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Environmental Constraints on

Managers

Chapter 2

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Learning Objectives
1. Define What is the external environment for
managers?
2. Describe What challenges do managers face in a
global environment?
3. Explain How do organizations do business
globally?
4. Explain How does the environment affect
managers?
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The External Environment
• The external environment refers to forces outside
the organization that may affect its performance.
• The external environment has three components:
– The specific environment
– The general environment
– The global environment

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The Specific Environment
• The specific environment includes external forces
that have a direct and immediate impact on
managers’ decisions and actions.

• Each organization’s specific environment is unique


and variable.

• Managers are affected by the relationships they have


with external stakeholders.
– Groups that have a “stake” in or are significantly
influenced by what the organization does
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The Specific Environment
Key forces that make up the specific environment are:

•Customers
– Organizations exist to meet the needs of customers.
•Suppliers
– Provide materials and equipment as well as financial and
labour inputs.
•Competitors
– Most organizations have one or more competitors to
which they must be prepared to respond.

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The General Environment
The general environment includes the broad political,
economic, sociocultural, technological, environmental,
and legal conditions that may affect the organization.
•Changes in these areas usually do not have as large an
impact as changes in the specific environment, but
managers must consider them as they plan, organize,
lead, and control.

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The General Environment
PESTEL is an acronym for the six general environment
factors.
•Political Conditions
– Considers the political climate and stability of a market.
– Governments influence what organizations do.
•Economic Conditions
– Interest rates, inflation, disposable income, and stock market
fluctuations influence management practices.
•Socio-Cultural Conditions
– The changing expectations of society as well as changing
demographic trends affect managers’ decisions and actions.

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The General Environment
• Technological Conditions
– Advances in technology are changing the ways that
organizations are structured and the way that managers
manage.
• Environmental Conditions
– How organizations treat the environment in which they
operate as well as sustainability practices.
• Legal Conditions
– Legislation and regulations that govern how businesses must
operate.

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The PESTEL Model
• P – Political • A model for
• E – Economic summarizing and
• assessing the conditions
S – Socio-Cultural
of the global
• E – Environmental environment
• T – Technological • Assists managers with
• L – Legal market entry decision-
making

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The Challenges Managers Face
in a Global Environment
In the global environment, managers must deal with
cultural, economic, and political differences.
New competitors can suddenly appear at any time,
from any place on the globe.
Managers who make no attempt to learn and adapt to
changes in the global environment end up reacting,
rather than innovating.

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The Challenges Managers Face
in a Global Environment
Global Trade benefits participating countries and is
shaped by:
•Regional Trading Alliances
– The European Union (EU), The North American Free
Trade Agreement (NAFTA), The Association of
Southeast Asian Nations (ASEAN), and others.
•The World Trade Organization (WTO)
– Sets rules for international trade and helps countries
negotiate trade problems and settle trade disputes.
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The Cultural Environment

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The Cultural Environment

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How Organizations Do Business
Globally
Types of International Organizations:
• Multinational Corporations
• Multidomestic Corporations
• Global Companies
• Transnational or Borderless Organizations
• Born Globals

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How Organizations Go Global

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How Organizations Go Global
• Global Sourcing
– Purchasing materials or labour from around the world,
wherever it is cheapest.
• Exporting
– Making products at home and selling them abroad.
• Importing
– Selling products at home that are made abroad.

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How Organizations Go Global (cont’d)
• Licensing and Franchising
– Giving another organization the right to use its name,
technology, or product specifications
• Franchising
– Franchising is used by service organizations to use another
company’s name and operating methods
• Licensing
– Licensing is used by manufacturing organizations that
make or sell another company’s products

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How Organizations Go Global (cont’d)
• Strategic Alliance
– Partnership between companies (domestic and foreign)
to share resources in developing new products or
building production facilities
A joint venture is a strategic alliance where partners
form a separate, independent organization for a
business purpose

• Foreign Subsidiary
– Direct investment in a foreign country by creating a
separate and independent production facility or office
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How the Environment Affects Managers
• Environmental uncertainty is defined as the degree
of change and complexity in an organization’s
environment
– Degree of change: How dynamic or stable is the external
environment?
– Degree of complexity: The number of components in an
organization’s environment and the extent of an
organization’s knowledge of these components.

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How the Environment Affects Managers

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