Chapter 8:

Environment

By Muhammet Said Dinç

ContentsDefinition of Environment from an

organizational theory perspectiveDifferentiation between the specific and the

general environmentThe key dimensions of environmental

uncertaintyThe contributions of Burns and Stalker,

Lawrence and Lorsch, and Duncan Reviewing the contributions of population

ecology, institutional theory and resource dependence

The effect of environmental uncertainty on complexity, formalization and centralization

Defining Environment

The environment is made up of those things outside of the organization’s boundaries.

Organizations are affected by events at the local, regional, national, and global levels.

General Versus Specific Environment (cont.)Eight Key Environmental Sectors:1) Industry

2) Cultural

3) Legal/Political

4) Economic

5) Technology

6) Human Resources

7) Physical Resources

8) Consumer/Client

General Versus Specific Environment

General environment encompasses conditions that potentially have an impact on the organization.

Price and availability of petrol in the general environment of cinema chains

• Specific Environment is that part of the environment that is directly relevant to the organization in achieving its goals.

General Versus Specific Environment (cont.)• It is unique to each organization and it

changes with conditions, typically, it will include:• Clients or customers• Suppliers of inputs• Competitors• Governments • Unions• Trade associations • Public pressure groups

Example of operator of Air New Zealand and Woolworths for the operator of Sydney Airport.

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General Versus Specific Environment (cont.)

An organization’s specific environment will vary depending on the domain it has chosen.

Domain refers to the claim that the organization stakes out for itself with respect to the range of products or services offered and markets served. Volkswagen and Mercedes- Benz

Toowoomba TAFE and James Cook Universities in Queensland

Shortly, Domain is the “space” in which the organization “plays”

Change domain =change the specific environment

Actual versus Perceived Environment

Making a distinction between the objective or actual environment and the one that managers perceive.

Measures of the actual characteristics of the environment and measures of characteristics perceived by management are not highly correlated.

Furthermore, it is perceptions –not reality- that lead to the decisions that managers make regarding organization design.

Environmental UncertaintyEnvironments differ in what we call

environmental uncertainty. Some organizations face:

Stable environments• Few forces in specific environment of organizations

are changing• No new competitors, no new technological

breakthroughs vs.

Dynamic environments• Rapidly changing technologies, new competitors,

the loss of major customers, difficulties in acquiring raw materials, unpredictable price changes vs.

Environmental Uncertainty (cont.)

The number of uncertainties that may exist in an organization’s environment also influences management action.

Hotels: …………………….. A rail system: ……………… Mining companies: …………. Retail stores: ………………..

Stable environment and those that are easier to predict create significantly less uncertainty for managers than do dynamic ones, and as uncertainty is a threat to an organization’s effectiveness management will try to minimize it.

Burns and StalkerUsed interviews with managers and

their own observations to evaluate the impact of

environment on organizational structure and management practice.

The type of structure that existed in rapidly changing and dynamic environments was different from that in organizations with stable environments.

B & S labeled the two structures organic and mechanistic, respectively

Burns and Stalker(cont.)

Mechanistic organization• Mechanistic structures are

characterized by high complexity, formalization and centralization.• They perform routine tasks, rely

heavily on programmed behaviors, and are relatively slow in responding to the unexpected.• Most flow of information and

communication is vertical.

Burns and Stalker(cont.)Organic organization• Organic organizations are relatively flexible

and adaptable.• They rely on lateral communication rather

than vertical communication. • Power and influence is based upon expertise

and knowledge rather than on authority of position. • Responsibilities are defined loosely rather

than rigid job definitions. • Emphasis is on exchanging information

rather than on giving direction.

Burns and Stalker(cont.)

CHARACTERISTIC MECHANISTIC ORGANIC

Task Definition Rigid Flexible

Communication Vertical Lateral

Formalization High Low

Control Centralized Diverse

Influence Authority Expertise

Burns and Stalker(cont.)They believed that the most effective structure

is one that adjusts to the requirements of the environment, which means using mechanistic design in a stable, certain environment and an organic form in a turbulent environment.

They also focused that one was not preferred over the other. The nature of organization’s environment determined which are organic and others which are mechanistic.

Large firms may have some parts which are organic and others which are mechanistic.• Motor vehicle manufacturers

Lawrence and LorschStudied ten firms in three industries:

plastics, food and containers. The three industries were deliberately

chosen as they differ significantly in the environmental uncertainty associated with each one.

The underlying hypothesis was that internal environments of the firms must match the external environmental requirements.

The better the match, the more successful the firm.

Lawrence and Lorsch(cont.)

Differentiation and integration were posited as the variables to examine to determine the state of the internal environment.

Differentiation, as used by Lawrence & Lorsch, closely resembles the traditional definition of horizontal differentiation, but in addition to task segmentation, suggested that managers will differ in their: (1) time frame, (2) interpersonal orientation, and (3) goal orientation.

Lawrence and Lorsch(cont.)Integration is the quality of collaboration

needed to overcome differentiation and achieve unity of effort among units.

Integration devices:• Rules and procedures• Formal plans• The authority hierarchy and decision-making

committees

• They perceived both the organization and the environment as having subsets: that is, that parts of the organization deal with parts of the environment.

Lawrence and Lorsch(cont.)

