Chapter 11: Managing t he Environment

1. Chapter 11: • Managing • the Environment • By Muhammet Said Dinç

2. Contents • Explainwhy management seeks to control the organization's environment • Compare internal and external environment control strategies • Describe 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 side • Explain how organizations smooth out fluctuations in the environment • Describe when an organization would apply rationing • Differentiate between co-opting and coalescing.

3. Management's quest to control its environment • Successful interactionwith environment is necessary for the organization's viability and survivalaccording 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?

4. Classifying Strategies • Managers 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.

5. 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 categorizea number of uncertainty-reduction techniques.

6. Classifying Strategies(cont.)

7. 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.

8. 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.

9. 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.

10. Internal Strategies (cont.) • Recruitment • The 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 appropri­ate management skills.

11. 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.

12. Internal Strategies (cont.) • Environmental scanning requires exploringthe environment to identify actions by competitors, government, unions and the like that might affect on the organization's operations. • Scanning activities also include • predictinglevels of economic activity and • undertaking research to determine changes in fashions and demand patterns.

13. Internal Strategies (cont.) • Boundary spanners are staff whose specific jobs require them to act as channelsbetween 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.

14. 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.

15. Internal Strategies (cont.) • Bufferingprotecting 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.

16. 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.

17. 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 includetelecommunication providers, retail stores, car rental companies, and magazine publishers. • Examplesmight include differential costs of long distance telephone calls that are lower during non-peak times, discount airline fares for off-time flights.

18. 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. Examplesof 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

19. Internal Strategies (cont.) • Improving information processing • One 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

20. Internal Strategies (cont.) • Geographic dispersion • Environmental 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

21. External Strategies • Bridgingrefers to the process by which managers endeavor to regulate their environments throughnegotiation, 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, and • being a member of golf or social clubs patronized by the well-connected.

22. External Strategies (cont.) • Advertizing • Through 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.

23. External Strategies (cont.) • Contractingprotects 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.

24. 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.

25. External Strategies (cont.) • Coalescing is combiningof 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.

26. External Strategies (cont.)

27. 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-monopolylaws. • Agreements to fix prices, share markets, restrict market entry or actively seek to reduce competition are not permitted under the Trade Practices Act.

28. External Strategies (cont.) • Lobbying —using influence to obtain a favorable outcome— is widely practizedby 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.

29. External Strategies (cont.) • Insuring • Organizations 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.

30. External Strategies (cont.) • Hedging and future markets • With 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.

31. External Strategies (cont.)

32. External Strategies (cont.)