Chapter 3: Organizational

Culture and External

Environment

Dai Le
LEARNING OUTLINE
Follow this Learning Outline as you read
and study this chapter.
• The Manager: Omnipotent or Symbolic
 Contrast the action of manager according to the
omnipotent and symbolic views.
 Explain the parameters of managerial discretion.
• The Organization’s Culture
 Describe the seven dimensions of organizational culture.
 Discuss the impact of a strong culture on organizations and
managers.
 Explain the source of an organization’s culture.
 Describe how culture is transmitted to employees.
 Describe how culture affects managers.
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LEARNING OUTLINE
Follow this Learning Outline as you read
and study this chapter.

• Current Organizational Cultural Issues Facing Managers

 Describe the characteristics of an ethical culture, an
innovative culture, and a customer-responsive culture.
 Discuss why workplace spirituality seems to be an
important concern.
 Describe the characteristics of a spiritual organization.

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LEARNING OUTLINE
Follow this Learning Outline as you read
and study this chapter.

• The External Environment (cont’d)

 Describe the components of the specific and general
environments.
 Discuss the two dimensions of environmental
uncertainty.
 Identify the most common organizational stakeholders.
 Explain the four steps in managing external stakeholder
relationships.

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The Manager: Omnipotent or Symbolic?

Omnipotent View of Management

• Managers are directly responsible for an organization’s
success or failure.
• The quality of the organization is determined by the
quality of its managers.
• Managers are held accountable for an organization’s
performance, yet it is difficult to attribute good or poor
performance directly to their influence on the
organization.

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The Manager: Omnipotent or
Symbolic?

Symbolic View of Management

• Much of an organization’s success or failure is due to
external forces outside of managers’ control.
• The ability of managers to affect outcomes is influenced and
constrained by external factors.
The economy, customers, governmental policies,
competitors, industry conditions, technology, and the
actions of previous managers
• Managers symbolize control and influence through their
action

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Exhibit 3–1 Parameters of Managerial Discretion

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 The Organization’s Culture

• Organizational Culture
 A system of shared meanings and common beliefs held by
organizational members that determines, in a large
degree, how they act towards each other.
 “The way we do things around here.”
o Values, symbols, rituals, myths, and practices
 Implications:
o Culture is a perception.
o Culture is shared.
o Culture is descriptive.
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Exhibit 3–2 Dimensions of Organizational Culture

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Exhibit 3–3 Contrasting Organizational Cultures

Dimension Organization A Organization B

Attention to Detail High Low
Outcome Orientation Low High
People Orientation Low High
Team Orientation Low High
Aggressiveness Low High
Stability High Low
Innovation and Risk Taking Low High

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Strong versus Weak Cultures

• Strong Cultures
 Are cultures in which key values are deeply held
and widely held.
 Have a strong influence on organizational
members.
• Factors Influencing the Strength of Culture
 Size of the organization
 Age of the organization
 Rate of employee turnover
 Strength of the original culture
 Clarity of cultural values and beliefs

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Benefits of a Strong Culture
• Creates a stronger employee commitment to the organization.
• Aids in the recruitment and socialization of new employees.
• Fosters higher organizational
performance by instilling and promoting
employee initiative.

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 Organizational Culture

• Sources of Organizational Culture

 The organization’s founder
o Vision and mission
 Past practices of the organization
o The way things have been done
 The behavior of top management
• Continuation of the Organizational Culture
 Recruitment of like-minded employees who “fit”
 Socialization of new employees to help them adapt to the
culture

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Exhibit 3–4 Strong versus Weak Organizational Cultures

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 How Employees Learn Culture

• Stories
 Narratives of significant events or actions of people that
convey the spirit of the organization
• Rituals
 Repetitive sequences of activities that express and reinforce
the values of the organization
• Material Symbols
 Physical assets distinguishing the organization
• Language
 Acronyms and jargon of terms, phrases, and word meanings
specific to an organization
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 How Culture Affects Managers

• Cultural Constraints on Managers

 Whatever managerial actions the organization
recognizes as proper or improper on its behalf
 Whatever organizational activities the organization
values and encourages
 The overall strength or weakness of the
organizational culture

• Simple rule for getting ahead in an organization:

• Find out what the organization rewards and do those things.

