CHAPTER 2 Understanding the External and Organizational Environments
Chapter 2
UNDERSTANDING THE EXTERNAL AND ORGANIZATIONAL
ENVIRONMENTS
Opening Case: Managing Human Resources at Haier
The Haier Group of China entered the U.S. market in the 1990s, selling small
refrigerators for dorm rooms in universities. In 2005, Haier acquired U.S. based
Maytag and later became the first Chinese company to build a factory in the
United States. Haier has been led by CEO Zhang Ruimin for more than 30 years.
Zhang and his team have successfully led the company across many countries
and many cultures, but the path was not without challenges. Zhang is the first to
admit that he and his team have learned many things about managing
employees in different countries and cultures. One of the biggest lessons is to
“act local.” When Haier first opened its factory in South Carolina, for example, its
HR policies and practices reflected Chinese culture and labor laws. It took some
experience and the advice of the local HR director, Gerald Reeves, to
successfully localize Haier’s HR policies and practices. Perhaps the most striking
example was to move away from giving feedback that is publicly embarrassing to
employees to giving such feedback in private. Another change was providing
health insurance for U.S. employees. In China, health insurance is provided by
the government. Today, Haier’s HR policies and practices are consistent with
those of the best companies in the world.
CHAPTER OUTLINE
I. THE STRATEGIC IMPORTANCE OF UNDERSTANDING THE EXTERNAL
AND ORGANIZATIONAL ENVIRONMENTS
A. Elements of the Environment
Organizations exist within an external environment (See Exhibit 2.1), but
also have internal environments in which employees are embedded.
Stakeholders are not included as elements of the external and
organizational environments. Instead, they are treated as distinct groups
of people whom the organization seeks to satisfy.
1. External Environment
The external environment includes local, national and multinational
conditions that confront an organization. It can be considered a set of
constraints and opportunities. Elements of the external environment
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Teaching Note: Ask your students what elements might be excluded from this
discussion of the external environment. A good example would be the weather,
which affects many industries from ski resorts to home repair
2. Organizational Environment
The organizational environment concerns conditions within the
organization itself. The organizational environment must be flexible
enough to adapt to changes in the external environment.
Three highly interdependent elements discussed in this chapter are:
➢ Technology.
B. The HR TRIAD
The success of an organization is dependent upon its ability to adapt and
change as the external environment changes. The members of the HR
triad contribute to the organization’s ability to adapt by monitoring the
environment, interpreting events, and making adjustments as needed.
See the HR Triad feature for specific examples.
II. ECONOMIC GLOBALIZATION
The size, wealth, and relative openness of the U.S. market make it a highly
attractive target for many foreign companies. U.S. firms face intense
competition from foreign firms due to the U.S.’s open market policy, e.g.,
shoes, textiles, electronics.
CHAPTER 2 Understanding the External and Organizational Environments
A. Competing on Cost versus Competing on Knowledge
In order to survive, U.S. companies must diversify into markets where cost
pressures are less severe. Menasha Corp. leveraged its knowledge to
B. Worldwide Operations
Many American companies are learning to produce and deliver goods and
services in international markets due to rapid global market expansion.
UPS, FedEx, EDS, and IBM are companies that generate significant sales
overseas.
Globalization is changing the way companies manage their human
resources which has implications for the organization’s stakeholders.
C. Economic Cycles
Business cycles have long been a reality which create challenges for HR.
People do not always buy a given product /service or the same quantity of
that product each and every year (how often do you buy refrigerators?)
D. Regional Trade Zones
Trade relations are often strongest among countries that are within close
geographic proximity to each other. Trade zones help smaller countries
through economies of scale and easier access to labor. However, many
attempts at regionalism have not been particularly successful.
1. North American Free Trade Agreement (NAFTA)
This agreement created a free trade zone between the U.S., Canada,
and Mexico by eliminating a wide range of tariffs, quotas and licensing
requirements. Since the passage of NAFTA, many U.S. companies
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have expanded their operations into Mexico. The operations these
companies have created along the U.S.-Mexico border are called
2. European Union (EU)
The European Union (EU) is described as an “institutional framework
for the construction of a united Europe” with the primary goal of
3. Association of Southeast Asian Nations (ASEAN)
The objective of ASEAN is to “accelerate the economic growth, social
progress, and cultural development in the regions through joint
III. THE POLITICAL LANDSCAPE
Political activity in a country clearly shapes activities of business
organizations. Some of the major political factors affecting organizations are
trade policies, military conflicts, and nongovernmental political or community
action groups.
Teaching Note: Note how the presidential elections can affect business. For
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A. International Labor Organization (ILO)
The ILO seeks “to promote social justice and internationally recognized
B. Social Accountability International (SAI)
C. World Trade Organization (WTO)
The WTO provides a forum for its members to conduct trade negotiations
D. Watchdogs and Activists
A multitude of private organizations exist that represent various causes
IV. Labor Markets
Firms must compete for employees, and organizations sometimes must seek
them domestically, in global markets, or both.
