External Environment’s Effect on Organization

External Environment’s Effect on Organization

Jeff

Hong Kong Polytechnic University

Abstract

This paper will examine how external environment affects organizational strategy and how organizations response to the ever changing external environment. To obtain a satisfactory observation of external environment effect, this paper chooses high technology industry as case study target. The reason of selecting high technology industry is that such industry external environment is changing more rapidly than the others and the significance of environmental effect could be revealed.

The objective of this study is to provide some environmental strategy propositions for organizations by a case study approach. In addition, this paper also aims to increase one’s knowledge of environmental effects on organizations. This paper will discuss ‘On-demand’ business model, a new global expansion ‘Controlling Variables’ business model, globalization strategy, and how to utilize emerging technology. The limitation of this conceptual study and feasibility of these propositions will be discussed. An informed conclusion will be drawn and then some recommendations for organizations to adopt proper strategies to response to external environment changes will be given.

 

External Environment’s Effect on Organization

 

Introduction:

An organizational external environment has several components, including suppliers, consumers, competitors, governments, industry associations, and other social and economic forces which also have leverage on the organizational governance of decision making process (Ansoff 1965; Bourgeois 1984; Hitt and Tyler 1991; Porter 1980). In this study, we will limit the external environment to include consumers, trend of globalization, and changing technology. Several case studies will be presented to support the arguments.

Propositions:

In the high technology industry, success could be evaluated by many methods. The success of a high technology company should rely on various factors, including the technology, products, and all other services it provides. These factors depend on the management practice of a company, not only including how well its executives manage the lower level managers, but how to handle the partnerships and consumer relations, and other external environment issues. Peters (2010) indicates that staying close to consumers, leveraging global ecosystem and using emerging technology effectively may help high technology companies realize success. This paper will examine these three elements, namely consumer relationship, globalization trend and technology first. Some propositions will be given after examining these elements.

Consumer:

This part will examine how one company adapts to consumer’s dynamic requirement successfully. Michael (2001) states that, if a product has some different features, especially can bring some measurable benefits on demand to customers, the consumers will select it even at a comparably higher price. This statement reveals one fact that if company carries out ‘On Demand’ business model, such company will have satisfactory profit margin. The International Business Machine Company (IBM) testified this idea exactly. The motto of IBM is ‘Information on Demand’ which indicates that the main commission of this company is to provide business On Demand. As early as 2004, IBM CEO Samuel started Electronic Business on Demand campaign and then transformed it into a comprehensive ‘On Demand’ business model in 2005. Such ‘On Demand’ business provides on demand solutions to the following business segments, namely hardware products like severs, printing systems and other systems, software products, and leading-edge research.

Such unique ‘On Demand’ business model contains four fundamental characteristics, namely responsive, variable, focused and resilient. The diagram 1.1 shows this business operating environment. In this model, IBM can make quick response to consumer’s dynamic request and unpredictable emergency. IBM is willing to vary as many factors as it can to fulfill customers’ request. Such flexibility can reduce price, which all customers are concerned with, in order to enhance the company price competence. The company focused on its core competence differentiated tasks and services. IBM maintains its capability of handling changes and threats in all conditions to provide consumer confidence and security.

Diagram 1.1 Source: IBM company official website (www.ibm.com)

The market response of this business model is positive. This business model have contributed significant amount of revenue to IBM since it was carried out. The following diagram 1.2 shows the year 2005 market share and awareness, from which one can figure out to what extend this business model succeeded.

Diagram 1.2     Source: IDC (LA Server, Storage, OC and SW Trackere; LA IT Service)

Source: Brand Leadership Tracking 1W05

Based on above case analysis and ideas from Michael, the following proposition is given:

Proposition 1: To be successful in the dynamic environment, one organization should set up close relationship with consumers, realizing what exactly they demand. It also should allocate its available resources according to the changes of consumer request.

