Overview of Chapter

This chapter examines the organizational environment.  It identifies and examines the various environmental forces that managers must perceive, interpret, and respond. These forces are divided into two categories, the task/specific and the general. The chapter also discusses the changing face of the global environment, the major factors that have contributed to its change, and an examination of the free trade doctrine’s impact upon managers. The chapter then closes with a discussion of national culture, its impact upon organizations, and a model to be used to compare various national cultures.

Learning Objectives

• Explain why the ability to perceive, interpret, and respond appropriately to the organizational environment is crucial for managerial success.
• Identify the main forces in a global organization’s task and general environments, and describe the challenges that each environment presents to managers.
• Explain why the global environment is becoming more open and competitive, and why barriers to the global transfer of goods and services are falling.
• Explain the role of national culture, why it is important, and the five dimensions upon which various national cultures can be compared.

 

Management Snapshot: LI & FUNG’S GLOBAL SUPPLY CHAIN MANAGEMENT

Brothers Victor and William Fung operate Li & Fung, a brokerage that has helped hundreds of global companies locate suitable foreign suppliers, especially suppliers in mainland China. To reduce costs, foreign suppliers have become very specialized. In the past a company such as Target might have negotiated with a single foreign supplier to produce 1 million units of a particular shirt at a specific cost per unit.  But with specialization, Target might find that it can further reduce costs by splitting the production process into its component parts (yarn manufacturing, weaving, sewing, etc.) and contracting different foreign suppliers, often in different countries, to perform each task.

Global companies are happy to outsource their supply chain management to Li & Fung because they realize significant cost savings, and the Fung brothers have capitalized upon this opportunity.

Questions:

• What factors in its general environment might encourage a company such as Target to use the services the Li & Fung?

 

Competition is intense among retailers in the U.S.  A high level of rivalry often results in price competition, and falling prices can lead to falling profits.  Therefore, Target must make every effort to keep its costs as low as possible. Also, technological advances have increased the reliability and ease of international communication, thereby reducing the risk associated with global business transactions. 

• What changes in the global environment have contributed to the success of companies such as Li & Fung?

 

Most managers recognize that their organizations compete in a global market.  Trade barriers have fallen and free trade is on the rise. Major advances in communication and transportation technology have eased the process of conducting business globally. And although differences in national culture still exist, many managers now realize the benefit of working through such differences in order to build strong global partnerships. Each of the above serves as an encouraging factor to managers anywhere in the world wanting to engage in global outsourcing in order to reduce costs.

LECTURE OUTLINE

I.       THE ORGANIZATIONAL ENVIRONMENT

• The organizational environment is a set of forces and conditions outside of the organization’s boundaries that have the potential to affect the way the organization operates. These forces change over time and thus present managers with opportunities and threats.

 

• The organizational environment consists of the task environment and the general environment.

• The task environment is the set of forces and conditions that affect an organization’s ability to obtain inputs and dispose of its outputs. It consists of the organization’s suppliers, customers, distributors, and competitors.

 

• The general environment includes the wide-ranging economic, technological, socio-cultural, demographic, political and legal, and global forces that affect the organization and its task environment.

II.     The Task Environment

Suppliers

• Suppliers are the individuals and organizations that provide the input resources needed by an organization in order to produce its goods and services. In exchange for providing an organization with inputs, the supplier is compensated.  Inputs may include raw materials, component parts, or employees.

 

• Changes in the nature, numbers or types of any supplier may result in opportunities and threats to which managers must respond. Depending upon these factors, a supplier’s bargaining position may be either strong or weak.

• Most large global companies utilize global outsourcing, which is the process by which organizations purchase inputs from other companies or produce inputs themselves throughout the world, for the purpose of lowering production costs and improving the quality or design of their products.

 

• Although the purchasing activities of global companies have become increasing complicated, the Internet often eases the process of coordinating complicated international transactions.

Distributors

• Distributors are organizations that help other organizations sell their goods or services to customers. Changes among distributors and distribution methods can create opportunities or threats for managers.

 

• The power of a distributor may be strengthened or weakened depending upon its size and the number of distribution options available.

• The structure of a country’s distribution system may serve as an opportunity or threat for a manager.

 

Customers

• Customers are individuals and groups that buy goods and services that an organization produces. An organization’s success depends on its ability to respond to the needs of its customers.

 

• Changes in the number and types of customers or in customers’ tastes and needs can result in opportunities or threats for managers.

Information Technology Byte: Designing Global Information Systems

 

Good website design is important to companies as customers buy more and more products online. Designing websites for foreign customers has proven challenging for many companies. Although Dell Computer has one of the easiest websites to use of any U.S. company, Japanese customers were not attracted to it because it contained a black border. The Japanese see black as the sign of negative feelings and emotions. Other companies have had problems correctly using foreign languages and understand how foreign customers prefer to pay for online purchases. To address these issues, companies such as Yahoo, Dell, and SAP have developed local management teams to oversee their foreign businesses. Companies are also careful to develop internal information systems and intranets that are understandable and attractive to foreign suppliers, as well as domestic and foreign managers.

Competitors

• Competitors are organizations that produce goods and services that are similar to a particular organization’s goods and services.  In other words, competitors are vying for the same customers.

 

• Rivalry between competitors is usually the most threatening and problematic force with which managers must deal.

• Potential competitors are the organizations that are not presently in a task environment but could enter if they so chose.

 

• The probability of new competitors entering an industry is a function of that industry’s barriers to entry. Barriers to entry are factors that make it difficult and costly for an organization to enter a particular task environment. The greater the barriers to entry, the smaller the number of competitors.

• Barriers to entry result from three sources: economies of scale, brand loyalty, and government regulations.

 

1.   Economies of scale are the cost advantages associated with large operations. They may result from manufacturing products in large quantities, buying inputs in bulk, or by fully utilizing the skills and knowledge of employees.

