The Organizations Environment

1
The Organizations Environment

• EMSE211
• Session 8

2
Outline

• Thoughts from Organizational Evolution
• Defining Organizational Environment
• Environmental Change and Uncertainty
• Organization-Environment Relations
• The International Environment
• Dimensions of Distance
• Multinationals, Globals, Internationals and
  Transnationals

3
Thoughts from Organizational Evolution

• Classical Management (Organization) Theory
• Max Weber and Henri Fayol, et al, initiated the
  body of study that became Classical Theory
  about bureaucracies.
• Among other features these theories described
  organizations as closed systems. That is, there
  was no interaction between an organization and
  its environment.
• Later Chester Barnard, et al, formed the Natural
  Movement to correct the lack of any human
  features in classical theory.
• However, organizations falling into this category
  were still considered closed systems.
• This remained true until the 1960s and early
  1970s when organizations could not ignore their
  environment any longer. During this period open
  systems theories were developed.

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Thoughts from Organizational Evolution

• Open systems still have boundaries. But now the
  boundaries that exist are permeable to the degree
  allowed by the organization.
• Finally, during the 1990s organization theory
  advanced to include complex, adaptive systems
  that are very interactive with their
  environment(s).
• Single, or multiple organizations (hybrids) can
  be included in complex, adaptive systems.
• Interorganizational alliances include
  outsourcing, licensing agreements, partnerships,
  and joint ventures.
• Underlying keys to making interorganizational
  alliances work focus on understanding creation
  (strategic), maintenance (relationship building)
  and performance (outcome) related issues,
  achieving sufficient confidence in the partners
  cooperation that the firms are able to develop a
  balance between trust and control.

5
Defining Organizational Environment

• An organizations environment can be loosely
  defined an anything external to the organization.
• A more precise definition consists of three
  elements
• How the firms boundary is determined
• The general versus specific environment
• The actual versus the perceived environment

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Organizational Boundaries

• The same as an organizations environment was
  loosely defined, an organizations boundary can
  similarly be defined as the distinction between
  where the organization exists and everything
  else.
• A more detailed definition would include
• Products and Services the organization will
  produce
• The organizations customers
• The organizations place in the industrys value
  chain, the corresponding interfaces, transactions
  and relationships

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General and Specific Environment

• Based on the loose definition of an
  organizations environment, the general
  environment includes everything from the global
  economy to current social fads, i.e. virtually
  everything external to the organization.
• An organizations specific environment focuses on
  those things external to the organization that
  have direct and immediate relevance, e.g.
• Customers
• Suppliers
• Unions
• Government regulatory agencies, etc.

8
Stockholders vs. Stakeholders

• The stockholder model has been the model most
  commonly used in business.
• The stakeholder model has become increasingly
  important as the environment has made
  increasingly greater impact on organizations
  operations and bottom line.
• The ability to effectively manage potentially
  competing interests across a variety of
  stakeholder groups has become a critical part of
  management.

9
Actual and Perceived Environment

• It is important to note the difference between
  the actual (objective) environment and the
  perceived (subjective) environment.
• The actual environment consists of those
  entities, objects, or conditions that exist
  outside the firm.
• The perceived environment reflects the
  subjective interpretation of that environment.
  Although these perceptions are also real events
  in their consequences, they take place within an
  organization.

10
Environmental Change and Uncertainty

• One way of assessing the potential effect of
  environmental change on an organization is based
  on three dimensions degree of stability,
  complexity and resource availability.
• The stability dimension refers to the extent to
  which elements in the environment are dynamic.
• The complexity dimension refers to the number of
  different stakeholders in an organizations
  environment and the level of complex knowledge
  necessary to understand that environment.

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Environmental Change and Uncertainty

• Resource availability refers to the level of
  resources available to firms in the environment.
• The stability, complexity and resource
  availability dimensions outlined above are
  significant for organizations in that they
  determine the amount of uncertainty an
  organization must confront in its environment.

