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Principles of Management Unit 2: The Organizational Environment and Culture

Organizations do not operate in a vacuum: outside forces and the inside culture both limit and shape what managers can do. This unit covers the external environment, stakeholders, organizational culture and managing across national cultures.

Covers: Omnipotent and symbolic views of management, General and specific (task) environments, Stakeholders and environmental uncertainty, Organizational culture and Schein's levels, Strong cultures and how employees learn culture, The global environment and Hofstede's dimensions, Ways organizations go global

Study guide

How much control do managers really have? The omnipotent view says managers are directly responsible for an organization's success or failure, which is why coaches and CEOs are fired after bad years. The symbolic view says much of an organization's performance comes from outside forces managers cannot control, such as the economy, competitors and government, so managers mainly shape meaning and symbols. Most experts take a middle position: managers have real influence, but it is bounded by the external environment outside the organization and by the culture inside it.

The external environment has two layers. The general environment is the broad set of conditions that affect all organizations: economic, political and legal, sociocultural, demographic, technological and global forces (often summarized as PESTEL). The specific or task environment includes the groups that directly affect a particular firm: customers, suppliers, competitors and pressure groups. Robert Duncan described environmental uncertainty along two dimensions: degree of change (stable or dynamic) and degree of complexity (few or many components). A dynamic and complex environment has the highest uncertainty. Managers also deal with stakeholders, any group affected by the organization's decisions, such as employees, shareholders, communities and governments.

Organizational culture is the shared values, beliefs and assumptions that shape how members think and act. Edgar Schein described three levels. Artifacts are the visible parts: dress code, office layout, logos and ceremonies. Espoused values are the stated beliefs and norms, such as a slogan about putting customers first. Basic underlying assumptions are deeply held, often unconscious beliefs about how things really work, and they are the hardest to see and to change. A strong culture is one where key values are intensely held and widely shared; it builds commitment and consistency but can resist needed change.

Employees learn culture through stories (tales of founders or heroic employees), rituals (repeated activities such as award dinners), material symbols (corner offices, company cars, open floor plans) and language (jargon and acronyms unique to the firm). A founder's values often set the early culture, and selection, top management behavior and socialization keep it going. Socialization is the process of helping new employees adapt; it moves through prearrival, encounter and metamorphosis stages. Culture also shapes how managers behave, because it tells them what is acceptable without anyone writing it down.

Managers increasingly work globally. An ethnocentric attitude assumes the home country's ways are best, a polycentric attitude assumes local managers know best, and a geocentric attitude seeks the best approaches anywhere in the world. Geert Hofstede compared national cultures on dimensions including power distance, individualism versus collectivism, uncertainty avoidance, masculinity versus femininity (achievement versus caring) and long-term versus short-term orientation. The later GLOBE study expanded this list to nine dimensions. Firms go global through steps of rising commitment and risk: global sourcing, exporting and importing, licensing and franchising, strategic alliances and joint ventures, and finally foreign direct investment such as a wholly owned foreign subsidiary.

Key ideas

• Managers' influence is real but limited by the external environment and organizational culture.
• The general environment affects all firms broadly; the specific environment contains customers, suppliers, competitors and pressure groups that directly affect one firm.
• Uncertainty is highest when the environment is both dynamic and complex.
• Culture has three levels in Schein's model: visible artifacts, espoused values and basic underlying assumptions.
• Stories, rituals, material symbols and language transmit culture to employees.
• Hofstede's dimensions explain why management practices that work in one country may fail in another.
• Global expansion options rise in investment, control and risk from exporting to foreign direct investment.

Formulas and rules

Common mistakes

• Placing competitors or suppliers in the general environment; they belong to the specific (task) environment.
• Thinking the visible artifacts are the deepest level of culture; basic underlying assumptions are the deepest.
• Assuming a strong culture is always good; strong cultures can block change and lead to groupthink.
• Confusing licensing (used mainly by manufacturers for technology or brand rights) with franchising (used mainly by service firms for a whole business model).
• Mixing up power distance (acceptance of unequal power) with uncertainty avoidance (discomfort with ambiguity).

Before the test, make sure you can

• Contrast the omnipotent and symbolic views of management.
• Classify forces as part of the general or specific environment.
• Use Duncan's two dimensions to rate an environment's uncertainty.
• Identify stakeholders and explain why managing them matters.
• Identify the three levels of culture in Schein's model from examples.
• Explain how stories, rituals, symbols and language transmit culture.
• Apply Hofstede's dimensions to a cross-cultural management scenario.
• Rank ways of going global by commitment and risk.

Words to know

Omnipotent view of management

The view that managers are directly responsible for an organization's success or failure.

Symbolic view of management

The view that much of an organization's success or failure comes from outside forces beyond managers' control.

External environment

Factors and forces outside the organization that affect its performance.

General environment

Broad economic, political-legal, sociocultural, demographic, technological and global conditions that affect all organizations.

Specific (task) environment

The customers, suppliers, competitors and pressure groups that directly affect a particular organization.

Environmental uncertainty

The degree of change and complexity in an organization's environment.

Stakeholders

Any groups inside or outside the organization that are affected by its decisions and actions.

Organizational culture

The shared values, principles, traditions and ways of doing things that influence how members act.

Artifacts

The visible, surface level of culture, such as dress, office layout, logos and ceremonies.

Basic underlying assumptions

Deep, often unconscious beliefs at the core of a culture; the hardest level to observe or change.

Strong culture

A culture in which key values are deeply held and widely shared.

Socialization

The process that helps new employees learn and adapt to the organization's culture.

Ethnocentric attitude

The belief that the best work approaches come from the home country.

Geocentric attitude

A world-oriented view that seeks the best approaches and people from anywhere.

Power distance

Hofstede's dimension for how much a society accepts unequal distribution of power.

Uncertainty avoidance

Hofstede's dimension for how much people feel threatened by ambiguity and prefer rules and structure.

Franchising

An agreement, used mainly by service firms, that gives another party the right to use a business's name, methods and brand for a fee.

Foreign subsidiary

A direct investment in a foreign country that creates a separate facility or office; the highest commitment and risk.

Sample practice questions

30 more questions like these, from level 1 to 5, are in the practice set.