The Organizational Context Seeing the Big Picture

The Organizational Context Seeing the Big Picture

1. Chapter 2Chapter 2
The Organizational Context:
Seeing the Big Picture

2. The Need for StrategyThe Need for Strategy
•When Lou Gerstner took over as Chairman and CEO of IBM,
he faced monumental challenges. Critics saw IBM as
bureaucratic, slow, bloated, and self-absorbed.
•Gerstner was an outsider to the computer industry and lacked
technical knowledge, but was a strong manager who could bring
fresh perspectives.
•He said, “What IBM needs now is a series of very tough-
minded, market-driven, highly effective strategies in each of its
businesses.”
•The chapter considers the “big picture” facing firms, and how
highly effective strategies are developed in the face of
environmental demands.

3. Four Strategic QuestionsFour Strategic Questions
•How do we respond to new opportunities in the environment,
lessen the impact of threats from the environment, and strengthen
the mix of the organization’s activities by doing more of some
things and less of others?
•How do we assign resources among the various subunits,
divisions, and activities of the organization?
•How do we compete with other organizations for customers
through allocation of existing or new products and services?
•How do we effectively manage organizational activities at the
departmental, divisional, and corporate levels of the organization?

4. Environmental Domains of an Environmental Domains of an
Organization (Figure 2-1)Organization (Figure 2-1)
Economic Technological
PhysicalPolitical
Competitive Social
Organization

5. The Economic DomainThe Economic Domain
•Many economic factors, such as interest rates, trade
deficits, inflation rates, gross domestic product
indicators, and the money supply, may influence an
organization’s activities.
•Factors in the economic domain influence the ability of
managers to get resources needed to produce goods and
services and distribute them to a market.
•Also, employees are likely to behave differently
depending on the nature of the economic environment.

6. The Political DomainThe Political Domain
•The political domain of the organization environment rests on the laws
and regulations passed by governmental agencies and legislative bodies.
•Legislation has been directed toward:
–eliminating discrimination based on gender, race, and age
–ending sexual harassment in the workplace
–preventing unfair pricing in markets
–restricting pollution
–protecting customers
–discouraging unethical behavior
–regulating corporate taxation
•As corporations are more global, they must consider political risk
associated with foreign governments.

7. The Social DomainThe Social Domain
•The social domain of an organization’s environment consists of
societal values, attitudes, norms, customs, and demographics.
•Values are what people believe to be proper goals for members of
society to maintain or achieve.
•Attitudes reflect what individuals think about issues and
behaviors that occur within a society.
•Values and attitudes may change over time. Examples in the
U.S. include changing attitudes toward mothers in the workplace
and toward providing benefits to same-sex partners of employees.

8. The Technological DomainThe Technological Domain
•The technological domain, or technology, refers to the
application of knowledge to the production and distribution
of goods and services.
•Technology is greatly affected by innovation; innovation is
the creation or modification of a process, product, or service.
•Technology transfer involves the application of innovation
to processes, products, or services either within or between
industries.
•Technology and technological change are transforming
organizations.

9. The Competitive DomainThe Competitive Domain
•Organizations can face a wide variety of competitive conditions
in their environment.
•Some large organizations compete only with small organizations,
often giving them an advantage in pricing of their products.
•Other competitive conditions arise from different mixes of the
strategies that competitors pursue.
•Within a capitalistic system, organizations can compete in one of
four competitive market structures.
•Deregulation -- relaxation of government controls to encourage
greater competition -- is transforming many industries.

10. Competitive Market StructuresCompetitive Market Structures
•Monopoly exists when an organization has sole access to
the market for its goods and services.
•Oligopoly exists when only a few firms are in competition
to provide goods and services to a market.
•Monopolistic competition exists when many firms offer a
similar good or service with only minor price differentials.
•Perfect competition exists when many organizations
offer essentially the same good or service; price thus
becomes the primary discriminator.

11. The Physical DomainThe Physical Domain
•All organizations must respond in some manner to their
physical domains.
•Weather conditions, for instance, may greatly influence
the activities of a firm. This is especially true, for
instance, of airlines, construction companies in the
upper Midwest, and orange growers.
•The physical domain may also influence things such as
the availability of qualified talent. For instance,
companies located in one of the “Best Places to Live”
may find themselves at an advantage.

