THE EXTERNAL ENVIRONMENT

organization theory and design  THE EXTERNAL ENVIRONMENT

THE ENVIRONMENTAL DOMAIN

In a broad sense the environment is infinite and everything outside the organization. However, the analysis presented here considers only the aspects of the environment to which the organization is sensitive and must respond to survive. Thus, organizational environment is defined as all elements that exist outside the boundary of the organizational environment is defined as all elements that exist outside the boundary of the organization and have the potential to affect or part of the organization.

The environment of an organization can be understood by analyzing its domain within external sectors. An organization’s domain is the chosen environmental field of action. It is the territory an organization stakes out for itself with respect to products, services, and markets served. Domain defines the organization’s niche and defines those external sectors with which the organization will interact to accomplish its goals. Barnes & Nobel ignored an important part of its domain when the bookselling environment changed. The company was slow to take advantage of new technology for e-commerce, allowing the competition to gain a huge advantage.

The environment comprises several sectors or subdivisions of the external environment that contain similar elements. Ten sectors can be analyzed for each organization: industry, raw materials, human resources, financial resources, market, technology, economic conditions, government, sociocultural, and international.

The sectors and a hypothetical organizational domain are illustrated in below for most companies; the sectors can be further subdivided into the task environment and general environment.

ENVIRONMENTAL UNCERTAINTY

How does the environment influence an organization? The patterns and events occurring across environmental sectors can be described along several dimensions, such as whether the environment is stable or unstable, homogeneous or heterogeneous, concentrated or dispersed, simple or complex; the extent of turbulence, and the amount of resources available to support the organization. These dimensions boil down to two essential ways the environment influences organizations; (1) the need for information about the environment and (2) the need for resources from the environment. The environment conditions of complexity and change create a greater to gather information and to respond based on that information. The organization also is concerned with scare material and financial resources and with the needs to ensure availability of resources. Each sector can be analyzed relative to these three analytical categories. The remainder of this section will discuss the information perspective, which is concerned with the uncertainty that environmental complexity and change create for the organization.

Organizations must cope with and manage uncertainty to be effective.

Uncertainty means that decision makers do not have sufficient information about environmental factors, and they have a difficult time predicting external changes uncertainty increase the risk of failure for organizational response and makes it difficult to compute costs and probabilities associated with decision alternatives. Characteristics, of the environment domain that influence uncertainty are the extent to which the external domain is simple or complex and the extent to which events are stable or unstable.

SIMPLE – COMPLEX DIMENSION

The simple – complex dimension concerns environmental complexity, which refers to heterogeneity. or the number and dissimilarity of external elements relevant to an organization’s operation. In a complex environment, many diverse external elements interact with and influence the organization. In a simple environment, as few as three or four similar external elements influence the organization.

Telecommunications firms, such as AT&T and British Telecom have a complex environment, as do universities. Universities span a large number of technologies and are a focal point for cultural and value changes. Government regulatory and granting agencies interact with a university, and so do a variety of professional and scientific associations, alumni, parents, foundations, legislators, community resident, international agencies, donors, corporations, and athletic teams. A large number of external elements thus make up the organization’s domain, crating a complex environment. On the other hand, a family – owned hardware store in a suburban community is in a simple environment. The only external elements of any real importance are few competitors, suppliers and customers. Government regulation is minimal, and cultural change has little impact. Human resources are not a problem because the store is run by family members or part – time help.

STABLE – UNSTABLE DIMENSION

The stable – unstable dimension refers to whether elements in the environment are dynamic. An environmental domain is stable if it remains the same over a period of months or years. Under unstable conditions, environmental elements shift abruptly. Instability may occur when competitors react with aggressive moves and countermoves regarding advertising and new products. For example, aggressive advertising and introduction of new products can create instability for companies, such as Coke’s giving away 2 million Coca – Cola cards to build its teen market in New York City and the introduction of Surge to compete with Pepsi’s Mountain Dew. Sometimes specific, unpredictable events – such as reports of syringes in cans of Pepsi or glass shards in Gerber’s baby foods, the poisoning of Tylenol, or the Church of Scientology’s attack on the antidepressant drug Prozac-create unstable conditions. Today’s “hate sites” on the World Wide Web, such as ihatemcdonalds.com and Walmartsucks.com are an important source of instability for scores of companies, from Allstate Insurance to Toys “R” Us. Microsoft critics can visit more than twenty hate sites.

Although environments are becoming more unstable for most organization today, an example of a traditionally stable environment is a public utility. In the rural Midwest, demand and supply factors for a public utility are stable. A gradual increase in demand may occur, which is easily predicted over time. Toy companies, by contrast, have an unstable environment. Hot new toys are difficult to predict, a problem compounded by the fact that toys are subject to fad buying Coleco Industries, makers of the once-famous Cabbage Patch Kids, and Worlds of Wonder, creators of Teddy Ruxpin, went bankrupt because of the unstable nature of the toy environment, their once – winning creations replaced by Bandai’s Mighty Morphin Power Rangers or Playmate Toys’ Teenage Mutant Ninja Turtles. Those toys, in turn, were replaced by fads such as Furby, Beanie Babies, Star Wars figures, and Pokemon.

FRAME WORK

The simple – complex and stable – unstable dimensions are combined into a framework for assessing environmental uncertainty. In the single, stable environment, uncertainty is low. There are only a few external elements to contend with, and they tend to remain stable. The complex, stable environment represents somewhat greater uncertainty. A large number of elements have to be scanned, analyzed, and acted upon for the organization to perform well. External elements do not change rapidly or unexpectedly in this environment.

Even greater uncertainty is felt in the simple, unstable environment. Rapid change crates uncertainty for mangers. Even though the organization has few external elements those elements are hard to predict, and they react unexpectedly to organization initiatives. The greatest uncertainty for an organization occurs in the complex, unstable environment. A large number of elements impinge upon the organization, and they shift frequently or react strongly to organizational initiatives. When several sectors change simultaneously, the environment becomes turbulent.

A beer distribution functions in a simple, stable environment, demand for beer changes only gradually. The distributor has an established delivery route, and supplies of bear arrive on schedule. State universities, appliance manufacturers, and insurance companies are in somewhat stable, complex environments. A large number of external elements are present, but although they change, changes are gradual and predictable.

Toy manufacturers are in simple, unstable environments. Organizations that design make and sell toys, as well as those that are involved in the clothing or music industry. Face shifting supply and demand. Most e-commerce companies focus on a specific competitive niche and hence, operate in simple but unstable environments. Al though there may be few elements to contend with – e.g. technology, competitors – they are difficult to predict and change abruptly and unexpectedly.

The computer industry and the airline industry face complex, unstable environments. Many external sectors are changing simultaneously. In the case of airlines, in just a few years they were confronted with deregulation, the growth of regional airlines, surges in fuel costs, price cuts from competitors such as Southwest. Airlines, shifting customer demand, an air – traffic controller shortage, overcrowded airports, and a reduction of scheduled flights. A recent series of major air traffic disasters has further contributed to the complex, unstable environment for the industry.

In today’s world of increased global competition rapid technological breakthroughs, and shifting markets, companies in all industries are facing a greater level of complexity and change.

ADAPTING TO ENVIRONMENT UNCERTAINTY

Once you see how environments differ with respect to change and complexity, the next question is, “How do organizations adapt to each level of environmental uncertainty? Environmental uncertainty represents an important contingency for organization structure and internal behaviors. Recall from earlier discussions that organizations facing uncertainty generally have a more horizontal structure that encourages cross- functional communication and collaboration to help the company adapt to changes in the environment. In this section we will discuss in more detail how the environment affects organizations. An organization in a certain environment with respect to positions and departments, organizational differentiation and integration, control processes, and future planning and forecasting. Organization need to have the right fit between internal structure and the external environment.

POSITIONS AND DEPARTMENTS

As the complexity in the external environment increases, so does the number of positions and departments within the organization, which in turn increases internal complexity. This relationship is part of being an open system. Each sector in the external environment requires an employee or department to deal with it. The human resources department deals with unemployed people who want to work for the company. The marketing department finds customers. Procurement employees obtain raw materials from hundreds of suppliers. The finance group deals with bankers. The legal department works with the courts and government agencies. Today, many companies are adding e-business departments to handle electronic commerce and information technology departments to deal with the increasing complexity of computerized information and knowledge management systems.

BUFFERING AND BOUNDARY SPANNING

The traditional approach to coping with environmental uncertainty was to establish buffer departments. The buffering role is to absorb uncertainty from the environment. The technical core performs the primary production activity of an organization. Buffer departments surround the technical core and exchange materials, resources, and money between the environment and the organization.

