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Chapter 4

Ch4 - The External Environment

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Joel Marcus

Chapter 4 The External Environment The Environmental Domain Organization Environment is composed of all elements that exist outside the boundary of the organization that have the potential to affect all or part of the organization. Its domain is the chosen field of action. The environment comprises several sectors or subdivisions of the environment that contain similar elements (e.g. industry, raw materials, human resources, market, technology, financial resources, economic conditions, government, sociocultural, and international).  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. o Industry, raw materials, market sector and HR and international sectors  General Environment – includes sectors that might not have a direct impact on the daily operations of a firm but will indirectly influence it. o Government, sociocultural, economic conditions, technology, and financial resources sectors  International Context o Domestic sectors can be affected by international events o The environment for all organizations is becoming extremely complex and competitive from the growing importance of the international sector Environmental Uncertainty Responding to the need for information. Two ways the environment influences organizations: (1) The need for information about the environment and, (2) The need for resources from the environment. Uncertainty applies to sectors that the organization deals with on a regular basis, the task environment, and this must be analyzed along dimensions of stability and degree of uncertainty. Uncertainty must be managed for organization 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.  Simple-Complex Dimension concerns environmental complexity, the heterogeneity, or the number and dissimilarity of external elements relevant to an organization’s operations. o ↑ in external factors influence and ↑ in # of organizations in their domain = ↑ complexity environment  E.g. University – deals with ever-changing government regulations, scarce financial resources for many programs, and alumni, parents, donors, corporations, and etc. o Simple environment = interacts with and is influenced by only a few similar external elements  E.g. Family-owned hardware store – does not deal with complex technologies or extensive government regulations, and cultural and social changes have little impact; deals with only a few competitors, suppliers  Stable-Unstable Dimension refers to whether elements in the environment are dynamic o If an environmental domain …  remains the same over a period of months/ years, experiences predictable change = stable  experiences elements shifting abruptly and unexpectedly = unstable o Most organizations today have unstable environments due to things such as “hate sites” and freelance bloggers (negative word of mouth) can destroy an organization’s reputation FRAMEWORK FOR ASSESSING E NVIRONMENTAL U NCERTAINTY Environmental Complexity Simple Complex Low Uncertainty Low-Moderate Uncertainty Low number of external factors High number of external factors Stable None to slow changes None to slow change (e.g. soft drink bottlers, beer distrib(e.g. universities, insurance companies, Environmental food processors) chemical companies) Change High-Moderate Uncertainty High Uncertainty Low number of external factors High number of external factors Unstable Frequent change and unpredictable Frequent change and unpredictable (e.g. e-commerce, fashion clothing, (e.g. computer firms, airlines, Toy manufacturers) Telecommunications) Adapting to Environmental Uncertainty Positions and Departments  An ↑ in complexity and uncertainty in the external environment = ↑ in # of positions and departments within an organization, which in turn, ↑ internal complexity  part of being an open system Buffering and Boundary Spanning  The purpose of buffering roles is to absorb uncertainty from the environment. Buffer departments (HR, purchasing, finance, legal) surround the technical core (primary org. production function) and exchange resources and information between the organization and the external environment. o E.g. purchasing department buffers the technical core by stockpiling supplies and raw materials  Some firms rid the organization of buffers and expose the technical core to the uncertain environment opening up the organization and making it more fluid and adaptable.  Boundary-spanning roles link and coordinate an organization with key elements in the external environment. Primarily concerned with exchange of information to: o (1) Detect and bring in to the organization information about changes in the environment, and o (2) Send information into the environment that presents the organization in a favourable light. o Boundary spanners prevent the organization from stagnating by keeping top managers informed about environmental changes (e.g. a market-research department scan and monitors trends in consumer tastes).  Business intelligence and competitive intelligence is necessary to analyze large amounts of data and find patterns. Differentiation and Integration  Organizational differentiation is “the differences in cognitive and emotional orientations among managers in different functional departments, and the difference in formal structure among these departments.”  When the external environment is complex and unstable, organizational departments become highly specialized to handle the uncertainty in the external sector.  High differentiation = difficult to coordinate between departments, so integrators (e.g. project managers, coordinators) become essential additions.  Integration is the quality of collaboration among departments.  Organizations perform better when the levels of differentiation and integration match the level of uncertainty in the environment.  Uncertain environments = high level of differentiation and integration.  Stable environments = low level of differentiation and integration. Organic vs. Mechanistic Management Processes  Mechanistic Organizational System: ↑ stability = ↑ formal structure and control imposed on employees  Organic Organizational System: ↓ stability = ↓ formal structure and control imposed on employees o E.g. learning organization, horizontal and virtual network structure Mechanistic structure Organic structure 1. Tasks are broken down in specialized, separate parts 1. Employees contribute to common tasks of the dept. 2. Tasks are rigidly defined 2. Tasks are redefined through employee teamwork 3. Strict hierarchy of authority, control, and rules 3. Less hierarchy of authority, control, and rules 4. Highly centralized at top of organization 4. Decentralized, free-flowing, and adaptive 5. Communication is vertical 5. Communication is horizontal Planning, Forecasting, and Responsiveness  Planning and environmental forecasting becomes necessary in uncertain environments contributing to the organization’s ability to quickly respond to sudden changes in the environment.  Planning cannot substitute for other actions, such as effective boundary spanning and adequate internal integration and coordination. Contingency Framework for Organizational Responses to Uncertainty
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