Organization Theory &

Design
External Environment
 The Environmental Domain
 Organizational Environment
is defined as all elements that exist outside the
boundary of the organization and have the
potential to affect all or parts of the body
 Organization domain
Chosen environmental field of action. It is the
territory an organization stakes out for itself with
respect to products, services, and markets
served
 Environmental sector
Subdivisions of the external environment that
contain similar elements
 Classification of Environment
 General Environment:
May not have a direct impact on the daily
operations of a firm but will indirectly
influence it. It would affect similarly on all
the players within the industry similarly.
 Task Environment:
Includes sectors with which the
organization interacts directly and have a
direct impact on the organization’s ability
to achieve its goals
 Environmental Uncertainty
 The two essential reasons why environment is
important to organizations:
1. The need for information about the environment
2. The need for resources from the environment
 Uncertainty:
Decision makers do not have sufficient information
about environmental factors and they have a difficult
time in predicting external changes.
An uncertain environment increases the risk of failure
for organizational responses and makes it difficult to
compute costs and probabilities associated with
decision alternatives
Simple and Complex Dimension
 Simple – complex dimension
Refers to heterogeneity, or number and
dissimilarity of external elements relevant to the
organization
 In complex environment, many diverse external
elements interact with and influence the
organization
 In a simple environment few and similar external
elements influence the organization
 Stable – Unstable Dimension
 Whether the elements in environment are
dynamic or stable
 Stable environmental:
Environmental domain remains same over
a period of time and changes could be
easily predicted
 Unstable environment:
Environmental elements shift abruptly
Adapting To Environmental Uncertainty
 Positions and Departments:
As the number of elements in the external
environment increases so does the
number of positions within the
organization, which in turn increases
internal complexity.
Each sector in the external environment
requires an employee or department to
deal with it
Adapting To environmental Uncertainty
 Buffering and Boundary Spanning
a. Buffering role:
Absorb uncertainty from environment
Technical core performs the primary production
activity of an organization. Buffer departments
surround the technical core and exchange materials,
resources, money between the environment and
organization
b. Boundary spanning role:
Primarily concerned with exchange of information to:
1. Detect and bring into the organization information
about changes in the environment
2. Send information into the environment that presents
the organization in a favorable light
Adapting To environmental Uncertainty
 Differentiation and Integration
Organization differentiation is “ the differences
in cognitive and emotional orientations among
managers in different functional departments,
and the differences in formal structure among
these departments.”
 When external environment is complex and
rapidly changing organization departments
become highly specialized to handle uncertainty
in their external sectors
 Success in each sector requires special expertise
and behavior
Differences in Goals and Orientation among
Organizational Members
Characteristics R &D Manufacturing Sales
Department Department Department

Goals New Efficient Customer

development, production satisfaction
quality
Time Horizon Long short short

Interpersonal Mostly Task Task Social

orientation

Formality of Low High Moderate

Structure
 Organic versus Mechanistic Organizations
Mechanistic Organic
Tasks are broken down into Employees contribute to
specialized separate parts common task of the department
Tasks are rigidly defined Tasks are adjusted and
redefined through employee
team work
Strict hierarchy of authority and Less hierarchy of authority and
control, many rules control, few rules
Knowledge and control of tasks Knowledge and control of task
are centralized at the top of are located anywhere in
organization organization
Communication is vertical Communication is horizontal
 Institutional Imitation
 Under high uncertainty, organizations mimic or
imitate other organizations in the same
institutional environment
 Managers in an organization experiencing great
uncertainty assumes that other organizations
face similar uncertainty
 These mangers copy structure, management
techniques, and strategies of the firms that
appear successful
 Such mimicking serves to reduce uncertainty
but also make organizations within the same
industry look alike
 Institutional Similarity
 Organizations have a strong need to appear legitimate
 In doing so many aspects of structure and behavior may
be targeted toward environmental acceptance rather
than toward internal technical efficiency
 Inter-organizational relationships are thus characterized
by forces that cause organizations in one population to
look alike
 Institutional similarity is called “institutional
isomorphism” i.e. the emergence of a common structure
and appearance among organizations in the same field
 Institutional Isomorphism
 Isomorphism is the process that causes one
unit in a population to resemble other units
that face the same set of environmental
conditions
 This happens because of three forces
1. Mimetic Forces:
 Organizations facing environmental
uncertainty are unclear what products or
technology will achieve desired goals and
sometimes the goals are not clear
themselves
 In the face of this uncertainty mimetic
forces occur where the pressure is to copy
or model other organizations
 Institutional Isomorphism
2. Coercive Forces:
 All organizations are subject to pressure both
informal and formal, from government, regulatory
agencies, and other important organizations,
especially on which a company is dependent
 Coercive forces are external pressures exerted on
the organization to adapt structures, techniques,
behaviors, similar to other organizations
 Some pressure may be the force of law
 Coercive pressures often occur between
organizations where there are power differences
 Organizational changes due to coercive forces also
occur when there is dependence
3. Normative Forces
 Organizations are expected to change
to achieve standards of professionalism
and to adapt to techniques that are
considered by professional community
to be up-to-date and effective
 Changes may be in the area of
information technology, accounting
requirements or marketing techniques
 Planning and Forecasting
 Stable Environment:
Organizations can concentrate on
operational problems and day to day
efficiency
 Organizational Uncertainty:
Planning and forecasting becomes
necessary
 Controlling Environmental Resources
 Two strategies are adapted:
1. Establishing favorable linkages with key
elements in the environment
2. Shape the environmental domain
 Establishing Inter-organizational Linkages
1. Acquisition
2. Mergers
3. Forming strategic alliances
4. Joint ventures
5. License agreements
6. Contracts
7. Advertising and public relations
Managing the environment domain
 Change of domain
a. Acquisition
b. Divestment
c. Political activity, Regulations
d. Trade Associations
e. Illegitimate activities
 Traditional View of Inter-
Organizational Relationship
 Inter-organizational relationships are relatively enduring
resource transactions, flows, and linkages that occur
among two or more organizations
 Traditionally, these transactions and relationships have
been seen as a necessary evil to obtain what an
organization needs
 The presumption has been that the world is composed
of distinct businesses that thrive on autonomy and
compete for supremacy
 A company may be forced into inter-organizational
relationships depending on its needs and the stability of
environment
 Argument: Resource Dependence
 Organizations try to minimize their dependence on
other organizations for supply of important
resources and try to influence environment to make
resources available
 Organizations succeed by striving for independence
and autonomy
 When threatened by greater dependence,
organizations will assert control over resources to
minimize their dependence
 This theory argues that organizations do not want to
become vulnerable to other organizations because
of negative effects on performance
 Contemporary View:
Organizational Ecosystem
 Organizational Ecosystem is a system formed by the
interaction of community of organizations and their
environment
 An ecosystem cuts across traditional industry lines. A
company can create its own eco system
 Microsoft travels in four major industries; consumer
electronics; information; communications; and personal
computers.
 Its ecosystem includes hundreds of suppliers and
distributors, thousands of retailers, and millions of
customers across many markets
The Changing Role of Management
 Within ecosystems managers learn to move beyond traditional
responsibilities of corporate strategy and designing hierarchical
and control systems
 If top management looks down to enforce order and uniformity,
the company is missing opportunities for new evolving external
relationships
 Management thinks about horizontal processes rather than
vertical structures
 Important initiatives are not just top down they run across the
boundaries separating organizational units
 Horizontal linkages now include suppliers, and customers who
become part of the team
 Managers learn to lead economic co-evolution
 Managers learn to see and appreciate the rich environment and
opportunities that grow from cooperative relationships with
other contributors of the ecosystem
 Counter Argument:
Collaborative Networks
 An emerging alternative to resource dependence
theory
 Companies join together to become more
competitive
 As companies move into their own un-chartered
territory, they are racing into alliances as a way to
share risks and cash in on rewards
 Reasons:
1. Sharing risks when entering into new markets,
mounting expensive new programs, and reducing
costs, and enhancing organizational profile in
selected industries or technologies
2. Cooperation is a pre-requisite for greater
innovation, problem solving, and performance
3. Partnerships are major avenues for entering global
markets, with both large and small firms developing
partnerships
 Changing Characteristics of
Interorganizational Relationships

