Topic 2 Organization and Its' Environment

Topic 2          ORGANIZATION AND ITS ENVIRONMENT

 

The following abstract is the forward introduction taken from the publication; Business Ethics, A Manual for Managing A Responsible Business Enterprise in Emerging Market Economies; A Publication of the Good Governance Program.

“Government has an important role in the spread of freedom and democratic capitalism. It provides for the essential market-oriented legal framework and reliable dispute resolution processes that allow businesses to compete fairly on the quality, prices, and delivery of their goods and services alone. It enforces laws, regulations, and judgments to safeguard the social order its citizen’s value. It cannot, however, act alone. Businesses and civil society must also be involved in solutions to community problems. They can help in the fight against the corruption that saps national resources. They must reform the unethical business practices that breed cynicism and distrust in communities. Businesses are at the strategic centre of a civil society, and they have a stake in their communities. They depend on free markets and good public governance for their growth and success, but they are also authors of their own destiny”.

What Is an Organization’s Environment?

Before we look at framing business ethics, let us consider what environmental factors affects an organization and how these factors do contributes to the overall operations and activities of an organization. Companies and organization in today's economy live in a challenging environment that in order to survive and continue to be competitive, they must understand the environment and what it encompasses. Thus companies have to look at the external environment as well as the internal environment.

External Environment consists of two layers; The General Environment and the Task Environment.     

General Environment: Is the set of broad dimensions and forces in its surroundings that create its overall context.

·         Sociocultural

·         Political-legal

·         International

·         Economic

·         Technological dimension

International Dimension

·         International Competition.

·         Major Operations – Canada, Germany, Britain, US.

·         Significant ownership of Mazda.

Within the international dimension, organization are affected by or involved in business in other countries. Even firms that sell products in only one country may be affected by foreign competition at home, and they may use raw materials or production equipment imported from abroad. The international dimension also has implications for non-profit organizations. Medical breakthrough and research in one country spread rapidly to others and cultural exchange of all kinds takes place continually between countries.As a result of advances in transportation and communication technology in the twentieth century, almost no part of the world is cut off from the rest. Virtually every organization is affected by the international dimension.

Economic Dimension

·         Moderate unemployment in Australia.

·         Growing Sales.

·         Low interest rates, low inflation. 

The economic dimension of an organization’s general environment is the overall health of the economic system in which the organization operates. Important economic factors are: Inflation, Interest Rates, and Unemployment all which affect demand for different products. During time of inflation, company pay more for resources and must raise its prices to cover the higher costs.

Interest Rates: When interest rates are high, consumers are less willing to borrow money and the company itself must pay more when it borrows. Companies are less willing to borrow money to upgrade plant and equipment, and expand production. When interest rates are low, companies are more willing to invest in new plant and equipment, and to recruit more employees; however investment funds may well move offshore to economies that offer high interest rate and thus a better return on investment.

Unemployment: When unemployment is high, the company is able to be very selective about whom it recruits, but consumer buying may decline because fewer people are working.

Exchange Rate: The exchange rates are also a crucial variable. Example: (Value of the PNG Kina dollar say in US dollars) Many loans are denominated in US dollars, and a lower PNG Kina may mean that our exports are more attractively price for international customers, but we must also pay more interest on our US-denominated borrowings. The economic dimension is important to non-business organizations as well.

Example: During poor economic conditions, funding for state agencies drops, and charitable organizations like the Salvation Army and the Red Cross are asked to provide greater assistance, while incoming contributions drops. Similarly, education and hospitals are affected by availability of government support. 

Technological Dimension

·         Increase emphasis on robotics.

·         Improved computer assisted design techniques.

·         More efficient operating systems.

Under the Technological dimension of an organization, managers look at methods available for converting resources into products and services. Although technology is applied within the organization, the forms and availability of that technology come from the general environment.

Example: Qantas has a highly sophisticated computer-controlled cockpit simulator to provide a level of realism in pilot training that is not realistically possible otherwise.

Bar code reader at the local supermarket check-out, which not only calculates the price of customers’ purchases and prints out a receipt but also instantly advices inventory control for  the need to re order.    

Sophisticated computer-controlled cockpit simulator and Supermarket Bar code reader are examples of applications of technology from the general environment in an organization’s operations. Innovations in robotic and other manufacturing techniques also have implications for managers.

Example: A company like Ford is clearly affected by all of these innovations, for example technological changes has affected the manner in which Ford designs, manufactures, distributes, and services cars and trucks throughout the world, as well as in particular national environments.            

Sociocultural Dimension

·         Growing consumer demands for quality.

·         Demographic shifts in the number of single adults.

·         Increase cooperation between management & labor.

·         Varying consumer tastes

The sociocultural dimension includes customs, moral values, and demographic characteristics of the society in which the organization functions. Sociocultural processes are important because they determine the products, services and standards of conduct that the society is likely to value.

Example: In some countries, consumers are willing to pay premium prices for designer clothes. Some of these clothes may virtually have no market in other countries. Consumer tastes and Social attitudes have changed over time.

Example; Consumers in developed countries are more health conscious then their ancestors with attitudes towards smoking and health diet changing.

Appropriate standards of business conduct also vary across cultures. In Australia and New Zealand accepting bribe and giving political favor is considered unethical. In other countries however, payments to local politicians may be expected in return for a favorable response to common business transactions.

The shape of the market, the ethics of political influence and attitudes in the work force are only a few of the many ways in which culture can affect an organization. Sociocultural factors are also reflected in how workers in a society feel about their jobs and the organizations that employ them.

Relationship (Employee and Organization)

·         Absence of trust,

·         Readiness to extract value from other by whatever means possible.

·         Pilferage of time and materials by one.

·         Intimidation and exploitation by other

Political-Legal Dimension

·         Government safety standards.

·         General posture towards business regulation.

·         Import tariffs/protection

The Political-legal dimension refers to the government regulation of business and the general relationship between business and government.

Important for three reasons:

·         Legal system partly defines what an organization can and cannot do.

·         Pro-business or anti-business sentiment in government influence business activity

·         Political stability has ramifications for business planning.

Governments consult closely with the business community, and business leaders lobby governments to legislate and regulate to improve the business environment. The political-legal dimension of the general environment thus becomes an element in the task environment.

Task Environment: Consists of specific organizations or groups that influence an organization.

·         Competitors

·         Customers

·         Suppliers

·         Regulator

·         Strategic Allies

They directly affect a particular organization but they are not part of the organization. Each dimension of the general environment embodies conditions and events that have the potential to influence the organization in important ways.

Because the impact of the general environment is often vague, imprecise and long-term, most organizations tend to focus their attention on the task environment. The task environment is also quite complex; it provides useful information more readily than does the general environment.

Managers can identify environmental factors of specific interest to the organization rather than having to deal with the more abstract dimension of the general environment.

Competitors (First Dimension)

An organization’s competitors are other organizations that compete with it for resources. The resource most commonly competed for is customer dollar.  No all competition can be expressed in terms of customer dollar.

·         Government department compete for tax revenue

·         Business compete for the best and brightest young graduate

·         Firms seeking limited funding from bank

Some organizations track their competitors more closely than others.

·         One company may purchase examples of its competitor’s products for the purpose of analyzing quality and construction techniques

·         One hotel chain may have its managers “mystery shop” the service provided by it competitors by having them book rival hotels to see how their competitors manage comfort and service.

·         Securing ‘inside knowledge’ of a competitor’s product plans, financial margins and marketing campaigns, while potentially valuable to the organization, not only is difficult, but also may fall into the category of industrial espionage and this is where business ethics emerges.

Customers (Second Dimension)

Customers are defined as persons or organizations that pay money to acquire an organization’s products or services. Dealing with customers has become increasingly complex in recent years.

·         New products and services

·         New methods of marketing

·         More discriminating customers all have added uncertain to how business relate to their customers

Organizations also have ‘internal customers’. These are persons, departments or divisions within the organization who are the customers of other persons, departments or divisions in the organization.

Example: Marketing Department is a customer of the production department. Accounting Department is a customer of the Accounting Department.

The desired effect is that everyone within the organization works to satisfy the demands of those whom they serve, whether external paying customers or internal colleagues who depend on them to be able to do their work and to add value to the organization.

Suppliers (Third Dimension)

Suppliers are organizations that provide resources for other organizations.

·         Business should try to avoid depending exclusively on one particular supplier because if the supplier goes out of business or is faced with an industrial action the firm may be crippled and go out of business.

·         Playing one supplier off against another has become routine business thinking however, in recent times businesses have come to recognized building strong relationship with a small set of suppliers

·         Long-term trusting relationships, where the supplier provides on time and at a reliable level of quality may be a far better way of doing business.

·         Some customer organizations are even giving their suppliers access to their computerized inventory systems to allow suppliers to monitor sales accurately and ensure adequate stock.

·         Some organizations provide their suppliers with regular feedback from end-user to help the supplier maximize the quality of their goods.

·         This trend has changed the nature of the relationship between the organization and its suppliers

Regulators (Fourth Dimension)

Organizations that have the potential to control legislate or otherwise influence an organization’s policies and practices. There are two important kinds of regulators:

·         Regulatory Agencies – Created by Government to protect the public from certain practices or to protect organizations from one another. ACCC monitor and regulate prices and competitive practices

·         Interest Groups – Organized by members to attempt to influence business outcomes.

·         Interest groups and industry self-regulation groups also function as regulators of business activities of organizations. This is especially so in regard to environmental issues and ethical conduct.

Strategic Allies (Fifth Dimension)

Two or more companies that work together in joint ventures or other partnerships for mutual benefit.

Example: Co sharing British Airways and Qantas;   Air Niugini and Qantas

These special relationships pay off in terms of increased market share through increased levels of customer services and customer loyalty

·         Strategic allies’ help companies gain from other companies the expertise that they lack. They also spread the risk.

·         Managers must be careful, however, not to give away sensitive, competitive information.

·         Strategic alliance need not always involve business. A number of universities worked together for example to secure government grants etc.

Internal Environment

Internal Environment consists of conditions and forces within the organization. Major components include its owners, board of directors, employees and organized labor and organizational culture.

·         Owners

·         Board of Directors

·         Employees

·         Culture

Owners - Owners of business are of course:

·         Person (or people) who have a legal property right to that business.

·         Single individuals who establishes and runs a small business

·         Partners who jointly own the business

·         Individual investors who buy shares in a corporation, or other organization

Individuals who own and manage their own businesses are clearly a part of the organization’s internal environment. Institutional shareholders are also becoming part of an organization’s internal environment.

Instead of sitting on the sideline and let top management run their organization, institutional shareholders are taking an active role in influencing the management of companies in which they hold shares. This is true of owners who hold large number of shares.

Board of Directors - Corporations require having a Board of Directors who has a legal obligation for the operations of the organization. They play a major part in setting organizational strategy and policy. Not every organization and non-incorporated businesses has a board of directors

A corporate board of directors is elected by the shareholders and is charged with overseeing the general management of the firm to ensure it is being run in a way that best serve the shareholders’ interests. Some directors may be employees of the firm often as senior managers.

Employees - Are the management and staff of the organization, paid and unpaid (depending on the nature of the employment contract). These are the people who implement the company’s strategy.

When managers and employees embrace the same value and have the same goals, the outcome is likely to be more positive than when there is conflict and hostility within the organization. 

Rifts occur when employees feel themselves to be disadvantaged by management actions. (Result – workers union strikes or industrial actions)

Organization’s Culture

·         Discuss the importance and determinants of an organization's culture and how culture can be managed.

What is “culture” and why is it important in organizations?

·         Culture is the shared values and norms expressed in the way that things are done by a group of people or the way people feel about an organization.

 

·         Culture is important to organization because it is a powerful influence in determining the success of a company.

 

·         Culture is important in differentiating the people of one country from those of another and it may even allow us some insight into and ability to predict behavior.

Organizations can also be said to exhibit their own “corporate culture”.

Companies are made up of;

·         Structures

·         Processes

·         Technology

·         People

(Manufacturing, information handling, hardware and software of their operations)

People within a company carry with them a corporate culture that is to the organization what the personality is to the individual.

Usually the company’s structure, processes and technology can be easily replicated by a rival firm, but people are unique – and so is the culture.

Increasingly, managers are coming to appreciate that it may be the people, more often than not, that determine just how well the organization can perform. A positive corporate culture is a prerequisite for success.

In today's corporate world where mergers and acquisition takes place on a regular basis, no longer can managers look at competitive advantages and a positive corporate culture as a prerequisite for success.

Corporate managers are faced with management challenges in today’s global and business environment.

Consider for example the complex matter of a merger or acquisition when one company buys another. Suddenly two companies with two corporate cultures have to work together, like two very large families that have to live in the same house, sharing information, furniture, cooking duties and a host of other resources.

·         Disputes are both predictable and inevitable.

·         The stakes are high. Reduced productivity can cost millions to a company.

Studies have shown that more than 50 percent of mergers have failed to proceed or result in the value of the merged company’s shares being significantly reduced.

Unfortunately, the negative usually appear within weeks of the formal announcement, but the positive usually judged in terms of economies of scale and financial results often take several years to show.

How do you deal with such a complex merger? It requires patients and tolerance on all sides and success will probably come years later.

The reason mergers failed are usually traceable to the management inability to resolve cultural differences among other things.

Examples of failed Acquisition and Mergers:

·         AMP acquisition of Insurance Company GIO is considered to have been unwise.

·         The collapse of insurance company HIH in 2001 was due in part to its merger with FAI Insurance

Internationally, the significance of corporate culture and the consequent problems in corporate mergers is equally apparent.

The environment external to the operations of companies such as the prevailing economic conditions, government regulations, the exchange rates etc is important when considering the firm’s operation but it is the culture of the organization that is increasingly likely to be the crucial factor that determines success, as studies of mergers have shown.

·         Culture is one of the important environment forces and how this is managed is important.

·         If culture is one of the important environmental forces, than how do we differentiate which environment element to manage.

·         Organization must understand the basic elements of its environment to properly maneuver as well as managing its environment effectively.

(Johnson, Abramov, 2004) Owners and managers must temper the competitive aspects of capitalism with concerned citizenship. They must take individual responsibility for the decisions and activities of their enterprises and their impact on the culture of their enterprise and its stakeholders. A business needs committed, productive employees, agents, and suppliers to create goods and services. It needs loyal, satisfied customers and consumers to make a profit. It needs people who believe in it and in its prospects enough to invest. It needs to take the long view and to respect the physical environment and the prospects of future generations. Standards, procedures, and expectations for business are emerging worldwide. Enterprises and markets that are unaware of them, or fail to plan their futures with them in mind, will be unable to participate in the global dialogue and will risk being left behind as the global market economy expands.

Organization- Environment Relationship

Organizations are open systems; they interact with the various dimensions in many different ways. How the environment does affect the Organization? Three basic perspectives

·         Environmental change and complexity

·         Competitive forces

·         Environmental turbulence

James D. Thompson described two dimensions;

1.      Degree of change – Is the extent to which the environment is relatively stable or dynamic

2.      Degree of homogeneity – Is the extent to which the environment is relatively simple (few elements, little segmentation) or complex (many elements, much segmentation)

The two dimensions interact to determine the level of uncertainty faced by the organization. Uncertainty is the driving forces that influences many organizational decisions

The least environment uncertainty is faced by organizations with stable and simple environment. No environment is totally without uncertainty.

Simple view of four levels of uncertainty

 

How Does The Environment Affects The Organization?

Organization with dynamic but simple environments generally face a moderate degree of uncertainty.

Examples: Clothing manufacturers (targeting a certain kind of clothing buyer but sensitive to fashion induced changes). Compact disc (CD) producer (catering to certain kind of music consumers but is alert to changes in music)

Another combination of factors is one of stability and complexity. Moderate amount of uncertainty results. Very dynamic and complex environmental conditions yield a high degree of uncertainty. The environment has a large number of elements, and the nature of those elements is constantly changing.

Example: Firms in the IT and electronic field face these conditions because of the rapid rate of technological innovation and changes in consumer markets that characterize their industry, their supplier and their competitors

Threats of New Entrants – Extent to which new competitors can easily enter a market or market segment

Example: It takes relatively small amount of capital to open a dry cleaning service or a pizza restaurant, but it takes a huge investment in plant, equipment and distribution systems to enter motor vehicle manufacturing.

Thus entrants is high for cleaning services or restaurant however, low for motor vehicle manufacturing

Competitive rivalry – Nature of the competitive relationship between dominant firm in the industry

Example: In the soft drink industry, Coca-cola and PepsiCo often engage in intense price wars, comparative advertisement and new product introduction.  Motor vehicles dealers continually try to outmaneuver each other with warranty improvements and rebates

Threats of substitute products – Extent to which alternative products or services may supplant or diminish the need for existing services or product.

Example: The electronic calculator eliminated the need for slide rules. The advent of micro computers in turn has reduced the demand for calculators as well as typewriters and large frame computers.

Power of buyers – Buyers have the ability to influence suppliers

Example: Boeing 747 has relatively few potential buyers. Only large airlines can purchase them hence they considerable influence over the price they are willing to pay, the delivery date for the order and so forth.

Power of Suppliers -  Suppliers have the ability to influence buyers

Example: The local electricity supplier may be the only source of electricity in your community. Subject to legislation, it can therefore charge what it wants for its product, provide service at its convenience, and so forth.

Similarly Boeing has few potential customers, those same customers have few suppliers that can sell them a 300 passenger jet, so Boeing too has power.

In spite of best planning efforts, chaos of various kind can still occur regularly and often disturbingly. The most common form of environment turbulence is a crisis of some sort.

Organizations can plan for unexpected turbulence in the areas defined by Porter’s forces, as well as having crisis teams skilled in crisis planning.

Example: A major adverse legal finding may result in rapid damage containment and public relations effort by a company skilled in crisis management. It may be a major disaster for one not so prepared.

Example: Unexpected turbulence

A few years ago Arnotts, a major Australian biscuit producer, faced a scare brought on by tampering with some of its product. Within two days, it had removed thousands of packets of its biscuits from supermarket shelves, put in place a positive public relations and communication campaign, and resolved the crisis with minimum threats to the public or loss to the company.

Planning for such risk management is an essential task for contemporary organizations in turbulent environment.

Understanding the organizations and their external and internal environment, managers may be able to make ethical decisions for the good of the organizations.

 

Sources:

Crane, Matten, (2007) Business Ethics; Managing Corporate Citizenship and Sustainability in the Age of Globalization. Oxford.

Nickel, McHugh, McHugh, (2005) Understanding Business 7^th Edition, McGraw-Hill

Johnson, Abramov, Business Ethics 2004, “A Publication of the Good Governance Program” International Trade Administration Washington D.C. 2004

The Environmental Context of Management by Kohler

International Business 3^rd Edition P. Subba Rao