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Exhibit 3–5 How an Organization’s Culture Is Established
and Maintained

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Exhibit 3–6 Managerial Decisions Affected by Culture

• Planning
● The degree of risk that plans should contain
●
Whether plans should be developed by individuals or teams
●
The degree of environmental scanning in which management
will engage
• Organizing
● How much autonomy should be designed into employees’ jobs

● Whether tasks should be done by individuals or in teams

●
The degree to which department managers interact with each
other

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Exhibit 3–6 Managerial Decisions Affected by Culture (cont’d)

• Leading
● The degree to which managers are concerned with increasing
employee job satisfaction
●
What leadership styles are appropriate
●
Whether all disagreements—even constructive ones—should
be eliminated
• Controlling
● Whether to impose external controls or to allow employees to
control their own actions
●
What criteria should be emphasized in employee performance
evaluations
●
What repercussions will occur from exceeding one’s budget

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Organization Culture Issues
• Creating an Ethical • Creating an Innovative
Culture Culture
 High in risk tolerance  Challenge and
 Low to moderate involvement
aggressiveness  Freedom
 Focus on means as  Trust and openness
well as outcomes  Idea time
 Playfulness/humor
 Conflict resolution
 Debates
 Risk-taking

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Exhibit 3–7 Suggestions for Managers: Creating a More Ethical Culture

Be a visible role model.

Communicate ethical expectations.

Provide ethics training.

Visibly reward ethical acts and punish unethical ones.

Provide protective mechanisms so employees can discuss

ethical dilemmas and report unethical behavior without fear.

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Organization Culture Issues (cont’d)

• Creating a Customer-Responsive Culture

 Hiring the right type of employees (ones with a strong
interest in serving customers)
 Having few rigid rules, procedures, and regulations
 Using widespread empowerment of employees
 Having good listening skills in relating to customers’
messages
 Providing role clarity to employees to reduce ambiguity
and conflict and increase job satisfaction
 Having conscientious, caring employees willing to take
initiative
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Exhibit 3–8 Suggestions for Managers: Creating a More Customer-
Responsive Culture

• Hire service-contact people with the personality and attitudes

consistent with customer service—friendliness, enthusiasm,
attentiveness, patience, concern about others, and listening skills.
• Train customer service people continuously by focusing on
improving product knowledge, active listening, showing patience,
and displaying emotions.
• Socialize new service-contact people to the organization’s goals and
values.
• Design customer-service jobs so that employees have as much
control as necessary to satisfy customers.
• Empower service-contact employees with the discretion to make
day-to-day decisions on job-related activities.
• As the leader, convey a customer-focused vision and demonstrate
through decisions and actions the commitment to customers.

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Spirituality and Organizational Culture

Characteristics of a
Workplace
Spiritual
Spirituality
Organization

• The recognition that • Strong sense of purpose

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people have an inner • Focus on individual
life that nourishes and is development
nourished by • Trust and openness
meaningful work that
• Employee
takes place in the
empowerment
context of community.
• Toleration of
employees’ expression
Benefits of Improved employee productivity
Spirituality
Reduction of employee turnover

Stronger organizational performance

Increased creativity

Increased employee satisfaction

Increased team performance

Increased organizational performance

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Defining the External Environment

External Environment

• Those factors and forces outside the organization that affect

the organization’s performance.

Components of the External Environment

• Microenvironment (competitive environment): external

forces that have a direct and immediate impact on the
organization.
• Macroenvironment (General environment): broad economic,
socio- cultural, political/legal, demographic, technological,
and global conditions that may affect the organization.

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 The External Environment

Source: Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization:

Concepts & Cases, 13e
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 Competitor environment (Industry
environment
• An industry is a group of firms producing products that are close
substitutes.
• Companies use a mix of different competitive strategies to pursue above-
average returns when competing in a particular industry.
• An industry’s structural characteristics influence a firm’s choice of
strategies.
• Compared with the general environment, the industry environment has a
more direct effect on firms’ competitive actions and responses.
• To study an industry, the firm examines five forces that affect the ability of
all firms to operate profitably within a given industry:
• The threats posed by new entrants
• The power of suppliers
• The power of buyers
• Product substitutes
• The intensity of rivalry among competitors
The Five Forces of Competition Model
 Threat of New Entrants

