The External Environment

The External Environment Environmental Uncertainty Adapting to Environmental Uncertainty Framework for Organization Response to Uncertainty Resource Dependence Controlling Environmental Resources

The Environmental Domain

Organisation environment as all elements that exist outside the boundary of the organization and have the potential to affect all or part of the organization The environment of an organization can be understood by analyzing its domain within external sector. Domain is the chosen environmental field of action defines the organization's niche and defines those external sector with which the organization will interact to accomplish its goals. Sectors the environment comprises several sectors or subdivisions of the external environment that contain similar elements.

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An Organizations Environment

(a) Competitors, industry size and competitiveness, related issues (b) Suppliers, manufacturers, real estate, services (i) (c) Labor market, Sociocultural Sector employment agencies, universities, training schools, employees (h) in other companies, Government unionization Sector (d) Stock markets, banks, savings and (g) loans, private Economic Conditions investors Sector (e) Customers, clients, potential users of products and services (f) Techniques of production, science, computers, information technology
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(g) Recession, unemployment rate, inflation rate, rate of investment, (j) (a) economics, growth International Industry (h) City, state, federal laws Sector Sector and regulations, taxes, (b) services, court system, DOMAIN Raw Materials political processes Sector (i) Age, values, beliefs, education, religion, (c) work ethic, consumer Human Resources and green ORGANIZATION Sector movements (j) Competition from (d) Financial and acquisition by Resources foreign firms, Sector entry into overseas (e) (f) Market markets, foreign Technology Sector Sector customs, regulations, exchange rates

The Ten Sectors of an Organisations Environment

Industry Sector competitors, industry size and competitiveness, related industries Raw Materials Sector suppliers, manufacturers, real estate services Human Resources Sector labour market, employment agencies, universities, training schools, employees in other companies, unionisation Financial Resources Sector stock markets, banks, saving and loans, private investors Market Sectors customers, clients, potential users of products and services Technology Sectors techniques of production, science, computers, information technology, e-commerce
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The Ten Sectors of an Organisations Environment

Economic Conditions recession, unemployment rate, inflation rate, rate of investment, economics, growth Government city, state, federal laws and regulations, taxes, services, court system, political processes Socio-cultural Sector age, values, beliefs, education, religion, work, ethic, consumer and green movements

International Sector competition from and acquisition by foreign firms, entry into overseas markets, foreign customers, regulations, exchange rate

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Domain and Sectors

Domain = focus (boundaries)
Task sectors = competitors, suppliers, human and financial resources General sectors = economy, governments, socio-cultural attitudes, technology, international trends and forces

General Environment

General environment includes those sectors that may not have a direct impact on the daily operations of a firm but will indirectly influence it. The general environment often includes the government, sociocultural, economic conditions, technology and financial resources sectors.

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Impact of General Sector

Can add to overall uncertainty Has an impact on ability to predict and to perform risk analysis Examples: (1) September 11, 2001 attacks and (2) 2008 market meltdown

Green Environment
Often overlooked in theories of the external environment Managers are seeing the importance of greening their organizations now Need to distinguish real greening from green wash

Organizational Departments Differentiate to Meet Needs of Sub-environments

President

R&D Division Scientific Sub-environment

Scientific journals Research centers

Manufacturing Division Manufacturing Sub-environment

Labor Raw Suppliers materials Production equipment

Sales Division Market Sub-environment

Customers Advertising Competitors agencies Distribution system

Professional associations

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Environmental Uncertainty

The patterns and events occurring across environmental sectors

can be described among several dimensions. Such as: Stable vs. unstable Homogeneous vs. Heterogeneous Concentrated vs. Dispersed Simple vs. Complex Turbulence vs. Non-Turbulent Resources available vs. Non-Resource Available

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Environmental Uncertainty

Two essential ways the environment influences organisations:

(1) The need for information about the environment and (2) The need for resources from the environment (3) The organisation also is concerned with scarce material and

financial resources with the need to ensure availability of resources

Each sector can be analysed relative to these three analytical categories

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Framework for Assessing Environmental Uncertainty

See Framework for Assessing Environmental Uncertainty

Stable
Environmental Change

Simple + Stable = Low Uncertainty

Complex + Stable = Low-Moderate Uncertainty

Unstable

Simple + Unstable = High-Moderate Uncertainty Simple

Complex + Unstable = High Uncertainty

Complex

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Environmental Complexity

Design Choices

In highly uncertain environments, organizations need to be organic in design

In relatively certain environments, organizations need to be mechanistic in design

