innovation 1. Commercializing innovation is the process of turning new ideas into actual products, services, or processes that increase profits through greater sales or reduced costs. 2. The four steps of the product innovation process are: Idea creation discovering a potential product or a way to modify an existing one. Initial experimentation sharing the idea with others and testing it in prototype form. Feasibility determination testing the practicality and financial viability of the new product. Final application commercializing the product for sale to customers or clients.

Management 04 4.4 Characteristics of Innovative Organizations 1. In highly innovative organizations, innovation is supported by: (a) Strategy and Culture 1. In highly innovative organizations, the corporate strategy and the corporate culture support innovation. 2. The strategies emphasize an entrepreneurial spirit; the culture is driven by values that let everyone know innovation is expected, failure is accepted, and the organization will take risks. (b) Structures 1. In highly innovative organizations, structure supports innovation. 2. Large organizations move away from hierarchical and mechanistic designs toward horizontal and organic ones. 3. Some organizations will set up skunkworks, which give creative units separate locations, special resources, and their own managers with a clear goal of innovation. 4. Other organizations will become ambidextrous organizations, which use integrated creative teams spread throughout the organization to simultaneously be good at both producing and creating. (c) Systems 1. Highly innovative organizations use special information and knowledge management systems to support innovation. 2. Internally, systems allow employees to collaborate with each other. 3. Externally, systems allow customers to submit ideas for possible innovation. (d) Staffing and Management 1. In highly innovative organizations, staffing supports innovation by following two steps: i. Step One make creativity an important criterion when hiring and moving people into positions of responsibility. ii. Step Two allow creative talents to fully operate by following through on the practices of strategy, culture, structure and systems. 2. Top management makes innovation a high priority and does its best to fully support the innovation process.