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Chapter 4: The External Environment The Environmental Domain Organizational environment is all elements that exist outside the

e boundary of the organization and have potential to affect all or part of the organization An organizations domain is an organizations chosen environmental field of activity The environment comprises several sectors, which are subdivisions of the external environment that contain similar elements:

a) Competitors, industry size and competitiveness, related industries b) Suppliers, manufacturers, real estate, services c) Labour market, employment agencies, universities, training schools, employees in other companies, unionization d) Stock markets, banks, savings and loans, private investigators e) Customers, clients, potential users of products and services f) Techniques of production, science, computers, info technology, e-commerce g) Recession, unemployment rate, inflation rate, rate of investment, economies, growth h) City, state, federal laws and regulations, taxes, services, court system, political processes i) Age, values, beliefs, education, religion, work ethic, consumer and green movements j) Competition from and acquisition by foreign firms, entry into overseas markets, foreign customs, regulations, exchange rate Task Environment Sectors with which the organization interacts directly and that have a direct effect on the organizations ability to achieve its goals Typically includes the industry, raw materials, and market sectors (and sometimes HR and international sectors)

For example: o In the industry sector, Wal-Mart has become the nations largest food retailer and nontraditional outlets such as club stores and discounters now account for more than 30% of the grocery market o In the raw materials sector, steelmakers owned the beverage can market until the mid-1960s, when Reynolds Aluminum Company launched a huge aluminum recycling program to gain a cheaper source of raw materials and make aluminum cans price-competitive with steel

General Environment Includes those sectors that may not directly affect the daily operations of a firm but will indirectly influence it Often includes the government, sociocultural, economic conditions, technology, and financial resources sectors For example: o In the sociocultural sector, shifting demographics play a significant role. In the US, Hispanics have passed African Americans as the nations largest minority group, and their numbers are growing so fast that Hispanics are becoming a driving force in US politics, economics, and culture International Context The international sector can directly affect many organizations, and it has become extremely important in the last few years All domestic sectors can also be affected by international events The distinctions between foreign and domestic operations have become increasingly irrelevant o For example, in the auto industry, Ford owns Swedens Volvo, while Chrysler is owned by Germanys DaimlerChrysler and builds its PT Cruiser in Mexico. Toyota is a Japanese company, but it has built more than 10 million vehicles in North American factories US-based companies are involved in thousands of partnerships and alliances with firms all around the world, and these can have positive and negative implications The growing importance of the international sector means that the environment for all organizations is becoming extremely complex and competitive Environmental Uncertainty 2 essential ways the environment influences organizations are: o The need for information about the environment o The need for resources from the environment Environmental uncertainty pertains primarily to those sectors that an organization deals with on a regular basis (task environment) Uncertainty occurs when decision makers do not have sufficient information about environmental factors and have a difficult time predicting external changes Uncertainty increases the risk of failure for organizational responses and makes it difficult to compute costs and probabilities associated with decision alternatives Simple-Complex Dimension The number and dissimilarity of external elements relevant to an organizations operation The more external factors that regularly influence the organization and the greater number of other companies in an organizations domain, the greater the complexity A complex environment is one in which the organization interacts with and is influenced by numerous diverse external elements

In an simple environment, the organization interacts with and is influenced by only a few similar external elements For example, Aerospace firms and Universities operate in a complex environment, while a familyowned hardware store in a suburban community is in a simple environment

Stable-Unstable Dimension The state of an organizations environmental elements (whether elements are dynamic) An environmental domain is stable if it remains the same over a period of months or years Under unstable conditions, environmental elements shift abruptly, and most environmental domains are increasingly unstable Instability may occur when competitors react with aggressive moves and countermoves regarding advertising and new products Instability can also occur with hate sites, blogs, etc. o For example, Kryptonites reputation in bicycle locks plummeted after a Web log was posted that the locks could be opened with a Bic pen An example of a traditionally stable environment is a public utility Toy companies, on the other hand, have an unstable environment, and this problem is compounded by the fact that children are losing interest in toys at a younger age because video games, TV, and the Internet is taking over Framework

Adapting to Environmental Uncertainty Positions and Departments As complexity and uncertainty increases, so does the number of positions and departments within the organization, which in turn increases internal complexity This relationship is part of being an open system Each sector in the external environment requires an employee or department to deal with it Buffering and Boundary Spanning Buffering roles are activities that absorb uncertainty from the environment