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Adapting to Environmental Uncertainty

Positions and Departments As the complexity in the external environment increases, so does the number of positions and departments within the organisation, which in turn increases internal complexity

Buffering and Boundary Spanning The traditional approach to coping with environmental uncertainty was to establish buffer departments. The buffer role is to absorb uncertainty from the environment. Example would be the purchasing department and the human resource department.
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Adapting to Environmental Uncertainty

Boundary-spanning roles link and co-ordinate an organisation with key elements in the external environment. Boundary spanning is primarily concerned with the exchange of information to: (1) Detect and bring into the organisation about changes in the environment and (2) Send information into the environment that presents the organisation in a favourable light Organisations have to keep in touch with what is going on in the environment so that managers can respond to market changes and other developments
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Differentiation and Integration

A response to environmental uncertainty is the amount of differentiation and integration among departments Differentiation is the differences in cognitive and emotional orientations among managers in different functional departments and the difference in formal structure among these departments Differentiation means that co-ordination between departments is quite difficult Integration is the quality of collaboration among departments. Formal integrators are often required to coordinate departments these include project managers, brand managers and co-ordinators
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Differences in Goals and Orientations Among Organisational Departments

Characteristics Goals R&D New development and quality Long Mostly Task Low High High Manufacturing Efficient production Short Task Sales Customer satisfaction Short Social

Time horizon Interpersonal Orientation Formality of Structure

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Organic vs. Mechanistic Management Processes

Another response to environmental uncertainty is the amount of formal structure and control imposed on employees Mechanistic when the external environment was stable, the internal organisation was characterised by rules, procedures, and a clear hierarchy of authority. Organisations were formalised, centralised and decisions made at the top Organic rapidly changing environment rules and regulations not written down, or if written down were ignored. People had to find their own way through the system to find out what to do. Decision making was decentralised

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Mechanistic and Organic Forms

Mechanistic
1. Tasks are broken down into

Organic
1. Employees contribute to the common

specialised separate tasks

2. Tasks are rigidly defined 3. There is a strict hierarchy of

tasks of the department

2. Tasks are adjusted and redefined

through employee teamwork

3. There is less hierarchy of authority and

authority and control, and there are many rules

4. Knowledge and control of tasks are

control, and there are few rules

4. Knowledge and control of tasks are

located anywhere in the organisation

5. Communication is horizontal

centralised at the top of the organisation

5. Communication is vertical

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Contingency Framework for Environmental Uncertainty and Organizational Responses

Low Uncertainty
1. Mechanistic structure; formal, centralized 2. Few departments

Low-Moderate Uncertainty
1. Mechanistic structure; formal, centralized 2. Many departments, some boundary spanning 3. Few integrating roles 4. Some planning; moderate speed response

STABLE

3. No integrating roles 4. Current operations orientation; low speed response

ENVIRONMENTAL CHANGE

High-Moderate Uncertainty
1. Organic structure, teamwork; participative, decentralized 2. Few departments, much boundary spanning 3. Few integrating roles 4. Planning orientation; fast response

High Uncertainty
1. Organic structure, teamwork; participative, decentralized 2. Many departments differentiated, extensive boundary spanning 3. Many integrating roles 4. Extensive planning, forecasting; high speed response

UNSTABLE

SIMPLE
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ENVIRONMENTAL COMPLEXITY

COMPLEX

Controlling Environmental Resources

Two strategies can be adopted to manage resources in the external environment:

(1) Establish favourable linkages with key elements in the environment

(2) Shape the environmental domain

When organisations believe that valued resources are scarce, they will use the above strategies rather than go in along Note that strategies for controlling resources is different that controlling resources

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Organising Strategies for Controlling the External Environment

Establishing Inter-organisational Linkages

1. Ownership 2. Contracts, joint ventures

Controlling the Environmental Domain

1. Change of domain 2. Political activity, regulation

3. Co-optation, interlocking directories 3. Trade association 4. Executive recruitment 5. Advertising public relations 4. Illegitimate activities

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Establishing Interorganisational Linkages

Ownership through acquisition or merger Formal strategic alliances including supplier arrangements, license agreements and joint ventures Co-optation, Interlocking Directorates Executive recruitment Advertising and public relationships
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Controlling the Environmental Domain

Change of domain changing the sectors

Trade associations Illegitimate activities Political activity, regulation

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