Organizations and Environments

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Organizations and Environments

• PMBA 540
• Fall 2006

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Open Systems View of Organization
ENVIRONMENT
Raw Materials Resources
Products Services
Output
Transformation
Input
Organization
Production Maintenance Adaptation Management
Boundary Spanning
Boundary Spanning
Subsystems
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Lets 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?
www.hasbro.com
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Changing Environments
Environmental Change Environmental
Complexity Resource Scarcity
Uncertainty
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Environmental Change

• Environmental change is the rate at which a
  companys environments change
• stable environments
• dynamic environments
• Punctuated equilibrium theory
• companies cycle through stable and dynamic
  environments

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Punctuated Equilibrium
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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
• Example?

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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

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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)
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Resource Scarcity

• Resource scarcity (vs. munificence) is the degree
  to which an organizations external
  environmenthas an abundance or scarcity of
  critical organizational resources

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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


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Types of Environmental Factors
Specific factors directly impinge on particular
organization
General factors affect all companies within an
industry
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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
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Theories of Organization-Environment Relationships

• Contingency Theory
• Resource Dependence
• Strategic Choice
• Population Ecology
• Institutional Theory
• Transaction Cost Theory

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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)

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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

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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

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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

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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

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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

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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

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Specific Adaptation Devices

• Inter-organizational Linkages
• Symbiotic interdependencies
• Benefit both organizations
• Competitive interdependencies
• Direct competition for scarce resources

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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

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Competitive Interdependencies

• Collusions
• Signaling
• Cartels
• Trade associations

• Regulatory bodies
• Competitive strategic alliances
• Networking