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Chapter 15

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Emad Mohammad

CHAPTER FIFTEEN: ENVIRONMENT, STRATEGY, AND TECHNOLOGY The External Environment of Organizations  External environment: events and conditions surrounding an organization that influence its activities  Ex. impact of SARS outbreak of 2003: o Bus, hotel, restaurant, theatre and travel companies impacted with cancellations o Decline in business Organizations as Open Systems  Open systems: systems that take inputs from external environment, transform some of them, and send back to environment as outputs  Inputs: capital, energy, materials, information, technology, people  Outputs: products/services  Transformation process can be: o Physical (ex. manufacturing/surgery) o Intellectual (ex. teaching/programming) o Emotional (ex. psychotherapy)  Organizations need to be ale to cope with the demands of the external environment on both the input side and the output side Components of the External Environment  The General Economy: o Organizations that survive by selling products/services suffer from economic downturn and profit from upturn o Downturn: competition for customers increases, downsizing to cut costs, reduced inputs  Customers: o Organizations must be sensitive to changes in customer demands o Successful firms are highly sensitive to customer reactions o Ex. removing trans fats from food products, making energy-efficient vehicles, not using animals to test products  Suppliers: o Organizations are dependent on environment for supplies (raw materials, equipment, component parts) o Shortages can cause difficulties o More exclusive relationships with suppliers based on quality and reliable delivery are becoming common  Competitors: o Competitors for suppliers and customers o Successful organizations devote considerable energy to monitoring the activities of competitors o Many organizations find themselves in hypercompetitive environments (very aggressive competition)  Social/Political Factors: o Organizations must be aware of social and political events that occur around them o Ex. public attitudes towards ethnic diversity, proper age for retirement, environment, CSR, etc.  Technology: o Technology refers to ways of doing things (not just forms of machinery) o Must adopt proper technology to enhance organization’s effectiveness  Interest Groups: o Parties or organizations other than direct competitors that have some vested interest in how an organization is managed o Different interest groups evaluate organizational effectiveness according to different criteria  Events in various components of environment provide both constraints and opportunities for organizations Environmental Uncertainty  Environmental uncertainty: condition that exists when external environment is vague, difficult to diagnose and unpredictable  Uncertainty depends on the environment’s: 1) Complexity (simple vs. complex) 2) Rate of change (static vs. dynamic)  Simple environment: o Involves relatively few factors o Factors are fairly similar to each other  Complex environment: o Contains large number of dissimilar factors that affect organization  Static environment: o Components of environment remain fairly stable over time o No environment is completely static  Dynamic environment: o Constant state of change o Unpredictable and irregular change, not cyclical Resource Dependence  Resource dependence: dependency of organizations on environmental inputs (capital, raw materials, human capital)  Carefully managing and coping with resource dependence is key to survival and success  Some organizations are more dependent on environments for resources than others  Some environments have a larger amount of readily accessible resources  Ex. organizations in traditional manufacturing industries face wary investors, disappearing customers and employees attracted to better career prospects  Competitors, regulatory agencies and various interest groups have a considerable stake in how an organization obtains and transforms its resources Strategic Responses to Uncertainty and Resource Dependence  Strategy: process by which top executives seek to cope with constraints and opportunities that an organization’s environment poses  Strategy formulation involves determining mission, goals, and objectives of organization  Chosen strategy must correspond to constraints and opportunities of environment Organizational Structure as a Strategic Response  Different industries face different levels of perceived uncertainty: o Environment of plastic firms is uncertain because of changing scientific knowledge, technology and consumer demands o Container firms face a more certain environment (no major changes in technology in past 20 years)  Also range of uncertainty across departments in each company: o Sales (market environment) o Production (technical environment) o Research (scientific environment)  Firms in uncertain environments: o Have highly differentiated departments because they differ in uncertainty o Adopt an organic structure o Decision-making power is centralized  Firms in certain environments: o Are not highly differentiated because environmental sectors are similar in perceived certainty o Adopt mechanistic structures o Highly centralized o Supervision and formalized schedules Other Forms of Strategic Response  Vertical Integration: o Vertical integration: strategy formally taking control of sources of organizational supply and distribution o Instead of stockpiling in anticipation of a supplier strike te company is in charge of own supplies o Ex. oil companies handle their own exploration, drilling, transport, refining, sales, etc. o Can reduce risks for an organization  Mergers and Acquisitions: o Mergers: joining together of two organizations o Acquisition: acquiring of one organization by another o Reasons for mergers/acquisitions: economies of scale, vertical integration (to reduce resource dependence on particular segment of environment), to reduce uncertainty prompted by competition  Strategic Alliances: o Benefit of a merger without the risk o Strategic alliances: actively cooperative relationships between legally separate organizations o Organizations keep own cultures o Cooperation replaces distrust, competition or conflict o Reduces risk and uncertainty and recognize resource interdependence o Joint venture: two or more organizations rom an alliance in the creation of a new organizational entity  Interlocking Directorates: o Interlocking directorates: condition existing when one person serveso n two or more boards of directors o Legally prohibited when firms are direct competitors o Provide a subtle but effective means of coping with environmental uncertainty and resource dependence  Establishing Legitimacy: o Establishing legitima
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