Lawrence and Lorsch Model

Lawrence and Lorsch(cont.)They proposed that the more turbulent, complex and

diverse the external environment facing an organization, the greater the degree of differentiation among its subparts.

Diverse external env. + differentiated internal env. = need for an elaborate internal integration mechanism to avoid having units going in different directions

Shortly:◦ The environments are composed of a number of

subenvironments, each with different degrees of uncertainty.

◦ Successful organization’ subunits meet the demand of their subenvironments.

◦ Finally, the environment in which an organization functions is of foremost importance in selecting the structure appropriate for achieving organizational effectiveness.

Lawrence and Lorsch(cont.)

The Effect of Uncertainty on Differentiation and Integration in Three Industries

Degree of uncertainty

Plastics Food-processing Container Variable industry industry industry

Environmental variable

Uncertainty (complexity,dynamism, richness)

Structural variables

Departmental differentiation

Cross-functional integration

High Moderate Low

High Moderate Low

High Moderate Low

Lawrence and Lorsch(cont.)

DEPARTMENTAL DIFFERENTIATION BASED UPON SUBENVIRONMENT CHARACTERISTICS

Duncan’s Complexity and Change Framework Robert Duncan classified environments along two

dimensions. First, the rate of change of environments.• Some environments change slowly like cement manufacturers and

banks.• Others are rapid changing such as the fashion and

telecommunications industries.

• Second dimension, environmental complexity.

• The greater the number of elements there are in an environment, the more complex the environment. • Airlines= complex environment

• Growing timber and baking bread companies= simple env.

• The interaction of environmental complexity and stability forms a two by two matrix, where different levels of uncertainty may be identified.

• Each of these levels of uncertainty leads to adoption of different structural responses.

Duncan’s Complexity and Change Framework (cont.)Stability enables decision making to be

centralized and permits high levels of formalization.

Complexity comes with the need to gather, process and respond to numerous environmental elements, each with their own demands.

This leads to decentralization and greater need for coordination.

Duncan’s framework stands as a powerful reminder of the influence of environment on structure.

The Role of Boundary Spanner

First, they have expertise in understanding and interpreting the environmental segment which they are concerned with.

Second, they filter and process environmental information into a form which is useful to organization and then transmit this information through established channels.

Third, they protect the core from undue disruption by removing the need for it to interact directly with environment.

Finally, they represent the organization to the environment.

At a motor vehicle manufacturer, the main boundary spanner is the car dealer.

The Role of Boundary Spanner(cont.)

The Use of Information Technology in Complex Environments Complex and dynamic environments require extensive

environmental scanning and flexible organizational responses.

Specific structural units and positions are often created to undertake this function.

Regardless of structural response, organizations facing such environments are intense users of information technology.

There are some outcomes of application of communication technology:

Increasing effectiveness of organizations

Unpredictable environments will become more manageable

Organizations considering that they have capacity to operate in more unstable environment

A Synthesis: The organization and Environmental Uncertainty There are three key dimensions to any organization’s

environment: capacity, stability and complexity

The capacity of an environment refers to the degree to which it can support growth. For instance: the availability of finance, customers, resource inputs.

The degree of instability in an environment is captured in the stability dimension. • Dynamic environment – financial markets

• Stable environments – cement manufacturer

• Environmental complexity is the degree to which the environment is concentrated on just a few elements.• Simple environments – a small mining company

• Complex environments – shipping company

A Synthesis: The organization and Environmental Uncertainty(cont.)

Stable

Simple Complex

Dynamic

Abundant

Scarce

Three- dimensional model of environment

Population Ecology Theory1. Adaptation of Darwin’s concept of

survival of the fittest.2. Argues that populations of

organizations vary and that the environment selects out only those types that are best suited.

3. Argues against the importance of managerial influence in the long-term survival of an organization.

4. Most appropriately applies to whole populations.

5. Controversial, but most scholars see some merit to the arguments.

Population Ecology Theory (cont.)

Population ecology theory seeks to explainthe rate at which new organizations are born (and die) in a population of organizations.

A population of organizations comprises the organizations that are competing for the same set of resources in the environment.

Different organizations within a populationmay choose to focus on different environmental niches, or particularsets of resources.

Population Ecology Theory (cont.)

According to population ecology, availability of resources determines the number of organizations in a population.

The amount of resources in an environment limits population density—the number of organizations that compete for the same resources in a particular environment.

Population Ecology Theory (cont.)

Population-ecology view of the change process

Variation

Large numberof variationsappear in thepopulation oforganizations

Selection

Someorganizationsfind a nicheand survive

Retention

A feworganizationsgrow large andbecomeinstitutionalizedin theenvironment

Institutional Theory Institutional theory: proposes

that organizations are influenced not only by their internal processes but also by the need to adapt to the institutional pressures in the external environment.

This need for adaptation then leads to behaviors being repeated and becoming ‘institutionalized’.

Resource-dependence Theory

Resource dependence theory argues that the goal of an organization is to:

Minimize its dependence on other organizations for the supply of scarce resources

AND To find ways of influencing these

organizations to make resources available

Resource-dependence Theory (cont.)The strength of one organization's

dependence on another for a particular resource is a function of:

How vital the resource is for survival

The extent to which the resource is controlled by other organizations