Environmental Change and Complexity

James D. Thompson was one of the organization’s environments. Thompson suggested

that the environment can be described along two dimensions: its degree of change and its
degree of homogeneity. The degree of change is the extent to which the environment is
relatively stable or relatively dynamic. The degree of homogeneity is the extent to which
the environment is relatively simple (few elements, little segmentation) or relatively
complex (many elements, much segmentation).These two dimensions interact to
determine the level of uncertainty faced by the organization. Uncertainty, in turn, is a
driving force that influences many organizational decisions.
The least environmental uncertainty is faced by organizations with stable and simple
environments. Although no environment is totally without uncertainty, some entrenched
franchised food operations (such as Subway and Taco Bell) and many container
manufactures (like Ball Corporation and Federal Paper Board) have relatively low level
of uncertainty to contend with. Subway for example, focuses on a certain segment of the
consumer market, produces a limited product line, has a stable network of suppliers, and
faces relatively consistent competition.
Organizations with dynamic but simple environments generally face a moderate degree
of uncertainty. Examples of organization functioning in such environments include
clothing manufacturer (targeting a certain kind of clothing buyer but sensitive to fashion-
induced changes) and music producers (catering to certain kinds of music buyers but alert
to changing tastes in music). Levi Strauss faces relatively few competitors (Diesel,
Wrangler, and Lee), has few suppliers and few regulators, and uses limited distribution
channels. This relatively simple task environment, however, also changes quite rapidly as
competitors adjust prices and styles, consumer tastes change, and new fabrics become
available.
Another combination of factors is one of stability and complexity. Again, a moderate
amount of uncertainty results. For, Nissan and Daimler AG face these basic conditions.
Overall, they must interact with myriad suppliers, regulators, and consumer groups and
competitors. Change, however, occurs quite slowly in the automobile industry. Despite
many stylistic changes, cars of today still have four wheels, a steering wheel, an engine, a
glass windshield, and many of the other basic features that have characterized cars for
decades.
Finally, very dynamic and complex environmental conditions yield a high degree of
uncertainty. The environment has large number of elements, and the nature of those
elements is constantly changing. Intel, Apple, IBM, Sony, and other firms in the
electronics field face these conditions because of the rapid rate of technological
innovation and change in consumer markets that characterize their industry, their
suppliers, and their competitors. Internet-based firms like eBay and Amazon.com face
similarly high levels of uncertainty.

McDonald’s Task Environment

Competitors An organization’s competitors are other organizations that compete with it

for resources. The most obvious resources that competitors vie for are customer dollars.
McDonald’s competes with other fast-food operations. In the UK, the main competition
comes from Burger King, but in the USA, competitors also include Wendy's, Taco Bell
and Subway.

Customers A second dimension of the task environment is customers, or whoever pays

money to acquire an organization’s products or services. Moat of McDonald’s customers
are individuals who walk into a restaurant to buy food. But customers need not to be
individuals. Schools, hospitals, government agencies, wholesalers, retailers, and
manufacturers are just a few of the many kinds of organizations that may be major
customers of the organizations. Some institutional customers, such as schools, prisons,
and hospitals, also buy food in bulk from restaurants like McDonald’s.

Dealing with customers has become increasingly complex in recent years. New
products and services, new method of marketing, and more discriminating customers
have all added uncertainty to how business relate to their customers, as has lower brand
loyalty. A few years ago, McDonald’s introduced a new sandwich called the Arch
Deluxe, intended to appeal to adult customers. Unfortunately, the product failed because
most adult customers preferred existing menu choices like the Quarter Pounder.
 Companies face especially critical differences among customers as they expand
internationally. McDonald’s sells beer in its German restaurants, for example, and wine
in its French restaurants. Customers in those countries see those particular beverages as
normal parts of a meal, much as customers in the United States routinely drink water, tea,
or soft drinks with their meals. The firm has even opened restaurants with no beef on the
menu! Those restaurants are in India, where beef is not a popular menu option. Instead,
the local McDonald’s restaurants in that country use lamb in their sandwich.