2.   Brand loyalty is a customer’s preference for the products of organizations that currently exist. If established organizations enjoy significant brand loyalty, a new entrant will find it difficult and costly to obtain market share.

3.   At the national and global level, government regulations sometimes function as administrative roadblocks that create barriers to entry and limit the imports of goods from foreign nations.

Managing Globally: American Rice Invades Japan

To protect its own rice farmers, for many years Japan’s rice market was closed to foreign competitors. During the 1990s, the Japanese government relaxed its trade barriers by opening 8% of its rice market to importers. Despite stiff tariffs, imported rice was less expensive than that grown in Japan. In 2001, an alliance between California-based Lundberg Farms and the Nippon Restaurant Enterprise Company found a new way to break into the rice market. Since there is no tariff on processed foods, Lundberg sells its rice in a hot boxed-lunch, called O-Bento. O-Bento lunches have become very popular, creating a storm of protest from Japanese rice farmers who have been forced to leave 37% of the rice growing fields idle and to grow less profitable crops.

III.    THE GENERAL ENVIRONMENT

• An organization’s general environment is comprised of economic, technological, socio-cultural, demographic, political and legal, and global forces. Managers must constantly analyze forces in the general environment because these forces affect ongoing planning and decision-making.

 

Economic Forces

• Economic forces, such as interest rates, inflation, unemployment, and economic growth, affect the general health and well being of a nation or region of the world. Economic forces produce many opportunities and threats for managers.

 

• Strong macroeconomic conditions, such as low levels of unemployment and falling interest rates, often create opportunities for organizations.

• Worsening macroeconomic conditions, such as recession or rising inflation rates, often pose a threat to organizations because they limit management’s ability to gain access to the resources they need.

 

Technological Forces

• Technology is the combination of skills and equipment that managers use in the design, production, and distribution of goods and services. Technological forces are the outcomes of changes in the technology that managers use to design, produce, or distribute goods and services.

 

• Technological change can create a threat to organizations by making established products obsolete.  It can also create a host of opportunities for the development of new products or processes. Managers must often move quickly to respond to such technological change if their organizations are to survive and prosper.

• Changes in information technology are also changing the very nature of work itself.  Telecommuting, videoconferencing, e-mail networks, and video cameras attached to personal computers have changed the way managers within many companies communicate with each other.

 

Sociocultural Forces

• Sociocultural forcesare pressures emanating from the social structure of a country or from its national culture. Social structure is the arrangement of relationships between individuals and groups within a society. National culture is the set of values that a society considers important and the norms of behavior that are approved or sanctioned in that society.

 

•  Societies differ substantially in social structure. Managers must pay close attention to the social structure of any country in which they are conducting business, since the existing social structure often influences how individuals perceive and interact with each other. For instance, in Tibet and India, high degrees of social stratification exist and therefore there are many distinctions among individuals and groups. In contrast, social stratification is much lower in New Zealand and the United States, and therefore fewer distinctions are made among individuals and groups.

•  Because the national cultures of societies vary, their values and norms and behavior differ. For example, in the United States individualism is highly valued, but in Korea and Japan individuals are expected to conform to group expectations. National culture is also a determinant of a society’s ethical standards.  National culture may also affect the way managers motivate and coordinate employees, and the way organizations do business.

 

• A society’s social structure and national culture can also change over time. For example, in the United States, attitudes toward the role of women, love, sex, and marriage have changed in past decades. Throughout much of Eastern Europe, new values emphasizing individualism and entrepreneurship are replacing communist values based upon collectivism and obedience to the state.

• Managers and organizations must be responsive to changes in and differences within the social structure and national culture of each country in which they operate. They must also respond to social changes occurring within any society in which they operate.

 

Demographic Forces

• Demographic forces are outcomes of changes in, or changing attitudes toward the characteristics of a population, such as age, gender, ethnic origin, race, sexual orientation, and social class.

 

• Demographic forces present managers with opportunities and threats and can have major implications for organizations.  For example, most industrialized nations are experiencing the aging of their populations as a consequence of falling birth and death rates and the aging of the baby boom population. This demographic change has led to increasing opportunities for organizations that cater to older people.

• The aging of the population also has several implications for the workplace, such as the relative decline in the number of young people joining the workforce and the willingness of older employees to postpone retirement past the age of 65.

 

Political-Legal Forces

• Political and legal forces are outcomes of changes in laws and regulations resulting from political and legal developments within a society. 

 

• Organizations must operate within the boundaries of a nation’s legal and regulatory framework.  A nation’s political processes shape its legal and regulatory environment. Changes in laws or regulations may create opportunities or threats for organizations.

• Deregulation and privatization are examples of political and legal forces that can create challenges for organizations. Others include increased emphasis on environmental protection, protection of endangered species, safety in the workplace, and prevention of discrimination based upon race, gender, or age. Successful managers carefully monitor changes in laws and regulations to take advantages of the opportunities and counter the threats they pose.

 

Managing Globally: The Changing Face of Global Car Manufacturing

During the last decade, a huge wave of mergers and alliances occurred among global car manufacturers. GM purchased Sweden’s Saab, Ford purchased Britain’s Jaguar, Renault purchased Japan’s Nissan, and Chrysler merged with Germany’s Daimler-Benz. This has occurred because carmakers realize they need a strong presence in every region of the world if they are to obtain the full benefits of globalization. Over the long run, they also hope to enjoy great cost savings, although such alliances can create financial losses in the short-term. As the world divides into economic regions, only a global presence will allow an organization to effectively compete in the global environment.

Global Forces

• Global forces are outcomes of changes in international relationships, changes in nations’ economic, political, and legal systems, and changes in technology.

 

• Perhaps the most important global force impacting managers is the increasing economic integration of countries around the world. GATT, free trade agreements such as NAFTA, and growth of the EU have led to the lowering of barriers between nations.

• Falling trade barriers have created opportunities for organizations to sell goods and services in other countries. However, falling trade barriers have also increased the level and intensity of competition in the task environment, thereby creating a threat to many organizations.

