Chapter 4 The External Environment PDF

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Organization Theory and Design Chapter 4: The External Environment Case Study: Target Gregg Steinhafl took over Target as CEO in 2008 and built the organization’s reputation of having trendy items at low prices and making their logo one of the most recognizable. Things went well then tool a turn for the worse. Disastrous security failure during holiday shopping season resulted the encrypted account information of 40 million credit and debit cards. Store traffic decreased and managers were too preoccupied with the data breach to deal with other pressing issues such as the costly and difficult expansion into Canada and issues with taking over their online store from Amazon who had been running it since 2011. Take over resulted in website crashing during high demand times for hot selling items. Problems led to the layoff of 475 people and elimination of 700 corporate positions. Changes in the environment can create threats and opportunities. Data breach was a huge external threat that created years of fallout. External environment is filled with uncertainty and organizations must adapt When Target Canada folded 17600 employees lost their jobs. Now serves as a textbook case for what not to do when expanding into new international market https://consumerist.com/2016/01/22/9-things-we-learned-about-the-downfall-of-targetcanada/

The Organization’s Environment Organizational environment: everything that exists outside of the boundary of the organization and has the potential to affect all or part of the organization Domain · Chosen environmental field of action · Organization’s territory re: products, services, markets served · Understand the environment of an organization by analysing how it fits within external sectors Sectors: · Subdivisions of the environment that contain similar elements · 11 Sectors (see figure 4.1): 1. industry: competitors, industry size and competitiveness and related industries 2. raw materials: suppliers, manufacturers, real estate and services 3. human resources: labour market, employment agencies, universities training schools, employees in other companies, unionization 4. financial resources: stock markets, banks, savings and loans, private investors 5. market: customers, clients, potential users of products and services 6. technology: techniques of production, science, computers, information technology, e-commerce 7. economic conditions: recession, unemployment rate, inflation rate, rate of investment, economics, growth

Organization Theory and Design Chapter 4: The External Environment

8. governments: city, state, federal laws and regulations, taxes services, court system, political processes 9. natural: green movement, sustainability, natural resource management 10. sociocultural: age, values, belief, education, religion, work ethic, consumer movements 11. international: competition from and acquisition by foreign firms, entry into overseas ,markets, foreign customs, regulations, exchange rate · these can be further categorized as either task environment or the general environment Task environment · sectors the organization interacts with directly and which have a direct impact on its ability to achieve it’s goals · typically involves: industry, raw materials, and market sectors as well human resources and international sectors o industry sector: rise in smartphone use in Korea created shift to online and home shopping and away from traditional department stores. Can purchase items by taking a photo of a barcode on a poster o raw materials sector: In the USA, Tyson Foods pays independent farmers to raise chickens for it’s processing plants. Due to lack of control of over product quality and safety in China, Tyson decided to run it’s own farms. o market sector: by monitoring social media, Mars, maker of M&M’s and Kraft, could address consumer concerns about certain additives, like dyes and flavourings, by removing them from their products o human resources sector: of significant concern to businesses. New labour groups and a growing awareness of labour law and workers rights are having significant impact on the business environment in China o international sector: of increasing importance due to globalization and intense competition. USDA approval of 4 Chinese poultry processors opened the door to China’s Shuanghui International Holdings Ltd.’s $4.7 billion take over of the US –based Smithfield Foods Inc. in a bid to access new technology and improve safety practices General Environment · sectors which may not have direct impact on the daily operations but will indirectly influence it and will affect all organizations eventually · typically involves: government, natural, sociocultural, economic conditions, technology, and financial resources o government sector: regulations influence every phase of organizational life. Recent examples include ObamaCare and Dodd-Frank (financial regulatory reform) which have caused small businesses to struggle with the time and expense required to meet these new regulations o natural sector: includes all elements that occur naturally on earth. Becoming of increasing importance as consumers, organizations, an managers become more sensitive to diminishing natural resources and environmental impacts. Resulting in companies adopting philosophy of

Organization Theory and Design Chapter 4: The External Environment

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environmental sustainability i.e. Caesars Entertainment began producing of scorecard of resource consumption resulting in higher customer satisfaction and return rate sociocultural sector: of particular significance is pressure from advocacy groups i.e. Wal-Mart forced to drop a supplier and go on the defensive when worker abuse and other violations were revealed economic conditions: global recession of 2008 meant that even huge, elite companies were tightening their budgets, causing a drop in bookings for Briggs Inc. which specialized in planning high end corporate event . This forced them to shift towards more economical offering. Although a financial burden it helped Briggs to hold onto clients for the long term technology sector: has seen massive changes in recent years. While technology is creating some jobs, it is eliminating more due to it’s speed and efficiency. Has caused significant drops in white collar jobs and an estimated 2 million jobs in HR(!), finance, info tech and procurement have disappeared in the US and Europe since 2008 financial sector: often top priority for entrepreneurs. With banks tightening lending standards, many small business owners are turning to online person-to-person (P-to-P) lending networks. Can often procure larger loans with better interest rates