Suppliers Suppliers are organizations that provide resources for other organizations.
McDonald’s buys soft-drink products from Coca-Cola; individually packaged servings of
ketchup from Heinz; ingredients from wholesale food processors; and napkins, sacks, and
wrappers from packaging manufacturers. Common wisdom in the United States used to
be that a business should try to avoid depending exclusively on particular suppliers
because a firm that buys all of a certain resource from one supplier may be vulnerable if
the supplier raises its prices, goes out of business, or is shut down by a labor strike. This
practice can also help maintain a competitive relationship among suppliers, keeping costs
down. But firms eager to emulate successful Japanese firms have started changing their
approach. Japanese firms have a history of building major ties with one or two major
suppliers. This enables them to work together better for their mutual benefit and makes
the supplier more responsive to the customer’s needs.

Strategic Partners Another dimension of the task environment is strategic partners

(also called strategic allies) –two or more companies that work together in joint ventures
or other partnerships. For instance, Disney and Steven Spielberg’s DreamWorks film
studio recently formed a partnership that calls for Disney to provide investment capital to
DreamWorks and to distribute four to six DreamWorks films each year. In return, Disney
gets 10 percent of the box office revenue from each film, as well as additional revenue
from the distribution of DVDs. McDonald’s has several strategic partners. For example,
it has one arrangement with Walmart whereby small McDonald’s restaurants are built in
many Walmart stores. The firm also has a long-term deal with Disney: McDonald’s
promotes Disney movies in its stores, and Disney has built McDonald’s restaurants and
kiosks at some of its resorts and theme parks. And many of McDonald’s foreign stores
are built in collaboration with local investors. Strategic partnerships help companies get
from other companies the expertise they lack. They also help spread risk and open new
market opportunities.

Regulators Regulators are elements of the task environment that have the potential to
control, legislate, or otherwise influence an organization’s policies and practices. There
are two important kinds of regulators. The first, regulatory agencies are created by the
organizations from one another. The second, the interest groups, are organized by their
members to attempt to influence organizations.

Powerful federal regulatory agencies include the Environmental Protection Agency

(EPA), the Securities and Exchange Commission (SEC), the Food and Drug
Administration (FDA), and the Equal Employment Opportunity Commission (EEOC).
Many of these agencies play important roles in protecting the rights of individuals. The
FDA, for example, helps ensure that the food we eat is free from contaminants and thus is
an important regulator for McDonald’s. At the same time, companies must dedicate
thousands of labor hours and hundreds of thousands of dollars a year to complying with
government regulations. To complicate the lives of managers even more, different
regulatory agencies sometimes provide inconsistent-even contradictory-mandates.

McDonald’s General Environment

The general environment of an organization consists of economic, technological,

sociocultural, political-legal, and international dimensions.

The Economic Dimension The economic dimension of an organization’s general

environment is the overall health and vitality of the economic system in which the
organization operates. Particularly, important economic factors for business are general
economic growth, inflation, interest rates, and unemployment. After several strong years
of growth, the U.S. economy fell into recession during 2008. During this period, energy
and related prices jumped, growth slowed dramatically, and unemployment mushroomed
as one struggling business after another made workforce cuts.
 As noted in Figure 3.2, since late 2008 McDonald’s U.S. operation has been
functioning in an economy characterized by weak growth, high unemployment, and low
inflation. These conditions produce paradoxical problems. High unemployment means
that fewer people can eat out, but those who do are looking for inexpensive options-like
McDonald’s. McDonald’s can also pay lower wages to attract new employees, since
many people are looking for work and there are fewer opportunities available than was
the case a few years ago. Similarly, low inflation means that the prices McDonald’s must
pay for its supplies remain relatively constant, but is also is somewhat constrained from
increasing the prices it charges consumers for a hamburger or milkshake.

