Chapter Four

The External Environment

External Environment
Environment is defined as all elements that
exist outside the boundary of the
organization and have the potential to affect
all or part of the organization.
 Organizational Domain
An organization’s domain is the chosen
environmental field of action. It defines
those external sectors with which the
organization will interact to accomplish its
goals.

Environmental Sectors
The sector is a subdivision of the external
environment that contain similar elements.

Ten sectors can be analyzed for each

organization. These sectors can be grouped
into two categories:
1- The task environment
2- The general environment
 Task environment
The task environment includes sectors with
which the organization interacts directly
and which have direct impact on the
organization’s ability to achieve its goals.
Task environment includes the industry
sector, raw material sector, market sector,
financial sector, and human resources
sector.

General environment
The general environment includes sectors that
may not have a direct impact on the daily
operation of the firm but that influence the
industry or economy in general way that, in turn,
indirectly influence the organization.
General environment includes the government
sector, socio-cultural sector, economic sector,
technology sector, and international sector.
 An Organization’s Environment
(a) Competitors, industry size and (g) Recession, unemployment rate,
competitiveness related issues inflation rate, rate of investment,
(b) Suppliers, (j) (a) economics, growth
International Industry
manufacturers, real Sector Sector
(h) City, state, federal laws
estate, services and regulations, taxes,
(i)
(c) Labor market, (b)
Sociocultural DOMAIN Raw Materials
services, court system,
employment agencies, Sector political processes
Sector
universities, training (i) Age, values, beliefs,
schools, employees (c)
education, religion,
in other companies, (h) work ethic, consumer
Human
Government
unionization Resources and green
Sector ORGANIZATION
Sector
(d) Stock markets, movements
banks, savings and (g) (d) (j) Competition from
loans, private Economic Financial and acquisition by
investors Conditions Resources foreign firms,
Sector Sector
(e) Customers, clients, (e) entry into overseas
(f)
potential users of products Market markets, foreign
Technology
Sector
and services Sector customs, regulations,
(f) Techniques of production, science, exchange rates
computers, information technology

Environmental Uncertainty
Uncertainty means that decision makers do not
have sufficient information about environmental
factors and have a difficult time predicting external
changes.

Organization environment can be described along

two dimensions:
1- The degree of environmental change
2- The degree of environmental complexity
 Environmental change
Environmental change refers to whether
elements in the environment are stable or
unstable.
Stable elements remain the same over a
period of time.
Unstable elements may change from time to
time.

Environmental complexity
Environmental complexity refers to the
heterogeneity and diversity of the external
elements that influence the organization.
In a simple environment few similar external
elements influence the organization.
In a complex environment many diverse external
elements interact with and influence the
organization.
 Framework for assessing
Environmental Uncertainty
Low Uncertainty
1- Small number of external elements,
and elements are similar
2- Elements remain the same or change
slowly.
STABLE
Examples: Soft drink bottlers, food
processors, and container
manufacturers.
ENVIRONMENTAL
CHANGE High-Moderate Uncertainty
Low-Moderate Uncertainty
1- large number of external elements,
and elements are dissimilar
2- Elements remain the same or change
slowly.
Examples: Universities, chemical
companies and insurance
companies
High Uncertainty

1- large number of external elements,

1- Small number of external elements,
and elements are dissimilar
and elements are similar
2- Elements change frequently and
2- Elements change frequently and
UNSTABLE unpredictably.
unpredictably.
Examples: Electronics firms, aerospace
Examples: PC, fashion clothing, and toy
firms, airlines and
manufacturers
telecommunications

SIMPLE COMPLEX
ENVIRONMENTAL COMPLEXITY

Adapting to Environmental
Uncertainty
How do organizations adapt to each level of
environmental uncertainty?
Organizations need to have the right fit between internal
structure and the external environment. And this can be
achieved by different techniques such as:
 Positions and Departments
 Buffering and Boundary Spanning
 Differentiation and Integration
 Organic and Mechanistic Management Processes
 Institutional Imitation
 Planning and Forecasting
 Positions and Departments

As the complexity in the external

environment increases, so does the number
of positions and departments within the
organization, which in turn increases
internal complexity. Each sector in the
external environment requires an employee
or department to deal with it.