The technical core performs the primary production activity of an organization, and buffer departments surround the technical core and exchange materials, resources, and money between the environment and the organization They help the technical core function efficiently o The purchasing department buffers the technical core by stockpiling supplies and raw materials o The HR department buffers the technical core by handling the uncertainty associated with the finding A newer approach is to drop the buffers and expose the technical core to the uncertain environment These organizations no longer create buffers because they believe being well connected to the customers and suppliers is more important than internal efficiency Boundary spanning roles are activities that link and coordinate an organization with key elements in the external environment Boundary spanning is primarily concerned with the exchange of information to: o Detect and bring into the organization info about the changes in environment o Send info into the environment that presents the organization in a favourable light Organizations have to keep in touch with what is going on in the environment so that managers can respond to market changes and other developments A new approach to boundary spanning is business intelligence, which is a high-tech analysis of large amounts of internal and external data to identify patterns and relationships Business intelligence is related to another important area of boundary spanning, known as competitive intelligence (CI) o CI gives top executives a systematic way to collect and analyze public information about rivals and use it to make better decisions o Using techniques that range from Internet surfing to digging through trash cans, intelligence professionals dig up info on competitors new products, manufacturing costs, or training methods and share it with top leaders

Differentiation and Integration Organizational differentiation is the differences in cognitive and emotional orientations among managers in different functional departments, and the difference in formal structure among these departments When the external environment is complex and rapidly changing, organizational departments become highly specialized to handle the uncertainty in their external sector Success in each sector requires special expertise and behavior Organizational departments differentiate to meet needs of subenvironments:

Differences in goals and orientations among organizational departments:

One outcome of high differentiation is that coordination among departments becomes difficult More time and resources must be devoted to achieving coordination when attitudes, goals, and work orientation differ so widely Integration is the quality and collaboration among departments Formal integrators are often required to coordinate departments When environmental uncertainty is high, frequent changes require more info processing to achieve horizontal coordination, so integrators become a necessary addition to the organization structure Environment uncertainty and organizational integrators: Industry: Plastics Foods Container Environmental Uncertainty Departmental Differentiation Percent of management in integrating roles High High 22% Moderate Moderate 17% Low Low 0%

BOTTOM LINE: If environment is more complex, differentiate more, and if environment is more uncertain, differentiate.

Organic versus Mechanistic Management Processes Mechanistic Organization System is marked by rules, procedures, a clear hierarchy of authority, and centralized decision making (occurs in stable environment) Organic Organization System is marked by free-flowing, adaptive processes, an unclear hierarchy of authority, and decentralized decision making (occurs in rapidly changing environments) Mechanistic Organic (Learning Organization) Tasks are broken down into specialized, Employees contribute to the common separate parts tasks of the department Tasks are rigidly defined Tasks are adjusted and redefined through employee teamwork There is a strict hierarchy of authority and control, and there are many rules There is less hierarchy of authority and control, and there are few rules Knowledge and control of tasks are centralized at the top of the Knowledge and control of tasks are organization located anywhere in the organization Communication is vertical Communication is horizontal Planning, Forecasting, and Responsiveness The entire point of increasing internal integration and shifting to more organic processes is to enhance the organizations ability to quickly respond to sudden changes in an uncertain environment In uncertain environments, planning and environmental forecasting is key to keep the organization geared for a coordinated, speedy response When the environment is stable, the organization can concentrate on current operational problems and day-to-day efficiency o Long-range planning and forecasting are not needed because environmental demands in the future will be the same as they are today When increasing environmental uncertainty, planning and forecasting become necessary Planning can soften the adverse impact of external shifts Organizations that have unstable environments often establish a separate planning department Planning cannot substitute for other actions, like effective boundary spanning and adequate internal integration and coordination The organizations that are most successful in uncertain environments are those that keep everyone in close touch with the organization so they can spot threats and opportunities, enabling the organization to respond immediately Framework for Organizational Responses to Uncertainty