 

IV.    THE CHANGING GLOBAL ENVIRONMENT

• In the 21st century, the idea that the world is comprised of a set of distinct countries and markets that are physically, culturally, and economically separated from each other has become obsolete. Managers recognize that their organizations exist and compete in a global environment.

 

• Managers view today’s global environment as open.  In an open environment, global companies are free to trade in whatever nation they choose. They are also free to establish foreign subsidiaries that help them to become strong world competitors.

Declining Barriers to Trade and Investment

• During the 1920s and 1930s, many countries erected barriers to international trade in the belief that this was the best way to promote their economic well being. One type of barrier is the import tariff, a tax that a government imposes on imported goods.The aim of import tariffs is to protect domestic industries and jobs from foreign competition.

 

• Often, imposing import tariffs results in a series of retaliatory moves during which countries progressively raise barriers against each other. In the 1920s this behavior depressed world demand and helped usher in the Great Depression of the 1930s. Rather than protecting jobs, governments that continually raised high import tariffs ultimately reduced employment and undermined economic growth.

GATT and the Rise of Free Trade

• After WWII, Western industrial countries made a commitment to remove barriers to the free flow of resources. The underlying philosophy is that free trade, rather than tariff barriers, was the best way to foster a healthy domestic economy.

 

• The free trade doctrine predicts that if each country agrees to specialize in the production of goods and services that it can produce most efficiently, this will make the best use of global resources and result in lower prices. 

• Countries that accept the free-trade doctrine set as their goal the removal of barriers to allow free flow of goods between countries. They attempted to achieve this through an international treaty known as the General Agreement on Tariffs and Trade (GATT). The last round of GATT negotiations involved 117 countries and was completed in December 1993. It resulted in lowering tariffs were lowered by over 30% of previous levels.

 

Declining Barriers of Distance and Culture

• In the past, barriers of distance and culture were major contributors to a closed global environment. Since the end of WWII, however, advances in communication and transportation technology have reduced these barriers. Satellites, digital switching, and optical fibers have revolutionized global communications, and now reliable communication is possible with nearly any location in the world.

 

• Innovations in transportation technology have made the global environment more open. The growth of commercial jet travel has reduced the time it takes to reach any location.

• Modern communications and transportation technologies have also helped to reduce the cultural distance between countries. The Internet, as well as global communications networks, have helped to create a worldwide culture above and beyond unique national cultures. Also, television networks such as CNN, BBC, HBO, and MTV can be received in many foreign nations, and Hollywood films are distributed globally.

 

Effects of Free Trade on Managers

• The lowering of barriers to trade and investment and the decline of distance and culture barriers have created enormous opportunities for organizations to expand the market for their goods and services through exports and investments in foreign countries.

 

• While some organizations such as Barnes & Noble have shied away from globalization, the response of Wal-Mart and Land’s End has been more typical. Both of these organizations have built profitable global operations. The success of these companies has been based in part on its managers’ willingness to seek out and utilize global suppliers.

• However, the manager’s job has also become more challenging because of the increased intensity of competition that comes with lower barriers to trade.

 

NAFTA

• The growth of regional trade agreements also presents opportunities and threats for managers and their organizations. NAFTA (the North American Free Trade Agreement), which became effective on January 1, 1994, aims to abolish tariffs on all goods and services traded between Mexico, Canada, and the U.S. by 2004. NAFTA will also remove most barriers on cross-border flow of resources, both capital and human.

 

• Free trade agreements create opportunities for manufacturing organizations because they allow them to reduce their costs. However, some managers might see free trade agreements as a threat because they expose the company to increased competition.

• The three current NAFTA members have announced that in the future they hope to expand the treaty to include other Central and South American nations. However, recent currency and economic problems in these countries, along with political resistance in the United States, have slowed down this effort.

 

The Role of National Culture

• Despite evidence that countries are becoming similar to one another and that the world is on the verge of becoming a global village, significant cultural differences still exist between nations.

 

• National culture includes the set of values that a society considers important and the norms of behavior that are approved or sanctioned in that society. National culture shapes individual behavior.  Values and normsare the basic building blocks of national culture. At a very early age, people begin learning their country’s culture through their everyday experiences and interactions with those around them.

• Values are ideas about what a society believes to be good, right, desirable, or beautiful. Values are deeply embedded in society, carry a great deal of emotional significance, and any change is likely to be slow and painful.

 

• Norms are unwritten social rules and codes of conduct that prescribe appropriate behavior in particular situations and shape the behavior of people toward one another. Two types of norms play a role in national culture, folkways and mores.

• Folkwaysare the routine social conventions of everyday life, such as good social manners, dressing appropriately, eating with the correct utensils, and behaving neighborly.  Folkways define the way people are expected to behave, but violation of folkways is not a serious matter. In many countries, foreigners may be excused initially for violating folkways, but repeated violations will not be excused.

 

• Mores are norms that are considered to be central to the functioning of society and to social life.They have greater significance than folkways, and the violation of them may result in serious punishment. There are many differences in mores from one society to another. In many societies mores have been enacted into law.

Hofstede’s Model of National Culture

While employed as a psychologist for IBM, Gert Hofstede collected data on values and norms from more than 100,000 IBM employees from 64 countries. He used this data to develop a model of national culture, which is widely accepted and used. Based upon his research, Hofsted identified five dimensions upon which various national cultures can be compared.

Individualism versus Collectivism

• Individualism values individual freedom and self-expression and adherence to the principle that people should be judged by their own individual achievements rather than their social background.

 

• In contrast, collectivism values subordination of the individual to the goals of the group and adherence to the principle that people should be judged by their contribution to the group. Collectivism was widespread in communist countries, but has become less prevalent since the collapse of those nations.

• Japan is a noncommunist country where collectivism is highly valued. One of the major reasons why Japanese and American management practices differ is that Japanese culture values collectivism and U.S. culture values individualism.

