OEC Handout # 3

External and Internal Factors of Change

External Factors of Change

Political forces: Political environment is an importnat trigger for organizational change. Managers need to understand the political system of the country where they work. During the 1990s, an all-emcompassing phase of globalozation began throughout the world. Globalization in turn facilitated free markets. Governments began to withdraw their stake from the business enterprises. A number of countries de-regulated industries and thus created new opportunities for entrepreneurs. From regulators, the governments have become facilitators. As a result of new thrust given to free market and foreign direct investment, the companies have changed their strategies and they are growing by leaps and bounds.
Certain developments in the international political scene such as the transition of the East-European nations to democracy and market economy, opening up of the economy of South-East Asia, the collapse of the erstwhile Soviet Union, the Unification of Germany, the Gulf War, the crisis in Yugoslavia etc. have had profound impact on economy and business thereby triggering organizational change in a number of companies.
V Nilakant and S Ramnarayan in their seminal work Change Management (Response Books) mention that organizational change itself is a political process because it involves influencing, persuading, and negotiating with people in order to bring about a change in their mental models. The manager tries to ensure the support of the key and influential individuals in the organization while implementing any intervention programme.

Economic forces: The uncertainty about future trends in the economy is a major cause of change. For example, fluctuating interest rates, declining productivity, uncertainties arising from inflation or deflation, low capital investments, etc. have significant impact on industrial organizations. Economic forces usually determine the direction an industrial organization takes. For instance, Infosys has changed its startegy from being a profitability-driven organization to growth-oriented one due to economic slowdown in the USA from where they got maximum number of clients. Accroding to a report published in Mint (New Delhi) on 29 July 2008, Infosys’ new approach is a consequence of what is happening in the market in which it operates. Excerpts from the news item:
By focusing on growth now, they (Infosys) will be looking to add new customers as their existing clients are cagey about increasing their budgets further. Infosys has said it will look to add new customers even as it expands its presence in businesses such as health care, pharmaceuticals, logistics, energy and utilities. Currently, much of its revenue comes from four major areas: financial services, telecommunications, manufacturing and retail. The company expects to grow revenue 6% in the three months to September as compared with the corresponding period in 2007.The emphasis on growth could mean a further dip in Infosys’ operating profit margin, measured as operating profit (or earnings before interest, taxes, depreciation and amortization) expressed as a percentage of revenue. In the quarter ended June, the company’s operating profit margin was 30.4%, down 2 percentage points from the previous quarter in the wake of higher salaries and visa costs. Over the past two years, the company’s operating profit margin has stayed in the 30-32% range. Infosys’ push for growth reflects the new business reality in the software services business.“Our existing customers are not growing and we need to find new growth engines,” Gopalakrishnan said. As part of growth strategy, the company plans to add new customers and newer service lines such as learning services and offering software as a service (where companies pay not for the entire solution but for what they use) by investing in solutions and intellectual property. The company is focusing on newer geographies such as West Asia, India, Latin America and South Africa.Infosys, which serves customers such as British Telecom Plc. and Cummins Inc., derives about 63% of its revenues from North America, 27% from Europe and about 10% from the rest of the world including India. “We want to reduce our dependence on the US by growing operations in other geographies such as Europe and rest of the world,” Gopalakrishnan said, adding that the target revenue ratio from these three geographies for the company would be 40:40:20. He did not elaborate on the time it would take the company to achieve this revenue mix.Infosys ended 2007-08 with revenue of Rs16,692 crore and a net profit of Rs4,659 crore. The company has issued a guidance of revenue up to Rs21,622 crore and earnings per share of up to Rs101.06 in 2008-09, a growth of 29.5% and 24%, respectively.Shares of Infosys closed flat at Rs1,538.9 each on the Bombay Stock Exchange even as the exchange’s benchmark Sensex index closed marginally down at 14,349 points and the technology index ended marginally lower at 3,606.81 points. In the past year, shares of Infosys have touched a high of Rs2,140 each and a low of Rs1,212 each.(Source: http://www.livemint.com/ 29 July, 2008)

