1. Organizations and Environments
MBA 540
Summer 2006

2. Essential Features of Organizations
Open system: input, transformation, output
Subsystems: boundary spanning, production, maintenance, adaptation, management
Domains: range of products and services produced for serving markets and customers
Environmental transactions: dealing with factors outside the organizational boundaries

3. Open Systems View of Organization
ENVIRONMENT
Raw Materials
Resources
Products
Services
Transformation
Output
Input
Organization
Production
Maintenance
Adaptation
Management
Boundary
Spanning
Boundary
Spanning
Subsystems

4. Let’s Consider Hasbro
Toy industry's growth prospects appear to be maturing
Increasing competition from video games, children's changing tastes, and consolidation of the industry's retail customer base.
Toy companies are increasingly dependent on movies and TV shows for product tie-ins
What are the major external challenges facing Hasbro?

5. Changing Environments
Environmental Change
Environmental Complexity
Resource Scarcity
Uncertainty
External environments are all events outside a company that have the potential to influence or affect it.

6. Environmental Change
Environmental change is the rate at which a company’s environments change
stable environments
dynamic environments
Punctuated equilibrium theory
companies cycle through stable and dynamic environments
The rate of environmental change affects many organizational aspects, particularly decision making.
In stable environments, the rate of environmental change is slow - decision makers can be more deliberate.
In dynamic environments, the rate of environmental change is fast - decision makers must be nimble and quick.
The fast-paced world of EA Sports is a good example of a dynamic environment.
While it would seem that companies would either be in stable external environments or dynamic external environments, recent research suggests that companies often experience both stable and dynamic external environments. Punctuated equilibrium theory says that companies go through long, simple periods of stability (equilibrium), followed by short, complex periods of dynamic, fundamental change (revolutionary periods), finishing with a return to stability (new equilibrium).

7. Punctuated Equilibrium
As shown in Exhibit 2.1, one example of punctuated equilibrium is the U.S. airline industry. Three times in the last 25 years, the U.S. airline industry has experienced revolutionary periods. The first, from mid-1979 to mid-1982, occurred immediately after airline deregulation in Prior to deregulation, the federal government controlled where airlines could fly, when they could fly, and the number of flights they could have on a particular route. After deregulation, these choices were left up to the airlines. The large financial losses during this period clearly indicate that the airlines had trouble adjusting to the intense competition that occurred after deregulation. However, by mid-1982, profits returned to the industry and held steady until mid-1989.
Then, after experiencing record growth and profits, U.S. airlines lost billions of dollars between 1989 and 1993 as the industry went through dramatic changes. Key expenses, like jet fuel and employee salaries, which had held steady for years, suddenly increased. Furthermore, revenues, which had grown steadily year after year, suddenly dropped because of dramatic changes in the airlines’ customer base. Business travelers, who typically pay full-priced fares, comprised more than half of all passengers during the 1980s. But now, the largest group is leisure travelers who, in contrast to business travelers, want the cheapest flights they can get. With expenses suddenly up and revenues suddenly down, the airlines responded to these changes in their business environment by laying off 5-10 percent of all workers, canceling orders for new planes, and getting rid of routes that were not profitable. Starting in 1993 and lasting until 1998, these changes helped profits return even stronger. The industry began to stabilize, if not flourish, just as punctuated equilibrium theory predicts.
Source: “Annual Operating and Net Earnings: U.S. Scheduled Airlines—All Services,” Air Transport Association, [Online] Available 6 February 2003.

8. Environmental Complexity
Environmental complexity: the number of external factors in the environment that affect organizations
Simple environments
have few environmental factors
Example?
Complex environments
have many environmental factors
The more complex an organization’s environment is, the more difficult it is for its managers to make decisions. Increasing complexity means that managers must track and deal with more environmental factors.
The changing nature of Kellogg’s environment is a good example of an organization dealing with an increasingly complex environment. Cereal companies face more competition, have been forced to make price cuts, and have been threatened by cheaper private-label store brands, such as those by Wal-Mart.

9. Environmental Uncertainty
Simple -Complex Dimension
Number of elements and their similarity
Family restaurant vs. automobile manufacturer
Determines what information you need
Stability-Change Dimension
how fast and unpredictably elements change
Universities vs. telecommunications
Determines how often you need to collect information

10. Environmental Uncertainty
Rate of Change
Low
High
Low
Uncertainty
Moderate
Uncertainty
Low
(Information known and available)
(Constantly need new information)
Complexity
Moderate
Uncertainty
High
Uncertainty
High
(Information
overload)
(Information needs
unknown)