 

Power Distance

• By power distance, Hofstede meant the degree to which societies accept that inequalities in the power and well being of their citizens are due to differences in individual’s physical and intellectual capabilities and heritage.

 

• Societies in which inequalities are allowed to persist or grow have high power distance. Workers who are professionally successful amass wealth and pass it on to their children, allowing inequalities between rich and poor to become very large.

• In societies with low power distance, large inequalities are not allowed to develop. The governments of these countries use taxation and social welfare programs to reduce the gap between the rich and the poor. Most industrialized Western countries have relatively low power distance and high individualism, which economically poor Latin American countries and Asian countries have high power distance and low individualism.

 

Achievement versus Nurturing Orientation

• Societies that have an achievement orientation value assertiveness, performance, competition, and success. Societies that have a nurturing orientation value the quality of life, warm personal relationships, and services and care for the weak.  Japan and the United States tend to be achievement oriented, while the Netherlands, Denmark, and Sweden are more nurturing oriented.

 

Uncertainty Avoidance

• Societies as well as individuals differ in their tolerance for uncertainty and risk. Societies low on uncertainty avoidance such as the U.S. and Hong Kong are easygoing, value diversity, and tolerate differences in personal beliefs. Societies high on uncertainty avoidance such as Japan and France are more rigid and skeptical about people whose behaviors differ from the norm.

 

Long-Term Versus Short-Term Orientation

• A national culture with a long-term orientation rests on values such as thrift and persistence in achieving goals. Examples are Hong Kong and Taiwan, both of which are well known for their high rate of per capita savings. The nations of France and the United States have a short-term orientation, and their citizens tend to spend more and save less.

 

National Cultures and Global Management

• Differences among national cultures have important implications for managers. Because of cultural differences, management practices that are effective in one country might be troublesome in another.

 

• Often, management practices must be tailored to suit the cultural context within which an organization operates.  Managers doing business with individuals from another country must be sensitive to the value systems and norms of that country and behave accordingly.

• A culturally diverse management team can be a source of strength for an organization participating in the global marketplace. Organizations that employ managers from a variety of cultural backgrounds are often better at appreciating the differences in national culture and tailoring their management systems and behavior to accommodate those differences.

 

Ethics in Action: Saving the Amazon Jungle Culture

In the Amazon jungle, huge efforts are being made to prevent the destruction of the rainforest and strengthen and preserve the culture and economy of the indigenous people.  When DaimlerChrysler learned it could combine the husks of coconuts with natural rubber to form headrests and car seats for its vehicles, it invested millions to build a factory to make these products.  Honda and Toyota followed DaimlerChrysler’s lead, which will further contribute to economic growth in the region.

The Body Shop has also been a leader in protecting the national culture of its Brazilian suppliers. This company purchased the machinery used by the inhabitants of the rainforest to process Brazil nuts to create a cold-pressed oil that commands a competitive price in the world marketplace. The Body Shop uses this oil as an ingredient in one of its hair products. Cosmetics manufacturer Estee Lauder and Hermes, the French fashion house, also found ways to incorporate natural resources from the Amazon into its products.

 The fight continues to find ways to slow down the disappearance of the Amazon jungle and the loss of the cultures of the many Indian tribes who live within it.

V.     SUMMARY AND REVIEW

LECTURE ENHANCERS

Lecturer Enhancer 4.1
HOUSE CALLS FOR PETS

One change in our society in recent years has been the increasing attention Americans pay to their household pets. This, coupled with the aging of the population, has created a unique opportunity for one Virginia veterinarian.

Veterinarian M. Christine Foster and her administrator, Michelle Ward, run Companion Paws, a mobile veterinary service. Pet owners can schedule appointments as early as 7:30 a.m. on some mornings and as late as 8 p.m. on most evenings.

“There are so many good standard practices in the area already… I wanted something that would serve a different need,” Foster said. Her town house doubles as home and a base for the mobile operation. Outside sits a 24-foot customized blue and white Companion Paws van. The mobile veterinary unit is equipped to provide services ranging from routine dental care and shots to surgery. There is even pharmacy, X-ray, and electrocardiogram equipment.

Companion Paws is limited to small animals—mostly dogs and cats. Fees are comparable to those charged in regular veterinary offices, Foster said. There is a discount if Foster treats more than one animal during the same visit, and in some cases, neighbors have joined together to schedule appointments.

In a typical day Foster and Ward may visit a cat with “behavior problems,” give an insulin injection to a diabetic cat whose owner is out of town, remove the sutures from a dog that recently had surgery, or give annual vaccinations.

Foster, who worked at a Reston, Virginia veterinary clinic before striking out on her own, said that she always liked the idea of a house call practice but that until recently, the scope of such a service was too limited. Those limits were lifted when Foster’s operation became the first mobile veterinary unit in Virginia to be licensed as a full service unit—meaning she can perform surgery on site.

Many of Foster’s patients belong to owners who are too busy to make regular visits to a veterinary office. Others are elderly or disabled pet owners for whom getting around is difficult, if not impossible. Some simply have too many animals to make office visits practical. One of Foster’s clients, for example, has nine dogs and three cats.

Foster said house calls also can benefit the animals—particularly those that are old or sickly. With a mobile service, pets can be cared for and pampered in the comfort of their own homes, she said.

Lecturer Enhancer 4.2
THE CHALLENGE OF DISTRIBUTION

Outside a corner candy stand in Shanghai, a 10-year-old girl folds a piece of Wrigley’s Doublemint gum into her mouth—one of 400 million sticks that Wm. Wrigley Jr. Co. sells each year in China. To reach this blue plywood stand, the stick traveled a thousand miles by truck, rusting freighter, tricycle cart, and bicycle—and is still soft and sugar-dusted at the time it is sold. That’s something of a wonder, given the daunting scale and obstacles in the world’s largest developing country.

Western goods can now reach about 200 million of China’s 1.2 billion people, more than double a few years ago. And many of those people are ready and willing to buy Western products. But in a land where roads are poor, rivers are jammed, and railways are clogged, delivering the goods isn’t easy. “Distribution is the biggest problem” companies now face, says W.J. Du, head of Wrigley’s China operations.

Finding reliable distributors—usually by word-of-mouth—is the first challenge, but seldom the last. Distributors are mainly state-owned and have little incentive, nor understanding, of how to position a brand. At Beijing’s airport, for example, bags of Mars Inc. products lie jumbled and neglected in a dim display case alongside packages of dried mushrooms. Wrigley wants its gum consumed within eight months of manufacture. Otherwise, the gum dries out or the sugar bleeds through the packaging. Getting it to consumers before then is a logistical nightmare.

Each stick of Doublemint starts out, like all Wrigley’s gum, as a large block of brown gum base. At a factory in Guangzhou, just north of Hong Kong, huge machines stir a mixture of gum, glycerin, and glucose into a heated goo. It’s mixed with sugar and flavorings, stamped into sticks, packaged, and loaded on a truck. Shanghai is on China’s coast, so Wrigley ships the gum by coastal freighter. Off the coast a marine patrol seizes the ship; besides 960,000 packs of gum, it turns out, the ship is loaded with smuggled cars. Wrigley waits nearly two months before the shipment is released—and frets the whole time about it aging.

In Shanghai’s river port, the gum is loaded onto a truck—and runs another gauntlet of corruption. Wrigley-hired trucks are often stopped not only by bandits, but by provincial police demanding exorbitant fees before they let the vehicles pass.

Once the gum gets into Shanghai, it leaves Wrigley’s control. Each industry has its own distribution network, usually made up of firms spun off from China’s state-owned trading companies and smaller private wholesalers.

Few distributors or wholesalers want to waste time delivering goods to customers. Most, like Wrigley wholesaler Chen Tuping, sit in their warehouses waiting for buyers to arrive. Mr. Chen’s tiny stockroom, crammed with cardboard cartons of foreign-made goods, opens onto a muddy Shanghai lane lined with identical wholesalers. He keeps a few cases of Wrigley’s gum stacked beside his desk and sells them to smaller whole sale-retail outlets, whose owners shop the lane. “The gum business is going great,” he says with a smile.

That’s largely thanks to Wrigley’s legwork. Teams of Wrigley representatives walk the streets, talking to shop owners, handing out free Wrigley posters and plastic display stands. Among the targets is Xu Meili, who runs a booth at the Beautiful & Rich Wholesale Market; after a successful sales call, she began to stock Wrigley’s gum, which she fetches with a tricycle cart from Mr. Chen or one of his competitors. She also stocks competing products. Hanging in her booth is a foot-long mockup box of Chiclets gum, delivered by Warner-Lambert Co. salesmen who are blitzing Shanghai.

Wrigley salesmen even visit small kiosks, like the blue plywood stand in Shanghai, run by a young woman who calls herself Little Yan. When stocks run low, she rides her bike the few blocks to Ms. Xu’s booth to buy more gum or candy.

Wrigley’s gum sells for about 22 cents a pack at the Shanghai kiosk. “The [profit] margin isn’t great,” says Wrigley’s international business chief, Doug Barrie, in Chicago. But for now, he says, the company is content to build up market share. He adds: “We’re a very patient company.”

MANAGEMENT IN ACTION

Notes for Topics for Discussion and Action

1.   Why is it important for managers to understand the nature of the environmental forces that are acting upon them and their organization?

The text defines an organization’s environment as the forces outside of its boundaries that have the potential to affect the way it operates. These forces change over time and thus present managers with opportunities and threats. The organization’s environment includes the task environment and the general environment (some theorists include the internal environment as another kind of environment.) The task environment consists of forces from suppliers, distributors, customers, and competitors. The general environment refers to the wider economic, technological, sociocultural, demographic, legal-political, and global forces.

The general environment affects the way an organization operates. Managers must constantly analyze forces in the general environment because these forces affect long-term decision making and planning. Furthermore, these forces in an organization’s general environment can have profound effects on an organization’s task environment.

It is important to understand the forces in the task environment because they have the ability to pressure and influence managers on an ongoing, daily basis and have a significant impact on short-term decision making. These forces affect an organization’s ability to obtain inputs and dispose of its outputs, which is critical to the success of any organization.

For example, it would be important for managers to understand the economic forces present in their general environment because they could affect their organization in both a positive and negative manner. Low levels of unemployment and falling interest rates provide opportunities for an organization. This could result in a change in their customer base since people have more money to spend on goods and services. A decline in the economy could result in a threat to the financial health of an organization. Declining economic conditions limit managers’ ability to gain access to the resources their organizations need to survive. Furthermore, customers would have less money to spend on goods and services.

2.   Choose an organization, and ask a manager in that organization to list the number and strengths of forces in the organization’s task environment. Ask the manager to pay particular attention to identifying opportunities and threats that result from pressures and changes in customers, competitors, and suppliers.

The text defines the task environment as consisting of forces from suppliers, distributors, customers, and competitors that pressure and influence managers on an ongoing, daily basis because they affect an organization’s ability to obtain inputs and dispose of its outputs.

Since suppliers provide input resources that the organization needs to produce goods and services, they are very critical to the success of the organization. Input resources include raw materials, component parts, employees, financing and funding. Suppliers are a threat to an organization when they are in a strong bargaining position and are capable of determining the availability of the necessary input resources. This is especially evident when they are the sole producers of the input resources needed by the organization and/or the resources they provide are crucial to the organization. The presence of low cost foreign suppliers provides both an opportunity and threat to an organization. They are an opportunity if the organization is able to purchase lower cost input resources from them, which could result in higher profits or competitive pricing for the organization. They are a threat to the organization if the organization’s competitors take advantage of the lower cost suppliers while they do not or are not able to due to union contracts that prohibit the use of foreign suppliers. This could result in competitors providing the same goods and services at lower prices resulting in a decline in sales for the organization that did not take advantage of lower cost foreign suppliers.

