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Ch04 The External Environment.doc

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Wilfrid Laurier University
Joel Marcus

Chapter 4: The External Environment The Environmental Domain • Organizational environment is all elements that exist outside the boundary of the organization and have potential to affect all or part of the organization • An organization’s domain is an organization’s chosen environmental field of activity • The environment comprises several sectors, which are subdivisions of the external environment that contain similar elements: a) Competitors, industry size and competitiveness, related industries b) Suppliers, manufacturers, real estate, services c) Labour market, employment agencies, universities, training schools, employees in other companies, unionization d) Stock markets, banks, savings and loans, private investigators e) Customers, clients, potential users of products and services f) Techniques of production, science, computers, info technology, e-commerce g) Recession, unemployment rate, inflation rate, rate of investment, economies, growth h) City, state, federal laws and regulations, taxes, services, court system, political processes i) Age, values, beliefs, education, religion, work ethic, consumer and green movements j) Competition from and acquisition by foreign firms, entry into overseas markets, foreign customs, regulations, exchange rate Task Environment • Sectors with which the organization interacts directly and that have a direct effect on the organization’s ability to achieve its goals • Typically includes the industry, raw materials, and market sectors (and sometimes HR and international sectors) • For example: o In the industry sector, Wal-Mart has become the nation’s largest food retailer and nontraditional outlets such as club stores and discounters now account for more than 30% of the grocery market o In the raw materials sector, steelmakers owned the beverage can market until the mid-1960s, when Reynolds Aluminum Company launched a huge aluminum recycling program to gain a cheaper source of raw materials and make aluminum cans price-competitive with steel General Environment • Includes those sectors that may not directly affect the daily operations of a firm but will indirectly influence it • Often includes the government, sociocultural, economic conditions, technology, and financial resources sectors • For example: o In the sociocultural sector, shifting demographics play a significant role. In the US, Hispanics have passed African Americans as the nation’s largest minority group, and their numbers are growing so fast that Hispanics are becoming a driving force in US politics, economics, and culture International Context • The international sector can directly affect many organizations, and it has become extremely important in the last few years • All domestic sectors can also be affected by international events • The distinctions between foreign and domestic operations have become increasingly irrelevant o For example, in the auto industry, Ford owns Sweden’s Volvo, while Chrysler is owned by Germany’s DaimlerChrysler and builds its PT Cruiser in Mexico. Toyota is a Japanese company, but it has built more than 10 million vehicles in North American factories • US-based companies are involved in thousands of partnerships and alliances with firms all around the world, and these can have positive and negative implications • The growing importance of the international sector means that the environment for all organizations is becoming extremely complex and competitive Environmental Uncertainty • 2 essential ways the environment influences organizations are: o The need for information about the environment o The need for resources from the environment • Environmental uncertainty pertains primarily to those sectors that an organization deals with on a regular basis (task environment) • Uncertainty occurs when decision makers do not have sufficient information about environmental factors and have a difficult time predicting external changes • Uncertainty increases the risk of failure for organizational responses and makes it difficult to compute costs and probabilities associated with decision alternatives Simple-Complex Dimension • The number and dissimilarity of external elements relevant to an organization’s operation • The more external factors that regularly influence the organization and the greater number of other companies in an organization’s domain, the greater the complexity • A complex environment is one in which the organization interacts with and is influenced by numerous diverse external elements • In an simple environment, the organization interacts with and is influenced by only a few similar external elements • For example, Aerospace firms and Universities operate in a complex environment, while a family- owned hardware store in a suburban community is in a simple environment Stable-Unstable Dimension • The state of an organization’s environmental elements (whether elements are dynamic) • An environmental domain is stable if it remains the same over a period of months or years • Under unstable conditions, environmental elements shift abruptly, and most environmental domains are increasingly unstable • Instability may occur when competitors react with aggressive moves and countermoves regarding advertising and new products • Instability can also occur with hate sites, blogs, etc. o For example, Kryptonite’s reputation in bicycle locks plummeted after a Web log was posted that the locks could be opened with a Bic pen • An example of a traditionally stable environment is a public utility • Toy companies, on the other hand, have an unstable environment, and this problem is compounded by the fact that children are losing interest in toys at a younger age because video games, TV, and the Internet is taking over Framework Adapting to Environmental Uncertainty Positions and Departments • As complexity and uncertainty increases, so does the number of positions and departments within the organization, which in turn increases internal complexity • This relationship is part of being an open system • Each sector in the external environment requires an employee or department to deal with it Buffering and Boundary Spanning • Buffering roles are activities that absorb uncertainty from the environment • The technical core performs the primary production activity of an organization, and buffer departments surround the technical core and exchange materials, resources, and money between the environment and the organization • They help the technical core function efficiently o The purchasing department buffers the technical core by stockpiling supplies and raw materials o The HR department buffers the technical core by handling the uncertainty associated with the finding • A newer approach is to drop the buffers and expose the technical core to the uncertain environment • These organizations no longer create buffers because they believe being well connected to the customers and suppliers is more important than internal efficiency • Boundary spanning roles are activities that link and coordinate an organization with key elements in the external environment • Boundary spanning is primarily concerned with the exchange of information to: o Detect and bring into the organization info about the changes in environment o Send info into the environment that presents the organization in a favourable light • Organizations have to keep in touch with what is going on in the environment so that managers can respond to market changes and other developments • A new approach to boundary spanning is business intelligence, which is a high-tech analysis of large amounts of internal and external data to identify patterns and relationships • Business intelligence is related to another important area of boundary spanning, known as competitive intelligence (CI) o CI gives top executives a systematic way to collect and analyze public information about rivals and use it to make better decisions o Using techniques that range from Internet surfing to digging through trash cans, intelligence professionals dig up info on competitors’ new products, manufacturing costs, or training methods and share it with top leaders 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 rapidly changing, organizational departments become highly specialized to handle the uncertainty in their external sector • Success in each sector requires special expertise and behavior • Organizational departments differentiate to meet needs of subenvironments: • Differences in goals and orientations among organizational departments: • One outcome of high differentiation is that coordination among departments becomes difficult • More time and resources must be devoted to achieving coordination when attitudes, goals, and work orientation differ so widely • Integration is the quality and collaboration among departments • Formal integrators are often required to coordinate departments • When environmental uncertainty is high, frequent changes require more info processing to achieve horizontal coordination, so integrators become a necessary addition to the organization structure • Environment uncertainty and organizational integrators: Industry: Plastics Foods Container Environmental Uncertainty High Moderate Low Departmental Differentiation High Moderate Low Percent of management 22% 17% 0% in integrating roles • BOTTOM LINE: If environment is more complex, differentiate more, and if environment is more uncertain, differentiate. Organic versus Mechanistic Management Processes • Me
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