They help the technical core function efficiently. The purchasing departments buffer the technical core by stockpiling supplies and raw materials. The human resources department buffers the technical core by handling the uncertainty associated with finding. Hiring, and training production employees.

A newer approach some organizations are trying is to drop the buffers and expose the technical core to the uncertain environment. These organizations no longer crate buffers because they believe being well connected to customers and suppliers is more important than internal efficiency. For example, John Deere has assembly – line workers visiting local farms to determine and respond to customer concerns. Whirlpool pays hundreds of customers to test computer-simulated products and features. Opening up the organization to the environment makes it more fluid and adaptable.

Boundary – spanning roles link and coordinate an organization with key elements in the external environment. Boundary spanning is primarily concerned with the exchange of information to (1) detect and bring into the organization information about changes in the environment and (2) send information into the environment that presents the organization in a favorable light.

Organizations have to keep in touch with what is going on in the environment so that managers can respond to market changes and other developments. A survey of high – tech firms found that 97 percent of competitive failures resulted from lack of attention to market changes or the failure to act on vital information. To detect and bring important information into the organization, boundary personnel scan the environment. For example, a market research department scans and monitors trends in consumer tastes. Boundary Spanners in engineering and research and development (R&D) department Scan new technological developments, innovations, and raw materials. Boundary spanners prevent the organization from stagnating by keeping top managers informed about environmental changes. Often the greater the uncertainty in the environment, the greater the importance of boundary spanners.

One of the fastest growing areas of boundary spanning is competitive intelligence. Companies large and small are setting up competitive intelligence departments or hiring outside specialists to gather information on competitors. Competitive intelligence gives top executives a systematic way to collect and analyze public information about rivals and use it to make better decisions. Using techniques that range from internet surfing to digging through trash cans, intelligence professionals dig up information on competitors’ new products, manufacturing costs, or training methods and share it with top leaders. For example, NutraSweet’s competitive intelligence department helped the company delay a costly advertising campaign when it learned that a rival sweetener was at least five years away from FDA approval. In today’s uncertain environment, competitive intelligence is a trend that is likely to increase. In addition, companies such as UtiliTech Inc. of Stratford, Connecticut, and WavePhore Inc. of Phoenix, Arizona, regularly monitor the internet for large corporation to see what is being said about them on the web. This provides important information to top executives about how the company is perceived in the environment.

The boundary task of sending information into the environment to represent the organization is used to influence other people’s perception of the organization. In the marketing department, advertising and sales people represent the organization to customers. Purchasers may call on suppliers and describe purchasing needs. The legal department informs lobbyists and elected officials about the organization’s needs or views on political matters. Many companies set up their own Web pages to present the organization in a favorable light. To counteract hate sites that criticizes their labor practices in Third World countries. Nike and Unocal both created Web sites specifically to tell their side of the story.

All organizations have to keep in touch with the environment. Here’s how Tommy Hilfiger spans the boundary in the shifting environment of the fashion industry to stay ahead of the style curve.

DIFFERENTIATION AND INTEGRATION

Another response to environmental uncertainty is the amount of differentiation and integration among departments. Organization differentiation is “the differences in cognitive and emotional orientations among mangers in different functional departments, and the difference in formal structure among these departments. When the external environment is complex and rapidly changing, organizational departments become highly specialized to handle the uncertainty in their external sector. Success in each sector requires special expertise and behavior. Employees in a research and development department thus have unique attitudes, values, goals, and education that distinguish them from employees in manufacturing or sales departments.

A study by Paul Lawrence and Jay Lorsch examined three organizational departments — manufacturing, research, and sales – in ten corporations. This study found that each department evolved toward a different orientation and structure to deal with specialized parts of the external environment. Each department interacted with different external groups. The differences that evolved among departments within the organization are shown in below to work effectively with the scientific sub environment, R&D had a goal of quality work, a long time horizon (up to five years), an informal structure, and task – oriented employees. Sales were at the opposite extreme. It had a goal of customer satisfaction, was oriented toward the short term (two weeks or so), had a very formal structure, and was socially oriented.