Resource Dependence A situation in which organizations depend on the environment but strive to acquire control over resources to minimize their dependence Although companies like to minimize their dependence, when costs and risks are high they also team up to share scarce resources and be more competitive on a global basis Formal relationships with other organizations present a dilemma to managers Organizations seek to reduce vulnerability with respect to resources by developing links with other organizations, but they also like to maximize their own autonomy and independence Interorganizational relationships present a tradeoff between resources and autonomy Dependence on shared resources gives power to other organizations Once an organization relies on others for valued resources, those other organizations can influence managerial decision making Controlling Environmental Resources Two strategies to manage resources in the external environment are: o Establish favourable linkages with key elements in the environment o Shape the environmental domain When organizations sense that a valued resource is scares, they will use strategies to attain them rather than go at them alone Establishing Interorganizational Linkages Ownership o Companies use ownership to establish linkages when they buy a part of or a controlling interest in another company o A greater degree of ownership and control is obtained through acquisition or merger An acquisition involves the purchase of one organization by another so that the buyer assumes control A merger is the unification of two or more organizations into a single unit o These forms of ownership reduce uncertainty in an area important to the acquiring company Formal strategic alliances o When there is a high level of complementarity between the business lines, geographical positions, or skills of two companies, the firms go the route of a strategic alliance, and theyre formed through contracts and joint ventures

o Contracts and joint ventures reduce uncertainty through a legal and binding relationship with another firm Contracts come in a form of license agreement that involve the purchase of the right to use an asset for a specific time and supplier arrangements that contract for the sale of one firms output to another Joint ventures result in the creation of a new organization that is formally independent of the parents, although the parents will have some control In a joint venture, organizations share the risk and cost associated with large projects or innovations Cooptation, interlocking directorates o Cooptation occurs when leaders from important sectors in the environment are made part of an organizations It takes place, for example, when influential customers or suppliers are appointed to the board of directors, such as when the senior exec of a bank sits on the board of a manufacturing company These influential people are thus introduced to the needs of the company and are more likely to include the companys interests in their decision making o An interlocking directorate is a formal linkage that occurs when a member of the board of directors of one company sits on the board of directors of another company The individual is a communications link between companies and can influence policies and decisions A direct interlock is when one individual is the link between companies An indirect interlock occurs when a director of company A and a director of company B are both directors of company C. They have access to one another but do not have direct influence over their respective companies Executive recruitment o Transferring or exchanging executives also offers a method of establishing favourable linkages o For example, each year the aerospace industry hires retired generals and execs from the Department of Defense o Having channels of influence and communication between organizations serves to reduce financial uncertainty and dependence for an organization Advertising and public relations o Advertising is a traditional way of establishing favourable relationships o Organizations spend large amounts of money to influence the taste of consumers o Advertising is especially important in highly competitive consumer industries and in industries that experience variable demand o Public relations people can as organization in a favourable light in speeches, in press reports, and on television o PR attempts to shape the companys image in the minds of customers, suppliers, and government officials

Controlling the Environmental Domain Change of domain o The organization decides which business (sector) it is in, the market to enter, and the suppliers, banks, employees, and location to use, and this domain can be change o An organization can seek new environmental relationships and drop old ones o Acquisition and divestment are two techniques for altering domain An example of divestment is when JC Penney sold off its chain of Eckerd drug stores to focus on the department store

Political activity, regulation o Political activity includes techniques to influence government legislation and regulation o Political strategy can be used to erect regulatory barriers against new competitors or to squash unfavourable legislation o Corporations also try to influence the appointment to agencies of people who are sympathetic to their needs o For example, Wal-Mart has recently been adding lobbyists to the payroll and becoming heavily involved in political activity o In addition to hiring lobbyists and working with other organizations, many CEOs believe they should do their own lobbying o Political activity is so important that informal lobbyist is an unwritten part of almost any CEOs job description Trade associations o Much of the work to influence the external environment is accomplished jointly with other organizations that have similar interests o For example, most large pharmaceutical companies belong to Pharmaceutical Research and Manufacturers of America o The National Tooling and Machining Association (NTMA) devotes a quarter million dollars each year to lobbying, mainly on issues that affect small business. It also gives its members statistics and info that help them become more competitive in the global marketplace Illegitimate activities o Certain conditions, such as low profits, pressure from senior managers, or scarce environmental resources, may lead managers to adopt behaviours not considered legitimate o Examples include payoffs to foreign governments, illegal political contributions, promotional gifts, and wiretapping o One study found that companies in industries with low demand, shortages, and strikes were more likely to be convicted for illegal activities, implying that illegal acts are an attempt to cope with resource scarcity o Some nonprofit organizations have been found to use illegal actions to bolster their visibility and reputation as they compete with other organizations for scarce grants and donations

Organization-Environment Integrative Framework Relationship between environmental characteristics and organizational actions: