Chapter 3: Management Environment

The New Management Context

Today’s economic and business conditions make a manager’s job challenging. Rapid technological advances in a highly competitive global environment force managers at all levels to adapt quickly to the far-reaching impacts of technology’s transformative power. Moreover, the organizational environment has changed radically in concert with the advent of new business practices. Many organizations are involved in inter-organizational networks, taking advantage of other firms’ capabilities and competencies. This implies a sizeable extension of the responsibilities of the managers that outsource business functions.

With the of the digital revolution, many new industries have emerged, often referred to as knowledge intensive industries, where high tech firms compete such as Google, Facebook, Twitter, and Microsoft. In these companies, we find new organizational forms that challenge the older, more bureaucratic structures of the past.

One of the global developments is that status of employment in organizations by the level of developments of the countries. People living in rural areas of emerging market countries have become factory workers. Meanwhile, there has been an explosive growth in knowledge intensive firms in more advanced economies.

The advancements in information and communication technologies enabled employees work as members of virtual project teams that are networked globally.

Business world is now becoming familiar with the term “Generation Z”. This latest generation is highly more skilled in the use of social media, mobile technology, and computer-driven environments than earlier generations.

Business Environments

In generic terms, environment refers to the factors that have critical importance to the survival and success of a business. Business environments can be divided into two broad categories: external environment and internal environment.

The external environment comprises factors affecting organizations indirectly. What managers can do to control them is very limited. On the other hand, the internal environment has relatively direct impacts on business operations; and the relationship between the internal environment and business operations is mutual. In other words, while internal environmental factors affect organizations, they are in turn, affected by the decisions of managers.

The external environment has two main components: general environment and task environment. The general environment includes those factors that might not have a direct impact on the daily operations of a firm but will indirectly influence it. The general environment includes political, sociocultural, economic conditions, global and technological environments. These factors eventually affect all businesses. The task environment includes factors that the organization interacts with directly and that have a direct impact on the organization’s ability to achieve its goals. Elements in the general environment influence the organization through the medium of the task environment. The task environment typically includes competitors, suppliers, and buyers (customers or distributors); businesses that produce substitute products for those sold in the industry; and businesses that provide complementary products/services.

The analysis of the general environment is called PEST ( P olitical and legal, E conomic, S ociocultural, and T echnological factors). Some authors suggest that the analysis includes e cological and l egal issues separately. In this case, this analysis is called PESTLE. We also examine the global environment as a part of the general environment since it affects virtually every business organization .

One of the critical aspects of the external environment is the direction and stability of political factors . Political and legal factors represent the law and regulations, not only the home country’s but also others in today’s global marketplace. Stability of the central government, legislation on antitrust and fair trade, nationalization and/or privatization approaches, consumer and environmental protection, foreign trade regulations, customs legislation, health and safety regulations are among the political factors that businesses should take into account.

The economy influences directly all the sectors and suppliers, producers of goods and services, wholesalers and retailers, non-governmental organizations operating in those sectors, people, and even the government. Economic factors related to the condition and the direction of the economy are critical ones for businesses to survive and accomplish their goals. Among the most important economic elements are interest rates, inflation, changes in disposable income, stock market fluctuations, and business cycle stages. These factors effect business firms to varying degrees.

Business managers develop their short- and long-term plans partly based on economic indicators, and make strategic decisions such as expanding, downsizing, undertaking new investments by analyzing the economic health of the economy. These indicators include interest rates, inflation rate s, money supply, unemployment rates, foreign trade figures, payments, budget deficits and surpluses, gross national product figures, energy costs and energy resources, wages, net income, and infrastructure investments

The sociocultural component is concerned with societal and cultural factors such as values, attitudes, trends, traditions, lifestyles, beliefs, tastes, and patterns of behavior.10 Sociocultural factors are shaped by national culture, religion, education, and ethnic elements. Business managers should understand and consider different life styles, values, and norms of the consumers they serve.

Lifestyles, values, attitudes, and behaviors change in time. The demand for products and services will respond to sociocultural changes. As individuals in society try to control and adapt to environmental factors, change in the sociocultural factors will be unavoidable.

