2. Chapter 8: Environment By Muhammet Said Dinç

3. Contents Definition of Environment from an organizational theory perspective Differentiation between the specific and the general environment The key dimensions of environmental uncertainty The contributions of Burns and Stalker, Lawrence and Lorsch, and Duncan Reviewing the contributions of population ecology, institutional theory and resource dependence The effect of environmental uncertainty on complexity, formalization and centralization

4. Defining Environment The environment is made up of those things outside of the organizations boundaries. Organizations are affected by events at the local, regional, national, and global levels.

5. General Versus Specific Environment (cont.) Eight Key Environmental Sectors: 1) Industry 2) Cultural 3) Legal/Political 4) Economic 5) Technology 6) Human Resources 7) Physical Resources 8) Consumer/Client

6. General Versus Specific Environment General environment encompasses conditions that potentially have an impact on the organization. Price and availability of petrol in the general environment of cinema chains Specific Environment is that part of the environment that is directly relevant to the organization in achieving its goals.

7. General Versus Specific Environment (cont.) It is unique to each organization and it changes with conditions, typically, it will include: Clients or customers Suppliers of inputs Competitors Governments Unions Trade associations Public pressure groups Example of operator of Air New Zealand and Woolworths for the operator of Sydney Airport.

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9. General Versus Specific Environment (cont.) An organizations specific environment will vary depending on the domain it has chosen. Domain refers to the claim that the organization stakes out for itself with respect to the range of products or services offered and markets served. Volkswagen and Mercedes- Benz Toowoomba TAFE and James Cook Universities in Queensland Shortly, Domain is the space in which the organization plays Change domain =change the specific environment

11. Actual versus Perceived Environment Making a distinction between the objective or actual environment and the one that managers perceive. Measures of the actual characteristics of the environment and measures of characteristics perceived by management are not highly correlated. Furthermore, it is perceptions –not reality- that lead to the decisions that managers make regarding organization design.

12. Environmental Uncertainty Environments differ in what we call environmental uncertainty. Some organizations face: Stable environments Few forces in specific environment of organizations are changing No new competitors, no new technological breakthroughs vs. Dynamic environments Rapidly changing technologies, new competitors, the loss of major customers, difficulties in acquiring raw materials, unpredictable price changes vs.

13. Environmental Uncertainty (cont.) The number of uncertainties that may exist in an organizations environment also influences management action. Hotels: …………………….. A rail system: ……………… Mining companies: …………. Retail stores: ……………….. Stable environment and those that are easier to predict create significantly less uncertainty for managers than do dynamic ones, and as uncertainty is a threat to an organizations effectiveness management will try to minimize it.

14. Burns and Stalker Used interviews with managers and their own observations to evaluate the impact of environment on organizational structure and management practice. The type of structure that existed in rapidly changing and dynamic environments was different from that in organizations with stable environments. B & S labeled the two structures organic and mechanistic, respectively

15. Burns and Stalker(cont.) Mechanistic organization Mechanistic structures are characterized by high complexity, formalization and centralization. They perform routine tasks, rely heavily on programmed behaviors, and are relatively slow in responding to the unexpected. Most flow of information and communication is vertical.

16. Burns and Stalker(cont.) Organic organization Organic organizations are relatively flexible and adaptable. They rely on lateral communication rather than vertical communication. Power and influence is based upon expertise and knowledge rather than on authority of position. Responsibilities are defined loosely rather than rigid job definitions. Emphasis is on exchanging information rather than on giving direction.

17. Burns and Stalker(cont.) CHARACTERISTICMECHANISTICORGANIC Task DefinitionRigidFlexible CommunicationVerticalLateral FormalizationHighLow ControlCentralizedDiverse InfluenceAuthorityExpertise

18. Burns and Stalker(cont.) They believed that the most effective structure is one that adjusts to the requirements of the environment, which means using mechanistic design in a stable, certain environment and an organic form in a turbulent environment. They also focused that one was not preferred over the other. The nature of organizations environment determined which are organic and others which are mechanistic. Large firms may have some parts which are organic and others which are mechanistic. Motor vehicle manufacturers

19. Lawrence and Lorsch Studied ten firms in three industries: plastics, food and containers. The three industries were deliberately chosen as they differ significantly in the environmental uncertainty associated with each one. The underlying hypothesis was that internal environments of the firms must match the external environmental requirements. The better the match, the more successful the firm.

20. Lawrence and Lorsch(cont.) Differentiation and integration were posited as the variables to examine to determine the state of the internal environment. Differentiation, as used by Lawrence & Lorsch, closely resembles the traditional definition of horizontal differentiation, but in addition to task segmentation, suggested that managers will differ in their: (1) time frame, (2) interpersonal orientation, and (3) goal orientation.

21. Lawrence and Lorsch(cont.) Integration is the quality of collaboration needed to overcome differentiation and achieve unity of effort among units. Integration devices: Rules and procedures Formal plans The authority hierarchy and decision-making committees They perceived both the organization and the environment as having subsets: that is, that parts of the organization deal with parts of the environment.