• Identifying new entrants is important because they can threaten the

market share of existing competitors.
• How likely firms will enter an industry is a function of two factors:
• Barriers to entry
• The retaliation expected from current industry participants

• Barriers to Entry
 Companies competing within a particular industry study entry barriers
to determine the degree to which their competitive position reduces
the likelihood of new competitors being able to enter the industry to
compete against them.
 Firms considering entering an industry study entry barriers to
determine the likelihood of being able to identify an attractive
competitive position within the industry.
 Threat of New Entrants

• There are several significant entry barriers:

 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels
 Cost disadvantages independent of scale
 Government policy

• Economies of Scale
 With economies of scale, the cost of producing each unit declines as the
quantity of a product produced during a given period increases.
 A new entrant is unlikely to quickly generate the level of demand for its
product that would allow it to develop economies of scale.
 Threat of New Entrants

• Product Differentiation
 Over time, customers may come to believe that a firm’s product is unique
and consistently purchase that firm’s product.
 To combat the perception of uniqueness, new entrants
frequently offer products at lower prices.
o However, this may result in lower profits or even losses.

• Capital Requirements
 Competing in a new industry requires a firm to have capital for physical
facilities, inventories, marketing activities, and other critical business
functions.
 The capital required for successful market entry may not be available to
pursue the market opportunity.
 Threat of New Entrants

• Switching Costs
 Switching costs are the one-time costs customers incur when they
buy from a different supplier.
 If switching costs are high, a new entrant must attract buyers by
offering either:
• A substantially lower price
• A much better product

• Access to Distribution Channels

 After building a relationship with its distributors, a firm will nurture
it, thus creating switching costs for the distributors.
 New entrants may use price breaks and cooperative advertising
allowances to persuade distributors to carry their products.
• However, those practices can reduce new entrants’ profit
potential.
 Threat of New Entrants

• Cost Disadvantages Independent of Scale

 Successful competition requires new entrants to reduce the
strategic relevance of cost advantages held by established
competitors that cannot be duplicated.
o Examples: Proprietary product technology, favorable access to raw
materials, desirable locations, and government subsidies

• Government Policy
 Governmental decisions and policies that can control entry into an
industry include:
o The granting of licenses and permits
o Deregulation
o Antitrust issues
 Bargaining Power of Suppliers

• Suppliers can exert power over firms competing within an industry by:
 Increasing prices
 Reducing the quality of their products
• A supplier group is powerful when:
 It is dominated by a few large companies and is more concentrated
than the industry to which it sells.
 Satisfactory substitute products are not available to industry firms.
 Industry firms are not a significant customer for the supplier group.
 Suppliers’ goods are critical to buyers’ marketplace success.
 The effectiveness of suppliers’ products has created high switching
costs for industry firms.
 It poses a credible threat to integrate forward into the buyers’ industry.
 Bargaining Power of Buyers

• To reduce their costs, buyers bargain for:

 Higher quality
 Greater levels of service
 Lower prices
• Customers (buyer groups) are powerful when:
 They purchase a large portion of an industry’s total output.
 The sales of the product being purchased account for a significant
portion of the seller’s annual revenues.
 They could switch to another product at little, if any, cost.
 The industry’s products are undifferentiated or standardized, and
the buyers pose a credible threat if they were to integrate backward
into the sellers’ industry.
 Threat of Substitute Products

• Substitute products are goods or services from outside a given industry that
perform similar or the same functions as a product that the industry
produces.
• In general, product substitutes present a strong threat to a firm when:
 Customers face few, if any, switching costs
 The substitute product’s price is lower
 The substitute product’s quality and performance capabilities are equal
to or greater than those of the competing product
• To reduce a substitute’s attractiveness, a firm can differentiate a product
along dimensions that are valuable to customers, such as:
 Quality
 Service after the sale
 Location
 Intensity of Rivalry among Competitors

• Competitive rivalry intensifies when:

 A firm is challenged by a competitor’s actions
 A company recognizes an opportunity to improve its market
position
• Common dimensions on which rivalry is based include:
 Price
 Service after the sale
 Differentiation or Innovation
• Factors that increase the intensity of rivalries among firms include:
 Numerous or equally balanced competitors
 Slow industry growth
 High fixed costs or high storage costs
 Lack of differentiation or low switching costs
 High strategic stakes
 High exit barriers
 Interpreting Industry Analyses