Buffering and Boundary Spanning

The buffering role is to absorb uncertainty
from the environment. The technical core
performs the primary production activity of
an organization. Buffer departments
surround the technical core and exchange
resources between the environment and
the organization. They make the technical
core as nearly a closed system as possible
so it can function efficiently.
 Buffering and Boundary Spanning
Boundary spanning role link and coordinate an
organization with key element in the external
environment. Boundary spanning is primarily
concerned with exchange of information between
the organization and its environment. Opening up
the organization to the environment makes it
more adaptive. Examples of Boundary spanners
are: Market research department and R&D.

Differentiation and Integration

Organizational differentiation is the differences in
cognitive and emotional orientation among
managers in different functional departments, and
the differences 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.
 Differentiation and Integration
Integration is the quality of collaboration
between departments. When the external
environment is highly uncertain, more
information is needed to achieve
coordination, so integration departments
become necessary units in the organization
structure.

Organizational Departments
Differentiate to Meet Needs of
Sub-environments
President

R&D Manufacturing Sales

Division Division Division
Scientific Manufacturing Market
Sub-environment Sub-environment Sub-environment

Scientific Research Labor Raw Suppliers Customers Advertising

journals centers materials Competitors agencies

Professional Production Distribution

associations equipment system
 Differences in Goals and
Orientations Among Organizational
Departments
R&D Manufacturing Sales
Characteristic Department Department Department
New
Goals developments, Efficient Customer
quality production satisfaction
Time
Horizon Long Short Short
Interpersonal
Orientation Mostly task Task Social
Formality of
Structure Low High High

Environmental Uncertainty and

Organizational Integrators
Industry: Plastics Foods Container

Environmental
Uncertainty High Moderate Low

Departmental
Differentiation High Moderate Low

Percent of
management in 22% 17% 0%
integrating
roles
 Organization Forms
Mechanistic: Organic:
 Tasks are broken down into
specialized, separate parts.
 Tasks are rigidly defined.
 There is a strict hierarchy of
authority and control, and
there are many rules.
 Knowledge and control of
tasks are centralized at the
top of the organization.
 Communication is vertical.
 Employees contribute to the
common task of the
department.
 Tasks are adjusted and
redefined through teamwork.
 There is less hierarchy of
authority and control, and
there are few rules.
 Knowledge and control of
tasks are located anywhere in
the organization.
 Communication is horizontal.

Institutional Imitation

Under high uncertainty, organizations

mimic or imitate other organizations in the
same environment. They copy the
structure, management techniques,
strategies, and products of other firms that
appear successful.
 Planning and Forecasting
When the environment is stable, the
organization can concentrate on current
operational problems and day-to-day
efficiency.
With increasing environmental uncertainty,
planning and forecasting become necessary.
Organizations often establish a separate
planning department.

Contingency Framework for

Environmental Uncertainty and
Organizational Responses
Low Uncertainty
1. Mechanistic structure; formal,
centralized
2. Few departments
STABLE 3. No integrating roles
4. Current operations orientation;
low speed response
ENVIRONMENTAL
CHANGE High-Moderate Uncertainty
1. Organic structure, teamwork;
participative, decentralized
2. Few departments, much boundary
UNSTABLE spanning
3. Few integrating roles
4. Planning orientation; fast
response
Low-Moderate Uncertainty
1. Mechanistic structure; formal,
centralized
2. Many departments, some boundary
spanning
3. Few integrating roles
4. Some planning; moderate speed
response
High Uncertainty
1. Organic structure, teamwork;
participative, decentralized
2. Many departments differentiated,
extensive boundary spanning
3. Many integrating roles
4. Extensive planning, forecasting;
high speed response

SIMPLE COMPLEX
ENVIRONMENTAL COMPLEXITY
 Organization Strategies for
Controlling the External
Environment
 Establishing Inter-  Controlling the
organizational Linkages: Environmental
 Ownership: acquisition, merger Domain:
 Contracts, joint ventures  Change of domain
 Cooptation, interlocking  Political activity,
directorates regulation
 Executive recruitment  Trade associations
 Advertising, public relations  Illegitimate activities

Relationship Between Environmental

Characteristics and Organizational
Actions
Environment Organization
High Many departments and boundary roles
complexity Greater differentiation and more
High integrators for internal coordination
uncertainty
Organic structure and systems with low
High rate formalization, decentralization,
of change and low standardization to enable
a high-speed response
Environmental
domain Establishment of favorable linkages:
(ten sectors) ownership, strategic alliances, co-optations,
interlocking directorates, executive recruitment,
advertising, and public relations
Resource
Scarcity of dependence Control of the environmental domain:
valued
change of domain, political activity,
resources
regulation, trade associations, and
illegitimate activities