Globalization:

The following part will discuss how a company can take the trend of globalization to be successful. The UN Secretary General Kofi Annan (October 1999) mentioned that globalization in this modern society is an irreversible trend instead of an option. The business definition of globalization is that an organization can operate across boundaries without any language, culture, economies, and technology barriers (Kenneth and Volkmar 2005). Globalization could be both opportunity and threat for an organization. On the one hand, by taking this globalization trend a company may gain substantial benefit. According to the US Bureau of Labor recent statistics result, the American enterprises which are carrying out global business are doing better than those which are not in the financial tsunami. On the other hand, there exist some companies which failed in carrying out global business. How a company could utilize a globalization trend to gain maximum profit is a hot debated issue.

Thomas (2007) points out that there are eight key flatteners, namely Berlin Wall collapses, workflow, outsourcing, off shoring, open sourcing, in sourcing, supply chaining, and informing, making the world flat. Peters (2010) suggests that one company should opt to outsource according to its own core competency and values, so that such bushiness partnership can maintain a longer time and maximize mutual benefit. Julie (2006) reveals one fact that the manufactories are feeling the pressure from new-industrialized nations. Whether off-shore production is an adventure or not, one company should experiment this new business process otherwise it will leave behind the trend. Robbins & Coulter (2009) states that a successful global company should have Chinese labor, Japanese assemble line, European design, and American market. Given all ideas illustrated above, a proposition is given as follows:

Proposition 2A: A successful global business model should have a strong control over these eight variables and integrate global mission into its own core company value. A possible model is illustrated in the following diagram 2.1.

Diagram 2.1: a possible successful controlling variables business model

Besides the variables demonstrated above, there is another significant element in global business cannot be neglected. Such element is differentiation. A global company should provide differentiated products or services in different regions. A survey conducted by Levitt (1986) revealed one simple fact that consumers from all regions expected that the products they bought would meet the global standards. They became more unwillingly to pay extra money for the localized products and less advanced ones. Michael (2001) believes that a successful global giant company should provide international differentiated products and services. They must take all kinds of regional differences into consideration, including language differences, demographic differences, certificates differences, law system differences and even national preferences and protectionism.

As a successful giant high-technology company, IBM provides distinguished software in different regions, and different services for consumers with different culture backgrounds. Basically, IBM solves the consumers’ specific problems following planning, designing, developing procedures. To make services globalized, IBM team adds a ‘translating’ step. Translating tasks always involve multinational teams and multifunctional teams. These teams design regional language Unicode, redesign the program according to the regional preference, and promote the service in the regional market way. The following diagram 2.2 shows the work-flowing.

Source: IBM official website (www.ibm.com)

To have a comprehensive knowledge about a specific region, IBM has already set up global laboratories. Its research range covers chemistry, computer science, mathematical science, management science and social problems (IBM official website). This specific global strategy has brought IBM significant success. According to the most recent International Data Cooperation year 2010 statistics, IBM is the leading worldwide application software vendor occupying 31.9 percent global market share based on revenue, which is almost double the closest competitor. IBM business grew around 4.2 percent year over year.

Based on these ideas and case analyses, a proposition related to global products, and services is posted as follows:

Proposition 2B: To be successful in the globalization trend, one company should provide differentiated products and service in regards of regional discrepancy.

Technology:

Innovation is changing the modern society in an unprecedented speed. High technology industry has been the greatest contributor to North America economic growth since last century 1990s. How to keep pace with technology updated and how to maintain advantage in the dynamic technology environment are becoming inevitable problems confront company managers.

Michael (2001) defines that there are two kinds of innovation successful companies in the market, namely the first to market companies and the fastest follower companies. As for the first kind companies, such companies need to keep channeling substantial money into research and development in daily operation. Utilizing the emerging high technology may help a company to be the first to market. The incentive for them to do that is, once they create a new market, they can acquire enough market shares before other competitors enter the market. Apple is a classic first-to-market instance. Apple is the first company to develop more advanced smart phone operation system and large phone touch-screen technology. Since Apple put iPhone into market in 2007, Apple has gain substantial profit margin. Just in its first quarter sale of 2007, iPhone market share has already climbed over the entire Microsoft smart phone products market share.

