Chapter IV– OPEN SYSTEM DESIGN ELEMENTS

The External Environment

The Environmental Domain

Organizational environment =All elements that exist outside the boundary of the organization

and have the potential to affect all or part of the organization.

Domain =The chosen environment field of action. It defines the organization’s niche and those

external sectors with which the organization will interact to accomplish its goals.

Sector =Subdivision of the external environment that contain similar elements. For each

organization, there are ten sectors.

Organize elements in the external environment into ten sectors for analysis:

a) Industry: Competitors, industry size and competitiveness, related industries;

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b) Raw materials: Suppliers, manufacturers, real estate, services;

c) Human resources: Labor market, employment agencies, universities, training schools,

employees in other companies, unionization;

d) Financial resources: Stock markets, banks, savings and loans, private investors;

e) Market: Customers, clients, potential users of products and services;

f) Technology: Techniques of production, science, computers, information technology, e-

commerce;

g) Economic conditions: Recession, unemployment rate, inflation rate, rate of investment,

economics, growth;

h) Government: City, state, federal laws and regulations, taxes, services, court system, political

processes;

i) Socio-Cultural: Age, values, beliefs, education, religion, work ethics, consumer and green

movements;

j) International: Competition from and acquisition by foreign firms, entry into overseas markets,

foreign customs, regulations, exchange rate.

Focus on sectors that may experience significant change at any time.

Task Environment: Includes sectors with which the organization interacts directly and that have

a direct impact on the organization’s ability to achieve it’s goals. Task environment typically

includes the industry, raw materials and market sectors, and perhaps the human resources and

international sectors.

General Environment: Includes those sectors that might not have a direct impact on daily

operations of a firm but will indirectly influence them. General environment often includes the

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government, socio-cultural, economic conditions, technology and financial resources sectors.

These sectors affect all organizations eventually.

International Context: Growing importance from the international sector. The environment for

all organizations is becoming extremely complex and competitive.

Environmental Uncertainty: Several dimensions like stable/unstable,

homogeneous/heterogeneous, Simple/complex, the amount of resources available etc. These

dimensions come together in two essential ways the environment influences organizations: need

for information about environment and need for resources from the environment.

Uncertainty: When decision makers don’t have sufficient information about the environmental

factors and have a difficult time predicting environmental factors.

Simple-Complex Dimension: Concerns environmental complexity, which refers to

heterogeneity, or the number and dissimilarity of external elements relevant to an organization’s

operations.

Complex environment: organization is influenced by numerous diverse external elements.

Simple environment: organization interacts with/ is influenced by only a few similar external

components.

Stable-Unstable Dimension: Refers to whether elements in the environment are dynamic.

Environmental domains seem to be increasingly unstable for most organizations. Although

environments are more unstable today, an example of a traditionally stable environment is a

public utility such as a provider of a water, gas or electricity.

Stable environment: If it remains the same over a period of months or a year.

Unstable environment: Environmental elements shift abruptly. May occur when competitors

react with aggressive moves.

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Framework: For assessing environmental uncertainty which combines the simple-complex and

stable-unstable dimensions. In the simple, 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 creates uncertainty for managers. Even though the

organization has few external elements, those elements are hard to predict, and they react

unexpectedly to organizational 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.

Adapting to Environmental Uncertainty

Aspects of organizations that differ as the uncertainty increases:

1) Positions and Departments: As the complexity and uncertainty increases, so do the number of

positions and departments in the organization. This increases internal complexity.

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2) Buffering and Boundary Spanning: when environmental uncertainty increases, traditionally,

buffer departments were established. More recently, organizations drop buffers because they

believe being well connected to customers and suppliers is more important than internal

efficiency. Opening up the organization makes it more fluid and adaptable. Boundary-spanning

roles are introduced.

3) Differentiation and Integration: When the external environment is complex and rapidly

changing, organizational departments become highly specialized to handle the uncertainty in

their external sector. One outcome of high differentiation is that coordination among departments

becomes difficult. With uncertainty, frequent changes require more information processing to

achieve horizontal coordination so integrators become a necessary addition to the organization

structure.

4) Organic vs. Mechanistic Management Processes: when the external environment is stable,

the internal organization is characterized by rules, procedures and a clear hierarchy of authority =

mechanistic organization. In rapidly changing environments, the internal organization is much

looser, free-flowing and adaptive. The hierarchy of authority is not clear and rules and

regulations are often not written down = organic organization.

(2) Buffering Roles: Purpose is to absorb uncertainty from the environment. They support the

technical core and exchange materials, resources and money between the environment and the

organization.

Boundary Spanning Roles: Link and coordinate an organization with key elements in the

external environment. Purpose of boundary spanning is the exchange of information to:

a. Detect and bring into the organization information about changes in the environment;

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b. Send information into the environment that presents the organization in a favorable light.

Boundary spanners prevent the organization from stagnating by keeping top managers informed

about environmental changes.

