Chapter 11: Managing t he Environment

Chapter 11: Managing

the EnvironmentBy Muhammet

Said Dinç

ContentsExplain why management seeks to control the

organization's environmentCompare internal and external environment control

strategiesDescribe the most comprehensive action that

management can take when faced with an unfavorable environment

Explain environmental scanning Identify several techniques for buffering the

organization from the input sideExplain how organizations smooth out fluctuations in

the environmentDescribe when an organization would apply rationingDifferentiate between co-opting and coalescing.

Management's quest to control its environment

Successful interaction with environment is necessary for the organization's viability and survival according to description of organizations as open systems.

But, environment is constantly changing in unpredictable and uncertain ways.

However, we know that managers don't like unpredictability and uncertainty.

They want to reduce this uncertainty. But can the environment be managed?

Classifying StrategiesManagers have two general strategies

they can adopt in their attempt to lessen environmental uncertainty.• Internal Strategies are those which

adapt and change organizational practices to better fit the environment. • making design changes to a product • recruiting executives from its competitors• By these strategies, the fit between the

organization and the environment is improved.

Classifying Strategies(cont.)

External strategies are efforts designed to change the environment.• F.e: merging with another company• If changes suggested in a tax reform

proposal affect superannuation companies, the large companies and their trade associations may lobby against the tax changes.

• Using the internal-external separation, we can categorize a number of uncertainty-reduction techniques.

Classifying Strategies(cont.)

Internal Strategies•Domain choice• Domain refers to that part of the

environment in which the organization operates. • Organizations make deliberate choices

as to which domain they operate in. •Wool-worths operates in the environment

relevant to the mass market for groceries; • Optus (BH Telekom) operates in the

telecommunications environment.

Internal Strategies (cont.)• One action that management can take

when faced with an unfavorable environment is to change to a domain with less environmental uncertainty.• Management could, for example, consider • moving into an environmental niche that has the

advantage of fewer or less powerful competitors • spreading its risk over a wider geographic area• introducing a new range of products or investing in

research and development to gain a comparative advantage.

Internal Strategies (cont.)If management cannot change to a

more favorable domain, it may choose to broaden its strategy to take a generalist format.Qantas Airways, for instance, is composed

of a number of airlines each catering to a specific market niche.

They include mainline Qantas, Qantas Link, Jet Star, both in Australia and Asia, Australian Airlines and New Zealand based Jet Connect.

Internal Strategies (cont.)RecruitmentThe recruitment of staff with

appropriate skills can lessen the influence of the environment on an organization.

If an organization faces an environmental challenge which it feels it lacks the expertise to manage, it may recruit staff with the appropri ate management skills.

Internal Strategies (cont.)F.e: Corporations can hire executives

with skills that the company does not already possess.

On their retirement from the armed forces, senior officers are often employed by defense contractors because of their knowledge of the operations of the defense establishment.

High-tech firms entice scientists from other companies to gain the technical expertise possessed by their competitors.

Internal Strategies (cont.)Environmental scanning requires

exploring the environment to identify actions by competitors, government, unions and the like that might affect on the organization's operations.

Scanning activities also include • predicting levels of economic activity and • undertaking research to determine changes

in fashions and demand patterns.

Internal Strategies (cont.)Boundary spanners are staff

whose specific jobs require them to act as channels between the organization and its environment.

Examples of typical boundary-spanning jobs include • sales representatives, market

researchers, purchasing managers, lobbyists, public relations specialists and recruitment specialists.

Internal Strategies (cont.)Senior managers also regularly scan

the environment to identify threats to and opportunities for their organization.• attendance at lunches, • trade fairs, • conferences and industry gatherings, and • reading business journals, are other means of scanning the boundaries of the organization.

Internal Strategies (cont.)Buffering protecting the operating core

from environmental variations in supply and demand.

On the input side, buffering is evident when organizations stockpile materials and supplies, reduce reliance on one supplier, undertake preventive maintenance or recruit and train new employees. • Oil refineries typically keep reserves of crude

oil on hand.

Internal Strategies (cont.)• The newspaper that buys newsprint from

two or three different paper companies• On the output side, the most obvious

method is the use of inventories.Buffering typically involves building and

keeping up warehouse and distribution inventories.• Toy manufacturers, for example, typically

ship most of their products to retailers in early October for selling during the Christmas season.

Internal Strategies (cont.)Smoothing seeks to level out the impact of

fluctuations in the environment. This mechanism is commonly used in service

industries, where the product cannot be placed into inventory or where the product is perishable. • Organizations that use this technique include

telecommunication providers, retail stores, car rental companies, and magazine publishers. • Examples might include differential costs of long

distance telephone calls that are lower during non-peak times, discount airline fares for off-time flights.

Internal Strategies (cont.)Rationing When uncertainty is created by way of

excess demand, management may consider rationing products or services—that is, allocating output according to some priority system. Examples of rationing can be found in • hospitals- rationing beds for non-emergency

admissions• universities- rationing to allocate students to

popular programs.• post offices- priority-paid mail takes precedence • restaurants- requiring reservations

Internal Strategies (cont.)Improving information processingOne of the main causes of uncertainty is

lack of information. If it is possible to improve the flow of

information, uncertainty will decrease. Modern information technologies allow us• to gather large amounts of data and, using

appropriate software, • process it into a format that can assist

managers to respond to environmental changes. • Airlines- constantly monitoring forward bookings

Internal Strategies (cont.)Geographic dispersionEnvironmental uncertainty

sometimes varies with location. To lessen location-induced

uncertainty, organizations can move to a different geographic location or lessen risk by operating in multiple locations.• Mining companies

External StrategiesBridging refers to the process by which managers

endeavor to regulate their environments through negotiation, cooperation, exchange of information and other forms of mutual benefit.

Bridging may include such actions as building personal relationships with managers in

supplying or distributing companies, sharing information, attendance at industry and chambers of commerce

meetings, andbeing a member of golf or social clubs patronized by

the well-connected.

External Strategies (cont.)

AdvertizingThrough extensive advertising, management

seeks• to reduce competitive pressures, • stabilize demand, and allow itself the opportunity to

set prices with less concern for the response of its competitors.• Unilever spends tens of millions of dollars each year to

promote Streets ice cream, Rexona products, Flora margarine…

• The organization that can build brand loyalty creates a more loyal customer base.

External Strategies (cont.)

Contracting protects the organization from changes in quantity or price on either the input or the output side. • For instance, management may agree to

a long-term fixed contract to buy materials and supplies or to sell a certain part of the organization's output. • Brick manufacturers sign long-term contracts

with gas suppliers in order to secure supplies of gas at specified prices.

External Strategies (cont.) • Co-opting• Organizations may resort to co-opting

their uncertainties—that is, absorbing those individuals or organizations in the environment that threaten their stability. • This is most often done in business firms

through selective appointments to the organization's board of directors.• For example, it is common for firms with a

need for finance to appoint a finance expert to the board.

External Strategies (cont.) Coalescing is combining of an organization

with one or more organizations for the purpose of joint action.

Mergers and takeovers are an example, and so, too, are strategic alliances and joint ventures. • The motor vehicle industry provides a good

example. Most of the world trade in cars is dominated by a few manufacturing groups. In many cases, various brands are wholly owned subsidiaries, for instance, General Motors ownership of Saab.

External Strategies (cont.)

External Strategies (cont.)

Mergers and strategic alliances are a legal means by which an organization can manage its environment, provided that they do not act as a restraint on trade.

Most countries have anti-monopoly laws. Agreements to fix prices, share markets,

restrict market entry or actively seek to reduce competition are not permitted under the Trade Practices Act.

External Strategies (cont.) Lobbying —using influence to obtain a

favorable outcome— is widely practized by organizations to manage their environment.• Farmers and agricultural producers have long

been effective in lobbying for their interests and,• the green movement has had some successes

as well. • Some organizations even use the power of

government to stabilize relationships in an industry.

External Strategies (cont.)InsuringOrganizations face many risks which

are unlikely to eventuate, but which may be catastrophic if they do.• Such risks may arise from a building

catching fire, accidents, acts of nature such as lightning strikes, hailstorms and cyclones, riots or insurgency in overseas countries, and oil or chemical spills.

• Most of these events, apart from floods, can be insured against.

External Strategies (cont.)Hedging and future marketsWith the deregulation of industries and

commodity markets and the free floating of currencies, the level of uncertainty of many businesses has risen.

New markets have consequently been developed in order to permit companies to manage their risk. • Futures exchanges allow miners and

commodity producers to lock in a price in advance of production and consumption.

External Strategies (cont.)

External Strategies (cont.)