Diagram 3.1 Source: Canalys

As for the fastest followers, they will enjoy some advantage over the first to market companies. They can learn from the first to market competitor’s mistakes and take advantage of ‘market resistance to change’ (Michael 2001) time lag to promote its products. According to ‘mimetic pressure’ theory raised by Teo (2003), the fastest follower tends to imitate his successful competitor’s behavior to save research cost and avoid predictable risks. Considerate these analyses, the fastest follower might be nearer to the eventual market champion. The Google’s opening smart phone operation system Android is an example of successful fastest follower. The Apple’s iPhone expanded a new smart phone market area, but almost the same time Google follows this trend and promote the Android system to compete with iPhone. Android learns some lessons from iPhone system, for example iPhone’s system only supports software from iTunes which limits consumers’ choice. Android adopts the opening system which is akin to Linux system to satisfy consumers at most. From the analysis of Canalys, there is a trend that Android system may overtake iPhone’s in one or two years.

Based on the above analyses and ideas, the following proposition is given:

Proposition 3: A company should have an appropriate investment of research and development to keep pace with technology updated. A high technology company may take all its effort to be a leader or be a fastest follower in a market.

Discussion:

This study generally examines external environments from consumers, globalization trend, and technology perspectives. In addition, IBM ‘On Demand’ business model has been analyzed, and a possible ‘Controlling Variables’ business models has been furnished. Two business propositions related to global differentiated products and services, and utilizing emerging technology, based on theory analyses and case studies have been posted.

There is some limitation of this study. Since this study is using a technology industry case study approach, the propositions do have some limits on non-high-technology industries. The feasibility of raised propositions needs a future empirical research to testify.

Conclusion:

This conceptual study is carried out in a theory analyses and case study way. The three elements, namely consumers, globalization, and technology, characters have been identified.

A conclusion that, the external environment affects organizational behaviors and how an organization response to a dynamic environment determines an organization success or failure can be drawn.

Recommendation:

As for the relation with consumers, besides the proposition 1, a company should have a quick response management structure to make adjustment of products in time.

As for globalization, besides proposition2A and 2B, a company should also use proper merger and acquisition methods to expand globally and evaluate risks of global expansion periodically.

As for utilizing emerging new technology, besides proposition 3, an organization should seek potential partnerships with some small innovative companies. In this way, an organization can reduce the risk by sharing with small companies.

Some further empirical studies related to these propositions are needed and companies should adopt proper strategies according to specific conditions.

Reference:

Ansoff, H. I. 1965. Corporate Strategy: an Analytic Approach to Business Policy for Growth and Expansion, New York: McGraw-Hill

Bourgeois, L. J. 1984. “Strategic Management and Determinism,”Academy of Management Review (9), pp. 586-596.

Diagram 1.1: International Business Machine Company website www.ibm.com Diagram 3.1 : Canalyst

G.P. Peters 2010: “Management Strategies for the High-Tech Industry”, Manager’s Forum, May 2010

Hitt, M. A., and Tyler, B. B. 1991. “Strategic Decision Models: Integrating Different Perspectives,” Strategic Management Journal (12), pp. 327-351.

Julie Fraser 2006: Offshoring strategies – Becoming a global manufacturer, Industry Direction, 2006

Kof Annan October 1999: Fifty-fourth Session Agenda Item 104 Globalization and Interdependence, October 1999

Kenneth A. McKethan, Jr.and Volkmar Burke Siegemund 2005: “Why Globalization?” 2005

Michael E. McGrath 2001: Product Strategy for High Technology Companies, McGraw-Hill 2001 pp 165

Porter, M. E. 1980. Competitive Strategy: Techniques for AnalyzingIndustries and Competitors, New York: Free Press.

Stephen P. Robbins & Mary Coulter: Management, Prentice Hall 10th edition, 2009 Theodore Levitt, The Marketing Imagination (The Free Press, 1986), p.28

Teo, H. H., Wei, K. K., and Benbasat, I. 2003. “Predicting Intention to Adopt Interorganizational Linkages: An Institutional Perspective,” MIS Quarterly (27:1) Thomas L. Friedman 2007: The World is flat, Farrar, Straus and Giroux, 2007

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About jeffamazingworld

My amazing world filled with my dreams.
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