Principles of Management

Islamic University of Lebanon – 2024-2025

2
Chapter

The
Management
Environment
What Is External Environment?
External environment refers to the factors, forces, situations,
and events outside the organization that affect its performance.

No successful organization, or its managers, can operate without

understanding and dealing with the dynamic external
environment that surrounds it. For example, a volcanic eruption
in Iceland in 2010 prevented delivery of auto parts that led to a
shutdown at a BMW plant in South Carolina and a Nissan Motor
facility in Japan.
 Components of External Environment
The external environment includes six components:

1) The economic component encompasses factors such as interest rates,

inflation, changes in disposable income, stock market fluctuations, and
business cycle stages.

2) The demographic component includes trends in population characteristics

such as age, race, gender, education level, geographic location, income, and
family composition.

3) The technological component focuses on scientific and industrial

innovations.
Components of External Environment (con)

4) The socio-cultural component is concerned with societal

and cultural factors such as values, attitudes, trends,
traditions, lifestyles, beliefs, tastes, and patterns of behavior.

5) The political/legal component looks at federal, state, and

local laws, as well as other countries’ laws and global laws. It
also includes a country’s political conditions and stability.

6) The global component encompasses issues associated with

globalization and a world economy.
Components of External Environment
How Has the Economy Changed?

• Began with disorder in mortgage markets

• Spread to businesses when broader credit markets

collapsed.
• Characterized by foreclosures1, high rates of
unemployment, huge public debt, and widespread
social problems
How Will Business Change?

• The role of the U.S. government in financial markets

and in consumer protection will increase 

Managers should stay informed about the additional

regulations and increased enforcement and oversight

of current regulations in the economic component.

What Role Do Demographics Play?
• Demographics refers to the characteristics of a
population used for purposes of social studies. It has a
significant impact on how managers manage and include
such factors as age, income, sex, race, education level,
ethnic makeup, employment status, geographic location,
and more.
• The size and characteristics of a country’s population can
have a significant effect on what it can achieve. For
example, experts say that by 2050, small European
nations with low birth rates, such as Austria, Belgium,
Denmark, Norway, and Sweden, are expected to drop off
the list of the 30 biggest economies.
 How Does External Environment
Affect Managers?
There are three ways that the external
environment affects managers and
organizational outcomes:

1. Its impact on jobs and employment

2. The amount of environmental

uncertainty

3. The nature of stakeholder

relationships.
 The Impact on Jobs & Employment
As external environmental conditions change, managers face the
impact of these changes on jobs and employment. Economists
predict that about one quarter of the 8.4 million U.S. jobs
eliminated during the most recent economic downturn won’t be
restored. Such readjustments create challenges for managers
who must balance work demands with having enough people
with the right skills to do the organization’s work. Changes in
external conditions not only affect the types of jobs available but
they also affect how the jobs are created and managed. For
example, many employers use flexible work arrangements and
contract freelancers or temporary workers.
 The Amount of Environmental Uncertainty
Environmental uncertainty refers to the degree of change and complexity in
an organization’s environment.
• The first dimension of uncertainty is the degree of unpredictable change;
that is, a stable environment experiences minimal change and a dynamic
environment experiences frequent change. For example, a stable
environment might have no new competitors, few technological
breakthroughs by current competitors, little pressure from groups trying
to influence the organization, and so on.
• The other dimension of uncertainty describes the degree of
environmental complexity, which looks at the number of components
(economic, demographic, technical, socio-cultural, political/legal, and
global) in an organization’s environment and the knowledge that the
organization has about those components.
Assessing Environmental Uncertainty
 Assessing Environmental Uncertainty
An organization with few competitors, customers, suppliers, or government agencies to
deal with, or an organization that needs little information about its environment, has
a less complex and more certain, stable environment, as seen in Cell 1.

Each of the four cells of the previous matrix represents different combinations of degree
of complexity and degree of change.

• Cell 1 (a stable-simple environment) represents the lowest level of environmental

uncertainty and Cell 4 (a dynamic and complex environment) represents the highest
level of environmental uncertainty.
• Not surprisingly, managers have the greatest influence on organizational outcomes in
Cell 1 and the least influence in Cell 4.
• Because uncertainty is a threat to an organization’s effectiveness, managers try to
minimize it.
• Most industries today face more dynamic change, and consequently, their
environments are more uncertain.
 The Nature of Stakeholder Relationships

Stakeholders are any constituencies in an organization’s environment that

are affected by that organization’s decisions and actions. These groups
have a stake in, or are significantly influenced by, what the organization
does. In turn, these groups can influence the organization.

The nature of stakeholder relationships is another way in which the

environment influences managers. The more obvious and secure these
relationships, the more influence managers will have over organizational
outcomes.
Organizational Stakeholders
 Why Manage Stakeholder Relationships?

Managers benefit from good management of stakeholder

relationships because stronger relationships can
improve the predictability of environmental changes,
lead to more successful innovations, foster a greater
degree of trust among stakeholders, and increase
organizational flexibility to reduce the impact of change.
What Is Organizational Culture?

Now that we’ve looked at the external environment of an

organization, let’s focus on the internal aspects of the
organization, specifically its culture.
Organizational Values

The enduring beliefs that have

worth, merit, and importance for the
organization e.g., cooperation,
obedience, responsiveness to
customers, perfectionism …
 Defining Organizational culture

Organizational culture is the shared values, principles,

traditions, and ways of doing things that influence the
way organizational members act. Organizational culture
is important because of the impact it has on decisions,
behaviors, and actions of organizational employees and
managers.
Culture and Its Impact
The definition of “culture” implies three things:
1) Culture is a perception that cannot be physically touched
or seen, but is perceived based on what employees
experience within the organization.
2) Organizational culture is concerned with how members
perceive or describe the culture based on high agreement
on what’s important, what defines good employee
behavior, what it takes to get ahead, and so on, not with
whether they like it.
3) Employees tend to describe the organization’s culture in
similar terms regardless of their backgrounds or their work
at different organizational levels.
How Can Culture Be Assessed?
An organization’s culture can be described using the seven dimensions
shown in the next slide: Attention to Detail, Outcome Orientation,
People Orientation, Team Orientation, Aggressiveness, Stability, and
Innovation and Risk Taking. In many organizations, one cultural
dimension is emphasized more than the others and essentially shapes
both the organization’s personality and the way organizational members
work.

• For instance, Sony Corporation focuses on product innovation,

identified in this graphic as “innovation and risk taking.”

• In contrast, Southwest Airlines has made its employees a central part

of its culture, illustrated in this graphic as “people orientation,” which
the company shows by how it treats its employees.
 The Culture’s Impact
Since introducing online sales in 1999,
Zappos1 has put “extraordinary
effort into building a desirable
organizational culture” that
espouses ten corporate values,
headed by this value: “Deliver
WOW through Service.”

• These values are literally paying off

because, despite recent economic
challenges, Zappos continues to
thrive.
 How Do Employees Learn the Culture?

Employees most commonly learn an organization’s culture

through its:
• Stories
• Rituals (the repetitive activities that express and reinforce
the important values and goals of the organization).
• Material symbols (the layout of organizations facilities, how
employees dress, …).
• Language (the terms used to describe equipments, key
personnels, customers, processes, or products related to
the business)
Where Does an Organization’s Culture
Come From?

• Organizational culture derives from:

– The founder’s biases and assumptions about what
the organization and its values should be.
– What the first employees learned from their own
experiences.
How Does Organizational Culture
Affect Managers?
Organizational culture affects managers in two
primary ways:

•Through its effect on what employees do and how

they behave.

•Through its effect on what managers do as they

plan, organize, lead, and control.
How Does Culture Affect What
Employees Do?
The more employees accept and commit to the
organization’s key values, the stronger the culture is.

• A strong culture reflects employee acceptance of,

and commitment to, the organization’s key values.
• The stronger the culture, the more it affects
employee and manager actions.
• A strong culture prevent the need for formal rules
and regulations.
How Does Culture Affect What
Managers Do?

An organization’s culture, especially a strong one, influences and

constrains the way managers plan, organize, lead, and control.

Such constraints are rarely explicit and all managers must

quickly learn how to respond in their organization.

Managerial Decisions Affected by
Culture
Case Study: Honest Tea Company
The strong culture of Honest Tea Company is, as the name
implies, all about honesty. Seth Goldman, cofounder and
“TeaEO” of Honest Tea, started the company with a mission to
create truly healthy, organic beverages. In growing his
company, Goldman used the same authenticity, integrity, and
purity in crafting his products as he conducted business and
his relationships with employees, suppliers, and customers.

Key values of Honest Tea include:

• Communicating with openness and trust, and
• Engaging employees in all aspects of the business, focusing on
corporate social responsibility, and committing to high
environmental standards.