Global Competition: Companies often change due to explict or implicit pressure from their competitors who might have better technologies, better systems, better products, better brand image, better HR practices, better aftersales service or better supply-chain. sometimes, the competitors might have advantages of being a first mover in the market or having a monoploy in raw material procurement (a captive mine for Steel companies, for example).When the competition is sharp-edged, the companies have no choice but to usher in necessary changes. Nokia's strategic move to reengineer its Research and Development unit is a case in point as reported in Economic Times (New Delhi) on 6 August 2008. Excerpts from the news item: In a major strategy change, handset major Nokia is re-engineering its research and development (R&D) model world-wide to tackle growing competition from unconventional sources of competition like Apple’s iphone and Google’s mobile phone platform Android. Taking a cue from companies like P&G, Nokia which till now largely carried out in-house innovation and R&D, is looking at external collaborations for product innovation. Nearly 50% of its new innovations are expected to come from external sources, a fact which is expected to help the company cut R&D costs significantly. It is expected to spare higher resources for product design and marketing, reduce time-to-market and improve return on investment (ROI), sources said. The Finnish giant’s move, which will be implemented throughout the company, is based on findings that breakthrough innovation sometimes originates from external sources. The company has also initiated a company-wide cultural change program, called `Living it working’ to directly involve and expose employees to consumers The major change in the way Nokia will now look at R&D has been caused by a slew of reasons. Not only are consumer preferences changing faster than ever, competition is emerging from hitherto unknown quarters. Computermaker Apple has swept the world with its iPhone, which now poses a huge challenge for Nokia. Google, which started as a search engine, has now launched a mobile phone platform called Android and the first handsets from this initiative are expected in the second half of this year.(Source: The Economic Times, New Delhi, 6 August 2008)There are other illustrations of completion-led organizational change as well. Facing stiff competition from the American automobile majors, the Japanese automobile companies such as Toyota, Nissan and Mitsubishi have been forced to relocate their manufacturing and assembly operations to South East Asia where the cost of labour is quite low. Simultaneously, they have established their plants all over Europe and America to get past the import restrictions. In this process, they have been able to retain their competitive edge in catering to the global automobile market.Technological forces: The world is characterized by the dramatic technological shifts. The technological advancements, particularly in information and communication technologies, have revolutionized the workplaces and have helped create new range of products and services. For example, a super communication system is on the anvil in which about 20 Japanese companies will join a Motorola-led project to set up a sattelite cellular telephone system that can be used anywhere on the earth. The partner companies include Sony, Mitsubishi, Kyocera, among others. The estimated cost of the project is US$ 132 million or 15 billion Yen.Globalization: Globalozation means integration of cpaital market, labour market and commodity market. This integration has touched almost all the aspects of business lifecycle. Hence, globalization is a unique trigger of change present everywhere.

Internal Factors of Change

System dynamics: An organization is made up of sub-systems, similar to that of the sub-personalities in human brain. The sub-personalities in the brain are in constant interaction with each other creating changes in human behaviour. Similarly, the sub-systems within an organization are in constant and dynamic interaction. The factors that influence the alignment and relationships are, for example, technology, internal politics, dominant groups, and formal and informal relationships within it.

Inadequacy of administrative process: An organization functions through a set of procedures, rules, and regulations. With changing times and the revision of organizational goals and objectives, some of the existing rules, regulations and procedures could be at variance with the demands of reality. To continue with such functionally autonomous processes can lead organizational in-effectiveness. Realization of their inadequacy induces change in the organization.

Individual/group expectations: The organization as an entity is a convergence f people, each one aiming to satisfy his/her needs and aspirations. In anthropological context, man is a social animal whose needs and desires keep changing. This creates differing expectations among individuals and groups as to the needs they intend to satisfy in the organizational context. Positive factors such as one’s ambition, need to achieve, capabilities, career growth, and negative aspects such as fear, insecurities, frustrations, etc operate as complex inter-individual and inter-group processes inducing change in n organization’s functioning and performance.

Organization design and structure: Over the years, structure of a company might become redundant due to new technologies and paradigm shift in managerial practices. At times, structure becomes a stumbling block in retaining competitive edge because of cost as well as procedural issues. Such a situation invariably leads to structural changes in the organizations. Many companies have launched structural reforms in their endeavour to remain at the top. Examples include: IBM, Tata, Ford, Hyundai etc.