External Environment

Chapter 4 The External Environment The Environmental Domain Organization Environment is composed of all elements that exist outside the boundary of the organization that have the potential to affect all or part of the organization. Its domain is the chosen field of action. The environment comprises several sectors or subdivisions of the environment that contain similar elements (ie. industry, raw materials, human resources, market, technology, financial resources, economic conditions, government, sociocultural, and international. Task Environment – includes sectors with which the organization interacts directly and that have a direct impact on the organization’s ability to achieve its goals. oIndustry, raw materials, market sector and hr and international sectors †¢General Environment – includes sectors that might not have a direct impact on the daily operation of a firm but will directly influence it. oGovernment, sociocultural, economic conditions, technol ogy, and financial resources sectors †¢International Context oDomestic sectors can be affected by international events Environmental UncertaintyResponding to the need for information. 2 Ways the environment influences organizations: (1) the need for information about the environment and (2) the need for resources from the environment. Uncertainty applies to sectors that the organization deals with on a regular basis, the task environment, and this must be analyzed along dimensions of stability and degree of uncertainty. †¢Simple Complex Dimension concerns environmental complexity, the heterogeneity, or the number and dissimilarity of external elements relevant to an organization’s operations. ^ in external factors and ^ in # of organizations in that domain = ^ complexity †¢Stable-Unstable Dimension refers to whether elements in the environment are dynamic oIf an environmental element remains the same over a period of months/ years = ^ stability FRAMEWORK FOR AS SESSING ENVIRONMENTAL UNCERTAINTY Environmental Complexity SimpleComplex Environmental ChangeStableLow Uncertainty Low number of external factors Low change Low-Moderate Uncertainty High number of external factors Low change UnstableHigh-Moderate Uncertainty Low number of external factors High changeHigh UncertaintyHigh number of external factors High change Adapting to Environmental Uncertainty Positions and Departments †¢An ^ in complexity and uncertainty in the external environment = ^ in # of positions and departments in the firm, which in turn ^ internal complexity Buffering and Boundary Spanning †¢The purpose of buffering roles is to absorb uncertainty from the environment. Buffer departments (hr, purchasing, finance, legal) surround the technical core (primary org. function) and exchange resources and information between the organization and the external environment. Some firms rid the organization of buffers and expose the technical core to the uncertain environmen t opening up the organization and making it more fluid and adaptable. †¢Boundary-spanning roles link and coordinate an organization with key elements in the external environment. Primarily concerned with exchange of information to: oDetect and bring in to the organization information about changes in the environment, and oSend information into the environment that presents the organization in a favourable light. †¢Business intelligence and competitive intelligence is necessary to analyze large amounts of data and find patterns.Differentiation and Integration †¢Organizational differentiation is â€Å"the differences in cognitive and emotional orientations among managers in different functional departments, and the difference in formal structure among these departments. † †¢When the external environment is complex and unstable, organizational departments become highly specialized to handle the uncertainty in the external sector. †¢High differentiation = difficult to coordinate between departments, so integrators become essential additions. †¢Uncertain environments = high level of differentiation and integration Organic vs. Mechanistic Management Processes Mechanistic Organizational System: ^ stability = ^ Formal structure and control imposed on employees †¢Organic Organizational System: v stability = v Formal structure and control imposed on employees oRules were loosened, free-flowing, adaptive, and decentralized MechanisticOrganic 1. Tasks are broken down in specialized, separate parts 2. Tasks are rigidly defined 3. Strict hierarchy of authority, control, and rules 4. Highly centralized at top of organization 5. Communication is vertical1. Employees contribute to common tasks of the dept. 2. Tasks are redefined through employee teamwork 3. Less hierarchy of authority, control, and rules . Decentralized 5. Communication is horizontal Planning, Forecasting, and Responsiveness †¢Planning and environmental forecastin g becomes necessary in uncertain environments contributing to the organization’s ability to quickly respond to sudden changes in the environment. Contingency Framework for Organizational Responses to Uncertainty CONTINGENCY FRAMEWORK FOR ENVIRONMENTAL UNCERTAINTY & ORGANIZATIONAL RESPONSES Environmental Complexity SimpleComplex Environmental ChangeStableLow Uncertainty Few departments No boundary spanning Non integrating roles Current operations orientation, low-speed responseMechanistic structure: formal, centralizedLow-Moderate Uncertainty Many departments Some boundary spanning Few integrating roles Some planning, moderate-speed response Mechanistic structure: formal, centralized UnstableHigh-Moderate Uncertainty Few departments Much boundary spanning Few integrating roles Planning orientation, high-speed response Organic structure: teamwork, participative, decentralizedHigh Uncertainty Many departments Extensive boundary spanning Many integrating roles Extensive planning orientation, high-speed response Organic structure: teamwork, participative, decentralizedResource Dependence Resource Dependence means that organizations depend on the environment but strive to acquire control over resources to minimize their dependence; vulnerability comes from dependence and negative effects on performance can follow with too much dependence on other organizations. †¢Interorganizational relationships present a trade-off between resources and autonomy Controlling Environmental Resources Responding to the need for resources. Two strategies are adopted to manage resources in the external environment: 1. Establish favourable linkages with key elements in the environment 2.Shape the environmental domain Establishing Interorganizational Linkages †¢Ownership – companies/ use ownership to establish linkages when they buy a part of or a controlling interest in another company giving the company access to technology, products, or other resources it doesnâ €™t currently have access to (ie. acquisitions and mergers) †¢Formal Strategic Alliances – when there is a high level of complementarity between the business lines, geographical positions, or skills of two companies, the firms often form a strategic alliance (ie. contracts, joint ventures) †¢Cooptation, Interlocking Directorates Cooptation occurs when leaders from important sectors in the environment are made part of an organization (ie. board of directors) oInterlocking Directorates is a formal linkage that occurs when a member of the board of directors of one company sits on the board of directors of another company. †¢Executive Recruitment – transferring or exchanging executives to establish favourable linkages †¢Advertising and Public Relations Changing or Controlling the Environmental Domain †¢Change of Domain – organizations can change the domains it is in, in each of the 10 domains specified (ie. t can choose which market its in, what relationships to hold, suppliers, and locations, etc. ) †¢Political Activity, Regulation – political strategy can be used to erect regulatory barriers against new competitors or to squash unfavourable legislations †¢Trade Associations – when work to influence the external environment is accomplished jointly with other organizations that have similar interests †¢Illegitimate Activities – when excessive downward pressure leads managers to adopt unfavourable techniques to reach an ends. Organization-Environment Integrative Framework