Change in the number and types of customers or changes in customers tastes and needs result in opportunities and threats in the task environment. It is critical for an organization to identify the needs of their customers, the people who buy the goods and services that they produce, and respond to any changes in customer needs. If customers require a lower priced or higher quality product, it is essential for an organization to respond to this in order to keep their customers happy and continually buying their products.

Competitors are other organizations that produce goods and services that are similar to a particular organization’s goods and services. Since they are vying for the same customers, competitors are potentially the most threatening force that a manager must deal with. They provide a threat to organizations when they engage in price competition. If an organization is forced to lower its prices to compete with a competitor, this could result in lower profits, which limits their ability to access further resources in the future. Besides existing competitors, potential competitors also provide a threat in the task environment. Potential competitors are those organizations that are not presently in a task environment but could be if they chose to be. The fewer competitors in an organization’s task environment, the lower the threat of competition. With fewer competitors, it is easier to obtain customers and keep prices high, which results in greater profits and success for the organization.

3.   Which organization is likely to face the most complex task environment: a biotechnology company trying to develop a new cure for cancer or a large retailer like the Gap or Macy’s? Why?

A large retailer like the Gap or Macy’s experiences a more complex task environment. Primarily two forces in the task environment exhibit this. First, competition is not a very strong force for a biotechnology company, while it is extremely strong for a retailer that must compete against hundreds, even thousands of other retailers. There might be other labs trying to develop a cure for cancer; but even if they do discover one first, there will still be plenty more work to do. Second, tastes and needs of customers for a cure of cancer do not change rapidly. The tastes of the customers of a retail store change each season of every year.

4.   The population is aging because of a combination of declining birth rates, declining death rates, and the aging of the baby boom generation. What might be some of the implications of this demographic trend for (a) a pharmaceutical company, (b) the home construction industry, and (c) the agenda of political parties?

The aging population is an example of a demographic force in an organization’s general environment. The aging of the population has increased many opportunities for organizations that provide goods and services to the older population.

The aging population will have a positive affect on the pharmaceutical industry. People are living longer due to advancements in the medical field in the form of cures for diseases and medications that alleviate the debilitating effects of old age. This results in a greater demand for prescription drugs and medical supplies, the output of the pharmaceutical industry. Furthermore, in order to effectively compete, pharmaceutical companies must spend a tremendous amount of money on research and development in order to remain competitive in their industry. The reward of inventing a much-needed medication is a patent that prevents other companies from producing that medication for seventeen years. Since they are the sole producers of the medicine, in response to the demand for the product, they have the capabilities to charge high prices since they have no competition.

The home construction industry will see a change in the demands of their customers. Older customers who have already raised their families will be looking for homes and apartments with less square footage. They also require easier accessibility, such as single level, few steps and buildings equipped with elevators. The older population has more time to spend on socializing. They will have more interest in amenities such as clubhouses and swimming pools.

The agenda of political parties changes due to the needs of the population. The needs of an aging population include social security, Medicare and Medicaid benefits. This is in opposition to a younger population that is more concerned with legislation involving social issues, education, and taxes.

• How do political, legal, and economic forces shape national culture? What characteristics of national culture do you think have the most important effect on how successful a country is in doing business abroad?

 

National cultures differ in many ways, and although we seem to be moving toward a more global culture, each country has a culture that is a unique mix of competing and complementary forces. One force that seems pervasive to all aspects of a nation’s culture is the political system that is in place. The global range of political systems ranges from communism to representative democracies, with many variations in between. Citizens may elect individuals to represent their interests, as they do in representative democracies, or have one single political party or individual that monopolizes political power, as is the case in totalitarian regimes, and this can have major effects on the nation’s culture. The political culture is important to managers trading with foreign countries because issues of economic freedom and legal representation can arise that may be more easily resolved in a democratic society.

Also, ethics is a concern for managers dealing with some foreign countries, for example, totalitarian regimes that may not respect human rights.

A country’s economic system is determined by the force that drives the production of goods and services. A free market economy operates under the law of supply and demand, and production is in the hands of private enterprise. In a command economy, the government decides which goods and services are produced, the quantity in which they are produced, and the prices at which they are sold. A mixed economy combines characteristics of free market and command economies, with some government ownership and some free enterprise. The economic system that is in place has major ramifications for a nation’s culture. Fewer restrictions to expansion to global markets make free market economies attractive. In democracies, services tend to be better because private enterprises must compete with each other for survival, in contrast to a state-run industry where there is no competition. Also, nations with free economies tend to have higher rates of economic growth and are more economically developed, so their citizens tend to have higher per capita incomes and more spending power. The degree to which a nation’s populace can support itself and its families has great impact on a nation’s culture.

• Following the passage of the North American Free Trade Agreement, many U.S. companies shifted production operations to Mexico to take advantage of lower labor costs and lower standards for environmental and worker protection. As a result, they cut their costs and were better able to survive in an increasingly competitive global environment. Was their behavior ethical—that is, do the ends justify the means?

 

The problem with the decision to shift production operations to low-wage countries, like Mexico, is that eventually the wages will increase due to increased demand for workers, and companies will be forced to again shift their production operations in pursuit of lower costs. In addition, American workers feel slighted, understandably, when plants close and layoffs occur due to these shifts. Increased competition to provide low-priced, quality goods and services is indeed an issue that managers must confront in a more open global environment, but there are other alternatives to shifting production to other countries. Organizations can avoid these hazards by building efficiency and effectiveness into their existing operations.

Decisions involving decentralization of management and other cost-cutting measures can replace less ethical solutions. Also, lax standards in environmental and worker protection can often hurt the organization in terms of public relations and consumer image. Nike has recently come under attack for its operations in foreign countries, and Kathy Lee Gifford experienced similar attacks for the sweatshop conditions in the factories that produce her clothing line. These disadvantages, while perhaps not as easily discerned as effects on the bottom-line, need to be considered when an organization contemplates relocation of production operations.