International Environment · of increasing importance because countries and organizations around the world are connected as never before and economic, political and sociocultural changes in one part of the world eventually affect other areas · shifts in auto industry due to the emergence of the Chinese auto market. International headquarters are moving to China and design features being implemented to appeal to Chinese consumers are now seen in models all around the world · international events can effect domestic sectors i.e. weather conditions and workers strikes impacting the cost of raw materials (Choco-Logo) · strong economic growth in developing nations created an increased demand for grain-fed meat, which led to grain shortages and rising costs for farmers, food manufacturers, fertilizer companies and grocers Case Study (Richard Ginori) · maker of handcrafted porcelain tableware founded in 1735, was forced to declare bankruptcy in January 2013. · Changes such as formal dining falling out of fashion and therefore less demand for an expensive product which is time consuming to produce · Shifted into everyday products which weakened the brand and placed in direct competition with cheaper tableware from China (60% of the market). Italian lobby group has accused China of flooding the market with products below the cost of manufacturing · Court appointed liquidators looking for a buyer while employees have little influence over these environmental uncertainties

Organization Theory and Design Chapter 4: The External Environment

The Changing Environment · Patterns and events occurring in the environment can be described along three primary dimensions (4.2 Factors causing uncertainty for an org.) o Dynamism: stable or unstable o Complexity: is simple or complex o Abundance: financial resources – abundance or scarcity o Ý complexity Þ less stability Þ ß financial resources Þ Ýuncertainty · two essential ways the environment influences organization o the need for information about changes in the environment o the need for resources from the environment · complexity and dynamism create a greater need to gather information and to respond to changes based on that information · scarcity of financial resources also put pressure on org. · environmental uncertainty pertains primarily to sectors an organization deals with on a day-to-day basis · general environment can cause uncertainty but determining environmental uncertainty usually means focusing on sectors of the task environment i.e. how many elements an organization deals with regularly and how rapidly these elements change · each sector of the task environment is analysed along dimensions such as stability/instability and degree of complexity · total amount of uncertainty = uncertainty accumulated across relevant task environment sector · Uncertainty: must be managed for org. to be effective o means that decision makers lack sufficient information about environmental factors and have a hard time predicting external changes o increases risk f failure for organizational decisions o makes it difficult to compute costs and probabilities associated with decision alternatives

Complexity: · refers to heterogeneity, or, the number and dissimilarity of external elements (competitors, suppliers industry changes, governments regulations) that affect and organization’s operations · more external elements regularly influencing and organization and greater number of other companies in an organizations domain Þ greater complexity; fewer external elements Þ less complexity (family owned hardware store vs. large pharmaceutical companies such as Pfizer and Merck) · some companies split into separate companies in order to deal with complexities, others merge in order to better deal with uncertainties Dynamism: · whether the organization’s operating environment is stable or unstable · stability = unchanging over time; instability = environmental elements shifting rapidly · instability often occurs when: o consumer interests shift

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o new technologies are introduced o competitors react with aggressive moves and counter moves regarding advertising and new products and services unpredictable events affecting stability: o data breach at Target o lead-tainted toys produced for Mattel in China o Pakistani government censoring YouTube o discovery of heart problems caused by Vioxx and Celebrex o social media spread damaging information § Dominoes responded to story about staff messing with pizza on the way to delivery by publicly apologizing via YouTube video and outlining how they would ensure behaviour didn’t happen again. Demonstrated concern for customers at halted the spread of further rumours Traditionally stable environment – public utility. Supply and demand relatively stable Unstable environment – toy company. Hard to predict hot new toy, children shifting from toys to electronics at earlier age, competition with large discounters like Wal-Mart, challenges being faced when trying to enter international markets

Case Study (Fujifilm holding company) · responded to the trend toward digital cameras faster than Kodak but were unprepared for the dynamism in the environment · as WIFI technology for internet connectivity became more popular, more people were taking photos with their smartphones Þfaster for uploading on FB and IG · digital cameras primarily remain as stand-alone devices · shipments of digital cameras fell 42% in the first five months of 2013 · Fujifilm’s plan to cut production of point and shoot cameras may not be enough to save the company · View of component supplier: assume inexpensive cameras are dead Framework (4.7 Framework for Environmental Certainty and Organizational Response) · Simple/stable: ß uncertainty. Few external elements in a limited number of environmental sectors (suppliers, customers) to contend with i.e soft drink distributor – demand changes slowly, established delivery routes · Complex/stable: greater uncertainty. Large number of elements (suppliers, customers, government regulations, industry changes, unions, economic conditions). External elements do not change rapidly or unexpectedly i.e. state universities, appliance manufacturers, insurance companies. · Simple/unstable: even greater uncertainty. Few but unpredictable external elements (shifting social trends, changing consumer interests) which react unexpectedly to organizational initiatives i.e. toy manufacturers and industries such as electrics, clothing and music industries.