Traditional Orientation: New Orientation:

Adversarial
Suspicion, competition, arm’s length
Price, efficiency, own profits
Limited information and feedback
Legal resolution of conflict
Minimal involvement and up-front
investment, separate resources
Short-term contracts
Contract limiting the relationship
Partnership
Trust, addition of value to both sides, high
commitment
Equity, fair dealing, both share profit
Electronic linkages to share key information,
problem feedback and discussion
Mechanisms for close coordination, people on-site
Involvement in partner’s product design and
production, shared resources
Long-term contracts
Business assistance beyond the contract
 Population Ecology
 Differs from other perspectives because it focuses on organizational
diversity and adaptation within a population of organizations
 A population is a set of organizations engaged in similar activities with
similar patterns of resource utilization and outcomes
 Organizations within a population compete for similar resources or
similar customers
 The population ecology model is developed from theories of natural
selection in biology, and the terms evolution and selection are used to
refer to the underlying behavioral processes

 Why do new organizational forms constantly appear and create such

diversity?
 Individual organizational adaptation is severely limited compared to the
changes demanded by the environment
 Innovation and change in a population of organizations take place
through the birth of new forms and kinds of organizations more so
than by reform and change of existing organizations.
 New organizations meet the emerging needs of the society more so
than established organizations that are slow to change
 Population Ecology
 What does this theory mean in practical
terms?
 Large established organizations often
become dinosaurs
 Established companies have tremendous
difficulty adapting to a rapidly changing
environment
 New organizational forms that fit the current
environment will emerge to fill a new form
and over time take away business from
established companies
 Population Ecology
 Why do established organizations have such a hard time adapting to
a rapidly changing environment?
 Limitations on ability of organizations:
1. Heavy investment in plant, equipment, specialized personnel,
limited information, established viewpoints of decision makers,
organization’s own success story, difficulty in changing culture
 When looking at population of organizations, changing environment
determines which organizations survive
 The assumption is that individual organizations suffer from
structural inertia and find it difficult to adapt to environmental
changes
 When rapid changes occur , old organizations are likely to fail, and
new organizations emerges that are better suited to the needs of
the environment
Organizational Form and Niche
 Organizational form is an organization’s
specific technology, structure, products,
goals, and personnel, which can be selected
or rejected by the environment
 Niche: each new organization tries to find a
domain of unique environmental resources
and needs sufficient to support it
 The niche may be small in the early stages of
the organization but may increase in size over
time
 If a niche is not available, the organization
will decline and perish
Elements in the Population Ecology
Model of Organizations

Variation Selection Retention

Large number Some A few

of variations organizations organizations
appear in the find a niche grow large and
population of and survive become
organizations institutionalized
in the
environment
A Framework of Inter-organizational
Relationships

Organization Type
Dissimilar Similar

Resource Population
Competitive Dependence Ecology
Organization
Relationship

Cooperative Collaborative
Network Institutionalism

*Thanks to Anand Narasimhan for suggesting

this framework.