Scientific and technological advancements and innovations have consequences for firms, products and services, strategies, and competition approaches. Technological changes represent new opportunities for businesses; however, they also may cause firms to cease operations. From the point of view of customers, it is always good to have technologies permitting cost- effective and more efficient products. Yet, businesses consider any necessary changes in the technologies they use or employed by rivals as a threat. Companies not tracking or adapting innovations relevant to their industry are destined to perish. Many products and technologies showed up on shelves for a while and then disappeared.

Global factors are outcomes of changes in international relationships, changes in nation’s economic, political, and legal systems, and changes in technology. Today’s managers recognize that their firms compete in a global and highly integrated market. They regard the global environment as a source of opportunities and threats to which they must respond.

The task environment is a set of forces and conditions that originate with suppliers, distributors, customers, and competitors; these forces and conditions affect an organization’s ability to obtain inputs and produce outputs. The task environment is closer to the organization and includes the sectors that conduct day-to-day transactions with the organization and directly influence its basic operations and performance.

Customers are the individuals or groups who buy the goods and services that a business produces.18 Customers can be not only individuals but also business organizations or non-government organizations, or institutions. They can consume the products and services by themselves or resell them. Resellers are retailers, wholesalers, industrial or institutional customers.

Suppliers are individuals or organizations that provide an organization with the input resources (such as raw materials, component parts, semi-finished materials, and energy) that it needs to produce goods and services. Businesses produce according to the orders taken, marketing, and distribution plans. Therefore, it is critical to manage the relationships with the suppliers to maintain the desired level of production complying with the pre- determined standards. Difficulties experienced in procurement may even endanger the survival of the company, depending on the extent of the problems.

Other organizations in the same industry or type of businesses which provide goods and services to the same set of customers are referred to as competitors . Each industry is characterized by specific competitive issues. Competitors pursue various strategies to capture more market share by making more sales. Typical strategies include cost leadership and differentiation.

As a task environmental force, substitutes focus on the extent to which alternative products and services can substitute for the existing products or services. Substitution is different from competition. Substitute products are goods or services that a consumer sees as the same or similar to any other product or services. As company executives monitor their rivals’ strategies, they should also pay attention to the effects of substitute products and the threats they cause.

Complementary products and services are the ones that can be sold separately but that are used together, each creating a demand for the other. A change in the demand of a complementary product can eventually influence the demand for the other one. So, if a company produces a complementary product, its control over its products can be limited.

The internal environment constitutes the factors inside the business that influence the ability of managers to pursue certain goals. The internal environment includes leadership and management styles, organizational culture, human resources, organizational structures, business assets, financial strength, and operational and managerial processes. These are environmental factors that directly affect and shape the managerial decisions and operations in organizations as well as business entities.

Environmental uncertainty and rapid changes experienced in virtually every aspect of business life make the adaptation to the new circumstances very critical for business survival and success in competition. It is upper management’s responsibility to sense the need for adaptation and take proactive measures towards this end. A strategic perspective is a necessity to deal with business operations, markets, and goods and services produced. Strong leadership and effective management practices are needed to accomplish long-term goals in today’s chaotic business environment.

Organizational culture , which indicates overall values of work relations among employees as well as attitudes towards customers. Organizational culture is one of the hot topics that managers deal with to direct the organization towards desired goals.

The actual challenge for businesses in terms of success is to find, recruit, and retain human resources who have the required qualifications ( e.g. expertise, skills, and capability .). It is very costly to replace qualified personnel because of extensive time and money devoted to human resources to keep them updated and motivated.

The organizational structure of a business typically reflects managerial layers, lines of authority, rights, and responsibilities in a firm. It also regulates how the roles, power and responsibilities are distributed, coordinated and controlled, and how information flows between the management layers. In a centralized structure , decision- making power is concentrated in the top management, and tight control is exercised over departments. In a decentralized structure , the decision- making power is distributed through various layers, and the departments exercise different degrees of decision-making power.

Organizational Culture

The degree to which organizational goals are accomplished, how employees feel and perceive the organization, what kind of emotions and motivations they have behind their acts while doing their jobs and interacting with their superiors, subordinates, and customers is directly related to the organizational culture. The existence of an organizational culture where employees feel appreciated and motivated will eventually affect the basic performance indicators in a company such as profitability, efficiency, and customer satisfaction.