A. U.S. Labor Markets
1. Slow Growth
Projections indicate the U.S. population will grow to approximately 383
2. Skills Shortage
Employers are having increasing difficultly finding workers with the
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3. Immigrants
Nearly half of the net labor force increase recently has been from
4. Multigenerational Workplace
Most companies today have workforce populations
that fall into four generations: Traditionalists, Baby Boomers,
Generation X, and Millennials (also known a s Generation Y). Each
B. Global Labor Market
The characteristics of the work population is changing, and employers
may consider availability of workers as one factor when deciding where to
locate. Asians will be almost two-thirds of the global labor market by 2025.
Teaching Note: For a lively discussion, ask your students to debate the pros and
cons of outsourcing.
1. Labor Costs
Companies such as IBM choose to move operations overseas to take
advantage of lower labor costs. Exhibit 2.6 shows relative labor costs
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2. Skills Levels
3. Health Issues
The AIDS epidemic has had a significant effect on employers. Not
V. COUNTRY CULTURES
Managers who fail to understand essential cultural differences may make
poor staffing and motivation decisions, often accounting for the failure of
businesses in the international arena. The feature, “Managing Globalization:
Mercedes-Benz Sets Up in Alabama,” is an example of how cultural
differences from three different countries were melded to produce a new
automobile.
A. Dimensions of Country Cultures
The best known framework for describing cultural difference was
developed by Geert Hofstede. Additional research by the Global
B. Consequences of Country Culture
Different cultures result in different HR practices and how employees
relate to work. U.S. employers cannot just impose their HR practices on
employees in their international operations and expect them to be
effective. Cultural differences can surprise even experienced global
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VI. TECHNOLOGY
Technology generally refers to the process of making and using tools and
equipment plus the knowledge used in the process. Technology has evolved
from simple hand tools to complex modern systems of mass production and
the factory system. Lower production costs, lower selling prices and therefore
expanded markets have largely been the products of technology.
Teaching Note: Technology can also harm service organizations. Use of the
internet and faxing has hurt telephone companies and delivery firms such as
FedEx.
A. Factories and Mass Production Technologies
With the advent of the factory system of producing goods came a new set
of challenges in managing human resources. First, people had to be
B. Computer Technologies
Computers have revolutionized the way we work and are managed. Their
impact include robotics, information technologies (IT), mobile devices (and
their apps), and a virtual workforce.
Many of the workers in manufacturing today need to use robots and
computers to perform their jobs. New Balance is an example of a
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C. HR Information Systems and Electronic HRM
Technology is also revolutionizing HRM, including the way employees are
recruited and managed. When computer technologies are used to gather,
VII. COMPANY CULTURE
Culture is the unique pattern of shared assumptions, values, and norms
that shape the socialization activities, language, symbols, rites, and
ceremonies of people in the organization. The culture of an organization
Teaching Note: Yahoo has used its culture to build a unique brand, but that same
culture held it back from making forward-thinking business decisions.
A. Leadership
The leaders of an organization must provide a vision of what the company
stands for, the mission it seeks to fulfill, and the values that will guide the
Teaching Note: Other examples include Disney, 3M, Coca-Cola, UPS and IBM.
B. Vision
A vision refers to top management’s view of what kind of organization they
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C. Mission
A mission statement defines a firm’s business and sets out clearly what
D. Values
Values are the strong, enduring beliefs and tenets that a company
considers to be central to its existence and survival. Value statements are
E. Company Subcultures
An organizational subculture exists when assumptions, values and norms
are shared by some–but not all–organizational members. Subcultures
may develop based on mergers, establishing global operations, different
demographics of employees in various parts of the organization, and
different divisions and occupations.
1. Benefits
2. Challenges
Subcultures may create problems, especially for employees of an
acquired firm who may feel a loss of power or status if their culture is
VIII. BUSINESS STRATEGIES
Business strategy refers to a set of integrated and coordinated commitments
and actions intended to achieve stated business goals (i.e., improved
competitiveness and more profits). Business strategy reflects a company’s
vision and mission and serves to guide its actions.
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Teaching Note: Depending on the background of the students, you may want to
give a brief overview of strategy, including SWOT analysis, Porter’s generic
strategies and product life cycle strategies.
Business strategies influence many employment issues. A strategy map is a
Teaching Note: Ask students to identify the major competitors for your school.
A. Total Quality
Quality is one way to differentiate your products or services. To achieve
this, a firm must have all parts of its organization working together.
Practices such as TQM and Six Sigma, which empower workers, support
a quality strategy.
Mabe is an example of a company that designs its HR practices (such as
training) to support its quality strategy.