12. Environmental DimensionsEnvironmental Dimensions
•Three important environmental dimensions are munificence,
dynamism, and complexity:
–Munificence of an organization’s environment refers to the level
of resources available to the organization.
–Dynamism refers to the rate of change in environmental factors.
–Complexity is the number of components in an organization’s
environment and the degree to which they are similar or different.
•High levels of dynamism and complexity result in perceived
environmental uncertainty (PEU). When PEU is high, firms may
have to emphasize creativity and flexibility over efficiency.

13. Perceived Environmental UncertaintyPerceived Environmental Uncertainty
Perceived
Environmental
Uncertainty
Environmental
Complexity
Environmental
Dynamism

14. Organizational EffectivenessOrganizational Effectiveness
•Organizational effectiveness can be
defined as the degree to which an
organization achieves its goals, maintains
its health, secures resources needed for
survival, and satisfies parties that have a
stake in it.
•This definition suggests that effectiveness
has many dimensions.

15. Approaches to Assessing OrganizationalApproaches to Assessing Organizational
EffectivenessEffectiveness
•Goals assessment is concerned with whether the organization
reaches the growth, sales, profitability, or other goals
management has set for it.
•Internal process assessment focuses on organizational health.
According to this approach, an unhealthy organization cannot be
considered effective.
•Systems resource assessment considers whether an organization
is able to acquire the resources it needs to survive and prosper.
•Strategic constituencies assessment considers whether an
organization satisfies important its constituencies.

16. Approaches to Assessing OrganizationalApproaches to Assessing Organizational
Effectiveness (Figure 2-2)Effectiveness (Figure 2-2)
CONSTITUENTS
(Strategic
Constituencies
Assessment)
INPUTS
(Systems
Resource
Assessment)
ACTIVITIES
(Internal
Process
Assessment)
OUTPUTS
(Goals
Assessment)

17. America’s Most Admired and Least America’s Most Admired and Least
Admired Companies (Figure 2-3)Admired Companies (Figure 2-3)
The Top Ten The Bottom Ten
1. General Electric 495. Humana
2. Microsoft 496. Revlon
3. Dell Computer 497. Trans World Airlines
4. Cisco Systems 498. CKE Restaurants
5. Wal-Mart Stores 499. CHS Electronics
6. Southwest Airlines 500. Rite Aid
7. Berkshire Hathaway 501. Trump Resorts
8. Intel 502. Fruit of the Loom
9. Home Depot 503. Amerco
10. Lucent Technologies504. Caremark Rx

18. The Malcolm Baldrige Quality AwardThe Malcolm Baldrige Quality Award
•The Malcolm Baldrige National Quality
Award was established in 1987 to
enhance U.S. competitiveness by
promoting quality awareness,
recognizing quality and business
achievements of U.S. companies, and
publicizing those companies’ successful
performance.
•The award is based on rated performance
on seven criteria.

19. Malcolm Baldrige Award CriteriaMalcolm Baldrige Award Criteria
Baldrige Award
Criteria
Leadership
Information
and Analysis
Strategic
Planning
HR Development
and Management
Process
Management
Business
Results
Customer Focus
and Satisfaction

20. StrategiesStrategies
•Strategies are methods of competition.
•The strategic plan of an organization is a
comprehensive plan that reflects the longer-term
needs and directions of the organization or subunit.
•Strategic planning consists of several components,
as shown in Figure 2-5.

21. The Strategic Planning ProcessThe Strategic Planning Process
(Figure 2-5)(Figure 2-5)
Strategic
Analysis
Establish the
Purpose, Vision,
and Mission
Define
Strategic
Objectives
Implement the
Strategic Plan
Evaluate the
Strategic Plan

22. Focus on Management: Alagasco Puts Focus on Management: Alagasco Puts
Customers SecondCustomers Second
•Alagasco, Alabama’s largest utility -- and the
only utility on Fortune magazine’s 100 Best
Companies to Work for in America list -- is
proud of its philosophy of “putting customers
second.”
•Alagasco believes that by putting employees
first and treating them well, good service to
customers will naturally follow.
•Each year Alagasco employees at all levels meet
to refine the corporate strategic plan for the
coming year.

