APPLIED WORKSHOP FOR BUSINESS - II

5th Week
External Environment

Workshop Topic:
Organizations You Rely On

External Environment
All organizations face tremendous uncertainty in dealing with events in the external
environment.

Changes in the environment can create both threats and opportunities for organizations.

How will organizations respond that changes?

1. Identify the organizational domain and the sectors that influence the organization.
2. Explore two major environmental forces on the organization (a) the need for information (b)
the need for financial resources.
3. Organizations respond to these forces through structural design, planning systems, and
attempts to adapt to and influence various people, events, and organizations in the external
environment.

Organizational environment is defined as everything that exists outside the boundary of the
organization and has the potential to affect all or part of the organization.

The environment of an organization can be understood by analyzing its domain within external
sectors.

An organization’s domain is the chosen environmental field of action.

Domain is the territory an organization stakes out for itself with respect to products, services,
and markets served.

Domain defines the organization’s niche and defines those external sectors with which the
organization will interact to accomplish its goals.

The environment comprises several sectors or subdivisions that contain similar elements.
Task Environment
The task environment includes sectors with which the organization interacts directly and that
have a direct impact on the organization’s ability to achieve its goals.
The task environment typically includes the industry, raw materials, and market sectors, and
perhaps the human resources and international sectors.

General Environment
The general environment includes those sectors that might not have a direct impact on the daily
operations of a firm but will indirectly influence it.

The general environment often includes the government, natural, sociocultural, economic
conditions, technology, and financial resources sectors.

International Environment
The international sector can directly affect many organizations, and it has become extremely
important in the last few years.

All organizations have to adapt to both subtle and massive shifts in the environment.

The Changing Environment

How does the environment influence an organization?
The patterns and events occurring in the environment can be described along three primary
dimensions:
1. Dynamism (whether events in the environment are stable or unstable),
2. Complexity (whether the environment is simple or complex),
3. Abundance (amount of financial resources available to support the organization’s growth)

As the environment becomes more complex, events become less stable, and financial resources
become less available, the level of uncertainty increases.

The environmental conditions of complexity and dynamism create a greater need to gather
information and to respond to changes based on that information.

The organization also is concerned with scarce financial resources and with the need to ensure
availability of resources.

To assess uncertainty, each sector of the organization’s task environment can be analyzed along
dimensions such as stability or instability and degree of complexity.

The total amount of uncertainty felt by an organization is the uncertainty accumulated across
relevant task environment sectors.

Organizations must cope with and manage uncertainty to be effective.

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

Uncertainty increases the risk of failure for organizational decisions and makes it difficult to
compute costs and probabilities associated with decision alternatives.

Complexity
Environmental complexity refers to heterogeneity, or the number and dissimilarity of external
elements (e.g., competitors, suppliers, industry changes, government regulations) that affect an
organization’s operations.

The more external elements regularly influence the organization and the greater the number of
other companies in an organization’s domain, the greater the complexity.

Dynamism refers to whether the environment in which the organization operates is stable or
unstable.
An environmental domain is stable if it remains essentially the same over a period of months or
years.
Under unstable conditions, environmental elements shift rapidly.

Environmental domains are increasingly unstable for most organizations.

Adapting to Complexity and Dynamism
Organizations facing uncertainty often use structural mechanisms that encourage horizontal
communication and collaboration to help the company adapt to changes in the environment.

Positions and departments, organizational differentiation and integration, control processes, and
future planning and forecasting will be important.

Organizations need to have the right fit between internal structure and the external
environment.
As complexity and uncertainty in the external environment increase, so does the number of
positions and departments within the organization, leading to increased internal complexity.

Each sector in the external environment requires an employee or department to deal with it.

Adding new positions and departments is a common way for organizations to adapt to growing
environmental uncertainty.

Building Relationships
The traditional approach to coping with environmental uncertainty was to establish buffer
departments.

The purpose of buffering roles is to absorb uncertainty from the environment.

The technical core performs the primary production activity of an organization. Buffer
departments help the technical core function efficiently.
Buffer departments surround the technical core and exchange materials, resources, and money
between the environment and the organization.

Highly uncertain environments require rapid transfer of information and knowledge so the
organization can adapt quickly.

Opening up the organization to the environment by building closer relationships with external
parties makes it more fluid and adaptable.

Boundary-spanning roles link and coordinate an organization with key elements in the external
environment.

Boundary spanning is primarily concerned with the exchange of information to detect and bring
into the organization information about changes in the environment.

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.

97% of competitive failures resulted from lack of attention to market changes or the failure to act
on vital information.

The greater the uncertainty in the environment, the greater the importance of boundary spanners.

Differentiation and Integration

Another response to environmental uncertainty is the amount of differentiation and integration
among departments.

Organizational differentiation refers to “the differences in cognitive and emotional

orientations among managers in different functional departments, and the difference in formal
structure among these departments.”

Organizational departments become highly specialized to handle the uncertainty in that part of
the external environment each department works with.

Success in each environmental sector (human resources, technology, government, and so forth)
requires special expertise and behavior.

Integration is the quality of collaboration among departments.

Formal integrators are often required to coordinate departments.

When the environment is highly uncertain, frequent changes require more information
processing to achieve horizontal coordination, so integrators become a necessary addition to the
organization structure.
Sometimes integrators are called liaison personnel, project managers, brand managers, or
coordinators.

Organic vs. Mechanistic Management Processes

1. Match internal organization structure to the external environment.

2. If the external environment is complex, make the organization structure complex.

3. Associate a stable environment with a mechanistic structure and an unstable environment with
an organic structure.

4. If the external environment is both complex and changing rapidly, make the organization
highly differentiated and organic, and use mechanisms to achieve coordination across
departments.