B. Low Cost
Offering acceptable quality at the lowest price is another name for cost
C. Customer Service
Customer service has become increasingly important as a company
differentiator, as the company Sabre Holdings exemplifies. See the
feature “Managing Teams: Sabre’s Virtual Teams” on page 62.
D. Innovation
Innovation is a strategy involving differentiating a firm’s products and
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IX. CURRENT ISSUES
The changing external environment creates many challenges for employers.
Two current issues are the aging workforce and globalization.
A. Mergers and Acquisitions
To compete in the global market, companies often turn to mergers and
acquisitions (M&As) to establish a market position. For example, in the
computer or bio-tech industries, a common objective is to gain access to
the skills and talents of another company’s employees. While products or
technologies may become out-of-date, the people who create them rarely
do.
1. HR Issues in M&A’s
Exhibit 2.10 shows the stages of the merger and acquisition process
2. Reasons for M&A Failures
Unfortunately, many mergers and acquisitions are not successful and
usually do not achieve their financial objectives. The most common
causes of the failure of mergers and acquisitions are:
➢ culture clashes
➢ incompatibility
➢ loss of key talent
B. Global Realities of MNCs for HRM
To survive and succeed, organizations must adapt their operations to face
the challenges and realities of globalization listed in Exhibit 2.11.
The Society for Human Resource Management and HR professionals
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QUESTIONS FOR DISCUSSION AND REFLECTIVE THINKING
1. Economic globalization has many implications for business. It also has
implications for employees. From your perspective, what are the three
most significant implications of globalization for employees of U.S.
companies?
There will be several different answers, but three high on the list should be
2. Think about the most recent technological developments. What are the
likely implications of these developments for employers during the next
10 years? For employees?
Modern technology has made it possible for workers to perform their jobs in
flexible and non-traditional ways (e.g., telecommuting) and to collaborate with
3. Some people argue that organizations can develop their own strong
company culture and that doing so will make differences in country
cultures irrelevant to effectively managing human resources. Do you
agree? Explain your opinion.
The answer to this question is that “it depends.” Although it is generally a
very risky strategy for any organization to ignore the cultures of the countries
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4. Describe how a powerful and clear statement of an organization’s
vision, mission, and values can be helpful to employees of the
organization.
The vision, mission, and values of an organization provide a philosophical
5. Imagine that you work at a local department store in a mid-level
management position. You learn that your company is being acquired
by Wal-Mart. The rationale given for the sale of your company to Wal–
Mart is to “Exploit many synergies and lower our costs. This merger is
about becoming more efficient; this is the way of the future for the retail
industry.” Assume this statement is true, and describe three significant
HR issues that you will likely face after your company is acquired.
HR issues: Cultural compatibility, communications and managing that
CASE STUDY: LEVI STRAUSS
DISCUSSION QUESTIONS:
1. Knowing that its managers are willing to trade off some economic
efficiency to operate according to their collective view of what is “ethical,”
would you buy shares of stock in this company? Why, or why not?
Many will disagree in their response to this question – even those who are strong
2. Managers at Levi Strauss believe that they run an ethical company, but
some critics view their liberal employment and benefits policies as
immoral. These critics object to the policies because they’re inconsistent
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with the critics’ religious views. Analyze the pros and cons of an
organizational culture that includes socially liberal employment policies
that are viewed by some members of society (including potential
employees and potential customers) as immoral.
It could be argued that it is impossible to please every single human being
3. Suppose you are looking for a new job. You have two offers for similar
positions: one at Nike and one at Levi Strauss. Both organizations have
indicated that they would like you to work for a year in one of their offshore
production plants somewhere in Southeast Asia. The two salary offers are
very similar, and in both companies you would be eligible for an annual
bonus. The bonus would be based largely on the productivity of the
production plant where you will be located. Which offer would you accept?
Explain why.
Different people will feel differently about this question. Some might focus on the
4. In the mid-1990s, sales began declining and the company had to move
many operations abroad, dramatically reducing its U.S. workforce. Levis
Strauss is now a global company with three major divisions around the
world (visit levistrauss.com). Do you think what has happened at Levis
Strauss is likely to happen with more U.S. companies? What are the
implications of this for you?
Many students will likely point that it is not a matter of whether it will happen
CHAPTER 2 Understanding the External and Organizational Environments
VIDEO CASE STUDY: METROPOLITAN BAKERY
Instructors: The following video case can be found on the companion DVD. The
video can be used in class as an introductory activity or a post-lecture activity, as
well as an online assignment for those students using CourseMate.
DISCUSSION QUESTIONS:
1. How does training relate to the firm’s system of financial rewards?
2. To what extent is there a rigid formal organizational environment at
Metropolitan Bakery? To what extent is that good or bad?
The firm does have a definite training program that includes so-called
3. Will and the firm seem to be appreciative of each other. What does
Will’s performance say about the environment at Metropolitan Bakery?
4. If you were to start a firm, would you use the same approach to
performance management as James and Wendy?