Organizational culture is described as the shared values, principles, traditions, and ways of doing things that influence the way organizational members act. These shared values and practices evolve over time and determine to a large extent how “things are done around here”.

Organizations with employees who subconsciously know the shared assumptions; consciously know the values and beliefs; and behave as expected are called strong cultures . On the contrary, organizations with many employees who do not behave as expected are called as weak cultures .

Some elements of organizational culture can be noticed easily while some others are not. In the deepest section of the culture are basic assumptions. Assumptions are accepted as they are without questioning; they reflect the beliefs concerning human nature and reality. The middle layer includes values, which are principles, standards, and goals. On the surface are artifacts that anyone can easily observe.

Ethics in Management

Ethics is a broad term covering all aspects of our lives whether business, economic, or political. Different ethical dimensions are integrated. Business people strive to combine the best interest of different parties related to their decisions. Thus understanding and practicing good business ethics is an important part of a manager’s job. Ethics is the study of moral obligation or separating right from wrong. Although many unethical acts are illegal, others are legal and issues of legality vary by nation. One of the many reasons ethics is important is that customers, suppliers, and employees prefer to deal with ethical companies.

Managerial ethics emphasizes the crucial necessity for ethical approaches in management practices starting with the decision-making process. It refers to the responsibility of managers as suppliers of ethical values to all stakeholders including employees, customers, shareholders, and the society

Ethical egoism highlights an egocentric (selfish) approach for making decisions.

Utilitarianism is defined as “An ethical philosophy in which the happiness of the greatest number of people in the society is considered the greatest good”. A manager or more a leader with a utilitarian approach considers benefiting the maximum number of individuals and groups.

Altruism , a step further of utilitarianism and opposite to ethical egoism, has a focus on benefiting others at the highest level.

Creating, distributing, and continually improving a company’s code of ethics and starting ethics programs are among the important steps managers should take to create an ethical workplace. A code of ethics declares the values, ethics, objectives, and responsibilities of the companies. Codes of ethics commonly address such issues as conflict of interest, privacy of information, gift giving, and giving and receiving political contributions.

Corporate Social Responsibility

Producing and marketing quality products and services at reasonable prices, innovating on a constant basis, formulating and implementing effective strategies are not enough for sustaining long-term success in today’s business world. The traditional role of businesses in the society has ended. Intimidated by corporate scandals and misconducts, consumers now have different perspectives towards business organizations and look for something more than quality, innovation, and low price.

Many people believe that businesses have an obligation to care about outside groups affected by an organization. Corporate social responsibility is the idea that firms have obligations to society beyond their economic obligations to owners or stockholders and beyond those prescribed by law or contract. Corporate social performance is the extent to which a firm answers to the demands of its stakeholders to behave in a socially responsible way.

Business organizations have four responsibilities: economic, legal, ethical, and philanthropic.

Economic responsibilities : Producing goods and services of value to society so that a firm may repay its creditors and shareholders.

Legal responsibilities : The laws and regulations that are enacted by governments to which businesses are expected to conform.

Ethical responsibilities : They are general beliefs about right/accepted and wrong/unaccepted behaviors in a society.

Philanthropic responsibilities : They are voluntary obligations a business firm assumes. Among them are contributions, training the unemployed, and providing day-care centers.

Some corporate social responsibility initiatives that companies undertake are:

• Work/Life programs such as flexible work schedules to help employees lead a more balanced life and be more satisfied with their job.
• Community redevelopment projects which business firms invest resources in helping to rebuild distressed communities.
• Environmental protection , which is influenced by a major corporate thrust toward ethical and socially responsible behavior, calls for business firms and not-for-profit organizations to go green, to make a deliberate attempt to create a sustainable environment.

A sustainable organization has the ability to meet its present needs without compromising the ability of future generations to meet their needs. In building a sustainable organization, management should strive to make the organization sustainable in three areas: the economy, the environment, and society. In terms of the economy, the sustainable organization focuses on performing behaviors such as minimizing waste by not overproducing goods and generating a fair profit for stakeholders.