472 • Chapter 14 • Environment, Power, and Culture

emergent business culture are unclear, and managers are attempting to identify which of their former assumptions about doing business remain relevant and which have been replaced by new assumptions and new rules.4 Similar events followed the fall of communism in Eastern Europe and the former Soviet Union after 1989. This also entailed changes from Cold War habits in entire patterns of doing business, managing government relations, and developing new market opportunities. The effects of these changes are still being sorted out in the region today.5

The norms of business practice vary widely across industries. Formal contracting is common in many industries such as aerospace and biotechnology. But there are many examples of established business practices that do not involve contracts. Business practice norms can develop around such areas as pricing, customer service, product design, research or advertising expenditures, dispute resolution, merger and acquisition activity, and restructuring. These norms reflect the habits or “ways of doing business” that develop in an industry and are taken for granted until times of industry change. Although these norms seldom have any formal status, they often are important to industry participants and, once established, change slowly. Here are just a few examples of noncontractual business norms. In the diamond trade, large transactions often occur on the basis of a handshake. In higher education, universities generally do not recruit each other’s faculty after May 1, so as to permit each school to schedule the next year’s classes. Dealers for a particular automobile manufacturer will trade cars when a customer in one town wants a particular car that the dealer in another town has in the showroom.

These noncontractual norms result from the social context in which businesses operate. Social context includes both the context in which firms act and the context in which managers make decisions. This permits a distinction between external and internal contexts. External context concerns not only the business environment in which the firm operates, which we have discussed in detail throughout this book, but also the legal, regulatory, political, and cultural environment in which the firm acts. Internal context concerns the political and cultural environment within a firm that affects how managers and employees behave. Of course, the behavior of managers and employees is also formally determined by its authority system. This was already discussed in Chapter 13 in terms of organizational structure. Below, we consider internal context first and complete the chapter by considering external context.

INTERNAL CONTEXT

The internal context of the firm describes the formal and informal mechanisms that guide the actions of managers and workers as they act as agents for the firm. Individuals link their activities and rewards to those of the groups to which they belong, and ultimately to the firm. Individual performance thus ultimately determines firm performance, although this requires coordination with other individuals and groups along the way. Environmental uncertainty, along with complex goal and reward structures, makes it likely that workers will have conflicting views about what goals to pursue and how and when to pursue them. Regardless of a firm’s formal incentive and authority structure, individuals are unlikely to put their own personal goals and career interests in abeyance while working for a firm. As we discussed in Chapter 12, an individual’s selfinterest can work to the detriment of the firm. When individuals rise to top management positions, it is increasingly likely that their personal goals become aligned with