23. SWOT AnalysisSWOT Analysis
Internal
Strengths Weaknesses
External
OpportunitiesThreats

24. SWOT Analysis Questions Regarding SWOT Analysis Questions Regarding
Internal StrengthsInternal Strengths
•A distinctive competence?
•Adequate financial resources?
•Good competitive skills?
•Well thought of by buyers?
•An acknowledged market leader?
•Well-conceived functional strategies?
•Access to economies of scale?

25. SWOT Analysis Questions Regarding SWOT Analysis Questions Regarding
Internal Strengths (Continued)Internal Strengths (Continued)
•Insulated from competitive pressures?
•Technology leader?
•Cost advantages?
•Competitive advantages?
•Product innovation abilities?
•Proven management?
•Other?

26. SWOT Analysis Questions Regarding SWOT Analysis Questions Regarding
Internal WeaknessesInternal Weaknesses
•No clear strategic direction?
•A deteriorating competitive position?
•Obsolete factories?
•Subpar profitability?
•Lack of managerial depth and talent?
•Missing any key skills or competencies?
•Poor track record in implementing strategy?
•Plagued with internal operating problems?
•Vulnerable to competitive pressures?

27. SWOT Analysis Questions Regarding SWOT Analysis Questions Regarding
Internal Weaknesses (Continued)Internal Weaknesses (Continued)
•Falling behind in research?
•Too narrow a product line?
•Weak market image?
•Competitive disadvantages?
•Below-average marketing skills?
•Unable to finance needed changes in strategy?
•Other?

28. SWOT Analysis Questions Regarding SWOT Analysis Questions Regarding
External OpportunitiesExternal Opportunities
•Serve additional customer groups?
•Enter new markets or segments?
•Expand product line to meet broader range of customer needs?
•Diversify into related products?
•Vertical integration?
•Ability to move to better strategic group?
•Complacency among rival firms?
•Faster market growth?
•Other?

29. SWOT Analysis Questions Regarding SWOT Analysis Questions Regarding
External ThreatsExternal Threats
•Likely entry of new competitors?
•Rising sales of substitute products?
•Slower market growth?
•Adverse government policies?
•Growing competitive pressures?
•Vulnerability to recession and business cycle?
•Growing power of customers or suppliers?
•Changing buyer needs and tastes?
•Adverse demographic changes?
•Other?

30. Focus on Management: SWOT Analysis Focus on Management: SWOT Analysis
at Ruby Tuesdayat Ruby Tuesday
•As the first step in a thorough strategic planning
process, Ruby Tuesday conducted a SWOT
analysis.
•Strengths identified included “growth rate of
20%,” “strong technical skills,” and “fast
reaction time from management team.”
•Weaknesses included “lack of proactive
approach,” “internal communications could be
improved,” and “need comprehensive review of
compensation system.”
•Opportunities and threats were also identified.

31. Purpose, Vision, and MissionPurpose, Vision, and Mission
•The purpose of the organization is the reason
for the organization’s existence.
•Vision is a vivid description of a preferred
future.
•The organizational mission is the path managers
choose to achieve the purpose and vision.
•The mission is often written down in the form
of a mission statement.

32. Focus on Management: Ben & Jerry’s Focus on Management: Ben & Jerry’s
Mission StatementMission Statement
•Product: “To make, distribute and sell the finest-
quality all-natural ice cream and related products in a
wide variety of innovative flavors made from Vermont
dairy products.”
•Economic: “To operate the company on a sound
financial basis of profitable growth, increasing value
for our shareholders, and creating career opportunities
and financial rewards for our employees.”
•Social: “To operate the company in a way that actively
recognizes the central role that business plays in the
structure of society by initiating innovative ways to
improve the quality of life of a broad community --
local, national, and international.”

33. Bottom Line: Developing a Mission Bottom Line: Developing a Mission
StatementStatement
Identify the
Basic Reasons
Why the
Organization
Exists
List the Core
Values of the
Organization
That Drive How
It Will Do Business
Identify the
Primary
Business or
Businesses of
the Organization
Identify the
Primary
Customers of
the Organization
Draft the Mission
Statement in
Writing, Evaluate
It, and Modify It
As Needed
Finalize the
Mission Statement
in a Way That is
Understandable
and Inspiring

34. Focus on Management: Strategic Focus on Management: Strategic
Objectives at Dana CorporationObjectives at Dana Corporation
•Dana Corporation, one of the world’s largest independent
suppliers to vehicle and engine manufacturers, was
selected as a “Most-Admired Manufacturer” in the U.S.
by Start Magazine.
•Start emphasized Dana’s strategic objectives, focus on
technology, employee involvement, and reputation.
•In 1998, Dana had 41% of its sales outside the U.S. and
44% from diversified (as opposed to highway vehicle
sales) markets. Among its key strategic objectives are to
have 50% international sales and 50% diversified sales.

35. Choose Corporate-Level StrategiesChoose Corporate-Level Strategies
•Corporate-level strategies provide direction for
the total organization.
•Managers at the corporate level define a
strategic direction that includes business units
and departments within those business units.
•Managers often select either grand strategies or
portfolio strategies for guiding their company.

36. Grand StrategiesGrand Strategies
•A grand strategy is a broad plan to guide the organization toward
reaching its goals.
•Managers may choose to implement one of three grand strategies:
–A growth strategy is common in new, emerging industries or industries
that are undergoing rapid growth and gaining new external opportunities.
–A stability strategy is selected when managers want to protect the existing
market share of the firm from external threats or have just completed a
phase of rapid growth or divestment.
–A retrenchment strategy is often selected when managers are faced with
declining performance due to internal weaknesses and external threats.

37. Focus on Management: The Risks of Focus on Management: The Risks of
“Growth at Any Cost”“Growth at Any Cost”
•The danger of “growth at any cost” was dramatically
evident in the crash of ValuJet Flight 592 in the Florida
Everglades.
•ValuJet -- which had grown from its inception to serve 17
states -- was only two years old.
•ValuJet had attempted to achieve growth through
aggressive efforts to cut costs. It paid low salaries, used
planes averaging older than 26 years, and turned planes
around so fast that FAA inspection was difficult.
•ValuJet pictured itself as the Wal-Mart of airlines but, as
noted by one writer, “Wal-mart does not conduct business
35,000 feet above the ground.”

38. Global Perspectives: Retrenchment of Global Perspectives: Retrenchment of
the Chaebolsthe Chaebols
•Korea’s largest family-owned conglomerates, or chaebols,
have fallen on hard times.
•These conglomerates pursued growth at any cost.
•They sprawl across industries, have heavy debt loads, and are
bloated, making little attempt to focus on core businesses.
•In the face of Korea’s economic crisis, smaller chaebols have
had to radically downsize to raise cash.
•For the larger chaebols, the crisis -- and government and
bank pressure -- is forcing downsizing and streamlining.

39. Grand Strategy Selection MatrixGrand Strategy Selection Matrix
(Figure 2-7)(Figure 2-7)
Stability
Stability
Growth
Retrenchment
Numerous Environmental Opportunities
Major Environmental Threats
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40. Portfolio StrategiesPortfolio Strategies
•A portfolio strategy considers the business
mix of the firm -- that is, the types of
business units and product lines the firm
controls.
•The BCG matrix and the GE matrix are two
models used by many corporations in
selecting a portfolio strategy.

41. The BCG Portfolio MatrixThe BCG Portfolio Matrix
(Figure 2-8)(Figure 2-8)
Relative Market Share
High Low
High
Market
Growth Rate
Low
Stars
Dogs
Cash
Cows
Question
Marks

42. Strategic Types in the BCG MatrixStrategic Types in the BCG Matrix
•A star is a business unit that has both a high market
growth rate and a relatively large share of the
market.
•A cash cow has a large share of the market, but
there is little growth.
•Question marks exist in a rapidly growing market
but have a small market share.
•A dog is a poor performer because of little growth
in the market and a small market share.

43. Implications of the Strategic TypesImplications of the Strategic Types
•Stars typically need large amounts of cash to support rapid growth.
Stars have the potential to increase sales and generate large amounts of
profit in the future.
•Large amounts of cash can be “milked” from cash cows and channeled
into stars.
•Managers must decide whether to invest more cash into question marks
to take advantage of high growth opportunities (and transform them into
stars) or to divest it to emphasize other business units and products in
the portfolio.
•Management must sell dogs to another company or liquidate their
assets.

44. The GE Matrix (Figure 2-9)The GE Matrix (Figure 2-9)
Business Strength/Competitive Position
Strong Average Weak
L
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s
High
Medium
Low
Divestment
Investment
Growth
Selective
Investment

45. The Adaptation ModelThe Adaptation Model
•Raymond Miles and Charles Snow developed the adaptation model
of organizational strategy.
•The model contends that a major thrust of strategic management
should be the aligning organizational activities with key dimensions
of the organizational environment.
•To do this, managers must set up a strategy that will adapt to
environmental conditions and also manage internal organizational
activities to support the selected strategy.
•Adaptation is accomplished by simultaneously solving three critical
strategic problems: entrepreneurial, engineering, and administrative.

46. Critical Strategic Problems in the Critical Strategic Problems in the
Adaptation ModelAdaptation Model
•The entrepreneurial problem considers what
managers believe to be their market.
•The engineering problem is one of deciding
which methods are appropriate for the production
and distribution of goods or services.
•The administrative problem addresses the need to
develop an appropriate administrative system
within the organization.

47. Organizational Types in the Adaptation Organizational Types in the Adaptation
ModelModel
•The defender strategy is carried out when management
seeks or creates an environment that is stable.
•The prospector strategy -- the opposite of the defender
strategy -- seeks or creates an unstable environment in the
form of rapid change and high growth rate in the market.
•The analyzer strategy exists between the two extremes of
defender and prospector. It involves adapting solutions
from both the defender and prospector strategies to the three
problems.
•The reactor strategy is adopted in an organization that has
experienced strategic failure.

48. Lighten Up: Ambushes and Golden Lighten Up: Ambushes and Golden
ParachutesParachutes
Some of the language of mergers and acquisitions:
•Afterglow: Postmerger euphoria of acquirer and/or acquiree, but soon lost.
•Cyanide pill: Antitakeover finance strategy in which the potential target
arranges for long-term debt to fall due immediately and in full if it is
acquired.
•Golden parachute: Provision in the employment contract of top
executives that ensures them a lucrative financial landing if the firm is
acquired in a takeover.
•Mushroom treatment: Postmerger problems from an acquired executive’s
viewpoint: “First they buried us in manure, then they left us in the dark
awhile, then they let us stew, and finally they canned us.”

49. The Competitive ModelThe Competitive Model
•The competitive model of organizational strategy
was developed by Michael Porter.
•This model contends that the nature and degree of
competition in an industry determine the strategy
that is appropriate for managers to formulate and
implement.
•The model considers five industry forces and three
competitive strategies.

50. Industry Forces in the Competitive ModelIndustry Forces in the Competitive Model
•The threat of new entrants to compete in the
industry.
•The bargaining power of suppliers in the industry.
•The bargaining power of customers in the
industry.
•The threat of substitute products or services from
potential competitors.
•Competitive rivalry among existing firms.

51. Strategies in the Competitive ModelStrategies in the Competitive Model
•Overall cost leadership. This strategy requires management
to formulate and implement a strategic plan that will lead to
an efficient and low-cost organization.
•Differentiation. This strategy recognizes that a firm’s
product is unique in relation to other products produced in
the industry.
•Focus. This strategy pursues either an overall cost leadership
strategy or a differentiation strategy by focusing on a narrow
customer group, product line, or geographic market.

52. Implement the Strategic PlanImplement the Strategic Plan
•Vince Lombardi said, “The best game plan in the
world never blocked or tackled anybody.”
•Managers must see that strategic plans are converted
into action.
•To do this, they must:
–effectively communicate the plan
–assign responsibility and authority for activities within the
plan
–motivate employees to achieve the plan
–develop methods for measuring the results of activities
–develop procedures for taking any corrective action

53. Evaluate the Strategic PlanEvaluate the Strategic Plan
•Since there are many facets of effectiveness, we must assess
effectiveness of the strategic plan on those multiple facets.
•The balanced scorecard (BSC) is a conceptual framework for
translating an organization’s vision into a set of performance indicators
distributed among four perspectives:
–financial
–customer
–internal business processes
–learning and growth
•Using the BSC, companies can monitor both their current performance
and their efforts to learn and improve.

54. Balanced Scorecard IndicatorsBalanced Scorecard Indicators
•Financial-based measures. Examples: return on
investment, cost reduction, profits.
•Customer-based measures. Examples: customer
satisfaction, retention, market share.
•Internal business process measures. Examples:
quality, response time, new product introductions.
•Learning- and growth-based measures.
Examples: employee satisfaction, employee
productivity, employee retention.