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Complex/unstable: greatest uncertainty. large number of elements in numerous environmental sectors impinge upon organization and shift frequently or react strongly to environmental initiatives. When several sectors change at once, the environment becomes turbulent i.e. telecommunications, oil and gas, airlines

Adapting to Complexity and Dynamism From Chapter 3: organizations facing uncertainty often use structural mechanisms that encourage horizontal communication and collaboration to help company adapt to changes in the environment. Environment influences how an organization will be managed and controlled – correct fit is essential Adding Positions and Departments · Increasing uncertainty and complexity in external environment Þ increase in number of positions and departments. Nature of open systems · Each sector requires employee or department to deal with it i.e. HR finds staff, marketing finds customers, procurement finds raw materials, finance deals with banks etc. · Increasing complexity of information technology Þ Obama creates chief technology and chief info officer positions. 2002 Sarbanes- Oxley Act (SOX) Þ chief compliance and chief governance positions · After Gulf of Mexico disaster, BP restructured exploration, development and production operations with a dedicated chief executive for this operation Building Relationships · Traditional approach Þ build buffer departments · Technical core: perform primary production activity · Buffering roles: absorb uncertainty from the environment. Help technical core function efficiently by surrounding it and overseeing the exchange of materials, resources, and money between the environment and the organization i.e purchasing stockpiles supplies and raw materials; HR handles uncertainty of finding, hiring and training employees · Recent approach Þ drop buffers, expose technical core to uncertainties based on the belief that being well connected to customers and suppliers is more important than internal efficiencies. o Uncertainty requires rapid transfer of information and knowledge so org. can adapt quickly o Closer relationships with external parties makes an org. more fluid and flexible · Boundary-spanning roles: link and coordinate an organization with key elements in the external environment o Scan the environment to detect and bring information to the org. about changes in the environment and to send information into the environment that represents org. favourably o Helps managers respond to market changes and other developments Þ prevents stagnation

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o High-tech firms Þ 97% of failures due to lack of attention to market changes or failure to act on vital information o The greater the uncertainty, the more important this role Business intelligence: high-tech analysis of large amounts of internal and external data to spot patterns and relationships that might be significant. Related to competitive intelligence Þ a systemic way to collect and analyze public information about rivals i.e. new products, manufacturing costs, training measures Intelligence team: cross-functional group of managers and employees, led by CI who study specific business issues and present insights and recommendations to the executive team allowing them to make more informed decisions and devise contingency plans

Differentiation and Integration · Differentiation: Differences in cognitive, and emotional orientations among managers in different departments as well as the difference in formal structure between these departments o Each environmental requires special expertise, therefore a more complex environment requires highly specialized organizational departments, each with it’s own unique attitudes, values, goals, and education o Departments evolve toward different orientation and structure to deal with specialized parts of the external environment (4.5 Differences in Goals and Orientations Among Organizational Departments) o Issue with high differentiation Þ coordination and collaboration among departments is difficult. Coordination requires more time and resources · Integration: quality of coordination between departments. o Horizontal coordination in highly uncertain environments often require, the aid of formal integrators a.k.a. liaison personnel, project managers, brand managers, or coordinators. o Greater the differentiation, the larger percentage of managers in coordinating roles o Levels of differentiation and integration should match the level of complexity and uncertainty in the environment o High levels of integration Þ better performance in complex environments Organic vs. Mechanistic Management Processes · Degree of uncertainty in external environment Þ one of the primary contingencies determining whether a mechanistic or organic structure works best · Stable external environment Þ mechanistic; rapidly changing Þ organic · Guiltless Gourmet: when challenged by larger players in low-fat snack market, changed entire structure, outsourcing production and focusing on marketing (employees went from 125 – 10) Planning, Forecasting and Responsiveness · In uncertain environments, planning and environmental forecasting are more important as a way to keep the organizations geared for a coordinated, speedy response

Organization Theory and Design Chapter 4: The External Environment

· Stable environment Þ can focus on current operational problems and day-to-day efficiency because the environmental demands of today will be much the same as tomorrow · Planners scan environmental elements and analyze potential moves and counter moves by other organizations · Potentially softens the adverse impacts of external shifts · Falling sales for electronics pushed Sony to change strategy and focus on medical equipment · Scenario planning: rehearsing different scenarios based on anticipating various changes that could affect the organization i.e. post 9/11 saw a surge in scenario and contingency planning as a way to manage uncertainty. Made a comeback during the financial crisis · Not a substitute for actions such as boundary spanning and adequate internal integration and coordination Dependence of Financial Resources · Environment is source of scarce financial resources essential to organizations · First response of many organizations to declining financial resources Þ lay off employees and cut investments · Resource-dependent: organizations depend on the environment but strive to acquire control over resources to minimize their dependence · Control over financial resources Þ minimizes dependence on other organizations. Lack of control Þ increased vulnerability · Trade off between resources and autonomy: when costs and risks are high companies may team...