One outcome of high differentiation is that coordination among departments becomes difficult. More time and resources must be devoted to achieving coordination when attitudes, goals, and orientation differ so widely. Integration is the quality of collaboration among departments. Formal integrators are often required to coordinate departments. When the environment is highly uncertain, frequent changes require more information processing to achieve horizontal coordination, so integrators become a necessary addition to the organization structure. Sometimes integrators are called liaison personnel, project managers, brand managers, or coordinators. As illustrated in below Organizations with highly uncertain environments and a highly differentiated structure assign about 22 percent of management personnel to integration activities, such as serving on committees, on task forces, or in liaison roles. In organization characterized by very simple, stable environments, almost no managers are assigned to integration roles. Below example Shows that, as environmental uncertainty increases, so does differentiation among departments; hence, the organization must assign a larger percentage of managers to coordinating roles.

Lawrence and Lorsch’s research concluded that organizations perform better when the levels of differentiation and integration match the level of uncertainty in the environment. Organizations that performed well in uncertain environments had high levels of both differentiation and integration, while those performing well in less uncertain environments had lower levels of differentiation and integration.

Differences in Goals and Orientations among Organizational Departments

Characteristic R&D Department Manufacturing Department Sales Department
Goals New developments, quality Efficient production Customer Satisfaction
Time horizon Long Short Short
Interpersonal Orientation Mostly task Task Social
Formality of structure Low High High

Environmental Uncertainty and Organizational Integrators.

Plastics Industry Foods Container
Environmental uncertainty High Moderate Low
Departmental Differentiation High Moderate Low
Percent management in integrating roles 22% 17% 0%

ORGANIC VERSUS MECHANISTIC MANAGEMENT PROCESSES

Another response to environmental uncertainty is the amount of formal structure and control imposed on employees. Tom Burns and G.M. Stalker observed twenty industrial firms in England and discovered that external environment was related to internal management structure. When the external environment was stable, the internal organization was characterized by rules, procedures, and a clear hierarchy of authority. Organizations were formalized. They were also centralized, with most decisions made at the top. Burns and Stalker called this a mechanistic organization system.

In rapidly changing environments, the internal organization was much looser, free flowing, and adaptive. Rules and regulations often were not written down or, if written down, were ignored. People had to find their own way through the system to figure out what to do. The hierarchy of authority was not clear. Decision – making authority was decentralized. Burns and Stalker used the term organic to characterize this type of management structure.

Summarizes the differences in organic and mechanistic systems: As environmental uncertainty increases, organizations tend to become more organic, which means decentralizing authority and responsibility to lower levels, encouraging employees to take care of problems by working directly with one another, encouraging teamwork, and taking an informal approach to assigning

Mechanistic and Organic Forms

Mechanistic Organic
Tasks are broken down into specialized separate parts. Employees contribute to the common tasks of the department.
Tasks are rigidly defined. Tasks are adjusted and redefined through employee teamwork.
There is a strict hierarchy of authority and control, and there are many rules. There is less hierarchy of authority and control, and there are few rules.
Knowledge and control tasks are centralized at the top of organization. Knowledge and control of tasks are located anywhere in the organization.
Communication is Vertical. Communication is horizontal.

Task and responsibility: Thus, the organization is more fluid and is able to adapt continually to changes in the external environment.

The learning organization and the horizontal structure are organic organizational forms that are used by companies to compete in rapidly changing environments. One example of a company that shifted to more organic system to cope with change and uncertainty is Rower Furniture Company, described in the Taking the Lead box.

PLANNING AND FORECASTING

The final organizational response to uncertainty is to increase planning and environmental forecasting when the environment is stable; the organization can concentrate on current operational problems and day-to-day efficiency. Long-range planning and forecasting are not needed because environmental demands in the future will be the same as they are today.

With increasing environmental uncertainty, planning and forecasting become necessary. Planning can soften the adverse impact of external shifting. Organizations that have unstable environments often establish a separate planning department. In an unpredictable environment, planners scan environmental elements and analyze potential moves and countermoves by other organizations. Planning can be extensive and may forecast various scenarios for environmental contingencies. As time passes, plane is updated through replanning. However, planning does not substitute for other actions, such as boundary spanning. Indeed, under conditions of extraordinarily high uncertainty, formal planning may not be helpful because the future is so difficult to predict. Learning organizations keep everyone in constant touch with the environment so they can spot threats and opportunities, enabling the organization to respond immediately.

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