Organizations and Organization Theory

Chapter Two: The External Environment

Numerous factors in the external environment cause turbulence and uncertainty for
organizations. The external environment, including international competition and events, is
the source of major threats confronting todays organizations. The environment often imposes
significant constraints on the choices that managers make for an organization.
There are two major environmental forces on the organization:
The need for information
The need for resources
Organizations respond to these forces through structural design, planning systems, and
attempts to change and control elements in the environment.

The Environmental Domain

In a broad sense the environment is infinite and includes everything outside the organization.
Organizational environment is defined as all elements that exist outside the boundary of the
organization and have the potential to affect all or part of the organization.
An Organizations Environment:

Competitors, industry size and competitiveness, related issues

Suppliers, manufacturers, real estate, services
Labor market, employment agencies, universities, training schools, employees in other
companies, unionization
Stock markets, banks, savings and loans, private investors
Customers, clients, potential users of products and services
Techniques of production, science, computers, information technology
Recession, unemployment rate inflation rate, rate of investment, economics, growth
City, state, federal laws and regulations, taxes, services, court system, political
processes
Age, values, beliefs, education, religion, work ethic, consumer and green movements

An organizations domain is environmental field of action. The environment includes many

sectors or subdivision of the external environment. Ten sectors can be analyzed for each
organization; these sectors can be subdivided into the task environment and general
environment:
The Task Environment:
The task environment includes sectors with which the organization interacts directly and that
have a direct impact on the organizations ability to achieve its goals. The task environment
includes:
The industry
The raw materials
Market sectors
Human resources
International sectors

General Environment:
The general environment includes those sectors that light not have a direct impact on the daily
operations of a firm but will indirectly influence it. It includes:
The government sector
The sociocultural sector
Economic conditions
The technology
The financial resources
International Context:
The international sector can directly affect many organizations; all domestic sectors can be
affected by international events. The growing importance of the international sector means
that the environment for all organizations is becoming extremely complex and extremely
competitive. Every organization faces uncertainty domestically as well as globally.

Environmental Uncertainty:
Two essential ways the environment influences organizations:
1. The need for information about the environment
2. The need for resources from the environment
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.
Simple-Complex Dimension
It concerns environmental complexity, which refers to heterogeneity, or the number and
dissimilarity of external elements relevant to an organizations operations. A complex
environment is one in which the organization interacts with and is influenced by numerous
diverse external elements. In a simple environment, the organization interacts with and is
influenced by only a few similar external elements.
Stable-Unstable Dimension
It 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. Instability may occur when
competitors react with aggressive moves and countermoves regarding advertising and new
product.
Framework
The simple-complex and stable-unstable dimensions are combined into a framework:
Simple + Stable = Low Uncertainty
1. Small number of external elements and elements are similar
2. Elements remain the same of change slowly
Simple + Unstable = High-Moderate Uncertainty
1. Small number of external elements and elements are similar
2. Elements change frequently and unpredictably
Complex + Stable = Low-Moderate Uncertainty
1. Large number of external elements and elements are dissimilar
2. Elements remain the same or change slowly
Complex + Unstable = High Uncertainty
1. Large number of external elements and elements are dissimilar
2. Elements change frequently and unpredictably

Adapting to Environmental Uncertainty:

How do organizations adapt to each level of environmental uncertainty?
Positions and Departments:
As the complexity and uncertainty in the external environment increase, so does the number
of positions and departments within the organization, which in turn increases internal
complexity:
The human resources department; The marketing department; The legal department; The
finance department; E-business department; Information technology department
Buffering and Boundary Spanning:
Differentiation and Integration:
Each department evolved toward a different orientation and structure to deal with specialized
parts of the external environment.
Differences in Goals and Orientations Among Organizational Departments
Characteristic

R&D
Department

Manufacturing
Department

Sales
Department

Goals

New developments, Efficient production

quality

Customer satisfaction

Time
Horizon

Long

Short

Short

Interpersonal
Orientation

Mostly task

Task

Social

Formality of
Structure

Low

High

High

Environmental Uncertainty and Organizational Integrators

Industry
Environmental
Uncertainty
Departmental
Differentiation
Percent
management
integrating roles

Plastics
High

Foods
Moderate

Container
Low

High

Moderate

Low

17%

0%

of 22%
in

Organic Versus Mechanistic Management Processes:

The formal structure and the control imposed on employees is also a way of responding to
environmental uncertainty.
As environmental uncertainty increases, organizations tend to become more organic. Thus,
the organization is fluid and is able to adapt continually to changes in the external
environment.

Mechanistic

Organic

Tasks are broken down into specialized, Employees contribute to the common task of the
separate parts.
department.
Tasks are rigidly defined.

Tasks are
teamwork.

adjusted

and

redefined

through

There is a strict hierarchy of authority and There is less hierarchy of authority and control,
control, and there are many rules.
and there are few rules.
Knowledge and control of tasks are centralized Knowledge and control of tasks are located
at the top of the organization.
anywhere in the organization.
Communication is vertical.

Communication is horizontal.

Planning, Forecasting and Responsiveness:

It might seem that in an environment where everything is changing all the time, planning is
useless. However, in uncertain environment, planning and environmental forecasting actually
become more important as a way to keep the organization geared for a coordinated, speedy
response. In an unpredictable environment, planners scan environmental elements and analyze
potential moves and countermoves by other organizations.
Framework for Organizational Reponses to Uncertainty:

STABLE

ENVIRONMENTAL
CHANGE

UNSTABLE

Low Uncertainty

Low-Moderate Uncertainty

1.Mechanistic structure; formal,

centralized
2. Few departments
3. No integrating roles
4. Current operations orientation;
low speed response

1.Mechanistic structure; formal,

centralized
2.
Many departments, some
boundary
spanning
3. Few integrating roles
4. Some planning; moderate speed
response

High-Moderate Uncertainty

High Uncertainty

1. Organic structure, teamwork;

participative, decentralized
2.
Few departments, much
boundary
spanning
3. Few integrating roles
4. Planning orientation; fast
response

1. Organic structure, teamwork;

participative, decentralized
2.
Many
departments
differentiated,
extensive boundary spanning
3. Many integrating roles

SIMPLE

4. Extensive planning, forecasting;

high speed response
COMPLEX

Controlling Environmental Resources:

Organizations try to maintain a balance between linkages with other organizations and their
own independence in response to the need for resources. Two strategies can be adopted to
manage resources in the external environment:
1. Establish favorable linkages with key elements in the environment
2. Shape the environmental domain

Establishing Interorganizational Linkages

1.
2.
3.
4.
5.

Ownership
Contracts, joint ventures
Cooptation, interlocking directorates
Executive recruitment
Advertising, public relations

Controlling the Environmental Domain

1.
2.
3.
4.

Change of domain
Political activity, regulation
Trade associations
Illegitimate activities