Business Intelligence: It is an approach to boundary spanning. It refers to the high-tech analysis

of large amounts of internal and external data to spot patterns and relationships that might be

significant. BI is related to another important area of boundary spanning, known as competitive

intelligence. This gives top executives a systematic way to collect and analyze public

information about rivals and use it to make better decisions. Use of internet, digging trash cans

etc.

(3) Differentiation =The differences in cognitive and emotional orientations among managers in

different functional departments, and the difference in formal structure among these departments.

Integration = Quality of collaboration among departments.

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(4) Mechanistic Organization Systems: Formalized, centralized organizations. Most decisions

are made at the top. Common system for a stable environment.

Organic Organization Systems: Organizations where the decision-making authority is

decentralized. Common system for an unstable environment with a lot of uncertainty. The

organization is more fluid and able to adapt continually. Organic are: learning organization,

horizontal and virtual network structure.

Planning, Forecasting and Responsiveness:The point of increasing internal integration and

shifting to more organic processes is to enhance the organization’s ability to quickly respond to

sudden changes.

Planning and forecasting become more important. When the environment is stable, organizations

can concentrate on current problems and day-to-day efficiency. Long-range planning and

forecasting are not needed because environmental demands will stay the [Link] that

have unstable environments often establish a separate planning department. Planningcan not

substitute for other actions!! (boundary spanning, integration etc)

Framework for Organizational Responses to Uncertainty

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Resource Dependence: Means that organizations depend on the environment but strive to

acquire control over resources to minimize their dependence. Third (what are one and two?)

characteristic of the organization-environment relationship. Companies want to reduce

vulnerability with respect to resources by developing links with other organizations, but they also

like to maximize their own autonomy and independence. Dependence on shared resources gives

power to other organizations.

Controlling Environmental Resources

Organizations try to maintain a balance between linkages with other organizations and their own

dependence. They try to maintain this balance through attempts to modify, manipulate or control

other organizations. There are two strategies to manage resources:

a. Establish favorable linkages with key elements in the environment;

b. Shape the environment domain.

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Establish Interorganizational Linkages

Ownership: When a company buys a part of or a controlling interest in another company, this

gives the company access to technology, products or other resources. Acquisition: involves the

purchase of one organization by another so that the buyer assumes control. Merger: is the

unification of two or more organizations into a single unit.

Formal Strategic Alliances: When there is a high level of complimentarily between the

business lines, geographical positions, or skills of two companies, the firms often go the route of

a strategic alliance rather than ownerships through merger or acquisition. Contracts: license

agreements (1) that involve the purchase of the right to use an asset for a specific time or

supplier arrangements (2) that contract for the sale of one firm’s output to another. Joint

ventures: creation of a new organization that is formally independent of the parents, although the

parents will have some control. Sharing of risks and costs with large projects or innovations.

Cooptation, Interlocking Directorates: Cooptation: when leaders from important sectors in the

environment are made part of an organization (board of directors). Interlocking directorate:

formal linkage that occurs when a member of the board of directors of one company sits on the

board of directors of another company (can influence policies and decisions). Direct interlock =

this person is the direct link between two companies. Indirect interlock = When director of

company A and B are both in the board of directors from company C.

Executive Recruitment: Transferring or exchanging executives.

Advertising and Public Relations: Traditional way of establishing favorable relationships is

through advertising. Organizations spend large amounts of money to influence the tastes and

opinions of consumers. Advertising is especially important in highly competitive industries and

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in industries that experience variable demand. Public relations is similar to advertising, except

that stories often are free and aimed at public opinion. Public relations people cast an

organization in a favorable light in speeches, on websites, in press reports, and on television.

Public relations attempts to shape the company’s image in the minds of customers, suppliers, and

government officials.

Controlling the Environmental Domain

Change of Domain: An organization may try to find a domain where there is little competition,

no government regulation, abundant suppliers, affluent customers, and barriers to keep

competitors out. Acquisition: deals with company’s in other domains.

Political Activity, Regulation: Techniques to influence government legislation and regulation,

like lobbyists and working with other organizations, also lobbying by CEO.

Trade Associations: Accomplished jointly with other organizations that have similar interests.

Illegitimate Activities: Certain conditions (low profits, pressure from senior managers, scarce

environmental resources etc) may lead managers to adopt illegitimate behavior.

Organization-Environment Integrative Framework

Two major themes about organization–environment relationships discussed in this chapter. One

theme is that the amount of complexity and change in an organization’s domain influences the

need for information and hence the uncertainty felt within an organization. Greater information

uncertainty is resolved through greater structural flexibility and the assignment of additional

departments and boundary roles. When uncertainty is low, management structures can be more

mechanistic, and the number of departments and boundary roles can be fewer. The second theme

pertains to the scarcity of material and financial resources. The more dependent an organization

is on other organizations for those resources, the more important it is to either establish favorable

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Linkages with those organizations or control entry into the domain. If dependence on external

resources is low, the organization can maintain autonomy and does not need to establish linkages

or control the external domain.

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