The technological Dimension The technological dimension of the general environment

refers to the methods available for converting resources into products or services.
Although technology is applied within the organization, the forms and availability of that
technology come from the general environment. Computer-assisted manufacturing and
design technique, for example, allow Boeing to stimulate the more than three miles of
hydraulic tubing that run through a 777 aircraft. The results include decrease warehouse
needs, higher-quality tube fittings, fewer employees, and major times’ savings. Although
some people associate technology with manufacturing firms, it is also relevant in the
service sector. For example, just as an automobile follows a predetermined path along an
assembly line as it is built, a hamburger at McDonald’s follows a predefined path as the
meat is cooked, the burger assembled, and the finished product wrapped and bagged for a
customer. The rapid infusion of the Internet into all areas of business is also a reflection
of the technological dimension. Another recent advancement is the rapid growth of
integrated business software systems. The Ethics in Action box focuses on the success of
computer maker Hewlett-Packard in converting its own (and other companies) discarded
products into resources for an entirely new line of products.

The Sociocultural Dimension The socicultural dimension of the general environment

includes the customs, mores, values, and demographic characteristics of the society in
which the organization functions. Sociocultural processes are important because they
determine the products, services, and standards of conduct that the society is likely to
value. In some countries, for example, consumers are willing to pay premium prices for
designer clothes, whereas the same clothes have virtually no market in their countries.
Consumer tastes also change over time. Preferences for color, style, taste, and so forth
change from season to season, for example. Drinking hard liquor and smoking cigarettes
are lee common in the United States today that they were just a few years ago. And
sociocultural factors influence how workers in a society feel about their jobs and
organizations.
Appropriate standards of business conduct also vary across cultures. In the United
States, accepting bribes and bestowing political favors in return are considered unethical
(as well as illegal). In other countries, however, payments to local politicians may be
expected in return for a favorable response to such common business transactions as
applications for zoning and operating permits. The shape of the market, the ethics of
political influence, and attitudes in the workforce are only few of the many ways in which
culture can affect an organization. Figure 3.2 shows that McDonald’s is clearly affected
by sociocultural factors. For example, in response to concerns about nutrition and health,
McDonald’s has added salads to its menus and experimented with other low-fats food.
And the firm was among the first fast-food chains to provide customers with information
about the ingredients used in its products.

The Political-Legal Dimension The political-legal dimension of the general

environment refers to government regulation of business and the relationship between
business and government. This dimension is important for three basic reasons. First, the
legal system partially defines what an organization can and cannot do. Although the
United States is basically a free market economy, there is still major regulation of
business activity. McDonald’s, for example, is subject to variety of political and legal
forces, including food preparation standards and local zoning requirements.
Second, pro- or antibusiness sentiment in government influences business activity. For
example, during periods of probusiness sentiment, firms find it easier to compete and
have fewer concerns about antitrust issues. On the other hand, during a period of
antibusiness sentiment, firms may find their competitive strategies more restricted and
have fewer opportunities for merges and acquisitions because of antitrust concerns.
During the prolonged period of economic growth that ended in 2008, the U.S.
government adopted a very “hands-off” approach to business, letting market forces
determine business success and failures. However, as the economy ground to a halt in
2008 and first one and then another industry began to stumble, critics began to point to
lack of regulation and oversight as contributing factors. As result, lawmakers began to
take a much more pronounced interest in adopting new and stricter regulations for
business.
Finally, political stability has ramifications for planning. No business wants to set us
shop in another country unless trade relationships with that country are relatively well
defined and stable. Hence, U.S. firms are more likely to do business with England,
Mexico, and Canada than with Haiti and Afghanistan. Similar issues are relevant to
assessments of local and state governments. A new mayor or governor can affect many
organizations, especially small firms that do business in only one location and are
susceptible to deed and zoning restrictions, property and school taxes, and the like.
The International Dimension Yet another component of the general environment for
many organizations is the international dimension, or the extent to which an
organization is involved in or affected by business in other countries. For example, as
noted in Figure 3.2, McDonald’s operates restaurants in 118 countries and derives about
two-thirds of its total sales from outside the United States. Even firms that do business in
only one country may face foreign competition at home, and they may use materials or
production equipment imported from abroad. The international dimension also has
implications for not-for-profit organizations. For example, the Peace Corps sends
representatives to underdeveloped countries. As a resulted of advances transportation and
information technology in the past century, almost no part of the world is cut off from the
rest. As a result, virtually every organization is affected by the international dimension of
its general environment.