Chapter 15- Environment, Strategy, and Technology
The External Environment of Organizations
• External environment – events and conditions surrounding an organization that influence its
• Example of the influence of the external environment is the recent economic crisis and global
recession, which manufacturing production plunged and thousands of employees lost their
jobs. Particularly hard hit was the global auto industry.
• The recession has resulted in a major restructuring of the global automobile industry,
including a number of alliances, mergers, and acquisitions.
Organizations as Open Systems
• Open systems – systems that take inputs from the external environment, transform some of
them and send them back into the environment as outputs.
• Inputs include: capital, energy, material, information, technology, and people
• Outputs include: various products and services
• Some inputs are transformed while others inputs assist the transformation process
• Transformation processes may be physical, intellectual, or even emotional
• The value of the open system concept is that it sensitizes us to the need for organizations to
cope with the demands of the environment on both the input side and the output side
Components of the External Environment
Involves any person, group, event or condition outside and the direct domain of the organization
1. The General Economy: organizations that survive through selling products or services often
suffer from an economic downturn and profit from an upturn.
2. Customers: all organizations have potential customers for their products and services.
Organizations must be sensitive to changes in customer demands.
3. Suppliers – organizations are dependent on the environment for supplies, which include
labour, raw materials, equipment, and component parts. Shortages can cause severe
4. Competitors – environmental competitors vie for resources that include both customers and
suppliers. Successful organizations devote considerable energy to monitoring the activities of
5. Social and Political Factors – organization cannot ignore the social and political events that
occur around them. Changes in public attitudes toward ethnic diversity, the proper age for
retirement, the environment, corporate and social responsibility, or the proper role of big
business will soon affect them.
6. Technology – the environment contains a variety of technologies that are useful for achieving
organizational goals. The ability to adopt the proper technology should enhance an
• Interest group –parties or organizations other than direct competitors that have some vested
interest in how an organization is managed
• Environment uncertainty – a condition that exists when the external environment is vague,
difficult to diagnose, and unpredictable
• Like individuals, organizations can find themselves in more or less certain environments.
• Simple environment – a simple environment involves relatively few factors, and those factors
are fairly similar to each other.
• Complex environment – a complex environment contains a large number of dissimilar factors that affect the organization.
• Static environment – the components of this environment remain fairly stable over time. The
small town radio station that plays the same music format relies on the same advertisers and
works under the same regulations year after year has a stable environment.
• Dynamic environment – the components of a highly a dynamic environment are in a constant,
which is unpredictable and irregular, not cynical.
It is possible to arrange rate of change and complexity in a matrix. A simple/static environment
(cell 1) should provoke the least uncertainty, while a dynamic/complex environment (cell 4)
should provoke the most. We might expect a static/complex environment (cell 2) to be somewhat
more certain than a dynamics/simple environment (cell 3). Refer to Teals Handout Rate of
Change vs Complexity
• Resource dependence – the dependency of organizations on environmental inputs, such as
capital, raw materials, and human resources
• Although all organizations are dependent on their environments for resources, some
organizations are more dependent than others
• Resource dependence can be fairly independent of environmental uncertainty, and dealing
with one issue will not necessarily have an effect on the other.
• The concept of resource dependence does not mean that organizations are totally at the
mercy of their environment. Rather, it means that they must develop strategies for managing
both resource dependence and environmental uncertainty
Strategic Responses to Uncertainty and Resource Dependence
• Strategy – the process by which top executives seek to cope with the constraints and
opportunities that an organization environment poses.
• Strategy formulation itself involves determining the mission, goals, and objectives of the
• There is no single correct strategy
Organizational Structure as a Strategic Response
• The Lawrence and Lorsch study is important because it demonstrates close connections
among environment, structure, and effectiveness.
• The effect of formalization, specialization, and administrative intensity was greater for larger
• While mature organizations typically need to become more organic and flexible to adapt
dynamic environments, the opposite seems to be true for new ventures, which tend to be
flexible an attuned to their environment but lack the benefits of structure.
• More centralized, simple structures might produce strategies that appear more rational and
Other Forms of Strategic Response
• Many managers live in fear of disruption on the input or output end of their organization. A
lack of raw materials to process or a snag in marketing products or services can threaten the
very existence of the organization. One basic way to buffer the organization against such
uncertainty over resource control is to use an inventory policy of stockpiling both inputs and
• Vertical integration – the strategy of formally taking control of sources of organizational supply
and distribution • Example: major oil companies, for instance, are highly vertically integrated, handling their
own exploration, drilling, transport, refining, retail sales, and credit.
Mergers and Acquisitions:
• There have been a number of very high-profile mergers and acquisitions
• Mergers of two firms and the acquisition of one firm by another have become increasingly
common strategic responses in recent years.
• Merger – the joining of two organizations
• Acquisition – the acquiring of one organization by another
• When mergers and acquisitions occur within the same industry, they are being affected partly
to reduce the uncertainty prompted by competition.
• When they occur across different industries, the goal is often to reduce resource dependence
on a particular segment of the environment
• Strategic alliances – actively cooperative relationships between legally separate
• Organizations can engage in strategic alliances with competitors, suppliers, customers and
• Among competitors, one common alliance is a research and development consortium in
which companies band together to support basic research that is relevant for their products.
• Another common alliance between competitors is the joint venture, in which organization