11. Resource Scarcity
Resource scarcity (vs. munificence) is the degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources
The third characteristic of external environments is resource scarcity: the degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources. From 1995 to 2000, qualified employees were scarce in many industries. The reason was simple: Demand for job applicants exceeded the supply. In fact, the number of job openings at companies was five times greater than the number of layoffs. Consequently, employers had to work harder to find and attract skilled employees, especially in technological and professional jobs.
For example, Cisco Systems started a “Friends” program to help recruit more engineers. When potential job applicants visit Cisco’s Internet home page to read about job openings, they would visit the “Friends” page, where they would electronically submit their resumes. When this happened, an would automatically be forwarded to a Cisco employee who had volunteered to be a “Friend.” That “Friend” would then call the job applicant within 24 hours. The program, which was an overwhelming success, helped Cisco solve the problem of job applicant scarcity.
However, there’s no longer a scarcity of job applicants. In the last two years, unemployment has risen and jobs are being eliminated. Cisco has put its “Friends” program on hold. The bad news is good news for companies wishing to attract qualified workers. It is now easier to find and hire qualified employees, who are no longer as scarce as they were just a few years ago.

12. Environmental Uncertainty
Uncertainty is how well managers can understand or predict the external changes and trends affecting their businesses
More
Uncertainty
More
Complexity
More
Change
Scarcer
Resources + +

13. Types of Environmental Factors
Exhibit 2.3 shows the two kinds of external environments that influence organizations: the general environment and the specific environment.
The general environment consists of the economy and the technological, sociocultural, and political/legal trends that indirectly affect all organizations. Changes in any sector of the general environment eventually affect most organizations. For example, most businesses benefit when the Federal Reserve lowers its prime lending rate, because banks and credit card companies will then lower the interest rates they charge for loans. Consumers, who can then borrow money more cheaply, will borrow more money to buy homes, cars, refrigerators, and large-screen TVs. By contrast, each organization has a specific environment that is unique to that firm’s industry and directly affects the way it conducts day-to-day business. The specific environment, includes customers, competitors, suppliers, industry regulation, and advocacy groups.
Specific factors directly impinge on
particular organization
General factors affect all companies
within an industry

14. Organization-Environment Interface
Task (specific) factors
Customers
Suppliers
Distributors
Regulatory agencies
Competitors
Unions
Partners
Special Interest Groups
General factors
Economic
International
Political/legal
Technology
Demographic
Cultural/social
Physical/natural resources
Example: Home Depot

15. Theories of Organization-Environment Relationships
Contingency Theory
Resource Dependence
Strategic Choice
Population Ecology
Institutional Theory
Transaction Cost Theory

16. Contingency Theory
Most effective way to organize is contingent on complexity and change in environment
Stable environments: Mechanistic structures (specialization, formality, hierarchy)
Changing environments: Organic structures (less specialization, informality, lateral relations)

17. Resource Dependence
Organizations obtain scarce and valued resources from environments
Desire to control these resources to minimize dependencies
Processes and transactions used to obtain resources develop dependencies
Balancing act of maintaining autonomy and recognizing dependencies

18. Strategic choice Managers perceive environments
Make strategy and design structure
Re-strategize when changes are perceived
Managers enact environments through their decision-making choices
Since managers perceive differently, they bring organizations in different directions
Example: Sears vs. Montgomery Ward

19. Population Ecology
Focus is on whole population of organizations (e.g., gasoline stations in Canada; wine industry in California)
Natural selection processes:
Variation Selection Retention
Unsuccessful organizational forms die out
Environmental determinism

20. Institutional Theory
Societal institutions are powerful forces for ensuring control and order
In responding to institutional pressures, organizations develop isomorphic (similar) strategies, structures, and systems
Normative, coercive, and mimetic forces make “all organizations look the same”
Goal is to obtain social legitimacy
Example: banks, universities, discount stores

21. Transaction Cost Theory
Organizations try to reduce monitoring, negotiating, and governing exchanges with environmental elements (transaction costs)
Environmental uncertainty, opportunism, bounded rationality, small numbers bargaining, asset specificity, and risk levels increase transaction costs
Transaction and bureaucratic costs balanced

22. What specific adaptation devices do organizations use?
Structural Responses
Develop new positions or units
Boundary-spanning activities
Buffering roles and units
Planning Groups
Forecasting
Management Information Systems

23. Specific Adaptation Devices
Inter-organizational Linkages:
Symbiotic interdependencies
Benefit both organizations
Competitive interdependencies
Direct competition for scarce resources

24. Symbiotic Interdependencies
Good reputation
Cooptation
Interlocking directorates
Strategic alliances
Long-term Contracts
Equity ownership in other firms
Joint ventures
Mergers, acquisitions, and takeovers
Licensing
Consortia
Marketing or distribution agreements
Franchising

25. Competitive Interdependencies
Collusions
Signaling
Cartels
Trade associations
Regulatory bodies
Competitive strategic alliances
Networking