• Analysis of the five forces within a given industry allows the firm to
determine the industry’s attractiveness in terms of the potential to
earn average or above-average returns.
 Stronger competitive forces usually mean a lower potential to
earn profits.
• An unattractive industry has:
 Low entry barriers
 Suppliers and buyers with strong bargaining positions
 Strong competitive threats from product substitutes
 Intense rivalry among competitors
• An attractive industry has:
 High entry barriers
 Suppliers and buyers with little bargaining power
 Few competitive threats from product substitutes
 Relatively moderate rivalry
Five Forces analysis example (for Samsung)
 The General Environments

• The general environment is composed of dimensions in the broader

society that influence an industry and the firms within it.
• The dimensions are grouped into seven environmental
segments:
• Demographic
• Economic
• Political/legal
• Sociocultural
• Technological
• Global
• Sustainable physical environment

Source: Hitt, Ireland, Hoskisson, Strategic Management:

Competitiveness & Globalization: Concepts & Cases, 13e
 The General Environment: Segments and Elements

Demographic • Population size • Ethnic mix

segment • Age structure • Income distribution
• Geographic distribution
Economic • Inflation rates • Personal savings rate
segment • Interest rates • Business savings rates
• Trade deficits or surpluses • Gross domestic product
• Budget deficits or surpluses
Political/Legal • Antitrust laws • Labor training laws
segment • Taxation laws • Educational philosophies
• Deregulation philosophies and policies
Sociocultural • Women in the workforce • Shifts in work and career
segment • Workforce diversity preferences
• Attitudes about the quality • Shifts in preferences
of work life regarding product and
service characteristics
 The General Environment: Segments and Elements

Technological • Product innovations • Focus of private and

segment • Applications of knowledge government-supported
research and development
(R&D) expenditures
• New communication
technologies
Global • Important political events • Newly industrialized
segment • Critical global markets countries
• Different cultural and
institutional attributes
Sustainable • Energy consumption • Availability of water as a
physical • Practices used to develop resource
environment energy sources • Producing environmentally
segment • Renewable energy efforts friendly products
• Minimizing a firm’s • Reacting to natural or man-
environmental footprint made disasters
 The Demographic Segment

• The demographic segment is concerned with a population’s size, age

structure, geographic distribution, ethnic mix, and income distribution.

• Population Size
• It is projected that population growth will continue in the twenty-first
century, but at a slower pace.
• Firms may want to recognize the market potential that may exist for
them in the following five nations, which are expected to be the most
populous nations in the world by 2050:
• India
• China
• United States
• Indonesia
• Pakistan
 The Demographic Segment

• Age Structure
 The world’s population is rapidly aging.
 The aging of the population:
o Has significant implications for availability of qualified labor, health
care, retirement policies, and business opportunities among others.
o Threatens the ability of firms to hire and retain a workforce that
meets their needs.

• Geographic Distribution
 How a population is distributed within countries and regions is
subject to change over time.
o Examples: In the United States, the shift from states in the Northeast
and Great Lakes region to states in the West, South, and Southwest; in
China, the shift from rural areas to urban communities
 The Demographic Segment

• Ethnic Mix
 The ethnic mix of countries’ populations continues to change.
o Example: The increase in the Hispanic population in the United States
 The ethnic diversity of the population is important because of:
o Consumer needs
o The labor force composition

• Income Distribution
 Income distribution within and across populations informs firms of
different groups’ purchasing power and discretionary income.
o Example: The rise in domestic consumption of consumer goods by
India’s middle class has positioned it as a market of interest.
 Of particular interest to firms are the average incomes of households and
individuals.
The Economic Segment

• The economic environment refers to the nature and direction

of the economy in which a firm competes or may compete.
• In general, firms seek to compete in relatively stable
economies with strong growth potential.
• It is challenging for firms studying the economic environment
to predict economic trends that may occur and their effects on
them.
• When facing economic uncertainty, firms especially want to
study closely the economic environment in multiple regions
and countries throughout the world.
 The Political/Legal Segment