Notes for Building Management Skills

Analyzing an Organization’s Task and General Environments

(Note to Instructors: The answers to this exercise are based on a university, since this is an organization with which students are familiar.)

1.   Describe the main forces in the task environment that are affecting the organization.

The main forces in the task environment that affect the University are its suppliers, customers and competitors.

The faculty and staff of the University are its primary suppliers. They supply the necessary inputs that are needed in order to provide the service of a quality education to the customer (students).  If the faculty and staff belong to a union, the University administration must negotiate a new contract every few years that is acceptable to both parties. Without faculty, the University would be unable to generate and deliver its product to its customers.

If you are a student, you are the university’s customer. The mission and purpose of this organization is to provide you with a high quality education. As a customer, you determine if the services provided are worth your money. The university has designed its curriculum in an effort to satisfy you, the customer, and meet your needs. When you select your courses, you are creating a demand for them.  If there were no demand for the product that your university provides, it would be forced to close its doors.

Competition is an extremely powerful force in the task environment of a university. Students often choose among many competing colleges and universities. Therefore, the university must learn how to compete effectively within the marketplace of students by providing the most attractive bundle services available. Today’s students often make decisions amongst competitors based upon criteria such the availability of computer labs, class size, on-campus recruiting opportunities, and the percentage of students securing jobs upon graduation.

2.   Describe the main forces in the general environment that are affecting the organization.

The university is affected by economic, technological, demographic, and legal-political forces.

The economy is a very powerful force to the University. When the economy is in a downturn, universities face an increase in graduate enrollment but a decrease in undergraduate enrollment. When the economy is in an upturn, universities experience an increase in undergraduate enrollment and a decrease in graduate enrollment. Additionally, during an upturn, employment opportunities increase at the university level. Since a good deal of expenses (i.e., salaries and operating costs) are fixed for the university, when enrollment decreases they might experience financial difficulty.

The technological force involves the need for the University to obtain and maintain advanced technology within their facilities. This involves updated computer systems as part of the administration of the University. An example would be on-line or telephone course registration. Advances in technology can provide a means of advertising and access to University resources. An example of this is found in the Internet and World Wide Web. A University that does not have its own web site or provide Internet access for its students is behind the times and is not keeping competitive in their industry. Professors of the University must keep current in their research and teach their students the latest skills, techniques and knowledge in order for them to be marketable upon graduation. If this is not provided then graduating students are at a disadvantage, which affects the University in a negative manner.

The demographic environment is constantly changing. People of many different nationalities, races, religion and ages attend universities. In addition, students with physical and mental disabilities are now welcome (or should be) as part of the campus culture. An atmosphere of tolerance and acceptability is required in any organization, especially the University. Additional services and policies for those who speak different languages, celebrate different holidays, or require physical accommodation are needed and sometimes mandated.

Furthermore, Universities are filled with more non-traditional students than ever before. The non-traditional student includes those beginning or returning to their undergraduate education after the age of 25. These students have more responsibilities and commitments than younger students. They have families, full-time jobs, and mortgages to pay. To attract this increasing market of customers, Universities need to provide more courses at nights and on weekends along with more flexible programs to meet the needs of the non-traditional student.

Since many Universities receive funding by their respective states, the legal-political environment plays an important role in their general environment. In many states the state legislature determines how much money each university receives. This money is very important to the University and can even determine the salaries it pays to the professors (suppliers) and the tuition it charges the students (customers.) The University also relies on the state and city to fund capital projects such as building new classrooms, laboratories and athletic facilities.

3.   Describe the main global forces that are affecting the organization.

With the advent of distance-learning technology, many universities are now finding students around the world.  Some of the challenges in educating these students would include the cultural, economic, and political differences in the students’ native countries and language barriers.  However, these students also represent a significant new market and potential revenue for the university.

4.   Explain how these environmental forces affect the job of an individual manager within this organization. How do they determine the opportunities and threats that its managers must confront?

Consider the Dean of the Business School as a manager in the University. An example of how environmental forces affect the Dean’s job is apparent if we look at customers, a force in the task environment. The changing number and needs of students, the customers, are a strong force that the manager must deal with. When enrollment increases the manager must ensure that there are enough courses for the students to take and enough professors to teach those courses. Furthermore, if students are interested in International Business (in response to the larger global environment that they will face in the future), then the Dean must ensure that these courses are offered in order to remain competitive in the university environment.

Notes for Small Group Breakout Exercise

How to Enter the Copying Business

1.   Decide what you must know about (a) your future customers, (b) your future competitors, and (c) other critical forces in the task environment if you are to be successful.

To enter the copy business in a college town we must know the needs of our customer, the student. We need to know where customers are located, since we should be easily accessible to them. We also need to know how much are they willing to pay for our services and what services we must provide to entice them to patronize our business instead of our competitors’.

We need to know exactly who our competitors are, where are they located, and their hours of operation. We need to position ourselves so that we are more conveniently located than they.   Since our primary competitor, Kinko’s, is open 24 hours, we must follow suit in order to attract customers and meet their needs. Also, we need to know what services our competitors are providing and how much are they charging for them. We would not want to charge more than our competitors do.

Another critical group in our task environment is our suppliers. Our suppliers consist of the organizations from which we purchase our input resources. Our input resources include copy machines, paper, and other office supplies. In addition, our landlord and the utility companies provide us with essential resources. The prices that all of our suppliers charge for their goods and services are a critical factor, since they help to determine the prices we must charge our customers in order to make a profit.

2.   Evaluate the main barriers to entry into the copying business.

Barriers to entry are the factors that make it very difficult and costly for an organization to enter a particular task environment or industry. Barriers to entry result from two main sources: economies of scale and brand loyalty. In the copying business, purchasing resources such as paper and copying supplies in bulk so that their price per unit is significantly lower creates economies of scale. Obtaining these resources in bulk should enable us to lower our costs so that we can increase our profits. However, in order to realize the benefits of bulk purchasing, we must first conduct a significant amount of business with our customers, so that we will be able to make use of large quantities of supplies in a short period of time. Our main competitor, Kinko’s, has an advantage over us in that they already generate sales volume large enough to make purchasing in bulk practical, which helps them keep their prices low.

