COMP6044   Just another ECS Blogs weblog

I pick up from where I left off last week – in particular, consideration of the field of management studies from the perspective of an organization (to be managed) as an ‘open system’. This conceptualization implies that various sub-systems should be considered from a management engagement viewpoint: the internal (towards maintenance of the system) and external (towards the competitive position of the system). One of the challenges under management theory is how to balance these competing values upon management time: in particular, how to trade-off the encouragement of flexibility and change, while still retaining control to ensure employees act appropriately.

In returning to the main research focus – how the Web/Internet is changing the nature of competition between businesses – an open system emphasizes how objectives, plans and solutions must adjust rapidly to changes in the external environment. These changes can come from a variety of sources. Boddy gives examples of the increasingly global nature of the economic system at large, deregulation in certain industries, the closer integration between many different areas of business (such as telecoms and entertainment), increasing consumer expectations and computer-based information systems. Many modern-day organizations operate in non-linear systems in which small changes are amplified through many interactions with other variables so that the eventual effect is unpredictable. In other words, management decisions should be grounded in the external context in which the organization is situated and the long-term consequences of a management decision can be majorly disrupted by circumstances in the outside world in an unforeseen manner.

Boddy goes on to introduce the idea of the competitive environment (defined as “the industry-specific environment comprising the organization’s customers, suppliers and competitors” or “micro-environment”). He distinguishes it from the “general environment (defined as the “political, economical, social, technological, (natural) environment and legal factors that affect all organizations” or “macro-environment”), as illustrated below:

Together, they make up the “external environment” or “external context”. Forces in the external environment become part of an organization’s agenda when internal or external stakeholders pay attention to them and act to place them on the management agenda. In turn, these demand a response (see next week for more on management theory related to the type of response).

In terms of analyzing the competitive environment, Porter put forward a theory of five forces which most directly affect management and the ability to earn an acceptable return. These are also found in economic theory and competition law: the ability of new competitors to enter the industry, the threat of substitutable products, the bargaining power of buyers, the bargaining power of suppliers and the rivalry amongst existing competitors. This analysis can also be applied at an industry level to determine overall profitability, being factors which influence prices, costs and investment requirements, as illustrated below:

To give one example, technological change can affect the proximity of competition between products which in turn can constrain a firm’s ability to raise price (Boddy gives the example of YouTube threatening established media companies and online recruitment threatening the revenues that newspapers receive from job advertisements).

Where management differs from economics is the nature of the response. Through analyzing the forces in the competitive environment, managers aim to seize opportunities, counter threats and generally improve their position relative to their firm’s competitors in the future. Like economics, however, management also looks at trends, such as the state of the economy which is a major influence on consumer spending and capital investment plans. Sociological trends can also be relevant. For example, many consumer businesses are changing direction from a strategy aimed at mass market towards developing much small brands directed at small, distinctive groups of consumers. This reflects the growing diversity of the population, with many personal and individual preferences more apparent (such as through the Web). Again, in turn, this shift has severe implications for media that relied on advertising from mass market advertising. There are also many examples of digital technologies affecting established markets (such as DVDs, MP3s, broadband services offering delivering online content, VoIP and digital photography).

In summary, critical reflection on business environment conditions is essential to the type of management strategy adopted. Next week I turn to theories of generic management activities of planning and decision-making, including strategy and marketing (to lead into discussions of how e-marketing has revolutionized the business world).