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Uncertainty

• Herbert Simon, Sciences of the Artificial

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Controlling the Environment

• Norms of rationality are used to try to buffer
  or isolate an organizations core technologies
  (internal operations) from external influence.
• Smoothing is used to attempt level input/output
  transactions.
• Forecasting is used to better anticipate and
  adapt to environmental changes.
• Rationing is used to allocate products and/or
  services based on their priority.
• Interorganizational coping strategies include
  coalition formation, cooptation, competition, or
  bargaining.

14
Managing Organizational Boundaries

• Transaction cost economics suggests that the
  most effective way to manage a firms boundary is
  determined by two factors the cost of a
  particular governance mechanism and the threat of
  opportunism in an exchange.
• Market governance uses market-determined prices
  to manage specific exchanges.
• Intermediate governance relies on
  interorganizational arrangements.
• Hierarchical governance brings an exchange within
  an organizations own boundary.

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Managing Organizational Boundaries

• Boundary-spanning roles are used to connect and
  position the firm with key elements in its
  external environment.

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Organizational Responses to Environmental Decline

• managers need to understand the reasons
  underlying organizational decline, develop
  strategies to attempt to avoid the decline, and
  be knowledgeable about how to manage requisite
  retrenchment if it does occur.
• Population Ecology Theory
• Sometimes referred to as a natural selection
  theory, this perspective argues that the
  environment chooses certain types of
  organizations to survive and others to perish
  based on the degree of fit between the firms
  structural characteristics and the
  characteristics of their environment.

17
Organizational Responses to Environmental Decline

• According to this perspective, there are four
  types of niche declines based on the continuity
  of the change and the impact on niche size and
  shape.
• Erosion is where niche size gradually shrinks
  over time (continuous change).
• Contraction is where niche size shrinks suddenly
  and organizations are placed in a defensive
  position, typically characterized by substantial
  cutbacks either in selected areas or throughout
  the entire organization.
• Dissolution is where the shape of the niche
  changes over time.
• Collapse is where a particular niche suddenly
  disintegrates, e.g. when the market for mainframe
  computers gave way to the personal computer
  revolution.

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Organizational Responses to Environmental Decline

• Most studies find that failure to effectively
  adapt to changes in the environment can be
  understood by examining the characteristics of
  the organizations managers, structure, culture,
  strategy and environment.
• Strategic Adaptation View
• Focuses on the role that managers can play in
  monitoring environmental changes and modifying
  organizational strategy to better match
  environmental contingencies.

19
The International Environment

• Distance Still Matters!
• In Distance Still Matters The Hard Reality of
  Global Expansion, Pankaj Ghenawat explores
  several dimensions of distance including
  cultural, administrative, geographic and economic.

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A Framework for Distance
From Distance Still Matters The Hard Reality
of Global Expansion, Ghemawat, P., Harvard
Business Review, Sept. 2001.
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Transnationals

• American manufacturing companies in the Fortune
  500 (and many other organizations) act globally.
• In their book, Managing Across Borders The
  Transnational Solution, Christopher Bartlett and
  Sumantra Ghoshal have categorized companies as
• Multinationals
• Globals
• International
• Transnationals

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Categories of Organizations
From Managing Across Borders The Transnational
Solution, Bartlett, C. and Ghoshal, S., Harvard
Business School Press, 1991.
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Categories of Organizations

• Multinational
• Companies who primarily pursue country-oriented,
  locally responsive strategies. These companies
  are usually decentralized.
• Examples include Philips, ITT and Fiat.
• Global
• Companies who primarily pursue globally-scaled
  strategies for cost advantage. These companies
  are usually centralized.
• Examples include Matsushita, NEC and Toyota.

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Categories of Organizations

• International
• Companies who primarily pursue core technologies
  at home and then distribute them to foreign
  affiliates who adapt them locally. These
  companies are typically top-down and sequential.
• Examples include General Electric (consumer
  electronics), Proctor Gamble and Ericsson.
• Transnational
• Companies who primarily pursue solutions tailored
  to suit their situation. These companies
  typically have differentiated structures.
• Examples include Boeing, IBM and Ford.