Another advantage that Kinko’s has is brand loyalty. Because they have been in business a long time and are located throughout the country, our customers are quite familiar with their name and reputation. If customers are satisfied with the service they have received, they may remain loyal to Kinko’s and see no reason to try us out.

3.   Based on this analysis, list some of the steps you will take to help your new copying business succeed.

Some of the steps that we will take include:

• Conducting market research prior to opening to determine the needs of our customers.
• Ensuring that we secure a location that is conveniently located to our customers.
• As much as we can, purchase inventory in bulk in order to keep our prices competitive.
• Remain open 24 hours a day so that we will always be available for our customers.
• Advertise heavily on and around the campus.
• Offer specials and provide coupons designed to entice customers to give us a try.
• Hire experienced and highly motivated workers and provide extensive training to ensure top quality customer service.

Notes for You’re the Management Consultant

Questions:

• Analyze the major forces in the task environment of a retail clothing store.

 

Retail clothing is by definition a representation of old and new.  The old is represented by those consumers who do not care about the latest fashions and purchase the same styles they always have. The new are those who love to keep up with the latest fashions that they see on TV, in the movies, in magazines, or on friends. Both can be lucrative markets, but one must first analyze the environment.  This includes the competition as well as the general social, economic, political and global trends. For example, Levi Strauss responded to Casual Fridays by marketing Dockers. Levi Strauss is a good example of a company that markets a standard brand with little change and is still in demand while also responding to changing trends such as relaxed fit for the expanding waists of Baby Boomers. Many catalog stores (L.L. Bean and Lands End) have also developed websites that allow customers to shop from catalogs and order online.

• Devise a program that will help managers and employees to better understand and respond to their store's task environment. 

 

One approach would be to look at the web sites of online retailers such as L.L. Bean and Lands End. These could be used as training tools for employees and managers to see what the competition is offering. The company could appoint a group of employees and managers from various departments within the store to keep track of trends and to compare notes. This group could devise customer surveys, read trade journals, and observe the fashions of those working and those attending school. The group could visit one or more college campuses to gather information by observing students or conducting group interviews. The company could also solicit feedback from customers concerning customer satisfaction levels and merchandise suggestions using email, phone surveys, or onsite questionnaires.

MANAGING ETHICALLY

• Either by yourself or in a group, discuss if it is ethical to employ children in factories, and whether U.S. companies should buy and sell products made by these children.  What are some arguments for and against child labor?

 

Opinions concerning the ethics of child labor vary.   Some economists argue that the practice is totally reprehensible and should be outlawed on a global level.  Other economists argue that those living in rich countries must realize that in poor countries, children are often the family’s only breadwinner.  Denying children the right to work would cause entire families to suffer, thereby leading to greater poverty.

• If child labor is an economic necessity, what could be done to make it as ethical a practice as possible?  Or is it simply unethical?

 

Some favor regulating the conditions under which children are employed in hope that over time, as poor nations strengthen their economies, the need for child employment will dissipate.

CASE FOR DISCUSSION

Case Synopsis: Expanding Globally in a Wired World

This case discusses the challenges of several dot-coms as they have attempted to expand globally. Many dot-com managers thought that once they established a solid business model for the U.S. market, they could easily adapt it to the needs of countries worldwide. For many dot-coms, the rapid growth of their stock price was built upon that belief.

Many bricks & mortar companies like Land’s End and Wal-Mart also saw opportunities to use the Internet to boost their global sales. Amazon.com has been the most aggressive in its global expansion, but has encountered very expensive distribution costs. Because eBay does not have to physically ship products, it has been quite successful. Some companies have encountered difficulties stemming from language and cultural differences.  Others, such as Barnesandnoble.com have made no attempt to expand internationally. The global expansion of Land’s End has been very successful because it was able to achieve economies of scale and its products required less customization.

Questions:

• What is the secret of Lands End’s success at expanding globally?

 

In each country in which Lands End operates, it set up a distribution and call center that allowed it to sell and deliver its products with efficiently, thus creating economies of scale. The company then used the Internet to capitalize its strong, worldwide sales/distribution infrastructure.  It also sells a product that requires minimal customization.

• What lessons can other companies and dot.com’s learn from Land’s End?

 

It is a mistake to assume that a business model that is successful in the United States will also be successful in a foreign nation.  It is probably a better idea to build a business model that is reflective of each foreign nation’s unique characteristics, and then seek economies of scale in order to lower operating costs.  It is also helpful to sell a product that requires minimal customization.

• Go to the Internet and find out what has been happening at Land’s End recently.

 

Land’s End has been acquired by Sears. Its new owner has made very few changes in the way its subsidiary conducts business.  Land’s End clothing is now available in most Sears stores.

BUSINESS WEEK CASES IN THE NEWS

Case Synopsis:  Surprise! Nokia Doesn’t Walk on Water: Its About Face on Growth Will Harm Its Credibility

Executives at Nokia, one of the world’s largest and most profitable manufacturers of cellular phones, were forced to slash its sales and profit projections due to unexpected changes in its external environment.  Increasing economic uncertainty, ongoing technological transition, and less aggressive marketing by the operators dashed the company’s earlier optimism. Both investors and analysts were stunned, and some feel that the company’s downward forecast was a blow to its credibility.  The company is attempting to recover by lowering its production costs.

Questions:

• What forces in the global environment shocked Nokia’s managers?

 

Nokia was impacted the economic environment, the technological environment, and the competitive environment. The European economy was in worse shape that expected, the networks to provide all the promised services were not complete, and the market for cell phones was saturated.

• How have they started to respond to these forces?

 

The company is attempting to lower its costs by shifting production to China and Mexico.