22. Lawrence and Lorsch(cont.) Lawrence and Lorsch Model

23. Lawrence and Lorsch(cont.) They proposed that the more turbulent, complex and diverse the external environment facing an organization, the greater the degree of differentiation among its subparts. Diverse external env. + differentiated internal env. = need for an elaborate internal integration mechanism to avoid having units going in different directions Shortly: The environments are composed of a number of subenvironments, each with different degrees of uncertainty. Successful organization subunits meet the demand of their subenvironments. Finally, the environment in which an organization functions is of foremost importance in selecting the structure appropriate for achieving organizational effectiveness.

24. Lawrence and Lorsch(cont.) The Effect of Uncertainty on Differentiation and Integration in Three Industries Degree of uncertainty PlasticsFood-processing Container Variableindustryindustryindustry Environmental variable Uncertainty (complexity, dynamism, richness) Structural variables Departmental differentiation Cross-functional integration High Moderate Low High Moderate Low High Moderate Low

25. Lawrence and Lorsch(cont.) DEPARTMENTAL DIFFERENTIATION BASED UPON SUBENVIRONMENT CHARACTERISTICS

26. Duncans Complexity and Change Framework Robert Duncan classified environments along two dimensions. First, the rate of change of environments. Some environments change slowly like cement manufacturers and banks. Others are rapid changing such as the fashion and telecommunications industries. Second dimension, environmental complexity. The greater the number of elements there are in an environment, the more complex the environment. Airlines= complex environment Growing timber and baking bread companies= simple env. The interaction of environmental complexity and stability forms a two by two matrix, where different levels of uncertainty may be identified. Each of these levels of uncertainty leads to adoption of different structural responses.

28. Duncans Complexity and Change Framework (cont.) Stability enables decision making to be centralized and permits high levels of formalization. Complexity comes with the need to gather, process and respond to numerous environmental elements, each with their own demands. This leads to decentralization and greater need for coordination. Duncans framework stands as a powerful reminder of the influence of environment on structure.

29. The Role of Boundary Spanner First, they have expertise in understanding and interpreting the environmental segment which they are concerned with. Second, they filter and process environmental information into a form which is useful to organization and then transmit this information through established channels. Third, they protect the core from undue disruption by removing the need for it to interact directly with environment. Finally, they represent the organization to the environment. At a motor vehicle manufacturer, the main boundary spanner is the car dealer.

30. The Role of Boundary Spanner(cont.)

31. The Use of Information Technology in Complex Environments Complex and dynamic environments require extensive environmental scanning and flexible organizational responses. Specific structural units and positions are often created to undertake this function. Regardless of structural response, organizations facing such environments are intense users of information technology. There are some outcomes of application of communication technology: Increasing effectiveness of organizations Unpredictable environments will become more manageable Organizations considering that they have capacity to operate in more unstable environment

32. A Synthesis: The organization and Environmental Uncertainty There are three key dimensions to any organizations environment: capacity, stability and complexity The capacity of an environment refers to the degree to which it can support growth. For instance: the availability of finance, customers, resource inputs. The degree of instability in an environment is captured in the stability dimension. Dynamic environment – financial markets Stable environments – cement manufacturer Environmental complexity is the degree to which the environment is concentrated on just a few elements. Simple environments – a small mining company Complex environments – shipping company

33. A Synthesis: The organization and Environmental Uncertainty(cont.) Stable Simple Complex Dynamic Abundant Scarce Three- dimensional model of environment

34. Population Ecology Theory 1. Adaptation of Darwins concept of survival of the fittest. 2. Argues that populations of organizations vary and that the environment selects out only those types that are best suited. 3. Argues against the importance of managerial influence in the long-term survival of an organization. 4. Most appropriately applies to whole populations. 5. Controversial, but most scholars see some merit to the arguments.

35. Population Ecology Theory (cont.) Population ecology theory seeks to explain the rate at which new organizations are born (and die) in a population of organizations. A population of organizations comprises the organizations that are competing for the same set of resources in the environment. Different organizations within a population may choose to focus on different environmental niches, or particular sets of resources.

36. Population Ecology Theory (cont.) According to population ecology, availability of resources determines the number of organizations in a population. The amount of resources in an environment limits population densitythe number of organizations that compete for the same resources in a particular environment.

37. Population Ecology Theory (cont.) Population-ecology view of the change process Variation Large number of variations appear in the population of organizations Selection Some organizations find a niche and survive Retention A few organizations grow large and become institutionalized in the environment

38. Institutional Theory Institutional theory: proposes that organizations are influenced not only by their internal processes but also by the need to adapt to the institutional pressures in the external environment. This need for adaptation then leads to behaviors being repeated and becoming institutionalized.

39. Resource-dependence Theory Resource dependence theory argues that the goal of an organization is to: Minimize its dependence on other organizations for the supply of scarce resources AND To find ways of influencing these organizations to make resources available

40. Resource-dependence Theory (cont.) The strength of one organization's dependence on another for a particular resource is a function of: How vital the resource is for survival The extent to which the resource is controlled by other organizations