Planning, Forecasting, Responsiveness

The whole point of increasing internal integration and shifting to a more organic design is to
enhance the organization’s ability to quickly respond to sudden changes in an uncertain
environment.

Planning can soften the adverse impact of external shifts.

Organizations that have unstable environments often establish a separate planning department.
In an unpredictable environment, planners scan environmental elements and analyze potential
moves and countermoves by other organizations.

The organizations that are most successful in uncertain environments are those that keep
everyone in close touch with the environment so they can spot threats and opportunities,
enabling the organization to respond immediately.

The complexity and dynamism dimensions are combined and illustrate four levels of uncertainty.

Resource Dependence Theory

A first response for many organizations faced with declining financial resources is
1. to lay off employees
2. cut investments.
3. Companies also strive to acquire control over financial resources to minimize their dependence
on other organizations.

The environment is the source of scarce financial resources essential to organizational survival.

Research in this area is called the resource-dependence perspective.

Resource dependence means that organizations depend on the environment but strive to acquire
control over resources to minimize their dependence.

Organizations are vulnerable if vital financial resources are controlled by other organizations, so
they try to be as independent as possible.
Organizations do not want to become too vulnerable to other organizations because of negative
effects on performance.

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.
Interorganizational relationships represent a trade-off between resources and autonomy.

To maintain autonomy, organizations that already have abundant financial resources will tend
not to establish new linkages.

Organizations that need resources will give up independence to acquire those resources.

Organizations try to maintain a balance between depending on other organizations and

preserving their own independence.

Organizations maintain this balance through attempts to modify, manipulate, or control elements
of the external environment (such as other organizations, government regulators) to meet their
needs.

To survive, the focal organization often tries to reach out and change or control its environment.

Two strategies can be adopted to influence resources in the external environment:

1. Establish favorable relationships with other organizations,
2. Shape the organization’s environment.
A. Establishing Formal Relationships
1. Acquire an Ownership Stake:
Companies use various forms of ownership to reduce uncertainty in an area important to the
acquiring company.

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.

The merger enabled the companies to combine resources and share risks to be more competitive.

2. Form Joint Ventures and Partnerships

When there is a high level of complementarity between the business lines, geographical
positions, or skills of two companies, the firms often go the route of a strategic alliance rather
than ownership through merger or acquisition.

Such alliances are formed through contracts and joint ventures.

Contracts and joint ventures reduce uncertainty through a legal and binding relationship with
another firm.

3. Lock in Key Players:

Cooptation occurs when leaders from important sectors in the environment are made part of an
organization.

4. Recruit Executives:
Transferring or exchanging executives also offers a method of establishing favorable linkages
with external organizations.

5. Use advertising and public relations:

A traditional way of establishing favorable relationships is through advertising.

Organizations spend large amounts of money to influence the tastes and opinions of consumers.

Advertising is especially important in highly competitive industries and in industries that

experience variable demand.

Public relations people cast an organization in a favorable light in speeches, on websites, in

press reports, and on television.

Public relations attempts to shape the company’s image in the minds of customers, suppliers,
government officials, and the broader public.
Blogging, tweeting, and social networking have become important components of public
relations activities for many companies today.

B. Influencing Key Sectors

In addition to establishing favorable linkages, organizations often try to change the environment.
There are four techniques for influencing or changing a firm’s environment.

1. Change Where You Do Business:

An organization’s domain is not fixed.
Managers make decisions about which business to be in; the markets to enter; and the suppliers,
banks, employees, and location to use; and this domain can be changed, if necessary, to keep the
organization competitive.

An organization can seek new environmental relationships and drop old ones.

2. Get Political:
Political activity includes techniques to influence government legislation and regulation.

Political strategy can be used to put regulatory barriers against new competitors or to squash
unfavorable legislation.

Corporations also try to influence the appointment to agencies of people who are sympathetic to
their needs.

Political activity is so important that “informal lobbyist” is an unwritten part of almost any
CEO’s job description.

3. Unite With Others:

Much of the work to influence the external environment is accomplished jointly with other
organizations that have similar interests.

For example:
-Council of Life Insurers,
-Petrolium Institutes,
-National Association of Manufacturers,
-Retail Industry Leaders Association.
4. Don’t Fall into Illegitimate Activities:
Illegitimate activities represent the final technique companies sometimes use to control their
environmental domain.

But this technique typically backfires.

Conditions such as low profits, pressure from senior managers, or scarce environmental
resources may lead managers to adopt behaviors not considered legitimate.

Bribery is one of the most frequent types of illegitimate activity, particularly in companies
operating globally.
1. The amount of complexity and dynamism in an organization’s domain influences the need
for information and hence the uncertainty felt within an organization.

Greater information uncertainty is resolved through greater structural flexibility (an organic
design) and the assignment of additional departments and boundary roles.

When uncertainty is low, management structures can be more mechanistic, and the number of
departments and boundary roles can be fewer.

2. The scarcity of financial resources.

The more dependent an organization is on other organizations for those resources, the more
important it is to either establish favorable linkages with those organizations or control entry into
the domain.

If dependence on external resources is low, the organization can maintain autonomy and does
not need to establish linkages or control the external domain.

SOURCE MATERIALS:
• Daft, Richard L., Organization Theory & Design, 13th Edition, Cengage Inc., 2021.
• Daft, Richard L., Organization Theory & Design, 10th Edition, Cengage Inc., 2009.
• Daft, Richard L., Management, 9th Edition, Cengage Inc., 2010.