• The political/legal segment is the arena in which organizations and

interest groups compete for attention, resources, and a voice in
overseeing the body of laws and regulations guiding interactions
among nations as well as between firms and various local
governmental agencies.
• Essentially, this segment is concerned with:
 How organizations try to influence governments
 How they try to understand the current and projected influences
of those governments on their competitive actions and
responses
• The relationship between national, regional, and local laws and
regulations creates a highly complex environment within which
businesses must navigate.
The Sociocultural Segment

The sociocultural segment is concerned with a society’s attitudes

and cultural values.
• Attitudes and values:
 Form the cornerstone of a society
 Often drive demographic, economic, political/legal,
and technological conditions and changes
 Are relatively stable, but can and often do change over
time
o Firms must identify these changes in order to stay
ahead of their competitors and stay relevant in the
minds of their consumers.
 The Technological Segment

• The technological segment includes the institutions and activities

involved in creating new knowledge and translating that
knowledge into new outputs, products, processes, and materials.
• Firms should continuously scan the general environment to
identify:
 Potential substitutes for technologies that are in current use
 Newly emerging technologies from which their firm
could derive competitive advantage
• New technology and innovations are changing many industries.
 Examples: The Internet and wireless communication
technology
 Thus, firms in all industries must become more innovative in
order to survive.
 The Global Segment

• The global segment includes relevant new global markets and their
critical cultural and institutional characteristics, existing markets
that are changing, and important international political events.
• When studying the global segment, firms should recognize that
globalization of business markets may create opportunities to enter
new markets, as well as threats that competitors from other economies
may enter their market.
 Global focusing:
o Is a more cautious approach to globalization in which firms
focus on
o global niche markets
o Allows firms to build onto and use their competencies while
limiting their risks within the niche market
The Global Segment

• Firms competing in global markets should recognize each

market’s sociocultural and institutional attributes.
 Examples: Korean ideology emphasizes communitarism;
Chinese ideology emphasizes guanxi—personal
connections; Japanese ideology emphasizes wa—group
harmony and social cohesion.
• The informal economy is another aspect of the global segment
requiring analysis.
 The Sustainable Physical Environment
Segment

• The sustainable physical environment segment refers to potential

and actual changes in the physical environment and business
practices that are intended to positively respond to those changes in
order to create a sustainable environment.
• Concerned with trends oriented to sustaining the world’s physical
environment, firms recognize that ecological, social, and economic
systems interactively influence what happens in this particular
segment and that they are part of an interconnected global society.
• An increasing number of companies are investing in
sustainable development.
Selected U.S. Legislation Affecting Business
• Occupational Safety and Health Act of 1970
• Consumer Product Safety Act of 1972
• Equal Employment Opportunity Act of 1972
• Worker Adjustment and Retraining Notification Act of 1988
• Americans with Disabilities Act of 1990
• Civil Rights Act of 1991
• Family and Medical Leave Act of 1993
• Child Safety Protection Act of 1994
• U.S. Economic Espionage Act of 1996
• Electronic Signatures in Global and National Commerce Act of
2000
• Sarbanes-Oxley Act of 2002
• Fair and Accurate Credit Transactions Act of 2003
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 How the Environment Affects
Managers?
• Environmental Uncertainty
 The extent to which managers have knowledge of and
are able to predict change their organization’s external
environment is affected by:
o Complexity of the environment: the number of
components in an organization’s external
environment.
o Degree of change in environmental components:
how dynamic or stable the external environment
is.

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Exhibit 3–11 Environmental Uncertainty Matrix

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Stakeholder Relationships

Stakeholders

• Any constituencies in the organization’s environment

that are affected by the organization’s decisions and
actions

Why Manage Stakeholder Relationships?

• It can lead to improved organizational performance.

• It’s the “right” thing to do given the interdependence
of the organization and its external stakeholders.

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Managing Stakeholder Relationships

• Identify the organization’s external

stakeholders.
• Determine the particular interests and concerns of
the external stakeholders.
• Decide how critical each external stakeholder is to the
organization.
• Determine how to manage each individual external
stakeholder relationship.

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Exhibit 3–12 Organizational Stakeholders

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 Terms to Know
• omnipotent view of • workplace spirituality
management • external environment
• symbolic view of • specific environment
management • general environment
• organizational culture • environmental uncertainty
• strong cultures • environmental complexity
• socialization • stakeholders

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